G-20:  Focus on global growth

-DR. ABDUL RUFF COLACHAL 

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Despite signs of improvement, global growth remains uneven and well below potential, while unemployment remains stubbornly high in many places. All tall claims and forecasts by the regimes about steady economic growth are incorrect or farce, meant to boost the ruling party image.

The world's top 20 economies, led obviously by the USA have, upon a conclave in Australian capital Sydney. on 22^nd February, adopted a soft target of adding at least 2 percentage points to growth over five years, signaling optimism that the worst of crisis-era austerity was behind them. The G-20 members are the USA, the European Union, Turkey, Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, South Korea, Russia, Saudi Arabia and South Africa.

The key focus of the meeting was exploring ways to restore global growth amid indications that the world's largest economies are once again slowing. Hockey, who says boosting private investment in infrastructure would help stimulate growth, wants G-20 leaders to commit to a global growth target higher than the International Monetary Fund's forecast, which is 3.7 percent this year.

The market turmoil sparked by the Federal Reserve's steps toward removing the US economy from life support is expected to be a top agenda item when finance chiefs from the world's big economies met in Sydney this weekend.

The G-20, which represents around 85 percent of the global economy, is made up of both wealthy nations and emerging economies from the USA to South Africa, China and Saudi Arabia. The world's rich nations pushed back on Friday against emerging market complaints about the spillover effects of their monetary policies, saying they had to get their own houses in order and get with the agenda of boosting global growth.

The meeting's host, Australian Treasurer Joe Hockey, said the Federal Reserve's decision to begin scaling back its stimulus was a key part of discussions, along with reinvigorating global growth. Australia spearheaded the push for growth in the face of some skepticism, notably from Germany. Opening the two-day meeting of the Group of 20 finance ministers and central bankers, Australian Treasurer Joe Hockey said support was building for setting a firm goal for growth.

The idea of setting concrete goals for the G20 has caused nothing but friction in the past, with proposals to target fiscal and current account deficits coming to nothing in the end. The proposal has already drawn skepticism, with governments criticizing the idea as a "slightly antiquated form for economic planning".

As finance ministers and central bank chiefs from the Group of 20 developed and emerging countries gathered in Sydney, many were already talking at cross purposes. Emerging nations want the US Federal Reserve to calibrate its winding down of stimulus so as to mitigate the impact on their economies and financial markets. Developed members reply that the troubles in the emerging world are mostly homegrown and domestic interest rates have to be set with domestic recoveries in mind.

The International Monetary Fund (IMF) warned advanced economies to avoid prematurely rolling back their stimulus programs. The need for some sort of fresh stimulus was highlighted by a grim report from The Organization for Economic Co-operation and Development which warned that sweeping reforms were urgently needed to boost productivity and lower barriers to trade to avoid a new era of slow growth and stubbornly high unemployment. In December, the US central bank said it would start reducing its monthly Treasury and mortgage bond purchases, intended to keep interest rates low and support economic recovery in the aftermath of the global recession. Investors responded by pulling out of emerging markets and funneling their money to the US in hopes of higher returns, which contributed to sharp falls in stock markets and the currencies of some developing countries.

Ultimately, the Federal Reserve has to operate in a manner that is consistent with its domestic mandate. Federal Reserve Board Chair Janet Yellen said the Fed would take "further measured steps" to reduce its bond buying if the US economy continues to improve.

In a letter to G-20 members, US Treasury Secretary Jacob Lew said boosting global growth and creating more jobs will be the G-20's top priority. Lew is attending the meeting and plans to meet with Hockey and finance ministers for Germany, Japan, Brazil and Turkey. Lew told reporters in Sydney on Friday. "The growth strategies that we will be developing must be ambitious in substance and address both deficiencies in near-term demand as well as longer-term economic challenges."

Another key item was the failure of the USA to pass the 2010 IMF reform package. Last month, Congress rejected a funding request from Obama that would have doubled the IMF's lending capacity to about $733 billion and increased the voting power of emerging economies. Australia insists the USA to opt for quick reforms for securing global economic stability. France's finance minister, Pierre Moscovici, welcomed a goal of lifting world growth by a total of 2.5 percentage points over five years, calling it ambitious but "not unrealistic". Germany had dropped its opposition to setting an overall target, as long as there were no goals imposed for individual states. Jens Weidmann, the German head of the country's central bank, called quantitative targets "problematic". And Nhlanhla Nene, South Africa's Deputy Finance Minister, said the target would be meaningless unless issues faced by emerging economies such as inequality, high unemployment, and volatile global financial conditions were addressed.

The IMF has forecast global growth of 3.75 percent for this year and 4 percent in 2015. The plan borrows wholesale from an International Monetary Fund paper prepared for the Sydney meeting which estimated that structural reforms would raise world growth by about 0.5 percentage point per year over the next five years, boosting global output by $2.25 trillion. The laundry list of reforms run the usual gamut of liberalizing product and labor markets, lowering barriers to trade, attracting more women into the workforce and boosting investment in infrastructure.

European Union's Economic and Monetary Affairs Commissioner said the bloc would back the growth target for the G20 group that accounts for 85 percent of global economic output provided it came with a firm commitment to bold reforms. He suggested that reform progress could be monitored by the IMF and the Organization for Economic Cooperation and Development and that EU's policy coordination and surveillance could serve as a model.

The emerging members have also been pressing for the US Federal Reserve to try to avoid sparking market volatility through better messaging as its throttles back on asset buying. There was never much expectation the Fed would consider actually slowing the pace of tapering, but its emerging peers were hoping for more cooperation on policy dealing effectively with market volatility.

Others were pointing out that troubles of hardest-hit emerging economies, such as Brazil and Turkey, were largely home-made and the Fed's tapering was in fact a good thing: a sign of US economy's improving health. Even Indonesia, one of the "Fragile Five" major emerging economies, said the Fed's gradual withdrawal of stimulus was not to blame for all the ills of developing world.

US Treasury Secretary Jack Lew said that the emerging markets need to take steps of their own to get their fiscal house in order and put structural reforms in place. Lew said it's a cross-cutting theme to what we see as the challenge for the global economy. The US recovery is healthy and moving very much in the right direction and picking up velocity, but it can't make up for a lack of demand and growth in the other key economies. He called on China, Japan and Europe to make domestic demand the engine room of growth. That was a sentiment very much echoed by the finance ministers of Japan, Britain and Germany. German views that emerging countries first had to do their homework, before demanding solidarity from the rest of the G20. Japan's Taro Aso said the Fed's tapering of its stimulus program was positive as it reflected an improving US economy, even if it raised the risk of sharp capital outflows from other countries.

QE tapering should be undertaken in a very orderly manner and carefully calibrated given the global economy today is very much interconnected, quantitative easing, usually in the form of central bank purchases of bonds or other assets.

Developing nations from South Africa to Turkey to Russia have seen their currencies crumble in recent months as the prospect of higher returns in the USA sucked foreign funds from their economies. South Korea Deputy Prime Minister, Minister of Strategy and Finance Hyun Oh Seok suggested the Fed and other major central banks could at least strive to avoid surprises in their policy.

The international lending agency's governing board gave a green-light to the overhaul in 2010, and approval by Congress is the last remaining roadblock for it to take effect. The onus would be on the rich nations to pick up the baton on growth from the developing countries, which had carried the world economy in the wake of the global financial crisis.

Still there were no details on how or whether the G20 would police each country's progress on the reforms, many of which would likely be politically unpopular at home.

The two-day meeting ended on 23^rd February with a round of news conferences by top officials, including European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde.

Australia is acting as president of the G20 this year, following Russia in 2013 and ahead of Turkey next year. Australia claims it is trying to bring some much-needed focus to the G20, proposing members sign on to ambitious growth agendas, and hold each other to account for delivering them.

The Group of 20 finance ministers and central bankers meeting is a precursor to the main G-20 summit that will be held in the Australian city of Brisbane in November.

Communiqué

A draft of the communiqué highlighted how the push for growth had trumped concerns about volatility in emerging markets that had threatened to overshadow the meeting. It commits to developing new measures to significantly raise global growth, while maintaining fiscal sustainability The G20 recognizes accommodative monetary policy settings in advanced economies will need to normalize in due course, in line with stronger growth. Many developed nations seek a common target for global growth. Developed market policymakers see little risk of the recent market turmoil spiraling into the kind of contagion which prompted concerted and coordinated action from the G20 following the global financial crisis.

The final communique from the two-day meeting of Group 20 finance ministers and central bankers in Sydney said they would aim to boost collective growth by "more than 2 percent. It included a pledge to take concrete action to increase investment and employment, among other reforms.

The growth plan borrows wholesale from an IMF paper prepared for the G20 meeting, which estimated that structural reforms would raise world growth by about 0.5 percentage points per year over the next five years, boosting global output by $2.25 trillion. The IMF has forecast global growth of 3.75 percent for this year and 4 percent in 2015.

The G20 communique also stated that it "deeply regrets" that progress on giving emerging nations more say in the International Monetary Fund had stalled. Major emerging powers including India, China, Brazil and Russia, have long lobbied for increased voting power in the IMF to reflect their growing share of the world economy, but the changes have been blocked by the US Congress. There was a nod to concerns by emerging nations that the Federal Reserve considers the impact of its policy tapering, with the communique saying central banks would be mindful of the effects on the global economy.

G20 meeting is not able to lay down a real and tangible framework for an increase in the growth of the global economy over the next five years. The target remains vague at the moment, with no road map on how nations intend to get there or repercussions if they never arrive. The aim was to come up with the goal now, then have each country develops an action plan and a growth strategy for delivery at a November summit of G20 leaders in Brisbane.

Agreeing on any goal is a step forward for the group that has failed in the past to agree on fiscal and current account targets. And it was a sea change from recent meetings where the debate was still on where their focus should lie: on growth or budget austerity.

If adopted and implemented, the plan would be a departure for the G20, as previous attempts to set fiscal and current account targets have faltered. And while Canada's central bank chief Stephen Poloz called the goal "aspirational" and doubts remain about its action.

The major message from G20 in Sydney is that the emerging markets should do their own homework. It would give the group fresh focus and mark a sea change from recent meetings where the debate was all about growth versus budget austerity. But nothing is new in this.