Last weekend's meeting of G20 finance ministers in Cairns achieved more than many other similar G20 meetings. But will it 'change the destiny of the global economy' as claimed by Treasurer Hockey? It could, but only if G20 countries deliver on their good intentions with policy action.
Treasurer Hockey was buoyant on the outcomes from the meeting. The focus was on increasing global growth, which was the centrepiece of the first G20 finance ministers' meeting under the Australian chair in February. The main outcome from that meeting was the commitment to lift global growth by an extra 2% over five years. The headline from the Cairns meeting was the assessment by the IMF and OECD that if G20 members do what they say they will do, global growth could rise by an additional 1.8% over five years.
Finance Ministers and Central Bank Governors Meeting Cairns 2014 (Flickr/Finance Canada).
But so far, all the 'strong resolve' to strengthen growth has not translated into results.
Prior to the Cairns meeting, the OECD was reported as 'slashing its growth forecasts' for 2014 and 2015. The IMF warned that the downside risks to the global economy, particularly from heightened political tension and financial market developments, had increased. The French Finance Minister referred to the 'fog of contradiction'; countries promising faster growth at the same time as estimates of global growth were slowing. [fold]
G20 members presented over 900 domestic policy reform recommendations to lift growth in their economies. But we will not see this extra growth unless these reforms are implemented. The OECD and IMF's quantification of the possible impact of the reforms acknowledged the high degree of 'implementation uncertainty'. Rather than the Treasurer saying that the G20 was '90% of the way towards meeting a 2% target', it would be more accurate to say the G20 agreed to start implementing policies necessary to achieve the target. There is a long way to go before the target will be met.
But the fact that Australia has shepherded a process which has resulted in countries presenting new measures to increase growth is a significant achievement. It is a big improvement on past G20 meetings, where the action plans were largely a restatement of existing policies. Achieving 'additional' growth above current forecasts requires 'additional' policy measures.
There is something missing, however, in that while G20 members have shared their detailed domestic growth agendas with each other, they have not been shared with the citizens of G20 countries. For example, what growth-enhancing reforms did Australia submit and what was the IMF's assessment as to the expected increase in Australia's growth rate? Perhaps the detailed plans are being 'saved' for announcement at the Brisbane Summit. But policy surprises usually don't go down well with the public.
The commitments to lift growth that really matter are those that leaders and ministers make to their own citizens. Each government has to win its own domestic political battles and convince its citizens of the merits of often contentious policy reforms. Most of the extra 1.8% growth comes from product and labour market reforms. These are usually the most difficult to implement. Consequently, the sooner the public is brought into the process, the more likely the measures will be implemented.
Australia has focused on increasing infrastructure investment. The idea of a knowledge-sharing platform to help match potential investors with projects is positive step, but it will take time to establish. Importantly, the World Bank pointed out that simply increasing spending on infrastructure may not lead to stronger growth over the long term. The major requirement is a sound and transparent process to select and prioritise projects with the best growth impacts.
On tax, progress was made but again, the challenge is implementation. The common reporting standard (CRS) for the automatic exchange of tax information was agreed to at the February finance ministers' meeting. This measure will largely tackle tax evasion by individuals. Australia announced in Cairns it would join 44 other countries in adopting CRS, although three G20 members are still holding out.
As to combating corporate tax avoidance, the OECD presented seven reports on its base erosion and profit shifting exercise. A significant achievement, but this is work in progress. Many of the difficult issues in modernising international tax laws are still to be addressed, but they will be looked at in OECD reports scheduled for 2015. Moreover, they are only recommendations and implementation will require each G20 country to amend its domestic laws. This will not be easy. The OECD says it is feasible to conclude a multilateral instrument that will amend over 3000 bilateral tax agreements at once. Such an instrument may be technically feasible, but it remains to be seen whether it can be achieved within a reasonable time frame.
The implementation task is large and uncertain. But the OECD could not have achieved what it has to date without the political support from the G20. The challenge is to maintain that support when it comes to implementation.
A degree of pragmatism is also appropriate on financial regulation. The communique says 'we have delivered key aspects of the core commitments' to make the financial system more resilient. The Financial Stability Board (FSB) is close to settling the design phase of some important financial regulatory reforms. But the work will never be completed. The challenge is to implement the reforms, ensure that they are working as intended and to respond to the risks coming from ever-changing financial systems. A positive development was the FSB's agreement to publish an annual report on the implementation of reforms and their effects.
The Cairns meeting had substance. However, G20 members are still at the stage of saying what they are going to do to strengthen growth. Words are yet to be turned into action. Whether they can change the destiny of the global economy will depend on whether they can 'walk the talk'.