Staying ahead of the curve: in the wake of an ever-evolving global market, Mike Callaghan discusses the Brisbane G20 Summit’s vital role in calling for worldwide economic institutions to adapt, reform and change their practices or risk continued unwieldiness.

In an increasingly integrated global economy, effective multilateral economic institutions are essential. They are the front line of global governance and the key players if globalisation is to work for all. This is an ongoing challenge. The mandates of these institutions must remain relevant and adapt to a rapidly changing world, but at the same time they must avoid “mission creep”. The institutions also have to be representative, but this cannot be at the expense of effective and timely decision-making. They must also avoid international political gridlock and remain fully accountable to their members.

So, if the G20 is to be a global economic steering committee, then one of its main tasks should be to help ensure that global institutions adapt to global changes and are effective.

An increasingly integrated world

The global economy is now more integrated than it ever has been, although not as much as it will become. Already financial institutions increasingly operate on a global scale. In 2013, the International Monetary Fund (IMF) estimated that cross-border bank claims have risen from $US6 trillion in 1990 to over $US30 trillion in 2008. This is a rise of 250 per cent as a share of global GDP. While this rapid growth in international capital flows has brought many benefits, such as better international allocation of saving and investment, such flows can be very volatile and result in the faster international transmission of shocks. The global crisis has demonstrated that greater attention has to be paid to the linkages between economies and the impact of one country’s policies on others – ie. spillovers.

It is not only financial firms that are operating globally. Global value chains dominate world trade. More than half of total manufactured imports and 70 per cent of total service imports are intermediate goods or services. With goods now effectively “made in the world” rather than solely in one country, the approach to trade policy has 
to change – the traditional trade negotiating stance that market access can only be granted as a concession for access to another country’s market is out of date
 and counterproductive.

In a world where goods are no longer produced in one country but are widely dispersed, including the provision of goods and services through the internet, it is also increasingly difficult for any one jurisdiction to identify where its taxing rights exist, and very easy for corporations to ensure that profits are only declared in low-tax regions. No country acting alone can respond to these developments – it is a global issue requiring a global response. Enter the G20…

Increasing integration requires
 effective multilateral institutions


The drivers behind the growth in integration, particularly technology, are not likely to stop. Effective international cooperation 
will become more and more important,
 as will forums such as the G20. However, effective cooperation will crucially depend on effective multilateral institutions.

The importance of multilateral institutions to the pursuit of economic and financial stability was recognised with the establishment of the Bretton Woods Institutions in 1944 – 
the IMF and the World Bank. In the area of trade, the General Agreement on Tariffs and Trade (GATT) commenced in 1948, replaced by the World Trade Organisation (WTO) 
in 1985. And more recently, to advance international efforts to promote strengthened financial markets post-Global Financial Crisis, the G20 sponsored the establishment of the Financial Stability Board in 2009.

Nonetheless, a comprehensive international institution does not yet exist in the area of energy, although the most prominent body 
is the International Energy Agency (IEA), which was established in 1974.

Role of G20 in reforming global institutions


Sure, these and other international economic agencies are vital for dealing
 with an integrated global economy. But the world has changed greatly from when they were first established, so they must adapt accordingly. To facilitate such change, the G20 has the capacity to provide the political impetus to drive reform in these bodies and ensure that they are effectively meeting the needs of their member countries. This is a role the G20 has played in helping to promote governance reform in the IMF and the World Bank – in particular ensuring that their quota and shareholding arrangements better reflect the rise of the rapidly growing emerging markets.

While changes to the World Bank’s shareholding have been implemented, a significant package of reforms to IMF governance agreed by the G20 in 2010 is still waiting passage by the United States Congress before they can be implemented. This stalling, mainly the result of US domestic political issues, is both unfortunate and frustrating, but the reforms will be implemented at some stage, and certainly quicker than in the absence of G20 initiatives.

Likewise, the magnitude of the work of the Financial Stability Board (FSB) 
in strengthening international financial standards would not have been achieved without the high-level support of the 
G20. The FSB is evolving and, with the encouragement of the G20, it is reviewing its membership and representation arrangements. Representativeness is not 
a problem with the WTO, but rather the challenge of advancing decisions in a body consisting of 159 members, as evident 
by the protracted nature of the Doha Development Round of trade liberalisation. The WTO needs to bring its trade policy agenda into the 21st century by recognising the importance of global value chains and services to international trade. The drive for such reform must come from the G20.

The international work on combating tax evasion and avoidance is being led by the Organisation for Economic Co-operation and Development (OECD), and while it has the expertise, its membership is limited to advanced economies. However, the momentum for advancing this work has come from the G20, and the establishment of an OECD/G20 task force has broadened the range of countries involved.

However, in the area of international energy governance, the current arrangements are complex and, in some cases, ineffectual. The global energy environment is changing and so must its governance structures. It falls to the G20, which has the implicit capacity to push for reform in this area, in order to drive an overarching vision for the future of global energy and its governance.

And now, over to you…

It is often difficult to induce change and reform from within international institutions. One of the strengths of the G20 is its diverse membership, which allows it to bridge a divide in a way that other forums cannot. Most importantly, being a Leaders’ level forum, it has the political power to provide
 a strong impulse for change that is lacking at the international institutional level. It is important that the G20 uses these attributes to ensure that the global economy has effective international institutions.

Mike Callaghan is the Director of the G20 Studies Centre in the Lowy Institute for International Policy.

This is an extract from G20: Words into Action Brisbane 2014, to be published by Faircount Media in association with the Australian Institute of International Affairs in October 2014.