Jesse Griffiths, Guest Blogger
Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).
The leaders of the G20 group of nineteen large economies plus the European Union met in Brisbane in November last year, capping off a year during which rhetoric significantly overshadowed achievements. Eurodad’s wrap up analysis of the year shows how efforts to kick-start global growth were largely summaries of existing national initiatives; the reliance on the OECD as the main forum for discussing tax issues resulted in major flaws in efforts to clamp down on tax dodging, and the desire to see institutional investors deliver a shot in the arm to infrastructure remains at odds with reality. Meanwhile, no progress was made on IMF governance reform, the UN led the way on structural solutions to debt crises, and the shadow of future financial crises was not dispelled by efforts to prevent banks from becoming too big to fail.
The global economy
The weakness of the global economy inevitably dominated the 2014 Brisbane summit of G20 leaders, which concluded that: “…the global recovery is slow, uneven and not delivering the jobs needed. The global economy is being held back by a shortfall in demand… [and] Risks persist, including in financial markets and from geopolitical tensions.” Their Brisbane Action Plan was thin, however, consisting mainly of the amalgamation of national-level decisions, and trumpeting the IMF’s earlier predictions that these actions would lift global growth by over 2% above trend. This prediction has already begun to look like faulty crystal ball gazing, as the IMF this week reduced its projections for global growth in 2016.While the G20 finally turned its attention to employment, asking for a report from labour and employment ministers in 2015, the global trade unions slammed the “unrealistic economic modeling” behind the 2% growth prediction, and predicted that “the G20 will be back next year with higher unemployment.”
Combatting tax dodging – right issues, flawed solutions
The G20 leaders recommitted to finalising the OECD’s plan to reduce ‘base erosion and profit shifting’ (BEPS) – the use by multinationals of complex structures to artificially shift profits to reduce the taxes they pay. Previous Eurodad analysis has noted the major flaws in the BEPs project – it lacks transparency, contains significant loopholes, and favours OECD countries over developing countries, who have had little meaningful participation in decision-making. In the original decision from 2013, the G20 leaders stated that “profits should be taxed where economic activities take place” despite the fact that this is the opposite of the OECD’s approach to the issue. Through model tax treaties, the OECD gives preference to ‘residency’ countries (where the company is owned) over source countries (where the company makes its money). This might also be a reason why the G20 leaders now changed the wording to saying “profits should be taxed where economic activities deriving the profits are performed”.G20 leaders formally endorsed the global standard for the exchange of tax information prepared by the OECD, already rubber stamped by G20 finance ministers in February 2014. Eurodad analysis highlighted flaws in this approach, which excluded developing countries from its design. The standard requires exchange “on a reciprocal basis” meaning that that any developing country wishing to automatically receive information from a tax haven – almost all of which are located in wealthy jurisdictions – will have to accept significant costs for their already over-stretched tax authorities to provide information before they can receive information.
The third main outcome on tax and transparency was the adoption of G20 High-Level Principles on Beneficial Ownership Transparency – intended to tackle the scandal that there are few requirements to establish who actually owns companies, trusts and other corporate legal structures. The main problem here is that the G20 did not agree that registers of beneficial owners (real owners) should be publicly available. A public register would be significantly more effective, allowing many interested groups, including civil society organisations, to help tax authorities identify potential cases where ‘shell companies’ have been used to facilitate tax dodging, corruption or other problems. This is particularly important for developing countries, which have over-stretched tax authorities and that suffer most from these problems. The confidentiality requirements might also prevent developing countries from getting access to the beneficial ownership information.
Infrastructure – misplaced focus
The G20 leaders endorsed the new Global Infrastructure Initiative, but the four page accompanying paper shows that is really about improvements in data and information. Australia gets to host a new international body in the form of a Global Infrastructure Hub, but the mandate is extremely limited: to “…help draw together … collective expertise … to yield ongoing improvements to the functioning of infrastructure markets.” The tiny budget – $10-15 million per year – confirms the narrow scope.Overall, the G20’s focus has sharpened this year on trying to create an infrastructure ‘asset class’ that institutional investors such as pension funds can invest in. However, as Eurodad’s analysis of last September’s G20 finance ministers meeting noted, World Bank research shows that institutional investors – currently “…have only around one percent of their portfolio exposure in infrastructure”. The barriers to investment in infrastructure by institutional investors were listed by the OECD at the time, and lack of data or information was not chief among them, suggesting that the G20 are using the wrong tools, and trying to fix the wrong problem. Instead, the finding hidden in the World Bank’s background paper for the G20 early in the year, that over the past decade in developing countries, “…private capital has contributed between 15 and 20 percent of total investments in infrastructure”, should provide food for thought. If the public sector has historically provided the lion’s share of financing for infrastructure, shouldn’t more time be spent on how to improve and increase this vital source of finance?
IMF reform – back to the drawing board
It became customary in 2014 for G20 statements to make increasingly plaintive calls on the US to implement the small reforms to IMF governance agreed in 2010. By the November G20 leaders’ summit, they had more or less given up, saying that “If this does not happen by year-end [it hasn’t] we ask the IMF to build on its existing work and stand ready with options for next steps.” The IMF is expected to publish these options this month, but no details have yet emerged.Meanwhile, reforms to the powerful Financial Stability Board did not materialise – in September, G20 finance ministers promised that the “review of the structure of [the FSB’s] representation”, would be completed by the Brisbane summit, but that summit had no details about this in its communiqué or background papers. Instead, the FSB quietly published a three page document on their website, which contained very limited proposals. On the critical issue of the exclusion of the vast majority of the World’s countries from the FSB, they agreed to give an extra seat on its governing council to the five lucky emerging markets who are members of the FSB. This means they will now have ten seats out of 70 – the rest held by developed countries and international institutions – and all other developing countries remain unrepresented.
Preventing damaging debt crises – UN outshines G20
Countries that have recent experience of debt crises may be baffled by the G20 leaders’ lauding “the progress made to strengthen the orderliness and predictability of the sovereign debt restructuring process.” However, this is the first time this critical issue has even been referenced by a G20 communiqué, after pressure from Argentina and other emerging markets. The real action on this issue continues to be at the UN: February 2015 will see the first working session of the committee set up to deliver on last year’s UN General Assembly commitment to create a multilateral legal framework for sovereign debt restructuring before the end of this year.
Orderly failures of ‘too big to fail’ banks?
The G20 leaders endorsed the Financial Stability Board (FSB) proposals to tackle the problem of banks that are ‘too big to fail’, though Eurodad’s previous analysis noted that several large banks have grown since the crisis, and the FSB’s plans allow for the failure of banks, raising concerns about potential domino effects should this happen.Finally, the G20 may finally be getting serious about meeting its target – set in 2011, with deadline of 2014 – to “reduce the global average cost of transferring remittances to five per cent” from 10%. In fact, according to the newly launched G20 plan to facilitate remittance flows, they only reached 8% by 2014 – meaning that migrants from developing countries who are sending hard-earned money home lose 8% of the value. This cost is particularly important for several low-income countries, where Eurodad research has shown that, in 2012, remittances were worth 7% of GDP on average – though the concentration of remittance flows means this figure is far higher in remittance-dependent countries.
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