A bet­ter G20 com­mu­nique

Financial Mirror (Cyprus) - - FRONT PAGE - By Arthur Kroe­ber

An­other year, an­other G-20, an­other yawn. The group of the world’s 20 big­gest economies per­formed some use­ful ser­vices in the af­ter­math of the 2008 fi­nan­cial cri­sis, when it helped co­or­di­nate the mas­sive mon­e­tary and fis­cal stim­u­lus that warded off a sec­ond Great De­pres­sion, or­gan­ised an agree­ment among big trad­ing na­tions to keep their trade bal­ances within rea­son­able lim­its, and set in mo­tion ef­forts to rein in fi­nan­cial ex­cess.

Since then, though, it has de­gen­er­ated into yet an­other one of those global draw­ing rooms where lead­ers get to­gether and ex­plain to one other how the world would be a bet­ter place if only it were a bet­ter place. Last week­end’s con­clave in Hangzhou went true to form. Aside from some fiercely ne­go­ti­ated but in the end tepid lan­guage about the need for cer­tain un­named coun­tries (namely, China) to re­duce steel ca­pac­ity, the fi­nal com­mu­nique was a 48-point laun­dry list of laud­able no­tions (freer trade, less pro­tec­tion­ism, more in­vest­ment, more in­fra­struc­ture, more ef­fi­ciency, less cor­rup­tion, etc.), with no in­di­ca­tion of how these no­tions might be turned into re­al­ity.

This was a missed op­por­tu­nity. Even if the G-20 is pow­er­less to act, it could help the world by de­scrib­ing eco­nomic re­al­ity ac­cu­rately, and lay­ing down some pa­ram­e­ters for what in­di­vid­ual govern­ments can and can­not rea­son­ably hope to achieve. My sug­ges­tion for a bet­ter com­mu­nique fol­lows, with the added ben­e­fit of hav­ing only five points rather than 48.

First, set re­al­is­tic ex­pec­ta­tions for global growth. In the decade be­fore the fi­nan­cial cri­sis, one could safely ex­pect the United States to grow an­nu­ally by more than 3%, and for China to grow by 10%, with enor­mous spillover ben­e­fits for ev­ery­one else. Over the next decade, the base­line growth rates for the world’s two big­gest economies will prob­a­bly be closer to 2% and 5%, re­spec­tively, with con­se­quently smaller spillovers.

These lower growth rates are not caused by a con­spir­acy of cen­tral bankers to ma­nip­u­late in­ter­est rates, nor by overzeal­ous govern­ments tax­ing and reg­u­lat­ing en­trepreneurs to death, nor by un­der­zeal­ous govern­ments fail­ing to in­vest as much as pos­si­ble in in­fra­struc­ture. They re­sult from de­mo­graphic shifts that will re­duce the work­ing-age share of pop­u­la­tion in both coun­tries, and from China’s nec­es­sary tran­si­tion from rapid in­vest­ment-led to slower con­sumer-led growth. Lower growth is a fact, not a crime.

Sec­ond, recog­nise that lower growth is still growth, and not “stag­na­tion.” One use­ful def­i­ni­tion of eco­nomic stag­na­tion is zero growth in real per capita in­come. Even in Ja­pan, which has sup­pos­edly stag­nated for a quar­ter cen­tury, real per capita in­come has grown sig­nif­i­cantly, and the av­er­age qual­ity of life has vis­i­bly im­proved. Scare sto­ries about the dire ef­fects of growth that is lower than it was once upon a time di­vert at­ten­tion from the real ques­tion, which is how to ex­tract the most so­cial ben­e­fit from the growth ac­tu­ally on of­fer.

Third, ac­cept that in a lower-growth world, dis­tri­bu­tional ques­tions must be taken more se­ri­ously. For three decades after 1980, the world’s rich economies, led by the US and the UK, es­sen­tially took the view that growth-friendly poli­cies made it un­nec­es­sary to worry about how wealth or in­come were dis­trib­uted. This may or may not have been true in the high-growth boom years. What is cer­tain is that when growth is lower, dis­tri­bu­tional claims can­not be so eas­ily ig­nored.

Fourth, pro­mote free trade and cross­bor­der in­vest­ment, but don’t kid your­self that ev­ery­one ben­e­fits from the “av­er­age” gains. One of the stu­pid­est speeches I heard this year was by a For­tune 500 CEO who lamented the rise of Don­ald Trump and other anti-glob­al­i­sa­tion pop­ulists, and at­trib­uted it to the fail­ure of elites to “ex­plain” how free trade was ac­tu­ally good for ev­ery­one. This is id­iocy. Glob­al­i­sa­tion did not lose cred­i­bil­ity be­cause it wasn’t ex­plained prop­erly. It lost cred­i­bil­ity be­cause the bosses of so­ci­ety failed to recog­nise and take care of the peo­ple who were in­evitably, and through no fault of their own, hurt by it.

Fi­nally, un­der­stand that what may be good for economies and so­ci­eties in the long run may not nec­es­sar­ily be good for as­set prices in the short run. In the 1990s and early 2000s both the US and China, for dis­tinct but re­lated rea­sons, ex­pe­ri­enced a pe­riod of high growth dur­ing which na­tional in­come was sub­stan­tially re­dis­tributed from labour to cap­i­tal. The re­sult­ing boom in cor­po­rate prof­its was great for in­vestors in pub­lic eq­ui­ties in the US, and for en­trepreneurs and pri­vate eq­uity in­vestors in China. It was all right for the work­ing class in China, and ba­si­cally bad for the work­ing and mid­dle classes in the US and other rich coun­tries.

For these so­ci­eties to stay sta­ble, and to sus­tain growth based on house­hold spend­ing, we prob­a­bly need an ex­tended pe­riod dur­ing which labour in­come grows faster than prof­its. This is tough luck for eq­uity in­vestors. And un­for­tu­nately, the long boom also cre­ated a su­per­abun­dance of global wealth which is now look­ing for safe places to rest, and keep­ing yields down. This is tough luck for bond in­vestors. Even­tu­ally, ris­ing in­comes and the grad­ual re­al­lo­ca­tion should cre­ate the con­di­tions for stronger as­set prices. But for a while, in­vestors may just have to ac­cept low re­turns as the price of a nec­es­sary and long over­due eco­nomic ad­just­ment.

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