G20 finance ministers and central bank governors have set themselves a formidable task in accelerating growth and creating millions of new jobs in order to add 2% to world economic growth over the next five years.
But how can this be achieved - and can the proposed growth alone fix the most urgent problems of the world’s economy?
Welcome to the club
The G20 nations represent top two of the three tiers of the world economy. The first tier includes large rich economies - Australia, Canada, Saudi Arabia, United States, France, Germany, Italy, UK, Japan, and South Korea. All the countries of this club, except Saudi Arabia, are facing similar long run trends of slowing growth, deindustrialisation, expensive labour forces and the outsourcing of their manufacturing to emerging lower cost economies.
Many of them also continue to ride through the aftermath of the global financial crisis. Their sovereign debt is increasing, while the United States’ quantitative easing program is making a lot of cheap money available, ultimately contributing to consumption beyond means.
The second tier includes the largest emerging or middle income economies - China, India, Russia, South Africa, Indonesia, Argentina, Brazil and Mexico. This club is not homogeneous. However, many of these members have avoided the turmoil of the recession caused by the global financial crisis, continuing to grow and industrialise, and have been at the receiving end of outsourcing from developed nations. The largest of them, China has become not only the second largest economy, but also one of the major financial donors of the debt-stricken Western nations.
However, in this club, members have done little to avoid increasing income inequality and to share the results of economic growth with their poor.
Sharing the spoils
It is not clear from the G20 Final Communiqué how the declared 2% of the proposed additional growth should be distributed across to different member countries and by what kind of economic mechanisms.
In the G20’s market economies, additional growth can be fostered either through public investment in infrastructure, by monetary policy such as interest rates, or by government policy efforts to boost business and investment. None of those measures seem to be available to post-world-crisis Western economies.
Almost all the developed nations of the G20 club have considerably increased their debt by extensively using stimulus packages during the crisis. All of them - including Australia - are facing an ageing population and an accelerating increase in social security and health expenditure. Therefore, their budgets cannot support the artificial goal of additional growth through additional public spending.
On the other hand, the central banks have nearly exhausted their capacity of monetary incentives. Official interest rates are either historically low, as in Australia, or are near zero, as in the EU and US; while buying of treasury bonds by central banks cannot continue indefinitely.
The last resort could be microeconomic policy tools such as subsidies and tax breaks to companies - which might be efficient, but costly to the budget. The other tool - further liberalisation of labour markets - looks politically difficult or impossible, as the electorates of the developed G20 nations is almost evenly divided between the economic conservatives and left to the centre progressivists.
Concentrating on youth unemployment
Perhaps the only realistic tool for the large rich G20 economies is to concentrate on reducing increasing levels of unemployment, especially among young workers, which is a gross economic inefficiency by itself.
Youth unemployment in developed G20 countries, except Germany, is considerably higher now than it was before global financial crisis. In 2012, the last year comparable OECD data exists for, it was 11.7% in Australia, 16.4% in USA, 21.8% in France, and 35.9% in Italy.
Leaders such as Australia’s Prime Minister Tony Abbott are championing work-for-the-dole programs - but this is not a solution for young people looking for decent jobs and qualifications.
A far better policy would be “work for apprenticeships”, which is applicable to any country that provides welfare payment to unemployed. Carefully designed, it could be attractive to employers, subsidise apprenticeships from the public purse with no extra spending, reduce youth unemployment immediately, give chances to young people and of course induce additional economic growth.
The question is then whether additional growth can be expected from the G20’s second tier – emerging markets. Yes it can. However, a considerable additional increase in export-led growth, that until recently was the engine of the emerging economies, would only be possible if the demand for imported goods from those countries increased. But an increase in demand that contributes to the debt of countries/importers is not sustainable.
Therefore, the only solution for the emerging economies is to retarget their growth into domestic consumption. This might have a flow-on effect on developed countries through increased demand for high technology, education, niche manufactured goods, tourism and resources.
Growth where it is needed most - outside the G20
The third tier of economies - poor stagnating nations are, of course, not represented in the G20 pool; and these are the countries where growth is needed most of all.
Tackling poverty was not directly on the agenda of the G20 summit. It seems that, in dealing with poor counterparts, wealthier nations rely on the inertia of ongoing aid. Nobody seems to be considering concentrating additional growth in the poorest countries, even though together with the poor of emerging markets, they are a potential area of future increases in consumer demand.
These are the countries where investments in infrastructure, health, education, and productivity are needed and potentially can bring a tangible effect. But this can be achieved only if international aid organisations are joined by the commercial sector. One of the areas where rather quick changes can be made is re-targeting aid money into anything that can assist young people to gain skills.
In other words, wherever possible, aid money needs to be spent for education and training, particularly for apprenticeships. This can attract both local and international business with access to subsidised training. Like work for apprenticeships in wealthy economies, this can contribute to the world’s economic growth.