The Committee To Save the World? The G-20 and the Future of Global Economic Governance

Robert D. Hormats
Under Secretary for Economic, Energy and Agricultural Affairs 
Brussels Forum 2010
Brussels, Belgium
March 28, 2010

Excerpts taken from the Brussels Forum. Full transcript and video are available on the Brussels Forum website.

QUESTION: Mr. Hormats, do you think that the big players on both sides of the Atlantic, Europe and the United States, do you think that they have the same vision of what the G20 is for? It is very striking in this town, in Brussels, that the most recent E.U. summit ended on Friday. The summit conclusion was truffled with mentions of the G20. And they tend to be heading in the direction of what about this very tough financial regulation we were sure we were going to have? When is it coming? When are we going to stop seeing resistance to tougher regulation? And then they mention the G20 because that seems to be for some European countries what the G20 was. It was a promise, perhaps, from countries like yours, from governments like yours, that you are going to give in and start regulating in a more sort of European way. Do we share the same vision of what the G20 is?

UNDER SECRETARY HORMATS: I think we do in many respects. Let me just identify two of those. One, the broad framework that was agreed for strong, sustained and balanced growth is something that I think both Europeans and Americans, indeed, the Chinese, Indians, Koreans and many others who participated in the Pittsburgh summit agreed to. There is a lot of work going on. I think there is a considerable amount of cooperation in that area.

On the question of financial reform, financial regulation, clearly there is a history between United States and Europe in seeing the particulars or the details in different ways. We have a different regulatory system in the United States. Europe's is different. Europe is different, in some cases, from country to country. But what we agree to do to try to reduce these differences is to create something called the Financial Stability Board. There is a lot of work going into the that group. It is run by Italian Mario (Inaudible) who is excellent. And a lot of work is going on in that group to try to narrow differences and come up with some generally accepted principles that can be accepted not just between the United States and western Europe, but by all the participating countries. So it is not necessarily a process that is going to happen right away but there is an understanding on the part of Americans and Europeans and others to avoid what is called here regulatory arbitrage where you do your business in the country that has the weakest standards. In a world where global financial markets are integrated, if you don't have at least high standards across the boards, if you can engage in regulatory arbitrage it tends to weaken the system. If there is a country that has poor regulations and that country is vulnerable to disruption, it can have an effect on the rest of the world.

So we understand that and we're working within the financial stability world and other groups, the OECD and the IMF and other groups to try to address these kinds of issues. It is not going to happen easily because there are long standing differences in approach but we are attempting to narrow those. And I think we have made a considerable amount of progress already.

QUESTION: Just before I come to Dr. Rhee, can I put you in the hot seat as the representative of a big government that a lot of people want to see taking decisions and being banned? How do you feel about this debate?

UNDER SECRETARY HORMATS: Well, I think Ernesto makes a very good point. And that is that if these governments represent about 85% of world GDP. So what their presidents and prime ministers, their heads of states say matters a great deal. The other part of it is that this is a phrase Bob Zelek used yesterday. They have to be networked in because in many cases they will make the decisions but they need to be implemented in other groups that engage and involve more countries, for instance, a lot of what they did in Pittsburgh was to reach agreements but then they asked their ministers to carry them out in other institutions, in the IMP, in the World Bank, in the OECD and elsewhere. They can't give instructions to those groups. They can't officially give instructions to the IMF but they can give instructions to their ministers within in the context of the IMP or the World Bank to do things. I think that is really the way they're networked into these broader groups.

The second point I make goes to the question of legitimacy. The legitimacy in part results from who is seated around the table. You have a number of countries including not just the G7/G8 countries, but as Pascal pointed out you have countries in the Middle East, from Africa who were not part of the G7. That is a very important difference.

The third is if you look at the G7 and this goes to your point about can you ask or is there risk that you'll put too much weight on the G20? It is a very legitimate question. It cannot do everything and it cannot resolve all issues. It has made a very clear point in the last discussions in Pittsburgh which I attended, that they do not want to get into sensitive geopolitical issues. The G7/G8 do geopolitical issues. The G20 does not in part because you have a wider range of countries. In most cases the countries in the G7 are allies except for one. U.S. is in alliance with Japan, the Europeans and U.S. and Canadians are in the NATO alliance. So there is a lot more political conversion and, therefore, conversion in that group compared to the G20. So they're willing to take on a wider range of geostrategic issues that the G20 is not willing to take on and simply resists doing that. At one point there was a notion to discuss Iran and the G20. They didn't want to do that. There is a danger in putting too much weight on the G20.

On the other hand, just as was the case with the G7 it started out being called the G7 Economic Summits. Over a period of time it took on more and more issues and therefore will evolve but it will have to be gradual. All of these things cannot be imposed by one government or any other government on the G20 process.

QUESTION: Secretary Hormats, when the United States is told we have this wonderful new Lisbon Treaty in Europe, it means an extra European will be coming, was that greeted with joy and delight?

UNDER SECRETARY HORMATS: We are very encouraged by the Lisbon Treaty and hope it works, although it will be up to the Europeans to make it work. The question that I think you have asked Ernesto and myself to talk about, the representation of Europe at the table, there is clearly an understanding in principle that the power in the global economy has shifted to a large number of emerging economies, but there is also this legacy notion that started out with the G7 that the G7 had, of course, four European countries in it. Some of those European countries plus others are now at the G20 table. So you really have to look at this in the context: Is that representation in the G20, does it represent the evolving changes in economic power in the global system? By any objective measure you would have to say that it probably has not quite gotten there yet. That is the whole notion in the World Bank and IMF of redistributing to a degree votes and voice. That process is underway.

I think the Europeans who understand how the global system has evolved and how more power is shifted into the emerging economies are also at some point going to have to come to grips with the fact that maybe the current representation doesn't fully reflect that. How Europe decides that internally who is going to go and who will represent Europe is something Europeans have to decide. But if you are looking at the way the system is evolved, it is not quite at the point yet where the balance in the G20 represents the balance of power in the global system.

UNDER SECRETARY HORMATS: I would say that there is, when you look at Europe from the outside there is a conflict and that is Europe increasingly wants to be seen as the unified entity in the world. On the other hand, in the G20 it wants to have a lot of seats and a lot of voices and a lot of, to use Pascal's words, "mouths". So this does raise a certain instancy. If Europe wants to be seen as having the kind of influence that greater unification would imply, it also needs to find a way of representing itself in these groups in a way that is consistent with that. And for the moment they want to have a lot of people and one unified voice and that is an inconsistency.

UNDER SECRETARY HORMATS: It does that on trade but most other things it does not. That's the problem.

QUESTION: You have had it put to you by the secretary of the OECD that the existence of the G20 has triggered these things but it shows, of course, the politics is a nasty crisis. In nasty depressions and crises we see people moving on tax evasion. How much of this is the G20 and how much of this is going to pass when the crisis goes less acute?

UNDER SECRETARY HORMATS: I was going to make a couple of points related to that. One, I think the G20 does make decisions. It makes decisions about what it wants its ministers to do in other institutions. And other institutions broaden those decisions. If a minister is saying ministers from the G20 countries are told by their heads of state or leaders to do something in the IMF or World Bank or the OECD, they can't tell the IMF or World Bank to do things, but they can translate the importance from their heads into those fora and the fora can make decisions using the importance from these large countries. It is not guaranteed.

The second point that is more important is they can set basic principles and the key principle is that we should not allow the world to deteriorate into zero sum competition. It does seem to me that if that is something that if they can reach agreement on that that the objective in these institutions is to develop some degree of convergence among these countries, that will be very effective.

The third is there is an increasing number of global public goods around. It is not just competition for markets and competition for capital around the world today. It is competition for increasing raw materials. It is competition for arable land. It is competition for water. There are a whole range of environmental exogenous inputs into the process that are being dealt with in these institutions. Increasingly they have to take the kind of cooperation that they have developed in the IMF and World Bank and expand that to environmental cooperational and economic development. That's going to be the big test. It is not what they do in traditional institutions, it is how they make new institutions work more effectively. That's going to be the test as to whether or not they can succeed.

QUESTION: We have a lot of questions in the audience. I'm going to take a brief point.

Dr. Changyong Rhee: (Inaudible) Because if you think about the issues with IMF involvement, once whatever the decision is it is trying to do the restructuring. In the Asian financial crisis in 1997 world economies are all now stagnant. It is very hard for Greece to get out of this crisis very easily. So what is most important agenda is where we have to find the new source of gross. In order to solve this problem, it is not just a European problem. The world economy has to incorporate together some consistent effort to solve this problem. So framework is related to this Greece problem. I'll stop here.

UNDER SECRETARY HORMATS: This is a very fundamental point. The global rebalancing was designed, in effect, to say a country or a group of countries cannot simply rely in this case on the over indebted American consumer for sustained growth of their exports and, therefore, sustained growth of their economy. The whole notion of rebalancing is that countries in a better current account position and a better fiscal position have to take a greater share of responsibility for resuming and sustaining global growth. That is important for the global economy but it is also helpful for countries like Greece and others that are having to make major changes internally to address their problems.

One of the reasons Korea and the East Asians did well after the crisis in the late 1990s is there was a strong global economy for them to sell to. If the countries like Greece and other countries in southern Europe are undertaking major adjustments, those obviously depend, in part, on what they do internally, but their degree of success will also be determined by a robust global economy. And a robust global economy will not happen unless a number of countries in a strong position, many of them are in East Asia, are willing to take a larger share of global growth. And the key to the G20 is the countries in a position to do so assume a greater responsibility for the global system. That, to me, is what the G20 is all about. If the emerging economies that are now quite strong financially and economically are to play a role in the global system one of the roles of the G20 is to help them do that, to encourage them to do that. If they don't do that the global system will not work and the countries now undertaking strong reforms will find it a lot more difficult to succeed.

QUESTION: Center for New American Security. I want to follow up on Secretary Hormats last remark about responsibility in Asian powers because one of the themes for the Brussels Forum this year as in many other forums recently has been the need to integrate the rising China. So the question is: So far, do you see China playing that constructive responsible role vis a vis the G20? I would be interested in the views of the panel on that. And maybe specifically for Secretary Hormats, if you think about an issue as thoroughly as this currency manipulator question, will China start to use the G20 as a lever against U.S. pressure in some other ways? Thank you.

QUESTION: Can we start with Secretary Hormats because you have poked the anthill that is called China.

UNDER SECRETARY HORMATS: I think I will stay out of the currency issue directly. I would like to make some broader points related to that question. It is clear that when you look at the growing role of the large emerging economies, China being one and it isn't the only one. There are a number of these countries. Those countries have been enormous beneficiaries of the open global system, the WTO, the IMF or the World Bank. And it is an interesting thing. The Cold War ended not with World War III. It ended with 2 billion people joining the global market system through the WTO and the World Bank and the IMF over a period of time. And those are countries that wanted to destroy that global system 20 years earlier and now they are a part of it. They are benefiting from it. I also think in some cases they are making important contributions to it. I don't mean to imply that they are not, in some cases they are, particularly in dealing with global financial crisis, China, India and many countries played a very constructive role.

Now the question is going beyond that are they going to play a constructive role in the rebalancing of the global system? And I do think where protection of intellectual property or in dealing with a lot of other issues, I think one of the important things is to recognize if they can't rely on the American consumer who is already in heavy debt and they want to continue to grow, then they have to find ways of increasing domestic demand. If they do that they rebalance better internally, they also help the global system to rebalance and they help a lot of other countries who are now undertaking the kind of reforms Greece is undertaking to grow more rapidly. So the answer is they have to play a greater role in the global system and a more constructive role after the financial crisis just as they have done during the crisis.

QUESTION: The title of the panel is "The G20: The Committee That Can Save the World." We spend our time talking about what should happen. I think the panel is to decide whether the G20 has a chance of being the thing that will happen.

UNDER SECRETARY HORMATS: It is the best possible framework for doing it. Will it work? I don't know, but I can't imagine any other framework that has a better chance of encouraging these countries to take a more responsible role in managing the global system, not just getting the benefits from it but assuming greater responsibility for it. If it couldn't be done at the G7 the G20 is the ultimate vehicle for doing it. Will it work? I don't know, but it is a far better instrument for doing it than anything we've had in the past.

QUESTION: We had a question. Will regional organizations help it work?

UNDER SECRETARY HORMATS: I never said they were a free rider on the system. And I also accept that they took major commitments that others didn't take. I would also stipulate the following. And this was a policy of (Inaudible). The success of China today is in large measure because it opened itself up to more competition by joining the WTO. I think it would not have as strong a domestic economy today if it had not joined the WTO. The objective was to make changes internally in China by opening China to more competition.

Therefore, I think they paid a price but also benefited enormously. I am not saying they have not done constructive things. There are areas that are imposing difficulties like intellectual property protection and a number of other things. In my view it is not that China has made progress, my view is that China as a big economy probably has to go somewhat further to take on the kind of responsibilities commensurate with its strong role in the global financial trading system.

QUESTION: Is the G20 capable of taking this discussion away from the concrete? Is the G20 capable of making this discussion concrete? Is the G20 the body that can make China do things that others want?

UNDER SECRETARY HORMATS: We all need to make internal structural changes because the external imbalances won't be reduced unless internal structure changes are made. And that's what the OECD is doing among some groups and what the G20 can do among other groups.

UNDER SECRETARY HORMATS: Everyone has to make adjustments. And I agree you shouldn't point to one country. It is not only one country. It has to be done by everyone in the G20.

UNDER SECRETARY HORMATS: We've got to deal with our internal imbalances, too, otherwise whatever we do internationally won't be very helpful for us.

QUESTION: I'm going to drag us just the last few minutes we have back to the title of this discussion because I think one of the most important things said is the title of this: Is This a Committee to Save the World? Do you feel, these discussions about finger pointing, European Union is very comfortable about forming a body and finger pointing within itself. It is what the European Union is for. It is so they can blame each other for things. The G20 is rather valuable if it is a place to finger point.

Just your last contributions, do you feel that the G20's momentum is inevitable and is linked to this long secular trend of the rising powers? How much of this is the crisis politics that once the crisis feels slightly more distant this will ebb away? Is this the committee that will save the world? I think I will take it in order. We have very little time.

UNDER SECRETARY HORMATS: I am very much along the lines of what Pascal is saying. There are two reasons for the G20. One, it was something that should have happened anyway to allow the large emerging economies to play a bigger role in the global and direct our international system. It is here to say because it is more representative than the G8. It got its real boost last year from the fact that it was a better group for addressing the financial crisis than the G8 or any other group.

Now the question of the future. I think it will stay, again, because it is the right group with some variations with some regional representation. Then question that Pascal asked: Can it be effective in addressing the after math of the crisis? Two things. One, it can be effective in addressing the aftermath of the crisis. The crisis may be over in some respects but there are still a lot of legacy issues: unemployment, how do you we get out of it? How do we deal with reform? That will be its first question. Can it be effective in dealing with those?

Second, can it identify new areas of global challenge where it can work together after the crisis is over? And then that really is going to be the longer term test. There are a whole range of issues, environmental issues and many other things that we have talked about.

The last point goes to a point that Ernesto and I were discussing. If it gets into the blame game, if each country says "you're responsible for the problem, not us" or "you're responsible for the answer, not us," then it won't work. It has to be seen as a group where everyone is taking responsibility for the global system, not as a blame game operation. That spirit of not looking at this as a zero sum game--you win/I lose, I win/you lose--that is going to be critical to making it a long term success.