Rethinking Bretton Woods | Sun, Sep 18, 2016
Analyzing the outcome of the G20 Summit, held September 4-5 in the city of Hangzhou (China), RBW Project Director Aldo Caliari explains why the agreement fails to provide the actions that could surmount the current challenges in the global economy.
The Group of 20 Leaders (G20 or “the Leaders”), under the presidency of China, held their yearly Summit in the city of Hangzhou (China), on September 4-5, 2016.
Ever since the G20 started meeting at Heads of State level, in November 2008, the economic policy-making community has had its sights set on the grouping. At that time it revealed itself as an effective actor taking forceful steps to coordinate action to stop what could have otherwise been a global meltdown (even though some observers caution such steps had been already agreed individually by each country, so the grouping as such was not the force propelling them). Nonetheless, a strong recovery of the global economy has eluded so far the subsequent G20 actions in successive yearly gatherings. This has been in spite of the ever-growing thickness of the activities by the Group: at Hangzhou, a Communique was accompanied by more than 100 documents, more than 30 of them being initiatives or Action Plans endorsed by the Group.
Speaking at the Summit, the IMF Managing Director, Ms. Christine Lagarde, summed up the situation by stating that growth had been “too slow, for too long and for too few.” The G20 Communique recognized that “growth is still weaker than desirable. Downside risks remain due to potential volatility in the financial markets, fluctuations of commodity prices, sluggish trade and investment, and slow productivity and employment growth in some countries.”
Will the Hangzhou agreements help surmount global economic challenges? Unlikely. On three areas of reform that should be central to efforts to reinvigorate the speed and inclusivity of growth, the unveiled G20 agenda was troublingly misguided. These areas were: structural reform, financial regulation and trade and investment. See below a further analysis of the outcomes for each of them.
One of the salient features of the Hangzhou outcome is the prominence it gives to structural reforms, which in the way the G20 is going about them, is quite problematic. The justification is, ostensibly, a certain sense of desperation about the ineffectiveness of demand support interventions to lift the global economy. But this is a self-serving statement, much truer of monetary policies, than of fiscal policies, which are kept on restraint across a growing number of countries. The G20 skipped revisiting the weight with which different demand interventions are being deployed, to look at the supply-side, with the potential consequence that negative employment and wage effects of such reforms may only make the demand gap worse.
Last year, the IMF had delivered a carefully crafted paper on the matter that some analysts found a bit overreaching. Yet, comparing that paper with the current G20 approach it is regrettable that the G20[i] decided to throw away even the degree of caution present in that paper.
First, the IMF paper judiciously recognized that structural reforms are very country-specific and need to be cognizant of each country’s circumstances and needs. The G20 makes a nod to national specificity, for instance stating that “choice and design of specific structural reforms must necessarily be informed by a country’s macroeconomic environment and national preferences.” But the adoption of a “common set of indicators” shows a uniform direction of travel that is not to be questioned.
Second, the Fund was very emphatic about structural reforms being “inherently” difficult to measure as they involve “issues that are not easy to quantify.” The G20 forgets about this “small” detail, and adopts quantitative indicators – whose comprehensiveness it announces is set to increase – making, on the way, some very questionable calls. Strikingly, labor productivity becomes the main outcome to measure as a result of five of the six priority areas for reforms. This approach neglects the difficulties in disentangling labor productivity from that of the other factors of production. Success in increasing labor productivity could also lead to lower employment or happen in the absence of real wage growth, thus putting a further dent on demand. Such variables could have been selected for measurement on their own, but were not.[ii]
Third, the IMF should be credited with encompassing as potential subject of structural reforms –at least at this general policy statement level – both actions that would need to address government failures, as well as the ones that would need to address market failures. This set the Fund’s approach apart from the widely-discredited “structural adjustment programs” that became a mark of the institution in the 1980s and 90s and were heavily focused on “getting the government out of the way,” thus biased towards the former category of failures. But a reading of what the G20 means by structural reforms goes back to the worst biases of structural adjustment. One priority reform area is unambiguously called “Promoting trade and investment openness.” While a growing body of literature advises on the risks of corruption and wasteful spending in Public Private Partnerships, the infrastructure area of the document raises eyebrows by calling for “cost-benefit and value-for-money analysis, possibly supplemented by multi-criteria analysis, for public infrastructure projects.” (emphasis added) Market failures are not even to be found under “Enhancing environmental sustainability,” which calls for extending “the use of market-based mechanisms to mitigate pollution and increase resource efficiency.”
Fourth, the IMF was careful to demarcate its engagement on structural reforms needed to be guided by its mandate and Articles of Agreement. It is true that if one looks long enough, every economic policy area can potentially have a macroeconomic implication and, thus, fall under the purview of the Fund. But the Fund knew better than falling into this temptation, approach that so ill served it in the past, and even said “many structural issues will likely remain outside the Fund’s areas of expertise.” It then becomes hard to understand why the G20 insisted on pushing the Fund to carry out analysis on what each G20 country should prioritize, across all reform areas, without relying on any of the other institutions whose expertise was more suitable to specific portions of the task.
Financial regulation and green finance
Referring to the financial regulation agenda, the Leaders said they remained “committed to finalizing remaining critical elements of the regulatory framework and to the timely, full and consistent implementation of the agreed financial sector reform agenda.” Seen in the light of the significance of financial regulation for a body created to respond to the greatest financial crisis since the Great Depression, the statement betrays a certain sense of complacency. It assumes the agreed reforms are enough to prevent a crisis and the worst consequences of its aftermath, a proposition that, at the moment, remains more faith than science.
But perhaps the most problematic (and less scientific) aspect of such complacency is that it seems to see finance as disconnected from all the other problems the Communique rightly recognizes (slowing trade, weak demand, limited growth, de-industrialization, and so on). In fact, if one reads this together with the growing structural reforms agenda the message is quite clear: “everybody else has to adjust, just not finance.” For instance, as reported by an observer, financial inclusion did not seem to be prioritized in this G20.
If one only looks at implementation of the agreed reforms, the picture is not so good, either. A report by the Financial Stability Board on the matter said, in the diplomatic language in which an intergovernmental body can address the G20, that “Implementation progress remains steady but uneven across the four core areas of the reform programme” (such areas are Building resilient financial institutions, Ending Too-big-to-fail, Making derivatives markets safer, Transforming shadow banking into resilient market-based finance). The same report alludes to a number of unintended consequences of the reforms that it keeps under observation. Here, one can find some justifiable ones, such as the impact on emerging markets and developing economies’ access to finance. But others are alarming reflection of the pushback by the financial industry that, past the reform momentum post-crisis, is trying to return to some of its pre-crisis practices, such as “effects of reforms on financial openness and integration.”
Thinking of the long term planetary limits to conceiving growth as usual, the Leaders’ endorsement of a report issued by the Green Finance Study Group set up under the Chinese Presidency of the G20 represented an important step. The G20 recognized the challenges to the development of green finance, such as “difficulties in internalizing environmental externalities, maturity mismatch, lack of clarity in green definitions, information asymmetry and inadequate analytical capacity.” Given the enormous obstacles China faced in its pioneering effort to install this concept within the G20 Finance track (that staffed by Finance Ministers and Central Banks), the mere inclusion of a paragraph in the declaration could be regarded as a triumph.
However, the fact that the Communique only welcomed the “voluntary options developed by the [Green Finance Study Group] to enhance the ability of the financial system to mobilize private capital for green investment,” gives some cause for concern. If the concept of green finance is to sustain credibility it will have to show its capacity to move companies beyond where they would have been by pursuing “business as usual.” For this it will have to show a proper balance between voluntary and mandatory actions, including regulatory ones.
Trade and investment
One of the symptoms of stagnation of the global economy as shown by recent reports is the continuation of the slowdown on the global volume of trade, which forecasts point to being almost unchanged this year from 2015. It is understandable that the G20 felt compelled to show resolve on this front. But the “Global Strategy for Trade Growth” Leaders endorsed, as the unambiguous title makes no secret, seems to assume that somehow growing global trade will solve all ills and, more importantly, some automatic effect to spread its benefits (trickle-down?) more fairly among and within countries. For instance, the strategy says: “G20 members recognize that facilitating trade and investment will enhance the ability of developing countries and SMEs to participate in and move up the value chain in GVCs,” something not borne out by experience. In fact, the Summit declaration does call for “policies that encourage firms of all sizes, . . .to take full advantage of global value chains (GVCs) and that encourage greater participation, value addition and upward mobility in GVCs by developing countries, particularly low-income countries.” But all experiences of countries that have managed to do that in real life, show them precisely relying on active use of trade and investment policies, not on some expectation that the automatic effect of expanding trade would lead them in that direction.
In fact, to some extent in open contradiction with such objective, the G20 also adopted the Guiding Principles on Investment Policymaking that had been endorsed earlier in the year by its Trade Ministers. The principles recognize the right of governments to regulate investment, but also profess an intention to move towards an “open, non-discriminatory” conditions for investment. While at the moment these are principles that the G20 have adopted for themselves and should not necessarily apply to other countries, the United States reportedly tried to introduce them in the UNCTAD XIV negotiations – a universal membership organization –last July. The moves on tax cooperation bears salutary lessons and one may not rule out that in future non-G20 countries are asked to join “on an equal footing” the implementation of such principles.[iii] Embedding such principles into multilateral rules for investment – a position rejected by more than 70 countries at the Cancun WTO Ministerial in 2003 – is, furthermore, an explicit demand by the Business 20.
Along these lines, the G20 members extended “their commitments to standstill and rollback of protectionist measures till the end of 2018.” One might object the bluntness of the methodology [iv] used in such survey. However, the fact that the latest report by UNCTAD, WTO and the OECD shows the monthly average of trade restrictions at the highest level registered since the G20 asked them to perform the survey for the first time (in 2009), raises questions beyond that, about the general value of such pledge.
Industrialization is perhaps the singular most important item in achieving a fairer distribution of the gains from trade. Thus, the Hangzhou Communique’s decision to launch a “New Industrial Revolution” Action Plan was well-placed. With the commodity price shock revealing again how little has changed in the structure of developing countries’ economies – undiversified and largely commodity-dependent—time to focus energies on how they can industrialize was long overdue.
Unfortunately, the components of this agenda are far from what developing countries need. Probably this was to be expected, given the composition of the G20, which in providing background on its “New Industrial Revolution” Action Plan mentions efforts of individual countries most of which are developed ones. This is, nonetheless, not the major objection one could make to such agenda. The requirements of sustainable development will need a transformation of industry, even in countries that industrialized already. The problem is the assumption that seems to permeate this plan that everybody, no matter their level of development, has to do the same thing.
The New Industrial Revolution Action Plan, together with an Innovation Action Plan, were part of a “Blueprint on Innovative Growth” launched by the Leaders.
The Action Plan prioritizes dimensions that are clearly not the ones that developing countries would care about. A conspicuous one is intellectual property rights. Obviously, one of the main obstacles poor countries face trying to industrialize is the lack of technology and the extremely high prices attached to accessing it from the companies – mostly oligopolies in developed countries – that have it. Their repeated demand, therefore, has been facilitation of technology transfer and existing rules on intellectual property rights such as the WTO Trade-Related Intellectual Property Rights (TRIPs) agreement have acted an obstacle in this regard. But the Action Plan is geared to strengthen IPRs protection. At one point it calls for the oxymoron of “effective protection and enforcement of . . . voluntary technology transfer.” (emphasis added) It also recognizes “enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises” prompting the question of whether it is the best use of the forum of the most powerful countries in the world to restate what companies do anyways.
Same doubts apply to the priority level to give to “cooperation in development of standards” which, if it is to be carried out in the G20, may easily become one more barrier for developing countries. These already spend significant time and resources trying to catch up to the many standards by countries and companies that, as a result of having created the standard initially, get to enjoy unsurmountable “first-mover” advantages.
There are, though, other aspects in the Action Plan more in sync with developing countries’ needs, for instance skills and adaptability of the workforce to the requirements of industrialization and SMEs lack of “resources and information to help them implement and benefit from new technologies.” It will be important to follow what tangible action the G20 is ready to perform on these fronts.
From the perspective of multilateral trade negotiations at the WTO, a key political development to underscore was the Summit Declaration’s reference to Leaders’ commitment “to shape the post-Nairobi work with development at its center and commit to advancing negotiations on the remaining [Doha Development Agenda] issues as a matter of priority . . . “ At the end of the WTO Ministerial Conference in Nairobi, last December, a group of developed countries had insisted on not recognizing the currency of the Doha Development Agenda anymore unless developing countries were ready to commit to including new issues on the agenda. Unfortunately the G20 breakthrough was not necessarily a net gain. As reported by South - North Development Monitor (SUNS), the cost to pay for such agreement was the mention that “a range of issues may be of common interest and importance to today's economy, and thus may be legitimate issues for discussions in the WTO, including those addressed in regional trade arrangements (RTAs) and by the Business 20.” The influence and access of the business community –completely out of sync with that of civil society – in trade negotiations is no secret. However, the direct, explicit and, in this case, open-ended, reference to the agenda of a specific group of large businesses in political commitments on trade is an unprecedented development of alarming proportions.
[i] The report from the G20 Framework Working Group “G20 Enhanced Structural Reform Agenda” is used as a proxy for the G20 position in the remainder of this section.
[ii] Employment to population ratio is a variable to measure only in the case of the “Advancing labour market reform, educational attainment and skills” area.
[iii] The initial G20 exercise of adopting for themselves the OECD Base Erosion and Profit Shifting (BEPS) package–which they did at the St. Petersburg Summit in 2013 -- could be considered a step in the right direction towards combatting tax evasion and avoidance. Moreover, the G20 could add value as peer pressure mechanism were it to review its own compliance and progress in implementation of said framework. But in the Hangzhou Communique the G20 expressed support to the widespread implementation of BEPS and called upon “all relevant and interested countries and jurisdictions that have not yet committed to the BEPS package to do so and join the framework on an equal footing.” No doubt this latest twist, whereby everyone is asked to “join on an equal footing” rules they have not been invited “on an equal footing” to design, illustrates too well the dangers of rule-making efforts in a non-inclusive forum, no matter how much such forum claims to engage only in coordinating efforts among its members.
[iv] For a more extensive analysis of problems with the methodology see Alexander, Nancy and Aldo Caliari 2013. Commentary on “Mapping G20 Decisions Implementation.”, Part II, Section 3.