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Op-ed

The Group of 20 Must Be Stopped

by Anders Aslund, Peterson Institute for International Economics

Op-ed in the Financial Times
November 26, 2009

© Financial Times


At its September summit in Pittsburgh, the Group of 20 leading economies in the world proclaimed themselves as the supreme global economic institution, replacing the increasingly flimsy and unrepresentative Group of Eight and outlining greater power for their new grouping. The dominant public reaction has been positive. After all, the G-20 represents 85 percent of the world's economy and two-thirds of its population, and though large in number it is still small enough to be effective.

But the G-20 actually violates fundamental principles of international cooperation by arrogating for itself important financial decisions that should be shared by all countries. In so doing it also emasculates the sovereign rights of small countries that have long been the prime defenders of multilateralism and international law as well as the foremost policy innovators. The rule of the big powers over the rest is in danger of becoming unjust and reactionary.

The G-20 has no clear criteria of membership, only that big countries from different continents, originally selected by the United States in 1999, should participate. Amazingly, this group of "20" leading countries is indeterminate in size. Apart from 19 countries, the European Union is also a member. Spain, the world's ninth largest economy, was left out, but it barged into the Washington summit last November. Holland just decided to join, and no one stopped it. After all, its economy is much larger than that of Argentina, a G-20 member. An international community based on the principle of gate-crashing deserves no respect.

Nor does the G-20 possess agreed rules of governance. At the London summit last April, complaints abounded that actual decisions were based on the intrigues of the leading insiders, excluding at least half the G-20 countries. That is the natural outcome if aggressive political leaders are let loose without rules.

A serious flaw is that the G-20 abuses the principle of universality that took hold with the League of Nations after the First World War. One reason why the League became ineffective was that a few key countries, including Germany and the Soviet Union, were not members. To correct that mistake, the principle of universality was reinforced after the Second World War in the United Nations and the Bretton Woods institutions. As this principle has been taken for granted, it has now been forgotten, but it remains as important as ever.

The greatest shortcoming of the G-20 is that it breaches the principle of national sovereignty first established in the Peace of Westphalia in 1648. The G-8 claimed to be an informal discussion club, but the G-20 has usurped power over global financial governance. It has made decisions that it expects 160 other countries to obey, even though they have been neither represented nor informed, reminiscent of the old days of gunboat diplomacy.

Finally, the G-20 is composed of the very policymakers that caused the current global financial crisis. They instigated excessively loose monetary policy, global imbalances, poor exchange rate policy, government-sponsored mortgage enterprises, and poor financial regulation. They are not going to blame themselves, and have proved this by rounding instead on tax havens and hedge funds, which did not cause the crisis. Without honest analysis they are not likely to improve the situation. To let the very culprits hide their tracks behind closed doors is a recipe for even worse policies and disaster.

The G-20 represents an extraordinary regression in international governance to Prince Metternich's concert of great powers in Vienna after the Napoleonic wars in 1814–15. The Congress of Vienna became infamous for its reactionary agenda and hostility to democracy. In reality, most of the governments invited were disregarded and the "real" Congress of Vienna consisted of first four and later five countries. Today, there are discussions about developing the G-20 into a G-4 (the United States, China, Japan and some form of Europe), which will be even less representative.

The irony of this exercise is that small countries have long been the strongest supporters and adherents of multilateral cooperation, while big countries have often disregarded international law or even heralded unilateralism. But now small countries are treated as international outlaws for whom the self-selected G-20 will make decisions—and in the name of multilateralism. This amounts to international gang rule, which is likely to attract neither respect nor obedience from outsiders.

The rule of big countries over small is likely to become extremely conservative, just as with the Congress of Vienna. Small countries are on average wealthier than large ones per capita because they are easier to govern and therefore better ruled. Usually big countries harbor the leading thinkers and public debates, but small countries tend to implement more important policy reforms.

Examples abound. In the 1930s, Sweden pioneered Keynesian demand management. Chile introduced pension reforms based on private savings accounts in 1980. New Zealand started inflation targeting in 1990, and Estonia launched flat income taxes in 1994. Big countries are better at usurping power, but the declared purpose of the G-20 is policy reform, for which it is poorly suited.

The current idea of making the G-20 a global economic organization with supernational powers over nonmember countries goes against multiple vital principles of international law. It must be stopped. Instead, the global community should urgently reform the International Monetary Fund. The IMF has all the properties the G-20 lacks—universality, statutes, governance, and staff, but the launch of the G-20 is a vote of no confidence in its functioning. The IMF needs to improve, becoming more representative, authoritative and effective, while the G-20 should step aside and serve as nothing more than a consultative forum.