The Group of 20 was formed eight years ago as the world stared into the abyss of the global financial crisis and recognized that without coordinated action among its top economies, another Great Depression was inevitable. The assembled leaders, which represented about 85 percent of global wealth, 80 percent of world trade and two-thirds of world population, rose to the challenge, pledged to coordinate action to stem the downward spiral, and then, remarkably, honored that pledge. Those policy firewalls kept the Global Recession from becoming a depression.
Ever since, the group has met regularly, producing statements and warnings, but it has not mustered the sense of purpose or urgency that marked its founding. The G-20 has eclipsed the Group of Eight as a global economic manager — understandably, given the limits of the latter — but it appears to increasingly resemble that gathering: more symbol than substance.
Last week’s G-20 meeting of finance ministers and central bankers in Shanghai again highlighted risks that threaten the global economy and urged members to undertake the reforms that would insulate them from more shocks. According to the communique released at the end of the meeting, “the global recover continues but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth.” Threats to continued growth include volatile capital flows, a sharp fall in commodity prices and the potential “shock” of a British exit from the European Union.
Those are worrisome, but the real source of global problems is the structural imbalance built into the global economy. The world relies too heavily on traditional markets of final demand — consumers in the United States and Europe — to which other countries export. Global stability will only ensue when there is more distributed demand, which requires governments to undertake basic reform of their economies to unleash greater demand.
They must tackle the vested interests well served by the status quo, a Herculean task. The third arrow of Abenomics seeks to address this problem and its fitful progress is an indication of how powerful opposition can be. Other countries face similarly entrenched constituencies and have struggled to reform as well.
It is far easier to pursue monetary gimmicks to facilitate economic activity. This has meant a reliance on central banks to ensure that liquidity is available to banks and businesses, a task they have fulfilled with ultra-low interest rates, including negative rates in countries such as Japan, and the printing of money known as quantitative easing.
Another staple of current economic strategy is the depreciation of currencies and using that to spur competitiveness and balance the books. A steady devaluation of the yen has marked the Abe administration since 2012 but its effectiveness has diminished in recent weeks. But when other countries rely on the same gimmicks, there is the real danger of a round of devaluations that would impoverish all participants. One of the most important successes of the initial G-20 meeting in 2008 was an agreement to avoid this race to the bottom. Over time, that pledge has eroded, and one of the most important outcomes of last weekend’s meeting was a renewed promise to avoid that easy option and to “consult closely” on foreign exchange markets.
Ultimately, governments must stop relying on central banks to create demand. This demands that they shrug off the vogue for austerity policies, an incomprehensible approach when demand is faltering and interest rates are zero. Governments must use their budgets and regulatory powers to create demand. While this should be common sense, there are dissenters, such as German Finance Minister Wolfgang Schaeuble, who worries that debt-financed fiscal policies and easy monetary policies “may have laid the foundation for the next crisis.”
The G-20 has recognized this problem before. In 2014, it laid out a plan to add $2 trillion in goods and services to the global economy. The group has failed to deliver more than half of those reforms; as a result, growth is more than a half percentage point lower than the forecast rate of 4.1 percent. Never before has the need to use “all policy tools — monetary, fiscal and structural — individually and collectively” (as last week’s communique noted) been so clear.
China, the G-20 chair this year, poses a special problem. The world is accustomed to a Chinese economy expanding at double-digit rates. The slowdown to 8, and now 7, percent is intended by the Beijing government to avoid overheating and to facilitate restructuring. But problems in the Chinese economy — volatile stock markets, massive currency outflows, a lack of transparency regarding government policy and doubts about statistics — have many wondering about the country’s economic stewards and their ability to keep it on course.
Beijing recognizes the problems and has begun a PR offensive to restore faith in its policy and its policymakers. Premier Li Keqiang told the G-20 opening session there was no basis for continued depreciation of the yuan and Finance Minister Lou Jiwei promised that “monetary policy will probably have to be kept appropriately loose.”
Chinese officials insisted that their economy is strong, a theme that was echoed throughout the meeting. Lou noted that “the magnitude of the recent market volatility has not reflected the underlying fundamentals of the global economy.” That may be true, but G-20 governments must do more to shore up those fundamentals. Honoring the pledge to avoid currency devaluations would a start — but only a start.