The November Brisbane meeting of the G20 nations comes with a lot of hope. The issues dominating the summit’s agenda are financial sector regulation, trade facilitation measures, protectionism, infrastructure investment, and tax policy coordination. The G20, as a genuine summit of national leaders, can credibly undertake to implement such measures. The issue is how much of these stated agenda are achievable.
This year, Australia hosts the G20 summit. The G20’s importance can be gauged from the fact that it accounts for 85% of the global GDP, more than 75% of the global trade, and touches the lives of about two-thirds of the world’s population. For the summit to be successful, what is desirable is a more focused approach on increasing economic growth across member nations, especially after the US’s financial crisis.
Financial crises can arise when money from financial markets is unable to find its way into real productive activities. Financial sector regulation is necessary to curb shadow-banking and to protect commercial banks from failure. The delinking of the financial and the real sectors of the economy can have other negative effects, too, such as capital flight, competitive devaluation, and protectionism.
Capital flight is an issue for any economy. It may occur when countries within any given region (Asia, Europe, and elsewhere) are not growing uniformly. As the US quantitative easing (QE) is pared, countries which are not performing well economically and yet have opened up their capital accounts are likely to be the first to experience an outflow of capital, making them vulnerable. Consequently, the G20 needs a growth strategy to increase the output potential, controlling for financial largesse (QE).
A second issue is competitive devaluation. QE in the US and Europe has not only exported inflation to developing and emerging economies but has been responsible, to some extent, for devaluing their currencies. Competitive devaluation not otherwise supported by an increase in productivity is bad for global growth and should be discouraged.
If growth does not pick up, the countries may become more inward-looking. A slump in global demand may see them resort to protectionist measures—the third issue, that is caused by the delinking the financial and productive sectors of the economy. Protectionism is now becoming evident in higher tariffs and non-tariff barriers—mainly anti-dumping measures, sanitary and phytosanitary sanctions, and even provisions granting subsidies to domestic producers.
Australia’s initiative to implement trade facilitation measures without fighting protectionism makes little sense. The G20 was partly successful in making the WTO Bali ministerial meeting work. India, which had initially agreed to the deal, declined in July 2014 to sign the trade facilitation agreement in the absence of any consensus on food security issues. However, there is hope that India and the US will soon reach an agreement.
An issue that fits well with the G20’s development agenda is the need of the developing and emerging economies to attract the long-term capital required to fund infrastructure such as roads, ports and airports. Much of this funding comes from multilateral institutions. Within institutions such as the International Monetary Fund (IMF) and the World Bank, which determine the flow of multilateral funds to specific regions, voting power then becomes an issue. A country’s voting power is determined by its contribution to these institutions, which in turn is determined by how rich its economy is. Currently, developed countries, including the US and EU nations, have greater voting power. Developing nations, including India and China, want reforms so that multilateral aid can better match their needs, independent of voting power. Australia will have to maintain a fine balance between the emerging and industrialised world when it comes to reforming voting power at the IMF and World Bank.
Again, keeping in mind the G20’s development objective, Australia should take a lead role in coordinating policies on transfer pricing (tax concession), and help to build better tax collection mechanisms in emerging economies. Member nations’ tax authorities should be encouraged to collaborate and coordinate their efforts to combat tax evasion, so that entities and individuals with cross-border business interests can be monitored effectively. Tax concessions, tax evasion, and unwarranted subsidies may worsen countries’ current account balances—which is bad for growth.
Finally, the task of the G20 summit will not be complete unless it increases the pressure on European governments to bring in necessary structural reforms. The reforming of labour and pension laws (which have been criticised as austerity measures), and a relaxation of immigration laws are essential if Europe’s fiscal deficits are to be reduced and economic growth sustained. To strengthen the G20 it should be upgraded from a forum to an institution, in order to make implementing difficult measures such as structural reform easier and more effective.
By Nilanjan Banik
The author is associate professor, Mahindra Ecole Centrale