A woman walks past the press centre for the G20 finance ministers and central bank governors who met earlier this year in Busan, South Korea.JO YONG-HAK
Policy matters. Politicians, economists, journalists and even policy makers themselves lost sight of just how much policy matters in the decade or so ahead of the financial crisis. We are witness to the result of that collective failure.
The Group of 20 puts such an emphasis on co-ordination because an isolated decision in, for example, the United States to boost home ownership, is no longer simply an isolated decision in the U.S. to boost home ownership. The G20 harnessed globalization in its collective decision in November, 2008, to commit to fiscal stimulus of 2 per cent of gross domestic product. The decision was an acknowledgement that trade and financial links made it impossible for, say, Brazil's government to boost its domestic economy without also seeing some of Brazilians' tax contributions end up in Argentina, China and elsewhere. The collective decision to spend proportionately the same amount was an attempt to ensure everyone benefited from this "leakage," not to mention the positive multiplier effect of so many governments acting at once.
But avoiding unintended consequences will be a difficult task.
Earlier this week, Bloomberg News documented one that few saw coming. Along with co-ordinated stimulus spending, another early success of the G20 was to clamp down on tax havens. As you would expect, companies are bailing on places such as Bermuda and the Cayman Islands. But they aren't necessarily going home. Some, as the Bloomberg article shows, are going to Switzerland. Why? Two reasons: it has tax treaties with the U.S. and other major economies and, because of a relatively strong fiscal situation, it is cutting business taxes.
There are two ways to look at this phenomenon.
First, the negative one. A tax cutting-campaign by Swiss states has a whiff of opportunism. In the aftermath of Greek's near default, European governments are under pressure to consolidate their finances to stabilize bond markets. They are raising taxes, not cutting them. Switzerland's business tax cuts surely will upset its neighbours.
There's also a positive way to look at it. Switzerland is showing the benefits of keeping the bond traders off your back. Andrew Busch, global currency and public policy strategist at BMO Nesbitt Burns in Chicago, played down the "beggar-thy-neighbor" aspect of the Swiss tax program in a note to clients on Wednesday. Capitalism is about competitive advantage. Some nations have an advantage in resources, cheap labour or cutting edge research -- and some have an advantage in a government and/or political system that allows for sound fiscal policy. For Mr. Busch, Switzerland simply is competing for its share of the global economy.
"Go ahead and engage in fiscal austerity," Mr. Busch wrote. "But if you tax your corporations to fix things, then Switzerland will be there ready to pick up the pieces. Hopefully, this will pressure governments, including the U.S., to not tax its way out of its problems, but cut their way out."