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G20 Australia 2014
1. A U S T R A L I A 2 0 1 4
TRADE & FINANCE
Reforming the international
tax rules: the importance
of a global approach
Gabriela Ramos, OECD Chief of Staff
and G20 Sherpa discusses
the issues Page 18
ENERGY
Maria van der
Hoeven talks
about the role
of the G20 in
developing long-term
sustainable
energy security
strategies
Page 80
In partnership with
2. Sight and Life is a
humanitarian nutrition
think tank of DSM
4. 42 60 84 78 80 74
96 46 38 90 36 62
INTRODUCTION & WELCOME
8 Message from the Prime Minister of Australia
Tony Abbott
9 Towards strong, sustainable and balanced growth
President of Mexico, Enrique Peña Nieto
10 Message from the Premier of Queensland
Campbell Newman
12 Outreach Dialogue: a chance to build a better world
Victor Philippenko, Chairman of the executive board,
G20 Foundation
TRADE & FINANCE
14 Improving the quality of banking supervision
worldwide in the post-reform world
Stefan Ingves, Chairman of the Basel Committee on
Banking Supervision and Governor of Sveriges Riksbank
18 Reforming the international tax rules: the
importance of a global approach
Gabriela Ramos, OECD Chief of Staff and G20 Sherpa
26 The role of the G20 in promoting trade is more
important than ever
Roberto Azevedo, Director-General, WTO
30 The role of sustainable investing as a
driver for change
Jessica Robinson, Chief Executive Officer,
Association for Sustainable and Responsible
Investment in Asia (ASrIA)
32 ILO Director General’s address on G20 labour markets
Guy Ryder, Director-General, International
Labour Organization
36 Transparency, like technology, is irreversible
Georg Kell, Executive Director, UN Global Compact
HEALTHCARE
38 WHO Director-General on health and climate
Dr Margaret Chan, WHO Director-General
42 We can defeat AIDS, TB and malaria if we all
come together
Dr Mark Dybul, Executive Director, The Global Fund
46 Dealing with noncommunicable diseases
Dr Oleg Chestnov, Assistant Director-General,
Noncommunicable Diseases and Mental Health, WHO
DEVELOPMENT
48 The post-2015 Development Agenda
UN Secretary-General Ban Ki-moon
54 Turning Africa’s digital divide into digital
opportunity
Donald Kaberuka, President, African Development Bank
56 National strategies to fulfill the global
commitment: financial inclusion
Dr. Alfred Hannig, Executive Director, Alliance for
Financial Inclusion
58 Connecting the next billion: ICTs and sustainable
development
Dr Hamadoun I Touré, Secretary-General,
International Telecommunication Union
60 Pursuing public private partnerships for
infrastructure projects
Deputy Prime Minister of Australia,
The Hon Warren Truss
CLIMATE CHANGE & SUSTAINABILITY
62 G20 and greening global finance
Achim Steiner, UN Under-Secretary-General and
Executive Director, UNEP
68 Sustainable water agriculture ensures
environmental security
Scott Vaughan, President, International Institute for
Sustainable Development (IISD)
71 Tourism and the sustainability challenge
Taleb Rifai, Secretary-General, World Tourism
Organization (UNWTO)
74 Resource and energy efficiency is needed today
for the buildings and cities of tomorrow
Arab Hoballah, Branch Chief UNEP-DTIE and Jacob
Halcomb, UNEP-SBCI
76 A loud and clear call from business and
governments in favour of carbon pricing
Dirk Forrister, President, International Emissions
Trading Association
78 Infrastructure for the rise of smart cities?
Michel Sudarskis, Secretary General, INTA,
International Urban Development Association
ENERGY
80 The role of the G20 in developing long-term
sustainable energy security strategies
Maria van der Hoeven, Executive Director,
International Energy Agency
84 Carbon capture and storage as a tool to deliver
cleaner fossil energy Luke Warren, CEO, The Carbon
Capture and Storage Association
86 Balancing the Energy Trilemma: much work
remains to be done
Christoph Frei, Secretary General,
World Energy Council
88 Insights on wind energy infrastructure
development
Prof. Dr. He Dexin, President, World Wind
Energy Association
90 Nuclear energy – a favourable climate
Jean-Jacques Gautrot, Chairman,
World Nuclear Association
92 How can industry assist in reaching the EU
energy efficiency targets
Nicolle Raven, Policy Officer, ESMIG
FOOD, AGRICULTURE & WATER
94 Improving food security and nutrition governance
José Graziano da Silva, Director-General, U.N. Food
and Agriculture Organization (FAO)
96 The value of achieving water security
Benedito Braga, President, World Water Council
98 Towards a Zero Hunger World
Ertharin Cousin, Executive Director,
World Food Programme
100 Member countries
102 Sponsors index
5. 8 I N T R O D U C T I O N & WE L C O M E I N T R O D U C T I O N & WE L C O M E 9
Towards strong, sustainable
and balanced growth
Message from the Prime
Minister of Australia
Prime Minister of Australia, Tony Abbott President of Mexico, Enrique Peña Nieto
In accordance with these purposes,
last February, G20 Finance Ministers
and Central Bank Governors decided
to coordinate efforts in order to lift
the Group’s GDP. The collective goal
is to increase it by more than 2%
over the coming five years, above the
implied trajectory by current policies.
I am convinced we can achieve this
by promoting sound macroeconomic
policies and reforms, as well as,
fostering investment, trade and
competition. For this reason, Mexico
embraces the ambitious commitment
and looks forward to discussing an
action plan, at the Brisbane Summit
this November.
In this regard, my country has a
renewed capacity to contribute to
global growth. Mexicans have started
an ambitious transformation agenda
that includes structural changes
on education, finance, energy, tax
collection, economic competition, and
telecommunications. These reforms,
approved last year thanks to Mexico’s
main political parties’ willingness and
sense of responsibility, will enhance
our competitiveness and development
perspectives.
Furthermore, Mexico is taking the
necessary steps to unleash its full
economic potential. For instance, we
have set an unprecedented investment
plan in infrastructure. Our National
Infrastructure Program will channel
almost 600 billion dollars from now
to 2018. Since our country has a
privileged geographical location, we are
determined to use these resources, to
consolidate our position as a high-value
added global logistics center.
Thus, Mexico is excited to co-chair the
Infrastructure Investment Working
Group, along with Indonesia and
Germany. We believe the G20 has the
required impulse to foster investment in
this sector, promote financing to small
and medium enterprises, and further
enhance global economic development.
We assume this responsibility as
an ideal opportunity to face, as a
team, the new challenges of a highly
interconnected world.
As one of the most open economies,
Mexico fully backs the Australian
Presidency initiative to hold a Trade
Ministerial Meeting. We should
continue strengthening this kind of
discussions on G20 summits, as a
means to attain more stable economic
conditions, and especially, to create
new employment sources and better
paid jobs for our countries.
One of my administration’s priorities is
achieving a Prosperous and Inclusive
Mexico. In that way, we will continue
working on improving employment, food
security, and financial inclusion levels,
particularly for the most vulnerable
people. This is why Mexicans welcome
recent efforts to incorporate gender
equality into G20 discussions and
support parallel events to engage non-state
actors, such as the B20, L20, Think
20, Y20, and Civil 20.
I believe Australia is playing a
remarkable role as G20 Chair, which will
certainly lead us to a successful meeting.
We must keep walking firmly towards
a suitable environment for strong,
sustainable, and balanced economic
growth. For this reason, it is a pleasure
to attend the upcoming Brisbane
Summit and be part of the construction
of a better future for our 20 societies.
The G20 is committed to develop comprehensive strategies to
stimulate strong, sustainable, and balanced growth worldwide. To do
so, it has played a significant role in enhancing macroeconomic policy
coordination among major economies, improving financial regulation
and setting the basis for international recovery
It is an honour for Australia to host the G20 in 2014.
It is an important opportunity and a major responsibility. Our Presidency comes at a time when global
economic growth is too low and unemployment too high.
This is preventing people from reaching their full potential.
So why is the G20 important? It comes down to a simple idea: the world’s major governments can do
more economic good for our citizens when we work together.
That is what the G20 Leaders Summit is about.
The G20 has proved itself in difficult times. It helped prevent an economic collapse following the global
financial crisis. The main problem we must now solve is how to strengthen economic growth and
employment, to create opportunities for our people. That is our common challenge.
The best way to do this is by empowering the private sector. To have strong economies, we need
business to invest, build the infrastructure of the future and trade with the rest of the world. We must
also implement the G20’s financial reforms to ensure our economies are more resilient to future
economic shocks.
The challenge for the G20 this year will be to make concrete decisions and take real steps that will
improve people’s lives through stronger growth, more jobs and better infrastructure. As the chair of the
G20 in 2014, I will ask world leaders to come to Brisbane with a commitment to take practical action.
It means developed and emerging economies working together. And it means partnership between
governments, private enterprise and the community.
I look forward to hosting world leaders in the beautiful riverside city of Brisbane in November 2014.
The G20 will be the most important meeting of world leaders Australia has ever hosted. I want it to
make a lasting difference.
The Hon Tony Abbott MP
Prime Minister of Australia
Our National
Infrastructure Program
will channel almost
600 billion dollars from
now to 2018
Source: www.g20.org
7. 12 I N T R O D U C T I O N WE L C O M E I N T R O D U C T I O N WE L C O M E 13
Since 1999, the G20 has achieved
remarkable progress as a platform
providing solutions to global
challenges. The goal of further
establishing a solid framework for a
better global governance depends
on several factors, most notably
the fostering of transparency and
increasing participation of the
stakeholders of the G20 process
within and between nations.
As a group consisting of countries with
various cultural, historical and economic
backgrounds, the implementation and
the success of G20 solutions requires
a broad consensus between different
countries and different communities
within the respective countries. With such
a inhomogeneous group it is necessary to
provide a framework for public debate of
the topics attached to G20 agenda.
The Outreach Dialogue has proven to have
the potential to become a key measure
on the way towards better coordination
of different stakeholders of the G20
process. The five Outreach groups bring
together the main groups of the societies
of the G20 countries like businesses, civil
society, academia, labor organizations
and youth in a structured and transparent
communication process to generate cross-sectoral
synergies and enhance the public
benefit of the G20 process. All Outreach
groups have been integrated in the G20
process with participation to Summits and
by giving recommendations to the heads
of state. A part of these recommendations
has been incorporated into the Leaders
Declaration of the Summit in Russia 2013.
However, the Outreach Dialogue as part of
the G20 process has proven valuable but
at this young stage is still in development
and needs further improvement. To reach
a new level of impact for the Outreach
format, the efficiency in the communication
process needs to be enhanced by a better
coordination of all actors. To really build
a meaningful consensus, it is crucial to
distribute the influence of the single
groups more evenly so the contents and
recommendations developed by each
group find their way into policy actions. It is
decisive, that there is also more interaction
and exchange between the groups, allowing
the representatives to search for common
ground and to work hand in hand on
innovative solutions to achieve stronger,
more sustainable and balanced growth.
Another point in this respect is to better
exploit the potential for cross-group
synergies by a better management of
communication between the different
groups. By this, the various strengths
of the individual groups could be
bundled to achieve common goals more
efficiently. Besides these measures on
the side of the work in the Outreach
groups, it is necessary to increase the
awareness of decision makers in the
G20 process by a stronger presence of
the Outreach groups in the preparation
and follow up of the summits. By this,
the Outreach format could play a more
central role with more recommendations
ending up making an impact on the G20
policies, contributing to transparency
in the overall communication process,
creating a broader public consensus
for G20 commitments and raising the
effectiveness of a governance process.
Most importantly, all these improvements
are bound to remain inefficient if they are
to be managed solely by the respective
presidency of each year’s summit. To
achieve a sustainable and precisely
targeted communication process that
provides solutions to challenges in the
long-run, an additional facilitation of
the process is needed that supports the
respective G20 presidencies with a long-run
perspective of the Outreach format.
This would ensure that the Outreach
groups can take a unified and continuous
approach in tackling global challenges
while adapting to the focus set by the
annual G20 agenda. With an independent
facilitator managing and monitoring
the Outreach Dialogue, an important
further step to ensure more transparency
and broader public involvement in the
Outreach Dialogue would be to establish
recurring events in all partner countries.
The G20 Foundation supports this
evolution by organizing events at the
national level to reinforce the post-summit
implementation process of
selective items decided upon on the
G20 level in cooperation with various
stakeholders from the member countries.
As a non-partisan Think Tank, we
stimulate constructive and effective
discussions in order to support the
implementation of the G20 commitments
on a national level. Thereby we foster
the development of innovative solutions
to global challenges, such as economic
stability and sustainable growth.
The overriding goal of the Outreach
Dialogue has to be an evolution from
singular events in the surrounding
of the annual G20 Summits to a
continuous and coordinated effort
working as an addition to the general
G20 process. The use of the Outreach
format has to be measured by the
impact the developed recommendations
have on policy making. This means
that the highest priority in the
near future have to be continuous
improvements in the implementability
of the Outreach recommendations, with
more concise and precise targeting
of the recommendations proposed
by the individual groups. Only if the
Outreach format is able to deliver
practical and feasible guidance for the
G20 governments it can provide added
value and become a keystone of the
G20 process.
Uncoordinated events under changing
management are bound to remain
ineffective and focused on short-term
solutions, while a well monitored and
managed communication process
bringing together all major stakeholders
of the G20 societies both on a G20 as
well as on the local level can truly make a
difference by providing targeted long-run
policy advices and increasing awareness
and transparency in the civil society.
With all the challenges we face
as a global society it is absolutely
essential to establish new approaches
for international cooperation by
connecting leading personalities from
all relevant sectors worldwide on G20
issues. This is an opportunity to unite
cultures, countries and people based
on shared ideals.
By encouraging the world leaders to take
on the decisive challenge of sustainable
governance innovation and achieving
a stronger economical and political
integration we have a chance to build a
more prosperous, sustainable, inclusive
and peaceful world.
Outreach Dialogue:
a chance to build a
better world
Victor Philippenko, Chairman of the executive board, G20 Foundation
8. 14 T R A D E F I N A N C E T R A D E F I N A N C E 15
Improving the
The major components of the
regulatory reforms focus on enhancing
banks’ management of capital and
quality of banking
liquidity risk. The Basel III capital
standards introduced stronger
minimum requirements for regulatory
capital, by increasing the quantity,
supervision
quality and risk coverage of capital
standards. These measures are
complemented by a simpler leverage
ratio, which serves as a backstop to the
worldwide in the
risk-weighted measures.
post-reform world
While the Committee has long discussed
liquidity risk, the sudden drying up of
liquidity during the crisis brought greater
impetus to establish globally harmonised
standards. Basel III introduces, for the
first time, two minimum standards to
manage liquidity risk. In early 2014, we
finalised the Liquidity Coverage Ratio
and just published the final Net Stable
Funding Ratio.
In addition to enhancing the resilience
of individual banks, the Basel III
framework incorporates broader
macroprudential elements. The
countercyclical capital buffer regime
has been introduced to increase the
resilience of banks to the build-up
of system-wide risks. Higher loss
absorbency requirements have been
imposed on systemically important
banks perceived to be too-big-to-fail.
In addition, the Committee’s revised
global framework for measuring and
controlling large exposures helps
address the negative externalities such
banks create and the risks associated
with their interconnectedness.
Pillar 2: strengthening
supervision
While much of the attention has been
on minimum regulatory standards, the
Committee has published important
guidance to strengthen supervisory
practices. In 2012, the Committee
updated the Core Principles for
Effective Banking Supervision. The
revised Principles emphasise the
need for greater supervisory intensity
for systemically important banks. By
applying a system-wide perspective, the
Principles increase focus on effective
crisis management and recovery and
resolution measures, and place greater
emphasis on corporate governance.
The Core Principles are
complemented by a series of other
initiatives to improve supervision. This
includes guidance on identifying and
dealing with weak banks; principles
for sound stress testing practices and
supervision; fundamental elements of
a sound capital planning process; and
internal audit practices.
Finally, the global community has
heightened expectations for cross-border
cooperation and information
sharing. The Committee has
highlighted this through our revised
principles for supervisory colleges
and ongoing efforts to foster dialogue
among supervisors.
While standards and guidance are
essential tools of supervision, we should
bear in mind that effective supervision
ultimately rests on the ability and
willingness of supervises to intervene.
Pillar 3: fostering market
discipline
It is critical that these improvements
in risk management and supervision
are understandable and comparable to
stakeholders. Thus, the Committee has
placed great emphasis on disclosure
and transparency, both from banks
and from supervisors. This includes
comprehensive, standardised disclosure
requirements
for all the major
Basel III standards,
along with a broader review of Pillar
3 disclosure requirements. Greater
consistency and comparability in bank
disclosures will enable investors to
better assess bank risk and thereby
strengthen market discipline.
Conclusion
The new minimum requirements for
capital, liquidity and disclosure have
raised the bar, requiring banks to take
greater responsibility to safeguard
financial stability. Supervisors, too,
are stepping up their efforts to
ensure implementation of the Basel III
framework into domestic frameworks,
and to more effectively – and more
intrusively – supervise banks for which
they are responsible. A sound and
stable financial system is crucial; only
strong banks can help the G20 achieve
its promise by facilitating strong,
sustainable economic growth.
Stefan Ingves, Chairman of the
Basel Committee on Banking
Supervision and Governor of
Sveriges Riksbank
The Basel framework comprises three
Pillars. Pillar 1 sets minimum capital (and
now liquidity) requirements. Pillar 2 is the
supervisory review process. And Pillar
3 promotes market discipline through
public disclosure. All three pillars have
been strengthened significantly through
a variety of measures.
With the reform agenda largely
completed, it is tempting to think that
the hard work is over. But, in fact, it is
only beginning. First, we must ensure
that the reforms are implemented by
both authorities and banks as they were
intended, which the Committee is doing
through its Regulatory Consistency
Assessment Programme. Second,
we must continue to strengthen our
oversight and supervision as banks
incorporate the new regulatory
requirements into their risk management
frameworks. In this respect, banks and
supervisors both have a role to play.
Pillar 1: stronger minimum
requirements for regulatory
capital and liquidity
Basel III responds to the risk
management and supervisory
challenges observed during the crisis.
The framework seeks to improve banks’
resilience to a range of shocks. It also
provides supervisors with the necessary
tools to address weaknesses identified in
individual banks and oversee the health
of the broader financial system.
Since the onset of the global financial crisis, the regulatory
community have initiated a series of significant reforms. The
Basel III framework constitutes a central component of the G20
regulatory reforms that have followed. The aim has been to
develop a regulatory framework that increases the resilience of
the banking system. In turn, this will reduce the probability and
mitigate the impact of future financial crises, setting the stage
for strong, sustainable and balanced growth.
10. 18 T R A D E F I N A N C E T R A D E F I N A N C E 19
Taxation creates an essential
element of trust between
governments and the societies and
citizens they serve. Moreover, fair
and efficient tax systems underpin
the social contract
When used appropriately, taxation can be
a powerful instrument to reduce inequality,
and create opportunities for all citizens and
companies to prosper in an increasingly
competitive environment. However, when
left unchecked, tax evasion and avoidance
raise questions of economic fairness and
efficiency, which are especially relevant
in an environment plagued by fiscal
consolidation, rising unemployment and
social hardship. The problem has been
getting worse over the years, as individuals
and companies have honed their skills to
exploit loopholes and inconsistencies in tax
rules across countries.
Led by G20 Leaders and supported
by the OECD, the international tax
agenda has advanced in two key policy
areas: tax evasion, by improving the
transparency of financial flows through
the exchange of tax information on; and
tax avoidance, by taking comprehensive
action to address the gaps and
mismatches in tax rules that can cause
profits to ‘disappear’ for tax purposes
or allow profits to be shifted to low
tax jurisdictions where little or no
company activities occur – shifting the
tax burden to individual taxpayers and
small domestic companies. Once, the
Reforming the
international tax rules:
the importance of a global
approach
Gabriela Ramos, OECD Chief of Staff and G20 Sherpa
objective of tax authorities was to avoid
double taxation. It is time now to avoid
double non-taxation.
Tackling tax evasion
through tax transparency
In 2009, the G20 committed to
eliminating bank secrecy, and in only 5
short years we have seen a quantum leap
in the efforts to improve transparency.
Developed and developing countries,
including financial centres, have
demonstrated how they can work hand in
hand to effectively fight against a lack of
transparency that can enable tax evasion.
The first steps began with the reform of
the Global Forum on Transparency and
Exchange of Information for Tax Purposes,
at the end of 2009. As a result, today the
Global Forum has 122 members, including
all financial centres and more than 60
developing countries, each of whom have
committed to the international standard,
exchange of information “on request”. The
Global Forum is the largest existing Peer
Review monitoring system which ensures
that members have the appropriate
legal and practical framework in place to
effectively carry out their commitment to
the standard.
Again responding to a call from the G20
in 2013, the OECD delivered the “next
generation” tool for effective cooperation
between jurisdictions on tax transparency:
a single common global standard for
the automatic exchange of information
(AEOI). The AEOI standard was endorsed
at the February 2014 meeting of Finance
Ministers and Central Bank Governors.
At the Brisbane Summit, the OECD will
deliver the full AEOI package, including
all the technical guidance which will allow
countries to take the next step and move
towards effective implementation.
The G20 and the OECD also recognise
that developing countries face specific
challenges to ensure AEOI, namely varying
capacities to implement it in an effective
and timely way. In February 2014, the G20
called on all financial centres to match
G20 commitments to implement the AEOI
standard in the short term, while noting
that the timeline for other developing
countries will depend on their ability
to do so. The Global Forum is currently
developing a roadmap to assist developing
countries in overcoming obstacles to
participation, allowing them to meet
the standard and thereby accessing the
benefits of improved global transparency.
Already over 60 countries, including all
OECD and G20 members, have committed
to implement the AEOI standard. A large
and growing number of jurisdictions
have further agreed to a detailed
implementation timeline which will see the
first exchanges taking place by September
2017. Further, as one of the main
instruments to provide a legal framework
for countries to participate in AEOI,
the Multilateral Convention on Mutual
Administrative Assistance in Tax Matters
has to date been signed by 66 countries,
including more than 10 developing
countries, with another 15 jurisdictions
covered by way of territorial extension.
If we are to be effective in tackling tax
evasion, there must be no place left to hide.
It is therefore critical that all countries, and
in particular all financial centres, quickly
commit and effectively implement the
single global standard on AEOI. Ensuring
a level playing field amongst countries
is important, and the Global Forum, with
its broad-reaching membership, has
been mandated by the G20 to establish
a mechanism to monitor and review the
implementation of the new standard on
automatic exchange of information.
Tackling tax avoidance
through modification
of tax rules
Tax transparency is not the only tax
issue of international concern since the
crisis. In recent years, there has been an
unprecedented focus from both political
leaders and the public about cross-border
tax planning strategies that enable
corporate profits to go untaxed. Tax policy
is at the core of national sovereignty and
yet in a globalised world with integrated
economies, domestic tax systems designed
in isolation are often not aligned, causing
devastating and unintended effects on
tax revenue. The impact is felt by both
developed and developing countries,
although the challenges to address these
risks may be different across countries,
both in their nature and scale. For instance,
developing countries are more reliant on
corporate income tax, which contribute on
average 20% of tax revenues, compared to
8-10% in advanced economies.
G20 Leaders first identified the need to
address Base Erosion and Profit Shifting
as a priority for their tax agenda at the
Los Cabos Summit. In 2013, the OECD
presented the BEPS Action Plan, and
the G20/OECD BEPS Project was born.
Leaders called on member countries
to examine how their domestic laws
contribute to BEPS and to work together
to ensure that international and national
tax rules do not allow or encourage
multinational enterprises to reduce
overall taxes paid by artificially shifting
profits to low-tax jurisdictions.
To ensure that the full range of BEPS
challenges are identified and discussed,
the G20/OECD BEPS Project builds on a
broad engagement process, drawing on
experience and perspectives beyond our
member governments. Working through
a number of avenues, including the G20
Development Working Group, there is
in place a comprehensive program of
targeted engagements with senior policy
makers in developing countries to discuss
their specific BEPS challenges and how
they can best be addressed. We have held
several major international meetings to
engage with developing countries on BEPS
over the last 18 months. In addition, the
first in a series of regional consultations
was attended by more than 100 countries
and over 300 delegates, and the next
round of dedicated regional consultations
will commence in the second half of 2014.
We also are engaging in an ongoing
dialogue to exchange ideas on BEPS issues
with global business leaders, civil society
groups, and labour representatives. The
OECD is also working together with the
United Nations, the World Bank and the
International Monetary Fund to avoid
a duplication of efforts and ensure
complementarity of work streams. We are
working closely with all stakeholders and
have put in place a number of mechanisms
to ensure a transparent process by
undertaking a large number of public
consultations, and providing access to
discussion draft papers and webcasts.
The first elements of the 15-point OECD
BEPS Action Plan will be delivered in
2014, with the remaining Actions to
be completed by the end of 2015. In
2014 we have already seen significant
progress on a number of areas including:
identifying the tax challenges raised by
the digital economy,
developing revised standards for
transfer pricing documentation,
establishing country-by-country
reporting that will ensure Multi-
National Enterprises will use a
standardised report format to provide
information on their allocation of
income, taxes and business activity on
a country by country basis,
as well as providing a report outlining
options to more effectively address tax
treaty abuse.
A global commitment
Today, the OECD and G20 are working
in partnership alongside dedicated
engagement with all stakeholders, to
ensure that momentum is maintained to
achieve the goal of an international tax
system which can face the challenges of
the 21st century economy. However, global
commitment to this objective is required;
and in the area of tax transparency in
particular, the engagement of all financial
centres is vital. G20 Leaders will continue
drawing attention to the need to take
collective action to deliver on these two
important initiatives. Swift action and
smart leadership at the domestic level will
also be needed, to undertake the requisite
national reforms. Better tax policies for
better lives for our citizens!
Individuals and
companies have
honed their skills to
exploit loopholes and
inconsistencies in tax
rules across countries
11. 20 T R A D E F I N A N C E T R A D E F I N A N C E 21
early actions could also threaten to
undermine the basic principles already
set out in the announcements so far,
even if directionally consistent with the
BEPS project. This could create more
uncertainty, greater risk and an erosion
of trust between tax authorities and
taxpayers. Each unilateral change also
increases the risk of double taxation
and the risk that there will need to
be an “unpicking” when the final
recommendations
are delivered.
One way to address this is for
governments to commit to reviewing
their recent changes and to “align”
once the final outcomes are known.
Again, this is a process that needs the
input of business.
Planning for implementation
Following the finalization of the BEPS
project next year, the focus is likely
to shift to the countries themselves.
There is an opportunity now to plan for
that period, to maximize the benefits
to all. These plans should include two
key focal points:
Greater investment into tax
administration: The focus on the
international tax regime is going
to result in more situations where
countries initially disagree with
how profits are allocated cross-border.
From a business perspective,
it will be important that these
disagreements be resolved quickly,
so that focus can remain on the
business rather than dealing
with disagreements between
governments. To this extent, the
BEPS project needs to be followed
with greater investment in resources
for tax administrations to support
the Mutual Agreement Procedure
and arbitration.
Commitments to consistent
implementation: Inconsistent
implementation is also a key
source of risk. Published plans for
implementation will help ensure that
changes are clearly communicated.
In conclusion, much effort and hard
work has gone into the BEPS project
to date. The next stage, however, is the
most difficult one, where principles
are converted into practical change.
In these times, more than ever, we all
need to be working closely together
if we are to create a better working
world for all stakeholders.
Engaging
First, it is in everybody’s interest,
taxpayers, tax advisors, tax authorities
and other interested parties, that all
these stakeholders work together. One
stated aim of the project is to produce
a more coherent cross-border tax
architecture, reducing the scope for
both double taxation and double non-taxation.
While the need to maintain
fiscal sovereignty means that any
international tax system will necessarily
remain a patchwork of the systems of
the individual countries, the project
aims to strengthen the “stitches” that
connect the fabric.
The resulting proposals and tax
architecture should recognise the
needs of all parties. To date, there
has been extensive consultation and
the BEPS papers have been amended
in response to some of businesses’
concerns. This engagement needs
to continue as, whatever the final
conclusion of the governments, the
proposals need to be able to work
in practice and therefore how these
would, or could, work when translated
into national legislation needs to be
fully considered.
Businesses, and those advising
them, need to work closely with
policymakers to reconcile the
BEPS project’s aspirations with the
practicalities of businesses operating
across borders.
Risk of disputes rising
Second, there are significant risks
in implementing changes of this
nature. As highlighted by EY’s 2014
Tax Risk and Controversy Survey,
many businesses as well as legislators
are expecting many more disputes
to arise as a result of the changes
being contemplated. This is perhaps
not surprising, as any tax change
will create uncertainty when first
implemented. But the work undertaken
on BEPS offers an opportunity to get
potential areas of dispute addressed
earlier, not later.
Resources, focus and prioritization
all need to be put in place to head
off, or at least reduce, the impact
of major disputes. Failure to do so
risks undermining the intended aims
of the project, to both business and
governments.
Beyond BEPS
Beyond the BEPS discussions
themselves, there are a number of other
expectations and concerns that need to
be managed, both at a global level and
by the individual governments.
Not everyone, for example, is waiting for
the OECD to complete its multilateral
BEPS work, and the work so far has
been a catalyst for change in both tax
policy and its administration by some
countries. These changes include
policy revisions in the areas of interest
deductibility, hybrid instruments,
transfer pricing documentation and
controlled foreign company rules,
while on the administration side many
companies report that some countries
are applying future BEPS concepts to
previously executed transactions.
While countries might justify their
actions on a case-by-case basis, these
Delivering the international
tax system of the future,
together
The tax world has been actively following the G20/
OECD Base Erosion and Profit Shifting (BEPS)
project since it was first suggested. As the project
moves forward, all stakeholders need to keep in
mind a number of crucial points.
Chris Sanger, Global Head of Tax
Policy, EY, Ernst Young LLP
Disclaimer - The views refl ected in this
article are the views of the author and do not
necessarily refl ect the views of the global EY
organization or its member fi rms.
OECD Secretary General Angel Gurría
and Pascal Saint-Amans, director of the
Centre for Tax Policy and Administration
present the fi rst recommendations
under the OECD/G20 Base Erosion
and Profi t Shifting Project
IMF Managing Director Christine
Lagarde with South Africa's
Finance Minister Nhlanhla Nene
at the G20 Finance Ministers
and Central Bank Governors
meeting in Washington DC
12. Restoring integrity of tax systems – a taxing crossroad Restoring integrity of tax systems – a taxing crossroad
It may be argued that the
OECD Action Plan on Base
Erosion and Profit Shifting
(BEPS) has two main
complementary objectives:
The first main objective is the
elimination of international tax
avoidance and evasion schemes
(specifically those labelled
BEPS and integrity of
tax systems
Restoring integrity in tax systems will
be difficult to achieve. Extensive as
the Action Plan on BEPS may be,
it is unlikely that it will result in tax
systems that the public, media and
civil society will accept as being truly
proportionate, equal, neutral and
impartial (and thereby that companies
are paying their fair share of taxes).
This is more so because (aggressive)
tax planning cannot be entirely
eliminated as countries continue to
design their tax rules with competition
in mind, and what is a “fair share of
taxes” will remain subjective and a
matter of perception.
Some stakeholders appear to have
rejected, for example, the long-standing
legal notion in tax law that
“anyone may arrange his affairs so that
his taxes shall be as low as possible;
he is not bound to choose that pattern
which best pays the treasury. There is
not even a patriotic duty to increase
one’s taxes”. There is now a clear
public demand for companies not
as “aggressive”) that thrive on
identifying and exploiting the legal
opportunities available to multinational
enterprises. This objective, apart
from its multilateral scale and scope,
is not completely new. Countries
have always been quick to close
tax loopholes whenever they have
been identified, just as tax advisers
and taxpayers have been quick at
only to pay their taxes, but to increase
the amounts payable. To satisfy this
demand will be a tall order, however,
mainly for the proliferation of legal
bases that allow companies to do
exactly the opposite.
Integrity of tax systems and
developing countries
The G20’s tax agenda includes
a commitment to international tax
cooperation to protect the integrity of
national tax systems by: (1) addressing
tax avoidance, particularly BEPS, to
ensure profits are taxed in the location
where the economic activity takes
place; (2) promoting international tax
transparency and the global sharing
of information; and (3) ensuring that
developing countries benefit from the
agenda, “particularly in relation to
information sharing”.
One wonders why developing
countries should only “particularly”
benefit in relation to information
sharing. In a global economy, a more
active involvement also of developing
countries ought to be critical to
the success of the Action Plan.
Emphasizing tax information exchange
with developing countries alone may
not sufficiently address international
tax avoidance and create integrity in
tax systems globally. It is mainly due
to globalization that most of the tax
avoidance schemes that the Action Plan
identifying and exploiting them.
The second main objective of the
Action Plan on BEPS is to restore
integrity in tax systems. According
to the Action Plan, base erosion and
profit shifting undermines the integrity
of the tax system because “the public,
the media and some taxpayers deem
reported low corporate taxes to
be unfair”.
on BEPS seeks to address are possible
and leaving out developing countries
would undermine the effectiveness of
proposed solutions under the Action
Plan.
Murky waters ahead
Achieving a level of integrity in global
tax systems that is acceptable to all
stakeholders will be challenging. We
are not dealing with an exact science.
Indeed, restoring integrity of tax systems
will in most cases mean ensuring that
companies pay their “fair share of taxes”
by curbing international tax avoidance
and evasion. But in some cases it may
simply require that authorities walk a
tightrope and address the public, media
and civil society’s perception of what is
a “fair share of taxes”.
In wading the murky waters ahead,
the International Bureau of Fiscal
Documentation will be there to provide
its independent tax expertise and also
document this unprecedented transition.
Kennedy Munyandi
Team Manager
Afr-ME-Latam, IBFD
Rietlandpark 301
1019 DW Amsterdam
P.O. Box 20237
1000 HE Amsterdam,
The Netherlands
Tel.: +31-20-554 0100 (GMT+1)
Email: info@ibfd.org
IBFD, Your Portal to Cross-Border Tax Expertise
Some stakeholders
appear to have rejected,
for example, the long-standing
legal notion
in tax law that “anyone
may arrange his affairs
so that his taxes shall be
as low as possible; he
is not bound to choose
that pattern which best
pays the treasury. There
is not even a patriotic
duty to increase
one’s taxes”.
(Billings Learned Hand)
Restoring integrity of tax systems -
a taxing crossroad
13. 24 T R A D E F I N A N C E T R A D E F I N A N C E 25
“If you are looking for a safe
environment to retire and or to
start up a business offshore in
a more relaxed, safe and highly
modern business environment
then Vanuatu is the country that
you should consider”
Brief country background
Vanuatu consists of a“Y-shaped” chain
of more than 80 islands that is located
about 1,750 km east of Australia, 500 km
north east of New Caledonia and west of
Fiji and south of Solomon Islands.
The country’s total land area is
approximately 12,200 square kilometers and
the territorial waters cover 450,000 square
kilometers. Despite its small size (population
and land mass), it is a developing nation
with great investment opportunities.
The country gained its Independence
from Britain and French in 1980 and self-governed
itself under a Parliamentary
democracy political system headed by
a President, a Prime Minister (the head
of the government) and 52 elected
members of parliament.
Vanuatu is ranked amongst the top
tourist destinations in the Pacific island
region. Recently it was voted twice
as the happiest place on earth by the
Lonely Planet Index.
Vanuatu has a positive
economic environment and
outlook
Vanuatu’s economy is sound amidst the
current challenging global economic
conditions, thanks to the strong
macroeconomic and policy buffers of the
authorities. The IMF’s latest assessment of
the country’s performance (2013 Article
IV Consultation Review ) showed that
despite the lower level of aid and public
investments, the country’s per capita
growth is higher compared to the other
Pacific Islands. Inflation level is maintained
within a 0-4% range of annual growth of
the CPI, country reserves are maintained
well above the four months of import
cover and the country’s public Debt to
GDP ratio is low compared to the region
and by international standards. 2014 real
GDP growth is projected at 3.6 percent
and is expected to gradually pick up in the
years ahead, supported by the large donor
infrastructure funded projects.
Government policy
fully supports domestic
investments and growth
There are a lot of untapped investment
opportunities in the country’s agriculture
sector, tourism industry, ICT and telecom
sector and more. IMF in the same
assessment above stressed that critical
infrastructure investments both from the
government and private sector are needed
to enable the country develop these sectors
to allow the country realize its full potential.
The Government recognises this critical
area and has taken steps in recent years
through the close cooperation and support
from the donor communities to address
them though its Policy Action Agenda.
Earlier deregulation in the telecom and
aviation sectors has boosted growth and
improve the business environment but
more remains to be done. A number of
donor/ government large infrastructure
projects will kick off in 2015 and onwards
that will improve the investment climate of
the country . Vanuatu is currently ranked
59 in the ease of doing business ranking,
way higher compared to some of its peers
in the region.
The Vanuatu government recognizes the
need to enhance and sustain private sector
led economic growth with its benefits
distributed equitably within Vanuatu.
Stable financial system
Vanuatu’s financial system is stable and
sound. Fiscal finances are strong, the
domestic financial sector players mainly
the four commercial banks (consisting of
the subsidiaries and branches of the big
names in the South Pacific region and
Europe) operate under a competitive and
well regulated environment.
The country presents one of the well-known
offshore centers in the region that
continue to attract legitimate and genuine
investors. The Vanuatu government
continues to cooperate and take important
steps in ensuring that the Vanuatu Offshore
center continues to fully comply with the
international requirements on AML issues
and other supervisory standards.
Banking sector offers many of the
modern facilities that are comparable
to many modern economies around the
globe. The benefits that Vanuatu offer
as a Tax Heaven are (i) Tax-friendly
environment (ii) no income or company
tax (iii) no capital gains tax (iv) no estate
or death duties and (V) no foreign
exchange controls.
Vanuatu has a strong
supervisory regime
The Reserve Bank of Vanuatu (RBV) plays
a very critical role in the safe and sound
operation of the financial system of the
country. The Bank regulates and supervises
the business of the domestic banks and
offshore banks under the provision of the
RBV Act , the Financial Institution Act,
International Banking Act and a number of
other legislative requirements. In carrying
out this important role, the Bank follows
internationally recognized supervisory
methods and standards (licensing, offsite
and on-site supervision).
Failure measures by banks and insurance
companies declaring bankruptcy in
Vanuatu is zero or near nothing because
of this stringent approach. Vanuatu is
a member of the Asia/Pacific Group on
money laundering and counter terrorist
financing in the Asia/Pacific region and
is committed to continue to improve its
measures to combat money laundering and
terrorist financing. Vanuatu is committed
to its international obligations and has
enter into 14 Tax information Exchange
Agreement with other jurisdictions.
Financial institutions are
taking a active role in
addressing inequality and
poverty
Vanuatu is embracing financial
inclusion to address inequality and
poverty, and simultaneously promote
financial stability and inclusive
economic growth. The Authorities are
increasingly conscious of the importance
of improving access to finance the
unbanked population, including for
the low income households so as to
improve their welfare and enable
them to engage in activities that will
support economic growth. However,
achieving financial inclusion in an
island country like Vanuatu is a huge
task given geographical challenges,
underdeveloped infrastructures and
low financial literacy levels but positive
outcomes are already showing and the
government is fully committed to this.
Vanuatu has modernized its
Vatu currency note series
Reserve Bank of Vanuatu issued in June
2014 three new banknotes in polymer
(200, 1000 and 2000 Vatu banknotes).
This modernized the currency family
series of the country after 30 years
in paper note substrate – placing the
country amongst the latest in the world
to modernize its currency and improved
its image globally.
The design style of these latest
releases follows the 10,000 Vatu
denomination that was issued
in polymer in 2010. The two last
denominations that remain to be issued
and complete the series in polymer are
5000 and 500 Vatu notes.
Vanuatu: discover
what matters
Simeon Athy, Governor, Reserve Bank of Vanuatu
1Vanuatu and Fiji successfully linked the
submarine optical fi bre cable (1,250KM)
investment (US$ 30 million) between the two
countries and Vanuatu to the world in January
2014. The high speed internet connection
opened the door for e-commerce, e-education,
e-government etc improving the investment
climate of the country.
2Construction of the main wharf to
accommodate the high infl ux of tourist cruise
ships arrivals and wharfs around the islands for
trading, the inter-island shipping, Port Vila roads,
drainage and sanitation, Port Vila sea front face
lift /beatifi cation, international airport upgrades,
Malekula and Tanna Islands roads and more.
14. 26 T R A D E F I N A N C E T R A D E F I N A N C E 27
competition to carry out these low-skilled
tasks is often intense. Upgrading
to higher value-added tasks can enable
developing countries to capture more
benefits but can be difficult and costly
to achieve. In addition, when competing
for the investments that many countries
require in order to participate, developing
countries can risk being drawn into a race
to the bottom on regulatory standards.
Third: the surge in agricultural and natural
resource prices over the last decade, and
the growing importance of commodity
exports. This shift has bestowed significant
gains on those developing countries that
are in a position to export commodities.
Although the risk of a reversal cannot be
ruled out, the state of global demand —
and especially the strong demand from
emerging economies — suggests that
prices of agricultural goods and natural
resources will remain robust in the
foreseeable future.
This means that the agricultural sector,
which employs more than half of the
labour force in developing countries, can
continue to play a critical role in lifting
people out of poverty. This role could
be strengthened if remaining obstacles
to agricultural exports were reduced,
including lowering tariff barriers and
distortive subsidies globally.
Fourth: the increasingly global nature
of macroeconomic shocks. While the
crisis of 2008-2009 had its roots in
the financial markets of a number of
developed countries, the impacts were
felt globally. A sharp reduction in trade
and investment flows, exacerbated by a
fall in aggregate demand and the drying
up of trade finance, helped transmit
the economic shocks to producers
and traders in developing economies.
However, the fact that we did not see
an outbreak of protectionism on the
scale experienced in previous crises
meant that a significantly worse fall in
international trade was averted.
Some trade restrictions were put in place
during the crisis, but neither developing
nor developed countries systematically
raised trade barriers. The WTO’s rules-based
system and its monitoring of
members’ trade policies played a crucial
role in keeping protectionist responses
under control. Ultimately, the coordinated
response combining macroeconomic
stimulus with a commitment not to
introduce protectionist measures was
critical in pointing the way back to growth
and in safeguarding the development
gains that were made in the period
before the crisis hit.
In considering how the system should
respond to these trends, it is useful
to note how both trade and the WTO
have been contributing to economic
development during this period. Foremost,
the WTO provides a trading environment
with clearly defined rules. At the same
time, it allows developing countries
to take advantage of flexibilities in
implementing their commitments. As a
result, it has supported wider integration
into global value chains, allowed
developing countries to take advantage of
rising commodity prices, and helped resist
the adoption of protectionist measures
during the global crisis. The changes we
have seen during this period underline
the fact that an open, predictable, non-discriminatory,
rules-based multilateral
trading system will be a necessary tool
to make trade work more effectively for
development in the future.
However, while some developing
economies have made significant
progress in recent years, much still
needs to be done to close the gap for
many poor economies. In this sense the
WTO’s work is even more crucial.
In December 2013, WTO members took
a series of decisions in Bali that will
help poor countries realize their export
potential and sustain the development
momentum created in the past decade.
This was an important moment, but of
course we need to properly implement
those results and conclude other
negotiating endeavours before us. Indeed,
the scale of the changes in the relationship
between trade and development since
the millennium underlines the importance
of further updating the WTO’s rules,
disciplines and flexibilities. It will be
essential that we do so if we are to ensure
that all countries are able to participate
fully in the global economy in the years to
come, and that people all over the world
are able to feel the benefits of trade in
improving their lives and the prospects of
their families and communities.
In this context the role of the G20 in
promoting trade and strengthening
the multilateral trading system is more
important than ever.
Since then we have seen strong evidence
of how trade, as a critical component of
economic growth and development, can
make a positive difference in people’s
lives. Rapid economic growth in many
developing economies has been combined
with deeper integration in the global
trading system, helping to boost per capita
incomes and set the stage for future
growth. It is essential that trade, through
the multilateral system, should continue
to play this role. However, the period since
the millennium has also seen an evolution
in the challenges of development and the
emergence of new trading patterns and
practices. If trade, and the multilateral
trading system, is to continue playing this
positive role it is important to consider
how the interplay between trade and
development has changed – and how the
system needs to respond.
There are a number of trends which
have altered the way that trade affects
development outcomes.
First: the accelerated economic growth
in developing countries since the start
of the millennium. Average rates of
The role of the G20 in
promoting trade is more
important than ever
Roberto Azevedo, Director-General, WTO
economic growth have tripled compared
to the 1990s, although there is marked
variation from country to country. The
growth trajectory seems to be in line with
long-term historical experience, including
that of Japan and the newly-industrialized
economies in East Asia, suggesting that
once a catch-up process commences,
rapid development is possible and has
the potential to push incomes toward
developed country levels. In each of these
cases, rapid growth has been accompanied
by increasing trade flows, which in many
instances were preceded by the lowering
of tariff barriers.
This gives rise to a number of
development challenges, such as
how to initiate catch-up processes in
those countries still left behind, or
how to ensure, once growth begins
to accelerate, that it is inclusive
and sustainable. Recent experience
has shown that while growth can
lead to improvement in human
development indicators, better
environmental outcomes or a more
equitable distribution of income do not
automatically follow.
Second: the expansion of global value
chains. Global value chains are not a new
phenomenon, but they have expanded
and deepened significantly in recent
years, offering greater opportunities for
developing countries to integrate into the
global economy at lower costs. Tasks that
were once performed in a single factory
or country are increasingly divided up
between different countries to take
advantage of their different skills and
cost advantages. This allows countries to
export by mastering certain specific tasks
or manufacturing certain components
instead of the entire final product. Over
the last decade developing countries
have increased their involvement in
global value chains and South-South
chains have become more important.
However, access to global value chains
is not automatic, and unlocking their
development potential can pose a series
of challenges for developing countries.
A country wanting to integrate into
these production chains needs already
to be at the cusp of producing at
globally competitive levels of quality and
efficiency. In practice this has meant
that some are not able to participate
meaningfully in global value chains, with
many least-developed countries being
left behind. While initial integration into
the lower end of value chains typically
triggers productivity improvements,
The G20 first met in 1999, on the eve of the millennium. Its
creation anticipated a great shift in the global economy – a
shift in which trade would play a major role
15. 28 T R A D E F I N A N C E T R A D E F I N A N C E 29
The financial crisis has
disillusioned investors in many
ways. One painful experience was
that some institutions that were
once trusted, now no longer have
investors’ trust. For example,
commonly used benchmarks,
such as money market rates
for the euro - Euribor - and the
British Pound – Libor - lost their
reputation as an accurate measure
of short-term interest rates when
they were manipulated. However,
neutral index providers have
developed solutions that address
these lessons learned from the
financial crisis. One of them is the
secured money market that has
been growing dynamically since
the financial crisis, and provides
an alternative to interbank trading.
Based on this market, sound and
objective benchmarks have been
developed that provide a new,
accurate and objective metric for
the money market.
The suspected manipulation of key
money market benchmarks during the
financial crisis triggered regulators to
define criteria for the calculation of
all indices independent of the asset
class and markets they replicate. The
proposals by the European Securities
and Markets Authorities (ESMA),
the European Banking Authority
(EBA), the European Commission
and the International Organization
of Securities Commissions (IOSCO)
include a wide range of considerations,
among them the scope and definition
of benchmarks, the establishment of
control and oversight as well as rules
for the administration and reporting of
benchmarks. Of course, the key focus
should be the avoidance of any conflicts
of interest, as this is the main driver
for all manipulations. Neutral index
providers are by nature best positioned
in this respect, as they, by definition, are
not subject to conflicts of interest – they
are not a user of the index. Needless to
say, well-established indices from neutral
index providers for equity markets have
never been subject to manipulations.
Regulators however do not differentiate
between subjective and objective
benchmarks but also apply the same
rules to strictly rules-based indices that
are created based on transaction data
from exchanges (“objective indices”).
Subjective benchmarks, such as money
market rates, are typically not based on
market data but on contributions from
a panel or other non-market data. Thus
they are less transparent and more
likely to be manipulated. In contrast,
objective indices usually already provide
the key characteristics essential for
stable and reliable benchmarks in the
interest of all market participants. Firstly,
the indices are calculated in a reliable
and transparent manner as the index
methodology is disclosed. In addition,
their sources are publicly available and
transparent as these indices are based
on market data. Secondly, conflicts of
interest are prevented, since neither the
data provider nor the index provider
benefits in any way from the index. As a
result, independent index providers have
no incentive for any manipulation, which
would put their business model – which
is based on reliable data and the trust
of market participants – at stake. Finally,
many innovative benchmarks are based
on such objective and strictly rules-based
indices and help improve the efficiency of
financial markets and support investors
in many of their key challenges.
One of the most recent examples of such
innovative benchmarks is the STOXX
GC Pooling index family that provides
investors with a money market rate based
on reliable market data and addresses
the key requirements regulators have
outlined for sound indices. The newly
introduced STOXX GC Pooling index
family is independently calculated
based on an objective and transparent
methodology. Moreover, the indices
reflect the development of a very liquid
market and thus provide an accurate
metric for the overall money market.
The underlying GC Pooling market has
One of the most recent
examples of innovative
benchmarks is the
STOXX GC Pooling
index family that
provides investors
with a money market
rate based on reliable
market data
grown in recent years to a volume of
up to 180 billion euros with on average
3,000 transactions on the platform.
More than 120 market participants
from 14 countries are connected to the
platform. The secured money market is
attracting volume from the unsecured
money market as it addresses key
concerns raised during the financial
crisis. Firstly, trading on the GC Pooling
market takes place via a central
counterparty (CCP), i.e. each participant
is only trading with the CCP, and thus
counterparty risks that were one reason
for the breakdown of interbank trading
during the financial crisis are mitigated.
Moreover, the CCP nets all positions in
the settlement process and thus helps
reduce transaction costs. The obligatory
collateralization of each position that
is centrally and automatically managed
also reduces credit risks. There are three
different baskets of securities eligible for
collateralization, two of them reflecting
requirements of the European Central
Bank (ECB), which can also be used for
refinancing directly with the central bank.
In late 2014, the first financial
instruments based on the STOXX® GC
Pooling EUR Deferred Funding Rate will
become available. A new futures contract
listed on Eurex will support the risk
management of banks and other market
participants. This is a good example of
how independent index providers can
create innovative solutions, which meet
high regulatory standards and investors
needs in a business environment altered
forever by the financial crisis.
An objective
benchmark for the
money market
Dr. Hartmut Graf, CEO, STOXX Ltd
16. 30 T R A D E F I N A N C E T R A D E F I N A N C E 31
Why should sustainable
investing be a priority in
2014?
Climate change, resource constraints,
environmental degradation and social
and economic inequality are just some of
the challenges that we now face. Simple
acknowledgement of these challenges
demonstrates that prevalent economic
growth models are not working.
We stand at a point in time when investors
can be a force for positive change.
Investing approaches are integral to
economic growth, with investors having
immense influence as the decision-makers
over how much of our capital is employed.
Creating a transformative
shift…
However in order to achieve this, investors
must think beyond financial return and
to the broader impacts that economic
activity can have. Today’s economic
circumstances necessitate such a shift.
The Global Financial Crisis of 2008
bore witness to the challenge at hand
– imploding asset bubbles, accounting
scandals and serious governance lapses
have drawn attention to the fact that
financial market actors are often driven
by short-term goals and fail to maintain
a long-term perspective that looks
beyond the next financial year.
We need investors to think in terms of 10,
20, 30 years and beyond – and this shift
in mindset needs to be mainstream.
What happens next –
leveraging the power of
sustainable investing?
One of the central challenges to be
addressed is the need for existing capital
market structures to be reformed, to
facilitate better capital allocation and better
understanding of risks. Through financial
market reform – on a national, regional and
international level - the concepts of prudent
financial risk management and long-termism
can be defined in the language of
investment professionals and embedded in
the governing regulatory frameworks.
With greater policy certainty and
regulatory structure, the investment
industry can be incentivized to develop
the appropriate tools and techniques
required to quantify and manage the risks
we face: risks associated with climate
change, social dynamics, sustainability
issues, risks that have often been ignored
and deemed too difficult to define.
Our markets require a framework
through which to adequately price these
risks – and this must begin with pricing
externalities and valuing natural capital.
Basic economics tells us that our markets
have been operating inefficiently, with
our insatiable demand for ‘free’ public
goods, without acknowledgement of
the real costs that this incurs to society.
Governments should send the right policy
signals by putting a price on carbon and
removing fossil fuel subsidies.
Emerging trends –
positive developments are
occurring…
In 2012, the Global Sustainable Investment
Review (published by the Global Sustainable
Investment Alliance, of which ASrIA is a
founding member) found that globally at
least US$ 13.6 trillion worth of professionally
managed assets incorporate environmental,
social and governance concerns into their
investment selection and management.
This represents 21.8 percent of the total
assets managed professionally, indicating
that sustainable investing is becoming a
viable force for change. Geographically, this
is highly varied – with greatest traction in
the North American and European markets
– but with the greatest opportunity in
emerging markets, and Asia in particular.
Positive trends are emerging. For example,
increasing pressure from all corners on
disclosure, reporting and transparency is
facilitating financial market reform. Better
information will allow investors to make
smarter investment decisions. Debate on
key issues such as fossil fuel investment is
becoming increasingly heated and finally
investors and policy-makers are beginning
to take note.
Sustainable investing –
steps to support the vision
for the future?
There is a long way to go – but, through
leveraging sustainable investing as a
driver for positive change, much can be
achieved. In order to create this vision
for the future, leadership is required. So
what steps can be taken to support this?
Policy-makers should focus on aligning
the financial system with the needs
of the ‘real economy’ – in particular,
to ensure that investors and other
market actors look ahead to the next
20 to 50 years;
Greater emphasis should be given
to educating investors – whether
institutional or retail – on the types of
investment opportunities that exist;
Focus should be given to scaling up
investor holding of long-term assets,
particularly infrastructure investments,
by lowering cost of capital and
facilitating longer term debt;
Investors should be encouraged to
facilitate corporate change through
mechanisms such as shareholder
engagement, asset allocation and
credit policy; and
Policy reform should reflect changing
societal values, facilitating long-term
objective setting with policy practices
and financial instruments that
underpin this.
Sustainable investing requires a re-setting
of market mechanisms to recalibrate the
decision-making process governing the use
of economic capital. Sustainable investing
is about sound risk management – but
more than simply improving risk-adjusted
performance, sustainable investing can
provide a response to the unsustainable
economic and industry trends of recent
years, to result in a better tomorrow.
Jessica Robinson, Chief
Executive Officer, Association
for Sustainable and Responsible
Investment in Asia (ASrIA)
Creating lasting societal change –
change that dramatically improves
the lives of the majority – requires
rapid and transformative action in
the way in which we use economic
capital. Capital can and should be
put to efficient and effective use in
reshaping the way we do business,
the way we grow, the way we live
our lives. Sustainable investing
must be at the heart of this.
What is sustainable
investing?
With roots in ethical investing
approaches, sustainable investing
requires economic and investment
decisions to be made on a set of values
that reflect long-term priorities and
sustainability concerns.
Historically, sustainable investors have
been a force for positive change through
developing inclusive mandates that,
whilst seeking to invest for a financial
return, include explicit consideration of
non-financial returns.
Where sustainable investing has gained
the most traction – largely in North
America and Europe – sustainable
investors have helped improve the
environmental, social and governance
practices of many companies.
The role of
sustainable
investing as
a driver for
change
17. 32 T R A D E F I N A N C E T R A D E F I N A N C E 33
ILO Director
General’s
address on
G20 labour
markets
The Director-General of the ILO, Guy
Ryder, joined the G20 Labour and
Employment Ministerial Meeting held in
Melbourne in September 2014, during
which the ILO presented a number of
reports on employment issues that
have been prepared to inform the
Ministerial discussions
Thank you for the floor, Minister Abetz, and thank you
for the opportunity to present the joint work that the
ILO, OECD and World Bank have been undertaking together over
the course of this year at your request and in response to the
call by G20 Leaders last year for each G20 country to develop
growth strategies and employment action plans.
It won’t come as a big surprise to any of the Ministers here
that despite the efforts made, current employment challenges
remain substantial for all G20 countries.
Looking at the slide (below), you can see that large
employment gaps opened as a result of the financial crisis that
broke in 2007 and remain significant in most G20 countries.
Jobs gaps in G20 compared to pre-2007 trend
Our projections of the future trend, based on IMF growth
projections, is that the gaps will remain large in advanced G20
countries at least to 2018 and indeed may even widen.
That said, in the last 12 months, the majority of the G20
countries have witnessed a modest reduction in the
unemployment rate. These positive developments were largely
due to welcome net job creation, especially in the United
States, but in some cases they resulted at least in part from
declines in the labour force participation rate.
This has to be noted while recalling that the rate of youth
unemployment declined in many countries but still remains at
historically high levels in others.
In the emerging G20 countries, jobs gaps are not as wide as an
industrialized countries but the prospect of closing the gaps in the
next five years is not very promising under current growth trends.
Jobs gaps in G20 compared to pre-2007 trend
And those overall growth trends do not give much cause for
optimism at the moment. Despite a modest economic recovery
in 2013-4, economic growth is expected to remain below trend
over the foreseeable future. The G20 jobs gap in 2012 was
about 55 million. The ILO estimates that the gap will continue
to widen until 2018, reaching 63 million that year.
“Jobless growth”
Furthermore, the employment intensity of growth has also
been weakened in many countries. This figure shows that even
very high growth rates in China, India and Indonesia have not
produced comparable growth in employment.
Except for Turkey, Mexico and Germany, all of the other G20 countries
that did grow saw lower rates of job growth than economic growth.
In addition to the sheer size of the jobs gap, then, there are
clearly specific employment problems facing G20 economies.
Long-term unemployment has grown in
many countries
*Selected urban areas. Q3 2007-Q3 2013 for the Russian Federation; and
Q1 2008-Q1 2014 for South Africa
In over half of the G20, the share of long-term unemployed
has increased as a share of total unemployment, in some cases
dramatically. These unemployed face daunting re-employment odds.
Particularly sharp increases took place in Spain as well as in
the United States, and countries such as Italy and South
Africa have seen further increases in already high long-term
unemployment rates. However, some declines were recorded in
Brazil and the Russian Federation and to a lesser extent Turkey
and, although from a high base, also in Germany.
The median value of long-term unemployment as a share of
total unemployment had risen to 30.2 per cent by the first
quarter of 2014, up from 24.6 per cent at the end of 2007. In
several countries, the challenge of long-term unemployment, and
unemployment more generally, is particularly acute among youth.
The next slide addresses one element of the quality of
employment, that is the issue of informality.
Informal employment is high in emerging
economies
1. Corresponds only to persons employed in the informal sector
2. Six cities only
In a number of emerging G20 economies, the biggest challenge
lies in moving the labour force out of low productivity, low
wage informal employment and underemployment. This slide
shows, disaggregated by gender, the high levels of informality
in many emerging G20 countries. In addition, we have
observed an emergence of informal working relationships even
in the formal sector in some advanced G20 economies.
Coinciding with the sizeable jobs gap we looked at is a deterioration
in job quality in a number of G20 countries, and here we look at the
behaviour of real wage rates. Real wages have stagnated across
many advanced G20 economies and even fallen in some.
Weak economic recovery has led to weak wage
growth, especially in advanced economies
18. 34 T R A D E F I N A N C E T R A D E F I N A N C E 35
wage growth policies, such as minimum wage increases and
collective bargaining, in order to rebalance their sources of
growth toward more domestic consumption and to address
inequality and working poverty.
The lower of the two tables shows that in twelve G20 countries
the ratio of the minimum wage relative to the average wage
has increased, reflecting recognition of its role in alleviating
working poverty and boosting household income and
consumption. The US, Germany and Saudi Arabia, among
others, have also launched initiatives to establish or increase
minimum wages in order to address working poverty and
inequality. Japan has encouraged significant wage increases
through collective bargaining and other wage setting processes
as a key component of its effort to fight deflation.
Ministers, many G20 governments have also addressed the crisis
through increased spending and coverage of social protection.
Income-led strategies (II): social protection
On the left side of the graphic are emerging countries.
Notable expansions occurred in Argentina, Brazil, China,
Indonesia and Mexico, for example through non-contributory
“social” pensions for low-income households and cash
transfer programmes. India established a highly successful
national rural employment guarantee that directly provides
job opportunities in rural areas to build infrastructure and
an income floor for vulnerable households. And South Africa
created a public employment programme to address high
unemployment and poverty.
Such programmes also helped to prevent declines in household
consumption and thus helped to sustain aggregate demand
and prevent further declines in economic growth and
employment.
There is also evidence that well-designed systems of income
support can help the unemployed search for jobs and ensure a
better match with their skills, resulting in more productive and
sustainable employment.
In advanced G20 countries, shown on the right, total income
support to the unemployed generally rose in line with the
number of jobseekers. Expenditures on unemployment benefits
thus acted as an important stabiliser by limiting the negative
impact of the crisis on household incomes.
Somewhat by contrast, and I would say unfortunately,
expenditure on active labour market programmes failed to
keep pace with the rise in unemployment in many countries
following the start of the crisis, despite their potential benefits
in re-integrating job seekers into employment.
But support for active labour market
programmes has declined in advanced G20
For the EU and for the OECD area as a whole, real expenditure
on such policies per unemployed person fell by 20% and 18%,
respectively, over the period from 2007 to2011.
Colleagues, finally let me just say a word in response to the
wise exhortation from our Australian hosts this year to look in
particular for policies that generate positive spillovers.
And in terms of the policies I have been discussing, there
are potentially strong spillovers from increasing incomes
and household consumption in many G20 countries at the
same time.
This can be achieved through policies for higher wages
-including minimum wages and collective bargaining - and
through social protection systems that act as automatic
stabilizers and discourage excessive precautionary saving.
It is also important to recognize that coordinated policy
to lift incomes avoids the trap of a low-wage competition
rather than competition through comparative advantage,
specialization and increased productivity.
The demographic transition can also generate positive
spillovers, provided that labour mobility is facilitated through
rational, balanced and fair migration policies and appropriate
skills development in sending countries.
Colleagues, Ministers,
Certainly there is no room for complacency, but there are I
hope some reasons for optimism at this fifth G20 meeting
of Labour and Employment Ministers. I look forward to our
debates and conversations.
Thank you.
On average, the crisis brought down the growth rate of average real
wages to about 1 to 2 per cent. That modest growth was attributable
almost entirely to emerging economies, particularly China, while
wage growth in advanced economies has been fluctuating around
the zero mark since 2008 and has been negative in some countries.
The reflection of that is the decline in the labour share of
income observed in most G20 countries over recent decades,
which has continued in some while in others it has stagnated.
The share of GDP going to labour continues
to decline in almost all G20 countries
This is a long-term structural problem, a “legacy vulnerability”
which was revealed by the crisis but has been decades in the
making. Its persistence over recent decades demonstrates that it
is a problem that won’t go away on its own; it must be addressed
by specific policies. And it is a problem affecting nearly all G20
economies, both current account surplus and deficit countries.
The next graphic shows that the declining labour share cannot
be attributed to lack of productivity growth. Wage growth has
significantly lagged behind labour productivity growth in most
G20 countries, and particularly in the advanced G20 countries.
Labour productivity has grown faster than
wages, especially in advanced G20
In the light of this rather negative news, it’s encouraging to
look at one very positive note in recent developments which
is that working poverty has declined in many emerging G20
countries, most notably China.
Some good news: working poverty has
continued to decline in the emerging G20
The aqua coloured band on the bottom shows the decline in
extreme working poverty (less than $1.25 per day) and the grey
band above it shows the decline in moderate working poverty,
and so on. The question is can this trend be maintained and
improved, in current circumstances?
Colleagues, I would like to turn now from the main trends
and outlook for the G20 labour markets the policy responses
we have observed.
And indeed policy efforts in many G20 countries, particularly
emerging ones, have sought to address wage stagnation,
income inequality and the vulnerability of low income
households, through measures such as minimum wages and
social protection.
Income-led growth strategies (I): labour income
This slide illustrates developments based in part on wage
policies, including minimum wages. China has significantly
raised minimum wages. Russia, South Africa, Brazil,
Argentina, Indonesia and Turkey have pursued a range of
