The G20’S Future: Conflict, Irrelevance Or Course Correction?

July 3,  2017

by Cecilia Nahón* and Sandra Polaski **

As this year’s G20 summit in Hamburg approaches (July 7-8), nerves are on edge, for good reason. The leaders of the largest advanced and emerging economies will meet in a profoundly different global scenario. Brexit, the failed Italian referendum and the US, French and British elections expressed a massive public rejection of political establishments. Widespread discontent among working and middle classes with stagnant incomes and anxiety about their future was revealed on both sides of the North Atlantic. The G20 embodies an international order based on market principles and open economies that was put into question by these electoral shockwaves.

In this new context, several years of repetitive leaders’ communiqués that pledged whole-hearted commitment to structural reforms and avoiding trade protectionism now seem like yesterday’s politics. The tensions have already been evident in ministerial meetings to prepare the G20 Summit, and were on display in the G7 Summit. The recent announcement that the US will unilaterally abandon the Paris climate accord, previously endorsed by the G20, suggests that, on the current course, conflict will only increase.

While the new US president is the overt agent of disruption, the fundamental cause of the new tension goes deeper. Globalization and financialization have always had winners and losers, but the cumulative share of losers has mounted, in some cases dramatically. The flip side has been the accelerating concentration of income and wealth on the top ten percent and particularly the top one percent. Trends in inequality are not uniformly spread across the G20. As income distribution has worsened in the advanced G20 economies, some emerging economies, including China, India, Argentina, Turkey, Russia, South Africa, Brazil and Indonesia, have made progress in raising workers’ wages and expanding the middle class in recent decades. But those countries still have very unequal income and wealth distributions. In nearly all G20 countries the share of national income going to working people—the labor share—has declined, and the gap between worker’s productivity and wages has widened. People all over the world have good reasons to believe that the global economy is working for the benefit of the few rather than the many.

The International Labor Organization (ILO) and others have documented these trends in reports to the G20 over the last five years, providing evidence and policy options. Some G20 Leaders pushed for stronger action by the group to tackle these harsh realities, notably Argentina and Brazil under their former leaders, occasionally joined by Turkey, China, South Africa, Russia, France and the US. But their calls were ignored by other members of the G20 and proposals for decisive action to raise incomes and reduce inequality were rejected in favor of the orthodoxy of unrestricted open markets (regardless of adverse impacts), structural reforms (including labor market deregulation) and fiscal consolidation (including reduced spending on health care, housing and education).

Against this backdrop, as the G20 host country, Germany has proposed an agenda to address the “fears and challenges associated with globalization”, acknowledging that a multilateral response to the current backlash is warranted. If the G20 is serious about this, the purely cosmetic and rhetoric responses of the past won’t do. What would an affirmative G20 response entail? Here are three concrete suggestions:

On trade, the G20 had repeated the mantra of vowing to “resist all forms of protectionism” since 2008 until the finance ministers meeting last March when the US resisted that language. Instead, the final Communiqué said: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.”

On its surface, this is a sound alternative (reportedly offered by Canada), a logical call to make trade serve economic and social goals. And yet the statement was treated by many as a troubling retreat from the earlier language — language that in effect made trade a goal in itself. Of course, trade is not an end in itself. It is a means to greater economic efficiency, which in turn is a way to increase living standards. It took a political cataclysm in the US to move finance ministers a rhetorical step toward policies that respond to the current realities and public demands in most G20 countries. The leaders should build on the new language and articulate commitments to domestic policies that can make growth more inclusive and reduce inequality.

On structural reforms, the current path of deregulating labor markets and the tepid approach to financial market regulation needs to be corrected. Labor markets have not provided much protection to workers, as evidenced by their falling share of national income in most of the G20 and the capture of gains from productivity and technology by owners of capital. Instead, sensible regulations that restore workers’ rights to organize and bargain, that guarantee adequate minimum wages and that reinforce social insurance systems are overdue and should be the policy goal endorsed by the G20, to be adapted to each national situation. Financial market reform was not completed after the 2007 crisis and should be pressed forward, not rolled back.

Finally, on fiscal and monetary policy, the G20 had its finest moments in 2008 when multilateral agreement to stimulate large economies in a coordinated fashion helped to contain the financial crisis. However, the decision by the G20 in 2010-11 to reverse course and call for fiscal consolidation (austerity) rather than continued support for recovery was a historical, pro-cyclical mistake that contributed to the prolonged recession in the EU and weak recovery elsewhere. This needs to be admitted and corrected.

The G20 should lead a new approach to international economic cooperation.  While the recent referenda and elections, and particularly the confrontational stance of the Trump Administration, may be the immediate trigger, it is the fundamental problems that demand a course correction.  Widespread frustration with the current economic status quo and public perception that policies are rigged to favor corporate and elite interests have now become electoral tinder.  They can be addressed through progressive policies that favor the large majority through inclusive, sustainable growth or continue to provide fodder for spurious, chauvinistic responses that make international cooperation a whipping post.  If the G20 clings to the status quo it is doomed to become mired in conflict—or worse—be consigned to irrelevance.  This year’s summit faces stark choices.

*Cecilia Nahón is Executive Director of the Model G20 Initiative at American University School of International Service. She was the Sherpa of Argentina to the G20 from 2012-2015 and served as Ambassador of Argentina to the U.S. from 2013-2015. Earlier she was the Argentine Secretary of International Economic Relations and Undersecretary of Investment Development of the Ministry of Foreign Affairs and Worship.

**Sandra Polaski is an expert on labour and social policy issues at national and global levels. She was the Deputy Director-General for Policy of the International Labour Organization (ILO) from 2012-2016 and served as ILO Sherpa to the G20. Earlier she was the U.S. Deputy Undersecretary of Labour in charge of international labour affairs.


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