With the global recovery continuing to be fragile, the finance ministers of 20 of the world’s largest economies have agreed to jump start growth to accelerate the process that many consider to be anemic. The G20 leaders have agreed to boost the global economy by injecting $2 trillion over a five-year period.The timing may or not be appropriate, because it occurs at the same time the world’s largest economy is beginning to change and tighter fiscal policies are being introduced in the United States.
The announcement was made at the end of the G20 meeting, held in Sydney, Australia. It is hoped that by generating an additional $2 trillion over five years, the GDP of the top 20 economies will increase economic output by more than two percent over what would be normally expected. It is also hoped that the economic boost will create millions of new jobs. The decision by the G20 leaders to boost the global economy is seen as unprecedented, and appears to be the first time that a concrete decision has been made.
The G20 countries include all of the industrialized nations, and a few emerging economies such as Saudi Arabia and the European Union. Together, these countries constitute more than 85 percent of the global economy. The next step calls for each member country to submit a detailed strategy at the next G20 summit, which will be held November 2014.
The communique issued after the meeting indicates that cross-border taxation was one of the issues discussed. It was agreed that stricter taxation may be necessary, as there has been a concrete shift to a global economy. The playing field should be made level, as many corporations have come under criticism for what has been observed to be profit shifting to avoid higher taxation. Some of the companies that have been brought into focus include Google, Amazon, Apple and Starbucks.
The G20 have developed a set of standards to allow the automatic sharing of bank account information among member countries. The standards are expected to be in place by the end of 2015.
The plan faces some challenges, as it calls for investment from the private sector, while emerging markets are expected to keep inflation in check. Some countries, such as Japan, the world’s third largest economy, continues to struggle with reforms, such as inducing more competition. The monetary policies introduced by the Bank of Japan has resulted in a devaluation of the currency, making exports much cheaper.
The timing of the strategy may also present some problems for emerging markets that may be entering the elections. The objective for many of the leaders facing reelection is to make the economy more productive by reducing debt and avoid overspending. The need to tread carefully is fairly obvious. As the implementation of the economic stimulus is curtailed with tighter monetary requirements in the United States, there is likely to be an effect that will be felt in other countries.
The communique issued after the G20 leaders agreed to boost the global economy was made with a warning that there may be an excess of volatility that may hamper growth as policies are adjusted. U.S. Treasury Secretary Jacob Lew maintains that the reforms, even though they may be unpopular and incite unrest, are necessary, and should not be delayed much longer.
By Dale Davidson