Group of 5 (G5) evolved into G20 in recognition of the changes that had taken place in global economy. It was realised that the big five plus Russia was not enough to take concerted actions to guide the world economy. The organisation of G20 and its meetings saw the coming of age of globalisation in world economy. But no sooner had the functioning of G20 started than the economics of the developed countries began to unravel. The break-down of financial institutions in America and Europe threatened to take the shape of a meltdown. Faced with runaway crisis the developed countries started 'ring fencing' with national measures of fiscal stimulus and easy monetary policy with little co-ordination among members of G20. While bailout of bankrupt and near collapsed financial institutions became the order of the day the emerging countries held their own in managing fiscal and monetary policies. It was largely due to their astute fiscal stance that the global economy was saved from a depression of the 1930s vintage.
The fiscal and monetary policies of the developed countries primarily aimed at shoring up their national economies. But there was some positive fallout that benefited the emerging economies, almost as unintended consequences. The liberal monetary policy pursued by the Federal Reserve Bank of America under the rubric of Quantitative Easing (QE) that saw purchase of US$85 billion worth of treasury bonds every quarter gave unforeseen boost to the capital market in emerging economies like India, South Africa, Brazil and Turkey. Flush with liquidity American capital market rushed to emerging economies to invest the available fund for higher return. When the financial crisis eased the Federal Reserve Bank started 'tapering' of QE in March last year sending shudders across the emerging economies. As outward flow of hot money started the national currency in emerging economies became volatile, losing heavily against dollar. Fortunately, the 'tapering' was postponed and began only recently and on a low key. But it has not spared the emerging economies from being bruised. Central bankers in more than one emerging country has griped about letting them down by America and took a swipe at the developed countries, particularly America, for the lack of co-ordination in respect of monetary policy.
In the wake of the financial crisis of 2007 fiscal restraint and austerity were adopted as anti-dotes by many countries, particularly in Europe. It played havoc with growth and employment. As a result of the conservative fiscal policy of pursued worldwide there was contraction of growth in global economy. The fluctuating monetary policy in America and the tight fiscal policy in both America and Europe gave the wake up call to G20. It, therefore, came as no surprise that G20 countries that met in Sydney on February 22-23 vowed to boost global growth by more than US$2.0 trillion over the next five years, shifting their focus away from austerity as a fragile recovery takes place.
Finance ministers and central bank governors for the Group of 20 which accounts for 85 per cent of the world economy, also agreed to pursue greater transparency about monetary policy to avoid the type of rifts that occurred over the US 'taper' last year.
After their meeting in Sydney the G20 ministers issued a statement on February 23 vowing to drive 'a return to strong, sustainable and balanced growth in the global economy. It was resolved that realistic policies would be developed with the aim to lift collective GDP (Gross Domestic Product) by more than 2.0 per cent above the rates implied by current policies over the coming five years. This is US$ 2.0 trillion more in real terms and will lead to significant additional jobs. With this declaration of intent the G20 has left the austerity debate behind and is now fully focused on growth. According to the IMF, the strategy adopted would add half a percentage point to global growth annually over five years starting next year.
In the strategy for sustainable growth private-sector investment is the central plank. For this there is need for structural reforms to drive growth. It will take concrete actions across the G20 to boost investment, trade, competition and employment opportunities as well as getting macro-economic fundamentals right.
Reform will not come easily, particularly if it has to concede national interest, however small. America's refusal to agree on re-structuring IMF is a case in point. Its wavering on the need to co-ordinate with the other countries in implementing monetary policy like QE is another example of its narrowly focused national interest. In response to criticism against unilateral monetary policy America has said that countries must make their own reforms to bolster their economies and blunt the impact of Quantitative Easing (QE).
Ambitious declarations notwithstanding, the Sydney meeting of G20 ministers will bear little fruit unless there is agreement on coordinated policies and reforms. Going alone to address national problems is hardly going to give a shot in arm of the world economy. If this elementary lesson has not been learnt by G20 countries it is high time that they did.
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