By Pedro Sousa
* The third in a series of three articles
The G20’s action for inclusive growth is being hampered by a lack of leadership
The G20 has emerged as the main forum for international economic cooperation. It would seem obvious that a meeting that brings together leaders from the most important developed and developing countries in the global economy has massive potential and reach. These are the 19 of the world’s largest developed and emerging economies plus the European Union. Its leaders meet annually, while G20 finance ministers and central bank governors meet regularly during the year to discuss ways to strengthen the global economy, reform international financial institutions, improve financial regulation, and implement necessary economic reforms. The G20 was created in 1999 in the aftermath of the 1997 Asian Financial Crisis, to promote dialogue between finance ministers and central bank governors, when the need for a forum for communication between more countries than just the G7 became clear.
Leaders of G20 countries gave prominence to the forum when they came together to shape the international response to the 2008 global financial crisis. That leaders met and acted together to save the global economy in 2008 elevated the G20 and marked a turning point in global economic governance. Its collective, coordinated actions boosted consumer and investor confidence and supported the initial stages of economic recovery. Some of its key agreements included increased resources for the IMF and new regulatory oversight for the financial sector in the form of the Financial Stability Board, as well as increased capital requirements for banks and other financial institutions. During a chaotic period, the global economy also saw leaders roll up their sleeves. The G20 summit in London in April 2009 galvanized countries into committing to fiscal stimulus. This collective commitment to boosting the economy was reversed in subsequent years. The collective safety net was removed, and the austerity agenda was pushed as a priority. Governments had no choice but to bailout banks with public money to save the financial system, leading to economically weaker countries which were heavily indebted facing higher interest rates as well as potential downgrades to their creditworthiness. These adverse market reactions to higher budget deficits in individual countries underscores the most compelling argument for governments to act together. The G20 is the only global forum that is capable of coordinating fiscal actions internationally. Despite the potential to be the central forum for managing global economic and financial affairs, so far the G20 has not come up with a meaningful agenda that puts fiscal stimulus at its core, to tackle low growth, weak demand and deflationary pressures.
Since the coordination effort of 2008, the forum has expanded its agenda, yet failed to address challenges arising from the financial crisis and from a skewed globalisation. As explained previously in PART I and II, economic growth since the global financial crisis has been non-existent or sluggish. A growing frustration among citizens that governments are not doing enough to address concerns about inequality or respond to public discontent about the perceived unfairness of the current system has given us a massive wake up call: Brexit. The job of a multilateral institution like the G20 is understandably harder in times of an economic downturn, but it becomes all the more important that it delivers the necessary policy responses. The recent G20 Hangzhou Summit in China was an expensive big show but again failed to address the challenges posed by rising anti-globalisation sentiment. The IMF’s Christine Lagarde warned that growth has been “too low for too long for too few”, urging governments to deliver on their promises. The communiqué has nine pages of small pledges. Days before the summit, US Treasury Secretary Jack Lew declared the world’s leading economies had come round to American efforts to put growth before austerity. That is not what transpired. The summit confirmed how inward-looking major countries have become, refusing to embrace a significant positive agenda of economic cooperation to improve people’s wellbeing. The electoral calendar means that the current leaders of France, Italy and Spain may not attend the next summit in Hamburg. Germany will hold elections shortly after hosting the summit.
Countries tend to retreat and protect their domestic priorities during downturns. It is likely that countries will continue to act according to their own agenda if there’s an absence of leadership from the G20 Presidency. The global economy requires collective action with everyone rowing in the same direction at the same time. The alternative is a dangerous path of nationalism, inwardness and isolationism, much like what we witnessed, with grave consequences, during the 1930s. The world hasn’t had leadership for some time and is unfortunately unlikely to see it in 2017, with Germany due to hold the Presidency.
The G20 has design flaws that it needs to address in order to become the effective macroeconomic policy coordination steering committee the global economy so desperately needs. The forum is informal with no treaty basis and relies on consensus agreement among its members. G20 communiqués are largely negotiated and agreed by bureaucrats before leaders meet. There needs to be a guarantee that governments engage effectively and devote ministerial time and resources to the task. Having a rotating presidency and not a permanent secretariat makes the forum hostage to the domestic interests of the host, who may not even be committed to multilateralism, undermining the potential of the G20 right from the start.
Here I propose some institutional design improvement and a policy action plan:
- Governments should devote careful strategic investments of ministerial time and bureaucratic resources in the G20, as part of a long-term international economic engagement strategy. The G20 needs internationalists with capacity to spend time and political capital brokering a deal. The G20 needs an internationalist independent permanent secretariat committed to middle-class inclusive growth that ensures collective economic action. Individuals with capacity to spend time and political capital brokering a deal. Additionally, the G20 would have a timetable for policy implementation and a monitoring mechanism. Internationalist leadership is the fundamental basis upon which the G20 may agree that the global economy is suffering from a deficit of demand, and is in need of strong and concerted fiscal stimulus to address this deficiency.
- G20 members have to agree to apply fiscal policies counter-cyclically, meaning that currently, countries must enact a coordinated fiscal stimulus. It is the global political imperative to act and stop the race to the bottom. Responsibility for action should fall upon members with the greatest room for fiscal manoeuvre, thus avoiding an adverse market reaction. A concerted move to provide stimulus, coordinated by the G20, would have a more substantial impact on global growth than individual policy actions. The concerted fiscal stimulus could include much needed infrastructure investment across a range of countries. In a setting of very low real interest rates this should be appealing. Infrastructure investment can give a much-needed boost to demand in the short term and to countries’ productive potential in the longer term.
- Unsustainable sovereign debt must be restructured. Developing a permanent mechanism for sovereign debt restructuring will provide an appropriate and effective structure. After the global financial crisis and the Great Recession, some countries are flooded with debt and won’t be able to grow given the weakness of their economies and financial systems. Greece is the prime example of this. Although agreement may be reached within the framework of the EU, having a global structure to handle this issue would benefit efforts towards enhancing global financial and economic stability.
- Labour markets need to be strengthened. The fourth industrial revolution and digital economy are challenging within the context of an already weak employment market. Creating, understanding, and adapting to the jobs of the future should be a priority to any government that wishes sustainable growth. Skills need to be built for all age groups. This means investing in early years education, but it also means investing in skills throughout a person’s working life. Policies like minimum wages and collective agreements will help to reduce wage inequality and ensure fairer wages. The G20 is an ideal place to promote universal social protection, in particular, social programmes that provide support a transition from unemployment or underemployment to quality, longer-term employment.
- Restoring public trust in the financial system. One way to do it is to save banks, not bankers, and not for free. By punishing poor management that puts at risk a whole financial system and by ensuring the public gets paid back for rescuing banks. Financial systems and financial regulations are extremely complex issues with hundreds of layers and hidden spots. To build a global force through the G20 to address these issues for financial stability would be a massive step towards avoiding the next global financial crisis.
- Identification and implementation of inclusive growth policies that strengthen the middle classes. Given what the global economy is going through and given the challenges at country level, a concrete G20 action plan towards policies that reduce income inequality and increase fairness while sustaining growth should be prioritized. This could help counteract the specific risks that the global economy is facing and the anti-globalisation, protectionist and nationalistic sentiments that is being witnessed. Promoting inclusive growth requires a comprehensive strategy and it provides the base to create opportunities for all and distributes the dividends of increased prosperity fairly.
- Tax avoidance and evasion must be addressed. This is a tough task to accomplish at a global level but is vital for a healthy global economy. An efficient tax system is a basic condition for inclusive growth. The G20 can provide the incentives and legitimacy to tackle such a complex issue. A start would be to identify the world’s tax havens and enact policies to ensure that multinationals pay their fair share of taxes in the countries where they make their profits. With so many interests at stake, only the G20 can provide a binding agreement that pushes this forward.
Public anger and frustration with the current system should be a wake up call for world leaders. Individual countries’ prospects depend too heavily on global prospects and decision makers need to act collectively and decisively. Multilateralism needs to be defended by internationalists. The G20 is the forum in which to do it, at a time when multilateralism is in decline and many countries are turning inward, or to regional alternatives as a basis for economic partnerships. As a forum for international economic cooperation, the G20 has its flaws, but provides the necessary legitimacy on global matters and a recent history of coordination in response to crisis. It is often said that if the G20 did not exist, we would have to invent it. Now we have to capitalise on its potential to guide us to shared prosperity in an ever more interconnected global economy.