G20 vows balanced growth – Capital flow a concern
Antalya, Nov. 16: The Group of 20 nations today pledged to adopt sound macroeconomic policies to achieve strong, sustainable balanced growth.
The near-term objective would be to support growth, create jobs and put debt as a share of gross domestic product (GDP) on a sustainable path.
Data show that several countries have excessively high debt to GDP ratios with Japan topping the club with 230 per cent, followed by Greece with 177 per cent, Italy (132 per cent), and Portugal (130 per cent). The US has a fairly modest debt to GDP ratio in comparison of roughly 103 per cent while India’s isn’t alarming at just over 66 per cent with most of it domestic debt.
“We remain committed to achieving our ambition to lift collective G20 GDP by an additional 2 per cent by 2018 as announced in Brisbane last year,” the communique said even as it noted that analysis by the World Bank, IMF and OECD “indicates that our implementation so far represents more than one third of our collective growth ambition.”
Many have suggested that the global economic slowdown will make that 2 per cent additional GDP growth objective – equivalent to $2 trillion or roughly the size of India’s economy – difficult to achieve.
One of the big concerns looming over the markets and the emerging market economies like India is the timing of the imminent interest hike that the US Federal Reserve is expected to announce any time soon.
“We remain committed to promote global rebalancing. We will carefully calibrate and clearly communicate our actions, especially against the backdrop of major monetary and other policy decisions, to mitigate uncertainty, minimize negative spillovers and promote transparency,” the communique said.
It also spoke of the need to create a global safety net to mitigate risks arising from large and volatile capital flows, which are generally expected when the Fed pulls the trigger.
As expected, the G20 reaffirmed its goal to reduce the share of young people who are at most risk of being permanently left behind in the labour market by 15 per cent by 2025.
The communique sprang a little surprise by pushing for cyber security – an issue that India’s G20 sherpa Arvind Panagariya said was placed in the bucket for discussion at the last moment.
In his press conference after the summit, President Barack Obama also highlighted the importance of cyber security issues, the need to protect the privacy of an individual and protect intellectual property rights.
“We commit ourselves to bridge the digital divide. In the ICT environment, just as elsewhere, states have a special responsibility to promote security, stability, and economic ties with other nations. In support of that objective, we affirm that no country should conduct or support ICT-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors. All states in ensuring the secure use of ICTs, should respect and protect the principles of freedom from unlawful and arbitrary interference of privacy, including in the context of digital communications.”
There was also consensus on the need to adopt a new set of international tax rules that would stop corporate giants such as Apple, Google, General Electric, IBM and Pfizer from socking away piles of cash in tax havens without paying taxes in the jurisdictions where they earned them.
The tax dodge is usually carried out through elaborate corporate structures and other artifices. They are perfectly legitimate since they exploit gaps in existing global tax rules and treaty arrangements between nations that allow large pools of money to be shifted to low- or zero-tax jurisdictions. There is a label for this practice: it’s called the Panama Scoot.
On a conservative estimate, the OECD reckons that nations collectively lose 4 to 10 per cent of global corporate income tax every year, or $ 100 to 240 billion annually.
The communique said the OECD had been asked to develop by early 2016 an inclusive framework for the adoption of the new tax rules – designed to stop the practice of base erosion and profit shifting (BEPS) – “with the involvement of interested non-G20 countries and jurisdictions which commit to implement the BEPS project, including developing economies”. India has come out in strong support of BEPS.
The G20 also affirmed its intent to enhance transparency of the tax systems. The 20 nations have agreed to move towards a regime where they will automatically exchange information on tax dodgers and money launderers by the end of 2018.
It also spoke about the need to force private sector companies around the world to comply with global standards of ethics and anti-corruption. It will also push for integrity in public procurement and promised to tighten domestic legal systems “to effectively combat bribery and to support asset recovery and the denial of safe haven to corrupt officials and those who corrupt them.”
One big disappointment for China was that it did not go far enough in supporting the inclusion of the renminbi in the Special Drawing Rights (SDR) basket of the IMF. But it did support the need to complete the review of the method of valuation of the SDR by reflecting the role of the currencies in global trading. China was hoping to get its currency in the SDR basket when it comes up for review at the IMF meeting later this month.
It also accepted the need to increase counter-cyclical capital buffers for the world’s co-called too big to fail banks. The reform will require these 30 banks – there are no Indian banks in this category – to issue a buffer of bonds by 2019 that can be written down to raise funds equivalent to 18 per cent of the risk-weighted assets, if the lender goes bust.
The buffer, known as total loss-absorbing capacity or TLAC, is in addition to the minimum core capital requirements a bank must already hold.
The aim is to allow a big bank to fail without creating the kind of mayhem in markets seen after Lehman Brothers bank went bust in 2008.