The Critical Role of G-20 in Dealing with the 2008 Global Financial Crisis

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As a leading forum of international economic cooperation, the G-20 has positioned itself in the discussion of concentrated issues on global monetary and financial in order to make the stability of global economy. In addition, there has been an agreement to run the fiscal policy to encourage and sustain the economic growth of each member from the beginning of its formation (Wolf, 2008:3-4). The initial reason for the establishment of the forum was the unstable global economic system. G-20 began to expand its discussion and be more open to emerging issues, but the G-20’s main focus was still on the global financial and economic issues. It is in accordance with the original goals and agreement of the establishment of the forum – until 2007.

So far, one of the most crucial challenges for G-20 is financial crisis in 2008. The crisis caused by bad loans because debtors could not afford or fail to pay (default) the housing sector involving developers, banks in the United States (USA) as well as institutions that primarily act as lenders. Bank, were tend to avoid underprivileged or unemployed community from lending to afford a house. President Bush decided to overcome this situation by issued a policy with the help of Fannie Mae and Freddie Mas as an institution to assist the US government in providing houses for the community. This policy, then, also applied by other institutions.

However, this policy faced a problem because the community was unable to repay the loan. Some institutions were actually aware of this situation as this package was pegged with higher taxes (Subprime Mortgage) compared to general packages (Prime Mortgage). This situation was known as the Subprime Mortgage crisis that occurred not only in the United States, but also spreading in some countries in the European Union (EU) such as Greece, Ireland, Portugal, Spain and Italy.

The crisis had a devastating impact on the stability of the global economy as it had affected almost every region, from America, Europe, to Asia Pacific. This impact occurred due to several things, including direct or indirect investment to international trade–especially mortgage trading (Dewi, 2014:2). This crisis impacts the economic network, especially the countries who invest in the housing sector.

The emergence of the crisis has raised questions and pessimism regarding to the relevance and role of G-20 as an elite group of international countries in maintaining the global economic stability. People were doubted the G-20 as the fact it created the global instability. In addition, the global financial crisis was triggered by the crisis emanating from the center of global capitalism and promoting the current form of market mechanism. Even the global losses due to debt originating from the US at the time calculated by the International Monetary Fund (IMF) reached 1.4 trillion US dollars (Arif, 2013:24).

Nevertheless, many still remain optimistic and assume that the G-20 has a key role in leading the international world out of global financial crisis at the time, by encouraging and promoting actions that lead to sustainable global growth through its members (Turkey G20, n.d.) with the involvement of several international financial institutions, such as, IMF, World Bank (WB), and the Financial Stability Board (FSB). However, there are certainly pessimism about it and few doubts the G-20’s role in overcoming the global financial crisis that occurred in 2008, as international financial institutions such as the IMF and WB have much more significant role than the G-20. Thus, the efforts of G-20 to overcome the global financial crisis or other global economic problems were still being questioned by international significance.

THEORETICAL FRAMEWORK

STATE AND THE INTERNATIONAL REGIME:

STRUCTURAL MODIFICATION APPROACH

The US financial crisis in 2008 has caused such a vast impact globally, both developed and developing countries. To overcome this problem, a global and collective handling was required from the countries (Stiglitz, 2009). The onset of the global financial crisis in 2008 that started by the failure of the US market had created many assumptions that the international world needs a new international economic mechanism to prevent the crisis. In analyzing the issue raised in this paper, the author has a basic concept, which the state has a role in handling the crisis in form of multilateral cooperation. Thus, the author will also explore how the crisis handling through the framework of G-20 cooperation.

In this paper, the author believes that state has an important position, as the one who created the crisis and the one whose responsibility to handle the crisis. As pointed out by Gilpin, state still has an important role in global political economy through its national policy or domestic economic conditions

(Stiles & Akaha, 1991:8). This crisis was occurred not only by market failure, but also by US government’s desire to provide cheap residential homes for its citizens. Besides, the crisis also occurred by applying subsidy policies and leniency conditions for citizens especially for subprime mortgage packages and default.

In facing this problem, a state needs to find a solution. It is in accordance with Keynes’s opinion that states needs to keep the economic balance (Sudirman, 2016:9-10). Keynes believes the government role in economic or market activity because they are the one who determine the fiscal and monetary policy. Keynes mentions that state and global need to manage the market. In this case the state appeared as an actor who facilitates the inability of the market in regulating itself, through policies that consider the values of democracy, especially policies for public interest (Vaut, et. al., 2009:31).

Besides national policies, a state also needs to conduct international and global management with policy adjustment (Keohane, 1984:11-12). Moreover, the crisis was not only happening in the US, but has been globalized as it affected the average rate of global GDP growth of 0% and the global inflation rate is almost 8%. Thus, global handling and coordination need to be applied in handling the crisis of 2008.

In particular, the author uses the international regime theory in explaining the relationship between the roles of state in the G-20 in relation to the handling of the global financial crisis of 2008. As a non-standalone interrupt variable, the regime is not seen as the end result of a process. The regime is a variable that influences behavior and result– intervening variable. Regarding the role of the regime, this study uses a structural modification approach that states regime has only a limited role that is used when a country find unresolved problems (Hennida, 2015:14). Basic view of this approach is on how the state can maximize its strengths (Krasner, 1982:191).

Keohane stated, “… in the international system regimes derive from voluntary agreements among juridical equal actors” (Keohane, 1982:330). The regime is developed on the idea that countries want their existence to remain in anarchy international system; therefore, the regime plays a role in coordinating the state’s behavior on certain issues. The goal is for each country to get maximum results on these issues. Stein also added that the regime could have an autonomous impact when the autonomous behavior of a country is perceived to jeopardize the existence of other states (Krasner 1982:330; Henida, 2015:16). Haas also said that regime will have a significant role when the actions taken by the state is independently no longer creates a good coordination in international system (Krasner 1982:330; Henida, 2015:16). This is in accordance to Stein’s opinion, “a regime exists when the interaction between the parties is not unconstrained or is not based on independent decision making (Stein, 1982:301).”

This approach can be seen in figure 1, which explained in two conditions. In most situations, there are direct relations between basic causal variable and related behavior and outcomes, but in other situation, where individual decision-making leads to non-optimal results, the regime may be significant, as has been explained by Haas. Shortly, this approach regards the regime as a behavioral coordinator in achieving the expected outcomes related to particular international issues (Toruan, 2010:18). Krasner explored five basic causal variables in relation to international regime, such as, egoistic self-interest; political power; norms and principles; usage and custom; and knowledge (Krasner, 1982:195-204).

Author : Ade Priangani, Taufik, Gede Endy Kumara Gupta