The G-20 Disappointment: Lessons Not Sufficiently Internalized

The recent G-20 pronouncement that the global economic environment is far from a crisis and hence that no special actions are necessary is both disappointing and worrying. It is disheartening inasmuch as the international community needs to be taken to task for not heading the warning signals noted by the IMF's Managing Director, the OECD's Secretary General, and the Financial Times this past week. It is further troubling because the global economy has yet to fully recover from the calamitous 2008-2010 downturn, as seen in large output gaps, and policy responses that have lacked coordination both nationally and internationally.

Recent statements by the U.S. Treasury Secretary that the global economy is far from crisis and that there is no need for extraordinary measures reflect the political reality in the world's largest economy that nothing much can be accomplished that requires congressional action. Some parties would rather see the U. S. slip back than allow the Administration to boost aggregate demand through fiscal means as might be healthy. The Federal Reserve's long anticipated move to reverse abnormally high monetary expansion will now be cast in doubt, as recent US economic data is not yet convincingly positive. Yet politics encourages doing nothing.

This paralysis is matched by the ostrich-like assertions by China that all is well despite the recent volatility seen in stock and foreign exchange markets. The issues in the world's second largest economy are more structural in terms of over-capacity and the underlying weakness of asset quality in both banks and shadow banks. Yet the policy statements claim that everything is under control and there should be no concern. Parallel statements by the influential Finance Ministers of Germany and the Netherlands re-enforce the view that more of the same is good economic policy. They are quite possibly mistaken, however, and their do-doing nothing simply increases global risks.

Countries and groups that try to rely excessively on monetary expansion while ignoring structural reform are wasting precious time and resources without addressing their fundamental growth constraints. Japan has done very little on its "third arrow" and further monetary expansion will not produce the expected miracle. China is also wasting precious time in failing to address financial bubbles, corporate over-indebtedness, and industrial over-capacity. Europe seems incapable of generating sustained forward momentum due to its internal imbalances, beginning with excessive saving and current account surpluses in Germany. In the latest twist of fate emerging markets are suffering, not only from commodity price shifts but also by the decline in global demand and in global trade.

Under these circumstances, one may well ask, where is the coordinated policy response of the world's most powerful nations? Is it not legitimate to ask why collective action, a clear goal of the G-20 process, isn't happening. The answer lies in the awkwardness of the group's constellation as well as the political constraints affecting the world's largest economies. The result is somewhere between paralysis and indifference. It appears that the lessons of the Great Recession may have to be relearned. One may hope not, but recent actions raise the chances that we will. In the interim, the largest negative impact will be felt by emerging markets and developing countries, many represented in the G20. An odd group indeed.

* Danny Leipziger is Professor of International Business and International Affairs at George Washington University and Managing Director of the Growth Dialogue. He is a former Vice President of the World Bank whose responsibilities included the G-20.