Opinion

The G20’s structural reform agenda should address income gap and financial system fragility

G20 leaders must address major issues like the distribution of income and the structure of our financial systems in order to combat the deeper underlying causes of weak global demand.

By: Date: March 15, 2016 Topic: Finance & Financial Regulation

A version of this op-ed was also published in Caixin and O Globo.

caixinO Globo logo

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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article Download PDF More on this topic More by this author

Policy Contribution

The G20 turns ten: what’s past is prologue

This Policy Contribution assesses the performance of the G20 since its first summit held in November 2008 to understand what could lie ahead for the institution.

By: Suman Bery Topic: Global Economics & Governance Date: November 15, 2018
Read article Download PDF More on this topic More by this author

External Publication

Examining interrelation between global and national income inequalities

The author contributed to the new issue of 'The Russian Journal of Economics' with a paper on the global dimension of the inequality trends

By: Marek Dabrowski Topic: Global Economics & Governance Date: November 15, 2018
Read article Download PDF More on this topic

Blueprint

Distributional effects of climate policies

The distributional consequences are likely to be a major driver of future climate policies. Policymakers will not accept forceful decarbonisation policies if they lead to visibly increasing inequality within their societies. The distributive effects of climate policies need to be addressed. This report provides a selective review of recent academic literature and experience on the distributional effects of climate policies.

By: Grégory Claeys, Gustav Fredriksson and Georg Zachmann Topic: Energy & Climate Date: November 14, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: How to reform and fortify the global financial system

Bruegel director Guntram Wolff is joined by Tharman Shanmugaratnam, deputy prime minister of Singapore and chair of the G20 Eminent Persons Group, and Jean Pisani-Ferry, mercator senior fellow at Bruegel, for a conversation about the growth and stability challenges facing the global financial system, and how the system can be better equipped to deal with the significant and novel problems of the future.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 23, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

Should we give up on global governance?

The pervasive gridlock affecting the traditional global governance approach calls into question the idea of broadening its scope beyond its core remit, and it calls for alternatives, either as substitutes for obsolete arrangements or to address emerging collective action problems in new, inadequately covered fields.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 23, 2018
Read article More on this topic More by this author

Blog Post

Inequality in China

After amply discussing income inequality in Europe and the US, economists are now looking at the magnitude, implications and possible remedies for this phenomenon in the context of the Chinese economy.

By: Silvia Merler Topic: Global Economics & Governance Date: September 24, 2018
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Barbara Botos, Maria Demertzis, Benjamin Denis, Lowri Evans, Mariya Gabriel, Svend E. Hougaard Jensen, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Rachel Lomax, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Johan Van Overtveldt, Martin Sandbu, Margrethe Vestager, Reinhilde Veugelers, Nicolas Véron, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels Date: September 3, 2018
Read article

Opinion

Goodbye deleveraging: Fiscal and monetary expansion to support growth in China

China has opted for a renewed fiscal and monetary stimulus to address the risk of the US-led trade war. The dual policies send a clear signal that economic growth is the priority, but such measures do not come without a cost. Deleveraging efforts will have to be put on hold for the time being.

By: Alicia García-Herrero, Gary Ng and Jianwei Xu Topic: Finance & Financial Regulation, Global Economics & Governance Date: August 23, 2018
Read article More on this topic More by this author

Podcast

Podcast

Italy's economic and political outlook

In this week's Sound of Economics, Bruegel affiliate fellow, Silvia Merler, is joined by Marcello Minenna, PhD lecturer at the London Graduate School and Head of Quants at Consob, as well as Lorenzo Codogno, LSE visiting professor, to discuss the Italian government's economic outlook in the European context.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 11, 2018
Read article More on this topic More by this author

Blog Post

EU income inequality decline: Views from an income shares perspective

Over the past decade, the income share of low earners has increased in the EU while that of top earners has slightly declined. Although the upward convergence of the impoverished central European population is impressive, the southern European poor have faced a major setback while the southern European rich have hardly suffered.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 5, 2018
Read article More on this topic

Blog Post

The G7 is dead, long live the G7

The summit in Charlevoix left behind a Group of Seven in complete disarray. The authors think that the G-group, in its current formulation, no longer has a reason to exist, and it should be replaced with a more representative group of countries. In this fast-changing world, is the G7 only a relic of the past?

By: Jim O‘Neill and Alessio Terzi Topic: Global Economics & Governance Date: June 13, 2018
Read article Download PDF

External Publication

The changing fortunes of central banking

What are the major challenges of central banks today? This book discusses the developing role of central banks and the policies they pursue in seeking monetary and financial stabilisation, while also giving suggestions for model strategies.

By: Philipp Hartmann, Haizhou Huang and Dirk Schoenmaker Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 29, 2018
Load more posts