The Global AnAlyst | aPRIl 201446

G20’s Vision 2020Can it Revive Global Growth?Markets have become interconnected and inter-dependent, leading to “criss-crossing globalization” of capital, goods, and ideas. So, G20 nations need to help their entrepreneurs to go

out even more in the global commons, expanding trade, creating more markets, and developing more supply chains in a seamless

interactive network, says Andrew K P Leung, International and Independent China Specialist & Chairman, Andrew Leung

International Consultants Ltd.

INTERNATIONAL

G20 finance ministers and central bank governors have set themselves a formidable task in accelerating growth and creating millions of new jobs in order to add 2 per cent to world economic growth over the next five years.

The Global AnAlyst | aPRIl 2014 47

G20’s Vision 2020

It is not the first time that the G20 vows to boost global growth. This latest initiative springs from the common perception that while the world is receding from the precipice, growth is

at best weak, below long-term potential, and uncertain. The G20 ‘blue print’ is almost entirely based on an IMF think-piece prepared for the G20 meet-ing in Sydney on 22-23 February - ‘Global Prospects and Policy Challenges”. This extols the virtues of –(a) market-oriented reforms; (b) labor participation reforms; (c) infrastructural investment; and (d) re-balancing between con-sumption and investment. The IMF recipe calls for careful calibration of “unconventional monetary policies” (including QEs) to avoid deflationary risks and shocks of massive capital flows out of emerging economies. The prescription is vaulted to boost world growth by a total of 2 ¼ per cent or 0.5 per cent per annum over the next five years, resulting in increases in produc-tivity, employment and capital accumulation. The recipe amounts to a collec-tion of standard macroeconomic and monetary tools. While need-ed, it is neither controversial nor innovative. What counts is how different countries may be able to deliver these policy correctives in face of their own diverse chal-lenges.

How is the Vision going to work?The IMF “blueprint” calls for higher private savings for the United States to re-balance the economy, for example. How-ever, unless such savings are channelled through higher taxes into productivity-enhancing investments such as enhanced

skill-training and infrastructural improvements, it is difficult to see how this would not dampen consumption, a key driver of US growth. For the European Union, the recipe highlights boosting pro-ductivity. This is hardly reveal-ing. But entrenched entitlements, aging demographics, and lack of breakthroughs in creating a genu-ine financial and banking union based on supranational pruden-tial rules remain insurmountable obstacles. For Japan, while “Abenomics” are beginning to turn things around after decades of deflation, the Japanese Prime Minister has still to let fly his most crucial arrow – structural reforms to unleash greater productivity amidst a greying population. Moreover, it remains unpredictable whether his second-stage consumption tax due in 2015 would undermine consumption, likewise a key driv-er of Japan’s economic growth. For China, the world’s second largest economy, almost all the ingredients of the IMF recipe are being put into action by edict of the Party’s latest Third Ple-num. These include re-balancing towards consumption, removing the constraints of the household registration system to improve labor mobility, changing the One Child Policy to boost long-term productivity, infrastructural investments to build a green economy, and above all, letting market forces play a “decisive role” throughout the economy. The latter translates into chip-ping away some of the State-wned Enterprises’ monopolies, for example, by increasing their state tribute from 15 per cent to 30 per cent by 2020 to finance improvement of the social safety net, freeing up the pricing of water, electricity, oil, gas, trans-port and telecommunications, and allowing the formation of private banks. However, in face of entrenched vested interests, how these reforms will work out in

practice remains to be seen. Moreover, shadow banking, as pointed out by the IMF paper, remains a Chinese headache. Nevertheless, as examined in my last think-piece in the March issue of The Global ANALYST, the problem is vigorously being reined in and, with a foreign currency reserve cushion of $3.8 trillion, this risk, though huge, is unlikely to result in financial Armageddon. But it remains an albatross on the neck of the Chinese economy. In the United States, the so-called “shale gas revolution” helps with easing energy costs, thereby boosting the economy and exports. In face of rising costs in emerging economies, especially China, some manufacturing is coming back onshore, creating more jobs. But overall wage levels remain depressed. There is a large pool of under-employed workers who have given up seeking jobs. So, despite better overall economic figures, labor productivity and job creation remain critical challenges. Notwithstanding the G20 hym-nbook, therefore, I am afraid that the global economy is in for an uphill battle. Much of the economic recovery so-far relied on continuing monetary eas-ing, cheap credits and financial largesse, rather than any real increases in competitiveness or productivity. This is especially true of the West, which remains addicted to debt-driven con-sumption.

What should be done further? The whole world has funda-mentally changed. What worked before may no longer be ad-equate. In addition to following the standard macroeconomic and monetary prescriptions pro-posed by the IMF, G20 countries need to think hard and act fast outside the box if they want to find the next holy grail of eco-nomic success. First, the internet has trans-

The Global AnAlyst | aPRIl 201448

formed not only how we live but how businesses, including banking and financial services, can remain competitive. Multi-billion-dollar global e-commerce giants like China’s Alibaba and Tencent are challenging mindsets. Taking advantage of the latest e-technologies, they seamlessly integrate across different business sectors between and amongst suppliers, customers, and even investors, combing the advantag-es of PayPal, Amazon, e-banking, and social media. Taking the lesson further to the banking sector, for example, physical branches, while still necessary, are no longer the name of the game. It’s now clicks, not bricks. It’s how a bank branch looks and feels, not how many branches there are. So G20 countries need, for ex-ample, to create the e-talent and e-infrastructure to increase their businesses’ competiveness and productivity. Second, businesses have to be even more strategically-focused in a more global context. If former global empires could be called Globalization 1.0, and Thomas Friedman’s ‘Flat World’could be called Globaliza-tion 2.0, we are now in the age of Globalization 3.0. Borders are not only crossed with relative ease; they no longer exist in a virtual world. What is more, markets have become interconnected and inter-dependent, leading to ‘Criss-crossing Globalization’ of capital, goods, and ideas (Mattoo and Subramanian, 2010). So, G20 nations need to help their entre-preneurs to go out even more in the global commons, expanding trade, creating more markets, and developing more supply chains in a seamless interactive network.Third, the world’s pendulum is swinging from the West to the East. According to the 2013 An-nual Report (Economic Outlook - Eagles) of BBVA, a Spanish bank, the EAGLEs (Emerging and Growth Leading Economies, in-

cluding Turkey) and NEST coun-tries (upcoming-EAGLEs) are together expected to add 68 per cent to world growth between 2012 and 2022. China and India are each expected to contribute a higher share than the US. The G7 economies together will account for a mere 16 per cent. Goldman Sachs estimates that by 2050, the six EAGLEs combined economic weight, what may be called the E6, would be over two and half times more than the economies of the US, Japan, United Kingdom and Germany combined. Nearer home, by 2020, China’s imports are expected to be one-and-a-half times that of the United States. Vast opportunities are, therefore, opening up in a number of dy-namic emerging markets, waiting to be tapped by an economically-challenged West. But what works in the West would almost certain-ly fail in the East without a deep and thorough mastery of the local business network and political

environment. Cross-country and cross-cultural knowledge and expertise is becoming ever more important. G20 countries should therefore step up even more cultural, business, intellectual and other exchanges with one another. Mutual understanding and trust often begets unexpected opportu-nities. If anything, more inter-change would at least mitigate any current and potential interna-tional conflict, conducive to a more harmonious global business environment.

Look Beyond the Current IssuesA G20 Vision therefore needs to look beyond how to fix current problems. It needs to follow JFK’s famous dictum “Some men see things as they are and say why. I dream things that never were and say why not”. That’s the stuff true visions are made of.

Understanding G20 Nations The G20 nations represent top two of the three tiers of the world economy. The first tier includes large rich economies - Australia, Canada, Saudi Arabia, United States, France, Germany, Italy, UK, Japan, and South Korea. All the countries of this club, except Saudi Arabia, are facing similar long run trends of slowing growth, deindustrialisation, expensive labour forces and the outsourcing of their manufacturing to emerging lower cost economies. The second tier includes the largest emerging or middle income economies - China, India, Russia, South Africa, Indonesia, Argentina, Brazil and Mexico. This club is not homogeneous. However, many of these members have avoided the turmoil of the recession caused by the global financial crisis, continuing to grow and industrialize, and have been at the receiving end of outsourcing from developed nations. The largest of them, China has become not only the second largest economy, but also one of the major financial donors of the debt-stricken Western nations. Courtesy : Gennadi Kazakevitch, Monash University

G20’s Vision 2020