The world's financial leaders will focus on four ways to boost global economic growth when they meet next week in Sydney but the discussion may be overshadowed by emerging market concerns over U.S. monetary policy, a G20 official said.
Finance ministers and central bank governors of the world's 20 biggest developing and advanced economies (G20) will discuss what changes to fiscal and monetary polices and what structural reforms could make the world economy grow faster than now.
The four areas of focus under Australia's chairmanship will be investment, employment, trade and competition.
"The ministers will decide in Sydney on a number of objectives to achieve strong, sustainable and balanced growth ... and the degree of ambition they want: if there should be some numerical outcomes or not," the official, involved in preparations for the meeting, said.
"You would have a number of scenarios - if we continue with current policies we will go this way, if we do a number of structural reforms and we close the output gap faster we could take a different route, etc.," the official said.
The talks may be complicated by turmoil in emerging markets, which started in January because of market concern that economic growth in the world's second biggest economy China would be slower than expected and that the U.S. Federal Reserve would tighten policy more quickly than thought.
As capital flowed out of emerging markets, the central banks of Turkey, South Africa, India and Brazil raised interest rates to curb a currency depreciation that could lead to higher inflation.
The policy moves will do nothing to help economic growth in these countries.
"If you want to have investment you have lower interest rates, but if you want to keep capital you have to raise interest rates - they are caught in a no-win situation," the G20 official said.
"The response to the turmoil is to raise interest rates, in some countries quite substantially like in Turkey, but of course they will have to pay for that in terms of real growth even if they stabilise the currency," the official said.
EMERGING MARKETS AND THE U.S.
Even though the United States has stuck to its message on the pace at which it is slowing its money creation, the official said some emerging market countries blame it for not communicating its intentions clearly enough to prevent the sell-off.
"Would it be good policy to, because of fear of the impact on emerging economies, delay the tightening in the U.S. even if that could create upward inflationary pressure in the U.S. and make the Fed tighten even more at a later stage?" the official said.
"Would it be desirable compared to a policy when the Fed is trying to tighten according to U.S. conditions and therefore do it gradually? These will be the issues on the table," he said.
Emerging market countries also have a bone to pick with Washington for failing to ratify a 2010 reform of decision making in the International Monetary Fund that gives developing economies more say.
"The United States will get some flak," the G20 official said, adding that the problem of U.S. monetary policy will certainly be mentioned in the final G20 communique.
But it was unclear what, if any, proposals emerging market economies might make in Sydney to address their problems at a G20 level, the official said.
New Fed chief Janet Yellen showed little inclination this week to change tack, saying the Fed would likely take "further measured steps" to curb its stimulus if data broadly supports policymakers' expectation of improved labour markets and a rise in inflation