The G20’s Growth Promise: Can They Deliver?
Last weekend’s meeting of G20 finance ministers and central bank governors in Sydney racked up some notable achievements. The most important was an agreement by the assembled governments to increase global growth by two percentage points over the next five years and to submit detailed national action plans to bring this about. At the same time, the gathering reminded observers how difficult it is to hold G20 members’ feet to the fire to ensure the timely fulfillment of their commitments.
For the past few years, the main debate at G20 summits has been between advocates of stimulus versus austerity. The Sydney meeting showed that this debate is settled. The G20 will focus on increasing global economic growth, with the strong backing of both of the International Monetary Fund (IMF) and Tony Abbott, the conservative prime minister of this year’s G20 chair, Australia. The Sydney agreement, if G20 leaders can deliver on their promise, will add some $2 trillion to global economic growth and create tens of millions of jobs.
To be sure, the two 2 percent growth target is arbitrary, chosen because it sounded plausible, notwithstanding some grumbling from developing countries that the world could do better than accelerate growth by .4 percent annually over the next five years. Jacob Lew, the U.S. treasury secretary, described the target as “significant.” More meaningful than the figure itself was the collective acknowledgment by G20 governments that current national efforts are inadequate to achieve robust global growth, and their promise to submit national strategies to advance this joint target to the scrutiny of the IMF and their G20 peers.
There were other bright spots in Sydney. Janet Yellen, the new chair of the U.S. Federal Reserve, won plaudits with her pledge to take the views of other nations into account when setting Fed policies. This was a welcome effort to calm the waters between the United States and emerging market economies, whose exchange rates have been whipsawed, first by massive U.S. “quantitative easing” and then by the “unwinding” of this same policy.
The G20 finance ministers also renewed their agreement, made at last September’s G20 leaders’ summit in St. Petersburg, to crack down on corporate tax avoidance and evasion, which has eroded the tax bases of G20 member states, including an estimated $337 billion annually in the United States alone. In Sydney, the G20 pledged to harmonize tax treatment of corporations and close legal loopholes that permit companies like Apple to avoid large tax bills through creative bookkeeping.
More negatively, the G20 risked further undermining its global legitimacy by failing once again to implement agreed governance reforms to the IMF, which would increase the voting weight of large emerging economies, notably China. The fault lies squarely with the United States—and specifically the U.S. Congress. In 2010, the Obama administration courageously pressed Europeans to correct their overrepresentation on the Fund’s Executive Board and disproportionate quota shares. Unfortunately, the White House had failed to persuade Republicans on Capitol Hill to pass the implementing legislation that would make this happen. Beyond injuring the reputation of the United States as an enlightened global leader, congressional inaction has reinforced Chinese cynicism about U.S. calls for it to become a “responsible stakeholder” in return for a greater voice in multilateral bodies.
The biggest uncertainty emerging from Sydney is whether the promises made by G20 states to pursue growth strategies will have any impact in the real world. And here, there is ample room for skepticism.
One of the biggest disappointments with the G20 has been its toothless Mutual Assessment Process (MAP). Endorsed at the 2009 Pittsburgh Summit, the MAP was envisioned as a rigorous peer review process that would allow G20 member states to evaluate one another’s macroeconomic policies and call out members whose policy choices had (or threatened to have) deleterious spillover consequences. In practice, the G20’s peer review has lacked bite, to the vocal frustration of senior IMF officials, including first deputy managing director David Lipton.
The question is whether the G20’s recent public commitment to a concrete 2 percent growth target and to providing detailed action plans will compel better performance from member states. A more optimistic scenario suggests that concrete multilateral commitments will shape national economic policies, for one of two reasons. First, domestic publics will hold leaders accountable for their promises on the global stage. Alternatively, G20 leaders can invoke the multilateral nature of these commitments to overcome any domestic objections to the sacrifices these commitments will inevitably entail. There is some evidence for the latter, at least. Already, Australian finance minister Joe Hockey has invoked the Sydney agreements to win support for his government’s domestic agenda.
On the other hand, a more sober outlook yields a more pessimistic conclusion: Namely, that it is not international commitments that tend to drive national policy; rather, domestic political calculations delimit the fulfilment of ostensible international obligations. This is particularly true in a nation like the United States, whose constitutional system is based on the separation of powers. In a parliamentary democracy, the prime minister has enormous powers to bind his or her country to global targets. Not so in U.S. politics, where a skeptical Congress can easily hamstring even the most internationally minded of presidents. But even in parliamentary systems—to say nothing of authoritarian polities like China and Russia—the ultimate factor in the fulfillment of multilateral commitments will be domestic politics.
This is not a counsel of despair, but of realism. When it comes to fulfilling the latest G20 pledges, don’t hold your breath. But neither should international leaders allow these realities to discourage international cooperation. G20 spats over the value of austerity versus stimulus have surfaced at recent summits and cramped coordination between the world’s leading economies. Though leaders are undoubtedly constrained by domestic political realities, international agreement on the long-term direction of policy directives and arguments is no small feat and will likely lay the groundwork for growth in the future.