Originally Published 2014-09-30 00:00:00 Published on Sep 30, 2014
Several challenges and threats may hinder achieving two percent growth for the world economy. For instance, the plans of IMF and Central Bank to raise the interest rate are likely to result in wiping out efforts to achieve the target. Also the investment is witnessing lower volatility.
Cairns G-20 meeting: Can it help revive the global economy?
The global economy is facing uneven growth with weakening demand and supply constraints and job growth remaining way below the required pace. Adding to the misery are the financial markets and the geopolitical tensions which have resulted in the downside risks. Since the February G-20 meeting held in Sydney, the global economy has faltered with Europe showing signs of slipping into deflation, Japan showing numbness in its recovery and China's growth target of 7.5% unlikely to be met. Last week's forecast by Organisation for Economic Cooperation and Development (OECD) for the biggest developed economies has trimmed down their growth prospects. While U.S is likely to grow at 2.1% instead of 2.6%, Euro- area is expected to grow at 0.8% down from 1.2% forecast in May this year. Also the G-20 growth prospects slipped to 3.25 per cent in the second quarter as compared to the 3.4% in the first quarter. Despite the situation not being too upbeat globally, the recently held G-20 meeting in Cairns has infused fresh hope emphasising on a more balanced and sustainable growth in different sectors to safeguard economies from risks. The recent gathering of the global financial chiefs in Cairns, Australia has discussed measures and G20's commitment to a 1.8% world GDP growth target (presently 1.6%) which would provide a boost to the world economy by US $ 2 trillion by 2018. Amidst the challenges, the meeting welcomed stronger economic conditions in the economies by putting in place the right policies to facilitate the growth in all G20 economies. Although around 900 initiatives have been put forward by members, Australian Treasure, Joe Hockey in the meeting suggested incorporating larger structural reforms to achieve the target, while leveraging fiscal and monetary policy where appropriate. Measures to address the risks and figuring out the appropriate policies to enhance growth was the focus of the recent meetings held in Sydney and in the lead up to the Brisbane Summit, there will be continuous identification of a series of additional measures to meet the growth ambition. These measures will lead to rebalancing global demand and its implementation will foster private sector growth. While Canada's finance minister Joe Oliver urged Europe to bolster demand by emphasising more on fiscal measures, for G-20 economies, financial chiefs advised changes in the composition and quality of government expenditure and tax to enhance the contribution of fiscal strategies to growth. For this a global Common Reporting Standard for automatic exchange of tax information on a reciprocal basis was finalised which will add to the modernisation of the global tax rules and close gaps that have emerged in recent years. Around 3000, bilateral tax agreements would be amended and will be technically feasible, it remains to be seen whether these can be achieved within reasonable time period. The meeting also emphasised on improving the investment climate by lifting infrastructure projects to help match the projects with potential investors. This will result in encouraging private sector participation. Moreover, the initiative by World Bank group to develop the global infrastructure facility will provide a platform for collaboration between development banks and the private sector to ensure that the emerging economies direct their efforts to lift quality infrastructure investments. To foster a stronger and more resilient financial system, plans were laid down to increase the consistency in bank's application of the strengthened Basel III rules on capital. For this efforts have been directed to set up stronger capital requirement for global banks and terms and conditions have been defined to protect the taxpayers in bank failure scenario. However, the forthcoming Brisbane Summit will provide a platform to deliver the remaining core elements of its shadow banking framework and updation on the roadmap which was agreed in 2013 to address the risk associated with it. Besides the above stated measures something which is been missing among the G-20 nations is the communication between the countries as they have failed to share their developmental agendas with the citizens. Also the countries governments need to enhance the role of public in tackling the internal issues of unemployment. The sooner it happens, the more likely the results will be seen. However, several challenges and threats may hinder achieving 2% growth for the world economy. For instance International Monetary Fund and Central Bank plans to raise the interest rate are likely to result in wiping out plans to achieve the target. Also the investment is witnessing lower volatility. As quoted by Canada's finance minister Joe Oliver, that " what we are looking at here is an apparent search for return in a low- yield environment and the concern is that we are seeing more investing in higher risk ventures". As a result of this a sudden reappraisal will lead to shooting up in volatility which will cause huge losses which will be troublesome. Moreover, the risks from shadow banking are making the investors complacent about financial markets. Adding onto further worrisome situation is the geopolitical risks and faltering demand from the world's bigger economies which has impacted the major financial markets of Asia, Europe and US, even though monetary stimulus has been embarked by FED, Japanese Bank and European Central Bank. Although G-20 is well on its way towards meeting its growth target, additional growth will require additional policy measures. Surely, Cairns meeting had materiality and solidity attached to it. However, Words are yet to be turned into action. How far G20 can change the fortune of the global economy and how far the group will manage to take all required actions will be mirrored in the forthcoming Brisbane Summit in November. Till then, the World Watches. (The writers are with Observer Research Foundation, Delhi)
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Kangkanika Neog

Kangkanika Neog

Kangkanika Neog Programme Associate Council on Energy Environment and Water (CEEW)

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