When the central bank governors and finance ministers from the G20 agreed in February to increase growth by at least two percentage points over the next five years, they fell short of delivering a common strategy to do it.
G20 communiques tend to express broad mission statements, and recommend a range of not necessarily consistent strategies. This is unsurprising when considering the huge range of countries involved, from Indonesia to China to the EU, with very different institutions, conditions and interests, so that any statement is likely to reflect the lowest common denominator.
Significantly the communiques delivered since February do not seek to recommend austerity measures, and explicitly aim to lift employment, an imperative which recognises that over 100 million people in G20 economies are still unemployed since the global financial crisis, and wages have stagnated.
The key aims mentioned repeatedly include lifting 'collective GDP by more than 2% above the trajectory implied by current policies over the coming 5 years', and growth strategies which 'include a set of leading practices to promote and prioritise quality investment, particularly in infrastructure'. The February communique also refers to maximising the impact of public sector capital expenditure, but this is not mentioned in the April one. In general the means to achieve these aims are left wide open, reflecting the lack of policy consensus among the governments of the countries involved.
The role of wages in economic growth
In response the L20, the parallel meeting of trade union representatives from each G20 country, offered measures toward achieving the 2% growth target, including raising wages and investment in public infrastructure.
The L20 recognised the share of wages in global output has fallen from over 62% in 1980 to 54% in 2011 (according to the UNCTAD Trade and Development Report 2013).
Raising the share of wages would promote economic growth through increasing demand for output and employment and reducing inequality. Increasing wages for the poorest people would promote growth in output because they spend more of their income on goods and services than do the better off.
The L20 also recognised that public investment in many countries has fallen due to austerity measures after the GFC. Raising public sector infrastructure investment would increase employment and economic growth, also through promoting technological advance.
The L20 proposals were backed by the estimates in a University of Greenwich study, which used a simulation method to find that a coordinated increase in wages as a share of GDP ranging between 1% and 5% across countries would generate nearly 2% growth overall over the next 5 years.
The effect on spending is higher for a wage increase than for a profit increase, and varies depending on how much income is spent on imports. It also found that a public investment stimulus of 1% of GDP in each country would lead to growth from around 2% to 4%. Like all such quantitative studies, the findings are dependent upon the assumptions necessarily made in the study and are strengthened by varying some key assumptions.
Using the Greenwich estimates for Australia, which assume that G20 countries coordinate their plans, our back of the envelope calculations show an increase in pay of about A$25 per week per employee (See ABS Table 6), combined with an increase in public investment in infrastructure of 1% of GDP or a mere $15.2 billion, would generate an extra 2% growth in GDP. From a further rough calculation, over 230,000 extra jobs could be created in Australia.
The Coalition government’s approach
The current federal government focus on 'fiscal consolidation', or restricting the budget, suggests it’s not taking an employment creating approach.
Unemployment in Australia has increased by nearly a percentage point over the last year to 6.4% or 789,000 in July (seasonally adjusted). It is an unconscionably high 20.4% of 15 to 24 year olds, at least 165,000 young people.
The government’s proposed infrastructure package does not amount to increased spending, as it basically assumes that private and state government spending will substitute for Federal government spending. The government’s planned cuts to the CSIRO and higher education, and scale back of the national broadband network do not appear well aligned with the expansion of employment, infrastructure and technological advance sought in the G20 communiques.
The federal government approach to promoting economic growth is that of laissez faire, a belief that leaving the market to its own devices will achieve growth. This puts it out of step with the current G20 rhetoric.
The government policy agenda in regard to employment is to make the labour market more flexible, so that employers can take on workers at lower wages if they wish. The intention is to reduce costs to employers for employing workers, thereby offering employers the incentive to employ more people.
As well as being unwise politically, the approach is out of step with current developments in economic policy. Even the US government has supported raising minimum wages, based on economic studies.
In a renewal of Keynesian approaches, as in the Greenwich study, raising wages would increase the demand for goods and services, and increase employment across the industries which supply them, domestically and globally. Business profitability would improve. This has an effect similar to the stimulus packages used to counter the effects of the global financial crisis, promoting growth in the economy.
Nor does the government’s approach to infrastructure appear to align with the G20 approach.
Infrastructure includes transport and logistics, communications, energy, water and waste disposal, and the justice and health systems. These are not readily provided by the market if at all, because they are subject to market failure – the level of private provision tends not to be sufficient to reflect the spillover benefits gained by others who do not have to pay directly for it. It is why infrastructure is regulated or provided directly by the government.
Infrastructure also includes services to technological advance, the engine of economic growth. These services include education, R&D and innovation. Everyone benefits from an invention, but there’s no easy way to get them to pay for it. This leaves governments to promote R&D.
Australia might be hosting the G20, but it can’t be viewed as leading it.