In spite of warm words about the need for inclusive growth and shared prosperity, the global financial institutions are doing little or nothing to combat inequality, and in some respects are exacerbating it. This is the main conclusion of the 2014 Global Financial Governance and Impact Report, released by New Rules for Global Finance (and 15 other organizations), to be released on October 8th.
Jo Marie Griesgraber, Director of New Rules for Global Finance, said: “Inequality is worsening in rich and poor countries alike. The world requires financial institutions and rules which will ignite and maintain sustainable, inclusive growth. The G20 needs to wake up and exercise the leadership it claims for itself.”
The Report evaluates the leading global financial rule-making entities: the G20, the Financial Stability Board (FSB), the International Monetary Fund (IMF), the World Bank, and this year for tax rule-making, the OECD. It asks what impact they are having on reducing inequality, especially in developing countries, and finds two institutions with marginal positive impact, two virtually none and one marginally negative.
The IMF and FSB score highest (2.2 out of 4, marginally positive effect). The IMF has encouraged slightly higher government spending to combat inequality, and led global thinking (through speeches and research) on the need for redistribution and more progressive tax policies: but it has yet to deliver consistent policy advice so tax, spending, employment and financial systems all combat inequality. The FSB has made considerable progress in generating consensus to regulate “Over the Counter Derivatives” and establish a Global Legal Entity Identifier System (GLEIS) to trace owners of financial entities, but less progress on cross-border crisis resolution, stopping “too big to fail” and regulating “shadow banking”.
The OECD and World Bank score only 2 (no discernible net effect). The OECD is making modest progress on curtailing illicit flows and tax evasion, and supporting (with the IMF) increased tax collection, but has made little progress on tax avoidance, avoiding tax wars or promoting progressive tax policies. It is not “fit for purpose” to coordinate global tax practices because its exclusive membership serves the wealthy countries and gives the poorest no decision-making power. The World Bank has recently recommitted to fight extreme poverty and inequality, and has a positive commitment to universal education and health care. However, its policy assessment frameworks (notably Doing Business) and lending conditions, and its private sector support via the IFC, are in some respects (on tax and labor) exacerbating inequality.
The poorest performer is the G20 (1.9). It deserves some credit for reopening debate about global tax reform, but is neither monitoring nor acting against rising inequality, deteriorating labor conditions and falling real wages, in its member states or in developing countries. As it currently controls the mandates of the other organizations, it must take primary responsibility for lack of progress in fighting inequality.
The report also finds that a key reason for inaction is relatively poor governance of these institutions. They are not transparent enough, do not (especially in OECD, G20 and FSB) have enough representation of low income countries, and are not accountable or responsible enough to civil society or citizens.
The report therefore recommends measures by all institutions to monitor and combat inequality, especially progressive fiscal policies, social protection floors and improved labor conditions and wages. The most dramatic recommendation is to establish a new World Tax Authority to fight “tax wars”, combat tax avoidance more effectively, and ensure companies pay their taxes in the poorest countries.
John Christensen of the Tax Justice network says:
“For decades powerful OECD countries have tolerated profit shifting, tax wars and tax havens which undermine the development of poorer countries. The case for a globally accountable World Tax Authority capable of setting effective rules for taxing transnational companies is utterly compelling.”