Over Labor Day weekend, the leaders of the G-20 countries gathered in Hangzhou, China, for their annual summit. Their goal this year: save the good name of globalization, which has recently taken a beating. In the wake of Brexit, the U.S. Republican presidential candidacy of Donald Trump, the rise of the European far right, and China’s own anti-Westernism, the G-20 leaders were supposed to renew their commitment to collective economic growth and open cross-border trade and investment.
Trouble is, few of the member countries, including China, are interested in promoting these goals in the short term. The United States’ stance on trade is growing increasingly protectionist. Both presidential candidates oppose the Trans-Pacific Partnership trade agreement on grounds that U.S. workers and industry will come out on the losing end. Chinese investment destinations such as Germany, the United Kingdom, the United States, and Africa are refusing ever more high-profile cross-border deals with Chinese companies, due to purported national security concerns. For its own part, China feels that it is not in a position given the slowdown of its own economy to champion outward-facing policies.
It is ironic, given China’s nearly gaffe-free, luxurious turn as host of the G-20, capped off by a communiqué promising all the right solutions to global problems, that the most important outcome of this summit is that it made abundantly clear that the world needs to re-evaluate the organization’s role. The sort of domestic policy coordination that it regards as a holy grail has severe limits when tested by political and economic realities on the ground. After two days of meetings, and a year’s worth of side meetings between finance ministers and other officials, the Paris Climate Agreement was the only initiative with concrete requirements on which the G-20 could agree. That is a powerful signal that other issues previously imagined as global in nature are in fact not.
FORGED IN CRISIS
The tradition of the G-20 summit was established in late 2008 as a response to the financial crisis and in recognition that emerging economic powers outside the G-7 would be instrumental to restabilizing the global financial system. At a summit in November 2008, the G-20 leaders agreed to contribute $1.1 trillion to the IMF and the World Bank, among other international financial organizations. That money would in turn be used for capital infusions to countries in times of economic distress, preventing more wide-scale contagion. The countries also agreed to stricter regulation of financial institutions, including hedge funds. Most surprising, and perhaps as a sign of the pressure the leaders felt to act in the face of the 2008 crisis, they committed to cooperating on international measures against tax evasion, an initiative that would mean ceding some sovereignty over domestic revenue generation policies.
For their part of the $1.1 trillion contribution, the new emerging market contingent of the G-20 did not leave empty-handed. Of the total amount raised, $43 billion came from China. In addition, Beijing agreed to pass a fiscal stimulus package of $586 billion. Brazil, Russia, India, and South Africa also figured prominently in the IMF’s capital campaign. At the Pittsburgh summit in 2009, the G-20 leaders agreed to increase developing countries’ voting power in the IMF by five percent and the World Bank by three percent. China would then vault over Germany, the United Kingdom, and France to hold the third-largest contingent of shares and voting power at the IMF and World Bank. This acknowledgment of China’s emergence as a global leader has led to other significant achievements for Beijing as well: the yuan is now part of the IMF’s currency basket, and a heavy campaign is underway to make sure China gains market economy status at the WTO early next year. Hosting the G-20 summit for the first time was but the latest manifestation of China’s newfound stature.
The G-20’s efforts in the immediate aftermath of the 2008 financial crisis have been generally praised. For those who dreamed of full cooperation and coordination between countries to unlock the full potential of globalization, the hope was that initiatives along the same vein would continue. Without the pressure of disaster, however, the G-20 reverted to its mode of operation prior to 2008. Instead of coordinating economic policy among the world’s wealthiest countries, it broadened its scope to include climate change, investment initiatives, and human rights. Since its members are largely unable to come to a meaningful consensus on this expanded range of issues, the G-20 then became a think tank of sorts. In conjunction with other multilateral organizations such as the IMF and the Organization for Economic Cooperation and Development, the G-20 produces reports and scholarship on policy prescriptions that will hopefully inform the leaders’ actions at the summits and other side meetings.
Come 2014, however, the G-20 countries became concerned about the slow speed of recovery after the 2008 financial crisis. At the summit in Brisbane, Australia, that year, the leaders agreed to target a global 2.1 percent growth rate by 2018. According to IMF and OECD projections, a quarter of this increase would be attributable to positive externalities from the G-20 countries implementing the agreed-upon growth measures at the same time. These policies included: greater investment in infrastructure projects, fostering competition, reducing the barriers to trade and doing business abroad, and creating jobs, particularly for young people.
Two years later, the IMF expressed concern that the G-20 was on track to fall short of its target, particularly because the growth rates of advanced industrial economies remained low. In addition to changing demographics and low productivity, the IMF blamed low growth in these countries on a lack of investment. Leading up to this year’s summit, the general understanding was that in order to save the project of globalization, growth rates would have to be increased so that populations would no longer use it as a scapegoat. It became all the more urgent, then, to get back on track for the Brisbane summit’s 2.1 percent growth target.
This year’s summit layered on additional commitments aimed at promoting collective growth. Chief among them was promoting innovation. The countries promised greater openness in their economies, geared toward fostering a friendly environment for the so-called new industrial revolution. The digital economy in each country would receive support through exchange of human capital, cross-border partnerships, and capital investments. Developing economies would receive special attention in crossing the digital divide. Interestingly, the communiqué included little about cybersecurity or the need to protect intellectual property rights on an international level. On the other hand, voluntary transfers of technology would be encouraged.
The countries also agreed to pursue structural reforms to boost economic efficiency. As ever, countries would do their utmost to resist trade protectionism and overly restrictive capital controls. Prior to the summit, US Treasury Secretary Jack Lew announced that he had brokered a deal among the G-20 countries to adopt expansive monetary and fiscal policy rather than austerity in service of global growth. Canada, China, South Korea, Japan, and other countries in Europe would accordingly pass measures later this year to delay tax increases or increase their government spending.
Despite meeting in the shadow of crisis again, the G-20 will likely find that few of the growth measures they set forth in 2014 and this year will have been implemented, and certainly not in a coordinated fashion among the member countries. The initiatives that they now seek to undertake are quite different from a one-time cash infusion made possible by short-term expansive monetary policy, or even from green initiatives to combat climate change. Those were responses to actual global problems, where the consequences are widely acknowledged to be borderless in nature, and risks can be significantly reduced with international cooperation. Methods for growth, on the other hand, are generally the purview of domestic policy.
The end result is that even though countries may pledge to coordinate, political and economic realities at home mean that national interests come first. Indeed, the voice of China as the host nation could be heard in this year’s G-20 communiqué with its repeated variations on the phrase “according to national circumstances.” For example, structural reforms mean growing pains as those who are entrenched in the current institutional framework will be displaced. In China’s case, an economic slowdown is therefore not the best time to implement these on a strict timetable or according to international mandates when local conditions may call for different solutions.
Walls have gone up for cross-border investment in the last year as countries become increasingly wary about foreign ownership of prized national assets. Technological innovation is also a largely domestic project in which the national security implications are growing increasingly sensitive. Even consumer technology companies can be said to have security risks that do not merit their being able to freely operate or purchase companies overseas. Finally, the fate of protectionism remains to be seen. If the political mood does not significantly change in Western industrialized nations by the end of the year, trade openness will suffer. Again, countries make this calculation for themselves, not because they don’t understand the intuition behind free trade and comparative advantage. Rather, there is good evidence that countries can yield short-term gains from fostering home industries.
MISSING THE BIGGER PICTURE
The larger concern is not that the G-20, or any multilateral organization, is ill equipped to coordinate domestic agendas for growth but that the G-20 members still accept the orthodoxy that all growth is good. Discontent leading to anti-globalization does not come from lack of growth so much as from inequality. Although economic openness has directed a share of the wealth to developing countries and narrowed the gap between them and the Western industrialized world, inequality within countries has increased. The solutions to this problem are almost exclusively domestic: greater investment in education, job retraining, more aggressive tax-and-transfer programs, and the like.
One area in which international cooperation is crucial, however, is in tax regulations that prevent tax evasion. High-net-worth individuals and corporations are able to move their income to jurisdictions with lower taxes, most of the time through legal means. This ability to hide income stymies tax-and-transfer programs, not to mention that it has meant a significant hit to government revenues in advanced and developing countries alike. In response, the G-20 and OECD have partnered to devise and implement a framework on tax reform that individual countries may implement at a customized pace. The success of this initiative remains to be seen since it internationalizes a tool that is at the heart of a country’s economic sovereignty.
Asking countries to incrementally but broadly give up that sovereignty is not a worthwhile endeavor for the G-20, or for any multilateral organization. It would be better served by focusing on problems that are recognized to be global in nature and by encouraging countries to cooperate on other economic issues without standardizing growth initiatives or imposing growth targets. In the end, after the summits are over, the job of saving globalization is still waiting for the leaders when they arrive home.
By Rebecca Liao