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About the project

From 2012 to 2016, the G20 Studies Centre at the Lowy Institute for International Policy produced independent research on global economic governance and the role of the G20, and supported research networks in Australia and overseas. The Australian Government provided funding to establish the Centre.

The archives of the Centre’s quarterly G20 Monitors (as well as other publications from the G20 Studies Centre) are available below. The Monitor brought together opinions from Australia and around the world to discuss developments in the G20 and suggest policy ideas.

The Lowy Institute will continue to comment and publish on economic governance issues.

Latest publications

Australia's national interest statement on TPP neglects capital control risks

Capital controls used to be taboo. The idea that a country would interfere with the free flow of capital across its borders was anathema to any right-thinking policy-maker.

That view has changed. Now there is a recognition that capital flows can be destabilising, as the rush to get money out of a country can exacerbate a crisis. Most famously, the IMF changed its tune, saying in 2012 that 'in certain circumstances, capital flow management measures can be useful'.

Trade negotiators, however, may have been slow to catch on; capital control measures may be inconsistent with various treaties. And if that’s the case, then any country imposing capital controls could be subject to action.

This action could be pursued through state-to-state channels, or even through Investor State Dispute Settlement (ISDS) channels, where private agents can take governments to tribunals to seek redress. Imagine if a large US bank were to seek damages from a small economy while that small economy was implementing measures to stave off a crisis. What a mess that would be.

Presumably in response to concerns about this possibility, the Trans-Pacific Partnership includes Article 29.3. This sets out various conditions under which countries can impose capital controls. But I reckon these conditions don’t go far enough.

For a start, there are time limits. The TPP allows for a country to impose these controls, but if they need to be implemented for longer than 18 months (Iceland’s capital controls have been in place since 2008 and counting), the other parties to the agreement need to give their blessing.

That could be a problem. If Australia were to impose capital controls at some point, what guarantee is there that we will see eye-to-eye on their rationale with the other TPP signatories? We’ve disagreed with our friends before on appropriate crisis responses — the Asian Financial Crisis comes to mind. There’s no good reason why it won’t happen again.

If that happens, and a financial behemoth then takes Australia to an ISDS tribunal…well, that is going to be awkward.

There are other issues with the carve-out. For example, it does not apply to foreign direct investment, which could open up all sorts of enforcement problems. If you want details, Michael Reddell, a former New Zealand economic mandarin, discussed potential problems in November.

I had hoped these issues would have been covered in Australia’s National Interest Analysis, released a couple of weeks ago.

But not a whisper. The Australian National Interest Analysis ran for only 19 pages (the Kiwis managed nearly 300). Just 19 pages to assess a 6000 plus pages agreement. Doesn’t seem adequate to me. And most of that was just a statement of what the TPP included. The issue of capital controls was not addressed.

So, we are all left wondering: do our top officials think this carve-out goes far enough? If so, why? And while we are on the topic, to what extent do our previous treaties limit our ability to impose capital controls? There is a potentially gaping hole here. And I have not seen any assessment of the risks.

Photo courtesy of Flickr user runran

G20 Monitor: The Chinese 2016 G20 host year

The 19th issue of the G20 Monitor focuses on the state of the G20 in the initial months of the Chinese G20 Presidency and examines policies that could contribute to the G20’s core goal of improving global economic growth.

Photo: Getty Images/ChinaFotoPress

The Big Short: A reminder of the danger of groupthink

Steve Carrell and Ryan Gosling at The Big Short premiere.             Photo: Barcroft Media via Getty Images

I’m looking forward to seeing The Big Short, which traces the stories of some who dared to doubt the US housing market before the global financial crisis. Friends and colleagues advise it does a great job of explaining some of the financial magic that caused the crisis, like subprime mortgages, securitisation and CDOs (collaterised debt obligations, in case you're wondering).

Back in 2008, the meltdown was a shock to most of us. I was shocked. I started at the Federal Reserve three weeks before Lehman Brothers went under. That's me at the time, in a rather nervous and stunned staff profile picture.

There were a lot of Fed employees walking around looking like that!

Why were economists shocked? Because many of us, including me, had got so many things spectacularly wrong.

Chief among the mistakes was the belief that the financial markets were relatively free of imperfections. I believed that Wall Street, and the other financial centres of the world, were populated with smart, sophisticated (and well paid) nerds working to channel savings toward the right investments while minimising risk. I thought all the complicated products and acronyms the financial sector dished up were an effective means of accomplishing that task. For example, I would have seen nothing wrong with this 2003 statement from Alan Greenspan, then chairman of the Fed:

What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.

Except they weren’t. For example, Credit Default Swaps, a type of derivative, were central to the crisis.

The crisis, to me, shattered the perception of a near-perfect financial market. That was quite a strongly held belief at the time.

Before the GFC, in polite company it was not acceptable to talk of big market failures in finance. And that contributed to groupthink. No doubt some who thought about speaking up thought twice about doing so. They only had to look at the treatment of Raghuram Rajan, now Reserve Bank of India Governor, in 2005. Rajan presented a paper called 'Has Financial Development Made the World Riskier?' He thought, in some respects, yes. In response, Larry Summers, one of the doyens of academia and US policymaking, apparently called him a Luddite.

The lesson? Being the contrarian in the room should be valued. I’m not talking about valuing argument for argument’s sake. But the world would have been a better place if more people had the courage of Rajan.

I think about this often. Organisations, and even entire academic disciplines, that do not tolerate dissent will make catastrophic mistakes. But everyone can play a role in stamping out groupthink, from the highest doyen and CEO to the lowest grad student and employee.

IMF: the hard yards on reform are still to come

It finally happened. The US delivered on its long-standing promise to deliver the 2010 IMF quota and governance reforms, spreading a cascade of pre-Christmas cheer across the economic policymaking world.

My colleague Mike Callaghan has neatly summarised the implications on US leadership. I want to focus on a different dimension of the decision's strategic impact, namely what it means for policymakers. The passage of reform leaves two very large unanswered questions going into 2016; and neither are likely to lift the spirits of fatigued IMF reformers.

The first is what will be done about the ongoing process to modernise IMF governance arrangements. The 2010 quota and governance reforms delivered a 2.8% shift in quota share from advanced to emerging markets and developing countries. Emerging markets, and China in particular, finally have a greater say in the IMF, one that better reflects their role in the global economy. The reforms also complement the symbolically important inclusion of the yuan in the basket of currencies that underpins the IMF's special drawing rights. There was also a promise of more governance reform to come, including the next round of IMF modernisation talks — the15th General Review of Quotas — which was due to be completed last year but was unable to even begin while the 2010 quota and governance reforms were pending.

Back in January, Ted Truman from the Peterson Institute for International Economics calculated (see chart below) that a further 5 percentage points of shift in quota shares from advanced to emerging market economies would be needed to reflect the economic realities of 2015. About 80 per cent of this shift would be to the benefit of China, which would become the second largest member at the fund.

Chart: Quote share, various countries, various scenarios

Former Canadian IMF executive director and CIGI distinguished fellow Tom Bernes has tweeted his fear that the arduous passage of the 2010 reform package will mean that it will come to be viewed as a final act, rather than a down payment on further reform. Given how much more change is needed, this would be a serious problem. The G20 Finance Ministers and Central Bank Governors meeting in Shanghai in February will test the ongoing political commitment to reform. A strong statement of intent should be the benchmark.

The second, and related, question is what to do about IMF resources.

The ratification of the 2010 reforms doubles the IMF's permanent resources to more than US$650 billion (although overall resources remain unchanged as the increases are accompanied by a corresponding reduction in borrowed funds). Yet it does nothing to prevent the expiry, from late 2016 onwards, of the $379 billion in bilateral loans that currently form the IMF's second line of defence.

While these loans have not been called upon, their expiry has the potential to introduce unacceptable systemic risk into the global economy, given the reason they are still in place is the continued vulnerability of global economy. The G20 should look to negotiate their extension in 2016 on the basis that the 15th General Review of Quotas will detail a longer term vision on the Fund's resourcing.

The resourcing issue opens up a fundamental question that goes to the heart of the IMF. Earlier this month economists Carmen Reinhart and Christoph Trebesh detailed the tensions between the IMF's traditional role as international lender of last resort, and its more recent behaviour of 'serial lending' in which programs often span decades and there is a much greater risk of the IMF lending into insolvency. Competing visions of how much money the IMF needs to perform its role in the international financial architecture, and how far its role should extend, will underpin discussions on whether and how to replace expiring funds.

In an added complication, the US will probably be asked to contribute new and additional financial contributions to any future quota increases. The US was not required to provide additional funds this time around, due to the accounting exercise that allowed quota resources to replace borrowed resources. But this cannot occur again because the borrowed resources have diminished.

It's hard to believe, but the next round of IMF reform is likely to prove far more controversial than the one just completed. And the US is the only country with veto rights on key IMF decisions. With the US seen as damaged goods, it is difficult to escape the sense that the most challenging discussions at the IMF are yet to come.

Image courtesy of Flickr user World Bank Photo Collection

IMF reforms pass Congress but too late to salvage US leadership credentials

The US Congress has finally passed long awaited IMF governance reforms. President Obama claimed it as a victory for the White House that will strengthen 'America's leadership of the IMF'. USA Today reported 'Congress finally preserves US leadership in global finance'.

Some leadership. With the US having a veto power over major decisions in the IMF, it has held up for five years reforms that were endorsed by nearly all the 188 members of the Fund. The reforms give emerging markets and developing countries a larger say in the institution.

The long delay in getting the reforms through the US Congress has significantly damaged US credibility. The British Chancellor of the Exchequer, George Osborne, said it was a 'tragedy that an agreement reached across all the members of the IMF was being blocked by the US Congress'.

The belated passage of the legislation through Congress supporting the reforms is welcome, particularly since it includes a doubling of IMF quota resources, but it will not restore, let alone strengthen, US leadership in the IMF.

The delay in implementing the IMF reforms highlighted that, regardless of commitments made by the US Administration, it — and, at times, the rest of the world — is hostage to the unpredictable and often irrational workings of the US Congress. This was evident in the recent Paris climate change negotiations, when a 'typo' in the final text nearly scuttled the whole agreement. The text said developed countries 'shall' be obliged to cut emissions rather than 'should'. The US delegation could not accept 'shall' because of the problem of getting through Congress support for anything involving a legal obligation.

Significantly, the delay in obtaining Congressional support for reforms agreed in 2010 has limited the immediate prospects of advancing further reforms. This is important because the legislation that has finally gone through the US Congress was intended as a first installment of much larger reforms. The measures agreed in 2010 only contain a 2.8 percentage point shift in quota shares from advanced to emerging markets, and while China will become the third largest member, it is still short changed relative to its weight in the global economy.  The 2010 reforms were to be part of bigger changes to come, including a review of the formula for determining quota allocations. This was expected to result in a larger shift in quota shares to emerging markets.

Any change in IMF quota distribution is highly contentious, because it is a zero sum game. For some countries to have a larger stake in the IMF, others have to see their share reduced. History shows that an agreement on changing quota shares only occurs when a country takes leadership and, at least figuratively, 'bangs some heads together'. The US normally plays this role and it was US leadership that achieved agreement on the package of IMF reforms reached in the G20 in 2010. After a long period of protracted and deadlocked negotiations, a deal was achieved at the October 2010 meeting of G20 Finance Ministers when then US Secretary to the Treasury, Tim Geithner, gathered the main protagonists — led by the Europeans and the emerging markets — in a room and thrashed out a deal. In brokering the agreement, the US gave assurances about getting the reforms through Congress and, in fact, the agreement was designed to facilitate such passage.

Given the experience of the last five years, there is little prospect that the US can play the same role in brokering agreement on a more extensive range of reforms to IMF representation.

It is often cited that the US delay in giving China a greater say in the IMF contributed to China establishing alternative institutions, such as the Asian Infrastructure Investment Bank (AIIB). This view underestimates China's motivation in establishing the AIIB, which was more than a reaction to what the US did or did not do. China had its own reasons to establish the AIIB, particularly in the context of its Silk Road Initiative, and it is highly likely that the new bank would have been established even if there had been speedy implementation of the 2010 IMF reforms. It was the US, not China that turned the establishment of the AIIB into a clash of leadership between the two countries; a clash the US lost.

While USA Today proclaims the action by Congress will 'keep the US on top — where it belongs', it is far from clear which country will provide future leadership in the IMF. The US is damaged goods. The interesting issue is whether China will, at some stage, step up to the plate and 'bang some heads together' in order to advance deadlocked IMF reforms.

Decoding China's GOOD approach to the G20

With this year's summit season coming to an end, Turkey will officially hand over the G20 hosting baton to China on 1 December 2015. The Hangzhou Leaders' Summit has already been announced for 4 and 5 September 2016, slightly earlier than previous years to avoid clashing with the US presidential election in November.

Although we are still waiting for China to release the official priorities document that will set out its goals in detail, President Xi Jinping did take the opportunity at the Antalya Summit to sketch an outline of what China's G20 year will look like.

G20 host countries have a habit of reconfiguring the same fundamental issues to suit their narrative. As the 2015 host, Turkey focused the G20 agenda around three 'i's: inclusiveness, investment, and implementation.

China, not to be outdone, has linked its presidency with four 'i's. Xi stated in Antalya that China wants to see a global economy that is 'innovative, invigorated, inter-connected and inclusive'. The sequence is important, as innovation is a new focus for both China and the G20.

Each of these 'i's can be linked to the acronym of GOOD that has been unofficially associated with China's G20 presidency; innovative Growth, Organizational reform, Open trade and investment, and sustainable Development. Chinese officials have used the GOOD acronym in meetings and, even though it's not to be found in official communications, it remains a useful guide to the priorities framing China's thinking.

China believes there is too much emphasis on weak demand as the cause of sluggish growth. Therefore, it wants to use its G20 host year to focus on the supply side, concentratating on innovation and technology as a means of creating growth. This also fits with China's domestic strategy of moving up the value chain and improving the quality of exports.

As for organisational reform or 'invigorating' governance, this reflects the preoccupation of China and other emerging economies with their exclusion from existing governance bodies. Long-stalled IMF reform is a particular sore point.

There is speculation the IMF is about to add the yuan to its basket of reserve currencies, but it will take more than such symbolic reform to satisfy China beyond the short term. Similarly, China remains disappointed with the World Bank shift in voting share in 2010. Despite some changes, the Bank still has a US-appointed president and emerging markets are underrepresented.

Wang Xiaolong, the newly appointed G20 special envoy from the Chinese Ministry of Foreign Affairs, emphasised that we need a more 'inter-connected' regime because the 'two engines' of the global economy, trade and investment, are not working as they should. It is well-known that world trade is slowing more than global GDP.

He confirmed that G20 trade ministers would meet in China next year (as they did in Turkey and Australia). However, if China wants to progress trade, it will need to convene a leader-level discussion on fixing the World Trade Organisation.

We might also assume China's G20 agenda will continue the focus on infrastructure investment, a feature of both the Australian and Turkish presidencies.

Turkey's inclusiveness priority did emphasise development, but China seems to be taking this further with sustainable development as a fourth priority. In the Chinese narrative, development is another key engine of growth, particularly 'shared development'. However, we do not know yet what this means for the G20 Development Working Group and whether development will become part of the core agenda.

Turkey struggled with its three 'i's and was unable to focus the agenda, eventually producing a disappointing communiqué.

China, with four 'i's and a 'GOOD', will have to be clearly communicate what it wants to achieve, and be careful its messages do not get lost in translation. We will have to wait to see if the priorities document contains yet another slogan or acronym.

It is unrealistic for any host to progress every item on the G20 agenda. Given the breadth of issues Turkey is bequeathing to China, the new G20 taskforce will have to be disciplined.

The best thing for the Australian G20 legacy would be if China revives a narrative on growth and runs a tight ship. Although Australia has departed the governing G20 troika, we should not go quietly back to the sidelines. We have a responsibility to encourage China to strengthen the forum and deliver real outcomes.

Photo: ChinaFotoPress via Getty Images

APEC attendees take note: Services are nice but most trade action still in goods

Attendees at the APEC summit this week may be walking around with a new spring in their step. Some observers have suggested the successful conclusion of the Trans Pacific Partnership could be a stepping stone to 'an even bigger Asian Pacific trade agreement among all 21 members of APEC'.

What will the summit focus on? APEC’s executive director, Alan Bollard, has declared this is the 'year of services'. This complements the hype surrounding the TPP and services. For example, Alan Oxley, a former Australian trade negotiator said:

Increasing foreign investment and access to services markets, key features of the TPP Agreement, are the new drivers of global growth. Restrictions on both are high in the Asian Pacific economies. This is why Korea, Japan and China have started to open these markets in bilateral FTAs, most latterly with Australia.

Let’s look at those three free trade agreements for a moment. The Department of Foreign Affairs and Trade released modelling by the Centre for International Economics in June which showed these agreements would boost Australian GDP by only 0.05 to 0.1 per cent. In this modelling, goods liberalisation was estimated to provide a five times bigger boost to GDP than services liberalisation. There may be a number of reasons for this. One could be that Australia’s services trade is still relatively small compared to goods trade. See the graph below.

In 2013 services made up about 17% of exports and 20% of imports. And the trend has been down. The fall in the relative importance of services exports is a commodity story: iron ore and other commodities are a larger part of our export bundle now. The share of services did increase through the 1980s, but that increase had stopped by the early-to-mid 1990s. Perhaps more surprising is the fall in the share of imports.

Just in case Australia is a bit special, let’s look at what has happened in worldwide trade.

Here, 'exports' represents a line calculated from summing up the exports of all countries, and similarly for 'imports'. In theory, the two lines should be identical, but because of measurement problems they aren’t. Awkward! In any case, both lines speak with the same voice. There has been no trend in the relative importance of services trade for at least 20 years (the spike in 2009 is GFC related and not indicative of any sort of trend).

A number of points can be made in response to these graphs. I’d lose your attention if I went through the full laundry list so I'll focus on just one.

Goods trade 'embodies' some services. If we export cheese, the export is counted as a good, but there were some services used to produce that cheese. For example, the dairy farmer may have employed an accountant to do his books, so the cheese 'embodies' some accountancy services. Therefore, the importance of services, in these graphs, is understated.

OK. Point taken. But when we are talking about dismantling barriers to trade, it is what crosses the border that counts. You can make all the changes to accountancy regulations you want, but if the cheese can’t get across the border, it doesn’t matter.

Moreover, I think the interesting point is about trends. If you listen to some of the rhetoric, 21st century trade is increasingly about services. But these graphs indicate that, worldwide, 21st trade looks similar to the trade that occurred when the Berlin Wall fell and Mark Zuckberg was starting primary school.

Paris attacks cast a shadow over 2015 G20 Summit

By the Lowy Institute's G20 Fellow Tristram Sainsbury and Research Associate Hannah Wurf

The 2015 G20 Leaders' Summit will be remembered for taking place in the aftermath of the brutal attacks in Paris, as leaders scrabbled to show unity and collective action.

In coverage of the summit, every article, tweet, and interview makes some mention of terrorism. All the briefings about leaders' bilateral meetings refer to the security issues discussed. This is a strange situation for what is known as the world's 'premier forum for international economic cooperation'.

Of course it is understandable that leaders wanted to show decisive action after the attacks. President Barack Obama and President Vladimir Putin met on the side to discuss Syria within hours of arriving. Even China has come out strongly to condemn the attacks.

The G20 statement on terrorism reaffirming that it 'cannot and should not be associated with any religion, nationality, civilisation, or ethnic group' is a powerful message. It's a demonstration of the cooperation that underscores both why G20 leaders should continue to meet and the importance of their dialogue.

However, to no one's surprise, the 2015 communique contains no ambitious economic policy. The G20's feeble repetition of its commitment to 'strong, sustainable, and balanced growth' is at odds with economic reality where global growth has slowed to 3.1 per cent.

Before the summit, three issues were expected to dominate: the refugee crisis, growth, and climate change. Much of the attention on the refugee crisis has been redirected to the conflict in Syria and tackling terrorist financing, as well as supporting countries that are hosting large numbers of refugees (including Turkey). Some of the actions decided could be more concrete, and detail still needs to be fleshed out, but it's a start.

Efforts on growth, however, continue to disappoint.

Supposedly, the G20 has implemented half of the1000 plus commitments in the Brisbane Action Plan from 2014, and this has contributed a third to growth ambitions. Remember that these commitments were supposed to be adding a 2% increase to GDP across the G20. Although some 500 measures have been undertaken, the IMF World Economic Outlook has yet to recognise any effect from these measures.

As it stands, the IMF predictions are uncomfortably close to a global recession. If the G20 was genuinely contributing 0.7 per cent to growth by 2018 then the story would be how the G20 has helped avert a recession. This is not the case. Instead, the target looks superficial and shows the G20 to be misguided in thinking it could easily shift the dial on growth. Country actions on trade, competition, labour markets, and investment remain important, but we cannot know with precision how this will translate into growth numbers.

The negotiations on the paragraph on climate change, like last year, extended into the final day of the summit. The end result was mixed. It was always a given that the G20 would support the COP21 meetings, and the text encouraging G20 negotiators to 'engage constructively and flexibly' to limit warming to the agreed 2°C should add some momentum to Paris. The firm language is a welcome relief for those who saw earlier drafts with a much shorter and watered down version of this paragraph.

However, climate action advocates have reason to be disappointed with the conspicuous absence of reference to climate financing, and no mention of additional efforts above the already submitted Intended Nationally Determined Commitments (INDCs). The world is not pledging enough and G20 countries have once again not acknowledged that they are a key part of the problem. This does not bode well for Paris.

This G20 communique is long and dense, so no lesson has been learnt from Australia's tight drafting last year. There are acknowledgements of ongoing work on tax cooperation and banking regulation. The reference to the 'internet economy' seems an add-on that lacks substance, and the reference to the Milano Expo should not have made it to the final draft.

The Antalya Summit will be remembered for the advances on security cooperation and the one page statement on the fight against terrorism. President Obama ended the summit with a strong speech defending US strategy against terrorism after a single, brief mention of the economy.

As an aside, the Australian influence at this summit seemed muted. The Prime Minister left before the final communique was released, and took most of the Australian media with him. This seems an inglorious end to our role in the G20 hosting 'troika'. At least there was positive reference in the communique to the Global Infrastructure Hub in Sydney.

As the world recovers from the Paris attacks, leaders will need to wake up to their fragile economies. The only saving grace for the G20's role in strengthening the global economy is China's host year in 2016.

On China's 2016 to-do list: stop the IMF running out of cash

The ANU's Adam Triggs recently argued in the East Asia Forum that the G20 will have to deal with a potentially pernicious issue: what to do about the $379.7 billion of bilateral loans that will begin to expire from late 2016.

Triggs is right to point out that if one third of IMF funding expires, this could introduce unacceptable systemic risk, given the loans are still in place because of continued vulnerabilities in the global economy.

But let’s get a few things straight. There has not yet been need for the IMF to call upon its bilateral loans. Despite the looming deadline, now is not the time to panic on policy alternatives.

The risk from the loans expiring depends on an inability to find a reasonable replacement. Working out the details of the replacement will involve negotiation by the collective memberships of the International Monetary and Financial Committee and G20, and is a good reason to reprise the G20’s International Financial Architecture working group.

The simplest solution would be for the US to pass the IMF reforms (currently stalled by Congress), and for the G20 to extend the bilateral loans on the expectation the next round of quota and governance reform negotiations, the 15th, will put the Fund’s resourcing on a more permanent basis.

We are far from an ideal scenario. As I explained in a recent Lowy Institute paper, US Global Economic Leadership: Responding to a Rising China, the IMF has long been a controversial institution in the US. Congressional challenges to IMF reform are not new.

An illustrative case was the last time the IMF’s articles of agreement were changed. In 1997, the IMF Board of Governors agreed to a proposed amendment to the articles that would bring all members’ cumulative allocation of special drawing rights (SDRs) up to the percentage of their quotas. The changes would mean that members that had joined after 1981, a full one-fifth of the IMF’s membership, were able to participate in the SDR system on an equitable basis. The US congress took more than a decade — until 2009 — to ratify the changes.

In hindsight, the relative swift passing of a package of IMF quota and governance reforms in 2010 probably stemmed from an exceptional set of circumstance. Strengthening the IMF was a necessary part of the global policy response to the global financial crisis, and it helped that the Democrats controlled the White House as well as both houses of the US Congress. That is no longer the case of course and the Republicans who control Congress are skeptical of the IMF.

So we are faced with the sombre prospect that, even though we are five years into the current ratification process, we may not even be at the midpoint. The chances of IMF reform in the short term — that is, before the bilateral loans are due to expire — are close to zero.

As experienced hands at the IMF know all too well, patience is required. This means ignoring the impulse for radical and impractical alternatives.

Mike Callaghan and I noted back in February the IMF Board has no workable plan B that would give (partial) effect to the reforms in the absence of US ratification. This is no great loss though. The options are, by definition, suboptimal, and generally too modest to be worth all the attention that has been put into discussing them. And the world needs to avoid actions that reduce US involvement in international institutions.

The search for a solution has turned over many stones in the last five years. One of proposals examined has been to include the yuan in the SDR basket. I have always been agnostic about this as a solution. For one thing, the economic consequences of such a move remain far from conclusive. More importantly, though, yuan inclusion should be decided by the technical merits of the case for expanding the basket; not politics. The IMF needs to be, and seen to be, free from overt influence from its largest stakeholders.

Some, including Triggs, have suggested exploring options in the broader financial architecture outside the IMF, and in particular the possibilities of enhancing regional arrangements like the Chiang Mai Initiative Multilateralisation and the BRICS Contingent Reserve Arrangement. However, these regional options are more symbolic than substantive and contribute little to the existing rules-based order. We should not pin our hopes on them.

The simple truth is there is no easy solution and the best path requires patience. China (and the rest of the world) will remain frustrated with the lack of short-term progress in the US domestic scene. G20 communiques, including the result from Antalya at the end of this week, should continue to emphasise such global frustration. But G20 leaders should not be panicking.

Things could be worse. At least the IMF is still performing its cornerstone role in the international financial architecture. But the Fund should be fully focused on monitoring emerging economic vulnerabilities.

In this context, although it may sound counter-intuitive, China should be the champion of the IMF in 2016. By that, I mean China should look to shepherd a process that brokers a reasonable compromise to secure IMF resources in the short term, and seek to avoid both a drawn-out negotiation and bundling other reforms into the mix.

If China were to drive a successful process in the G20 and IMFC, it would demonstrate a strong Chinese commitment to delivering outcomes that are in the global public good.

Photo courtesy of IMF

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