G20 finance ministers and central-bank governors will gather in Sydney this weekend. The forecast is for possible showers. But will it rain on Australian Treasurer Joe Hockey’s parade?
As the Treasurer has said, 'It’s a big event.' Notwithstanding the fact that the finance ministers from South Africa, Brazil, Italy, Mexico and the World Bank President have dropped out, the line-up is still impressive.
Having all these finance dignitaries in Sydney may be a big thing for Australia, but will it be a 'big thing' for the rest of the world? That will depend on what is discussed and the progress made in dealing with some pressing global economic issues.
The press build-up to the meeting suggests there will be a clash between the emerging markets and the US Federal Reserve over quantitative easing (QE). The Indian Central Bank Governor received much publicity when, while commenting on recent volatility in emerging markets, he said that 'international monetary cooperation had broken down.' The headline in the Wall Street Journal on 19 February was 'Emerging Economies to Face Aligned Germany, US at G20 Meeting'. Hockey is reported as saying that he is 'backing' the US Fed taper of quantitative easing.
Tension at G20 meetings is, overall, a good thing. It means something is happening.
But it is to be hoped that there is a balanced discussion over the issue of volatility in emerging markets and the impact of QE tapering. It is not a case of taking sides. The recent bout of emerging-market volatility was not the result of a recent decision by the US Fed. As Tim Adams from the IIF notes, 'recent volatility in these markets seems to reflect increased investor concerns about macroeconomic imbalances, dependence on external financing and other political and policy uncertainties'.
But Governor Rajan is quite right to say that 'the US should worry about the effects of its policies on the rest of the world'. Stronger growth in the US is a positive, but how the US withdraws from QE will have major implications for all countries.
As the IMF has warned, unwinding quantitative easing too quickly could rock global markets. The challenge confronting the global economy is to adjust to a 'normalisation' (that is, a raising) of interest rates. This will prove a challenge for large bond holders, governments with substantial debt loads, corporations which have borrowed on the expectation that low rates will stay for an extended period, and banks which granted loans on a similar misplaced assumptions.
As the IMF has noted, misjudgements by the US Fed on QE tapering could see global interest rates jump abruptly, causing turmoil across world financial markets. So there is no place for pointing fingers at this G20 meeting.
Another major issue is Treasurer Hockey's plan to get agreement on a global growth target. Again, this appears to be an area of tension, with reports that German officials are ‘extremely sceptical about the proposals of some G20 partners for agreeing binding quantitative goals (for growth)’, noting that this would be a 'slightly antiquated form of economic planning'.
If the Australian aim is just to get agreement on a quantitative global growth target, the German officials are right. Such targets are not binding and are too diffuse for individual countries to feel they are accountable for meeting it. Moreover, the G20 has basically been there before. The headline from the July 2013 G20 Finance Ministers' Meeting was 'G20 agrees global growth targets in Moscow'. Yet while past G20 meetings regularly agreed that global economic performance was not good enough and 'agreed' to boost growth and create jobs, the track record of doing something about it was poor.
Having a 'growth target', even an aspirational one, only has meaning if it is accompanied by a plan for how the increase in growth will be achieved, and if countries feel responsible for implementing the plan. It is to be hoped that by referring to a growth target, Hockey is trying to focus the minds of his colleagues on the need for the G20 to have a comprehensive growth plan. Because it needs one. But each G20 member also needs its own growth strategy.
Having a growth plan is only the first step. To make it meaningful, it has to be implemented. The best way to help ensure that plans are implemented is to directly involve the public in each G20 country. Rather than making commitments to boost growth at international meetings, G20 leaders and ministers should be outlining to their citizens how they intend to lift growth in their own countries.
Let's hope that one of the outcomes from the meeting is an agreement by all G20 members to bring to the Brisbane Summit comprehensive plans to lift growth, but that in advance they will present a draft of their plan to their citizens for comment and scrutiny. Achieve this, and the meeting will be a 'big thing' for the world and not just for Australia.
Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.