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Rejecting the path of 'enlightened self-interest' Add to ...

There are skeptics, and then there are skeptics with economic models.

Paul Masson, a research fellow and adjunct professor at the University of Toronto's Rotman School of Management, is the latter.

Mr. Masson, along with co-author John Pattison, has just published a tidy little paper of 18 pages that shows Prime Minister Stephen Harper's call for his Group of 20 counterparts to follow a path of "enlightened self interest" stands a good chance of being smothered by non-enlightened self interest, the near impossibility of getting big clubs to agree on anything significant and the human tendency to become less concerned with the state of your neighbours once the storm passes.

A few years ago, a former colleague and I had a pact not to write much about the futility of the Group of Seven. Why? Because if our bosses came to the same conclusion, they would stop sending us to places like Osaka and St. Petersburg to cover the meetings. So it's with a measure of reluctance that I circulate Mr. Masson's conclusion that the G20 is unlikely to ever co-operate effectively enough to come up with effective financial regulation.

G20 skeptics are like Maple Leafs fans: they admonish the franchise ad nauseam, yet show up for every game. Mr. Masson is a different sort of critic, and therefore deserves to be taken seriously. His latest opinion was formed on some economic models he adapted to consider the prospects for overhauling financial regulation. Beyond that, his research is influenced by his years as an adviser to both the Bank of Canada and the International Monetary Fund.

Mr. Masson's study backs up with analysis and theory what Finance Minister Jim Flaherty often describes in anecdotal terms: that it's difficult to get anything done in a big group.

The biggest achievement in modern international co-ordination in the modern era was the creation of the Bretton Woods institutions, something Mr. Masson and Mr. Pattison argue was made possible by the fact that the Second World War limited the number of countries who were able to join the negotiations.

Optimal results, according to Mr. Masson, are achieved by smaller collections of like-minded countries, which might explain why the Group of Seven finance ministers and central bank governors were the co-ordinating body for the international response to Europe's emerging debt crisis over the weekend. The more countries that are added to the group, the less likely an effective outcome becomes, reducing the benefit of joining the group.

Mr. Masson's study raises questions that go beyond financial regulation. His results speak to the makeup of the G20 itself.

Facing an international calamity, U.S. President George W. Bush was persuaded that a bigger assembly than the G7 or Group of Eight was needed to address the problem. But there was no time to waste on the delicate business of assembling such a group. The G20 was sitting there as a little used forum of finance ministers and central bank governors, so the Bush administration elevated it to the leaders' level.

Now, as a result of the Pittsburgh summit, the G20, as constituted, is the premier body for organizing global economic policy. That's fine, except there's a big difference between what countries such as China and Saudi Arabia bring to the table and what countries such as Argentina and Australia bring. The tradeoff for having a supremely representative group is the inclusion of "free riders" that will ultimately follow the path set by the more powerful nations, but bog down the debate and dilute the outcome in the process.

When Mr. Flaherty talks of the difficulty of getting his G20 colleagues on the phone, or the patience it takes to sit through Asian ministers' penchant for reading long statements, there remains hope that enlightened self-interest can overcome difficulties with translation and time zones.

For some reason, when one of Mr. Masson's mathematic equations produce the same conclusion, hope dims a little.

 

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