G-20 economic growth pledge easier said than done

The Group of 20’s proposal to lift economic activity by two per cent over the next five years has so many holes in it, there’s no wonder it was the first official target that all members felt happy to agree on.

Each country has until November to come up with its own supposedly “concrete” plans, but there is nothing to enforce their implementation except the moral suasion of other members. The International Monetary Fund has said it will be watching for progress on the plans, but it has no power to compel or punish.

The target is also a moving one, as it is based on beating an estimate for growth which itself is just a best guess. Forecasting is by its nature a highly imprecise art and the IMF is forever revising its forecasts up or down.

Predicting growth for the next quarter is tough enough, no matter over five years.

“We’re not even sure where we are now on growth. How will we be able to judge if these targets are being met?” said Michael Blythe, chief economist at Commonwealth Bank of Australia.

Indeed, the Germans were reluctant to sign up to any hard target at the G-20, but accepted the growth goal because it was not binding. Others also stressed it was an aspiration, not a locked-in promise.

“The results of this process can not be guaranteed from politicians,” German Finance Minister Wolfgang Schauble said after the deal was signed on Sunday.

And financial markets took little notice of the agreement, instead focusing on Monday on the same concerns they had on Friday — the impact of the US Federal Reserve’s taper of its stimulus and uncertainty over China’s economic performance.

For the G-20, the prospect of higher growth is an incentive to help sell the need for structural reforms around the globe — take some hard decisions now, and end up wealthier and stronger in five years. The IMF does have a laundry list of reforms that it says will boost growth and productivity. It includes everything from liberalising domestic service industries, to spending more on infrastructure, to attracting more women into the workforce.

Some are country specific, such as boosting private savings in the United States to improving healthcare and the social safety net in China. But all are politically or fiscally difficult.

“Some of the reforms potentially have a big payoff but they tend to be unpopular and entail hard grind,” says Blythe.

“Take the ageing of populations that so many countries are struggling with. There’s no way they can meet future pension obligations, but dealing with that is a politician’s nightmare.”