At the recently-concluded G20 (Group of Twenty) summit in Hangzhou, China, world leaders used the platform to highlight their pet concerns but in the process missed a wider breadth of issues that deserved the attention of the world’s major economies. Chinese President Xi Jinping, for example, argued for consensus on “structural reforms" pertaining to cross-border investment norms, while his American counterpart Barack Obama underlined the need for more cooperation within the grouping to tackle issues such as income inequality and tax avoidance. Meanwhile, India’s Prime Minister Narendra Modi called on the member states to fight back terrorism by imposing sanctions on terror-sponsoring countries.
Though their narratives were framed within the context of resolving “common structural issues", they did little to actually further this objective. Sure, the grouping went beyond the usual discussion on promoting international investment when domestic investment in almost all G20 countries seem to be dismally low. But the “soft" multilateral set up, representing both industrial and emerging markets, could have done a lot more to address some of the other common issues that plague them.
For example, on monetary policy, central banks, working under a domestic mandate often design policies which benefit their respective national economies but have an adverse impact on other economies (due to spillover effects). The G20 could have made a strong case for central banks to at least acknowledge their international responsibilities instead of only catering to their domestic mandates.
Similarly on fiscal policy, we are still not sure whether a fiscal stimulus initiated by governments (with low aggregate demand) to inject more liquidity necessarily helps in spurring investment or spending. Evidence from most G20 countries (through consumption and investment data) indicates that a fiscal push alone (combined with lower interest rates) may not spur aggregate spending.
Looking ahead, the forum should consider seeking common ground in these areas:
1. Containing shadow banking and the growth of informal financial institutions:
Since 2007, central banks, in their quest to raise capital requirements, have reduced interest rates, allowing most banks to borrow at cheaper rates.
However, given the increasing cost of regulation and financial compliance, banks over time seem to have restricted themselves from greater to small and medium-scale enterprises. This has negatively affected domestic investment needs and, in countries like China and Brazil, also allowed informal financial institutions and shadow banking systems to play a greater role in lending (including in high-risk sectors).
2. Re-conceptualising the validity of macro-economic growth aggregates:
Currently, there is little discussion globally on the validity of traditional macro-economic indicators and metrics in the analysis of economic performance.
Take, for example, gross domestic product (GDP) computation in countries that have an ageing population, such as China, Japan and some in Europe. If people are ageing, will they not be interested in saving more towards retirement? Will this not negatively affect investment? It is natural then to see a slowdown in aggregate growth levels, as a result of a low aggregate demand and less consumption. In such a situation, if the central bank reduces interest rates to spur household consumption, its policies may not work as the ageing population will prefer to save than spend. In fact, economists in Japan are already assessing the impact of negative interest rates on aggregate investment and savings levels.
There is a similar problem with productivity measurement: a closer look at productivity levels of countries (including the G20 economies) reveals a diminishing or stagnating trend in the last decade or so. This is because as GDP traditionally measures only monetised goods and services, the degree of change in the quality of products that are produced over time is ignored in the process of productivity measurement. Simply put, a car manufactured today may be much more technologically advanced (with a better engine and airbags) but this improvement in quality is hardly reflected in the measurement of a country’s productivity level (i.e. in the GDP computation process).
This brings us to the question: if, in technological terms, countries are continuously evolving and innovating, how do we reflect that change in terms of aggregate productivity levels? In that case we still do not know what is the “real" level of productivity of a country that remains functionally linked to its stage of development and innovative capacities?
3. Greater coordination on tax avoidance issues: This is one area in which the G20 has already tried to cobble together some form of a consensus, but issues related to the creation of a less disproportionate tax structure require more attention. Rationalising the tax structure will help limit capital movement by tax-avoiding corporations to countries where taxes have been deliberately kept at low levels, allowing for an oligopolisation of sectoral markets globally. A good example here is the European Commission’s recent ruling on Apple Inc, according to which the corporation owes $14.5 billion to Ireland in taxes.
Unless “soft" multilateral groups like the G20 effectively address these issues in a more coherent manner, it is unlikely that the current cloud of global economic uncertainty will disappear anytime soon.