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G20 finance ministers agree to growth target: experts react

The G20 finance ministers, who have been meeting in Sydney this weekend, say economic grow is still below the rate needed to get people back into jobs. In a statement released at the conclusion of talks…

The G20 Finance Ministers and Central Bank Governors Meeting concluded with a growth ‘aim’ of 2% above current projections over five years. AAP/Jason Reed

The G20 finance ministers, who have been meeting in Sydney this weekend, say economic grow is still below the rate needed to get people back into jobs.

In a statement released at the conclusion of talks, the ministers and central bank governors pledged to “develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2% above the trajectory implied by current policies over the coming 5 years”.

Treasurer Joe Hockey said boosting investment would create growth and jobs. “There is much we can do to remove constraints to private sector investment by establishing sound and predictable policy,” he said.

The Treasurer had pushed for a concrete target to be adopted in the weeks leading up to the Meeting of Finance Ministers and Central Bank Governors, the first in a series of meetings scheduled in the lead-up to the G20 Leaders Summit in Brisbane in November.

The ministers also recognised reliance on monetary policy to stimulate economic growth should be reduced. The communiqué was relatively silent on the role of debt, noting it should be put on a “sustainable path”.

Other previously adopted measures were restated. The ministers called on the United States to ratify the IMF reforms that would change the portion of votes given to each member, and reduced the US vote, that have languished since 2010. Mr Hockey confirmed there was “deep disappointment” the process hadn’t moved faster.

An automatic exchange of tax information was again endorsed after originally being taken up last year in St Petersburg. That move was foreshadowed at the Institute of International Finance forum that took place earlier in the week.

Expert reaction follows:


Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University:

Most G20 meetings are talk-fests. This one was no exception. But what goes unmentioned is often more important than what is discussed. For the first time in its short history, the G20 has established a growth target, 2% (or $2 trillion-plus) above current forecast trajectories.

Joe Hockey credited this outcome to Australia’s leadership of the G20. However, analysts at investment bank JP Morgan were critical last week of establishing growth targets – effectively, these are wish lists – over which governments have little or no control.

Second, the communiqué criticised the lack of progress on the 2010 IMF reforms, which would give China and other emerging powers more voting power in the IMF. Washington has blocked these reforms persistently, although the Europeans and Japanese are not keen to see their voting positions diluted.

China currently holds 4% of IMF votes, against the US’s 16.5% (41% for all advanced economies).

Passing the 2010 reforms would give China 6%, making Beijing the third-largest player in the IMF, behind Japan and the US. However, the US would remain a veto player (85%-plus is required for any major IMF reform).

Third, the most important point was buried well down the list: the impact of Base Erosion and Profit Shifting (BEPS). This allows multinational firms, such as Google, Apple and Microsoft to minimise tax obligations in the country of operations, while shifting taxable revenues to alternative jurisdictions.

In most cases, profit shifting is entirely lawful. However, the consequence has been a gradual diminution of the taxation base in many OECD countries.

BEPS has long been an issue for the G20 and G8. However, it is also hypocritical for G20 countries to maintain the fiction of international taxation cooperation, when states continue to compete for investment and capital flows by deliberately creating tax rules and jurisdictions that routinely circumvent taxation agreements.

But the G20 has not shown it is serious about confronting this issue. The British Virgin Islands, Monaco, Liechtenstein, Luxembourg, the Channel Islands and Cyprus are among the many tax havens for firms, individuals and criminals alike. Ireland is a corporate low-tax jurisdiction. Even OECD members Belgium and the Netherlands act as clearing houses for hundreds of billions of dollars annually via the use of Special Purpose Entities.

The communique was ominously silent on the Basel III banking accord, which many central bankers regard as too stringent and damaging to growth. Basel III was introduced in 2010 to reduce myriad forms of dangerous, thinly-capitalised leverage that characterised over-leveraged global banks in the pre-GFC era.

European central bankers, behind closed doors, have backed away from Basel III, fearing their banks’ vulnerability, as well as the structures upon growth a more disciplined financial regime could bring.


Mark Crosby, Associate Professor of Economics at Melbourne Business School:

The problem with these sorts of pronouncements is that there’s absolutely nothing to make domestic policy makers change policies. If this additional growth is possible, why haven’t policy makers been able to implement changes to achieve it? I don’t think there will be any change in policies and no change in growth.

It was, however, interesting to see that the OECD report released earlier this week was pessimistic about medium-term growth and worried about productivity growth being low and fiscal issues remaining. I think medium-term growth is going to remain weak.

The only interesting thing to come out of the discussions was the desire to find new ways to finance infrastructure spending. [Consulting firm] McKinsey came out with a report last year about how much investment is required in infrastructure globally, around US$57 trillion, and the big question is how to fund that.

Hopefully there may emerge some interesting new ways to finance infrastructure, particularly in emerging countries, and that’s where there’s potential for slightly higher growth, but I think it’ll still be far from 2% faster.

If the IMF reforms move forward, emerging economies will see greater voting rights. At the moment it’s convenient for the US and Europe to keep the current quotas in place, and Europe in particular is overrepresented. The IMF does reflect, in some sense, too much of the interests of the US and Europe. The statement was interesting and hopefully change will come.


Tim Harcourt, J.W. Nevile Fellow in Economics at the University of New South Wales:

The target is ambitious but deliberate. They are trying to change the psychology of recovery by setting an ambitious target that might improve the chances of a stronger recovery, even if they just make half that, it’s still a gain. I think it’s an aspirational target trying to break the shackles of a slow recovery.

The communiqué made strong statements on having a flexible currency. I think if you read between the lines it’s referring to Abenomics in Japan, that it shouldn’t be creating a Pearl Harbour of currency wars and upsetting everybody else’s recovery.

The statement on the IMF reform was made, I think, because there was some talk they would drop a lot of those things and they wanted to firm them up. There’s an argument that the G20 could replace the IMF’s role in global finance, and so this statement said they weren’t interested in replacing the IMF, just reforming it.


Fariborz Moshirian, Professor of Finance, Director of the Institute of Global Finance at the University of New South Wales:

It’s great to see this year’s Summit is more focused on economic growth because, over the last five years, we’ve been working on repairing the global financial system, including dealing with the sovereign debt crisis in Europe and the US banking crisis. Thus, talking about stronger economic growth is useful for the market.

However, the way the statement is phrased doesn’t give responsibility to any member for this objective. This means no-one is going to take full responsibility if such a collective GDP goal is not achieved. In the past, the G20 was criticised for not having an executive power and only relying on peer pressure for achieving its objectives.

The communiqué is trying to strike a balance on monetary policy. It is saying that the US should be mindful of the implications of its monetary policy on developing economies but there’s nothing in this statement that guarantees that the Federal Reserve may consider the interests of emerging economies ahead of its own national monetary policy. More dialogue is required.

They are also asking emerging economies to accelerate restructuring of their economies so that they can attract good investment. In other words, emerging economies should not rely on speculative capital which flows because interest rates are higher in developing economies.

The issue with foreign exchange flexibility is with China, because China’s currency is fixed rather than flexible. A more flexible exchange rate in China could address the trade imbalances between the US and China and may lead to more imports from the rest of the world by China.

Join the conversation

21 Comments sorted by

  1. Garry Baker

    researcher

    Joe Hockey, and his wish lists. That's about all there is to him, and this gab fest for that matter. A bring on the clowns affair

    Anyway, let's see how he performs at home on the domestic front in the coming months. Given that maybe several hundred thousand jobs, along with the industries to support them have displayed their early signs of vaporisation under his watch

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  2. Anthony Nolan

    logged in via email @hotmail.com

    What? The G20 recommends growth? Strewth, who would've thought? Sad that it's only in the way that a cocaine addict recommends more snort as the solution to all ills.

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  3. Lincoln Fung

    Economist

    It is difficult even for a single country to achieve a target of economic growth for the past few years, now G20 anounce a collective target that is 2% above teh current underlying growth with little agreed concrete and coordinated policies.
    It seems that G20 can achieve something in two extremes of conditions. One is when the world economy is in a depressional crisis, such as the one experienced in from 2008 and sometime thereafter when G20 acted together in some sort of coordinated way. The other is when the world economy is in a extremely good shape so nothing could derail it and no addtional policy is needed.
    When the world economy is between the two extremes, the role of G20 in getting some useful and coordinate policies is very much in doubt.
    That, however, does not reduce the photo orportunities for G20 finance ministers, central bankers and heads of government.

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    1. Garry Baker

      researcher

      In reply to Lincoln Fung

      You've got it Lincoln - Photo opportunities, and look as busy as a Swiss Admiral.

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  4. JB Rawson

    Writer

    Does anyone know if there was any discussion at the meeting of the implications this would have for emissions, and how to deal with those? I've seen no reporting of it, but that doesn't necessarily mean it didn't happen.

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  5. Terry Mills

    lawyer retired

    Sometimes, when you have nothing to say but really want to say something it is standard practice to decide on an "aspirational" target which is "non binding" on the parties.

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  6. David Stein

    Businessman

    Thank you to the contributors for your excellent comments.
    Tim Harcourt - great thoughts on the psychology of recovery. I recall reading a lot about the impact of inflation expectations on investment decisions - deflation discouraging investment of course, with the added benefit of a currency devaluation from a little inflation. (Mandel and Barnes looking at Japan for example.)
    I love the idea of managing growth expectations - the US Fed and others have come up with ways to manage inflation expectations…

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  7. Brandon Young

    Retired

    The increased growth target is deliberately designed to give greater justification for the continuing removal of local laws and dismantling of national institutions in order to minimise cost and complexity for the US corporations.

    This is important because the US economy will never again grow fast enough to service US debt on its own, and the resources of other countries must be plundered by the corporations for the insane dream of perpetual growth to continue for a few more years.

    Of course…

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    1. David Stein

      Businessman

      In reply to Brandon Young

      US debt service has been declining in recent years from a high of 15% of the US budget to around 6/7%.
      http://www.gao.gov/special.pubs/longterm/debt/budgetdebt.html
      I don't necessarily disagree with your assessment of Abbott and Hockey, but I think they are acting out of incompetence and listening to the wrong people who keep telling us debt is bad in all circumstances. Growth is key for jobs and employment - the key is more equality of income distribution and ensuring the growth is sustainable both economically and environmentally. Growth resulting from asset bubbles is bad, but growth resulting from technological innovation and making or doing things people benefit from is good.

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    2. Brandon Young

      Retired

      In reply to David Stein

      Thanks David.

      But "Growth is key for jobs and employment" is what is seen from inside the dream. I appreciate it is difficult for people to question long held, and widely shared presumptions about how the world works, but perpetual growth is not possible, except in very specific circumstances, and reality is moving in the opposite direction anyway.

      For example, for growth to be sustained, all necessary finite resources must be 100% recycled or recovered eventually, and this must be achieved…

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  8. Ben Marshall
    Ben Marshall is a Friend of The Conversation.

    Writer

    The premise of this overview was..."G20 finance ministers agree to growth target: experts react"

    I was a tad underwhelmed by the 'react' part, chaps.

    We got a 'no one's going to do anything real about tax evasion' from Remy, Mark thought nothing much different was going to happen but was interested that we're going for 'growth' via 'new ways of infrastructure' without enlightening us as to what that might mean in real terms, Tim said it was all about the 'psychology' and being 'aspirational…

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    1. David Stein

      Businessman

      In reply to Ben Marshall

      Dude - love your work, and we are all frustrated by the lack of action on things that seem obvious.
      I would point out there are many economists who have been crying out for more fiscal stimulus as a way to break the cycle of low investment leading to low unemployment.
      Tim Harcourt's contribution is interesting since it identifies one of the key problems in the global economy - low growth expectations. Ironically, by calling for infrastructure spending, the G20 could actually do something to create…

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    2. Ben Marshall
      Ben Marshall is a Friend of The Conversation.

      Writer

      In reply to David Stein

      Thanks, David. I appreciate your economic reality check.

      At the risk of appearing a climate change obsessive, the entire G20 economic growth thing (assuming infinite growth on a finite planet is somehow a good thing) hinges on one crucial point - political acknowledgment that AGW requires local and global action now.

      Had we a government that could add 'need for growth' with 'need for climate change mitigation' would that not equal 'two birds, one freaking stone'?

      sigh

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    3. David Stein

      Businessman

      In reply to Ben Marshall

      Hi Ben - yes! That's why the renewable energy target is so important - we have a shot at being on the front end of renewable technology which could be a huge source of employment in Australia. The $10 billion fund is also a great initiative - cancelling it would be akin to telling Henry Ford to pull the pin on his ridiculous horseless carriage contraption that those farriers know would just never take off.

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  9. John Doyle

    architect

    It really is a rearranging of the deck chairs on the good ship Titanic of the Economy.
    The G20 should be discussing what to do about the inevitable decline of our civilization. Endless growth is fantasy, an impossible dream we need to wake from while we still have resources to spare. It's going to be hard to substitute for phosphorus once it's all gone in several decades time. No phosphorus, no food no people. Simple really. We are also made of oil. expensive oil = less humans [maybe that's a solution]. 30 hours without food = pandemonium.
    Silly old Joe, hasn't a clue, although he's in good company.
    Except we can't afford such dills to be in positions of authority.

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    1. Brandon Young

      Retired

      In reply to John Doyle

      Spot on John, well said, especially the point about phosphorus.

      You have probably seen this video, or are at least are familiar with the wisdom it contains, but for anyone interested it gives a powerful argument that 'peak resources' means that economic growth is not sustainable.

      http://www.youtube.com/watch?v=b2OzyNpPe5s

      It is 29 minutes long, but well worth watching, as it will leave people with great insight into the limitations of old approaches to economics, or at the very least, enough ammunition to win a few arguments.

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    2. John Doyle

      architect

      In reply to Brandon Young

      Yes, Brandon, that's the one.
      Also look at the published papers attached such as; "The World 5 model; Peak metals, minerals, energy, wealth, food and population; urgent policy considerations for a sustainable society" It's shows nearly all the graphs from his talk in a legible format.
      You know even if his forecasts are wrong on the dates that's a minor quibble because the events will happen.
      INHO it's going to be a financial event which triggers the awareness. We are so debt ridden now that climate change and peak minerals won't yet have bitten. He discusses the example of gold to make it clear.
      http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/
      This describes the maths, that critical EROEI formula.

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  10. Albert Rogers

    logged in via Facebook

    I'm a bit fed up with the idea of "Growth" as a panacea for our ills. What the Earth needs of its human population is reduction, and lower consumption too.
    Now it is possible that we could benefit from growth in intelligent ideas, knowledge of the ways of the natural universe, and a very general growth in the skepticism of the human population. There is of course a huge difference between skepticism and mere denial.
    Lord Kelvin was entitled to be skeptical of the views of the biologists and the…

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