G20 in pole position as global recovery sought

WASHINGTON (Reuters) - Rich nations humbled by a home-grown financial crisis have made room for emerging economies on the world stage, reflecting a lasting power shift that will be on full display at the G20 summit this week.

Group of 20 leaders will review calls to rebalance the global economy. It is a challenge the more exclusive Group of Eight western industrial countries cannot tackle alone.

"There is agreement that there is a need to give the G20 greater power. It needs to have more teeth if what is agreed is to be properly implemented," said one European G8 source, who expected leaders to discuss the issue at dinner on Thursday.

A document outlining the U.S. position ahead of the September 24-25 summit in Pittsburgh also emphasized the need for cooperation strengthened the argument to reinforce the G20's role.

"The success of our coordinated effort to respond to the recent crisis have increased the case for more sustained and international cooperation," according to the document, which was obtained by Reuters.

As part of this cooperation, the G20, rather than the G8, is expected to become the defacto arena in which to thrash out global economic problems.

Former Canadian Prime Minister Paul Martin said the strength of emerging economies, versus the relative weakness of the wealthy west, showed the need for change in the balance of power.

"It is clear that the G8 cannot be the global steering committee. Without major emerging economies like China and India it is simply not representative of the world's reality," Martin, chair of the first G20 meeting of finance ministers and central bank governors in Berlin in 1999, told Reuters.

G8 NEEDS G20

The G20 was created after the 1990s Asian financial crisis to give members of the G7 -- wealthy industrial powers of the United States, Japan, Germany, Britain, France, Italy and Canada -- a new way to talk to the wider world. Russia joined the G7 at the leaders level in 1997 to form the G8.

The G20 proved its worth during the crisis last year, when then U.S. President George W Bush used it to gather the leaders of the world economy to an emergency summit in Washington.

His successor Barack Obama has signalled Washington views the G20 as the best place to tackle global economic challenges, and he will push for ambitious reform in Pittsburgh.

This will involve encouraging greater domestic demand in China and Europe, while boosting higher savings and cutting the deficit in the United States.

Big trade surpluses among heavy export-orientated countries like China, Germany and Japan, matched by deep deficits among the import-hungry nations led by the United States, are a potentially dangerous source of instability for world growth.

A G20 finance ministers summit in London earlier this month committed to keep stimulating growth to the tune of $5 trillion since the crisis hit last September.

But so-called BRIC leading emerging economies -- Brazil, Russia, India and China -- said the world needed a fairer and more inclusive set of economic structures to prevent future crises.

Former Brazilian Finance Minister Pedro Malan, who was at the 1999 Berlin summit, said a period of "excess complacency" in the subsequent years weakened the G20 but the importance of emerging economies could no longer be ignored.

"There will be no quick turnaround in the United States and Europe," he said. "That means we will ... see in the next few years international capital inflows into stable, democratic and economically diversified emerging countries."

TEA PARTIES OVER

In the 10 years since Berlin, China's export-led economy and massive foreign exchange reserves have made it central to any global rebalance, and this is quite obvious to Beijing.

The days of the G8 solving the world's economic problems alone are over, and they need support from other emerging countries -- the G20 can function in this regard," said Xu Mingqi, deputy head of the Institute of World Economy under the Shanghai Academy of Social Sciences, a government think-tank.

But this does not mean the G7/G8 will disappear.

"The smaller countries in the G7 don't want to give it up, particularly the ones who are lined up to chair it," said Simon Johnson, a former IMF chief economist. Also, G7 finance ministers and central bankers their exclusive club.

"They trust each other, more than they would trust emerging markets with sensitive things," said Johnson.

But the habit of the G7 to hold a meeting and then ask the BRICs to join them for an adjacent dinner is not a productive way to build trust among potentially suspicious partners.

"That is what cooperation is all about -- generating a process of mutual understanding -- and the way to do it is not just for the G7 to have its meetings and then invite the BRICs over for tea," said Edward Truman, a former senior U.S. Treasury official closely involved with the launch of G20.

(Additional reporting by Zhou Xin in Beijing, Walter Brandimarte in New York and Darren Ennis in Brussels; Editing by Andrew Hay)