The latest article by Dr Wes Widmaier looks at the history of the G20 from Keynes concept to the current role this summit plays in the world economy. You can read the original article from The Brisbane Times here: http://www.brisbanetimes.com.au/queensland/why-we-should-care-about-brisbanes-g20-summit-20130220-2ergt.html
By Wes Widmaier
When the heads of 19 countries and the European Union descend on Brisbane for the G20 Summit in November next year, the city and Australia will be looking at a golden opportunity.
For Australia, being a member of the G20 represents more than a chance to influence how the dominant world economies respond to periodic international crises. It allows us to work hand-in-hand with like-minded middle powers, as well as the major powers, to shape the global order over the long term.
This will no doubt be a dominant theme when Australia becomes the ninth country to formally host the G20. The wider Queensland and Australian community should seize every opportunity to familiarise themselves with the role of the G20, its origins, and why we need it.
The answers to such questions reach beyond the Asian economic crises of the late 1990s when the G20 was established as a forum for finance ministers and central bankers, or the G20’s more recent role in displacing the G7 as the world’s premier forum to promote macroeconomic and regulatory cooperation after the Global Financial Crisis.
To truly understand the G20, one must go back to the 1920s, when the Great Crash was followed by the Great Depression. Despite the magnitude of the economic calamity, states proved incapable of cooperating to turn things around, refusing to provide mutual aid and engaging in crude beggar-thy-neighbor protectionism. As economic historian Charles Kindleberger put it, “When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all.”
Into the 1930s, this first “Global Financial Crisis” descended into the Great Depression. Having failed to cooperate, states were instead forced to seek aid from corporate financiers like J.P. Morgan. However, these lifelines came with a catch: Morgan and company promised assistance, but also required spending cuts and tax increases, deepening the downturn.
As the Great Depression wore on, these hard times provided fertile ground for demagogues, who exploited popular discontent in ways that triggered conflict and ultimately humanitarian catastrophe.
In moving on from World War II, states drew on the writings of Maynard Keynes. In seeking to ensure that the mistakes of the 1930s would not be repeated, they sought to look after a global public interest, in a way that provided the template for today’s G20.
Rather than go cup-in-hand to private financiers, Keynes argued, states should establish a global fund for all to draw on in hard times. This de facto global central bank would of course evolve into the International Monetary Fund, and would be backed over the next thirty years by a U.S. dollar that was widely seen as being “as good as gold.”
Of course, nothing lasts forever. American hegemony would wane, and shifts in economic power by the 1970s compelled a shift to a “club model” of economic cooperation. As U.S. deficits increased, the postwar fixed exchange rate system – which had been based on a dollar foundation – would collapse, and cooperation took on a more multilateral form.
In 1975, the “G5” was established by the US, the UK, West Germany, Japan and France to manage the global economy. Over the following decades, the G5 expanded into the G7 and later G8, enabling states to deal with crises like the Great Stagflation of the 1970s, the Latin American debt crisis of the 1980s, and the Mexican peso crisis of the 1990s.
In this light, the G20 should be seen as simply the latest adaptation of the postwar Keynesian order, promoting continued global cooperation – whether providing macroeconomic stimulus or strengthening the global regulatory order – in a way that reflects the realities of shifts in the balance of power.
Over the decades, such adjustments have been essential to the system’s continued effectiveness. For example, while the U.S. provided a $787 billion fiscal stimulus following the GFC, the Chinese contribution was a close second at $586 billion. Taken in concert with the efforts of their partners in the G20, these measures were crucial to avoiding a 1930s-styled Great Depression, and so the potential for large-scale conflict.
In the big picture, the G20 should be seen as an institution rooted in the continued lessons of the 1930s. To be sure, in its core specifics, it is designed to address macroeconomic problems pertaining to global demand and price stability. But in a deeper sense, the G20 stands as the guardian of a global common interest, as a way for states to head off the sources of instability, extremism, and conflict that have been so debilitating in the past.
- Wesley Widmaier is an ARC Future Fellow co-located in the Centre for Governance and Public Policy and the Griffith Asia Institute.