Yves Tiberghien is an associate professor of political science at the University of British Columbia, Canada.

 

 

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Big Picture: The Context of the Seoul G20 Summit and the Northeast Asian Paradox

 

Since the 2008 financial crisis, the global economic system has entered a period of intense turbulence, higher systemic risk, and structural change. Many observers and policy-makers recognize the current period as a critical juncture , during which the system of global governance must be successfully upgraded to cope with increasingly globalized and volatile markets. In addition, the global system is undergoing a historic rebalancing in the distribution of power, a process marked by the rise of large emerging countries, primarily China, India, and Brazil. As a consequence, the share of OECD countries in the global GDP has shrunk from 60% to 50% between 2000 and 2011 (PPP basis). This new reality has empowered the new rising emerging economies to demand a larger say in global governance, as witnessed during the debates over the choice of a new IMF Managing Director in June 2011.

 

By chance and also owing to its relatively careful initial design, the G20 Leaders Summit has emerged as the prime forum for the negotiation of changes in the global economic governance. In particular, the G20 represents a relatively stable equilibrium, due to its near equal balancing between developed OECD countries and emerging economies (nearly 10 to 10, depending how one codes Mexico and Korea). The G20 suffers somewhat from its large size, but at least enjoys support from most of its members due to its numerous opportunities for coalition-building and issue-specific balancing.

 

It is true that the G20 in still in the process of proving itself and has to deal with many skeptics. Many analysts in Canada and the U.S. are quick to discount the G20 process as meaningless summitry among too many countries focused on widely divergent domestic agendas. Ian Bremmer and Nouriel Roubini both call this a G-zero situation. Likewise, many leaders in Japan, especially in the Ministry of Foreign Affairs, are very skeptical about the G20’s potential and Japan has broadly not yet accepted the G20 as the central game of global governance, preferring to it the well-established G8. Yet, the G0 or G8 or G193 are not functional options. They represent default realities without the ability to solve any of our global problems. Only the G20 is able to deliver the necessary political leadership to initiate the upgrading of global governance. For this reason, the majority of key countries (including Europe, China, Korea, and many in the U.S.) see the G20 as the core game of global governance and the best option for the enhancement of global cooperation and the restructuring of global institutions.

 

After an interim summit in Toronto, the Seoul summit came at a critical moment when the future of the G20 was in the balance. By managing to deliver visible results and institutional milestones, the Seoul Summit played a key role in the gradual institutionalization of the G20. The Seoul summit provided significant momentum to the G20 and significant legacies. It can be seen as a second high point after the London summit.

 

This was not immediately obvious in the fall of 2010, due to a high profile conflict between China and the U.S. (and Japan and Canada, among others) over the exchange rate level of the renminbi and current account imbalances. This issue dominated press reporting and ended up in a stalemate in Seoul. To a large extent, it was too big for the G20 to solve at that time, given the superpower status of both China and the U.S. In addition, weaker links with China at that time a clear positioning on the side of the U.S. prevented Korea from being an effective mediator.

 

Yet, in the wake of the Seoul Summit, the North East Asian Paradox of the G20 stands out: despite a recent intensification in China-Korea-Japan integration and negotiations, and despite positional similarities in the global economy (as large current account surplus countries with significant reserves in $ invested in U.S. Treasury bonds), these three countries have next to zero coordination of G20 policies. It is likely that political leaders in the three countries will notice this gap in the near future and find significant interest in coordination and cooperation before G20 summits. Korea is the most likely catalyst of any such cooperation. And Japan is the country where change must happen first, depending on the leadership of its future prime minister(s). At the time of writing, change could be imminent with the passage of the torch from Kan Naoto to his successor.

 

Such North East Asian coordination would have a large impact on the future of the G20 and could shape outcomes, given that the three North East Asian countries are positioned as median or pivotal players on the spectrum of many key issues. Any joint proposal by Korea, Japan, and China (open to others, such as India, Indonesia, or European partners) on a roadmap for capital flow regulations, on updated developmental norms, or on the operationalization of the financial safety net ideas initiated at the Seoul G20 summit might reshape the outcome of G20 processes and carry the day. These are issues where the ideas and underlying preferences in the 3 countries are actually very close. The list could include new ideas on stabilizing commodity markets and reducing global financial volatility. If the three countries generated common ideas and acted together on those issues, they would likely carry the day, given their position at the center of the spectrum and on the moral high ground of global public good.

 

Solving the North-East Asian Paradox could also have a large influence over regional politics in North East Asia. Indeed, joint action over such a definitive terrain of common interests and mutual benefits could build trust and generate enough momentum to help defuse security tensions and counter the fears generated by the rise of China. Joint trilateral work on financial regulations, economic monitoring, or policy responses to environmental and security shocks might constitute the crucial missing link that could initiate a snowballing process of institution-building in North-East Asia.

 

Interesting, China, Japan, and Korea need each other to exert global clout in economic governance. China has the most financial power and muscle; yet, China needs Japan’s know-how acquired from its long G8 experience and links with the U.S. and Europe. Japan is comfortable in the G8 and in those links but needs China’s clout to exert any true influence. The same goes for Korea. And both China and Japan need Korea to be able to work positively together. Korea is both the most natural partner for Japan as a fellow OECD advanced democracy and the closest bridge to the OECD and Japan for China. If Korea plays well, it can have a large agenda-setting role. But similarly to the approach employed by Singapore, it needs to maintain powerful simultaneous ties with Japan, the USA, and China.

 

Looking forward, the G20’s future remains uncertain. The G20 carries both significant momentum and significant internal disagreements. The low hanging fruits of policy coordination have been harvested. The game ahead is more about institutional change and institutional creation, both more difficult tasks. In 2011, the ambitions of the French presidency are facing very steep political obstacles, as most key countries (U.S., Germany, France, Russia, China, Japan, Italy, etc.) are in pre-electoral mood and have lame duck governments. The Cannes Summit is most likely to implement and concretize some past pledges (on development, financial safety nets) and score limited advances on capital controls or the future of the SDR. But it is unlikely to solve the bigger issues of the international monetary system or the institutionalization of the G20. It could be marked by a confrontation over a global financial transaction tax (so called “Tobin Tax”) after the Franco-German renewed call for such a tax in mid-August. The years 2012-2013 will most likely be the make-or-break years for the G20, determining whether it remains a low-key policy coordination forum or a true global steering committee able to orchestrate grand bargains and lead to institutional creation. Korea, China, and Japan are probably the key players in determining the future of the G20.

 

The G20 Stage Before Seoul

 

The 2008 G20 Leaders’ Summit was initiated by the G8 and particularly Europe and the U.S. It represented an effort by G8 leaders to open up the steering committee of global governance after acknowledging that they faced a crisis too big to solve on their own and that the distribution of power had changed over the preceding decade.

 

Europe and the U.S. proposed the G20 Summit and shaped its agenda in October 2008. French President Nicolas Sarkozy initiated the process by inviting President Georges Bush to convene a summit initially envisaged as a G12 or G13. The initial quid pro quo within the G20 was European support for counter-recession deficit spending in exchange for an American promise of broad international financial regulations. It was clear, however, that international coordination out of the global financial crisis required the participation of the largest world creditor, China and other major emerging powers and creditors (Russia, Brazil, India, Saudi Arabia); using the existing format of the G20 (in existence since 1999 as a Finance Ministers and Central Bankers meeting) was the most convenient way of doing so.

 

It is rational to assume that the U.S. was ambivalent about the G20 from the start. While being aware that coordination among the major economies (including China) was crucial to ride out of the global financial crisis and solve other functional problems, the U.S. was less willing to turn the G20 into an instrument of post-U.S. hegemony. In contrast to the ambitious European call for a “new Bretton Woods”, the US sought only a flexible forum for policy coordination.

 

Thus, right from 2008-2009, the G20 has embedded two significant tensions. First, the two midwives of the G20, the U.S. and Europe, have broadly different views about the G20: on one hand, the U.S. seeks a minimal coordination among stakeholders of the global economic system, minimal common regulations when indispensable, and a way to constrain China, the rising superpower and new rival. On the other hand, the EU sees a drastic need for fundamental financial regulations to prevent future systemic financial crises and a general institutional upgrade to balance the widely globalized markets, and prevent regulatory arbitrage. Europe also seeks a more stable global monetary system, one less reliant on the U.S. $. In this dialogue, however, Europe is significantly disadvantaged by its lack of internal coherence and unified voice. At times, France and Germany are able to provide both a cogent position, coordinate with the UK, and gather support from the rest of Europeans. But at other times, especially after the demise of Gordon Brown, the UK takes distinct positions, sometimes close to that of the U.S., and key European leaders are unable to have a global impact.

 

The second internal tension in the G20 is that between the G8 members who are at the origin of the G20 (except Japan, and possibly Italy that have been hesitant from the start) and the rising emerging powers loosely organized under the banner of BRICS (Brazil, Russia, India, China, South Africa). While the G8 members see the G20 as a means of gaining the approval of the emerging powers for global coordination led by developed countries, the BRICS countries see the G20 as the opportunity to gain more voice in global governance, preempt effort by developed countries to slow down their rise, and to rebalance the Bretton Woods institutions. Thus, significant zero sum gain battles are embedded within the larger positive-sum game thrust of the G20.

 

Korea finds itself in an interesting position. It is both an OECD country that was not part of the G8 but with close links to G8 countries AND a recently emerged economy with good links to other emerging economies.

 

In terms of power and influence, the G20 game on the eve of the Seoul summit could be interpreted as a triad with three dominant players (U.S., EU, and China) and several significant potential or active mediators (Japan, Russia, Brazil, India, Korea, Canada, Australia). The core game is the one between the three poles of the triad. Anything that can be agreed upon by the U.S., Europe, and China will almost certainly become a G20 consensus. Naturally, these 3 poles of the triad have deep conflicts of interests. The US wishes to use the G20 to force China to revalue the renminbi, while China wishes to see the G20 as a peer-pressure forum able to prevent the U.S. from pursuing quantitative easing (given its status as global reserve currency owner). Europe wishes to see the G20 as a tool to regulate global finance, while the U.S. has a too profound vested interest in unregulated finance (as the home of Wall Street) to countenance much of it. So, in effect, the G20 is forced to move forward by seeking the small existing common ground between the three giants.

 

Despite these tensions and difficulties, the two months before the Seoul G20 Summit made it clear that it had become the core Great Game of international economic governance, with an immense gravitational pull over international relations in 2010. For example, the Beijing Summit between Russia and China, the October trip of Chinese Prime Minister Wen Jiabao to Europe, followed by the highly strategic visit of Chinese President Hu Jintao to Paris and other European countries early November, or U.S. President Barack Obama’s journey to India, Indonesia, and Japan in November were all linked to the G20 process. While the U.S. was shoring support among India, Indonesia, Japan, and possibly Korea for its effort to force China to move on its currency, China was developing a strong strategic link with European powers as a wedge against the U.S. coalition.

 

Assessment of the Results of the Seoul G20 Summit

 

The Seoul G20 Summit had the significant merit of reaching significant deliverables and institutional outcomes. In so doing, it buttressed the role of the G20 as a useful global steering committee and kept its momentum going. The key long-term results reached in Seoul (and in Gyeongju, two weeks earlier) were the result of slow and gradual work over the entire year, while the last minute brinkmanship by big powers around the issue of current account imbalances was less successful.

 

The most important positive results of the Seoul Summit include the following items:

 

① IMF Voting Rights Reform (so called “Quota and Voice Reforms”): the issue of voting shares and voting rights at the IMF and the related issues of board directors had been vexing issues for years. The reluctance of existing power holders to accept changes that would make IMF voting more in line with the changing economic situation was seen as a key problem for the legitimacy of the IMF. For example, while the EU as a whole had 32.5% of voting shares until 2008 (and 32% as of 2011), China’s share was at 2.93% (equal to Canada’s and below Italy’s 3.2%). Slow changes were ongoing since 2008, but no breakthrough had been reached despite promises by overrepresented countries (especially Europeans). On October 23, 2010, in Gyeongju, the G20 Finance Minister’s Meeting reached a major breakthrough (ratified by the IMF’s Executive Board on November 5 and included in the Seoul Declaration on November 11). The results included a shift of 6% of quota shares to emerging economies and dynamic developing economies, 80% of which comes from overrepresented OECD economies. For example, after the reform to be effective in October 2012, China’s voting share will reach 6.07% (from 3.65% in 2011), just a notch below number 2-ranked Japan (at 6.14% in 2012 and 6.00% as of 2011). Europe also agreed to relinquish two chairs on the Executive Board.

 

Interview sources in Japan, France, and Korea have noted that this remarkable result was not obvious until the Gyeongju meeting. At Gyeonjgu, it is reported that IMF Managing Director Dominique Strauss-Kahn and Korean President Lee Myung-Bak put a carefully crafted proposal on the table and threatened to lock the room and block transportation in Korea should the ministers not agree. This was a significant case of successful mediation of a general compromise.

 

② The Basel III banking ratios: The Gyeongju meeting also led to the major agreement to adopt the Basel III banking ratios, increasing the ratio of Tier 1 capital to 7% by 2013. This step, also difficult in coming, due to significant doubts among some key countries, was meant to reduce the leverage of major banks and thus the financial risk run by too big to fail financial institutions.

 

③ The Financial Safety Nets: the agreement in the Seoul Summit Declaration includes reference to several new credit lines, better coordination with the IMF, and links to regional financing arrangements (RFAs). This issue was a significant Korean priority and marked a significant victory for Korean leadership. Much work remains to be done to implement these safety nets and make them effective for developing countries in times of crisis. But Korea continues to work on the item with the French presidency in 2011 as part of the G20 troika. The G20 summit declaration also referred to the volatility and instability of the global monetary system, thus including a marker for future work on this issue.

 

④ The Seoul Development Consensus for Shared Growth: this document, included in the Seoul Summit Declaration, includes several practical consensus commitments and explicit links to the UN’s Millenium Development Goals. While not making any conceptual breakthroughs on the role of the state or on the management of capital flows (two hotly disputed topics today), the Seoul Consensus document is a lean and practical document devoid of the broad principles formerly embedded in the Washington Consensus. The Seoul Development Consensus document opens the door for much more work within the G20 in 2011 and beyond. It can be seen as the start of a normative change that can be used by actors on the ground in the near future to legitimate policy change.

 

⑤ Negotiations on current account imbalances: this issue dominated headlines and was much more contentious and difficult. While the hoped for guidelines on current account imbalances proved out of reach, the Seoul Summit Declaration includes a paragraph on the need to devise indicators for “external sustainability.” It is on that basis that the Paris Finance Minister meeting in February 2011 was able to reach a compromise. The delicate comprise was reached by breaking current account indicators into individual components (rather than following it as a whole) and avoiding foreign exchange reserve.

 

Paradox in Chinese, Japanese, and Korean positions

 

One interesting paradox arising from the Seoul Summit is the Northeast Asian paradox. While China, Japan, and South Korea are divided by significant differences (economic development level and size), they also share key similarities: current account surplus countries with large currency reserves in $, jointly owning 50% of the U.S. foreign debt; all large trading nations with weak financial centers, vulnerable to volatile capital flows. Yet, at the G20 in Seoul and in 2011, the three countries have not only avoided coordinating their policies, they have actually openly clashed on a number of issues. For example, Japan has openly supported the current $ dominated international monetary system (e.g. at the Nanjing G20 summit in late March 2011), in opposition to ideas proposed by China and Europe. Japan has also supported the U.S. push against the value of the renminbi. Japan and China have clashed in the Paris G20 meeting in February over rare earths, while Korea and China have clashed at the same summit over the internationalization of the renminbi in total absence of coordination with the Chiangmai initiative...(Continued)

 

 

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Acknowledgement

The author acknowledges the support of the East Asian Institute for this research. In April-July 2011, as an East Asian Institute Peace Fellow, he was a visiting scholar at Peking University, Fudan University, Taiwan University, Keio University, and at the East Asian Institute in Seoul. This paper builds upon a larger research project on the role of China in Global Governance funded by the Social Science and Humanities Research Council of Canada (SSHRC). Research in Japan was made possible, thanks to the invitation as visiting scholar at the National Graduate Institute for Policy Studies (GRIPS). Research in France was made as an associate researcher with the Asia Centre (Paris) with the support of French Ministry of Foreign Affairs. During the academic year 2010-2011, he was based at National Chengchi University in Taiwan as a Visiting Associate Professor. The author also acknowledges wonderful research assistantship by Cheng-Yu Lin, Pascale Massot, and Chunman Zhang.