International Economic Cooperation in Troubled Times: A Call for Strong Action by the G20

International Economic Cooperation in Troubled Times: A Call for Strong Action by the G20

Authors:
Axel Berger,
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Uri Dadush,
Bruegel and OCP Policy Centre
Andreas Freytag,
Friedrich-Schiller-University Jena
Simon J. Evenett,
University of St. Galen
Christian von Haldenwang,
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Ricardo Meléndez-Ortiz,
International Centre for Trade and Sustainable Development (ICTSD)
Raul Ochoa,
Argentine Council on Foreign Relations (CARI)
Agustin Redonda,
Council on Economic Policies (CEP)
Karl P. Sauvant,
Columbia Center on Sustainable Investment (CCSI) and International Centre for Trade and Sustainable Development (ICTSD)


The leaders of the G20 will meet on 30 November and 1 December in Buenos Aires for their annual summit. They need to acknowledge that the last two years have been characterized by strong headwinds for the world economy. This time, however, it is not a mixture of poor macroeconomic policies and bad business decisions – as in 2008 when they met in Washington for their first summit – that endangers the well-being of billions of citizens around the globe. This time the threat stems from deliberate political decisions, in particular on trade.

The danger emerges from an unholy trinity of insufficiencies in the trade book to address persistent trade distorting practices in major players, primarily with respect to a revival of mercantilist ideas, populist governments championing economic nationalism and uncompetitive advantages of State Owned Enterprises (SOEs). The climate of cooperation has given way to beggar-thy-neighbor-policies on trade, investment and tax. The G20 trade ministers’ meeting in mid-September in Mar del Plata concluded with a plea to modernize the World Trade Organisation (WTO), however, without providing guidance where this path of reform should lead to. In fact, G20 countries differ substantially with regard to the main deficiencies of the system and in turn solutions for reform. Individual governments know the virtues of the multilateral economic order, praise it if it appears appropriate and at the same time act against this order by pursuing narrow national interests. Whether or not such actions are responses to other countries’ actions, they contribute to an erosion of the multilateral order.

The G20 summit in Buenos Aires presents an eleventh hour opportunity to stop or at least mitigate these destructive forces, by taking strong action in favor of an open and rules-based system multilateral cooperation on trade, investment and tax matters.

Key reforms on trade

Unmistakable evidence demonstrates that G20 members routinely violate their “no protectionism” pledge. The scale of trade affected should concern senior officials: by March 2018 over 80{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of G20 goods exports competed against trade distortions implemented since November 2008 that were still in force.

Concerns that the current G20 approach does not address the full range of policy intervention that distort 21st century commerce should be addressed by leaders taking two steps: expanding the scope of the G20 protectionist pledge and calling for upgraded monitoring that goes beyond conventional barriers to trade and doubles down on efforts to track new barriers across all sectors of the economy, including the services sector. Rather than engaging in another fruitless debate about what constitutes protectionism, an approach based on the principle of non-discrimination should be pursued that condemns any protectionist policy intervention.

That said, while overwhelming evidence establishes that overall nations gain from trade, there are disruptions through trade that need to be addressed. While many gain from trade, import surges have sometimes undermined the economic viability of whole communities.

Gradualism in trade liberalization combined with preemptive measures to strengthen competitiveness, can help mitigate such trade adjustment costs. Displaced workers are best helped using generally applied safety nets, not those specific to trade, as trade shocks are only a part of the economic uncertainty affecting workers. International coordination is required to support an open and predictable trading system under the World Trade Organization (WTO), as the greatest future source of trade shocks could be protectionism, not trade liberalization.

In addition, there are major challenges for the governance of the digital economy and digital trade. Rule-making processes currently in course, such as those at the WTO, need strengthening. Such attention also needs to effectively address the risks of a widening digital divide in particular in the Global South. The G20 is best placed to provide direction for global governance actions that address the multifaceted relationship between digital technologies and trade, the digital divide, and the incorporation in rule-making and implementation of distributive ledger technologies and artificial intelligence, among other strategic trade related issues. These issues comprise international cooperation, digital connectivity and the need for liberalization and facilitation of trade in goods and services.

The G20 should reaffirm the facilitating role of the WTO in global governance on digitally-enabled trade, and suggest a WTO Facility on Digitally-Enabled Trade as a focal point to initiate information-sharing, cooperation, and coordination among international agencies related to digitally-enabled trade. A strengthening of aid for trade and other forms of technical assistance to low income countries is key to bridge the digital divide.

Cooperation in tax matters is crucial

The world is facing a new round of international tax competition that may result in a ruinous race to the bottom, undermining the fiscal capacity of states to respond to global challenges and to implement the Agenda 2030 for Sustainable Development. G20 leaders must take action to strengthen multilateral and cooperative approaches to taxation, curtail harmful tax competition and protect their own tax base as well as that of developing countries.

Governments use tax expenditures to boost investment, innovation and employment. However, these schemes are largely opaque, costly and often ineffective in reaching their stated goals. In order to improve the performance of these tools, first, G20 governments should increase transparency on tax benefits. G20 members should for example take the lead on this with frequent and comprehensive tax expenditure reports. Second, G20 governments should improve the design of tax incentives with the aim of minimizing the generation of windfall profits and negative spillover effects within and across (in particular, on poorer) countries. Third, G20 governments should phase out tax expenditures that are environmentally harmful, including tax incentives for fossil fuels and other schemes that promote an unsustainable use of natural resources.

Fourth, a priority of the international community is how to best address the tax challenges of digitalization within the current framework of international taxation. G20 leaders need to work towards a joint framework of value creation in the context of digital business models and to promote international agreements on the treatment of economic activities based on digitalization, rather than engaging in short-sighted unilateral action and protectionist policies.

Investment policy reforms

It is of paramount importance that the G20 pay attention to the mounting challenges facing the international investment regime, a regime that regulates an activity that is more important than trade in delivering goods and services to foreign markets and integrating these markets.

This is all the more important because international investment is crucial to advance sustainable development, especially in developing countries. For both immediate and long-term reasons, investment policies should, therefore, be a core item on the agenda of the G20. The G20 should therefore continue its important work on international investment policy reform and initiate steps to operationalize the Guiding Principles for Global Investment Policymaking adopted during the Chinese G20 presidency in 2016. Also, the G20 should support ongoing WTO discussions on investment facilitation, suggesting that investment facilitation discussions should not only aim at facilitating more FDI, but sustainable FDI. The deliberation of a set of Guiding Principles for Global Investment Facilitation may provide overall guidance for the discussions starting on investment facilitation at the WTO.

Long-run Perspective

We realize that a number of these proposals, submitted by the T20 Task Force on Trade, Investment and Tax Cooperation to the G20, require actions that go beyond Argentina’s Presidency. However, they are in line with the desirability that international trade, investment and tax issues constitute a core item on the agenda of the G20. It is up to the G20, which describes itself as the premier forum for international economic cooperation, to take the lead in advancing these reforms.

This article is based on the policy proposals put forward to the G20 by the T20 Task Force on Trade, Investment and Tax Cooperation which brings together more than 100 researchers from nearly 80 think thanks and universities representing 14 G20 countries. The Task Force is co-chaired by Axel Berger, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Christian von Haldenwang, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Raul Ochoa, Argentine Council on Foreign Relations (CARI), and Ricardo Meléndez-Ortiz, International Centre for Trade and Sustainable Development (ICTSD).

Photo credit: G20 Argentina on Visual Hunt / CC BY-NC-SA

Photo credit: G20 Argentina on VisualHunt / CC BY-NC-SA

Sustainable Development in Africa and the role of the G-20

Sustainable Development in Africa and the role of the G-20

Authors: Catherine Grant Makokera and Faith Tigere

The Group of Twenty (G-20) remains the premier forum for international cooperation on global economic governance and finance. Representing a large chunk of the global economy (86{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}) and world trade (78{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}), it is not surprising that over time the Group’s mandate has expanded to address other issues. Through the different summits that have been held, issues ranging from development, environment and health have been included on the agenda. In addition to that, the adoption of the UN’s 2030 Agenda and the Sustainable Development Goals (SDGs) has required the G-20 to adjust its approach to development issues. This has resulted in the G-20 adopting a range of plans to contribute to the implementation of the SDGs.

The G-20’s policies and plans have an impact on Africa’s overall economic development. As such, the participation of Africa in the G-20 process is crucial. South Africa is the only permanent member of the G-20 from Africa. It bears a huge responsibility in ensuring effective participation for its interests as well as those of the continent where necessary. Representative agencies who have an observer status, such as the New Partnership for Africa’s Development (NEPAD) and African Union (AU), similarly have a role to play. These African institutions have an opportunity for more effective participation now that there is space provided for greater participation by the NEPAD Agency and the AU Commission (rather than representation only through the rotating political heads of the organisations).

The G-20 has stated that Africa’s development remains a priority for them. An analysis of the G-20 agenda indicates key issues are included that are of relevance to Africa such as infrastructure, food security and human resource development. Initiatives that have been introduced include the G-20 Energy Access Action Plan in Sub-Saharan Africa (Antalya Summit), Support for Industrialisation (Hangzhou Summit) and the G-20 Africa Partnership (Hamburg Summit).

Bearing in mind that Africa’s economic development is also a priority for African states and the AU. The AU has developed its own Agenda 2063 – a strategic framework for Africa’s sustainable socio-economic transformation and integration to be implemented over a five-decade period. The agenda is summarised in six aspirations and still needs to be fleshed out to identify a concrete set of objectives. A comparative analysis of the AU Agenda and the UN 2030 Agenda shows there are significant overlaps between the two agreements. These overlaps include the objectives of poverty alleviation, achieving food security, full access to education, sustainable development, achieving sound health and wellbeing, and achieving gender equality in all spheres of life.

As the UN SDGs and the AU Agenda are aligned, it becomes easier to incorporate developmental issues in the G-20 agenda. The G-20 has indicated a commitment to the UN SDGs and some goals have been explicitly incorporated into the agenda. For example, the goal to alleviate poverty has seen support from initiatives such as the G-20 and Low Income Developing Countries Framework (Antalya Summit), Good Practices on Family Farming and Smallholder Agriculture (Hangzhou Summit) and the G-20 Initiative for Rural Youth Employment (Hamburg Summit).

Through the work of the G-20 Development Working Group (DWG) , a level of continuity in terms of African objectives is ensured. The main objective of the group is ensuring the consistency with the G-20 framework, engaging developing countries, and focusing on tangible outcomes for low-income countries to mention just a few. The original agenda for the DWG was agreed in the Seoul Declaration and included infrastructure, trade, human resource development, food security, financial inclusion, private investment and job creation, growth with resilience, domestic resource mobilisation, and knowledge sharing.

There are many benefits that can be gleaned from the G-20 by developing and least developed countries alike. A number of analysts and researchers have made useful suggestions of how Africa can benefit from the G-20 process. These include the following from the Think-20:

  1. Ensuring that the representative agencies at the G-20 are fully resourced and supported.
  2. A close cooperation by all the different countries to implement the SDGs to ensure that no one is left behind.
  3. Prioritising areas where there is a significant overlap between the G-20 initiatives, DWG and the UN SDGs.
  4. Implementing G-20 commitments that support the SDGs and African development.
  5. Bridging the gap between existing initiatives and to build linkages across different initiatives by the different summits.
  6. Encouraging international finance institutions to embed the SDGs in their work.
  7. Promoting capital flows from surplus countries to profitable opportunities in sustainable infrastructure and climate finance.

These are just some of the recommendations made to fully reap the benefits of the G-20. South Africa as a permanent member could also identify some focus areas that it could prioritise and seek to obtain tangible results. In addition to that, South Africa could continue with a balanced approach to the three dimensions of sustainable development (economic, social and environmental) and specify contributions towards both the environment and the social dimension.

Our most recent paper on the G-20 explores these issues in more detail and makes additional recommendations for the engagement of African policymakers with the G-20.

Photo credit: GovernmentZA on Visualhunt / CC BY-ND

The Taxman – An Unlikely Movie Star

The Taxman – An Unlikely Movie Star

Giraffe and cloudsWhat do the Toronto Film Festival, Burger King, the G20, Scotland, the United Nations, President Obama and the OECD have in common?  In September, they all had something to say about tax.  It seems that tax is rapidly moving up the agendas of all sorts of companies, countries and organisations. Case in point, at the recent Toronto Film Festival, where Harold Crooks “The Price We Pay” was premiered. Among the issues it aired was whether tax avoidance may be immoral, but not actually illegal.  While this film will probably not make it into the mainstream movie theatres, it shows that tax is becoming an issue on which social commentators are making their mark.

US President Barack Obama has made some strong comments about what is known as tax inversion – where companies decide to move their tax headquarters away from a high tax jurisdiction, such as the US, to somewhere with a lower effective tax rate, such as Canada. Obama accused fast food chain Burger King of being “unpatriotic” and branded them “deserters”, after they announced a merger with Canadian coffee chain Tim Horton’s Inc. which will effectively reincorporate them to Canada. These strong words show how sentiment about global tax structuring has become almost as strong…as it is about climate change.

Or take the recent Scottish independence vote.  The Scottish National Party (SNP) stated that an independent Scotland would use aggressive tax structures to attract new investment, and that the corporate tax rate would be lowered to 17{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}.  While it is important to have a competitive corporate tax rate, particularly for smaller economies, 17{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} is rather low – and this strategy would be likely to lead to a race to the bottom.

Recently the tax systems of 34 OECD countries were reviewed on over 40 tax policy variables by the International Tax Competitiveness Index (ITCI).  Estonia was ranked first, and France emerged as the worst performing country.  Estonia’s tax policy, with a low corporate tax rate of 21{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, a flat 21{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} rate on individual income, property tax that only applies to land (rather than to a property), and 100{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the foreign profit earned by domestic corporations exempt from the domestic tax system, outperformed it’s OECD counterparts.  France did poorly because it has a high corporate tax rate of 34.4{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, high property taxes (including an annual net wealth tax), a financial transaction tax, high individual income taxes on dividends and capital gains, and an estate tax.

While South Africa was not included in this study, tax incentives are something I follow closely.  The ITCI rating system penalises a country if it has an unusual array of tax incentives.  SA has just such an offering, with companies being able to claim, for example, a 150{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} tax allowance on R&D expenditure, compared to countries that did well in the ranking – namely Estonia, Sweden, Switzerland, Denmark and Chile – which had no R&D tax benefits.  South Africa seems to be moving in the opposite direction to the global leaders, with many amendments to the recent Taxation Laws Amendment Bill affecting tax incentives.

September also saw an update by the OECD of its Base Erosion and Profit Shifting (BEPS) work, which effectively promotes multi-national corporations (MNCs) paying their “fair” share of tax to the governments where they operate. Quite a few BEPS documents were released by the OECD in September, and may be adopted at the G20 Summit meeting in Brisbane, Australia, next month (November).  While the OECD has put a positive spin on issues such as Country-By-Country Reporting (CBCR) there has been quite a lot of criticism by, inter alia, the Financial Transparency Coalition and the Tax Justice Network on whether this will actually be a major step forward in transparency.  A big discussion centres on whether the reporting of tax matters should be between MNCs and governments, so the information does not enter the public domain, and there are many conditions surrounding secrecy and confidentiality included in the OECD text.  This would effectively mean, if the OECD approach is adopted, that MNCs will not be forced to disclose their detailed tax information in their annual financial statements. Because of this, there is a view that the OECD is promoting transparency – behind closed doors!   This approach also seems to be supported by South Africa.

The other big issue on the CBCR agenda is whether developing countries will be able to implement the new reporting system by the planned implementation deadline, 2018.  While South Africa will most likely be ready, most other developing countries will not.

Another important issue which doesn’t seem to be moving very fast is the treatment of so-called harmful tax practices, which covers preferential tax regimes offered by specific countries.  What is interesting to note is that tax incentives on assets are not seen as a harmful tax practice even though they are used to attract investment and can erode the tax base.

Many critics believe the OECD needs to be looking at more radical changes such as a unitary taxation model – where worldwide profits (and taxes) of an MNC are allocated to each country by sales, numbers of employees and assets, to ensure that taxes are allocated fairly. An interesting concept, but it needs considerably more thought.  In the meantime, forward-thinking MNC executives should find it best not to disclose more information on taxes.

While global tax policy is being decided on by 44 large countries – including South Africa through our G20 membership – there is concern that many of the 100 developing countries are not invited. Even when the 44 countries take part, it does seem rather secretive. South Africa does need to consider how it provides leadership to ensure the process is more inclusive. The African Tax Administration Forum is expected to be a vehicle for this leadership.

Finally, the United Nations has concluded another climate change meeting, and it seems that tax is finding its way onto the UN agenda.  While I can’t imagine another body being set up by the UN to deal with tax, there has been a proposal to specifically include tax in the new Sustainable Development Goals (SDG), which will replace the Millennium Development Goals (MDG) from the end of next year.  It is feared that developing countries might have lost more than 2.5 trillion US dollars in tax revenues over the period of the MDGs, so it is vital that the UN keeps an eye on global tax developments to ensure developing countries’ interests are looked after.

Closer to home, it is clear to me that tax should be moving up the boardroom agenda. Are you aware how these global tax developments could impact your business?  Remember many SA businesses are global and tax authorities are everywhere. Just ask Mark Shuttleworth, the latest man to do battle with the SA tax authorities.

This article was prepared for Business Report and is available here.

The Taxman – An Unlikely Movie Star

Key Issues Pertaining to South Africa’s Growth Strategy

Giraffe and cloudsSouth Africa’s current growth rate, and trajectory, is weak. Global circumstances, notably our exposure to continued European stagnation and financial market tapering by the US Federal Reserve Bank, are partly to blame. Structural conditions, particularly continued commodity dependence, weak manufacturing capacity, skills shortages, and infrastructure bottlenecks, also play a role. While problems with macroeconomic policy, specifically an expanding fiscal deficit driven by recurrent expenditures, are emerging, these do not currently seem to be insurmountable. Overall, the weak growth trajectory primarily reflects microeconomic policy weaknesses or misdirection, resulting in mounting investor angst. This disquiet is greatly aggravated by militancy in the trade union movement, which has surged in recent months.

Clearly deficient external demand cannot be decisively addressed domestically. Nonetheless, more could be done to open new markets to non-traditional South African exports, through pursuing free trade agreements and deeper regional integration in Africa. The intensifying crisis of the multilateral trading system, and likely escalation of mega-regional trade negotiations[1] amongst key developed and developing markets, sharpens the possibility that our exporters will increasingly be disadvantaged in key markets. But a concerted response to these developments is unlikely since it would require openness to reciprocal trade liberalization, a policy stance manifestly lacking in South Africa.

Structural deficiencies are a function of economic evolution over time, and at least in my opinion are not easily amenable to government-driven solutions, with the exception of addressing infrastructure blockages, which are, correctly, a core focus for the South African government. Nonetheless, more could be done to leverage existing comparative advantage in minerals and agricultural commodities exports, particularly through confidence-building measures in those sectors for domestic and foreign investors.

However, a plethora of recent policy initiatives point towards tightening or restricting access to the South African market, particularly, but not only, for foreigners. These include, inter alia, proposals to:

  1. ‘Screen’ foreign direct investment and condition national treatment on meeting a ‘public interest’ test;
  2. Oblige foreign (private security providers) and domestic (farmers) to yield 51 percent of the shares in their companies to black South Africans;
  3. Obligate all energy companies wishing to prospect for new discoveries to cede a 20 percent ‘free carry’ share to the South African state, which would have the option to raise this share to 80 percent at prices ‘to be agreed upon’;
  4. Tighter controls on visa regulations including obtaining work permits for skilled personnel.

The common thread running through these initiatives is an increasingly inward-looking, national security – oriented, mindset in the governing tripartite alliance[2]. This mindset is reinforced by political developments, notably the ANC’s diminishing, albeit still dominant, electoral fortunes; the rise of the militant populist and largely youth-based political party – the Economic Freedom Fighters; and the seemingly imminent formation of a Workers Party by the most militant and largest trade union[3] in COSATU. Reinforcing this political economy are increasingly vocal voices within the black business community and broader society agitating for more redistributionist policies, and protection-minded business interests that have coalesced around the SACP trade minister, who is inclined to deliver on their desires. These developments are underscored by the ANC’s failure to deliver on promises of jobs and significant economic growth, resulting in finger-pointing at the economic model in place.

Against this broad, disparate constellation of interests there are very few voices speaking in favour of market opening and reform – the key normative foundations of G20 summitry, albeit observed in the breach by other G20 states. Consequently South Africa’s growth strategy is not likely to align with the thrust advocated by the Australian chairmanship of the G20 summit process; indeed the reverse is foreseeable and the country may assume an increasingly oppositionist stance such as [4]its recent alignment with the Venezuela-Cuba led ALBA group in the World Trade Organization’s trade facilitation agreement debacle.

Nonetheless there are some counter-trends, which offer hope for market reform advocates such as myself. The infrastructure-spending plan, if properly implemented, will lead to significant de-bottlenecking of the economy, which would be growth promoting. Second, there is rhetorical focus in the ANC on implementing the National Development Plan (NDP) – a centrist growth agenda – although implementation is subject to the political economy described above. Furthermore, various state agencies are taking concrete actions that could be growth promoting, inter alia: ramped up manufacturing development incentives; elaboration of a more focused special economic zones programme; the digital broadcast migration programme; and the agricultural policy action plan.  Total envisaged spending in the next three years on these items alone is expected to amount to R38,3 billion, a substantial sum.

Flowing from this analysis, and with due caveats regarding the likelihood of these measures being implemented, I recommend the South African government take the following concrete steps to boost and sustain economic growth:

  1. Faithfully implement the NDP, and rapidly;
  2. Similarly implement the various growth enhancing plans put forward by various government departments;
  3. Implement confidence building in areas of traditional export strength through eliminating legislative measures that deepen investor insecurities;
  4. Embrace trade reforms and reciprocal trade liberalization with new partners, especially in Asia.

 

[1] Especially the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership.

[2] Consisting of the African National Congress (ANC), South African Communist Party (SACP), and Congress of South African Trade Unions (COSATU).

[3] The National Union of Metalworkers of South Africa.

[4] The Bolivarian Alliance for the Americas.