tag:theconversation.com,2011:/us/topics/g20-finance-ministers-9081/articlesG20 Finance ministers – The Conversation2015-09-07T00:48:53Ztag:theconversation.com,2011:article/468832015-09-07T00:48:53Z2015-09-07T00:48:53ZG20 growth goal not helped by Hockey’s ‘boring’ budget<p>G20 finance ministers met in Turkey on the weekend, where they <a href="https://g20.org/wp-content/uploads/2015/09/September-FMCBG-Communique.pdf">admitted</a> global growth had fallen short of their expectations. </p>
<p>The host is keen to shake off perceptions that these meetings are just a talkfest. The problem is they are. If you happened to be paying attention last year, Joe Hockey came up with the <a href="https://theconversation.com/g20-finance-ministers-agree-to-growth-target-experts-react-23566">unverifiable plan</a> to “lift our collective GDP by more than 2% by 2018 above the trajectory implied by policies in place … in 2013”.</p>
<p>The focus of that summit was on reforms and infrastructure spending across the G20 to raise growth. The problem is that most advanced economies have problems with public debt that make significant increases in infrastructure spending unaffordable. </p>
<p>Australia has enough problems enacting reforms to product and labour markets, but in other advanced economies with even worse structural problems the difficulties seem to be greater.</p>
<p>Prime Minister Shinzo Abe in Japan has not been able to make progress on any significant structural reforms in that economy, even though these reforms are critical in getting Japan out of its long secular decline. European economies have similar problems, but in many cases these economies are going backwards rather than forwards. Even Germany has cut the retirement age, which is at odds with efforts to raise participation and deal with rising pension costs.</p>
<p>Since the G20 meeting last year economic growth has slowed everywhere. Global growth slowed in the first half of 2015, with manufacturing, investment and trade all weak. A key problem is weakness in business investment and, as a recent <a href="http://www.bis.org/publ/qtrpdf/r_qt1503g.htm">Bank for International Settlements report</a> makes clear, the problem is uncertainty about the future state of the economy and profitability. </p>
<p><a href="https://theconversation.com/what-the-latest-capital-expenditure-figures-tell-us-about-the-economy-42477">Business investment</a> is a key indicator of expectations about future growth, and businesses are telling us that they don’t expect to see growth enhancing reforms any time soon.</p>
<h2>Reform still required</h2>
<p>The IMF is expecting growth to pick up in advanced economies in the second half of this year and into 2016. The finance ministers said:</p>
<blockquote>
<p>“We have pledged to take decisive action to keep the economic recovery on track and we are confident the global economic recovery will gain speed.”</p>
</blockquote>
<p>This is wishful thinking. Without reform and without business investment, growth will continue to be weak. </p>
<p>The IMF is concerned about slowing emerging market growth, but the reality is that the real drag on the global economy is the major advanced economies in Europe, Japan and also the United States. It is in these countries where the need for reform is the greatest, but the progress is nowhere to be seen.</p>
<p>G20 meetings probably do no harm, but they don’t seem to do much good either. For Australia the issue is to make progress on our own structural reforms, <a href="https://theconversation.com/pms-infrastructure-plan-failing-growth-and-cost-benefit-goals-37164">infrastructure bottlenecks</a>, <a href="https://theconversation.com/government-calls-for-tax-rethink-but-reform-answers-abound-39436">tax</a> and spending problems. Dealing with these issues is a priority irrespective of what other G20 countries do. </p>
<p>Having pledged to raise global growth last year, Joe Hockey delivered a “boring” budget in 2015 that did nothing to raise Australia’s growth, or address any of these issues. But we could say the same about most of the other 19 G20 countries.</p><img src="https://counter.theconversation.com/content/46883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Crosby does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Without true structural reform and business investment the G20 economies will be unable to deliver on their lofty growth ambitions.Mark Crosby, Associate Professor of Economics, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/338372014-11-09T19:30:21Z2014-11-09T19:30:21ZAustralia’s G20 growth challenge: protecting our standard of living<figure><img src="https://images.theconversation.com/files/63944/original/wnmmbfds-1415336646.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's standard of living is under threat.</span> <span class="attribution"><span class="source">Scott Woodman/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>When the G20 finance ministers <a href="https://www.g20.org/sites/default/files/g20_resources/library/Communique%20Meeting%20of%20G20%20Finance%20Ministers%20and%20Central%20Bank%20Governors%20Sydney%2022-23%20February%202014_0.pdf">agreed</a> in February to significantly raise global growth, they locked in a goal of lifting collective GDP by more than 2%. This was a cumulative goal - that is a total of 2% above the trajectory implied by current policies over a period of five years.</p>
<p>The ministers argued this would equate to US$2 trillion more in GDP in
real terms, leading to significant additional jobs. </p>
<p>The IMF’s latest forecasts for medium-term annual growth in GDP in Australia are between 2.8% and 3.0%. With the addition of the G20 goal, Australia will be looking for annual GDP growth well in excess of 3%.</p>
<p>According to forecasts by the Centre of Policy Studies at Victoria University, annual GDP growth of almost 2.5% will be required just to prevent Australia’s standard of living (proxied by per capita real income) from falling from its present level for the rest of the decade. </p>
<p>One might wonder how a respectable level of GDP growth translates into such a poor result for per capita real incomes. Usually, growth in GDP per worker, a measure of individual economic output, is a pretty good proxy for individual incomes, but this is not always the case. </p>
<p>During the boom period – we’ll call it 2004 to 2011, during which the price of iron ore increased eight-fold – GDP grew at an average of 2.8% per year, equivalent to annual growth of just under 1% in output per hour worked. Over the same period, individual incomes rose at an average of 2.2% per year, easily outpacing growth in output. In other words, we were able to consume and save more than we had to produce. What is going to be different now?</p>
<p>Firstly, the purchasing power of domestic income will be weakened by depreciation of the Australian dollar. This is the opposite of what happened in the boom years. By 2011, we could exchange one tonne of iron ore for a bundle of imported goods that would have cost us eight tonnes back in 2004. To the extent that we did this, the commodity price boom made us richer. The undoing of this effect has begun, and will continue for several more years. </p>
<p>The average price of household consumption, a fifth of which is imported, is set to increase annually by half a percent faster than producer prices for the remainder of the decade. As we exchange the goods we produce for the goods we consume, we are coming out worse off.</p>
<h2>Mining might be good for GDP, but not incomes</h2>
<p>Secondly, foreign ownership plays an important role. Much of the growth in GDP will be driven by mining exports. The mining industry operates with relatively few employees, and enormous capital stocks, of which four fifths are foreign owned. An increase in mining production, which feeds into GDP, will be good for the foreign recipients of mining profits, but less good for domestic incomes.</p>
<p>Thirdly, as the baby boomers move into retirement, population growth will outstrip employment growth. When we translate the nation’s aggregate income into per capita income, we find there is less to go around.</p>
<p>This is not the only challenge. It is not clear that the annual GDP growth of 2.5%, sufficient to maintain our standard of living, can even be achieved. In the absence of a stronger increase in employment (via increased participation, hours worked, or a lower unemployment rate) the key requirement here is growth in productivity. Growth in productivity enables output to increase by more than inputs. Its contribution varies widely over time, but the average over the last 40 years is a contribution of a little below three quarters of a percentage point to annual GDP growth. </p>
<p>Over the next five years, if we were to achieve the annual GDP growth of 2.5% required to maintain our incomes, we would require annual productivity growth of half a percent. (This is similar to that of the 1980s, and much less than that experienced in the 1990s.) More than 1% would be required to achieve the much higher target espoused by the G20.</p>
<p>However, over the last decade, non-mining productivity growth has contributed just one quarter of a percentage point to annual GDP growth (the contribution of mining has been negative). Our incomes grew without much help from productivity growth, buoyed instead by high commodity prices during the boom years. If this low rate of productivity growth continues, it will not be enough to maintain the present standard of living for the remainder of the decade, let alone the G20 goal. </p>
<h2>The productivity challenge</h2>
<p>Productivity growth is the mantra of economists, but sources of productivity are not always easy to find. Regulatory reform and innovation are the “silver bullets”, but take time to implement, and the effectiveness of the Abbott government’s proposed reforms in the health and education sectors is as yet unproven. Pressing our noses ever harder to the grindstone may increase measured productivity, but drawing a connection between an increase in incomes achieved by this method and an increase in “living standards” is dubious indeed.</p>
<p>If, in keeping with recent history, productivity growth is less than half a percent for the remainder of the decade, the circumstances – falling terms of trade, falling investment in mining, the concentration of growth in the largely foreign-owned mining sector, and a growing and ageing population – present a challenge for the nation. Living standards will fall.</p>
<h2>Why wages are stagnating</h2>
<p>An important element of an orderly adjustment to these circumstances will be to limit wage growth. Over the last decade, annual growth in wages adjusted for inflation in consumer prices averaged 0.9%. This was possible because good times enabled employers to pay high wages, while consumer inflation was low because the strong currency made imports cheap. </p>
<p>As growth in producer prices starts to lag behind growth in consumer prices, there will be no reason to expect an increase in wages commensurate with consumer prices. Wages adjusted for inflation will need to fall if unemployment is to decrease or even remain at its present level. The latest wage and inflation figures from the ABS indicate that in the year to June 2014, for the first time this century, the inflation adjusted wage fell. It will need to fall further, undoing most of the growth of the last decade, to prevent further increases in the unemployment rate.</p>
<p>Although the wage statistics show promising signs of good adjustment in the labour market, unemployment has increased throughout the year. Households are stuck between a rock and a hard place. A reduced wage relative to the cost of living is undoubtedly bad for household income, but unemployment is worse.</p>
<p>With modest productivity growth and no further increase in unemployment, real wages will fall to around 5% less than their current level by 2020 and living standards will fall. The G20 growth target might not be achievable, but if it inspires productivity-enhancing reform, we might just manage to retain our present living standards.</p><img src="https://counter.theconversation.com/content/33837/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janine Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When the G20 finance ministers agreed in February to significantly raise global growth, they locked in a goal of lifting collective GDP by more than 2%. This was a cumulative goal - that is a total of…Janine Dixon, Senior research fellow, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334052014-10-27T03:28:26Z2014-10-27T03:28:26ZShould bank capital levels distress Australian regulators?<p>Following its stepped up year-long <a href="https://www.ecb.europa.eu/press/pr/date/2014/html/pr141026.en.html">review</a> of European banks, the European Central Bank this weekend failed 25 of the 130 banks it tested on the strength of their capital buffers to protect against a downturn.</p>
<p>The result was seen as <a href="http://online.wsj.com/articles/europes-good-enough-bank-stress-tests-heard-on-the-street-1414345314">“good enough”</a>, with many banks scraping through and those that didn’t, forced to again increase their capital, somewhat concentrated.</p>
<p>With the final report of the <a href="http://fsi.gov.au/">financial system inquiry</a> due before the end of the year, the level of capital held by Australian banks is also up for review. ANZ bank chief Mike Smith has been <a href="http://www.smh.com.au/business/anz-chief-mike-smith-tells-b20-meeting-banks-have-to-reearn-trust-20140722-3cdn8.html">insisting</a> Australian banks are already well capitalised.</p>
<p>The issue of how much capital banks need gets very confused. There are three separate elements of the debate which get conflated.</p>
<p>Like other companies, banks hold equity capital as a buffer against bankruptcy. Banks now hold about double the amount of equity capital they held in the 2000s and hold about three times as much as they did in the 1980s.</p>
<p>Just what is the right amount clearly depends on the riskiness of the underlying business: risky businesses need to hold more capital to get the same degree of protection against bankruptcy as less risky businesses. By this criterion Australian banks seem well capitalised since they run quite low risk business models and have quite large capital buffers. This is clear from the chart below which compares CBA’s capital ratio with those of other large banks as measured by the standards used in different jurisdictions.</p>
<p><strong>Common Equity Tier 1 ratios: CBA under various regimes</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/62814/original/d25dz24p-1414376555.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">CBA 2014 annual results presentation</span></span>
</figcaption>
</figure>
<p>The second concern with capital does not relate to the potential bankruptcy of an individual bank, but rather to the resilience of a country’s banking system as a whole. Australia invests more than it saves with foreign capital inflow making up the difference. Capital flows in in a wide variety of forms: foreign direct investment, foreign portfolio investment, offshore government borrowing, offshore corporate borrowing, and borrowing by Australian banks. The figure below shows how the mix has changed over time, with a big reduction in banks’ borrowings since the financial crisis, and with government and non-financial corporations now responsible for the bulk of the borrowing.</p>
<p><strong>Net capital inflow (% of GDP)</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=220&fit=crop&dpr=1 600w, https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=220&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=220&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=277&fit=crop&dpr=1 754w, https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=277&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/62815/original/mzs53fft-1414376680.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=277&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">RBA Guy Debelle speech, 20 May 2014</span></span>
</figcaption>
</figure>
<p>The fact that Australian banks borrowed heavily offshore in the period 1998-2007 has created sensitivity to the funding risk they ran during the period.</p>
<p>When capital markets closed during the crisis, and particularly after Ireland’s ill-judged guarantee of its banks’ borrowings, there was a risk Australian banks would have to quickly cut borrowing, and hence lending, which risked creating a recession in Australia. There are many tools governments can use to reduce the risk of importing a crisis through exposure to international borrowings, but raising capital requirements seems likely to be one of the better ones.</p>
<p>The third issue that is often raised in Australia is the potential to use capital requirements as a tool of competition policy. There are two separate strands to this argument.</p>
<p>The first is that the large banks have a competitive advantage over smaller banks simply because of their size, and that the advantage could be reduced if the banks were required to hold more capital. This is simply an argument against size and could be applied in any industry, and is basically misplaced. If the banks are large because they are more efficient, or better managed, then handicapping them results in social losses. If they are large because of collusion or misbehaviour of some sort, then we already have mechanisms available through the ACCC to address them. There is simply no justification of a policy simply aimed at size.</p>
<p>The second is that the big banks have an advantage because their depositors, shareholders and bondholders are likely to be protected in a crisis (the too big to fail idea), that is that the government provides them with implicit insurance. The best solution to this is to take away quite explicitly any idea of government insurance for large banks. This has been the direct intention of regulators since the crisis. </p>
<p>Governments have a concern to see the operations of bank continue even in a crisis but not to protect shareholders or bondholders. Resolution regimes, <a href="http://www.smh.com.au/business/banks-warn-living-wills-come-at-a-cost-20120708-21pek.html">living wills</a>, and the compulsory conversion of bond-holders to equity holders <a href="http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-2">(bail in)</a> are all steps in the right direction.</p><img src="https://counter.theconversation.com/content/33405/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock has received funding in the past from a range of financial institutions. None is current.</span></em></p>Following its stepped up year-long review of European banks, the European Central Bank this weekend failed 25 of the 130 banks it tested on the strength of their capital buffers to protect against a downturn…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318272014-09-22T05:42:47Z2014-09-22T05:42:47ZLittle appetite for painful reform needed to hit G20 growth target<p>In 2000 in Lisbon the European Union countries met and agreed on the “Lisbon Agenda”. Europe was already lagging in terms of growth and jobs, and it was hoped that the Agenda would “deliver stronger, lasting growth and create more and better jobs in order to unlock the resources needed to meet Europe’s wider economic, social and environmental ambitions, thus making Europe a more attractive place to invest and work and improving knowledge and innovation for growth in Europe.” </p>
<p>In 2005 <a href="http://cordis.europa.eu/programme/rcn/843_en.html">the strategy was modified</a> to focus primarily on creating growth and jobs.</p>
<blockquote>
<p>“The strategy is designed to help Europe address the challenges of an ageing population, the need to increase productivity and the competitive pressures of a globalised economy…To unlock existing resources in Europe, the following actions are needed: - investing more in young people, education, research and innovation to generate wealth and provide security for every citizen; - opening up markets; - cutting red tape; - investing in modern infrastructure to help enterprises grow, innovate and create jobs; - developing a skilled entrepreneurial workforce; - ensuring a society with high levels of employment, social protection and a healthy environment.”</p>
</blockquote>
<p>The Lisbon Agenda is perfectly sensible. Economic growth in Europe in the 1990s was 2.2%, roughly half the 4.3% growth achieved by other advanced economies. The EU unemployment rate in 2000 was around 9%, more than 2% higher than in Australia. European economies had not gone through many of the economic reforms that had been introduced in countries like Australia and New Zealand in the 1980s and 1990s.</p>
<p>Despite the appeal of the Lisbon Agenda, virtually no meaningful reforms were implemented in Europe in the 2000s, with the exception of some important labour market reforms introduced in Germany. The result was poor economic growth even prior to the GFC, and even worse outcomes since 2008. The unemployment rate in the EU is now above 10%, having remained well above the unemployment rate in Australia even prior to the GFC.</p>
<p>Despite issues with weak labour markets and economic growth, ageing populations, and fiscal difficulties European economies have in general not been able to implement any significant reforms. Political weakness has continued to stand in the way of reform.</p>
<p>So now we get to the G20’s plans to lift its collective GDP growth by more than 2% by 2018. Outlining how they would do this, G20 member countries have said: </p>
<blockquote>
<p>“Structural reforms will be important in this regard. We have developed a set of new concrete measures that will facilitate growth, increase and foster better quality investment, lift employment and participation, enhance trade and promote competition.” </p>
</blockquote>
<p>The <a href="http://www.imf.org/external/np/sec/pr/2014/pr14434.htm">IMF has now estimated</a> that reforms proposed by the G20 will be sufficient to raise G20 growth by 1.8% above the pre-existing growth trajectory.</p>
<p>It won’t happen. If these reforms were easy, why haven’t they already been implemented? One might think that the pressure of no economic growth, high unemployment and social upheaval would be the trigger for reform in Europe. But no reforms have happened. </p>
<p>Reform is painful, and in general the status quo is seen to be easier than further upheaval. Even in Germany the retirement age has recently been cut to 63 – populism almost always trumps reform, even in the more sensibly managed economies. And other advanced economies in the G20 are the same – difficult policies don’t get implemented.</p>
<p>In emerging economies there has been reform, and growth is much stronger. But that means that further reforms are likely to have only a very modest effect on economic growth. Already demographic changes and other economic challenges are having a major impact on China’s economy, and growth is more likely to slow than to pick up in the medium term.</p>
<p>If you’re interested in the detail of the G20 declaration, go <a href="https://www.g20.org/sites/default/files/g20_resources/library/September%202014%20communique%20-%20FINAL_0.pdf">here</a>. Somehow we have been missing out on billions of dollars in infrastructure spending, and through some mystical new financing strategies (through Public Private Partnerships and so on) we should expect to see a spur to new infrastructure and economic growth in the next few years. Labour, tax, and product market reforms provide the rest of the uptick in economic growth.</p>
<p>Australia has been very fortunate to have had able and courageous economic management until recent years. Particularly during the Hawke-Keating government, and in the early years of the Howard government many tough economic reforms were made. Our economy is much more resilient than most other advanced economies. But we need further reform to spur future growth. It is questionable whether we have the appetite for further reform. But there is no question about many of the other major economies and their appetite for reform – there is no appetite, and no reforms will be forthcoming.</p>
<p>Does this matter for Australia? It is much easier to grow when the global economy is doing well. Europe and the United States are still major economies and drivers of economic growth. But Europe has been in reverse for more than a decade and we have still been able to grow. Partly this is of course about China and growth in other emerging markets, but it is also about Australia’s strong economy and low public debt. </p>
<p>Economic growth is for the most part in the hands of a country’s policymakers, and does not depend on reforms made in other economies. For that we should be thankful, but not complacent.</p><img src="https://counter.theconversation.com/content/31827/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Crosby does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In 2000 in Lisbon the European Union countries met and agreed on the “Lisbon Agenda”. Europe was already lagging in terms of growth and jobs, and it was hoped that the Agenda would “deliver stronger, lasting…Mark Crosby, Associate Professor of Economics, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/315142014-09-17T06:34:40Z2014-09-17T06:34:40ZG20 host Australia faces hard truths of multinational profit shifting<figure><img src="https://images.theconversation.com/files/59245/original/64njsjjz-1410926066.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Finance Ministers meeting in Cairns is a chance for Treasurer Joe Hockey to show leadership on OECD-recommended tax reform.</span> <span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span></figcaption></figure><p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial <a href="http://www.oecd.org/ctp/beps-2014-deliverables.htm">recommendations</a> of the OECD on how to address the global problem of multinational tax avoidance.</p>
<p>The <a href="http://www.oecd.org/ctp/BEPSActionPlan.pdf">work</a> of the OECD on the issue to date is substantial. Most notable is the adoption by many nations, including Australia, of the Common Reporting Standard for the automatic exchange of tax information. This standard will allow significant inroads to be made into tax avoidance, particularly by individuals sheltering money offshore. This is the first step in an ambitious tax reform program. </p>
<p>There is a long way to go if we are to end the issue now known as Base Erosion and Profit Shifting (BEPS). This week’s release of the first of the OECD recommendations contains some positive signs that further advances will be made. It also recognises some hard truths. </p>
<h2>Transparency: a three-pronged approach</h2>
<p>Three key OECD recommendations address international tax transparency: country-by-country reporting, harmful tax practices, and a multilateral instrument.</p>
<p>The most positive recommendation is county-by-country reporting, which will complement the information obtained via the Common Reporting Standard with the onus on the taxpayer to provide information to tax administrations. It will also extend the net of information captured to all multinationals. </p>
<p>A revamp of the OECD work on harmful tax practices is also welcome. This measure focuses on nations that engage in harmful tax competition. The OECD recommendations place an emphasis on improved transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. However, the focus will be on distinguishing between preferential regimes which encourage real activity and those which encourage profit shifting. The “spillover” effect, or the impact that one country’s choices have on other countries, highlighted recently by the <a href="http://www.imf.org/external/np/pp/eng/2014/050914.pdf">IMF</a>, is unlikely to be examined by the OECD. </p>
<p>Steps towards a multilateral instrument to expedite and streamline the implementation of BEPS measures are a positive sign. Tangible outcomes rely on nations adopting G20 endorsed recommendations of the OECD. Success will only occur if a consensus framework is maintained. The suggested multilateral instrument is an administrative tool and, if used effectively, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.</p>
<h2>Hard truths</h2>
<p>I have previously <a href="https://theconversation.com/developing-nations-need-more-than-words-from-g20-tax-reform-30608">argued</a> that the current international tax system is broken and it’s going to take significant global effort to fix it. </p>
<p>Global effort needs to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of current laws which allow profit shifting through tax advantaged structures. These structures allow the use of transfer pricing rules and treaty provisions to minimise tax, and lie at the heart of the problem. While acknowledging the systemic challenges of ensuring profits are taxed where economic activities occur and where the value is created, the first set of OECD recommendations understandably raise more questions than answers. </p>
<p>The most telling is the report into the challenges of the digital economy which is the result of information and communication technologies. We are seeing rapidly evolving technologies and business structures leading to problems including a nation’s ability to establish the right to tax transactions. The OECD and G20 countries have reached a common understanding of the challenges raised by the digital economy but leave much of the work to the rest of the Action Plan. Those recommendations are not due until 2015. </p>
<p>More progress has been made in relation to treaty abuse and specifically treaty shopping. Tax treaties are entered into between two countries to determine taxing rights and prevent double taxation. They are not intended to be used to generate double non-taxation. </p>
<p>Currently, we are seeing multinationals obtaining benefits under treaties where they are a resident of neither country. It is positive to see that treaty anti abuse rules have been drafted and will be included in the OECD Model Tax Convention. However, again, more work is needed in this area. </p>
<p>Progress has also been made in the area of transfer pricing, but the majority of this work will form the basis of the 2015 recommendations.</p>
<p>Many of the BEPS problems are created by the hard truth that from a business perspective multinationals structure their operations in a truly global manner. Yet, from a tax perspective, we continue to treat the multinational entity as having separate parts. By treating a multinational as having separate parts, they are able to shift profits. </p>
<p>Despite recognising the systemic challenges, the OECD is committed to addressing flaws in the current regime. It is not considering other approaches such as <a href="http://en.wikipedia.org/wiki/Formulary_apportionment">“formulary apportionment”</a> which is suggested by civil society groups and academics as being a possible solution to the current separate entity approach. </p>
<p>The recommendations reflect OECD and G20 countries consensus on a number of solutions to end BEPS. Australian Treasurer Joe Hockey should endorse the OECD’s recommended measures as a positive step to address profit shifting and promote the welfare of Australia’s citizens through a sound tax regime. </p>
<p>At the same time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is both robust and adaptable to the modern global economy. As host of the G20 in 2014 we must also been seen to be a leader in tax reform.</p><img src="https://counter.theconversation.com/content/31514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial recommendations of the OECD on how to address the global problem of multinational tax avoidance. The work of the OECD…Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/314722014-09-16T20:26:05Z2014-09-16T20:26:05ZInformation is power: OECD tax plan puts Apple and Google on notice<figure><img src="https://images.theconversation.com/files/59130/original/3zxkvw4k-1410851353.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Google books much of its Australian profit to offshore operations.</span> <span class="attribution"><span class="source">Tawel/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting by multinationals led to the <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">endorsement of the G20</a> in September 2013 for the OECD to embark on an ambitious project aiming to eliminate double non-taxation. </p>
<p>The OECD has just released the first package of proposals addressing seven action items. These will be presented to G20 Finance Ministers in Cairns this weekend. </p>
<p>One of the key proposals is to increase transparency through a country-by-country reporting regime. Under the proposal, multinationals would have to report the amount of income, profit before tax and income tax paid in each of the countries where they have operations. In addition, they would have to disclose their total employment, capital and assets in each of the countries.</p>
<p>A properly designed country-by-country reporting regime is critical in the war on profit shifting for two reasons. First, it would provide much needed information for tax authorities to identify targets for tax investigations. For example, if such reporting were in place when Apple implemented its <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">international tax avoidance structure</a>, the substantial profits booked in Ireland and the minimal tax paid in that country would be immediately apparent to the ATO. </p>
<p>Second, the country-by-country reporting regime would have a deterrent effect. As the tax benefits from an international tax avoidance structure would be disclosed to tax authorities around the world, the risk of a tax investigation would be much higher. Multinationals would likely think twice before engaging in aggressive tax structures.</p>
<h2>Multinationals are campaigning against change</h2>
<p>The strong opposition from business against the country-by-country reporting regime suggests it would be an effective anti profit shifting weapon for tax authorities. The OECD consultation on this regime has been one of the most controversial action items of the profit shifting project so far. It has attracted over 130 submissions in total, with 79 from businesses and 43 from tax lawyers and accountants. </p>
<p>The overwhelming enthusiasm from the business and professional communities reflects their strong desire to keep as much tax information as possible “hiding from light”. One of their arguments against the country-by-country reporting regime is the compliance costs associated with preparing the required information. But compliance costs under the proposed reporting regime are likely to be a small fraction of the tax advisory fees that multinationals are willing to pay for tax avoidance structures. </p>
<p>In a recent US congressional hearing it was revealed Caterpillar Inc, an iconic US multinational, paid US$55 million to PwC for a tax structure under which it has successfully shifted US$8 billion from the US to Switzerland. </p>
<h2>Transparency compromised</h2>
<p>NGOs and academics, on the other hand, have argued for the country-by-country information to be made public. The deterrent effect is likely to be more powerful if the information is disclosed in the public financial statements of the multinational. The reputational issue is now a boardroom concern and can be a deal breaker when a multinational contemplates a profit-shifting structure. </p>
<p>But the concerns of multinationals have made inroads in the OECD proposal, in which the country-by-country information would be reserved for the eyes of tax authorities and not disclosed to the public. It appears that the OECD’s preference hinges to a large extent on its focus of the first function of the regime, namely, providing essential information for tax authorities to identify tax audit targets.</p>
<p>A successful implementation of the country-by-country reporting regime would be good news for “honest” companies which pay their fair share of tax. As the regime helps tax administrators to focus on the right targets for tax investigations, it would minimise the risk of wasting time and effort on honest taxpayers.</p>
<p>Of course, the devil may be in the detail. The OECD will undertake additional work in the coming months to develop detailed implementation and reporting rules. </p>
<p>It is unclear at this stage how much additional useful information will become readily available to tax authorities. For example, the proposal suggests that information about related party transactions of a multinational in a country would be provided to that country in a “local file”. It is not clear if these local files would be readily available to other countries where the multinational has operations. </p>
<h2>Possible loopholes</h2>
<p>Taking Apple’s tax structure as an example, Apple Australia buys products from Apple Singapore, which in turn buys the products from Apple Ireland. The ATO would have the local file showing the information about the intra-group sales between Australia and Singapore. However, unless it can readily obtain information about the intra-groups sales between Singapore and Ireland, the ATO would not have enough information to complete the puzzle. Without a global understanding of the whole tax structure, it would still be difficult for the ATO to effectively assess and challenge the arrangement.</p>
<p>Obtaining full global information about the tax structure of a multinational is the correct first step in the battle against profit shifting. However, it will take much more to win the war. </p>
<p>The tax structures of Apple and Google, etc. are in full compliance of tax law. Even with the whole picture of Apple’s tax structure in front of the ATO, it will still need effective tax law to collect the fair amount of tax. The challenge for the ATO is: how can it lay its hands on the profits booked in Ireland that have not been taxed anywhere in the world? The current tax law does not empower the ATO to claim a share of that income. Tax administrators in most countries are in the same boat.</p>
<p>This is the most challenging part of the project. A fundamental rethink of the underlying principles of the taxation of multinationals is necessary for a comprehensive solution to the profit shifting issues. The OECD will have to do much more work on some highly controversial issues in the coming months. International consensus would likely to be more difficult to achieve on these issues.</p><img src="https://counter.theconversation.com/content/31472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting…Antony Ting, Senior Lecturer of Taxation Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/314622014-09-11T02:46:21Z2014-09-11T02:46:21ZAustralia may be hosting the G20, but it’s no G20 leader<p>When the central bank governors and finance ministers from the G20 agreed in February to increase growth by at least two percentage points over the next five years, they fell short of delivering a common strategy to do it.</p>
<p>G20 communiques tend to express broad mission statements, and recommend a range of not necessarily consistent strategies. This is unsurprising when considering the huge range of countries involved, from Indonesia to China to the EU, with very different institutions, conditions and interests, so that any statement is likely to reflect the lowest common denominator. </p>
<p>Significantly the <a href="https://www.g20.org/sites/default/files/g20_resources/library/Communique%20Meeting%20of%20G20%20Finance%20Ministers%20and%20Central%20Bank%20Governors%20Sydney%2022-23%20February%202014_0.pdf">communiques</a> delivered since February do not seek to recommend austerity measures, and explicitly aim to lift employment, an imperative which recognises that over 100 million people in G20 economies are still unemployed since the global financial crisis, and wages have stagnated. </p>
<p>The key aims mentioned repeatedly include lifting “collective GDP by more than 2% above the trajectory implied by current policies over the coming 5 years”, and growth strategies which “include a set of leading practices to promote and prioritise quality investment, particularly in infrastructure”. The February communique also refers to maximising the impact of public sector capital expenditure, but this is not mentioned in the April one. In general the means to achieve these aims are left wide open, reflecting the lack of policy consensus among the governments of the countries involved. </p>
<h2>The role of wages in economic growth</h2>
<p>In response the <a href="http://www.ituc-csi.org/l20-australia-2014">L20</a>, the parallel meeting of trade union representatives from each G20 country, offered measures toward achieving the 2% growth target, including raising wages and investment in public infrastructure. </p>
<p>The L20 recognised the share of wages in global output has fallen from over 62% in 1980 to 54% in 2011 (according to the UNCTAD Trade and Development Report 2013). </p>
<p>Raising the share of wages would promote economic growth through increasing demand for output and employment and reducing inequality. Increasing wages for the poorest people would promote growth in output because they spend more of their income on goods and services than do the better off. </p>
<p>The L20 also recognised that public investment in many countries has fallen due to austerity measures after the GFC. Raising public sector infrastructure investment would increase employment and economic growth, also through promoting technological advance.</p>
<p>The L20 proposals were backed by the estimates in a University of Greenwich <a href="http://www.ituc-csi.org/the-case-for-a-coordinated-policy">study</a>, which used a simulation method to find that a coordinated increase in wages as a share of GDP ranging between 1% and 5% across countries would generate nearly 2% growth overall over the next 5 years. </p>
<p>The effect on spending is higher for a wage increase than for a profit increase, and varies depending on how much income is spent on imports. It also found that a public investment stimulus of 1% of GDP in each country would lead to growth from around 2% to 4%. Like all such quantitative studies, the findings are dependent upon the assumptions necessarily made in the study and are strengthened by varying some key assumptions.</p>
<p>Using the Greenwich estimates for Australia, which assume that G20 countries coordinate their plans, our back of the envelope calculations show an increase in pay of about A$25 per week per employee (See <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5204.02012-13?OpenDocument">ABS Table 6</a>), combined with an increase in public investment in infrastructure of 1% of GDP or a mere $15.2 billion, would generate an extra 2% growth in GDP. From a further rough calculation, over 230,000 extra jobs could be created in Australia. </p>
<h2>The Coalition government’s approach</h2>
<p>The current federal government focus on “fiscal consolidation”, or restricting the budget, suggests it’s not taking an employment creating approach.</p>
<p>Unemployment in Australia has increased by nearly a percentage point over the last year to 6.4% or 789,000 in July (seasonally adjusted). It is an unconscionably high 20.4% of 15 to 24 year olds, at least 165,000 young people. </p>
<p>The government’s proposed infrastructure package does not amount to increased spending, as it basically assumes that private and state government spending will substitute for Federal government spending. The government’s planned cuts to the CSIRO and higher education, and scale back of the national broadband network do not appear well aligned with the expansion of employment, infrastructure and technological advance sought in the G20 communiques. </p>
<p>The federal government approach to promoting economic growth is that of laissez faire, a belief that leaving the market to its own devices will achieve growth. This puts it out of step with the current G20 rhetoric.</p>
<p>The government policy agenda in regard to employment is to make the labour market more flexible, so that employers can take on workers at lower wages if they wish. The intention is to reduce costs to employers for employing workers, thereby offering employers the incentive to employ more people. </p>
<p>As well as being unwise politically, the approach is out of step with current developments in economic policy. Even the US government has <a href="http://www.nber.org/erp/2013_economic_report_of_the_president.pdf">supported</a> raising minimum wages, based on economic studies. </p>
<p>In a renewal of Keynesian approaches, as in the Greenwich study, raising wages would increase the demand for goods and services, and increase employment across the industries which supply them, domestically and globally. Business profitability would improve. This has an effect similar to the stimulus packages used to counter the effects of the global financial crisis, promoting growth in the economy. </p>
<p>Nor does the government’s approach to infrastructure appear to align with the G20 approach. </p>
<p>Infrastructure includes transport and logistics, communications, energy, water and waste disposal, and the justice and health systems. These are not readily provided by the market if at all, because they are subject to market failure – the level of private provision tends not to be sufficient to reflect the spillover benefits gained by others who do not have to pay directly for it. It is why infrastructure is regulated or provided directly by the government.</p>
<p>Infrastructure also includes services to technological advance, the engine of economic growth. These services include education, R&D and innovation. Everyone benefits from an invention, but there’s no easy way to get them to pay for it. This leaves governments to promote R&D. </p>
<p>Australia might be hosting the G20, but it can’t be viewed as leading it.</p><img src="https://counter.theconversation.com/content/31462/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Margaret McKenzie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When the central bank governors and finance ministers from the G20 agreed in February to increase growth by at least two percentage points over the next five years, they fell short of delivering a common…Margaret McKenzie, Lecturer, School of Accounting, Economics and Finance, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/236092014-03-03T19:41:09Z2014-03-03T19:41:09ZTime for the G20 to invest in gender equality<p>IMF chief Christine Lagarde left Sydney commenting that the “two genders” will have to contribute if the G20 was to achieve its aim of lifting economic growth targets by 2%.</p>
<p>Critiques of that growth target have ranged over whether it is <a href="http://www.theguardian.com/world/2014/feb/23/g20-finance-ministers-global-growth-target-two-percentage-points">achievable</a> or not <a href="http://www.lowyinterpreter.org/post/2014/02/24/G20-Sydney.aspx?COLLCC=1697783862&">new</a> to suggestions for growth with strategic add-ons - social inclusion, environmental protections and/or climate-mitigation strategies, or growth with decent work. </p>
<p>But even if you just <a href="http://www.oecd.org/eco/goingforgrowth.htm">“go for growth”</a>, every which way but loose, Lagarde is dead right. If the G20 is serious about “sustainable and balanced growth” as the “premier forum for international economic cooperation”, then it needs to demonstrate its serious intent towards matters of gender equality.</p>
<p>Despite a promising paragraph in the Los Cabos Leaders Declaration and several references to health and education over the years, the G20 has been seriously deficient in its recognition of gender issues in the global economy, despite the clear evidence base for such issue in terms of productivity and every facet of the G20’s focus.</p>
<p>G20 Leaders Declaration, Los Cabos 2012 said:</p>
<blockquote>
<p>We commit to take concrete actions to overcome the barriers hindering women’s full economic and social participation and to expand economic opportunities for women in G20 economies. We also express our firm commitment to advance gender equality in all areas, including skills training, wages and salaries, treatment in the workplace, and responsibilities in care-giving. </p>
</blockquote>
<p>But what has actually happened? Economic policies and institutions still mostly fail to take gender disparities into account, from tax and budget systems to trade regimes. Evidence of the gendered impact of austerity measures is still emerging from Greece and Spain, including the high representation of female public sector employees laid off and the mass closure of domestic violence refuges. </p>
<p>That the political economy of violence against women impacts on national productivity and health systems is well-known. KPMG <a href="http://www.dss.gov.au/sites/default/files/documents/05_2012/national_plan.pdf">estimated</a> in 2009 that such violence costs Australia $13.6 billion each year.</p>
<p>But evidence of the impact that including women could make to growth of the formal economy seems to be routinely ignored. Even when it comes out of the World Economic Forum, not known for its feminist leanings. The Forum now publishes the <a href="http://www.weforum.org/issues/global-gender-gap">Global Gender Gap Index</a> and regularly identifies gender inequality as a substantial risk to economic growth and stability in its annual <a href="http://www.weforum.org/reports/global-risks-2014-report">risk</a> survey.</p>
<p>Partly this is because of the under-representation of women in G20 processes. Only 25% of the heads of state of the G20 member countries are currently women. The figure for finance ministers, central bank governors and sherpas is even lower, with only 15% women. </p>
<p>The official Sydney photo of finance ministers and central bank governors shows 10% representation: </p>
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<img alt="" src="https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42342/original/7jq399cf-1393219841.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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</figure>
<p><a href="http://www.trust.org/item/?map=poll-canada-best-g20-country-to-be-a-woman-india-worst/">Advocacy campaigns</a> using data to model gender gaps in G20 countries and the <a href="http://www.booz.com/global/home/what-we-think/multimedia/video/mm-video_display/third-billion-ii90-2012">Third Billion</a> campaign are beginning to add some pressure to leaders. Some countries are responding at the rhetorical level, most notably prime minister Shinzo Abe stating that empowering women is a key pillar of his ‘Abenomics’ agenda, because “women are Japan’s most under-used resource”. </p>
<p>One positive area of progress has been in recognising the importance of financial inclusion - the concept of ensuring the poor or marginalised can access financial services. At a rhetorical level at least, the G20 has recognised the benefits of financial inclusion to economic growth and poverty reduction with the successive endorsement of high level principles, action plans and the establishment of the <a href="http://www.gpfi.org/">Global Partnership for Financial Inclusion</a> (GPFI) and the <a href="http://www.womensfinancehub.org/">Women’s Finance hub</a>. </p>
<p>These various principles refer to the importance of “addressing vulnerable groups’” needs for protection and education. In 2012 G20 Leaders asked for a <a href="https://www.g20.org/sites/default/files/g20_resources/library/G20_Women_and_Finance_Progress_report_WB_and_OECD.pdf">report</a> on how women and youth could gain access to financial services and financial education. This links to UN discussions about what comes after the Millennium Development Goals which end in 2015. The <a href="http://www.post2015hlp.org/wp-content/uploads/2013/05/UN-Report.pdf">High level Panel</a> identified a key principle of “<a href="http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8638.pdf">leave no one behind</a>”. </p>
<p>So what are G20 countries going to actually do with all these high level principles? The next GPFI meeting will be in Hobart in May, and civil society groups are urging policy makers to ensure national financial inclusion strategies and targets address a full range of financial services (savings, credit, insurance and payments) and monitor the progress made towards including groups like the poor, older adults, persons with disabilities, youth, women, rural households, migrants, refugees, subsistence farmers, and the LGBT community. Focusing on protecting the vulnerable is one thing, but promoting women’s economic agency would be a better strategy.</p>
<p>The G20 needs a seminal moment on this issue - as the Security Council had in 2000 with the emergence of the Women Peace and Security agenda - and one that sees women as agents in the economy. A nascent G20 discussion on “inclusive” growth, the financial inclusion agenda and investing in gender equality measures for employment needs to accelerate. Leaders of G20 countries need to demonstrate awareness of, and accountability for, the gendered consequences of their decisions. Then we would be truly be going for growth.</p><img src="https://counter.theconversation.com/content/23609/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Susan Harris Rimmer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>IMF chief Christine Lagarde left Sydney commenting that the “two genders” will have to contribute if the G20 was to achieve its aim of lifting economic growth targets by 2%. Critiques of that growth target…Susan Harris Rimmer, Director of Studies, Asia Pacific College of Diplomacy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/236102014-02-25T19:38:12Z2014-02-25T19:38:12ZCan worldwide economic growth be ‘planned’?<p>G20 finance ministers and central bank governors have set themselves a formidable task in accelerating growth and creating millions of new jobs in order to add 2% to world economic growth over the next five years.</p>
<p>But how can this be achieved - and can the proposed growth alone fix the most urgent problems of the world’s economy?</p>
<h2>Welcome to the club</h2>
<p>The G20 nations represent top two of the three tiers of the world economy. The first tier includes large rich economies - Australia, Canada, Saudi Arabia, United States, France, Germany, Italy, UK, Japan, and South Korea. All the countries of this club, except Saudi Arabia, are facing similar long run trends of slowing growth, deindustrialisation, expensive labour forces and the outsourcing of their manufacturing to emerging lower cost economies. </p>
<p>Many of them also continue to ride through the aftermath of the global financial crisis. Their sovereign debt is increasing, while the United States’ quantitative easing program is making a lot of cheap money available, ultimately contributing to consumption beyond means. </p>
<p>The second tier includes the largest emerging or middle income economies - China, India, Russia, South Africa, Indonesia, Argentina, Brazil and Mexico. This club is not homogeneous. However, many of these members have avoided the turmoil of the recession caused by the global financial crisis, continuing to grow and industrialise, and have been at the receiving end of outsourcing from developed nations. The largest of them, China has become not only the second largest economy, but also one of the major financial donors of the debt-stricken Western nations. </p>
<p>However, in this club, members have done little to avoid increasing income inequality and to share the results of economic growth with their poor.</p>
<h2>Sharing the spoils</h2>
<p>It is not clear from the G20 Final Communiqué how the declared 2% of the proposed additional growth should be distributed across to different member countries and by what kind of economic mechanisms. </p>
<p>In the G20’s market economies, additional growth can be fostered either through public investment in infrastructure, by monetary policy such as interest rates, or by government policy efforts to boost business and investment. None of those measures seem to be available to post-world-crisis Western economies. </p>
<p>Almost all the developed nations of the G20 club have considerably increased their debt by extensively using stimulus packages during the crisis. All of them - including Australia - are facing an ageing population and an accelerating increase in social security and health expenditure. Therefore, their budgets cannot support the artificial goal of additional growth through additional public spending. </p>
<p>On the other hand, the central banks have nearly exhausted their capacity of monetary incentives. Official interest rates are either historically low, as in Australia, or are near zero, as in the EU and US; while buying of treasury bonds by central banks cannot continue indefinitely. </p>
<p>The last resort could be microeconomic policy tools such as subsidies and tax breaks to companies - which might be efficient, but costly to the budget. The other tool - further liberalisation of labour markets - looks politically difficult or impossible, as the electorates of the developed G20 nations is almost evenly divided between the economic conservatives and left to the centre progressivists. </p>
<h2>Concentrating on youth unemployment</h2>
<p>Perhaps the only realistic tool for the large rich G20 economies is to concentrate on reducing increasing levels of unemployment, especially among young workers, which is a gross economic inefficiency by itself. </p>
<p><a href="http://www.oecd.org/dataoecd/9/50/50305438.xlsx">Youth unemployment in developed G20 countries</a>, except Germany, is considerably higher now than it was before global financial crisis. In 2012, the last year comparable OECD data exists for, it was 11.7% in Australia, 16.4% in USA, 21.8% in France, and 35.9% in Italy. </p>
<p>Leaders such as Australia’s Prime Minister Tony Abbott are championing work-for-the-dole programs - but this is not a solution for young people looking for decent jobs and qualifications. </p>
<p>A far better policy would be “work for apprenticeships”, which is applicable to any country that provides welfare payment to unemployed. Carefully designed, it could be attractive to employers, subsidise apprenticeships from the public purse with no extra spending, reduce youth unemployment immediately, give chances to young people and of course induce additional economic growth. </p>
<p>The question is then whether additional growth can be expected from the G20’s second tier – emerging markets. Yes it can. However, a considerable additional increase in export-led growth, that until recently was the engine of the emerging economies, would only be possible if the demand for imported goods from those countries increased. But an increase in demand that contributes to the debt of countries/importers is not sustainable. </p>
<p>Therefore, the only solution for the emerging economies is to retarget their growth into domestic consumption. This might have a flow-on effect on developed countries through increased demand for high technology, education, niche manufactured goods, tourism and resources.</p>
<h2>Growth where it is needed most - outside the G20</h2>
<p>The third tier of economies - poor stagnating nations are, of course, not represented in the G20 pool; and these are the countries where growth is needed most of all. </p>
<p>Tackling poverty was not directly on the agenda of the G20 summit. It seems that, in dealing with poor counterparts, wealthier nations rely on the inertia of ongoing aid. Nobody seems to be considering concentrating additional growth in the poorest countries, even though together with the poor of emerging markets, they are a potential area of future increases in consumer demand.</p>
<p>These are the countries where investments in infrastructure, health, education, and productivity are needed and potentially can bring a tangible effect. But this can be achieved only if international aid organisations are joined by the commercial sector. One of the areas where rather quick changes can be made is re-targeting aid money into anything that can assist young people to gain skills.</p>
<p>In other words, wherever possible, aid money needs to be spent for education and training, particularly for apprenticeships. This can attract both local and international business with access to subsidised training. Like work for apprenticeships in wealthy economies, this can contribute to the world’s economic growth. </p><img src="https://counter.theconversation.com/content/23610/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gennadi Kazakevitch does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>G20 finance ministers and central bank governors have set themselves a formidable task in accelerating growth and creating millions of new jobs in order to add 2% to world economic growth over the next…Gennadi Kazakevitch, Deputy Head, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/234722014-02-20T19:19:08Z2014-02-20T19:19:08ZBoosting infrastructure investment can prove G20’s value to the world<figure><img src="https://images.theconversation.com/files/42064/original/67ggy7b2-1392873578.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">G20 nations should fly the flag for the rest of the world when it comes to boosting infrastructure investment.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/downingstreet/3406897568/sizes/o/">Flickr/DowningStreet</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>As G20 finance ministers and central bank chiefs prepare to meet in Sydney this weekend, leading corporate figures known as <a href="http://www.b20australia.info">the B20</a> will meet separately with major global investors to discuss the need for <a href="http://www.theaustralian.com.au/national-affairs/business-chiefs-embark-on-infrastructure-drive/story-fn59niix-1226829908655">infrastructure investment to boost growth</a>. The meeting comes as treasurer Joe Hockey calls for G20 members <a href="http://www.theaustralian.com.au/national-affairs/policy/joe-hockeys-g20-growth-mission/story-fn59nsif-1226831035358">to commit to ‘hard’ global growth targets</a>. </p>
<p>More than five years after the global financial crisis, the world economy is performing well below its potential, largely due to problems caused by the governments of the Eurozone and the United States. </p>
<p>The future of the Euro hangs in the balance while Germany refuses to stimulate growth or adopt policies that could reduce the unsustainable debt burden of the weakest European economies. The United States has shuffled along the edge of a fiscal cliff for several years while spending far too little on the public goods needed to underpin its future.</p>
<p>The uncertainty caused by such brinkmanship has deterred private investment and led to a huge accumulation of savings, driving real interest rates into negative territory. The remedy for inducing a recovery of confidence, demand and growth has been well known since the 1930s. It was applied effectively by G20 governments in 2009. Facing the danger of a global depression, all of them agreed to adopt fiscal policies to stimulate demand in their economies. </p>
<p>However, once the immediate threat had passed, excessive concern about long-term debt led too many G20 governments to apply their fiscal brakes far too soon. As we enter 2014, it is becoming unsustainable to counter perversely contractionary fiscal policy by unprecedented monetary policy easing.</p>
<p>There are many ways G20 governments can improve their productivity, including more efficient management of product and factor markets. They should also agree on smarter fiscal policies. </p>
<p>If the leaders of the world’s largest economies make a determined effort to accelerate sound investments in infrastructure, that can create a large, and potentially rapidly growing, source of effective demand which does not require unsustainable borrowing. Sound investment in transport and communications, energy and urban services can pay for itself by adding to long-term productive potential.</p>
<p>To be big enough to revive confidence in sustained global recovery, such new stimulus to needs to be coordinated – no economy can do it alone, hence the opportunity for G20 coordination. To be sustainable, it will also be essential to attract private as well as public sector investment. To be commercially attractive and fiscally affordable, infrastructure investments must be selected carefully.</p>
<p>There is no shortage of good investment opportunities. The OECD estimates that global infrastructure requirements over the next two decades will be around US$50 trillion. The ADB estimates that developing Asian economies need to invest $US8 trillion in this decade to keep pace with expected infrastructure needs. The supply of savings is more than adequate to begin to fill some of this unmet demand.</p>
<p>Investments in better transport and communications among economies is, at the same time, the most efficient way to promote deep economic integration. The prospective gains from improving transport and communications among economies now outweigh, massively, the potential gains from negotiating free trade areas. Connecting low income economies to global markets is one of the most effective ways for the G20 to prove its value to the rest of the world.</p>
<p>It will not be easy to fix the massive market failure which currently allows massive savings to co-exist with huge gaps in infrastructure. Many constraints will need to be addressed to accelerate investment, especially to attract investment in infrastructure from private savings. But limits of skill, institutional and administrative capacity and problems of financial intermediation can all be overcome gradually.</p>
<p>G20 governments are already looking for ways to help steer more capital towards investment in infrastructure, but there is a risk that they will not go further than enthusiastic statements and more and more studies. By far the most effective way to find ways past constraints is to learn from experience – to set out a strategy for actual investments, starting with some pilot projects large enough to attract high-level political commitment to delivering them.</p>
<p>The Asia Pacific Economic Cooperation (APEC) is setting a good example for the G20. Asia Pacific leaders have adopted a long-term <a href="http://www.apec.org/Meeting-Papers/Leaders-Declarations/2013/2013_aelm/2013_aelm_annexA.aspx">APEC Framework on Connectivity</a>. Within that framework, targets for physical connectivity include better regional transport and energy networks and universal broadband access. Institutional connectivity will aim for better cross-border financial cooperation and more coherent approaches to economic regulation. </p>
<p>People-to-people links can be enhanced by expanding the coverage of the successful <a href="https://www.immi.gov.au/skilled/business/apec/">APEC Business Travel Card</a> and by taking advantage of the information technology revolution in higher education.</p>
<p>Multilateral development banks can help to mobilise finance for the necessary investments from global capital markets. Both the Asian Development Bank and the World Bank are designed for such financial intermediation. The incentive for them to do a lot more has been heightened by China’s decision to establish a new <a href="http://www.eastasiaforum.org/2014/02/11/the-potential-role-of-the-asian-infrastructure-investment-bank/">Asian Infrastructure Investment Bank</a> (AIIB). </p>
<p>As a new institution, the AIIB will want to make its mark by moving rapidly to finance some significant projects which promise sound economic rates of return. Potential examples include a multilateral program to achieve a significant, measurable improvement in the efficiency of some major Asia Pacific ports and airports in the next ten years and a massive upgrading of connectivity between Southeast Asia, Northeast Asia and South Asia, taking advantage of Myanmar’s gradual opening to the outside world.</p><img src="https://counter.theconversation.com/content/23472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Elek does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As G20 finance ministers and central bank chiefs prepare to meet in Sydney this weekend, leading corporate figures known as the B20 will meet separately with major global investors to discuss the need…Andrew Elek, Research Associate, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.