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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

China, the G20 and global economic governance

In this Lowy Institute Analysis, Hugh Jorgensen and Dr Daniela Strube examine China’s approach to global economic governance. The paper argues that China will seek a greater role in governance processes, but will pursue a combination of approaches involving both existing Bretton Woods Institutions and new forums.

G20 Monitor: The G20’s growth agenda

This issue of the G20 Monitor provides a guide to the policies that G20 members will have to tackle to achieve the G20’s 2 per cent growth target, drawing on the recommendations of the IMF, OECD and a number of international think tanks.

G20 2014: Reform of the international organisations, financial regulation, trade, accountability and anti-corruption

This issue of the G20 Monitor discusses the reform of international economic institutions, financial regulation, and the trade, accountability and anti-corruption agendas at the forthcoming Brisbane G20 Summit. It also provides a summary of the key ideas from the ‘G20 Conference: Strengthening Accountability and Effectiveness’ hosted by the Lowy Institute.

Is the Fed acting as the world's central bank?

'The Federal Reserve enters its second century as the closest the world has to a global central bank.' So says Ted Truman, who speaks with some authority as he played a key advisory role for many years with the Fed (the US central bank) and the US Treasury.  However, Truman's detailed account of the Fed's international role over the past three decades demonstrates how limited (and sometimes arbitrary) that role has been.

The central issue here is whether the US Fed can act for the global interest where American interests aren't involved or might conflict.

Truman identifies fourteen occasions where the Fed has acted in response to global events, and a clear pattern emerges: where US foreign policy interests are at stake, the Fed will act to assist with global problems. Thus Mexico's crises (in the 1980s and again in 1994) spurred a vigorous and helpful response. The 1998 crises in Thailand and Indonesia hardly rate a mention in Truman's account, while the concurrent crisis in South Korea (where 35,000 US troops were stationed) resulted in a path-breaking (and principles-breaking) intervention in which the US orchestrated controls on capital outflows from Korea. Foreign banks, pressured by their own national central banks, refrained from withdrawing funds which they had lent to Korean banks. An Australian bank (ANZ) was a significant participant in this stand-still, which fortunately turned out well, with Korea able to resume repayments within a short time.

The US Fed's swap operations are akin to global central bank operations, effectively making short-term US dollar loans to foreign central banks, which can on-lend these to their domestic banks to help them through a foreign currency liquidity crisis. This is analogous to traditional liquidity operations, where central banks make domestic currency loans to banks in need of liquidity.

These Fed swap arrangements have been a powerful and valuable stabilising element during global financial crises since 1965 or even earlier. Until recently, however, they have been available only to a small group of advanced economies (including Australia), plus Mexico.

In 2008 the swaps were a crucial part of the crisis response, especially for Europe. The Reserve Bank of Australia was able to use this facility to on-lend US dollars to Australian banks in need of foreign currency liquidity when the New York money market dried up. 

The usefulness of this facility was demonstrated even more powerfully in 2008 when South Korea experienced a foreign currency crisis. Its own substantial foreign exchange reserves were not sufficient to stabilise confidence. The crisis ended as soon as the Fed's swap facility was announced, arriving like the US cavalry over the horizon to save the embattled Koreans.

As the Korea experience demonstrates, the swap facility is a more powerful instrument than a country's own reserve holdings. This is a current policy issue, as many emerging economies (especially in Asia) are building up huge foreign exchange reserves in readiness for renewed episodes of capital flow volatility. Such reserve holdings have to be funded, so are expensive and often disrupt monetary policy. Wouldn't it be helpful if the Fed really did act as a global central bank, offering this swap facility to everyone?

Unsurprisingly, the Fed offers swaps only to its trusted friends. In 2008, for example, it refused Indonesia's approach for access to the swap facility. It is not, and is unlikely to become, a global facility that would make the US Fed analogous to a global central bank.

Those, like Australia, in the swap network should be grateful that this powerful facility is available to us, though we might note that Truman reports earlier efforts by the Fed staff to close down the facility.

Truman avoids specifically addressing a vexed current issue. What obligations does the Fed have to consider the impact of its policies on other countries? Financial markets certainly expect a significant global effect from the unwinding of quantitative easing (QE). Raghuram Rajan, the Indian central bank governor, sees the Fed as having important obligations to countries so affected. But beyond ensuring that these QE operations are understood by financial markets, the Fed sees itself as having no wider obligations.

It's hard to see how the Fed could act otherwise. There are, in fact, historical examples where the US has helped its closest friends and paid a price. In 1927 it lowered the discount rate in response to the entreaties of Montagu Norman, governor of the Bank of England, who was struggling to contain the damage from Churchill's disastrous return to the gold standard two years earlier. This lower interest rate encouraged the asset-price boom which ended in 1929 with the Great Crash, ushering in the Great Depression.

If the US Fed cannot be an effective global central bank, what about the IMF? Truman talks of the IMF as if it is a simple extension of US policy. Taken together, perhaps there is some truth in the idea that the US Fed and the IMF can serve as a global central bank. But a precondition for this to be acceptable to the rest of the world is to implement the IMF governance reforms (especially voting shares) which are currently held up, pending US Congressional approval.

Photo by Flickr user jareed.

What next for multilateral trade negotiations?

The Director-General of the World Trade Organization is sounding despondent after the latest setback to the December 2013 Bali Agreement. Meanwhile, a survey of exporters has given some endorsement for the alternative path of free trade agreements (FTAs). Is there any hope for furthering the multilateral trade agenda?

Mike Callaghan described the Bali Agreement signed last December as a small win for the WTO — the first multilateral trade agreement since the WTO replaced the GATT as the multilateral trade forum in 1995. The main components of the Bali Agreement were trade facilitation (aimed at cutting red tape and corruption in ports, thus encouraging international trade), an agriculture package that allowed governments to run food security programs without breaching WTO commitments, and a reaffirmation of market access for less-developed countries.

While the agreement reached in Bali required subsequent endorsement, this was seen as a mere formality, as the text was signed by all trade ministers and had been painstakingly tailored to India's special sensitivities on food security. Yet India late last month blocked the deal.

The time limit for final endorsement expired at the end of July, with India insisting on re-opening the agricultural issues. The WTO Director-General, reporting to the WTO ambassadors in Geneva on 31 July, had a tone of desperation. This is not 'just another delay which can simply be ignored or accommodated into a new timetable'. Here is the wider context:

I want to stress the importance of each of the three pillars of the WTO: disputes, monitoring and negotiations — not to mention our work on technical assistance and aid-for-trade. We saw the importance of our work during the financial crisis when, unlike with previous crises, there was no surge in protectionism. Having the rules in place and adherence closely monitored — with the dispute settlement mechanism there to back them up — helped to keep protectionism in check during a dangerous period for the global economy. The value of those pillars was plain to see — and they performed very well. But, when I took office last September, I was clear that I had real concerns for the future of the negotiating pillar. Bali was a very important moment in reviving and revitalising the negotiating function. But, just seven months later, once again I am very, very concerned.

The central component of the Bali Agreement (making ports more efficient) is hardly controversial. But why is food security policy such a sticking point? In an imperfect-market world, surely India should be able to offer some subsidies to its own farmers? When, however, the farm price-support programs result in what are effectively export subsidies, it becomes a multilateral concern

The WTO Director-General expressed some hope that the European summer holiday period might deliver a breakthrough when the ambassadors next meet in September. But if not, the consequences do indeed seem dire for the future of multilateral trade agreements. When a hard-fought negotiation, finally brought to fruition, can be torpedoed in this way, who will bother to try again?

Meanwhile, the rival model for international trade negotiation, FTAs, received some endorsement from a survey by The Economist Intelligence Unit. Senior executives from 800 exporters in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore and Vietnam were quizzed on their experience.  All these countries have extensive FTA coverage. The survey finds that each FTA signed in Asia is used, on average, by only one in four exporters. But where they are used, the result is positive: more than 85% of respondents report that their exports to the markets concerned have increased either significantly or moderately as a result of FTAs. According to the EIU report:

Critics of FTAs have long warned this would happen. FTAs, they say, replace the relative simplicity of multilateral WTO agreements with a "noodle bowl" of overlapping preferences and rules and regulations that, in practice, often prove more trouble than they are worth for companies to use. But the result is nonetheless surprising, given the benefits in terms of increased exports reported by companies that do use the FTAs.

Of course exporters (the survey respondents) are not in a position to judge the overall national or multilateral benefit of FTAs. The central criticism of FTAs (which should properly be called 'discriminatory preferential trade arrangements') is that they divert a country from buying its imports from the cheapest foreign supplier. FTAs are unambiguously second-best, compared with multilateral agreements. But the current multilateral model seems in need of drastic modification.

Photo by Flickr user Betsy Dorset.

G20 must save the WTO, among other things...

As John Lennon wrote, 'life is what happens when you are busy making other plans.' How true for Australia's plans for the G20. Life is not being kind in the lead-up to the Brisbane G20 Summit.

The head winds for the summit so far include:

  • International organisations (the IMF and World Bank) lowering their forecasts for global growth.
  • Equity markets being hit with concerns of rising geopolitical tensions ( Ukraine, Gaza, Syria, Iraq).
  • Economic sanctions being imposed by some G20 members (US, EU, Australia, Canada) on another G20 member (Russia) and that member imposing trade sanctions on other G20 members.
  • A G20 member (Argentina) defaulting on its external debts.
  • Another G20 member (the US) continuing to block agreed governance reforms of the IMF. 
  • One G20 member (India) vetoing an agreed WTO trade deal, a move which has brought into question the future of the WTO and the multilateral trading system.

To add to the depressing developments, Indian Central Bank Governor Raghuram Rajan (who is famous for forecasting the 2008 financial meltdown) has warned that the world economy is on the brink of another market crash. To top things off, the World Health Organisation has called the Ebola outbreak an international health emergency.

How should the G20 react to these developments? It must confront them; it must deal with reality. If it did not, any collective commitment coming from a G20 meeting to strengthen global growth or do anything else would be hollow.

The G20 — not only at the summit in November but also when G20 finance ministers meet in Cairns in September — must discuss the impact of rising geopolitical tensions on the global economy. It would be surreal if, in the face of the developments listed above, a meeting of world leaders or finance ministers limited their discussions to technical economic and financial issues. As Michael Spence has noted, rising geo-political tensions are a major threat to global co-operation and economic prospects. If the G20 truly is a global economic steering committee, it must adapt to developments and respond to all the challenges and threats to the global economy.

One of the threats to global economic cooperation that the G20 must confront is the impact of India's veto of the Bali WTO trade deal.

The G20 must respond and restore confidence in the multilateral trading system and the WTO. Tom Miles sums up much of the reaction to India's decision when he says that 'India has dealt a potentially fatal blow to the World Trade Organization's hopes of modernising rules of global commerce and remaining the central forum of multilateral trade deals'. Simon Evenett from the Swiss Institute for International Economics said that 'without a serious shake-up, the WTO's future looks like that of the League of Nations.'

The world economy has prospered with a rules-based global trading system administered by the WTO. However, trade liberalisation through the WTO's Doha round has dragged on for over 13 years and in response, countries have sought progress through bilateral or regional trade deals. While this may benefit the countries involved, it has not been a positive for the global trading system and the countries excluded. There is a 'noodle bowl' of trade arrangements, often mutually incompatible, which discriminate against non-members, mainly developing countries. This trend has undermined the WTO, including its vital dispute resolution mechanism.

In the absence of the WTO's mediation of trade disputes and its capacity to deliver binding rulings, the world economy would likely be engulfed in retaliatory trade wars. For example, China recently lost an appeal at the WTO in a case brought by the US, EU and Japan to challenge China's restrictions on exports of rare earths. In the absence of the WTO's dispute resolution mechanism, the US and the other countries would probably have retaliated with their own restrictive measures.

For the sake of the global economy, the G20 must act decisively to restore faith in the global trading system and the future of the WTO.

How? At the Brisbane Summit, G20 members should commit to rolling back protectionist measures introduced since the global financial crisis, including non-tariff measures. The G20 should ask the WTO to monitor, report and make public progress with the rollback. The G20 chair should seek individual commitments from members for the early implementation of the Bali trade facilitation agreement. G20 members should not wait for the formal ratification of the agreement but include in their individual growth strategies the steps they are taking to facilitate trade. If one member does not make such a commitment, it should not stop action by others.

At the Brisbane Summit, G20 leaders should call on WTO trade ministers to conclude the Doha round and leaders should set the strategic direction for the WTO in a post-Doha world. This should be one that does not repeat the ambitious and wide-ranging Doha program with its 'nothing is agreed until everything is agreed' agenda. In future, negotiations should target specific areas and allow for plurilateral agreements, where WTO members may opt in. The discussions over the future of the WTO should be anchored around the governance and implications of global value chains.

As chair of the G20 in 2014, Australia has to ensure that the G20 is nimble, does not become preoccupied with a set agenda, and responds to challenges and risks that arise. One of those challenges is to save the WTO.

Image courtesy of the G20 Australia website.

G20 2014: The G20 Brisbane Summit, inequality, energy and anti-corruption

The 12th edition of the G20 monitor contains an overview from John Lipsky on the G20’s role in global governance after the global financial crisis; a paper by Geoff Weir on the G20, Thomas Piketty, and inequality; thoughts from Hugh Jorgensen and Christian Downie on multilateral energy governance; and a piece by Charles Sampford on integrity and anti-corruption.

Credit rating agencies must do better


Standard and Poors' credit ratings. (Wikipedia.)

Foreign investors learn about the Australian economy from a variety of sources, but the credit rating agencies (CRAs) have a special place, as many investment managers are committed to following the rating agencies' assessments. As well, the CRA ratings are used in prudential supervision. This gives special importance to Standard and Poors' (S&P) latest pronouncements, reaffirming Australia's AAA rating.  

The S&P press release begins by noting 'the country's strong public policy settings, economic resilience, and significant fiscal and monetary policy flexibility' as well as its 'strong ability to absorb large economic and financial shocks, as was demonstrated during the global recession in 2009.'

So far, so good. Then come the caveats: 

Australia's high external imbalances, dependence on commodity exports, and high household debt moderate these strengths...In our opinion, while Australia benefits from many fundamental strengths, its key credit weakness is the economy's high level of external liabilities. The banking system in particular has a high degree of external indebtedness and remains highly reliant on the ongoing backing of foreign investors...Meanwhile, Australia continues to run significant current account deficits... 

Pressing the panic button? Not really. This is just having 'two bob each way', as S&P goes on to say:

In our opinion, however, the risks associated with Australia's high private-sector external debt are manageable because of the strength of the country's financial system, the high degree of foreign currency debt hedging, and an actively traded currency that historically has allowed external imbalances to adjust. Additionally, Australia's highly credible monetary policy framework remains able to help counter the impact of any economic shocks.

So we're OK after all? Not so fast.

Just in case you’re getting lulled into complacency, S&P concludes with some warnings and a line-in-the-sand threat:

We could lower the ratings if external imbalances were to grow significantly more than we currently expect, either because the terms of trade deteriorates quickly and markedly, or the banking sector's cost of external funding increases sharply. Such an external shock could lead to a protracted deterioration in the fiscal balance and the public debt burden. It could also lead us to reassess Australia's contingent fiscal risks from its financial sector. We could also lower the ratings if significantly weaker than expected budget performance leads to net general government debt rising above 30% of GDP.

What would a country have to do to get a clean bill of health? Australia's banks are no longer obtaining new funding flows from overseas, and their outstanding balances are smaller than in 2008 (see graph below). Sure, the AAA government guarantee helped them to come through the crisis smoothly but the same thing could be provided again, if needed. The financial system was given the ultimate stress test in 2008 and came though well, unlike many countries. As for the warning on external imbalances, since 2008 the current account deficit is significantly smaller, as is the external income deficit

Source: Reserve Bank of Australia.

What about the 'line in the sand' on net government debt? With the current level at just over 20% of GDP, it would indeed be a major slippage if we were to find ourselves over 30%, so for S&P to finish its press release with this hypothetical outlier is drawing a long bow. It's drama-queen stuff, but it has been picked up by the press, always happy to spotlight an impending disaster, no matter how unlikely.  

Let's also put the current level (and even the 30% line in the sand) in perspective. Here are the equivalent IMF figures for the G7 countries:

Source: IMF Global Stability Report, Table 1.1.1.1.

Remarkably, some of the key actors responsible for the 2008 financial debacle have managed to restore their reputations, and no rehabilitation is more remarkable than that of the Teflon-coated credit rating agencies. Leading up to 2008, they handed out AAA ratings to worthless mortgage securitisations (but of course these were a different sort of AAA rating: the debt issuers simply paid for it). Nor were the country ratings much better: S&P's 'investment-grade' endorsements of bankrupt Greece survived well into 2010.  The role of the CRAs was under critical review well before the 2008 crisis but no satisfactory answer has yet been found for their undue influence and they are still accorded a role in the Basel prudential supervision arrangements.   

Could it be that S&P is peeved because it recently lost its reputation-damning court case in Australia? It's little wonder that analysis of the sort produced by S&P for Australia evokes a derisive response. Can't they do better?

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