Geopolitics of a new G-7
from Follow the Money

Geopolitics of a new G-7

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There is a growing sense that the G-7 no longer is the right grouping for discussing today’s major international macroeconomic issues. It is hard to see, for example, how you can discuss "global rebalancing" if one major part of the global economic and financial balance -- China -- is not at the table.

So -- as the comments section on my previous post brought to light -- proposals for new groups abound, whether to supplement the G-7 (which is the G-8 when Russia is included, but on many economic issues, Russia is currently excluded, to its irritation) or to replace the G-7. Some, like Larry Summers, suggest that the G-20 provides the right forum -- it was created after the Asian crisis, but sort of fell by the way side in the first George W. Bush Administration. Others are calling for a G-4 (Japan, China, US, Europe). Some would add China to the G-7 and consolidate Eurozone representation. And others are calling to add the BRICs (Brazil, Russia, India and China) to the G-7, creating a G-11 ... (the current G-10 has 11 members -- the US, Canada, Japan and eight, yes eight, Europeans ... it is a bit of an anachronism)

The logic behind all these proposals is right -- the big emerging economies, above all China -- are too big not to play a bigger role in global macroeconomic governance. Of course, that assumes that the G-countries should do more than get around and do a show and tell on their domestic policy choices, namely on occasion they really ought to coordinate policy.

But G-diplomacy also has its pitfalls.Pitfall 1:

Is the G-X a forum for global economic management, or a forum of the world’s largest democracies? This obviously is an issue for China. An economic G-4 is easier than a political G-4.

Pitfall 2:

Is the goal to bring Asia in, or to punish "old" Europe? Some in the American right are selling a G-11 with Russia, India, Brazil and China as a means of diluting French and German influence in the G-7. Implicitly, they hope the G-11 will be more sympathetic to W’s foreign policy/ the war in Iraq. To be honest, though, the dilution is more obvious than the support for W/ the war in Iraq. Lula of Brazil has won the heart of New York’s financial community, but he is not exactly on W’s side in Iraq. His global agenda (hunger) a bit different than the American president’s. India and China have their own oil/ natural gas/ energy interests, like the major Europeans. They might not be less than interested in joining a global effort to sanction Iran right after making big investments of their own in Iran. Ken Pollack says the European policy on Iran is carrots and more carrots. China just gave Iran some really big carrots.

Pitfall 3: Who gets left out of a G-4? Britain, because there is only one European representative and that goes to the Eurozone? Ouch. Not exactly the best reward for W’s steadfast ally Tony Blair. On the other hand, both British and a "Euro zone" seat makes a "G-5" look a lot like the UN’s P-5 (the permanent members of the UN security council), only with Japan substituting for Russia and Europe substituting for France. Makes economic sense, but it won’t make Russia happy. Same goes for including China but not India -- replicates the P-5, and lets a autocratic government in while leaving a democratic one out. This is the big problem with Goldman’s proposal to add China to the G-8.

Pitfall 4: Who represents the Islamic world in a G-11? Note two things about a G-7 plus the BRICs (Brazil, Russia, India, China): one, there is no majority Islamic country on the list, and two, it looks a lot like an alliance of the US, Japan and those on Islam’s various (and often bloody, as Sam Huntington has argued) frontiers, if one assumes the euro countries are part of a European Union that stretches to at least the borders of Turkey. It could be sold in the US as a slap at France (Timothy Garton Ash has noted that the US has adopted Britain’s traditional enemy as its own, with a bit more vigor than the Brits themselves can muster there days) and as a new alliance v. terror. But many would see it as a new alliance against the Islamic world. But picking a representative of the Islamic world is hard -- Indonesia? Pakistan? Turkey? -- all too small, at least economically, to fit comfortably in a small club, and Pakistan shares China’s democratic deficit. And none is an Arabophone country -- Saudi Arabia or Egypt anyone.

Pitfall 5: Do you let major IMF borrowers into the Club? Brazil still owes the IMF over $20 billion. A lot of what the G-7 Finance Ministers do, at least at the working level, is decide on large IMF lending packages. The G-7 in its current form won’t die -- the IMF’s big creditor countries will still find a way to talk.

Pitfall 6: Can you make a large body work effectively? The G-20 solved the problems with representation by being fairly inclusive -- though you can tell it was designed to be a forum to talk primarily about financial integration back when that was the cutting edge issue. No way Argentina would make the cut today. The G-20 includes Indonesia, Turkey and Saudia Arabia -- as well as South Africa (hard to keep them out, even if they are not a BRIC) ... But finding ways so many countries can meaningfully cooperate is difficult.

Personally, I like the idea of an economic G-4 (but only if the US and China are prepared to get serious about trying to find a cooperative way out of the current balance of financial terror), the current economic G-7 and political G-8 (though expansion clearly is coming) and reinvigorating the economic G-20 and ADDING a political G-20. The time has come for a G-20 heads of state meeting rather than having continuous ad hoc rotating invitations to the G-7.

That leaves out a new G-10/ G-11. I don’t quite see how you can make a new G-11 really work -- on one hand, it is probably too big and diverse to be really effective, and on the other hand, it leaves too many people out. On the big economic issues, I suspect that a new four is enough to really work out a strategy to address global imbalances (if there is political will to do so) and then you can expand that consensus by bringing in the twenty ... .

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