G20: Vows to act but few specifics

April 15, 2009

g20— Kenichi Kawasaki is managing director and senior analyst at Nomura Securities’ Financial and Economic Research Center. The views expressed are his own —

The G20 leaders failed to come up with any concrete policy steps to pull the global economy out of recession at the London summit. The leaders vowed to restore growth and jobs, but lacked specifics about fiscal measures by each country and there were no binding promises.

There were expectations that the summit would tackle the issue of rising protectionism, but the summit is not an appropriate place to discuss international trade and investment. We saw a measure of results in expanding assistance to emerging economies, but it made the summit look as if it were a mere international conference on aid to emerging economies.

Since the collapse of Lehman Brothers last September, G20 countries have been trying to stabilize the financial markets with central banks taking exceptional action and cutting interest rates aggressively. The governments’ focus now appears to have shifted to restoring growth and protecting jobs from reacting to contingencies arising from the financial crisis.

The G20 leaders vowed fiscal stimulus totalling $5 trillion and to raise output by 4 percent by the end of next year. However, it failed to break down how much spending each country would bear. There is no indication that there are any binding targets. Since the financial crisis erupted, it has become increasingly difficult to coordinate policy given differences in the economic, fiscal and financial situations of the member countries.

Japan fleshed out its own $150 billion economic stimulus package on April 10, but the impact on boosting gross domestic product remains to be seen. The Japanese government had previously dished out economic packages with spending totalling 12 trillion yen ($120 billion). Government spending in the last fiscal year ended in March, however, only increased by 2.6 trillion yen (equivalent to about 0.5 percent of GDP). The “real water” spending will likely be limited even with the new stimulus package.

On the concern that world trade is falling for the first time in 25 years, the G20 leaders promised to extend the pledge made last year to “refrain from raising new barriers to investment or to trade” by one year to the end of 2010. Certainly, protectionist measures in any country will not protect jobs, but rather hinder economic growth. Moreover, economic model analysis on the economic effects of liberalizing trade and investment shows that “free-rider” gains from other countries’ free-trade policy would be limited. The analysis also indicates that it is important to liberalize the domestic market to maximize the benefits of global trade and investment.

On the issue of building a new order for the global economy, there are concerns about leadership struggles between industrialized economies and emerging economies. Although emerging economies may be gaining influence in the field of trade, it is unlikely that their competence in financial matters will match that of industrialised economies anytime soon.

We saw some advancement in extending assistance to emerging economies at the G20 summit. Japan pledged an additional $22 billion to assist with trade and to expand official development assistance (ODA) to other Asian countries to about $20 billion. But the biggest contribution Japan can make for the sake of the global economy may simply be pulling itself out of recession.

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