G-7 Reflects `World That Was,' Risks Irrelevance Without China
Bloomberg.com | April 17, 2005
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Finance ministers from the Group of Seven industrial nations,
meeting in Washington, may find that the week's most important
international economic talks already took place -- without them.
As the ministers gather in Washington on April 21, they may catch a
glimpse of Chinese President Hu Jintao's motorcade as he leaves town
after his talks on currency policy with U.S. President George W.
Bush. The G-7, meanwhile, remains stuck in a time warp, with a
membership that fails to reflect current economic realities and may
become increasingly irrelevant unless it changes, say a growing
group of academics, economists and policy makers.
They say progress on such issues as reducing trade imbalances and
limiting the rise of energy prices can't happen without China, the
world's fourth-largest economy and holder of the biggest stash of
foreign reserves, at the table. Some would add India, Brazil and
Russia.
"The G-7 reflects a world that was, not the world that is or the
world that is going to be,'' says Nigel Wicks, a former U.K.
Treasury official who co-authored a 2004 report on the issue for the
Centre for Economic Policy Research in London. ``You need to get the
countries around the table that have the biggest influence on the
global economy."
The last time the group actually included the world's seven largest
economies was 1994, when Nelson Mandela became president of South
Africa, 18-year-old Tiger Woods won the U.S. amateur golf title and
Walt Disney Co.'s ``The Lion King'' led the global box office.
China's Absence
The absence of China from the meetings will be particularly
important, says Nicholas Lardy of the Institute for International
Economics in Washington. He says China isn't likely to feel itself
bound by discussions in which it doesn't have a voice.
"They are the biggest trading nation, they are one of the biggest
receivers of capital flows,'' says Lardy. ``If you are going to be a
global policy making organization and leave a huge player outside
the framework, you aren't going to have much credibility."
Time is short, says Johannes Linn, a researcher at the Washington-
based Brookings Institution and former World Bank official. ``Keep
China out much longer, and they may say, `It's not our game, why
should we play by their rules?'''
Incorporating China into the G-7 would mean a lesser role for some
of the current seven -- the U.S., Japan, Germany, the U.K., France,
Italy and Canada. Some scenarios would drop Canada and create a
single seat for the three members, Germany, France and Italy, that
share the euro as their currency. Other proposals would expand the
club, or make membership automatic for economies of a certain size.
Momentum for Change
``Anyone who is in now won't want to get out, so it's better to have
an automatic process that also makes it more representative over
time as countries grow,'' says Jim O'Neill, London-based chief
global economist at Goldman Sachs Group Inc. ``Momentum is
definitely building for change.''
The makeup of the G-7 hasn't changed since the 1980s. The members
represented 62 percent of world output last year, down from 67
percent in 1999, according to International Monetary Fund figures.
In previous years, the G-7's influence helped ease the world off the
Bretton Woods system of fixed exchange rates in the 1970s, adjusted
currency values through the Louvre and Plaza accords in the 1980s
and helped solve financial crises in Asia, Latin America and Russia
in the 1990s. More recently, its clout has been dwindling: The seven
failed, for example, in a two-year effort to reduce the price of
petroleum.
'Obsolescence'
"The G-7 process was started at a time when major issues of global
demand and policy coordination involved only the industrial
countries,'' former U.S. Treasury Secretary Lawrence Summers said in
a March 24 speech in Mumbai. Recent trends ``suggest the
obsolescence of the G-7 as the dominant forum for international
financial discussion," he said.
Not everyone thinks the organization needs an overhaul. John Taylor,
former U.S. Treasury undersecretary for international affairs, says
the G-7 is still ``a very useful group for getting things done,''
citing a crackdown on terrorist financing and more frequent meetings
with ministers from other nations.
Ralph Goodale, former Canadian finance minister, says the G-7's
current structure brings together important countries with similar
political and economic systems in a forum small enough to avoid
getting bogged down.
Still, the current makeup leaves out two of the three most powerful
engines of future global growth. China, the U.S. and India will
account for half the increase in worldwide economic growth over the
next 14 years, according to the London-based Economist Intelligence
Unit.
Overtaking the U.K.
In 1995, China's output passed $700 billion, vaulting over Canada to
become the world's seventh-largest economy. Last year, the Chinese
economy soared to $2.26 trillion, overtaking the U.K.'s to become
No. 4.
Some in the club are already talking about change. Bank of England
Governor Mervyn King argued in February that ``membership of the top
table must change with circumstance.'' European Central Bank
Executive Board member Lorenzo Bini Smaghi said last month the G-7
is not ``sufficiently representative.''
U.S. Treasury Undersecretary Tim Adams, who last year called for
putting the group on a ``glide path'' to reform, said in an
interview that countries such as China and India need to be ``part
of the conversation.''
``That will require a decision at some point by all those
involved,'' Adams says. ``It's not on the near-term docket.''
Goldman Sachs and the London-based CEPR advocate that the G-7 be
reduced to between four and six members. Each would keep the U.S.
and Japan, and promote China.
Losing Membership
The 12 euro countries should have a single representative, instead
of separate memberships for France, Italy and Germany, says Charles
Wyplosz, who co-authored the CEPR report with Wicks. The U.K. and
Canadian memberships might also be at risk.
``Some countries are less important to the international economy
than they once were,'' says Wyplosz, director of the Geneva-based
International Centre for Monetary and Banking Studies.
To avoid diplomatic spats over membership, O'Neill said countries
should move in and out based on a pre-determined share of the global
economy. That would ultimately benefit emerging markets such as
India, Brazil and Russia, he said.
Increasing the size of the global economic forum is a better idea,
says C. Fred Bergsten, a former U.S. Treasury official who now
directs the Institute for International Economics. He proposes a 16-
member group with representatives from every region and income
level.
That would hand membership to countries such as China, Russia,
Indonesia, India, Mexico, Brazil and Saudi Arabia. ``Its members
would have the competence to address every major issue facing the
world economy,'' says Bergsten. ``It would offer a more promising
basis for steering the world economy.''
o o o o o o o o o o
To contact the reporters on this story:
Simon Kennedy in Paris at [EMAIL PROTECTED]
Kevin Carmichael in Washington at [EMAIL PROTECTED]
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