Governance and impact report 2014

How do Global Financial Institutions Impact Poverty & Inequality?

New Rules, in collaboration with its partners, will be releasing its second Global Financial Governance & Impact Report. This year’s report places particular emphasis on the impact of global financial institutions on poverty and inequality.

Panelists include:

Key Note Speaker Thomas Bernes, former Executive Director at the IMF, head of IMF’s IEO and high-level official at the World Bank and regional development banks; Matthew Martin, Executive Director, Development Finance International; John Ruthrauff, Director, International Advocacy, InterAction;

Tom Bernes opening statement

• Inequality, principal framing of the report, is receiving more attention as an economic issue
• Some (even most economists) argue that inequality is a necessary aspect of driving economic growth
• However, increasing work examines how inequality impairs growth, in different dimensions including driving crisis
• Harmfulness includes its impact on poor’s ability to generate human capital, drive investment-reducing instability, and deters consensus required for social responses to shocks
• Nancy Birdsall’s examination of SE Asian societies which achieved growth with low inequality showed that virtuous cycles of higher growth and reduced inequality stimulated growth and demand for education

Matthew Martin – overview of the report

• Key message – little work by financial institutions to combat inequality.
• Some actions continue to exacerbate inequality
• The report argues that the G20 needs to wake up and address the issue
• Despite how problematic it is to address the G20 as an ‘institution’, its leadership role is central
• Though it has mostly been criticized in the report, the G20 did open the debate on taxation and base erosion – though principally on their own economies lost tax revenue.
• Though we find somewhat more positive findings for the other institutions, that 2 have a marginal positive impact, and some have no discernible effect.
• The IMF and FSB come out slightly positive, the IMF thanks to its permission recently for slightly higher spending, and indeed via its research, though its policy advice is not yet consistent to mobilise tax and spending systems
• The FSB has made progress in generating consensus in a number of dimensions, but has struggled on cross-border crisis resolution and too big to fail institutions.
• OECD and Bank get effectively a net score that shows no effect on balance
• The OECD may not be fit for purpose to coordinate global tax practices, by dint of its own membership – e.g. it excludes the poorest countries and people from any decision making
• The Bank has recommitted to fighting extreme poverty and committed to universal healthcare and education
• Yet it continues to be very problematic, including in its Doing Business work, and its private sector support via the IFC, which are anti labour, bad for poverty and inequality and often untraceable.
• On balance the institutions are insufficiently accountable to citizens and civil society

John Ruthrauff

• The G20 is distinct to the other institutions, as there is no core, no secretariat, and despite rotation we only know one year out who will preside.
• This is a moving target and no central place for rules or process for how they operate
• Questions revolve around access, not to officials or leaders but to media and each other

Vicky Perry

• This work is not just policy advice, but also Technical Assistance, including over 150 missions on tax policy alone
• The technical advice, unlike programs and surveillance which are published, is not published though we encourage all recipients to make it public but only a few do so.
• A key question is why does our advice not always get the traction it should? This is no doubt related to the non-public nature of our advice
• Was pleased the paper endorsed our work on the fiscal transparency code, as well as on extractives, which is in particular led by the Fiscal Affairs department
• A book on fiscal policy and inequality is currently being developed
• Also the Fiscal Monitor 2013 focused on taxation and had emphasis on progressivity
• Spillovers work also examined the impact on tax impacts on developing countries
• The G20 created the mandate to the OECD to focus on BEPS, though the IMF paper instead focused on the impact on developing countries
• G20 (Cairns) has followed up on a so-called set of toolkits to use in the context of what comes out of the BEPS action plan, and we will be involved. The BEPS project also does not focus on so-called ‘tax wars’ or tax competition/corporate tax incentives has been a major focus of the Technical Assistance work FAD does, and it has had frustratingly little impact.
• As a result G20 has requested that IMF, UN, OECD, World Bank prepare a report on this problem, though only on Low Income Countries. IMF is taking the lead on preparing a paper, building on wide range of studies and research historically
• On spending, work on health and education for developing and lower income countries, the inequality is extremely clear – the cross-country inequality is evident in the current Ebola problem

Comment from Matthew Martin

• The report does call for a systematic approach to how the tax and spending decisions advocated by the Fund require a massive investment of resources into the fiscal affairs of the Fund’s work given the rhetoric to be able to assess beforehand the distributional and efficiency consequences of tax and spending policies

Patricia Miranda

• Bolivia has gone in the last decade, partially thanks to debt forgiveness and also new tax laws (including on hydrocarbons), is no longer a heavily indebted state and has higher income since 2006, also benefitting from higher commodity prices
• Thus Bolivia has been benefitting from higher reserves, higher public investment (which tripled, including on social protection expenditures) and higher income
• Poverty has been reduced, and its extreme policy target has achieved the Millenium Development Goal, while the Gini index has reduced
• Thus internal and external factors combined to drive these changes.
• Challenges remain, especially as Bolivia has issued sovereign debt in international markets
• A more progressive tax system is necessary, the current tax system is currently very exposed to hydrocarbon taxation – which is an explosively sensitive political subject – as even several sectors remain entirely untaxed
• Informal employment remains hugely significant (as high as 70 per cent perhaps).
• Most private and public investment is dominating capital, though it is not a rich source of job creation.
• Bolivia is also gaining opportunities to source financing from non-traditional sources, such as China and Venezuela
• We need to take advantage of current environment to achieve a diversified economy, industrialised and generating added value, and away from an extractive only model