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Business News/ Opinion / G20: Kick-starting global growth
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G20: Kick-starting global growth

G20 will launch a global infrastructure initiative to raise investments but improving the investment climate may be a slow process

A file photo of the flags of the G20 member countries. Photo: AFPPremium
A file photo of the flags of the G20 member countries. Photo: AFP

The Group of Twenty (G20) nations aims to change the destiny of the global economy, which has been stuck in a low-growth trap since the financial crisis. Global output growth has been falling steadily since 2011.

Six years ago, output was fiscally stimulated through coordinated efforts by this group. Despite increased monetary stimulus in the severely crisis-affected advanced countries—even though fiscal spurs were withdrawn—global growth has continued to fall, to 3.5% in 2012 and 3.2% in 2013 (according to the most recent IMF estimates).

Looking at the second quarter performance of the euro zone, especially Germany, and the slowdown signals emitted by China, Japan as well as several emerging economies, history seems set to repeat itself for the third consecutive year in 2014.

With its objective of sustainable global growth, the G20 is understandably worried. In February 2014, it declared its intention to lift collective GDP by more than 2% by 2018. Last week, it elaborated on how it will get there. The measures are a combination of structural reforms and macro-economic policies. While advanced economies are to continue their monetary support to economic recovery and combat deflationary pressures, fiscal policies are to be aligned in accordance with near-term growth and employment objectives and long-term sustainability of public debt. However, there is nothing new about this strategy.

What the G20 has in mind—to revive global investment—is of fundamental interest. Across the world, investment has been subdued relative to pre-crisis levels; large firms are sitting on plentiful cash but are not investing. There’s a dearth of demand. To stimulate investment, the G20 has agreed to launch a Global Infrastructure Initiative to raise quality investments, especially in infrastructure. A multi-year investment agenda will be implemented as a result.

How does it plan to realize this goal? To start with, a knowledge-sharing platform to match potential investors and projects will be built. This might not be too difficult. Two, the G20 leaders will take measures to improve the investment climate for the private sector. It isn’t clear as to which country promises to do what at this stage.

The G20 media release says about 80% of a total of 1,000 measures are new, and if implemented, the actions on the part of each member would take the group close to the 2% goal. This is likely to be the trickier part.

Making the climate better for private business—the G20 aspires to shift the levers of growth from public to private sector—mostly involves easing a lot of constraints in diverse aspects all over the world. Limitations may range from red tape, opaque and lengthy procedures, difficult rules at various points, high transaction costs in various dimensions, institutional or otherwise, formal or informal. Raising productivity of land and labour inputs is a very important part of the investment climate as well.

The list is quite long and the reforms involved usually require strong political will. Political costs are usually attached too. So, the process is unlikely to be smooth, or fast. It is reasonable to expect this may be slow and uneven; perhaps even unmoving in many cases, if past trends are anything to go by. The common pattern in the world, so far, has been to opt for short-term, monetary and fiscal quick fixes; structural reforms have been hard to come by. If coordinated commitments can reverse this trend, so much the better for global growth.

Renu Kohli is a New Delhi-based macroeconomist.

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Published: 23 Sep 2014, 04:05 PM IST
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