Why it takes small groups to solve global problems
By Raghuram Rajan
It may seem easy to get countries to discuss global economic problems – after all, country authorities encounter each other at meeting after meeting. In spite of this frenetic activity, we have too few meetings where substantive dialogue, especially
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between big industrial countries and big emerging markets, can take place.
One reason many meetings are ineffective is that, in the interest of legitimacy and inclusiveness, a lot of countries are invited. But with many participants no real discussion takes place. Instead they deliver speeches.
Meetings among a small group of countries are typically more effective. Not only is there the chance of real dialogue, but also promises made to the group have greater credibility than promises made by one country to another. Moreover, a country does not signal weakness by making compromises for a multilateral agreement – it can tout them as exemplifying global citizenship. Such meetings score over direct meetings between two countries, where compromises by one country could be seized upon by its domestic opposition as weakness.
The archetypal small group has been the Group of Seven, which, though still powerful, is not as dominant as it was. In purchasing-power parity terms, the combined gross domestic product of China and India is now approximately equal to that of the combined GDP of the G7 other than the US.
Absence of economically powerful countries from global discussions matters. The G7 debt relief proposal, where the group in essence told multilateral financial institutions such as the World Bank and the International Monetary Fund to write off fully the debt of a number of (largely African) countries, was put together without widespread consultation. Multilateral institutions, having been given their marching orders, then scrambled to make the proposal consistent with their rules and to persuade other reluctant member countries. Promises of additional money were made by the G7 to sweeten the pill – it is to be hoped they will materialise.
Increasingly, though, it is emerging markets such as China and India that will buy commodities and labour-intensive goods from the poorest countries, as well as make investments there. They were not consulted while the deal was put together. Is it surprising that they feel perfectly happy to lend to countries that have obtained debt relief through the G7's largesse? After all, they were also not responsible for the build-up of the prior debt.
Countries that obtained debt relief were certified by multilateral financial institutions to be responsibly governed. Is it not hypocritical for the G7 to complain now about the fresh build-up of debt, even though some countries may be repeating past mistakes?
The debt relief proposal should have been put together more carefully, not in response to domestic politics and the clamour of well-meaning activists. Industrial countries outside the G7 that have long been involved in giving aid should have been consulted, as should the large emerging markets. A golden opportunity was missed to build a wider, and thus stronger, coalition against poverty.
The way forward is not to create yet another permanent group. Any group that includes all players who have a legitimate role in every important global issue will be too big. It is wiser to adopt a more contingent approach to the world's economic problems through groups brought together issue by issue, depending on each participant's relevance. The IMF is experimenting with such an approach, termed multilateral consultation. The first is on global imbalances and involves China, the European Union, Japan, Saudi Arabia and the US.
One objective was to get participants to commit to beneficial domestic policies, which would have the effect of bringing down imbalances. Critical here was not the novelty of the policies but the commitment to the world, so that the IMF could legitimately assess progress on these policies over time. A second aim was to get the group of officials from these countries together regularly so they could develop the trust to deal effectively with problems that develop in future.
The fund's interim report at its spring meetings contained detailed commitments by each participant. While it is too early to tell whether these consultations prove useful, the road map they offer for fostering future dialogue is well worth considering.
The writer is professor of finance at the University of Chicago's graduate school of business and former chief economist of the IMF
