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G20 Finance Ministers: crises brewing, but little action

Added 25/Feb/14

Last weekend's G20 finance ministers’ meeting produced an eye-catching (but detail-free) promise to raise global growth levels, but obscured the fact that little concrete progress has been made, with IMF reform mired in US inaction, no proposals for systemic reforms such as debt workout mechanisms, and a reliance for implementation on international institutions such as the OECD that exclude developing country participation.

News headlines focused on the G20 ministers’ five year target to push GDP growth two per cent higher than current projections. However, the communiqué is at its most vague on the issue that had dominated the build up to the summit: increasing concerns about the vulnerability of emerging market currencies, with Turkey and South Africa all raising interest rates to protect their currencies in recent weeks. The reduction of the US’s money-creating ‘quantitative easing’ programme, which had previously caused capital to flood into emerging markets, is now blamed by many for causing money to flow out. India’s central bank governor, Ragurham Rajan, hit out at the US, claiming that “international monetary co-operation has broken down.” This seems to have been confirmed by the communiqué’s reaffirmation that although “policy transitions” can “sometimes lead to excessive volatility”, “our primary response is to further strengthen and refine our domestic macroeconomic, structural and financial policy frameworks”. In other words, emerging markets, that pulled the world out of the global financial crisis, are on their own when they face their own crises, even if the origins may be in developed country policy choices.

As noted by Eurodad’s analysis of last year’s G20, the G20 ministers also continue to have nothing to say about introducing sensible mechanisms to deal with debt crises, which are still plaguing Europe and other countries.

This sense of grand statements hiding little tangible progress was confirmed by the now ritual call for the ratification of small shifts in IMF voting power towards emerging markets. This was agreed four long years ago, with a 2012 deadline for completion, and is being held up, as the communiqué explicitly notes, by the US’s failure to ratify. The US is the only individual country with sufficient votes at the IMF to hold up the process, pointing again at that institution’s governance failings, which Eurodad has analysed before.

Tax – proposals exclude developing countries

Following their now standard practice of delegating implementation to existing international institutions, the ministers endorsed the OECD’s proposal for a common standard for exchange of tax information. As Eurodad warned, the rapid timetable set by the G20 last year, and the nature of the OECD as largely a rich country club ,mean the standard has been designed “with a view to maximising efficiency” by using existing developed country systems, and “draws extensively on the intergovernmental approach to implementing FATCA” [the USA’s Foreign Account Tax Compliance Act]. This means not only have developing countries – who suffer the highest burden from tax avoidance and evasion – been excluded from the design, but the requirement for exchange “on a reciprocal basis” implies that any developing country wishing to automatically receive information from, for example, Switzerland, will have to accept significant costs for their already over-stretched tax authorities. As the Tax Justice Network said in its response, “the OECD plan is likely to result in developing countries being excluded because they are expected to provide ‘reciprocal’ information exchange, even though pretty much all active tax havens are in rich countries.”  They also pointed out significant loopholes, including that the proposal doesn’t cover storage mechanisms such as safety deposit boxes, and highlighted that “there are no sanctions for recalcitrant jurisdictions.”

On other tax issues, the ministers received only updates, but they did ask the G20 anti-corruption working group to “update by our April meeting on concrete actions that the G20 can take to meet the Financial Action Task Force (FATF) standards regarding the beneficial ownership of companies and other legal arrangements.” This provides an opportunity for the G20 to finally call for public registries of the real or ‘beneficial’ owners of all companies and other legal structures such as trusts. The European Parliament took an important lead this month, when its lead committees voted in favour of making EU registers public.

World Bank push on private infrastructure investment

Despite being a stated priority of the Russian presidency, the G20’s focus on infrastructure investment made little progress last year, a gap that this year’s G20 seems set to fill, with the World Bank producing three background papers on the issue. The communiqué repeats the standard mantra of past meetings, focusing on the need to “promote long-term private sector investment” and emphasising the role of the multilateral development banks, and promising that they “will undertake reforms to remove constraints to private investment. However, this time they promise that these issues will “be an important part of our growth strategies and the Brisbane Action Plan” to be agreed at the G20 summit in September.

The World Bank is the G20’s go-to agency on this issue, and two of its papers focus on how to tap institutional investors, such as pension funds and sovereign wealth funds, to finance infrastructure in developing countries. This agenda is based on a high degree of optimism about the role these investors can play, as the Bank notes that “institutional investors in OECD-member countries … have only around one percent of their portfolio exposure in infrastructure” and that “actual financial allocations of advanced and emerging market economy institutional investors into infrastructure remain quite modest.” The suggestions for how to change this picture include the traditional World Bank proposals of promoting capital markets – a controversial approach not generally suited for the poorest countries - or channeling funding through the World Bank, which perhaps indicates an ulterior motive for the Bank’s heavy interest in this issue.

The remaining paper, despite having the broad and engaging title of “success stories and lessons learned” in financing infrastructure, is in reality about public private partnerships (PPPs), another controversial World Bank favourite. The paper sets out a framework designed to encourage governments to think about how to undertake more and better PPPs. Interestingly, it also casts serious doubt on why they would want to do this. “Looking at the broader picture of private sector investments in developing countries [over the past decade], private capital has contributed between 15 and 20 percent of total investments in infrastructure.” Which begs the question: if public investments have contributed 80 to 85 per cent of the total, isn’t a focus on the private sector looking at this through the wrong end of the telescope? One key fact about PPPs that the Bank fails to highlight is that they often involve the public sector borrowing money from the private sector, rather than leveraging new investments, and that this can prove costly. The Bank’s real agenda is clear: while recognising that “countries and markets need to be sufficiently mature to apply the concept of PPPs wisely” the solution is to highlight the role of the World Bank, as provider of “external technical and policy advice”, to support “these countries to become more sophisticated and mature PPP markets.”

A great deal of work clearly remains to be done if the G20 is to come up with a credible plan to give substance to its focus on increased growth – even leaving aside the issue of whether this focus on growth obscures equally important issues of inequality and environmental challenges. Emerging market currency problems, coupled with stock market bubbles in the US and UK suggest that the ministers’ attempts to focus on growth may be overtaken by financial crises in the near future, which may give the G20 more impetus to support the kinds of serious reforms that have so far been lacking.