Creating a strong G20
- By Xu Hongcai
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E-mail Beijing Review, April 21, 2016
Global significance
The world economy has been undergoing slow growth in recent years, and the economic trends and policies of different countries have diverged significantly. In particular, the spillover effects of macroeconomic policies from major economies have been on the rise. Global financial risks are also increasing, serving as a poignant reminder to relevant countries to urgently improve the coordination of current global macroeconomic policies.
The U.S. economy, for example, has taken the lead in terms of its recovery and is courting with attempts to raise interest rates. The economic recovery in Europe is relatively weak, and the European Central Bank's policy of quantitative easing (QE) is still expanding. In Japan, Abenomics—named after the country's Prime Minister Shinzo Abe—has produced only limited results, and the Japanese central bank has set a negative interest rate.
Meanwhile, bulk commodity prices continue to slump and short-term capital flows are accelerating in global markets. The foreign exchange market fluctuates incessantly and emerging economies also face additional risks from a variety of economic factors. Under such a complicated milieu, establishing and improving the coordination of macroeconomic policy mechanisms among major economies is greatly needed to avoid another financial crisis.
After World War II, the troika composed of the Bretton Woods System—the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO)—was set up.
For 70 years, the influence of the Bretton Woods System has been evolving and still plays an important role in global governance, after the emergence of floating exchange rates in the 1970s. Even after the establishment of the Group of Seven (G7) in the mid-1970s, and the replacement of the General Agreement on Tariffs and Trade in the 1990s for the WTO, as well as the establishment of the G20 in 1999, the system is still affecting the current global financial system.
Now that new challenges have reared their faces, the underlying flaws within the system have been fully exposed. For instance, in terms of fiscal and monetary policy coordination, G20 members have a biennial assessment on each country's fiscal standing, public debts and potential financial risks.
It is meaningful to reveal such risks, so that an under-assessed state can focus on ameliorating their problems and adjusting its economic policy to reduce hazards. However, this system relies on the conscientiousness and frankness of the organization's members. Also, the current financial system does not provide an efficient solution for problems such as interest polarization and the increasingly negative spillover effects of leading economies' macroeconomic policies.
In regards to trade policy coordination, all kinds of bilateral and multilateral free trade agreements are surging, and the WTO Doha multilateral trade negotiation is severely hindered. Besides, major world economies are all facing their own structural problems. The meetings of G20 finance ministers and central bank governors have absorbed structural reform into the framework of a "strong, sustainable and balanced growth." As for structural reform, G20 members are required to strengthen their policy coordination as well.
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