The Role of the Emerging Countries

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Bruges Regional Integration& Global Governance Papers

The Role of the Emerging Countriesin the G20: Agenda-setter, Veto Player

or Spectator?Katharina Gnath and Claudia Schmucker

2 / 2011


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The Role of the Emerging Countries in the G20:

Agenda-setter, Veto Player or Spec tator?

Katharina Gnath &Claudia Sc hmuc ker

Ka tha rina Gna th & Claud ia Sc hm uc ker 2011

Joint working paper series of the EU International Relations and Diplomacy StudiesDepartment a t the College of Europe a nd the Comparative Regional Integration

Stud ies Programmeof the United Nations University, Bruges


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Katha rina G nath & Claudia Sc hmuc ker

About the Authors

Katharina Gnath is Associate Fellow at the German Council on Foreign Relations

(DGAP). From 2007 to 2008 she headed the Globalisation and World Economy

Prog ramm e a t the DGAP. Befo re joining the DGAP, she wo rked a t the Lond on-ba sed

think tank Fed eral Trust for Educ a tion a nd Resea rc h on q uestions of Europ ea n

economic policy and at the international relations department of the European

Central Bank in Frankfurt. She has studied Philosophy, Politics and Economics at the

University of Oxford (BA Hons) and European Politics and Governance at the London

Sc hoo l of Ec ono mic s (MSc ). She is currently pursuing a doc to ra l deg ree a t the Hertie

School of Go vernanc e in Berlin. Her resea rc h foc uses on Europ ea n and inte rna tiona l

political economy.

Claud ia Sc hmuc ker is Hea d of the Globa lisat ion a nd World Ec onomy Prog ramm e a t

the DGAP in Berlin. Befo re joining the Institute in 2002, she wa s a p rojec t m anager a t

the C ente r for Internationa l Coop eration (CIC) in Bonn. She a ttended the Ya le

Cente r for Inte rna tiona l and Area Stud ies (YCIAS) a t Ya le University, co nduc ting

resea rch on EU-US transa tlant ic t rade relat ions and on the World Trade O rganiza tion

(WTO). She has pub lished va rious a rtic les on the G20, inte rna tiona l trade rela tions

and the WTO. She sta rted her stud ies in Bonn a nd Elmira , NY, and ho lds an MA in

North American Stud ies and a PhD in Ec onomics from the Free University of Berlin.

Editorial Tea m:

Ad em ola Abass, Sieg linde Gsthl, Stephan Keuke leire, Luk Van Langenhove

Co lleg e o f Europe | Dijve r 11 | 8000 Bruges, Belg ium | Tel. +32 (0)50 477 251 | Fax +32 (0)50477 250 | E-ma il info.ird@coleurop e.eu | ww w.coleurop e.eu/ ird

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Views expressed in the BRIGG Papersare those of the authors only and do not necessarilyreflec t positions of eithe r the series ed itors, UNU-CRIS or the Co lleg e of Europe.

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mailto:[email protected]:[email protected]


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BRIGG Paper 2/2011

Abstract

In 2008, the G20 convened for the first time at leaders level, making emerging

countries such as China, India and Brazil permanent members of an informal

ga thering a t the h ighest politica l level. The a im of this paper is to refine p rev ious

assessme nts on the role of these em erging c ountries in the new G20. We first a na lyse

the p refe renc es of the United Sta tes and Europ ea n members as a p roxy for G8

positions and then juxta pose them with the preferenc es of C hina , Ind ia and Brazil as

representatives of the emerging countries within the G20. We find that the latter

share in pa rtic ular the conc ern for mo re voice in globa l ec onom ic go vernanc e b ut

due to o ften heterogeneous preferenc es do not g enerally ac t as a bloc . Moreove r,

by comparing their preferences with G20 outcomes, the paper investigates to what

extent the em erging c ountries have ag enda-setting or veto po wer, or whether they

are taking a back-seat role among the G20 countries. We show that they are not

mere spe c tato rs but have a c erta in a genda -setting po wer, espe c ially when they a re

ab le to forge c oa litions or hold the p residenc y.

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The stella r rise of the G20

Som et imes it takes a c risis to change. The up grade o f the G201 to the level of the

heads of state and government was one of the major institutional outcomes of the

rec ent g lob al financ ial and ec onom ic c risis. The d evelopm ent d ep ic ts a drama tic

turnaround: in 2007, the G8 invited large emerging countries within the Heiligen-

damm Process to its summits only on a restricted number of topics. A year later, the

G20 convened for the first time a t lead ers leve l, making emerging c ountries such as

China, India and Brazil permanent members of an informal gathering at the highest

political level.2 In 2009, its me mb ers esta b lished the G20 as the p rem ier forum for

international economic cooperation,3 and South Korea was the first eme rg ing

c ountry holding the p residenc y for a G20 lea ders meeting in 2010.

With the fading of the immediate crisis experience, the G20 finds itself at a crucial

sta ge in its deve lop ment from a te mp orary c risis ma nage me nt mec hanism to a long -

term global economic steering committee. If the forum does not want to fall into

oblivion, it is important to ensure a high level of commitment by all its members. For

that it is imp ortant to d evelop a c omm on a genda that bridg es fault lines am ong the

different G20 countries interests and priorities and to meaningfully incorporate

emerging c ountries into the fo rum tha t now stands at the a pe x of g lob al ec onom ic

governance.

So fa r, the re is little c onsensus on the role of em erging c ountries in the new ly

upgrad ed G20. The forum is still new, and p rac tices and p refe renc es have not fully

developed on all aspects of the forums work.4 More imp ortantly, the deb ate on the

role of emerging countries has up to now been dominated by generalisations that

c loud the underlying fac tors shap ing the role of individua l emerging c ountries: on theone hand, commentators cite the hopes and goals of the G20 to systematically

include newly emerged economies into global governance structures to better

1 The G20 members are Argentina, Australia, Brazil, Canada, China, France, Germany,Ind ia, Ind one sia, Ita ly, Jap an, Mexico, Russia, Saud i-Arab ia, South Afric a , South Korea ,Turkey, the UK, and the US. The 20th me mb er is the Europ ea n Union.

2 They w ere p reviously only mem bers of t he Financ e G 20 tha t m et since 1999 outside thepublic limelight at the level of finance ministers and central bank governors.

3 G20, Lea ders Sta tement: The Pittsburgh Summit , 24.-25.9.2009.

4 Assessments of emerging countries role in and towards the G8 are more advanced; see,for instance, Andrew Cooper and Agata Antkiewicz (eds.), Emerging Powers in GlobalGo vernanc e: Lessons from the Heiligend am m Proc ess, Waterloo, Centre for InternationalGovernance Innovation, 2008.

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BRIGG Paper 2/2011

reflect the shift of power in the world economy. 5 For instance, the new G20 summits

are seen as an opportunity of a less western-centred view of the difficulties of the

world economy in a forum in which emerging countries outnumber the G8

members by a margin of 2:1.6 Other authors have been more pessimistic on the

eme rging c ountries role in the G20, arguing tha t the nume ric al ad vanta ge and the

shift in rhetoric towards emerging countries do not translate into actual policy

outcomes. It has been criticised that the G20 agenda so far was still dominated by

the G8-members preferences, and emerging countries were merely spectators in

the neg otiations, thus rubb er-stamp ing ge nuine G8 po lic ies and thereby giving them

a b roa der basis of legitima c y and supp ort.7

The a im of the paper is to refine p rev ious c ursory assessme nts on the role o f eme rg ingcountries in the new G20 by systematically assessing the preferences of G20

members based on official statements, press coverage and interviews and

c om pa ring them w ith G20 outc omes. The paper identifies a number of key themes

of the upgrad ed G20 and summ arises their outc omes in p ast summit m eetings. In a

sec ond step , we a na lyse the p referenc es of the United Sta tes and Europ ea n

me mb er sta tes as a p roxy for G8 p ositions,8 which are juxtaposed with preferences of

China, India and Brazil as representatives of emerging countries within the G20. In a

last step , the paper assesses the role o f the em erging c ountries in the G20, ana lysing

whethe r they have ag enda-setting or veto p ower, or whether they take a b ac k-sea t

role a mo ng the G20 co untries, be ing a spec ta to r a t the side lines of the d isc ussions.

We argue that all the emerging countries are interested in participating as equal

and permanent members in the G20 as the premier forum for international

ec onom ic go vernanc e. However, due to o ften heterogeneous preferenc es, they do

5 See Afte r the G20 , Financ ial Times, 13.11.2010, p. 16. See also Haibing Zhang, G20 andGloba l Governanc e: Cha lleng es and Imp ac ts , in Thom as Fues and Pete r Wolff (eds.),G20 and Globa l Developm ent: How Ca n the New Summit Architec ture Promo te Pro-poo rGrowt h a nd Susta inab ility, Bonn, German Development Institute, 2010, p. 63.

6 Mark Malloch-Brown, How the G20 glasshouse is under attack, Financ ial Times,12.11.2010, p. 11.

7 For a similar assessment of developing countries in the Finance G20, see LeonardoMa rtinez-Diaz, The G20 afte r Eight Years: How Effec tive a Vehic le for Develop ing-CountryInfluence?, Brookings Global Economy and Development Working Paper, no. 12,Washing to n, DC, The Brookings Institu tions, Oc tober 2007; Jean Pisani-Ferry, The G20ag end a sounds a lot like that o f the G7, The Economist, 29.6.2010.

8 We use the term G8 as a proxy for industrialised countries. While technically being a

member of the G8 group of countries, Russia is left out of the present analysis, as it is not afull member of the group in questions of economic and financial policy. It isacknowledged that G8 members can also differ in their positions and strategies.Disag reem ents am ong them are highlighted in the d esc ript ion o f po lic y stances be low.

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not ge nerally ac t a s a b loc in the G20 disc ussions. When c om paring the preferences

of the emerging countries with the outcomes of the G20 summits, the paper finds

that they a re no t mere spe c ta tors. Instea d they have certain agenda -setting power

when they are able to forge coalitions (e.g. regarding the reform of international

financial institutions such as the IMF) or hold the presidency (as was the case with

South Korea in 2010).

Key G20 issues: mapp ing outc om es and preferenc es

Being an informal forum, the upgraded G20 does not have a clear-cut remit or

age nda. The G20 at lea ders leve l was initially estab lished to ac hieve an interna-

tionally coordinated response to the global financial crisis: at the first G20 summits in

2008 and 2009, the m a in foc us wa s on c risis ma nagem ent . Subseq uent G20 summ its

in 2010 have, furthermore, dealt with issues of global financial regulation and

macroeconomic policy more broadly, as well as with the reform of important

internationa l financ ial institutions. Korea a dded deve lop ment to the G 20s age nda .

Early G20 initia tives: c risis ma nagem ent and first resc ue pac kag es

At the G20 summit in London in April 2009, the G20 countries pledged 1.1 trillion US-Dollar (USD) for the IMF and other multilateral organisations, consisting of 750 billion

USD in direc t a id a nd 250 billion USD in spec ial d raw ing rights for the IMF, as well as

100 billion USD for multila te ra l develop me nt b anks to increa se lend ing. The a im was

to dampen the immediate repercussions of the financial crisis. Furthermore, the IMF

created two new credit lines for countries that were affected by the financial crisis:

the so-called Flexible Credit Line (FCL) was introduced in 2009 for high-performing

countries to strengthen their economic position. In 2010, the Precautionary Credit

Line (PCL) was established for countries facing moderate vulnerabilities not (yet)

meeting the high FCL qualific at ion sta ndards. The new c red it lines we re pa rt o f the

G20s vision for an improved global financial safety net a network of insurance

and loan instruments that countries could draw on to cope with volatility and

c onta gion in the fa c e o f a c risis.9

Moreover, many countries around the world introduced national stimulus packages

in response to the crisis. Almost 90% of the global measures originated in G20

9 Ma nuela Gorett i and Bikas Joshi, A Step Closer to a Stronger Globa l Financ ial Sa fety Net ,IMF Survey Ma gazine, 30.8.2010.

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BRIGG Paper 2/2011

countries and were introduced after the first G20 summits in Washington, DC, in

November 2008 and in London in April 2009. Most of the stimuli were a mix of tax

brea ks, guarantees and ac tua l spend ing. The b igge st resc ue p ac kages (relative to

GDP) were initiated by China , Saud i Arab ia a nd the United Sta tes: in 2009, the US

introduced the American Recovery and Reinvestment Act (ARRA) worth 800 billion

USD. In a dd ition, the Troub led Asset Relief Prog ram (TARP) of 700 billion USD was

estab lished to support the troub led US banking sec tor. Ge rma ny introd uc ed two

stimuli pac kages in 2008 and 2009, which amounted to 82 b illion USD (1.6% of GDP).

On the part of the emerging countries under investigation, China initiated a 586

b illion USD (13.9% of GDP) stimulus pac kag e to b oo st d om estic dem and . Measures

inc lude d spend ing on infrastruc ture, hea lth c a re in rura l areas and low -rent housing.

Furthermore, nine specific industries received direct tax cuts. India introduced a fiscal

stimulus pac kage worth 4.1 b illion USD in Dec em ber 2008 (0.3 % of GDP). The

prog ramme foc used on labour-intensive and export-oriented sec to rs. Lastly, Brazil set

up a fisca l resc ue pac kag e of 3.6 billion USD (0.2% of GDP), which foc used

spec ifica lly on the autom ob ile sec tor that ac c ounts for 5% of Brazil s ec onomy.10

The first G20 leaders summ its dea ling with the imm ed iate effec ts of the financ ial crisis

saw a largely unified front of industrialised and emerging countries. All members

supported the increased funding for international financial institutions and believed

in the need for national stimuli packages. While some G20 members most

prominently Germanywere reluctant to introduce more flexible credit for fear of

provoking moral hazard, emerging countries were in favour of the new IMF credit

lines.11 The G 20 agree d under the c ha irma nship o f South Korea on the e xtension

of the PCL and the FCL a t the summ it in Seo ul.

Paying fo r the c risis: financ ia l levies and ta xes

The d eb a te befo re the June 2010 summ it in Toronto wa s dom ina ted by the question

of how the financial sector could adequately share the costs of the financial crisis.

Several measures we re d isc ussed a t the G20 leve l, includ ing the introd uc tion o f an

internationa l bank levy or a financ ia l tax (either in form of a financ ia l transac tion tax

10 Same er Khatiwa da, Stimulus Packag es to Counter Glob al Economic Crisis: A Review ,Discussion Paper, no. 196, International Institute for Labour Studies, Geneva, 2009, pp. 10

and 27-32; Jiem ian Yang, Country Fac t Shee t China , in Christoph Pohlma nn, Step hanReic hert and Hubert Ren Schillinger (eds.), The G-20: a Globa l Ec onom ic Governmentin the Making?, Internationa l Policy Ana lysis, Fried rich Ebert Foundation, June 2010, p . 22.

11 See , for insta nc e, BRIC c ountries joint c om muniqu , 14.3.2009.

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or a financial activity tax12). The G20 mem bers d id not reac h a c onsensus a t the

lea de rs meeting in Toronto b eyond a vag ue stateme nt on a fair and substantial

c ontribution on the pa rt of the financ ial sec tor.13 While the d ec laration ga ve g reen

light to G20 countries wanting to implement a bank levy unilaterally, it made clear

tha t not a ll of the G20 c ountries needed to p ursue the sam e a pproa ch. Follow ing the

Toronto sta teme nt, bank levies we re no longer pa rt o f the G20 disc ussions a t Seo ul.

Instead, the supporters of the bank levy pursued individual tracks.14 Similarly, the

introd uct ion of a financ ial tax proved too c ontentious and did no t even find its wa y

onto the fina l agend a of Toronto . It was subseq uently igno red a ltog ethe r a t Seoul.

Whereas the European G20 members (Germany,France and the United Kingdom),

Japan and the United Sta tes suppo rted a levy,15

other industrialised countries andemerging ec onomies op posed it: at the G20 summ it in Toronto , host Ca nada

stressed that its banking sector was already sufficiently regulated and that it had

survived the financial crisis relatively unharmed. Large emerging countries such as

China , Ind ia, Brazil and G20 cha ir South Korea we re a lso c ritic a l: China and Ind ia

stressed that their banks had not been at the root of the financial crisis and should

therefo re no t be punished . Their financ ial sec tors we re ra ther seen as a source fo r

future growth that should not be burdened unnecessarily. Brazil aligned with the

Canadian position that there had not been a need to bail out its banks during the

financial crisis and that there was therefore no need to impose a levy.16 Opposition

towards a financial tax proved to be even stronger and there was not even a

majority among the industrialised G20 members in favour of it: while Germany,

Franc e a nd the United Kingd om supp orted the financ ia l ta x, the US who had

supp orted a G20 ba nk levy and Ca nad a vehemently oppo sed it. Large e merging

countries were also very critical: India and Brazil were against the proposals which

they saw m a inly as a means for the heavily indeb ted EU c ountries to inc rea se the tax

revenue.

12 Ofte n also referred to a s Tob in ta x in the p ublic d eb ate on curta iling short-terminte rna tiona l financ ial transac tions.

13 G20, The G -20 Toronto Summit Dec lara tion , 26.-27.6.2010, p. 5.14 Germa ny, Franc e, a nd the United Kingdom pushed for an EU-wide bank levy. US President

Ob ama initiate d a na tiona l bank levy fo r lend ers with a ssets exceed ing 50 billion USD.Obama eventually gave up the levy in return for Congress support for the Dodd Bill onfinanc ial regulation.

15 The introd uc tion of a coo rdinate d levy was also endorsed by IMF Manag ing Direc torDom inique Strauss-Kahn a t the 2010 spring me et ing of the IMF and the World Bank.

16 India cold to global bank tax proposal as G20 meet, Financ ial Express, 27.6.2010; HuwJones, G20 wa ffles on b ank tax , The Globe a nd Mail, 3.6.2010.

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BRIGG Paper 2/2011

Given the unanimity requirement in the G20, an issue is pushed off the agenda if

there is a considerable opposition in form of several G20 members forming an issue-

spec ific c oa lition. In the c ase o f the financ ia l levies and taxes, no c oa lition wa s ab le

to d ominate the age nda and therefore put a joint measure through d espite be ing in

the interest o f a numb er of G 8 mem bers. The example shows tha t in their unanimous

op position and their a llianc e w ith som e G 8 co untries, emerging c ountries we re a b le

to veto the issues a t the G20.

Ma king t he financ ial system m ore robust: financ ia l reg ulation a nd Basel III

Sinc e the G20 was upg raded to the lea ders leve l, internat iona l financ ial reg ula tory

refo rm has been a nothe r key top ic of the fo rum. At the Lond on summit in April 2009,

the hea ds of states and governments announc ed that no financ ial ma rket, produc t

or ac to r should rem a in unregulated in the future. In Toronto, stric te r financ ial

reg ulat ion was high on the politica l age nda althoug h the lead ers merely took stoc k

of the p rogress of the Basel Committee of Banking Sup ervision (BCBS). The BCBS was

ma ndated to p resent its proposa ls until the Seo ul summit in Novemb er 2010 a t which

the G20 unanimously endorsed the reform package.17 Basel III inc ludes a stronger

definition o f key cap ita l (c ore tier one ). In add ition, the new key cap ita l ra tio will rise

from 2% (Basel II) up to 7%, including a new capital buffer of 2.5%. Basel III alsointroduces a new leverage ratio for banks. G20 members were tasked to gradually

phase in the new rules, sta rting in January 2013 until Janua ry 2019.

Espec ially the US and the EU we re strong supporters of reg ulato ry reforms given their

internat iona lly co nnec ted banking sec to r: for exam ple, US Trea sury Sec reta ry Timothy

Ge ithner c a lled Basel III a ma jor milestone in the p roc ess of glob a l financ ial reform :

raising the capital requirement reduced the risk of future crisis significantly.18 And

Mic hel Barnier, EU Co mmissioner for Inte rnal Markets and Services, stressed : We a relearning the lessons of the crisis in requiring better capitalisation for our banks and

larger liquidity cushions, two essential elements for stronger stability in our financial

system. 19

17 G20, The Seo ul Summit Lea ders De c larat ion , 11.-12.11.2010.

18 Timothy Ge ithner, Written Testimo ny , House Financ ial Services Co mm ittee , Washington,DC, 22.9.2010.

19 Barnier cited in EU welcomes Basel III global banking rules, Business & Leadership,13.9.2010.

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All G20 member states including China, India and Brazil who had also been

ad mitted to the BCBS20 agreed on the p rop osed reg ula tions by the Basel Banking

Comm ittee a nd subseq uently endorsed them a t the G20 summ it. The Chinese

go vernment supp orted the ide a tha t risky spe c ula tions with futures trad ing ha d to be

backed up with more and better capital as required by Basel III. However, China

stressed that the new capital standards would have a limited impact on Chinese

banks, as the average key capital ratio was already at 9% and core capital

accounted for 80% of the total capital.21 Simila rly, Ind ia supported the idea of Basel

III but stressed that its banks fulfilled much of the higher capital ratios: in June 2010,

the average capital to risk-weighted assets ratio of Indian banks was 13.4% and core

tier one c ap ita l ac c ounted for 9%.22 Lastly, Brazil also strong ly sup ported Basel III, as it

had a lrea dy imp lem ented mo st o f the issues.

Strong er financ ia l reg ula tion was la rge ly und isputed amo ng the G20 co untries

even though the push for reform came mainly from G8 countries given their large

internat iona l financ ial sec to rs. Particularly the US and the EU were engage d in the

d iscussions a t the BCBS to find a c ommo n language on reg ula tory refo rm. China ,

Ind ia , Brazil and the othe r emerging c ountries d id not a tta c h the same priority to the

issue their main concern being solid economic growth instead of financial

regulation.23 Yet, they went along with the proposals, as they were not strongly

affecte d b y it.

Subseq uent c onc erns: fram ewo rk for grow th and ma c ro-ec onom ic imb alanc es

At the 2009 Pittsburgh summ it, the G20 launc hed the Frame wo rk for Strong ,

Susta inab le, and Ba lanc ed Growth . Initially, the framewo rk served to c oo rd ina te

countries exit strategies out of their economic stimulus measures. G20 countries

agreed to the Canadian proposal according to which industrialised countries would

halve their fiscal deficits by 2013 and stabilise or reduce their debt-to-GDP ratios by

20 In a dd ition to China, India and Brazil, Australia , Korea , Mexico and Russia were invited tojoin the BCBS in March 2009.

21 Yang Ning a nd Wang Bo, CBRS see s litt le impac t from Basel III on b ank , China Daily,19.9.2010.

22 Bea trice Gorawantschy et a l., G20-Gipfe l in Toronto : Im Zeichen w ac hsend enSelbstbewusstseins Indien, KAS Lnderbericht, Konrad Adenauer Foundation, p. 3;

Nee lasri Barma n and Parnika Sokhi, Prop osed Basel III rules not to impac t Indian banksmuch, Daily News & Ana lysis, 8.9.2010.

23 Da isy Ku and Rachel Armstrong , Asia regulators say G20 refo rm driven by U.S., Europe ,Reuters, 29.11.2010.

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BRIGG Paper 2/2011

2016.24 In a further step , the IMF was ta sked with assisting the Mutua l Assessment

Process in the form of providing analysis on coherence, consistency and mutual

compatibility of G20 members policy frameworks and with issuing policy

recommendations.25 In February 2011, the G20 finance ministers finally agreed on a

set of indicators to help identify global imbalances: public debt and fiscal deficits;

private savings rate and private deb t; and the external imb alanc e c ompo sed of the

trade balance and net investment income flows and transfers, taking consideration

of exchange rate, fiscal, monetary and other policies.26 Seven systemic G20

countries27 will now be assessed ac c ording to these indica tors.

The c oo rd inat ion o f ind ividua l growth stra teg ies bec ame mo re c ontroversial amo ng

the G20 over the course of 2010, as countries recovery paths and economicstrengths diverged more and more: Germany and China have been seeing

considerable economic growth and a constant increase in current account

surpluses, while c ount ries like the US have c ont inuously reg istered high budget and

trad e d efic its with relatively low grow th rates. In the run-up to the Seo ul summit, the

two sides clashed over the viability of strengthening domestic demand in export

c ountries as a solution to the imba lanc es. Furthermore, a t the G20 ministe rial meet ing

in Gyeong ju in Oc tober 2010, Timo thy Geithners c a ll to restric t c urrent ac c ount

surpluses and defic its (to a ma ximum of 4% of G DP) ran into he avy c ritic ism b y expo rt

countries such as China (4.7% projected current account surplus for 2010), but also

Germany (6.1%) and Japan.28 The Germa n g ove rnment rejec ted the USs c a lls as

flaw ed ap proac h and de nounced them as a step to wa rds a p lanned e c onomy. In

contrast, Germany was adamant that large national public debts posed a severe

problem for the international community and that exit from the stimuli programmes

wa s to b e p referred to p ublic ly boosting d omestic de ma nd through further de bt .

China has supported the G20 Frame wo rk for Strong , Susta inab le and Balanc ed

Growth. Yet, global imbalances are understood to be an issue of uneven global

24 G20, The G -20 Toronto Summit Dec lara tion , 26.-27.6.2010.25 International Monetary Fund, The G-20 Mutual Assessment Process and the Role of the

Fund, 2.12.2009.26 G20, Me et ing of Financ e Ministe rs and Central Bank Governors , Co mm uniqu, Paris, 18-

19.2.2011.

27 These co untries will be: United Sta tes, China , Ge rmany, Franc e, United Kingd om , Jap anand India.

28 Sew ell Cha n, Na tions Ag ree on Need to Shrink Trade Imba lanc es , New York Times,22.10.2010.

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development, rather than merely a problem of trade deficits and surpluses.29

Simila rly, the mo st imp ortant issue fo r Ind ia in the c ontext o f the Frame wo rk has been

to sec ure g lob al ec onomic growth. Ind ia has sided with the US in rejec ting an ea rly

exit from the stimuli programmes for fear of a double dip recession. According to

Prime Ministe r Manmohan Singh, the rec overy wa s still too frag ile espec ially in the

Eurozone and that industrialised countries still needed to strengthen domestic

demand.30 With respect to global imbalances, India has opposed strict caps on

individua l c ountries c urrent a c c ount ba lanc es. Simila rly, Brazil has been op posed to

terminating the economic stimulus measures swiftly at the expense of growth: the

Brazilian Minister of Finance Guido Mantega stated that emerging countries should

not b e b urde ned by the g lob al rec overy, and ad vanc ed exporting c ountries should

not make a severe, "draconian, exaggerated fiscal adjustment" at the expense of

emerging c ountries.31

The latest c onflic t o ver the p ertinenc e o f c ountries exchang e-rate and moneta ry

policy stance also falls within the context of global imbalances. In the run-up to the

2010 summ it in Seoul, the frustrat ion over the low e xternal va lue of the renminb i grew

within the US administration: ac c ording to the US view , China s exchang e-ra te

polic y inc rea sed the c osts of Am erican exports and prevented a fa st rec ove ry and

thus a red uc tion of the trade d eficits of the US ec onomy. Even thoug h China s

c urrenc y re-va lued faster in the we eks p rior to the summit, the Chinese go vernment

cautioned against too high expectations of a swift currency revaluation. China

considered its monetary policy as a domestic affair and did not want the G20 to

infringe on its sovereignty on this issue. In particular, it rejected pressures (especially

by the US) to b e b ound by nomina l ta rge ts within the G 20 fram ework or to revaluate

quickly aga inst the USD, c iting internal rea sons for a slow pac e o f reva luation.32 In

turn, China and other emerging c ountries b lame d the United Sta tes for its loose

mo neta ry po lic y, which w as lea d ing to la rge c ap ita l inflow s and to up wa rd p ressures

29 See Lan Xue a nd Yanbing Zhang, Na tiona l Perspec tives on G loba l Lea dership: China ,NPGL Soundings, Novem ber 2010, 17.11.2010, Waterloo, CIGI.

30 Manini Chatterjee, PM economy lesson for G20 leaders, The Telegrap h, 28.6.2010; Indiato op pose c ap on c urrent a/ c ba lanc es-source , Reuters, 21.10.2010.

31 Mantega cited in George Landau, National Perspectives on Global Leadership: Brazil,Wate rloo, C IGI.

32 Ma rtin-Ma urice Bhme e t a l., G20-Gip fel in Toronto : Im Zeichen w achsend en

Selbstbewusstseins, KAS Lnderbericht, Konrad Adenauer Foundation, p. 5; see alsoJiem ian Yang, C ount ry Fac t Shee t China , in Christoph Pohlma nn, Stepha n Reichertand Hubert Ren Schillinger (ed s.), The G-20: a Globa l Ec onom ic Gove rnment in theMa king?, Internat ional Polic y Ana lysis, Fried rich Ebert Foundation, June 2010, p. 23.

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BRIGG Paper 2/2011

on their loc a l currenc ies. Germa ny joined the c ritics of the US loose mo neta ry

policy33: the Federal Reserve Banks buying of bonds worth 600 billion USD

(quantitative easing or QE2) was perceived as holding the dollar artificially down.

In September 2010, the Brazilian finance minister Guido Mantega coined the term

currency war before imposing controls on foreign portfolio investments, citing

upwa rd p ressures on the rea l as ma in rea son.34

What began as a bilateral dispute on adequate exchange-rate policies between

the US and China d eve lop ed ove r the c ourse o f 2010 into a la rge r question on g lob a l

capital flows and appropriate growth strategies, in which the G20 countries stood at

odds with each other in a complex set-up of interests and alliances. Especially on

currency policy, emerging countries such as China but also Brazil were vocal inthe ir op position to US dem ands. Wherea s Ge rma ny ac tively op posed the US-

proposed cap on current account deficits and surpluses together with China, the

alliance between surplus and deficit countries within the G20 was rather

c irc umstantial and uneasy: Germa n Chancellor Angela Merkel ma de c lea r that the

German surplus is different from the Chinese one in the sense that it is due to the

qua lity and c omp etitiveness of G erman p rod ucts not o n c urrenc y ma nipulation. 35 In

sum, whereas emerging countries were not able to shift the agenda to focus on

uneven g lob a l developme nt, they c ould suc c essfully ve to p rop osa ls by industria lised

c ountries in this c ase the US s c a ll for qua ntita tive c aps in the c ontext o f the G20,

espe c ia lly as G8 memb ers d id not p resent a united front.

Emerging c ountries ma in c onc ern: refo rm of internationa l financ ia l institutions

One of the upgraded G20s main objectives was to reform international financial

institutions in particular the IMF to acknowledge and reflect the change in the

international economic balance of power in favour of emerging countries. A first

round of quota reforms was initiated in 2008. With a procedural ploy to block the

elec tion of the new Executive Boa rd , the US administrat ion jump -sta rted the reform

discussions at the IMF in August 2010: the US maintained that if there was no

compromise on reshuffling seats in favour of emerging countries, the practice of

having twenty-four members on the IMF Exec utive Boa rd four more than p rovided

33 For example, Brd erle: Loc kere Ge ldp olitik der USA ist fa lsch , Reuters, 23.10.2010.

34 Jonathan Wheat ley and Joe Lea hy, Trade war looming, wa rns Brazil , Financ ial Times,9.1.2011.

35 Cited in Jacques Mistral, National Perspectives on Global Leadership: France, NPGLSound ings, Novemb er 2010.

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for in the IMFs Artic les of Ag reement wo uld b e d isc ontinued . This wo uld hurt

precisely some of the big emerging countries such as Brazil or Argentina whose

presence and influence should be strengthened within the framework of multilateral

financial institutions.

In Oc tober 2010, the G20 financ e m iniste rs agree d under the South Korea n

chairmanship in Gyeongju on a reform package that was subsequently endorsed at

the lea ders summ it in Seoul and at the IMF Exec utive Boa rd . At the c entre o f the IMF

reform package stands a quota shift by more than 6% in favour of large emerging

c ountries. China w ill bec om e the third -la rge st shareho lder a fter the US and Japan. It

will relegate Germany which reduced its quota share to just under 6% to the

fourth position among the ten most powerful shareholders at the IMF that now alsoinclude Russia, India, and Brazil. Furthermore, the Funds capital stock was doubled

to 755.7 billion USD a t c urrent exchange ra tes.36 Most rem arkab ly, the G 20 agreed on

reforming the composition of the IMF Executive Board. In the future, advanced

Europea n c ountries will give up two of the ir c urrent ly eight sea ts. The Boa rd s size w as

kept a t tw enty-four sea ts (in c ont rast to the USs preferenc e to red uce it to its reg ula r

size o f twenty memb ers).

The United Sta tes a rgued tha t b y hold ing on to a ll of its sea ts, Europe w as denying

emerging countries the opportunity to play a bigger role in the IMF.37 Having been

close to political exodus before the financial crisis, fundamental governance reform

was seen as vital for the Funds effectiveness and legitimacy, as it would help ensure

that emerging countries especially China would not abandon the Fund for

a lternative regiona l or nationa l arrange ments in the future. In a dd ition, the US hop ed

that by supporting emerging countries demands, it would receive greater support

on several vital policy issues at the IMF in the future. All emerging countries strongly

supported the reform of the international financial institutions. For China, the issue of

IMF reform held the highest priority on the G20s agenda: China required a fast

implementation of the voting rights reform as a first step of overall reform and more

36 Each IMF member country is assigned a quota, based broadly on its relative position inthe w orld ec onom y. The q uota de termines its ma ximum financ ial c ommitment to the IMF,its access to IMF financ ing, and its vot ing pow er in the Fund. See also M ee ting o f Financ eMinisters and Central Bank Governors, Communiqu, Gyeongju, 23.10.2010; IMF, IMF

Executive Board Approves Major Overhaul of Quotas and Governance, Press Release,no . 10/ 418, 5.11.2010.

37 While many com menta to rs and p olic y-makers outside the US a lso mad e this a rgum ent,the US wa s a c lear d river in the rec ent refo rm proc ess.

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BRIGG Paper 2/2011

senior management posts for staff members from emerging countries.38 Similarly,

India voiced the need to quickly progress IMF reforms on many occasions in the

context of G20 preparations.39 Brazil had previously criticised the lack of emerging

countries influence over the IMFs lending decisions in the face of unequal voting

power.40 The three em erging c ountries unde r investiga tion ha ve used the G20 forum

to c a ll for a strong er voice in internat iona l institutions.41

Thus, advanced Europ ea n countries we re c onfronted with an a llianc e of

polic yma kers from the US, eme rg ing c ount ries and the IMF itself to red uc e their

presence at the Executive Board. And while European member states did not fully

embrace the reform process for fear of losing influence, they eventually

acknowledged the changing tides and agreed to institutional reforms of the Fund.The fac t tha t emerging countries go t a sea t the G20 tab le made para llel refo rm in

the IMF more ne cessary in the m ed ium te rm. In the short run, howeve r, the US veto

po wer and its strategy to use the b loc king p ower to ad vanc e the reform m omentum

we re vital elements to spur refo rms of the Executive Boa rd .

Expa nding the ag enda : develop ment c once rns

The Seo ul summit 2010 under the South Korean p residenc y saw a stronger foc us on

global development of the official agenda than the first leaders summits and the

previous G20 ministerial meetings.42 In contrast to the G8, where the issue of

deve lop ment ha s ma inly c onsisted in a p led ging exerc ise, the South Korean G20

presidency shifted the focus on principles of development, mainly in the areas of

growth, investment in infrastruc ture, trad e and huma n resource deve lop ment. The

Seoul summ it a greed on a Development Co nsensus for Shared Growth , sta ting tha t

there w as no single fo rmula for de velopment suc c ess.

The shift tow ard d eve lop ment wa s strong ly supp orted by emerging a nd d eve lop ing

countries. While it has not been Chinas primary concern, the country has called for

38 For example, Lan Xue and Yanbing Zhang, National Perspectives on Global Leadership:China, NPGL Soundings, Novemb er 2010, Wate rloo, C IGI.

39 Lee Tae -hoon, G20 urge d to spe ed up IMF refo rm , Korea Times, 1.9.2010.40 Paulo Nogueira Batista, Europe must make way for a modern IMF, Financ ial Times,

23.9.2010.41 For insta nc e, BRIC countries joint c om muniqu , 14.3.2009.

42 Milena Elsinger and Katha rina Gnath, G8 und G20: Eine neue Agend a fr Sicherheit undEntwicklung, in Josef Braml et al. (eds.), Einsatz fr den Frieden: Sicherheit undEntw icklung in Rumen b eg renzte r Sta at lichkeit, Jahrbuch International Politik, vol. 28,Oldenbourg Verlag, 2010, pp. 344-350.

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more attention for the developing world and for promoting global development in

the context of the G20.43 Out of the three emerging countries under investigation,

India has been keenest on shifting the G20s agenda towards development, both as

an individual agenda item, as well as through a refocusing of existing topics. For

example, Prime Minister Singh a dvised tha t ma c roec onomic imb a lanc es and the

c hallenge of inter-country diverge nce s be c ome an opp ortunity to dea l with a more

funda mental imb alance whic h is the development g ap betw een the ric h and poo r

countries.44 While the eme rging c ountries we re a ble to introd uce a de velop menta l

perspec tive into som e of the key issues, it w as due to the 2010 host South Korea

who saw itself as a bridge between the industrialised and the developing world

that de velopme nt wa s inc luded as individua l item on the offic ial ag enda. Given the

informality of the forum with no fixed topical mandate, the role of the presidency

c an thus be a po werful tool to refoc us the a genda tow ards non-G8 c onc erns. Other

emerging c ountries will have the c hanc e in the yea rs to c om e, with Mexic o follow ing

Franc e a t the he lm in 2012.

Conc lusion: assessing the role of the em erging c ountries

The p ape r has examined the role of the eme rging countries in the new G20 with a

particular focus on the question whether they have acted as agenda-setters, veto

p layers or mere spec ta to rs.

The G8 c ountries we re hit ha rdest b y the financ ial crisis me asured in terms of o utp ut

loss. In contrast, emerging and developing countries were not immediately affected

by the g loba l disrup tions tha t fo llowe d the c ollapse o f Lehm an Brothers in 2008. They

felt the medium-term effects of the economic crisis, but their banking systems

remained largely stable.45 As such, China and India managed to sustain a

c onsiderab le g row th ra te though lower tha n b efo re the c risis. Simila rly, Brazilwas

comparatively well prepared to counter the crisis having stabilised economic

43 Lan Xue and Yanbing Zhang, National Perspectives on Global Leadership: China, NPGLSound ings, Nove mber 2010, 17.11.2010; see a lso Jiemian Yang , C ountry Fac t Sheet China , in Christoph Pohlmann, Stephan Reic hert and Hubert Ren Schillinger (eds.), TheG-20: a Global Economic Government in the Making?, International Policy Analysis,Fried rich Ebert Foundation, June 2010, p. 23.

44 Singh c ited in Subhomoy Bhattac hariee, PM c laims some c red it for deve lop mentfocus, Financ ial Express, 14.11.2010.

45 Avina sh Persaud , The locus of financ ial regu lation: home versus host , New Delhi, ICRIER,Ma y 2010.

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BRIGG Paper 2/2011

fundamentals (such as the inflation rate, foreign debt repayment and foreign

reserves) in the wake of the previous crisis. Moreover, its financial sector was relatively

stable, with low liabilities abroad. Emerging countries have also come out of the crisis

as growth motors: this trend has been strengthened in 2010, with growth figures for

high-income countries at 3.0%, whereas the emerging countries of the G20 and the

develop ing c ountries have g rown a t 7.1% Asian em erging c ountries even a t 9.3%.46

The esta b lishment of the G20 and its initial key ob jec tive to p reve nt a d isinteg ra tion

of the internationa l ec onomy was therefore ma inly in the interest of the G8 countries

tha t dom ina ted the a ge nda of the p ast G20 summits. The em erging c ountries we re

altogether less affected by the financial crisis and showed thus different priorities and

preferences: their interest has focused less on regulatory change and more on areform of the international institutions. Chinas willingness to go along with the initial

G20 agenda was underpinned by its interest in consolidating the G20 as an

alternative forum to the G8 in order to secure influence for emerging countries in

globa l ec onom ic governanc e. As such, it d id not want to b e seen a s bloc king m ajor

dec isions: be sides its d ispute with the US over its c urrenc y polic y, the c ountry has

ta ken a bac k sea t in the G20 disc ussions. Similar to China, Ind ia s partic ipa tion in the

G20 did not arise from its direct concerns with the immediate crisis but is rather seen

as a means to be present at a key global forum. However, India still sees the UN as

the major forum for international cooperation.47 Therefo re, Ind ia ha s not bee n a

strong proponent of any particular position with the exception of IMF reform. Brazil

was one of the earliest advocates of an upgrade for the G20 of Finance Ministers,

with a view to diminishing the influence of the G8 and abolishing the unpopular

Heiligendamm Process. However, Brazil distanced itself from the process and did

not p articipa te in the Gyeo ngju ministeria l meeting.

While the emerging countries share some general preferences especially with

regard to their inc rea sed voice in g lob al ec onom ic go vernanc e , a joint stanc e in

the G20 is difficult to achieve: given their different economic policy traditions and

the d iverse ec onomic c ha lleng es they fac e, eme rging c ountries vary co nsiderab ly in

their preferences on a range of G20 policies (e.g. on exchange-rate policy or

46 Internat ional Mone ta ry Fund, World Econom ic Outlook Upd ate, 25.1.2011.47 See Ranjiv Kumar, Co untry Fac t Sheet India , in Christoph Pohlmann, Stepha n Reic hert

and Hubert Ren Schillinger (ed s.), The G-20: a Globa l Ec onom ic Gove rnment in theMa king?, Internat ional Polic y Ana lysis, Fried rich Ebert Foundation, June 2010, p. 34.

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financial supervision) much more so than the European countries or the G8

members within the G20.

Summ ing up , the analysis of the summ it outcom es and me mb ers p refe renc es

suggests that emerging countries have not been able to influence (and shift) the

formal agenda of the leaders G20 single-handedly. However, while the United

States and the European G20 members as proxies for industrialised countries have

dominated the agenda of the first G20 summits, the G8 members have not

nec essary ac ted in c onc ert. The c ac op hony of G8 voices has given emerging

countries room to manoeuvre at the G20. Big emerging countries have not been

mere spec ta tors a t the G20. Their leewa y to shape outc omes has so far large ly

depended on the ability to strike coalitions among each other and with G8c ountries, suc h a s with IMF reform or financ ial taxes and levies.

The key question for the leaders G20 is whether it c an deliver on its p ledge to

become the premier forum for international economic cooperation in the long run.

The G 20 is per de finition (and volition) a mo re he terogeneous forum tha n the G8.

However, for the survival and legitimacy of the G20 it is important that the forum

doe s not slide into e mp ty p rom ises and va gue c om prom ises. This will only be possible

if the newly-involved emerging countries remain engaged in the process and the

G20 does not develop hard fault lines along the G8/emerging country divide.48

Including ag enda items that are of imm ed iate relevanc e for emerging countries will

ensure the ir c ont inued interest in the fo rum. This c ould include top ics suc h as

development or commodity markets. It is therefore important for future presidencies

to strike the right b a lanc e o f top ics for G20 co untries whether they a re industria lised

or eme rging.

48 It is enc ouraging tha t such fault lines have not hardened am ong the G 20 mem be rs so far.

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BRIGG Paper 2/2011

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List of Bruges Reg ional Integration & Global Governanc ePapers

1/ 2008

Kennedy Graham, Tow ards a Co herent Reg iona l Institutiona l Landsc ape in the

United Nat ions? Imp lica tions for Europe

2/2008

Sieglinde Gsthl, 'Pa tc hwork Power' Europ e? The EU's Rep resenta tion in Inte rnat iona l

Institutions

3/2008

Daniele Marchesi, The EU Co mmon Foreign a nd Sec urity Polic y in the UN Sec urity

Counc il: Betw een Rep resentat ion a nd Coordination

1/2009

Quentin Weiler,The Europea n Union a nd Sec urity Sec to r Refo rm in Afric a : A Lea der inTheo ry, a Laggard in Rea lity?2/2009

Simona Lipsta ite, EU-US Coop erat ion in Internationa l Pea c e and Sec urity: Bila te ra l

versus Multilateral Dialogues

3/2009Andrew Cottey, Sub-reg iona l Coop erat ion in Europe: An Assessme nt

4/2009

Giovanni Molano Cruz, La coop ration entre lUnion europe nne et la Comm unaut

and ine c ontre le tra fic illic ite de stupfiants : une tude d e c as d interrg iona lisme5/2009

Anne Willenberg, The Prom ot ion o f Reg iona l Econom ic Integ ra tion in the EUs

Neighb ourhood : CEFTA 2006 and the Agad ir Agreement

1/2010

Helena Lindholm Sc hulz, Sec urity as an Interreg iona l Conc ern: The EU and the Midd le

East

2/2010

Tobias Felix Franke , Nosc e Te Ipsum: Position ing the EU's CSDP as a Regiona l

Ordnungsmacht

3/2010

Emanuele Pollio,What Kind of Inte rreg iona lism? The EU-Merco sur Rela tionship withinthe Emerg ing 'Transa tlant ic Triang le'

22


24/24

BRIGG Paper 2/2011

1/2011

Andrej Kirn, The Europea n Union s Role in Prom ot ing a nd Imp lementing the

Responsibility to Protec t in Afric a : Turning Politica l Com mitments into Effec tive Ac tion

2/2011

Katharina Gna th a nd Claud ia Sc hmuc ker,The Role o f the Emerg ing Countries in theG20: Agend a-setter, Veto Player or Spe c ta tor?

Documents

The Role of the Emerging Countries