Group's Action Plan for Growth Will Likely Disappoint
Op-ed in the Australian Financial Review
© Australian Financial Review
The Group of 20 finance ministers and central bank governors announced in Sydney on Sunday an aim to boost their real gross domestic product in 2018 by 2 percentage points relative to current projections. They pledged to redesign their economic policies to achieve this worthy objective. Unfortunately, the November 16 Brisbane action plan is likely to disappoint.
The G-20 ministers and governors should be congratulated for acknowledging the failure of the G-20 program to achieve the strong, sustainable, and balanced growth that was unveiled by G-20 leaders in Pittsburgh in September 2009.
According to an International Monetary Fund (IMF) report released in Sydney, the level of real GDP in G-20 countries is about 4 percent below the baseline projected by the IMF in October 2010 and 2 percent below its downside scenario at that time.
Thus, I applaud the Australian-inspired effort to boost the level of real GDP in 2018, but the devil will be in the details of countries' commitments in Brisbane.
Each country should provide a target for its 2018 GDP at the Brisbane meeting consistent with the desired overall result.
Past leaders' summits have set growth targets, for example at the London G-7 summit in 1977, when advanced countries were mired in disappointingly low growth similar to what they are experiencing today.
But the lesson from London was that growth targets alone are useless without concrete changes in policies to achieve them.
Consequently, at the 1978 Bonn summit, the leaders announced commitments to quantified changes in policies to achieve their growth objectives. Most countries fulfilled their commitments.
However, largely because of an abrupt increase in oil prices in 1979, inflation accelerated. This is why the Bonn summit is often cited as a failure in international economic cooperation.
Nevertheless, it would be refreshing if the G-20 countries were to announce in Brisbane specific changes in the settings of their macroeconomic and structural policies to produce better growth and employment outcomes.
But I will wait and see.
First, many countries will argue that their current policies should produce better outcomes than current IMF projections-an argument about the goal posts.
For example, the United States Federal Reserve recently projected that the real GDP of the United States at the end of 2015 will be about 0.5 percent higher than the current IMF projection.
Second and more important, the G-20 record on policy commitments is not encouraging.
Most previous G-20 action plans have consisted of vague pledges to continue existing policies along with a few promises to change policies that were not likely to be adopted by legislatures.
For example, do we really expect President Barack Obama to commit to a balanced and comprehensive medium-term fiscal plan (including entitlement and tax reform) that puts public debt on a downward path, as called for by the IMF? And would the United States deliver if he were to make such a commitment?
Do we expect the German authorities to pledge to boost public infrastructure and private investment through tax and financial system reform and services sector liberalization in order to stimulate domestic demand in Germany and reduce its contribution to global external imbalances, as called for by the IMF?
To date, the German authorities have declined to agree that they are part of the problem of inadequate global growth and, therefore, that they should contribute to a cooperative solution.
Thus, the Australian G-20 focus on economic growth is welcome, but I will hold my cheering until I see what comes out of Brisbane.
A final note: Writing from the United States, I would be remiss not to acknowledge the G-20 ministers and governors' call for the United States to finally ratify the G-20 Seoul package of the IMF quota and governance reforms before their April meeting in Washington.
I am sure that US Treasury Secretary Jack Lew and Federal Reserve Chair Janet Yellen got an earful on this topic in Sydney. However, the other ministers and governors were preaching to the choir.
It would better if they spoke directly to members of the US Senate and House of Representatives.