The G-20 met in Shang­hai. Why noth­ing hap­pened

The big­gest economies fail to co­or­di­nate more stim­u­lus “They should go bold ... and they should go to­gether”

Bloomberg Businessweek (Asia) - - CONTENTS - −Peter Coy

Why can’t the Group of 20 large economies agree on a plan to lift world growth? Ac­cord­ing to a work­ing pa­per re­leased in Jan­uary by Har­vard Univer­sity Kennedy School of Govern­ment econ­o­mist Jef­frey Frankel, dif­fer­ent sets of na­tions don’t just dis­agree on so­lu­tions; they even dis­agree on what game is be­ing played. “When two play­ers sit down at the board, they are un­likely to have a sat­is­fac­tory game if one of them thinks they are play­ing check­ers and the other thinks they are play­ing chess,” Frankel wrote in the pa­per, ti­tled “In­ter­na­tional Co­or­di­na­tion.” Frankel’s frame­work helps ex­plain what hap­pened when G-20 fi­nance min­is­ters and cen­tral bankers met in Shang­hai on Feb. 26-27. While re­it­er­at­ing their com­mit­ment to avoid cur­rency wars, the lead­ers came away with­out an agree­ment to stim­u­late global growth through co­or­di­nated govern­ment spend­ing, such as stepped-up in­fra­struc­ture

in­vest­ment. “In­vestor hopes of co­or­di­nated pol­icy ac­tions proved to be pure fan­tasy,” David Lo­evinger, a for­mer China spe­cial­ist at the U.S. Depart­ment of the Trea­sury and now an an­a­lyst at fund man­ager TCW Group, said af­ter the meet­ing. “It’s ev­ery coun­try for them­selves.”

The In­ter­na­tional Mon­e­tary Fund and the U.S. went to Shang­hai be­liev­ing the world is suf­fer­ing from a short­fall in de­mand that can be cured with a

short-term, co­or­di­nated burst of stim­u­lus. “They should go bold, they should go broad, and they should go to­gether,” IMF Man­ag­ing Di­rec­tor Chris­tine La­garde said. “To­gether” is the key word in her sen­tence. (Frankel called co­or­di­nated stim­u­lus a “lo­co­mo­tive game” in his Jan­uary pa­per.)

If a sin­gle coun­try, such as China, tries to stim­u­late growth while oth­ers don’t, much of its stim­u­lus will tend to leak abroad, ben­e­fit­ing other coun­tries. That’s be­cause a por­tion of the money Chi­nese house­holds get from stim­u­lus will be spent on im­ported goods. Leak­age isn’t a prob­lem if all coun­tries stim­u­late at once, Mau­rice Ob­st­feld, the IMF’s chief econ­o­mist, said at the U.S. Mon­e­tary Pol­icy Fo­rum in New York on Feb. 26.

But other coun­tries, in­clud­ing Ger­many and Bri­tain, ar­rived in Shang­hai be­liev­ing that stim­u­lus is in­ef­fec­tive and the real risk is that gov­ern­ments will be tempted to over­bor­row, push­ing up in­ter­est rates for ev­ery­one else. If so, rather than spend­ing more, the pub­lic-spir­ited thing to do is spend less and flush ex­cesses out of the sys­tem. “The debt-fi­nanced growth model has reached its lim­its,” Ger­man Min­is­ter of Fi­nance Wolf­gang Schäu­ble said at an event in Shang­hai be­fore the

for­mal meet­ing. If the stim­u­lus con­tin­ues, he said, “we’ll be the walk­ing dead.” Frankel—who wrote his pa­per be­fore the Shang­hai meet­ing but was fa­mil­iar with the na­tions’ lean­ings—said coun­tries such as Ger­many are play­ing what he calls a “dis­ci­pline” game. “Ger­many’s view is that it is do­ing

ev­ery­one a fa­vor by ex­er­cis­ing as much bud­getary dis­ci­pline as it is,” he wrote.

With its eco­nomic growth slow­ing, China is step­ping up fis­cal stim­u­lus via in­creased pub­lic spend­ing, a widen­ing bud­get deficit, and a $489 bil­lion debt-re­fi­nanc­ing plan for lo­cal gov­ern­ments. China would ben­e­fit if other coun­tries also stoked de­mand, which would help its ex­ports. Yet the host na­tion didn’t try to get other coun­tries to play a lo­co­mo­tive game. “China’s lead­er­ship style is cau­tious and con­sen­sus-ori­ented ,” says John Kir­ton, co- di­rec­tor and founder of the G -20 Re­search Group at the Univer­sity of Toronto; its lead­ers didn’t want to take sides in a chess-vs.-check­ers de­bate. This is what can hap­pen at an eco­nomic sum­mit when del­e­gates show up with rad­i­cally dif­fer­ent views of the world. Wrote Frankel: “If dif­fer­ent coun­tries have fun­da­men­tally dif­fer­ent mod­els [of the world econ­omy] in mind, the of­fi­cials might not even be able to carry on a co­her­ent dis­cus­sion of the po­ten­tial gains from co­or­di­na­tion and how to achieve them.” The bot­tom line The fi­nance min­is­ters of the G-20 meet­ing in Shang­hai couldn’t even agree on the ob­jec­tive they should pur­sue.

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