On Track for Inclusive Growth - How to Make Ends Meet in G20?

Güven Sak, PhD

TEPAV

01/12/2014

Since the onset of the financial crisis, the G 20 Forum, whose membership consists of systemically important advanced and emerging economies, has emerged as the principal forum for inter-governmental economic cooperation. At the Washington Summit, building on the momentum created by deteriorating economic conditions, the G 20 leaders declared their commitment to respond to the crisis collectively to restore global financial stability. The leaders also agreed to follow up on a broader policy response to the crisis by exercising closer cooperation on non-financial issues including development, employment, trade, social issues and corruption among others. Thus, in addition to the Finance Track that focuses on economic issues and financial matters, the G 20 incorporated the Sherpas’ track to deal with political, non-financial issues.

The incorporation of the Sherpa track into the G20 Forum is an important step towards setting up a more inclusive and sustainable growth agenda to address economic and development challenges at the global level. However, compared to the Finance Track, the Sherpa Track is still in its infancy and needs to be further developed to effectively address ongoing and emerging global challenges. One way to ensure a successful Sherpa track in the G 20 is to identify Sherpa related policy areas that overlap with the finance track. Establishing linkages and setting a common agenda for the finance and Sherpa tracks will also help bring focus to the G 20 Forum. The following policy areas that have been identified underpin the need to integrate Sherpa track issues into the finance track and the broader G20 agenda.

First, the G 20 Forum offers an important opportunity to promote SMEs as key contributors to global job creation and to support SME integration into the globalisation process. The World Bank’s World Development Report (2013) notes that 22 million jobs have been lost globally since the beginning of the crisis and that 600 million jobs need to be created over the next fifteen years to sustain current employment rates.[1] Currently, SMEs generate more than 60 per cent of the global workforce, employ youth and women and often operate at the grassroots level where income disparities and access to basic needs are most persistent. Therefor, SMEs are critical for the creation of jobs globally as well as for social stability, equitable growth and poverty alleviation.

The issue of financial inclusion, fundamental in supporting SMEs, in the Sherpas Track can help ensure access to basic services and facilitate sustainable and equitable growth. On the other hand, relating to the G 20’s Finance Track, global macroeconomic policy coordination and a strong consensus driven global financial architecture, are critical for SMEs that tend to be more vulnerable to external financial shocks than large companies. For instance, at the monetary level, the United States Federal Reserve’s recent unilateral decision to begin tapering asset purchases caused significant financial turmoil across some emerging economies that experienced capital outflows and financial market volatilities. Macroeconomic weakness, inflation, higher lending rates as well as borrowers’ risk put considerable pressure on emerging market SMEs. Similarly, the lack of sufficient global policy consensus or coordination regarding the design of rules and regulations that govern global finance and investment threaten macroeconomic and financial stability particularly in emerging markets. In this respect, the G 20 can set up and administer a global financial safety net mechanism to avoid negative spillovers to emerging and other developing markets.

Secondly, increasing connectivity vis-à-vis investments in transportation networks/ routes, as well as energy routes and ICT infrastructure is central for a more inclusive and sustainable trade, employment and development agenda in the G 20 Sherpa Track. Today, there are considerable connectivity disparities between G20 countries as well as between G20 countries and non-G20 countries. Moreover, North-North and North-South trade connections are generally stronger than South-South connections. Connectivity problems also affect SMEs far more than large companies preventing these from participating in export markets and global/regional supply chains. Thus, improving trade connectivity will especially benefit emerging markets and other developing countries, boost South-South trade as well as increase SMEs’ international operations. Connectivity in areas such as ICT technology and the internet also provide a unique opportunity for emerging markets and SMEs.

At the same time, to improve connectivity, major investments in transport infrastructure and new transport corridors are required. In this regard, the G20 Finance Track can facilitate a cross-border investment framework to help sovereign states to cope with financing problems and create incentives for the private sector to invest in complex and expensive infrastructure projects.

Thirdly, the G 20 has a key role in tackling global imbalances and poverty and addressing inequitable distribution of income domestically. In order to tackle global imbalances and poverty the G 20 Forum must adopt a more inclusive jobs and growth agenda that emphasize the needs of the most vulnerable and at the lower end of the income distribution and how these are affected by policy decisions. Three fourths of domestic income disparity depends on geographic location and in most instances, people born in poor countries are more affected than in rich countries[2]. Moreover, while jobs and growth will remain at the centre of national policy debates for years to come, intensified global interdependencies reinforce the need for greater policy cooperation. The policy agenda envisioned by the global governance structures such as the United Nations Development Programmes’ Millennium Development Goals (MDGs) is more focused on improving policies related to domestic income disparities and often favor middle-income countries and discriminates against low-income countries. Therefore, stronger policy cooperation and a jobs and growth agenda where all countries needs are taken into account are critical to tackle global inequality.

Furthermore, the G 20 must continue to promote effective global and domestic tax systems to combat both global and domestic inequalities. The G 20 Finance Track has been working together with the OECD towards addressing international tax avoidance and reforming the global tax system (through the Base erosion and profit shifting (BEPS) Action Plan). At the same time, the Finance Track has been working with the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) to develop a Common Reporting Standard (CRS) for automatically exchanging taxpayer information between jurisdictions (Automatic exchange of tax information (AEOI)). Thirdly, the G20’s Development Working Group (DWG) has been supporting effective domestic resource mobilization (DRM) within developing economies and works with the finance track on the implementation of BEPS and AEOI reforms in developing economies. The tax agenda is part of a broader G 20 agenda to promote transparency and combat corruption, essential in strengthening the resilience of the global economy. Moreover, an effective tax regime is particularly important for developing economies to collect government revenue and address inequality.

By way of conclusion, the G20 Forum must focus on setting a more inclusive jobs and growth agenda while continuing to promote global financial stability. Sherpa track issues including development, trade and employment still need to be integrated into the finance track and to the broader G 20 agenda. To this end, the G 20 must determine focused and concrete targets for a number of economic and development challenges at the global level.

This piece was published in the G20 Brisbane Australian Summit journal.

Güven Sak is Managing Director of TEPAV.