The Evolution of Global Economic Governance: G7 to G8 to G20

First constituted in 1975 as a G-6 meeting of advanced economies’ finance ministers, Canada joined the following year, making it a G-7. Beginning in 1994, G-7 meetings were followed by ‘political’ meetings, to which Russia was invited. Russia became a full member of the G-8 in 1997. It participated in all discussions, bar some that related to financial issues. Until 2003, the G-7 continued to meet separately in advance of the G-8.

In addition to the aforementioned, the US, the UK, France, Germany, Italy and Japan are members, while the EU is represented, but cannot host or chair meetings. The Presidency rotates annually, with the hosting of a mid-year summit of Heads of Government, as well as Ministerial formations at the discretion of the incumbent Presidency.

These ‘G’ groupings constitute an informal model of global economic governance which allows the most powerful countries to debate issues and reach conclusions without having to operate under the constraints of formalized governance structures, such as in the UN or Bretton Woods institutions. Often, a G-7 /8 conclusion will later be rubber stamped at, for instance, the Bretton Woods institutions where they control a preponderance of the voting strength.

Following the Asian and Latin American crises of the 1990s, there was a growing recognition among G-8 leaders of the need to expand the scope of the group’s work to reach out to emerging and developing countries. Driven by Lawrence Summers, US Secretary of the Treasury, and Peter Martin, Canadian Finance Minister, several larger groupings of finance ministers met in the late 1990s before the G-20 format was settled upon in December 1999.

After the financial crisis hit in 2008, the G-20 met for the first time as a summit of heads of government. Following its initial success in dealing with the fallout from the financial crisis, the G-20 continues to meet in both ministerial and heads of governments format.

From the Washington summit of 2008 onwards, the G-20 came to be seen as the more legitimate and inclusive forum for wealthy nations to debate important issues facing the global economy. This was reinforced at the Pittsburgh summit where the G-20 leaders’ statement designated it the “premier forum for our economic cooperation.” While the G-8 continues to meet, and will discuss economic issues, the balance of power appears to have shifted decisively from the G-8 to the G-20 when it comes to the global economy, leaving the G-8 to focus on security issues.

The November 2010 G-20 meeting in Seoul was the first to be hosted in a non G-8 country. While there was no significant or substantive movement on the core issue of global trade imbalances and currency manipulation, the development agenda was given greater prominence than heretofore in the G-20 forum. In addition, the Basel III reforms were formally endorsed.

The adoption of the Seoul Development Consensus, a nine pillar framework for the engagement of the G-20 with less developed nations, was particularly notable. The significance of this protocol may be best understood not in terms of concrete achievements, but in a recognition that it must in  future be a serious forum for debating global development issues. It thus represented a subtle, yet important, shift in tone for the G-20 which may have gone some way towards enhancing its legitimacy with non G-20 developing countries.

This change in tone was reinforced by the concrete achievement of agreement on reforming the governance structure of the IMF to ensure better representation for emerging markets and developing countries. This followed through on commitments previously made at the Pittsburgh summit. Although comprehensive reform of the Bretton Woods institutions is a continuously (albeit slowly) evolving process, the Seoul summit was an important stepping stone.

What is certainly clear in the buildup to the forthcoming G-20 summit in Cannes is that the unity of purpose of late 2008 and 2009 has dissipated. Now, there is more emphasis on what divides the G-20, rather than what unites them. Disagreements over currencies, fiscal policy, trade imbalances and a putative Financial Transactions Tax are to the fore. Divergent interests between the trade surplus and deficit countries are particularly apparent.

Moreover, there is no single leader with a vision and a sense of mission driving the G-20 process – a role played with aplomb by UK Prime Minister Gordon Brown in the early stages of the financial crisis. By contrast, the host of the Cannes summit, French President, Nicolas Sarkozy, seems more focused on using the summit as a platform to bolster his standing domestically ahead of his re-election campaign next year.

Although the formal agenda is ambitious, covering global trade imbalances, unemployment, exchange rates and commodity prices, and the regulation of systemically important banks, it will undoubtedly be overshadowed by the ongoing crisis in the Eurozone. Thus, the central focus on China, for example, will likely be on whether it agrees to make a financial contribution to support the eurozone – and what concessions in can obtain in return – rather than its contribution to global imbalances.

While the Eurozone crisis – and the debt burden on advanced economies generally – is certainly a grave and immediate threat to the health of the world economy, it is a testament to the lethargy of European leaders and policymakers that this element of the crisis has not been dealt with in a timely manner. Time after time in recent months, they have given solemn declarations that they will ‘do what it takes’ to end the crisis, only to disappoint.

Then IMF Executive Director, Dominique Strauss Kahn summed up the Seoul G-20 as a ‘G-20 of debate, not a G-20 of conclusion.’ Given the loss of impetus for bold action since the early stages of the financial crisis, it may be unrealistic at this point to expect any great advances at the Cannes summit.

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