A recurring topic here at NN is how globalization has shifted some of the most pressing political economy decisions away from national governments and into the global governance arena, where the rules are largely being drawn up as we go. Never has the world been as globalized as it is today, and we can be certain that tomorrow will only lead to further integration.
A number of problems inherently arise in issues of global governance. There are innumerable public and private interests at work, none of which want to give up their legal/structural advantage for the greater global good. Politicians must balance the short-run interests of domestic actors with the long run interests of the global community (but only one of those groups is responsible for that politicians future job prospects). This may lead to a “free rider problem”, where a country may decide it will simply reap the benefits of global governance (which tend to be non-excludable), while not contributing anything (and by further complicating an already complex and differentiated international legal/policy/taxation order, undermining global governance initiatives). Differences in national regulations can lead to capital flight to low cost countries, creating another incentive to “cheat” on global commitments.
One way to overcome free-rider problems is to create forums or groups where countries can coordinate their policies and voice grievances with one another (and shine a spotlight on “cheaters” and “free riders”). The G-20 is one such organization. The 3G Global Governance Group is a similar group comprised of 30 more countries. Critics and proponents of such groups often bicker over the merits and limitations of inclusivity versus exclusivity–I am of the mind that if the stated goal is coordination, cooperation, and some element of global policy coherence, then the more the merrier. This does not mean we need a G-193; groups can determine for themselves their level of exclusivity, as long as they can interact together through global mechanisms such as the United Nations.
The concept of “common but differentiated responsibilities” in reference to the “global common”, has until this point been used almost exclusively in the environmental and natural resource arena. I would argue that both of these terms have a much wider application. Global commons should refer to any non-excludable good / service, with positive / negative externalities, whose effective management requires global coordination (to overcome cheater and free-riders). This new definition would include, among other things: environmental regulation, trade openness, financial and tax policies, issues of regional and global security and human rights concerns (and yes these are all interrelated issues, further boosting the argument for global coordination in tackling them).
By re-framing the concept of global commons, a new global partnership for development can take root through the UN Post-2015 Development Agenda, with the concept of common but differentiated responsibilities at its core. This concept itself will make countries more willing to coordinate on global commons issues. By acknowledging that countries are accountable to different degrees for the current state of global affairs, a basis for financing global initiatives that is fair yet acknowledges common goals all countries should be working towards can emerge. By “common but differentiated” I do not mean that countries should have different policies–quite the contrary. The “common” aspect refers to creating programs with global policy coherence, the “differentiated” aspect refers to how those programs will be financed in a way that allows them to fully realize their goals (as opposed to unfulfilled commitments that have dominated global agreements in the past).
Perhaps such commitments would be a more sustainable and effective way for donor countries to channel ODA, freeing up fiscal space for national governments in developing countries to finance their own domestic development programs without the distorting effects that large aid inflows can have.
The G-20 is currently focusing on the issue of corporate tax evasion. (for a refresher, in a previous blog I explored the costs to society of corporate tax evasion)
“Government officials from the world’s largest and richest economies on Friday for the first time endorsed a blueprint to curb widely used tax avoidance strategies that allow some multinational corporations to pay only a pittance in income taxes.”
“In light of such practices – which are entirely legal, but take advantage of differing tax rules around the world – the Organization for Economic Cooperation and Development has proposed that all nations adopt 15 new tax principles for corporations. The plan focuses only on corporations and would, if adopted widely, shift some of the global tax burden toward large companies — the ones big and rich enough to devise complex tax-reduction strategies — and away from small businesses and individuals, which tend to spend a much bigger share of their incomes on taxes.
“Shifting profits to low-tax countries and costs to high-tax countries is less an option for small businesses and individuals, who inevitably wind up carrying more of the tax burden as a result. In the United States, for example, taxes on corporate profit contributed 40 percent of all income tax to the United States Treasury 50 years ago. Today, corporations contribute less than 20 percent, with the slack taken up by small companies and those paying individual income tax.”
“In contrast, the owners of a small coffee shop would probably not able to reduce its tax liability by claiming they had paid royalty fees to an overseas company owning the copyright to their cafe’s name.
The reform is intended to address such inequities, the finance ministers said Friday”
“‘It’s a matter of justice and fairness,’ Angel Gurría, the secretary general of the O.E.C.D., said at the presentation of the new plan with the finance ministers of France, Britain, Germany and Russia.”
The list, presented Friday at a meeting of finance ministers of the Group of 20 countries in Moscow, includes ideas to prevent corporations from “treaty shopping” to find countries with the lowest taxes and then find ways to book their profits there, even when much the money is made elsewhere.”
“The details, however, may prove daunting and will be subject to intense lobbying by corporations. In addition, countries have long used tax policies in efforts to lure businesses to locate operations there. The O.E.C.D. plan would not seek to end such competition entirely – any country would be free to charge lower rates than others did — but it would try to keep countries from essentially offering companies ways to avoid paying taxes anywhere, something critics say Ireland did in reaching agreements with Apple.”
“The O.E.C.D. does not expect to complete work on the proposals until the fall of 2015, and after that it would be up to governments and legislatures to implement them by passing new tax laws.”
Government are coming together to address the issue of corporate tax avoidance, which could not be addressed unilaterally. Reform will take a long time and run into intense opposition, but it has to start somewhere, and the G-20 is that somewhere. If the worlds biggest economies agree on rules, smaller countries will follow suit (powerful countries often use economic leverage to secure policy changes). In time, with nowhere left to run, large corporations will have no option but to pay their fare share–to the benefit of all.