G7 | Normative Narratives

July 15, 2014
by bzupnick 2 Comments

Conflict Watch: 70 Years After “D Day”, Time To Move Foward

World’s top 15 military spenders in 2013

List by the Stockholm International Peace Research Institute (2013)^[1]

Rank	Country	Spending ($ Bn.)	% of GDP	World share (%)
	World total	1747.0	2.4	100
1	United States	640.0	3.8	36.6
2	People’s Republic of China^[a]	188.0	2.0	10.8
3	Russia^[a]	87.8	4.1	5.0
4	Saudi Arabia^[b]	67.0	9.3	3.8
5	France	61.2	2.2	3.5
6	United Kingdom	57.9	2.3	3.3
7	Germany^[a]	48.8	1.4	2.8
8	Japan	48.6	1.0	2.8

The Top 10 Providers of Assessed Contributions to United Nations Peacekeeping Operations in 2013 [A/67/224/Add.1] are:

United States (28.38%)
Japan (10.83%)
France (7.22%)
Germany (7.14%)
United Kingdom (6.68%)
China (6.64%)
Italy (4.45%)
Russian Federation (3.15%)
Canada (2.98%)
Spain (2.97%)

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I like to think of myself as a pretty laid back guy. I don’t get worked up when people joke about stereotypes in a non-malicious way, because that’s what stereotypes are–a joke (in that they hold no value). I also believe the ability to laugh about things and engage self-deprecating humor are signs of maturity and progress.

As a Jewish American, there is one thing I cannot tolerate joking about–the Holocaust. There is a saying associated with the Holocaust–“never forget”–to both honor the victims and ensure such evil acts are never repeated. I’m sure other cultural groups have their “red-lines”, and these lines should be respected.

While we must never forget the Holocaust, we must also move on from the legacies of WWII; 70 years is a long time, and the world is a much different place. Germany and Japan no longer represent the “Axis of evil”; both of these countries have proven themselves committed to the institutions and norms that have made the second half of the 20th and 21st centuries the most progressive in the history of mankind.

Both of these countries have also benefited greatly from the global economic system put in place after WWII. Therefore, we must not only welcome but demand that Germany and Japan play a more active role in fostering the global security which allows this system to function.

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Germany:

Anger at Washington mounted Wednesday with the disclosure that American intelligence agents were suspected of having recruited a second spy in Germany, this time linked to its Defense Ministry, prompting even robust allies of the United States to suggest that a fundamental reset was needed in one of the most important of trans-Atlantic partnerships.

“At some point, the ‘no comment’ will not be enough,” Norbert Röttgen, the committee’s head and an influential member of Chancellor Angela Merkel’s center-right Christian Democratic Party, said in a telephone interview from Washington. “The U.S. must understand what psychological damage it is inflicting. I think that will be a difficult process.”

At the same time, Mr. Röttgen cautioned his German colleagues to appreciate that Berlin and Washington had profoundly differing views on the role of an intelligence service and should not let this difference permanently damage otherwise strong ties. Analysts have said that Germans have a far more restrictive view of how intelligence agencies should operate and what a fair target is.

Foreign Minister Frank-Walter Steinmeier, a Social Democrat who after the Sept. 11, 2001, terror attacks led an effort to tighten cooperation with American intelligence, seemed at a loss to understand why the United States would spy on Germany.

“We speak to each other all the time, and nobody makes a secret of their views,” he said in an interview published Wednesday by the newspaper Saarbrücker Zeitung. “The attempt to find out about Germany’s position is not just unseemly, it is unnecessary.”

Despite hurt feelings, “psychological damage”, and a degree of mistrust, US and Germany have vowed to continue cooperating in the name of global security:

The United States and Germany put a brave face on an escalating espionage dispute, stressing on Sunday the importance of their cooperation to solving several global crises but offering little indication they’ve fully mended ties.

After a meeting on the sidelines of nuclear talks in Vienna, German Foreign Minister Frank-Walter Steinmeier and U.S. Secretary of State John Kerry each extolled the value of the two NATO allies’ work together on issues such as Iran and Israeli-Palestinian violence.

“Relations between Germany and the U.S. are necessary and indispensable, and that’s for both of our sides,” Steinmeier told reporters in German. Still, he acknowledged the recent “difficulties” and urged that relations “revive on the basis of trust and mutual respect.”

Relations between the U.S. and Germany have never been more important. With the number of humanitarian and security crises rising, and extremist threats posing a challenge to democracy and capitalism abroad, the German-U.S. relationship must be redefined.

The U.S. must focus it’s intelligence efforts on its real enemies, and stop acting like a global hegemon that must know everything about everyone at all times, friend or foe. We must learn to loosen our grip and trust our allies, especially ones as strong and stable as Germany.

Germany, for its part, must contribute a greater share to NATO and UN Peacekeeping operations. Many German’s see their World Cup victory as the beginning of an age of global prominence–I would argue Germany, as the strongest EU economy, has held this distinction for some time. Either way, Germany must assume the responsibilities that come with being a global power.

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Japan:

Prime Minister Shinzo Abe has disturbed many in Japan and increased anxiety in Asia by reinterpreting his country’s pacifist postwar Constitution so that the military can play a more assertive role than it has since World War II. While a shift in Japan’s military role was never going to be readily accepted by many, Mr. Abe’s nationalist politics makes this change even harder to swallow in a region that needs to reduce tension.

It is difficult to overstate the significance of what Mr. Abe has done. Since 1947, Japan’s Constitution, written and imposed by the American Army, has permitted the military, known as the Self-Defense Forces, to engage only in self-defense. That meant the large and technologically advanced armed forces was barred from “collective self-defense” — aiding friendly countries under attack — and thus was far more constrained than those of other nations.

With the reinterpretation, Japan’s military would still face restrictions on what it could do, but it would be allowed for the first time, for example, to help defend an American ship under attack, destroy a North Korean missile heading toward the United States or play a larger role in United Nations peacekeeping operations.

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As I mentioned before, a large part of honoring those who perished in the Holocaust and WWII is making sure such deplorable acts are never repeated. As the world becomes more interconnected due to technological advances, people become more acutely aware of the gross human rights violations inflicted by terrorist organizations and totalitarian governments with relative impunity on a daily basis. While these acts may occur on a smaller scale than the Holocaust, they are nonetheless deplorable.

Security is a necessary precondition for both human and economic development. As the 3rd and 4th largest economies in the world respectively, Japan and Germany must contribute more than their current 2.8% of global military spending (they do perform better in terms of UN Peacekeeping contributions, but still do not do enough). To fully cast off their WWII legacies, Japan and Germany must take leadership roles alongside the U.S. in ensuring security and human rights are enjoyed by all.

As the U.S. (partially) winds down it’s disproportionate contributions towards global security, the “power void” must be filled by the rest of the international community, led by Germany and Japan. Thankfully, it seems that Germany and Japan are ready to make this transition. It is up to the rest of the international community to not only welcome this shift, but demand that it occurs to a scale that leads to real improvements to the world’s most vulnerable people.

As a Jewish American I will never forget the Holocaust. But I can forgive, so long as Germany and Japan take a more active role in defending innocent people through multilateral security pacts (such as NATO) and UN Peacekeeping operations.

May 24, 2013
by bzupnick 5 Comments

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.