G20 under Strain with Battles over Growth vs Stability

Second despatch

Arun Goyal

BRISBANE, 15 Nov

Brisbane G20 is on the horns of the dilemma. The Finance Ministers met today to make recommendations to the 19 leaders of G20 said to cover 80 percent of the world economy. On the one hand, the leaders want to add two percent extra GDP set in the Sydney meeting for generating growth and employment. This will mean injecting more liquidity in the financial system which is already under the control of the “shadow bankers” whose assets are valued at over $70 tn which is more than half the world GDP. This new class covers institutions which are not taking deposits from the public and are thus outside the normal scrutiny of the Central Bank. The shadow bankers give finance on demand to borrowers against debt or property. In the event of a crisis, the shadow bankers cannot fall back on the Central Bank who are designed to bail out the traditional deposit based banks as “bankers banks”.

Australia is for putting shadow banks are under the G20 scanner. But US, China, UK and Europe is where the shadow bankers operate thriving on the liquidity injections regularly administered by their governments to keep the economy growing. At the end of the day, the traditional banks will be regulated even further with Basel norms requiring higher capital adequacy while the shadow bankers make the most of rising liquidity

The OECD inspired “base erosion and profit shifting programme” is yet another initiative of theG20 to stop the big companies from shifting profits to low tax areas through transfer pricing. The G20 wants that the companies must pay tax in at least one country. The B20, a conglomerate of banking and mining interests recognized as official participants on the fringes of the G20 meet, is not all that happy with this. They want the governments to compete with each other in offering investment and employment. They demand an end to double taxation which is endemic in the global supply chains.

Developed countries like UK have adopted the “patent box” regimes where earnings from in house IPRs are taxed at just 10 percent. The G20 as a group does not like this system and sees it as yet another instance of the erosion of the tax base.

There is a similar dichotomy on movements at the border. The G20 is for free movement of goods across borders. But theB20 in a statement asks for free movement of services, labour and investment across borders, and not just services. The B20 Group said that more than 30,000 data analysis jobs in the Developed world are lying vacant, these can be taken up by Indian professionals if migration laws are relaxed. The supply-demand mismatches will grow in the next five years so protection to local workers must be re-examined.

Obama promised $3bn to the UN to protect the environment on his visit to the G20. He called upon the countries like India to move towards low carbon emission technologies and avoid coal in his address to the University of Queensland at Brisbane today. The devaluation of coal is not music to the coal producers like Australia and South Africa or consumers like India and China.

Nonetheless, there is a move to overhaul of the global energy market and create an open regime in energy markets above both the OPEC cartel and the International Energy Agency (IEA). This is the opportune time with oil prices diving well below the $80-per-barrel mark, and global prices collapsing by some 30 percent since June. The world has moved to a less oil-intensive stage of growth while technological innovations have unlocked shale resources in North America. Saudi Arabia and Russia as majors in oil production will oppose the back seat driving on the part of the G20.

The contradictions in G20 are in the open, Putin may leave early with the Europeans and Australia ganging up against him with sanctions over Ukraine and Crimea. While G20 may be riven by severe internal contradictions, the scares of the GFCs, the accepted abbreviation for “Global Financial Crisis” and the effects of volatility in the aftermath of the monetary easements act as the glue to keep the majors together.

Tailpiece: Indian Prime Minister Modi was seated next the Saudi Crown Prince Salman in the opening ceremony. Neither of them were happy in the company of the other, they did not talk to each other at all. The Saudi Leader is happy to finance the fellow Islamists in Afghanistan and Bosnia. He throws his weight around the Indian Ocean with months of stay in the hotel islands of Maldives with over 100 security guards at the invitation of the Maldives Prime Minister.

Australia the host has gone overboard to host the G20. Brisbane chef introduced world leaders to the tradition of an Australian barbecue at the conclusion of a retreat at the Queensland Parliament House. On offer were prawns, oysters, Bay bugs, trou and spiced lamb. Vegetarian Modi must have concentrated on salads and cheeses with heirloom tomatoes and basil. He had his plate full, as they say.