In These New Times

FE Editorial : G-7 + crisis = G-14

The Financial Express
Posted: Oct 11, 2008 at 0008 hrs IST

With the world in crisis, are seven countries enough to tackle it? Expansion of G-7 has been debated off and on ever since BRIC (Brazil, Russia, India and China) became a force to reckon with. This crisis may be the time to expand the club. World Bank president Robert Zoellick has been admirably clear on this, calling for G-7 to become G-14, adding India, China, South Africa, Mexico, Russia, Brazil and Saudi Arabia. It needs to be said that some of these countries are more important to global plans than, say, Italy, a founding member of G-7. Asian representation, in particular, is crucial because the big economies of this continent will grow even amidst the crisis at healthy rates, though disappointing by their own recent standards (see previous edit for India’s prospects). More big economies mean better coordination. How national actions can make a crisis worse was clear when Ireland’s unilateral declaration of complete guarantee of all bank deposit, a policy soon followed by countries like Denmark and Greece, began a large-scale transfer of funds within the EU, weakening already weak banks in other member countries of the EU which hadn’t guaranteed all deposits.

The Irish response also buttresses Zoellick’s second point—a club has to have a mechanism for coordinated policy response. The EU, of which Ireland is a member, is a longstanding club but clearly lacks, despite many institutions, a way to plan and implement coordinated policies. G-14 shouldn’t become a bigger G-7—a talking shop minus policy heft. And nor can G-14 take comfort from other international financial institutions—the IMF, in particular, stands discredited as a policy framer. Few have bothered to remember that the Fund is mandated to maintain global financial stability. True, the balance of payments crisis it was set up to tackle is not the problem. True, too, Iceland— a country that’s paying for having banks bigger than its GDP—may take IMF help. But the Fund has been caught short, like everyone else, by the crisis. IMF can’t survive just by lecturing developing economies—the Asian crisis proved that it isn’t best at that either. It can’t recommend anything to America and Europe because they are large shareholders. Even big emerging economies find the Fund less relevant; one reason being that IMF’s voting share still favours small European countries over big Asian ones. What better club than an empowered G-14 to recommend IMF reform.