G20: Too many priorities

G20 should focus on crucial financial sector topics

The next G20 Summit meeting will take place in three weeks in Hamburg, Germany on 7-8 July. The G7 was expanded to the G20 in 1999, after the East Asian financial-economic crisis, but limited to finance ministers and central bank governors. Immediately after the financial sector meltdown of 2008 the G20 format was raised to the level of heads of government.

The G20 grouping of countries accounts for about three-fourths of world trade, four-fifths of global GDP and two-thirds of the world’s population. Spain is a permanent invitee. Representatives of the UN, World Bank, IMF, WTO, Financial Stability Board (FSB), OECD, and International Labour Organisation (ILO) attend all G20 Summits. The G20 has no permanent secretariat and has a rotating presidency which hosts summits annually. At each summit the pre-occupations of the host country form a significant part of the agenda.

To recapitulate, in the 2000s global financial imbalances were driven mostly by persistently high US current account deficits and financed by capital inflows from trade-surplus China. Imprudent US housing sector lending combined with greedy financial sector excesses in the US, the UK and continental Europe led to the crisis in September 2008. Immediately thereafter there were fears about impending recession and the fiscal stimulus provided by G7 countries plus China amounted to about $4 trillion. Concurrently, the central banks of the US, the UK, and the European Central Bank (ECB) bought mortgage-backed securities and drove benchmark interest rates down to low and even negative levels to resuscitate banks. Japan, already in a recessionary trough, had low interest rates before 2008 and has persisted with this policy.

At the first G20 summit in Washington DC in November 2008, the heads of government approved steps to anticipate and prevent future financial crisis which included better regulation of financial institutions. The following year in 2009, at the London summit, it was agreed that risk capital requirements for banks would be increased and the astronomically high compensation packages plus bonuses of personnel in financial firms would be brought down. Subsequently, at the 2010 summit in Seoul, Basel-III capital adequacy requirements were agreed upon. At the Antalya (Turkey) summit in 2015 the emphasis was on how to wind down systemically important financial institutions (SIFIs) without imposing heavy costs on governments.

The impossibly long list of topics to be addressed at the Hamburg Summit, as available on the G20 website of the German government, include geo-political conflicts, terrorism, migration and refugee flows; poverty and hunger; climate change; health, epidemics and anti-microbial resistance; agriculture, food security and water; global connectivity; stability-oriented macroeconomic policies with emphasis on the resilience of individual countries; international finance, taxation, tax evasion and money laundering; employment; trade and investment; and strengthening of the status of women. Further, Germany would like the Hamburg summit to work towards achieving the objectives of the 2030 Agenda for Sustainable Development and the Paris Agreement.

In March 2017, Mark Carney, the FSB chair, wrote to G20 finance ministers and central bank governors, on concerns about shadow banking; over-the-counter (OTC) derivatives; and misconduct risks. Large financial firms in China and Italy are over leveraged and could trigger another international financial crisis. OTC derivatives continue to be mostly traded off stock exchanges. As for misconduct risks, rogue traders and financial firms are tempted to take irresponsibly risky bets since compensation is still disproportionately based on annual profits rather than performance over longer periods of time.
 

On cooperation among G20 countries to reduce tax evasion and money laundering, although there are joint statements there is little tangible progress on the ground. The ploy used by tax havens is to enact legislation locally which outlaws providing information to non-local tax authorities. The country concerned has to first prove tax evasion by specific individuals/firms before any information is provided. The bottom line is that tax havens continue to accept unaccounted funds.

Cooperation among the G20 to mitigate the negative consequences of tax competition including Base Erosion and Profit Shifting (BEPS) came up at the 2016 summit in Hangzhou (China). However, countries are unwilling to harmonise tax rates such that profit shifting is reduced. Even from within Europe, there is complicity with low tax regimes. For instance, the Ireland-Bermuda connection (Bermuda is a British overseas territory) with low-zero corporate tax rates make it convenient for global firms such as Google, Microsoft, Apple and Facebook to set up profit centres in these locations.

In the first six months of 2017, Germany has hosted meetings of G20 ministers of finance, agriculture, digital affairs, labour, health and a separate meeting of finance ministers and central bank governors. Even with these preparatory meetings, due to the G20’s interminably long list of priorities the heads of government are unlikely to do more than restate intentions than commit to time bound action.

In June 2016 a majority in the UK voted to exit the EU and since January 2017 the self-focussed Donald Trump has been the US president. These unexpected electoral results are to an extent because stagnation of real wages and prolonged ultra-low interest rates in these two developed countries are hurting workers and pensioners/lower income groups who are dependent on interest income. The US is likely to be relatively isolationist for the next several years. And, the EU and UK will be involved in complicated Brexit negotiations for at least the next two years.

The financial sector was the Achilles heel of the global economy in 2008. At the risk of expressing an extremely unrealistic yet rational opinion, the G20 should revert to the level of finance ministers and governors of central banks and meet on the side-lines of annual IMF-World Bank gatherings. The G20 focus should be on crucial financial sector topics. For example, how best to wind down SIFIs at times of crisis; limit compensation in financial firms; adopt universally accepted accounting standards including for OTC derivatives; and reform the beggar thy neighbour tax haven and taxation policies.

The writer is the RBI Chair Professor at ICRIER

j.bhagwati@gmail.com