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Prospects and Prescriptions for the G20's Shanghai Finance Meeting
Jonathan Luckhurst
Center for North American Studies of the Pacific Studies Department, University of Guadalajara
February 19, 2016
The G20 meeting of finance ministers and central bank governors, to be held in Shanghai on February 26–27, will attempt to bolster confidence in the world economy. A joint declaration of intent would send an important political signal that the premier international economic forum, accounting for some 85 percent of global economic output, intends to lead efforts to stabilize financial, currency and commodity markets in pursuit of its sustainable economic growth targets. I argue in my forthcoming book, G20 Since the Global Crisis, that the forum has been much less effective in implementing its Framework for Strong, Sustainable and Balanced Growth, agreed at the 2009 Pittsburgh Summit, than in its cooperation on financial reform and sustainable development. Enhancing implementation of existing policy commitments would boost global growth, but recent economic circumstances have made those targets more difficult to achieve. Currently only around half of G20 commitments, intended to raise gross domestic product (GDP) by an additional 2 percent above the 2013 projections issued by the International Monetary Fund (IMF) in five years, have been implemented; the IMF and Organisation for Economic Co-operation and Development (OECD) estimate this would only bring an additional 0.8 percent by 2018. The recent tendency of international institutions to lower growth predictions indicates that the final GDP increase could be well below the 2 percent target agreed at the 2014 Brisbane Summit.
Arguably, central bankers have been left to fill a macroeconomic policy void by governments, but the absence of market optimism has increased doubts about the efficacy of further quantitative easing, or "QE-style" stimulus. In End This Depression Now! Paul Krugman predicted after the 2008 global financial crisis that such central bank activism would have limited growth effects if not combined with fiscal stimulus and effective public investment. The Chinese agenda for 2016 emphasizes the need for greater macroeconomic policy coordination. The finance meeting this month should take concrete steps to achieve it. Enhanced G20 cooperation could help restore global confidence, by reassuring market actors, the private sector and citizens that a return to something like economic normalcy, even recovery, might be possible.
The G20 finance ministerial will likely continue to prioritize the implementation of agreed financial reforms to protect societies from future shocks. In her recent blog post, Kateryna Dzhaha asked whether the G20 is ready for the next financial crisis. She argues it is not, despite the recognition by the Financial Stability Board (FSB), in its November 2015 report, of G20 progress on making the banking sector more resilient. On three other key policy areas — ending too-big-to-fail, making derivatives markets safer and transforming shadow banking into resilient market-based finance, the FSB notes significant variation across G20 members. The G20 finance meeting will discuss key points raised in the FSB report. It will also consider progress on global tax cooperation, as stressed in China's G20 presidency agenda. One issue that has been resolved, after five years of delay, is the recent implementation of the IMF governance and quota reform agreement of 2010. The next round of quota negotiations could bring fresh controversy later this year.
The euro area's troubles since 2010 indicate how contagion effects from financial crises harm interdependent economies. The Shanghai finance ministerial, in cooperation with the IMF and other stakeholders, should seek to strengthen governance standards of the financial markets of systemically important states that constitute weaker links in global finance. This would echo the original purpose of the G20 at its 1999 launch. Similar attention should be given to the sovereign-debt restructuring regime, in light of events in Argentina and Greece in recent years; and the potential for further sovereign risks, especially in emerging countries. Former Canadian prime minister Paul Martin and others have helped keep this issue on the G20 agenda. The Chinese G20 presidency also emphasizes the need to promote orderly sovereign debt restructuring.
Weak global growth combined with unstable energy, commodity and financial markets is partly a reaction to lower Chinese demand. This has significantly strained developing and emerging economies and their currencies, for which Joseph Stiglitz and Rashid Hamid have advocated policy innovations, such as targeted capital controls. The G20 finance meeting should evaluate how alternative macroprudential tools could enhance international and domestic financial stability. The G20 forum should also build on recent negotiations between oil producers such as Saudi Arabia and Russia, focused on pricing and production concerns, to involve other G20 members in a cooperative stakeholder approach to the complex issues involved in market fluctuations. These matters are implicitly linked to the potential for achieving sustainable growth and reducing negative effects of economic imbalances.
The Shanghai finance meeting and the Hangzhou Summit in September should try to connect the dots between core economic policy fields. This would help reduce the risk of isolated governance silos leading to disjointed and insufficient responses to complex and interrelated challenges. Aside from having practical policymaking benefits, international perceptions of G20 leadership could bring important psychological effects in raising global confidence, one of its most crucial contributions during the global financial crisis of 2008–09.
Jonathan Luckhurst is Associate Professor of International Relations at the Center for North American Studies of the Pacific Studies Department at the University of Guadalajara in Mexico and author of G20 Since the Global Crisis (from Palgrave Macmillan in March 2016). He is a British academic with a PhD from the Department of Government of the University of Essex, whose research focuses on aspects of global governance and international relations, including the G20 and the 2008 global financial crisis. He is a member of the Mexican National System of Researchers (SNI). Follow him on Twitter @JonLuckhurst.
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