Answers for Caijing on G-20 in Hangzhou
Richard Boucher 02 September 2016
- China is trying to turn G20 into an effective mechanism of global governance rather than crisis management. How do you see these efforts?
While many countries are still cleaning up from the global crisis, most are struggling to reestablish consistent, quality growth. Even more than in the immediate post-crisis period, domestic reforms must be coordinated between countries. So, first and foremost, the G20 offers an opportunity for all members to exchange commitments and monitor progress as they carry out domestic reform. The G20 can also maintain its vigilance against trade and investment barriers. Finally, the G20 has a role in encouraging countries to adopt global standards, like eliminating fuel subsidies or implementing anti-bribery rules.
So, as the G20 move beyond crisis recovery, the countries remain the drivers of global growth and standards. It is vital that even in times of less economic turmoil they continue to meet and coordinate policy steps.
The G20 will find its place in a broader framework of global governance but not as some sort of “governing body.” Because of the nature of the participants and the domestic sensitivity of the issues they deal with, the G-20 will remain a coordinating and discussion group, but one where initiatives, practices and standards can be spread through the world economy, to everyone’s benefit.
- I noticed that you were in Beijing last month for the T20. Among the T20 policy recommendations, structural reform is seen as core for global growth. This is not the first time that structural reform was mentioned at G20, but it seems that little progress has been made. Why？
In a way, it’s inevitable that the world’s leaders and economists turn to structural reform at this point. Prior measures –fiscal spending and extraordinary monetary policy– have stabilized the world’s economies, but have not restored healthy growth in most countries. Most countries have taken on too much debt to be able to fuel growth by additional spending, and central banks are seeing the limits to what they can accomplish.
So, what’s left? Structural reform. But structural reform is hard and countries need constant encouragement to open markets, revise rules to be more fair and efficient, and unleash the money and ideas that companies and individuals will use to challenge existing entities and create new growth.
Structural reform is not easy because when you change the rules, you change who benefits in an economy. However, every economy needs this periodic reform so that protected entities face the discipline of competition and new investment. Structural reform thus has political implications. It’s easier for economists to identify what needs to be done than it is for politicians and leaders to carry through. They need constant encouragement and pressure; that’s a role for the G20.
- China’s Finance Minister Lou Jiwei said during a recent interview that G20 has identified nine priority areas and will have an index system to assess the progress of structural reform. Will you consider it as a breakthrough?
Regrettably, the amount of reform after the 2008 crisis has not been as extensive as many would like. The United States failed to fundamentally revise tax laws and has left much of the financial system untouched. China has talked about rebalancing towards households and subjecting state enterprises to more market discipline, but may believe these reforms are moving slowly. India has benefitted from a surge of growth but, other than the recent reform of goods and services tax, has relied more on enthusiasm and efficiency than opening up markets. The list goes on and on; everyone could use a good dose of structural reform.
The G-20 can monitor and encourage these reforms. As Minister Lou Jiwei has said, that would be a big step in the right direction,. Beyond monitoring, countries have to work with each other to understand what policy changes can work best and to ensure the reforms improve investment and trade opportunities between countries. This kind of work is done already done at the OECD and elsewhere; if the G20 can find ways to use these methods and exchange best practices as well as monitor reform, that could be another step forward.
- In 2014, G20 members agreed to have their GDP growth by an extra 2 percent by 2018. But as slow global growth has become a new norm, will G20 countries miss the target?
They will probably miss. Artificial GDP targets are hard to achieve without new capital or new debt, which most governments have run out of by now, and, in any case, stimulus alone will not solve the current problems. The G20 countries are seeing that they must reform to achieve new growth. Structural reform usually creates difficulties in the short term, both political and economic ones, while spreading multiple and increasing benefits over time. So, we shouldn’t focus on the immediate results but rather try to get as many countries as possible on the right track of reform.
In many countries GDP is not the right target. We need a bigger emphasis on supporting poor households, on labor market adjustments as automation expands into new areas and on creating conditions for creativity and entrepreneurship at all levels. These steps are not reflected in GDP figures, especially short-term ones. In terms of economic health, I’d rather see an increase in household income for those in the bottom ranks or a spike in new firms rather than simply an overall increase in GDP. Thus, I don’t think the GDP target means much and in any case it will most likely not be achieved.
- We have seen more anti-globalization, anti-free trade sentiments these days, while China has set strong international trade and investment as one of the four main agendas. To what extent do you think the G20 Hangzhou summit can help boost trade and investment?
G20 Hangzhou can help establish a better base for growth by promoting reforms, preventing obstacles and improving coordination between countries in order to open up investment and jobs. International trade and investment remains important to all but we must also look to the future. The nature of trade is changing. Some labor intensive manufacturing is moving to new countries, but many products, and even services, are increasingly made by automation and won’t move to places with lower labor costs. Investment will increasingly go to where the markets are, where customized products can be made with modern technology for middle-class consumers. Thus, the value chains of today will change. At Hangzhou the leaders can start to focus on these changes, as the Trade Ministers did in Chengdu by linking trade and investment, and look for ways to promote investment, trade and innovation as a package.