Is the G7 still relevant?

Is the G7 still relevant?

Giraffe in city street [News]Founded as the Group of Six in 1975, comprising of finance ministers and central bank governors of France, West Germany, Italy, Japan, the United Kingdom, and the United States; the G7 grew to become an influential actor in shaping global governance processes.  Canada was admitted to the group the following year, and Russia was coopted to the heads of government segment in 1998, but not allowed to participate in the finance ministers’ track. Russia would again be ejected from the group in 2014, in the wake of a fallout over Ukraine.

In the course of nearly four decades of the group’s existence, it has exerted enormous influence on the global economy. It has shaped ideas about global economic governance, and was a pacesetter on the performance of the global economy. That era was brought to a halt by the outbreak of the global financial crisis.

The financial crisis acted as a crucible that gave rise to the G20 Leaders Summit to overshadow the G7/8 as a premier mechanism for global economic governance. There are many who predicted that the G8 would simply disappear into oblivion. However, the group has continued to exist, more as a caucus mechanism to influence decision-making processes in multilateral processes including the G20.

In early June 2015, Germany played host to the G7. The declaration that emerged from the Schloss Elmau Summit was hefty and covered everything under the sun: a comprehensive undertaking to decarbonize the global economy by the end of the 21st Century; combatting tax evasion; tackling security challenges in Central Europe, the Middle East, and Africa; dealing with major health crises; and improving the plight of women. This is in addition to contending with deep structural challenges that plague many G7 economies.

What is becoming clear is that there is a false sense of power amongst the G7 that they still have capabilities and can call the shots on global affairs. In some respects they behave as if China’s rise is not a game changer, and that other rising powers such as India, Brazil, and Russia are irrelevant. It has not fully dawned upon the G7 countries that the gravity of power is shifting in fundamental ways, and global coordination require different ways of managing a global system that is undergoing a complex transition.

In many ways, in its conception of power the G7 suffers a phantom limb syndrome – a sensation that a limb that has long been amputated is still firmly attached to the body. Since the global financial crisis, it has become more glaring that the global system is no longer anchored on just one center of power. Rather, it is fragmented along multiple and competing groups that are all vying for significance.

In addition to the G7, these groups include the BRICS, and MIKTA, which is made up of Mexico, Indonesia, South Korea, Turkey and Australia. The BRICS hosted its 7th Summit in Ufa in July 2015, which Russia used as a platform to try and project its global relevance. Of concern for the stability of the global system is the tensions between countries that belong to these different groups.

The tensions between the US and Russia over Ukraine are not subsiding. The US and China have sharp differences over the East and South China Sea, with the US also accusing China of engaging in cyber-attacks. Japan and China collide intermittently over disputed Islands in the East China Sea. These tensions deepen mistrust amongst major economies that belong to important geopolitical groups. This bodes ill for managing interdependence, deepening cooperation and stabilising the global system. Already the World Economic Forum Global Risks 2015 has identified geopolitical risk as one of the top risks this year.

While it is apparent that the G7’s influence on global affairs is waning, and that BRICS countries are growing in influence, there is nothing that stops the two groups from collaborating. They could, for example, establish the basis for strategic dialogue on an equal footing to collaborate on a range of issues, including overcoming global security threats. They could also forge cooperation over areas in which there are significant grounds for agreement. Some of these areas include tackling climate change and energy challenges, enriching the post-2015 agenda for sustainable development, and managing the reform of global governance system.

A version of this article was published in the Business Day edition of 12 June 2015

What can the G7 do for Africa?

What can the G7 do for Africa?

On the 7th of June the group of seven major industrialized countries (G7) convened for their annual summit in Schloss Elmau, Germany. While there were other pressing matters on the agenda Africa still made the list. After all, Africa is the continent that on average has grown the most in recent years. As an emerging continent, Africa can be considered a market for the future.

Bundeskanzlerin Angela Merkel spricht auf der Abschluss-Pressekonferenz des G7-Gipfels.

“Federal Chancellor Angela Merkel speaks at the G7 summit’s closing press conference” by Bundesregierung/Steins

In Africa much has changed for the better, but there are still numerous ‘dictatorships’ (only one-third of African countries can be described as genuine democracies), corruption is still a widespread problem and in many countries management is relatively weak. On the positive side, there is a growing middle class. This is particularly important against the current governance background in Africa as the middle class can be seen as the pillar of democracy, the more citizens gravitate towards the middle class the more they will demand liberties and civil rights.

But this positive perspective is not prevailing in Germany; for many German politicians and citizens, Africa is seen more as the crisis continent: Ebola, AIDS, corruption and unproductive agriculture. This image corresponds to the federal government’s general Africa strategy, which – summarized a little harshly – is not on economic cooperation, but rather the reduction of poverty, especially with development aid and a focus on agriculture.

This perception was partly mirrored in the agenda of the Federal Government for the G7 Summit. Central to this agenda is health (the many epidemic diseases, shortage of doctors, poorly developed insurance systems), which in the face of numerous unsolved problems is quite significant. But to be fair, it must be noted that the Federal Government significantly widened the Summit’s Agenda on Africa, which included finding ways to improve governance, grow potential for trade and investment, innovate policy and address climate change in that order. The choice of topics is thus better chosen than the weighting.

And the G7 is right to not only credit Africa with strong growth, there are also many innovative ideas coming from Africa. Think of the many applications of mobile technology. When talking to African representatives in Germany, for example from the business community or the embassies, you get a relatively clear signal. They want to talk about business ideas, investment and profit opportunities; aid is not mentioned.

An excellent example of this appetite for growth and expansion was evident at an event in the Thuringian State Representation, Berlin, at the end of May. The Ambassador of Botswana in Germany, Mrs Tswelopele Moremi, gave a presentation on the investment conditions in Botswana that wooed German investors. The country is politically stable, corruption is low, and economic freedom high. And indeed, the country has recently attracted some big investments.

The Ambassador’s presentation took place during the conference on the topic “Enhancing Africa’s Opportunity: The G7’s Contribution and Challenge “, organized by the G8 Research Group (at the University of Toronto), the German Chambers of Industry and Commerce, and the University of Jena. Participants from Europe, North America and Africa were in agreement that the G7 does not have the required capacity to “save” Africa. This must be done in Africa itself.

The G7, however, can facilitate African governments to take necessary measures for further development. In this respect the G7 can contribute to the so-called public good, in particular the protection of the environment, improving health (especially with regard to epidemics), and innovation-friendly rules such as assistance in the production of generic medicines or concessions in patent protection.

When it comes to climate change, the G7 countries should pursue their own modes to further reduce CO2 emissions and help developing countries to, themselves, reduce emissions without requiring the same effort. The outcome of a fair climate agreement, to which the G7 contribution would be significant, would be helpful for further global cooperation. In this regard financial support for developing countries makes a lot of sense.

This being said emphasis should rather be placed on foreign trade and investment policy. This will involve further liberalization measures, mainly for sensitive products, in the framework of different trade agreements such as the EU’s Economic Partnership Agreements (EPAs) and the United States’ African Growth and Opportunity Act (AGOA). Secondly, in negotiating the Mega-Regional trade agreements (TTIP and TPP) the G7 countries should keep markets open to African suppliers. This would require mutual recognition of standards, which can for example be extended to African companies. This would mean that a company in Lesotho can export US standards compliant goods to Europe and European standards compliant goods to the United States.

In addition, the G-7 governments could encourage, by means of guarantees and insurances, their own companies to invest in Africa and to develop markets. Only in this way can African companies move up the value chain and generate greater added value domestically. Especially resource-rich countries and agricultural exporters can draw great benefits. Without the willingness of the G7 countries’ private sector to get involved in Africa the potential will remain largely unused.

The summit indeed decided, with a corresponding obligation on foreign trade for Africa, to continue to open up and to support private activities on the African continent, overall a good signal. In addition, this signal would mean that the G7 have that extra prosperity elsewhere – including in Africa.

Again, the move to Africa must be accompanied with a change in the perception of the problems and a corresponding reallocation of resources in cooperation.  There’s a certain imbalance in the German ministerial bureaucracy and the downstream public agencies. Thousands of people are working in the Federal Ministry for Development Cooperation and its agencies, especially in the area of development aid and Africa; while the Federal Ministry of Economics have fewer than ten employees who deal with Africa. This does not do justice to the growing importance of African countries, their people and businesses.

The original article was published on the 5th June 2015 by WirtschaftsWoche, available here in German.

SA needs a concrete BRICS strategy

SA needs a concrete BRICS strategy

Heads of state of the BRICS countries are gathered in Ufa, Russia, this week for the grouping’s seventh summit, which comes at a particularly challenging time for Russian diplomacy. Precipitated by the conflict in Ukraine, Russia is barred from the Group of Seven/Group of Eight processes and increasingly estranged from the West.

It intends to use the BRICS summit to project itself as a major global power.

By holding the summit at the same time as the annual meeting of the Shanghai Co-operation Organisation (SCO), Russia is attempting to impress its Central Asian neighbours and highlight its growing strategic co-operation with China, co-organiser of the SCO. This also sends a message to the West that Russia has other platforms on which to challenge for global power. Russia’s agenda preferences can be conceived along two axes: global security and politics; and economics.


“BRICS heads of state and government hold hands ahead of the 2014 G-20 summit in Brisbane, Australia (Agencia Brasil)” by Roberto Stuckert Filho

BRICS national security advisers are meeting regularly, discussing a range of international issues such as the rapidly evolving situation in the Middle East, to the extent that the BRICS can agree on co-ordinated positions on such difficult issues. This will presumably build the group’s coherence over time.

Offsetting this potential is their disagreement on how to reform the United Nations Security Council — a key gap since it is at the apex of the global security architecture. Accordingly, Russia emphasises economic co-operation.

Discussions at the Ufa summit are broadly divided into two parts: the financial co-operation package and the evolving Strategy for BRICS Economic Partnership.

The strategy is too general and vague and unlikely to grow in substance at Ufa. Perhaps, for this reason, the Russians are pushing for a move beyond a strategy “on paper”, to identify concrete trade and investment projects up to 2020.

Nonetheless, three top priorities appear to have been identified in the BRICS economic strategy discussions.

First is co-ordination on e-commerce, and Russia proposed the establishment of a working group. This was apparently downgraded to a limited agreement to convene a dialogue leading, possibly, to the establishment of a working group.

More cynical observers of the BRICS believe Russia wants to use this discussion to market a cellphone operating system they have developed.

Second are ongoing discussions about trade facilitation. These centre on the creation of a virtual working group on trade and export promotion agencies. There have also been discussions about establishing a single window for electronic processes connected to trade.

Third, China has proposed closer collaboration on intellectual property rights regimes. Observers are understandably sceptical of the prospects and co-ordination possibilities, since the focal points in each country are not obvious. But agreement has ostensibly been reached to exchange information on member states’ systems.

At Ufa, there will be much discussion of the two signature BRICS achievements to date: the Contingency Reserve Arrangement and the New Development Bank.

Given the closed nature of BRICS processes, it is difficult to discern SA’s positions on the grouping’s economic agenda but some contours are apparent.

SA seems to regard the economic partnership strategy as being weak and less of a roadmap of how to get things done than a “ticking the check box” exercise for Russia to notch up some “success”.

For SA it is not clear how the strategy will promote more value-added exports and attract investment in minerals beneficiation or processing at source. The draft trade ministers’ joint communiqué is seemingly noncommittal and soft.

SA has some challenges with agreeing to create a single window for trade facilitation. It has to navigate through legal arrangements within the Southern African Customs Union, especially on external agreements SA has with third parties that may see the free movement of goods in the common customs area.

Although the government supports India’s proposed business travel card, modelled on the Schengen visa arrangement, SA views it as unfair that its liberalised visa arrangement for the BRICS countries has not yet been reciprocated.

Several working groups have been set up under the auspices of the BRICS Business Council: for manufacturing, ICT, small business and finance. The president of the South African delegation to the council, Brian Molefe, proposed new working groups for deregulation and agribusiness.

South African business is interested in common issues affecting BRICS trade and investment and specific issues pertaining to particular companies and industries — such as pharmaceuticals — for which they want to identify important platforms for joint technology development.

They support the trade facilitation agenda in principle, but want progress in promoting transparency in the financial incentives each country makes available to its companies, and progress in approvals for businesses from other BRICS countries.

They want to promote “fair” trade. The concern is that SA has the lowest average import tariffs of all BRICS countries, but implements the fewest nontariff barriers.

South African business representatives to the BRICS Business Council are concerned about how the government is managing the BRICS process.

It is regarded as too bureaucratic and there is a strong feeling that the government is not prepared to tackle the real issues, such as “fair” trade.

There are problems within the council. Brazil has not been driving the process, and Russia and China are represented primarily by state-owned enterprises — unlike India, Brazil and SA — with the interests of the private and state sectors not being sufficiently aligned.

The BRICS process seems to be of limited use to South African business.

Promoters of the Contingency Reserve Arrangement argue that it will provide “insurance” to SA in the event of investment status downgrades by the ratings agencies, and an ensuing capital flight — an increasingly likely proposition. SA could tap these resources during balance of payments crises, enabling the government to cover calls on forex reserves.

However, the Contingency Reserve Arrangement is not capable of providing more than an initial first line of support. The amount SA could call from it is capped at $10bn — twice its contribution of $5bn — a small fraction of the daily turnover in South African currency markets. But only $3bn can be called without recourse to the IMF.

Clearly, a lot more money would be required to prevent a run on the rand, assuming the South African Reserve Bank wishes to intervene to prevent a slide in the currency, which it does not. In the extremely unlikely event that such funding was to be sought, it would come from the International Monetary Fund (IMF). The Contingency Reserve Arrangement rules explicitly provide for this. The idea put forward by some BRICS promoters, that the Contingency Reserve Arrangement will enable the BRICS countries to avoid IMF conditionalities, therefore holds no water.

South African officials have indicated they will seek to revive African infrastructure development as an important issue for the Ufa communiqué. They are of the view that this lost momentum during the 2014 BRICS summit. There is much speculation about the New Development Bank’s Africa Regional Centre, whose agreed establishment is regarded as a diplomatic victory for SA.

The government is still working on the Africa Regional Centre’s articles of association. There seems to be agreement it will be located in Johannesburg. It could, in effect, be a “mini New Development Bank”, targeted at African markets, but it is not clear how it will relate to the New Development Bank’s head office in Shanghai, and what autonomy it will enjoy.

The BRICS Business Council has expressed an interest in playing an advisory role in the New Development Bank, as it wants more say in project selection and the disbursement of funds. But there is no clarity on the interest rates that will be charged; how small and medium enterprises will be treated; the methodology to be applied in selecting projects; and how considerations such as sustainability will be integrated into project design and selection.

Further complicating matters, the government recently decided to join the Asia Infrastructure Investment Bank, which will be heavily focused on infrastructure projects in Asia. It is not clear what the strategic value of this move is — apart from earning kudos from China. But it could erode the effectiveness of the New Development Bank and the Africa Regional Centre.

The BRICS agenda for Ufa is ambitious. It is important SA identifies its clear interests and thinks carefully about its allocation of resources vis-à-vis potential returns.

This article was co-authored by Peter Draper and Mzukisi Qobo, and was published 6 July 2015 on Business Day Live.