G-20: West Abandons Its Theological Belief In Unbridled Free Markets

The G-20 communique issued by the world’s major finance ministers and central bankers in Chengdu, China, on Sunday (24 July) has mea culpa as its undertone. It is a manifesto for action that does not openly admit that unbridled capitalism and financialisation have caused havoc, but accepts that the world economy needs better supervision and regulation.

Just as the fall of the Berlin Wall led to premature announcement that Communism is dead, the 2008 global financial crisis has shown that capitalism and free markets are not unblemished gifts to the world either. Politically, Brexit and Donald Trump are standing proof that the west is abandoning its theological belief in markets and globalisation as a panacea for everything. Free trade and globalisation create both winners and losers, and the concerns of the latter cannot be ignored. The G-20 communique is testimony to this shift in thinking.

The communique, directly or indirectly, acknowledges the following (read the full text of the communique here):

One, that zero and negative interest rates alone cannot help the world economy out of the ditch. Monetary policy is not good enough to do all the heavy lifting. The communique says the following:

“Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth….we emphasise that our fiscal strategies are equally important to support our common growth objectives.”

The world is abandoning fiscal fundamentalism. Deficit targets will be loosened.

Two, that there is an unequal distribution of the benefits of growth within and between countries that needs to be levelled to the extent possible. Says the communique:

“The global economic recovery continues but remains weaker than desirable. Meanwhile, the benefits of growth need to be shared more broadly within and among countries to promote inclusiveness. The global economic environment is challenging and downside risks persist, highlighted by fluctuating commodity prices, and low inflation in many economies.”

This is an admission that eight years of crisis management have all but failed. The old trickle-down theory, which says growth itself will take care of poverty and inequality, is being questioned.

Three, there is a clear acknowledgement that public policy and investment is important to reviving growth and fix industries in deep trouble – like steel, for example. Says the communique:

“We are using fiscal policy flexibly and making tax policy and public expenditure more growth-friendly, including by prioritising high-quality investment….We recognise that excess capacity in steel and other industries is a global issue which requires collective responses.”

A subtle form of industrial policy is coming through the back door; belief in the market’s ability to optimise investment and capacity building is eroding. Government action is seen as vital.

Four, there is a clear recognition that one-size-fits-all solutions like the kind offered by the World Bank and the IMF in the past cannot work. The solutions have to be tailored for national needs and variations. The communique says:

“We take note that the choice and design of structural reforms are consistent with countries’ economic conditions. Based on the nine priority areas of structural reforms agreed in April, we have developed and agreed upon a set of guiding principles, which will provide high-level and useful guidance to members, while allowing them to account for their specific national circumstances.”

The old assumption that the World Bank and IMF have all the answers is gone. There is more humility among global institutions now.

Five, economic imbalances need action on both sides of the imbalance. Says the communique:

“We underscore the role of open trade policies and a strong and secure global trading system in promoting inclusive global economic growth, and we will make further efforts to revitalise global trade and lift investment. We will also strive to reduce excessive imbalances and promote greater inclusiveness in our pursuit of economic growth.”

Embedded in this statement is a simple message: it takes two to adjust an imbalance. It means countries with high external surpluses due to export orientation (Germany, China), must upvalue their currencies and/or rebalance their economies. It is also a warning to lenders that they should take a haircut if they have lent too much to the likes of Greece or other such countries. Adjustment cannot be one-sided.

Six, there is a backlash against tax evasion by the rich. The G-20 is making a huge commitment to penalise tax havens which facilitate tax evasion by rich individuals and corporations. The communique warned:

“We reiterate our call on all relevant countries, including all financial centres and jurisdictions which have not yet done so, to commit without delay to implementing the standard on automatic exchange of information by 2018 at the latest and to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.”

This is another move to end the imbalance of power between rich and poor, by getting the rich to pay more tax by coercing tax havens to cooperate, or else…

Seven, the power imbalance in global institutions has been recognised and is being reduced. Thus the communique says :

“We look forward to the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings (of the World Bank and IMF). We reaffirm that any realignment under the 15th review in quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole.”

The overwhelming power of the west in the World Bank and IMF is gradually coming down.

Eight, excessive financialisation, poor understanding of risks, and even poorer global supervision of financial institutions, is now a threat to financial stability. The communique says:

“Recent market turbulence and uncertainty have once again highlighted the importance of building an open and resilient financial system. To this end, we remain committed to finalising remaining critical elements of the regulatory framework and the timely, full and consistent implementation of the agreed financial reforms, including Basel III and the total-loss-absorbing-capacity (TLAC) standard as well as effective cross-border resolution regimes…...We will continue to address the issue of systemic risk within the insurance sector…. We continue to closely monitor, and if necessary, address emerging risks and vulnerabilities in the financial system, including those associated with shadow banking, asset management and other market-based finance.”

Reckless financial adventurism and buccaneering activity will be reined in.

Nine, the G-20 is moving against the orthodoxy of leaving exchange rates to adjust on their own, or leaving this subservient to national manipulation. The communique, therefore, noted:

“We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will resist all forms of protectionism.”

Translated, this mean the big powers no longer believe exchange rates should go where they will, driven purely by national objectives or speculators.

After the fall of the Berlin Wall, the West celebrated the event as the final victory of capitalism and democracy. 2008 and the eight years of listless growth have convinced that while capitalism is a good system to have, it has its warts. It needs managing. Or else the “hidden hand” of the markets can be manipulated by forces inimical to capitalism’s survival.