The impending Group of 20 summit in Washington, DC, November 14–15, organized to discuss solutions to the economic crisis and reforms to the international financial architecture, is potentially the most important international economic meeting in a very long time. However, it has been hastily convened, insufficiently prepared, and President-elect Barack Obama will not participate. To make this meeting and those that will follow successful, officials of the Bush administration and other governments should heed six key principles for successful international negotiations. The Obama team should also reflect on them as it prepares to take office.
The first principle is to organize negotiations among those players whose participation is critical, and not complicate the bargaining by including those whose contribution is marginal. The G-20 can be a useful aegis under which to conduct negotiations, but it is too large, diverse, and leaky to be the nexus for tough negotiations. It would be better for initial discussions to take place among three, four, or five crucial governments, depending on whether the subject is financial regulation, crisis lending, or fiscal stimulus. Bargains struck in the smaller groups can then be considered by the broader group, with adjustments when necessary. In this way, the requirement of small-group negotiation can be reconciled with the need for broader participation and legitimacy.
Rightly or wrongly, the G-20 session is being called a new Bretton Woods meeting. At the original Bretton Woods conference in 1944—which set up the International Monetary Fund (IMF), the World Bank, and other elements of the post–World War II financial architecture—John Maynard Keynes and Harry Dexter White were the British and American negotiators, respectively. The representatives of the remaining forty-two countries brokered deadlocks between these two men, smoothed over the contentious relationship between them, and modestly influenced the final outcome. The participation of this larger circle of countries lent broad international legitimacy to the Bretton Woods agreements. But British-American bargaining was at the heart of the agreements.
The second principle is to invite those players within governments who have the authority to make commitments and follow through on them. As the senior political leaders of their governments, the summit participants themselves are usually in the best position to make and follow through on commitments. But President Bush will not be able to follow through beyond his remaining two and a half months in office, and President-elect Obama is not ready to enter into commitments. Any long-term, institutional reforms will thus have to wait until after Senator Obama’s inauguration as President.
The United States is not the only country with other relevant players beside the incumbent head of government. That is especially true in countries where independent central banks are involved and/or legislative approval is required for any agreement that is reached. The authority of finance ministers varies from one country to another. When it comes to inviting officials to the table for the hard bargaining at the ministerial level, substance should take precedence over protocol.
The second principle comes with an important proviso: an international agreement can bolster the domestic political position of the signatory, whether the head of government, finance minister, or another official. This is sometimes due to international support for the agreement, moral suasion, and a desire to maintain a reputation for keeping agreements. More substantially, international agreements reinforce these officials by bringing concrete benefits to domestic constituencies that would be lost if the government reneges or fails to ratify the agreement. This effect was critical to the conclusion and implementation of the highly productive Bonn summit of 1978, for example, at which Germany agreed to a fiscal stimulus in return for oil price decontrol by the United States. The following decade, Treasury Secretary James A. Baker III artfully used the Plaza and Louvre agreements to consolidate his authority over international economic policy in the second Reagan administration.
The third principle is preparation. A crisis can highlight commonality of interest in emergency measures but is generally not sufficient to produce lasting agreements on long-term institutional change. Preparation is required in order to identify the positions of the key actors, specify potential areas of common ground, and negotiate a package of measures that commands support, including domestic political support. Judging from the recent statements of the summiteers—such as those from French President Nicolas Sarkozy, British Prime Minister Gordon Brown, and others—there is little consensus on the scope of these talks, let alone reason to be confident about a potential agreement. Their conflicting comments bring to mind not the successful conferences of the past but rather the failed World Economic Conference of 1933.
The fourth principle is to focus on essential objectives and the measures needed to achieve them and not on the intellectual constructs and theoretical underpinnings. This principle is counter-intuitive for many economists and technical experts, who tend to want intellectual buy-in to their paradigms, but it is natural for practitioners of political pluralism. The sharing of common analytical frameworks can often facilitate agreements, of course, but that is not always the case. (A set of governments that favor weak currencies, export-led growth, and trade surpluses may have more trouble coming to an agreement than a set of governments with mixed preferences. Players may well agree on commitments to a package for entirely different reasons.) Seeking analytical consensus, moreover, carries the risk of transforming meetings into a university seminar. President Carter’s summit Sherpa once advised that, after an agreement on action is reached, “do not try to agree on why you agree.” The G-20 summit is not the place to debate the relative merits of different flavors of capitalism.
The fifth principle: hegemonic dominance is overrated. Scholars of international relations have vigorously debated the role of a dominant power in establishing international economic governance and securing open trade and investment. The presence of a hegemon facilitates the creation and maintenance of an open international economic regime. But it is not strictly necessary—which is good news in a world in which the long-term trend is toward dispersion of economic power. However, major reform of the international financial architecture and world economic system more broadly will require a core group of countries whose preferences converge and are willing to use carrots and sticks to prod others to adhere to their regime.
Countries’ preferences with respect to financial rescues, bank capitalization, and international regulation will be largely determined by domestic politics. The task for international negotiators is to identify domestic coalitions that can support a new regime in the countries that matter most. Reconciling domestic politics and international negotiations can be difficult, but crises change the calculus of actors at both levels and can open avenues to agreement that are closed during normal, tranquil economic times.
The final principle is to design transparency and accountability into reformed institutions and cooperative arrangements. A widespread concern about accountability and legitimacy of international cooperation distinguishes today’s reform negotiations from those of the original Bretton Woods meeting. These concerns have faded into the background in the heat of the crisis, but only temporarily. They are likely to resurface as new agreements are reached and implemented and will hinder the operation of new arrangements if not anticipated. Reconciling this requirement with small-group decision-making in a crisis is difficult, but it is not impossible and must be done if reform is to prove durable.
President-elect Obama’s reluctance to attend the G-20 summit meeting next week is understandable. The last meeting he attended that was convened by President Bush to address the financial crisis—which occurred as Congress was about to consider the administration’s $700 billion rescue package in September—was nearly a complete disaster. The President-elect will not set the agenda for next week’s meeting but he must keep his options open and his powder dry for after the inauguration. Whether or not he is present at the meetings, he should plan to endorse the attention to immediate measures needed to respond to the crisis, as well as the planned launch of additional sessions to address the details of a new international financial architecture.
The G-20 summit should limit action to those items that require immediate action—coordination of international crisis lending, reinforcing the IMF, and some economic stimulus. It probably will not reach agreement on long-term changes to international institutions, financial regulation, and other forms of intergovernmental cooperation. Instead, it should define a specific agenda for the future and mandate ministerial meetings that address those matters, while keeping the list open to ideas from the President-elect. Preparation of these matters, such as institutional changes to the IMF, will require some additional months. Governments will have to mount rescues and address the recession in the meantime.
Once the bargain is teed up, the heads of government could be convened a second time to conclude an agreement in March or April, around the time of the spring meetings of the IMF and World Bank. We should not be sanguine about the prospects for a robust agreement, but this approach would help to produce an outcome more worthy of the name “Bretton Woods II.”