Putting the G20 back on track
November 14, 2014, 6:48 am

For a large section of the Australian public, the most exciting part of the Brisbane G20 Summit meeting maybe the interaction between Prime Minister Abbott and Russian President Putin. For the world economy, though, there is much more to be expected. Seven years into the global financial crisis, the rate of employment growth remains weak in most G20 countries.

Even though the world’s leading economies are preoccupied with their response to the financial crisis, the global economy is losing momentum.

The International Monetary Fund (IMF) has downgraded its global growth forecast for both 2014 and 2015, warning that “growth is uneven and still weak overall and remains susceptible to many downside risks.” Emerging markets, especially, are facing a tough time. Since the global financial crisis, emerging markets have been the primary force for economic growth, but they are now suffering an unprecedented slowdown. Global trade has also turned down sharply after the global financial crisis, now it is growing slower than global production. Financial markets remain relatively calm for a while, but many observers believe that the market is still mispricing and potential crises are lurking in the shadows.

“China feels far more at ease at the G20 than in other forums like the G8,” writes Fan He [G20 Australia]

Brisbane targets

A 2 per cent growth target has been announced. Members will commit in Brisbane to lift G20’s GDP by more than 2 per cent above the current trajectory over five years. If the goal is achieved, $2 trillion will be added to the global economy, and millions of new jobs created. Much emphasis has been put on structural reforms in each country. The IMF and Organization for Economic Cooperation and Development (OECD) will provide regular reports monitoring the progress that member countries have made.

It’s fair to say, however, that the 2 per cent goal does not have any binding power. Each country has its own specific policy measures and there is no way to find a one-size-fits-all solution. However, by publicly pledging oneself to this benchmark, member countries can improve the credibility of much warranted structural reforms. Policy makers can utilize the peer pressure to overcome domestic political roadblocks, if they want to do so.

It’s also encouraging to see that more practical policies have been put on the agenda. Infrastructure investment is another priority for the Brisbane Summit meeting. The demand for infrastructure building is huge, yet there is a wide funding gap, because governments are facing more strict budget constraints, banks’ long-term lending is restricted by new regulatory requirements. Innovations are needed to close this gap. The G20 Brisbane Summit asks the right questions but is not poised to provide satisfactory answers.

Energy is another important issue, with the world at risk of an unprecedented energy crunch that could inflame financial crisis. The Brisbane Summit highlights the importance of facing global energy challenges by urging the major energy consumers and producers to work closely. Existing global energy governance arrangements are fragmented and need to be reformed and consolidated. How we generate and consume energy is now perhaps the most significant threat to economic and social wellbeing.

Other issues are aiming at increasing the resiliency of global economy. The G20 reaffirmed its commitment to pursue financial regulatory reform agenda. International tax coordination caught much attention around the world. Combating tax evasion and avoidance can help to level the play field, and make global economy more transparent. Ending bank secrecy is critical for the prevention and rescue of future financial crisis.

The G20 needs to prove its mettle

It seems that G20 is moving forward from phase one, or G20 1.0, to phase two, or G20 2.0. Soon after the global financial crisis, G20 summit meetings helped save the world from more severe economic crisis. The main policy measures that member countries adopted were fiscal and monetary stimulus packages to boost economic growth. However, when the crisis subsided, clash of different interests emerged.

The legitimacy of G20 is declining, and people are increasingly cynical to what the forums can achieve. By insisting on economic growth as the priority of the agenda, the success of the Brisbane Summit meeting can help to boost morale.

Australia has also tried hard to engage both developed and developing countries, and improve the habits of cooperation. Hopefully, the dialogues and coordination will continue. Turkey is selected as the chair of G20 in 2015, and many think tanks in China and elsewhere are urging China to offer to take the presidency in 2016. If this occurs, we will see a continuous and further deepening discussion of all these issues, and a more active involvement of emerging markets.

G20 could do better by upgrading to 3.0. Economic growth is important, but it is not the answer to all the questions. We have to look beyond the fluctuation of annual growth rates and address the issue of global governance gap. All the long-term issues with global governance and multilateral organizations should be on the G20 agenda.

“The legitimacy of G20 is declining, and people are increasingly cynical to what the forums can achieve” [PPIO]

The IMF reforms remains stalled because of continuing deadlock in the US. The longer the IMF reforms are delayed, the more centrifugal forces will be generated. For example, BRICS have already announced a common currency pool as well as a new bank, BRICS Bank, or the New Development Bank. It’s not a challenge to the existing regime, but rather a response to the failure to pass IMF reforms.

China and the G20

The coming two years will be an important period in the evolution of G20. In G20’s tradition, a “troika” made up of the current, immediate past and next host countries should work together on the summit agenda. If China takes the 2016 presidency, the troika would consist of Turkey, Australia and China.

China is rising steadily and trying to find its place in the new alignment of global power. The G20 is a major platform for dialogue and coordination between developed and developing big countries. China feels far more at ease at the G20 than in other forums like the G8. It has always been very supportive and willing to shoulder more responsibilities in the international community. China needs G20 and G20 needs China. If and when China assumes the presidency, it should seek to strike a fine balance between the developed and developing countries, granting a credibility to the G20 it badly needs.

However, positive reaction from the international community is also important. It has to be admitted that many Chinese people still have a deep-rooted distrust of the West, even as Chinese leaders are becoming more confident. China does not harbour interests to please the international community any longer. Domestic politics influence diplomacy. The evolving economic and political changes in China may reflex on its international stance. A cold war mindset and zero sum game assumptions could poison and jeopardize G20 cooperation. Look at how geopolitical conflicts tarnished the G8. A failure of G20 is unacceptable for all the members. Each country has its own different diplomatic tradition, but to foster collaborative relationships, they will need to urgently develop a habit of thinking collectively about common challenges of global economic governance.