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About the project

From 2012 to 2016, the G20 Studies Centre at the Lowy Institute for International Policy produced independent research on global economic governance and the role of the G20, and supported research networks in Australia and overseas. The Australian Government provided funding to establish the Centre.

The archives of the Centre’s quarterly G20 Monitors (as well as other publications from the G20 Studies Centre) are available below. The Monitor brought together opinions from Australia and around the world to discuss developments in the G20 and suggest policy ideas.

The Lowy Institute will continue to comment and publish on economic governance issues.

Latest publications

Inequality on the G20 agenda? Obama and the Pope would probably support that

Will Prime Minister Abbott be discussing inequality with fellow G20 leaders when they gather in Brisbane this November? 

He would if civil society and the labour movement had their way. The C20 (civil society) has 'inclusive growth and employment' as its top priority for the Brisbane summit. The Trade Union Advisory Committee's statement to the recent OECD ministerial meeting referred to G20 Labour and Finance Ministers in 2013 recognising the dangers of rising inequality and the need to move to inclusive growth.

Inequality would certainly be on the agenda if Thomas Piketty had a say, the French economist whose best selling 700 page book on inequality is making waves. Stephen Grenville noted in his review of Piketty's 'tome' that it has received widespread praise, even being described as 'one of the watershed books in economic thinking'. Dani Rodrick, a distinguished academic with a major international reputation in his own right recently said that 'I get the same question these days wherever I go and from whomever I meet: what do you think of Thomas Piketty?' 

Piketty's work focused not just on income inequality but also on wealth. His basic point is that we are heading back to the levels of inequality not seen since the 'Gilded Age' of the late 19th century, and that we should do something about it, maybe by imposing worldwide taxes on capital transfers and wealth.

Inequality would likely be on the agenda for Brisbane if Pope Francis was involved, for he recently tweeted that 'inequality was the root of all evil'. Winne Byanyma, head of Oxfam International, said in reference to the comments by Pope Francis, 'even God is on our side'. You could also assume that inequality would be a hot topic if President Obama was there, for like the Pope, he has been saying a lot about the evils of 'dangerous and growing' inequality in the US, mentioning the word 26 times in his latest State of the Union address.

So will the Prime Minister lead a discussion about inequality with G20 leaders when they discuss their strategies to increase global growth by two percentage points, in line with the commitment by G20 Finance Ministers at their February Sydney meeting? He should.

Recent work by the IMF suggests inequality is a drag on growth. While Piketty is getting the rock star treatment, the IMF's findings are probably more important because they are helping to 'mainstream' the need to consider inequality as part of 'traditional' economic management. As the IMF Managing Director recently said 'put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term'. 

The debate on inequality versus growth has been around for a long time and the accepted view was that some inequality was needed to provide incentives for growth though entrepreneurship and innovation. Based on the work of Arthur Okun in 1975 (Equality and Efficiency: the Big Tradeoff), it was generally assumed that redistribution hurts growth as higher taxes and subsidies dampen incentives to invest and work. 

However, the recent detailed work by the IMF, particularly the paper by Ostry, Berg and Tsangarides, takes advantage of new data sets to look at the relationship between inequality, redistribution and growth. They find that inequality is a robust and powerful determinant both of the pace of medium-term growth and the duration of growth spells, even controlling for the size of redistributive transfers. This last point is important. The Fund finds little evidence for growth-destroying effects of fiscal redistribution at a macroeconomic level. As the IMF authors conclude:

It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable. 

The bottom line is that concerns over inequality come not just from moral viewpoints, but from a hard-nosed economic perspective — it can be bad for growth. The IMF managing Director has said that she is often asked why the IMF bothers about inequality because it is not the core business of the Fund. Her response is 'well sorry, it is also part of our mandate. Our mandate is financial stability. Anything that is likely to rock the boat financially and macroeconomically is within our mandate'.

So inequality should be on the agenda for the Brisbane Summit, although it is not yet acknowledged as being an issue in the material and the statements coming from the G20 presidency. But when the leaders discuss the measures in their growth plans (such as labour reforms, social safety nets, education, the role of minimum wages, infrastructure investment, tax reform and so on), the impact on inequality should be a consideration. Moreover, the work on combating tax evasion and avoidance should also be anchored in concerns over promoting greater equality within economies. And the G20's development agenda should be focused on reducing income disparities between economies, because that is good for global growth.

Paul Krugman said that Thomas Piketty's work will change the way we talk about inequality. But before changing the way it is discussed in the future, the G20 has to first start talking about the impact of inequality on growth. Let's hope there is a good conversation on the issue in Brisbane.

Photo by Flickr user marsmettn tallahassee.

Currency manipulation and quantitative easing: Rajan vs Bernanke

The long running international squabble about China's management (or 'manipulation') of its exchange rate, quiescent over the past couple of years, has sprung to life again.

The original accusation was that China held down its exchange rate to enhance its international competitiveness, boosting its own growth at the expense of others. Over the past few years there was not much to complain about, as the renminbi (RMB) appreciated in real (inflation adjusted) terms by 20%, trimming China's export competitiveness and putting a brake on its external surplus. But the RMB has depreciated by 3% so far this year. China's foreign exchange reserves have risen to almost US$4 trillion, suggesting that the Chinese authorities have been engineering the currency fall. The improvement in international competitiveness would help, at the margin, to keep the Chinese economy growing.

In the latest of its regular reports to Congress on these issues, the US Treasury went well short of declaring China to be a 'currency manipulator', but said: 'Recent developments in the RMB exchange rate would raise particularly serious concerns if they presage renewed resistance to currency appreciation'.  

The report also noted other recalcitrants, notably Germany, where the external surplus is running at 7% of GDP (compared with China's 3%). But it is China which will be the butt of criticism. The Financial Times reported this news under the headline: 'US Treasury slams China on currency'. Congress members will call for retaliatory measures. As well, it's sure to reappear at meetings where international economic coordination is discussed.

When it does, there will be a new element in the debate. Raghuram Rajan (pictured), the Indian central bank governor, has argued that quantitative easing (specifically, America's QE) is analytically much the same as foreign exchange intervention, in that it distorts free market outcomes and that this distortion adversely affects emerging economies. Ben Bernanke, just retired from the US Fed chairmanship, is reported to have 'taken him to task' for this view. 

The analytical logic, however, favours Rajan.

Monetary policy, by its nature, is an intervention in financial markets, as it sets the short term interest rate. QE goes further still in intervention, influencing interest rates further out on the yield curve. Changes in interest rates influence economic activity directly, but interest rates also work via their impact on the exchange rate, enhancing the external competitiveness of countries implementing QE.

Thus Bernanke is wrong in arguing that QE is a justified intervention because it boosts activity (which benefits everyone) while foreign exchange intervention is unacceptable because it just shifts growth from one country to another. QE gave the US the double benefit of boosting domestic demand from the lower interest rate and stronger export demand from its depreciated exchange rate. This second effect has been at the expense of US trading partners.

If America is going to complain about China's intervention in the RMB exchange rate, then it is open to the same charge of intervention in financial markets with QE. 

When the new Fed chair, Janet Yellen, firmly asserts that American monetary policy will be set solely by domestic considerations, she reflects the American political environment in which she has to operate. Suppose, however, there was a world monetary authority. Optimal policy would take some account of the external impact of the advanced countries' monetary policies.

This debate will play out at international groupings such as the IMF and G20. To the extent that QE (both when it was applied and when it is unwound) presents new challenges for emerging economies, it will be worthwhile to develop a form of dialogue which recognises the inherent complexity of these issues. The old reliance on simple assertion of free market principles will not be enough.

Photo by Flickr user World Economic Forum.

G20 gives US an ultimatum on IMF reform: But is it a bluff?

The IMF/G20 meetings in Washington last week were not good for the US. And things may get worse.

Instead of focusing on the possibility of additional economic sanctions on Russia, which no doubt would have been the desire of the US, the headlines were 'G20 gives US ultimatum over IMF reforms'

The G20's frustration centres on US failure to ratify the IMF quota and governance reforms agreed by the G20 in 2010. While countries representing nearly 80% of IMF votes have approved the reforms, the required threshold is 85%. The US has a veto with its 16.75% shareholding and the US Congress continues to block the reforms. 

At their recent meeting, G20 finance ministers said that 'if the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and develop options for next steps'. This has been interpreted as the G20 threatening to move to 'Plan B' which will by-pass the US, an approach strongly advocated by Russia

How significant are the reforms and is there a realistic 'Plan B'? Moreover, what would be the broader consequences of such a move? Or is it all a bluff?

Joe Hockey said the 2010 IMF reforms are a top priority because they would 'double the IMF's permanent resources and lead to a major realignment of voting shares'.

The reforms will not increase the overall resources of the IMF. While IMF quotas (equivalent to share capital) will be doubled, this will be matched with an equivalent reduction in the IMF's permanent credit line from 38 of its members, known as the New Arrangements to Borrow (NAB). Ironically, the US insisted that the increase in quota be matched by a reduction in its contribution to the NAB, because it judged the reforms were more likely to pass Congress if they involved no net increase in the US financial commitment to the IMF. This logic did not persuade Congress. But an increase in quotas is necessary to achieve a change in quota shares. Moreover, it is considered important that the bulk of the IMF's resource base be linked to members' quotas rather than loans from a small sub-set of the membership.

With regard to the shift in voting shares to better reflect the change in relative weights of countries in the global economy, the 2010 package represents a modest change — the proposed shift in quota share from advanced economies to emerging markets and developing economies is only 2.8%. But the package also includes a shift in shares among the emerging markets, with the rapidly growing economies benefiting at the expense of over-represented countries. The result would see China become the third-largest shareholder in the IMF.

Furthermore, the package is intended to be part of bigger changes to come. Part of the deal is for a review of the formula used to determine quota allocations and an acceleration of the next general review of quotas. This is expected to produce larger shifts in quota shares to emerging markets.

The other key aspects of the reforms are a move to an all-elected IMF Executive Board and Europe agreeing to give up two of its chairs on the Board in favour of developing countries.

Is there a realistic 'plan B' if the US continues to veto these reforms? Neither the IMF nor G20 are giving away any details, but an unnamed G20 official is reported to have said there is no plan B; 'there is nowhere to go, initially you have a discussion, but then when you move to details, there is nothing'.

Bergsten and Truman from the Peterson Institute proposed the idea of moving ahead without the US. Truman subsequently suggested that a way forward would be to set aside the 2010 package of reforms and renegotiate the quota formula such that the US quota would rise; then move to double the size of quotas, with the resolution to increase quotas contingent on the support of 80% of voting power, thus removing the US veto.

The prospect of getting agreement on such a package seems unlikely. The negotiations over the quota formula have been very contentious and given the extent of ill-feeling towards the US, it is unlikely countries will endorse a change with the aim to increase the US share. Moreover, the proposal to end the US veto is based on the assumption that the US Treasury Secretary would vote in favour of such a resolution. This hardly looks like a plan that by-passes the US. It will require the support of the US.

Assuming it could be achieved, the consequences of by-passing the US could be significant. The chair of the IMFC, Tharman Shanmugaratnam, said enacting IMF reforms without US congressional approval would be possible, though less desirable. He said it would reduce American influence in the global economy and could cause a 'disruption in the multilateral system'. Such a move could see Congress become even more insular and result in a reduction in US support for a range of multilateral institutions.

Is 'Plan B' a bluff? It is to be hoped we don't find out and the US Congress does pass the IMF reforms, for if it is not a bluff, it could accelerate a reduction in US involvement in the global economy and international institutions. This would be very disruptive.

After six months, how is Australia's G20 presidency going?

G20 finance ministers and central bank governors meet (yet) again in Washington today under the chairmanship of Joe Hockey and Glenn Stevens. This meeting is not getting as much publicity in Australia as the meeting held in Sydney in late February.

Admittedly it is only seven weeks since the February G20 meeting and it is reasonable to ask 'so what's new?'. But it also demonstrates that most of the domestic press is not interested in the meeting itself but the fact that the financial heavyweights are in town. Moreover, recent research by ECB economists suggests that, as far as the markets are concerned, G20 meetings are much ado about nothing and while they may have some long-term payoff, they probably do not justify the media attention they sometimes receive.

All a bit harsh.

There will be some tricky items on the agenda for the Washington G20 Finance Ministers' meeting. Changed since February is the geo-political environment following Russia's annexation of Crimea. As we have noted previously, the Ukraine will cast a shadow over the G20 in 2014. The IMF's program for Ukraine will no doubt come up, although it is unlikely that the impact of the economic sanctions on the Russian economy will be openly discussed.

Another tricky issue will be the lack of progress on implementing reforms to IMF governance. At their meeting in February, G20 ministers said that ratifying the 2010 reforms to the IMF was their highest priority, and they urged the US to do so by the April meeting.

The US Congress has still not ratified the reforms, notwithstanding the Administration's attempt to link it to an aid package for Ukraine.

What will the G20 do now?

The Indian economic affairs secretary said this is perhaps the 'first visible failure of the G20' and there are reports that Russia and China are leading efforts to bypass the US. What they may be planning is not clear. But Treasurer Hockey will have to show leadership beyond continuing to urge Congress to pass the reforms. The G20 should focus on the performance of the IMF and assess what would change if the reforms were ratified.

A major topic will be progress in preparing reform blueprints to support the 'aim' endorsed at the February meeting to lift global growth by a further 2% over 5 years. Reports suggest the first 'sketches' of the reform agendas collected by G20 officials are not ambitious enough. One indicates that ministers will give a mandate to their officials to add new measures in order to reach 2%. If only it was so simple!

The required reforms are contentious and difficult and governments have to win domestic political battles for them to be implemented. For example, will Australian officials include an increase in the GST rate in Australia's growth plan? It will require much more than mandating officials to be more ambitious.

The Washington G20 meeting approaches the halfway mark in Australia's G20 presidency (it finishes at the end of November). A number of participants in the Think20 process (G20 think tanks), have provided a progress report on the Australian presidency.

The Prime Minister's aim for a focused leaders' agenda and short communiques is welcomed. But many note that Australia still has ten separate work streams and it is not clear which one or two items will be the focus of the Brisbane Summit. Australia has not added any items and has in fact dropped one — climate change.

On the 2% growth 'aim', this was seen as a positive initiative provided it leads to countries implementing new domestic economic reforms. But concern was expressed that the growth objective is vague, subject to different interpretations and hard to verify.

As to the priority to lift infrastructure investment, again the view in the report is that this will be an empty shell if it is not supported by concrete action. There was concern that an excessive focus is being placed on private sector financing and an appropriate balance has to be maintained between public and private infrastructure financing.

Many agree that trade should be a focus in 2014, although the Think20 report notes that Australia has not given much indication of what it wants to achieve. The view of Think20 is that the objective should be on strengthening the multilateral trading system and setting a strategic direction for the WTO to focus on implications of the growth in global value chains.

The G20's work on tax is endorsed in the report, although concerns are expressed over whether the OECD has the political clout to get international agreements. The G20 will have to provide that clout. There are also concerns over the ambiguous wording on financial regulation in the Sydney communique. Hopefully this will be cleared up. On development, the call is made for the G20 to provide leadership to the UN's post-2015 development goal process. And Australia has to improve the flow of information around the issues being progressed by the G20.

This is an interim assessment. It is still early days. But the Brisbane Summit will soon be on us. There remains cautious optimism among G20 members that Australia will achieve tangible results through the G20 in 2014. But this will require a lot more hard work and the direct involvement of the Prime Minister.

Free trade deal: Did Australia just breach Japan's protectionist fortress?

For a trade deal that Prime Minister Abbott says is the most significant since the 1957 post war-trade pact with Japan, there seems to be a lot of whinging.

The trade minister says it is a 'glass half full, glass half empty situation'. Good for some, even if there are not many benefits for others. 

The biggest export winners from the trade deal with Japan are Australia's beef exporters. The trade minister says the deal has the potential to add $2.8 billion to the industry over the next 20 years. Some estimate even higher gains. But it is worth repeating the timeframe: 'over the next 20 years'. The gains for Australia's exports will come gradually. Japan's tariff on frozen beef will be cut from 38.5% to 30.5% within a year, and then reduced by another 2% in the second year, 1% in the third until in 18 years the tariff reaches 19.5%. It is similar for Australia's fresh beef exports, where the Japanese tariff will fall to 23.5% over 15 years.

On the face of it, this doesn't seem dramatic enough to justify popping the champagne corks. In 20 years time, Australia beef exporters will still be facing tariffs in Japan close to 20%. The president of the Cattle Council expressed disappointment that 'substantial tariffs will still exist on Australian beef after the phase out period, unlike previous free trade agreements'. The trade deal with South Korea, conversely, provides for the elimination of the 40% tariff over 15 years.

But even though they are complaining, the beef exporters are in the 'glass half full' side of the deal with Japan. The other winners are our horticulture, wine and seafood industries. However, there is little in it for Australia's dairy, sugar, grain, pork and rice exporters. One rice grower called the deal a 'bloody disgrace'. This is the 'glass half empty' camp.

For Australian consumers, the main benefit is the reduction in the 5% tariff on imported cars over five years.

Of course, Australia could give this benefit immediately to Australian consumers by reducing the tariffs. Unilateral trade liberalisation makes great sense, for the bulk of the gains to the domestic economy from these deals do not come from increased exports, but from the investment and productivity gains generated from more import competition. We don't have to wait for a trade deal to get these benefits. 

Mr Abbott's response to criticism that the trade deal with Japan did not go far enough is to point out that at least Japan is reducing its tariffs on some agricultural goods, and the tariff reduction is the most generous Japan had offered to any of its partners. The trade minister's response is that this was the best deal that could be negotiated.

They may be right. As Matthew Linley pointed out in a previous post, perhaps the most important aspect of this deal is that at last the Japanese agricultural protectionist nut has been cracked. If Prime Minister Abe is going to succeed with structural reform (the third arrow of Abenomics) he is going to have to reform Japan's highly protectionist agricultural sector. You could take a negative view and say that if the modest and protracted reduction in Japan's beef tariffs contained in the trade deal with Australia is the best Abe can do, then there is little hope he will drive ambitious reforms under his third arrow. 

However, once the protectionist fortress has been breached, the momentum usually leads to further reforms. Perhaps it will lead to more ambitious reductions in agricultural tariffs in the Trans Pacific Partnership (TPP) negotiations. Views on this seem to be mixed. Some see the deal with Australia as undermining prospects for a more ambitious deal in the TPP; others like Kurt Campbell see it as opening the door for more reductions

Irrespective of the outcome of the TPP negotiations, the agricultural protectionist door in Japan has at last been opened and it is to be hoped that this means Prime Minister Abe will push ahead with domestic structural reforms that will help revitalise the Japanese economy. That outcome is significantly more important for Australia then any direct export gains from tariff reductions in a bilateral trade deal.

Of course the trade deal is as much, if not more, a political and foreign policy statement than a major breakthrough in Australia's trading relationship. This was also the case with the Australia-US trade agreement, signed more than a decade ago. 

The deals with Korea and Japan has been very good in domestic political terms for Prime Minister Abbott as a demonstration of his 'can-do' government. They have also been important for Australia's broader relationships with both countries, just as a deal with China may have more symbolic value then representing a major trade breakthrough. 

Bottom line: don't get carried away or too despondent by the size of any direct economic gains from these bilateral trade deals. The real benefits may lie elsewhere.

Photo courtesy of @TonyAbbottMHR.

Think20 2014: Progress report on Australia’s G20 presidency

Leading analysts from influential think tanks from 11 countries across the world provide their interim assessment of the Australian G20 presidency in this report. They all participated in last year’s Think20 meeting in Sydney, organised by the Lowy Institute, and are now discussing whether Australia has been able to make progress as G20 chair, which global issues need more attention from the Australian presidency, and what will need to be done to make the Brisbane G20 Summit in November 2014 a success.

G20 2014: perspectives from business, civil society, labour, think tanks and youth

G20 engagement partners from Business (B20), Civil Society (C20), Labour (L20), Think Tanks (T20) and Youth (Y20) have each provided a contribution for this issue of the Monitor. Each address how the groups are organising their contribution to the G20 process in 2014, their priorities for the G20, and thoughts on what would constitute ‘success’ in terms of possible outcomes from the Brisbane Summit. The Australian G20 Sherpa, Heather Smith, has provided an opening comment.

Policy ideas for the Brisbane G20 Summit: Reflections on Think20 2014

This issue of the Monitor contains reflections on Think20 2014. The Think20 involves think tanks and academics from G20 countries, and aims to feed policy ideas into the G20 process. The Monitor contains papers covering the four policy areas discussed at Think20 2014: The G20’s economic and finance challenges, trade liberalisation, infrastructure and development. The papers are not a summary of the meeting nor do they reflect the agreed views of participants.

G20 Sydney Finance Ministers' Meeting: They came, they saw, but did they conquer?

Well, not all G20 finance ministers came to Sydney this weekend. No-shows were from South Africa, Brazil, Mexico, Italy and the World Bank president.

The Guardian reported that the number of ministers failing to show up to Sydney was an indication of the G20's fall from grace.  This was a bit harsh. Domestic pressures are likely to result in some casualties. And while the drop-out rate may have started to cause some concerns, there were enough big names to give the Sydney meeting gravitas.

The ministers certainly 'saw'. There was TV coverage of Australian Treasurer Joe Hockey pointing out the sights of Sydney Harbour and the compulsory 'G20 family photo' was taken in front of Sydney Harbour Bridge and the Opera House.

But did they conquer?

It all depends what you expect from these international meetings. Most people think 'not much'.  A financial market reaction is unlikely;  it is only in the midst of a crisis that such international meetings move markets.

The communiqué was pleasingly short, and the priorities for G20 finance ministers in 2014 are clearly identified. But none of them are easy. Moreover, this was one of many preparatory meetings for the Brisbane Summit. The hard work still lies ahead if Australia's chairing of the G20 is to be considered a success.

There was expected to be a clash between emerging markets and Janet Yellen, Chair of the US Federal Reserve, over the impact of the tapering of quantitative easing. Perhaps perversely, this 'tension' gave the meeting a welcome focus.

The year started with optimism that the world economy had turned the corner. Policy complacency is a danger and the concerns of the emerging markets were a reminder of the volatility and vulnerabilities confronting the global economy. There appears to have been a good discussion on this issue during the meetings, and as the Treasurer said, agreement that there should be good communication and no surprises. The communiqué said that the setting of monetary policy will include an 'exchange of information and being mindful of impacts on the global economy'. This is progress.

The Treasurer's big win was endorsement of a target to lift global growth by 2% over five years. The target came from research by the IMF suggesting this could be achieved if G20 countries all adopted additional policy measures.

But the G20 has been here before.

The Toronto G20 summit declaration refers to research by the IMF showing that if G20 members adopted more ambitious policies, global output could be increased by $4 trillion, 52 million jobs could be created and 90 million people could be lifted from poverty. In June 2009, G20 leaders committed to work together to achieve these outcomes. Yet global growth continued to disappoint; the ambitious reforms were not adopted.

Will the new growth target lead to better outcomes? Hopefully it will focus minds on the need to lift growth. More importantly, it is to be hoped that ministers recognised that the G20 needs a comprehensive and coordinated growth strategy, because the current approach is not working. So it is welcome that each G20 country will present its growth plan at the Brisbane summit.

But having a growth target and a plan to get there is only meaningful if the plan is implemented. And the reforms identified by the IMF and OECD to lift growth are politically difficult for all. For example, the top reform priorities identified by the OECD for Australia are: boosting business-research collaboration; improving the efficiency of the tax system by lowering corporate taxes and relying more on the GST; improving the regulation of infrastructure by expanding user charges and congestion charges; improving childcare support; and reducing the stringency of the scrutiny of foreign investment. Tough stuff.

Having agreed on a target to lift growth, the real challenge now is for each G20 country to engage with its citizens over the necessary reforms that will have to be implemented to achieve the target. Australia has to continue to work on ensuring that G20 members take the growth target and strategy seriously.

G20 ministers continued to endorse efforts to strengthen financial sector regulation and combat tax evasion and avoidance. On financial regulatory reforms, there was the noble aim to ensure that the reforms promote resilience, certainty and promote growth, but no detail on achieving these objectives.

Regret was expressed over the failure to complete IMF quota and governance reforms and the US was urged to ratify the reforms by this April. Will this influence the US Congress?  Unlikely.  But it is a reminder that it is one thing to reach agreement at an international meeting, it is another thing to win the domestic political battle to have it implemented.

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