Posted on December 08, 2018

As large emerging market (EM) economies catch up and continue to grow faster than major advanced economies, the G-20 dynamics evolve, making it an ever more important arrangement for global economic governance. The recent détente in bilateral trade between the US and China, agreed last week during the G-20 Summit in Buenos Aires, is just the latest expression of both the new dynamics and overall importance of the forum. The G-20 has indeed gone a long way from its origins in the late 1990s and is set to become even more central as global economic convergence takes place. Our analysis focuses on the underlying economic factors behind the G-20 growing influence.

The G-20 is an international forum for the governments and central bank governors of some of the largest economies in the world, deemed of systemic significance for the international financial system. Membership includes 19 countries and one bloc, the European Union, represented by the European Commission and the European Central Bank. Member countries are comprised of the traditional G-7 countries (Canada, France, Germany, Italy, Japan, the UK, and the US), BRICS countries (Brazil, Russia, India, China, and South Africa), MIST countries (Mexico, Indonesia, South Korea, and Turkey), Argentina, Australia as well as Saudi Arabia. Taken together, the G-20 makes up more than 90% of the world economy. While this number has been stable since the official creation of the group in 1999, the economic clout of different countries within the group has changed dramatically. Indeed, the strength of the G-7 has dwindled, while large EM economies, led by the BRICS and MIST countries, have increased substantially.

Curiously, the G-20 was initially conceived by the G-7 countries to tackle international financial stability issues associated with the spillover of EM balance of payment and debt crisis in the late 1990s. Back when the G-20 was created, EM economies were still seen as the most important sources of international financial crisis. However, perceptions changed significantly after the Great Financial Crisis (GFC) of 2007-09, when the G-20 was chosen as the preferred forum for a coordinated response to the crisis. The status of the G-20 has then changed and activities started to include a summit of heads of state or government. The 2009 G-20 London Summit was a watershed moment for global economic coordination, as member states pledged to mobilize USD 1.1 trillion to support trade finance and international financial organizations. Since then, the G-20 evolved to become the premier forum for discussing, planning and monitoring the global economy. Importantly, EM members of the G-20 started to be seen as equal partners or part of the solution to the crisis originated in the advanced economies rather than sources of financial problems.

The change in the status of the EM economies within the G-20 was and still is mostly associated with their economic performance and growing influence in both global activity and finance. While the G-7 countries represented 73% of the nominal USD GDP of the G-20 when the forum was created, this number has shrunk to 60% during the peak of the GFC and now hovers around 50%. In contrast, EM economies increased their GDP share within the G-20 from the initial 15% to 25% in the peak of the GFC to the current 34%. Large BRICS and MIST countries spearheaded the way.

China, India, Indonesia, Turkey, South Korea and Russia were the G-20 growth champions over this century. Under their leadership, the BRICS and MIST were able to expand respectively 8.6 and 2.4 times faster in USD nominal terms than G-7 countries. The BRICS currently represents around 27% of the G-20 economies, while the MIST represents nearly 5%. Over the next five years, the IMF estimates that the BRICS and MIST are going to continue to grow faster than the G-7 economies. From 2019 to 2023, the BRICS and MIST are expected to grow respectively 2.2 and 1.8 times faster than the G-7 economies, representing 31% and 6% of the G-20 USD nominal GDP, respectively.

In short, global economic convergence is expected to continue and the importance of the G-20 as a forum for governance is set to increase accordingly, as key EM economies become systemically significant for financial stability and global growth.