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The Los Cabos Growth and Jobs Action Plan

Los Cabos, Mexico, June 19, 2012
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Risks and uncertainty in the global economy have increased substantially. Our collective focus now is to strengthen demand, growth, confidence and financial stability in order to improve employment prospects for all of our citizens. We have agreed today on a globally coordinated economic plan to achieve those goals through our Framework for Strong, Sustainable and Balanced Growth. This plan, which incorporates and extends the Cannes Action Plan, significantly intensifies our efforts to achieve a stronger, more durable recovery. The Los Cabos Growth and Jobs Action Plan starts from the premise that cooperation and coordination will result in better economic outcomes. We are united in our commitment to take strong and decisive action to deliver on the commitments set out below.

We have agreed that, in light of what are perceived to be the most significant risks, our policy actions should focus on:

Our ability to successfully address these risks is influenced by our ability to take stronger actions to promote stability and growth, and reduce ongoing imbalances, including by encouraging the rotation of demand from the public to the private sector in countries with fiscal deficits and from the external to the domestic sector in countries with current account surpluses. We are in full agreement that we need to intensify our efforts to reduce both internal and external imbalances.

As we agreed in Cannes, we have established the Los Cabos Accountability Assessment Framework (Annex A) to assess progress in meeting commitments toward our shared goal of strong, sustainable and balanced growth. This Framework is based on three pillars. First, guiding principles to ensure the assessments are: country-owned; based on a comply or explain approach; concrete; consistent across members; fair; open and transparent. Second, a peer review process that includes review and discussion of members’ policies and in-depth assessments from the international organisations. Finally, annual reports to Leaders summarising the outcomes of the assessments.

We have conducted our first assessment under this framework (Annex B). We have agreed that the commitments set out in the Cannes Action Plan to promote recovery and lay the foundation for robust growth and job creation remain broadly appropriate. The recent intensification of risks, however, has increased the importance of implementing and building upon the Cannes commitments. Progress has been good in meeting some elements of the Cannes Action Plan, but in several areas more progress is needed. We will undertake ongoing accountability assessments and improve our tracking of measures to assess progress as set out in the Los Cabos Accountability Framework.

The Los Cabos Action Plan, as set out below, includes a combination of policy measures, with short- and medium-term impacts, in order to ensure that policy credibility is enhanced and to reflect the different capacities of countries to respond in particular areas.

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Addressing Near-term Risks, Restoring Confidence, and Promoting Growth

Central to this plan is a common agreement that the strongest actions to minimize risks and spur growth are those that promote the stability and proper functioning of our financial systems, supported by fiscal and monetary policy actions.

To address near-term risks, promote confidence, ensure economic and financial stability, and bolster the economic recovery, we have agreed on the following actions.

1. The Euro Area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.

2. Fiscal policies in all of our economies will focus on strengthening and sustaining the recovery in a manner which promotes fiscal sustainability and enhances policy credibility.

3. Monetary policies will remain focused on maintaining price stability and sustaining the global economic recovery. In this context, the actions taken by central banks in advanced economies have played an important role in promoting global economic growth and stability. Central banks will remain vigilant and take action as appropriate to achieve their objectives.

4. Our central banks, financial market supervisors and treasuries will remain in close dialogue and will cooperate through the FSB to maintain financial stability during this period of heightened uncertainty. We will maintain momentum on the financial sector institutional reforms needed to safeguard our financial systems over the medium term while taking appropriate actions to protect credit channels and the integrity of global payment and settlement systems.

5. Should economic conditions deteriorate significantly further, Argentina, Australia, Brazil, Canada, China, Germany, Korea, Russia and the US stand ready to coordinate and implement additional measures to support demand, taking into account national circumstances and commitments.

6. Emerging markets will adjust their macroeconomic policies to support domestic demand, while ensuring price stability. When and where appropriate, macro-prudential measures will also be used to help manage domestic credit growth and liquidity.

7. Recognizing that geopolitical risks might lead to a supply-side induced spike in oil prices, in an environment of limited spare capacity and modest inventories, members stand ready to take additional actions as needed. We welcome the commitments by producing countries to ensure adequate supply. In particular, we welcome Saudi Arabia’s readiness to mobilize, as necessary, more than 2.5 million barrels per day of existing spare capacity.

8. In all policy areas, we commit to minimize the negative spillovers on other countries of policies implemented for domestic purposes. We reaffirm our shared interest in a strong and stable international financial system and our support for market-determined exchange rates. We reiterate that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.

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Strengthening the Medium-term Foundations for Growth

All members agree to build on the 6-point plan developed in Cannes to boost confidence, raise global output and create jobs, focussing on priority areas.

1. Advanced economies will ensure their fiscal finances are on a sustainable track.

2. We will intensify our efforts to rebalance global demand, through increasing domestic demand in countries with current account surpluses, rotating demand from the public to private sector in countries with fiscal deficits and increasing national savings in countries with current account deficits.

3. In Cannes, countries put forward structural reform commitments to boost and sustain global demand, foster job creation, contribute to global rebalancing and increase the growth potential in all G20 countries. These remain core priorities going forward and are reflected in additional reforms and commitments made since Cannes. These reforms include:

4. We have made substantial progress in strengthening financial sector regulation and supervision. Current global economic challenges underscore the need to reaffirm our commitment to the effective implementation of the agreed financial reforms in order to make the financial sector more resilient, stable and able to support economic growth. We welcome the FSB’s work, in conjunction with the IMF and the World Bank, identifying the extent to which agreed regulatory reforms may have unintended consequences for EMDEs. G20 members continue to look to the FSB, in cooperation with standard setters, to monitor progress, reporting back on a regular basis. This will be complemented by efforts to increase financial inclusion.

5. We reaffirm our commitment to resist protectionism in all forms and promote open trade, and will take active measures to reduce the number of WTO inconsistent trade restrictive measures and resist financial protectionism.

6. Members reiterate the commitment on actions to maximize growth potential and economic resilience in developing countries, as well as the importance of fulfilling aid commitments by advanced countries, and mobilizing domestic, external, and new innovative sources of finance to meet development needs. These actions will complement the efforts of multilateral and bilateral donors, public and private partners to assist developing countries in achieving the Millennium Development Goals. Emerging market members will also promote a range of reforms to promote development, including improving the investment climate and enhancing infrastructure investment.

Details on country-specific reform commitments are posted on the Mexican Presidency’s website. We will continue to coordinate policy in the future as economic conditions evolve. We ask our Finance Ministers to work closely together in the coming months to address vulnerabilities and sustain the recovery. We will review progress against all of our commitments at the St. Petersburg Summit in 2013.

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Annex A: The Los Cabos Accountability Assessment Framework

G20 members have developed an Accountability Assessment Framework based on three pillars. This Framework will be used to prepare reports on progress in meeting past commitments, which will inform the development of future action plans and domestic policies.

Guiding Principles

To make sure that the Framework meets the needs of the membership, members have agreed that it be:

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1. A Peer-Review Process informed by Third-Party Assessments

To ensure the Framework’s credibility and integrity, we task our officials with further enhancing the Accountability Assessment Framework, by looking at ways to promote peer review discussions based on a shared understanding of issues. We are committed to agreeing on a common approach to measure progress against previous commitments in the areas of fiscal, monetary, exchange rate, and other policies. As well we agree that commitments need to be specific, measurable and relevant to achieving strong, sustainable and balanced growth. We task our Finance Ministers and Central Bank Governors to review progress by their meeting in Mexico City in November 2012.

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2. Regular Reports to Ministers/Governors/Leaders

The culmination of the peer review discussions will be short progress reports prepared for Ministerial meetings and regular Annual Accountability Assessments for Ministers, Governors and Leaders. These assessments would also provide critical input to inform the range of concrete policy commitments that should be included in the G20 Action Plans.

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Annex B: The Los Cabos Accountability Assessment

The G20 launched the Framework for Strong, Sustainable and Balanced Growth in Pittsburgh in 2009 to promote the range of policy actions required to overcome the legacy of the 2007-08 financial crisis and put the global economy back on the path of strong, sustainable and balanced economic growth and robust job creation. The bold policy actions undertaken by G20 countries in response to the crisis limited the loss of output and jobs, and launched the global recovery.

While significant policy actions have been implemented since then, our common goal of achieving strong, sustainable and balanced growth as agreed in Pittsburgh has remained elusive. It is clear that the rebuilding of public and private sector balance sheets across advanced economies will continue to constrain global growth for some time. Further, a number of risks continue to weigh heavily on global growth as outlined above. The recovery in private demand in most advanced economies remains muted. Although growth in emerging market economies has remained relatively strong, there are indications that it too is slowing. Reflecting the differential growth profiles, unemployment rates in emerging market economies have generally fallen below pre-crisis levels, while unemployment rates in advanced economies generally remain stubbornly high.

External imbalances have generally narrowed compared to the very large imbalances in the pre-crisis period. Structural policy adjustments have played a role in some countries, but the improvement also reflects cyclical effects, in particular the relatively weak cyclical position of many advanced economies and movements in terms of trade. Oil-exporting countries continue to run large and mounting current account surpluses.

On balance, developments since Pittsburgh suggest that a continued and more determined effort across all policy areas is required to meet the objectives set out when we established the Framework.

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Fiscal Policy

Good progress has been achieved in meeting the Toronto fiscal commitments, although the weaker-than-expected economic outcomes has affected the fiscal adjustment paths of some countries. In some countries the credibility of fiscal policy needs to be bolstered through actions to place public finances on a sustainable medium-term path:

Member countries have made progress on their commitments to implement structural fiscal reforms. The Euro Area has strengthened its fiscal frameworks with the adoption of the Fiscal Compact. Some members have delivered on their commitment to reform the pension system (Italy) and others are making progress on pension reforms (France, the UK). Brazil has approved a reform of the civil servants’ pension system. Spain has implemented a major labour market reform. Further progress is required on a range of fiscal actions across G20 members that would both promote sustainable public finances and facilitate global rebalancing: the Euro Area needs to complete reforms to fiscal governance; and, the US and Japan need to fully implement ambitious medium-term fiscal plans. India, Indonesia and Mexico need to continue their reforms of major subsidies. Further progress on tax reform is required in many emerging and advanced economies to reduce distortions.

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Monetary and Exchange Rate Policies

In advanced economies, monetary policies have played an integral role in supporting the recovery while maintaining price stability. In emerging market economies, inflationary pressures have generally eased, largely as a result of slower growth.

Since the Pittsburgh Summit, emerging market economies with relatively inflexible exchange rate regimes, under the IMF’s de facto classification system, implemented a number of important reforms. In particular, both China and Russia have widened their exchange rate floating bands. China’s exchange rate has appreciated substantially since 2005, but progress towards greater exchange rate flexibility has been less clear since the Cannes Summit, particularly given the short time that China’s most recent reforms have been in place. Reserves fell in China during the last quarter of 2011 partly owing to the narrowing in its current account surplus. Reserve accumulation resumed in the first quarter of 2012.

Emerging market countries expressed concerns that the easing in monetary policies in advanced economies is contributing to an increase in both the level and variability of capital flowing to their economies and volatility in other financial variables, complicating macroeconomic policy management. Members generally recognised that domestic monetary policies of advanced economies are appropriately targeted to achieve domestic objectives while at the same time recognising the need to remain vigilant against possible negative spillovers of their policies.

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Structural Policies

The implementation of key structural reforms is critical to strengthening growth and creating jobs, and promoting global rebalancing, such as policies that affect social safety nets and investment patterns. However, members agreed that structural reform commitments are particularly difficult to assess, in part due to the length of time it takes to implement them and witness their effects. That said, members remain committed to pursuing structural reforms as not only are some reforms able to provide employment gains in the short-term, they also boost jobs and growth domestically and have positive spillovers via trade and other linkages to help rebalance the global economy.

The OECD estimates that implementation is underway for over three quarters of all structural reform commitments, with full implementation of about one-third of all commitments. Progress in implementing reforms is broadly similar for advanced and emerging economies. However, progress across the different categories of structural reforms has been uneven and greater ambition is needed to implement the reforms that will have the greatest impact on rebalancing, job creation, and promoting stronger growth.

Several advanced economies need to make more progress on product market reforms (Euro Area, Japan). Emerging markets, in general, need to further improve the business and investment environment, which will facilitate investment in infrastructure and enhance potential growth, and foster financial inclusion. To facilitate global rebalancing: the US needs to do more to encourage private savings; Germany should implement measures to promote domestic demand; and, some emerging markets need to increase domestic consumption and improve the efficiency of investment.

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Trade, Financial Sector and Development Policies

The WTO, UNCTAD, World Bank and OECD continue to monitor progress countries have made in reducing tariffs and liberalizing trading systems, including reducing entry barriers in key sectors. Most members have maintained their commitment to resist protectionism, including by addressing unfair trade practices through WTO-consistent trade remedy measures rather than ad-hoc policy responses. However, the political climate in some regions appears to be more accepting of new forms of protectionist measures, which should be resisted.

The FSB is responsible for coordinating and promoting the rigorous monitoring of the implementation of the agreed G20/FSB financial reforms and its reporting to the G20 under the FSB’s Coordination Framework for Implementation Monitoring (CFIM) that was established last year. This process involves intensive monitoring and detailed reporting, in collaboration with the standard setting bodies, on national implementation progress in six priority reform areas (Basel III, policy measures for G-SIFIs, resolution frameworks, OTC derivatives, compensation practices, shadow banking) as set out in the FSB’s report to G20 Leaders. The FSB, in coordination with relevant standard setting bodies, also reports on the implementation of other agreed regulatory reforms and publishes information on the

steps taken by FSB members to implement them. The IMF reviews progress realized by its members via its Article IV surveillance and FSAP assessments. The FSB, in coordination with the staff of the IMF and World Bank, has prepared a study identifying the extent to which agreed regulatory reforms may have unintended consequences on emerging market and developing economies.

The World Bank, in conjunction with other international organizations, will continue to assess the growth and development agenda in developing countries, including the impact of the Framework policies and the external environment on promoting development and reducing the development gap. In addition, they continue to monitor the progress towards fulfilling commitments in this area.

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Overall, progress has been made in moving ahead on the Cannes and previous summit reform commitments, but more progress and new actions are required in several important areas. In order to facilitate future assessments, members also recognised that policy commitments need to be as specific and concrete as possible, and need to substantively contribute towards the overall objective of strong, sustainable and balanced growth. We also agree on the need for a common approach to measure progress against previous commitments in all policy areas.

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1. For consistency across members, this assessment of the Toronto commitments is based on general government deficit, using the actual deficit in 2010 and comparing to the IMF’s projections for 2013, allowing a 0.5 percentage point confidence band around the projections.↑↑

2. Using the IMF’s forecast for the general government debt-to-GDP ratio over 2015 and 2016.↑↑

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Source: Mexican Presidency of the G20

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