The G20 summit next month in Cannes has a great deal riding on it as the world lurches backwards into the recession.
Europe is still in a mess. The European experiment is at risk. Deep down the worry is that the writing is on the wall for the Euro itself. There’s no doubt at all that, despite all the emergency measures to prop up Greece and keep it in the fold, the Euro zone’s collapse is a serious risk. Greece is not the only Euro zone member trapped in the Euro straightjacket. The core problem for southern Europe is its chronic inability to match German productivity growth.
When two countries — Germany and Greece, for example — engage in free trade, the country with the slower rate of productivity growth normally experiences depreciation of its currency. But currency depreciation need not occur. There are other possibilities: its workers’ wage rates could grow at a commensurately slower rate; it could experience ever-increasing unemployment; its workers could emigrate; or it could find some means of ‘validating’ its increasingly over-valued real exchange rate. Greece chose the last of these options. And the means it chose was to increase government spending, financed by borrowing. Over the last decade, unit labour costs in Greece grew by about 30 per cent more than in Germany. This implies a 30 per cent effective appreciation of Greece’s real exchange rate. The validation of a real appreciation of that magnitude required a lot of government spending. Ultimately, that fiscal stance was going to prove unsustainable. Greece is not the only European country in this pickle. Whether the Greek and European body politic can now wear the fiscal burdens of an adjustment without breaking the Euro currency system remains to be seen.
As Elek says in this week’s lead, ‘the self-imposed crises in the US and the EU have destroyed the capacity of industrial countries to contribute to global growth in the short term’. The danger now is that G20 leaders, consumed by the anxieties in Europe and North America, will miss the global main chance when they meet in Paris next month.
With Europe and the United States in the mire, the global main chance for medium term growth is investment and growth in developing economies. That’s not just another big fiscal stimulus in China — there are risks with that which the Chinese authorities are justifiably cautious about assuming. As Elek points out, the potential for productive investment in economic infrastructure is enormous. The OECD estimates global infrastructure requirements to 2030 to be in the order of US$50 trillion. Much of this demand is in Asia, also the primary source of the savings that are currently sloshing around the global economy. There are almost a trillion dollars of infrastructural investments there that have been given the once-over by the Asian Development Bank. China may be facing a temporary problem of over-heating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments to rehabilitate or extend its economic infrastructure. More generally, global investment is a historically-low share of global output.
Meanwhile the G20 is wrongly focusing on a development agenda that largely misses this main point. As Elek explains, G20 leaders have appointed a High-Level Panel on Infrastructure to advise them on improving the institutional and enabling environment for investment in infrastructure, and ideas for financing infrastructure projects with significant but delayed returns to investors. But the Panel’s brief currently focuses only on much needed infrastructure in the world’s most difficult investment environments, especially sub-Saharan Africa. This is a diversion. The issues of institutional capacity, innovative financing and risk management need attention everywhere. G20 leaders at their next summit need to grab the Panel’s terms of reference and widen them, challenging their officials, financial sector managers, and international financial institutions to use their expertise to find ways to intermediate more savings into commercially-viable investment in infrastructure where it is needed, as Elek argues.
The Asian six in the G20 can take a lead here. Last week, Japanese METI minister Yukio Edano announced on a visit to Jakarta that Japan would support theconstruction of Jakarta’s ramshackle port capacity, including its airport and help to build a long overdue urban subway system. This is the kind of infrastructure investment that will both boost Indonesian productivity and lift Japan’s and other industrial countries’ growth prospects.
Europe has too long dominated the global agenda and it is clinging on to it. It’s time for G20 leaders to look beyond the European funk and focus on the opportunity for sustaining global growth through a development agenda beyond Europe’s messy backyard.
Peter Drysdale