G20 the world's best hope

THE two world economic shocks of the past decade, the Asian financial crisis and the 2008 great recession, have worked decisively in favour of Australia's strategic influence and prestige on the regional and international stage.

Economic crisis begets changes in global power. Australia has been the beneficiary of economic crisis because of its strong economy and its constructive economic diplomacy. This story has played out for more than a decade. The long growth cycle from the early 1990s has not just boosted Australia's national income but given Australia a better platform in world affairs.

The narrative is on display today with the decision taken by leaders during their dinner last Thursday night at Pittsburgh and formalised at their meeting the next morning. They enshrined the G20 as the new andpermanent body for global economic co-operation, a long-run Australian objective.

The omens were apparent at the dinner when US President Barack Obama asked Kevin Rudd and South Korean President Lee Myung-bak to lead the informal discussion on global governance. Both Australia and Korea are winners from the decision to shift the global economic decisions from the G8 to the G20.

For Australia, the symmetry is remarkable. It was the Howard government's active role in the Asian crisis that guaranteed Australia's inclusion in the original G20 meeting of finance ministers held in Berlin in 1999. As former treasurer Peter Costello said: "This was a breakthrough point for Australia. We only got this seat because of our active stand during the Asian crisis."

This is undoubtedly true. There has been no change to the G20 membership since its inception. And there is no hard and fast rule to G20 membership. Some earn entry because of their regional significance (witness South Africa as the only African nation); others because of their resources centrality (witness Saudi Arabia); while Indonesia, a country with little political clout, gains entry because of its size among emerging economies.

After the Asian crisis, John Howard said: "Australia's success in the world depends upon its strong economy." This is a tangible reality. Rudd and Treasurer Wayne Swan are reminded of this every time they attend an international meeting. The 2008 great recession gave the Rudd government a fresh opportunity, the chance that the G20 would be elevated to a new status. It was George W. Bush's decision late last year to call G20 heads of government together to respond to the crisis that opened the door.

From the start, Rudd seized his chance. Sure that the crisis would provoke changes in global power arrangements, Rudd launched a campaign on behalf of the G20. His lobbying of other heads of government in person and by phone has been relentless.

Until recently, the Obama administration had reserved its final decision. Opinion was divided. For example, the head of Obama's council of economic advisers, Larry Summers, wanted to retain a small body such as the G8 on grounds of decision-making efficiency.

The risk is that the G20 will be too large and ineffective. The Europeans, grossly over-represented on the G8, wanted to retain a smaller body. There was a strong push for a G14 that would have excluded participation by nations such as Australia, South Korea, Turkey and Saudi Arabia. Rudd saw this as a serious threat. In the end, the US and China plumped for the G20 and this, in effect, sealed the deal.

Within Australian politics, the G20 has been a shared aspiration. But the opposition's claim on bipartisanship is compromised precisely because the G20 has authorised the fiscal stimulus and expansionary policy settings championed by the Rudd government and opposed, in their scale, by the Malcolm Turnbull-led opposition. Rudd and Swan, unsurprisingly, recruit the G20 decisions to depict the Opposition as hopelessly out of touch.

They are assisted because there is no stomach in the G20 for cutting back the global stimulus. With most members in a worse situation than Australia, Rudd said the view of other leaders was that "we're still well within the woods".

To this point, global co-operation to combat the downturn has been effective, in contrast with the 1930s. The Depression became more pronounced because global co-ordination failed and the wrong policies were embraced. Yet the fiscal expansion for which G20 praises itself is the easy part.

The hard part lies in implementing the Pittsburgh communique: planning exit strategies from the emergency interventions, creating a better basis for global growth and preventing any reversion to trade protectionism.

The reality, as Swan says, is that the rich world is confronting a period of slower growth. This will compound domestic demands for regressive policies.

The gap between rhetoric and action is the demon that haunts the world. There will be many critics saying the G20 is grossly overrated. Just ask them, in reply, what better solution they propose: the G8 or the UN? The G8 has lost its legitimacy in economic decision-making though it continues to deal with security issues. The UN General Assembly has no ability to reach agreement on responses to the global crisis.

This penetrates to the significance of the Pittsburgh decision.

In a world where the need for agreement is greater than ever but striking such agreements is harder than ever, the G20 is perhaps the last best hope for negotiated multilateralism. With only 20 members, it represents 85 per cent of global GDP. This creates the chance for some modest co-ordinated action.

The limits to the G20 summarise the present international condition. The biggest single question in global financial imbalances lies in US-China exchange rate management. That is too sensitive for the G20 and must be addressed directly by the US and China. The G20 wants the successful completion of the Doha trade round by 2010 yet its own members have impeded such progress. It calls for a climate change agreement in Copenhagen knowing that nations remain divided by competing national interests that are unlikely to be resolved for many years.

The almost guaranteed failure to reach genuine agreement at Copenhagen (as distinct from gesture politics) sets the scene for new and punitive divisions between nations. Europe, led by France, talks about new tariffs to punish rich nations that refuse to impose hefty cuts in greenhouse gas emissions. It is a threat that may become more than idle.

Meanwhile Obama, plagued by expectations about his ability to solve the world's problems, is trying to reposition the US. By opting for the G20 framework, Obama concedes the relative decline in US power and champions a new strategy of pragmatic engagement with the world.

Rudd works as closely as possible with Obama. But the lesson in a world where global agreements are more difficult than before is the imperative of national leadership to deliver better national economic performance.