A retreat from globalization is a clear and present danger to the world economy. As Britain’s vote to leave the EU and the appeal of Donald Trump show, too many people are rebelling against the free flow of goods, capital and people because they have not benefited from them. The G20 can stop the rot at its summit in Hangzhou, China, in September by pledging vigorous efforts to share the fruits of globalization more equitably.
A ‘Hangzhou Charter’ for fair growth and responsible capitalism would give the G20 a much-needed sense of purpose. The code would be voluntary, but the OECD could be charged with reviewing compliance and applying peer pressure to those who fall short of agreed benchmarks in the following five areas.
The stagnation in real incomes that is a root cause of widespread malaise in the West coincides with a protracted decline in the labour share of national income going back to the 1970s. Gains in labour productivity have gone disproportionately to capital. Moreover, the shrinking labour share has been associated with sharply rising inequality – another grievance of those who feel left behind by globalization.
Governments should be free to choose from a menu of options to reverse the decline in labour income, including tax tweaks to encourage companies to share profits or increase pay instead of hoarding cash or buying back their equity; higher minimum wages; and strengthening the bargaining power of labour. Even conservative politicians are coming to recognize the need to make capitalism more equitable. New British Prime Minister Theresa May has called for an overhaul of corporate governance, including appointing workers to company boards and clamping down on excessive board room pay.
Public opinion in many countries has turned against free trade. The WTO has given up on the Doha Round. The G20 must prevent the sour mood from spawning outright protectionism. Governments should pledge not to erect trade barriers, beyond accepted remedies, or discriminate against foreign direct investment. They should also make an explicit promise not to depreciate their exchange rates deliberately to gain a competitive trade advantage. Initiatives to reduce excessive capacity in sensitive global sectors are especially important. They must not come too late. China’s drive in the steel sector is a case in point.
Current account imbalances
Reducing global economic imbalances remains a critical task. In a world of subdued demand, countries with big external surpluses are open to the charge that they are ‘stealing’ growth and jobs from others. The G20 should revive the idea of limiting countries’ current account imbalances to 4% of GDP. China should not feel threatened by numerical targets. On the contrary, China has impressively reduced its surplus from more than 10% in 2007 to 2.7% last year – the same as America’s. Germany, by contrast, ran a disturbingly large surplus in 2015 of 8.8% of GDP.
Governments should decide for themselves how best to adjust a big external deficit or surplus. The surest way to reduce a persistent surplus is by boosting domestic demand. The scope for monetary policy easing is almost exhausted, so governments should take advantage of record low borrowing costs and invest more. The priority should be to provide more public goods, notably education, to compensate the losers from globalization. Upgrading infrastructure might be an option for Germany; spending more on health, as recommended by the World Bank, might be more sensible for China.
Many people are turning against globalization because economies have still not fully recovered from the 2007-09 financial crisis. This makes it critical to prevent the recurrence of a crisis on the same scale. Regulators and lawmakers have taken welcome steps in that direction, but the job is incomplete. Banks in some countries still do not have sufficient capital; in others, shadow banking poses a potential risk to financial stability. Overall debt and bad loans are worryingly high in many economies. To reduce financial risks, the G20 must insist on the full, early implementation of capital requirements as and when they are finalised; press for the prompt resolution of problem loans; and strengthen the global financial safety net of precautionary IMF credit lines and central bank currency swaps.
Resentment of multinational companies that do not pay their fair share of tax is another factor undermining popular support for globalization. The G20 must continue to throw its weight behind efforts led by the OECD to clamp down on tax avoidance strategies.
The G20 can rescue itself from aimlessness by committing in Hangzhou to a voluntary plan of action to restore trust in global markets. The summit is an opportunity for China in particular to shoulder responsibility commensurate with its growing influence by helping to write new rules of the road for the global economy. China should not regard the steps outlined above as a ruse for reining it in. On the contrary − China’s GDP has risen more than six-fold since it joined the WTO in 2001. It is China that will suffer most of all if the rising tide of nativist populism leads to a retreat from globalization.
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