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A happy twist in Seoul

When the finance ministers and central-bank chiefs of the group of 20 leading economies met in South Korea last month, the world seemed to be on the verge of a “currency war.”

The US accused China of manipulating its currency, while Beijing criticised Washington for supplying excessive money, threatening to flood emerging economies. Other major members were also split on the issues. But the G20 ministers averted the currency battle with a surprise deal. Instead of blindly focusing on exchange rates, they agreed to reduce trade imbalances and maintain current-account deficits or surpluses at “sustainable” levels. Though short on details, the G20 agreement “to move toward a more market-determined exchange-rate system” and “refrain from competitive devaluation of currencies” was positive enough to relieve financial markets as well as global policymakers. “This will put an end to the controversy of foreign-exchange rates,” declared South Korean Finance Minister Yoon Jeung-hyun.

The minister might have been a bit 
optimistic, but the accord definitely raised the profile of the G20. The agreement effectively silenced the criticism that as a nonbinding body, the G20 is becoming 
less relevant as the world economy recovers. On that positive note, the G20 heads of state met in Seoul this week to cement the accord and discuss other potential measures to heal the global economy, such as stronger international financial regulations. Expectations are running high.

“I expect good results as the international community agrees on the need for cooperation,” said South Korean President Lee Myung-bak, the host and chair of the summit. “We have a very important mission to coordinate the agenda to decide the future of the world economy.”

Reflecting a new world economic order where emerging economies play a bigger role, the G20 is ascending as a premier forum for global economic-policy cooperation, threatening to sideline the G7, which consists only of advanced economies. The G20 encompasses the G7 plus the huge BRICs (Brazil, Russia, India, and China), as well as vibrant new economies like South Korea. Argentina, Australia, Indonesia, Mexico, Saudi Arabia, South Africa, and Turkey are also included. The 20 nations account for 85 per cent of global GDP and two thirds of the global population.

The G20 was originally formed in 1999 as a ministerial meeting in the aftermath of the Asian financial crisis, but upgraded to a summit in 2008 after the near collapse of Wall Street threatened to destroy the global economy.

“The G20 structure best represents the current world economic order,” says Lee Dong-hoon, a senior researcher at Samsung Economic Research Institute in Seoul. “Its relevance will grow as emerging economies gain more influence.”

During the 2008 financial crisis, the G20 was instrumental in discouraging its members from adopting protectionist trade policies, which analysts say could have led to a 1930s-style depression. G20 members cut interest rates, pushed through stimulus measures amounting to $1 trillion, and reformed financial sectors almost in unison, despite their drastically different domestic situations. In the following summits in London, Pittsburgh, and Toronto, the leaders continued their policy of cooperation and coordination.

This week’s fifth G20 summit in Seoul, the first to be held outside the G8, is expected to produce more results. On the currency front, it is unlikely that the members will agree on specific targets for reducing trade imbalances; Washington wants to set a new rule limiting current-account surpluses to less than 4 per cent of GDP so that countries like China are forced to appreciate their currencies and make their exports more expensive. But Germany and China have rejected the proposal. Nevertheless, the two-day summit will reinforce last month’s accord with more details and stronger commitments. It could also produce a new job definition for the International Monetary Fund, which the ministers hope will include monitoring unfair trading practices.

The IMF indeed will play a greater role under the new G20 order. Last month the G20 decided to increase the voices of emerging economies in the IMF by reallocating 6 per cent of its quota, which determines the voting rights of IMF members, to China and other emerging countries. Some of the board memberships were also taken away from Europe and given to the new economies. Seoul proposed that the newly reformed IMF function not only as a watchdog of currency manipulation, but also as a possible lender of quick emergency loans to troubled economies.

In addition to the safety net, Seoul placed the development of poor countries on this week’s agenda. As a recipient of international aid until very recently, Seoul wants to use the summit to call attention to the more than 170 countries not invited to the meeting, many of which are still in poverty. “Through the development agenda, Korea hopes to be known as a defender of less developed nations,” says Sohn Jie-ae, a spokesperson for the G20 Seoul summit. In order to ensure its success, South Korea has organised a sideshow of the G20: a business summit, where more than 110 global executives will gather in Seoul for conferences.

The G20 risks becoming a fierce battleground between advanced and emerging economies. But with the global economy still struggling to recover, the G20 remains highly necessary, as last month’s deal demonstrates. As long as power continues to shift from Western industrial nations to emerging economies, the G20 is likely to stay.

© Newsweek