G20 finance ministers: frenetic activity, little progress

Added 30 Jul 2013
G20 finance ministers’ wrapped up their meeting in Moscow on 20th July, but their communiqué reveals only limited progress on tackling tax dodging, no attempts to put in place permanent solutions to sovereign debt crises, and a potential focus on volatile international capital for long term investment. It has little to say about global economic governance reform or tackling the underlying problems of the international monetary system. 

The finance ministers summarised their dilemma very well: their actions are not healing the global economy. Of course, the ministers chose more obscure language: “while our policy actions have contributed to contain downside risks” (the best we can aim for is to stop the worst from happening), “those still remain elevated” and “there has been an increase in financial market volatility and tightening of financial conditions” (things continue to look dreadful for the global economy). 

Tax: only those in the club get a say?

Media coverage focused on the issue of combatting tax dodging – where the ministers were keen to trumpet the genuine policy changes that are taking place. The Ministers picked up on several crucial issues that Eurodad and partners have campaigned on, including tackling multinational profit-shifting to dodge taxes, and the need to expose the real ‘beneficial owners’ of all companies, but they said nothing on others, including the need for country-by-country reporting. They also managed to avoid using the words “tax havens” even though these are at the centre of the problem.

They endorsed the OECD’s plan to tackle ‘base erosion and profit shifting’ (BEPS) – the shifting of profits around multinationals’ subsidiaries to dodge tax. Though the language used suggests a change in approach towards taxing profits “where functions driving the profits are performed and where value is created”, the OECD doesn’t plan to change its current model. Jim Henry, chair of the Global Alliance for Tax Justice said “the OECD is having a hard time moving beyond the ‘arm’s length’ standard for transfer pricing, which is impossible for many low-income countries to implement.” Alvin Mosioma of Tax Justice Network Africa called this, “papering over the cracks of an old, failed tax model.” Without progress on country-by-country reporting – making multinationals report publicly on profits, turnover, employment, and taxes paid in all countries - it is hard to see how corporate tax dodging can be detected and deterred. The plan has a two year timeframe; as ever, how it is implemented will be key.

Furthermore, while developing countries are heavily affected by this issue, the housing of the process in the OECD – a rich nation club – means most countries risk being left out of decision-making. Eurodad members Oxfam and Christian Aid called for “a firm commitment to strengthen the UN Tax Committee” as one mechanism for ensuring that all countries can have a say in these crucial processes.

The ministers also endorsed “the OECD proposal for a truly global model for multilateral and bilateral automatic exchange of information” and “fully” supported “the OECD work with G20 countries aimed at setting such a new single global standard”. Other countries are asked “to commit to implement this standard” and “capacity building support” is promised to low-income countries to help them do this, but there is no suggestion that non-G20 or OECD countries will be involved in the design of this standard. Civil society groups have been pushing to ensure that developing countries can begin to use information provided by other countries without immediately having to comply with any global standard, which would take them time to adjust to.

Other than endorsing existing work, the ministers had little to say about another key plank in global efforts to tackle tax dodging – exposing the real ‘beneficial owners’ of companies, trusts and other corporate vehicles. They hinted that they plan to adopt a comprehensive scope when implementing Financial Action Task Force recommendations on this, to include the “owners of companies and other legal arrangements such as trusts”, but said nothing about making information on beneficial ownership transparently available. Eurodad is part of a coalition calling on the EU to introduce public registries of beneficial owners as part of the revision of the European Anti Money Laundering Directive.

Sovereign debt: crisis management, not real resolution

Public outrage against blatant abuses of the current system by household name multinationals has given ministers impetus to take action, but so has the parlous states of their national budgets. Efforts to “contain downside risks” through banking bailouts and recapitalization were very costly for governments, and have lead to a renewed wave of sovereign debt crises, focused in Europe. The obvious and essential answer, promoted by Eurodad and partners for many years, would be an effective, fair and transparent sovereign debt workout mechanism, that could force creditors to take their share of responsibility for irresponsible lending, and prevent the self-destructive austerity policies being forced on many unfortunate populations. 

The G20 ministers ducked this challenge, preferring instead to focus on “strengthening the existing practices of public debt management” through updated IFI and OECD guidelines – which looks like asking creditor-dominated institutions to prioritise lecturing over helping. While recognizing that “unless new financing and borrowing are undertaken prudently, new risks may emerge”, they also had little constructive to say about how to prevent future debt crises through promoting responsible lending and borrowing practices, as detailed in Eurodad’s Responsible Finance Charter. Despite having a general tendency to reference every possible ongoing international process, the G20 revealingly omitted to mention the existing UN Principles on promoting responsible sovereign lending and borrowing and the UN General Assembly’s call to provide further debt relief and new grant-financing to poor countries, preferring instead to “endorse continued attention to [debt sustainability] in the activities of the IMF and World Bank”– two rich-country dominated institutions often mistrusted by developing countries.

The G20's working group on international financial architecture reform will be working on "government borrowing and public debt sustainability" along with IMF governance (see below). A February civil society paper for the G20 argued that it "needs to acknowledge the need for sovereign debt work out" and "establish milestones for a global dialogue and a common debt work out framework."

Spot the contradiction: volatile international capital and long term investment

The G20’s focus on “long-term financing for investment” continues, and was highlighted by the Russian Finance minister as a ‘major topic’ of their presidency. The ministers welcomed the OECD’s draft High level principles of long-term investment financing by institutional investors, though formal approval is expected at the September G20 meeting. While containing nuances, the principles argue that governments should aim to  “facilitate open, free and orderly capital flows and long-term cross-border investment by institutional investors.” This is in contrast to UNCTAD’s emphasis on the need for developing countries to carefully manage inflows of foreign investment, as they can have a negative as well as a positive impact.

Despite the obvious problems of relying on highly volatile international capital to drive long-term investment, the G20 puts faith in the World Bank Group and other multilateral development banks’ work to “optimize the use of their existing resources, including through leveraging private capital” and “to mobilize and catalyze financing for infrastructure investment, particularly in emerging markets and developing countries”. The IFI-led study group on financing for investment produced an Action Plan that the Ministers welcomed. Though this is not yet publicly available, previous Eurodad analysis has questioned whether the institutions involved are likely to come up with any new thinking.

Elephant in the room: who gets a say?

The G20’s initial response to the crisis was to recognise the need to reform global economic governance, but this agenda seems to have ground to a halt. The oversold and limited 2010 IMF governance reforms have long since passed their 2012 deadline for completion, and are still held up by the US failure to ratify them. G20 ministers proclamations’ that “completing the ongoing reforms of IMF governance is indispensable” and that current quota reform discussions will be completed “by January 2014” should therefore be taken with a dose of salt.

The failure to recognize the undemocratic and unstransparent nature of many of the institutions tasked with overseeing the global economy is a common theme. As noted, the OECD, a rich country club, is given a central role in reforming tax policy, and the World Bank and IMF – both with a majority of votes and seats held by high-income countries – continue to act as the unofficial secretariat and implementing agency for many G20 decisions. More careful observers will note other examples. For instance, the International Accounting Standards Board – a private company with no public accountability – is given a key role in “achieving convergence on a single set of high- quality accounting standards.” The welcome given to the Financial Stability Board’s intention to “review the structure of its representation… by the end of 2014” raises questions about how open this process will be – it was announced earlier this year, but no public details are yet available on the FSB’s website on how civil society groups and other stakeholders, including the countries that are not represented in the FSB, can feed in. 

What about solving underlying problems?

Previous G20 summits have been dominated by talk of resolving the problems with the global monetary system that have caused the global imbalances that many argue are at the heart of the economic crisis. There had even been talk of ending the dollar’s dominance through its use as the de facto global reserve currency, and expanding the role of the special drawing right (SDR) – an international reserve asset all IMF members hold - as an alternative.  

The February G20 finance ministers meeting this year was dominated by discussion of ‘currency wars’, but this meeting seems to have confirmed a diminished commitment to tackle the underlying issues, and a return to the laissez-faire approach of a “move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility”. While many observers may suggest that we need more management of exchange rates, not less, this reflects western countries’ desire to push China and other emerging markets away from their exchange rate management policies which many argue have been key to their rapid economic growth.

Though the G20 has previously recognized the need of countries to take a more proactive stance in their management of international capital flows – and forced the IMF to backtrack from its previous pro-liberalisation stance - nothing new is hinted here, beyond noting that “excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Overall, the communiqué is peppered with references to work ongoing around the world, including on financial sector reform, but the abiding impression is one of little concrete progress so far on the issues that matter most.




tags: tax, debt, G20