>The G20 and the new global order (MACQUARIE RESEARCH)

GLOBAL VISION

The recent Group of Twenty Finance Ministers and Central Bank Governors (G20) summit in Pittsburgh made clear the global economic order is transitioning to a more multilateral axis post the financial crisis. Comprising the major advanced and emerging economies, 85% of global gross national product, 80% of world trade and two-thirds of world population, the G20 is certainly a broadbased economic forum. Cooperation on the recovery through the Group has codified some important global economic realities, laying the foundations for a new global economic structure.

■ The new reality
The decision to enlarge the G7 to the G20 in the fallout of the financial crisis finally catches up policymaking with the evolving dynamics of the global economy. Indeed, the emerging economies now account for more than one-third of world output, and have contributed more than half to global GDP growth in the years leading into the crisis. Furthermore, the world’s economies are highly interdependent, highlighted by the recent collapse in financial and trade linkages.

The enlargement certainly puts power on more even footing. Australia, South Africa and India are among the key beneficiaries of the broader governance structure. And with the major developed and emerging economies at the table, more balanced global growth could also be in reach. Explicit agreement gives encouragement that this transition could be expedited and could provide a sustainable base for global activity over the longer-term. Furthermore, structural rebalancing in global demand is already happening in the aftermath of the financial crisis.

■ Time to cooperate
With the growing importance of the G20, increasing coordination of macroeconomic management is also expected to emerge. The success of coordinated fiscal and monetary responses to the financial crisis certainly vindicates an internationally-consistent approach to policy.

Still, trade and currencies could certainly be contentious issues. In spite of consensus on the importance of more flexibility, these could be a throwback to the old economic order for some time. Indeed, recent comments from European policymakers are an important reminder that reluctance to allow currency adjustment and cut trade imbalances could be a major sticking point to global rebalancing. Japan’s new government’s plans to shift to an economy that is less
export dependent also seem vague.

■ A more even, and prosperous, keel
More balanced growth and a more equitable international governance structure mark an important break with global economic dynamics in recent years. Still, one important thing does not look to change. While it’s clear the emerging economies will likely grow their domestic demand base and global economic might, they are nonetheless expected to remain closely coupled with the advanced economies for some years yet. At the same time, the major developed powers are also expected to remain dependent on emerging markets, for example with the severe market disruptions of the past two years exposing US weaknesses that had been building for decades. So if the G20 can achieve global rebalancing, this relationship should become much more prosperous.

To see the full report: GLOBAL VISION