G20 discussions were back in international media headlines during the last week, as Shanghai hosted the first major meeting of China's 2016 G20 Presidency. The concluding statement issued by finance ministers and central bank governors on Saturday was strong on rhetoric, and Chinese leadership has managed to insert a sense of momentum back into G20 discussions. But the meeting will disappoint the many who called for the G20 to be more active in addressing economic vulnerabilities and risks. In particular, on the main substantive issue for the meeting, that of calls for greater fiscal action, a lack of consensus has led to the finance ministers and central bank governors kicking the can down the road.
In the lead up to the meeting, there was plenty of speculation on whether the G20 would discuss exchange rate tensions. Two matters in particular had been prominent: whether the Chinese authorities would devalue their exchange rate in response to recent market pressures, and whether the meeting would lead to a grand Plaza-style accord on exchange rates. But, prior to the G20 meeting, China had largely put issues around the yuan to bed when PBoC governor Zhou articulated, in rich detail, China's approach to exchange rate management, and it appeared a grand bargain on exchange rates was not a realistic proposition. More G20 attention therefore went to warding off the temptation for competitive devaluations, with a reiteration of previous exchange rate commitments and a commitment to consult closely on exchange rates.
There was some positive news in the G20's rhetoric on fiscal and monetary policy settings. This was not a meeting convened under crisis settings, and the G20 recognised as much. However, there are significant challenges facing the global economy. As finance ministers and central bank governors recognised, they aren't achieving growth and employment goals, and, since the Antalya leaders summit, downside risks and vulnerabilities have lifted. Volatile capital flows, commodity prices, geopolitical tensions, Brexit, and refugee issues were all highlighted. Finance minister and central bank governors also reiterated the point they made last September that monetary policy alone cannot lead to balanced growth, and called for faster progress on structural reform, as well as making tax policy and public spending as growth-friendly as possible.
Finance ministers did not see eye to eye on co-ordinated fiscal stimulus. This was not surprising, given the diversity in positions going into the meeting, and the fact there was no crisis to focus minds on consensus The G20 did, however, state that it would use all policy tools — monetary, fiscal and structural — to achieve its goals of strong, sustainable, and balanced growth. The implied hope is that governments will individually take the initiative to do more so policymakers can be confident they would be able to respond to a global shock.
But with little specific direct action expected to come out of the meeting, it is difficult to escape the the conclusion these impressive-sounding statements ring hollow. Finance ministers have done little to lift pressure off central banks, and not much to assure financial markets their governments have the political will necessary to advance substantive structural reform, especially given this has proved near impossible in recent years.
The lack of commitment to act is a disappointment for those hoping governments would act more urgently to position fiscal policy more prominently in the policy mix. The broad chorus advocating for this included the IMF, the OECD, The Economist, members of think tanks (including me), academia, and financial market analysts.
Ultimately, we are in much the same position as we were before the meeting. We may not be in a crisis, but governments need to do more heavy lifting to boost growth. What is clear from the past week is that a lack of policy urgency on the part of governments is now flying in the face of expert advice. If negative risks are realised and economic conditions deteriorate markedly, the fact that governments did not act when they had opportunity to do so will reflect poorly on those who were around the table last week. [fold]
In the lead-up to this meeting, I also suggested it would be important for the G20 itself, which needs to restore a sense of relevancy to discussions. Post event, it's fair to say the meeting in and of itself is not enough to address complaints that today's version of the G20 is no more than talkfest. But, beyond the headlines, there was much to like in the more detailed and procedural parts of the communique and this should be of interest to technocrats and active G20 observers.
The communique flagged potentially substantive advances in a number of G20 finance work streams. Encouragingly, China has made a conscious effort to reign in discussions from Turkey's host year experience, and focus on substantive outcomes in multi-year 'core finance' areas rather than yet another re-branding exercise. It was clear that work would continue in IMF and World Bank governance reform discussions, and in prosecuting the investment agenda. Further, the Chinese G20 presidency will prioritise widespread, consistent, and effective implementation of agreed reforms in financial regulation and international tax.
Among the list of actions to look to in the future are a proposed structural indicator system to secure the delivery of the G20's growth strategies (by April); IMF reviews on the global financial safety net architecture (by April) and on the possible broader use of the SDR (by July); support for a proposal to develop a tax platform jointly by the IMF, OECD, UN and World Bank Group, and various actions by development banks and the Global Infrastructure Hub on investment challenges. Perhaps the most surprising development was the G20-acknowledgement of a Chinese decision to set up a tax policy research centre.
China should be reasonably happy with a solid start to its leadership year. Its first meeting was able to signal ambition, and its negotiators worked effectively to push the G20 forwards on 'core finance' areas such as investment, the financial architecture, financial regulation, and tax. But the G20's relevancy depends upon its capacity to respond to both pressing issues of the day as well as longer term challenges of global governance.
With just over six months to go until G20 leaders meet in Hangzhou, the focus now should be on building on the platform created in Shanghai. And when finance ministers and central bank governors pick up their conversation in Washington in just six weeks time, the world will be looking for a stronger statement of political will to address near-term economic challenges.