Abstract
Since the unfolding of the 2008 global financial crisis, the G20 has played a major role in coordinating macroeconomic policies of major economies and reviving the world economy. As the world’s primary forum for international economic cooperation, its objectives have been to ensure more sustainable and balanced growth, achieve economic and financial stability and reform the prevailing international financial architecture. In the wake of the crisis, there was a sense of urgency and strong agreement to enact extraordinary policy measures to fend off the collapse of the real sector because of the “collapse of confidence” in the financial sector. The G20 performed spectacularly in this regard: global gross domestic product (GDP) contracted less than expected in 2009 and rebounded faster than expected in 2010. These coordinated actions were widely credited for forestalling a second Great Depression, with the G20 declaring victory at their third summit at Pittsburgh in September 2009 (“It worked”).
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Notes
- 1.
The global financial crisis of 2008 required a more legitimate and representative forum than the G8 if it was to effect global macroeconomic and financial policy coordination to ward off imminent depression. It was in this context the G20 Leaders Summit was born.
- 2.
World Economic Outlook (April 09) predicted that world output would contract by 1.4 % in 2009 and grow about 2.5 % in 2010. However, the actual outcome was −0.5 % in 2009 and a 5 % growth in 2010 (Ahluwalia 2011).
- 3.
There is a large theoretical literature on the international coordination of macroeconomic policy. See Pilbeam (2006) for a textbook treatment. The principal argument in favour of international coordination is that governments will be tempted to pursue suboptimal policies without it. In short, there will be a failure to internalize the externalities, with the uncoordinated approach leading to Pareto inefficient outcomes. Bird (2012) however argue that policy coordination does not necessarily imply Pareto efficient gains as individual countries may perceive that they would lose from coordinating macroeconomic policy when they subvert domestic policy preferences for policy outcomes that are seen as jointly superior. Further, the bargaining position of individual countries is unlikely to be equal in securing a coordinated outcome.
- 4.
International policy coordination can take two broad forms: discretion-based cooperation or rule-based coordination. While many examples of policy coordination favour rule-based coordination, discretion-based cooperation is typically superior given extreme unanticipated events for which the existing set of rules cannot cope (Bird 2012). From this standpoint, the London summit of the G20 in April 2009 was an attempt to organize discretion-based coordination.
- 5.
For example, the Chinese 12th 5-year plan document pretty much reflected what the global community wanted of it.
- 6.
Since 2012 however, coordinated implementation of bank liquidity support, including in particular the Outright Monetary Transactions operation by the European Central bank, along with capital regulation in the euro area and well-guided national policies, has helped calm financial markets.
- 7.
First the crisis in Greece was denied, then diagnosed and treated for a liquidity problem while it was a solvency problem. Further, ECB worsened market sentiments as it demanded preferred creditor’s status after buying Greek bonds on the secondary markets.
- 8.
For example, the Federal Deposit Insurance Corporation has closed 448 banks since 2008.
- 9.
Some argue that debt mutualization should be partial, i.e. the EU should put in place a mechanism for internal transfer where less creditworthy nations should compensate the more creditworthy ones and for monitoring fiscal progress of member countries, and also ensure that the national governments remain responsible to reduce deficits.
- 10.
Nominal budget deficits declined from 6.4 % in 2009 to 3.2 % in 2012 for EU as a whole, while structural deficits corrected for the business cycle declined from 4.6 % to 2.1 %.
- 11.
Europe 2020 is a strategy adopted by the European Union to address the shortcomings in the growth models of European countries targeting specifically education, research and innovation, social inclusion and poverty reduction, and climate/energy for achieving smarter, more sustainable and more inclusive growth.
- 12.
The session also discussed what would be the likely implication of euro crisis on the Exempted Micro Enterprises (EMEs) and India. Is the slide in growth correlated with intensification of the eurozone crisis? EMEs—like India—would be affected by the crisis through three channels: (1) the confidence channel transmitted through financial markets, (2) regulation-triggered deleveraging of European banks may hurt the quantum of funds available to EMEs and (3) the trade channel. The implications for India would be severe as the EU is India’s largest trading partner and half of external commercial borrowings in India are from European banks.
- 13.
A closer look at the external imbalances in the run-up to the crisis shows that sources vary widely across seven systemic economies (the countries that account for 5 % or more of G20 GDP are China, France, Germany, India, Japan, UK and USA). A variety of structural factors reflecting country circumstances have driven savings and investment behaviour: low private and public savings, imbalances between tax revenues and spending commitments and resistance to raising taxes in the USA; low savings in the UK; high savings and over-investment partly reflecting the distortions in the financial sector in Germany; scores of factors including high savings, structural imbalances between tax revenues and spending, declining productivity and a shrinking labour force in Japan; despite high private savings, low public savings and tax revenues, and high spending commitments in India; and exceptionally high private savings and investment, partly inadequate social safety nets, restrictive financial conditions, under-valued exchange rates, subsidized factors of production, limited dividends and lack of competition in product markets in China.
- 14.
For example, see Blanchard and Milesi-Ferretti (2009).
- 15.
Another factor is petro-dollars. To quote the Economist, “[t]he biggest counterpart to America’s current account deficit is the combined surplus of oil exporting economies which have enjoyed huge windfalls from high oil prices. This year the IMF expects them to run a record surplus of US$ 750 billion, three fifths of which will come from the Middle East. This amount will dwarf China’s expected surplus of US$ 180 Billion. Since 2000, the cumulative surpluses of oil exporters amounted to over US$ 4 Trillion, twice as much as that of China” (The Economist 2012). Little attention has been paid to this, as petro-dollars do not show up in international reserves but go into sovereign wealth funds. This does not help the recovery of global demand. This could be corrected partly by exchange rate movements and partly by spending, especially on domestic consumption.
- 16.
In a May 3, 2013 entry to the IMF direct (blog), David Romer of Berkeley points out that financial shocks are not rare, and should be thought as being closer to commonplace rather than being considered as exceptional events. He suggests that in the past 30 years in the USA, there have been six occasions in which financial developments have posed important macroeconomic risks: the Latin American debt crisis, the 1987 stock market crash, the savings and loans crisis of the late 1980s and early 1990s, the Russian debt crisis of 1998, the dot-com bubble bust of the late 1990s and early 2000s and the housing crisis and financial meltdown of the GFC starting in 2008. See http://blog-imfdirect.imf.org/2013/05/03/preventing-the-next-catastrophe-where-do-we-stand/.
- 17.
One of the fears of current reform initiatives is that it may lead to credit rationing. Domestically, the most affected segment would be small- and medium-sized enterprises, while globally it would be EMEs, especially trade credits to EME firms. Similarly, countries where a home-grown banking system is absent would get affected most as globally active backs deleverage. This would call for targeted reforms—special provisioning—rather than general relaxation regulatory standards. Second, much of the G20 debate on financial regulations reflects problems of the USA and Europe and is not necessarily relevant for EMEs .
- 18.
Many participants felt that regulatory concerns of EMEs are different given their developmental needs. The regulatory philosophy in most of the EMEs, especially in Asia (and India), is different—regulators pay close attention and capital and liquidity standards are high. Asian regulators also have used macro-prudential policies—administrative guidance to limit bank-credit growth, real estate loan caps, etc.—which provided a cushion against the crisis. Hence, reforms proposed to address weaknesses in advanced country financial markets may not be applied to EMEs. Though capital and liquidity standards of Basel III are easily achievable for Asian countries, strengthening regulatory capacity and data requirements for implementing Basel III may impose an excess burden. However, it should be noted that international standards such as Basel rules are meant for internationally active banks. Countries have a large leeway to implement them as they deem fit—for example, India has proposed to apply it fully, while Japan and the USA have opted it for only the internationally active banks. Finally, an important issue that arises here is the concern over the rapid growth of bank credit. This may be a misleading indicator of “stress” since in EMEs, bank credit is partly driven by more financial inclusion. Universally stringent capital standards (such as Basel III) may disproportionately affect EMEs as globally active banks would reduce their exposure to EMEs to meet new stringent capital standards. Further, if the new standards are implemented in EMEs, this would make development financing and financial inclusion difficult.
- 19.
See the Landau report on global liquidity prepared by BIS at the behest of G20 (BIS 2011).
- 20.
In normal times, sovereign borrowing costs are positively associated with public debt. During a crisis period, however, funds tend to move from high-risk assets to risk-free sovereign bonds. Thus, though there is an increase in the fiscal deficits, there will be a fall in the Treasury bond yields in major developed countries. This fiscal space, if utilized, can stimulate growth which will be a key factor for stimulating growth, and hence fiscal consolidation in the medium to long run.
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Acknowledgement
We are deeply grateful to Isher Ahluwalia, Parthasarthi Shome, Rajat Kathuria and members of the ICRIER G20 team for their support related to this volume.
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Callaghan, M., Ghate, C., Pickford, S., Rathinam, F. (2014). Global Cooperation Among G20 Countries: Responding to the Crisis and Restoring Growth. In: Callaghan, M., Ghate, C., Pickford, S., Rathinam, F. (eds) Global Cooperation Among G20 Countries. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1659-9_1
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