The G20 leaders want to add 2% extra to the global GDP, a goal set in the Sydney meeting, for generating growth and employment. This will require injecting more liquidity in the financial system which is already under the control of the “shadow bankers” whose assets are valued at over $70 trillion—more than half the world GDP. This new class covers institutions which are not taking deposits from the public and are thus outside the normal scrutiny of central banks. The shadow bankers provide ‘finance-on-demand’ to borrowers against debt or property as collateral. In the event of a crisis, the shadow bankers cannot fall back on the central banks which are designed to bail out the traditional deposit-based banks.
Australia has sided with putting shadow banks under the G20 scanner. But the US, China, the UK and Europe are the economies where the shadow bankers operate, thriving on the liquidity injections regularly administered by the respective governments to keep the economy growing. At the end of the day, the traditional banks will be regulated even further under the Basel norms, requiring higher capital adequacy, while the shadow bankers make the most of rising liquidity
The OECD inspired “base erosion and profit shifting programme” is yet another initiative of the G20 to stop the big companies from shifting profits to low tax areas through transfer-pricing. The G20 wants that the companies must pay tax in at least one country. The B20, a conglomerate of banking and mining interests—recognised as official participants on the fringes of the G20 meet—is not all that happy with this. It wants the governments to compete with each other in offering investment and employment. It is demanding an end to double-taxation which is endemic in the global supply chains.
Developed countries like the UK have adopted the “patent box” regime, where earnings from in-house IPRs are taxed at just 10%. The G20, as a group, does not like this system and sees it as yet another instance of the erosion of the tax base.
There is a similar dichotomy on movements at the border. The G20 is for free movement of goods across borders. But the B20 has asked for free movement of services, labour and investment across borders, and not just goods. The B20 has said that more than 30,000 data analysis jobs in the developed world are lying vacant which can be taken up by Indian professionals if migration laws were relaxed. The supply-demand mismatches will grow in the next five years; so protection to local workers must be re-examined.
US president Barack Obama promised $3 billion to the UN to protect the environment on his visit to the G20. In his address at the University of Queensland in Brisbane, he called upon the countries like India to move towards low-carbon-emission technologies and avoid coal. The devaluation of coal is not music to the ears of coal producers like Australia and South Africa or consumers like India and China.
Nonetheless, there is a move to overhaul the global energy market and create an open regime in the energy markets, above both the OPEC cartel and the International Energy Agency (IEA). This is the opportune time with oil prices diving below the $80-per-barrel mark, and global prices collapsing by some 30% since June. The world has moved to a less oil-intensive stage of growth while technological innovations have unlocked shale resources in North America. Saudi Arabia and Russia as majors in oil production will oppose the back seat driving on the part of the G20.
The contradictions in G20 are in the open.
Tailpiece: Indian prime minister Narendra Modi was seated next the Saudi Crown Prince Salman in the opening ceremony. Neither of them were happy in the company of the other, they did not talk to each other at all. The Saudi leader is happy to finance the fellow Islamists in Afghanistan and Bosnia. He throws his weight around the Indian Ocean with months of stay in the hotel islands of Maldives with over 100 security guards at the invitation of the Maldives prime minister.
Australia, the host, has gone overboard for the G20 summit. Brisbane’s chefs introduced the world leaders to the traditional Australian barbecue at the conclusion of a retreat at the Queensland Parliament House. On offer were prawns, oysters, bay bugs, trout and spiced lamb. Vegetarian Modi must have concentrated on salads and cheeses with heirloom tomatoes and basil. Even otherwise, he had his plate full.
By Arun Goyal
The author is with the New Delhi-based Academy of Business Studies