Governing the Global Economy: G7 and G20 contributions
Remarks at the Pre-G7 Conference, Brussels, 2 June 2014
Robert Fauver, former G7 sherpa, United States
When I first started working with John Kirton and his group at these annual conferences prior to the meeting of Heads of State and Government the Summit itself was comprised of 7 Industrial nations – plus the ever present European Community. What a change we have seen over the last 20 years or so. Now we have the G20 which as you all know isn't really a group of twenty, but after including the international institutions – IMF, World Bank, and others – is more like a group of 24. But from time to time even that number understates the size of the body as special guests are invited to participate in the discussions in most years.
I believe that we are approaching a crossroad in the development of Summitry. We have watched the G20 for a considerable length of time now and can evaluate its contributions to the global economy. Without a doubt, the first couple of G20 leaders meetings helped the world navigate the global financial crisis. The first meetings added stability and confidence to global financial markets. But then analysts began to evaluate the performance of the world economy under the G20 leadership. By this criteria, the meetings have left much to be desired. Concrete macroeconomic policy commitments to strengthen the weak global economy were few and far between. While G20 communiques contained the right overall messages, they were very thin on specific action plans.
I believe that the G20 group is simply too large to effectively coordinate policy approaches. In numerous other fora – the IMF and the OECD in particular –group size became a detriment to progress and both institutions established sub-groups of selected members in order to more effectively discuss policy approaches to existing macroeconomic problems. Early on, the IMF created the Group of Ten to undertake macroeconomic policy discussions. Similarly the OECD decided that the full membership committee of the Economic Policy Committee was simply too large to work efficiently. This led to the creation of the WP3 – the working party focused on external imbalances.
In both cases, it was determined that groups or committees that comprised the full membership of the body on the order of 20 or more members was simply too large for creating consensus and policy commitments. In addition, participants came to recognize that their discussions needed to be confidential if they were to make real progress in sharing policy approaches and solutions to common problems. Both the IMF and the OECD seemed to conclude that a group size of 10 was the maximum for both confidentiality and consensus building.
When I was at the Treasury Department I worked on the Plaza Accord in 1985. That ground breaking agreement on a combination of policy commitments and exchange rate targets needed to be negotiated in secrecy. We spent roughly 4 months discussing in the G5 Deputies Group the details of the package among the G5 countries. Imagine how that process would have been accomplished with today's current Group of Twenty. Could one maintain secrecy in a group as large as the 20? Not possible in my estimation.
I think that we are now at that same point regarding the G20. Perhaps it is time to create a new grouping of the G5 or 7. I fully agree that the original G7 is perhaps too limited to industrial countries. I can imagine a group that includes the US, Japan, the EU, China and say Brazil or India. That would be a manageable sixed collection of important economies. How willing the new members would be to participate in serious macro policy discussion remains to be seen. Experience with the G20 suggests that new players are rather reluctant of participate in detailed policy discussions and commitments.
One of the original goals of economic summitry back in the nineteen seventies was the hope for better macroeconomic policy cooperation and coordination among the major industrial nations. During the second half of the seventies and the eighties, economic policy coordination was fairly successful among major nations. This is not to imply that all seven followed identical policies. The countries were however able to plan their individual policies with a full understanding of the policy stances and changes being sought by their counterpart members of the Summit. During those times, we never saw a global recession in which all of the major industrial countries were simultaneously in trouble. There was always an odd man out. And this helped stabilize the global economy.
Since the turn of the century, economic coordination and cooperation has fallen by the wayside. Countries are less likely to share policy thoughts among their peers than they used to be. And obtaining political support for the needed policy enactments has proven extremely difficult in the major economies – especially in the US.
International economic policy coordination was easier to achieve when policy makers believed that their only economic issues centered on macro themes – fiscal policy, monetary policy, and exchange rate policy. While coordination has never been perfect, it has helped to smooth the bumps in the world economy – and importantly has helped provide the cover policy makers need to restrain the implementation of beggar thy neighbor policies. Which in hard times are easy to give in to.
But today, many of the economic problems center on structural issues – and not simple macro issues. And these are much more difficult to coordinate across countries. During the 1980's the OECD led discussions on structural reform issues and worked hard to include structural policies in ministerial communiques. Unfortunately many of the structural issues – especially labor market reforms – are simply too political to discuss openly or internationally.
In all major economics, demographics are rapidly changing. The major industrial countries face aging populations. Japan is leading us in terms of the aging process, but we are all following. Many countries are experiencing a decline in the size of the work force. This means that there are fewer and fewer workers contributing to pension systems while the demands of pension withdrawals are rising. Underfunded national pensions systems are plaguing all major countries.
Underfunded pension systems in turn are driving national fiscal deficits to higher and higher levels and national debt levels are rising as well.
In addition to pension problems, aging populations are placing new burdens on health care systems. Both of these entitlement programs are under increasing strains and are drains on the national economies. In all major economies, fiscal problems are confronting policymakers.
From a global perspective, if all major governments simultaneously attempt to reduce government deficits and national debt levels, global demand will suffer and the problem will worsen.
Another structural issue surrounds labor markets.
Many commentators have focused on problems with US employment and unemployment data. In particular, they observe that measurements of unemployment discussed by the Administration and in the popular press significantly understate the actual rate of unemployment. For example, during the recent recovery period substantial numbers of individuals have simply dropped out of the work force. They have in essence given up on finding work.
The U.S. labor force keeps shrinking rapidly. Back in 2007, 66 percent of Americans had a job or were actively seeking work.
As of February 2014, the labor force participation rate down to 63%, the lowest level since 1978. One out of three adults in neither working nor actively looking for work. So why is the labor force dropping? There are a couple big factors going on here. Older Americans are retiring, younger Americans are going back to school, and many workers have been discouraged by the weak U.S. economy and lack of job openings.
In an increasingly globalized economy, flexibility of labor markets is critical to maintaining competitiveness. Labor markets in the industrial world are not very flexible. In particular, changing technologies require different training and job skills than exist in many work forces. None of the major economies have developed a successful model for retraining labor. And none have major significant adjustments in the educational systems to recognize the new skill requirements.
Most importantly the leaders need to focus on monetary policy among the major nations. Essentially all Summiteers are pursuing some sort of Quantitative Easing policy. Clearly the US and Japan are following announced policies of quantitative easing. Europe is pursuing a policy of low interest rates without the explicit easing targets similar to those of Japan or the United States.
These various monetary easing policies are associated with historically low interests in most of our countries. And in addition, levels of liquidity are historically high as well. Most major banks are sitting on very sizeable volumes of excess reserves.
At some point, monetary authorities will need to tighten policy, in all likelihood via a combination of reducing or eliminating domestic asset purchases or in raising borrowing costs from the central bank itself. In any event, there is a strong probability of higher short and medium term interests over the course of the next year or so. We would all benefit if these monetary policy changes were undertaking in a cooperative and/or coordinated manner. Should interests rise simultaneously in all G7 nations, there is a danger of a synchronized slowdown in all countries. We would obviously like to avoid a simultaneous downturn in the G7 members.