The Last European: Why the G-20 Was a Success

Simon Johnson, a professor of entrepreneurship at M.I.T.’s Sloan School of Management, is the former chief economist at the International Monetary Fund.

What did Thursday’s G-20 summit meeting really achieve?

On the highest-profile issues of financial regulation, fiscal stimulus and monetary policy, there was little progress. But on the International Monetary Fund, the American side engineered a breakthrough — not just in terms of how much money the fund can lend to countries, but also in terms of rebuilding its legitimacy and making it more effective as the world’s only global crisis-fighting organization.

The Europeans are claiming progress at the summit meeting in terms of promises to regulate hedge funds and create more cooperation between bank supervisors across countries. These are sensible steps in principle, but do nothing to rein in the political power of huge banks and their ability to evade regulation. No one at the meeting said anything as simple and — these days — as obvious as, “Any bank that is too big to fail is also too big to exist.”

The Obama administration pushed for more government spending as a way to provide fiscal stimulus around the world, but they were completely rebuffed by the Europeans. And not even the United States was willing to push other countries aggressively for the most important stimulus when wages and prices are entering a downward deflationary spiral — further easing of monetary policy to help borrowers around the world.

The only real news is the support shown by the G-20 for the I.M.F. The headline is obviously the extra money that the I.M.F. will have — up from $250 billion to around $1 trillion in effective lendable resources; finally, enough to begin to make a global difference. Most of the press coverage stops with this point, but all this extra money is helpful only if it gets lent out.
Lots of countries are in trouble or under pressure, yet many are reluctant to borrow from the fund because this comes with “stigma” — such loans are interpreted as a sign that you are doing badly. Many countries also feel that the conditions attached to I.M.F. loans are onerous and mostly there at the behest of the rich countries that founded the fund and still control it.

The best way to enhance the I.M.F.’s legitimacy would be to give middle- and lower-income countries a greater role in its governance (more votes or more seats on the board or both), but progress on this front remains glacial; European countries in particular are unwilling to give up their long-standing over-representation.

In this difficult context, the Obama administration produced a rabbit out of the hat.

The managing director of the I.M.F. is very powerful, with a great deal of authority and discretion, and has always been a European — in effect, appointed by European governments to represent their interests. The G-20 made it clear that this will stop — the communiqué says the selection process will be open, transparent and competitive. But really this is code for saying they will pick someone from an emerging-market country, such as India or Brazil (and there are some excellent candidates). The right person in this job could have a huge positive effect on the I.M.F.’s legitimacy.

To make things matters more interesting, the I.M.F.’s managing director is expected by insiders to resign within a year, to resume his (promising) pursuit of the French presidency. The leadership race for the next managing director effectively starts today; the stakes are high, and competition will be intense.

How did the Obama administration pull this off? In a brilliant move, they took the lead by volunteering to open up the selection process for the World Bank, the I.M.F.’s sister organization, which has always been run by an American. The next president of the World Bank is very likely to be Chinese.

By Simon Johnson