Yves here. It’s hardly uncommon for big international pow-wows like the G20 to produce grand-sounding statements that when read carefully call for unthreatening, which usually means inconsequential, next steps. But this G20 just past was revealing, in a bad way, about the state of international political economy.
This post by Jesse Griffiths contends that the lack of anything beyond the recycling of dubious economic ideas at the G20 session just past is a sign that the international economic architecture is under stress. He goes over a list of sobering failures and retreats, such as weak proposals on combatting tax avoidance, a loss of will on reining in too big to fail banks, and too much fondness for the looting program know as public/private partnerships.
The financial crisis showed the old system to be more and more unstable, yet the remedy was to as much as possible restore it. With that salvage operation coming at very high cost to the citizens in many countries (start with Europe’s periphery), the underlying economic fragility remains unresolved, and a new set of political pressures are now part of the mix. And the intellectual rigidity of the economics profession, which has far too much sway given that the system that blew up was shaped by their advice, sure isn’t helping.
By Jesse Griffiths, the director of Eurodad, European Network on Debt and Development. Originally published at Triple Crisis
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.
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 sheet,” meaning they will continue to focus on using public money to leverage private investment in infrastructure, despite earlier World Bank 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 $80 million 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 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 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 “… 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 it will require a huge amount of other policy reforms by governments to make themselves attractive to overseas investors. As the OECD’s background paper notes, 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)’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 U.S. “to ratify the reforms … by year-end.” The reforms require an 85% majority at the IMF to pass, and the U.S. 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.