Revitalising growth through strategic policies
The world needs more than lofty rhetoric to spur growth amid economic uncertainty and geopolitical tensions, and the pressing challenge of climate change. G20 members must unite at the Rio Summit to create effective measures
Global growth prospects are decidedly mixed and anaemic by historical standards. While the United States seems headed towards a soft landing, the Chinese economy faces enormous headwinds, and Europe and Japan remain sluggish. Aside from India, there are not many emerging market bright spots. On the plus side, the profound impacts of the pandemic are increasingly behind us, inflation is coming down in the US and Europe, and the US Federal Reserve and European Central Bank are cutting interest rates.
These positive developments are taking place amid significant downside risks.
Geopolitical tensions such as Russia’s barbaric war against Ukraine and US-China tensions are rife, putting the brakes on interdependence. Populism, isolationism and nationalism are on the rise. Global economic openness is, to some degree, fragmenting.
Excessive global imbalances are returning. China’s manufacturing trade surplus is 10% of the country’s gross domestic product. Germany’s habitually excessive current account surplus is climbing. Meanwhile, the dollar is strong, and the US and Europe are concerned about Chinese ‘overcapacity’ spilling into global markets. This is a recipe for increased protectionism.
G20 demographic developments and ageing will depress potential growth. Increased public investment could help boost needed climate and infrastructure spending, laying a foundation for stronger sustainable growth.
But high fiscal debt and deficits in advanced economies often constrain public investment. European country debts – notably in France, Italy and the United Kingdom – are generally high, and Germany is needlessly shackling itself with a return to its inflexible debt brake, despite promises to increase military spending, meet infrastructure demands and boost climate spending. Japanese debt levels need to be reined in. China has been wary of using fiscal space to spur the needed reorientation of growth away from excess investment towards greater consumption and services. US deficits are unsustainable, and its fiscal trajectory is daunting, but neither political party is ready to tackle America’s budgetary woes.
Increased immigration could support growth, as is now evident in US activity data. But migration is a global flashpoint.
G20 leaders first met in November 2008 in Washington amid the global financial crisis. At that summit, and subsequently in 2009 in London and Pittsburgh, they successfully advanced multilateral cooperation, updated global governance, promoted financial stability, and fostered strong, sustainable and balanced growth.
Despite this heady start, the G20’s momentum flagged as the crisis faded and then Russia invaded Ukraine in 2014, Chinese statism increased, US-China tensions grew and Donald Trump was elected president of the US.
Today, the G20 remains stunted. Yet there remains a strong imperative for renewed G20 cooperation to address common global challenges.
Addressing climate change
Climate change is the greatest challenge facing the planet, but G20 members are falling far short in meeting the 2015 Paris Agreement’s objectives. The US advanced helpful legislation to curb emissions, but that will not suffice in meeting net zero goals, and the domestic political atmosphere is turning against further actions. China and India, along with the US, account for the bulk of global emissions, but they too are falling short. The International Monetary Fund estimates global fossil fuel subsidies are greater than 7% of worldwide GDP. Far more remains to be done.
The multilateral development banks will play a pivotal role in helping emerging markets and lower income countries tackle climate change. They are finding creative ways of leveraging their balance sheets. But the amounts being generated are inadequate. The G20 should lead the international community in going big and backing MDB capital increases. That is not now in the cards.
Alleviating low-income country debt distress is another key global challenge. The IMF, alongside the G20 Common Framework for Debt Treatment, has made progress in more quickly securing financing assurances, enabling reform programmes to be put in place. But official bilateral and private creditors are loath to lose money and thus drag their feet in providing relief, let alone timely relief. Reflecting creditor hesitation, borrowers are often being saddled with ‘extend and pretend’ unsustainable debt overhangs that likely consign them to a cycle of perpetual indebtedness. China remains an obstacle in this regard. The IMF should be more forceful in removing debt overhangs.
More grant and concessional World Bank and IMF funding is desperately needed.
To tackle these and other global challenges, the G20 is the right body.
There will be much fanfare and lofty rhetoric at the G20 summit in Rio de Janeiro in November. But the real key will be to pull back the curtain, look at the facts and assess what was achieved.
Can the G20 recapture its mojo?
