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G20 to Discuss Future of Economic Stimulus

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During the past year, the G8 and G20 nations met to coordinate their plans for preventing a global financial meltdown.  Many of those governments used stimulus packages that pumped $5 trillion (U.S.) worth of taxpayer money into the global economy.

The meeting this week in Pittsburgh will be different.  Part of the focus will be on strategies for withdrawing government support and allowing the private sector to reassert itself as the engine of world economic growth.  Experts warn this approach could lead to inflation if not done in a careful and coordinated fashion.

Stimulating the economy, debt

John Kirton, Director of the Toronto, Canada-based G20 Research Group, says stimulus packages have lifted economies and provided some employment, but they have also increased large deficits in the United States and many other industrialized countries.

"Government debt has ballooned," says Kirton, "imposing a burden on taxpayers that could be large if interest rates go back up.  At some point investors may say, 'I do not think I will buy government bonds any more to finance this debt because I am not sure that the biggest government [the US] will be in a position to pay the bonds back.'  So you may have the lenders of the world going on strike.

"It is also said all the world's savings are not large enough to [pay for] the deficits that the United States will produce over the next 10 years," he adds.   "For that reason alone the stimulus has to come off, sometime, but not now." 

Many countries participating in the Pittsburgh meeting support a continued stimulus plan.  Among them, China.

"China's key interest," explains Kirton, "is to "stay the course" on the stimulus so the global economy grows.  [That way], China can export its way to prosperity again and keep jobs for its peasants who are flowing into the cities at home.  China hopes not to face more riots and social instability, which could challenge the political regime."

Growth and influence

The economist says China and India have their own interest in the G20 meeting.  They want their voting power increased at the World Bank and International Monetary Fund (IMF) to reflect the growth and weight of their economies.

"We now have a world where China's vote has about the same weight in the IMF as Belgium," he says. "No one believes that this is a sound formula for having
the IMF work effectively and adequately reflecting the people who have the money - China - with over $2 trillion in exchange reserves."

Opposing the change, he says, are European powers who were allotted a large proportion of the vote in 1944, but have since been overtaken by emerging economies.

Challenges and imbalances

China is also suggesting an alternative to the dollar as the primary world monetary unit of trade.  The value of its investments in the United States drop when the dollar loses value.  China is suggesting a new multilateral reserve currency composed of a basket of currencies.  The United States is opposed to any replacement for the dollar. 

Kirton says the issue of trade imbalances between the United States and China will also likely come up for discussion.  He says with Americans saving more, it is not clear if U.S. consumers will return to buying imports in large enough numbers to jump start the global economy.

He says Chinese consumers could take over that role if they were encouraged to invest in Western stock markets rather than domestic ones tightly controlled by Beijing.  Kirton says if China can be persuaded to make its currency convertible so the exchange rate will float, Chinese consumers will have more money to purchase goods from abroad when the yuan rises in value.

"The Chinese will become relatively richer and spend more on the kinds of things Americans produce," says Kirton, "and the U.S. can export its way to prosperity by selling things to China, rather than the other way around."

Kirton says another way to curb imbalances involves letting China's state-owned enterprises to buy domestic U.S. assets, including companies, land and oil.  He says that way U.S. money in China will be recycled back to the United States.

But many U.S. policy makers remain wary of allowing government-backed foreign companies to invest in the United States, and  applicants are considered on a case-by-case basis. 

Developing opportunities

Representing African interests in Pittsburgh will be G20 member South Africa and representatives of the African Union.  But, Kirton says African policy makers will be watching.  Export-led growth in Africa depends on the recovery of industrialized countries, including the ability of the banks to make loans and consumers to buy African exports.

Policy makers are also looking for progress to be made in completing the Doha talks on liberalizing world trade. If successful, they could open Western markets to African goods and lower subsidies to U.S. and European farmers that make their produce cheaper for African countries to import than to grow.


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