G20 finance ministers cannot hide failure to tackle major issues

24 September 2014 by Jesse Griffiths

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 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). 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 GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
by more than 2 per cent by 2018”. They get the seal of approval from the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

’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 Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
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 at the G20. Instead it was picked up by the UN, which passed a resolution in September to negotiate a “multilateral legal framework for sovereign debt Sovereign debt Government debts or debts guaranteed by the government. 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.

Tax: OECD spin hides serious flaws

Pre-summit briefings from the Australian government showed they hoped to ride the wave of the OECD’s media campaign to present its new reporting standard for automatic exchange of tax information as a “step-change in our ability to tackle and deter cross-border tax evasion.” Detailed Eurodad analysis, however, showed serious flaws in the proposal for country by country reporting of multinationals’ accounts, which was negotiated behind closed doors.

Transparency has been seriously undermined, not just because the OECD’s understanding of the term appears not to include public access to information, but also because corporations will be allowed to hide information regarded as “commercially sensitive”: a huge loophole. The fundamental problem is that the standard builds on and reinforces the existing OECD system, based on the ‘arm’s length’ principle and their tax treaty model which give preference to ‘residency’ countries (where the company is owned) over source countries (where the company makes its money) - which generally means favouring OECD countries over poorer countries. Other problems include the possibility that not all multinationals will be covered, and the exclusion of key issues for developing countries from the discussions. The fact that the OECD is the forum for this discussion means that global tax policies are being decided by just 44 countries, many of which are a core part of the problem (Switzerland, Luxembourg, the Netherlands, Ireland, to name a few). Meanwhile, more than 100 developing countries have not been invited to participate in decision-making.

Infrastructure – an obsession with private finance

The ministers said they approved a “Global Infrastructure Initiative”, but published no details about it, merely saying that the “implementation mechanism” will be “announced by our leaders in November.” The communiqué initially suggests its ambitions may be limited to information sharing, as it will focus on “a knowledge sharing platform, addressing data gaps and developing a consolidated database of infrastructure projects”. However, the ministers say it will also “seek to support quality public and private investment, including by optimizing the use of the public balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet,” meaning they will continue to focus on using public money to leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. private investment in infrastructure, despite earlier World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

research showing infrastructure continues to be overwhelmingly publicly funded, as Eurodad has noted.

Meanwhile, the World Bank’s development of a Global Infrastructure Facility (GIF) was “welcomed” and the background note confirms the Bank’s intention to launch this at its upcoming annual meetings in October. In addition to the $80million the Bank is seeking as “seed funding for a pilot phase” the background note also includes a request for $200 million for a future “downstream window.” The GIF is “a global, open platform that will facilitate preparation and structuring of complex infrastructure PPPs” [public private partnerships.] Eurodad has previously highlighted major problems with many PPP models, including the fact that that they often prove very expensive for the governments involved. The Bank’s failure to take this issue seriously was highlighted by a report of the Bank’s own Independent Evaluation Group, which found that the public sector liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). triggered by PPPs can be “substantial”, but that they are “rarely fully quantified” at the project level.

The main long-term purpose of this facility is “…to help in the development of [emerging and developing economy] infrastructure as an asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). class attractive to the full range of private investors”. However, the accompanying OECD paper on institutional investment in infrastructure, lists some of the reasons why this approach will be extremely difficult: “the longer time horizons over which agency problems and related weaknesses can materialise, the greater uncertainty regarding investment returns, the particular illiquidity of long-term investments, … insufficient investor capacity to manage longer-term assets, and potential problems with investment conditions and market infrastructure.”

These major problems help explain why, as the Bank previously noted, institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. “…have only around one percent of their portfolio exposure in infrastructure.” So why are the G20, the OECD and the World Bank so keen to pursue this agenda, which is so far from the current global reality of infrastructure financing? Perhaps one answer is that is will require a huge amount of other policy reforms by governments to make themselves attractive to overseas investors. As the OECD’s background papernotes, these include changes to “the legal and regulatory system, supervision, tax laws”, “product market regulations” and “financial markets and institutions”.

Banking reform: G20 confidence wobbles

Although we will have to wait until the G20 leaders’ summit in November for the Financial Stability Board FSB
Financial Stability Board
The Financial Stability Board is an informal economic group that was created during the G20 meeting in London in April 2009. It succeeded the FSF (Financial Stability Forum) that had functioned since the G7 in 1999. The Board is made up of 26 national financial authorities (central banks and finance ministries), several international organizations and groups that devise financial stability standards. Its raison d’être is to enable cooperation in the fields of supervision and the observation of financial institutions.

Financial Stability Board : http://www.fsb.org/
(FSB)’s full “proposal for addressing the too-big-to-fail issue”, there appear to be cracks in the G20’s confidence that it can prevent systemically important banks from failing. While lauding existing “stronger capital requirements for systemically important banks”, it turns out they only seek to guarantee “additional loss absorbing capacity that would further protect taxpayers if these banks fail.” Keen observers will remember that the global financial crisis was so serious not because tax payers were on the hook for the failure of any one big bank, but because the financial system had become so interconnected that all banks were threatened by the failure of one. As the IMF noted in June, this problem is far from being solved, and in fact several of the biggest banks have grown considerably bigger since the crisis, as the chart shows.

IMF governance: the long road to nowhere

The longstanding saga of the G20’s failure to force ratification of the very modest reforms to IMF governance agreed in 2010 drags on, with the – now familiar – plaintive call from the G20 to the US “to ratify the reforms … by year-end.” The reforms require an 85% majority at the IMF to pass, and the US holds 17% of the vote. Governance reform is also promised at the increasingly powerful FSB. However, no mention is made of the need to expand membership – the majority of the world’s countries are currently excluded – or tackle its serious lack of transparency and accountability. Instead, the ongoing “review of the structure of its representation”, to be completed by the Brisbane summit, will focus on responding to “the increasingly important role of emerging markets in the global economy.”

These problems in tackling global economic governance reform show the G20’s real weaknesses: it has a limited legitimacy and reach, thanks to its narrow membership, and as it has no permanent home or secretariat, can only pursue reform through existing institutions, particularly the OECD, World Bank, IMF and FSB, meaning it often follows rather than leads their agenda. The need for a truly global, legitimate and effective body to take over from the G20 will only grow, reviving the call made by the 2009 expert commission for a global economic coordination council at the UN.

Source: http://www.eurodad.org/Entries/view/1546262/2014/09/23/G20-finance-ministers-cannot-hide-failure-to-tackle-major-issues



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