Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
What was not included in the communiqué was the most interesting thing coming from the meeting of G20 finance ministers and central bank governors in Washington, DC on 18-19 April. Some of the omissions were positive, some negative.
The positives? Not criticising Japan's attempt to stimulate its economy to end 15 years of deflation, and not committing to fixed public debt-to-GDP targets. On the negative side, the failure to recognise the importance of structural reforms to stimulate growth, and the lack of progress on IMF governance reform.
But none of this is a surprise.
The communiqué is very much a progress report – 'welcoming' work being undertaken by various international bodies and 'looking forward' to future reports. The most newsworthy outcome was support for improved tax information exchanges to combat tax avoidance. And there was no prospect of the G20 explicitly criticising Japan's monetary stimulus. the G20 is a consensus-based forum and markets were naïve to expect explicit public criticism of a G20 member. Nevertheless, the Japanese Finance Minister said Japan's policies were unopposed at the meeting. [fold]
But while Japan's monetary stimulus was not singled out, and the G20 reaffirmed its commitment to avoiding competitive currency devaluations, this did not appease the concerns of many countries. The Korean Finance Minister said Japan's weakening yen was hurting his country's economy more than North Korean threats. Singapore's Finance Minister called for better coordination of economic policies, warning that some of the biggest economies are responsible for sending a flood of capital into smaller trading rivals and driving up exchange rates. This is an issue that will not go away soon. And in contrast to the International Monetary and Financial Committee's 20 April statement, there was no acknowledgment from the G20 that the eventual exit from monetary expansion needs to be carefully managed.
In the lead-up to the meeting, there were reports that G20 members would consider reducing their debt-to-GDP ratios to well below 90%. While the Russian and Canadian Finance Ministers supported debt-to-GDP targets, the G20 only endorsed 'soft parameters'. Specifically, advanced economies will develop medium term fiscal strategies by the September St Petersburg summit. There was no prospect that the US or Japan would adopt fixed targets for reducing their debt-to-GDP levels. Japan has launched a fiscal expansion notwithstanding its very high public debt.
Targets and timetables can be helpful, but they need to be carefully handled. The targets for reducing deficits and debt set at the Toronto Summit were agreed because at the time they were consistent with national projections (except for Japan, which was exempted). However, the economic recovery has not eventuated in the way it was assumed, so these targets are no longer appropriate for many other countries. Policy should not become a slave to what has become an inappropriate target.
All countries must ensure the sustainability of their fiscal positions, although there is no magic around a debt-to-GDP ratio of 90%. The global financial crisis demonstrates that what were once considered safe levels of public debt are not so safe. The sustainable level of public debt (and more importantly in the current context, the rate at which public debt should be reduced), must depend on the circumstances facing each country.
As to negative omissions from the communiqué, the lack of emphasis on the importance of advancing structural reforms to boost competition, demand and growth was surprising. As was the absence of any reference to job creation. In contrast, the IMFC communique did refer to the need for advanced economies to tackle the structural weaknesses that weigh on growth and that 'structural reforms to boost productivity and employment need to continue'.
There was no progress on IMF reform. This was not surprising. The next step is for the US Congress to approve the 2010 quota and governance reforms. If this legislation is not passed, other countries will not be willing to compromise to allow for the IMF quota formula reforms to be completed by January 2014.
This is a bellwether issue for emerging markets and developing countries. It also goes to the heart of the credibility of the G20 and the IMF. The Russian presidency must give the highest priority to making progress on this issue at the St Petersburg Summit and the IMF Managing Director must deploy her best diplomatic skills to persuade Congress to pass the 2010 reforms.
Photo by Flickr user nuttallp.