International Monetary Fund Managing Director Christine Lagarde backed Group of 20 chair Australia’s proposal to put a number on economic growth targets as the gathering shakes off its crisis-response group origins.
With the world outlook more favorable than at any time since the G-20 became the premier forum for economic affairs in 2008, Australian Treasurer Joe Hockey said yesterday policy makers must produce proposals “that can shift the dial on growth” and he wants quantifiable targets. The IMF predicts the global economy will expand 3.7 percent this year.
“It is a good idea” to set a higher growth target, Lagarde told Australian Broadcasting Corp.’s Q&A program yesterday. “The Australian presidency has asked us to actually look into the policies that could be decided by each of those G-20 governments in order to improve the growth situation. And if the right policies were decided in all these countries, there could be improved growth going forward.”
Setting economic targets has proved a contentious issue for the G-20 before. Officials previously clashed over whether to introduce fiscal goals and ended up diluting a 2010 commitment by some to halve budget deficits by 2013. They also split over a 2010 U.S. suggestion to try to limit current-account imbalances as a share of gross domestic product.
“I would like to see the G-20 lift its sights further and indicate in clear terms what it wants to achieve,” Hockey said yesterday, adding he wanted to “put a number” on it. He cited a better outlook in the U.S. and Japan, as well as the euro area resuming growth, for his optimism.
U.K. Chancellor of the Exchequer George Osborne and South Korean Finance Minister Hyun Oh Seok also backed Hockey’s plan for a growth target. The G-20’s focus on growth was timely and appropriate, Hyun said in an interview in Sydney.
“If we can come to an agreement on a target, if you like, or an aspiration, that will be a good thing,” Osborne said at an event in Sydney today. “I suspect that will be one of the big issues over the next couple of days.”
The IMF said this week that better coordination between central banks over their exit of unconventional monetary stimulus, combined with steps such as infrastructure investment, changes to labor markets, and policies to boost domestic demand in export countries could raise the world’s output by 0.5 percentage point a year. That would add $2.25 trillion to the size of the global economy by 2018, the fund said.
A German government official, speaking at a briefing in Berlin on condition of anonymity this week, said the country is very skeptical of proposals for setting GDP and investment targets.
“I don’t think it is realistic,” said Sacha Tihanyi, a currency strategist for Scotiabank in Hong Kong. “It is difficult enough for an individual country to do so, let alone a large group of them. There are much simpler things between countries that are already difficult to coordinate on, which tells us this is probably something that countries can only pay optimistic lip-service to, rather than being a legitimate target.”
While growth in developed markets are forecast to accelerate this year, political tensions from Kiev to Bangkok, a slowdown in China and the Federal Reserve’s tapering of its stimulus have resulted in falling stocks and currencies in emerging nations.
A draft of the G-20 communique that’s due to be released on Feb. 23 says the global economic recovery is gaining strength, while noting recent market volatility is a risk, according to a G-20 government official involved in discussions of the statement who asked not to be identified because deliberations weren’t public.
Monetary policy requires careful calibration and clear communication, the official cited the G-20 draft statement as saying. The final communique is likely to include global growth targets proposed by Australia, the official said.
Policy makers including India central bank Governor Raghuram Rajan have warned of a breakdown in global coordination due to the tapering. Fed officials in December announced a $10 billion reduction in monthly asset purchases, and repeated the move last month with a cut of the same size to $65 billion.
In a Feb. 18 letter to his G-20 colleagues, U.S. Treasury Secretary Jacob J. Lew called on countries with current-account surpluses to boost domestic demand and adhere to “market-based exchange rates that facilitate, rather than frustrate, the international adjustment process.”
While the Fed needs to be aware of international implications as it withdraws stimulus, it ultimately has to “operate in a manner that is consistent with its domestic mandate,” Hockey said yesterday at an Institute of International Finance conference in Sydney ahead of this weekend’s meeting of G-20 finance ministers and central bankers.
Lew argues that the countries being punished most by investors are those that haven’t taken care of their economic fundamentals, a view backed by Lagarde.
“What we are saying, we in the IMF, is mind the shop at home,” she said. “In other words, emerging market economies, you need to look after your various equilibriums, you need to look at your fiscal policies, you need to look at your monetary policy, you need to have the house in order to resist volatility that can be induced from the tapering by the U.S. Fed.”
Policy cooperation isn’t a new concept, especially since the global financial crisis. The turbulence that began in August 2007 forced policy makers to cut interest rates to record lows, adopt so-called quantitative-easing measures such as buying bonds and hand out more than $2 trillion in fiscal support.
A group of Asian nations pooled $240 billion of foreign-currency reserves to shield the region from global financial shocks, while European governments set up a permanent rescue fund for their cash-strapped economies.
Even as the G-20 officials promised to safeguard a global recovery that was encountering booms and busts, some nations turned to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength. The dependence on exports led to competitive currency devaluations as countries seek to give their companies an edge.
“We need to realize that everyone wants to grow in a sustainable way and if there is an aspiration for this, there will need to be an agreement about what is the policy framework that brings it about,” Jacob Frenkel, chairman of JPMorgan Chase International and a former governor of the Bank of Israel, said in Sydney. “It’s a much more concrete question: what needs to be done to bring about growth? Whether it’s a number or a direction. I think what we will see is a much greater focus on infrastructure, investment in education, on open markets, on the things that all our history shows have worked well.”