Institutionalization of G20

2013/06/20

abstract

In the G20 institutionalization process, there are three “tipping points”: First is in December of 1999, when the first G20 finance ministers and central bank governors meeting was held in Berlin, which symbolizes the birth of the G20; second is in November of 2008, when the first G20 leaders’ summit was held in Washington, which represents the updating of the G20 from the ministerial level to leaders level; Third is in September of 2009, when the third G20 leaders’ summit was held in Pittsburg, which marks the start of the G20 transition from a crisis mechanism to a global economic governance mechanism. How to complete this transition? This paper argues that regime complex approach is more feasible facing the current global economic governance crisis. There are two schools of thoughts: single regime approach and regime complex approach. Single regime approach insists that an informal group such as the G20 can only be credible if it becomes a formal institution, with formal rights and obligations for its members, and a permanent secretariat, legally binding Charter, etc. According to this approach, the G20 will definitely become the global economic council, parallel to the UN Security Council. However, regime complex approach argues that G20 should keep its informal character, and it can achieve both credibility and flexibility through “informal G20 plus other formal international organization”. For example, the G20 will not replace IMF in the macroeconomic policy coordination field, but help IMF to reform its outdated governance structure. In this sense, the G20 will inject political momentum to the macroeconomic policy coordination among the great powers while the IMF will implement the consensus among the powers technically. I. Regime Complex and Global Governance Reform

Oran Young points out that most scholars like to treat international institutions separately, which is useful for us to analyze the single international institution but it is not so good for us to find the linkage between different international institutions.[①] John Peterson also mentions that the linkages between the international institutions rather than the institutions themselves are becoming the new focus of many international institution scholars.

Compared to these research initiatives, Kal Raustialia and David Victor put forward the new concept “regime complex”, which is more likely to be an operationalized research agenda.[②] Robert Keohane mentions that in thinking about regime complex, it is useful to imagine a continuum. At one extreme are fully integrated institutions that impose regulation through comprehensive, hierarchical rules. At the other extreme are highly fragmented collections of institutions with no linkages between these institutions. In between is a wide range of regime complex. Specially, there are three different categories of regime complex, including parallel institution, overlapping institution, and nesting institution.[③]

In the current global governance reform era, formal and informal international institutions working together is a new trend. It can be called nesting institution mode of regime complex. G8, G20, BRICS, and Nuclear Security Summit are the cores of the nesting institutions to build and sustain the political consensus on these important global issues, while IMF, WB, WTO, and IAEA are playing the complementary roles to implement the decisions and consensus of the leaders.

 II. Regime Complex and G20 institutionalization

Charles Lipson contends that informal institutions have some advantages while formal institutions haven not, including avoiding formal and visible pledges, avoiding ratification, renegotiating or modifying the agreements as circumstances change, reaching agreements more quickly, etc.[④] David Cameron, UK prime minister, also mentions that the reason why the leaders of the world’s major economies turned to an informal approach in the crisis was not the lack of more formal mechanisms. Rather, that approach enabled them to explore the scope for political agreement outside the constraints of more formal, binding institutions and structures.[⑤] This has been the G20’s greatest asset, and so this approach offers the best route to effective governance.

However, Kenneth Abbott and Duncan Snidal emphasize that formal institutions also have its advantages, mainly to increase the credibility of the commitments while informal institutions cannot. On one hand, formal institutions enhance credibility by constraining self-serving auto-interpretation; on the other hand, formal institutions fix the consequences for the violation of the agreements. So we can see flexibility and credibility are the trade-offs when we think about the design of international institutions.[⑥]

For the G20, regime complex is more feasible. To keep the G20 overall framework informal can increase the flexibility of institution, which can be very useful for the leaders to build the political consensus. At the same time, to strengthen the formalization degree of the international organizations within the G20 framework can increase the credibility of G20 governance on specific issue areas.

 III. Case Study: G20 and Financial Regulation

In the area of financial regulation, G20 keeps its informality in the leaders’ level, while it also pushes the institutional transition from informal FSF to formal FSB, which is called by former US Treasury Secretary Timothy Geithner as “the fourth pillar of Global economic governance”.

FSF was founded in 1999 by the G7 finance ministers and central bank governors. It is a typically informal institution, without Charter, non-legally binding, developed country-only. In the first G20 summit, the G20 leaders point out that there is a huge deficit of representativeness of the FSF and emerging economies should be included. In the March of 2009, the FSF has expanded to include all of the G20 emerging economies, but it is still an informal institution. At the London summit, G20 leaders declared to set up a new body-Financial Stability Board (FSB) to succeed the FSF. FSB will help the G20 leaders to implement the new financial regulation rules. At the G20 Pittsburg summit, the leaders agreed to set up and release the FSB Charter, including the mandate, organizational structure, working practices of the new international organization. So it means that G20 leaders have formalized the institution.

According to Kenneth Abbott, Duncan Snidal, Anne-Marie Slaughter, and Robert Keohane, formalization includes three dimensions: obligation, precision, and delegation.[⑦] Obligation means that states are legally bound by rules or commitments and therefore subject to the general rules and procedures of international agreements. Precision means that the rules are definite, unambiguously defining the conduct they require, authorize, or proscribe. Delegation grants authority to third parties for the implementation of rules, including their interpretation and application, dispute settlement, and possibly further rulemaking.

On obligation, one is to participate in a FSAP every five years and to publicize the detailed IMF/WB assessments used as a basis for the ROSCs. A second is to implement international financial standards, including new standards created by FSB itself. On precision, besides FSAP, FSB members will have two kinds of peer review: thematic review and country review. If the FSAP is called the comprehensive test, thematic review and country review can be called the specific test. And the FSB will publish the much more précised compliance report of the review, including fully qualified, basically qualified, basically unqualified; fully unqualified. On delegation, unlike FSF, FSB has its own secretary, who is playing an important role in setting the agenda and implementing the agreements. And FSB has its plenary, steering committee, standing committee on assessment of vulnerabilities, standing committee on standards implementation, standing committee on supervisory and regulatory cooperation, standing committee on budget and resources, and several regional consultative groups.

Obviously, FSB is much formalized than FSF. Within the G20 framework, FSB is the main international organization that helps to implement the G20 leaders’ consensus on financial regulation. So the G20 itself is informal while the G20 governance in specific issue area depends heavily on other formal international organization.

Conclusion

The G20 is the premier forum for international economic cooperation. It means that the G20 is special, playing the leading role and injecting political consensus in the international economic governance process. It also means that the G20 should cooperate with other formal international organizations. If other formal IO does not work, the G20 will help to reform it. If there is no such kind of formal IO, the G20 will help to create a new one.

On trade, Doha round negotiation is in a very difficult situation. Because of the deficit of political momentum, industrialized countries pay more attention to TPP and TTIP while emerging countries pay more attention to RCEP and others. How to rebuild the political consensus among the industrialized countries and emerging countries on WTO is a key challenge for the G20. On monetary policy, the US and Japan are all stimulating their economies through the QE, while it has negative spillovers towards the emerging markets on asset bubbles, financial instability and inflation over the long term. How to coordinate their monetary policies and refrain from competitive devaluation needs the political will of these major powerful leaders of these major powerful countries. On development aid, advanced countries emphasizing the emerging donors, China, India alike, should follow the existing OECD-DAC rules on development aid, while emerging donors emphasize that growth should be the first priority of global development cooperation and we should not use donor-recipient outdated words. Obviously, political consensus is scarce on development aid among the advanced countries and emerging countries. This kind of “informal G20 plus other formal international organization” regime complex represents the new trend of institutionalization in the twenty-first century. [①] Oran Young, Governance in World Affairs, Cornell University Press, 1999, p.155.
[②] Kal Raustiala and David Victor, “The Regime Complex for Plant Genetic Resources,” International Organization, Vol. 58, No. 2, 2004, p. 227.
[③] Robert Keohane and David Victor, “The Regime Complex for Climate Change,” Perspectives on Politics, Vol. 9, No. 1, 2011, p. 8.
[④] Charles Lipson, “Why are some International Agreements Informal,” International Organization, Vol. 45, No. 4, 1991, pp. 495-500.
[⑤] David Cameron, “Governance for Growth: Building Consensus for the Future,” November 2011, http://www.g20.utoronto.ca/2011/2011-cameron-report.pdf.
[⑥] Kenneth Abbott and Duncan Snidal, “Hard and Soft Law in International Governance,” International Organization, Vol. 54, No. 3, 2000, pp. 421-456.
[⑦] Kenneth Abbott, Robert Keohane, Andrew Moravcsik, and Anne-Marie Slaughter, “The Concept of Legalization,” International Organization, Vol. 54, No. 3, 2000, pp. 401-419.

author： ZHU Jiejin