DAVID MALPASS: G-20 SPEED DATING IN LOS CABOS
G-20 Speed Dating in Los Cabos
The obstacles to global growth are clear and need to be addressed in national capitals, not a resort town.
With global growth precariously slow, the two-day G-20 summit this week—the diplomatic equivalent of speed dating—did little but drain more money from deeply indebted nations. Greece’s Sunday election strongly endorsing the euro did more to promote global economic growth than anything that happened in Los Cabos.
Despite the announcement of the “Los Cabos Growth and Jobs Action Plan,” which mostly commits Europe’s struggling economies to still more government control, Group of 20 leaders have fundamental disagreements on practically every key economic topic—high taxes or low, larger or smaller central bank bond portfolios, more government or less.
The clearest decisions that came out of the summit promoted governments, not private sectors, pointing to even more deficit spending, an IMF expansion led by China and another expensive G-20 meeting next year in Russia. The outcome raises fundamental doubts about the G-20’s value in furthering free markets, strong private economies and global living standards.
The elephant in the living room at the summit was the U.S. year-end deadline imposing history’s largest tax increase. Despite numerous pleas from across the U.S. political spectrum to act now to delay the deadline at least until a new government is fully formed in 2013, the summit barely discussed the problem and made no concrete progress to avert it.
U.S. corporate tax policies are also bewildering to the world, especially during a global slowdown when U.S. dynamism is vital. The U.S. maintains the world’s highest—meaning most anti-jobs—corporate tax rate, with the added kicker of prohibitive taxation on the repatriation of foreign-based corporate earnings. The result is an exodus of U.S. capital, investment and jobs to friendlier tax jurisdictions abroad at the expense of critical stimulus in the U.S.
Also unaddressed at Los Cabos, Japan has been strangling its economy with deflation for two decades. As the world outlook clouds, Japanese savers hunker down in the yen, pushing it stronger despite decades of zero or negative investment returns. A strong and stable yen, meaning one that doesn’t keep going up in value, would go a long way toward restoring investment and growth in the world’s third-largest economy. The solution is for Japan to put an explicit ceiling on the yen’s value—borrowing yen to buy dollars when necessary—as Switzerland did in September 2011 with the franc.
China needs encouragement to cut interest rates faster, but instead it got another idle G-20 admonition about its currency policy. With growth slow in the developed world, the extent of China’s current downturn is a major uncertainty in the global outlook. Its GDP growth peaked at 11.9% in 2010 and has slowed to 8.1%, paralleling the U.S. slowdown to 2% in the year through March from the recent high of 3.5% year-over-year in 2010. But instead of working toward a more pro-growth monetary policy, China has used its time in Los Cabos to gain even more influence over the IMF.
The obstacles to global growth in 2012 are clear and need to be addressed in national capitals, not in summits. Europe’s policy initiatives are probably the most urgent. Europe’s growth focus should be maintaining the euro and setting up decisive mechanisms to reduce borrowing costs while governments sell assets, downsize and remove private-sector obstacles.
In this week’s G-20 communique, euro-area leaders are pledging to “take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks.” That’s a fine sentiment, but the leaders’ time would have been better spent in Europe hammering out the actual mechanisms.
In a welcome development, Italy’s cabinet met in Rome last week to seek growth and, according to Prime Minister Mario Monti, “reduce the dimension of the government.” It’s a sharp contrast with the U.S. approach. Italy’s cabinet also agreed to wind down agencies and reduce staff. In support, the G-20 could have urged each leader to meet with his or her advisers to downsize government as a way of encouraging private-sector investment and hiring.
However, Argentina’s large entourage had a splendid time at the summit even though Argentina is disrespecting property rights, one of the key underpinnings of global growth, most recently by seizing 51% of YPF, the Argentine oil company owned by Spain’s Repsol. As next year’s host, Russian President Vladimir Putin, already in his 12th year of building an oligopoly, will gain power and prestige at a particularly ill-timed juncture in geopolitics. Elsewhere, the perennial mega-summit calls for unlimited event budgets at a time when taxpayers can’t afford it—tens of millions of dollars are needed each year for travel to exotic locations, gold-plated security details, and to pay summit staffers.
Fast global growth is achievable, but the G-20 summits aren’t helping. Country-specific tasks—not further institutionalization of global financial governance—are the solution.
Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.
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