Australia's approach to global economic governance

Most participants in this Interpreter debate on the G20 agree the forum needs more committed political leadership and a doubling of existing efforts. 

But what if strategically minded political leaders aren’t convinced the G20’s agenda enhances their domestic standing? If leaders are expected to take time out of their busy schedules for annual discussions that they do not find to be especially pressing or productive, might they not be tempted to de-prioritise the G20? 

For example, recent political events in G20 member states like the United Kingdom (Brexit), the United States (Trump), Turkey (an attempted coup), alongside impending elections in France and Germany, have all been tainted by growing concerns about migration. Migration may be a geopolitical issue that lies outside the G20’s traditional agenda, but many of those fortunate enough not to live in G20-land may find it curious that world leaders could attend such a high-powered meeting and leave substantive discussion about migration (forced or otherwise) off the formal agenda. 

Yet in 2015, during the Turkish G20 presidency, there was resistance to a push led by Turkey and the EU to ensure migration was recognised as a global problem in the Antalya Summit Communiqué. While there are sound arguments against the G20 poking its nose into policy quagmires like global migration management, the idea that G20 leaders could assemble in Turkey, presently home to two million refugees from Syria, and not acknowledge the fallout from unregulated cross-border flows of people, is politically naïve. And although migration did eventually make it in to the Communiqué, it was through a fairly general and open-ended clause.

To that end, I have co-authored a piece in the latest G20 Monitor that lays out some more specific options available to G20 leaders on migration issues at the upcoming leaders Summit in Hangzhou. In general, the piece argues that the G20’s engagement with migration matters should be discrete but clear, that the G20 Hangzhou Summit should seek to give the maximum possible momentum-boost to the UN Summit on Refugees and Migrants taking place in New York on 19 September, and that the G20 should consider how it can best support the outcomes of the UN Summit at the G20 Hamburg Summit in 2017. [fold]

Balancing the agenda at the Hangzhou Summit so that leaders can maintain a strong focus on pressing economic matters while still having time to discuss migration concerns (without getting bogged down) will not be easy. The difficulty in getting this kind of balance right is why it is common to see pieces calling for the G20 to simplify its work and stick to its original raison d'être: restoring global economic growth to pre-crisis levels and boosting the classical drivers of growth in order to stave off another global economic crisis. 

Yet if the G20’s important conversations about global economic challenges ultimately result in outcomes like the revision of technical financial standards and adjusted banking capital ratios (which appears to be the case in recent years), then it seems fair to question whether annual G20 summits are achieving economic results that could not have been attained by finance ministers and central bank governors working on their own. 

When Glenn Stevens writes that the G20 ought to adopt a ‘simpler’ and more ‘achievable’ agenda, as well as devote ‘at least as much energy to discouraging bad ideas’ as to ‘advocating good ones’, I am reminded of his concern expressed in 2008 (pre-GFC) that converting the G20 into a leader-led process would be a ‘mistake’; ‘if you’ve got a heads of state meeting … they’ve got to go home with some great triumph in their bag … it is less likely that you can actually work hard over a number of years on quite important fundamental things’. Whether Stevens’ still feels this way I do not know, and his premonition does offer a plausible diagnosis of the apparent malaise felt by many working on G20 issues.

Either way, the G20 is now a leader-level forum. And as former Canadian Ambassador and a key background player in the G20’s creation Paul Heinbecker has observed, leaders can only discuss technical matters relating to financial regulation for so long, or else ‘the G20 might die of boredom’. Given the Sisyphean task that is lifting the global economy out of its current rut, it should hardly be surprising that leaders occasionally want to put non-traditional items like migration onto the agenda. And even the legendary Sisyphus at least had the benefit of knowing the precise rock he was doomed to push up the hill before it inevitably crashed back down upon him. In contrast, the G20 cannot even agree upon which fiscal or monetary policy ‘rocks’ the global economy most needs to be pushed.

Yes, the G20 does have a ‘Christmas tree problem’ (whereby every new host wants to add a new bauble to the tree) and yes, the G20 should focus on promoting strong, sustainable and inclusive growth. But it is somewhat contradictory for G20 analysts to insist that the strength of the G20 lies in the unique political capacities of leaders, only to then insist that leaders ‘do not get distracted’ by the most pressing political issues of the day. There must be a space for leaders to do a little of both.

Photo by Flickr user Stowe Boyd.

Part 1 of this post examined the basic business case for Australia's involvement with the G20. This post examines the other, less appreciated strength of the forum: how it complements most other key planks of our economic diplomacy strategy. The key question therefore is not one of choosing how to 'balance' our G20 efforts with other approaches, but, rather, how to build a coherent strategy that secures Australia's interest through the totality of our relationships.

The G20 includes all our key bilateral economic partners and provides unrivaled opportunities to strengthen these relationships through regular contact and cooperation. Certainly the side meetings around the G20 are important opportunities to progress bilateral issues.

But international relationships are a bit like interpersonal ones: they gain strength from participating in common activities. Hence, our relationship with key countries have been deepened by our work with them in the G20 – negotiating common positions on G20 issues, caucusing, and ensuring Asia Pacific and other common interests are protected.

The G20 also supports our interests in key international institutions. The G20 has itself strengthened the role of the key economic crisis prevention and response institutions like the IMF and the Financial Stability Board (FSB). The G20 created the FSB and provides it with the necessary political backing, and this represents an important institutional strengthening of the global financial system. Our membership of the G20, and our own record of sound and pragmatic implementation of financial regulation, gives us a strong seat at this table. [fold]

Turning to the institution I currently work within, I consider that the G20 has strengthened the role of the IMF and Australia's voice within it. Australia has a strong national interest in an effective IMF, given the key role its surveillance advice and lending can play in crisis prevention and stronger growth. We particularly have an interest in a Fund that is respected and trusted partner in Asia. The G20 has delivered the political consensus required to both increase the resources and better distribute voting power within the IMF, including among Asian emerging economies. The G20's wide membership has assisted the Fund's own transition in recent years to developing policy positions more suited to a multipolar global economy. [fold]

Fund Management and staff rightly take seriously the task of advising the G20 on key economic policy issues. The G20 provides a forum to test the IMF's policy advice supporting growth and resilience. This is about getting better traction for Fund advice, and hence the priority on supporting the G20 is completely consistent with the Fund's mandate, and the interests of its members.

The IMF of course has its own governance institutions that must be respected, including the Board. It is particularly critical that the G20 doesn't step into operational decisions, and that policy decisions are subject to the involvement of the full membership.

Nevertheless, gaining consensus for major changes at the IMF is hard, and inevitably involves political trade-offs. The G20 provides an opportunity for key players to hammer out the basic outlines of consensus, which the more formal governance bodies can then work with to produce concrete progress. In this way, having a strong Australian presence within both the G20 and the Fund governance bodies is complementary.

Australia has always had a strong and respected voice inside the Fund, and this has been strengthened by our membership of the G20. We have a good reputation coming mainly from good economic performance over a sustained period. Sitting on the IMF Board as country experiences are assessed, it is clear we have done most things right over the last few decades across the key areas of structural reform, macroeconomic frameworks, macroeconomic management, and financial stability. This alone means people listen.

We have also brought a different perspective to the IMF as an advanced economy in a dynamic region with predominantly emerging economies. Indeed, one of the other ways in which our G20 and IMF participation are reinforcing is that we have long shared a chair at the IMF with Korea, another G20 country, and one that has only recently moved from emerging to advanced economy status. Our own interests as a country and a constituency generally match the broad range of interests in the Fund. This has, for example, put us in front of the curve on governance reform, and given us some ability to assist in forging consensus within the Fund on a range of issues. This approach works well with the structure of the G20 with its variety of players.

Our chairing of the G20 in 2014 was widely regarded as successful by Fund Management, staff and other Board members, which has further strengthened Australia's already strong reputation.

The G20 should by no means be the only element of our economic diplomacy but it should remain a central priority given its reach across our interests.

Photo: Getty Images/Mark Wilson

Membership of the modern G20 has been an important development in Australian foreign policy, and has quickly formed a key part of our economic diplomacy.

The core case for maintaining effort in the G20 is that it offers the chance to progress Australia's economic interests in a way that no other forums provide.

At its heart the G20 means that we are part of the key global 'economic steering committee'. This gives us valuable intelligence on global trends affecting Australia and, more importantly, insights into the way top policy makers are thinking about responding to them. It also means that we have a seat at the table making major decisions around global economic policy cooperation.

Policy cooperation becomes critical in an international economic crisis situation, and the case is stronger as international factors dominate domestic ones. In crisis times, economic issues normally the concern of finance ministers and central bank governors become issues for leaders, as economic performance dominates other concerns and responses require whole-of-government efforts. This can be seen in the broad ranging nature of the G20 response which played a major role in averting a major economic collapse in 2009. It is no surprise at all therefore that the G20 was 'more successful' during the crisis and has since found progress more difficult; it will always be thus.  The G20 is nevertheless now a key part of the global crisis response architecture, pulling in all major systemic players. Australia has a huge stake in the success of these actions. A major payoff in crisis mitigation is relatively rare, but the payoff from successful crisis response is so large that this 'insurance value' alone is worth a significant investment in the G20. Habits of cooperation built up in non-crisis environments then become critical. [fold]

In more normal times this cooperation is difficult to secure, and judgements of the effectiveness of any forum need to recognise the inherent limits of international cooperation. Nevertheless, it is fair to say that the G20 has made important progress, and certainly relative to many other international institutions. The Brisbane growth commitments created an important benchmark with which G20 individual and collective efforts could be judged. Even if progress against this benchmark has been incomplete, it has raised the bar and pushed countries to put forward substantive reforms in a way that qualitative commitments would not. It has highlighted in a sharper way what needs to be done to reduce the burden being borne by monetary policy in the current recovery, and lift long term growth.

There are other examples of G20 success in 'normal' times. Commitments around exchange rates have played important roles in calming markets at times in the post crisis period, in 2013 and as recently as Shanghai earlier this year. G20 discussions in Sydney and subsequently achieved important consensus about international monetary policy cooperation, where systemic central banks made explicit their willingness to be mindful of international spillovers and all agreed to their responsibilities to build domestic resilience. This was hard fought and marked a change in atmospherics around international tensions over monetary policy, which has to some extent endured.

The G20 is also an important forum for testing new ideas in macroeconomic policy arising from the very different circumstances of this recovery. By bringing together idea generators such as the IMF and key policy makers grappling with the practical and political realities of implementing policies, the forum accelerates the policy development process. For example, it has been an important forum for discussing the various ways to take pressure of monetary policy, including through well targeted structural policy and infrastructure spending. These discussions don't produce immediate results but affect underlying policy paradigms with long-lasting effects on the global economic environment within which Australia operates. As we are not immune from the some of the same forces, this discussion can also benefit domestic policy making. Our participation provides us with the opportunity to ensure Australia's specific circumstances are taken into account and, with other countries, shape an emerging consensus that is more relevant to our situation.

As well as being a steering committee, the G20 plays a key role in setting the rules of the road. The G20 has been key to progressing global standards and norms that are important for a resilient international economy. The coordinated strengthening of financial stability legislation has been arguably the most important achievement of the G20. It has lifted capital and liquidity requirements on key banks, which has significantly improved the resilience of the core international financial system – the main reason why, despite the significant economic uncertainties, talk of 'Lehmans' crisis are overblown. The G20 has progressed important norms on anti-corruption, and has been key to making headway on international tax cooperation.

Australia, like other countries, will generally adopt such standards through market or political pressure, so it makes sense for us to participate in their development to better protect our interests. We want standards that make the international environment genuinely safer, and that can be sensibly tailored to our interests. This means we should strive to be part of the decision making process. Of course we need to be realistic about our influence – but we should also not underestimate our ability to progress important Australian interests when we share these with other G20 members.

And finally, the success of international institutions should not be measured only by the progress they make, but by the extent to which they stop bad things happening. The G20 has found it hard to accelerate progress on trade liberalization, but it has been important in resisting the extent of rising protectionism. This is set to remain an important role for the body, and will need to be progressed in the context of a broader inclusive growth agenda.

This is not to say international groups are always effective – one only needs to sit through meetings and read dense communiques to know they are far from it.

Nevertheless, the G20 is large enough though to capture a good range of interests from all systemic economies, and small enough to forge efficient consensus on critical issues for the world economy. The modern G20 engages leaders, which gives it its power, but also means its agenda needs to be focused on issues that require the highest political input to progress.

 Part two of this post will examine how Australia's involvement with the G20 fits within our broader economic diplomacy strategy.

Photo: Barcroft Media via Getty Images

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement, explores many of the themes that will be aired in this debate.

Australia has a choice. It can actively seek to influence international economic events, or it can play a passive role. 

As an open economy dependent on access to international markets, the first option seems the obvious answer. But it involves more than promoting exports and investment. It means Australia throwing itself into international economic engagement in an effort to influence the policy decisions of other countries and the performance of international bodies with the aim of promoting a stable, open and growing global economy. Easier said than done, particularly when there is little immediate domestic political payoff for governments engaging on international issues. 

But if Australia wants to have an impact, it has to apply the Avis motto when it was the number two car-rental company to Hertz: 'we are number two, but we try harder'. Australia is not big enough, rich enough or ugly enough to passively sit back and think it will automatically be involved in all key international forums or have a major influence in international bodies. If it wants to be heard, it has to try harder.

This point was forcefully made to me when, in my capacity as the prime minister's special envoy on the international economy, I met with Larry Summers in January 2009 to lobby for an ongoing G20 leaders' meeting. While the US initiated the first leaders meeting, it was initially hesitant for an ongoing process. Summers, who was director of the US National Economic Council at the time, said that in selecting members of key international groupings, Australia was not an obvious choice. It was not big enough to be there in its own right and it did not represent a region. There were more 'Asian' countries to represent Asia than Australia.

Australia cannot take for granted its membership of the G20. There was no guarantee it would be included when the forum was formed in 1999. Australia had failed in attempts earlier in the decade to join the G10. Peter Costello pressed Australia's case to be in the G20 and in support highlighted it had an agenda on how to reform the international financial system in the wake of the Asian Financial Crisis. Australia had ideas to offer. These were based on the report of the Prime Minister's Taskforce on International Financial Reform that was established by John Howard in 1998. [fold]

In 2008 Australia lobbied for the G20 to meet at leader's level to respond to the Global Financial Crisis. There were other proposals going around at the time that excluded Australia. But Kevin Rudd campaigned aggressively in support of the G20. He followed the Avis motto and 'tried harder'. The then-US Assistant Secretary of State, Kurt Campbell, observed that Rudd's role was 'decisive'.

In the early years of the G20 leaders process, Australia continued to try harder by making many proposals as to how the G20 could operate and by chairing G20 working groups. For example, it was an Australian initiative that resulted in the B20 (the business grouping) meeting for the first time at the Toronto Summit in 2010.

Australia had the opportunity to make its mark when it chaired the G20 in 2014. Its performance was mixed. Australia sought to move the forum away from an ever expanding and increasingly ineffective agenda and focus on lifting global growth. The initiative of getting G20 members to commit to a target of increasing their growth by an additional 2% by 2018 kept the focus on the economy, but it was always an aspirational objective that would not be achieved. Australia over-played the issue, which subsequently led to headlines such as 'Joe Hockey's G20 growth target ends in failure'. This has not helped the reputation of the G20 or Australia. The meetings were well organised and achieved progress on some issues, but Australia's image was tarnished when it attempted to avoid discussion on climate change or have any reference to 'inclusive growth'.

Australia could have achieved more during its term as G20 chair, but maintaining that momentum would have been difficult given the uninspiring G20 Turkish presidency in 2015. There were hopes that China would achieve much as the 2016 chair, but it appears to have adopted a bureaucratic approach, with outcomes likely to be a mixture of procedural and nebulous initiatives. 

The effectiveness of the G20 has declined. At a workshop some years ago, a senior Australian official predicted the G20 would become 'international space junk'; meetings would circle the globe but achieve little. That may be right, at least until the next crisis. But the G20 remains an important forum that brings together major advanced and emerging markets. Given inward-looking and protectionist pressures in many countries, we need every avenue possible to promote global economic cooperation. Australia should continue to seek to improve the effectiveness of the G20.

However, Australia should not be dewy-eyed about the G20 and see it as the only outlet for international economic engagement. If Australia wants to influence international economic developments, it has to try harder in its bilateral relations with other countries as well as in all international organisations and forums. Concerns over the lack of effectiveness of the G20 (along with growing unease with some of its members) could see the emergence of a smaller grouping of key economies. If Australia wants to remain at the top table, it has to continue to 'try harder.' History demonstrates that this involves having a clear, articulated and strategic agenda as to what Australia wants and what it can offer international economic bodies and forums. And most importantly, it requires political leadership.

Photo: Kremlin.ru

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement, explores many of the themes that will be aired in this debate.

Sitting alongside some of our key economic partners at the G20 finance ministers and central bank governors meetings, and IMF and World Bank Spring meetings, I was reminded how Australia’s place in the world economy is truly remarkable. We have a relatively small population (53rd in the world, ranking us somewhere between Madagascar and Cameroon), we are one of the world’s most geographically isolated countries, and yet we have the 13th largest economy and play a critical role in the global economic architecture. The Australian footprint is strong, with investments around the world worth around $2 trillion. Foreign investment in Australia is at a record high of $3 trillion. 

Despite being relatively small and remote, we are leaders and partners alongside the world’s largest economies. In global forums, where the challenges of an unsettled present and an uncertain future loom large, we have a seat at the table and a voice in the conversation, not only because of the size of our economy but also because of our strong economic policy record. 

Our agenda for the April Spring meetings covered the global economic outlook, including the ambition of raising collective G20 GDP by an additional two per cent by 2018, the risks facing the global economy, and ways to strengthen the global financial safety net and reform the IMF. But one of the most pressing topics of discussion (inside and outside the meeting rooms) was the recent release of the Panama Papers, which raised questions about international tax evasion and avoidance arrangements, and the capacity of authorities to monitor and act on such activity. As the world’s attention was caught by what these papers revealed, there was a particular onus on the world’s finance leaders to respond. 

Importantly, Australia had already acted, taking a lead role in developing measures to improve tax integrity across the globe during our presidency of the G20 in 2014 and in partnership with the OECD. We championed the joint OECD/G20 project on Base Erosion and Profit Shifting, known as BEPS. The project is primarily aimed at preventing multinationals from artificially shifting their profits away from where they are earned to lower-taxing jurisdictions. Potential revenue losses from BEPS alone have been estimated at between US$100 billion and US$240 billion annually around the world — or between 4% and 10% of global corporate income tax revenues. [fold]

Given the Australian Government has led the crackdown on tax avoidance, I was well placed to argue strongly in Washington that global efforts toward cooperation and transparency must be implemented and better integrated.

There was a firm consensus that collective action was needed. This was a promising sign but the focus turned to ensuring countries that have signed up to tackle tax avoidance can act quickly, and put the right systems and processes in place. This included one commitment, by all jurisdictions, to follow through on the common reporting standard for the automatic exchange of tax information.

Australia had already fulfilled our commitment. with the Turnbull Government putting the common reporting standard into law in March 2016. We have turned our attention to helping other countries in the region to implement the standard. The finance leaders also agreed to identify and consider action against non-cooperative jurisdictions that are not making progress. It is simple; the more jurisdictions that implement a common reporting standard, the greater the level of global transparency and the ability for tax authorities to ensure taxpayers pay the right amount of tax.

Australia also argued for greater standards on tax transparency, standards that all jurisdictions should apply. The Turnbull Government is committed to greater transparency, including through publishing the ATO’s corporate transparency reports in December 2015 and March 2016. These reports disclosed details of Australian public and foreign owned companies with total income of $100 million or more and Australian owned private companies with total income of $200 million or more. This is further evidence of the Government’s commitment to tax transparency. 

The government has also taken steps to further bolster Australia’s anti-avoidance laws. Last year the government passed legislation to help target multinationals that use complex arrangements to avoid tax by booking revenue offshore; doubled the penalties for companies that engage in profit shifting or transfer pricing schemes; and implemented the OECD’s Country-by-Country reporting and new transfer pricing standards. In this year’s budget, we announced the introduction of a diverted profits tax which is also aimed at multinationals that shift profits offshore; a 100-fold increase in the maximum penalty for failing to lodge tax documents on time; and a doubling of penalties for making false or misleading statements.

Australia now has the toughest anti-avoidance laws we have ever had and some of the strongest in the world. We also have the greatest capability we’ve ever had to detect evasion and avoidance, with tax exchange arrangements with over one hundred countries and targeted resources in the Australian Taxation Office in the form of a new Tax Avoidance Taskforce. Again, we have found ourselves leading the way and helping to set the global standard.

There’s no question Australia benefits from our global economic engagement, but on the other hand we do have a lot to offer. Our economic experience and credentials, as well as our drive and pragmatism, help us play an important role on the world economic stage. It is a role the Turnbull Government takes seriously and will continue to play to ensure that Australia continues to be a global leader, upholding tax integrity, and combatting tax evasion and multinational tax avoidance.

Photo: Getty Images/Darrian Traynor

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement, explores many of the themes that will be aired in this debate.

It was inevitable that maintaining relevance would become more difficult over time; nevertheless, two years on from Australia’s hosting of the 2014 Brisbane G20 summit, the G20 has largely descended into a talk-fest to which very few are listening. In 2014, Australia contributed to this erosion of authority by its embarrassing refusal to countenance a substantive debate about climate change and to champion an agenda to combat growing wealth and income inequality.

Both in 2014 and since, no political leader or nation has seized the bully pulpit and spoken clearly and persuasively about the growth challenges in the global economy. It’s been left to IMF Managing Director Christine Lagarde and central bank governors like Mark Carney to champion inclusive growth.

The recent G20 finance ministers’ meeting in Chengdu, China (the second of 2016) made some progress, with sound recommendations for financial reform and some steps in the battle against rampant multinational tax evasion. But in general, it was a triumph of rhetoric over substance, officialdom over leadership and ideology over practical economic reform. The communique — 10 sprawling pages, 35 attached reports and 19 issues for further action — said it all.

There was nothing, absolutely nothing, on jump-starting demand in the global economy. It ignored the central IMF recommendation for advanced countries uninhibited by high debt to deploy fiscal policy to lift global demand particularly through infrastructure investment (advice publicly rejected by the Australian treasurer, Scott Morrison). When the IMF takes such a position it’s the clearest signal it is concerned at the possibility of global economic disruption.

There are deep structural changes occurring in the global economy and Australia’s biggest danger remains a profound global economic slowdown.

The political gridlock evident in the G20 and the US, the rise of new political forces on the Left and Right, the replacement of moderate leaders by voices at either extreme makes me much more pessimistic about the future. I genuinely doubt the capacity for global institutions to respond as we did internationally at the height of the Great Recession in late 2008, early 2009. [fold]

The IMF has just published its sixteenth downgrade in global growth since January 2012. The current complacency for global policy-makers, including the Australian government, sends a shiver up my spine. I feel like they are determined to sleepwalk into a burning house.

As Larry Summers has so eloquently argued, developed economies have entered a period of secular stagnation where structural factors such as aging populations, profound technological change and rising inequality increase savings rates relative to investment.

Since the 1950s, income growth in the bottom ninety per cent of the income distribution in many advanced economies has trended downward. It is this squeeze on living standards and income (which has accelerated post the Great Recession) that has rendered politics surly and dysfunctional.

In recent years there should have been a more vigorous and open discussion among G20 leaders and finance ministers about the policy responses required to substantially lift global demand in a sustainable and equitable manner.

Mark my words, we will rue the day we did not use this period of ultra-low global interest rates to invest in infrastructure and put our people to work. Future generations will think us mad, and they will be right.

Australia was in an ideal position to lead this debate as economic activity shifted from west to east. In our region, economies like China and India are in the midst of profound and long-term economic transformations, and at home we have done a better job than most of mixing strong growth with social equity.

Australia’s 2014 G20 chairmanship was a missed opportunity to re-energise and redefine the G20 core mission of strengthening global growth, and we will not bring anything useful to the table while an embattled prime minister and treasurer keep parroting trickle-down economics solutions, rejected not only by the Australian people in the last election, but also by most thoughtful economic scholarship in the wake of the Global Financial Crisis.

Paradoxically, Australia is in a perfect position to spearhead the international conversation on inclusive prosperity; a discussion acknowledging that countries that grow more equally will grow more strongly. This message resonates strongly throughout the US and Europe but must be heard in the developing world if they are to avoid the mistakes of growing wealth and income concentration seen in the developed world.  

The Australian experience of structural reform (inclusive prosperity through market opening reforms, sensible fiscal and monetary policy in concert with a fair industrial relations system and a strong progressive tax and transfer system) is a pathway to avoid the secular stagnation and political polarisation infecting the global economy.

Fairly sharing the benefits of growth is the leadership we ought to be showing in the G20 and to the world.

 Photo: Getty Images/Pool

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement, explores many of the themes that will be aired in this debate.

Australia's enviable economic performance over the last quarter-century has given us something more than boasting rights in international fora. It has delivered comparatively strong improvements in real incomes and asset prices for middle Australia at the same time that the middle class in America and Europe has withstood stagnant real wages, falling asset values and a withering attack on traditional jobs as a result of the 'fourth industrial revolution'.

This improvement in Australians' standard of living was driven by a range of domestic policy decisions taken by successive governments. Moreover, the protection of our economic diversity served us well as everything from the internet to commodity prices endured boom and bust conditions.

As a medium-sized, open economy however, Australia's economic growth prospects will always be most significantly influenced by external developments. Our flexible currency, manageable external debt and robust financial system have helped us to withstand external shocks.

In the future we may not be so lucky in a more volatile economic environment, so working hard to better understand increasingly complex international economic transitions really does matter for a number of reasons. [fold]

The first is that better understanding global trends leads to better informed domestic policy. Many of the reforms that shaped the modern Australian economy were influenced by the success of similar policies in other countries. These include: opening our economy to freer trade and bigger cross border capital flows; moving to a flexible exchange rate regime; pursuing labour and product market reforms to increase competition; and building strong institutions that support the rule of law. 

While much has already been done, there are always new political and structural challenges. 

In my role as Australian Ambassador to the United States of America, I am witnessing first hand the policy debate on free trade. America is divided and too few policy leaders are willing to defend a principle of free trade that has helped make America prosperous (and great) for the last 98 years. 

We continue to face turbulent days ahead because extraordinary policy decisions of recent years have created the need for extraordinary countermeasures in the future.

Traditional monetary policy and fiscal policy stimulus are near capacity. Central bank liquidity levels are at all-time highs. And as governments seek to wind back 'extraordinary measures' through fiscal consolidation or a gradual tightening of interest rates, the pressure for more global regulation (like the new rules for banking in the Third Basel Accord) will ring in some further uncertainty as the impacts of new regulation remain untested and unknown. 

We must not assume that Australia will be immune to these external challenges going forward. Support for free trade and an open economy remains comparatively strong in Australia because they have delivered real benefits to all Australians. But if global growth is weak, then demand for our exports will be as well. And Australia is not immune to deflationary pressures that are increasingly evident in a number of the world's major economies. In this less-than-perfect environment, more Australians will question the necessity of maintaining existing policies in the same way that they may want to upgrade an old mobile phone or trade in the old Holden Commodore.

The second justification for greater global engagement is that we can influence global policy well beyond our traditional playing weight.

With a quarter of a century without a recession and a deep operational understanding of emerging Asian economies, Australia has an increasingly influential voice on the world economic stage. In recent years this has been most obvious in the G20. It has not been lost on global opinion leaders that many of the initiatives that Australia introduced when we hosted the G20 in 2014 remain at the centre of the G20 agenda two years later. The impact of our leadership and the progression of our policies has been embraced by China, the 2016 host of the G20.

The Brisbane G20 set out a collective growth target of an additional two per cent of Global GDP by 2018 through more than 1500 new structural reforms initiated by member nations. Although countries are only halfway there, the need to maintain the plan for growth has become more important. Traditional macroeconomic levers like low interest rates and expansionary fiscal policy have failed to deliver the expected baseline growth; only structural reform can deliver the growth trajectory the world needs. 

In a world with massive liquidity and an aversion to risk, investing in new and upgraded infrastructure remains highly attractive. In June the McKinsey Global Institute highlighted that between now and 2030 the world needs to invest an average of US$3.3 trillion a year in economic infrastructure just to support expected rates of growth. So I am encouraged that the Global Infrastructure Hub, established under Australia's G20 leadership and based in Sydney, continues to play a key role in helping to grow the global pipeline of quality, bankable infrastructure projects.

Another key focus of our host year was cracking down on systemic tax avoidance by large multinational companies. As countries implement the action plans that were agreed, it is important to remember why these plans matter. For free trade and open investment to retain public support, both individuals and smaller businesses need to be confident that large multinational companies will pay the right amount of tax and are not gaining an unfair advantage over their competition by avoiding tax. 

Finally it is reassuring that the G20 continues to monitor and evaluate the changes that have been made to the global financial system. While much has been done to strengthen the financial system following the 2008 crisis, the most recent Communique from G20 finance ministers and central bank governors highlights that, like everything else, there is still much work to be done.

In a global economy, global engagement matters. Australia is very good at it and now is the time to redouble our efforts and help shape the direction of future prosperity.

Photo: Getty Images/Cassie Trotter

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement,  explores many of the themes that will be aired in this debate.

As a small open economy in an increasingly interconnected global economy, Australia has a direct interest in the global policy agenda. In the narrowest sense, we need to be engaged in the international policy discourse because we are directly affected by the decisions that are made. Given that Australia has little choice but to abide by the rules and conventions that are agreed in international forums, it is clearly in our interest to be sitting at the table when those rules and conventions are being formulated.

Beyond pure self-interest, international engagement is an inherently and, arguably, increasingly worthwhile objective. International engagement can improve policy formulation in response to both global crises — for example, the coordinated G20 policy response to the global financial crisis — and common structural challenges, such as population ageing, structural reform, climate change and economic inequality.

Notwithstanding Australia’s small size, we have the potential to contribute to the international policy process. Indeed, in some respects, Australia’s position within global policy-making circles is unique. We are an advanced economy with strong institutional ties to the ‘traditional’ economies in North America and Europe, but we are also very closely connected to the new and emerging economic growth leaders in the Asian region. We are highly exposed to shocks and spillovers emanating from overseas, but we have developed policy and institutional frameworks that have — to date at least — allowed our economy and financial system to withstand these shocks. We are small enough to rarely be at the centre of international disputes on key issues, but large enough to contribute a dispassionate third party perspective. Taken together, these characteristics allow Australia to speak with a credible voice in global policy discussions.

But this alone is no guarantee that Australia’s voice will be heard. Consider the G20 for example. As a mid-sized economy with a small population and a slower rate of economic growth than most of its Asian neighbours, Australia is not a natural member of this group. This means that, if we are serious about the intrinsic value of international cooperation and the benefits that it can bring to those who take part, we have to work hard to ensure that our voice is not only heard but also valued by other, more powerful, members.

In practice, there are a number of ways in which the Reserve Bank tries to achieve this. [fold]

First, we pick our issues. To some degree this strategy is forced upon us by our small size, which means that we inevitably have to prioritise our use of resources more than other, larger institutions. But it can also be an effective negotiating and influencing strategy in its own right. A voice that speaks rarely — but with clear, well-considered and constructive messages — may well influence the debate and contribute to concrete outcomes more than one that is heard all of the time. Indeed, the G20 itself could be better served by adopting a simpler, more targeted and achievable agenda. It is therefore incumbent upon countries like Australia to resist the natural tendency for the broadening of the G20 agenda, including by devoting at least as much energy to discouraging bad ideas as we do to advocating good ones.

Second, the Reserve Bank places a high priority on developing its relationships with the broader Asia-Pacific region. This, plus its existing links to the central banks in North America and Europe, serves to reinforce Australia’s position as an economy with close ties to both regions. Of course, Australia’s regional engagement is very important in its own right, particularly as structural shifts in the world economy have moved the global economic centre of gravity towards the Asian region. But by investing time and effort into regional forums such as the Executives’ Meeting of East Asia and Pacific (EMEAP) central banks and the Financial Stability Board’s Regional Consultative Group (RCG) for Asia , we also become better equipped to understand and contribute to the strengthening Asian regional voice on global issues.

Third, we recognise the value of informal relationships with our international counterparts. Having a seat at the table in a formal meeting also means a place in the coffee queue during the break. This enables some valuable informal connections to be made which can, in turn, provide the foundation for developing a network of genuinely productive working relationships across a range of issues (including issues that are perhaps lower profile, but at least as important, as those being discussed in front of an audience at the G20).

Of course, international policy engagement is a two-way street — it is not only about Australia’s influence on the rest of the world, but also about the rest of the world’s influence on Australia. A number of examples of policy successes are evidence of the benefits that international engagement can bring, including the post-crisis financial reform agenda and the Base Erosion and Profit Shifting (BEPS) initiative.

There will, inevitably, also be some outcomes that we will not be able to influence as much as we would like to, no matter how hard we try. But even in situations where the outcome appears sub optimal from Australia’s perspective, there is still real value in being in the room and contributing to the discussions. By identifying the motivations and challenges facing other economies and understanding the logic behind the final outcomes, we place ourselves in a better position to set appropriate domestic policy.

Photo courtesy of ArchivesACT

The G20 is a policy no-brainer for Australia, and we should be actively engaged in the forum. 

This is one of the basic conclusions that my colleague Hannah Wurf and I outline in our Lowy Institute analysis, Making the most of the G20, released today. 

The position may surprise those that have bought into the sheer cynicism embodied in Gordon Brown’s recent remarks that the G20 is widely viewed as ineffective. There’s been a noticeable downgrading of Australian government attention on the G20 (particularly in the treasury) since the end of 2014.

To be clear, the G20 may be a flawed forum (a viewpoint that is justified by a lacklustre meeting among finance ministers last week in Chengdu) but it is certainly valuable.  At a time when multilateralism is in decline and countries are turning inwards, it is needed. 

As an economic governance scholar, I’ve found myself in many quite depressing conversations about the state of the world. I think that they can be ordered along a ‘spectrum of depressing challenges’. At one end (let’s call it the ‘positive’ end) are conversations with financial markets analysts, who will confidently weave a story about emerging dangers in financial markets and predict that the next financial market crash is just around the corner. There will be an impressive chain of logic backing up their views, and I often need to seek comfort in Nobel Laureate Paul Samuelson’s famous joke that Wall Street predicted nine out of the last five recessions (and its mistakes were beauties). [fold]

Further along the spectrum are conversations with climate change experts. These are the people examining an existential threat for the planet. Generally, they will tell you that there is a narrow window in which we can act, although we can’t say for certain when or what the impacts of missing are. But they are confident that the clock is ticking, and that government efforts have only done enough to save the chance to save the planet.

This doesn’t even get close to those looking at refugee issues, where governance arrangements globally are failing both states and people, there is no coherent global architecture governing cross-border migration (and seemingly little appetite to create one), and an absence of global leadership. 

But the space at the end of spectrum needs to be reserved for multilateral trade experts. These are the people examining trade liberalisation; a movement that has a strong track record of contributing to global prosperity since the 1940s (even if benefits are not spread evenly). Yet we’ve experienced two decades of disappointing results, and significantly backsliding is an ever present and increasingly real threat. One only has to look at the number of protectionist measures implemented every six months and the dangerous rhetoric coming out of the US to recognise the threat to a crucial policy space.

You sit in enough of these conversations, and it becomes clear exactly why it is so important to have a forum like the G20 that brings together the political leaders to progress intractable issues.  

The G20 has developed a bit of a reputation of ‘good during the global financial crisis, but less effective over time’.  The forum certainly has design flaws and governments need to work to make the G20 more effective.

But here’s the thing: it still provides valuable political leadership on macroeconomic matters. For example, Australian policy settings, and the lives of Australians, are affected by minimum global standards on tax and finance. 

These are long-term issues that we will need to continue to engage in. Even if there were no other motive, being involved in and contributing to such discussions would be worth the price of admission. And as Phillip Lowe, governor-elect of the Reserve Bank, points out in our paper, Australia has a responsibility as a high-income country to contribute to global public goods.

In an uncertain world, and with at least one prominent global risk scenario (Donald Trump) having an uncomfortably high probability of realisation, the G20 remains the best means the international community has to coordinate responses to global economic and financial crises.  The G20 also has an as-yet-untapped potential to play an important role in countering anti-globalisation sentiment, although it needs to be stronger, clearer and more robust in its rhetoric in support of the liberal economic order and the institutions (such as the IMF and WTO) that underpin in.

The forum also gives us an unrivalled chance to influence, and not just listen to, the global economic debate.  As those who are not members of the G20 will readily tell you, it’s much better to be a policy-maker, and not a policy-taker.

Rather than a question of why engage in an ‘ineffective’ process, the key question Australians ask should be how do we get the most out of our membership. 

One important area is ideas. To make and shape policy as a middle power, you need to be continually coming up with influential suggestions. Australia has forged a strong reputation in this space over the past two decades. Our contributions are better when we do our homework: thinking about issues, developing proposals, socialising ideas, and backing our proposals with evidence. 

In this vein, Wurf and I argue that what is needed now is for Australia to make focused and strategic investments of ministerial time and bureaucratic resources.

Central to our efforts should be a Cabinet-approved long-term international economic engagement strategy. And it should start with the Australian prime minister and treasurer issuing a statement (perhaps drawing inspiration from the 1998 Task force on International Financial Reform) that details the challenges facing the global economy that could lead to a future international economic crisis.*

It would be a great opportunity for the government to demonstrate the importance it attaches to it the liberal economic order, that it is addressing global issues that Australians care about, and that it is improving how it communicates the relevance of the influential work of the G20 to Australians.

Photo: Getty Images/VCG

*This reference to the 1998 Task force was altered after original post