The G20 wants to change the world. More specifically, the G20 gives national politicians a chance to put forward ambitious global agendas. This is good for their careers. But it can also be good for the world. The balance and weight of the G20 allows it to have some influence on other, older global organisations that may be less able to take a comprehensive view of what needs to be done in today?s risky world. What exactly is needed?
There are two classes of challenges. The first is what brought the G20 to prominence?fending off disaster. The disaster that has been threatening in various forms since 2008 is financial meltdown that leads further to more general economic collapse. The latest manifestation is the ongoing eurozone crisis. The technical challenges here are not difficult. Perhaps the G20 can make a difference in this situation by providing some political cover for the Germans, as well as additional financial support, indirectly through the IMF.
The broader and longer-term approach to fending off financial disaster is supposed to be through global rebalancing. The idea here is that large asymmetries of financial asset holdings across countries make the global system more vulnerable. The G20 has tasked the IMF with doing the measurement and analysis needed before policies can be crafted. One might also put climate change and food security into the ?disaster? bucket. The G20 certainly hopes to address both these issues substantively.
When the financial crisis of 2008 appeared to have receded, and before it reared its head in a new form in Europe, the G20 also began to turn attention to a ?development agenda?. This is the second class of challenges?how does one promote and sustain growth across the globe? Of course, disasters reduce growth, both immediately and through their after-effects, but measures to increase growth rates are conceptually distinct from policies to contain or prevent disasters. The advanced economies? slow recovery from the last crisis has tended to put the spotlight on growth, which has always been the central concern of developing countries.
In the context of growth, the G20 is in danger of losing touch with what it can realistically accomplish. A coordinated approach to designing a global financial system with appropriate checks and sufficient safety nets is necessary to avoid regulatory arbitrage by mobile capital. However, policies for enhancing global growth seem less dependent on cross-country coordination, except for cases such as multilateral trade agreements.
The G20 asked software billionaire turned global philanthropist Bill Gates to weigh in on policies for global growth. Gates? ideas include raising more money for public sector investment, through taxes on alcohol, tobacco and fuels, and through a financial transactions tax. These are old ideas, and it is unclear what the costs and benefits of such taxes will be. A financial transactions tax is one policy that would require global coordination to be effective, in the face of mobile capital, but the overall premise of this approach seems to be flawed. Neither the G20 nor Bill Gates has anything very useful to offer in terms of innovations in fiscal policy. The problems have to do with domestic politics on a country-by-country basis. The eurozone may (and should) address the fiscal behaviour of its constituent governments, but otherwise this avenue is more like a blind alley.
Underlying the Gates report is also the notion that rich countries? governments should raise more money to help poor countries. This could be through conventional aid. An alternative that has also been doing the rounds is expanding the capacity and role of multilateral development banks, such as the World Bank, especially for infrastructure finance. Of course, the current level of operations of these institutions is only a small fraction of projected infrastructure investment needs of the developing world. The idea is that they would catalyse private sector investment. Overall, the talk has been of recycling global savings towards investing in developing countries? infrastructure, and hence their growth.
Again, one has to be sceptical. Why has the money not already gone in this direction? There are issues with the capacity of developing countries to absorb large amounts of foreign capital. Low capacity implies corruption as well as waste. Exhortations and grand plans for a new pipeline for investment funds are unlikely to get anywhere, and the G20?s grandiose vision here seems unrealistic. It would be far better to address the microeconomic reforms needed at the national level, which will ultimately create more productive investment opportunities. This includes, of course, developing domestic financial institutions, such as corporate bond markets, which is in the G20 wish list. But there is much more, in terms of creating better environments for doing business, and the G20 should be considering its intellectual agenda more carefully.
If the G20 is to succeed, it has to avoid being too caught up in grand visions that may not be achievable, and worse, may be misguided in emphasis. The G20 has to keep itself real to make real change come about.
The author is professor of economics, University of California, Santa Cruz