COVER STORY • Global Governance at a Crossroads – a Roadmap Towards the G20 Summit in Osaka • 8

T

he G20 & Global
Governance

By Sachin Chaturvedi & Priyadarshi Dash

Introduction
A diverse set of “movers and shakers” have explained the contoursof global governance over the past decade. Some importantdevelopments that need mentioning in this parlance include thecollapse of the WTO Doha Round of trade negotiations, the originationof the financial crisis of 2008-2009 in the United States (the mostsophisticated financial system in the world), the unhealthy trade war
between the US and China, the so-called proponents of free trade,
protectionist and isolationist policies in the US, migration fromconflict-ridden Arab countries and Africa, and human rights violations
across countries. These unusual events happening across countries
regardless of their level of development tempts the intelligentsia andordinary citizens to question the relevance, adequacy and legitimacyof the existing superstructure of global governance. Moreover, theslow response to standard bailout and crisis financing packages by
the IMF in the wake of the financial crisis in 2008-2009 and theprolonged and uncertain recovery have exposed inherent deficiencies
in the current systems of global governance.
The post-crisis evolution of narratives on the role of multilateral
institutions and country configurations or reconfigurations has beenkaleidoscopic and introspective. While pressure on the institutions ofglobal governance such as the United Nations, IMF, WTO, World Bankand regional development banks to undertake necessary reforms intheir functioning, particularly on the issue of fair representation of
emerging markets and developing countries, continues to mount,
there is a greater recognition of the existence of a vacuum ininternational economic governance. Can the G20 fill this vacuum? Inother words, can the G20 demystify and blur the conventional country
configurations into stereotype categories of developed anddeveloping, and nurture mutually-reinforcing engagement among
countries?
Despite not having the legal status of an international organization,
the G20 has gained substantial influence as a global platform in recent
years, perhaps by leveraging the benefit of the doubt. This benefit ofthe doubt accrues from declining faith in the existing multilateralprocesses of promoting trade, investment and development
cooperation. In the 1980s, the G7 lost its importance as a platform forinternational economic policy coordination and this skepticism lasted
till the outbreak of the East Asian Financial Crisis in 1997. The severityof this emerging markets crisis in terms of contagious spread andmagnitude of output and employment loss created the space for the
32 Japan SPOTLIGHT • May / June 2019

Author
Sachin Chaturvedi

AuthorPriyadarshi Dash

G20 to emerge (“G20 and Global Governance” by Stephen Kirchner,
Cato Journal, 2016, Vol. 36, No. 3). Subsequently, the first meeting of
the G20 finance ministers and central banks was held in Berlin in
December 1999. Regardless of the efficacy of other countrygroupings, the expectations from the G20 appear to be high as thegrouping has graduated from playing a stabilizing role (in the context
of post-crisis inter-country coordination) to promoting development.
This has been manifested in the widening and broadening of the G20
Summit agenda from its focus on restoring financial stability andensuring global macroeconomic coordination in the first three G20
summits during 2008-2010 to a wide range of development issues
like global value chains, food security, skill development, women
empowerment, Africa compact, and so on. Being a club of developed
as well as emerging markets, the G20 envisages a world thatcherishes high and inclusive economic growth, protects the interestsof the poor and marginalized, prevents financial crises, and ensures
upward social mobility (poverty alleviation, food security, women
empowerment, etc).
Basically, the business of the G20 over the years has evolved in two
tracks – a finance track and a development track. Even though theleaders’ summits have not exclusively referred to these two tracks forpractical purposes, they define the sequence of activities in the G20
platform. As this year’s G20 host, Japan has cautiously identified thecore areas of these tracks. In development sectors, universal healthcoverage, aging, and quality infrastructure assume importance, while
the finance track will probably continue to implement regulatory
reforms in financial markets and envision new and innovative meansof fund mobilization for development projects.

Finance Track
As the name suggests, the finance track largely covers the areas ofglobal financial stability, fiscal and monetary policy coordination,exchange rate coordination, financial systems development, anddevelopment finance issues. The success of G20 initiatives in
restoring financial stability to the global economy is laudable.
However, a lot depends on the measures and commitments beyond
crisis prevention and resolution. The vitality of the finance track can
only be regarded as successful if finance contributes to inclusive andsustainable development in emerging and developing economies.

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COVER STORY 8

Functioning of Global Financial Systems
The G20 assumed prominence during the global financial crisis of
2008-2009 when it facilitated joint efforts by the advanced economies
and emerging markets to restore financial stability and ensure acoordinated macroeconomic response, and resist resorting to beggarthy-neighbor policies. The smooth and coordinated implementation of
fiscal stimulus packages and adherence to monetary policy andexchange rate disciplines helped contain the crisis-related disruptionsin the affected economies. These issues dominated the commitmentsof the G20 at the first three summits. While short-term crisis
prevention and mitigation continued to occupy substantial attention insubsequent summits, the finance track of the G20 has widened
significantly in terms of issues covered and the scope ofcommitments. A good number of commitments refer to long-term
structural reforms, especially reform of international financial
institutions, the expanded mandate of the Financial Stability Board(FSB), mobilizing private capital for infrastructure financing,promoting institutional and long-term finance for development,
measures to address debt sustainability, and tax and accounting
reforms.
In October 2018, the G20 Eminent Persons Group (EPG) submitted
a report on the global financial system. The EPG was tasked with amandate “to recommend reforms to the global financial architectureand governance of the system of International Financial Institutions(IFIs), so as to promote economic stability and sustainable growth ina new global era; and to consider how the G20 could better provide
continued leadership and support for these goals” (G20 Secretariat,“Making the Global Financial System Work for All, Report of the G20
Eminent Persons Group on Global Financial Governance”).
Unfortunately, most of the proposals of the EPG do not reflect thiscentral mandate. On the contrary, the report reiterates continuation ofcertain practices which have long been the subject of criticism. A
number of EPG recommendations seek for the G20 to allow the IFIs tolead harmonization of regulations, standardization of risk assessmentand mitigation, mobilization of capital for infrastructure anddevelopment financing, and attracting private capital. There are many
contentious issues in the provision of and access to global
governance, especially in the economic and finance domain.
Developing, less developed, small and vulnerable economies would
ideally demand more space for representation in global affairs thanremaining dependent on their fortunate large and developed economy
peers.

In order to realize the full potential of a cooperative international
order, it is important that developing countries are given fair anddemocratic representation in the decision making of IFIs, particularly
the IMF and the World Bank. Despite repeated efforts by developing
countries including India for action on long-pending reforms of the
IMF and World Bank, not much has happened except some revision in
the IMF quota formula and inclusion of the Chinese currency, therenminbi, in special drawing rights. As it appears, taking forward the
EPG proposals in any manner would amount to empowering the IFIs,
and contribute to perpetuation of existing inequities. It could alsoerode the policy-making space of the sovereign nations. Moreover,the proposals sound self-defeating as they would re-establish theflawed pre-eminence of the IMF in global macroeconomic
governance. It is an over-optimistic claim that governance and humancapital development have been at the core of the IFI’s operations.
Among IFIs, the IMF has supported countries during balance of
payments crises as the lender of last resort but with conditionalities
and Structural Adjustment Programs (SAPs). The efficacy of SAPs fordeveloping countries implemented in the past has been mixed,
especially taking into account the experience of small developing
economies and Least Developed Countries (LDCs). The G20 should
work to suggest and commit to reforms that bring inclusive
development, not packaging old wine in new bottles.
The idea of country platforms or any kind of joint platform within
the G20 is indicative of an unhealthy trend of cartelization among the
IFIs. Without country platforms the G20 can unlock investments in themember countries. Creating an enabling environment for attracting
investment should be left to the member states rather than the G20 asa whole. The G20 should enable countries to explore various sourcesof financing for development. Instead of the G20 creating any suchplatforms, IFIs can pool their own resources in a common platform
without making countries party to that arrangement, and offer themdevelopment finance, if approached by any country. By that logic,
regional platforms for promoting cross-border investments andconnectivity are also not required. Regional platforms would have tonecessarily align themselves with the priorities of the member
countries in regional cooperative frameworks, like Bangladesh,
Bhutan, India and Nepal (BBIN), the Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC), etc.
In practice, the IFI community has placed excessive emphasis on
promoting financial liberalization in developing countries. So far, thisparadigm has not led to holistic social and economic development inJapan SPOTLIGHT • May / June 201933

COVER STORY 8

the developing world. The pitfalls of such an approach were
anticipated by Gunnar Myrdal long ago. Myrdal, in three volumes ofAsian Drama: An Inquiry Into the Poverty of Nations and other works,
underscored the importance of making a fine balance between alaissez-faire economy and state intervention. For example, Brazil had avery active stock market which virtually disappeared following
liberalization that allowed local companies to be listed on the New
York Stock Exchange. The EPG also argues for convergence of early
warning systems, which is a no brainer. Early warning systems havenot been effective in predicting financial crises in the past. Although
there is a need for continuous surveillance and assessment of riskbuild-up, it is more efficient to have independent systems of macroeconomic risk assessment by institutions such as the IMF, FSB and
the Bank for International Settlements than the integrated system. It
will help maintain the plurality of early assessment systems as well as
contribute and validate the predictive ability of the alternative models.
IFIs have failed in anticipating the occurrence of financial crises in
Asia and Latin America in the past and most importantly in the UnitedStates and the Southern European countries in recent years.
Moreover, the post-crisis policy prescriptions offered by the IMF andother IFIs to the crisis-affected economies proved counterproductive
and resulted in unwanted economic adjustments. Interestingly, in theearly years of these institutions, Harry Dexter White and John
Maynard Keynes, eminent economists in this field, were apprehensiveof the role and contribution of the IMF and World Bank in pursuit ofgrowth and full employment.
The idea of reorienting development finance by involving the nonG20 constituencies and the IFIs appears to be an unnecessary step.
This is an attempt to legitimise the leadership and intervention of the
IFIs in G20 matters. This could be a barrier to developing country
institutions such as the New Development Bank and the AsianInfrastructure Investment Bank in developing their own procedures.
The G20 is not a legitimate global platform; therefore it would be afutile exercise for the G20 to take the responsibility of reorienting
development finance by involving IFIs and non-G20 constituencies as
it may not be acceptable to the global community. After all, at themeeting in Busan, the developed countries had attempted
harmonization of approaches to aid which was rejected by thedeveloping countries.
The report is misleading as it apparently assigns more weight topreventing short-term financial crises as an indicator of healthy
development compared to the role of other important development
34 Japan SPOTLIGHT • May / June 2019parameters. The IMF is mandated to primarily provide short-termbalance of payments financing. The idea of combined assessment ofdevelopment risks recognizes the undue emphasis on crisis
prediction and management, which is unnecessary at this stage of theevolution of the G20. Financial stability and macroeconomic
coordination were the over-riding objectives of the G20 in theimmediate years following the financial crisis in 2008-2009. Since
then then G20’s agenda has expanded to include various development
issues. Now that the global economy is seeing buoyancy after aprolonged slowdown following the financial crisis, the G20 should
prioritize expeditious implementation of its commitments on various
development goals.

Leveraging on Private Capital
Private capital, especially cross-border capital flows, has not been
efficiently harnessed by developing countries. This pattern more orless holds across all regions, although there are slight differences.
Most countries have relied on official aid flows and concessional
funding which would not suffice given the extent of development gaps
in developing Asia and Africa. Developing countries in Asia, Africa andLatin America need massive investment in physical and social
infrastructure in the next 20 to 30 years. It would not only require
efficiency in existing resource use but identifying new and innovative
sources of funding, with significantly large contributions of private
capital. Paradoxically, globalization has inverted traditional economic
views of the desired direction of international capital flows. Rather
than encouraging capital to flow to places where it is scarce, globallymobile capital flows to places where it is most secure. This pattern iscreating distortions in the efficiency and equity of investment aroundthe world, especially of government investment.
While public investment would remain a vital component ofdevelopment finance, the G20 should take proactive steps now topromote a more efficient allocation of private capital through newforms of public-private partnerships. A unified ecosystem, good
governance and investment in human capital would attract private
capital into desired sectors of investment. Blended finance and local
currency financing facilities are novel supplementary financing
windows. Small and medium enterprise (SME) financing andagribusiness have been dynamic sectors. Private financing in lowincome countries and fragile states is feasible as healthy mobilization
ratios (total cost of investment per unit of IDA resources) of 8:1 havebeen realized (International Development Association. IDA18 IFC-COVER STORY 8MIGA Private Sector Window (PSW): IDA18 Mid-Term Review. 2018).
The G20 should promote long-term institutional capital from G20
countries into investments related to the Sustainable Development
Goals (SDGs). Some countries face particular issues, especially lowincome countries, fragile states and selected LDCs. For example, there
are 12 LDCs that will graduate from this group in the next few years
with consequent loss of duty-free, quota-free preferential market
access and aid for trade under the WTO window. They may needspecial attention for financing to manage their current account deficits
during this transition. A balance is needed between macro, micro andaffordability/access concerns that should be based on detailed
country considerations. Rules of thumb are not good proxies in thesedebates.

Financing Global Public Goods
Global public goods cannot be created with pure commercial termsof funding. There is a need for special or dedicated funds.
International collective action is warranted to fund non-rival and nonexcludable functions like research and knowledge sharing, control ofpandemics and mitigation of global warming, and global standard
setting, visioning, convening and advocacy on policies, such as the
Food and Agricultural Organization’s principles for responsible
investment in food and agriculture (“We Need a Consensus on the
Definition of ‘Global Public Goods for Health’,” by Gavin Yamey,
Osondu Ogbuoji and Kaci Kennedy McDade, Brookings Future
Development, Nov. 20, 2018). G20 members constitute the largest
economies in the world and hence will be the main contributors tothese potential funds. They should negotiate on such funds. They
could learn from the experience of the UN in its new Funding Compact
which strives to rectify the imbalance between stagnant core
contributions and rising non-core, voluntary contributions that haveto be continuously renegotiated. Wise use of new innovative sourcesof funding would be a pragmatic step in this endeavor.

Development Track
Unlike the finance track, the development track or the Sherpa trackcovers a whole range of sectors and issues which have larger
development implications. To name a few, food security, economic
empowerment of women, agriculture, and skill development havesignificant bearings on the lives and livelihood choices of the poorand excluded sections of the people. In the last 20 years, andparticularly since 2008, the G20 agenda has had commitments on
various development issues. Some areas that could be potential gamechangers in the development track are discussed below.

Science, Technology and Innovation (STI) for Meeting SDGs
Technology development, deployment, dissemination and transfer
to developing countries require suitable responses. Current
institutional arrangements are not equipped to meet the genuine
needs of developing countries in technology development andtransfer. The UN has undertaken several initiatives over the years in
the area of technology transfer, including 1) the Multilateral Fundunder the Montreal Protocol; 2) the Green Climate Fund, 3) the Global
Environment Facility (GEF); and 4) the Climate Technology Centre andNetwork of the United Nations Framework Convention on Climate
Change (UNFCCC). These are necessary and are not sufficient as
more is needed in terms of research and development, funding,technology transfer and adoption and in terms of synergy among
them. The 2030 Agenda, prima facie, has only produced a roughskeleton of the proposed Technology Facilitation Mechanism (TFM).
Mapping of capacity gaps in developing countries for technology
assessment, particularly in the domains of development andsustainability in tune with the SDGs should be undertaken. Proper
ecosystems with specific (cost-effective) technology solutions shouldcome up in individual countries and contribute to the global
repository. A universal technology bank should be created as the core
institution of the TFM. The activities around a TFM technology bankand dissemination of technologies require careful policy design tomitigate informational asymmetries and address market failures andother systemic challenges.
Novel models for incentivizing innovation, such as open source,
open innovation, crowd sourcing and innovation prizes, can be
explored and adopted. In this regard, the literature on successful
examples and models and their adoption in different sectors, ranging
from agriculture to drug discovery, is growing. Addressing
technology-related issues from a public goods perspective will enablefinding workable solutions. Global public goods can be produced andadopted to find cures for communicable diseases, enhance
productivity in agriculture, protect environmental commons, andenable access to information and knowledge. Successful examples ofsuch cooperation include the Consultative Group on International
Agriculture and the European Organization for Nuclear Research.
Further, integrating the SDGs in STI cooperation has not happened
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and there is a disconnect between STI cooperation and strategies for
the SDGs. There is a strong case to use STI cooperation to meet theSDGs by developing specific programs and mechanisms. The current
frameworks and agreements in STI cooperation can be analyzed froman SDG perspective, and institutions that facilitate STI cooperation
can be asked to integrate relevant SDG targets as an objective for STI
cooperation.

Global Value Chains
As production fragmentation intensifies globally, countries canbenefit from integrating into global value chains (GVCs). Currently,
trade flows and positioning in GVCs in Sub-Saharan Africa are far
below their potential. Lower tariffs, better access to credit for theprivate sector and a conducive business climate can enable better
integration of Sub-Saharan countries into GVCs. Since the G20
already has the Africa Compact initiative, GVCs may strengthen theexport prospects of African countries. The same would apply todeveloping economies in Asia and Latin America as well. Tradefacilitation in the form of modern customs and border procedures
have the potential to facilitate efficient integration of African
economies into GVCs as trade flows in intermediate products are
more sensitive to trade facilitation changes. As wages rise in East
Asia, production can be pushed to relatively low-wage areas, possibly
Africa. However, Africa can only tap this opportunity provided
appropriate policies are in place for developing requisite skills among
the local workforce, as well as investment in institutional reforms,
particularly in technical education and training. At the same time,liberal foreign direct investment regimes may attract investment into
industrial sectors in Africa which would fuel local industrialization andstrengthen participation in GVCs.

Trade Finance
Globally, one-third of international trade is backed by one or two
trade finance instruments. By providing financial support andinsurance for uncertainty in payments by importers and delays inmeeting orders, trade finance instruments support the trading firms.
In Africa, trade finance is a relatively low-risk portfolio for commercial
banks. The overall default rate is 5% whereas SMEs face the risk of a
14% default rate. Better provision of trade finance would help
integrate SMEs into the mainstream economy and expand theircapacity to export. Lack of adequate collateral and poor
creditworthiness often leads to rejection of applications by the banks.
36 Japan SPOTLIGHT • May / June 2019

Development banks like the African Development Bank and African
Export-Import Bank could fill this perverse gap in trade financing andactivate the hidden triggers for export growth in African economies.
The G20 should enable adequate provision of trade finance todeveloping countries so as to enable them to benefit from tradeliberalization, particularly from GVCs.

Conclusion
Good global governance is a sine qua non for achieving sustainable
and equitable development in the world. The G20 has to play a criticalrole in this endeavor. Since countries have already embarked uponachievement of SDGs, the G20 must envisage and steer effective
inter-country cooperation mechanisms for realization of this goal. Toomuch dependence on the IMF, World Bank and other IFIs would not
help. In other words, the G20 relegating responsibility to IFIs using
their own platforms would not serve the purpose. In fact, IFIs should
undertake reforms of their organizations on their own. The financetrack must keep the onus on reforming the Bretton Woods institutions
and other institutions of global governance.
Global governance is not just about providing finance but putting inplace institutional mechanisms that adequately address thevulnerabilities of countries in the long run. Private capital must
supplement public investments in infrastructure development andother critical areas of social infrastructure. Cooperation in STI will be
an important pillar in developing partnerships in the future. The G20
must nurture such partnerships which would not only help achieve
SDGs but provide indigenous technological solutions to numerous
development problems. GVCs offer vast opportunities for developing
countries to benefit from integration with the rest of the world. Tradefacilitation and financing would enable the countries to expand
exports and create millions of jobs. With respect to contributions to
global governance, the G20 should assign topmost priority toattainment of inclusive and sustainable development and promote
global institutional architecture for minimizing country vulnerabilities.
In that endeavor, the G20 should proactively advocate for necessaryreforms in the existing institutions of governance and adhere to thespirit of mutually beneficial international cooperation.
Sachin Chaturvedi and Priyadarshi Dash are director general and assistantprofessor respectively at the Research and Information System for Developing
Countries (RIS), a New Delhi-based think-tank.