G20 is only the beginning

The formalisation of a new world economic order at the end of last week – with the new status that has been bestowed in Pittsburgh, US by world leaders on the Group of 20 (G20) as caretaker of the global economy – is but the ears of the hippopotamus of a completely changed post-recession world. The now fast deploying new order in almost all international relationships offers many challenges, but also opportunities to those businesses that harness the ability to adapt in response to the new realities.

History teaches us that, inevitably, all instruments of power – be they political, diplomatic or military – follow economic power.
In historic context, the rise to power of the G20 has been nothing less than breath-taking. It was formed a mere 10 years ago in 1999 for finance ministers and central bank chiefs following the Asian financial crisis. The idea at the time was to assist the then G7 (the United States, Germany, Italy, Japan, France, Britain and Canada) as the richest nations on the globe to communicate with the wider world. It was only in last year that it was upgraded from a ministerial to a leaders level.

How big a shift?

The story of the extent of the shift of power away from the traditional developed world to the rising developing world is at least partly reflected in the numbers. The G20, which includes South Africa as the strongest economy in Africa, replaces the Group of 8 (G8) – for long the world’s richest countries – as the main custodian of the global economy. Jointly, the G20 accounts for 90% of the world’s economic output.
The new reality, however, is further evident on other fronts including the new role and makeup of the International Monetary Fund (IMF) and World Bank. In future, the head of the IMF will be selected based on qualifications, where it traditionally has been someone from Europe, with the president of the World Bank coming from the US.
The G20 will also in future have stronger persuasive powers over its members with the introduction of a peer review system based on forecasts by the IMF about the impact of policies, and report back to the Group. Although there is no sanctioning foreseen at this stage, a country such as the US will find it difficult in future to ignore warnings by the IMF – as it did in 2007, when the IMF cautioned about the US housing sector shortly before a property collapse that triggered the global credit crisis.

Potential pitfall

One of the pitfalls of the new dispensation was highlighted in a speech on Monday by the president of the World Bank Robert Zoellick, when he said the G20 leaders made a good start towards increased global co-operation, but “peer review will need to be peer pressure.”
In what may seem an unrelated development, at the end of last week there was a sign of the power shift towards the developing world. The World Trade Organization appointed an investigating panel to investigate charges that the US is imposing illegal taxes on frozen orange juice it is importing from Brazil.
Zoellick added that the US should not take for granted the dollar’s status as the world’s key reserve currency because other options are emerging. Global forces are shifting and it is time now to prepare for the fact that growth will come from multiple sources.

The agenda

High on the agenda of the newly empowered G20 is the formulation of new regulation aimed at reining in financial industry excesses that triggered the credit crisis two years ago. The new rules, which will be aimed at improving the quality and amount of capital to be held by financial institutions, should be ready by the end of 2010 and will be phased in over the following two years. The issue of bankers' pay schemes, believed to be responsible for fostering a high-risk corporate culture that led to heavy losses and taxpayer-funded bailouts, will also come under scrutiny.
Indicative of the impact of the new reality on other stages where international power plays take place, is the prediction by observers that the G8 is likely to live on as a forum for its members to deal with geopolitical issues.

Anatomy of the new reality

Some of the basic facts that underlie the events in Pittsburgh and which will help shape the new future on a broad front, include:

At least four developing countries now count among the 10 largest economies in the world. China is already in the number-two spot, India fourth, Russia eight and Brazil in 10th position;

By 2030, the Chinese economy is projected to be in the number-one spot and India’s economy would at least be close to equalling that of the US;
As early as next year, there would be more aged people in Europe than children, and centres of productivity will have to move to developing countries – bringing huge opportunities to countries such as South Africa, if education is brought up to standard and the necessary skills put in place;
The centre of gravity for consumer demand will also shift to the developing world, a trend likely to be led by China; and
New innovation and scientific/technological advances are likely to come increasingly from the developing world, while there are already signs that China will be next to have a human on the moon before the US can repeat its effort of 40 years ago.

There was also a sobering note from Zoellick in his speech: “We need a system of international political economy that reflects a new multi-polarity of growth. It needs to integrate rising economic powers as responsible stakeholders while recognising that these countries are still home to hundreds of millions of poor and face staggering challenges of development.”