G20 members should have explored possible economic cooperation on addressing the global productivity slowdown, fighting the rise of informal credit and reducing discriminatory taxation.
The G20 group of countries met of July 7 and 8 in Hamburg to discuss potential areas of economic cooperation in times of a waning trend in geo-political cooperation and rising economic nationalism. With the troubling bilateral relationship between India and China on border disputes in the northeast; US-Germany and other countries failing to muster cooperation on the climate change agreement; and countries like Turkey, Saudi Arabia and Brazil facing domestic tensions, what we saw was another G20 summit that aimed high and achieved little on identified areas of economic cooperation.
The G20, as a soft multilateral arrangement with no hard governance structure or institutional mechanisms to enforce agreements made, first emerged from the East Asian crises (during the late 1990s) that affected the fastest-growing economies in the region like Thailand, Indonesia, South Korea and Singapore. The crisis brought together finance ministers and central bank governors of industrialised and emerging countries (including countries like India, China, Turkey, Brazil and Russia) to discuss key issues in the global economy as part of the G20 agenda; since the financial crisis of 2008, the group saw the involvement of heads of member nations in their annual summits.
With little evidence on the realisation of previous goals and agreements confirmed in past G20 summits, the viability and importance of such a soft multilateral arrangement (like the G7) has often been questioned.
However, there are three key focus areas of economic cooperation warranting the G20 members’ immediate attention.
Addressing global productivity slowdown and stagnating real wages
As argued earlier, over the last decade or so, there has been a significant decline and stagnation in industrial productivity levels, with stagnating real wages across manufacturing sectors in both developed and developing countries. While technological advancements in areas of artificial intelligence and automation are redesigning the manufacturing process globally, the measurement of productivity and its impact on the process of upward income mobility for employees warrant greater international scrutiny.
There are no quick-fix solutions for emerging economies like India, Brazil, China or Turkey in addressing structural domestic problems of slowing job creation, stagnating industrial productivity and deflating export prices unless they seek greater economic cooperation with countries in Europe, the US and Canada. The G20 summit provides a good platform for this. One vital area on cooperation in this regard is related to reassessing the traditional metrics of productivity assessment.
Existing growth measurement techniques remain incapable of factoring changes in quality of products, non-monetised services and national demographic levels – as seen in case of countries like Japan where the effect of population ageing and its impact on consumption demand remains inadequately captured in its growth measurement process.
In India too, a major misspecification is involved in implicitly treating growth as the sum of economic contributions made by exogenous factors alone. It would be useful to acknowledge indicators like total factor productivity as a global measure of productivity assessment and for policy considerations in emerging markets, replacing it with a redundant metric like GDP.
Circumscribing the growth and expansion of shadow, informal credit institutions
In an increased global regulatory environment post 2008, we are now witnessing an increasing cost in banking regulation and compliance rules for formal credit delivery mechanisms and banks.
As a result, banks over time seem to have become restricted in their lending capabilities, particularly in areas of equity investments which involve some risk. This has negatively affected domestic investment needs from formal banking channels for small- and medium-scale enterprises and the starting of new businesses in countries like China, Brazil and India.
A decline in demand for loanable funds may lead to one of two outcomes: one, a decline in industrial growth and productivity levels due to weak credit requirements in emerging markets; or two, a rapid expansion of informal financial institutions and shadow banking network systems (including in high-risk sectors) within emerging markets, substituting the formal credit delivery system.
It is vital for G20 member nations to cooperate globally on curbing the rise of informal credit networks by balancing regulatory requirements (within formal banking systems) and facilitating credit delivery in necessary areas of economic expansion (for example, in areas of basic infrastructure and services). Financial regulation in balance requires deeper cooperation between central banks of member nations in areas of short-term interest rate management, currency rates and other monetary policy tools to minimise spill over effects.
Greater coordination on reducing discriminatory taxation
This is one area in which the G20 members have already made some progress during the last few years, but more effort needs to be made in reducing disproportional, nationalised tax systems that inadequately affect global capital movements and affect interest rates.
What we see today is a disproportionate tax structure, promoting bigger firms to invest transnationally in such markets, leading to a rapid oligopolisation of market structures across various sectors (for example retail and telecom sectors in emerging markets).
Rationalising the direct-indirect tax structure in member nations and ensuring a parity in credit requirements shall ensure a more competitive market structure with easier entry and exit of firms. Such a balance in capital requirements driven by coordination in international taxation policies will help central banks of member countries to monitor real interest rates with minimum volatility in currency markets and capital flows.
Unless soft multilateral arrangements like the G20 can successfully cooperate and deliberate on some of the above areas of economic cooperation, one can hardly put any faith in the effectiveness of such multilateral forums in the future.
Deepanshu Mohan is assistant professor of economics at Jindal School of International Affairs, O.P. Global Jindal University.