Drezner: Last Chance to Save the Global Economy

A lot is riding on the London summit of G20 heads of state scheduled for next week. International regimes can develop reputations for not mattering in a short span of time. Multilateral bodies that that seem feckless or hypocritical quickly devolve into meaningless talking shops. Right now, the G20 is on the precipice of irrelevance.

To understand why, let's review the past year's exciting developments in global governance—and by "exciting" I mean "fraught with peril."

For years, many commentators, myself included, pointed out the myriad ways in which the G8 was an outdated steering group for the global political economy. China and India were not included, except in "outreach dinners" that reeked of condescension. The idea that Italy belonged at the grown-up table but Brazil had to sit with the kids bordered on the absurd. The financial crisis finally forced the powers that be to remedy matters. Last fall, when the crisis became acute, the key meeting was the G20 rather than the G8. This was a good thing, in theory. International regimes that reflect the current global distribution of power will possess the legitimacy and authority to affect real change. The G20 included the major governments of the West, plus the BRIC economies (Brazil, Russia, India and China), plus the principal oil exporters.

In practice, however, the first G20 summit was disappointing. The final communiqué produced little of substance beyond a pledge to meet again in six months. The countries acknowledged that "inconsistent and insufficiently coordinated macroeconomic policies" were an underlying cause of the crisis, and promised to coordinate their fiscal expansions. Since that communiqué, however, the responses of the important actors have varied wildly. The United States and China have stepped up; the European Union claimed that their "automatic stabilizers" were sufficient, a position that has just enough credibility to keep the snickering to a minimum.

The response on trade has been even worse. In the fall communiqué, the G20 made one of its few concrete pledges: "within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services." Sounds great, except that two days after the summit, Moscow announced that increased tariffs on imported cars. A day after that, India slapped a 5 percent duty on several iron and steel products. A month later, Brazil approved the idea of raising common external tariffs among the countries under the Mercosur agreement on a number of goods, including textiles and wine. China increased export tax rebates on more than 3,700 goods. The U.S. Congress approved "Buy American" provisions in the February stimulus package that blocked government procurement from most developing countries, including the BRIC economies. The World Bank recently reported that 17 of the 20 countries had imposed a total of 47 trade-restrictive measures. Simply put, the first G20 summit produced little action but copious amounts of hypocrisy.

Will the London summit fare any better? There are reasons to be optimistic. The November G20 meeting was hastily arranged, and hosted by an unpopular and lame-duck Bush administration. The global reach of the downturn still seemed uncertain. Things are different this time around. Barack Obama's political capital is significant. The depth and breadth of the crisis is now fully acknowledged by all. With six months to prep, a variety of private-sector and public-sector agencies have drafted some useful guidance for the heads of state. The finance ministers' meeting demonstrated a consensus toward broader oversight of the financial sector.

That's the good news. The bad news is that there is more that divides the G20 than unites it. Disputes over fiscal policy still split the transatlantic relationship. This week the Czech Prime Minister (and rotating European Union president) Mirek Topolanek warned the European Parliament that the Obama administration's fiscal plans represented "a way to hell." This came a day after Topolanek's government fell in Prague, weakening the EU's ability to speak with a common voice.

In the past month, the BRIC economies have made their displeasure with the status quo known. Russia and China have articulated their frustrations with the dollar as the world's reserve currency. Both countries have proposed ways to create a reserve currency that is less dollar dependent. Senior U.S. officials, including Obama, Paul Volcker, Tim Geithner and Ben Bernanke, have flatly rejected these ideas. Brazil has argued that the responsibility for fiscal stimulus should rest with those responsible for the crisis in the first place—the developed world.

Perhaps the most cynical exercise the G20 will engage in is the inevitable reaffirmation of completing the Doha round of trade talks. This same pledge was made at the Washington summit six months ago—and nothing happened. Given the rise in economic populism, the political will to complete it now has receded even further. Despite this roadblock, the heads of state will feel obligated to proffer this empty promise. As Brazilian Foreign Minister Celso Amorim explained last week, if the positive statements about Doha are not in the communiqué, then it will be politically easier for governments to raise protectionist barriers even further.

As World Bank president Bob Zoellick recently observed, the promotion of the G20 to the global stage is an accident of history. The group had a harmless existence for close to a decade. When the crisis hit, it was the only forum around that brought together the key players in global finance.

The G20 gets a mulligan for last year's hastily arranged summit. A failure to act this time around will be far more damaging. In the absence of global cooperation, countries will go it alone, which means a ratcheting up of financial, trade and fiscal protectionism. And today's global economy already has too much in common with the 1930s.