Feb 01 2013
The Fundamental Problems in World Economy and the Role of the G20
By LIU Zongyi
world   economic   map,   global   economic   governance,   economic   system   reform,   the   G20  
The burst of financial crisis in 2008 revealed underlying contradictions in world economy. The contemporary world economy is faced with two contradictions. The first lies in the mismatch between the change of world economic map and the current global economic governance structure on the international level. The second stems from the bottlenecks that all the economies or economic zones encountered with their old development models. In the context of economic globalization, to solve the current world economic contradictions and difficulties calls for concerted efforts by all the economies. The G20 is the best platform for international cooperation. This paper analyzes the reason why the world economy is facing these conflicts as noted, and suggests carrying out more extensive cooperation on the G20 platform to solve these problems. The attitude of the developed countries to emerging economies will play a key role in addressing the contradictions mentioned above.

The Change of the World Economic Map and the Failure of the Global Economic Governance
The world economic map has undergone significant changes since the 21st century. At the end of the 20th century, Japanese scholar Kenichi Ohmae put forward that the world at that time was made up of Three Economic Plates. One was the United States-centered, including Canada， Central and South America. One was European Union-centered, including EU countries, Commonwealth of Independent States and Africa. The other was Japan-centered, including Taiwan, Chinese mainland, South Korea, Southeast Asia, West Asia, Australia and New Zealand (Ohmae, 1985). However, since the 21st century, especially after the global financial crisis in 2008, the global economic map has changed drastically, forming three new plates: developed countries, pan-Asian countries and energy countries. These plates have already shattered the traditional geographical concept completely with their consistent economic cycles and stronger connection with the global economy (Zhu, 2012).

The most obvious change of the world economic map is the rise of pan-Asian economic plates. The economic development of China and India has already altered Japan’s superiority in Asian economy. Now the pan-Asian economic plates with vertical supply chain have broken the original pattern divided by traditional geographical location. Besides the countries in Asia, some Latin American and African countries, such as Brazil, Chile, Tanzania, Gabon, etc., also belong to this economic circle. The supply chain of pan-Asian economic plates which continues to expand will attract more countries to join and create more opportunities for economic development. Owing to the rise of pan-Asian economic plates, the GDP of the developing countries has risen to account for about 50% of the world’s total, which will have an enormous impact on the global economy by changing the global demand structure. The emergence of the BRICS is the best evidence of the change of the global economic order and the rise of pan-Asian plates. Among the BRICS, there are such productive countries as China and India, and also countries with extraordinarily abundant natural resources like Russia, Brazil and South Africa. Highly economically complementary, they can enjoy the benefits if they can further strengthen their cooperation. It is expected that in 2015 the economic aggregate of BRIC (not including South Africa) will surpass that of the United States, and their GDP increment is supposed to account for 1/3 of the world’s total (Lin & Zhou, 2011, p.63).

Meanwhile, those great powers which were in leading position after the Second World War still play important roles in the global economy. In 2012, the European Union continued to be the largest economic zone, accounting for 23% of the global GDP, almost twice the size of the Chinese economy. In the same year, the GDP of the United States (15.68 trillion dollars) was almost doubled that of China (8 trillion dollars), remaining its place as the largest economic entity of the world. The Group of Seven (G7), including Japan and excluding China, made up 47% of the global GDP. According to the evaluation of the IMF, even in 2016 while China is going to account for 15% of the global economy, the EU and the G7 will still occupy 20% and 43% respectively.  Obviously, it is premature to deny the status of the members of the G7 and the EU as well as Japan as world economic powers.

However, since 2001, the “anti-terrorism war” and the financial crisis have proved the limitation of the United States and Europe in the financial and military fields. The US and European countries have lost their power to lead other countries around the world to operate the global governance. For effective global governance, they have to get active support from emerging economies, led by the BRICS such as China and India. Currently, the global economic map is in the period of transformation. The balance of power between developed countries and the BRICS is changing. However, this changing process will take a long time since the global economic order is still dominated by the former countries and they attempt to keep their advantage in making global rules. Just as what happened after this international financial crisis shows, the United States and the EU do want to use the sizable foreign exchange reserve of the emerging economies to contain the crisis, to utilize their power to strengthen the global governance, and to make them shoulder the international responsibility without letting them share the same rights. These emerging economies also hope the world to get out of the crisis as soon as possible. So they have been trying their best to help Europe and America to stabilize the international debt market and to retain quite a considerable amount of debt of the developed countries. But they do not want to suffer debt losses without any reason, which is of course inevitable, therefore, they hope the developed countries to treat them equally and to make a long-term plan to stabilize the debt situation with them, and hope that they can get some compensation for future losses. They require to change their passive position in the global governance gradually, to carry out reforms on the international finance system including the international monetary system, and to have greater voice in the global economic governance institutions such as the World Band and the IMF. However, Europe and America are reluctant to give up their vested interest. In this March, the United States Senate rejected the reform program of the IMF, which once again hindered the progress of increasing the voting rights of the emerging economies (Jiao, 2013). The mismatch between the global economic map and the global economic governance structure is the root cause of the low efficiency of the global economic governance.

All the World’s Major Economies are Faced with the Problem of Coordinating Internal Reforms with External Economy
The financial crisis in 2008 had a huge impact on world economy and its consequence doesn’t disappear until today. This situation does not only indicate the low efficiency of global governance, but also shows the end of economic development model leading to major economies’ prosperities in the past and the necessity to develop a new one. In the past five years since the financial crisis, jointly or alone, the world major economies have taken many measures to cope with it, especially after it just happened. Some of them are effective, while others are not. Therefore, currently, the world economy is presenting a picture of “three-speed-recovery”:  emerging economies in Asia and developing countries in sub-Saharan are enjoying rapid economic growth; the United States is at a medium-speed recovery; Euro Zone and Japan are the “short board” of global economic growth, especially the Euro Zone, whose economy is continuing to shrink (Asia-Pacific Finance and Development Center, 2013).

However, emerging economies and the United States have many obstacles to overcome, even though their economies are in good momentum. For the United States, due to appropriate fiscal and monetary policy in the past five years and the stimulating effect of large-scale exploitation of shale gas and shale oil, the current recovery of its economy is well, but it also faces those challenges including shortage of employment and income growth stagnation in working-class. It needs to promote the competitiveness of the manufacturing industry through tax reform and to increase the investment in areas such as research, infrastructure, energy, education and training, in order to create more jobs and improve the professional skills of the American people. In addition, raising the minimum hourly wage to help workers improve living standards is essential (United States Government Printing Office, 2013). Those involve a series of tough reforms.

For China, India and other emerging economies, although the speed of the economic development is already quite fast compared with the developed countries, they all come across bottlenecks of growth after two or three decades of rapid development. Therefore, without further reforms, former reformation and achievements would be likely to be in vain. In China, new breakthrough needs to be made by the following reform: In the aspects of economy and finance, China should gradually liberalize its interest rate, accelerate the convertibility of currency, and make efforts to increase domestic consumption and reduce economic growth relying on exports; in order to boost the consumption thereby reducing bank deposits; it’s essential to reform the Hu Kou system and strengthen the social security system; meanwhile, China also needs to combat corruption and make great efforts into environmental governance, especially in solving such problems as food safety, air and water pollution. Chinese top leaders all agree that reform is the only path to promote economic growth in a more sustainable way. Chinese government even deliberately lowers the speed of the growth for the sake of economic restructuring.

It is the same with India. Many people including Prime Minister Manmohan Singh, believe that the Indian economy could not continue to have a high growth until the reform is deepened, great efforts are to be made into the poor infrastructure and the situation of cumbersome administrative examination and approval is to be changed. In mid-September 2012, the Singh government announced tough reforms and introduced a package of government orders, which are reducing fuel subsidies, further opening the retail, airline and broadcast television industry and increasing the share of the foreign investment in those areas or companies in response to a decline in economic growth. And later, they modify some laws related to competitiveness in order to increase foreign investment proportion in the market of insurance and pension. The purpose of those initiatives is to attract more foreign investment, strengthen the position of rupee and reverse the trend of slow economic growth in India. Given India's complicated political party system, it’s unclear whether the reform will go smoothly.

For Japan and Europe whose economic recovery is sluggish, reform is more needed. After Shinzo Abe government came to power, Japan started to reform its economic policy and implement the so-called “Abenomics”, whose three pillars are “bold monetary policy”, “flexible fiscal policy” and the economic growth strategy involving industrial revitalization, stimulation in private investment, relaxation of administrative control and expansion of trade liberation. Now massive quantitative easing monetary policies have held a dominant position, but whether the monetary expansion and depreciation of the yen could recover Japanese economy which has been stagnant for nearly 20 years, is still in doubt. In late May, Japan's stock market crash seems to give the answer. In fact, the Japanese government should pay more attention to reform the tax regime, technological innovation system and national energy policy so as to reduce its industrial cost and improve products’ competitiveness; it should also adopt reforms to take some basic measures and make social policies to address the effect of population aging on the financial budget.

The structural reform of the Euro Zone may be the most difficult among all the large economies. At present, all the Euro Zone governments are increasing their efforts to deal with those stubborn factors restraining economic growth, which include: support professional youth pre-employment training program, ease restrictions of labor rules, privatize staple industries and so on. The Euro Zone and its European Central Bank also need to offer a more reasonable pricing credit mechanism for their small- and middle-sized enterprises, whose development are vital for the reviving of the suffered most southern European countries (Rhodes, 2013). The Euro Zone has been steadily integrating European bank industry. The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, also called the Fiscal Compact, has been in effect formally, which is a great step for a European fiscal union. As a unified monetary union, the lack of a unified fiscal policy is the key issue for the Euro Zone. Thus a fiscal and monetary union framework within euro zone will largely benefit the stability of Euro and future economic growth of Euro area. This reform is not only economically related, but also need political progress of European Union. It must get all member states’ agreements. This needs a long way to go.

Thus it can be seen that all large economies have similar tasks. First of all, either developed economies or emerging economies have to propel internal reform and economic system adjustment. We can even say that who goes first, right and deepest in the reform wave will be the final winner in the power competition. Reform needs great political determination. The competitors know clearly about the cruxes of themselves. What they need to do is to form social consensus on reform. In terms of this issue, China’s further step are being stumbled by the vested interest groups. For some western countries, the task is harder as their political party system has been in their way of reform. Take America as an example. The present two-party system has two problems: first, in the past, neither the party in power nor the opposition would break the bottom line in political games. They could reach compromises when issues touched the bottom line. But there is a trend of extremism. The opposition rejects all policies of the party in power even if they know clearly that’s what America should do. The two-party balance mechanism is leading to an institutional paralysis. Second, a kind of “consumer culture” is controlling internal politics. Voters can’t take time to wait for the effects of structural reform. On the contrary, they require immediate interests. The phenomenon is not only for America, which is famous for mature democracy. Those emerging economies, for example India, where democracy is developing, have the same trouble. The situation is more complicated in the Euro Zone. While party politics poses a stumbling block within member states, the structural reform of European Union need all members’ agreements. This forms a double-deck game that cost tremendously. In fact, Germany can be a solution for the present debt crisis as well as the pushing hand behind it. But German voters don’t think so. So German leaders turn to requiring indebted countries to implement policies of fiscal austerity, which lead to further economic recessions in these countries. Thus, Germany’s exports will also be reduced, which is a result the leaders of Germany wouldn’t like to see. However, they have to do this if they want votes .

Paralleling the reform challenge, how to react to globalization and how to deal with inter-economies relations is another great task for all the large economies. It has been sure that the financial crisis is one of the negative effects following globalization. But globalization can not be reversed as it has made all the large economies become an interest-community within which the economies are interdependent and share joys and sorrows with each other. In the context of globalization, spillover effects are quite possible. Economic policies or reforms within any of the large economies may pose positive or negative effect on other countries’ economic developments. As every country is struggling to break away from the influence of the financial crisis, their economic policies can easily go against with each other. For instance, the monetary easing policy of Western countries brings great pressure on developing countries’ exchange policy. The financial minister of Brazil called this “a currency war” (Wheatley & Garnham, 2010). As the economic growth is slowing down world-widely, trade has been a main engine for economic growth. But in order to reduce trade deficit and unemployment, some countries has gone to trade protectionism which benefit themselves with other countries’ expenses. Some also build some kinds of excludable trans-regional investment and trade arrangements just for keeping their advantages in global economy, especially in the rule-making of global economy order, and restrain development of emerging economies. All of these measures are harmful for the economic reform within the large economies as well as for the recovery and sustainable development of global economy. In the backdrop of global economic integration, enhancing economic cooperation and coordination is the only way for coexistence and co-prosperity of all the large economies. And for this aim, the G20 can and should play a more important role.

The G20 should Play a Greater Role
The G20 upgraded from a ministerial meeting mechanism to a summit mechanism during international financial crisis in 2008. As a Crisis Response Mechanism, the G20 had played an important coordinating role for two years since the crisis erupted, during which great and detailed achievements were reached such as institutionalizing financial supervision sector, promoting the reform of IMF and financing for IMF etc. However, these achievements are limited. Since the Pittsburg Summit, along with the slow recovery of the global economy and turmoil of the Euro Zone, the political and economic divergences between the G20 members are growing and members are hard to achieve consensus. The consensuses achieved on Toronto summit, Seoul summit, Cannes summit and Los Cabos summit are merely principled ones, and they just repeated common views on the reform of international financial system achieved during the crisis by member countries and without substantive breakthroughs. Thus, the G20 is suffering a difficult transition from a crisis response mechanism to a global economic governance mechanism. Nevertheless, the G20 is still an irreplaceable mechanism which provides dialogue and cooperation platform for developed economies and emerging economies.

1. The G20 should become a platform for great powers to coordinate, cooperate and learn from each other

As the main forum to discuss the world economy, the G20’s success lies in the cooperation and compromise between great powers rather than to seek benefits for themselves at the expense of other countries or shift its troubles onto others. Based on the background that main economies are focusing on domestic reforms, the G20 should not only be the platform for cooperation, but also be a platform for mutual learning for great powers. Countries should exchange the experiences of their own on reforms. Under the background of globalization, the imperfection of economic system, and even the imperfection of political system of each country, is the main reason why this financial and economic crisis cannot be curbed effectively. At the same time, some countries were able to get rid of the crisis quickly with less negative influences by the crisis, which indicates that their economic or political system does have values to learn from. To avoid the occurrence of such crisis in the future, each state must give ideological barriers up, and learn from each other. Emerging economies should further improve market transparency, develop and open up service industry; while developed countries should recognize the limitation of market’s "invisible hand" and drawbacks of party politics. As an informal international platform, the G20 achieves specific advantages in communication and mutual learning of statecraft experiences among leaders.

2. Promoting international financial system reform will improve global economic governance

Reform of the international financial system is one of the priority agenda of the G20. The development of international financial system reform will to some degree correct the uncoordinated situation in which the world economic landscape has changed and global economic governance are still under the domination of European countries and the United States. Emerging economies has already made great contributions by buying government bonds of US and EU countries, boosting capital for IMF to help western countries, and at the same time maintaining economic growth, thereby avoiding the recession at a global scale. Thus, the US and EU countries should fulfill their promise to transfer excess shares in IMF and the World Bank to emerging economies. Only in this way can western countries expect the emerging economies to play a greater role and make greater contribution in global economic governance in the future.

Meanwhile, the international financial system reform is also a powerful approach to offset the G20 validity. For the G20, currently, starting the real reform of the international financial system is the key to its revitalization. Regardless some suspicions about its legitimacy, the G20 is irreplaceable as the prime platform to discuss world economic problems when taking its population and economic scale into account. Meanwhile, some national and regional organizations were invited on previous the G20 summits, which to some extent, makes up for its lack of legitimacy. However, the real threat to the G20’s existence and development is its validity. The G20, as an informal organization, has neither a Secretariat nor executive agencies. Besides, the resolutions reached by the G20 can only be executed by members consciously, or through the help of other international organizations like IMF and the World Bank. In this aspect, the reform of shares and voting rights of IMF and the World Bank will enhance the executive ability and validity of the G20. At the moment, lots of scholars from EU and the US regret realizing too late that emerging economies should acquire status consistent with their economic scales. They believed that emerging economies should be treated more equally in the G20. 

3. Promoting international trade will motivate the sustainable development of world economy

Opposing to trade protectionism is one of the several fields in which the G20 plays a rather effective role. But its effort to oppose to the trade protectionism didn’t eliminate the word’s trade protectionism, especially for the region like EU which has not restored its economic growth and frequently chose trade protectionism as their current policy. Of course, many EU members have realized the disadvantages of trade protectionism and objected to EU’s trade protectionist measures against China and other emerging economies. While, Some European countries out of the Euro Zone have started to sign FTA (free trade agreement) with China. Theoretically, investing to countries or regions which have implemented trade protectionism can avoid protectionist barriers. China and other emerging economies do have lots of foreign exchange reserves looking for investment market and access to high technology. At the same time, for developed countries, attracting foreign investment is an effective way to get rid of debt crisis and create jobs. But since emerging countries like China are new creditors, their assets overseas and industry security in Europe and America haven’t got effective guarantee.

Besides trade protectionism, some exclusive arrangements of transnational investment and trade also have an adverse effect on the world economy’s sustainable development, such as “The trans-pacific strategic economic partnership agreement” (TPP) and “The transatlantic trade and investment partnership agreement”(TTIP). There may appear a new round of global rules negotiation without and even against the emerging economies, so that the developed economies can contend the rise of emerging economies and grab the right to make international rules in the post-crisis era (Chen, 2013). Some western scholars are extremely worried about this situation. Former world bank President, senior visiting fellow at the Peterson Institute for international economics, Robert Zoellick asked WTO to continue promoting trade liberalization and the Doha round negotiations. He thinks, just like IMF, World Bank and other international organizations, WTO should also promote multilateralism modernization, in order to reflect the change of global economic landscape and the increasing influence of developing countries. If the Doha round negotiations are stalled, WTO will be at the risk of being marginalized by bilateral and regional trade agreements. The economic recovery in the past few years is mainly because of the push of fiscal and monetary policies, and then the trade will be the critical point to promote the world economy’s sustainable recovery in the future. Zoellick thinks that the current major economies like the United States, Japan and China, all have the will to promote the international trade, so it is a good opportunity to advance the global trade liberalization at this moment (China Review News, 2013). The G20 should play an active role in promoting Doha round negotiation. Moreover, since the aim for United States to set up TPP and TTIP is to reach a global free trade agreement with high standards, the G20 should encourage the United States and other countries to discuss TPP and TTIP on the G20 platform. This will motivate the Doha round negotiations to make progress.

Main Factors that Influence the G20’s Role
The G20 may have a significant impact on the fundamental contradictions of world economy, but the cooperation between the great powers, especially what attitude western countries have to emerging economies will determine the role the G20 may play.

1. Sino-US cooperation is the guarantee of the G20’s influence

Some scholars believe that the tension between China and the US is the reason why the G20 didn’t achieve too much in the past few years. Though the contradiction between the two countries is not the main factor making the G20 lose its momentum, the cooperation and tacit understanding between them are indispensable conditions in which the G20 can make agreements. From the aspect of the US, the reform of international financial institutions is its policy priority of global economic governance. But it holds the view that in accordance with economic size, the US has a relatively less representative in IMF and World Bank and the voice of Europe is disproportionately louder. Therefore, the US tries to lower Europe’s power in these two institutions to a reasonable level. Both Chinese and American scholars realize that enhancing their cooperation in the G20 can consolidate the G20 and develop a new type of great power relationship at the same time. Scholars in the two countries believe the G20 must fulfill its promises it have made to defend its credit, including the international financial system reform agreed in 2010 (China Institutes of Contemporary International Relations, the Center for American Progress, and the Stanley Foundation, 2013). In fact, some American scholars have already suggested IMF to offer same veto power to China as the United States (China Review News, 2013). The summit between President Xi Jinping and President Obama in the “Sunnyland” of South California shows that both sides realize that there would be too many problems for both countries without cooperation. They admit that the basic game rules between them have changed through the arrangement of this meeting (Chance, 2013).

2. Equal treatment of Western countries to emerging economies is the key to the G20’s success

Another problem for the G20 that many scholars concern is that Caucuses may form in the G20. There are G7 members and BRICS in the G20, which are likely to transform to two antagonistic Caucuses. Actually, BRICS members differ a lot on political and economic system, cultural background and ideology. There are two goals for their union: to promote the global governance reform, including the reform of international financial system; and to enhance South-South cooperation, including the cooperation between emerging economies and other developing countries. If the G20 can solve the problem of international financial reform and BRICS have a louder voice in IMF and the World Bank, they have no reason to from a caucus and hinder the G20’s proper function. Instead, they will take an active part in fulfilling their international responsibility. Yet, it is possible that G7 becomes the Caucus in the G20. As an international organization which has lost its former influence, G7 can hardly solve any global political and economic problems alone, but they have common values and shared interests on safeguarding vested interests in the current international order, which is now highlighted deliberately by Japan and other countries. And in fact, the majority of agendas in the G20 are initiated by G7. Therefore, the possibility that two antagonistic Caucuses between G7 and BRICS emerge or not lies in western countries’ attitude towards emerging countries: whether they will abandon their arrogance and treat emerging economies equally.

Source of documents：Wirtschaftspolitische Blätter

more details：

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[1] The data was calculated by the author, and the original data came from ECONOMY WATCH, http://www.economywatch.com/
[2] Quoted from conversation between the author and Professor Ding Yifan, Vice Director of the Institute of World Development under Development Research Center of the State Council.
[3] Quoted from dialogue between Matthew P. Goodman, Director of Simon Chair in Political Economy CSIS, and the author.