China has put a lot of important issues on the G-20 agenda for the summit that it will host in Hangzhou this weekend—green financing, sustainable infrastructure, development of the poorest countries, to name a few. But, as usual, global growth will be at the center of the discussions.
Global growth continues to disappoint. A year ago the IMF was projecting 3.8 percent growth of world output in 2016; its latest update has marked that down to 3.1 percent. This has been the pattern in recent years: optimism that global growth was finally returning to a healthy pace, only to be overtaken by disappointing results. The difference between 4 percent and 3 percent may not sound like much, but it has a big effect on improvements in living standards in developed and developing countries alike, especially if the mediocre growth is sustained over a long period of time.
Hangzhou cannot do much to change this picture, but it is useful for the leaders of the major economies to meet and urge on each other’s reforms. In general, they know what they need to do, but face domestic political opposition.
Here’s my short list of what China, the United States, and the eurozone could do to accelerate growth in a sustainable way:
China: China is the chair and is in the enviable position of having solid growth this year, but its growth faces two problems: sustainability and a lack of positive spillovers for its partners. China is growing at above 6 percent because consumption has held up well while investment naturally slows down in the face of massive excess capacity problems. China’s excess capacity will definitely be a topic, if not in the formal sessions, then in the side meetings (e.g., Xi-Obama). China is keeping zombie firms afloat with lending in order to smooth the downturn in industry, but risks are building up as a result. To avoid a financial crisis that would be bad for China and the world, the government needs to tighten budget constraints, allow some firms to go bankrupt, recognize the losses in the financial system, and recapitalize banks as needed. Naturally there is political opposition, but history shows it makes more sense to help the affected workers and communities rather than to try to keep alive firms that have no prospect of succeeding.
The other important reform for China is to open up its service sectors to foreign trade and investment. It is striking that China is growing rapidly but has sharply declining imports. This is because imports of material and machinery have been used for investment, but consumer markets are largely closed. Consumption is mostly services, and China stands out among the G-20 as being closed to imports and investment in these areas. Opening up these markets would help China create more innovative, productive services sectors (one of its objectives) and also help prevent the reemergence of an excessively large trade surplus. Not to mention set a good example in a world with growing protectionist sentiment.
United States: For the United States, three measures that could help short-term and long-term growth are greater infrastructure investment, immigration reform, and new trade and investment agreements. The United States has been spending very little on infrastructure, and bridges and roads are deteriorating. With interest rates so low and under-employed labor, this one should be a no-brainer. Immigration reform includes both normalization of the status of a large number of low-skill workers, as well as larger quotas for high-skill workers. Trade agreements such as the Trans-Pacific Partnership, which President Obama has vowed to continue to push, can help the United States grow faster and create more good jobs when combined with the other policies noted above. All of these measures, even infrastructure, are hugely controversial in the U.S. elections.
Europe: The third big part of the global economy is the eurozone. The fixation on austerity has not worked well, and the continent has not really recovered yet from the global financial crisis. Countries that can afford fiscal stimulus—such as Germany and others in northern Europe—should pursue it, addressing both infrastructure and social needs. Southern European countries such as Italy and Greece, meanwhile, need more structural reforms to make it easier to start businesses and create jobs. Debt relief for Greece would help as well.
This list usefully reminds us that these are big tasks, each facing political opposition at home. We should be realistic about what a meeting in Hangzhou can do, but it is still useful for our leaders to talk through their reform ideas and challenges, as well as exhort each other on. The benefits will be greater if the major economies are all pursuing growth-enhancing reforms at the same time.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.