October 28, 2011

Another drama of our financial-crisis era is coming up next week: a G-20 summit, where world leaders will gather to develop and debate solutions to the global economic turmoil. But for all their pomp, what do these meetings really accomplish? As President Obama and other heads of government travel to Cannes, France, let’s set straight some misconceptions surrounding these high-level gatherings.

1.The G-20 has 20 members.

Actually, the Group of 20 is a group for our times: The numbers don’t add up. The host governments usually invite additional countries, whether to represent particular regions or assuage complaining neighbors. So there are usually about 25 nations present, plus the heads of international organizations such as the World Bank, the International Monetary Fund and the United Nations. (The European Union has the most seats, usually with six or seven countries as well as representatives of the president of the European Council, the presidency country and the European Commission.)

The countries around the table account for about 85 percent of global GDP. Of course, the bigger developed economies — especially the United States — carry considerable weight, though their troubled performance in recent years lessens their pull. The views of large developing countries, such as China and India, are also important, but midsize economies can punch above their weight by mobilizing others around a specific issue. For example, Australia and South Africa have pushed this month for consideration of various options to supplement IMF resources if financial markets dive again.

2.The G-20 was born during the financial crisis of 2008.

Though it achieved prominence in the aftermath of the collapse of Lehman Brothers in the fall of 2008, the G-20 was created in 1999, after the Asian financial crisis that spread to other emerging markets. At that time, a collection of finance ministers, led by Canada’s, argued that developing nations needed to have a greater voice in global debates over economic policy.

Illustrating the ad hoc nature of the new group, the G-20’s membership still reflects some oddities of the initial self-selection process: South Africa and Saudi Arabia wanted to take part, for instance, but Egypt and Nigeria did not sign up. Even so, the creation of the G-20 was an early signal that the era of the G-7 — the old club of developed nations comprising Britain, Canada, France, Germany, Italy, Japan and the United States — was waning.

Apart from a 2004 agreement on tax matters, the G-20 served largely as a discussion group in its early years. In October 2008, however, President George W. Bush wanted to assure finance ministers and central bankers assembled in Washington for the World Bank-IMF annual meetings that his administration was committed to preventing a global economic breakdown. He met first with the G-7 but recognized that the changed world called for a broader group, so he asked to speak to officials from the G-20 nations, chaired that year by Brazil. Then, urged on by President Nicolas Sarkozy of France and others, he convened the first G-20 summitin Washington the following month.

3. The G-20 is a lot of talk and little action.

The jury is still out on this one. There certainly is lots of talk: The summits and meetings of finance ministers and central bank chiefs are now accompanied by occasional sessions for ministers of agriculture, development and labor, with all the requisite “working groups” meeting in advance. As with the G-7, there is a real risk of bureaucracy taking over; a larger group may be more representative, but size also impedes deliberations, turns frank discussions into more formal (and less useful) presentations of positions and makes it harder to take action.

But some important action has emerged. The London G-20 summit in 2009 produced a $1.1 trillion global recovery plan, featuring national stimulus efforts, calls for increased IMF resources and greater financing for trade. But as fiscal deficits have since surged, it has proved easier for world leaders to spend large sums than to tighten belts.

Even when the summits do not produce headline-grabbing plans, smaller efforts can yield results over time. The London summit also transformed the Financial Stability Forum — a loose grouping founded by the G-7 — into a more influential Financial Stability Board open to all G-20 nations and tasked with guiding new financial regulatory policies; it has already led to accords on standards and monitoring. The G-20 summits in Pittsburgh, Toronto and Seoul, as well as the preparations under France’s chairmanship this year, have achieved agreements on exempting emergency food supplies from export bans and on agricultural assistance for Africa. Also, France has used the G-20 to spark debate on what a future international monetary system might look like.

4. The G-20 is a new global government.

Not even close. There are no votes, no charter of rights or responsibilities, no compulsory actions. The G-20 is a forum for economic diplomacy — an informal steering committee that shares views, reports and recommendations, while seeking consensus for action. Its members also draw on multilateral institutions to push ideas and execute policies with the help of nations that are not in the G-20.

With a disparate group such as the G-20, meaningful action is most likely achieved by first forging agreements in smaller groups and then seeking to expand coalitions, preferably with support from both developing and developed countries, or with backing across regions. (For example, a proposal shared by the United States and China or India would clearly be influential.) In the end, though, all big decisions still rest with national governments, which as sovereign representatives must decide whether, when and how to cooperate.

5. The true test of the G-20 will be if it can prevent a future financial crisis.

That’s an important test, but the immediate test must still be passed — overcoming the current crisis. The world economy is hobbled not only by large deficits and troubled banks, but by joblessness and slow growth.

At the G-20 summit in France this coming week, the euro zone will present its new plan to recapitalize and strengthen E.U. banks; use its new European Financial Stability Facilityto enable Italy and Spain to roll over government debts, while assisting Greece, Portugal and Ireland; and ease the debt load on Greece to give it a chance of recovery.

Washington’s budget, debt, growth and jobs challenges may not be as imminent in the eyes of international markets, but they could be just as serious. Developing countries’ economic growth has helped compensate for the lackluster performance of developed nations, but they are hardly immune to the shocks coming out of industrialized countries. Together, all nations must at least agree not to do dumb things — such as retreat to protectionism or trade wars. The G-20 also must offset the damage to the poorest countries, which do not sit at the table.

Robert B. Zoellick, president of the World Bank Group, has taken part in all the G-20 summits.

Want to challenge everything you think you know? Check out more Five Myths from Outlook, including myths about the European debt crisis and foreign aid.

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