The Brisbane Summit of the G20: Perspectives from Asia and the Pacific

THE BRISBANE SUMMIT OF THE G20: PERSPECTIVES FROM ASIA AND THE PACIFIC

* BACKGROUND PAPER

The Fifth High‐level Consultation on the G20 Summit Bangkok, 6 August 2014

* Background paper prepared by the ESCAP secretariat for the High‐Level Consultation on the G‐20 Brisbane Summit: Perspectives from Asia‐Pacific. It has been issued without formal editing.

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

CONTENTS

I. INTRODUCTION AND OVERVIEW OF THE AGENDA ...... 3

II. INFRASTRUCTURE AND INVESTMENT ...... 4

III. TRADE ...... 8

IV. EMPLOYMENT ...... 9

V. FINANCIAL INCLUSION AND REMITTANCES ...... 11

VI. FINANCIAL REGULATORY REFORMS ...... 13

VII. TAX COOPERATION AND ANTI‐CORRUPTION MEASURES ...... 15

VIII. ENERGY ...... 17

IX. CONCLUSIONS ...... 19

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

I. Introduction and overview of the agenda

1. The Fifth High‐level Consultation on the G20 Summit is organized as a special event of the 70th ESCAP session. The purpose of the Asia‐Pacific consultation is to provide a platform for all countries including non‐G20 members and least developed countries to share perspectives on the issues addressed by the G20 and to identify areas of common interest for ESCAP and the G20. This year’s G20 summit will take place on 15‐16 November 2014 in Brisbane, Australia.

2. This is the fifth annual consultation since 2010, when the process was initiated by the Republic of Korea, then G20 chair. This year’s consultation takes on added significance as the previous, current and next chairs of the G20 – namely, Russian Federation, Australia and Turkey – are all ESCAP members.

3. The consultations are part of ESCAP’s broader effort to effectively integrate the region’s development priorities at the global level and to develop a strong and coordinated regional voice in major global fora – the need for which was stressed by the Commission in light of the 2008‐2009 global financial crisis.

4. The priorities for the G20 laid out by the Australian presidency are, first, to promote strong economic growth and employment outcomes and, second, to make the global economy more resilient to future shocks.

5. In February 2014, the G20 members committed to develop policies to lift their collective GDP by more than 2 per cent above the trajectory implied by current policies over the coming 5 years.1 This policy package will include both country‐specific and common actions in the areas of investment and infrastructure, trade, employment, financial inclusion and remittances.

6. The closely related resilience agenda addresses financial regulatory reforms, international tax cooperation and anti‐corruption measures, and energy markets. Reform of international institutions such as the IMF also falls under this category.

7. It is useful to view the G20 process from a broader perspective, as one among major processes shaping the global and regional agendas today. This broader view allows for the identification of synergies.

8. Therefore, in addition to elaborating on the above G20 agenda items, this background note tries to highlight the relationship to policy debates in the Asia‐Pacific region, as supported by the work of ESCAP. The note also makes references to ongoing discussions on the post‐2015 development agenda wherever relevant.

1 This is measured as 2 per cent above the IMF’s October 2013 World Economic Outlook baseline projection for 2018 3

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

II. Infrastructure and investment

G20 initiatives

9. The need to support global demand and increase productivity through investment, particularly in infrastructure, gained wider acceptance in the aftermath of the global financial crisis. The G20 has been highlighting this for several years.

10. This year Australia has placed infrastructure and investment at the forefront of the G20 growth agenda. The emphasis is on increasing the availability of private savings for long‐term investment by improving the investment climate and strengthening institutions and regulatory frameworks for financial intermediation.

11. In February, the G20 members agreed on the need to:  Remove constraints to private investment by establishing sound and predictable policy and regulatory frameworks and by emphasising the role of market incentives and disciplines;  Maximise the impact of public sector capital expenditure; and  Enhance the catalytic role of multilateral development banks (MDBs).2

12. In April, they further agreed on the need to:  Improve the quality and accessibility of investment information; and  Strengthen the capacity of financial markets to channel more long‐term finance.3

13. At the Brisbane Summit, the G20 members are expected to adopt a set of “Leading Practices” to help identify, prioritise, plan and deliver quality investment and PPPs. There is also a discussion to set up a global database of investment‐ready projects, to help reduce the costs of searching for investment opportunities.

14. Infrastructure and investment is identified as one of the areas in which G20 efforts will also benefit non‐G20 developing countries, through actions such as improving the coordination of infrastructure project preparation requirements across donors and MDBs and supporting capital market development in those countries.

Asia‐Pacific perspectives

15. Infrastructure and investment are of critical importance for the Asia‐Pacific region, home to two‐thirds of the world’s population and where economic development and urbanization are progressing at a rapid pace. From a regional perspective, enhancing

2 Para 7, Communique of G20 Finance Ministers and Central Bank Governors, Sydney, 22‐23 February 2014. 3 Para 4, Communique of G20 Finance Ministers and Central Bank Governors, Washington D.C., 10‐11 April 2014. 4

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP connectivity in transport, ICT and energy also has the potential to unlock growth and spread the benefits of growth more widely, as analysed in detail in recent ESCAP reports.4

16. Infrastructure financing was one of the main issues discussed in the Asia‐Pacific Outreach Meeting on Sustainable Development Financing jointly organized by UNESCAP and the Ministry of Finance of Indonesia in Jakarta in June 2014. The meeting, which was attended by was attended by more than 150 participants from 30 countries, including finance ministers, central bank governors, and business leaders and representatives of civil society, contributed views from the region to global discussions coordinated by the UN Intergovernmental Committee of Experts on Sustainable Development Financing. What follows is partly based on deliberations during that meeting. 5

17. The region’s financing requirements are huge. The ADB estimated in 2009 that the region would need $750 billion per year to close its infrastructure gaps in the areas of energy, transport, telecommunications and water & sanitation by 2020.6 This estimate, however, does not include necessary investments in maintenance of roads and railways. A recent ESCAP publication estimated that the region needs $160 billion per year for land transport maintenance.7

18. The above estimates do not consider the need for investments to contribute to sustainable development. In this respect, enhancing energy efficiency and reducing the carbon intensity of the energy mix are critical. A new ADB study which includes such additional expenses estimates that total energy investment needs for the region between 2010 and 2035 at about $19.9 trillion, or $765 billion per year.8 Although the different estimates mentioned in this and the previous paragraph are based on somewhat different country groupings and base years, adding them gives a preliminary estimate of the region’s total infrastructure investment requirements of $1.3 trillion per year.

19. While the region’s financial requirements are huge, its financial resources are also very large. Its gross national saving amounted to $8.4 trillion in 2012, representing more than half of the world’s total savings. The region also holds the largest share of the world’s foreign exchange reserves, $7.3 trillion in 2012. And according to PricewaterhouseCoopers (PwC), the region’s high net worth individuals had $12.7 trillion in assets in 2012, while the

4 ESCAP, Growing Together: Economic Integration for an Inclusive and Sustainable Asia‐Pacific Century (Bangkok, 2012) and Economic and Social Survey of Asia and the Pacific 2014: Regional Connectivity for Shared Prosperity (Bangkok, 2014). 5 See background paper and additional materials from this meeting at http://www.unescap.org/events/asia‐ pacific‐outreach‐meeting‐sustainable‐development‐financing. 6 ADB and Asian Development Bank Institute, Infrastructure for a Seamless Asia, Tokyo, 2009, available from www.adbi.org/files/2009.08.31.book.infrastructure.seamless.asia.pdf. The total investment needs are expressed in US dollars of 2008 and include investment in water and sanitation. See Table 5.1 in p. 167. 7 ESCAP, Review of developments in transport in Asia and the Pacific, 2013: Transport as a key to sustainable development and regional integration, Chapter 3. 8 ADB, Energy outlook for Asia and the Pacific, Manila, October 2013. 5

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP region’s mass affluent had $20.5 trillion in assets.9 PwC estimated that these values will increase, respectively, to $22.6 trillion and $43.3 trillion by 2020.1011

20. The key challenge, however, is to mobilize resources by improving the efficiency of financial intermediation. In this regard, a three‐pronged strategy consisting of public finance, private flows, and regional financial cooperation could be considered.

21. Public finance has been the primary source for infrastructure financing in the region. It also provides vital guarantees and seed investments in PPPs. Thus, strengthening domestic resources mobilization and unlocking fiscal space could contribute directly to public infrastructure investment and also leverage private resources. Countries like India have also actively used private equity infrastructure funds.

22. Private investment in infrastructure in the region’s developing countries grew rapidly, from merely $2 billion in 1990 to $120 billion in 2010, and the latest estimate is $150 billion. Yet there is still much room to expand. A major challenge is the absence of mature capital markets and financing vehicles, which has resulted in a heavy reliance on bank loans.

23. Given the Asia‐Pacific region’s income and demographic diversity, regional financial cooperation has great potential to mobilize surplus savings for productive investments. With a growing number of institutional investors such as pension funds in the region, the time is ripe to deepen and broaden regional capital markets. In fact, ESCAP was an early proponent of creating a large‐scale regional infrastructure investment facility.12 In line with this, China is now leading the establishment of the Asian Infrastructure Investment Bank.

24. Apart from financing, project capacity is a key constraint. Most developing countries in the region have difficulties in generating a pipeline of investment‐ready projects and in designing and effectively negotiating complex contractual terms. Thus their capability to engage a wider range of potential investors and private partners is limited. Weak project governance skills also lead to implementation delays and quality concerns.

25. Technical assistance from development partners is important. But as highlighted in a 2012 ESCAP ministerial conference on infrastructure PPP, different organizations should improve their coordination and standardize their processes so as to reduce the overhead costs countries need to burden in developing and implementing PPP projects with them.

9 High net worth individuals own $1 million or more in assets; mass affluent individuals own between $100,000 and $1 million in assets. 10 PwC, Asset management 2020: a brave new world (PricewaterhouseCoopers International, 2014). Available from www.pwc.com/gx/en/asset‐management/publications/pdfs/pwc‐asset‐management‐2020‐a‐brave‐new‐ world‐final.pdf. 11 According to Wealth‐X and UBS, the region’s ultra‐high net worth individuals (UHNWIs), those with a net worth of $30 million or more, held $7.5 trillion of net wealth in 2012‐2013. 12 See ESCAP, Theme Study of the Sixty‐second Commission Session: Enhancing Regional Cooperation in Infrastructure Development Including that Related to Disaster Management, 2006, available from http://www.unescap.org/resources/theme‐study‐sixty‐second‐commission‐session‐enhancing‐regional‐ cooperation‐infrastructure. 6

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

26. ESCAP’s work highlights that the financing and capacity challenges vary significantly across countries in the region. Greater technical assistance is needed in least developed countries, landlocked developing countries, and small island developing States – of which there are 31 in the Asia‐Pacific region. For the proposed G20 initiatives to have a wider development impact, it is critical that the special needs of these countries are adequately considered. Otherwise, there is a danger that well‐intended initiatives could further widen the gap by leaving behind smaller and poorer countries in the competition for financing.

27. ESCAP’s work also highlights the importance of cross‐border infrastructure projects, such as the Asian Highway and Railway networks, in boosting trade and investment and people‐to‐people connectivity. However, these projects are challenging to coordinate and the G20 initiatives could consider these aspects. In 2013, ESCAP ministers agreed to set up expert working groups to prepare concrete action proposals to deepen regional cooperation and integration in connectivity and finance. Greater synergy of cooperation in these two areas may further unleash the potential of the complementary nature of countries in the region.

Post‐2015 development agenda

28. At the 2012 UN Conference on Sustainable Development (Rio+20), world leaders agreed that the next phase of global development must ensure a better balance between the three pillars of sustainability: economic growth, social equity, and environmental stewardship.

29. The result of this agreement is a growing global consensus that the post‐2015 development agenda must extend beyond poverty reduction and the MDGs alone to incorporate issues such as infrastructure development and climate response. For instance, the UN high‐level panel, co‐chaired by the leaders of Indonesia, Liberia and UK, in its 2012 report, called for universal access to modern infrastructure, including for women, and highlighted the need to catalyse long‐term finance for this purpose. 13

30. The latest draft of the proposed sustainable development goals for post‐2015 also calls for the development of “quality, reliable, safe, sustainable and resilient infrastructure for energy, water, waste management, transport, ports and ICT, with a focus on affordable access for all”.14 The draft lays emphasis on the adoption of green technologies and on investment in rural infrastructure.

13 See “A New Global Partnership: Eradicate Poverty and Transform Economies through Sustainable Development”, available from http://www.post2015hlp.org/wp‐content/uploads/2013/05/UN‐Report.pdf 14 See “Outcome Document ‐ Open Working Group on Sustainable Development Goals”, available from http://sustainabledevelopment.un.org/focussdgs.html 7

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

III. Trade

G20 discussions

31. Trade has been on the G20 agenda for several years, although it has made relatively little progress. At their July 2014 meeting, the trade ministers of the G20 reaffirmed their commitment to standstill and roll back protectionist measures introduced since the global financial crisis. However, a WTO report showed that the G20 members had put in place 112 new trade‐restrictive measures since their last summit in November 2013, and it noted that the vast majority of trade‐restrictive measures taken since the onset of the crisis remained in place.15

32. The G20 members recognized the contribution of bilateral, regional and plurilateral trade agreements to economic growth by encouraging domestic structural change and that they can complement multilateral liberalization. They noted the growing importance of global supply chains and the need to address barriers to trade in services through domestic reform and international cooperation.

33. The G20 members expressed support for a timely implementation of the WTO Trade Facilitation Agreement concluded in Bali in December 2013 and the successful conclusion of the Doha round of multilateral trade negotiations. They reaffirmed the importance of aid‐ for‐trade as a means of poverty reduction in developing countries.

Asia‐Pacific perspectives

34. All countries in the Asia‐Pacific region and the members of the G20 recognize the importance of trade as an engine of economic growth. As is clear from this region’s experience, trade can play a key developmental role, a fact that is also emphasized in the post‐2015 development agenda.

35. Trade restrictive measures globally and regionally since the global financial crisis have had severe impacts on the region’s exports. For instance, ESCAP estimates a loss of merchandise export opportunity worth $255 billion (1.6 percent of the region’s output) during the period 2009‐2013, associated with measures introduced by major developed economies outside the region.

36. FTA negotiations have accelerated since the stalling of the WTO Doha Round, and the global financial crisis. ESCAP database shows that countries in the region are currently involved in 150 FTAs, and they have another 70 under negotiation. Several countries are also engaged in mega‐FTA initiatives, including the Regional Comprehensive Economic Partnership (RCEP) and the Trans‐Pacific Partnership (TPP).

15 See WTO, Report on G‐20 Trade Measures (mid‐November 2013 to mid‐May 2014), 2014, available from http://www.wto.org/english/news_e/news14_e/g20_wto_report_jun14_e.pdf 8

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

37. However, the “noodle bowl syndrome” of FTAs in the region is resulting in a complicated and opaque regional trading system. A more efficient approach would be either a comprehensive free trade agreement encompassing the entire Asia‐Pacific region with a single set of rules of origin and one schedule of items on which concessions are granted, or a consolidation of the trading rules embodied in current agreements. These issues deserves further work among ESCAP member States.

38. ESCAP member States should undertake deep trade reforms and engage in reciprocal cooperation to offer effective market access for their goods and services and to reduce non‐ tariff measures. Despite significant trade integration in the region, specific trade facilitation measures are generally lacking. The ESCAP‐World Bank Trade Cost database shows that it still costs more for Asia‐Pacific subregions to trade with each other (e.g. South‐East Asia with South Asia) than to trade with developed economies outside the region.16

39. The low share of least developed countries in Asia‐Pacific trade continues to be a concern. LDCs account for only 0.7% of regional exports, valued at $50 billion in 2012. A priority is to integrate LDCs more fully into regional and global supply chains by providing them with preferential market access, improving their productive capacities and enhancing regional connectivity.

40. Continued support and expansion of the global Aid for Trade initiative (AfT) will be important. In 2011, AfT commitments to LDCs accounted for only 32% of the total, raising concerns that they are at risk of being left behind. G20 members could initiate more concrete measures to support these countries. Post‐2015 development agenda

41. The open working group for sustainable development goals supports the promotion of a universal, rules‐based, open, non‐discriminatory and equitable multilateral trading system under the WTO, including through the conclusion of negotiations within its Doha Development Agenda.

42. It suggests increasing significantly the exports of developing countries and doubling the LDC share of global exports by 2020. It supports the timely implementation of duty‐free, quota‐free market access on a lasting basis for all LDCs consistently with WTO decisions, ensuring that preferential rules of origin applicable to their imports are transparent and simple, and facilitate their access to markets.17

IV. Employment

G20 discussions

43. At their 2013 summit, the G20 members reaffirmed that policy reforms to support higher employment and facilitate job creation and better matching of skills with job

16 Available from http://artnet.unescap.org/trade‐costs.asp 17 See “Outcome Document ‐ Open Working Group on Sustainable Development Goals”, available from http://sustainabledevelopment.un.org/focussdgs.html 9

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP opportunities are central in their growth strategies. The G20 labour ministers agreed on the importance of implementing labour market and social investment policies that support aggregate demand and reduce inequality. Such policies could include, among others, targeted social protection, appropriately set minimum wages, and national collective bargaining arrangements.18

44. This year Australia added greater emphasis on increasing workforce participation, particularly of women, older workers, youth and low‐skilled workers. The G20 members are considering a collective commitment to reduce the gap between male and female participation by 25 per cent by 2025. Other proposed actions include reducing non‐wage costs and reforming labour market regulations, increasing investment in skills and education, and addressing informality.

Asia‐Pacific perspectives

45. A principal concern in many economies of the region is low job creation amid rapid growth. Over the past decade, both before and after the financial crisis, GDP growth in the region was not accompanied by a commensurate expansion in formal sector employment. During the period 2009‐2013, average GDP grew by 6.4% while employment grew by only 1.3% in the developing Asia‐Pacific region.

46. The majority of workers in the region are informally employed, own‐account or contributing family workers. Such informal jobs are more likely to be done by women and youth. The number of “working poor”, those who earn less than $2 a day, also remains high.

47. While the overall open unemployment rate is estimated to be 4.8% in the Asia‐Pacific region, the unemployment rate is almost three times higher for the youth than for the adult population. In addition to a lack of decent and productive jobs, this is also an outcome of the mismatch between education and employers’ requirements, low secondary schooling completion rates and gender discrimination. Several countries, especially in South Asia, face a potential demographic dividend. Yet to realize it, they will need to secure productive employment for the growing pool of young people.

48. Some countries have undertaken active labour market programmes. China initiated policies to improve access to and the quality of training systems, especially to benefit migrants from rural areas to urban areas in search of industrial jobs. For several low‐ and middle‐income countries, one of the key areas of focus should be to generate more productive and remunerative rural (off‐farm) employment.

49. Wage growth has generally remained weak over the past five years despite relatively robust economic performance. Economic growth has not translated into higher wages, especially in relatively richer countries in South‐East Asia and South Asia. This has been one of the factors contributing to rising income inequality in the region. Since the 1990s, regional inequality as measured by the Gini coefficient has risen from 29.9 to 36.8. In

18 Paragraph 8, “Joint Communique of G20 Labour and Employment and Finance Ministers”, Moscow, 19 July 2013. 10

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP particular, Gini coefficient increased between the early 1990s and the late 2000s in many major economies of the region: from 32.4 to 42.1 in China, from 30.8 to 33.9 in India, and from 29.2 to 38.1 in Indonesia. 19

50. ESCAP analysis indicates that a minimum wage policy, if designed carefully with supportive adjustment measures (e.g. active labour market programmes and SME support measures), boosts workers’ income and improves long‐term job prospects without adversely affecting businesses. Moreover, it forces firms to improve production efficiency and contributes to economy‐wide productivity growth.20

Post‐2015 development agenda

51. One of the proposed sustainable development goals in the Open Working Group (OWG) is to achieve by 2030 full and productive employment and decent work, including for young people and persons with disabilities. An intermediate goal by 2020 is to substantially reduce the proportion of youth not in employment, education or training. The OWG also calls for fair wages, i.e. equal pay for work of equal value, for the protection of labour rights, and for the promotion of safe and secure working environments of all workers, including migrant workers and those in precarious employment.21

V. Financial inclusion and remittances

G20 initiatives

52. In 2010, the G20 members adopted a Financial Inclusion Action Plan and created a new body, the Global Partnership for Financial Inclusion (GPFI), to implement it. The GPFI is an inclusive platform for all G20 countries, interested non‐G20 countries and relevant stakeholders for peer learning, knowledge sharing, policy advocacy and coordination. It has four subgroups focusing on principles and standard setting bodies, SME finance, data and measurement, and consumer protection and financial literacy.

53. In 2010, the G20 members also committed to reducing the global average costs of transferring remittances from 10 to 5 percent in 5 years – by 2014. The World Bank estimates that this would generate a net increase in income of $16 billion per year for migrants and their families in the developing world. But this goal is not expected to be achieved this year.

Asia‐Pacific perspectives

19 ESCAP, Economic and Social Survey of Asia and the Pacific 2014: Regional Connectivity for Shared Prosperity, Chapter 1, Sales No. E.14.II.F.4. 20 See ESCAP, Economic and Social Survey of Asia and the Pacific 2013: Forward‐looking macroeconomic policies for inclusive and sustainable development, Sales No. E.13.II.F.2, available from http:// www.unescap.org/resources/ economic‐and‐social‐survey‐asia‐and‐pacific‐2013. 21 See “Outcome Document ‐ Open Working Group on Sustainable Development Goals”, available from http://sustainabledevelopment.un.org/focussdgs.html 11

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

54. Despite rapid economic growth, the region is home to billions of adults that lack access to reliable financial services and suffer from low financial literacy and capabilities. Recent data show that the percentage of adults that have an account at a formal financial institution such as a bank, a credit union, a cooperative, a post office, or a microfinance institution is 50% worldwide, but for most developing Asia‐Pacific countries it falls below this average.22

55. One way to increase access to financial services has been through the use of mobile phone banking. This could be especially useful in the Pacific island economies, where mobile phone penetration had risen to nearly 60 percent by 2012.23 However, as noted during the Asia‐Pacific Outreach Meeting on Sustainable Development Financing jointly organized by UNESCAP and the Ministry of Finance of Indonesia in Jakarta in June 2014 in some countries, the lack of access to electricity limits the applicability of mobile and internet banking. Other concern is that the move to mobile and internet banking has in some countries led to closure of branches in geographically isolated areas, harming people who required more customized services.

56. A remaining challenge is the expansion of financial sectors in rural areas, where banks have often been resistant to adopt new technologies or to provide access to brick‐and‐ mortar services. In such cases, regulators have coupled banking licenses to requirements to deepen financial inclusion in rural areas. For instance, since 2013, banks in Bhutan are required to allocate 20% of their capital to rural areas.

57. Officially recorded migrant remittances to the region’s developing economies increased steadily to $260 billion in 2013, which represents over 55 percent of the world’s total remittance inflows. For some countries such as Kyrgyzstan, Nepal, Samoa, Tajikistan and Tonga, remittances represent more than 20 percent of GDP. Large amounts of remittances are still transferred through unofficial channels. Thus, the amount of actual remittances is believed to be significantly higher.

58. Remittances provide a financial cushion to many households and economies in the region. Governments could facilitate these transactions by reducing the costs of sending money and providing mechanisms that would enable them to tap these resources through, for instance, diaspora bonds or other remittance‐backed bonds.

Post‐2015 development agenda

59. Financial inclusion is a critical enabler and accelerator of equitable economic growth, job creation, social and human development. The UN Secretary‐General’s special advocate for inclusive finance has argued that universal access to financial services by 2030 is within reach. The goal would be for all households and businesses to have access at a reasonable to a wide‐range of financial services provided by responsible and sustainable institutions operating in well‐regulated environments.

22 See http://datatopics.worldbank.org/g20fidata/ (accessed on 22 July 2014). 23 See ESCAP Online Statistical Database, http://www.unescap.org/stat/data/statdb/DataExplorer.aspx (accessed on 22 July 2014). 12

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

60. Migrants’ families in countries of origin stand to benefit from remittances, which increase household incomes and enable recipients to invest in housing, health, education and entrepreneurship development, as well as to increasing household resilience in case of natural disasters or other shocks. However, due to high cost of sending remittances, migrants often turn to unofficial channels. In this regard, reducing the cost of remittances is included as a mean of implementing the post‐2015 development agenda.24

VI. Financial regulatory reforms

G20 initiatives

61. Over the past five years, G20 members have agreed and begun to implement a broad range of policy reforms to promote financial stability. G20’s work in this area is coordinated by the Financial Stability Board (FSB), earlier a more exclusive forum which since 2008 has included all G20 members. The FSB works closely with international financial institutions such as the IMF and with standard setting bodies such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO).

62. According to a letter by the FSB chair to the G20 members dated April 2014, more work is needed on preventing and managing the failure of globally important financial institutions, to avoid the problem of privatising gains and socialising losses as during the global financial crisis. Proposals on their loss‐absorbing capacity and cross‐border resolution are thus being developed.

63. More progress is also needed on improving the oversight of the shadow banking sector, which includes money market funds, taking into account issues of regulatory arbitrage and the need to preserve the benefits of credit intermediation through non‐bank channels. There is also ongoing work to make derivatives markets safer.

64. The FSB conducted a study in 2012, followed by a brief in 2013, on the effects of regulatory reforms on developing economies, including potential unintended consequences. It found that developing economies tend to lack adequate resources and expertise to respond to the numerous post‐crisis global regulatory initiatives, and highlighted the need for increased technical assistance, training and knowledge‐sharing activities.

65. The study also revealed certain concerns over the Basel III capital and liquidity framework. Reliance on a given credit‐to‐GDP ratio to activate the countercyclical capital buffer was viewed as inappropriate for some developing economies because of their higher exposure to swings in credit and growth cycles.

66. However, given that most banks in developing countries are well capitalized, of greater concern are the new liquidity requirements. A key issue is the limited availability of high‐

24 See, e.g., “Compendium of existing goals and targets under the 19 Focus Areas being considered by the Open Working Group”, available from http://sustainabledevelopment.un.org/owg10.html 13

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP quality liquid assets (HQLA) in developing economies, which may lead to hoarding, with adverse effects on domestic capital market development. Banks may also be discouraged from undertaking long‐term lending.

67. Finally, the study identified as an overarching concern the need for adequate coordination between home and host jurisdictions to address potentially adverse cross‐ border effects, given that most parent banks are located in advanced economies and their subsidiaries in developing economies.

Asia‐Pacific perspectives

68. Following the Asian financial crisis of 1997‐98, countries in the region undertook ambitious reforms which made them largely resilient to the recent global financial crisis. A more proactive approach to bank supervision was adopted, and macro‐prudential measures such as restrictions on loan‐to‐value and debt‐to‐income ratios were implemented to mitigate emerging systemic risks. The development of local currency bond markets also gained attention, because of their potential to reduce the double mismatch of currency and maturities in banks and corporate balance sheets and to diversify funding sources.25

69. However, there is another side to the story: When it comes to financial sector development, the Asia‐Pacific region punches well below its growing economic weight. In particular, regional bond markets remain significantly underdeveloped. Addressing this will be crucial to efficiently intermediate between the region’s savings and investment needs. Also, most countries have very small domestic institutional investor base, making them vulnerable to large and volatile capital flows.

70. These are important concerns to which the G20, the FSB, and the IMF should pay greater attention to. The implementation of Basel III capital and liquidity framework and the ongoing reform discussions related to too‐big‐to‐fail, shadow banking and derivatives are certainly important. In fact, more countries from the region should be allowed to take part in global standard setting, not least so that the concerns revealed in the FSB study (e.g. potentially adverse cross‐border effects) are adequately addressed.

71. At the same time, it is important that the implementation of new regulatory standards do not stand in the way of the deepening of Asian financial markets. Countries in the region are at various stages of financial sector development, and financing is crucially important for the healthy expansion of the region’s trade and investment. Global regulatory efforts should be accompanied by scaled up technical assistance for least developed countries, which face severe capacity constraints.

72. Countries in the region should also strengthen financial cooperation with each other. Existing initiatives such as the Asian Bond Market Initiative and the Chiang Mai Initiative for

25 The double mismatches, which were a common problem in the run‐up to the Asian financial crisis of 1997, consisted on the financing of long‐term, local currency‐denominated domestic investments with short‐term, foreign currency‐denominated instruments. 14

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP liquidity support and surveillance could be further strengthened and perhaps, even broadened to include more countries in the region.

73. ESCAP members plan to spearhead efforts on regional financial cooperation and consider concrete policy options at a ministerial meeting scheduled for the end of 2015. There is ample room to increase and expand regional dialogues and consultations on financial market issues, especially in the context of national and regional economic development. As the UN’s regional development arm, ESCAP’s work is also focused on sustainable financing for the implementation of the post‐2015 development agenda.

Post‐2015 development agenda

74. The global debate on financial regulatory reforms is highly relevant for the post‐2015 development agenda, as finance is a critical means of its implementation. As the global financial crisis made clear, loose financial regulations can lead to speculative bubbles posing deleterious risks to the real economy if they burst. Thus Sustainable Development Goal 10 on reducing inequality within and among countries calls for improving the regulation and monitoring of global financial markets and institutions and for strengthening the implementation of such regulations.26

VII. Tax cooperation and anti‐corruption measures

G20 initiatives

75. Tax cooperation is relatively new on the G20 agenda, but has quickly come to the forefront of G20 discussions, in line with recent public and political reactions to evidence suggesting that some multinationals pay little or no tax anywhere in the world. There is a wide range of cross‐border tax planning techniques that are used to produce such results which are collectively referred to as “base erosion and profit shifting (BEPS)”.

76. In 2013, the OECD and G20 jointly established the BEPS project, and a BEPS action plan was released, with a view to ensure that profits are taxed in the location where the economic activity takes place. The G20 members have identified this issue as relevant to development and for non‐G20 developing economies, as wasteful tax incentives can be a significant source of base erosion.

77. A related focus area is international tax transparency and the exchange of information, so as to make taxpayers with offshore investments comply with their domestic tax obligations. In February 2014, G20 members endorsed a new standard on automatic exchange of information (AEOI) between their tax authorities.27 With a view to encourage wider participation in this initiative, a draft roadmap for developing countries was prepared by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

26 See “Outcome Document ‐ Open Working Group on Sustainable Development Goals”, available from http://sustainabledevelopment.un.org/focussdgs.html 27 Para 9, Communique of G20 Finance Ministers and Central Bank Governors, Sydney, 22‐23 February 2014. 15

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

78. On anti‐corruption, G20 members are developing high‐level principles on transparency of company ownership and control, aimed at supporting a stronger investment climate and protecting developing countries from losing further revenue.28

Asia‐Pacific perspectives

79. Tax collection tends to be below its potential in many Asia‐Pacific countries, and efforts to improve it are needed for the region to mobilize domestic resources for investment in sustainable development. The G20 initiatives are thus highly relevant for the region.

80. A recent ESCAP report highlights that average tax revenue for the region’s developing economies is lower not only compared with developed OECD economies but also with Latin America and sub‐Saharan Africa. Some countries have tax‐to‐GDP ratios in the single digits. The report estimates that closing the tax gap (between actual and potential) could add another $300 billion per year to domestic revenues in the region, and recommends a set of tax policy and administration reform measures which governments can consider. 29

81. Low tax revenue is partly due to the low share of the population that pays income taxes. In Bangladesh, for instance, it is only 1 percent, while in India it is 3 percent. The region accounts for more than 60% of the estimated $5.9 trillion which flowed out of developing countries illicitly or illegally between 2001 and 2010 to evade or avoid taxes. Of the 10 countries with the largest illicit capital flows, 6 are in the region.

82. In addition, a large part of tax revenue is eroded by exemptions and concessions aimed at promoting investment and attracting FDI. These exemptions include policies such as tax holidays, reduced corporate income tax rates, investment tax allowances and partial profit exemptions to reduce the cost of capital.

83. Mispricing trade, i.e. overstating the value of imports or understating the value of exports, is also prevalent. Estimates of such mispricing into the EU and the US between 2005 and 2007 include $577 million for Pakistan, $350 million for Bangladesh and $477 million for Viet Nam.

84. Similarly, multinationals often price transactions between subsidiaries in different countries so that they can divert profits to low‐tax countries. In response, some 20 countries in the region have adopted transfer‐pricing rules in their tax laws, mostly based on OECD lines, which favours the retention of a greater share of taxing rights by the residence country, i.e. the country of the investor or trader. This is in contrast with the UN model which tends to preserve a greater share of taxing rights for the source country, i.e., the country where investment or other activity takes place. Because most multinational companies have headquarters in developed countries, the OECD model is less favourable to developing countries.

28 See https://www.g20.org/g20_priorities/g20_2014_agenda/fighting_corruption 29 ESCAP, Economic and Social Survey of Asia and the Pacific 2014: Regional Connectivity for Shared Prosperity, Chapter 3, Sales No. E.14.II.F.4. 16

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

85. With regards to the BEPS problem, it should be mentioned that during the Asia‐Pacific Outreach Meeting on Sustainable Development Financing jointly organized by UNESCAP and the Ministry of Finance of Indonesia in Jakarta in June 2014 an interesting proposal of creating a ‘passport’ for capital was made to tackle tax evasion through profit shifting, transfer pricing and money laundering. Such passport is akin to a telephone number that includes an international country code. Further discussions on the feasibility and possible implementation of this proposal will require concerted efforts at the regional and global levels, for which the G20 could play an important role.

86. Finally, the 2014 Economic and Social Survey of Asia and the Pacific suggested the establishment of a regional tax forum, under the auspices of ESCAP, which could monitor tax legislation and regulations across Asia and the Pacific, help to develop regional best‐ practice, and create mechanisms to address issues ranging from avoiding tax competition for foreign investment, to double taxation, and preventing the illicit transfer of funds.30

Post‐2015 development agenda

87. There is much evidence that corruption, by diverting rents from productive uses, has an adverse impact on sustainable development. Therefore, the implementation of the Rio+20 agenda will depend, to a large extent, on improving the quality of governance and institutional arrangements in developing countries. The report of the high‐level panel of eminent persons suggested good governance as one of five “transformative” shifts needed to drive the post‐2015 development agenda.31 In particular, profit shifting through transfer prices, tax fraud, and illicit financial flows, which are the result of weak governance arrangement at the international level, result in reduced government revenues. This is an area where cooperation between the G20 and the UN system could be highly fruitful.

VIII. Energy

G20 initiatives

88. Energy has been on the G20 agenda for several years, with a focus on supporting international efforts to improve operation of global energy markets and increasing cooperation between major producers and consumers. Specific actions included the strengthening of Joint Organizations Data Initiative (JODI)‐Oil, in collaboration with the International Energy Agency, the International Energy Forum, and OPEC. JODI‐Gas is also expected to be launched. A related area of work has been to improve the regulation and supervision on commodity derivatives markets, through IOSCO. The G20 members are also discussing practical domestic actions to improve energy efficiency and curb fossil fuel subsidies, on a voluntary basis.

30 See ESCAP, Economic and Social Survey of Asia and the Pacific 2014: Regional Connectivity for Shared Prosperity, Chapter 3, Sales No. E.14.II.F.4. 31 A New Global Partnership to Eradicate Poverty and Transform Economies Through Sustainable Development, available online from http://www.post2015hlp.org/wp‐content/uploads/2013/05/UN‐Report.pdf. 17

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP

Asia‐Pacific perspectives

89. The Asia‐Pacific region, 1.7 billion people rely on traditional biomass and more than 600 million people live without electricity. In addition, more than 70% of the people in the Pacific subregion still do not have access to electricity. Extending access to electricity to the population at large in the region is fundamental if the region is to move towards a more inclusive pattern of development that provides equal opportunities to all. In this regard, ESCAP estimated that for extending universal access to modern sources of energy, countries in the region would need upto 3% of GDP. 32

90. Going forward, emerging market economies, many of them in the Asia‐Pacific region, will account for over 90% of net energy demand growth to 2035. However, rapid energy expansion will not only lead to increased CO2 concentrations in the atmosphere but also, due to a global situation of excess demand, to high energy prices with serious economic and social implications. Therefore, it is necessary to not only improve access to reliable, affordable and economically viable energy services but also to improve energy efficiency and avoid waste and shift the energy mix towards sources that are less carbon intensive and more environmentally sustainable.33

91. Given that the Asia‐Pacific region is home to major producers and consumers, and also to countries with green technologies and expertise, the potential for regional cooperation in energy is significant. Taking note of this, ESCAP members in 2013 adopted an action plan on regional cooperation for enhanced energy security and the sustainable use of energy. To support its implementation, ESCAP is developing a portal with statistics, indicators and policies to capture developments in 15 actionable areas, as well as in areas of actions for the Asia‐Pacific subregions.

Post‐2015 development agenda

92. In 2012, the UN Secretary‐General launched the global initiative Sustainable Energy for All, which resolves to achieve three key objectives of providing universal access to modern energy services, doubling the global rate of improvement in energy efficiency and doubling the share of renewable energy in the global energy mix, by 2030. The UN General Assembly also declared 2014‐2014 as the decade of sustainable energy for all.

93. Achieving these goals will require an immense global investment commitment. Resourceful solutions that promote the use of public finance to mobilize and leverage private capital are needed.34 In particular, there is a need to develop the market system to incentivize the private sector to provide sustainable energy solutions and to mobilize

32 See ESCAP, Economic and Social Survey of Asia and the Pacific 2013: Forward‐looking Macroeconomic Policies for Inclusive and Sustainable Development. Sales No. E.13.II.F.2. Available from www.unescap.org/resources/economic‐and‐social‐survey‐asia‐and‐pacific‐2013. 33 Section II of this note shows estimates of the cost of enhancing energy efficiency and reducing carbon intensity. 34 http://www.se4all.org/hio/innovative‐finance/ 18

Asia‐Pacific Perspectives on the G20 Summit Agenda ESCAP financial resources towards energy investments. This is an area where cooperation between the G20 and the UN system could be highly fruitful.

IX. Conclusions

94. As highlighted in this note, many of the issues addressed by the G20 are highly relevant from countries in the Asia‐Pacific region. So it is a positive development that 11 countries from the region will be participating at this year’s G20 summit: Myanmar, New Zealand and Singapore, in addition to the 8 members.

95. In the context of the post‐2015 development agenda, this note also identified areas where cooperation between the G20 and the UN system could be highly fruitful. The UN, with 193 members, is the most representative global platform. The international community is already addressing issues such as trade and employment through the relevant UN system organizations such as the WTO and the ILO. It is important that G20 initiatives empower these broader processes rather than marginalizing them.

96. The G20 members are taking concrete initiatives on some fronts; in other areas the G20 is undertaking preliminary discussions. Since the first summit in 2008, the G20 agenda has broadened significantly beyond immediate crisis‐response to incorporate a host of issues ranging from infrastructure investment to tax cooperation which concerns the entire international community. So it is crucial that the process becomes more inclusive. As highlighted in previous ESCAP‐G20 consultations, broader cooperation and dialogue not only enhances legitimacy but also help deliver better solutions.

97. The G20 members are making an effort to engage others, particularly in development‐ related topics such as tax cooperation. In this vein, it has encouraged organizations such as the OECD to undertake regional consultations. However, it may be more appropriate for representative regional platforms such as the UN Regional Commissions to be engaged for this purpose. Similarly, the G20 consultations with business, civil society, think tanks and youth through forums such as the B20 and Y20 should engage groups from non‐G20 countries as well.