G20 – a chance for solutions, or a part of the problem?
As G20 leaders meet this weekend to debate the state of the global financial and economic system, there is no shortage of problems to discuss.
For example, the world is facing a new wave of debt crises; continued large-scale corporate tax avoidance; and a desperate lack of funding for achieving the sustainable development goals, including for ensuring basic infrastructure for public services and combating climate change. The failure of the global system is also exacerbating existing inequalities, including gender inequality.
But the G20 is by no means a young and new initiative and while assessing the challenges ahead, it is also important to look back and discuss whether the global problems we are facing have arisen in spite of the G20 leadership, or – at least to some extent – because of it. Another important question is whether the G20 is ready to learn from the mistakes of the past. The recent meeting of the Finance Ministers and Central Bank Governors in Fukuoka, Japan, gave a clear sense of the direction the G20 is taking and there is little cause for optimism.
Responding to a new wave of debt crises
In developed countries, a key part of the response to the global financial crisis was to pump large sums of hot, speculative money into the global economy. For developing countries, this materialised as large inflows of capital into their economies and resulted in a lending boom. Today, the capital inflows have been replaced by capital flight and developing countries are deeply entangled in a debt trap. This is a key reason why they are now being hit by a new wave of debt crises. Despite clear warnings, the G20 has failed to act to prevent this and now, the key question is how they will deal with it.
In the communiqué from the Finance Ministers and Central Bank Governors meeting, the G20 countries recognised the importance of ensuring debt sustainability and addressing emerging debt vulnerabilities, but their discussions failed to observe the dimensions and implications of the coming debt crisis , ignoring particularly the negative fiscal and human impacts of protracted debt crises in a growing number of countries in the global south.
In terms of action, the G20 governments supported the multi-pronged approach of the International Monetary Fund (IMF) and World Bank for addressing emerging debt vulnerabilities. However, this approach falls short of what is needed to resolve the new debt crisis in the global south in a timely and orderly manner. Instead of encouraging renewed discussions to establish an independent, multilateral and transparent debt restructuring mechanism, the approach focuses on enhancing an outdated forum known as the Paris Club, without addressing its inherent imbalances and limitations.
As developing countries are holding more diverse and expensive public debt stocks from an ever more complex landscape of official and private creditors, the existing debt resolution framework – including the Paris Club - reveals itself as unsuitable to address the complexities of the new debt crisis while prioritising the people's needs and rights. Apart from not addressing a substantial part of increasing and risky debt, the Paris Club has also been criticised for its inconsistent treatment of debtors and being a ‘cartel’ of creditors working primarily in their own interests. Furthermore, the approach continues to rely on a debt sustainability analysis as well as promoting lending and borrowing strategies, which ignore, among others, human rights, gender inequalities or climate vulnerabilities. This reality starkly underlines why the need for a multilateral sovereign debt restructuring framework that is fair and transparent, can no longer credibly be ignored.
On the issue of debt transparency, the G20 countries expressed “support” for the work of the Institute of International Finance on Voluntary Principles for Debt Transparency. Still, this leaves open the question of how debt transparency will be ensured in case countries fail to follow those voluntary principles.
The G20 also applauded the countries that completed the survey on implementing the G20 Operational Guidelines for Sustainable Financing, while omitting the fact that some G20 members had not filled it out. It is also important to note that this is only the first step needed to actually implement them. Unfortunately, there is a high risk that the guidelines will not be fully implemented as the G20 is still far from accepting the need for mandatory frameworks that improve financing practices.
Despite underlining the importance of ensuring debt sustainability, the G20 has yet to acknowledge one of the most obvious risks of the worsening debt situation in developing countries, namely large-scale public-private partnerships (PPPs) on infrastructure. At their meeting in Fukuoka, G20 countries endorsed the Principles for Quality Infrastructure Investment, which unfortunately continue the course the G20 previously laid out. Instead of recognising the central role of public finance in sustainably financing infrastructure, the G20 maintains its push for developing infrastructure as an asset class. As Eurodad has previously stressed, this can result in even higher public sector debt.
The new principles also contain another serious flaw. While noting the importance of integrating environmental considerations, there is no mention of the importance of adhering to international environmental commitments, in particular the Paris Climate Agreement and its temperature goals. Without taking the implications of climate change on infrastructure projects into account, there is a high risk of fixing some problems while creating others.
Repairing the failed global tax system – again
One important way to reverse the negative spiral of debt and lack of public finance would be to ensure that governments around the world are able to effectively tax multinational corporations. According to the best available estimates, governments lose around US$ 500 billion annually through tax avoidance by multinational corporations – money that is direly needed to fund expenses such as quality public services and environmental protections.
This issue has long been in the hands of the G20, who has delegated the issue to the OECD Secretariat. However, there is now a growing awareness about the fact that the package on Base Erosion and Profit Shifting (BEPS), which the OECD and G20 adopted in 2015, has failed to solve the problem. At the Finance Ministers and Central Bank Governors meeting in Fukuoka, the G20 endorsed a Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy, which among other things, acknowledges that some “consider that [the measures set out in the BEPS package] do not yet provide a comprehensive solution”.
The problems with BEPS are numerous, but among the central issues is the fact that BEPS maintained the basic structure of the international tax system in the form of the OECD Transfer Pricing System (including the much criticised “arm’s length principle”). Furthermore, BEPS has greatly increased the complexity of international corporate taxation.
As the G20 now embarks on a new attempt to combat large-scale corporate tax avoidance, there are some important issues on the table. These include new mechanisms that would start to move away from an approach of taxing multinational corporations as a group of separate independent companies towards a more holistic approach, which views corporations as one overall entity. Another important issue is whether to introduce a global minimum effective corporate tax rate.
However, the G20’s newly adopted Programme of Work also includes some concerning tendencies. For example:
- The overall political focus is on allocating more taxing rights to countries where the business’ customers are located or its services are used. This agenda, which has been pushed especially hard by some large European countries, reflects the interests of large economies, which have a high number of customers and users of services. It does not particularly reflect, however, the interests of smaller developing countries, which are more commonly the countries where production or resource extraction takes place rather than where customers and users are based.
- The work programme leans towards building on and supplementing, rather than replacing, the failed OECD Transfer Pricing System. Thus, there is a high risk that the international corporate tax system will become even more complex and that the problems related to the current system will continue to exist.
- The timeline of the programme of work is very tight, with negotiations scheduled to conclude already in 2020. This risks limiting the level of political ambition in terms of what can be achieved and might soon be used as a political excuse for why real fundamental reforms of the international tax system cannot be achieved.
Last, but not least, there are some strong concerns related to the OECD-led process, which the G20 has mandated. When the 2015 BEPS package was negotiated, over 100 developing countries were not included in the process. After the package — a document of almost 2,000 pages — was adopted, the OECD set up an implementation body known as the Inclusive Framework, inviting all countries to come and follow the agreed-upon standards “on an equal footing”. This is the forum where the negotiation about the new additional rules are now taking place. However, to join the Inclusive Framework, developing countries are required to agree with the decisions that have already been made, which means that developing countries are still not able to participate on truly equal footing in the setting of international tax standards. Over 40 percent of United Nations’ member states have not joined the Inclusive Framework, and are thus not at the table while the new rules are being negotiated. And even for those who are, there is a concern about whether the process will include their interests and concerns in a balanced way, when it is being led by the OECD.
Meanwhile, the Group of 77 (G77) have continued to call for an intergovernmental tax process to be set up under the United Nations, where all countries participate as equals. Unfortunately, this call has so far been rejected by the OECD countries.
The failure of the G20 to resolve some of the biggest problems in the global financial and economic system is impacting severely on the lives of ordinary people around the world and undermining the chances of achieving global goals, including the sustainable development goals and the fight against climate change. Relying on a small club of big economies to address the issues has so far not produced the necessary global reforms and the G20 is left discussing problems which it, to a large extent, has played a part in creating.
As a body with very limited membership, the G20 also lacks legitimacy as a decision maker on issues such as global tax rules. The area in which the G20 does have legitimacy is the issue of ensuring that G20 members clean up their own houses and play a strong and constructive role in the achievement of global development and environmental commitments. However, the lack of political ambition has made it difficult to achieve significant progress on this front.
As regards global solutions, the alternative approach would be to replace the G20 with a transparent and participatory forum, where both large and small countries can participate as equals. The obvious place to set up such a forum would be at the United Nations.