China resurrects important issues at G20 Finance Ministers’ meeting

Added 01 Mar 2016

China has taken the helm of the G20, hosting the first meeting of G20 Finance Ministers last week, while global storm clouds are brewing. The Ministers’ short communiqué underwhelmed many observers, despite a shift towards recognising that greater public spending or tax cuts may be necessary to stimulate the economy. China also signalled its intention to reopen major issues related to reforming the international financial system.

China’s first opportunity to chair the G20 comes at a time when the global economy looks extremely fragile. Emerging markets, including China, are one major focus of concern. Low commodity prices, particularly the collapse of the oil price, have hit several emerging markets, while capital flows to these countries have also reversed. The volatility of the Chinese stock market and declining growth figures have eroded confidence in China’s previous position as a stable growth provider for the world economy.

Despite the calm tone of the communiqué, G20 Finance Ministers are clearly very worried.  They note that “downside risks and vulnerabilities have risen, against the backdrop of volatile capital flows, a large drop of commodity prices, escalated geopolitical tensions, the shock of a potential UK exit from the European Union and a large and increasing number of refugees in some regions”.

Ignoring the reference to ‘Brexit’ – which seems to have been a carefully planted headline grab by the UK government – the major change in the Finance Ministers’ approach seems to be on the issue of using greater public spending to revive economies. They note that “monetary policy alone cannot lead to balanced growth. Our fiscal strategies aim to support the economy and we will use fiscal policy flexibly to strengthen growth, job creation and confidence.” This follows the change of tune from both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) on this issue in the run up to the meeting. However, there are few concrete promises in the communiqué, beyond the continuation of work on G20 members’ national growth plans. These were supposed to have added 2% to the long run growth rate, but have so far failed to do so.

Some observers have – rightly – complained about the lack of transparency, accountability and access that is expected, including for civil society groups, now that China is at the helm of the G20.  However, this is nothing new, as the transparency and accountability of the G20 is traditionally extremely poor. One retrograde step can already be seen, however, with the short list of background documents listed in the communiqué clearly not reflecting the papers that were actually provided. For example, the Chinese government provided short issues notes for Ministers and various G20 working groups provided inputs, yet none of these are mentioned. It remains to be seen whether these will all be released. Given the G20’s past track record, this cannot be guaranteed.

China puts reform of the monetary system back on the agenda

The G20’s working group on the international financial architecture has been resurrected by the Chinese presidency, reflecting their – reasonable – perception that both the governance of, and the issues tackled by, international institutions do not reflect their concerns or those of emerging markets and developing countries more generally. It remains to be seen how much headway the Chinese can make, but important issues that had fallen off the table are now back on it.

These include “the orderliness and predictability of sovereign debt restructuring processes” – which, despite the obvious importance of the issue, has never been tackled by the G20 in a systematic way. The UN’s progress in this area – developing a set of principles for the orderly resolution of sovereign debt crises, for example – has been pushed by emerging markets, with major developed nations, particularly the UK and the USA, so far blocking progress towards the much-needed creation of institutions to resolve such crises in a fair, orderly and sustainable manner. However, it is unclear whether the G20’s renewed interest in this issue will help to renew the mandate for the UN Committee set up to tackle this issue, to continue its work in a transparent and fully inclusive manner, and move from principles to implementation of fair and effective debt workout mechanisms.

A second key priority of this work area will be to revive the discussion on how to manage capital flows, including a promise to “… take stock of and review policy tools and frameworks as appropriate to address challenges arising from large and volatile capital flows, drawing on country experiences”. This issue has lain dormant since 2011, when the G20 – at the insistence of China and other emerging markets – recognised 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.

A third priority will be another resurrection of previous G20 discussions, this time on the role of Special Drawing Rights (SDRs): an international reserve asset all IMF members hold. Three issues are at play. First, the Chinese renminbi was added to the basket of currencies that determine the value of the SDR in November last year. This goes beyond Chinese ambitions to expand the international role of their currency, however, as the second underlying objective may be to end the dollar’s dominance through its use as the de facto global reserve currency, by expanding the role of the SDR as an alternative.

The communiqué hints at this, saying the G20 will “support further work to examine the possible broader use of the SDR”. Thirdly, many have proposed regular creation of new SDRs as a way of bolstering countries’ reserves, particularly those of developing countries. The UN had previously proposed creating up to $250 billion annually, and directing the majority of that to developing countries. The major barrier to this is not inflationary concerns – the amounts involved are small compared to the global economy – but the fact that a change to the IMF’s constitution would be required to direct the majority to developing countries. The size of the US shareholding in the IMF means that it has a veto over any such changes, as do European countries, when acting together.

Finally, the G20 notes the ongoing review of governance at both the IMF and the World Bank Group. The IMF finally achieved the ratification of its 2010 reform of its governance structure in mid-December last year, when the US (which, as noted, has a de facto veto) finally approved it, days before the deadline for its expiration. The 2010 reforms were heavily oversold by the IMF – in reality, advanced economies retained over 55% of the vote at the institution, losing only 2.6% as a result of the reforms. The main impact of the reforms will be the doubling of the IMF’s financial resources, to $660 billion – a figure that most experts agree would prove very small should there be a further wave of debt crises.

The new reforms promise both a review of the relative voting shares of member countries, and also “a new quota formula” to determine what those shares should be. Eurodad and others have long argued that the simplest way to ensure that all categories of countries have a fairer say at the IMF is to introduce ‘double majority voting’. This is where agreements need to be reached between both a majority of shareholders (which favours economically powerful countries, and, in particular, at the moment, European countries) and a majority of members, which would give the more numerous developing countries a stronger voice. It remains to be seen whether reforms will reach for this level of ambition. The fact that the IMF’s Managing Director Christine Lagarde was reappointed without opposition for a second five-year term in February this year does not augur well. Not only does Lagarde face charges of negligence in public office relating to decisions made during her time as France’s Finance Minister, but she is the embodiment of the most glaring failure of the IMF to reform: the fact that, by an unwritten convention, all IMF Managing Directors have been Europeans. 

Meanwhile, the G20 welcomes the World Bank Group’s plans to complete their own shareholding review by 2017. Careful observers will note that, in 2010, the Bank promised to complete such reviews every five years, so the initial deadline for this has already passed.

Tax rule-making excludes many

On tax reform – a priority of the 2013 G20 – little new is promised, beyond continued support for the OECD’s Base Erosion and Profit Shifting (BEPS) initiative to address tax avoidance by multinational corporations. Eurodad has already noted the major flaws of BEPS – it lacks transparency, contains significant loopholes, and favours OECD countries over developing countries, which have had little meaningful participation in decision-making. To try to tackle the exclusion of the majority of the world’s countries in the initiative, the G20 Ministers backed the OECD’s creation of an “Inclusive Framework”. According to the OECD, this will ensure that developing countries can now participate on an “equal footing”. However, Eurodad has pointed out the undemocratic nature of this exercise, where developing countries have to agree to follow all the decisions that have been made in their absence, and stick to the OECD’s agenda if they want to join.

This announcement comes less than one year after the OECD countries blocked a proposal from developing countries, which would have established a global tax body under the UN, where all countries are members and would be able to participate on an equal footing.

Focus on private finance for infrastructure remains

The G20’s long-standing focus on using private finance to mobilise more financing for infrastructure remains unchanged. Eurodad has critiqued this in the past. The main concrete initiative of the year will be for “Multilateral Development Banks (MDBs) to present concrete actions by July to optimize their balance sheets” – an action that was agreed at Turkey’s G20 last year. Exactly what this means  remains to be seen, but the communiqué points to a familiar theme, encouraging the MDBs to “…attract new sources of long-term investment financing, including by catalyzing private sector funding”.

To back this up, the G20 asks for “…the development of a guidance note on recommended policy steps that could contribute to diversified financing instruments for infrastructure … with special attention to equity financing by promoting capital markets development, engaging institutional investors … and promoting infrastructure investments as an asset class”. Eurodad has previously argued that this agenda – to persuade institutional investors such as pension funds to invest in infrastructure in developing countries – ignores the risks that prevent them from doing so, and, in the guise of ‘mitigating’ such risks, often entails transferring them to the public sector

The G20 also promised to enhance “…cooperation among existing and new MDBs” (emphasis added) a clear reference to the push by China and other major emerging markets to create new institutions to challenge the hegemony of the World Bank and other western-dominated institutions. In addition to the Chinese-led Asian Infrastructure Investment Bank – which has nearly completed its governance negotiations, and recently approved several operational policies – the New Development Bank of the BRICS (Brazil, Russia, India, China and South Africa) is planning to approve its first batch of loans in the next quarter.

Financial sector reform: job done?

The G20 Finance Ministers’ communiqué paragraph on financial sector reform is, in effect, a list of previous reforms that the G20 intends to monitor. This may reflect a perception that the ‘job has been done’ in this area – a perception that Eurodad has argued is misguided. Or it may result from the Chinese government’s belief that international monetary and institutional system reform is a more important agenda. It remains to be seen whether this is correct, and whether the G20 really has the desire or mechanisms to deal with the major systemic issues mentioned in the communiqué.