A job for the G20 : Overseeing multilateral institutions

Le G20, dont les ministres des finances viennent de se réunir à Paris, ne peut tout réglementer. Au lieu de se fixer des objectifs irréalistes, il devrait se donner pour mission de contrôler les institutions multinationales, comme le FMI, l’OMC ou la Banque mondiale, estime Jennifer Hillman du German Marshall Fund.

When the G20 finance ministers and heads of the central banks gather this weekend in Paris, attention will center on some of the major pledges made at the G20 Summit in Seoul—most notably the commitments related to a more market-determined exchange rate system and to policies to address current account imbalances, whether excessive deficits or large external surpluses. Likely to be added to the agenda are two newer issues : the role of the dollar as a reserve currency and controls on international capital flows. All of these issues flow in part from the priorities that French President Nicholas Sarkozy set out for himself as leader of the G20 this year. 

Substantial movement on these four issues is probably unlikely, given the big differences that emerged in Seoul with respect to the specifics underpinning a number of these general principles. However, buried in some of the devilish details of their weekend agenda is a proposal to create a new governance model for the international monetary system, which could potentially reap immediate results and carry with it long-term benefits. France’s economy minister, Christine Lagarde, is expected to take up some of the recommendations made by the Palais-Royal Initiative, a group of 18 former ministers and central bankers, headed by Michel Camdessus, former head of the IMF, Alexandre Lamfalussy, the founding president of the European Monetary Institute, and Tommaso Padoa-Schioppa, former Minister of Economy and Finance in Italy, and a panel that also includes former Chairman of the Federal Reserve Paul Volcker. 

The report calls for a three-tiered governance structure for the international financial system, with the top tier consisting of the heads of state, meeting once a year, presumably to set and coordinate overall direction for the IMF. The second-tier would be made up of the G20 finance ministers and central bankers—the very group meeting in Paris this weekend—sitting as a newly formed “Council” to make strategic decisions relating to the international monetary system and its institutions. The third-tier would consist of the current executive directors, who would oversee the work of the IMF and its managing director.

Placing the G20 heads of state in such an overarching role makes a good deal of sense, as does the formation of a “Council” made up of the G20 finance ministers to give more detailed strategic direction to the IMF. However, the Palais-Royal Initiative’s recommendation should be taken one step further and applied not only to the IMF, but also to the World Bank, the World Trade Organization (WTO), and the newly created Financial Stability Board (FSB). The G20 heads of state, when sitting as a “Council of Governors,” could set the overall strategic direction of these international institutions. This would ensure that their mandates are broad enough to cover the many issues that can fall between the cracks of the various institutions, such as exchange rates, energy policy, climate change, and food security, yet tailored enough to ensure that inefficient overlaps or mission creep are avoided. They would also ensure that the work of each of the various institutions moves coherently toward the same goals. A Council of G20 finance ministers would foster more specific strategic direction-setting for each of the international financial institutions. 

Providing the G20 with such a role would allow it to set broad-based strategic direction for all of the international economic institutions, while using the considerable expertise and qualified personnel working for each of these bodies to carry out their leaders’ instructions. By giving the G20 heads of state the continuing role of coming together at least once a year to perform the fiduciary duty of direction-setting and oversight for these institutions, the G20 would be assured of a consistent and ongoing role in setting the course of global economic activity. Use of the G20 for this purpose would also give the emerging market countries a permanent and significant voice in global economic governance, getting them more engaged in addressing problems at the multilateral level. Playing this strategic leadership role would also allow the G20 to fill an oft-cited need for high-level political engagement in the work of the international institutions. Finally, inclusion of the WTO within the ambit of responsibility of this “Council of Governors” would ensure that the WTO takes its rightful place among the international institutions, in recognition of the critical link between finance, development, and trade, and the imperative of using the expertise and rules of the WTO to ensure that private enterprise can be fully engaged in worldwide economic recovery and future prosperity.

Coming to an agreement on specific targets for deficits or surpluses or finding a solution to perceived currency manipulation or excessive use of capital controls may be too much to expect from the Paris weekend. But moving forward with long-term revisions to governance structures of international financial institutions may well be just bland enough not to attract too much opposition and just important enough to warrant the time and energy required to reach an agreement that would both improve the overall governance and coherence of international economic policy and carve out an important on-going role for the G20 and its finance ministers.