The Group of 30 is a secretive assemblage of some of the most powerful people in the world of finance, most of them current or former central bankers, finance ministers, chiefs of mega-banks or all three. Monday morning, they released a new report arguing for how they think the financial system needs changes to ensure a more prosperous global economy.
The assemblage of 30 men, led by former European Central Bank president Jean-Claude Trichet, sees a particular dearth of long-term capital. Not enough global savings is channeled toward making long-lasting investments in countries that need it, and too much is “hot money,” or in the Group of 30’s language, “cross-border capital flows have been driven by short-term, volatile lending.”
The report, “Long-term Finance and Economic Growth,” was produced by a working group led by Guillermo Ortiz, former head of Mexico’s central bank; Tharman Shanmugaratnam, Singapore’s finance minister; Adair Turner, the top British bank regulator; and Axel Weber, former head of the German central bank and now chairman of Swiss bank UBS. It paints a portrait of a global economy increasingly constrained by a financial system that encourages short-term investment rather than long, making the system vulnerable to crisis in the process.
The job of finance is to channel funds from global savers to global investment — but a number of rules and practices have made that system of allocating capital less resilient than it ought to be — and potentially inadequate to the task.
“To sustain growth, economies must build and continually renew the physical and intangible capital that fuels productivity growth and innovation,” the report says. “The ability to develop modern infrastructure will determine whether emerging nations can fulfill their economic potential. It will take an enormous infusion of capital to build transportation networks and deliver education, health care, water, housing and electricity to growing populations. Advanced economies, too, need long-term investment, since it is one of the few ways to boost economic growth during a time of deleveraging and necessary fiscal consolidation.”
To do that, they need investment dollars that have long investment time horizons. It is hard to build a water purification plant or power grid with money that could be pulled away at a moment’s notice.