If the Group of 20 was a professional hockey team, it would be time to fire the coach.
With the financial crisis raging in 2008, the G20 was anointed as the leader of the global economy, usurping the Group of Seven, whose members bore most of the responsibility for creating the worst global recession since the Great Depression.
Pundits questioned the makeup of the team. Argentina, for example, had a reputation for selfish play, having little regard for the rules of the game.
Chemistry also was an issue. The G20’s two key players – the United States and China – were emerging rivals that deeply distrust the other.
However, leaders looked past these concerns, as they had little time to tinker with the lineup. At first, the G20 performed well. The sight of the world’s leading economies working together calmed financial markets. The group’s commitment to fiscal stimulus ended the recession. The global economy started growing again.
The G20 was pleased with itself. It made admirers of some disgruntled followers of the G7. It adopted a mantra, pledging to foster “strong, sustainable and balanced growth.”
So, more than four years later, how is the G20 faring at its mission? Rather poorly, according to a new assessment by a couple of Bank of Canada economists. “Overall, global growth has been neither strong nor balanced,” writes Robert Lavigne and Subrata Sarker in an article that appears in the latest Bank of Canada Review.
The G20 never lacked for ambition. Leaders took interest in rather technical economic issues, giving the process a degree of political ownership that previous efforts to co-ordinate economic policy had lacked. The group created the Mutual Assessment Process to guide the implementation of policies the G20 adopted as beneficial to properly calibrated global economy. The bet was that peer pressure from engaged leaders would ensure implementation of policies that would narrow trade deficits in the U.S. and Europe and their corresponding surpluses in Asia. True, moral suasion has its limits; still, the effort amounted to the most aggressive attempt to co-ordinate global economic policy since the Bretton Woods agreements that followed the Second World War.
But as any fan of the Toronto Maple Leafs will tell you, ambition is no guarantee of success.
Mr. Lavigne and Mr. Sarker show that with the exception of China, virtually no G20 country has made a meaningful contribution to global economic growth since 2009. China’s contribution to nominal domestic demand growth roughly doubled in the 2009-11 period compared with 2004-08. The contribution of almost everyone else declined significantly. That was to be expected from the U.S. and European countries, which were mired in debt. The hope was that the big emerging markets would stoke domestic demand. That hasn’t happened, as countries such as Brazil and India remain heavily dependent on exports.
And China’s relative strength is deceiving. Too much of the growth in Chinese domestic demand has come from investment, which now accounts for almost half of the country’s gross domestic product. Consumption’s share of the economy dropped during the financial crisis and hasn’t revived. It was about 35 per cent of GDP in 2011, “well below” that of other emerging markets, according to the review.
It’s tempting to give up on the G20. However, the G20 has shown promise. It worked well as an emergency response team in warding off a global depression, and the review notes the group has made commendable progress in overhauling international financial regulation by backing the work of the Financial Stability Board.
But the G20 shows its limits when it comes to forcing policy changes that attract the attention of voters. The U.S. and Spain never came close to meeting a 2010 promise to halve their budget deficits, and China continues to actively manage the value of its exchange rate.
Mr. Lavigne and Mr. Sarker argue that the Mutual Assessment Process could be made more rigorous. They say the International Monetary Fund could be more “assertive” in advising G20 countries of the benefits of keeping their G20 promises, and the peer-review procedure could be made more relevant if countries’ promises were more specific. They also would put a greater focus on domestic demand, and require more transparent reporting of each member’s currency policies.
Will anyone listen? Mr. Lavigne and Mr. Sarker have a better chance of getting a hearing than the typical G20 pundit.
Canada co-chairs the G20 committee that guides the Mutual Assessment Process with India. And Tiff Macklem, the No. 2 at the Bank of Canada, has a personal stake in the success of the MAP. Before taking up his current job, Mr. Macklem was the G20 deputy at Finance, a position that made him one of the original co-chairs and architects of the process.
Mr. Macklem also is the front-runner to replace Mark Carney as the Bank of Canada governor later this year. That would put him in a position to finish what he started.