G20 Finance Ministers Reveal Impotence in the Face of Rising Stresses

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.

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  1. proximity1

    Faux News Service: For Immediate Release:

    In a communiqué released today, the world’s G20 heads of state, speaking at the conclusion of the Meeting of G20 Finance Ministers and Central Bank Governors at Cairns, from 20-21 September 2014, reported to the assembled cameras and microphones of the international press corps:

    Jack Lew: “I, uhm, I got nuthin’ . How about you, George?”
    George Osborne : ” Sorry, no.”
    Jack Lew: “Mr. Padoan? Anything?
    Pier Carlo Padoan: (shuffles feet)
    Jack Lew: “Uh, Luis, help me out here.”
    Luis Videgaray Caso: “Sorry, nada, amigo.”
    Jack Lew : “Anybody? Anybody got anything?
    (assembled group looks down absently at their feet)


    1. Yves Smith Post author

      International capital flows are already over 60x trade flows.

      Reinhart and Rogoff’s work on 800 years of financial crises showed that higher levels of international capital flows are strongly correlated with more frequent and severe financial crises.

      All these guys seem to know how to do is more of what isn’t working (except for a certain slice of the global elite).

      1. James Levy

        You are, of course, correct, but the mantra for our elites are, “rules do not apply to me”, “history is bunk”, and “constraints are for losers.” We have to disabuse ourselves of any notion that the people who run things are thoughtful, reflective, self-aware, ethical, patriotic, or conscious of anything more than their own personal economic and political desires. There is no evidence that they possess any of the above characteristics (except Putin, who is a creep but may be a Russian patriot). If C. Wright Mills was correct, then this is what the system wants and selects for. By a combination of elite selection and personal self-selection these are the types who are useful in a world where individual commercial interests are the only values left standing. It’s grab what you can, now. We are going to have to, as individuals and communities, work around these people, because they have the money and the guns and the surveillance and the courts and the prisons at their disposal. If we are “lucky” we are Rome waiting for a Diocletian to brush away all pretenses and establish a century of tyrannical stability. If we are not then we are in the days of Honorius waiting for the whole thing to come crashing down. Yes, I am that pessimistic.

      2. Larry

        You hit the nail on the head with the last sentence Yves. They certainly do well by a global elite.

        These ministers and technocrats like to think they view the world in a calculated and scientific fashion. They do not. These people are far removed from the concerns of every day citizens. They can’t fathom their needs or the struggles they face. After all, their professional and social circles all live in the finest cities, dine in excellent restaurants, send their children to wonderful schools, and vacation at the poshest of locales. They have the ability to see what their policies are doing, but they chose not to. The system works well enough for them, and especially for deeply powerful and wealthy interests.

        Those wealthy people have direct lines to these technocrats, while all we have are strikes, protests, and public comments that likely land on deaf ears. So of course they just keep doubling down on what is working. Any reform frightens them as being far too radical, and if the apple cart is wobbly, but not tipping, why try to understand why it’s wobbly in the first place? Better to keep chugging along and blame unforeseen bumps in the road when the cart finally crashes.

      3. Tony

        Aren’t those the same guys who’s Excel error “correlated” a +100% nat’l debt/GDP ratio with losses to GDP and brought Hoovernomics back into style?

        Your capital v. trade flow ratio is interesting, and another symptom of the underlying problem: the financial markets are no longer allocating capital to its highest and best use.

        All kidding aside, if someone wants to do a project and needs to go abroad for capital, that’s probably a signal that the project is excessively risky (i.e. insufficient number of local willing lenders – who presumably are a lot better informed about its prospects). “Hot” money is never a sign of overly prudent planning.

      4. susan the other

        Here’s what we need an app for: The prevention of dire hardship, inexcusable inequality and environmental degradation to the world by the procrastination and incomplete solutions of the elite institutions making decisions protecting their own positions.

        1. proximity1

          + 100! We need something, alright.

          Tuesday, in the thread, “Bill Black: Roger Cohen’s Ode to Colonialism and Imperialism,” at one point Clive mentioned Rudyard Kipling and a brief discussion of him ensued in which Mark P. , replying to a comment of mine, recommended George Orwell’s essay “Kipling” from the February 1942 issue of Horizon. (and it’s always a good idea to mention Orwell ;^ ) )

          From that essay, Orwell at one point writes of how very differently (contemporary 1942) people people’s working assumptions had come to be from the world-view of Kipling:

          “All left-wing parties [ i.e. in 1942 ] in the highly industrialized countries are at bottom a sham,because they make it their business to fight against something which they do not really wish to destroy. They have internationalist aims, and at the same time they struggle to keep up a standard of life with which those aims are incompatible. We all live by robbing Asiatic coolies, and those of us who are ‘enlightened’ all maintain that those coolies ought to be set free; but our standard of living, and hence our ‘enlightenment’, demands that the robbery shall continue. A humanitarian is always a hypocrite, and Kipling’s understanding of this is perhaps the central secret of his power to create telling phrases.”

          (link: http://www.george-orwell.org/Rudyard_Kipling/0.html )

          I’m not sure that all of these allegations are necessarily true for all times, but they are apparently true over very long periods of time. Those are hard words to read, even, or especially, seventy-two years and many armed-conflicts later.

      5. Lakshminarayanan

        “All these guys seem to know how to do is more of what isn’t working”

        It is extremely unlikely NONE of these guys knows what he is doing. The reason is likely to be that doing something that is right would mean exactly the opposite of what they have been doing all along. That could have serious consequences like they could be held responsible for past sins and also may not find a place in the new scheme of things. So they just kick the can down the road. Crisis erupts… bail the criminals out, open the money spigot (after all it is not their money), spew moral hazard, reduce interest rate (difficult–already at ZIRP, may be the reason Fed wants to raise rates asap) and screw the hapless taxpayers. Remember all done to spare you pain… Goebbels would have been proud.

  2. NotTimothyGeithner

    The problem with the G-20 is regular meetings. When the next meeting is pre-set, there is no pressure to accomplish anything, and the world leaders can either hope conditions change or leaders change. The original Vienna Conference governed Europe for a century, but nothing like that had happened. There might not have been another chance, and leaders don’t want to be the guy who screwed it up.

    I’m not certain about Wilson’s health, but when he went to Europe, he was under pressure for a big win which meant not creating divisions with the allies. Wilson knew he wouldn’t get a second chance. Obama isn’t under this pressure because he can play diplomat with NATO, the G-7, and whatever hot spot appears because of modernity.

  3. Banger

    We need to see this all as a part of a long-term shift in power from nation-states towards the multi-national corporate and financial sector. To be blunt, major policy matters are not ironed out in any meeting of countries other than war policies–the last holdout for the nation-state. Economic and most political issues are ironed out informally by networks of oligarchs and their armies of operatives and lawyers. I think, by now, this should be obvious. In 2008 the oligarchs demanded a bailout on their terms and got it so the new dispensation means in most matters to do with money and politics those guys run the show. So talking about climate change or the financial crisis or hunger or anything else on a government to government level is not useful–can we just ignore them now?

    I will illustrate the lay of the political landscape by turning to the now dormant Ukraine crisis now forgotten. The government functionaries and operatives sought to create a crisis in the Ukraine by engineering a government overthrow–the ground had been well-seeded by intel operatives in the NED who were trying to spread instability by promoting chaos in ethnically, religiously, or culturally divided countries in order to continue the strategy of tension that keeps many contractors happy in Washington. They knew this would bring about a confrontation with Russia which would put their various plots and sub-plots much needed funding. If you remember, I said that there will be a lot of huffing and puffing but, in the end, the finance oligarchs will nix the attempts by the neocons to get their grubby little hands on more power. This is exactly what happened during the several Iran crises as well. The finance/corporate oligarchs like war but not serious war–the headline about “calm” being restored is that the power struggle I described is over. The government types got their war against ISIS so they are happy–lots of loot and opportunity for advancement and power there. The corporate types were happy to avoid a major crisis and go on with their unopposed feeding. There will always be a tension with these people. The alliance between the National Security State and the Corporate State is close but they fire shots across the bow to signal their collective power and life goes on. Absence any interest by the public which is happy with endless distractions and concerns with salutes and coffee cups the elite go on with their little plots and conspiracies on the virtual Imperial palace grounds–the rest is, increasingly, theater.

    1. James Levy

      That seems to be about right. Capital still needs the State to perform the nasty job of employing deadly force (the alternative has not yet been assimilated into the popular consciousness) but most other functions of the government have been, or are, being systematically turned over to the “private sector”. Whether this process can any longer be fought is open to doubt.

      1. Banger

        It is hopeless–there is just too much money changing hands at this point and the players are now armed and dangerous and will not and cannot be opposed–possibility of reform existed up until 9/11/01 after that the door closed.

      2. Lune

        Actually, that would be a return to history such as the British East India Company, which raised its own army and had its own bureaucratic arm to administer its holdings. In many ways, the East India Company was a virtual sovereign over its territories, which were much bigger than the UK itself.

        So such examples exist, and indeed, were quite successful in the past. Perhaps a Goldman East Indies Company isn’t too far-fetched…

  4. TarheelDem

    Infrastructure that creates general prosperity is that which is available to everyone in society–water, sanitation, education, health, transportation, income security, food security. Developing a private asset class in a market requires that the infrastructure not only finance its replacement costs but provide a sufficient bribe for private investors to want to hold that asset class. In public infrastructure, there is an implicit income transfer from the rich to the poor through effective progressive taxation. In asset-class-based infrastructure, there is an implicit transfer of income from the poor to the rich. The rich can choose not to use some infrastructures and demand not to pay the accompanying fees – the pressure on tax-funded national health services and education is evidence that not all providers would be supported and that only those who culturally catered to the rich would be supported, excepting the worthy charities to assuage rich guilt. The poor lack the market demand to draw the provision of institutions providing services to begin with.

    The fundamental truth. If it is infrastructure, it cannot be privatized. The corollary. Privatization diminishes total prosperity in the society. The rich are getting a smaller share of a pie that could be potentially much bigger if they were only more generous. The poor are being asked to quietly go away and die. And as the pie shrinks, the proportion becoming poor increases.

    Bottom line. The G-20 finance ministers are fools captive to a cult.

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