A V Rajwade: An 'inclusive' world economy

In the communique issued after the G20 Summit meeting in China earlier this month, leaders of the 20 largest economies in the world committed themselves to "an innovative, invigorated, interconnected and inclusive world economy". The communique emphasised the need to ensure that "to be strong, sustainable and balanced", growth "must also be inclusive. We are committed to ensuring the benefits of our growth reach all people and maximise the growth potential of developing and low-income countries". On a related issue, the G20 leaders will also "continue to improve the analysis and monitoring of capital flows and management of risks stemming from excessive capital flow volatility". As for exchange rates they "will refrain from competitive devaluation and we will not target our exchange rates for competitive purposes". After reading the communique, one thought that occurred to me was whether the various commitments are at all compatible with each other.

Take, for example, the question of liberal capital flows, which the G20 will "monitor" - in other words, look at them from the sidelines. Is this enough? Economists at the International Monetary Fund (IMF) have come to the conclusion that liberal capital flows (and fiscal austerity) increase income inequalities ("Time to upend convention", August 18); they are clearly incompatible with "inclusive growth" aimed at reducing inequalities. As for growth, Raghuram Rajan, when he was the chief economist of the IMF, showed that countries that grew rapidly relied less, not more, on foreign capital. If the G20 is serious about strong growth and reducing income inequalities, should it not be looking at controlling, rather than merely monitoring, cross-border capital flows, particularly of finance capital? As it is, the last few decades of the neoliberal ideology has led to a significant increase in inequality. Oxfam, the well-known UK charity, recently estimated that one per cent of the population owns half the wealth globally; in the US, income inequality as measured by the Gini Index, is worse than it has been since the 1930s - and the average income of 99 per cent of Americans is less than it was in 1998.

Consider also the question of exchange rates which, in many ways, is linked to capital flows: In an era of market-determined exchange rates, too often, it is capital flows, which move exchange rates significantly away from economic fundamentals. Surely, those countries whose exchange rates are overvalued, need to depreciate their currencies to lead towards a more balanced external account: to my mind, the balance needs to be achieved both on "flow" and "stock" accounts. To elaborate, a balance on the flow account would mean a reasonable equality between external income and expenditure; and on stock account it would involve a reasonable balance between external assets and liabilities. This would mean that the two largest democracies, India and the US, would need to depreciate their currencies in order to improve their competitive strength in the global economy. But the G20 is against targeting exchange rates for competitive purposes. The IMF, in its country review of the US, recently cautioned against the overvaluation of the currency. As for the US, there is a precedent for competitive devaluation of the dollar in the Plaza Agreement of 1985, which called for appreciation of the major currencies against the US dollar: this was of course nothing but a managed depreciation of the dollar to improve its global competitiveness.

The more direct effect of liberal capital flows and market-determined exchange rates, long part of the IMF's ideology, has seen a sharp slowdown in global trade in goods and services in recent years. For several decades, it was growth in cross-border trade that pulled up global economic growth; in recent years, trade as a proportion of global output has been stagnant and the World Trade Organisation does not see much possibility of an improvement in the current year, even as global economic growth itself has slowed. This clearly has major negative implications for the growth of emerging economies, which have benefited significantly from the increase in trade in goods and services.

The other side is that in at least some parts of the world economy, the US and the UK for example, there is a backlash against globalisation. The result of the Brexit referendum and the possibility of Donald Trump winning the US presidential election are indicators of the direction in which the wind is blowing: to be sure, in both these cases it is/was immigration which has had greater psychological impact.

The author is chairman, A V Rajwade & Co Pvt Ltd;
avrajwade@gmail.com