Author: Dr. Abdul Ruff
Edited by Divas
Despite signs of improvement, global growth remains uneven, while unemployment remains stubbornly high in many places.
The world’s top 20 economies, G-20, led by the USA have, upon a conclave in Australian capital Sydney, on 22nd February, adopted a soft target of adding at least 2 percentage points to growth over five years, signaling optimism that the worst of crisis-era austerity was behind them.
The G-20 members include the USA, the European Union, Turkey, Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, South Korea, Russia, Saudi Arabia and South Africa.
The key focus of the meeting was exploring ways to restore global growth amid indications that the world’s largest economies are once again slowing.
The G-20, which represents around 85 percent of the global economy, is made up of both wealthy nations and emerging economies from the USA to South Africa, China and Saudi Arabia.
The world’s rich nations pushed back on Friday against emerging market complaints about the spillover effects of their monetary policies, saying they had to get their own houses in order and get with the agenda of boosting global growth.
The meeting’s host, Australian Treasurer Joe Hockey, said the Federal Reserve’s decision to begin scaling back its stimulus was a key part of discussions, along with reinvigorating global growth.
The idea of setting concrete goals for the G20 has caused nothing but friction in the past, with proposals to target fiscal and current account deficits coming to nothing in the end.
The proposal has already drawn skepticism, with governments criticizing the idea as a “slightly antiquated form for economic planning”.
Emerging nations want the US Federal Reserve to calibrate its winding down of stimulus so as to mitigate the impact on their economies and financial markets.
Developed members reply that the troubles in the emerging world are mostly homegrown and domestic interest rates have to be set with domestic recoveries in mind.
The International Monetary Fund (IMF) warned advanced economies to avoid prematurely rolling back their stimulus programs.
The need for some sort of fresh stimulus was highlighted by a grim report from The Organization for Economic Co-operation and Development which warned that sweeping reforms were urgently needed to boost productivity and lower barriers to trade to avoid a new era of slow growth and stubbornly high unemployment.
In December, the US central bank said it would start reducing its monthly Treasury and mortgage bond purchases, intended to keep interest rates low and support economic recovery in the aftermath of the global recession.
Investors responded by pulling out of emerging markets and funneling their money to the US in hopes of higher returns, which contributed to sharp falls in stock markets and the currencies of some developing countries.
Ultimately, the Federal Reserve has to operate in a manner that is consistent with its domestic mandate. Federal Reserve Board Chair Janet Yellen said the Fed would take “further measured steps” to reduce its bond buying if the US economy continues to improve.
In a letter to G-20 members, US Treasury Secretary Jacob Lew said boosting global growth and creating more jobs will be the G-20’s top priority.
Another key item was the failure of the USA to pass the 2010 IMF reform package. Last month, Congress rejected a funding request from Obama that would have doubled the IMF’s lending capacity to about $733 billion and increased the voting power of emerging economies.
Australia insists the USA to opt for quick reforms for securing global economic stability.
France’s finance minister, Pierre Moscovici, welcomed a goal of lifting world growth by a total of 2.5 percentage points over five years, calling it ambitious but “not unrealistic”.
Germany dropped its opposition to setting an overall target, as long as there were no goals imposed for individual states.
Jens Weidmann, the German head of the country’s central bank, called quantitative targets “problematic”.
South Africa’s Deputy Finance Minister Nhlanhla Nene stressed that target would be meaningless unless issues faced by emerging economies such as inequality, high unemployment, and volatile global financial conditions were addressed.
The IMF has forecast global growth of 3.75 percent for this year and 4 percent in 2015.
European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said the bloc would back the growth target for the G20 group that accounts for 85 percent of global economic output provided it came with a firm commitment to bold reforms.
Rehn suggested that reform progress could be monitored by the IMF and the Organization for Economic Cooperation and Development and that EU’s policy coordination and surveillance could serve as a model.
The emerging members have also been pressing for the US Federal Reserve to try to avoid sparking market volatility through better messaging as its throttles back on asset buying.
Others were pointing out that troubles of hardest-hit emerging economies, such as Brazil and Turkey, were largely home-made and the Fed’s tapering was in fact a good thing: a sign of US economy’s improving health.
Even Indonesia, one of the “Fragile Five” major emerging economies, said the Fed’s gradual withdrawal of stimulus was not to blame for all the ills of developing world.
US Treasury Secretary Jack Lew said that the emerging markets need to take steps of their own to get their fiscal house in order and put structural reforms in place.
Lew called on China, Japan and Europe to make domestic demand the engine room of growth.
That was a sentiment very much echoed by the finance ministers of Japan, Britain and Germany.
German views that emerging countries first had to do their homework, before demanding solidarity from the rest of the G20.
Japan’s Taro Aso said the Fed’s tapering of its stimulus program was positive as it reflected an improving US economy, even if it raised the risk of sharp capital outflows from other countries.
Developing nations from South Africa to Turkey to Russia have seen their currencies crumble in recent months as the prospect of higher returns in the USA sucked foreign funds from their economies.
South Korea Deputy Prime Minister, Minister of Strategy and Finance Hyun Oh Seok suggested the Fed and other major central banks could at least strive to avoid surprises in their policy.
The international lending agency’s governing board gave a green-light to the overhaul in 2010, and approval by Congress is the last remaining roadblock for it to take effect.
The onus would be on the rich nations to pick up the baton on growth from the developing countries, which had carried the world economy in the wake of the global financial crisis.
Still there were no details on how or whether the G20 would police each country’s progress on the reforms, many of which would likely be politically unpopular at home.
The two-day meeting ended on February 23, with a round of news conferences by top officials, including European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde.
The Group of 20 finance ministers and central bankers meeting is a precursor to the main G-20 summit that will be held in the Australian city of Brisbane in November.