The G-20 meeting concluded in Sydney on 23 February. The text of the communique issued by the G-20 finance ministers and central bank governors is available on Bloomberg .
These statements should catch our attention:
“We commit to developing new measures, in the context of maintaining fiscal sustainability and financial sector stability, to significantly raise global growth. We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2% above the trajectory implied by current policies over the coming 5 years. This is over $2 trillion more in real terms and will lead to significant additional jobs… We recognise that monetary policy needs to remain accommodative in many advanced economies, and should normalize in due course, with the timing being conditional on the outlook for price stability and economic growth.”
Yes, growth will lead to additional jobs. But the wrong kind of growth can also take them away. The world economy grew at 2% (or more) above its potential between 2006 and 2008 and the result was a crisis that was global in scale and nature. Many million jobs have been lost and they may never come back. Perhaps, some of them do not need to or deserve to come back.
Contradictions abound in the G-20 declaration above. Policies can be either ambitious or realistic. It is rare that they can be both. Second, G-20 policymakers promise to raise growth while remaining mindful of fiscal sustainability and financial sector stability. Yet, when they promise to maintain accommodative monetary policies, it is only in the context of price stability. Financial sector stability is conspicuous by its omission. Empirical evidence suggests a strong causal link between accommodative monetary policies and financial sector instability at the global level.
The G-20 communique is silent on the role of capital flows and financial innovation. Yes, the G-20 communique has some reference to cooperating across jurisdictions on over-the-counter (OTC) derivatives. However, financial innovation is not confined to OTC derivatives. A robust counter-cyclical regulatory framework is required to handle capital flows and innovation. Stephany Griffith Jones, at a conference held in January in Delhi, made the point that counter-cyclical rules could not be loosened, but could be tightened if circumstances justify. Yet, as far as we can tell, there is no acknowledgement at the G-20 level on the need for permanent counter-cyclical measures.
Unrestricted capital flows and innovation are two of the principal factors behind the problem of “too big to fail” financial institutions and spillover on emerging economies. Excessive and prolonged monetary accommodation and unconventional monetary policies pursued in the developed world are other factors. That the G-20 had nothing to say about these things that undermine global growth prospects, even as it pledged to pursue higher growth, is disappointing.
Instead, it makes a rash and imprudent commitment to boost global growth by 2% over and above the current trajectory. It is a bit like humans directly pursuing happiness. If we directly pursue happiness we may achieve ephemeral pleasure, but only through unhealthy means that have long-term unhappy consequences. Similar consequences are likely when countries target economic growth. Among other things, countries have to allow the harmful effects of previous growth episodes to be discharged first before a fresh growth episode can commence. That has not happened in Europe, in China, in India and may have happened only partially in the US. The UK has commenced another unsustainable growth phase.
The second question that arises with respect to this growth target is whether it is a prelude to countries opting for a nominal GDP target. Nominal GDP target is nothing but a compound inflation target. If the actual rate of inflation undershoots the target in any given year, then it can be added to next year’s target. That is how countries are expected to reach a preset nominal GDP target within a pre-specified time-frame.
Importantly, the G-20 communique acknowledges that reforms meant to redress the imbalances in the governance of the International Monetary Fund (IMF) have not made progress. The US is yet to ratify the changes agreed to in 2014. To that extent, IMF remains under the influence of the intellectual framework that the US provides. It is reflected in the recommendations that IMF has made to India in its Article IV report on the country. It recommends that India issue a sovereign international bond and re-offer FX swaps for non-resident Indian deposits. The fiscal cost of the latter is quite substantial. Issuing an international sovereign bond when one’s currency is still deemed overvalued in real terms (that is the conclusion of IMF) is not the best thing to do.
It appears that the G-20 has its focus and priorities wrong. It is not clear that developing countries are making much headway in changing the international financial architecture. Perhaps, they should end the G-20 charade.
V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at firstname.lastname@example.org.
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk- -