The central bank governors of the world’s largest economies are attempting to orchestrate better international co-operation on monetary policy to help prevent future financial turbulence.
“There has to be a policy, if you like, of no surprises,” said Australian treasurer Joe Hockey at an opening session of a Group of 20 meeting in Sydney over the weekend.
Finance ministers and central bankers are meeting after a sustained period of volatility in emerging markets that followed the drawback of the U.S. Federal Reserve’s massive stimulus package, which caused investors to pull billions of dollars out of riskier economies to invest for better returns in the United States.
The chaos that unfolded from Argentina to South Africa led central banks in numerous developing counties to hike interest rates dramatically in response, and Indian’s central banker Raghuram Rajan decried publicly that “international monetary co-operation has broken down.” Also stressing that emerging economies such as China helped pull the world out of the recession, Mr. Rajan’s remarks have formed the backdrop to a G20 meeting that is focusing on how to accelerate global growth and improve investment conditions for infrastructure. That’s a challenging task at a time when advanced economies are weary of expensive stimulus and emerging market central banks have little additional monetary firepower.
Speaking on Saturday morning in Sydney after a roundtable dinner with bank governors and finance ministers, Mr. Hockey said there was a lot of goodwill around the room and a clear sense that better co-ordination is possible.
“I think if there is a no-surprises policy in relation to monetary policy activity and central banks around the world have reasonable warning of what may be events that might create market volatility, then I think that’s not unreasonable,” Mr. Hockey said. “And I think that’s what the central bank governors are asking for.”
As the G20 meets, however, observers are skeptical that any hard, concrete goals – such as Mr. Hockey’s wish that countries agree to GDP growth targets – will actually be fulfilled by the end of the weekend, or even by the end of the year, at the larger G20 summit in Brisbane. Without the pressure they faced to co-operate during the global financial crisis, there is little left to unite the broad, disparate group of G20 central bankers and finance ministers, which includes representatives from the United States, Canada and European countries, as well as a host of emerging market giants such as China, Brazil and India.
But while G20 host Australia’s goals for the summit – including boosting growth and removing impediments to investment in infrastructure – are broad, it does seem possible that central bank governors can at least ease tensions in bilateral meetings, even if U.S. Fed chair Janet Yellen has made it clear she will not stop drawing back the U.S. bond-buying stimulus program.
“Emerging countries will want to discuss the tapering of the Fed and its impact around the world. But while this discussion is useful, the Fed is unlikely to change course,” says Yves Tiberghien, a professor at the University of British Columbia who studies the G20 and the global economy. “The discussion can, however, lead to more advanced sharing of information among central banks and ministries of finance.”
Global businesses are also likely to benefit from greater certainty in emerging markets that already come with a much higher degree of risk and volatility.
“There is absolutely room for greater co-operation,” says Robert Milliner, a prominent Australian lawyer who is serving as the host for the G20’s business liaison group, the B20, which includes the chief executives of BHP Billiton and ANZ Banking Group. “But equally, on the other hand, some of the emerging markets making the loudest noises are also some of the ones that have made the least progress on structural reforms.”
Those structural reforms – such as removing distortive subsidies, boosting the percentage of women in the labour force or improving quality education – form the basis for a new OECD report launched by the organization’s secretary general, Angel Gurria, in Sydney on Friday. Mr. Gurria, who heads the Organization for Economic Co-operation and Development, said the Fed’s decision to taper its stimulus was not only predictable but desirable, since it means the U.S. economy is back on track.
Asking which countries were hurt most by the Fed’s move, Mr. Gurria answered his own question – with clear allusions to Turkey, India and South Africa. “The ones with high current account deficits and the ones who still had reforms on their homework books,” Mr. Gurria said. “It’s a wake-up call. Accelerate reforms.”