G-20 Communiqué: Heavy on Commitments and Committees; Light on Actionable Steps Forward

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From Ethical Markets Correspondent  at the G-20 Summit, June 26-27 in Toronto, Canada

June 28, 2010 – Toronto, Canada – On Sunday, world leaders converged in Toronto, Canada to find consensus on next steps towards ensuring “strong, sustainable, and balanced global growth”.  Although a few important measures were agreed upon, the declaration missed a major opportunity to implement solutions that would encourage the development of a truly sustainable economy.

Leaders were correct in saying that “while growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt”.  Unfortunately, their prescription to remedy the ailments of unemployment and social inequity is woefully inadequate.  The core of the agreement is a commitment to halve national deficits by 2013, and to stabilize or reduce national debt-to-GDP ratios by 2016.  These goals are laudable, as governments cannot expect to spend beyond their means forever, but leaders missed an opportunity to implement global initiatives that would help achieve these targets.

Typically, governments have two ways of reducing deficits: cut spending or increase taxes.  Neither option is a good strategy for politicians seeking re-election, although it is likely that both tactics will be needed to achieve fiscal sustainability.  So far, austerity measures have proven more acceptable than the political poison-pill of new taxes, as seen in Europe with England and Germany’s prudent belt-tightening versus Kevin Rudd’s suicidal mining tax in Australia.

The tragedy is that two great ideas to encourage economic sustainability got buried within the communiqué.  The first is simple: eliminate subsidies to oil companies.  A recent presentation shows that globally during 2008, governments provided $557 billion in support to companies in one of the world’s most profitable sector (http://www.iea.org/files/energy_subsidies_slides.pdf).  This cut is welcome by economists and environmentalists alike, and would have little impact on job creation and retention.  Unfortunately, leaders merely acknowledged the suggestion from the International Energy Agency, OPEC, OECD, and World Bank to remove these unnecessary subsidies:

“We welcome the work of Finance and Energy Ministers in delivering implementation strategies and timeframes, based on national circumstances, for the rationalization and phase out over the medium term of inefficient fossil fuel subsidies that encourage wasteful consumption, taking into account vulnerable groups and their development needs”.  This $557 billion would be much better spent paying down debt or leveraging private investment in the emerging green economy.  According to the GREEN TRANSITION SCOREBOARD®, more than $1.24 trillion is already flowing into sectors such as clean technologies, renewable energy, and green buildings.  However, this is still a far cry from the $10 trillion required by 2020 to complete the transition.

The second missed opportunity was a chance to use the global population’s dissatisfaction with the banking community to implement broad financial reform including a tax on speculative trading.  Although it goes by many names, such as a Tobin or Robin Hood Tax, the concept is simple.  Governments would levy a tiny transaction tax (usually .05%) on any financial trades that are more ‘bets’ than they are ‘investments’.   These include trades in the murky derivatives market, and the more than $4 trillion of daily currency trades.  The downside of this initiative is reduced liquidity,  but the kind of “faux liquidity” provided by computerized, high-frequency trading  is of little use and evaporates when most needed as in Wall Street’s May 6 “Flash Crash” of 2010. It would be a good thing  if traders must be more deliberate to avoid paying excessive taxes.  The upside, however, is massive.  This marginal tax would generate billions of dollars in revenue that could be used to pay down debt or to fund the United Nation’s Millennium Development Goals.  It would also help stabilize financial markets by dampening massive price swings, as investors would think twice before executing a trade and are encouraged to employ long-term buy and hold strategies.  Although this idea was promoted by leaders from Europe and America, it got severely watered-down in the final communiqué, giving governments the option of pursuing “a range of policy approaches”.  Without consensus from the major economies, it is doubtful that any country will implement the initiative, for fear of losing competitiveness and driving financial activity away.

If governments are serious about addressing the global economic crisis, they need to display leadership through action, not words.  Unfortunately, this year’s G-20 Communiqué was heavy on commitments and committees, but light on actionable steps forward.  Until global leaders come up with a compelling vision and a strategic plan for step-by-step movement in the right direction, the world’s economies will continue to stumble from crisis to crisis.

Timothy Jack Nash is president of Strategic Sustainable Investments and Senior Research Advisor to Ethical Market Media (USA and Brazil).