Traditional macroeconomic policies have been important in stabilizing the global economy, but they are no longer enough to addressing the fragility and low growth of the current economic environment.
In particular, they cannot sustainably address the persistent weakness of demand, let alone drive new productivity growth.
Such policies have far more limited ammunition now than 8 years ago, when the global crisis erupted. Monetary policy in numerous large countries is at the zero lower bound, and interest rates can hardly be lowered further. Fiscal policies are more constrained in some countries now than they were before the crisis.
Fiscal policies are more constrained in some countries now than they were before the crisis.
In fact, sovereign debt in advanced economies has increased from 70% to more than 100% of GDP. While some countries like Germany could use fiscal policy to boost public investment in necessary infrastructure and thereby promote growth, for many countries this policy is not an option due to limited fiscal space.
It is time to look at the deeper, underlying causes of the persistent weakness of global demand, the slowing down of trade, and economic growth more generally.
The first issue is the distribution of income. The share of national income going to labour globally is declining, meaning that increases in productivity do not result in pay increases for workers, but instead go to owners of capital.
The labour share in the corporate sector in the United States for example, has fallen from over 65% in the 1970s to less than 60% a few years ago, and similar declines are found in Japan, China and Germany. Furthermore, a large part of the growth in GDP has been accruing to the 5% most prosperous households.
The share of national income going to labour globally is declining.
These are very profound structural changes to our economies. Undoubtedly, they deserve attention at the G20 level as to their underlying drivers and their economic consequences.
There are different explanations for why this has happened, ranging from technical change and the use of robots to increasing global integration and shifting political power.
But whatever the causes of the change in income distribution, it has implications for aggregate demand, and the future of the welfare state. It will also impact international cooperation on capital taxation and, for the stability and prosperity of our economies more generally.
financial systems with a large banking system relative to equity and private bond markets are associated with more systemic risk and lower growth.
The second issue concerns the structure of our financial systems. Recent research shows that financial systems with a large banking system relative to equity and private bond markets are associated with more systemic risk and lower growth, especially during housing market crises.
Providing the right structural conditions for developing capital markets, and adequately regulating the financial system as a whole is therefore key for stability and growth, particularly in the EU and China.
Though some argue that structural reforms risk being deflationary in a low inflation environment, the right reforms could have a positive impact.
In fact, some reforms could boost investment almost immediately. Establishing a proper land registry in Greece, liberalising road transport, improving the efficiency of the justice system, upgrading education facilities and integrating and deepening markets could all have positive consequences for inflation and demand. Carrying out reforms that allow increasing productivity should induce investment.
Many reforms are country specific, but these major structural reform issues are relevant for all G20 countries. There is scope for joint initiatives across the G20, as well as best practice learning and benchmarking.
In a period of weak demand, G20 countries should carry out reforms that trigger investments quickly, and supportive macroeconomic policies should complement such reforms.
Shifting income distribution and strengthening the resilience and diversity of our financial system should be at the core of the structural reform agenda that China rightly identified as a key priority of its presidency.