The G20 is often described as a workshop discussion that is long on intent but short on actionable details. The intent is reflected in the opening lines of its joint statement: “As major economies, we collectively bear responsibilities and…our cooperation was necessary for global economic recovery…and [we must] lay the foundations for strong, sustainable, balanced and inclusive growth.
The G20 economies represent 80% of global GDP, 75% of international trade and 60% of the world’s population. It is therefore a leading forum for global economic cooperation. The theme of the G20 meeting in Bali under the chairmanship of Indonesia is “Recover Together, Recover Stronger”.
“Recover Together” is set against the backdrop of post-Covid economic crises and disruptions to global production value chains, aggravated by the war in Ukraine which has created severe food and energy insecurity. The G-20 communiqué is eloquent on this subject, but does not provide a detailed roadmap for economies to coordinate their macroeconomic policies to “recover together”.
Developed economies are largely inward-looking and tend to give little thought to the impact of their macroeconomic policies on the developing world. So where is the element of unity in the global stimulus mechanism?
Politics in the United States, the world’s largest economy, is domestically focused on controlling inflation at all costs by aggressively raising interest rates. It has imposed heavy costs on developing economies, whose currencies are rapidly losing value, making it increasingly expensive to import food and energy. The food and energy crisis is aggravated by the constant appreciation of the dollar against the currencies of developing countries, net importers of energy.
Some US analysts are calling for extraordinary measures – market interventions to stem the dollar’s rise beyond one point. This could bring some relief to developing economies which could recover faster, boosting global growth, it has been argued.
The rising US dollar and more expensive energy imports have even endangered India’s macroeconomic situation by dramatically increasing the current account deficit to over 3% of GDP. For the first time in decades, India will experience a significant negative balance of payments for 2022-23.
The most important point is that the US and strong EU economies have a very high per capita income base. So if they adjust their policy to allow low- and middle-income countries to recover quickly, then the G20 slogan “Recover Together, Recover Stronger” might hold firm.
The statement talks about allowing increased capital flows and trade, but the IMF forecasts a sharp deceleration in GDP growth and global trade in 2023. All macroeconomic strategies in the developed world, including the aggressively hawkish monetary stance of the United States, lead to a destination ― a sharp slowdown or mild recession. In such a situation, developing economies, which do not have an adequate social safety net, will be the hardest hit. The G20 Presidency arrives in India at the most difficult times.
In 2008, after the global financial crises, the G20 rebounded together because it was easier to get each country to ease its fiscal and monetary policies. But today, macroeconomic coordination is much more difficult as each economy is under pressure to tighten fiscal and monetary policies, which were eased a lot during the Covid crisis. The policy direction is the opposite of what we saw after the 2008 global financial crisis.
If most of the G20 economies tighten, a sharp global economic slowdown and much pain must ensue. Under India’s leadership, the G20 will need to discuss how this hard landing policy, particularly in the US and EU, can be calibrated to minimize harm to poor countries. It’s a bumpy road ahead.
This article first appeared on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been reposted here. To subscribe to The India Cable, click on here.