G20 discuss economic risks from climate change, digitalization and economic recovery

On 9 and 10 June 2021, the fifth Framework Working Group meeting focused on the macroeconomic risks related to climate change and on the relationship between digital transformation and productivity.

G20 discuss economic risks from climate change, digitalization and economic recovery

With the G20 Finance Ministers and Central Bank Governors Meeting only a month away, the activities of the G20 working groups are underway to provide a solid basis for sustainable and inclusive economic recovery. On 9 and 10 June 2021, the members of the Framework Working Group (FWG) met virtually for their fifth official meeting under the Italian G20 Presidency.

The Framework Working Group tracks the evolution of the global economic outlook, while coordinating policies aimed at underpinning global economic growth and monitoring potential macroeconomic risks.

Discussions at the fifth meeting of the Group focused on the macroeconomic risks deriving from climate change and on the relationship between digital transformation and productivity. In particular, this meeting offered the Italian G20 Presidency an opportunity to present the Menu of Policy Options on productivity-enhancing digital transformation.

In April, G20 Finance Ministers and Central Bank Governors committed to tackling climate change and supporting environmental protection. They agreed on the need of urgently addressing environmental challenges and on the unique opportunity provided by the Recovery to develop forward-looking strategies for investing in innovative technologies and promoting the transition toward more sustainable societies.

For the first time, this meeting gave G20 FWG members the opportunity to discuss macroeconomic risks connected to climate change. The debate spanned from the economic costs of climate change and the progress made so far in dealing with them, to the importance of mitigating climate risks when developing future policies.

While the impact of climate change on the global economy is fully recognized, it is far from being homogeneous across countries. The IMF estimates that a comprehensive policy package can pave a road toward net zero emissions by 2050 and limit global warming to below 2oC, with global output in 2050 lower by 1.2% compared to the baseline projection. However, the IMF stressed that the cost variation across countries must be taken into account.

Although the economic impacts of climate change are difficult to quantify, particularly in the long run, the FWG is working to better include climate-related risk factors on a regular basis in global economic risk monitoring discussions. In this framework, the G20 will benefit from regular updates provided by International Organisations.

Recent studies show that the cost of decisive actions for tackling climate change in the short term is small when compared to potential future economic damages. To this end, one of the objectives of the FWG is to evaluate evidence – within G20 countries – linking climate change to short-, medium- and long-term economic damage.

Another theme that was central in the April G20 Ministers and Governors meeting was the support to G20 economies. Although the economic stimulus packages will continue for as long as required, Ministers and Governors agreed that the economic support would need to move toward more targeted measures, with an effective and cautious macro policy mix, subject to country-specific circumstances. The G20 unanimously concur on the need to harness the opportunities stemming from technological innovation to boost recovery and ensure broad-based prosperity.

In this context, the Italian G20 Presidency presented the FWG members with the G20 Menu of Policy Options on productivity-enhancing digital transformation. This policy toolkit provides good practices for harnessing the opportunities offered by digitalization, ensuring that these are shared within and across countries.

Digital technologies offer a vast potential to foster well-being and living standards by improving product and service quality and increasing productivity. The COVID-19 pandemic has accelerated the digital transformation and created new opportunities, allowing households, entrepreneurs, and businesses to better cope with the pandemic. However, the diffusion of digital technologies is still incomplete and uneven across sectors and countries.

The crisis has also changed the way people work and consume. The need to reduce in-person interaction has boosted remote working and put a premium on digitalization and automation. Consumer spending has shifted from in-person to digital services and durable goods. The use of online platforms, by both consumers and firms, is growing at an unprecedented pace and, overall, digital firms have been more resilient to the adverse effect of the crisis. Evidence indicates that these trends will continue, and that technology adoption may be further accelerated.

In this sense, COVID-19 triggered a strong policy response by all G20 countries. Not merely in terms of assisting firms and households in dealing with the effects of the pandemic, but also by promoting the digitalization of public and private-sector activities, thereby laying the ground for future productivity growth. For many countries, this starts with efforts to narrow the digital divide by targeted training and reskilling. Within this framework, supporting investment in intangible assets is crucial, in addition to fiscal incentives for innovation and product market reforms.

The G20 Menu of Policy Options provides an overview of the measures adopted by G20 countries in their efforts to boost productivity through digitalization, including policy response to the pandemic. It has benefited from the contribution of the Organisation for Economic Co-operation and Development, the International Monetary Fund, the International Labour Organisation, and the United Nations Conference on Trade and Development, as well as from discussions held within the G20 FWG.

All of the above issues will continue to progress in the coming months at FWG meetings and will shape the agenda of the July G20 Finance Ministers and Central Banks Governors meeting in Venice.

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