THE OUTLOOK
The architects of the global financial system excel at constructing meeting groups. There's the G-3 (U.S., Germany and Japan), the G-7 (the G-3 plus Canada, Britain, France and Italy), the G-8 (add Russia), the G-10 (which is really 11), the G-30 (a private-sector group) and the G-77 (made up of developing countries).
Gee, does the world really need the new G-20? Will this group, which meets Thursday for the first time, finally move governments beyond talk to action to prevent another global financial crisis?
"You should ask the U.S., because the initiative for this new G came from them," says German Finance Minister Hans Eichel, the initially reluctant host for the gathering in a building that was the office of one of Hitler's favorite G's -- Hermann Goering. "But we came together very quickly after it was clear that the goal is not to weaken the Bretton Woods institutions."
The G-20 is an American idea. When a bad call by the foreign-exchange trader at the Thai central bank is the proximate cause of a crisis that threatened global prosperity, the U.S. argued, decisions can no longer be made by the G-7 club. It pushed for a group of manageable size that would be a "permanent informal mechanism for dialogue" among big industrialized countries and big emerging markets, such as China, India, South Korea, Indonesia, Argentina, Mexico and South Africa.
"In terms of image and substance, you can't go on talking about this stuff with only the industrialized countries present," says Jeffrey Frankel, a Harvard economist. "This is not some fuzzy-minded notion of being nice to poorer countries."
The U.S. wasn't being magnanimous. It hopes the G-20 will reduce the disproportionate influence of smaller European countries in international financial decision-making and increase the influence of non-Europeans who often have views closer to those of the U.S. Korea's Kim Dae Jung, for example, is a bigger fan of U.S.-style free-market capitalism than his German counterpart.
The Europeans resisted, arguing that the International Monetary Fund's policy committee is a sufficient, even if overly ritualistic, forum. The IMF agrees. But the U.S. withheld support for naming Britain's finance minister as chairman of the IMF committee until Europeans backed the G-20 with Canada's internationally minded finance minister, Paul Martin, as chairman. The Germans then suggested that Canada host the first meeting. But Canada wanted the highly visible G-7 aura that would come from a Berlin venue. Germany, this year's G-7 chairman, agreed. Then the two squabbled over who would run the session. The compromise: Mr. Eichel speaks first, then turns the session over to Mr. Martin.
With Asia rebounding and gadfly Joseph Stiglitz leaving his perch as chief World Bank economist, calls for radical change are fading. The architects are grinding away on financial good-housekeeping practices -- better disclosure, norms for prudent financial regulation -- and on bank-capital standards that better reflect risky reality.
But on several big issues, there is still significant disagreement. A few stand out:
What exchange-rate regime works? Must every small economy either fix its currency to a major one in an Argentina-style currency board (which means neutering the central bank) or let its currency float freely (which means big swings in exchange rates)? That's almost doctrine now. The G-7 has vowed to withhold aid "for a country intervening heavily to support a particular exchange-rate level, except where that level is judged sustainable." But what that exception means in practice is still far from clear. Even less clear: When is it OK for a country to impose controls to limit inflows of short-term foreign money, which is quick to flee in a panic? Five years ago, the G-7 answer was, "Never!" Today, it's a too-vague, "Sometimes."
What is the right role for the IMF? It's attacked both for lending too readily and for imposing conditions so onerous that its aid hurts more than helps. The IMF now offers preapproved credit lines to deserving countries, but no one has signed up, apparently because of the stigma attached. In his latest parry, U.S. Treasury Secretary Lawrence Summers wants the IMF to specialize in short-term emergency loans, and leave long-term aid (except to the very poorest) to the World Bank.
How much sacrifice should investors make? The architects don't want to encourage governments to default if they can afford to pay their debts, but neither do they want investors to assume that the IMF & Co. will always lend governments in distress enough money to make bondholders whole.
By making bondholders suffer in the tiny cases of Ecuador and Pakistan, the architects delivered a message to the market. But proposals to systematize this -- by rewriting bond covenants to make restructuring easier to negotiate, for example, or by linking bond repayment to commodity prices so borrowers and lenders share the risk -- have yet to jell. And big countries such as Brazil aren't asked to stiff their creditors.
"This ad hoc approach has shown itself to be a source of confusion and great uncertainty," complains Barry Eichengreen, a University of California at Berkeley economist.
By bringing emerging-market officials into the inner circle, the creation of the G-20 may someday be seen as a milestone -- but only if the new group can move more forcefully to effect change than its predecessors.
--David Wessel