Friday, November 28, 2014

The Gospel of Growth

CANBERRA/SEOULAlmost four years after the start of the global financial crisis, the world economy remains fragile and unemployment is unacceptably high. There are roughly 200 million unemployed people worldwide, including nearly 75 million young people. Growth is weakening in many countries, risks are mounting, and uncertainty has intensified, owing especially to events in Europe. Only swift and sustained recovery can stem the rise in the human cost of economic stagnation.

When the G-20 meets in Los Cabos, Mexico, on June 18-19, its challenge will be to shift public perceptions from pessimism and concern about the future to an optimistic mindset of growth and stability. We need resolute action to address the uncertainty confronting the global economy and to chart a path toward self-sustaining recovery and job creation.

We see two components to such a strategy. First, we need a clear message from Europe – the immediate source of global economic concern – that it is taking decisive steps to stabilize and strengthen its banks, and that it is focused on restoring growth while credibly committing itself to fiscal consolidation. A crucial element of restoring confidence in Europe is agreement on a “roadmap” for the eurozone to underpin its monetary union with a fiscal union and a banking union, including pan-European supervision and deposit insurance.

It is essential that Europe move quickly to ensure that its banks are adequately capitalized and backstopped. In this regard, we welcome the recent decision by Spain to seek financial assistance from the European Union to recapitalize its banks as required. Decisive steps to safeguard the banking sector’s health are necessary not only to reduce some of the risks that are preoccupying markets, but also because healthy financial institutions are vital for economic growth.

Europe must have credible fiscal-consolidation plans to restore debt sustainability, but it is also essential that it has a growth strategy that includes policies aimed at boosting investment, freeing up product and labor markets, deregulating business, promoting competition, and building skills. These reforms, including deeper institutional integration, will be politically difficult and their benefits will take time to become fully apparent; but setting a clear pathway will underpin public confidence in Europe’s long-term growth and cooperation.

We do not underestimate the magnitude of the reforms that Europe has achieved in recent years. Since the G-20’s meeting at Cannes last November, for example, Europe has increased its financial firewalls by €200 billion ($252 billion), restructured Greek debt, taken steps towards strengthening its banks and banking regulations, established rules for fiscal discipline, and implemented a range of labor- and product-market reforms.

But the magnitude of the challenges confronting Europe implies an urgent need for far more decisive reforms. We are confident that Europe will act together to meet these challenges, and we will continue to support such efforts, because European stability and growth matter for us all.

Second, we need a clear message from the G-20 that all of its members are delivering policies for strong, sustainable, and balanced growth. To be meaningful, the message must be backed up with action: G-20 members must demonstrate that their policies are clearly directed toward restoring economic growth and creating jobs, and that they will be accountable for meeting their commitments in full. And world leaders must be unambiguous about resisting protectionism and opening trade and investment.

In particular, we believe that an international agreement on trade facilitation is the right step, as it would reduce export and import costs and restore momentum to global trade liberalization. The G-20 must demonstrate in Los Cabos that reform of the International Monetary Fund is continuing. That means that countries must deliver on their commitment to increase IMF resources by more than $430 billion, and that the Fund’s quota and governance structure must reflect the ongoing global shifts in economic influence.

Economic growth and new jobs are crucial to improving people’s livelihoods now and to ensuring the prosperity of future generations. The reforms needed to secure these objectives are not easy, and change will not happen overnight. But the world expects the G-20 to deliver.

Read more from our "Free Trade in Troubled Times" Focal Point.

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    1. CommentedDavid Joseph Deutch

      Global trade liberalisation should not be seen as an end in itself. Economies are not one stop fixes and, as such, we should be wary of providing shared diagnoses for different countries with differing economies.

      Post financial crisis, we should be moving away from liberalisation as the only prerequisite for a prosperous economy. Therefore, countries should only enter into these sorts of international agreements if they are malleable to differing social needs.

    2. CommentedGary Marshall

      Here is a solution to the Greek problem and poor growth in general. If anyone can find the flaw, I shall be more than happy to give him or her $50,000. I am just tired of doing this.


      The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

      Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by simple arithmetic.

      The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

      Cost of public services is $10 million.

      Scenario 1: The government taxes $10 million.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      No community government debt, no community government IOU.

      Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      Community government debt: $10 million;
      Community government bond: $10 million.

      At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

      The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.

      So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any more than taxation would have. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

      Whatever financial benefit taxation possesses is nullified by the fact that borrowing instead of taxation places no greater financial burden on the community.

      However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public debt.

      Gary Marshall

    3. CommentedTristan de Inés

      Maybe policies and discussions about the future of the world should begin to accomodate the question of how to achieve social stability and high living standards -without- perpetual growth as sustenance. All the discussions about economy seem to narrow down into questions of how to achieve ever more "growth" like it was some universal antidote to solving all our economic problems. However in a world of limited resources perpetual growth is impossible, and unless we start investing heavily into unconventional methods of resource procurement, the signs of the supply bottlenecks that are already beginning to show, will accumulate.

      Another factor to consider is how much more growth our planet is able to sustain, without inflicting irreparable and irreversible damage. A threshold that unfortunately, we seem to have crossed already some time ago.

      Finally, the last thing to keep in mind is that growth is worse than useless if it completely bypasses the populace to only benefit a tiny percentage of wealthy elites. A trend that has been accelerated by globalization and is reflected in the sad statistics of the ever widening income gaps across the world. This kind of growth that promotes inequality, poverty, corruption, exploitation of human lives and natural resources, leads down a self destructive path of social instability.
      Artificial indicators like the GNP and growth rates are worthless as a representation of a society's well-being if the distribution of the generated value is warped and disproportional.
      It appalls me that the article calls for more deregulation and liberalization when it was precisely the turbo capitalism with its lack of regulations and checks that lead to the financial crisis in the first place.

      The fixation on growth is becoming a tiresome, uninspired, and increasingly aloof and obsolete way of approaching the social and economic challenges of the 21st century. And the economic problems we are experiencing right now were not caused by excessive regulations, but by the concentration of wealth and power on irresponsible and corrupt actors.