TWN Info Service
on Finance and Development (Nov11/02)
G20 Summit reiterates
past policy commitments, pays special attention to jobs and growth
The recently concluded G20 summit in Cannes produced an action plan on jobs and growth that outlines macroeconomic policy commitments across the various G20 countries, repeatedly emphasizes the need to strengthen international policy cooperation, and states an “ultimate objective” of job provision and social inclusion in all countries.
The G20 states that its action plan on jobs and growth reflects only the views of the G20 countries, and draws on the independent assessments by IMF staff on global imbalances and recommended policies to address them. The IMF staff are distinct from its executive board, where the US has veto power and European countries hold unequal sway in decision-making.
The G20’s action plan to “promote growth and restore financial stability” is variegated by the economic health and status of a country, which differentiates between deficit and surplus countries, and between advanced and emerging market countries.
The mix of measures across the different country groupings are as follows:
• Advanced countries will adopt policies to build confidence and support growth while “taking into account different national circumstances.” In other words, advanced countries are to balance measures to lower their fiscal deficits and public debts while also pursuing stimulus and public investment measures to support growth. Different national circumstances imply that each country will have a tailored and unique mix of austerity and stimulus measures.
• Eurozone governments commit to take all necessary measures and actions to ensure the stability of the euro (and as such, do not have the ability that other advanced countries have to calibrate austerity and stimulus measures). The various policy commitments for Eurozone countries include fiscal austerity and governance, structural reforms, and banking sector reforms (raising the “capital position of large banks to 9% of Core Tier 1 capital after accounting for sovereign exposures by the end of June 2012,” while maintaining credit flow to the real economy and avoiding excessive deleveraging.
• Italy commits to attaining a declining debt-to-GDP ration starting in 2012 and a balanced budget by 2013, based on the full implementation of the 60 billion euro fiscal package approved for the country this summer. This includes the structural reforms announced on October 26th and a strengthening of fiscal rules. Italy also agrees to IMF public assessment of its policy implementation on a quarterly basis.
• The US commits to a package of public investments, tax reforms, and targeted jobs measures to be carried out in the near-term. In the medium-term, a credible plan for medium-term fiscal consolidation is to be drawn up.
• Japan commits to the implementation of substantial fiscal measures for reconstruction from the earthquake, estimated at about 4% of its GDP, while ensuring, similar to the US, fiscal consolidation in the medium term.
• Australia, Brazil, Canada, China, Germany, Korea, and Indonesia, countries where public finances remain relatively strong, agree to allow automatic stabilizers to work on a country-tailored basis. And if global economic conditions worsen further, these countries will take “discretionary measures to support domestic demand” while still maintaining medium-term consolidation.
• Emerging market economies, which includes Argentina, China, Brazil, India, Indonesia, and Mexico, are to adopt macroeconomic policies to enhance the resilience of their economies.
• Surplus countries, such as China, will support global recovery by moving towards domestic-led growth by strengthening the purchasing power and goods demand of their domestic market.
For countries outside the one-currency eurozone, the G20’s action plan supports a flexible monetary policy that supports economic recovery by allowing interest rates to “respond to changes in economic and financial market conditions,” subject to their impact on maintaining “stable inflation levels.” This allows countries such as the US to continue unhindered with its near-zero monetary policy.
Again, for non-eurozone countries, and in line with all previous communiques, the G20 commits to market-determined exchange rates and to “refrain from competitive devaluation.” This is foreseen as easing the challenges of global liquidity and capital flow volatility, and, reducing excessive accumulation of reserves.
Russia’s recent changes to allow the rouble to move in line with market forces and China’s willingness to increase exchange rate flexibility are supported in the communiqué.
Across all G20 countries, banks are to be “adequately capitalized” with “sufficient access to funding” (for which central banks “continue to stand ready to provide liquidity to banks as required”) in order to preserve the “stability of banking systems and financial markets.”
The G20’s job creation strategy
The G20 agreed to a six-point plan to strengthen global economic growth, with a focus on job creation.
The six points of the plan are:
1. Fiscal consolidation over the near- or medium-term in all countries;
2. Boosting private demand in surplus countries, and, where appropriate, to rotate demand from the public to the private sector in countries with current account deficits;
3. Structural reforms to raise growth and boost job creation;
4. Reforms to strengthen national and global financial systems;
5. Measures to promote open trade and investment, rejecting protectionism in all its forms; and,
6. Promoting development.
The first point of fiscal consolidation repeats the Toronto commitment in 2010 to reduce fiscal deficits to 2010 levels by the year 2013, and to reduce debt-to-GDP ratios by 2016.
The US commits to reduce its debt-to-GDP ratio no later than 2015 through a balanced deficit reduction plan that builds on the Budget Control Act of 2011, which enacted about $1 trillion in discretionary savings over the next ten years and locked in at least $1.2 trillion in deficit reduction beyond that.
The US plan will include: spending reductions, particularly on entitlement programs, tax reforms that raise revenue, lower rates, and cuts tax loopholes, as well as stronger budget rules. These reforms will yield a total deficit reduction in the US of $4 trillion over 10 years.
France commits to reducing its fiscal deficit to 3% in 2013 through: tighter limits on government and health insurance expenditure, better targeted social transfers, a growth-friendly reduction of tax expenses, and the integration of existing fiscal rules into the Constitution.
The UK reaffirms its commitment to planned fiscal consolidation and the four-year plan set out in its 2010 Spending Review. It will also undertake structural reforms, including measures to ensure growth-friendly fiscal adjustment while addressing long-term spending pressures and imbalances, such as managing future increases in the state pension age more systematically in response to changes in longevity.
Japan commits to implementing its “Definite Plan for the Comprehensive Reform of Social Security and Tax,” which includes a gradual increase in consumption tax to 10% by 2015.
India commits to strengthening domestic revenue mobilization through tax reforms, including a unified goods and services tax, and the overhaul of personal and corporate tax codes.
The G20’s jobs plan underscores that surplus countries with weak private demand, such as Germany, Japan, and China, play an important role in rebalancing global demand. Germany will implement measures to promote private consumption and investment, strengthen domestic demand, and address the factors that drive high private savings and low investments nationally.
Japan will also implement measures to promote consumption and investment, including accelerating the implementation of the “New Growth Strategy” comprising policies that will boost demand for a range of services.
China is to scale up domestic consumption by strengthening social safety nets, increasing household income, and transforming the economic growth pattern. Two other actions China will undertake is to reduce gradually the pace of foreign reserve accumulation and to promote greater exchange rate flexibility.
Indonesia and Korea are also committed to encourage private spending. Indonesia has announced a national plan for infrastructure that will significantly increase private investment.
Structural reforms to raise output in all G20 countries
Some key components of structural reforms outlined in the G20’s action plan are: tax and benefit reforms to reduce unemployment, flexible labour market policies, effective labour institutions that provide incentives for increasing formal and quality jobs, and infrastructure investment, which will be intensified by Brazil, India, Indonesia, Mexico, Saudi Arabia, and South Africa.
China is to reform its pricing for production inputs, while France, Germany, Italy, and Korea are to boost productivity in the services sector, and Germany and Italy are to reform tax to promote employment. Russia is to raise disclosure standards by its financial institutions.
India and Indonesia commit to phasing out wasteful and distortive subsidies in the medium term, while providing targeted support for the poor in the interim. Turkey commits to focusing on energy efficiency and the greater use of renewable energy, while Argentina is to focus on boosting agricultural investments and output.
South Africa takes on scaling up regional integration for expanding trade and investment, and the US will enhance oversight of short-term financing markets while trying to boost household savings.
Australia is to address carbon pricing for a clean energy economy, and Korea will promote green growth. And Saudi Arabia will continue to play its systemic role in stabilizing oil markets in the global economy.
The EU commits to deepen Single Market integration through a regional action plan to boost growth, which includes services, trans-European networks, workers’ mobility, taxation, and financing for small and medium enterprises.
The EU’s key targets for 2020 are to raise employment to 75% for citizens aged 20-64, to improve education levels, and to raise the share of public and private investment in research and development to 3% of aggregate EU GDP.
The financial reform, infrastructure, and trade agenda
The G20’s plan on financial reform simply repeats the agenda agreed in Seoul in November 2010, which includes: implementing Basel II, II.5 and III along the agreed timelines; more intensive supervisory effort; clearing and trading obligations for OTC derivatives; standards and principles for sounder compensation practices, achieving a single set of high quality global accounting standards; a comprehensive framework to address the risks posed by systemically-important financial institutions; and, strengthened regulation and oversight of shadow banking.
The G20’s emphasis on infrastructure is clear in the following statement in the Action Plan: “Developing countries have the potential to contribute to stronger and more balanced global growth and should be viewed as markets for investment, especially in infrastructure.”
The G20 stresses that while reducing barriers to trade and investment will help reduce the development gap, further efforts to support capacity building and channeling of surplus savings for productive use in developing countries, including infrastructure, is critical. The Infrastructure Action Plan of the Multilateral Development Banks is supported, as is the High-Level Panel’s recommendations on infrastructure.
With regard to trade, the G20 highlights market access for least developed countries (LDCs), and mentions that trade facilitation, trade finance, and aid-for-trade programs should all be strengthened to enhance LDC trade capacity.+