The Group of 20 Finance Ministers and Central Bank Governors met on Friday, April 23, to discuss their framework for strong, sustainable and balanced growth. This is the very first time that leading world economies coherently reviewed their vision for global economic forecasts, not just in terms of growth, but in terms of fiscal, social and environmental sustainability and balance across and within countries. If nothing else, this framework can become a blueprint for stabilizing business expectations—one of Keynes’ original goals for the Bretton Woods system.
Although the G-20 is a self-appointed club, the communiqué is clear in saying that officials considered the implications of their own national policies on all countries and regions of the world. The G-20 ministers also believe there are opportunities for superior global outcomes based on collective action formulated through mutual policy assessment.
This is an outcome of enormous importance for developing countries. The framework provides a mechanism for putting on the table a range of beggar-thy-neighbor policies, like exchange rates, regulations, trade restrictions and conditionalities, that developing countries have long complained tilt the playing field against them. It also promises action against major global shocks—food, fuel and finance—that have periodically set back the cause of development in so many countries.
The good news is that the new framework provides a platform for discussing these issues. The not-so-good news is that there is as yet no indication of whether a discussion platform will actually result in any changes in individual country national policy. After all, there have been many other such efforts at international economic policy coordination. The International Monetary and Financial Committee, the IMF’s Multilateral Surveillance and the Development Committee were set up for precisely such purposes. But without any enforcement powers, these forums became all talk and no walk. It remains to be seen whether the G-20 can rise above the logic of geopolitics as practiced at present and actually act to create a better global growth environment.
So here’s a test for the G-20 that could signal whether it will really take action.
The global recovery is all about ensuring an adequate expansion in private sector demand. There are two large sources of demand in the world whose full potential is not being tapped: consumption by an emerging middle class in middle-income countries and infrastructure in all developing countries. The former means less domestic savings; the latter means more investment. The combination means a greater need for foreign capital to flow into developing countries.
The problem is that many developing countries are unwilling to expand to their full potential because they worry that the financing needs will expose them to excessive risk. They are right to worry. Asia, Latin America, Eastern Europe and Africa have all had experiences over the last 20 years of “sudden stops” of private capital flows—indeed capital reversals—through no fault of their own. In several cases, the result has been a crisis that has had serious costs to growth.
Unleashing the demand potential in developing countries therefore also requires a sustainable and predictable flow of capital to these countries. This is where current geopolitics comes in. The existing institutions tasked with funneling money to developing countries are running out of headroom as a result of their expansion during the current crisis. The World Bank, African Development Bank, Inter-American Development Bank and European Bank for Reconstruction and Development are asking for general capital increases this year. But the major shareholders, the Europeans, the U.S. and Japan, are all struggling with large fiscal deficits of their own. They are reluctant to pony-up more money.
That would not be an insuperable obstacle as there are many other countries, including emerging economies themselves, who would be perfectly happy to provide new equity to the multilateral development banks. But that would mean that existing shareholders would be diluted—their influence and share of votes would have to go down. That is not something they are currently prepared to tolerate. As a result, the solution is to go slow on any new capital increases and not to allow emerging economies to significantly increase their contributions.
What this means in practice is that the institutions that were designed to channel large, stable financial flows to developing countries will be unable to play this role in the post-crisis world. For example, the Development Committee of the World Bank, the largest of the development banks, endorsed a proposal for a paid-in capital increase of just $3.5 billion that would keep its post-crisis net lending—new lending minus repayment of outstanding loans—at around $3 billion per year. This is a tiny amount considering the Bank estimates that infrastructure investment, operation and maintenance needs in developing countries are $200 billion a year higher than current spending levels.
So this is the dilemma: a strong, sustainable and balanced growth framework would require far more financing to a broad range of developing countries. Stable and predictable financing to these countries can best come from the multilateral development banks. But these banks are being constrained by their shareholders who neither wish to inject sizeable new capital themselves, nor permit the dilution in their influence that would come from allowing others to inject new capital. The new growth framework is at odds with the old geopolitical framework. The outcome of the discussions on the multilateral bank capital increases will reveal much about whether the G-20 is going to be a serious global steering body or just another talk shop.
The whole spirit of multilateralism is on life support. Normally you’d want to heap praise on some other country for taking on a larger share of this global burden, but Trump doesn’t think about global problems needing to be globally shared.