Can G20 bridge gulf between geopolitics and macroeconomics for responding to a crisis?

Planned and co-ordinated policy responses of the G20 helped stabilise the world economy, restore functioning of financial markets, and avert a recession in 2009. (Image source: Reuters)

As a responder to global crises, the G20 attempted to live up to its image through its final communication from its leadership summit at Bali. Most members strongly condemned the war in Ukraine, admitted the necessity of “tangible, precise, swift and necessary actions, using all available policy tools”, to tackle common challenges, including through international macro policy co-operation; it stressed undertaking of co-ordinated actions to advance the agenda of strong, inclusive, and resilient global recovery, and sustainable development.

However, it also specified the G20 is not a forum for security issues that “can have significant consequences for the global economy”. This indicates the binding constraint for collaborative multilateral actions is geopolitics, even as other parts of its communiqué are not an insignificant achievement given the divisions caused by the war in Ukraine and US-China tensions. Ahead of the meeting, even universal attendance and friendliness had seemed difficult, leave aside global economic co-operation for which the G20 is the premier forum.

Most pressing of the global challenges are persistent and high inflation, a weakening global recovery, and the impact of Russia-Ukraine war upon supply disruptions, food insecurity for the most vulnerable groups, and energy concerns. Addressing these require bridging the gulf between geopolitics and macroeconomics, which tempers optimism about the G20’s ability to resolve the common problems faced by a world economy in crisis.

It is a far cry from its role in the global financial crisis. Planned and co-ordinated policy responses of the G20 helped stabilise the world economy, restore functioning of financial markets, and avert a recession in 2009. The body was further able to agree on restraining protectionist responses by members, and restore global trade growth by 2010. Those crisis-time responses demonstrate how the G20 plays a crucial role in maintaining and improving global trade and investment linkages, important for recovery, and price stability.

Replicating that performance is hugely doubtful in 2022. Joint action by the G20 seems difficult with co-operation strained from the war in Ukraine. The best way to mend the world economy, according to US Treasury Secretary Janet Yellen, is to stop the war. True. But it’s not apparent the stoppage of the war in Ukraine will stem some fundamental alterations triggered as a result. For example, structural changes in key energy markets, such as Europe, which increases uncertainty. Or an acceleration in global economic fragmentation due to attempts at ‘reshoring’ and ‘friendshoring’ of production and trade, and reshaping of global value chains. Paying greater heed to security and shared values could compromise efficiency, increase production costs, and undermine competitiveness precisely when the opposite is required to tackle the crisis at hand.

A strong, sustainable, balanced, and inclusive recovery requires price stability and joint encouragement from sources other than macroeconomic policies that are committed to checking inflation and limited by high public debts. Trade is one such, and a powerful channel to tackle supply-side inflation, and provide impetus.

Last year’s recovery from the pandemic for example, was enormously supported by a strong rebound in goods’ trade volumes, which rose 9.7 percent over 2020 according to the World Trade Organization. Countries refrained from imposing fresh restraints and restrictions to unclog bottlenecks and supplies. The strength persisted into the first half of this year but manifold shocks weighed down momentum thereafter, slowing trade volume growth to an expected 3.5 percent, followed by a bare 1 percent growth in 2023.

For the immediate, global trade needs protection and strengthening for moderating prices and to navigate the downturn in the world economy. Next year, 2023, is widely predicted to be worse. The IMF projects G20’s GDP growth slowing to 2.5 percent from 3 percent this year, mainly due to a sharp, 120-bps plunge in advanced economies’ growth to 0.9 percent.

Without multilateral economic co-operation, especially in relation to trade sanctions, disruptions to transportation, among others, the G20 cannot even ensure food security for the vulnerable poor in a context of increased poverty and hunger from the pandemic. The IMF further cautions that permanent output losses are also likely in many economies due to the pandemic, particularly emerging market ones. This points to the scale and persistence of global challenge at hand over the medium-term.

If that is defined by weakening of the close trade and investment ties cultivated in the past decades, a simultaneous reversal of the positive gains from globalisation would make it more testing. All the more reason for determined multilateral actions and economic co-operation by the G20. It is wishful without reduction in geopolitical tensions.

Renu Kohli is a New Delhi-based macroeconomist. Views are personal, and do not represent the stand of this publication.