Any expectations from the meeting of the G-20 finance ministers and central bankers in England were set a pretty low bar. There were numerous reports about a major difference of opinion between the US and UK on the one side and France, Germany and Japan on the other?the former were pressing for further coordinated fiscal action while the latter wanted to discuss regulation while resisting further fiscal stimuli. The stage, it seemed, was getting set for a deadlock and breakdown, just like the much interrupted and delayed Doha round of trade talks.
Viewed in that context, the outcome of the meeting was rather successful. For one, the top economic officials from the G-20 which account for 85% of the global economy emerged at the end of the weekend presenting a united front in the battle against the global downturn. This was no small achievement, given the rumoured differences. And importantly, it presented a picture of confidence, not disarray, which would help alleviate the gloom surrounding the global economy. One thing is clear?a lot of the crisis has to do with a catastrophic loss of confidence and the primary role of governments is to restore that missing confidence. The ministers did okay, now it?s up to the heads of government to do more confidence boosting in April.
Unity and confidence aside, the ministers even managed to commit to a couple of very constructive measures. First, and very importantly, all the member countries reiterated their resolve to resist protectionism. One of the stand-out features of the current crisis?apart from the drought in capital flows?is the sharp fall in the volume of trade. Major exporting countries like Japan, Germany and China have reported falls in exports ranging from 45% to 20%. Even a country like India, not one of the big boys in exports, has seen exports slow down by double-digit levels. The primary loss of employment in India, and in countries like China, is in the export oriented sectors. And this is only the outcome of falling growth and demand in major markets. Any whiff of protectionist measures, and exports and trade may collapse further, endangering more jobs and more economies.
Despite widespread acknowledgement of this, countries find it difficult to resist some protectionist measures?European countries increased subsidies for dairy products, the US still has certain buy-American provisions in its stimulus, even India has raised some duties. Now, it would help if countries walked the talk on protectionism and reversed all the barriers they have erected in recent months in time for the heads of government meeting?that would be an excellent confidence-building measure.?
The second commitment made over the weekend was to beef up the IMF, which can help countries?-especially small and/or poor economies?battle the adverse economic scenario. The US would like to increase funding to the IMF from $250 billion to $750 billion?the Europeans would prefer $500 billion. The Bric countries have put in a caveat?they will only increase funding if the structure of the IMF is revised and they are given a greater say in decision making. The developed countries, fortunately, do not seem averse to this suggestion. We may, at last, be heading towards a fundamental reform of the IMF which would make it more representative and more effective at tackling and preventing crises like the one we are in now. Obviously a lot more needs to be done. A stronger commitment to this reform in April will lend it even more credibility and urgency.
Interestingly, what may have made all this and the unity possible was an announcement made before the summit even convened?relating to offshore financial centres and tax havens. While tax havens and offshore financial centres had little to do with triggering the current crisis, they have been the cause of much discomfort to many governments?primarily because they cost them billions in tax revenues, by assisting individuals and corporations to evade tax. The US and UK, by pressing some major countries which house offshore finacial centres (including themselves, but also Switzerland, Lichtenstein, Austria, etc) to sign up to an OECD agreement on sharing information with foreign tax authorities(and abandoning complete secrecy) may have mollified concerns about a lack of interest in pursuing supranational financial regulation.
In fact, it is perfectly plausible to argue that the deal struck on offshore financial centres is actually a very good one. It protects the useful features of offshore financial centres?these play a crucial role in facilitating globalisation, an argument made eloquently by Avinash D Persaud in these columns last week. They have an important role as a ?parking lot? or ?way station? for global money, in the absence of which multinational corporations in particular may have to end up paying multiple taxes on the same income. But avoiding double or triple taxation isn?t the same as avoiding legitimate one time taxation. And so an information sharing agreement will help national tax authorities pursue those individuals and corporations who are avoiding legitimate tax dues.
What this also shows is that it is possible to combine good regulation without necessarily tripping globalisation all together. The US and UK have realised that. Now, everyone must start playing a similarly constructive role. France, et al can begin with more fiscal stimuli.
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dhiraj.nayyar@expressindia.com