|Satyajit Das: The G-20's Growth Commitment Is Much Ado About Nothing|
The G-20 commitments are largely meaningless. Few, if any, initiatives are likely to be implemented, and based on its previous performance, few targets will be met.
The G-20 Finance Ministers' Meeting in Sydney in February 2014 provided a convivial winter break for the global economic elite. Travelers from the Northern Hemisphere could enjoy the Southern summer. Everybody could escape domestic political traumas and spend a few days among peers in luxury paid for by taxpayers. They could bask in the slavish adulation of the local popular press, which was in awe of the gathered central banking "rock stars" and the charms of the International Monetary Fund's (IMF) president Christine Lagarde.
A jovial Joe Hockey, Australia's Treasurer, proclaimed the meeting was a "success." The G-20 had "committed" to growth targets. Mr. Hockey's off-the-cuff remarks about the consequences of not meeting the agreed objectives recalled former US Vice President Dan Quayle's comment: "If we do not succeed, then we run the risk of failure."
Let There Be Growth
Advanced economies committed to a coordinated push to boost growth by more than $2 trillion over the next five years. This additional growth would be driven by "concrete" macroeconomic policies and structural reforms. But there were no specific initiatives, other than a call for additional investment, especially in infrastructure.
The only specific undertaking was that monetary policy would remain accommodative. But this, too, was dependent on the outlook for prices and growth of individual member nations, a concession to the US central bank's "taper," which had created volatility in financial markets.
The targeted additional 2% of economic activity equates to around 0.40% per annum. In practice, this would mean real Gross Domestic Product (GDP) in the G-20 would grow by around 3.8 % in both 2014 and 2015, above the 3.3% achieved in the last two years. But this would still leave the GDP of the G-20 around 8% below its long-term trend, in effect failing to reverse the output losses following the Global Financial Crisis (GFC).
In any case, given the poor forecasting record of authorities, the base rate of expansion is uncertain -- meaning any additional growth target is meaningless. The IMF and central banks have repeatedly downgraded growth forecasts over recent years.
Apart from well-worn homilies to "fiscal sustainability" and other economic shibboleths, there was little detail on how high debt levels, weak public finances, continuing global imbalances, deflationary pressures, exchange-rate instability, and other vulnerabilities would be managed. There was only vague reference to an exit from current policies and normalization of interest rates.
The commitment to infrastructure investment failed to address how over-indebted governments would finance expenditure in a deleveraging world.
There was no acknowledgement of deep structural issues such as aging populations, climate change, social stresses, and political instability and their effect on the target.
In essence, the Lords of Finance agreed that they would wave their magic wands to magically conjure up growth and prosperity. If that was the case, then the interesting question is, why haven't they done so until now?
The markets were underwhelmed. Reuters spoke for many concluding, "The Group of 20's proposal to lift economic activity by 2% over the next five years has so many holes in it, there's no wonder it was the first official target that all members felt happy to agree on."
The Emerging Problem
The G-20 failed to confront one of the major threats to global recovery identified by the IMF: the fragility of many emerging markets.
Emerging market instability has been driven, in part, by the decision of the US Federal Reserve to scale back its purchases of government bonds. Despite the fact that US monetary policies remain expansionary, the taper has resulted in a reversal of capital flows into emerging markets. This has revealed the inherent weaknesses of many economies, such as current account deficits, large budget deficits, high debt levels, weak financial systems, and a dependence on foreign capital flows. Rapid falls in emerging market currencies, asset prices, and foreign exchange reserves have exacerbated the pressures.
In early 2014, the governor of India's central bank Raghuram Rajan warned of a breakdown in the global coordination of monetary policy. He was reacting to the effects of the adjustment of asset purchases by the US Federal Reserve on the value of the India rupee. Dr. Rajan argued that the Federal Reserve could not ignore the impact of its policies on the rest of the world.
Federal Reserve Chairwoman Janet Yellen rejected this accusation. She told American politicians in congressional testimony that the US central bank's focus was on the domestic economy. After mouthing the usual platitudes about the need for a strong US economy and how that would be good for the world, she stated that volatility in emerging markets resulting from US policies was only relevant insofar as it might affect the US economy.
The US position was supported by German Finance Minister Wolfgang Schaeuble, who blamed India's own internal policies for its economic woes rather than the monetary policies of developed nations.
The G-20 Meeting communique was, unsurprisingly, silent on this issue, reflecting the different positions of members on better monetary and exchange rate policy coordination.
United in Our Division
The G-20 has a poor record in meeting targets.
The reduction in government debt by 50% by 2013 has not happened. Action to minimize tax avoidance, another objective of the Sydney Meeting, has been subverted by individual countries using differential tax rates and other policies to encourage businesses to relocate or remain in particular jurisdictions. Objectives, such as reducing the dominance of Too Big To Fail (TBTF) banks and the size of the shadow banking system, have not been met. Any decline in the size of the shadow banks was a direct result of the GFC, with the scale of the sector having remained relatively static since.
A key reason for the G-20's failure is a lack of coordination; individual national interests have taken primacy. After the Sydney meeting, it did not take long for the feigned unanimity to disappear.
The European Central Bank (ECB) and the German Finance Minister, were skeptical about the growth targets, pointing out no new measures have yet been adopted to facilitate these. Jens Weidmann, the head of the Bundesbank, damned the agreement with faint praise, stating that while "fundamentally positive," quantitative growth targets were "problematic."
Indian Finance Minister Palaniappan Chidambaram said that he did not consider the growth targets binding. The South African finance minister flew home to announce a reduction in the nation's forecast growth. Growth numbers from Brazil and even the US released shortly after the meeting were disappointing.
Zhou Xiaochuan, Governor of the People's Bank of China (PBOC), emphasized the need of his country to balance economic growth, reforms, and stability, and refused to commit to measures to increase growth. Shortly thereafter, the Chinese authorities moved to reduce the value of the yuan against foreign currencies to reduce capital inflows and increase China's competitiveness.
There were divisions even on previously agreed upon principles. US Treasury secretary Jack Lew argued for more coordination on regulation of financial markets and banks. Prior to the meeting, the host, Joe Hockey, stated that all of those regulations should be "evaporated" on the grounds that they were impeding efficient resource allocation. He was particularly opposed to European plans for a financial transactions tax. Mr. Hockey argued that transparency was all that was needed.
The reality is that, to the extent that individual nations' policies serve domestic interests of growth, the G-20 measures may be implemented, with potential spillover benefits for the global economy. But major, often-repeated steps -- such as increasing domestic demand in exporting nations like Germany and China, which are seen as detrimental to national interests -- are unlikely, even if they would benefit the global economy overall.
In effect, the G-20 consistently fails the real measure of coordinated global policy identified by ECB President Mario Draghi -- that countries adopt policies that would otherwise not be adopted if they were acting solely in their own domestic interests.
The G-20 commitments are largely meaningless. Few, if any, initiatives are likely to be implemented. Based on its previous performance, few targets will be met. This poses a fundamental question about the point of such forums.
As several commentators observed, the real point was to illustrate the indispensability of the global financial and political elite and to reassure citizens that powerful leaders were in control of the situation. The propositions are inconsistent with the fact that it is the same individuals or their ilk who created the conditions for the crisis in the first place. They are also inconsistent with the fact that after near six years of meetings, communiques and targets, the global economy is no closer to a sustainable recovery.
The most honest course of action would be recognize that the policy options are limited, the level of understanding and degree of control over economies compromised, and the idea of global coordination is an impossible, utopian dream.
The bad news is that the heads of the G-20 are scheduled to meet in Brisbane later in 2014 for a new round of talks.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.