G20 Hangzhou agreement unlikely to heal global economy's malaise

The world economy is in a malaise, and judging by their final communique and the accompanying 100 documents, including some 30 action plans, the annual summit meeting of the Group of 20 (G20) major economies (4-5 September) at Hangzhou, China seems unlikely to heal the malaise.

Aldo Caliari

EVER since the G20 started meeting at the level of heads of state in November 2008, the economic policymaking community has had its sights set on the grouping. At that time it revealed itself as an effective actor taking forceful steps to coordinate action to stop what could otherwise have been a global meltdown (even though some observers hold that such steps had already been agreed individually by each country, so the grouping as such was not the force propelling them).

However, subsequent G20 actions in successive yearly gatherings have so far failed to bring about a strong recovery of the global economy.

This is in spite of the ever-growing volume of activities by the Group: at Hangzhou, the communique was accompanied by over 100 documents, more than 30 of them being initiatives or action plans endorsed by the Group.

Speaking at the summit, International Monetary Fund (IMF) Managing Director Christine Lagarde summed up the situation by stating that growth had been 'too slow, for too long and for too few'.

The G20 communique recognised that 'growth is still weaker than desirable. Downside risks remain due to potential volatility in the financial markets, fluctuations of commodity prices, sluggish trade and investment, and slow productivity and employment growth in some countries.'

Will the Hangzhou agreements help surmount the global economic challenges? Unlikely. On three areas of reform that should be central to efforts to reinvigorate the speed and inclusivity of growth, the unveiled G20 agenda was troublingly misguided. These areas were: structural reform, financial regulation, and trade and investment. This article examines the outcomes for each of them in turn.

Structural reform

One of the salient features of the Hangzhou outcome is the prominence it gives to structural reforms, which, in the way the G20 is going about them, is quite problematic.

The justification for focusing on structural reforms is, ostensibly, a certain sense of desperation about the ineffectiveness of demand support interventions to lift the global economy. But this is a self-serving statement, much truer of monetary policies than of fiscal policies, which are kept on restraint across a growing number of countries.

The G20 skipped revisiting the extent to which different demand interventions are being deployed, in favour of looking at the supply side, with the potential consequence that negative employment and wage effects of such reforms may only worsen the demand gap.

Last year, the IMF had delivered a carefully crafted paper on the matter that some analysts found a bit overreaching. Yet, comparing that paper with the current G20 approach, it is regrettable that the G20 decided to dispense with even the degree of caution present in that paper.

Firstly, the IMF paper judiciously recognised that structural reforms are very country-specific and need to be cognizant of each country's circumstances and needs. For its part, the G20 makes a nod to national specificity, for instance, stating that the 'choice and design of specific structural reforms must necessarily be informed by a country's macroeconomic environment and national preferences'. But the adoption of a 'common set of indicators' shows a uniform direction of travel that is not to be questioned.

Secondly, the Fund was very emphatic about structural reforms being 'inherently' difficult to measure as they involve 'issues that are not easy to quantify'. The G20 forgets about this 'small' detail, and adopts quantitative indicators whose comprehensiveness, it announces, is set to increase - making, along the way, some very questionable calls.

Strikingly, labour productivity becomes the main outcome to measure as a result of five of the six priority areas for reforms. This approach neglects the difficulties in disentangling labour productivity from that of the other factors of production. Success in increasing labour productivity could also lead to lower employment or happen in the absence of real wage growth, thus putting a further dent on demand. Such variables could have been selected for measurement on their own, but were not.

Thirdly, the IMF should be credited with encompassing as the potential subject of structural reforms - at least at general policy statement level - actions that would need to address market failures as well as government failures. This set the Fund's approach apart from the widely discredited 'structural adjustment programmes' that became a hallmark of the institution in the 1980s and 90s and that were heavily focused on 'getting the government out of the way', being biased towards the latter category of failures.

But a reading of what the G20 means by structural reforms shows it going back to the worst biases of structural adjustment.

One priority reform area is unambiguously called 'Promoting trade and investment openness'. While a growing body of literature advises on the risks of corruption and wasteful spending in public-private partnerships, the infrastructure area of the document raises eyebrows by calling for 'cost-benefit and value-for-money analysis, possibly supplemented by multi-criteria analysis, for public infrastructure projects' (emphasis added).

Market failures are not even to be found under 'Enhancing environmental sustainability', which calls for extending 'the use of market-based mechanisms to mitigate pollution and increase resource efficiency'.

Fourthly, the IMF was careful to demarcate its engagement on structural reforms with the need to be guided by its mandate and Articles of Agreement. It is true that if one looks long enough, every economic policy area can potentially have a macroeconomic implication and thus fall under the purview of the Fund. But the Fund knew better than to fall prey to this temptation - an approach that so ill served it in the past - and even said that 'many structural issues will likely remain outside the Fund's areas of expertise'.

It then becomes hard to understand why the G20 insisted on pushing the Fund to carry out analysis on what each G20 country should prioritise across all reform areas, without relying on any of the other institutions whose expertise is more suitable to specific portions of the task.

Financial regulation and green finance

Referring to the financial regulation agenda, the G20 leaders in Hangzhou said they remained 'committed to finalising remaining critical elements of the regulatory framework and to the timely, full and consistent implementation of the agreed financial sector reform agenda'.

Seen in the light of the significance of financial regulation for a body created to respond to the greatest financial crisis since the Great Depression, the statement betrays a certain sense of complacency.

It assumes the agreed reforms are enough to prevent a crisis and the worst consequences of its aftermath, a proposition that, at the moment, belongs more in the realm of faith than science. But perhaps the most problematic (and less scientific) aspect of such complacency is that it seems to see finance as disconnected from all the other problems the communique rightly recognises (slowing trade, weak demand, limited growth, de-industrialisation and so on).

In fact, if one reads this together with the growing structural reform agenda, the message is quite clear: 'Everybody else has to adjust, just not finance.'

For instance, as reported by an observer, financial inclusion did not seem to be prioritised in this G20 summit.

If one looks only at implementation of the agreed reforms, the picture is not so good, either.

A report by the Financial Stability Board on the matter said, in the diplomatic language in which an intergovernmental body typically addresses the G20: 'Implementation progress remains steady but uneven across the four core areas of the reform programme.' (These areas are building resilient financial institutions; ending too-big-to-fail; making derivatives markets safer; and transforming shadow banking into resilient market-based finance.)

The same report alludes to a number of unintended consequences of the reforms that it keeps under observation. Here, one can find some justifiable ones, such as the impact on emerging markets and developing economies' access to finance. But others, such as 'effects of reforms on financial openness and integration', are an alarming reflection of the pushback by the financial industry, which, past the post-crisis reform momentum, is trying to return to some of its pre-crisis practices.

Thinking of the long-term planetary limits to conceiving growth as usual, the summit's endorsement of a report issued by the Green Finance Study Group set up under the Chinese presidency of the G20 represented an important step.

The G20 recognised the challenges to the development of green finance, such as 'difficulties in internalising environmental externalities, maturity mismatch, lack of clarity in green definitions, information asymmetry and inadequate analytical capacity'.

Given the enormous obstacles China faced in its pioneering effort to install this concept within the G20 finance track (that was staffed by finance ministers and central bankers), the mere inclusion of a paragraph in the declaration could be regarded as a triumph.

However, the fact that the communique only welcomed the 'voluntary options developed by the [Green Finance Study Group] to enhance the ability of the financial system to mobilise private capital for green investment' gives some cause for concern.

If the concept of green finance is to sustain credibility, it will have to show its capacity to move companies beyond where they would have been by pursuing 'business as usual'. For this it will have to show a proper balance between voluntary and mandatory actions, including regulatory ones.

Trade and investment

One of the symptoms of stagnation of the global economy as shown by recent reports is the continuation of the slowdown in the global volume of trade, which is forecast to be almost unchanged this year from 2015.

It is understandable that the G20 felt compelled to show resolve on this front. But the 'Global Strategy for Trade Growth' endorsed in Hangzhou seems to assume, as its unambiguous title suggests, that somehow growing global trade will solve all ills and that its benefits will automatically be spread (trickle-down?) more fairly among and within countries.

For instance, the strategy says: 'G20 members recognise that facilitating trade and investment will enhance the ability of developing countries and SMEs [small and medium-sized enterprises] to participate in and move up the value chain in GVCs [global value chains]', something not borne out by experience.

In fact, the summit declaration does call for 'policies that encourage firms of all sizes ... to take full advantage of global value chains and that encourage greater participation, value addition and upward mobility in GVCs by developing countries, particularly low-income countries'.

But all experiences of countries that have managed to do that in real life, show them precisely relying on active use of trade and investment policies, not on some expectation that the automatic effect of expanding trade would lead them in that direction.

In fact, to some extent in open contradiction with such an objective, the G20 also adopted the Guiding Principles on Investment Policymaking that had been endorsed earlier in the year by its trade ministers. The principles recognise the right of governments to regulate investment, but also profess an intention to move towards 'open, non-discriminatory' conditions for investment.

While at the moment these are principles that the G20 have adopted for themselves and should not necessarily apply to other countries, the United States reportedly tried to introduce them in the 14th session of the UN Conference on Trade and Development (UNCTAD) - a universal membership organisation - last July.

Salutary lessons can be drawn from the field of tax cooperation - where developing countries are expected to follow OECD-crafted rules 'on an equal footing' - and one cannot rule out the prospect of non-G20 countries being asked to join 'on an equal footing' the implementation of such investment principles in future. Embedding such principles into multilateral rules on investment - a position rejected by more than 70 countries at the Cancun World Trade Organisation (WTO) Ministerial Conference in 2003 - is, furthermore, an explicit demand by the Business 20 (the coalition of business associations from the G20 countries).

Along these lines, the G20 members extended 'their commitments to standstill and rollback of protectionist measures till the end of 2018'. One might object to the bluntness of the methodology used in such survey. However, the fact that the latest report by UNCTAD, the WTO and the OECD shows the monthly average of trade restrictions at the highest level registered since the G20 asked them to undertake the survey for the first time (in 2009), raises questions beyond that, about the general value of such a pledge.

Industrialisation is perhaps the single most important item in achieving a fairer distribution of the gains from trade. Thus, the Hangzhou communique's decision to launch a New Industrial Revolution Action Plan was well-placed. With the commodity price shock revealing again how little has changed in the structure of developing countries' economies - undiversified and largely commodity-dependent - focusing energies on how they can industrialise was long overdue.

Unfortunately, the components of this agenda are far from what developing countries need. This was probably to be expected, given the composition of the G20, which, in providing the background on the Action Plan, mentioned the efforts of individual countries, most of which are developed ones.

Still, this is not the major objection one could make to the agenda. Sustainable development will require a transformation of industry, even in already industrialised countries. The problem is the assumption that seems to permeate this plan, that everybody, no matter their level of development, has to do the same thing.

The New Industrial Revolution Action Plan, together with an Innovation Action Plan, were part of a 'Blueprint on Innovative Growth' launched by the G20 leaders. The Action Plan prioritises dimensions that are clearly not the ones that developing countries would care about.

A conspicuous example is intellectual property rights. One of the main obstacles poor countries face in trying to industrialise is the lack of technology and the extremely high prices attached to accessing it from the companies - mostly oligopolies in developed countries - that have it. While developing countries' repeated demand has therefore been for facilitation of technology transfer, existing rules on intellectual property rights such as the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) have acted as an obstacle in this regard.

But the Action Plan is geared to further strengthening protection of intellectual property rights. At one point, it makes the seemingly contradictory call for 'effective protection and enforcement of ... voluntary technology transfer' (emphasis added).

It also recognises that 'enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises'. This prompts the question of whether it is the best use of the forum of the most powerful economies in the world to restate what companies already do in any case.

Similar doubts apply to the priority attached to 'cooperation in development of standards', which, if it is to be carried out in the G20, may easily become one more barrier for developing countries. These countries already spend significant time and resources trying to catch up to the many standards set by countries and companies that, as a result of having created the standard initially, get to enjoy insurmountable 'first-mover' advantages.

There are, however, other aspects in the Action Plan that are more in sync with developing countries' needs, for instance, skills and adaptability of the workforce to the requirements of industrialisation and SMEs' lack of 'resources and information to help them implement and benefit from new technologies'. It will be important to follow what tangible action the G20 is ready to take on these fronts.

In relation to multilateral trade negotiations at the WTO, a key political development to underscore was the G20 leaders' commitment 'to shape the post-Nairobi work with development at its centre and commit[ment] to advancing negotiations on the remaining [Doha Development Agenda] issues as a matter of priority ...'

At the end of the WTO Ministerial Conference in Nairobi last December, a group of developed countries had insisted on not recognising the currency of the Doha Development Agenda anymore unless developing countries were ready to commit to including new issues on the agenda.

Unfortunately, the G20 breakthrough on the Doha Development Agenda was not necessarily a net gain. As reported by the South-North Development Monitor (SUNS), the cost to pay for such agreement was the mention in the Hangzhou communique that 'a range of issues may be of common interest and importance to today's economy, and thus may be legitimate issues for discussions in the WTO, including those addressed in regional trade arrangements (RTAs) and by the Business 20'.

The influence and access of the business community - completely out of sync with that of civil society - in trade negotiations is no secret. However, the direct, explicit and, in this case, open-ended reference to the agenda of a specific group of large businesses in political commitments on trade is an unprecedented development of alarming proportions.  

Aldo Caliari is Director of the Rethinking Bretton Woods Project at the Washington-based Center of Concern. This article is reproduced from the South-North Development Monitor (SUNS, No. 8316, 21 September 2016). The full version of the article including footnotes can be found at

*Third World Resurgence No. 312/313, Aug/Sept 2016, pp 13-16