What Holes Has The Financial Crisis Revealed In The G8 Will The G20 Fill Such Holes - Essay Example

? What holes has the financial crisis revealed in the G8? Will the G20 fill such holes? Introduction The 2007/2009 recession has caused huge financial crisis across the word. Not only the poor and developing countries, but also the developed world faced severe financial problems as a result of it. World’s wealthiest country; America was the major sufferer of this crisis. In fact many people believe that America was responsible for stimulating recent global recession. The unhealthy lending habits of American banks and the crazy life styles of American public have given momentum to the recent financial crisis. G8 and G20 are two of the major coalitions in the world at present. G20 was proposed by former Canadian Prime Minister Paul Martin in 1999 to deal with international financial matters. Sustainable development is the major theme of G20. It is also interested in solving global energy crisis, economic problems, demographic problems etc. Australia, Canada, Saudi Arabia, United States, India, Russia, South Africa, Turkey, Argentina, Brazil, Mexico, France, Germany, Italy, United Kingdom, China, Indonesia, Japan, South Korea and European Union are the members of G20. On the other hand the Group of seven (G-7) comprises Canada, Germany, France, Italy, Japan, United Kingdom and United states (Bergsten, and Henning, 1996, p.1). “The G7 is often referred to as G8 because Russia fully participated in all but financial and certain economic discussions of G7 since the 1998 Birmingham summit” (Bailin, 2005, p.42). Before the formation of G7, G6 was formed in 1974 by world's major industrialized democracies such as United States, the United Kingdom, Italy, West Germany, Japan and France. In 1975 Canada joined G6 and it became G7. Russia joined G7 in 1997 to make it G8. Since, its formation G8 contributed heavily to global economy. Fratianni, et al (2005) pointed out that “The world without G8 would be more brutish and riskier than it is now” (p.4). The recent financial crisis has unveiled many of the loopholes in G8 functioning whereas G20 stood well to the challenges raised by the recession. It should be noted that G8 consists of mainly European and American countries whereas G20 consists of countries from Asia also. It is often said that global wealth is currently shifting from America and Europe to Asia at present. This is evident from the fact that most of the prominent Asian countries escaped from recession problems whereas American and European countries are still struggling for survival. In other words, G8 failed miserably in tackling recession problems whereas G20 managed these problems well, mainly because of the contributions of Asian countries. This paper analyses the loopholes in G8 in tackling recession problems and the ability of G20 in filling that loopholes. What holes has the financial crisis revealed in the G8? Even though G8 countries are believed to be the wealthiest countries in the world, recent financial crisis has unveiled the loopholes in the governance of these countries. According to Fratianni et al. (2007), “Today, the G8 leaders are dealing directly with central question of how to build better global governance in both public and private sphere” (p.23). As a result of globalization, privatization is taking place at rapid pace in most of the countries. Moreover, governments in G8 countries are privatizing many of the publicly owned companies to stay away from the responsibilities of servicing the people. It is a fact that private capital is essential for the economic growth of a country. However, uncontrolled private capital in critical sectors may bring more harm than good. India like emerging economies is allowing private participation cautiously even though they are following mixed economic policies. On the other hand, China does not allow private capital in critical sectors even though they are doing everything possible to encourage private capital on all other sectors. G8 countries on the other hand allowing private companies to invest at will in all major industrial sectors. This uncontrolled privatization is causing big problems in G8 countries. “The G8 is increasingly criticised for its inability to show consistently effective, representative and accountable leadership. This is particularly evident in the multilateral trade” (Fratianni et al. 2007, p.100). Even though leadership in G8 countries are capable of handling all other matters, they are not much efficient in handling economic matters. Even president Obama is struggling to put American economy back on track after the recession. The case of Britain is not an exception. Both president Obama and Prime Minister Gordon Brown is seeking help from renowned economists in solving current financial crisis. Reports show that in a recent G20 summit, they discussed global recession with Indian prime minister Man Mohan Singh. Indian Prime Ministers are probably more used to being lectured to on economic policy than sermonizing themselves. It was therefore a surprise to see Dr. Man Mohan Singh deliver some home truths to a gathering of Heads of State representing 80 per cent of global GDP at the G-20 summit in Los Cabos. The speech delivered by Dr Singh must have stunned the audience, especially leaders from the eurozone, as he bluntly told the gathering that Europe was getting it all wrong in its approach to solving the crisis. He also left the gathering in no doubt about his displeasure on the impact of the crisis on the developing countries due to disruption in capital flows (Srinivasan, 2012) It should be noted that Dr. Man Mohan Singh is more of an economist than a politician whereas the leaders of G8 are more of politicians than economists. Therefore, Dr. Singh faced less trouble in solving current economic problems in India whereas G8 leaders are still struggling to do so. In short, absence of visionary leadership is the major problem facing by G8 in solving current economic problems. “G8 has not given enough attention to the way it presents its work to the public. There is too little joint briefing. Most heads give separate briefing that are angle to their national press and play up their own achievements rather than the common agreements” (Fratianni et al. 2007, p.183). Since current world is extremely globalized, recession like global problems should be tackled collectively. It should not be forgotten that economic problems in one part of the world can cause huge problems in other parts because of the interconnectedness of global economy. For example, “In Canada, many citizens are now beginning to sense the implications of the ever more deeply integrated North American financial market” (Pauly, 1998, p3). Leaders of G8 are not recognising this fact well. They are trying to solve economic problems individually. They are more interested in convincing the public than taking meaningful actions to solve current problems. They are trying to safeguard their future at the expense of their country’s interest. Collective action is necessary to solve recession problems; however such actions remain only on papers, not in practice among G8 countries. Over many decades, hosts have instrumentalized G8 summits in order to enhance domestic standing. US president Gerald Ford unexpectedly called the second summit of the Group of 7 (G7) in San Juan in 1976 with one eye on the presidential election of that year. Over thirty years later, UK Prime Minister Gordon Brown was able to bolster momentarily flagging domestic support by hosting the G-20 summit in London and attempting to exhibit international statesmanship (Cherry and Dobson, 2012, p.364) The above examples clearly suggest that G8 leadership utilizing the G8 platform for selfish needs. They are not much keen in using this platform for solving international crisis. Such selfish motives are making G8 extremely ineffective in solving global problems. People in the developing and underdeveloped world are looking suspiciously at the activities of G8 leaders. In short, G8 has not much popularity in the developing world and hence its opinions and views are taking lightly by the developing world. Current crisis has proved the loopholes in capitalist economies. G8 country leaders thought that capitalist economy is much better than socialist economy. “The 2007/2009 credit crisis has revealed global capitalism to be a sham” (Germain, 2001, p.4). The countries which escaped from current financial crisis are socialist economies or countries following mixed economic policies. For example, China and India are two of the most heavily populated countries in the world. Yet, they escaped from recession without many injuries. Even though India is not a socialist economy, it follows mixed economic policies in which capitalism and socialism are blended together. China on the other hand is a socialist economy. “The G7/8 never has been successful in creating systematic arrangements that would prevent global economic problems. It has instead generally resorted to ad hoc reactions to whatever issues came to the fore”(Bergsten, and Henning, 1996, p.2). It is impossible to solve global economic crisis with the help of temporary policies. In order to get long term results, economic policies intended for the long term benefits, should be implemented. G8 seems to be interested in putting dust in the eyes of people with the help of some fake offers and policies. For example, “The G8 pledges were look like one time contributions without any assurance of continuity of funding” (Bayne, 2005, p.96). It should be noted that continuity of funding is necessary to solve recession like global problems. In fact the G8 leadership did not show the courage or wisdom in solving the current crisis. They were more interested in publicising some policies which in turn were insufficient to solve the current crisis. For example, Obama has implemented certain policies such as Obama care or the federal healthcare law, cash for clunkers etc to revitalise the healthcare sector and the automobile sector respectively. However, none of these policies yielded the desired results because of the problems in implementation. “The scope for disputes between governments over trade and economic issues was growing steadily among G8 nations”(Bayne, 1995, p.492). G8 countries were more interested in solving their domestic problems instead of solving the global problems. They failed to recognize the fact that international or global economic and trade problems may cause many problems in their domestic market. For example, America is the biggest market for many of the prominent companies all over the world. Therefore, problems in American market may cause problems to companies which market their products in America. In other words, problems of America can cause many problems in other countries. So, it is necessary for global countries, especially the G8 countries to work collectively to solve problems in America. However, most of the member countries of G8 are interested only in solving their internal problems. The globalization of the world economy preoccupied Birmingham as well as Edinburgh. The rich G7 countries did not over?praise globalization, but recognized the need to counter its dangers. As in the past, British and Commonwealth ideas on debt relief for the poorest countries strongly influenced the G8 treatment of this issue. The initial G8 response to India's nuclear tests was cautious, but they avoided a split over sanctions. The leaders have since deployed the G8 apparatus, which has grown up over the years, to keep pressure on India and Pakistan to adhere to the key nuclear treaties. On other issues too, the G8 overlapped with Commonwealth interests. The Commonwealth should give more thought to its potential influence in international economic issues (Bayne, 1998, p.445). G8 failed to take a uniform policy on global matters. For example, the nuclear tests conducted by India and Iran were perceived differently by the G8. While G8 took a cautious stand towards India’s nuclear tests, it took an aggressive stand towards Iran’s ambitions to become a nuclear power. India is labelled as a responsible country whereas Iran is labelled as an irresponsible country by many of the G8 countries. Such dual policies have caused a division in the global political and cultural matters. “The gap between rule-makers and rule-takers—as well as the cohesion between those perceived to have benefited or lost out through this transformation—has widened” (Cooper, 2010, p.742). Many of the Islamic countries are of the view that G8 is not acting impartially on global issues and hence they are keeping a distance from G8 countries. “The publicly declared objectives of G7 were to promote values of open democracy, individual liberty and social advancements” (Kirton & Stefanova, 2004, p.3). However, many Islamic countries are of the view that G8 is trying to cause problems to Islamic world in conjunction with America. Islamic world perceives G7/8 summits “as collusive agreements that give incumbent governments’ competitive advantage over their rivals in domestic politics” (Fratianni, et al 2003, p.4). So, they are not cooperating properly with G8 in solving global problems. Will the G20 fill the holes created by G8? Majority of the countries in G8 are capitalist economies whereas G20 has a blend of capitalist economies, socialist economies and mixed economies. America and Britain are examples of capitalist economies whereas China is an example for socialist economy. India on the other hand represents mixed economy. In short, G20 is a diverse coalition. Therefore it is capable of taking the goods and leaving out the drawbacks of each economic or political system. G20 leadership values the opinions of all its members before taking a decision. Thus, G20 leadership is more effective than G8 leadership and it can definitely fill the holes created by G8. As a direct consequence of the ‘Great Recession’ of 2008–2009 and the continuing financial instability left in its wake, the G20 has moved into the putative position of premier forum for global economic governance. The immediate impact of the G20 as a ‘crisis breaker’ has been palpable. From the initial leaders’ summit in Washington DC (November 2008) to the second in London (April 2009) and the third in Pittsburgh (September 2009), the G20 served as an effective catalyst for generating both big domestic stimulus packages and promises of new resources for the International Monetary Fund (IMF), the World Bank and other multilateral development banks. (Cooper, 2010, p.741) ‘Unlike some of the older coalitions involving developing countries, G20 did not have a blocking agenda but a proactive one. G20 is a coalition which is capable of making a difference through the logic of its arguments and its sheer strength of weight”(Narlikar and Tussie, 2004, p.953). G20 has wider representation of the developing world whereas G8 has the representation of only the developed world. “The G20 has the embedded characteristics of ‘executive multilateralism’. On the one hand, the G20 can be reproached for being a classical expression of elite or top-down multilateralism; it is, after all, ‘reforming from the top’”(Cooper, 2010, p.742). G20 has equal representation both from the developing and developed world. As mentioned earlier, developed world seems to be having the wisdom of solving the current financial problems since they rarely faced such problems in the past. On the other hand, developing world has faced such problems frequently in the past and hence they know better to tackle it. Developed world or G8 is giving more emphasize to the theoretical aspects whereas developing world or G20 is giving more emphasize to the practical aspects while solving recession problems. In other words, the approaches of G8 and G20 in solving recent financial problems are different. As mentioned earlier, G20 is valuing the opinions of emerging economies very much while formulating policies to tackle recession problems. In other words, G20 is trying to solve the crisis collectively. On the other hand, G8 member countries are trying to solve the crisis individually. “G20 claims three specific big successes: stronger international financial regulation, including the Basel 3 Capital Accord; more effective macroeconomic coordination; and governance reforms of the Bretton Woods organizations” (Vestergaard & Wade, 2012, p.481). Basel III Accord is intended for a global regulation on banking standards. Basel Committee on Banking Supervision is of the view that since global economy is interconnected in many ways, it is necessary to have some unification of global banking standards. G20 countries are ready to accept these arguments and they are showing sincerity in implementing Basel III Accord. On the other hand, G8 seems to be not much interested in implementing Basel 3 because of the concerns expressed by some prominent economists. “20 leading finance professors published a scathing critique in a letter to the Financial Times (FT). They warned that Basel 3 fails to “eliminate key structural flaws in the system” and therefore is “far from sufficient to protect the system from recurring crises” (Admati et al. 2010). In any case, G20 is keen in relying Basel 3 for solving current financial problems. The Bretton Woods Project on the other hand is intended for the networking of information-providers to analyze the influence the World Bank and International Monetary Fund. It should be noted that World Bank and IMF are the major global financial institutions and the role of these financial institutions solving global recession problems cannot be neglected. G20 is keen in working along with these institutions to solve the current financial problems. The G20 works closely with a number of key international institutions, including the International Monetary Fund (IMF), the World Bank, the Organisation for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), the Financial Stability Board (FSB), the United Nations (UN), and the International Labor Organization (ILO). Representatives from regional organizations such as the Association of Southeast Asian Nations (ASEAN), the African Union (AU), the New Partnership for Africa's Development (NEPAD) and the Gulf Cooperation Council (GCC), have attended various G20 Summits (The G20, n.d.). “Structurally, the G20 finance forum (along with the G8 summit process and outreach sessions with the new G5 of China, India, Brazil, South Africa and Mexico) had established a system in which ministers and officials were used to meeting with each other on a regular basis” (Cooper, 2010, p.747). Unlike G8, G20 leaders conduct meetings on a regular basis to discuss the latest developments in global economic systems. Such meetings are important since changes are taking place rapidly in global financial systems. The leaders of G20 are working unselfishly to solve financial problems. They are giving equal importance to domestic problems as well as international problems. “If the G7/8 embodies the geographical power of the older trilateral world, a key positive feature of the G20 is its cross-regional reach. The G20 does have both symbolic and instrumental advantages in its ‘bridging’ function between the established North and the ‘rising’ powerhouses of the global South” (Cooper, 2010, p.745). It is often said that global wealth is currently shifting from the less heavily populated north to the more heavily populated south. In other words global wealth is shifting from America and European regions to the Asian region at present. The emergence of countries such as India, China and Korea are definitely underlining the above arguments. “An economic driver of globalization is the worldwide explosion of financial flows” (Kirton et al., 2001, p.248). Globalization can achieve its objectives only if the financial flows taking place from more heavily developed regions to the less heavily developed regions. G8 has the representation of only the developed world. Therefore, it may try to prevent the financial flow from developed world to underdeveloped world. On the other hand, G20 has the representation of both developed and developing world and hence it can smoothen the flow of capital from developed to developing world. For example, capital flow is currently taking place from developed world to developing world in the form of outsourcing of works. America and European countries are trying to block the outflow of jobs from their domestic market to international markets. Obama’s protest against outsourcing is not a secret. In fact, he warned American companies that they may not get any tax reductions or concessions, if they continue to outsource their jobs. American and European countries are struggling because of manpower shortage and expensive labor. On the other hand Asian countries such as India and China are blessed with cheap labor. Therefore things produced from India and China would be much cheaper than the things produced from America or Europe. Thus American and European products may struggle to compete effectively with Asian products in terms of price in international market. In order to avoid that, American and European firms are currently outsourcing and offshoring their business to Asian countries. As a result of that capital outflow is taking place from America and Europe like developed regions to underdeveloped regions. Thus, the true objective of globalization is met through these capital outflows. G20 is taking pragmatic approach towards such issues even though G8 has other ideas. When we look back in 10 years’ time, the G20 meeting is less likely to be remembered for any of the single issues discussed at the table than for a governance reform: the commitment to widen the membership of these same technocratic bodies to include more emerging market countries. Even the long-term significance of this reform is unclear. If their new seat at the table gives emerging market governments a genuine ability to shape international regulatory outcomes, this reform will be a lasting and important legacy of the summit. If, however, their new influence turns out to more symbolic than real, existing resentments may be strengthened in ways that could boost centrifugal forces in international financial politics. The kind of internationally coordinated regulatory initiatives backed by the G20 leaders summit could give way to a more fragmented and decentralized international financial order (Helleiner & Pagliari, 2009, p.276 At the same time, some people have doubts about the abilities of G20 in solving current crisis. Pauly (1998) pointed out that “The standard economic analysis of global financial integration emphasizes the trade-offs that exists between capital mobility, exchange rate stability and monetary autonomy” (p.10). Monetary freedom is essential for solving financial problems. In EU, member countries do not have monetary freedom. For example, Greece is currently facing stiff financial problems because of the tight norms imposed upon them by the EU countries. EU believes that Greece’s failure in solving domestic economic problems may cause huge burden to other member countries of EU. Therefore, they are not allowing Greece to implement independent monetary policies. Not only Greece, but also many other EU countries such as Spain, Portugal and Italy are currently struggling in terms of economic development. European Central Bank is not allowing these countries to print enough Euros to solve the crisis. It should not be forgotten that EU is one of the prominent members of G20. The Seoul G20 meeting discussed the global economic imbalances with the help of the roles of exchange rate policy, currency manipulation and ‘currency wars’. The difficulties in making progress on these issues are created by a lack of academic agreement on them and differences in the views of individual member countries of the G20 (Bird, 2011, p.196). However, economists and political analysts believe that G20 leaders will undertake meaningful actions to solve the current financial problems. Conclusions G8 and G20 are approaching the global financial problems through different angles. G8 seems to be adopting a more selfish approach whereas G20 is more practical in solving the present crisis. G20 leadership consists of leaders from different political and economic systems such as capitalism and communism whereas G8 leadership consists of leaders from capitalist economies alone. In other words, G20 can analyse the financial problems through different perspectives and hence they have the ability to fill the gaps left by the G8. Even though G8 consists of prominent countries in the world, its representation of global population is minimum. On the other hand, G20 represents more than 60% of global population. The superiority of G20 over G8 in population representation is helping them immensely in implementing drastic measures to solve the present global financial problems. Since G20 has the representation of developing as well as developed world, it can cater the needs of both in solving Cross-regional reach of G20 is much better than that of G8. G8 countries are mainly from American and European continents. Moreover, these countries have almost similar culture. On the other hand, G20 countries are scattered on different continents and hence its ability with respect to cross cultural or regional reach is immense. In other words, G20 has better ability in convincing global public with respect to the importance of implementing drastic economic measures to solve current financial problems. References 1. Bayne, N. 1995, The G7 Summit and the Reform of Global Institutions. Government and Opposition, 30: 492–509. doi: 10.1111/j.1477-7053.1995.tb00140.x 2. Bayne, N. 1998. ‘Britain, the G8 and the commonwealth: lessons of the Birmingham summit’ The Roundtable: The Commonwealth Journal of International Affairs Volume 87, Issue 348, 1998 3. Bayne, N. 2005. Staying together: the G8 summit confronts the 21st century Ashgate  4. Bailin, A. 2005. 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