(MK Venu is Executive Editor of Amar Ujala publications group)India's Sherpa for the forthcoming G-20 meeting in Brisbane, Suresh Prabhu, has given a flavour of how India might approach key issues facing the global economy.
As Prime Minister Narendra Modi arrives in Brisbane for a summit level dialogue with the G-20 leaders, Suresh Prabhu, who will assist the PM, spoke about the need to look at the quality of growth that the world, and indeed India, has been generating over the past decade and more. Speaking at a conference organised by the IISS (International Institute of Strategic Studies) and ORF (Observer Research Foundation) in New Delhi, Prabhu emphatically argued that the question of jobless growth must be addressed on priority. In fact, even the IMF has recently spoken about the need to focus on the quality of growth. So this is a rare juncture where both the emerging economies and the OECD countries are agonizing about jobless growth.
Prabhu was probably echoing this larger sentiment when he said "there have probably been more losers than winners" during the growth boom the world saw after 2002. Prime Minister Narendra Modi has also repeatedly spoken about ushering in higher growth which creates more jobs in the rural/agriculture sectors. It is possible that Modi may make jobs-generating growth his main theme at the G-20.
Of course there would be many other sub themes like the G-20's collective approach to multilateral trade negotiations, climate change, global financial stability, better coordination of monetary and fiscal policies and so on. All these discussions too are aimed at optimizing quality employment growth around the world. It is odd that youth unemployment in some advanced European economies are running higher than many emerging economies. Eurozone remains the weakest link in world growth, followed by Japan which seems to be faltering in its implementation of Abenomics. The biggest worry, of course, is China where growth is seen to slow down to below 7%, the slowest since 1990. China has over 30% contribution to incremental world GDP. China's slowdown is largely the reason why India is getting oil and commodities so cheap. So while India may rejoice in the short term, it may have to worry if China's economy slips further.
India has felt that the G-20 leaders showed far more urgency in coordinating macro-economic policies in the immediate aftermath of the 2008 global crises. But as time passed and the immediate crisis receded, most developed economies, which could print currency, went back to adopting unconventional monetary policies without necessarily looking at the consequence these would have on emerging economies like India. Emerging economies like India initially felt good about the US printing more money to keep the global economy well oiled, but soon such excess liquidity hit the developing economies badly as global commodity prices, mainly oil, and other asset bubbles caused persistently high inflation, causing incomes to erode and growth to collapse. Of course, in India's case, internal factors like lack of structural reforms in the product and factor markets, inability to enhance agriculture production enough to quell food prices, compounded the problem of rising inflation. This created a political crisis for the UPA II regime.
The larger point is there was far less coordination of macroeconomic policies between the developed and developing world between 2010 and 2013. It is time to rectify this, especially because green shoots of recovery can be seen in the US as well as some emerging economies, notably India.
It may be recalled that in the immediate aftermath of the global financial meltdown there was a knee-jerk reaction among all nations, developed and developing, and everyone decided to go full throttle in expanding the fisc as well as money supply to keep the global economy chugging. Soon it was realized that mindless spending by the government would be counterproductive and act as a dampener on growth.
So the advanced economies decided at the G-20 meeting in Toronto in June 2010 that they would halve their fiscal deficit by 2013 and complete their internal debt stabilization by 2016. This was part of the Mutual Assessment Process (MAP) by nations initiated under the G-20 framework. Many Eurozone economies and America have pared their fiscal deficit substantially so far but it is still doubtful whether the internal debt stabilization with happen by 2016 as many affected Eurozone countries are slipping back into a crisis. This has prompted IMF to talk about a return to "mediocre growth" in major world economies.
While the US and Europe were paring their fiscal deficit after 2010, their monetary policy continued to expand. By one estimate the balance sheets of the US, EU, UK and Japan together expanded from about $3 trillion before the 2008 crisis to about $9 trillion now. This is too much additional money in the system. India feels such unconventional monetary policy can cause uncertainty in the emerging world whose financial markets are not wide or deep enough and can get volatile when such a massive expansion of money supply by the advanced economies start to withdraw. In fact, finance minister Arun Jaitley's maiden budget speech began with an emphatic mention of the "unconventional monetary policies" of the OECD economies and its possible impact on India. The US is gradually withdrawing its excess money in a process popularly described as "taper". The taper began last year and did cause an initial fright among the emerging market currencies. India's currency was also very volatile for much of 2013. This year the emerging market currencies are relatively stable as the fear of the US taper has got factored in substantially. On the other hand, Japan and EU have been trying to reflate their economy through additional money supply. There is fear that these measures will have limited impact.
So each region or sovereign nation is doing what is best suited to it to revive growth. But there is consensus among G-20 governments to control fiscal deficit across the board. The summit in Australia must further emphasise fiscal consolidation as one of the means to produce the additional 2 percentage point global output in the next five years. Although there is another school which argues that fiscal fundamentalism must not be taken too far, especially by emerging economies which are way below full employment level, in a classical sense. Of course, the government can always spend more in physical infrastructure such as roads, airport, ports etc. which are productivity enhancing.
However, one still doesn't know whether the deeper structural problems of the global economy are being addressed through the Mutual Assessment Process (MAP) undertaken at the G-20. We have seen Japan's lost decades (1990s and 2000s). We have also seen the US and Eurozone going through similar phases with real incomes stagnating at levels seen 10 to 15 years ago.
The only way out seems to be a further deepening of global trade in merchandise and services, with a greater emphasis on services. Typically, when nations go through a growth slump, they turn protectionist because of domestic political pressures. The collective response of the political class becomes less rational as it is during growth recessions that trade barriers must be removed further to increase global welfare gains. But humans end up doing the opposite because the short term imperative of protecting existing employment/income drives the medium to long term objective of growing employment/income. Now that there are signs of uptick in many economies of G-20, the Australian meeting could take a fresh look at deepening the global trade in goods and services. Here, the emphasis must be on services because the welfare gains in opening up the services sector (Mode 1 to Mode 4 under the WTO framework) can produce many times more global growth than further liberalization of merchandise trade.
In his book titled "World 3.0 --- Global Prosperity and How to Achieve It", former Harvard Professor Dr. Pankaj Ghemawat has argued that as per the mathematical model used by WTO, standard estimate of gains by liberalizing the remaining barriers in global merchandise trade is about 0.5% of GDP which works out to $300 billion. However, the potential gains by eliminating all cross border labour mobility restrictions is 100% of current global GDP.
Of course, this is partly a rhetorical argument as 100% removal of restrictions on labour movement can never happen in reality. However, Ghemawat poses this extreme case just to show that even moderate easing of cross border labour movement, and of liberalizing services, will yield massive gains. It would still be multiple times the gains made from fully opening up merchandise trade. Clearly G-20 must look at a new model for liberalising trade in services to produce substantially higher global growth and employment. This is indeed the lowest hanging fruit that ever existed.
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