The economic and political consequences of last week's Brexit bombshell will have far-reaching implications. One of these is that the G20 should see Brexit as a wake-up call.
Philip Stevens from the Financial Times points out that capitalism needed saving in the aftermath of the Global Financial Crisis, but in bailing out financial institutions with taxpayer money, governments transferred the stresses from the markets to politics.
The G20 was meant to be a key valve for resolving the political risk that governments took on. When the forum was established in 1999, it was intended as an informal dialogue on economic and financial policy to help achieve stable and sustainable global growth, and, in the words of former Canadian Prime Minister Paul Martin, to focus on translating the benefits of globalisation into higher incomes and better opportunities for people everywhere. [fold]
The G20 has runs on the board on crisis management. When Lehman Brothers collapsed, G20 agreements in 2008 and 2009 were instrumental in the global response to the ensuing financial calamity. The model then proved a useful template during the Euro crisis a few years later, albeit on a smaller scale.
Barring further serious policy missteps, the G20 should ideally not need to convene in a 'crisis response' mode as a result of Brexit.
Yes, the decision is the biggest monetary shock since 2008. It has permanently lowered the growth trajectory of the UK and adversely impacts the EU. There have been significant financial market gyrations in the immediate aftermath of the decision. The uncertainty of Brexit also comes at a time when growth is persistently sluggish and the world economy is fragile. The deterioration in global financial markets could worsen and still has to potential to be the tipping point to a global recession. Conditions within Europe could still lead to an unwinding of the EU, particularly if the politics are handled poorly.
But so far the actions of the key central banks, including the European Central Bank and Bank of England, and the likes of the IMF, have projected the steady hand that's required. German Chancellor Angela Merkel has called for calm and composure from EU politicians, though not everyone appears to have received that memo. The Peterson Institute's Olivier Blanchard predicts that, should this continue, the fires can be largely contained to the UK and EU.
In contrast, the G20 has been relatively impotent in addressing the longer-term challenges of globalisation. As Duncan Weldon points out, globalisation is fraying. Yes, flows of people across borders continue to rise and the internet is driving ever higher flows of information, but trade and capital flows are slow, post-crisis growth remains weak, and productivity trends are alarming. What's more, the graph of growth of real income in recent decades is elephant-shaped; winners have been the global 1% and middle income people in emerging economies. Those left behind are the poorest, who remain locked out of growth, and the lower-middle class in developed economies.
At a recent address, the IMF's David Lipton discussed the many for whom vulnerability and insecurity are now more salient than the gains from interconnectedness, which has brought market volatility, powerful spillovers and dislocations. Such uncertainty has fostered resentment (rightly or wrongly) of globalisation.
The G20 should be a ballast against this kind of resentment; it should represent the coming together of policy experts and politicians to provide collective leadership on shared economic challenges. Yet its record remains sparse on the core matters of globalisation. Despite a migration crisis, G20 leadership has been absent on the flow of people across borders. Capital flows remain a controversial and technical matter plagued by competing philosophical positions. Progress in trade liberalisation has been glacial, and the issues divisive (though the G20 has at least made an important contribution to resisting outright protectionism).
But it is the G20's failures to address low growth and inequality that have been most jarring.
Growth since the crisis has not been strong, sustainable or balanced, and discussions on the path forward are at a frustrating stalemate. In recent years the G20 has fallen into a practice of endorsing bureaucratic plans to improve growth and jobs and implement difficult structural reform. But such plans have lacked political backing, with the general public typically unaware of what happens behind the forum's closed-door negotiations. And although there has been important progress on tax avoidance by multinationals, the G20 has failed, even at an aspirational level, to substantively address the disconnect in returns going to different segments of society.
Larry Summers is spot on when he says that the challenge is now about responsible nationalism. G20 governments can be criticised for taking the public for granted. They have done too little to win back public trust following years of austerity. Moreover, the dense and technical G20 communiques do little to convince the public that it is people, not government balance sheets and fiscal targets, that are the priority.
At a time when confidence in experts and public institutions across OECD countries is low, politicians and experts need to find a better way to speak to the sense of disillusion from those who have been left behind. The G20 remains a useful vehicle. But it needs to be seen to act, rather than talk. Starting points should be reexamining the role of fiscal policy, more active efforts to resist protectionist sentiment, and examining how to narrow the gap so not all gains go to the booming global elite.
Otherwise political leaders should not be surprised when citizens remain frustrated and feel the need to take matters into their own hands. Brexit has clearly demonstrated that options which are clearly self-destructive will not necessarily be avoided.
What is needed is a positive, constructive G20 agenda, one that cuts through to actually reach people and demonstrate to them the merits of economic liberalism. We are far from that place now. It is the G20's biggest test since 2008. Can policymakers adapt?
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