Economic Stress, Old Debates, and the Role of the G-20

Nothing is more frustrating that hearing old debates about the flaws of neo-liberalism at a time when our global economic problems are so pervasive. The notion that pure market solutions always yield the best results has long given way to more reasonable and nuanced views. Using the trilogy of preferred policies ascribed to Prof. Robert Lucas---stabilize, liberalize and privatize--is simply a convenient mechanism to lament where poor policies have landed us, but neo-liberalism is not our biggest problem. In reality, very few governments support uncontrolled printing of money or rigid import substitution. But in a world of low growth, rising inequality, and concerns about jobs, governments often reach for bad policy options. This phenomenon was described in the section of the Spence Commission on Growth and Development Report (2008) labeled " Bad Ideas."

The best way to combat bad ideas is with better ones. The latest effort to do so, the G-20's Hangzhou Summit Communique (2016), focuses squarely on the need to foster economic growth and to catalyze new drivers of growth, such as innovation. No one disputes the role of technological progress as a major factor of growth dynamics, so innovation is undoubtedly a good thing. It will produce winners and losers, such as those described by Prof. Joseph Stiglitz (2002) with respect to globalization, and indeed, disruptive technologies will do so with much greater rapidity. That's a legitimate public policy challenge; however the bigger dilemma is how to produce more innovation, greater productivity, and ultimately more economic activity. Here is where the limits of communiqués are acutely felt.

Identifying new growth engines, providing new skills, catching the wave of the Fourth Industrial Revolution are all inspiring ideas emanating from Hangzhou, but they require more than rhetoric and greater commitments than seen in the G-20's Innovation Action Plan or the G-20's Blueprint on Innovative Growth. At the individual country level, they require a combination of vigorous competition, openness to new ways of doing things, and fluid capital markets alongside public policies to successfully deal with " winner take all " innovations, greater wealth concentrations, and job displacement. What we need is Schumpeter with safety nets; incentives to be more productive; and policies less focused on the present.

At the international level, we are replete with diagnoses of what ails the global economy, but short on practical solutions and weak on means of global coordination. Grand pronouncements do not inspire confidence because national political pressures prevent real commitments to undertake actions that would move us forward. The G-20 Summit was right to focus on economic growth as the major challenge, since sustainability and inclusiveness objectives are even less attainable if the current slump persists. But where will we find the innovation-led growth that the Communique hangs its hat on?

Currently, the U. S. economy is seen as the most open to innovation, but it is weak on the side of effective taxation of certain sectors and slow to recognize unfairness. Europe, on the other hand, has much more developed social policies, but is at its core not really open to free competition. Calls for structural reform in the G-20 context are both hollow, since economic rigidity suits incumbents and stifles innovation, and unenforceable. For this reason, it is worrisome to hitch the growth challenge to innovation since this requires a fundamental change in ideology about the acceptable pace of change, openness to new entrants, and changes in markets that few countries are willing to sanction. The final problem is the world's second largest economy, the G-20 host, and others practice state capitalism in a way that blends industrial policy, state financing, and politics is a way that Adam Smith would not have tolerated and that the global economy can no longer afford.

So where does that leave us? We must hope that surplus countries and those with the ability to stimulate growth will do so for their benefit and that of the collective; that national incentives to invest in the real economy will move resources into more productive endeavors; and that countries will eschew new forms of protectionism even as innovation proceeds. Is this too much to hope for? Is it impossible to imagine a consensus emerging around a real innovation and growth agenda? No, but it will require a fundamental change in mind-set. As long as influential governments continue to be shortsighted in their policy formulation, or status-quo oriented in pursuit of pan-national interests or abusive of markets to gain nationalist goals, we will not solve this problem. And the result will be a continued debate about old ideologies rather than current realities.

Citations

G-20 Leaders Communique Hangzhou Summit, 2016, www.g20.org

Commission on Growth and Development, World Bank, Washington, D. C. (2008)

Stiglitz, Joseph, Globalization and Its Discontents, Princeton U. Press (2002)

* Danny Leipziger is Professor of International Business, George Washington University (USA) and Managing Director of the Growth Dialogue. He was Vice Chair of the Spence Commission and formerly, Vice President at the World Bank.