G-20 problems: Why there is no global leadership on climate change, trade policy, and energy.

Commentaries on economics and technology.
Feb. 15 2011 3:30 PM

A World Adrift

Why there is no global leadership on climate change, trade policy, energy, and too many other issues.

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Washington monument with flag. Click image to expand.
If U.S. influence is waning, can global leadership be found in the G-20?

We live in a world where, in theory, global economic and political governance is in the hands of the G-20. In practice, however, there is no global leadership. And there is severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food, and global security. Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games. Ours is, in essence, a G-Zero world.

In the 19th century, the stable hegemon was the United Kingdom, with the British Empire imposing the global public goods of free trade, free capital mobility, the gold standard, and the British pound as the major global reserve currency. In the 20th century, the United States took over that role, imposing its Pax Americana to provide security to most of Western Europe, Asia, the Middle East, and Latin America. The United States also dominated the Bretton Woods institutions—the International Monetary Fund, the World Bank, and, later, the World Trade Organization—to determine the global trade and financial rules, with the dollar as the main reserve currency.

Today, however, the U.S. "empire" is in relative decline and fiscally overstretched. Moreover, the rising power, China, which is not a liberal democracy, is pursuing a model of state capitalism, and is free-riding on the current global system—on trade, exchange rates, climate change—rather than sharing in the provision of global public goods. And, while there is general unhappiness with the dollar, the Chinese renminbi is still far from becoming a major global reserve currency, let alone the dominant one.

This power vacuum has reinforced the absence of leadership on global economic and political governance within the G-20 since it succeeded the G-8 at the onset of the recent economic and financial crisis. Indeed, with the exception of the London summit in April 2009, when a consensus was reached on joint monetary and fiscal stimulus, the G-20 has become just another bureaucratic forum where much is discussed, but little is agreed upon.

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As a result, the global economic powers have been left bickering about whether we need more monetary and fiscal stimulus or less of it. There are also major disagreements about whether to reduce global current-account imbalances—and about the role that currency movements should play in this adjustment. Exchange-rate tensions are leading to currency wars, which may eventually lead to trade wars and protectionism.

Indeed, not only is the Doha round of multilateral free-trade negotiations effectively dead, but there is also a rising risk of financial protectionism as countries re-impose capital controls on volatile global financial flows and on foreign direct investment. Likewise, there is very little consensus on how to reform the regulation and supervision of financial institutions—and even less on how to reform an international monetary system based on flexible exchange rates and the dollar's central role as the leading reserve currency.

Global climate-change negotiations have similarly ended in failure, and there is disagreement concerning how to address food and energy security amid a new scramble for global resources. And, on global geopolitical issues—the tensions on the Korean peninsula, Iran's nuclear ambitions, the Arab-Israeli conflict, the disorder in Afghanistan and Pakistan, the political transition in autocratic Middle East regimes—the great powers disagree and are impotent to impose stable solutions.

There are several reasons why the G-20 world has become a G-Zero world. First, when discussion moves beyond generic principles into detailed policy proposals, it's much more difficult to reach clear agreements among 20 negotiators than among eight.

Second, G-8 leaders share a basic belief in the power of free markets to generate long-term prosperity and in the importance of democracy for political stability and social justice. The G-20, on the other hand, includes autocratic governments with different views about the role of the state in the economy, and on the rule of law, property rights, transparency, and freedom of speech.

Third, the Western powers now lack the domestic political consensus and financial resources to advance an international agenda. The United States is politically polarized and must at some point begin to reduce its budget deficit. Europe is preoccupied with its attempt to save the eurozone and has no common foreign or defense policy. And Japan's political stalemate on structural reforms has left it helpless to stem long-term economic decline.

Finally, rising powers like China, India, and Brazil are far too focused on managing the next stage of their domestic development to bear the financial and political costs that come with new international responsibilities.

In short, for the first time since the end of World War II, there is no nation—or strong alliance of nations—with the political will and economic leverage to secure its goals on the global stage. As in previous historical periods, this vacuum may favor the ambitious and the aggressive as they seek their own advantage. In such a world, the absence of a high-level agreement on creating a new collective-security system—focused on economics rather than military power—is not merely irresponsible, but dangerous. A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security.

This article comes from Project Syndicate.

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