The G20 finance ministers, who have been meeting in Sydney this weekend, say economic grow is still below the rate needed to get people back into jobs.
In a statement released at the conclusion of talks, the ministers and central bank governors pledged to “develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2% above the trajectory implied by current policies over the coming 5 years”.
Treasurer Joe Hockey said boosting investment would create growth and jobs. “There is much we can do to remove constraints to private sector investment by establishing sound and predictable policy,” he said.
The Treasurer had pushed for a concrete target to be adopted in the weeks leading up to the Meeting of Finance Ministers and Central Bank Governors, the first in a series of meetings scheduled in the lead-up to the G20 Leaders Summit in Brisbane in November.
The ministers also recognised reliance on monetary policy to stimulate economic growth should be reduced. The communiqué was relatively silent on the role of debt, noting it should be put on a “sustainable path”.
Other previously adopted measures were restated. The ministers called on the United States to ratify the IMF reforms that would change the portion of votes given to each member, and reduced the US vote, that have languished since 2010. Mr Hockey confirmed there was “deep disappointment” the process hadn’t moved faster.
An automatic exchange of tax information was again endorsed after originally being taken up last year in St Petersburg. That move was foreshadowed at the Institute of International Finance forum that took place earlier in the week.
Expert reaction follows:
Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University:
Most G20 meetings are talk-fests. This one was no exception. But what goes unmentioned is often more important than what is discussed. For the first time in its short history, the G20 has established a growth target, 2% (or $2 trillion-plus) above current forecast trajectories.
Joe Hockey credited this outcome to Australia’s leadership of the G20. However, analysts at investment bank JP Morgan were critical last week of establishing growth targets – effectively, these are wish lists – over which governments have little or no control.
Second, the communiqué criticised the lack of progress on the 2010 IMF reforms, which would give China and other emerging powers more voting power in the IMF. Washington has blocked these reforms persistently, although the Europeans and Japanese are not keen to see their voting positions diluted.
China currently holds 4% of IMF votes, against the US’s 16.5% (41% for all advanced economies).
Passing the 2010 reforms would give China 6%, making Beijing the third-largest player in the IMF, behind Japan and the US. However, the US would remain a veto player (85%-plus is required for any major IMF reform).
Third, the most important point was buried well down the list: the impact of Base Erosion and Profit Shifting (BEPS). This allows multinational firms, such as Google, Apple and Microsoft to minimise tax obligations in the country of operations, while shifting taxable revenues to alternative jurisdictions.
In most cases, profit shifting is entirely lawful. However, the consequence has been a gradual diminution of the taxation base in many OECD countries.
BEPS has long been an issue for the G20 and G8. However, it is also hypocritical for G20 countries to maintain the fiction of international taxation cooperation, when states continue to compete for investment and capital flows by deliberately creating tax rules and jurisdictions that routinely circumvent taxation agreements.
But the G20 has not shown it is serious about confronting this issue. The British Virgin Islands, Monaco, Liechtenstein, Luxembourg, the Channel Islands and Cyprus are among the many tax havens for firms, individuals and criminals alike. Ireland is a corporate low-tax jurisdiction. Even OECD members Belgium and the Netherlands act as clearing houses for hundreds of billions of dollars annually via the use of Special Purpose Entities.
The communique was ominously silent on the Basel III banking accord, which many central bankers regard as too stringent and damaging to growth. Basel III was introduced in 2010 to reduce myriad forms of dangerous, thinly-capitalised leverage that characterised over-leveraged global banks in the pre-GFC era.
European central bankers, behind closed doors, have backed away from Basel III, fearing their banks’ vulnerability, as well as the structures upon growth a more disciplined financial regime could bring.
Mark Crosby, Associate Professor of Economics at Melbourne Business School:
The problem with these sorts of pronouncements is that there’s absolutely nothing to make domestic policy makers change policies. If this additional growth is possible, why haven’t policy makers been able to implement changes to achieve it? I don’t think there will be any change in policies and no change in growth.
It was, however, interesting to see that the OECD report released earlier this week was pessimistic about medium-term growth and worried about productivity growth being low and fiscal issues remaining. I think medium-term growth is going to remain weak.
The only interesting thing to come out of the discussions was the desire to find new ways to finance infrastructure spending. [Consulting firm] McKinsey came out with a report last year about how much investment is required in infrastructure globally, around US$57 trillion, and the big question is how to fund that.
Hopefully there may emerge some interesting new ways to finance infrastructure, particularly in emerging countries, and that’s where there’s potential for slightly higher growth, but I think it’ll still be far from 2% faster.
If the IMF reforms move forward, emerging economies will see greater voting rights. At the moment it’s convenient for the US and Europe to keep the current quotas in place, and Europe in particular is overrepresented. The IMF does reflect, in some sense, too much of the interests of the US and Europe. The statement was interesting and hopefully change will come.
Tim Harcourt, J.W. Nevile Fellow in Economics at the University of New South Wales:
The target is ambitious but deliberate. They are trying to change the psychology of recovery by setting an ambitious target that might improve the chances of a stronger recovery, even if they just make half that, it’s still a gain. I think it’s an aspirational target trying to break the shackles of a slow recovery.
The communiqué made strong statements on having a flexible currency. I think if you read between the lines it’s referring to Abenomics in Japan, that it shouldn’t be creating a Pearl Harbour of currency wars and upsetting everybody else’s recovery.
The statement on the IMF reform was made, I think, because there was some talk they would drop a lot of those things and they wanted to firm them up. There’s an argument that the G20 could replace the IMF’s role in global finance, and so this statement said they weren’t interested in replacing the IMF, just reforming it.
Fariborz Moshirian, Professor of Finance, Director of the Institute of Global Finance at the University of New South Wales:
It’s great to see this year’s Summit is more focused on economic growth because, over the last five years, we’ve been working on repairing the global financial system, including dealing with the sovereign debt crisis in Europe and the US banking crisis. Thus, talking about stronger economic growth is useful for the market.
However, the way the statement is phrased doesn’t give responsibility to any member for this objective. This means no-one is going to take full responsibility if such a collective GDP goal is not achieved. In the past, the G20 was criticised for not having an executive power and only relying on peer pressure for achieving its objectives.
The communiqué is trying to strike a balance on monetary policy. It is saying that the US should be mindful of the implications of its monetary policy on developing economies but there’s nothing in this statement that guarantees that the Federal Reserve may consider the interests of emerging economies ahead of its own national monetary policy. More dialogue is required.
They are also asking emerging economies to accelerate restructuring of their economies so that they can attract good investment. In other words, emerging economies should not rely on speculative capital which flows because interest rates are higher in developing economies.
The issue with foreign exchange flexibility is with China, because China’s currency is fixed rather than flexible. A more flexible exchange rate in China could address the trade imbalances between the US and China and may lead to more imports from the rest of the world by China.