The G20 Hangzhou Summit may be a milestone for the world economy and the G20 agenda. To understand the significance of the G20, think in terms of four: four imbalances, four highlights, and four future steps.
The G20 suffers from a number of imbalances at present. The first one is the imbalance of investment in finance versus the “real” economy which is getting worse after the 2008 crisis. Investment in the financial sector is usually overflowing, but in real-world sectors like industrialization and infrastructure building, current investment is nowhere near enough There is an urgent need to guide investment from the pure financial sectors to the real ones. After all, the real economy is the ultimate driving force of economic growth.
Secondly, there is a great imbalance among capital, labor, and land. With the development of economic globalization, the flow of capital accelerates on a global scale; however, land can’t follow capital and move from one country to another (except for rare cases). This causes an imbalance in resources between countries. Labor, meanwhile, tends to move from countries that lack job opportunities to those that has better conditions, especially good social welfare. This generates labor issues and the migration we see today.
The third imbalance is the divergence in monetary and fiscal policies between countries. Since each country is facing different issues, it is hard to formulate correct policies to solve these individual problems and also address global weaknesses. The monetary and fiscal policies in response to the financial crisis so far have raised serious doubts, because they haven’t been able to provide strong and sustainable power to the world economy.
The last imbalance is between innovation and industry. In the 40 years after the third industrial revolution starting in 1970s, industry has grown very fast and nearly consumed the energy that the most recent industrial revolution can provide. The world economy has lost steam; that’s why it is so hard to recover. The problems call for fundamental changes.
To answer these imbalances, the Hangzhou G20 Summit will provide four highlights. The first one is structural reform to boost the mid-to-long term growth potential of the global economy. Monetary and fiscal stimulus policies have been repeatedly used by major Western countries since 2008, bringing to the world new money supplies but without resolving high unemployment, high debt, low growth, and other issues. It is time to speed up structural reform in industrialization and technological innovation. It it the medicine for the economical difficulties for China and the world.
The second highlight is an emphasis on innovation, which will be one of the key features distinguishing the Hangzhou Summit. In fact, one of the reason that Hangzhou was chosen as the site of China’s G20 is because it also houses the headquarters of Alibaba and is very famous for innovation. Currently, mass entrepreneurship and innovation is going well in China, and many new industries are emerging, like Internet Plus and intelligent manufacturing, bringing energy to the Chinese market. At the summit, China’s innovation experiences will be spread to the world to create a new source of growth, which helps to speed up the transformation from the old growth momentum to a new one. The fourth technological revolution is highly expected, bringing with it a more more effective and sustainable global economy.
The third highlight will be global guidelines for investment and trade. The 3,200 bilateral treaties that regulate international investment at present have played a very small role in promoting investment globally. And over the past eight years, more than 1,600 restrictions on trade protectionism have been introduction, but very few of them have been implemented. During its G20 presidency, China has launched the first G20 Guiding Principles for Global Investment Policymaking in the first Trade Ministers Meeting, introducing cross-border investment issues to the G20 agenda. As the second-biggest economy in the world, China will brings it ideas and plans for the the process of restructuring international investment rules, having a profound impact on the pattern of the world economy and the adjustment of international economic relations.
The last highlight is inclusiveness. The share of emerging economies in the world economy has been growing rapidly, up to 57 percent in 2014. Despite the decline in growth since 2011, the growth rate of emerging economies is still nine times faster than the developed economies’ growth rate in 2007, before the crisis. However, the rules of the global economy are still unequal and unjust, and many poor countries are hard pressed to find a path to development. The Hangzhou Summit will introduce the development issue to the G20 agenda, and align the G20’s development focus with the UN 2030 Agenda for Sustainable Development. At the same time, the G20 will also respond to some global challenges like climate change and environmental protection. The purpose is to allow countries in different positions on the global value chain make use of their advantages and share developmental opportunities together.
Four Future Steps
The prospects beyond the Hangzhou Summit can be summarized into four points as well. Each of these steps are being taken by China this year, with the hope they will spark broader changes in the future.
First, there’s the question of the G20’s role and purpose. The G20 should focus on economic governance rather than other issues like geopolitics or security. Global economic governance needs the cooperation of all countries around the world, and to do that it must have earned a sense of legitimacy. However, the G20 only includes the biggest economies of the world; a lot of developing countries have not been invited into the G20, calling into question its representativeness. China, as president, has invited many developing countries to this year’s G20 thus giving them more of an opportunity to make their voices heard.
The second point is a focus on practicality. The G20 should follow the Chinese principles of being loyal to ideals while facing reality. The primary task of the G20 is implementing policy; the group should put more emphasis on operational development issues rather than theoretical ones. It is also necessary to have more connections between the development agenda and other areas.
In this regard, the G20 must become more functional. Although it is impossible to achieve all the agenda items put forward by the G20, achieving some is a worthy success. The current working groups should be more connected to form a lasting mechanism for implementing G20 agendas.
The last future step involves Africa, which currently isn’t represented in the G20. In this regard, the Hangzhou Summit will have a lot of continuity with last year’s Turkish presidency, which also stressed African issues. This focus will likely be inherited by the German presidency too.
Chen Xiaochen is Head of Dept. of International Studies, Chongyang Institute for Financial Studies, Renmin University of China (RDCY). Cheng Shujing is a RDCY intern.