Role of G20 in International Finance
The Group of Twenty (nations) or G20 is an international, premier forum for the governments and central bank governors of 19 countries and the European Union. It was founded in 1999, with an aim to discuss policies related to the development of international financial stability. Since 2008, the G20 has expanded its agenda and heads of state as well as finance and foreign ministers of the member nations have regularly met at summits.
The main aim of the G20 is to address issues that are beyond the purview of a single organisation or have a global impact. Since the G20 is a global platform for the world’s leading and emerging economies, it is important to know about its direct impact on international finance and markets. But before we dive into that, let’s understand why the G20 actually came into existence.
Why was the G20 Formed?
The G20 was one of the post-World War II initiatives that was undertaken with the primary aim of coordinating economic policy on a global scale. Other global institutions that were created around the same time were the International Monetary Fund (IMF), the “Bretton Woods twins,” and the World Bank (now known as the World Trade Organisation).
The idea of the G20 was introduced at the Cologne Summit of the G7 nations, held in June 1999, with the group being formally created at the G7 Finance Ministers’ meeting on September 26, 1999.
The inaugural G20 meeting was held on December 15-16, 1999, in Berlin, Germany. Canadian Finance Minister Paul Martin was selected as the first chairman and Hans Eichel, Germany’s finance minister, hosted the first ever meeting.
The efforts of Germany and the United States are acknowledged as the driving factors for transforming the idea of a global economic forum into reality. A 2004 report, published by Johannes F. Linn and Colin I. Bradford of the Brookings Institute, stated that the credit for the formation of the G20 goes to Eichel, who was also the concurrent chairman of the G7.
However, Bradford later described the then Finance Minister of Canada, Paul Martin, as “the crucial architect of the formation of the G-20 at finance minister level,” and the one who later “proposed that the G-20 countries move to leaders level summits.”
Other journalistic sources have also supported the idea that the G20 was a project that was started by the then US Treasury Secretary, Larry Summers, and Paul Martin. Both these gentlemen conceived the idea of creation of the G20, as a counter measure to the various debt crises that had occurred across the emerging markets during the late 1990s.
The debt crises started with the Mexico peso crisis (1994), followed by the Asian financial crisis (1997), the Russian financial crisis (1998) and finally the collapse of the “Long-Term Capital Management” hedge fund in the autumn of 1998, which impacted the US economy. These continuously occurring debt crises clearly showed that in a world that was rapidly globalising, the G7, G8 and Bretton Woods systems would not be able to provide the much-needed financial stability. This is why the idea of a new, permanent group of large global economies came into existence.
Membership of the G20
Hans Eichel’s deputy, Caio Koch-Weser, and Larry Summers’ deputy, Timothy Geithner, were initially given the task of selecting the countries that would be a part of this newly created international group. Currently, the membership of the G20 includes 19 individual countries, in addition to the European Union. The EU is represented by the European Central Bank and the European Commission.
Apart from the EU and the G7 nations (France, Germany, Italy, Canada, the UK, Japan, and the United States), the G20 includes 11 emerging markets and small industrialised countries. These countries are Australia, India, Indonesia, China, Brazil, Argentina, Mexico, South Africa, Turkey, Saudi Arabia, South Korea and Russia.
Together, the economies of the G20 contribute around 90% of the Gross World Product (GWP), nearly 80% of the world’s trade and form two-thirds of the total world population. This only goes to highlight the importance of the G20 in shaping and driving international finance.
Agenda and Focus of the G20
The main focus of the Group of 20 has been governance of the world economy. Different themes have been selected for the G20 summits over the years.
The topics under discussion revolve around the financial concerns of its member countries. In the early years, the focus was on the sustainability of sovereign debt and the achievement of global financial stability. These two issues continue to be active topics at G20 summits, in addition to discussions related to international trade, regulation of the financial markets and global economic growth.
Impact on Global Finance
As the G20 members account for a sizable share of the global economy, when they work together in a cohesive manner, they can transform the landscape of the world markets.
For example, after the financial crisis of 2008, G20 leaders agreed to coordinate and adapt their economic policies to handle the worst effects of the market crash. As compared to the previous economic crises of similar magnitude, the global economy recovered a lot faster than expected. A major part of the credit for this global recovery has been given to the coordinated response driven by the G20.
Using Other Global Organizations
Although the G20 does not own any permanent staff or other resources, it can procure the required resources and commitment of other international organisations, when the need arises. Global bodies, such as the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) are included in the G20’s negotiation process.
These organisations help the G20 willingly, since they are dependent on the political and material support of the G20 member nations for their existence. In turn, the G20 enlists the help of these bodies to:
- Make multinational corporations pay taxes, with the help of the OECD.
- Boost green finance, with the help of the United Nations Environment Programme.
- Address the issue of fossil fuel subsidies, with support from the International Energy Agency.
Establishment of Financial Stability Board
In its London Summit in 2009, the G20 established the Financial Stability Board. This board works with the aim of promoting stability among the global financial markets by coordinating the activities of national as well as international financial authorities.
The G20 relies on the board to perform a number of tasks, such as:
- Ensuring large financial institutions hold more capital to make them less vulnerable to collapse.
- Monitoring the progress of financial institutions.
- Implementing strict transparency standards.
Greater G20 cooperation in the future could drastically alter economic conditions for the greater good. It can also help create new avenues for clean energy transition.