G20 Summit in Buenos Aires: the risks and stakes are high, expectations low
The G20 summit will be held on 30th of November – 1st of December in Buenos Aires amid rising geopolitical tensions and grave new and persistent challenges. Increasing financial markets globalization creates risks of rapid spread of crisis to emerging markets countries in case of problems in the markets of large developed countries. New financial technologies contain risks of malpractice and rising complexity and intransparency of financial products.
Growing imbalances and rising debts, the two main causes of 2008 economic crisis, are exacerbated. Intensifying protectionism contains economic growth. The G20 commitment to refrain from protectionist measures, made in November 2008 and reiterated since then at each subsequent summit, failed to restraint escalation of protectionism. The G20 members undertook 1671 restrictive measures from 2008 to 2016. At the 2017 Hamburg summit the G20 failed to agree the core antiprotectionist commitments and recognised the role of legitimate trade defense instruments reflecting the US position. The World Trade Organization (WTO) estimates that from May to October 2018 the trade coverage of the import-restrictive measures increased in six times compared to the previous period and amounted to USD481 billion.
According to various estimates, an infrastructure financing deficit in the world is about USD1-2 trillion annually. In the forthcoming 15 years sustainable infrastructure development will require USD3 billion of new investments every year. The risks of digital divide and informational security are rising. China, the US, Canada, Russia, Germany, the UK, France and India are in the top-10 countries in the world in terms of a number of DoS attacks.
The crisis of multipolarity in the system of international relations disrupts the sustainable economic growth perspectives. It is suffice to say that in 2018 for the first time in the G7, Organisation for Economic Co-operation and Development (OECD) and Asia-Pacific Economic Cooperation (APEC) history the member countries were not able to agree on the final documents of the G7 summit, OECD annual ministerial meeting and APEC summit. Can the G20 in this context harness its potential to forge collective decisions and respond to persistent challenges?
The hope exists. It draws on the G20 cooperation past successes.
The G20 initiated the global financial regulations reforms: advanced regulation of the OTC derivatives, hedge funds, credit rating agencies, Global Systemically Important Financial Institutions (G-SIFIs); pushed progress in improving the International Accounting Standards (IAS) and banking capital and liquidity requirements (Basel standards) and revising senior management compensation practices. The Financial Stability Board (FSB) assessments of the progress, mandated by the G20, confirm a high level of compliance with financial regulation decisions, including capital and liquidity requirements improvement; addressing problems with the G-SIFIs; changing compensation practices, etc.
To restore domestic credit systems and international capital flows, the G20 leaders at their London summit decided to support the third in the International Monetary Fund (IMF) history distribution of the Special Drawing Rights (SDRs) in the amount of USD250 billion. Markets responded positively to this global liquidity increase, and in combination with other measures related to the global monetary and financial system functioning, agreed by the G20 (increasing resources and improving IMF lending) the allocation of SDRs helped to mitigate the severity of the crisis.
The developing countries’ pressure led to the approval by the G20 in 2010 of the IMF quota and governance reform package. The decisions on reform came into force on January 26, 2016. 2.8% of quotas were reallocated to the developing countries. A positive outcome of the reform was the increase of the BRICS countries’ total share of votes in the IMF to 14.18%. The capital of the International Bank for Reconstruction and Development (IBRD) grew by USD86.2 billion, and the capital of the International Finance Corporation (IFC) increased by USD0.2 billion. It was agreed that the share of emerging market and developing countries in the IBRD would increase by 3.13%. As a result, their share increased by 4.59%, and the total percentage of votes reached 47.19%. The share of votes of these countries in the IFC was increased by 6.07% to 39.48%.
In 2013, the G20 approved the OECD Action Plan on Base Erosion and Profit Shifting. Pooling the efforts of the OECD and the G20 allowed to involve all members of these institutions, both developed and developing, as well as a significant number of non-member partner countries. As a result, the total number of states participating in the Inclusive Framework on BEPS reached 118.
The G20 promoted the adoption of the Trade Facilitation Agreement and its ratification. In the employment sphere the G20 made about 118 commitments. The average unemployment rate for G20 members dropped to 5.2% in 2018, compared with 9% in 2010. Transition to more efficient and sustainable energy consumption patterns were set out as a shared objective in the 2017 Climate and Energy Action Plan for Growth. At the 2017 Hamburg summit the G20 stated that it “aims to create favorable conditions for the development of the digital economy,” including through the convergence of norms and standards for the production and provision of digital goods and services. The RANEPA and UoT analysis reveals that the G20 members’ compliance with the commitment is as high as 95%.
Overall, in the past decade, the G20 member states agreed on 2,230 commitments and demonstrated a fairly high level of their implementation (the average level of compliance was about 75%). It gives some ground for modestly optimistic expectations.
So can the G20 justify the expectations of optimists and pragmatists? What should be the priorities for the summit agenda?
The risks to global financial stability and coordination of monetary policy should be at the top of the G20 Buenos Aires agenda. The process of revising the formula for the IMF quotas calculation should be completed and work on creating an effective mechanism for regulating global liquidity should be launched.
The Buenos Aires summit achievement would be the G20 a return to the commitment to not apply new restrictions and remove existing protectionist measures, even if on “twenty minus one” formula, used in Hamburg for the climate commitment. The G20 should consolidate efforts in pursuit of the World Trade Organization systemic contradictions (above all, the crisis in the Dispute Settlement Body) and encourage development of regulatory frameworks in new industries, including the development of digital commerce.
Given the public resources constraint to increase infrastructure investment, the G20 catalyze cooperation on enhancing profitability of infrastructure projects for private investors and transforming infrastructure financing tools into an independent asset class. The ultimate goal could be formation of a global infrastructure assets market similar to the largest commodities markets. G20 should step up efforts to improve the functioning of multilateral development banks on the basis of agreed principles on which their operations will be based; the creation of country platforms as the core of the investment value chains; a programmatic approach to risks insurance and system-wide securitization for mobilizing institutional investors’ funds.
The G20 commitment to continued cooperation on tax can reduce risks of unfair international tax competition increasing transparency with regard to tax incentives for competition at the international level (the cost and benefits of most tax incentive mechanisms are currently unknown) and further improving the multilateral tax-sharing mechanisms.
The G20 should address the gap between skills and demands of digital economy creating a sustainable system of skills development and cooperate with the B20 to solve the problem of informal employment.
The G20, or G20 minus one, reaffirmation of the commitment to the Paris Agreement, nationally determined contributions and transition to more efficient and sustainable energy consumption models would be an important response to the challenge of critics and skeptics accusing the G20 of inefficiency, illegitimacy and inability to overcome internal divisions.
The collective expression of political will to implement these decisions at the G20 summit in Buenos Aires can be a confirmation of its role as a key forum of economic governance, an important milestone in strengthening the G20 political leadership and its power to contribute to shaping new rules in the system of international economic relations.
Will the G20 live up to these expectations? We will learn in the coming days.
Author: Dr. Marina Larionova, Head of the Center for International Institutions Research (CIIR), Russian Presidential Academy of National Economy and Public Administration (RANEPA)