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G20 Monitor: The G20’s growth agenda
About the authors
Stephen Grenville
Dr Grenville is a Nonresident Fellow at the Lowy Institute.
Mike Callaghan
Mike Callaghan is a former Nonresident Fellow at the Lowy Institute.
Barry Carin
Barry Carin is a Senior Fellow at the Centre for International Governance Innovation (CIGI) in Canada.
Maria Monica Wihardja
Dr Monica Wihardja, is a researcher at the Centre for Strategic and International Studies and teaches at the University of Indonesia.
Sergey Drobyshevsky
Sergey Drobyshevsky is a Senior Research Fellow at the Russian Academy for National Economy and Public Service and the Head of Macroeconomics and Finance at the Gaidar Institute for Economic Policy.
Andrés Rozental
Andrés Rozental is the founding president of the Mexican Council on Foreign Relations, established in 2001.
Rei Tang
Rei Tang is an associate program officer in the Policy Programming Department at the Stanley Foundation, where he works to advance effective global governance through policy analysis, dialogue, and outreach.
Ye Yu
Dr Ye Yu is a former Nonresident Fellow at the Lowy Institute.
Peter Draper
Professor Peter Draper is Interim Head: School of Economics and Public Policy, and Executive Director of the Institute for International Trade in the Faculty of the Professions, The University of Adelaide.
Mike Callaghan[1]
This issue of the G20 Monitor contains a series of papers commenting on the G20’s objective to increase global growth. In February 2014 G20 Finance Ministers and Central Bank Governors committed to lift global growth by 2 per cent over five years above what the IMF was forecasting at the time of the October 2013 IMF-World Bank Annual meetings. Each G20 member has agreed to submit a comprehensive growth strategy at the Brisbane G20 Summit that will include the additional policy measures required to achieve the increase in global growth. The growth strategies will be combined to form the Brisbane Action Plan.
At the G20 Finance Ministers and Central Bank Governors meeting in Cairns on 20‑21 September 2014, the IMF and OECD said that the new policy measures that had been submitted by G20 members to date would, if fully implemented, increase global growth by an additional 1.8 per cent over the next five years. They did, however, note that there were high implementation risks. Countries have not publicly released the specific policy reforms that are part of their growth strategies. Presumably these will be included in the action plan that will be released at the Brisbane Summit.
The papers in this Monitor provide a guide as to the specific policy reforms G20 countries will have to implement if the extra ‘2 per cent growth target’ is to be achieved. My paper provides a summary of the main OECD and IMF policy recommendations to increase growth in each G20 member country. The objective is to achieve extra growth, consequently, extra policy steps are required by each G20 member if the 2 per cent target is to be realised.
There are also a number of papers from participants in the 2014 Think20 process (involving think tanks and academics from G20 countries), which outline the key measures required to increase economic growth in a number of G20 countries. The papers cover the following G20 members:
Australia – Stephen Grenville
Canada – Barry Carin
China – Ye Yu
Indonesia – Maria Monica Wihardja
Italy – Fabrizio Carmignani
Italy – Paolo Magri
Mexico – Andres Rozental
Russia – Sergey Drobyshevsky
South Africa – Peter Draper
UK – Stephen Pickford
US – Matthew P. Goodman
US – Rei Tang
[1] Director G20 Studies Centre, Lowy Institute for International Policy
Mike Callaghan
Increasing global growth is an overarching priority of the G20. The Australian Treasurer, Joe Hockey, has said that when Australia started its G20 presidency, the global economy was in a mediocre state with the IMF downgrading its global growth outlook six consecutive times over the past few years. Against this backdrop, Mr Hockey stated that something had to be done to decisively shake off the legacies of the crisis. The response was the commitment by G20 Finance Ministers and Central Bank Governors at their meeting in Sydney in February 2014 to introduce the necessary policy measures to lift global growth by more than 2 per cent over five years. Each G20 member will submit the specific policy measures it will implement to collectively achieve the growth target and these actions will be combined into the Brisbane Action Plan.
The additional 2 per cent growth target is based on model simulations undertaken by the IMF, OECD and World Bank. These organisations prepared a paper for the February 2014 G20 Finance Ministers and Central Bank Governors meeting which identified that if each G20 member corrected specific policy gaps, world real GDP would increase by about 2¼ per cent (or $US 2¼ trillion) in 2018. This is relative to the IMF’s projections for global growth made in October 2013, implying 0.5 percentage points higher growth over the next five years.
Global growth has been slower than projected. Since the February meeting of G20 Finance Ministers and Central Bank Governors, the international institutions have lowered their forecasts for global growth. In June 2014 the World Bank revised down its forecast for global economic growth in 2014 from 3.2 per cent to 2.8 per cent. In October 2014 the IMF lowered its outlook for global growth in 2014 by 0.4 per cent to 3.3 per cent. In explaining this revision, the IMF has said that global growth could be weaker for longer, given the lack of robust momentum in advanced economies.
Growth in a number of G20 countries has slowed. The IMF cut its growth forecast for the United States in 2014 from 2.8 per cent to 2.2 per cent. There was no growth in France, Germany and Italy in the second quarter of 2014 and in July 2014 Japan cut its growth forecast for 2014 from 1.4 per cent to 1.2 per cent. In August 2014 the Reserve Bank of Australia projected growth in Australia in the twelve months to June 2015 of 2 to 3 per cent, down from a forecast of 2¼ to 3¼ per cent made three months earlier.
The reduction in growth forecasts during the course of 2014 means that an even larger increase in global growth is now required to achieve the target established by G20 Finance Ministers and Central Bank Governors in February 2014.
The target is to lift global growth by an ‘extra’ 2 per cent. Consequently ‘extra’ policy measures are required by G20 members. This was acknowledged in the policy note by the Australian G20 presidency: “The actions that contribute to this ambition are expected to be in addition to those measures previously made by the G20.”
The Australian presidency has stated that G20 members themselves should determine the policy actions that will form the basis of the Brisbane Action Plan. However, to have credibility, these policy actions will have to address the policy gaps identified by the international organisations. At the Cairns meeting of G20 Finance Ministers and Central Bank Governors on 20-21 September 2014, the IMF reported that if the policy reforms that had been submitted by members to date were implemented in full, global growth would increase by 1.8 per cent over five years.
The policy gaps identified by the international organisations in their advice to ministers in February 2014 were in six areas: fiscal, rebalancing, labour supply, other labour market reforms, product market reforms, and infrastructure investment. In the modelling, product market reforms contribute the most to the higher growth, followed by labour participation reforms and infrastructure investments.
In addition to measures to lift growth, the international organisations also advocated for polices to reduce global imbalances. They noted that while the rebalancing policies do not contribute much to medium-term growth, they are needed to reduce risks to the sustainability of growth arising from domestic and external imbalances, including risks of financial crises.
As a guide to the specific policy measures that should be part of each member’s growth strategy and the Brisbane Action Plan, the following section outlines the assumptions regarding country actions that are the basis of the international organisations’ simulations.
Fiscal consolidation is phased in progressively over five years, except for Japan where it is phased in over ten years.
In China, additional reforms to education, health care, and pensions raise public transfers by 1.1 per cent of GDP and reduce private saving by 1 per cent over five years. Financial sector reforms better price risk and raise the cost of finance to tradable sector firms by 50 basis points after five years. The financial sector reforms also result in a shift to higher-quality investments, implying a reduction in the private capital depreciation rate of 50 basis points after five years. These policies are accompanied by a fully flexible exchange rate.
In Germany, reforms are implemented that lower the cost of capital by 90 basis points and increase economy-wide productivity by 1 per cent after five years.
In the United States, reforms encourage an increase in the private saving rate by 0.6 per cent of GDP after five years.
Product market and labour market reforms to ease overly restrictive employment protection legislation and to boost productivity are a priority in Argentina, Brazil, France, India, Indonesia, Japan, Korea, South Africa, and Turkey.
Reforms that increase the labour force participation rate though increases in childcare spending are a priority for Germany, Japan, and Korea.
Pension reforms that increase participation rates are a priority in France, Germany, Japan, and Russia.
Active labour market reforms are a priority in Canada, France, India, Indonesia, Italy, Japan, Korea, Russia, South Africa, and the United States.
The reform scenario includes a permanent increase in public investment by ½ per cent of baseline GDP in the United States, Germany, Brazil, India, and Indonesia. It is assumed the increase takes place gradually over two years and is financed by a reduction in general transfers.
A further guide as to the types of reforms, particularly structural reforms, which could be in the growth strategies G20 members present at the Brisbane Summit can be gained from the country recommendations contained in the OECD’s Going for Growth framework and the most recent IMF Article IV reports for G20 members. These are summarised in the attachment.
This paper is intended to provide a guide as to the range of policy reforms that G20 members should bring to the Brisbane Summit. A major outcome would be the release of an assessment by the international organisations that the policy measures G20 have submitted will see a significant increase in global growth and that the organisations will be revising their forecasts accordingly. In order to boost credibility, the G20 should also ask the organisations to monitor implementation of these policies.
[1] Director G20 Studies Centre, Lowy Institute for International Policy.
[2] Joe Hockey. Australian Treasury. Speech 5 September 2014 to ANZ leadership lunch, http://jbh:ministers.treasury.gov.au/speech/as-2014/
[3] World Bank, Global Economic Prospects, June 2014.
[4] IMF, World Economic Outlook Update, October 2014, http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/text.pdf.
[5] Australian G20 Presidency. Policy note. Lifting G20 GDP by more than 2 per cent above the trajectory implied by current policies over the coming 5 years, www.g20.org/sites/default/files/g20/library/Policy%20Note%20FMM%20Sydney.pdf.
[6] Ibid.
[7] The OECD’s Going for Growth exercise does not cover Argentina and Saudi Arabia.
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Reforms to state-owned enterprises are required to level the playing field between private and public sectors.
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[1] This is a summary (not direct quotes) of policy recommendations for G20 members made in the OECD’s Going for Growth initiative and in recent IMF Article IV reports.
Stephen Grenville[1]
In aiming to raise growth by 2 per cent above the existing trend over the next five years, Australia faces a different set of challenges compared with those economies directly affected by the 2008 crisis. With few exceptions, they still have some distance to go in their recoveries to bring economic output back to capacity. They also have to realign their policy settings as the recovery concludes.
The Australian economy has been operating not far below capacity, so the central challenge is to raise productive capacity. That said, the global experience of 2008 confirms that crises (or even severe cyclical shocks) undermine longer-term capacity. Thus the twofold task is to raise productive capacity while making actual output more resilient against the inevitable buffering of the cycle.
The policy challenge is to facilitate a smooth transition from the resources investment boom of the past decade. Unlike many economies, investment has been running above historical levels, but as the resources component falls away (it rose by 5.5 percentage points of GDP during the boom), non-resource investment will need encouragement. Commodity exports will be higher, probably resulting in a strong and more volatile exchange rate than before 2008. While the exchange rate is off its highs, it is still at a level that weakens international competitiveness. Australia’s deeply established tradition of maintaining a minimum wage well above that of many industrial countries constrains some policy options.
The key to meeting this challenge is flexibility. The Australian economy already rates quite well in this regard, having restructured its manufacturing sector, radically changed its export composition, and accommodated the resources boom without inflation. Wage relativities have responded strongly to the market rather than regulatory constraints. Australia rates well in the OECD’s measures of regulation. Yet the momentum of reform has stalled over the past decade and productivity — even allowing for formidable problems of measurement — is slower than before.
One key initiative will be to heighten the reform drive, especially by mobilising public opinion to accept the inevitable disruptions and dislocations. Australian politicians would understand Jean-Paul Juncker’s plaint: “We know what to do; we just don’t know how to get re-elected after we’ve done it”.
The substantial reforms that began in the mid-1980s were driven by a powerful sentiment of crisis. No such driving force exists now. As well, the constellation of policy pressures and inputs has shifted, with vested interests having a stronger voice (notably demonstrated in the debate on a mining super-tax in 2010) while the economics-driven analytical input is weaker.
Some of the elements of enhancing the reform debate (and mobilising public support) are already in place. There are currently two major public inquiries underway, into the financial sector and into competition policy. Both areas offer abundant opportunities for improvements.
The financial sector has absorbed many of the best and brightest graduates over the past two decades, with little to show in terms of more effective investment decisions or stable returns to investors. Instead, the time horizon of investment decisions has shortened, often driven by distorted management incentives. Overly influential rating agencies have distorted financing, discouraging government funding in favour of more expensive private sources. Pension administration has been excessively complex and resource-intensive.
In the area of competition policy, the small size of the Australian market is an argument in favour of wider considerations being taken into account, with a greater focus on the economic content of market situations in order to balance an excessively legalistic approach. There are still many areas (particularly in the professions) where vested interests enforce inefficient regulation. With the greater importance of IT and services, finding the right balance between protecting intellectual property and enhancing competition is tricky and decisions will often favour the loudest voice. Policy needs to redress the balance.
A stronger role for the technocratic arguments — whether advanced by the Productivity Commission, the Treasury, the Australian Competition and Consumer Commission, the prudential regulators or ad hoc committees — requires resources and will be resisted using generalisations about free markets and regulatory burden. But a complex modern economy requires a strong institutional base as well as a vigorous entrepreneurial voice. Above all, the analysis-driven approaches to reform require strong political support.
[1] Non-resident Fellow, Lowy Institute for International Policy.
[2] See Larry Ball, Long-Term Damage from the Great Recession in OECD Countries, http://www.econ2.jhu.edu/People/Ball/long%20term%20damage.pdf.
[3] See David Gruen, ‘After the Resources Investment Boom: Seamless Transition or Dog Days’, http://www.treasury.gov.au/PublicationsAndMedia/Speeches/2014/20140703.
[4] See http://www.oecd.org/australia/going-for-growth-2014-australia.htm.
Barry Carin
Canadian growth “hinges critically on stronger exports and business investment.” G20 Finance Ministers and Central Bank Governors have been advised to open markets, increase competition through less restrictive regulation, develop support for more efficient long-term investment and tackle structural unemployment. Canada has introduced several initiatives to contribute to the G20 target of an extra 2 per cent in global growth in 2018. Canada should consider additional policy changes in tax reform, interprovincial trade liberalisation, and a ‘youth guarantee’ program.
The IMF suggests “restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, in favour of carefully designed energy taxes.” The key to make any tax reform politically feasible is a gradual phase-in, convincing the electorate that the effect will be revenue-neutral. The successful introduction of smart energy taxes, starting small and slowly rising over several years, would require a prior cut in income taxes and payroll taxes, with refundable income-tested tax credits and targeted cash transfers so low-income people are not negatively impacted. The growth impact of revenue-neutral tax reform will depend on the specifics of the reduction in labour and income taxes and the transfers to compensate affected sectors and regions, but one can confidently predict a strong positive increase in employment. The IMF estimates phasing in carbon taxes over several years could increase Canada’s GDP by 1.4 per cent.
Canada suffers from interprovincial trade barriers in government procurement, and in goods and services, such as wine and trucking. As Richard Blackwell has noted, “We just have allowed an accretion of barriers over time — everything from marketing boards for agriculture, to restrictions on mobility of labour, to competing regulatory standards, to redundant regulatory standards. All of those discourage the free movement of goods, services and people in the country.” The 20 year-old Agreement on Internal Trade is toothless. It is difficult to estimate the savings interprovincial free trade would deliver, but the barriers within Canada compromise the ability to negotiate international free trade agreements. These would enable stronger exports and business investment, which are critical for growth.
Canada should strengthen human capital through better-designed training and apprenticeship programs. In particular, it should remove disincentives in employment insurance and tax credit schemes. And it should reform immigration and pension policies. As Jean Charest, Youth Minister in a 1986 Conservative government, emphasised, “The best way to kill a man is to pay him not to work.” He campaigned that everyone under 25 should be guaranteed skills training but be ineligible for social assistance. His youth guarantee idea has been adopted in Finland and Sweden. The Finnish government provides people under 25 a concrete offer for a job, apprenticeship, traineeship, or continued education, within four months of them leaving formal education or becoming unemployed. The impact on growth is difficult to estimate but should be weighed against the costs of inactivity.
Canada does many things right to stimulate growth. Replacing income taxes with smart energy taxes, undertaking real action on interprovincial trade liberalisation, and establishing a youth guarantee would add significant impetus.
[1] Senior Fellow, Center for International Governance Innovation.
[2] Bank of Canada, Monetary Policy Report Summary, July 2014, http://www.bankofcanada.ca/wp-content/uploads/2014/07/mpr-summary-2014-07-16.pdf.
[3] International Monetary Fund, Macroeconomic and Reform Priorities, note prepared with inputs from the OECD and the World Bank, available at http://www.g20.utoronto.ca/2014/G-20%20Macroeconomic%20Reform%20Priorities%20Report%20Feb%2012%202014.pdf.
[4] Canada’s economic action plan, available at http://actionplan.gc.ca/.
[5] A ‘youth guarantee’ is an umbrella program with the idea that within a short period of unemployment, a young person should be offered a subsidised job, more education, an apprenticeship, or skills training.
[6] “Getting Energy Prices Right: From Principle to Practice”, July 2014, http://www.elibrary.imf.org/view/IMF071/21171-9781484388570/21171-9781484388570/21171-9781484388570.xml?rskey=kHyJS5&result=1&highlight=true.
[7] E.g. http://www.greenfiscalcommission.org.uk/index.php/site/about/final_report.
[8] http://www.theglobeandmail.com/report-on-business/economy/canada-competes/why-are-we-blocking-free-trade-between-provinces/article11541453/?page=all.
[9] One estimate by the Canadian Manufacturers’ Association cited costs that range from 0.05 per cent of GDP to the substantial figure of 1 per cent of GDP, http://www.ppforum.ca/sites/default/files/Beaulieu%20-%20Exploring%20the%20economic%20impact%20of%20AIT%20chapters.pdf.
[10] Félix Leclerc, French-Canadian singer-songwriter.
[11] http://www.eurofound.europa.eu/publications/htmlfiles/ef1242.htm.
Ye Yu
The much talked about need for China to shift the composition of its growth from investment to consumption is not a goal in itself. Nor will it alone help China avoid the ‘middle-income trap’. Investment will remain the vital driver of growth for China in the medium term, but the key is to raise the efficiency and productivity of investment and promote sustainable growth, both financially and environmentally. China needs to implement announced market reforms and open up the economy to market forces while at the same time controlling risks to the economy. For quality growth, China also needs to take decisive measures to improve social equality.
Achieving sustained growth will require tapping into the underperforming parts of the Chinese economy. Trillions of yuan will be needed for infrastructure investment in China between 2014 and 2020. Priorities include reconstruction of shantytowns in the cities, the construction of high-speed railways in inland areas, along with large hydro projects and the development of rural areas and improvements in agricultural production, among others. Effective public private partnerships (PPP) will be required in order to avoid the accumulation of further public debt. Fiscal systems will need to be restructured, including expanding local government revenue.
Supply side reforms are required. Some of the reforms required for the market to play a decisive role in allocating resources include: the liberalisation of interest rates; environmental impacts being fully priced into the cost of energy resources; improvements in the governance structure of state-owned enterprises; better regulation of monopolies and vested interests; and a strengthening in the rule of law. The interests of small and medium enterprises need to be taken care of, and this should include a reduction in taxes and fees. The momentum of reform should be locked in through the further opening up of the economy. Indigenous innovation policies can only be effective through market-based approaches.
Achieving sustainable growth will require reducing social inequalities. China’s Gini coefficient is estimated to have reached 0.47, or even higher, in 2013. In the process of ongoing urbanisation, further land reform should be implemented in a way that sees farmers’ entitlements being increased. Similarly, state control of key sectors of the economy must be reduced, to ensure that the public interest is being served rather than a small group of people being enriched. The government should take measures to equalise the provision of public resources, especially in education, health and social security, so as to narrow the gap between the rich and poor. Stabilising housing prices will also be a positive step from the perspective of reducing inequalities.
Sustainable growth will also require dealing with longer-term risks to the economy. Following the financial crisis in 2008, China was applauded for its quick and substantial fiscal stimulus of 4 trillion yuan (US$650 billion), which resulted in a 73 per cent increase in the credit-to-GDP ratio over the past five years. However, the IMF has warned that the rapid expansion in credit cannot be sustained and China may need to grow at a slower rate, perhaps below 7 per cent, in the short term. China’s relatively high saving rate is a positive in countering potential financial risks. Sustainable growth will also require that China deals with chronic environmental risks, which will require the tougher enforcement of environmental regulations.
China’s international strategy will need to move ‘beyond trade’ for growth to be sustained. While support of global and regional trade liberalisation will remain at the forefront, China is deepening its international strategy to embrace further investment and infrastructure development. The ‘One Belt One Road’ strategy, which involves extending economic connectivity, should be carried out as a truly win-win outcome for all involved, building capacity and trust in other countries, while helping to diversify Chinese exports.
[1] Research Associate, Shanghai Institutes for International Studies.
Maria Monica Wihardja[1]
For the past decade, Indonesia's strong growth has successfully hidden serious structural issues. In particular, strong growth has not always meant quality growth. Two external factors have been at play in influencing the Indonesian economy. The first is the commodity boom that started around 2003 and ended in 2011. In 2013, seven out of Indonesia’s top ten exports were commodities, accounting for half of total exports. The end of the commodity boom in 2011 resulted in a widening of the current account deficit. This was exacerbated with the introduction of a ban on mineral exports in January 2014. The impact of the ban on mineral exports has been clearly felt since the first quarter of 2014, where the net export contribution to growth and the contribution from mining production declined significantly. The second international factor is capital flows. These remain very high, albeit volatile, with net portfolio investment reaching a decade-high in the first quarter of 2014. These two drivers of Indonesia's growth are not sustainable as commodity prices are volatile and the 'easy money' era will eventually end.
Indonesia will have to find sustainable new sources of quality growth through structural transformation that relies less on extractive industries and volatile short-term capital inflows. Structural transformation has not been as ‘smooth’ as expected. The 20 million jobs created since 2001 have mostly been in the low-productivity services sector. The six million farm households that have moved from the agriculture sector in the past decade might not have found better jobs. The manufacturing sector's growth rate has also been anaemic. Indonesia has one of the highest urbanisation rates in the world. With most of the jobs created in the low-productivity services sector, moving from rural to urban areas might not actually improve people’s welfare. By 2020, Indonesia needs to create 14.8 million additional jobs. As the experience of other countries demonstrates, only by moving to higher productivity and value-added sectors and sub-sectors can Indonesia become a high-income country.
Inequality has also been rising steadily since 1999, with richer households benefiting through better access to assets and the increase in the wage premium for skilled labour. Between 2003 and 2010, consumption expenditure by the poorest 40 per cent of the population grew at only 1-2 per cent per year, while the richest 10 per cent grew at 6.5 per cent and the second richest at 5.5 per cent.
From external factors that hide structural issues to Indonesia's incomplete domestic structural transformation, the quality of growth is far from being either inclusive or sustainable. However, the dynamism of Indonesia’s young population, alongside the consolidation of democracy, as evident by the third successful direct presidential election this year, may provide a window of opportunity for reforms in the next one or two decades.
Indonesia's reform agenda in the immediate term should include: managing the deteriorating fiscal balance as a result of a large and poorly targeted fuel subsidy; heightening macro-prudential policy to deal with possible capital reversals; ensuring that the floating exchange rate serves as a ‘shock absorber’; and increasing and monitoring social safety nets to prevent increased poverty as a consequence of these reforms and risks.
Indonesia's reform agenda in the medium term should include setting the right policies and mindset to tap Indonesia's potential for investment and to complete the structural transformation of the economy. Since the commodities boom is over for the foreseeable future, foreign direct investment has swung to manufacturing for import substitution and non-commodities exports, such as the automotive industries (Toyota, Isuzu, and Honda). This trend seems to be entrenched. Furthermore, the soaring prices for land, water and labour in China, combined with increasingly severe environmental constraints, have resulted in factories continuing to move from China to Vietnam and Indonesia. The right implementation of the new trade and industrial laws issued in early 2014 will play an important role in completing Indonesia's structural transformation in the medium term. The new Negative Investment List that is seen to be more restrictive in key sectors, such as the logistic sector, could however be detrimental to tapping investment in needed areas.
Indonesia's reform agenda in the longer term should include aspiring to become a high-income country with low inequality, integrated into the global economy. Institutional reforms including regulatory and policy-making process reforms will be key. Improvements in public service delivery at the local level by local governments will also be important. Regional dynamics combined with improved domestic connectivity, especially interisland connectivity, will improve the domestic value chain and competitiveness. Through increased competitiveness, Indonesia will be better integrated into the global economy, which will be welfare-enhancing for all.
[1] World Bank Office, Jakarta.
[2] World Bank, Indonesia Development Policy Review 2014.
[3] World Bank, Indonesia Economic Quarterly, July 2014: 36.
Fabrizio Carmignani
Slow growth is not a recent problem in Italy. In the ten years leading to the GFC, the annual rate of GDP growth in Italy averaged around 1.5 per cent; that is, one full percentage point less than the average of the G7 economies. Slow growth also pre-dates the launch of the Euro: in the decade prior to the introduction of the common currency, Italy grew at a rate of 1.6 per cent per year on average, again one percentage point less than the G7 average. In fact, GDP growth in Italy has been on a declining trend since the ‘economic miracle’ of the 1960s. In that decade, growth averaged around 5.8 per cent a year. In the two subsequent decades, growth decreased to 3.5 per cent a year and became progressively more volatile. Then in the 1990s and 2000s average growth dropped to around 1.5 per cent a year, barely above stagnation.
Several factors contributed to the boom of the 1960s, but one in particular stands out, mainly because it is lost today: entrepreneurial initiative. To exit the tunnel of slow growth (which causes other problems, from unsustainable debt to high unemployment), Italy must recover this lost entrepreneurial spirit. How? By addressing the regulatory and institutional deficiencies that make it so difficult to do business. In this regard, building new physical infrastructure is not a top priority. New roads, bridges, or motorways can reduce travel time between, say, Milano and Rome by maybe fifteen minutes. But is this really going to make a difference when enforcing a contract takes 1,185 days and costs 23% of the claim? According to the World Bank Doing Business survey, Italy is ranked 65 in the world in terms of ease of doing business. Performance is particularly weak in areas like obtaining construction permits, paying taxes, and getting credit. On a scale from 0 to 10, the World Bank assigns 3 to the strength of legal rights in Italy, while the average for OECD countries is 7. Building infrastructure will not improve this situation and will not encourage entrepreneurs.
Italy needs to reform the justice system to ensure the full protection and enforcement of economic rights. Reform of labour market legislation is also necessary to resolve problems created by the expansion of contractual arrangements over the past ten years (such as temporary or fixed-term work). Such arrangements were introduced with the objective to achieve greater flexibility, but have instead resulted in employment becoming more precarious and increasingly insecure. The system of industrial relations should be re-orientated to ensure greater attention to the interests of ‘outsiders’ (i.e. those in search of a job), rather than be focused almost exclusively on the demands of ‘insiders’ (i.e. those in power). In addition, competition needs to be strengthened in a number of markets and sectors. And business regulations need to be simplified. In addition to helping stimulate growth, this is also necessary to increase transparency and to control corruption.
Finally, Italy should resist the temptation to reduce the size and scope of government for the sake of balancing the budget. Pressured by ill-designed and ill-applied EU fiscal rules, Italy has embarked on a spending review that so far has not delivered any appreciable results. Italy does not need a smaller government. Instead, Italy needs a government capable of (i) increasing the supply of public goods and strengthening social protection/social welfare, and (ii) conducting fiscal policy counter-cyclically to reduce macroeconomic volatility. A fiscal strategy that specifically targets these two objectives will contribute to making growth more inclusive, and thus strengthening its welfare content. In this context, the spending review should reallocate resources rather than cut resources. Italy should, of course, aim at consolidating its long-term budgetary position. But this consolidation should not be pursued at the cost of neglecting the fundamental purpose of fiscal and economic policy.
[1] Professor, Griffith Business School at Griffith University.
[2] World Bank Group, Doing Business 2014 database, available at http://www.doingbusiness.org/data/exploreeconomies/italy/.
[3] Ibid.
Paolo Magri
The following is a summary of the key elements that should be included in Italy’s growth plan.
Jobs creation and social challenges
Recovery and long-term growth potential
Long-run fiscal sustainability
[1] Executive Vice President, ISPI.
Andres Rozental
Mexico is committed to contribute to the G20 objective of coordinating growth strategies to lift collective GDP by more than two per cent above the trajectory implied by current policies over the coming five years. The required policy measures will be over and above the structural reforms set out in the St. Petersburg Action Plan.
Economic reforms
Mexico’s growth strategy is based on an economic reform agenda that will increase potential growth in a way that promotes strong, sustainable and balanced growth. This reform agenda will improve the investment climate and financial intermediation process of the country, contributing to opening sectors for private investment, and fostering stronger competition. There are a number of components to this reform agenda. This includes:
Investment commitments
Mexico’s federal government recently presented the National Infrastructure Program 2014-2018, which includes a comprehensive infrastructure development strategy that aims to increase the country’s economic growth and productivity. This program estimates public and private investment in the sector to be almost $US 600 billion dollars over the next five years.
Trade action
Mexico has implemented a series of measures to reduce the cost of doing business, deepen the process of economic liberalisation and avoid unnecessary customs delays, so as to strengthen the country’s role in global supply chains. More specifically, action has focused on the following areas:
Employment
The comprehensive structural reform agenda will have a significant impact on employment. The Mexican Ministry of Finance estimates that the reform agenda could create around 350 thousand additional jobs per year by 2018.
In November 2012, the Mexican Congress approved a comprehensive labour reform program. The reforms are expected to contribute to a more flexible labour market, promote formal employment and increase labour productivity. In terms of boosting labour market flexibility, the reforms allow firms to have training programs, trial contracts and temporary contracts for specific activities. Moreover, they protect vulnerable groups, especially women and the disabled, while also reinforcing health and civil protection measures.
[1]President, Mexican Council on Foreign Relations.
[2] Mexico Secretariat of Finance and Public Credit, National Infrastructure Program 2014-2018, Mexico Official Gazette of the Federation, 29 April 2014.
Sergey Drobyshevsky
The Russian economy today is in a very different situation than when the decisions of the previous G20 Leaders’ Summit in St. Petersburg in September 2013 and the Finance Ministers and Central Bank Governors meeting in February 2014 were taken.
One of the most significant changes is the economic sanctions imposed on Russia by the United States, the EU and other countries. Obviously, these sanctions negatively affect the economy. However, the more important impact is the uncertainty regarding the forms, scale and length of the sanctions. There are currently no official assessments of the impact of the economic sanctions, either by the Russian Government or international organisations. The assessment by experts at the Russian Presidential Academy of National Economy and Public Administration (RANEPA) is that that the sanctions will lower Russia’s GDP growth by 0.3–0.4 percentage points in 2014 and by 0.5-1.0 percentage points between 2015–2017. Therefore, there is a risk that Russia might not fulfil its contribution to the G20 commitment to increase global growth. This risk is beyond the control of the Russian Government.
Nonetheless, Russia intends to implement its national plan on accelerating economic growth, raising the quality of growth and in turn changing the country’s growth model. To achieve this goal, it is necessary to implement the following major reforms, which broadly correspond to the G20 decisions and agenda.
Ensuring macroeconomic stability
Despite the increased outflow of capital, the decline in foreign investment, and the increased volatility of the exchange rate, the Central Bank and the Government of the Russian Federation are committed to ensure the transition to inflation targeting in 2015, and to lower inflation to below 5 per cent per year. The federal budget deficit should not exceed 1.2 per cent GDP and public debt should remain stable. The budget deficit can be funded from the proceeds of oil and gas exports and privatisation.
Stimulating investment activity
To stimulate investment activity within the country given the lower inflow of direct foreign investment and the ‘closing’ of global capital markets for Russian borrowers, work should be focused in two areas:
Developing infrastructure
A significant proportion of the planned budget investments and PPP projects are in the area of infrastructure, especially the development of new transportation and logistics routes. This investment is particularly important for lifting Russia’s growth rate.
‘Cleansing’ the banking system
During the past year, the Central Bank has made serious efforts to cleanse the Russian banking system from unstable and non-transparent banks. In the next few years it will be necessary to continue this process and strengthen the whole macro-prudential supervision system, and the system of monitoring not only banks but also other financial institutions.
De-offshorisation
The national plan on the de-offshorisation of the Russian economy is aimed at not only raising tax revenue, but also making business more transparent and reducing the opportunities for corruption and the development of the shadow economy.
Amending migration laws and facilitating internal migration and occupational mobility
Russia has a relatively low unemployment rate, which can be explained partly by demographic factors, that has resulted in the reduction in the working-age population. However, it is extremely important that Russia carry out labour market reforms aimed at correcting regional and professional imbalances, developing geographical and intersectoral mobility, retraining, reforming professional education, and attracting legal migrants from abroad.
Developing foreign trade integration through the WTO, Customs Union, APEC and others
Russia’s membership of the WTO created new opportunities for foreign trade and enabled full-scale participation in the international trading system. However, Russia should expand its participation in regional integration associations such as the Customs Union, the Eurasian Economic Union, APEC, and others.
Russian companies are focused on cooperation with companies from other countries in building global value chains, but in the context of the expanding sanctions, progress in this area will, unfortunately, be limited.
Reforming the energy sector
To enhance energy efficiency and reduce energy subsidies, Russia should as soon as possible cancel export duties on oil and oil products, and reform the taxation system within the oil industry. In terms of natural gas, it is urgent that access to the gas pipeline system is liberalised so as to ensure gas supply to domestic and foreign markets.
[1] Russian Presidential Academy of National Economy and Public Administration (RANEPA).
Peter Draper
South Africa’s current growth rate, and trajectory, is weak. Global circumstances, notably its exposure to continued European stagnation and financial market tapering by the US Federal Reserve Bank, are partly to blame. Structural conditions, particularly continued commodity dependence, weak manufacturing capacity, skills shortages, and infrastructure bottlenecks, also play a role. While problems with macroeconomic policy, specifically an expanding fiscal deficit driven by recurrent expenditures, are emerging, these are not currently insurmountable. Overall, the weak growth trajectory primarily reflects microeconomic policy weaknesses or misdirection, resulting in mounting investor angst. This disquiet is greatly aggravated by militancy in the trade union movement, which has surged in recent months.
Clearly deficient external demand cannot be decisively addressed domestically. Nonetheless, more could be done to open new markets to non-traditional South African exports, through pursuing free trade agreements and deeper regional integration in Africa. The intensifying crisis of the multilateral trading system, and likely escalation of mega-regional trade negotiations among key developed and developing markets, sharpen the possibility that South Africa’s exporters will increasingly be disadvantaged in key markets. But a concerted response to these developments is unlikely since it would require openness to reciprocal trade liberalisation, a policy stance not common in South Africa.
Structural deficiencies are a function of economic evolution over time, and at least in my opinion are not easily amenable to government-driven solutions. The exception is addressing infrastructure blockages, which are, correctly, a core focus for the South African government. Nonetheless, more could be done to leverage existing comparative advantage in minerals and agricultural commodities exports, particularly through confidence-building measures in those sectors for domestic and foreign investors.
Instead, however, recent policy initiatives point towards tightening or restricting access to the South African market, particularly, but not only, for foreigners. These include proposals to:
The common thread running through these initiatives is an increasingly inward-looking, national security-oriented, mindset in the governing tripartite alliance. This mindset is reinforced by political developments, notably the ANC’s diminishing, albeit still dominant, electoral fortunes; the rise of the militant populist and largely youth-based political party, the Economic Freedom Fighters; and the seemingly imminent formation of a Workers Party by the most militant and largest trade union in COSATU. Reinforcing this political economy are increasingly vocal voices within the black business community and broader society agitating for more redistributionist policies, and protection-minded business interests that have coalesced around the SACP trade minister, who is inclined to deliver on their desires. These developments are underscored by the ANC’s failure to deliver on promises of jobs and significant economic growth, resulting in finger-pointing at the economic model in place.
Against this broad, disparate constellation of interests there are very few voices speaking in favour of market opening and reform — the key normative foundations of G20 summitry, albeit observed in the breach by other G20 states. Consequently South Africa’s growth strategy is not likely to align with the thrust advocated by the Australian chairmanship of the G20 summit process. Indeed the reverse is foreseeable and the country may assume an increasingly oppositionist stance such as its recent alignment with the Venezuela-Cuba led ALBA group in the World Trade Organization’s trade facilitation agreement debacle.
Nonetheless there are some counter-trends, which offer hope for market reform advocates such as myself. The infrastructure spending plan, if properly implemented, will lead to significant de-bottlenecking of the economy, which would be growth promoting. Second, there is rhetorical focus in the ANC on implementing the National Development Plan (NDP) — a centrist growth agenda — although implementation is subject to the political economy described above. Furthermore, various state agencies are taking concrete actions that could be growth promoting. These include: ramped up manufacturing development incentives; elaboration of a more focused special economic zones program; the digital broadcast migration program; and the agricultural policy action plan. Total envisaged spending in the next three years on these items alone is expected to amount to R38.3 billion (approximately US $3.5 billion), a substantial sum.
Flowing from this analysis, and with due caveats regarding the likelihood of these measures being implemented, I recommend the South African government take the following concrete steps to boost and sustain economic growth:
[1] Senior Research Fellow, South African Institute of International Affairs.
[2] Especially the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership.
[3] Consisting of the African National Congress (ANC), South African Communist Party (SACP), and Congress of South African Trade Unions (COSATU).
[4] The National Union of Metalworkers of South Africa.
[5] The Bolivarian Alliance for the Americas.
Stephen Pickford
The UK is better placed than many of the G20 advanced economies, having started to grow again from the start of 2013. Employment has also recovered reasonably strongly, and unemployment (at least on conventional measures) is not much above historical average levels.
However, even after adjusting for a loss of capacity in the long drawn-out recession, the output gap is still firmly negative. Productivity remains low relative to competitors, and is growing only slowly. Furthermore, much of the gain in employment has been in part-time and low-paid jobs, thus labour market problems remain.
The UK faces a number of challenges:
The macro policy stance is unbalanced, with monetary policy having to remain overly easy in order to offset the impact of fiscal consolidation. The fiscal stance is also overly deflationary because the action taken to reduce the deficit is resulting in an increase in income and wealth inequalities. But extremely low interest rates also open up possibilities for growth-enhancing investment. The policy toolkit also needs to be expanded with macro- and micro-prudential measures to focus on developments in the housing market.
This points to a package of six measures to boost growth:
The fiscal balance should be changed to increase the tax burden on high-income earners and wealth sectors. In particular, increasing taxes on high-value housing could reduce the house price bubble (concentrated on London and the South East).
The public sector should increase its involvement in infrastructure investment, both directly and indirectly. Direct public investment should be financed by additional borrowing, which would add to gross public debt but leave the government balance sheet unchanged. There is also a role also for indirect measures, such as public guarantees and measures to boost private financing instruments.
Stronger measures are also needed to incentivise individual pension provision. This would increase the private funding available for longer-term investment and reduce future public pension liabilities.
Macro- and micro-prudential measures to reduce financial institutions’ exposure to over-priced housing markets could also help rebalance the housing market as well as increase credit flows to non-housing industrial sectors, and thus help to generate jobs.
The overhaul of financial regulation should be completed quickly, to bring to an end as soon as possible uncertainty over the size and shape of the financial sector. The government should also move as quickly as possible to reduce its shareholdings in major retail banks, to reduce public debt levels and increase competition in the banking sector.
Fundamental changes are also needed to improve the skills and employability of young people. There are no easy options, and the impact will only be realised over the long term. But without continuous up-skilling it will not be possible to reduce the international productivity gap facing the UK.
Finally, the result of the Scottish independence referendum has taken away a major source of uncertainty. But it has been replaced by a wider debate on the nature of the UK — with calls for greater devolution of powers in all regions of the UK, as well as fundamental political disagreements about the UK’s relationship with the EU. There is a risk that these arguments, combined with the usual political uncertainty in the run up to a general election in mid-2015, will dominate the policy debate. Unless the UK government can also focus on the actions needed to boost sustainable growth, there is a serious risk that the difficult political decisions will be ducked.
[1] Senior Fellow, Chatham House
Matthew P. Goodman
As the world’s largest economy, the United States will play a critical role in the success or failure of the G20’s goal of increasing global growth by an additional 2 per cent by 2018. The IMF currently forecasts average annual real GDP growth for the United States at slightly below 3 per cent through 2018. There is limited scope for more accommodative fiscal or monetary policy to raise this trajectory; thus structural reform holds the key to any significant boost in US growth. However, it must be acknowledged that because the United States is also the world’s frontier economy, there are clear limits to how rapidly US productivity can grow. Moreover, policy will be constrained by the country’s enormous debt overhang and by the current climate of political dysfunction in Washington.
As recognised in the St. Petersburg Action Plan, the top priority for structural reform in the United States is improving the country’s ageing infrastructure. In 2013, the American Society of Civil Engineers estimated that US infrastructure needs through to 2020 would require US$3.6 trillion in investment — roughly $200 billion per year beyond what existing funding mechanisms are expected to supply. The Obama Administration has made addressing this gap a top policy priority but has thus far been unable to win Congressional approval of even the relatively modest US$50 billion infrastructure spending plan outlined in the St. Petersburg Action Plan. However, political recognition of the need for greater infrastructure investment appears to be growing; the key to consensus is likely to be less emphasis on Federal spending and more on incentivising State-level spending and long-term private-sector investment.
A second policy priority for enhanced US growth over the medium term is labour market reform. As an ageing population causes a slowdown in the rate of labour force expansion and necessitates a greater focus on boosting productivity, Democrats and Republicans have begun to debate a wide variety of policy responses, from expansion of the Earned Income Tax Credit and an increase in the minimum wage to development of new apprenticeship and non-degree training programs. Targeted immigration reform could also play a major role in boosting both labour supply and productivity. While the political prospects for reform in this area are limited prior to the 2016 Presidential election, they will likely improve thereafter. In addition, the Obama Administration has appropriately stressed the importance of worker-training programs to boost productivity and potential growth. In this regard, passage of the strengthened Trade Adjustment Assistance (TAA) legislation in the near term would be most helpful.
This points to a third priority for US policy to enhance growth: international trade liberalisation. Since the global financial crisis, trade has played a critical role in sustaining the US recovery; the Obama Administration claims that approximately one-third of US economic growth has been driven by exports. The United States is currently involved in a number of important trade negotiations at both the multilateral and regional level, including on trade facilitation, services, and information technology, and regionally through the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). In addition to using its leadership to push for progress on multilateral economic agreements, Washington should redouble its efforts to complete both TPP and TTIP within the next 12-24 months; a completed TPP agreement alone would produce estimated annual income gains for the United States in 2025 of some $77.5 billion.
Other growth-enhancing reforms include capitalising on America’s dramatically improved energy posture by removing export restrictions on crude oil, retooling the country’s energy infrastructure to transport and export gas, and incentivising investment in green technology. An overhaul of the US tax code and additional streamlining of regulations would also boost investment and produce growth dividends, as would the conclusion of a bipartisan budget deal aimed at promoting fiscal consolidation over the medium term. Reforms to improve educational outcomes would also raise the United States’ long-term growth trajectory but, even if advanced in the near term, are not likely to contribute much to meeting the Brisbane growth target. Again, these are all challenging objectives in the current political environment and thus will be difficult in practice to advance before the 2016 Presidential election.
The easy path to stronger global growth would be for the United States to resume its role as the world’s ‘consumer of last resort’. However, this would clearly fly in the face of the other two adjectives modifying the G20’s growth objective first set out at Pittsburgh in 2009: ‘sustainable’ and ‘balanced’. Structural reform in the United States must therefore be focused on removing supply-side constraints and boosting productivity, and must be complemented by reforms in China, Germany, and other G20 economies to generate more balanced sources of growth.
[1] Simon Chair in Political Economy, Center for Strategic and International Studies. Washington, DC.
[2] As Federal Reserve Vice Chairman Stanley Fischer noted in a recent speech, Fed estimates of U.S. long-term potential growth are below 3 per cent, having steadily declined since the crisis to between 2 and 2.25 per cent (down from 2.5 to 3 per cent in January 2009). Stanley Fischer, “The Great Recession: Moving Ahead,” 11 August 2014, http://www.federalreserve.gov/newsevents/speech/fischer20140811a.htm.
[3] Patrick Natale, “Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future,” Presentation to the Government-University-Industry Roundtable, 25 June. Summary available at http://sites.nationalacademies.org/pga/cs/groups/pgasite/documents/webpage/pga_086194.pdf.
[4] Michael Froman, “Remarks at the World Trade Center Denver,” 23 June 2014, http://www.ustr.gov/about-us/press-office/speeches/transcripts/2014/June/Remarks-by-USTR-Michael-Froman-at-the-World-Trade-Center-Denver.
[5] Peter Plummer, Michael Petri, and Fan Zhai, The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment, Peterson Institute for International Economics and East-West Center, 2012.
[6] For example, one estimate puts the impact of tax code reform at a 1.6 per cent increase in real GDP in 2023 over baseline projections. See Joint Committee on Taxation, “Macroeconomic Analysis of the ‘Tax Reform Act of 2014,’” 26 February 2014. Available at https://www.jct.gov/publications.html?func=startdown&id=4564.
Rei Tang
On 20 September 2013, Congress failed to appropriate funds for the United States federal government. A sixteen day shutdown of the federal government ensued. President Barack Obama, now with urgent demands in Washington, cancelled his trip to the Asia Pacific Economic Cooperation (APEC) meeting in Bali. And US trade negotiators postponed a negotiating session in Brussels on the Transatlantic Trade and Investment Partnership (TTIP).
While newspapers have moved on from this episode — which now seems to have happened in a previous era — Washington remains mired in the intense political gridlock heralded by the rise of the Tea Party in 2010. This has impeded the ability of America to take the lead in global economic governance, despite the efforts and best intentions of the White House and the US Treasury.
With the United States undergoing this dreary phase in its politics, the Administration’s emphasis will be on realistic efforts to engage in global economic governance. This may not be enough, however. The reform prescriptions for the United States to increase its economic growth rate are well known — including higher infrastructure investment and increased savings, on which the president has laid out executive actions in his 2014 State of the Union speech. Meanwhile the Federal Reserve holds the responsibility to fine-tune monetary policy.
In the area of international economic policy, Congress still needs to approve IMF reform, and provide negotiators with credibility in discussing the proposed TTIP and Trans-Pacific Partnership agreements. All of this is gravely important for the G20 and for global governance.
The world is wondering if the United States has enough political interest to carry the global economic system — that runs on America’s centrality — into the twenty-first century. Emerging economic powers, particularly the BRICS, have formed the kernels of an alternative.
One sector that has budding political dynamism in the United States is energy. The economic boon of natural gas to the United States has strong connections to the pressing concerns of G20 countries, including in the geopolitical realm. The United States will need to catch up with its energy policy, and should formulate some guiding points. The White House is taking executive action that will lead to significant improvements in energy efficiency in the United States, particularly the energy efficiency of buildings and vehicles, which will see changes in the energy mix with a decline in reliance on coal. This provides a compelling starting point for the United States to introduce new dynamism into the G20 and to demonstrate its multifaceted ability to lead.
[1] Associate Program Officer, The Stanley Foundation.
