Treasurer Joe Hockey this week revealed plans to push for quantitative economic growth targets from the G20 Finance Ministers, who are meeting in Sydney this weekend.
But it’s unclear whether this mission is actually possible. On the one hand, the US and Canada seem to be on Hockey’s side. On the other hand, sceptical views have already been expressed by German officials.
If accepted, Hockey’s proposal would produce a welcome change in the method of operation of the G20: countries would no longer just discuss economic policy, they would make a commitment (albeit probably not a binding one) on specific economic outcomes.
The idea, however, could also backfire. A target is meaningful to the extent that it is achievable and what is achievable now varies a lot across G20 countries. Also, it is unclear if the growth target would refer to individual economies, to the G20 as a whole, or to global growth.
The enforcement of the target would be very complicated: what happens when the target is not achieved? The G20 as a group has very little enforcement power, apart from moral suasion and peer pressure. But if the target is missed and there is no effective enforcement, then what is the incentive to achieve the target in the first place?
And more fundamentally, leaving aside the complications concerning its design and application, does a target on economic growth make any economic sense?
Camp Hockey
In motivating his proposal, the treasurer made a number of valid points. First, without growth there is not much chance of creating jobs and delivering prosperity.
Second, growth can help fiscal repair. For instance, in several European countries, debt sustainability is essentially an issue of economic growth, or lack thereof.
Third, growth does not just happen: countries have to work hard and implement reforms to achieve reasonably high rates of growth.
Fourth, it would be “reckless” to cut government spending too hard when growth is below trend. This statement was indeed a most pleasant surprise as it seems to imply that the treasurer now acknowledges the importance of a counter-cyclical approach to fiscal policy.
But even if valid, these points might not be strong enough to make Hockey’s case successful.
The other camp
Five or six decades of research on economic growth have taught us two things. One is that one size does not fit all: there is no unique recipe for economic growth. The other is that economic growth, defined as the increase in GDP over time, is “only” a necessary condition to achieve prosperity. The argument of the treasurer seems to neglect both these lessons.
Hockey lists the reforms that G20 countries should agree upon to bring growth up to some desirable target: freedom in the marketplace, less regulation, less tax, more transparent markets, greater competition, labour market reforms, and private investment in infrastructure.
However, this list is all but uncontroversial. The idea that less government means more growth (which underlies Hockey’s approach to economic growth) has been rejected by the empirical evidence.
Similarly, in most countries the issue is not the level of regulation or taxation, but rather their efficiency and effectiveness. More infrastructure could be a driver of long-term growth in emerging and developing economies, but this is not always true for advanced economies.
Labour market reforms are certainly needed in several G20 countries, but exactly what type of reform is needed differs considerably across countries. What Hockey has in mind for Australia might not be appropriate for, say, Italy.
All in all, it has hard to dictate the reform agenda to the G20 countries starting from a rather narrow national perspective, as the treasurer seems to be doing.
What type of growth do we need?
Moreover, the treasurer appears to be exclusively concerned with the “quantity” of growth, forgetting that socioeconomic outcomes (i.e. welfare, prosperity, and well-being) ultimately depend on the “quality” of growth.
To put it differently, what Hockey has in mind is a type of growth that would probably match the objectives of a private business. But governments are not private businesses.
The growth that the government should deliver must involve a decline in inequality, the redistribution of opportunities, the assistance to and protection of vulnerable groups. These are all things that a simple target cannot capture. Even more importantly, these are things that cannot be achieved if reforms exclusively aim at shrinking the scope of government.
Finally, while growth is of critical importance, it is just a tool to reach some greater good. In other words, economic growth is an intermediate objective between the input (policy actions) and the final objective (prosperity and welfare).
Strategically, it makes more sense to design targets for either the input or the final objective.
A target for policies (which could be designed learning from the mistakes of the European Union) would provide more concrete guidance to policymakers and help coordinate macroeconomic policies at global level.
A target for the final objective (which could be designed learning from the lessons of the Millennium Development Goals) would help develop a common long-term vision for the global economy.
A target on growth, instead, achieves none of the above. That’s why, on balance, the G20 is probably better off without it, which obviously does not mean that growth should not be a major concern this weekend in Sydney.