Normative Narratives

Monthly Archives: May 2013


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Economic Outlook: Financial Flows,Taxation, and Accountability

The primary function of taxation is to collect revenue to pay for public goods and services. Public goods and services are non-rival and non-excludable, they therefore often suffer from a “free-rider problem” (people benefit from the positive externalities regardless of whether they pay into the cost of the good or not). It is because of this free-rider problem that the private sector cannot efficiently provide public goods, necessitating what is sometimes referred to as the “social contract” between people and their governments (I will give up something, in this case money via taxation, in order to have certain publicly provided provisions). Examples of public goods are basic infrastructure (such as roads), and public services (such as police officers, firefighters, and public school teachers). 

Individual countries decide for themselves at what level taxes should be set, and what should be provided for via taxation. Individual countries also decide to what extent taxes should be progressive or flat. But across the world, in societies as fundamentally different as you can imagine, this general “social contract” relationship exists. Taxes also provide resources for social safety-net programs, which are important for inter-generational income smoothing, social mobility, and reducing inequalities (despite the “47% argument”)

Taxes can also be used for legitimizing purposes. Every modern country has tax collection and income monitoring services (performing similar functions as the IRS in America). One of the major functions of these organizations is ensuring that everyone pays what they are supposed to. A secondary function is to provide legitimacy to ones income; if someone claims large amounts of money with a questionable source, it will raise a red flag, and an investigation will ensue (if the system is working properly).

Taxes can also be used to influence ones behavior. The tax on cigarettes in NY is a good example of this. While the government cannot stop people from smoking, they can make it prohibitively expensive to smoke in hopes that people pursue healthier activities.

These are just some of the general functions of taxation.

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As we know here at NN, not everyone plays by the rules, particularly when it comes to taxation. Offshore banking is a huge problem, perpetuating income inequality,  human rights abuses, and robbing governments of resources to fulfill their obligations. Some countries systematically provide rock-bottom tax rates and legitimacy for depositors without properly vetting the source of their money, leading to destabilizing financial inflows that dwarf the countries annual output (Cyprus is the most recent example you may remember).

As governments face difficult choices in the wake of the Great Recession, it has become more and more obvious that greater coordination and accountability are needed between countries to ensure that the world’s wealthiest pay their fair share for the public goods and services that have helped them to amass their wealth (and are held accountable for their role in the Great Recession).

The silver-lining of the Great Recession is that much more focus has been put on destabilizing forces that have accompanied financial globalization (and more recently technological advances which have made high speed / arbitrage seeking investment all the more possible). One example of this is the breaking of secrecy by Swiss Banks. Swiss Accounts are arguably the most famous example of elite tax-evasion; their exposure serves as a symbolic as well as practical turning point in offshore banking history. Another example is the imposition of a financial transaction tax (FTT), even if it has been watered down for now.

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Swiss Banking:

“The Swiss government said on Wednesday that it would allow its banks to disclose information on American clients with hidden accounts, a watershed move intended to help resolve a long-running dispute with the United States over tax evasion.

The decision, which comes amid widening scrutiny in Europe of tax havens, is a turning point in what has been an escalating conflict between Switzerland and the United States.

Eveline Widmer-Schlumpf, Switzerland’s finance minister, said the move would enable Swiss banks to accept an offer by the United States government to hand over broad client details and pay fines in exchange for a promise by United States authorities not to indict any banks.”

“Ms. Widmer-Schlumpf declined to say how much banks might have to pay. But she said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement.

“It is important for us to be able to let the past be the past,” Ms. Widmer-Schlumpf said at a news briefing in Bern, Switzerland. She declined to give any details about the program, but said banks would have one year to decide whether to accept the American offer.

American clients whose names are handed over by Swiss banks but who have not voluntarily disclosed hidden accounts to the Internal Revenue Service would probably face criminal tax-evasion charges, lawyers said. Dozens of Americans have been indicted or charged in recent years for failing to disclose their accounts.”

Calling the decision ‘a good, a pragmatic solution for the banks to emerge from their past,’ Ms. Widmer-Schlumpf said, ‘We expect this to create the base for banks to again gain some room for maneuver so that calm can return to the sector.’”

“‘This is an important step for the banks; it will apparently allow them to disclose statistical information, such as the number of accounts with U.S. beneficial owners, the number of accounts with foreign corporations or foundations, and the amount of assets under management,’ said Scott Michel, a tax lawyer in Washington, D.C. ‘The I.R.S. and D.O.J. can use this information as the basis for financial penalties under settlement agreements, which might be deferred-prosecution agreements or non-prosecution agreements.’”

It seems Switzerland wants to shed it’s stigma of an off-shore tax haven, and move forward with a more sustainable and transparent financial sector.

“‘Resolution of the conflict ‘has taken longer than it should have, with a lot of otherwise avoidable damage suffered on the Swiss side,’ said Robert Katzberg, a white-collar criminal defense lawyer in New York with Swiss and American bank clients. ‘But it now appears the end is in sight.’”

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Financial Transaction Tax: It is no secret that irresponsible lending practices perpetuated financial bubbles around the world which eventually led to the Great Recession. One way of holding financial institutions responsible for their role in the Great Recession, while also raising revenue governments desperately need, is a financial transaction tax (FTT). CESR is a great resource for background info on the financial sectors role and human rights implication of The Great Recession, as well as the FTT.

A recent NYT article is critical of a watered down FTT in the works in Europe. While I agree it is disappointing the tax has been significantly reduced, the introduction of any FTT is a movement in the right direction. An incremental approach may be the best way to introduce this important new policy, and give it a real chance to work (instead of leading to large-scale capital flight to non-FTT countries):

“European countries planning a tax on financial transactions are set to drastically scale back the levy, cutting the charge by as much as 90 percent and delaying its full roll-out for years, in what would be a major victory for banks.

“Under the latest model, the standard rate for trading bonds and shares could drop to just 0.01 percent of the value of a deal, from 0.1 percent in an original blueprint drafted by Brussels. That would raise only about 3.5 billion euros, rather than the 35 billion initially forecast, a senior official said.”

“The tax may now also be introduced more gradually: rather than applying to trades in stocks, bonds and some derivatives from 2014, it may apply next year only to shares. Bond trades would not be taxed for two years and derivatives even later.

The roll-out could be scrapped altogether if, for example, the tax pushed traders to move deals abroad to avoid paying it.”

“The Financial Transaction Tax (FTT) resurrects an idea first conceived by U.S. economist James Tobin more than 40 years ago and has been symbolically important for politicians to show they are tackling the banks blamed for causing the financial crisis.”

‘You can introduce it on a staggered basis,’ said a second official. ‘We start with the lowest rate of tax (0.01 percent) and increase it bit by bit.'”

“‘The risk is that if you have some countries not participating, you have some shift of business from the countries in the tax to the countries without the tax,’ said one official, familiar with French government thinking. ‘This step by step approach can make sense.’“

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There is also the issue of which financial assets should be included in the proposed FTT:

“Within the group of 11 countries, Italy and France have expressed concerns about widening the tax beyond shares to government debt as both believe it could discourage investors from buying their bonds.”

I agree with Italy and France on this issue. The main reason many Euro countries are facing such crippling austerity is due to a “sovereign debt crisis“. These countries cannot afford to borrow sustainably, forcing them to make painful cuts which have led to a double-dip recession and high unemployment throughout Europe.

The FTT could potentially add to the borrow costs governments face if it included bonds as well. If however, a tax included everything except bonds, it would have the effect of lowering government borrowing costs. Making other financial transactions more expensive would make bond purchases more profitable by comparison (assuming financial institutions will pass on some portion of the tax to the customer, which is a pretty safe assumption). While the difference would be marginal, even a marginal decrease in borrowing costs can unlock millions if not billions in government resources.

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What we see is the international community slowly working to make financial globalization more accountable and sustainable. While we may be frustrated with the slow rate of progress (as the author of the NYT article clearly is), it is important to realize that we are making meaningful progress.

Despite the political and economic cynics out there, who in their great “wisdom” will tell you nothing is happening to hold powerful interests accountable for their role in the financial crisis, we have as a global community learned lessons (albeit incredibly hard learned lessons) and are taking steps to ensure we do not repeat our past mistakes.

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Transparency Thursday: Making Sanctions “Smarter”

Sanctions are defined as penalties or other means of enforcement used to provide incentives for obedience with the law, or with rules and regulations. In a foreign affairs context, sanctions are generally imposed by a group of countries (the greater the participation the more effective sanctions can be, and in many cases without strategic involvement sanctions can effectively be useless) in order to influence a political/military/economic  outcome abroad. Sanctions allow countries to show their dislike of a particular course of action without infringing on the sovereign rights of states and without military intervention. Sanctions are often used in the face of gross human rights violations. Prominent examples of sanctions in use today are North Korea, Iran, and Syria (covering both the government and the opposition).

Despite the ability to hold powerful interests accountable, sanctions are not a unanimously popular foreign policy instrument.  One reason, as stated before, is that without strategic agreements (neighboring countries, trade partners, ideologically aligned states) sanctions will be ineffective. They can lead to the formation of black markets, giving criminal organizations even more resources for nefarious activities. The main concern regarding sanctions however is in regards to their human rights implications.

Although sanctions are often meant to end human rights violations, their existence can actually exacerbate humanitarian crises, especially in the short run. While each sanction is uniquely tailored to the situation it is trying to influence, the indiscriminate shortages that sanctions generally cause affects everyone in society (and arguably vulnerable / marginalized groups the most). Because of this, the practice of imposing sanctions has evolved towards the imposition of “smart sanctions“. In essence, smart sanctions are more targeted sanctions (think freezing financial assets as opposed to a complete embargo), meant to put pressure on strategic parties while considering and sometimes providing aid to compensate for human rights issues that may arise.

Smart sanctions are the topic of today’s lesson. I am referring specifically to recent changes made in sanctions against Iran and Syria.

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Iran: A little background, Iran is currently facing sanctions which are attempting to deter Iranian nuclear capacity development, which Iran has insisted is for peaceful purposes (medical), but the Western world has strongly opposed.

Iran is also in presidential campaign season, and preliminary reports do not look good for denuclearization and human rights interests:

“Mr. Jalili, known as Iran’s unyielding nuclear negotiator and a protégé of the supreme leader, Ayatollah Ali Khamenei, is emerging as the presumed front-runner in Iran’s presidential election on June 14, an unsettling prospect for future relations with the West. Mr. Jalili, 47, who many analysts say has long been groomed for a top position in Iran, is by far the most outspoken hard-liner among the eight candidates approved to participate in the election.”

“He has been featured in flattering terms in recent weeks in the semiofficial Fars news agency, which is connected to the Revolutionary Guards, as well as in dozens of Web sites and other news outlets. By contrast, the other candidates now sometimes discover their campaign appearances canceled for unclear reasons and often find themselves under sharp attack in interviews on state TV, while Mr. Jalili gets softball questions.”

“If he gets elected I foresee even more isolation and conflict, as he doesn’t care about foreign relations, the economy or anything,” the analyst said.”

To make matters worse, lack of transparency has marked previous Iranian elections.

“Iran’s presidential elections, lacking independent opinion polls and subject to manipulation, are notoriously unpredictable. In 2005, Mr. Ahmadinejad came out of nowhere to win. In 2009, millions of people took to the streets to protest what they said was widespread fraud in the voting that returned Mr. Ahmadinejad to office over the more popular opposition candidate, Mir Hussein Moussavi.”

In order to prevent against corrupt election practices, and possibly to help organize opposition to Mr. Jalili, the U.S. today announced it will repeal sanctions on mobile devices and  communication software / equipment. 

“The change is intended to help Iranians communicate through social media, text messaging and mobile-phone videos in order to overcome some of the media and communications restrictions imposed by Iranian authorities.

The action “aims to empower the Iranian people as their government intensifies its efforts to stifle their access to information,” according to a Treasury Department statement.”

“Providing the democracy movement in Iran with access to the latest social media organizing tools will strengthen their efforts to bring about positive change to a government that fears information it can’t control,” Democratic Representative Jim Moran of Virginia, who has sought such action, said in an e-mailed statement today.”

“The U.S. has supported attempts to boost democratic movements and stepped up efforts to stop regimes such as those in Iran and Syria from blocking social media through what Obama has called the “malign use of technology.”

In November, the administration imposed sanctions on Iranian officials –including the nation’s communications minister — and government agencies for blocking Internet access, mobile-phone lines and satellite-television channels to stifle free speech.

The Treasury named today additional individuals and entities for “contributing to serious human rights abuses committed by the Iranian regime, including through the use of communications technology to silence and intimidate the Iranian people.” The State Department issued visa restrictions on about 60 Iranian officials linked to human rights abuses.”

This story highlights the importance of media independence and transparency for effective democracy. The use of social media has been instrumental in “The Arab Spring” revolutions, enabling  the dissemination of information, while overcoming collective action problems that tend to allow powerful interests to remain in control to the detriment of society as a whole. Communications technology also has positive uses for healthcare, education, and e-governance. But in this case, it is clear that the U.S. is trying to allow more liberal Iranians to communicate, in hopes of challenging Mr. Jalili’s candidacy. Additionally, mobile devices make it easier to report political rights abuses, such as coercive measures at polls and other means of election-rigging.

At a recent ECOSOC Partnerships forum I was lucky enough to attend in my capacity as a UNDP intern, Mr. Suneet Singh Tuli, CEO of Datawind, called access to affordable mobile internet access a human right–I agreed with him, and it seems the Obama administration is of like mind. These smarter sanctions should help uphold electoral integrity in the upcoming elections, and should help improve the average Iranian’s opinion of America.

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Syria has now been engaged in a civil war that has lasted over 2 years, claimed over 80,000 lives, and lead to over 1 million refugees and internally displaced people in the Middle-East. The civil war and refugee flows have threatened the already tenuous stability of the region, and a full blow humanitarian crisis has enveloped the entire country of Syria.

Gridlock in the U.N.S.C. has prevented direct international military intervention. Russia and China have repeatedly vetoed international intervention, championing Syria’s national sovereignty despite undeniable human rights violations committed by the Assad regime. As the fighting continues, and Western support has lagged compared to Russian military support of the Assad regime (with no signs of slowing down, as Assad has apparently just received a new shipment of Russian arms), the Syrian opposition has turned towards extremists groups for support, which has further complicated international involvement.

Recent actions show that the EU is reconsidering its position on it’s Syrian arms embargo.

“Divisions among European Union foreign ministers on Monday prevented the renewal of the arms embargo on Syria, raising the possibility of a new flow of weapons to rebels fighting to bring down the government of President Bashar al-Assad.

“While we have no immediate plans to send arms to Syria, it gives us the flexibility to respond in the future if the situation continues to deteriorate and worsen,” William Hague, the British foreign secretary, said after more than 12 hours of stormy talks.”

“The ministers did agree to renew all the economic sanctions already in place against the Syrian government.”

“There were also fears that Russia, which already sends arms to the Syrian government, would feel freer to send more.”

“The only effect you could have — let’s be realistic about this — is that it will stimulate the Russians to provide even more arms,” he said. “But they’ve been providing so many arms that I’m sure even more will not make much of a difference.”

While nothing will change immediately, it is significant the Europe has left the door open to providing military aid to the Syrian opposition in the future. The fact the Europe is taking the lead on this is encouraging. It also makes much more sense, as Europe is geographically much closer to Syria and it’s main ally Russia. While I am sure any coordinated European effort would have American support, it is nice to have the spotlight off American foreign affairs for a change.

There is also some concern that increased arms flow will undermine proposed peace talks in Geneva, which would include the Assad regime, the Syrian opposition, the U.S. and Russia among other participants. This is also a legitimate claim, although I see this as more of a measure to ensure the peace talks do bear fruit. European leaders are putting pressure on the Assad regime to negotiate a political transition by signaling their willingness to further aid the rebels should the peace talks break down. Syria has been in a hurting stalemate for sometime now, perhaps European powers are giving the Assad regime one more chance at a political transition to end this war before pursuing a military end.

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These two stories are linked, as Mr. Jalili, a hardliner and supporter of Hezbollah, would likely step up support to the Assad regime if elected as Iranian president. Perhaps the Assad regime is just trying to buy time with “peace talks” until it has a stauncher ally in Iran.

There has also been the issue of whether Iran should be allowed to participate in Syrian peace talks (if you have been paying attention, the usual suspects are backing the sides you would expect them to in this dispute).

Sanctions are getting smarter, as human rights considerations gain more recognition as the cornerstone of the modernization process.  Will these “smart sanctions” help achieve the desired outcome without exacerbating human rights violations? Lets be cautiously optimistic; be sure to check back for regular updates on these evolving and inter-related issues.

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Conflict Watch: Secretary of State Kerry Visits Sub-Saharan Africa; Talks Human Rights

Two days ago President Obama made a speech envisioning a new direction for American foreign policy. Unsuprisingly, Secretary of State John Kerry is doubling down on Obama’s vision (NYT article):

“Making his first visit to sub-Saharan Africa as secretary of state, John Kerry urged Nigeria on Saturday to uphold human rights as it steps up its fight against Islamic extremists.”

“…reports that Nigerian forces have carried out extrajudicial killings, including against civilians, have become a problem for the United States, which provides law enforcement assistance and has cooperated with Nigeria, a major oil supplier, on counterterrorism issues.”

“‘We defend the right completely of the government of Nigeria to defend itself and to fight back against terrorists,’ he added. ‘That said, I have raised the issue of human rights with the government.’”

“Earlier this month, Mr. Kerry, in a statement, noted ‘credible allegations’ that Nigerian forces had been engaged in ‘gross human rights violations.’”

“Asked about reports of human rights violations — there have been reports of large-scale civilian killings by the army and police in Nigeria — Mr. Kerry said the Nigerian government had acknowledged that abuses had occurred.”

“‘One’s person’s atrocity does not excuse another’s,’ Mr. Kerry said, when asked about reports of serious human rights violations by Nigerian forces.

“What is needed ‘is good governance,’ Mr. Kerry said. ‘It’s ridding yourself of a terrorist organization so that you can establish a standard of law that people can respect. And that’s what needs to happen in Nigeria.’”

Secretary of State Kerry also met with Egyptian President Mohamed Morsi, in attempts to support Egypt’s rocky transition towards effective democracy:

“Mr. Kerry was scheduled to meet with the Egyptian president, Mohamed Morsi, later on Saturday. At a March meeting in Cairo, Mr. Morsi promised to move ahead with negotiations with the International Monetary Fund, and Mr. Kerry announced that the United States would provide $250 million in assistance to Egypt. But concerns have mounted since that Egypt is not prepared to undertake serious economic reforms.

The African Union, the organization that Mr. Kerry is in Ethiopia to celebrate, remains, half a century in, a work in progress. First molded by the Pan-African ideals of Kwame Nkrumah, who led Ghana in the 1950s and 60s when it became the first African state to break its colonial bonds, the union, then known as the Organization for African Unity, emphasized African self-reliance and independence.

But those notions quickly curdled into a doctrine that led African leaders to believe that they were above reproach. Autocratic, corrupt leaders like Mobutu Sese Seko of Zaire, now known as the Democratic Republic of Congo; Idi Amin of Uganda; and Félix Houphouët-Boigny of Ivory Coast earned the organization the nickname “dictator’s club.”

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Many dictators have fallen in the “Arab Spring” revolutions. The article also discusses the Syrian civil war, frayed relations with Pakistan, terrorist networks in Yemen, pulling out of Afghanistan, and sectarian conflicts in Iraq and between Sudan and South Sudan. As far as extreme poverty and human rights violations are concerned, there is a very strong argument that these issues are becoming more and more exclusive to the African continent. While this is a disturbing if not suprising trend, it also provides a strong mandate for where the vast majority of future humanitarian aid, assistance, and debt forgiveness should be focused (not that there was really much of a question on this to begin with).

Obama and Kerry continue to be a sort of super-team on foreign affairs; their pragmatic and diplomatic approach towards foreign economic and security issues have the potential to bolster America’s standing in foreign affairs while simultaneously spending fewer resources on military endeavors.

I hope my readers realize that by writing about “The End of Team America World Police” that I am in now trying to belittle the efforts of our brave men and women who serve in the armed forces. You can support the troops without supporting some of the Wars they are told to fight in (which the troops themselves have very little no say over). You can support the U.S. D.o.D. While believing that a more even distribution of resources between itself and the D.o.S. would allow America to have a more meaningful impact in global affairs. And you can certainly give military personnel training in human rights, so that our normative vision for this nations role in global affairs can be practiced in the field, instead of our military presence inciting anti-American prejudices.

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Another article in the Times today picks apart Obama’s speech. And while I cannot argue with the issues raised in this article, I can question the overall point of the article. The the basis of the argument is that it will not be easy to accomplish what Obama has set out to do, and he did not offer many concrete examples of military action in his public address.

Of course it will not be easy to accomplish the global vision President Obama set out. As I said before, the transition will be neither quick nor linear, there are many obstacles in the way and many more unforseen obstacles will present themselves as vested interests struggle against the forces of modernization. And of course President Obama did not lay out the specifics of his national security agenda; only this nations top security advisors will ever be privy to that information.

After over a decade being engaged in a costly “War on Terror”, America has an administration who is willing to work with the global community to achieve real results on issues that we require coordination to be adequately addressed, instead of ineffective and inefficient unilateral action. This approach will unlock resources that can be spent at home, and raise America’s standing abroad by creating more lasting alliances.

One indisputable fact remains, and that is that America cannot continue its military operations indefinitely as it has since 9/11/01–this is not a sustainable position fiscally or theoretically. The changes Obama has laid out are something Americans should embrace–nobody should ever want us to have to use our armed forces.

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Economic Outlook: Tax Dodging, Tax Havens, Fiscal Space and Human Rights

Two related pieces caught my eye this morning. Both pieces explore how owners of wealth (be it large corporations, wealthy individuals, or autocratic rulers) benefit from “offshore” financial centers.

The first piece, from the NYT, emphasizes how corporate tax avoidance disproportionately shifts the burden of paying for government services to regular people:

“As muddled and broken as the individual income tax system may be, the rules under which the government collects corporate levies are far more loophole-ridden and counterproductive.

That’s not entirely Washington’s fault. Unlike individuals, multinational corporations can shuttle profits — and sometimes even their headquarters — around the globe in search of the jurisdiction willing to cut them the best deal on taxes (and often other economic incentives).

Much of this occurs under the guise of “transfer pricing,” the terms under which one subsidiary of a multinational sells products to another subsidiary. The goal is to generate as high a share of profit as possible in the lowest-taxed jurisdictions.

A study by the Congressional Research Service found that subsidiaries of United States corporations operating in the top five tax havens (the Netherlands, Ireland, Bermuda, Switzerland and Luxembourg) generated 43 percent of their foreign profits in those countries in 2008, but had only 4 percent of their foreign employees and 7 percent of their foreign investment located there.

All in all, it is a race to the bottom on the part of revenue-starved governments eager to attract even a relatively small number of new jobs.

As a consequence, the effective corporate tax rate in the United States fell to 17.8 percent in 2012 from 42.5 percent in 1960, according to the Federal Reserve Bank of St. Louis. (The share of federal revenues arriving at the Treasury from companies has fallen even more sharply, in part because an increasing number of businesses are taxed as individuals rather than as corporations.)

That’s just not fair at a time of soaring corporate profits and stagnant family incomes.”

“Happily, the gaming of the tax system is becoming a global concern, with an action plan coming from the Organization for Economic Cooperation and Development in July. The O.E.C.D. should work toward taxing business profits where they actually occur, not where they’ve been shifted by some tax adviser.

As we strive for a global solution, we should take a number of interim steps, including better policing of transfer pricing.”

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Another piece, written by Jeff Sachs at the Earth Institute, expands on this topic to bring other forms of money-laundering into the mix, as well as crystallizing the fiscal space / austerity argument against tax evasion:

“In recent weeks, citizens in many countries suffering from government budget cutbacks have been learning more and more about one of the biggest and most dangerous scams in the world: the global web of tax havens that U.S. and European politicians and bankers have nurtured over the years. The only real purpose of these havens is to facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities inflicted by international companies.”

“During the boom years, the rich and powerful kept the public distracted from the tax haven reality. Yet now with budget austerity, the public is having a close look at tax evasion by the rich and powerful. As a result, the veil over the tax havens has started to slip, and the sight is not lovely.”

“The politicians of rich nations who protect the exorbitant privileges of bankers and hedge-fund managers, who wink at mega-tax evasion by billionaires, and who tolerate unpardonable games played by major companies, are playing with fire. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.”

“Developing countries too are saying that enough is enough. For decades they’ve been on the receiving end of hypocritical lectures about good governance. For them, the tax havens have served the purpose of paying bribes to potentates, and providing easy ways for elites to keep their money safe from tax collectors. Yet it is the rich countries that have fostered that system.”

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The existence of tax havens represent the political power of the ultra-wealthy and the collective-action problem facing the rest of the world. However, the internet and watchdog groups, along with crushing austerity programs in the wake of The Great Recession, have thrust tax-avoidance into the spotlight. This is the first step towards pressuring governments for real, coordinated action against this unfair practice. 

At best, tax-havens allow wealthy people to avoid paying their fair share of taxes. Every dollar not paid in taxes is a dollar more of debt for a government, a dollar less available for an important social program. Forget the moral and ethical implications of this “reverse-Robin-Hood” system for a minute. Economically speaking, this system leads to stagnant growth. Less wealthy people have a higher average and marginal propensity to consume, and tend to keep their money in their home country. Also, diminishing marginal utility of money states that less wealthy people (in the aggregate, there is of course there is anecdotal evidence against this point), spend a greater percentage of their money on things that are beneficial for social welfare. The current system provides for less, more wasteful consumption. It corrodes the “American Dream” by reducing social mobility and perpetuates income inequality. And this is what I would consider the “best case scenario”.

At worst, tax-havens offer a stable place for oppressive regimes to park their money. Elites can amass rents from a variety of places (most commonly extractive industries, or through black-markets / drug trade), and know that they have a safe place to keep that money. This money can then be used for personal reasons, or to build up a military to further entrench Elite control–particularly in less developed countries where democracy does not exist. It is not difficult to draw the link between entrenching autocratic, rent-seeking regimes, and human rights abuses.

A Reuters blog about the book “Treasure Islands”, by Nicholas Shaxton, articulates this point very well. “The broad brush — and this is a simplication of the overall argument — is that tax havens enable the flight of scarce capital from Africa to other regions, stunting the continent’s ability to develop on a range of fronts. Such havens inclue not only tropical destinations like the Cayman Islands but the City of London and the U.S. state of Delaware.” The book “Offshore: Tax Havens and the Rule of Global Crime”, by Alain Deneault, makes a similar argument.

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The U.N. recently passed an Arms Treaty, with human rights considerations at it’s core. While arms trade was a natural starting point,  I believe this is a strong model for all international transactions. Any time large amounts of money are transferred, be it tax-avoidance or the hiding or ill-gotten gains, this money has the potential to fund / perpetuate human rights abuses. The sooner the international community realizes this, and acts in a coordinated fashion to review and (act on) the human rights implications of ALL financial flows, the sooner we will see a meaningful reduction in human rights abuses around the globe.

The U.S. famously prosecuted Al Capone, not for criminal activities, but because of tax avoidance. Autocratic regimes are in many ways similar to mafias, and they enjoy the additional protection of “national sovereignty” which allows them to continue to abuse human rights with relative impunity. Maybe we can take a page from history and allow the paper-trail bring down some of today’s worst human-rights abusers. Of course this would require a strong international justice system–with real punitive powers–which unfortunately does not currently exist.

The best case scenario of tax-avoidance is it unfairly shifts the burden of paying for government services from the wealthy to the not-wealthy, which compromises the ability of governments to pay for social programs. The worst case scenario is the perpetuation of human-rights violations. Obviously neither of these outcomes should be tolerable–we can only hope that a silver-lining of The Great Recession is that it will force governments to work together to tackle the issue of tax-avoidance and offshore financial centers, which affects developed and developing countries alike.          

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The (Real Beginning of the) End of Team America World Police Part 3(? 4? 5?, I’ve Lost Count…)

I started my narrative on this topic with a two-part political and economic analysis of current U.S. Defense Policy. I then wrote a piece on the true cost of the war on terror, and more recently a piece on how Europe’s shrinking military expenditure is hurting it’s credibility as a meaningful security partner to the United States. Current U.S. military policy has long been an issue affecting America’s fiscal space, constraining resources for social programs which compromise our future growth prospects and social mobility, thereby perpetuating rising inequality in America. At the heart of the matter is the uneven proportion of Global Security expenditure that America pays. Today, President Obama signaled he is of similar mind on the subject.

“Taken together, the president’s words and deeds added up to an effort to move the country away from the perpetual war on terrorism envisioned by his predecessor, George W. Bush, toward a more limited campaign against particular groups that would eventually be curtailed even if the threat of terrorism could never be eliminated.

‘Our systematic effort to dismantle terrorist organizations must continue,’ Mr. Obama said. ‘But this war, like all wars, must end. That’s what history advises. That’s what our democracy demands.’

Mr. Obama rejected the notion of an expansive war on terrorism and instead articulated a narrower understanding of the mission for the United States. ‘Beyond Afghanistan, we must define our effort not as a boundless ‘global war on terror’ but rather as a series of persistent, targeted efforts to dismantle specific networks of violent extremists that threaten America,’ he said.

‘Neither I, nor any president, can promise the total defeat of terror,’ Mr. Obama added. ‘We will never erase the evil that lies in the hearts of some human beings, nor stamp out every danger to our open society. But what we can do — what we must do — is dismantle networks that pose a direct danger to us, and make it less likely for new groups to gain a foothold, all the while maintaining the freedoms and ideals that we defend.’”

“As our fight enters a new phase, America’s legitimate claim of self-defense cannot be the end of the discussion,” Mr. Obama said. “To say a military tactic is legal, or even effective, is not to say it is wise or moral in every instance. For the same human progress that gives us the technology to strike half a world away also demands the discipline to constrain that power — or risk abusing it.”

“The changes reflect a conclusion by the White House that the core of Al Qaeda has been decimated by years of strikes and the raid that killed Osama bin Laden. But in the speech, the president said that the threat had evolved in a complicated mosaic of dangers from affiliated groups and homegrown terrorists, like the bombers who attacked the Boston Marathon.”

As is to be expected, Republicans were critical of Obama’s realistic, transparent, straightforward and even-handed speech:

“Speaker John A. Boehner, Republican of Ohio, issued 10 questions to the president in reaction to previews of his speech. “Is it still your administration’s goal to disrupt, dismantle, and defeat Al Qaeda?” he asked. “If you are scaling back the use of unmanned drones, which actions will you be taking as a substitute to ensure Al Qaeda’s defeat? Is it your view that if the U.S. is less aggressive in eliminating terrorists abroad, the threat of terrorist attacks will diminish on its own?”

Senator Saxby Chambliss of Georgia, the top Republican on the Intelligence Committee, was sharper in reaction. ‘The president’s speech today will be viewed by terrorists as a victory,’ he said. ‘Rather than continuing successful counterterrorism activities, we are changing course with no clear operational benefit.'”

First to address Senator Chambliss, are you sir a moron? how could the winding down of the war on terror have “no clear operational benefit”? Does making a military mission less costly both in dollar terms and American lives have no effect on the operational benefit of The War on Terror? Not to mention the impact on public opinion of the U.S. abroad (which is directly related to terrorism). Or do you not consider the costs of an operation unless the money is going to those lazy “takers”? (i.e. any social program the G.O.P. will fight tooth and nail). If anything, we should have much sooner reconsidered the operational benefit of the War on Terror in the first place (which has been marginal at best, as highlighted by recent sectarian violence in Iraq).

Speaker Boehner’s questions are more substantive; I have actually grown to like Senator Boehner, I almost pity him for the impossible job he has of trying to legitimize the current cluster-fuck of ridiculous soundbites and indefensible policy advocacy that has come to define the G.O.P. I’m sure Mr. Boehner did not imagine his constituents would be so unrealistic and uncompromising that his time as House Speaker would be marked as a period of historically low congressional approval ratings.

But back to Congressman Boehner’s Questions. Questions 1 and 2 (“Is it still your administration’s goal to disrupt, dismantle, and defeat Al Qaeda?” he asked. “If you are scaling back the use of unmanned drones, which actions will you be taking as a substitute to ensure Al Qaeda’s defeat?”) were already addressed by President Obama in his speech:

“But what we can do — what we must do — is dismantle networks that pose a direct danger to us, and make it less likely for new groups to gain a foothold, all the while maintaining the freedoms and ideals that we defend.”  

Obviously Al-Qaeda would be considered a “network that poses a direct danger to us”, probably the primary of such networks. One has to question whether John was not sleeping through the President’s speech with questions like those. And to expect a President to openly discuss his defense strategies, probably our most important national security secret, is not exactly proposing a reasonable question.

President Obama also alluded to the answer to Speaker Boehner’s 3rd question in that very same breath. Mr. Boehner asked, “Is it your view that if the U.S. is less aggressive in eliminating terrorists abroad, the threat of terrorist attacks will diminish on its own?”

The answer to that is, of course not. The President stated he planned to “make it less likely for new groups to gain a foothold”, but what exactly does that mean? It could only mean putting more resources into preventative peace-building and diplomacy efforts, as I have advocated for here at NN.

Conflict resolution theory tells us that the majority of todays armed conflicts are “Protracted Social Conflicts”. This means that their roots are in human rights violations, which almost always involve inadequate service delivery and security being provided by a country’s government. In situations like this, conflict is likely to break out. When conflicts break out, there is no military to keep terrorist activities at bay (assuming the regime in power is not allied with extremist groups to begin with).

Terrorist groups seize onto this absence of government human rights “duty bearers” and begin to provide services and security themselves. People on the ground, having no other option other than living in extreme poverty and extreme discomfort, welcome these terrorists in with open arms. Terrorists are able to buy goodwill, gain footholds for their operations, and attract a new generation of young Jihadists.

The only way the President can prevent new terrorist groups from forming is to scale up the capacity of strong, democratic governments in developing countries around the world (or factions within countries that do not have democratic governments). If America undertakes this much more noble pursuit, we can build sustainable relationships that foster greater economic and security alliances, rather than destroying nations and then attempting to build them back up from scratch, which is costly in money, time, and lives.

We must remember that building these relationships is not easy. Transitions to democracy and a higher standard of living take time, and the process is not always linear. Vested interests will never give up easily, as they have so much to lose as society reaps the benefits of modernization, and more resources are invested into basic infrastructure as well as physical and human capital.

Though we face an uphill battle, we must never falter in our fight to promote peace, security, and mutually beneficial and environmentally sustainable economic relationships. Only through cooperation and coordination can the global community confront and overcome the issues we collectively face in the 21st century and beyond.

And we must always remember we are not alone in this fight. Our Allies around the world remain committed to the same vision as us. Institutions such as the UN, NATO, WB, IMF, WHO and countless other international, national, and regoinal institutions, alongside non-governmental organizations, charities, and civil society organizations join our ranks. The day when extreme poverty and human rights violations are no longer a threat is just beyond the horizon, and I look forward doing whatever I can to work towards that future.


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Conflict Watch: Oil Sand and Renewable Energy, a New Case for a Carbon Tax / Cap and Trade

An interesting piece in the NYT about how a less incentive-laden renewable energy sector in Europe is actually helping the industry grow “sustainably”:

“Europe used to be nirvana for companies in the clean-energy business, but in the past couple of years it has become a much tougher place. With economies anemic, electricity demand is down; and, not surprisingly, once-generous subsidies that encouraged installing swaths of solar collectors in sun-poor Germany or wind farms in relatively calm areas of France are either being reduced or look as if they could be.

But for some people and companies, the harsher environment is fostering a tough-minded approach that may be healthy for the effort in the years ahead to curb the greenhouse gases that are blamed for global warming.

Europe’s struggles, for instance, pushed Enel Green Power, one of the world’s largest electricity generators from renewable sources like wind and solar, to explore markets like Brazil, Chile and Mexico, that may turn out to be a lot more promising than Europe.”

“Contrary to the practice in much of Europe, where subsidies are used as a lure for renewables projects, developing countries like Brazil often award contracts to build new power capacity through competitions that sometimes pit clean energy against fossil fuels like natural gas and diesel. For instance, Enel Green Power recently won wind power deals in Brazil in bake-offs that included proposals for natural gas-fired stations.

‘There was a competitive approach to renewables that we liked a lot,’ said Francesco Starace, the company’s chief executive'”

“Mr. Starace especially likes long-term deals like the ones he has worked out in Mexico with Nissan and Nestlé to build wind farms to supply factories with power. He hopes to replicate this sort of arrangement across emerging markets, including east Africa. These private, one-on-one arrangements are more sustainable, he figures.

You don’t run the risk of a regulator or a state coming back at you and saying, ‘Guys, the good days are over, now we have to talk about reducing this and that,’ he said.”

“The goal of the renewables business, Mr. Murley said, should be to be competitive eventually on costs with other energy sources and not to rely on subsidies. He also believes in building businesses like his clusters of Swedish wind farms that have the scale to engage a team of managers and the clout to cut better deals with suppliers. His organization tries to buy turbines and other equipment that are reliable rather than cheap and does not skimp on spending money on maintenance.

The closer you are to the wholesale price of power, the less you are at risk,’ he [Tom Murley of HgCapital] said. He is also investing in onshore wind projects in Ireland, where the operating environment resembles that of Sweden.”

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Talking about the “sustainability” of the renewable energy sector may be an interesting choice of words, but how the renewable energy sector matures is yet to be decided. Perhaps a rethinking of the subsidy approach to developing renewable energy would be a good think, if a more efficient complimentary / substitute path is proposed. Subsidies distort markets, so governments must have a credible threat that they will stop providing subsidy support if companies in the industry do not mature as they are  supposed to. But pulling the plug on subsidy programs is a bad move politically–it is always difficult to find politicians that are willing to let jobs leave their municipality.

What you get is subsidies and tax-breaks that are not at all linked to any real C-B analysis or long term commitment from companies (Another reason that making MNC themselves finance sustainable energy infrastructure makes sense as it locks the company into a longer term commitment–the cost of closing up shop is greater).  Some tax breaks and subsidies are good ideas, but they should be based on adequate C-B analysis and should contain long-term legally binding commitments. Additionally, tax breaks and subsidies for “dirty-energy” have to go, so that these two competing industries can actually compete on common ground. If we are considering an approach to scale back subsidies for an “infant industry”, removing subsides for a more mature competing industry must be part of that approach.

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Ending tax breaks for “dirty energy” brings us to the next point of this article, which is the argument for some sort of carbon-tax or cap-and-trade system. If we are not going to reward the renewable energy industry for its implicit positive externalities, we should make dirtier forms of energy pay for their negative externalities. An article about “petroleum coke” highlights the need for something to keep emissions in check:

“Assumption Park gives residents of this city lovely views of the Ambassador Bridge and the Detroit skyline. Lately they’ve been treated to another sight: a three-story pile of petroleum coke covering an entire city block on the other side of the Detroit River.

Detroit’s ever-growing black mountain is the unloved, unwanted and long overlooked byproduct of Canada’s oil sands boom.

And no one knows quite what to do about it, except Koch Carbon, which owns it.

The company is controlled by Charles and David Koch, wealthy industrialists who back a number of conservative and libertarian causes including activist groups that challenge the science behind climate change. The company sells the high-sulfur, high-carbon waste, usually overseas, where it is burned as fuel.”

““What is really, really disturbing to me is how some companies treat the city of Detroit as a dumping ground,” said Rashida Tlaib, the Michigan state representative for that part of Detroit. “Nobody knew this was going to happen.” Almost 56 percent of Canada’s oil production is from the petroleum-soaked oil sands of northern Alberta, more than 2,000 miles north.”

“Detroit’s pile will not be the only one. Canada’s efforts to sell more products derived from oil sands to the United States, which include transporting it through the proposed Keystone XL pipeline, have pulled more coking south to American refineries, creating more waste product here.”

“And what about the leftover coke? The Environmental Protection Agency will no longer allow any new licenses permitting the burning of petroleum coke in the United States. But D. Mark Routt, a staff energy consultant at KBC Advanced Technologies in Houston, said that overseas companies saw it as a cheap alternative to low-grade coal. In China, it is used to generate electricity, adding to that country’s air-quality problems. There is also strong demand from India and Latin America for American petroleum coke, where it mainly fuels cement-making kilns.

“I’m not making a value statement, but it comes down to emission controls,” Mr. Routt said. “Other people don’t seem to have a problem, which is why it is going to Mexico, which is why it is going to China.”

“It is worse than a byproduct,” Ms. Satterthwaite said.“It’s a waste byproduct that is costly and inconvenient to store, but effectively costs nothing to produce.””

“Lorne Stockman, who recently published a study on petroleum coke for the environmental group Oil Change International, says, “It’s really the dirtiest residue from the dirtiest oil on earth,” he said.”

–Here we have an example of billionaire industrialists selling oil and shipping the dirty byproduct around the world to be burned, releasing even more emissions. And how much does all this profit-generating business pay for it’s emissions? Essentially zero. Oil sand creates 3rd degree pollution (burning of the oil, transportation of petro-coke, and burning of the petro-coke), and because of their lobbying power, industrialists are able to shift the cost onto future generations.

It is appalling our government, and other governments, let companies do this without paying anything for the emissions they produce.  Companies claim they cannot deal with a carbon-tax or cap and trade, while posting billion dollar profit margins. At the end of the day, a carbon tax is a small blip on the companies cost-function. Cap and Trade would initially not even make emissions more expensive, as the market is depressed (due to lower energy demand following the Great Recession) and swamped with low-price / free vouchers. For these reasons, a carbon tax would likely be more effective in the short-run, but having either system in place would be better than what we have now (which is essentially having no system in place to check emissions).

Corporate interests will always claim the sky is falling, and that any additional cost will bring that industry to it’s knees, forcing  them to outsource jobs and close operations. What we would see , I imagine, is that if you call this bluff, often companies will decide the cost and uncertainty of relocation is not worth the small price of paying for emissions (especially if that company had to install, say, a wind-farm when it started operations). If companies want access to developed countries markets, they should have to pay for their emissions. If America and Europe came up with a strong carbon-market (perhaps part of a larger U.S.-Europe FTA?), the rest of the world would join in. The ultimate goal would be a global carbon-market, which would eliminate the threat of companies to move operations to a lower regulation  area.

A double sided approach–ending subsidies / tax-breaks for both renewables and “dirty-energy”, combined with a carbon-tax / cap-and-trade system, could allow market forces to help renewable energy prices converge towards the price of more traditional forms of energy. It would do so while creating a more resilient renewable-energy industry, create a cleaner environment, and open up fiscal space for spending on important social programs.

This approach is different, and theoretically sound–it would be very interesting to see how effective a pilot version of this program could be.

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Economic Outlook: The United States of Europe?

https://i0.wp.com/upload.wikimedia.org/wikipedia/commons/thumb/8/84/Supranational_European_Bodies.png/400px-Supranational_European_Bodies.png

The title of this post is a bit of a joke, even in the unlikely scenario that such a federation is established, I’m sure they would make it a point to make a name less similar to that of the USA. What is not a joke is the state of the European economy, whose unemployment rate and output gap makes America seem like the a model of economic efficiency. (It is impossible to find a single EU or Euro Zone output gap figure, but one can safely assume based on unemployment levels that it is significantly large).

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French President Francois Hollande made strong, if not novel, points.

“The French proposal, which Hollande said he would submit to his eurozone partners, also calls for much deeper fiscal integration between the eurozone nations, with a common budget and the authority to issue debt. The government would also debate the main political and economic decisions to be taken by member states and launch a battle against tax fraud.”

“He acknowledged he could face resistance from Germany, Europe’s dominant power, which opposes mutualising debt among member states. Berlin is also reluctant to give the euro zone its own secretariat for fear of deepening division in the EU, between the 17 members of the single currency and the 10 others.

Non-euro Britain’s government already faces growing domestic pressure to hold a referendum on leaving the bloc.

Hollande said he wanted Britain to stay in the EU but added: “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.

He proposed bringing forward planned EU spending to combat record youth unemployment, pushing for an EU-wide transition to renewable energy sources, and envisaged “a budget capacity that would be granted to the euro zone along with the gradual possibility of raising debt”.

He also called for a 10-year public investment plan in the digital sector, the promised energy transition, public health and in big transport infrastructure projects.”

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Indeed, these concepts are not new. There has always been doubt as to whether the Europe had the necessary preconditions for a strong currency union (based on the theory of optimal currency area). There is considerable economic interdependence, but differences in language and culture make labor less mobile (which is why some countries in the EU have unemployment rates above 25%, while others are high but more manageable).

The head of the Economics department at Fordham, Dominick Salvatore, (a man whom I greatly admire) wrote about the issue of having a currency union without fiscal coordination in the early 1990s. He was probably not the only one to identify this obvious flaw. European leaders thought that by creating the EU and Euro zone, that greater coordination would naturally occur, however this has largely not taken place (at least with respect to fiscal coordination).

The E.U. is at a cross-roads (it has been at it for some time). Britain will eventually have a referendum on whether or not to stay in the EU (a few high level officials have recently signaled they would vote to leave). The economic recovery in Europe has been non-existent. If a stronger European economic government make the Euro zone project more sustainable, it would be in the best interest of both the 17 Euro Zone countries and the 10 countries in the E.U. but without the Euro.

I used to be worried about a E.U. breakup, but I do not think such an outcome would be as painful as a Euro zone breakup. The E.U. was recently given the Nobel Prize, a symbolic move emphasizing the importance of the block of countries in promoting democracy and human rights globally. But if the E.U. wished to merely become a FTA or  common market, I do not see any of the countries drastically changing their political ideology. All of these countries still have a shared history in which peace and trade led to mutually beneficial outcomes, while war and isolation led to pain and suffering; allowing countries to leave the E.U. to sustain the Euro Zone would not change this. Indeed, I do not believe there is any foreseeable outcome that could change decades of hard learned lessons .

Economic integration would continue to exist between non Euro Zone and Euro Zone countries. The Euro Zone, with a more unified political and economic voice, would undoubtedly be a more meaningful partner with the U.S. in terms of global governance. The Euro Zone would become more effective in global security measures, with a strong unified military–in this sense having the Euro Zone move forward without all of the E.U. would help achieve many of the original goals of the E.U.

There is no question that a monetary union cannot be sustained without fiscal coordination. President Hollande was dead on when he said “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.” Sometimes you have to cut off the limb to save the patient, and it seems like this might be the case with the Euro Zone. E.U countries not in the Euro Zone could wake-up tomorrow, decide to leave, and as long as economic ties remained very little would change. If the Euro Zone fell apart, there would be unprecedented losses as countries scrambled to put the pieces of their monetary policies back together.

If allowing countries to leave the E.U. is what it takes to make the Euro Zone sustainable, then this option has to be explored. When has forcing someone to stay, when popular consensus is to go, ever led to a sustainable union? If countries want to go, they should be allowed to go, so that those who remain can move forward.

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Transparency Thursday: In Response to the Bangladeshi Factory Collapse, Who is Responsible for Ensuring Safe Working Conditions?

Body carried from Rana Plaza. 9 May 2013

The collapse of the Rana Plaza Complex in Dhaka, Bangladesh was a tragic event which has resulted in the deaths of more than 1,100 people. If there is any silver lining to this horrific event, it is that more attention is being paid to factory safety conditions and workers rights in Bangladeshi factories and in the garment industry as a whole. Bangladesh is the second largest producer of apparel globally after China.

The origin of goods and a consumer demand for sustainable production processes has its origins in the food production industry. The trend has expanded into the garment industry in recent years. When garment producers first came under scrutiny, much of the focus was on workers rights. “Sweatshops” and child labor became lightning-rod issues. While these issues have not been fully eliminated, progress has been made—the “spotlight effect” can greatly change the actions of large MNCs. The new issue on consumer and producer agenda’s is factory safety conditions. How best to address this issue is open for debate.

In the past week, many European and a few American clothing producers have agreed to sign onto a legally enforceable plan which mandates; “rigorous, independent factory inspections, and helping to underwrite any fire safety and building repairs needed to correct violations.”

An alternative approach, championed by The Gap, seeks a watered down version of the plan without the legally binding aspect. “Under Gap’s proposal, if a retailer were found to have violated the agreement, the only remedy would generally be public expulsion from the factory safety plan.

“The U.S. is quite litigious,” said Bill Chandler, a Gap spokesman. “We put forward specific proposals that we thought would bring other American retailers into the fold. We thought it would be a step forward and would turn it into a much more global agreement.”

According to Gap, its plan is not to exonerate companies from having a legal obligation, but rather an attempt to bring many more companies on-board. Admittedly, the spotlight-effect of public expulsion from such a plan would probably be very costly for a clothing producer, leading the company to seriously consider internalizing the cost of bringing its factories up to code.

Walmart is planing on its own internal safety audit system,which is likely to be rife with conflicts of interest. Walmart’s reasoning is efficiency, it does not believe a global mechanism can work efficiently as there will be lots of bureaucracy involved.

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I believe a large element of the picture has gone largely unnoticed in the aftermath of this tragedy—the role of Government on working conditions. What exactly are Bangladeshi factory safety-standards like? How do they compare to other developing / developed countries? If the rules on the book are not adequate, then requiring MNCs to underwrite getting up to code will not fix anything. If the rules are adequate, and are simply not enforced properly, then requiring producers to pay for bringing factories up to code should theoretically work.

The Bangladeshi government response has been significant. “This week the Bangladesh government said it had closed 16 garment factories in Dhaka and two in the south-eastern port city of Chittagong for safety reasons after the collapse of Rana Plaza.

“These factories will only be allowed to reopen after they have made structural and safety improvements,” a senior official of the labour ministry said. “Every factory in the country will be inspected as part of a government initiative to ensure safety.”

There are concerns that corruption and political influence may allow owners to evade regulations.”

Again, is the issue the laws in place, or how they are enforced? Actions by the Bangladeshi government make it seem like it is an enforcement issue. If this is the case, the issue likely reaches beyond apparel and is one of corruption and lack of transparency (and is likely government-wide). Is the movement towards stronger enforcement authentic, or is it merely an attempt to appease clothing producers until media attention dies down?

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Ultimately, a mixed approach will need to be taken. Pressure has to continue to be put on the Bangladeshi government to enforce better safety conditions for workers. In a country with over 4 million garment workers, this is an important step in protecting the rights of Bangladeshi workers.

Pressure can also be put on MNCs by consumers. Consumers can “shop with their wallets”, but will they? I had a conversation with a co-worker, and we both felt that when considering the food and garment industries, it would be harder to pass the extra cost onto the consumer in the garment industry. Our reasoning was that when it comes to food, people are willing to pay extra because they believe they are putting something better into their bodies—it is a mutually beneficial relationship. When it comes to garments, the benefits to the consumer are diminished, far off, and often forgotten except in the direct aftermath of events like the one this article is based on.

So MNC will perhaps have to make up more of the cost on this one. MNCs can also “vote with their wallets”. By shifting production to other countries, the Bangladeshi government will understand the value of having a reasonable minimum standard for worker safety and workers rights. MNCs can pressure the Bangladeshi government to better enforce safety regulations (if the cost cannot be passed onto consumers, perhaps part of it could be shared with the Bangladeshi government). The government’s role cannot be overstated in this issue—without good governance any plans by MNCs will be hampered.

As far as what MNCs can/should do, I think that a more inclusive, less binding plan that relies on the spotlight-effect is more practical even if theoretically less effective. What good is the legally binding plan if the majority of producers do not sign onto it? If a less binding plan got the majority of garment producers on board (as opposed to just a handful), those producers would have a more unified voice. The Bangladeshi government would have less options and ultimately would have to appease MNC s (since such a large portion of the Bangladeshi economy is based on textile exports) by helping enforce stricter factory safety standards.

 A more recent Bangladeshi factory fire, in which 8 were killed, highlighted that there is indeed much more work to be done.

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Conflict Watch: Pakistan; Modernization v. Vested Interests, Effective v. Formal Democracy

Today, Pakistani’s are voting in a milestone election. Before diving into specifics of how effective Pakistani democracy may be, some background on the lead-up to the election:

“The election is Pakistan’s 10th since 1970 but only the first where a civilian government has served a full five-year term and is poised to peacefully hand power to another political administration.

Unlike previous elections, in which the military’s Inter Services-Intelligence Directorate had been widely accused of vote manipulation and intimidation, there was little evidence of involvement in this campaign by the military, which has ruled Pakistan directly for more than half its 66-year history.”

“The election has evoked a rare sense of enthusiasm for politics in Pakistan. Some 4,670 candidates are fighting for 272 directly elected seats in the national Parliament, while almost 11,000 people are battling for the four provincial assemblies. Aside from more traditional politicians, candidates included astrologers, openly transgender candidates, former models and the first female candidates in the tribal belt along the Afghan border.

Also standing for election are dozens of candidates from Sunni sectarian groups, some with links to violent attacks on minority Shiites.

But the sense of a vibrant, if flawed, democracy has been tempered by Taliban attacks throughout the campaigning. The militant movement’s ability to derail wide tracks of the campaign, particularly in the mountainous northwest, is being taken as a signal that it has evolved beyond its nihilistic guerrilla roots and has become a powerful political insurgency bent on upending Western-style democracy in Pakistan.

In a statement on Friday, the Taliban leader Hakimullah Mehsud ordered his commanders to attack the “infidel system” of democracy, warning that teams of suicide bombers would hit targets across the country.

At least 17 people were reported killed in attacks across Pakistan on Saturday, including a gunfight and an attack on a polling station in the western province of Balochistan, and two explosions in the northwest, including Peshawar, that left several people injured. The deadly bombing in Karachi appeared directed at a candidate from the Awami National Party, one of three secular-leaning parties that have borne the brunt of Taliban attacks in the last month that have killed at least 110 people.”

“But after a slow start to polling, large numbers of voters emerged by midmorning, including many women. About 300 burka-clad women stood in line outside the Lady Griffith High School, where policemen warned photographers not to take their picture.”

“There were also signs of irregularities that have tainted some past votes. At least one party, Jamaat-e-Islami, withdrew its candidates from Karachi and Hyderabad to protest against alleged rigging of the elections at different polling stations of the city.

“The votes of J.I. are being frightened and harassed by MQM armed activists in different parts of the city,” said Muhammad Hussain Mehanti, the party’s chief in Karachi, referring to the party MQM, which has traditionally dominated the city. He called for a peaceful strike on May 13 as a sign of protest against alleged rigging in the polls in the city.

Prominent officials of both Mr. Zardari’s PPP party and Mr. Sharif’s PML-N party lodged accusations of vote rigging in Karachi, saying they would reject results in the city.”

While time will tell whether the claims of J.I. party have any truth, and violence surrounding the elections is troubling, overall the elections seem to be going very smoothly. It would be naive to think that nobody would try to play “spoiler” in the first true democratic election Pakistan has ever had.

But Pakistani’s, who have “election fever” remain undeterred. It will be interesting to see what the overall voter turnout is once the election is over. Modernization and democratization cannot be imposed from the outside, they have to come from the will of the people, and it seems that Pakistani’s have fulfilled this important prerequisite for sustainable democracy.

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The question now can turn from sustainable democracy to effective democracy—the existence of democracy on paper does not ensure it will work in practice. To this end, there are mixed signals for what to expect. I will base effective democracy on the following criteria; the ability of people to vote and run in elections, indiscriminate protection of human rights, an independent judiciary system, and the existence of independent media outlets. There are certainly others, but I had to draw the line somewhere for the sake of writing this piece. I left out military control, as the NYT article already highlights that the military has remained uninvolved in this election (perhaps too much so, as the military arguably should be providing security and not letting 100+ people die during the buildup to the election).

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Ability of people to vote and run in elections: As stated in the article, “Some 4,670 candidates are fighting for 272 directly elected seats in the national Parliament, while almost 11,000 people are battling for the four provincial assemblies. Aside from more traditional politicians, candidates included astrologers, openly transgender candidates, former models and the first female candidates in the tribal belt along the Afghan border.” Clearly the right to run for office has been upheld.

As far as voting rights, while the system is not perfect, steps have been taken to make the voting process indiscriminate. “In January 2002, President Musharraf introduced a “joint electorate,” lifting the requirement to declare religion when registering to vote. Millions of Hindus and Christians in Pakistan were listed along with Muslims, and could vote in general elections.”

“Pakistan’s constitution sets aside 10 seats in Parliament for religious minorities, but they are not filled by direct elections. After general elections, each political party nominates candidates from minority communities for the seats based on the party’s proportional representation in the new Parliament.”

Women are also voting in this election, while expatriates will not have their votes counted. The system is not perfect, but it is certainly heading in the right direction.

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Indiscriminate protection of human rights: In this sense, the country is not doing as well as it could be. Deaths surrounding the election (over 110), show that the right to life is not being protected indiscriminately. The Ahmadi community is particularly disenfranchised:

“Pakistan’s Supreme Court took up a petition against the practice last month, but neither Pakistan’s Attorney General nor the Election Commission replied to the court’s request to explain why Ahmadis were being listed separately. The listing could also allow religious extremists to easily identify Ahmadis in each electoral district, the Ahmadi spokesman said. In 2010, 86 Ahmadis were killed in attacks on worshippers in two mosques in Lahore.  Last year, at least 20 Ahmadis were killed in Pakistan”

Effective democracy must uphold the will of the majority and the rights of the minority. A national human rights institution (NHRI) passed parliamentary voting late in  2011, but has yet to be operationalized. Having such an institution in place would go a long way in making Pakistani democracy more effective. Assuming the election goes as planned, operationalizing the NHRI should be one of the first objectives of the new Pakistani government.   

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Independent judiciary system: “In Pakistan, neither the judiciary as an institution nor the individual judges are independent… Independence of judiciary is the hallmark of liberal democracies. On the other hand, our judicial process is based on arbitrary principles, from the appointment and removal of judges to the process of deciding the cases. And particularly, the absolute powers of the chief justices to grant cases to different benches.”

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Independent media outlets: “Since 2002, the Pakistani media has become powerful and independent and the number of private television channels has grown from just three state-run channels in 2000 to 89 in 2012, according to the Pakistan Electronic Media Regulatory Authority.

Pakistan has a vibrant media landscape and enjoys independence to a large extent. After having been liberalised in 2002, the television sector experienced a media boom. In the fierce competitive environment that followed commercial interests became paramount and quality journalism gave way to sensationalism. Although the radio sector has not seen similar growth, independent radio channels are numerous and considered very important sources of information – especially in the rural areas.”

However, recent news that a NYT reporter was expelled from Pakistan on the eve of elections has to draw concerns about media independence. Certainly this one instance does not undo recent gains in Pakistani media independence, but it does question the countries commitment to media’s role in providing information transparently and indiscriminately.

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There are many signs suggesting that Pakistan is ready for democracy. However, there are still hurdles to be cleared. The first is obviously a smooth transition of power following elections. After that, judicial reform should be pursued and a NHRI must be established. These two actions will ensure that human and civil rights are upheld indiscriminately. Additionally, the independence of media outlets, both domestic and international, should be reaffirmed (an official apology, explanation and invitation back to Pakistan for the expelled journalist would be a good start).

An effective democratic government must also protect personal and societal security. The newly elected leaders must figure out a way to reduce the homicide rate, which has been a problem since before the recent uptick in violence surrounding the elections began . 

What do my readers think? Is Pakistan ready for effective democracy? Will vested interests whom oppose democracy (for example, the Taliban) allow a peaceful transition to democracy? This is an exciting time for the sixth largest country in the world, with a population of 180 million people. A democratic transition in Pakistan could greatly shift the geopolitical landscape in the Middle-East and Southern Asia. I will try to update the Pakistani shift to democracy whenever a relevant story presents itself.

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Economic Outlook: (Hopefully Learning) Lessons From Japan

Japanese economic policy, named “Abeconomics” after Japan’s Prime Minister Shinzo Abe, offers a natural experiment from which the U.S. can draw lessons. There is a much more obvious natural experiment for the U.S., which is U.S. economic policy, but those against “Quantitative Easing” are never short on reasons for why QE hasn’t debased the dollar / led to soaring interest rates on U.S. bonds (but soon will ahhtheskyisfallingmoralhazard!!!!!). Perhaps Japan’s experience, which is further removed from the U.S., can allow us to be more objective in our analysis.

The basis for expansionary monetary policy is due to “liquidity trap” macroeconomics. When the Fed cut’s interest rates near zero, non-traditional means of using monetary policy are the only policy choice left to stimulate aggregate demand and reduce unemployment (as far as monetary policy goes, fiscal policy is another story to be addressed shortly).

Both the U.S. and Japan have greatly increased the supply of money in attempt to revive the economy. QE in the U.S. has basically quadrupled the Feds holdings since 2008, while Abeconomics has doubled Bank of Japan’s (BoJs) holdings. In the U.S., the dollar has remained strong despite QE. In Japan, the Yen has slid in value (and this is a desired result, to increase export competitiveness):

“Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar.

In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.”

The U.S. probably benefit from a slightly weaker dollar, making exports more competitive which could help revive U.S. manufacturing and renewable energy industries (among others). I believe the USD role as primary international reserve currency (60% of international holdings) are keeping the dollar strong despite QE. Foreign holders do not want to see the value of their reserves go down, so the dollar continues to be the safe-haven for investments despite unprecedented monetary stimulus.

How effective have these policies been? U.S. unemployment has dropped to 7.5%, although underemployment and people dropping out of the labor market may be producing a rate that doesn’t capture the stagnation in the job market in the U.S. Japanese unemployment sits at 4.1%, a rate that for the U.S. would currently constitute an economic pipe-dream.

Japan certainly has its issues, but it is not letting doomsayers dictate its economic policy. Despite much higher gross government debt to GDP (Japan has roughly 235% debt to GDP ratio, while the U.S. is at about 107%) Japan is pursuing fiscal stimulus. Abeconomics includes a 2-2.5% of GDP stimulus plan for Japan. Compare that with the fiscal contraction in the U.S.

So the U.S. and Japanese economic policies give us a natural experiment. Both are advanced countries with highly skilled labor forces and strong financial markets. Both are pursuing monetary expansion. One of the countries, despite a much higher debt-to-GDP ratio, is also pursuing fiscal stimulus, while the other is pursuing fiscal contraction. Granted Japan went through years if not decades of stagnant growth before flipping the script to “Abeconomics”. The U.S. is “only” 5 years removed from the Great Recession. Do we really need to wait decades before we pursue policy that we know will stimulate the economy and reduce unemployment / the output gap?

As Keynes said, “In the long run, we’re all dead”. It is not enough to say give it time and things will get better. Peoples skills and confidence in their abilities are deteriorating in the U.S.. The output gap is large and growing, and spending on safety-net policies will not decrease until unemployment goes down (hence “automatic stabilizers”). Hopefully Japan’s successes will inspire confidence in fiscal stimulus; if a country with twice as high of a debt-to-GDP ratio (and an unemployment rate almost half as low) can benefit from fiscal stimulus, surely the U.S. can as well.