The G20 and Its Contribution to Growth and Global Governance
Claudia Schmucker
Head of Geo-economics Program, DGAP
Claudia Schmucker is head of DGAP’s Geo-Economics Program. Prior to that, she had headed DGAP’s Globalization and World Economy Program since 2002. She has published extensively on European and transatlantic trade policy, the World Trade Organization (WTO), and the Doha Round as well as on the role of informal global forums such as the G7 and G20.
Schmucker studied at Rheinische Friedrich-Wilhelms Universität in Bonn, at Elmira College in New York State, and at Yale University. She holds an MA in North American studies and a PhD in economics from the Freie Universität Berlin.
The G20 at leaders’ level was created in November 2008, shortly after the collapse of Lehman Brothers, at the height of the global financial crisis. Growth was therefore immediately at the center of the agenda and the success of the group was to a large part measured by progress in this area.
The heads of state and government of the twenty industrialized and emerging market economies confirmed at their first summit in Washington on “Financial Markets and the World Economy” that, “We are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.” To this effect, the G20 countries agreed on immediate steps to combat the economic downward spiral. These included “monetary policy support” as well as “fiscal measures to stimulate domestic demand to rapid effect.”[1] In addition, they pledged to refrain from protectionist measures.
Countries shared a sense of urgency in times of crisis. In the aftermath of the summit in Washington, the G20 countries initiated various domestic stimulus measures. These stimulus packages included the U.S. Recovery and Reinvestment Act (February 2009) and two German economic stimulus packages (Konjunkturpaket 1 & 2 from November 2008 and January 2009). Globally, close to 90 percent of these domestic measures came from G20 countries.[2]
As a follow-up, the G20 countries agreed at their second summit in London in April 2009 on a “Global Plan for Recovery and Reform.” The first main goal (of six in total) was to restore confidence, growth, and jobs. As part of this plan, the G20 countries pledged $750 billion of direct aid and $250 billion in special drawing rights (SDR) for the International Monetary Fund (IMF), as well as $100 billion for multilateral development banks to increase lending.[3] This was an important step to enable international organizations to sufficiently help countries affected by the global financial crisis. The G20 leaders agreed in Washington and London that they had to work together to avoid further economic decline and to enhance growth. They shared a common understanding of the roots of the crisis and a belief in the necessity of monetary and fiscal measures. Everybody agreed that this was the time for Keynesian measures. Based on this understanding, the G20 was able to function as an effective crisis committee. Thus, the G20 countries were able to send an important, collective, and reassuring signal to markets.
Based on their initial success, the G20 leaders decided at their third summit (Pittsburgh 2009) to make the summits a regular event and to turn the G20 into the “premier forum for international economic cooperation,”[4] essentially taking over the role of the G8. The U.S. Council on Foreign Relations regarded this shift from the G7/G8 to the G20 as the “most profound development in global governance since the creation of the World Trade Organization in 1995.”[5]
The G20 after the Financial Crisis: Divergent Growth Strategies and a Broader Agenda
Since then, the issue of growth has always remained central on the G20 agenda. In Pittsburgh, the G20 established the framework for strong, sustainable, and balanced growth that connected the growth paradigm to macroeconomic imbalances. However, in the aftermath of the financial crisis, it soon became apparent that countries held different ideas about how to achieve these goals. Particularly at the Toronto and Seoul summits in 2010 and the Cannes summit in 2011, there was an open rift between (fiscal and trade) deficit countries like the U.S. and surplus countries like China and Germany. The U.S. wanted to put an emphasis on balanced growth (fighting export surpluses, particularly in China and Germany) and called on these countries to use fiscal policies to boost domestic demand. In contrast, Germany wanted to focus more on sustainable growth (debt reduction) and on structural reforms.[6]
So the growth issue became connected to broader goals and progress was slow. The sense of urgency that had characterized the first summits had waned, and now countries increasingly looked at their own domestic economic situations. They became less and less willing to commit themselves at a global level.
After the first summits, the G20 had also tried to overcome its role as an ad hoc crisis committee and to establish itself as a global steering committee and agenda-setter. As the issue of growth and macroeconomic imbalances became increasingly contested, the G20 broadened its agenda to new issues, which included among others energy, climate, and development topics. The downside of this development was that the G20 produced increasingly long communiqués and vague summit outcomes and was increasingly seen as a mere talking shop.
The G20 in 2014 and 2015: Refocus on Growth as a Centerpiece of the Agenda
Growth and the Brisbane Action Plan 2014
In 2014, Australia wanted to reverse this trend and bring the G20 back to its origins, and used its presidency to refocus the agenda on growth. Shortly before, Lawrence Summers, professor at Harvard and former U.S. Treasury Secretary, had introduced the concept of “secular stagnation” as a possible new normal, where “the U.S. and other major global economies might not return to full employment and strong growth without the help of unconventional policy support.”[7] The goal of the Australian presidency was to add $2 trillion to the world economy over the next five years. In the Brisbane Action Plan, each member country was asked to develop a comprehensive growth strategy covering areas such as investment, competition, trade, and employment, as well as macroeconomic policy. The close to one thousand measures that were listed as a result were designed to add more than 2 percent to the October 2013 IMF World Economic Outlook by 2018. [8]
Australia wanted to set a numerical target to have a benchmark by which the G20 could be measured. This was also seen as a way to strengthen the group’s role in connection to global growth. Despite this apparent success, German finance minister Wolfgang Schäuble criticized the 2-percent target. He claimed that politicians could not guarantee growth rates, as they were the result of complicated economic processes that involved many actors.[9]
Follow-up during the Turkish Presidency 2015
This year, Turkey has taken over the G20 presidency. Turkey expressed its concern that the economic potential of the G20 economies had further decreased and that inequalities were rising. It therefore wanted to focus its agenda on inclusive and robust growth. In this regard, the Turkish presidency introduced the “three Is”: inclusiveness, implementation, and investment for growth. First and foremost, Turkey wants to implement the commitments made in Brisbane and to meet the timeframes set out in the Brisbane Action Plan. The second focus is on investment as a driver for global growth. Turkey wants to address public and private investment gaps (e.g., in infrastructure) and establish concrete and ambitious investment strategies.[10]
At the last finance ministers’ meeting in Istanbul in February 2015, all twenty participants agreed that global growth was uneven and the recovery slow, especially in some advanced economies, notably the euro area and Japan.[11] But the group was still divided over the methods for supporting growth. On the one hand, the U.S. in particular was critical of the fact (with regard to Germany) that the fiscal space, namely more public spending, had not been sufficiently utilized in the EU to achieve growth. U.S. Secretary of the Treasury Jacob Lew criticized in Istanbul: “In Europe, there’s a need for more fiscal policy. There’s a demand shortfall. Different countries have different amount of fiscal space. With the fiscal space, they need to use it to grow demand.”[12] On the other hand, Germany still focuses on growth through structural reforms and debt reduction. The Istanbul communiqué tried to merge these two diverging positions by saying that “fiscal policy has an essential role in both building confidence and sustaining domestic demand.” But the statement added that debt as a share of GDP had to be put on a sustainable path.[13] This shows that the gap in thinking on the issue of growth, which has divided the G20 countries for a long time, has not been closed. And this makes it difficult for the G20 to present itself as a driver for global growth.
How Can the G20 Remain Relevant? Focus on International Issues!
The G20 is still the premier forum for international economic cooperation, but the relevance is decreasing. Particularly with regard to growth, the rift between countries that propose more fiscal stimulus and countries that focus on structural reforms and debt reduction has been a recurring theme throughout the history of the G20. The unity that characterized the first summits has disappeared.
In addition, the issues that the G20 addresses in the context of growth have become increasingly national in scope. The measures that were set out in the Brisbane Action Plan and taken over by the Turkish presidency are country-specific commitments: They focus on national investment in infrastructure, the removal of trade barriers, and enhancing flexibility in the labor markets. But the G20 as an informal forum naturally has no direct influence over national policies and legislative procedures. In order to implement these reforms, political power and will is necessary on the domestic front (bringing up the issue of sovereignty). Many countries therefore only introduced reforms that were already on the national agenda. For example, the German government proposed measures regarding investment in infrastructure, broadband, and energy as well as a high-tech strategy—all measures which had already been agreed in the coalition agreement after the 2013 election. It would have been very difficult for Germany to have proposed new programs in the context of the G20 that had not already been accepted by the coalition partners or the Bundestag.
So, given these limitations with regard to domestic growth strategies, what can the G20 do to make itself relevant to its member states? First of all, as an informal forum, it is well equipped to provide a platform for an exchange of “best practices” among its members in their reform efforts. It can also provide a clear long-term vision of what countries want to achieve in order to sell the reforms at home. In addition, while the G20 cannot implement reforms, it can offer to support these changes through peer reviews and accountability reports. In Brisbane, the G20 agreed that the IMF and OECD would monitor the implementation of the proposed measures and report on their progress.
With regard to growth, however, the actual added value of the G20 lies in a possible agreement on better international practices, rules, and standards. The G20 countries should focus on international issues where they can improve the conditions for global growth. The basis for this is not easy. As Ignazio Angeloni and Jean Pisani-Ferry put it: “For the G20 to regain its role, its members need to develop a common vision of global economic problems and the way to approach them.”[14]
What problems need to be tackled at the G20 level? Possible international topics where the G20 countries share common goals and can increase their cooperation include, among others: improved international tax cooperation (the G20 already started the BEPS[15] initiative in 2013); consensus on how to move forward in the WTO trade negotiations of the Doha Round; removal of blockades in global value chains; and agreement on fair and open standards in foreign investment.[16] Improved international coordination and better standards will in the long run enhance global growth prospects. But these measures cannot be implemented by the G20 as the policy proposals are not enforceable. However, an agreement among the twenty countries can give impetus to existing international processes (OECD: taxes; WTO: trade) or put new issues on the agenda of international organizations.
The G20 has undergone a development from a successful crisis committee to a more broadly defined steering committee and agenda-setter. The Australian and Turkish presidencies have refocused the agenda again on growth issues. But long-standing disputes on how to achieve growth and a focus on domestic reform commitments have made progress on this issue very difficult in the G20’s informal context. The G20 should therefore focus on international issues, where it can add value to the growth debate. It can remove blockades in international trade processes and establish better global standards in tax cooperation, investment, and employment. As such, it can successfully enhance the environment for growth, and it can stay relevant.
Dr. Claudia Schmucker is the Head of Program, Globalization and World Economy at the German Council on Foreign Relations (DGAP).
[1] G20, Declaration of the Summit on Financial Markets and the World Economy, Washington DC, 15 November 2008, www.g20.utoronto.ca/2008/2008declaration1115.html (accessed 6 May 2015).
[2] Sameer Khatiwada, “Stimulus Packages to Counter Global Economic Crisis: A Review,” International Institute for Labour Studies Discussion Paper 196 (2009): 10 and 27–32, www.ilo.org/public/libdoc/ilo/2009/109B09_49_engl.pdf (accessed April 30, 2015).
[3] G20, Global Plan for Recovery and Reform, Statement Issued by the G20 Leaders London, 2 April 2009, www.g20.utoronto.ca/2009/2009communique0402.html (May 4, 2015).
[4] G20, Leaders Statement: The Pittsburgh Summit, 24-25 September 2009, Pittsburgh, www.g20.utoronto.ca/2009/2009communique0925.html (accessed 8 May 2015).
[5] Steward M. Patrick, “G20: Present at the Creation of a New Economic Order,” Council on Foreign Relations, 25 September 2009, www.cfr.org/international-organizations-and-alliances/g20-present-creation-new-economic-order/p20296 (accessed 6 May 2015).
[6] See, e.g., Philip Inman, “US Intensifies Trade Row with China,” The Guardian, 22 October 2010, www.theguardian.com/business/2010/oct/22/geithner-trade-surplus-cap-call (accessed 12 May 2015).
[7] Lawrence Summers, “Why stagnation might prove to be the new normal,” Financial Times, 15 December 2013, www.ft.com/intl/cms/s/2/87cb15ea-5d1a-11e3-a558-00144feabdc0.html (accessed 7 May 2015).
[8] G20, Brisbane Action Plan, https://g20.org/wp-content/uploads/2014/12/brisbane_action_plan.pdf (accessed 7 May 2015).
[9] “Germany’s Finance Minister Wolfgang Schaeuble says the G20 governments cannot guarantee special economic growth rates,” ITN Source, 23 February 2014, www.itnsource.com/en/shotlist/RTV/2014/02/23/RTV230214032/?v=0 (accessed 10 May 2015).
[10] G20 Turkey 2015, Turkish G20 Priorities, https://g20.org/wp-content/uploads/2014/12/2015-TURKEY-G-20-PRESIDENCY-FINAL.pdf (accessed 7 May 2015).
[11] G20, G20 Finance Ministers and Central Bank Governors, Communiqué, Istanbul, 10 February 2015, www.g20.utoronto.ca/2015/150210-finance.html (accessed 7 May 2015).
[12] “Finance chiefs vow action to bolster growth at G20 meet, Greece weighs,” Reuters, 10 February 2015, www.reuters.com/article/2015/02/10/us-g20-meeting-idUSKBN0LE10V20150210 (accessed 7 May 2015).
[13] G20, G20 Finance Ministers and Central Bank Governors, Communiqué, Istanbul, 10 February 2015, www.g20.utoronto.ca/2015/150210-finance.html (accessed 7 May 2015).
[14] Ignazio Angeloni and Jean Pisani-Ferry, “The G20: Characters in Search of an Author,” Bruegel Working Paper, 2012/04, p. 1, 46, www.bruegel.org/download/parent/714-the-g20-characters-in-search-of-an-author/file/1556-the-g20-characters-in-search-of-an-author/ (accessed 10 May 2015).
[15] The OECD published an action plan on Base Erosion and Profit Shifting (BEPS), which was endorsed by the G20 in St. Petersburg in 2013. The goal is to tackle double non-taxation due to base erosion and profit shifting.
[16] Katharina Gnath and Claudia Schmucker, “Group with a Cause: there is no alternative to the G20, but it does need reform,” in G20 at the end of 2014, Lowy Institute for International Policy (January 2015), p.33.
