Coping with global economic risks
The G20 summit at Antalya in Turkey next weekend takes place at a time of continuing risk in the global economy. Although the United States seems on a path to steady recovery, Europe remains fragile, growth in the major emerging economies, except India, is weakening and world trade has taken a nosedive.
Global growth is uneven and in most countries still too weak to bring down the legacies of high debt and unemployment left from the global financial crisis. Managing the debt overhang is now inextricably mixed up with coping with the structural problems associated with demographic transition and ageing in the mature industrial economies and looms, a decade or two out, in China. Investment remains at anaemic levels and growth is slowing in emerging markets. The euro area continues to face downside risks with Greece, low inflation and high unemployment. And the United States, while still growing, will need to manage its transition to higher interest rates while the euro area simultaneously shifts into its own more aggressive monetary easing programme.
The Turkish G20 presidency has focused on inclusiveness, implementation of the Brisbane target of lifting global growth and investment for growth. Inclusiveness is aimed at ensuring that the benefits of growth and prosperity are shared across all parts of society. Small and medium-scale enterprise, female and youth employment are objects of attention domestically. The challenges facing very low income countries are the targets internationally. The G20 members’ commitment to lifting the collective economic growth by an additional 2 percent by 2018, which would boost the global economy by US $ 2 trillion, is important to G20 credibility. Investment for growth is a central theme for the Turkish presidency because it’s important for lifting the global growth potential and also for generating new jobs.
Despite Turkey’s ambitions, the Antalya Summit will likely produce few noteworthy outcomes. Exceptions might include an action plan aimed at curbing tax avoidance by multinational corporations and a strong political push by G20 leaders on the road to the UN climate talks in Paris. Expectations about the outcome are modestly low.
More than any other factor, economic and political order in the coming decades will depend on how global governance adapts to the rise of China and the other emerging economies and the role they play in shaping global governance in the future. China’s presidency of the G20 in 2016 will come at a time for the global economy that continues to be very challenging. Effective global governance will be critical to dealing with these challenges.
Global governance is too often seen as being about what others have to do to fix a problem — what the G20 needs to do, or what the G7 needs to do, what the IMF needs to do, what the World Bank needs to do or what other countries need to do, to improve global economic outcomes. That is part of what the focus in global governance needs to be about. Yet the agents of change always begin at home. So, an even more important focus in global governance is what countries need to do domestically to improve global outcomes in concert with their international partners.
Hence, a central element in China’s leadership on the G20 through 2016 will be the articulation of its own domestic reform agenda and how it will be fashioned to strengthen global economic outcomes. China’s domestic commitment to financial reform and capital account liberalisation will impact significantly on global economic outcomes. They will also play a major role in improving global economic governance as they are put in place over the coming years.
Capital account liberalisation
Capital account liberalisation will increase China’s role in international commercial and financial markets; it will be key to making the renminbi a global currency and having it included in the IMF special drawing rights (SDR) basket of key currencies; it is key to internal rebalancing of the Chinese economy; and it is key to facilitating China’s deeper integration and political stability in the Asian region.
In this context and more broadly, what are some of the systemic risks on which global leaders will be looking for Chinese input over the coming year?
In our lead essay this week, Adam Triggs argues that strengthening the global financial safety net has to be a major objective. If the IMF is to continue to perform a central role in underwriting international financial stability, reform of its governance already approved through the G20 needs to be enacted by member states, notably the United States, but there also needs to be a significant replenishment of global liquidity.
The global financial safety net, as Triggs explains, consists of the financial resources and institutional arrangements designed to provide emergency funding when a country becomes unable to meet external payments and cannot access markets because it is hit by financial or other economic shocks. It provides a financial backstop for countries in trouble and helps prevent financial contagion spreading from one country to another. It also encourages countries to open their economies to trade and capital knowing that, should they experience unexpected trouble, assistance will be available.
‘With global risks tilted to the downside, the safety net is more important than ever’, says Triggs. ‘There are a number of practical things the G20 can do to further IMF reform, improve institutional cooperation between the IMF and regional financing arrangements, and renegotiate the bilateral loans with the IMF that are about to expire’.
The trade system is also in need of attention. In Turkey G20 leaders are expected to return to the importance of trade liberalisation as global trade growth heads south. The meeting will see the G20 trade ministers’ meetings entrenched as a regular part of the G20 agenda. How the new mega-regional trade agreements, such as the Trans-pacific Partnership impact upon the multilateral system and the trading outlook, and how to ensure these agreements are compatible with multilateral liberalisation through the WTO, are particular concerns of major emerging economies such as China, Indonesia and India who are not party to them yet.
Working to get consensus on some of these issues will be important both to China and the heft of the G20 process. China will struggle to play a strong role in the global economy if it lacks a deep international currency, contributes to global imbalances, remains dependent on the currency of the United States and cannot be represented in core mechanisms like the SDR basket. So its G20 presidency offers an important opportunity to make progress on working these things through with its G20 partners.
(Courtesy East Asia Forum) (Peter Drysdale is editor of the East Asia Forum)