Hamburg Summit

The end of the G20’s days as a premier forum for international economic cooperation”?

Jesse Griffiths

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

The strangest aspect of the G20 communiqué, and the part that has dominated media coverage, is the section on the Paris climate agreement.  The strangeness arises not because of the topic—the G20 has always played second fiddle to the UN on climate issues—but because, for the first time, a whole paragraph is devoted solely to one member, the USA, explaining why it doesn’t agree with the others, followed by a paragraph by the others explaining why they will go ahead without the USA anyway, including through agreeing a “G19” action plan on energy and climate for growth.

The climate change issue is a jarring symbol of the G20’s difficulty in reaching agreement. However, the Trump administration’s “America first” stance and resulting lack of movement on economic issues—the raison d’etre of the G20—is evident throughout the document.

Two things stand out.

Firstly, many key economic issues receive very little attention. The opening paragraphs on the global economy, trade and investment are masterpieces of bureaucratic obfuscation, offering something for everyone, while saying very little, and presenting no new initiatives. Financial sector reform—an issue at the centre of G20 work since the global financial crash of 2007/8—merits one short paragraph, with no new promises. The Action Plan which accompanies the communique has a more detailed summary of work in this area, highlighting that the G20 has essentially outsourced this work to the Financial Stability Board (FSB)—a worrying development given the major governance problems with that institution. In addition to being one of the least transparent and accountable international financial institutions, the FSB replicates the flawed G20 governance model, but makes it worse by adding the financial centres of Switzerland, Hong Kong, and Singapore to the G20 membership list (as well as Spain and the Netherlands).

Secondly, the continued expansion of G20 interest into a whole host of issues outside its traditional mandate is striking, with the G20 concerning itself with, for example, health, women’s empowerment, food security, rural youth employment, and marine pollution.

Debt problems, what debt problems?

Shockingly, despite developing country debts reaching record levels, and a significant number of countries being in debt distress, not a single mention was made of the need to tackle current and future debt crises in the communiqué. This came after the Finance Ministers earlier this year ignored the strong work being done at the UN on the need for a fair and transparent debt workout mechanism to rapidly resolve and help prevent debt crises, preferring instead to endorse a two page Operational Guidelines for Sustainable Financing that simply emphasises better information sharing informal methods of creditor coordination. They are a step backwards when compared to existing guidelines such as the UNCTAD Principles on Promoting Responsible Lending and Borrowing, which have already been endorsed by the UN General Assembly.

The G20’s Action Plan also fails to mention the UN’s work on multilateral sovereign debt restructuring frameworks, and offers only one new initiative—a Compass for GDP-linked Bonds. While it makes sense to focus on linking debt repayments in bond contracts to the ability of the borrower to pay, the vast majority of low-income country debt does not involve bonds: countries suffering from debt crises need a comprehensive approach which deals rapidly and fairly with all kinds of debt. The way the G20 deals—or fails to deal—with debt issues faced intensive critique by Eurodad members and partners at a major event that took place alongside the Hamburg Summit.

The German government had hoped to make management of international capital flows a central issue at this G20, but, as Eurodad predicted, the issue merits barely a mention in the communiqué, due probably to long-standing differences between some developed countries that are keen to further liberalise international finance, and emerging markets, who are rightly wary of this agenda.

As noted previously by Eurodad, promises to conclude governance reform of the IMF by 2019 shows how glacial progress is, given that the last of these “every five year” reforms was concluded in 2010 (though only implemented in 2016).

Tax—a blacklist of one

G20 efforts to tackle tax dodging by multinationals continue to centre on the flawed OECD Base Erosion and Profit Shifting (BEPS) initiative. Eurodad has already noted the major flaws of BEPS—it lacks transparency, contains significant loopholes, and has failed to incorporate the needs and interests of developing countries, the vast majority of which have had little meaningful participation in decision-making.

In March, Finance Ministers called on the OECD to prepare a blacklist of countries not meeting “agreed international standards of tax transparency.” The result was that the OECD—a body that boasts well known tax offenders such as Luxembourg, Switzerland, the Netherlands and the UK amongst its members—produced a blacklist naming only tiny Trinidad and Tobago as “non-compliant” with international standards. Almost comically, the G20 chose to see this as a sign that all was well, and asked the OECD to repeat the flawed exercise for the next summit. Finally, the G20 leaders noted the work they are doing on “enhancing tax certainty” which previous Eurodad analysis suggests is an effort to shift attention away from ensuring that multinationals pay taxes in the country where they do business, to a focus on ensuring they don’t receive any surprises—in other words, protecting the status quo.

Private finance

There is remarkably little in the communiqué on previous G20 pushes to increase the role of private finance, particularly for infrastructure. However, the leaders endorsed the Joint Principles and Ambitions on Crowding-In Private Finance, which Eurodad has previously raised concerns about, including its emphasis on mechanisms to “de-risk” private finance—a euphemism which can often mean the risks are not actually reduced, but simply transferred to the public sector.

As one centrepiece of its presidency, the German government had launched a new Compact with Africa initiative, aimed at encouraging foreign private investment in Africa, but this is not mentioned in the communiqué. Instead, the G20 groups a number of smaller initiatives under the umbrella of an Africa Partnership. Perhaps this downplaying of the Compact was due to the small number of African countries that signed up—only seven are listed in the communiqué—or it may be a response to the substantive criticism of the Compact and the real motives behind it. For example, Eurodad’s sister organisation, Afrodad, launched a comprehensive critique of the initiative, after consultation with groups from across the African continent. While noting that “the initiative could be beneficial,” Afrodad goes on to highlight major concerns, including noting that developed countries that support such initiatives are “in search of space for their expansionism” and that the end result may be “how to integrate Africa into the global division of labour … with Africa playing the same old role of raw materials provider.”

The “digital economy” was a particular focus of the German G20, which published a “G20 Roadmap for Digitalisation.” The G20 promise to “constructively engage in WTO discussions relating to E-commerce” is a warning flag for critics of the WTO’s work in this area. A recent analysis by the think tank the Center for Economic Policy Research (CEPR) found that current e-commerce proposals being considered by the WTO “are designed around a borderless, digitized global economy in which major technology, financial, logistics, and other corporations like Amazon, FedEx, Visa and Google can move labor, capital, inputs, and data seamlessly across time and space without restriction. They also want to force the opening of new markets, while limiting obligations on corporations to ensure that workers, communities, or countries benefit from their activities.”

Finally, green finance, a major topic of China’s presidency, seems to have been sidelined: it is not mentioned in the communiqué, though both the accompanying G20 Hamburg Action Plan and the Climate and Energy Action Plan take note of the work of the G20 study group on green finance, and the recommendations of the Task Force on Climate-related Financial Disclosures.

The lack of concrete outcomes in the G20’s core areas as the self-proclaimed “premier forum for international economic cooperation” underlines the governance shortcomings of the G20. As an informal club with no permanent secretariat and which operates by consensus, its ability to reach agreement can be held to ransom by powerful countries, such as the U.S., refusing to cooperate. This governance problem is inherent in the G20 design, which is one reason Eurodad and others have called for its replacement by an Economic Coordination Council elected by all UN member states, as proposed by the UN Commission of Experts on reforms of the international monetary and financial system.

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Battling Apple and the Giants

C.P. Chandrasekhar

On the 30th of August European Competition Commissioner Margrethe Vestager dropped a bombshell at the tax doors of the world’s leading multinational corporations. After a lengthy investigation she ruled that Ireland must recover from the local Apple subsidiary up to 13 billion euros ($14.5 billion) in unpaid past taxes, adding on interest on delayed payments, which could take the total to as much as 19 billion euros ($21 billion).The ruling was based on a decision that tax benefits provided to Apple’s subsidiaries in Ireland through two tax rulings amounted to ‘state aid’ that was illegal under EU rules.

The penalty, though huge by past standards, is not the issue here. With as much as $230 billion of cash and liquid securities (which can be easily converted to cash) at hand, Apple would not have to stretch itself to meet this bill. The real issue is whether Apple’s tax accounting, which is considered legal by the Irish government, can be challenged by investigators acting on behalf of the European Commission. It is taken for granted by the world’s biggest companies that they can transfer profits earned anywhere to locations that are tax havens as part of their “tax planning” decisions. The method through which this is often done is to charge inflated book prices (“transfer prices”) for goods or services sold by the parent or a third country subsidiary (depending on which is located in a country that imposes lower taxes) to the subsidiary in the country from which profits are to be transferred out. This inflates costs and reduces profits on paper in the country from which incomes are being siphoned out. The practice could mean both, that the effective income tax incidence on these companies globally is less than that on smaller companies and even individuals, and that some countries from where the profits of these multinationals are earned would be deprived of tax revenues on those incomes. These problems have been accentuated in the neoliberal era, since countries pursuing neoliberal trajectories are keen on attracting foreign investors into their economies, and are competing with each other to offer them a range of concessions, including concessions that facilitate this kind of tax avoidance, which is legal and does not constitute tax evasion.

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September 27, 2016 | Posted in: Uncategorized | Comments Closed

G20 Finance Ministers focus on private financing of infrastructure

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

Last weekend, G20 Finance Ministers had their penultimate meeting before the G20 Leaders summit, scheduled for December in Turkey. Despite the current instability in stock markets and currencies in many countries, the focus of the communiqué is on the continued push, led by multilateral development banks and the OECD, to radically change the way infrastructure is financed by trying to draw in private finance, though this method has a weak recent track record. Discussion of ongoing efforts to combat tax evasion and reform the financial sector were slated for the next meeting in October, while the G20 continued to complain about the failure of IMF governance reform, but offered no hope that an IMF governance crisis can actually be avoided.

This was the Finance Ministers’ third meeting of the year, with one more slated to coincide with the World Bank/ IMF annual meetings in Lima in October. Detailed analysis of the outcomes of the meeting has been hampered by the fact that almost all of the large number of background papers were not put in the public domain until some days after the summit ended.

The stock market problems in China, and related currency problems of many other emerging markets were at the centre of the discussions, but monetary policy coordination has been a major area where the G20 has failed to have any impact in the past. The communiqué underscores this fact by noting that “monetary tightening is more likely in some advanced economies” – effectively endorsing anticipated raises in interest rates in the United States, which many expect will lead to a significant outflow of capital from developing countries.

Private infrastructure top of the agenda

Instead, as Eurodad predicted earlier in the year, the big focus this year is on “boosting investment,” which the ministers proclaim as “a top priority.” This is nothing new – infrastructure was a major theme of the Australian G20 presidency in 2014, though outcomes were limited – but the sheer scale of the preparatory work suggests the international institutions that act as the secretariat for the G20 have moved into overdrive, with multiple background papers from the OECD, the World Bank and others.

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How More and More U.S. Corporate Profits Escape the Corporate Income Tax

The effective corporate income tax rate is almost exactly the same in the United States as in other OECD countries. (While the U.S. statutory corporate tax rate is well above the OECD average, the many loopholes in the U.S. corporate tax bring the effective rate down substantially.) Then how is it that corporate taxes account for a much smaller share of GDP in the United States than in other high-income countries? The answer lies in forms of incorporation that allow U.S. corporate profits to be taxed at the lower individual income tax rate. 

This article was originally a sidebar for an article in the January/February issue of Dollars & Sense magazine, Another Gift for Corporations–Lower Tax Rates.

John Miller, Guest Blogger

Two changes paved the way for more and more profit to escape the corporate income tax in the United States. The federal government extended limited legal liability, which protects owners from losing their personal assets if their business fails, to some partnerships and “pass through” corporations not subject to the corporate income tax. Then the tax reform of 1986 cut the top tax bracket of the individual income tax to 28%, well below the statutory corporate income-tax rate. That opened up a large tax advantage for owners who paid individual income taxes on their profits instead of corporate income taxes.

Pass-through businesses—-S-corporations (which afford up to 100 owners limited liability), partnerships (including limited liability partnerships in which all the partners enjoy limited liability), and sole proprietorships—-have flourished over the last three decades. In 1980, corporations subject to the corporate income tax (called “C-corporations”) generated nearly four fifths (78%) of business net income, a measure of a business’s profitability. By 2007, pass-through businesses’ share of net income surpassed that of C-corporations. In fact, partnerships, S-corporations, and sole proprietorships each outnumbered C-corporations.

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Can “Abenomics” Revive Japan’s Economy? Part 1

Junji Tokunaga, Guest Blogger

This is the first part of a two-part post on the economic policies of Japan’s prime minister, Shinzo Abe, and on alternatives to neoliberal “Abenomics.” Junji Tokunaga is an Associate Professor in the Department of Economics, Dokkyo Univeristy, Saitama, Japan. He is the co-author, with regular contributor Gerald Epstein, of a multi-part series for Triple Crisis on “Global Dollar-Based Financial Fragility in the 2000s” (Part 1, Part 2, Part 3, Part 4).

Japanese Prime Minister Shinzo Abe won a landslide victory in the snap election for the lower house of parliament on December 14, 2014. Abe’s Liberal Democratic Party (LDP), the leading conservative political party, and its partner party in the ruling coalition have won 326 of 475 seats, which enabled the coalition to secure a two-thirds supermajority in the lower house.

Why did Abe win the election? Since the end of 2012, the Abe government has carried out an economic revitalization program, called “Abenomics,” consisting of “three arrows”: more aggressively quantitative monetary easing, massive fiscal stimulus, and structural reforms. The main reason of his emphatic victory is that Abe  succeeded in persuading the electorate to stay the course, with slogans like “Abenomics is progressing” and“there is no other way to economic recovery,” while shifting the electorate’s attentions from more delicate political matters such as restarting Japan’s nuclear power plants and bolstering its military forces.

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G20 Finance Ministers Cannot Hide Failure to Tackle Major Issues

By Jesse Griffiths, Guest Blogger

Jesse Griffiths is the director of Eurodad, European Network on Debt and Development.

The communiqué from this weekend’s G20 finance ministers’ meeting in Cairns tried to paper over increasingly evident cracks in the global economy, trumpeted an OECD initiative to reduce tax dodging which is not as good as it seems, continued to focus on privately funded infrastructure, and suggested G20 impotence in tackling big problems including too-big-to-fail banks and global governance reform.

The global economy: fragile and faltering

The G20 cannot hide the continued high levels of fragility, huge unemployment, and glaring inequality that continue to characterise the global economic situation. The finance ministers’ communiqué notes that, “the global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth.” Recent reports that companies are buying their own stocks at record rates, helping stock market bubbles build rather than investing for future growth, is one reason the ministers “are mindful of the potential for a build-up of excessive risk in financial markets,” though they promise no new measures to tackle this.

Instead, their response has been to trumpet the promise they made in Sydney earlier in the year to “develop new measures that aim to lift our collective GDP by more than 2 per cent by 2018.” They get the seal of approval from the IMF and OECD’s “preliminary analysis, ” which, at three pages long, has so little detail it is impossible to assess its accuracy. Interestingly, according to the crystal ball gazing that inevitably characterises such attempts to assess global impacts of national policy changes, “product market reforms aimed at increasing productivity are the largest contributor to raising GDP,” which appears to largely mean changes in trade policies in emerging markets. The next biggest impact comes from public infrastructure investment commitments – highlighting the problems with the G20’s focus on private investments in infrastructure, discussed below.

Brief reference is made to the problem that dominated the G20 Finance Ministers’ meeting in February: developing countries’ concern about how the gradual ending of quantitative easing and possible future rises in interest rates in the developed world will affect capital inflows and outflows, which can create huge problems for them. The rich countries that dominate the G20 cannot offer more than the promise to be “mindful of the impacts on the global economy as [monetary] policy settings are recalibrated.”

Despite the fact that Argentina – currently fighting a rearguard action to prevent a US court ruling from undermining a decade of debt restructuring – has a seat on the G20, the issue of permanent mechanisms to deal with debt crises continues to be off the table. Instead it was picked up by the UN, which passed a resolution in September to negotiate a “multilateral legal framework for sovereign debt restructuring,” which could be a game changer for how sovereign debts are managed, offering the possibility of preventing and resolving debt crises: a consistent plague for many countries and a huge problem for the global economy.

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Climate Policy as Wealth Creation, Part 1

James K. Boyce

This is the first installment of a five-part series on climate policy by regular Triple Crisis contributor James K. Boyce, professor of economics at the University of Massachusetts-Amherst and director of the Program on Development, Peacebuilding, and the Environment at the Political Economy Research Institute (PERI).

The series is adapted from Prof. Boyce’s March 31 lecture, part of the Climate Change Series at the Honors College of the University of Pittsburgh. The lecture explores how to turn the atmosphere (heretofore treated as an “open access” resource, into which greenhouse gases can be dumped at no cost to the emitter) into a common-property resource. This requires the establishment of a set of public property rights over the atmosphere’s capacity to absorb and recycle carbon, the imposition of costs (as through a carbon tax or sale of carbon permits) on those who use this finite resource, and a determination of how the rents will be distributed.

The remaining parts of the series will appear once a week for the next four weeks. The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.


Demand and Supply

Broadly speaking, there are two types of policies to reduce carbon emissions from fossil-fuel combustion. One set of policies operates on the demand side of the picture, on the need for fossil fuels. These are policies that include investments in energy efficiency, investments in alternative sources of energy, public investment in mass transit, etc.—investments that reduce our demand for fossil fuels at any given price. Even if the prices of fossil fuels were to remain unchanged, people would consume less of them, thanks to these investments in efficiency, alternative energy, alternative modes of transportation, etc. That’s an important set of policies, but it’s not the only one that is relevant.

I’m going to focus on the complementary set of policies that operate not on the demand side of the equation, but the supply side—policies that raise the price of fossil fuels at any given level of demand. Those policies operate by raising the price in either of two ways which are more or less equivalent, either by instituting a tax on carbon emissions or, alternatively, by putting a cap on emissions and thereby restricting supply. In the same way, OPEC restricts supply when it wishes to increase the price of oil and increase profits—it raises the price. Well, that’s how a cap works to raise the price, too.

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Rent in a Warming World

James K. Boyce

What’s rent got to do with climate change? More than you might think.

Rent isn’t just the monthly check that tenants write to landlords. Economists use the term “rent seeking” to mean “using political and economic power to get a larger share of the national pie, rather than to grow the national pie,” in the words of Nobel laureate Joseph Stiglitz, who maintains that such dysfunctional activity has metastasized in the United States alongside deepening inequality.

When rent inspires investment in useful things like housing, it’s productive. The economic pie grows, and the people who pay rent get something in return. When rent leads to investment in unproductive activities, like lobbying to capture wealth without creating it, it’s parasitic. Those who pay get nothing in return.

Two other types of rent originate in nature rather than in human investment. Extractive rent comes from nature as a source of raw materials. The difference between the selling price of crude oil and the cost of pumping it from the ground is an example.

Protective rent comes from nature as a sink for our wastes. In the northeastern states of the U.S., for example, the Regional Greenhouse Gas Initiative requires power plants to buy carbon permits at quarterly auctions. In this way, power companies pay rent to park CO2 emissions in the atmosphere. Similarly, green taxes on pollution now account for more than 5% of government revenue in a number of European countries. When polluters pay to use nature’s sinks, they use them less than when they’re free. Read the rest of this entry »

Billionaires: Decline of the West, Rise of the Rest

Robin Broad and John Cavanagh

With the help of Forbes magazine, we and colleagues at the Institute for Policy Studies have been tracking the world’s billionaires and rising inequality the world over for several decades. Just as a drop of water gives us a clue into the chemical composition of the sea, these billionaires offer fascinating clues into the changing face of global power and inequality.

After our initial gawking at the extravagance of this year’s list of 1,426, we looked closer. This list reveals the major power shift in the world today:the decline of the West and the rise of the rest. Gone are the days when U.S. billionaires accounted for over 40 percent of the list, with Western Europe and Japan making up most of the rest. Today, the Asia-Pacific region hosts 386 billionaires, 20 more than all of Europe and Russia combined.

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Who does it hurt? The IMF on fiscal consolidation

Arjun Jayadev

Who does it hurt? The IMF on fiscal consolidation

In 2010 Alberto Alesina from Harvard University was celebrate by Business Week for his series of papers on fiscal consolidation. This was ‘his hour’ the article argued. The surprising argument that he and his coauthors made that was that the best way forward for several countries facing debt issues was to undertake “Large, credible and decisive spending cuts”. Such cuts would work to change the expectations of market participants and bring forward investment that was held back by the uncertainty surrounding policies in the recession.

The idea of ‘expansionary austerity’ has failed spectacularly by any account. Martin Wolf’s latest article in the New York Review of Books goes over this, as does Paul Krugman’s earlier piece in the same outlet. In a forthcoming paper written by Josh and I  (which I will blog about later), we argue that austerity succeeded at least in part because of the nature of consensus macroeconomics (by which we mean both New Keynesian and Real Business Cycle approaches).

One paper that I had wanted to write was to discuss the distributional implications of austerity. For many reasons, including those elucidated by Jim Crotty, Josh and Jerry Epstein, austerian policies and should really be seen as class conflict—protecting the interests of the wealthy and attacking those of the poor.

I never got to the empirical tracing out of this argument- but the IMF has. And the abstract really does say it all:

This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments

In other words—it does hurt, and it hurts the relatively poor more. Even more importantly, the claim that spending cuts are ‘better’ for the economy than tax raises as argued by Alesina and some coauthors forgets to ask for whom this is better. The IMF’s answer is that spending cuts are definitely not good for the working class and that advocating spending cuts rather than tax increases imposes distributional costs to those least capable of bearing it.

What a surprise!

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