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Federal Reserve Chair Janet Yellen testifies before a House Financial Services Committee hearing on ‘Monetary Policy and the State of the Economy.’


The world's most important finance ministers and central bankers will gather this weekend for a G20 summit in Sydney. Here's what to watch for:

Emerging-market turmoil

The turmoil that has recently roiled emerging markets and sparked brief fears of financial contagion will undoubtedly be high on the G20 agenda as central bankers and finance minister from both developed and developing economies meet for the first major summit since the developing world's recent financial troubles began.

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Starting with the Federal Reserve's signal that it would reduce its massive stimulus spending, emerging-market currencies such as the Indian rupee and Indonesian rupiah fell sharply over the summer of 2013.

Once the "taper" of the Fed's bond-buying stimulus finally began, global investors sought to take advantage of better returns in the U.S. and began to withdraw billions of dollars from emerging market stocks and bonds, forcing central banks in Ankara, Johannesburg and New Delhi to take swift action by raising interest rates. To make matters worse, China's growth has begun to slow – endangering all those who rode the commodity boom.

The volatility has largely subsided after brief fears that a crisis similar to the 1997 Asian financial crisis might be brewing, but there is concern about the structural state of several key emerging-market countries.

The developing world's booming economies helped G20 leaders steer the world out of the global financial crisis. But much of that growth was powered by recessionary stimulus, particularly in China. And there is growing concern among those in advanced economies that some emerging-economy governments may lack the fiscal discipline to implement tough economic reforms at home – such as removing huge subsidies – that were sustained during the post-recession boom times.

Many developing economies now face the precarious leap from relatively easy economic growth to a situation where productivity and innovation need to play greater roles to keep growth rolling along – and social tensions low. Additionally, several big elections this year in major markets such as Brazil, India and Turkey may stall long-planned reforms for short-term political gain and might serve to sharpen leaders' tongues for domestic audiences.

The G20's overall aim is to encourage global growth. "Global growth is subdued and the outlook is not improving quickly enough," reads a statement on the official Australia G20 website. Emerging economies are being relied upon to keep growth going.

"Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities," said the IMF.

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Yellen versus the World

In Sydney, the "taper talk" that has sent ripples through the global economy could devolve into arguments as tensions rise between developing and developed economies. The new Fed chair, Janet Yellen, will be arriving in Sydney for the G20 meeting shortly after India's central banker publicly decried a breakdown in global monetary co-operation, remarks clearly aimed at the U.S. taper's impact on emerging markets.

The Fed, though, has pushed ahead with the drawback of its bond-buying stimulus, making it clear the central bank is exclusively focused on what is best for the U.S. economy. A U.S. recovery gaining speed, of course, is great for emerging markets that have exposure to North America, such as Mexico.

Australia's treasurer, Joe Hockey, has made it clear in remarks leading up to the Feb. 22-23 meeting of G20 finance ministers and central bankers that he is not looking to lecture anyone, but at the same time has said emerging markets need to wean themselves off the "morphine" of easy money that has sloshed about the global economy in the wake of recessionary stimulus.

He also noted that even if some policies in the developed world have led to capital outflows from emerging markets, that the biggest problems are related to specific domestic conditions in specific markets.

As delegates gather, it is unclear whether greater global monetary co-operation – whatever that looks like – is possible in such a dour mood, at a time when many member states such as Argentina and Turkey are facing extremely risky domestic economic conditions.

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Is the G20 having an existential crisis?

The G7 and G8 were expanded to reflect the true face of the international economy in the 21st Century, growing to include large, fast-growing economies such as China and India.

But like other large multilateral forums, with disparate groups of members and divided priorities, the G20 is at risk of becoming an incoherent, divided talk-shop – removed from the sort of decisive, influential policy-making that can be made quickly in Washington, Brussels and Moscow, or even divided but formal international institutions like the United Nations or World Trade Organization.

Now the G20 finance ministers are meeting, in advance of the larger Brisbane G20 summit later this year, without even the unifying impetus of the global financial crisis.

"The reality is that the G20 may be becoming forgettable as a forum to provide the global economic leadership that it was created to achieve," wrote Thomas Bernes, who served in the Canadian public service and at international economic institutions. "After its initial success in confronting the 2008 financial crisis, the challenge facing the G20 was to demonstrate it could be equally successful in addressing medium-term challenges … We are still waiting for credible results."

In Sydney, G20 finance ministers and central bankers, with varying wiggle room to enact further fiscal and monetary measures to encourage growth, are going to have to find something to talk about – and agree on.

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For Australia, now ruled by a coalition led by Tony Abbott's conservative Liberal party, the G20's global goal should be the one they are trying to embody domestically: To create jobs and improve investment conditions by cutting regulations and red tape and telling the private sector that the onus for growth is now on them.

"The G20 is at an important juncture," Mr. Hockey said in a recent speech. "It must show it is able to act decisively to implement policy reforms outside of a global crisis … That is why Australia's focus will be on improving the environment for private sector investment and growth."

Making a favourable comparison to the Asian crisis of 1997, Mr. Hockey said that emerging markets are much better off now, with lower levels of debt and significant economic reforms already made across several emerging markets (such as Mexico, South Korea and Malaysia).

At the same time, the G20's goal of reforming the International Monetary Fund have – like many other things – become ensnared in the deadlock of the U.S. Congress.

Reforms agreed on by the G20 back in 2010, including doubling the IMF's resources and realigning voting rights to better represent countries' relative weight in the global economy, remain stalled. Australia's goals for the G20 meeting are a further evolution of the G20 declaration from the last major meeting in St. Petersburg: To encourage global growth and job creation, agree on a "fair and effective" international tax policy, and help rejig the global financial system so that it's more resilient.

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