BERLIN — One thing you can count on in any G7/G8 summit is that the leaders will declare success.
The most recent summit, chaired by British Prime Minister David Cameron, was no exception, and indeed there were promises to reduce tax evasion and avoidance by multinational corporations and to force the identity of the true owners of hidden accounts in tax havens.
But on the major challenges facing the world, the G7/G8 leaders had little to say. In particular, they had little to offer on how to restore economic growth to past high levels. But if the G7/G8 is not capable of exercising leadership, where else can we look?
Unfortunately, the G20, which includes other key players such as China, India, Saudi Arabia, South Africa and Mexico, has shown, absent a grave crisis, an inability to act. As Ian Bremmer, founder of the Eurasia Group, argues, we live in a “G-Zero” world where agreement has proven to be extraordinarily different.
This a leadership issue.
“There are many countries now strong enough to block international action, but none is both willing and able to bring about lasting positive change,” Bremmer argues. The world’s failure to design a more lasting international financial regime, agree on a new global trading system, adopt a global action plan on climate change, or create an agenda for sustained global growth are examples.
Yet the risks to the global economy are real, as the West searches for ways to restore the higher growth rates of the past.
Whether new growth strategies can be found remains to be seen. But without stronger growth, the fiscal pressures will become worse, with the G7 world facing the threat of social cutbacks and broken promises to the public.
The decision by Prime Minister Stephen Harper’s government to raise the age of eligibility for the basic old age pension is just one example of what could lie ahead if growth cannot be enhanced. In Britain, the Labour Party has announced it would not spend more in its early years as government than the Cameron-Clegg coalition and has proposed a cap on welfare spending. This is the new fiscal reality.
The monetary expansion of recent years, as Western central banks flooded the world with cash and kept interest rates at as close to zero as they could go, may have averted greater economic distress. But monetary policy failed to put the world on a new growth path. What might have worked in the past didn’t work this time.
If the Bank for International Settlements is right, then central banks have effectively done all they can to foster stronger economic growth. In an unusually critical annual report, the BIS argues that monetary stimulus gave governments and financial institutions time to put their houses in order but that they failed to do this.
It is now up to governments to “return still-sluggish economies to strong and stable growth,” the BIS said.
The question is how. Given the weak fiscal position of most G7 countries, governments cannot pile up significantly more debt so policies have to be highly targeted. Infrastructure, innovation and skills development are three candidates for a growth policy since growth depends on expanded wealth creation and higher productivity.
In the meantime, there are dangers that actions by individual nations may make the situation worse.
Pascal Lamy, the director-general of the World Trade Organization, worries that the world has failed to respond to major structural problems exposed by the 2008 financial crisis and that unless we get a better handle on growth that we risk further protectionism, which would make matters worse.
“The risk of protectionism may be greater now than at any time since the start of the crisis, since other policies to restore growth have been tried and found wanting,” Lamy warned recently.
The key challenge is to identify new possibilities for growth. But some economists view the 20th century, with its industrialization and innovation, and the rise of a great middle class, as a special case — and that the new normal, at least for the West, is an era of slow growth and painful cuts in public programs.
Clearly, we live in transformative times. There is no returning to the past pathways for prosperity. If we are to restore hope and opportunity, new thinking is needed. But so far no leaders have emerged who have the ideas we need for a more sustainable future.
That is the challenge.
Who will answer it?
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.