G20 Governance Shortcomings mean Finance Ministers make little Progress – By Jesse Griffiths

While media reports largely focussed on trade policy – an area the G20 has never made important decisions on – the real impact of the new US administration has been to severely limit the scope of new initiatives planned by the G20 this year, highlighting major deficiencies in its governance structure.


Newspaper headlines highlighted the dropping of previous G20 calls to avoid trade protectionism, and the absence of climate issues in the G20 Finance Minister’s communique from last weekend. However, the G20 has never been able to make any meaningful decisions on trade, and has always played second fiddle to the United Nations on climate issues. The real impact of the omission of these issues is to highlight the governance shortcomings of the G20. As an informal club with no permanent secretariat that operates by consensus, its ability to reach agreement can be held to ransom by powerful countries, such as the US, refusing to cooperate. It seems likely that, thanks to the new US administration, this will be the least ambitious G20 in recent years, and the absence of major new initiatives in the G20 Finance Ministers Communique confirms this suspicion. This governance problem is inherent in the G20 design, which is one reason Eurodad and others have called for its replacement by an economic coordination council elected by all UN member states, as proposed by the UN Commission of Experts on reforms of the international monetary and financial system.

Campaigners call for fair resolution of debt crises

Outside the meeting, campaigners, with the support of bishops from both the Catholic and the Protestant churches, highlighted the fact that, despite developing country debts reaching record levels, and a significant number of countries being in debt distress, or at risk of it, the G20 has so far failed to tackle the central issue: the lack of a fair, and transparent debt workout mechanism to rapidly and sustainably reduce unsustainable and illegitimate debts for such countries.

The G20 Finance Ministers put this issue on the table, but in an extraordinarily limited manner, ignoring the existing work that has already been agreed at the United Nations (UN). They endorsed a two page document on “Operational Guidelines for Sustainable Financing” which suggests that the main mechanisms for “ensuring that sovereign debt remains on a sustainable path” are “information-sharing and cooperation among borrowers, creditors and international financial institutions” and “capacity building.” The document, which is not yet in the public domain, references the UN Financing for Development conference but fails to mention the significant body of work the UN has recently undertaken, including developing principles for sustainable lending and borrowing, and the adoption by the UN General Assembly of Basic Principles for Sovereign Debt Restructuring in 2015. While these UN agreements are not perfect, they are considerably more sophisticated than the G20 Operational Guidelines, which appear to have been drafted by the Bretton Woods Institutions, without consulting colleagues in the UN system.

For example, the Operational Guidelines recognise that “when unavoidable, debt restructuring should be conducted in good faith in a timely, orderly, and effective manner” but give no indication on how this could be accomplished. The Ministers stick largely to the IMF’s focus on improving bond contracts – which represent a very small proportion of developing country debts. They raise the issue of “non-cooperative creditors” – also known as vulture funds – but commit only to “enhanced international monitoring” of them, a far cry from the much better approach of countries such as Belgium which have passed laws to prevent vulture funds buying debt for cents on the dollar and suing developing countries for full repayment.

Private finance: the G20’s controversial agenda

Previous G20 summits have placed heavy emphasis on the role of international private finance, and this theme continues. This time the Finance Ministers called on the multilateral development banks (MDBs) to finalise the ongoing work on “Joint Principles” on “mobilising private capital” by their next meeting, and to develop “ambitions on crowding-in private finance.” There is very little information in the public domain about these new initiatives – lack of transparency is a further consistent governance failing of the G20.

The two and a bit page draft of the Joint Principles, prepared by the MDBs, including the World Bank, while endorsing some welcome elements, such as recognising the importance of ownership by recipient countries, repeats many of the worrying elements of the G20’s approach to this issue, which Eurodad has analysed in depth. Two points are worth noting. First, the Principles include a reference for MDBs to support “reforms to enhance a country’s investment climate” – an area where the World Bank’s track record is highly controversial, not least because of past heavy uses of conditionality to promote an agenda of economic liberalisation.

Second, the Principles emphasise the need to “de-risk” private finance through promoting “risk-sharing instruments” such as “guarantees, insurance products [and] blended finance.” Eurodad has previously pointed out that under the guise of ‘mitigating’ risks for private investors, the risks are often transferred them to the public sector.

The German government hoped to make its new “Compact With Africa” which aims to “foster” “private investment, including in infrastructure” a centrepiece of the summit, but the fact that only five African countries are listed as having signed up suggests they may be disappointed.

Tax: prioritising ‘certainty’ for multinationals

On tax reform – a priority of the 2013 G20 – the Ministers continue to emphasise 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.

They also raise the prospect of another ‘blacklist’ by asking the OECD to prepare a list “of those jurisdictions that have not yet sufficiently progressed towards a satisfactory level of implementation of the agreed international standards on tax transparency.” As Eurodad has pointed out, asking the OECD, which contains most of the world’s most notorious tax havens, including the UK, Luxembourg and the Netherlands, to prepare a blacklist suggests that the G20 and OECD will pick on less powerful developing countries who are excluded from their decision-making, while protecting powerful members from blacklisting. This would not be the first time that a blacklisting-exercise turns political.

Ministers “acknowledged” a new report from the OECD and IMF on “tax certainty” for business, which appears to be an effort to shift attention away from ensuring that multinationals pay taxes in the country where they do business, to a focus on ensuring that they don’t receive any surprises. The report favours controversial tools such as advance tax rulings – or secret ‘sweetheart deals’ – between governments and multinational corporations. These became famous in 2014, when the LuxLeaks scandal revealed they had been used by multinationals to dramatically lower their tax payments, in some cases to less than 1%.

While the report promotes these controversial tools, it ignores the obvious opportunity for increasing tax certainty for investors: public country by country reporting. This type of reporting, which has already been implemented for banks in the European Union, allows the public, including investors, parliamentarians, journalists and civil society, to get an overview over where multinational corporations are doing business, and how much taxes they pay in each of these countries. Such transparency would allow investors to spot multinational corporations with “high risk” tax strategies, such as those that pay low levels of tax in the countries where they do business.

Finally, while once again expressing appreciation of the international agreements on automatic information exchange, the G20 yet again failed to acknowledge the fact that these agreements have led to a de facto exclusion of the poorest countries.

Managing finance: G20 makes little progress

One issue the German presidency has been keen to push is a new agreement on how to manage international capital movements. However, this is an area where the tensions between developed and emerging economies in the G20 comes to the fore. Emerging economies previously used the G20 as a venue to tackle the issue of their vulnerability to volatile international capital flows. Initially, they had some success, forcing the IMF to change its tune and accept that free movement of capital is not the desired end point and that capital controls can be a useful part of their policy toolkit. The German government, in contrast, has been pushing for the G20 to promote the OECD’s Code of Liberalisation of Capital Movements which aims to provide “a balanced framework for countries progressively to remove barriers to the movement of capital.” This March, the G20 Finance Ministers “encouraged” G20 members “to consider adhering to the Code”, while under the Chinese Presidency last year, the ongoing review of the Code was merely “noted”. Given that successful emerging economies such as China have built their success on tight management of international capital flows, this tiny shift of emphasis is all Germany is likely to win on this issue.

Financial sector reform has also been a major preoccupation of the G20 since its inception, and this communiqué highlights the tension between the G20 wanting to say that the problem has been fixed after a raft of G20 sponsored reforms, and the knowledge that huge risks remain in the financial sector. On the one hand, the Ministers tasked the Financial Stability Board (FSB) with preparing a framework for “post-implementation evaluation” of the effects of the G20 financial regulatory reforms”, while on the other hand they also asked the FSB to assess “the adequacy of the monitoring and policy tools available to address …. risks from shadow banking.”

IMF governance: the slow road to nowhere?

While unwilling to tackle its own evident governance failings, the G20 promises to finalise the next round of IMF governance reform “no later than … 2019”. Careful observers will note that the last round was agreed in 2010 but only implemented at the end of last year, having taken years to receive the approval of the US, which has a veto over governance changes at the IMF thanks to the size of its shareholding. This means that, instead of happening every five years, as mandated, IMF reform seems to be on a ten year – or longer – cycle. This, coupled with the fact that the last round of reform resulted in relatively minor shifts in voting power that left rich countries with the majority of votes and board seats despite their declining global economic role, suggests that the institution’s legitimacy problems will continue to grow.

 

Jesse Griffiths, Director

Eurodad, European Network on Debt and Development

This article has been categorized in Uncategorized.

Leave a comment