Inter Press ServiceJomo Kwame Sundaram – Inter Press Service http://www.ipsnews.net News and Views from the Global South Thu, 18 Jan 2018 16:29:44 +0000 en-US hourly 1 https://wordpress.org/?v=4.8.5 PPPs Likely to Undermine Public Health Commitmentshttp://www.ipsnews.net/2018/01/ppps-likely-undermine-public-health-commitments/?utm_source=rss&utm_medium=rss&utm_campaign=ppps-likely-undermine-public-health-commitments http://www.ipsnews.net/2018/01/ppps-likely-undermine-public-health-commitments/#respond Wed, 17 Jan 2018 08:50:30 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=153905 The United Nations Agenda 2030 for the Sustainable Development Goals (SDGs) is being touted in financial circles as offering huge investment opportunities requiring trillions of dollars. In 67 low- and middle-income countries, achieving SDG 3 — healthy lives and well-being for all, at all ages — is estimated to require new investments increasing over time, […]

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Capacity-building support for developing countries to safeguard the public interest in terms of public health and especially, to ensure that no one is left behind, is essential. Credit: IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR , Jan 17 2018 (IPS)

The United Nations Agenda 2030 for the Sustainable Development Goals (SDGs) is being touted in financial circles as offering huge investment opportunities requiring trillions of dollars. In 67 low- and middle-income countries, achieving SDG 3 — healthy lives and well-being for all, at all ages — is estimated to require new investments increasing over time, from an initial $134 billion annually to $371 billion yearly by 2030, according to recent estimates by the World Health Organization (WHO) reported in The Lancet.

Selling PPPs
Deprived of fiscal and aid resources, none of these governments can finance such investments alone. The United Nations Intergovernmental Committee of Experts on Sustainable Development Financing estimated in 2014 that annual global savings (both public and private sources) were around US$22 trillion, while global financial assets were around US$218 trillion.

The third International Financing for Development Conference in Addis Ababa in mid-2015 recommended ‘blended finance’ as well as other public private partnerships (PPPs) to pool public and private resources and expertise to achieve the SDGs. Development finance institutions (DFIs), particularly the World Bank, are the main cheerleaders for these magic bullets.

Sensing the new opportunity for mega profits, the private sector has embraced the SDGs. The World Economic Forum now actively promotes PPPs with DEVEX, a private-sector driven network of development experts. A recent DEVEX opinion claims that PPPs can unlock billions for health financing. It invokes some philanthropy driven global partnership success stories — such as the Global Alliance for Vaccine Initiatives (GAVI) and the Global Fund to Fight Aids, TB and Malaria — to claim that national level PPPs will have similar results.

A managed equipment services (MES) arrangement with GE Healthcare in Kenya is also cited as a success story, ignoring criticisms. For example, Dr. Elly Nyaim, head of the Kenya Medical Association, has pointed out that MES has not addressed basic problems of Kenya’s health system, such as inappropriate training and non-payment of salaries to frontline health workers, encouraging emigration of well-trained health professionals to developed countries, further worsening Kenya’s already difficult health dilemmas.

It should be obvious to all that private sector participation in the development process is hardly novel, having long contributed to investments, growth and innovation. Not-for-profit civil society organisations (CSOs), especially faith-based ones, have also been significant for decades in education and health. Thus, in many developing countries such as Bangladesh and Indonesia, health and education outcomes are much better than what public expenditure alone could fund.

False claims
However, PPPs have a long and chequered history, especially in terms of ensuring access and equity, typically undermining the SDG’s overarching principle of “leaving no one behind”, including the SDG and WHO promise of universal health care. Also, partnerships with for-profit private entities have rarely yielded better fiscal outcomes, both in terms of finance and value for money (VfM).

Misleading claims regarding benefits and costs have been invoked to justify PPPs. Most claimed benefits of health PPPs do not stand up to critical scrutiny. As a policy tool, they are a typically inferior option to respond to infrastructure shortfalls in the face of budgetary constraints by moving expenditures off-budget and transferring costs to future governments as well as consumers and taxpayers.

Typically driven by political choices rather than real economic considerations, PPP incurred debt and risk are generally higher than for government borrowing and procurement. PPPs also appear to have limited innovation and raised transactions costs. PPP hospital building quality is not necessarily better, while facilities management services have generally reduced VfM compared to non-PPP hospitals. Underfunding and higher PPP costs lead to cuts in service provision to reduce deficits, harming public health.

Healthcare PPPs in low- and middle-income countries have raised concerns about: competition with other health programmes for funding, causing inefficiencies and wasting resources; discrepancies in costs and benefits between partners typically favouring the private sector; incompatibility with national health strategies; poor government negotiating positions vis-à-vis powerful pharmaceutical and other healthcare service companies from donor countries.

Perverted priorities

Rich and powerful private partners often reshape governmental and state-owned enterprise priorities and strategies, and redirect national health policies to better serve commercial interests and considerations. For example, relying on antiretroviral drugs from PPPs has resulted in conflicts with national authorities, generic suppliers and consumer interests, which have undermined health progress. Donor-funded PPPs are typically unsustainable, eventually harming national health strategies, policies, capacities and capabilities.

PPPs may divert domestic resources from national priorities, and thus undermine public health due to financial constraints they cause. Such redirection of investment exacerbates health disparities, adversely affecting vulnerable groups. Health workers often prefer to work for better funded foreign programmes, undermining the public sector.

PPPs can thus lead governments to abdicate their responsibilities for promoting and protecting citizens’ health. Partnership arrangements with the private sector are not subject to public oversight. Therefore, selecting private partners, setting targets and formulating operating guidelines are not transparent, they only aid in creating more scope for corruption.

PPPs are certainly not magic bullets to achieve the SDGs. While PPPs can mobilize private finance, this can also be achieved at lower cost through government borrowing. Instead of uncritically promoting blended finance and PPPs, the international community should provide capacity building support to developing countries to safeguard the public interest, especially equity, access and public health, to ensure that no one is left behind.

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Trade Multilateralism Set Back yet Againhttp://www.ipsnews.net/2018/01/trade-multilateralism-set-back-yet/?utm_source=rss&utm_medium=rss&utm_campaign=trade-multilateralism-set-back-yet http://www.ipsnews.net/2018/01/trade-multilateralism-set-back-yet/#comments Wed, 03 Jan 2018 07:32:06 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=153713 Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales (Australia); he held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The International Trade Organziation (ITO) sought to make finance the servant, not the master of human desires’ the world over. Credit: IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Jan 3 2018 (IPS)

As feared, the Eleventh Ministerial Conference (MC11) of the World Trade Organization (WTO) in Buenos Aires, Argentina, on 10-13 December 2017, ended in failure. It failed to even produce the customary ministerial declaration reiterating the centrality of the global trading system and the importance of trade as a driver of development.

Driven by President Donald Trump’s ‘America First’ strategy and his preference for bilateral trade deals, instead of multilateral or even plurilateral agreements, United States Trade Representative (USTR) Robert Lighthizer was key to the outcome. The USTR also refused to engage in previously promised negotiations on a permanent solution to the use of food reserves by India and other countries. Most importantly, the failure of MC11 undermines prospects for orderly trade expansion to support robust global economic recovery.

India’s National Food Security Act, the most ambitious food security initiative in the world by far, buys food grains from small-scale farmers for distribution to some 840 million poor, two-thirds of its people. Since 2013, US and other OECD countries, all subsidizing their own farmers, have frustrated WTO acceptance of Indian efforts.

In fact, US rejection of the WTO Doha Round began much earlier. The Obama administration undermined the 2015 Nairobi WTO ministerial. Then USTR Michael Froman derailed the Doha Round of trade negotiations by demanding inclusion of previously rejected agenda items which WTO members could not agree to after 14 years of negotiation. He claimed that the then recently concluded Trans-Pacific Partnership Agreement was the new gold standard for free trade agreements (FTAs), and insisted on including corporate-promoted issues, such as broadened intellectual property rights and investor-state dispute settlement arrangements.

Following the 1999 Seattle WTO ministerial failure, Doha Round negotiations began in late 2001 after 9/11, with the OECD promising to rectify the previous Uruguay Round outcomes inimical to developing country interests. Ending the Doha Round inconclusively will enable WTO members to renege on promised concessions to keep all countries at the negotiating table. Not surprisingly, most developing countries want the Doha Round to continue, hoping to finally realize the 2001 post-9/11 promises to rectify Marrakech outcomes which have undermined food security and development prospects.

ITO stillbirth due to US corporate lobby
The US had previously killed the attempt to create a pro-growth and development International Trade Organization (ITO) after the Second World War to complement the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), better known as the World Bank. These two international financial institutions were created at the 1944 Bretton Woods conference with broad supervisory and regulatory powers to provide short- and long- term finance to stabilize the international order.

A third international multilateral economic organization was deemed necessary for the regulation of trade, including areas such as tariff reduction, business cartels, commodity agreements, economic development and foreign direct investment. The idea of such an international trade organization was first mooted in the US Congress in 1916 by Representative Cordell Hull, later Roosevelt’s first Secretary of State in 1933.

In 1946, the US proposed to the United Nations Economic and Social Council (Ecosoc) to convene a conference to draft a charter for an ITO. The US State Department prepared a draft charter for the UN Conference on Trade and Employment. US officials then made significant concessions to accommodate ‘underdeveloped’ countries. Underdeveloped countries then were generally unwilling to guarantee the security of foreign investments, widely seen as a means for foreign exploitation.

The Havana Charter’s rule that the foreign investments could not be expropriated or nationalized except with “just”, “reasonable”, or “appropriate” conditions was seen by US business as weakening the protection that US investments previously enjoyed. US concessions on the use of quantitative restrictions for economic development were also seen as undermining free trade. Thus, the Havana Charter lost crucial support from US business.

The ITO Havana Charter’s final text was signed by 53 countries, including the US, on 24 March 1948. Sceptical observers viewed such efforts as part of a grand strategy to extend US hegemony, even if at the expense of its closest ally, Great Britain.

However, by 1949, US political elites and corporations believed that American interests and investment interests were not well protected by the Havana Charter. What had begun as an American project was out of control. Thus, the Republican-dominated Congress opposed ratification. What seemed a certainty only months earlier, ended in failure by December 1950.

Thus, the ITO did not survive American trade politics despite initial US sponsorship and signing the Draft Charter in Havana. A coalition of protectionist and ‘perfectionist’ critics of the Charter convinced President Truman to withdraw the draft treaty from Congress, reneging on his administration’s undertaking to support the ITO.

Different trade order
As envisioned, the ITO was quite different from the WTO, created almost half a century later. The ITO Charter was committed to full employment and free market cornerstones for multilateralism, and ‘sought to make finance the servant, not the master of human desires’ internationally. It was much more than a defence of investor rights.

Clearly, this strong commitment to achieving full employment was the glue for the post-war global consensus underlying the new post-colonial economic multilateralism. This global new deal became the basis for the post-war Keynesian Golden Age quarter century when inequality declined among nations as well as within many economies.

Negotiators at the Conference recognized the need for domestic and international measures, including international policy coordination, for “attainment of higher living standards, full employment and conditions of economic and social progress development”, as envisaged by Article 55 of the UN Charter. Security of employment would have become a critical international benchmark for international trade promotion. Thus, the ITO’s collapse represented a significant setback to prioritizing full employment, accelerating the transition to the imperial ‘free trade’ canon.

Richard Toye, a leading economic historian, has suggested a different order had the ITO survived: “The ITO might have been a more attractive organization for underdeveloped countries to join, which might, in turn, have promoted less autarchic/anarchic trade policies among them with additional growth benefits. This development might, in its turn, have given a further boost to the impressive post-Second World War growth in world trade … At the same time, the Havana charter’s exceptions to free-trade rules, especially those made in the interests of the economic development of poorer countries, might have helped to reduce global inequalities.” Thus, the ITO could have enabled a more inclusive, productive, orderly and just world economy.

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Arming Poor Countries Enriches Rich Countrieshttp://www.ipsnews.net/2017/12/arming-poor-countries-enriches-rich-countries/?utm_source=rss&utm_medium=rss&utm_campaign=arming-poor-countries-enriches-rich-countries http://www.ipsnews.net/2017/12/arming-poor-countries-enriches-rich-countries/#respond Thu, 14 Dec 2017 09:35:42 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=153534 Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales; held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The iconic statue of a knotted gun barrel outside U.N. headquarters. Credit:Tressia Boukhors/IPS.

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY/KUALA LUMPUR , Dec 14 2017 (IPS)

Although the Cold War came to an end over a quarter century ago, international arms sales only declined temporarily at the end of the last century. Instead, the United States under President Trump is extending its arms superiority over the rest of the world.

The five biggest importers were India, Saudi Arabia, the United Arab Emirates (UAE), China and Algeria. Indian arms imports increased by 43 per cent. Its imports during 2012–2016 were far greater than those of its regional rivals, China and Pakistan, as Pakistan’s arms imports declined by 28 per cent compared to 2007–2011. UAE imports increased by 63 per cent while Saudi Arabia’s rose a staggering 212 per cent
Meanwhile, some fast-growing developing countries are now arming themselves much faster than their growth rate. Such expensive arms imports mean less for development and the people, especially the poor and destitute who constitute several hundred million in India alone.

The end of the Cold War in the early 1990s had raised expectations of a ‘peace dividend’. Many hoped and expected the arms race to decelerate, if not cease; the resources thus saved were expected to be redeployed for development and to improve the lives of ordinary people.

But the arms trade has continued to grow in the new millennium, after falling briefly from the mid-1990s. And without the political competition of the Cold War, official development assistance (ODA) to developing countries fell in the 1990s. Such ODA or foreign aid only rose again after 9/11, the brutal terroristic attack on US symbols of global power, only to fall again after the global financial crisis.

 

Arms sales

The Stockholm International Peace Research Institute’s (SIPRI) latest report on the world’s arms trade offers some revealing new data. The volume of international transfers of major weapons in 2012–2016 was 8.4 per cent more than in 2007–2011, the highest for any five-year period since 1990.

As Figure 1 shows, international arms exports rose steeply until the early 1980s, after a brief decline during 1955–1960. It fell once again from the mid-1980s as Mikhail Gorbachev sought to end the Cold War which had diverted resources to military build-ups in developing countries.

Foreign sales of military arms and equipment across the world totalled $374.8 billion in 2016, the first year of growth (by 1.9 per cent), after five years of decline. American companies had a $217.2 billion lion’s share of foreign arms sales. Seven out of ten of the world’s top arms companies were American, earning $152.1 billion, with Lockheed Martin leading with $40.8 billion.

 

Arms Sales: Arming Poor Countries Enriches Rich Countries - Source: SIPRI Arms Transfer Database (20 Feb. 2017) Note: The bars show annual totals while the line shows the five-year moving average, with each data point representing an average for the five-year period ending that year. The SIPRI trend-indicator value (TIV) measures the volume of international transfers of major weapons.

Figure 1. International transfers of major weapons, 1950–2016. Source: SIPRI Arms Transfer Database (20 Feb. 2017) Note: The bars show annual totals while the line shows the five-year moving average, with each data point representing an average for the five-year period ending that year. The SIPRI trend-indicator value (TIV) measures the volume of international transfers of major weapons.

 

Arms exporters

The five biggest exporters during 2012–2016 were the United States, Russia, China, France and Germany (Figure 2).

 

 

Arms Sales: Arming Poor Countries Enriches Rich Countries - Source: SIPRI Arms Transfer Database (20 Feb. 2017)

Source: SIPRI Arms Transfer Database (20 Feb. 2017)

 

US exports of major weapons increased by 21 per cent during 2012–2016 compared to 2007–2011. The major destination was the Middle East which accounted for 47 per cent. The USA exported major weapons to at least 100 states during 2012–2016, significantly more than any other supplying country.

Russian major weapons exports increased by only 4.7 per cent. It sold weapons to only 50 states, with exports to India alone accounting for 38 per cent. Meanwhile, China’s exports increased by 74 per cent, as its share of global arms exports rose from 3.8 to 6.2 per cent. China’s arms exports to Africa grew most, by 122 per cent, to account for 22 per cent of its total arms exports.

 

Arms importers

The five biggest importers were India, Saudi Arabia, the United Arab Emirates (UAE), China and Algeria. Indian arms imports increased by 43 per cent. Its imports during 2012–2016 were far greater than those of its regional rivals, China and Pakistan, as Pakistan’s arms imports declined by 28 per cent compared to 2007–2011. UAE imports increased by 63 per cent while Saudi Arabia’s rose a staggering 212 per cent! Saudi Arabia is the largest buyer of US weapons followed by South Korea.

India, the world’s largest arms importer, has more of the world’s abject poor (280 million) than any other country, accounting for a third of the world’s poor living below the international poverty line of US$1.90 a day. Using a US$3.10 a day poverty line, more appropriate for a middle-income country, the number of poor in India goes up dramatically to 732 million.

A study in 2014, led by the former chairman of the Indian Prime Minister’s Economic Advisory Council, C Rangarajan, estimated that 363 million, or 29.5 per cent of India’s 1.2 billion people, lived in poverty in 2011–2012, i.e., on less than Rs 32 daily in rural areas, and below Rs 47 a day in urban areas.

Asia and Oceania was the main importing region in 2012–2016, accounting for 43 per cent of global imports, followed by the Middle East, with 29 per cent, and African states accounting for 8.1 per cent. Between the two five year periods, arms imports in Asia and Oceania increased by 7.7 per cent and in the Middle East by 86 per cent. Arms imports by European states fell by 36 per cent while African arms imports declined by 6.6 per cent.

Tensions in Southeast Asia have driven up demand for weapons. Viet Nam’s arms imports increased by 202 per cent, pushing it to become the 10th largest arms importer in 2012–2016 from being 29th in 2007–2011. This was the fastest increase among the top ten importers. Philippines’ arms imports increased by 426 per cent while Indonesia’s grew by 70 per cent.

 

Fuelling conflicts

Six rebel groups are among the 165 identified recipients of major weapons in 2012–2016. Even though deliveries to the six accounted for no more than 0.02 per cent of major arms transfers, SIPRI argues the sales fuel conflicts.

Conflict regions alone accounted for 48 per cent of total arms imports to sub-Saharan Africa. According to SIPRI, governments fighting rebel groups used major arms against anti-government rebels.

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Strengthening Governments to Cope with PPPshttp://www.ipsnews.net/2017/12/strengthening-governments-cope-ppps/?utm_source=rss&utm_medium=rss&utm_campaign=strengthening-governments-cope-ppps http://www.ipsnews.net/2017/12/strengthening-governments-cope-ppps/#respond Tue, 05 Dec 2017 16:47:13 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=153334 Public-private partnerships (PPPs) have emerged in recent years as the development ‘flavour of the decade’ in place of aspects of the old Washington Consensus. Instead of replacing the role of government or consigning it to the garbage bin of history, corporations are increasingly using governments to advance their own interests through PPPs. On the one […]

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Through public-private partnerships (PPPs) corporations are increasingly using governments to advance their own interests. Credit: IPS

Through public-private partnerships (PPPs) corporations are increasingly using governments to advance their own interests. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Dec 5 2017 (IPS)

Public-private partnerships (PPPs) have emerged in recent years as the development ‘flavour of the decade’ in place of aspects of the old Washington Consensus. Instead of replacing the role of government or consigning it to the garbage bin of history, corporations are increasingly using governments to advance their own interests through PPPs.

On the one hand, in a contemporary variant of previously condemned ‘tied aid’, developed country governments have been persuaded to use their aid or overseas development assistance (ODA) budgets to promote their own national – read corporate – interests, e.g., by providing ‘blended finance’ on concessional terms to secure PPP contracts, or to otherwise advance the interests of such businesses.

On the other hand, aid-recipient governments have been encouraged to replace government procurement with PPP arrangements to undertake infrastructure and other projects despite the mixed records of PPPs, not least in developed countries themselves.

 

Improving PPPs

Hence, many developing countries have little choice but to deal with the active promotion of PPPs. Thus, to secure financing for needed infrastructure, they need strong institutional capacity to create, manage and evaluate PPPs.

When presented with PPP proposals, governments need to have the capacity to critically evaluate these proposals and to make counter proposals when needed. It is therefore important for government institutional capacity to be enhanced to create, manage and evaluate PPP proposals.

Governments should be empowered, and thus discouraged from presuming that they have no choice but to accept PPP proposals from the private sector. Most developing country governments cannot dodge the PPP bullet and need to be able to better deal with the challenge.

 

Strengthening institutional capacity

Strong institutional capacity to better cope with PPPs requires having a dedicated competent service loyal to the government and public priorities and concerns in order to do as needed.

Responsible and accountable developed and developing country governments must work together to ensure that they are all better able to cope with this growing trend of state-sponsorship of private corporate expansion, mainly by the North.
But most low-income and many-middle income developing countries do not have the capacity, let alone the capabilities needed to be able to effectively evaluate and respond to such proposals. Hence, most developing countries need international technical support for the necessary accelerated capacity-building.

Using private consultants to fill the gap in the interim before national capacities are sufficiently developed can be attractive in the short term, but it is often forgotten that most such consultants tend to be mainly oriented to serving ‘better paymasters’ from the private sector.

Hence, strengthening public sector capacities to cope with PPP proposals is both essebtial and urgent. This is not a major problem in some emerging market economies, which generally have more choice in such matters, but it is for many poorer developing countries.

Overseas development assistance (ODA) should, therefore, enable public sector capacity building, rather than give governments little choice. Instead of helping countries develop such capacities, much ODA often gives developing country governments little choice but to accept some PPP proposal touted as superior.

Collective action

As many governments may not be able to develop such a centralized capacity and mechanism with the capacity and ability to deal with very varied PPP proposals, one alternative is for them to work together to develop some kind of shared capacity.

But relying on organizations committed to PPPs, such as multilateral development banks (MDBs) or international financial institutions (IFIs), raises different problems. So far, they have largely failed to credibly provide such capacities and mechanisms.

They have also not enabled cooperation among developing countries to better cope with the PPP challenge, partly due to their current inclination to promote and enable PPPs as directed by their major shareholders.


Alternatives

Hence, there is an urgent need to consider and develop alternative arrangements. Government procurement, with sovereign debt, if necessary, has been found to be generally much cheaper, contrary to the misleading claims of PPP advocates.

Ensuring transparent competition among prospective PPP proposals would also help. Many PPP proposals have been approved and implemented without any real or meaningful transparency or competition despite a great deal of pious rhetoric by donor governments, IFIs and MDBs about the importance of and need for competition and transparency.

There are many contemporary examples that clearly suggest that the public interest would be well served by more transparent bidding. Also, it is important to make sure that PPPs are not abused, with the government or public sector, and ultimately, the public bearing the costs or taking the bulk of the risks, while rents or profits mainly accrue to the private partner.

 

Multilateral guidelines

Internationally agreed guidelines would also help. International guidelines for PPPs need to be developed multilaterally through an inclusive multi-stakeholder process, perhaps through the United Nations Financing for the Development process. Alternatively, UNCTAD in Geneva is well placed to work towards such guidelines which would go some way to leveling the playing field.

Such guidelines should endeavor to enhance developing countries’ bargaining and negotiating positions, e.g., by ensuring competition through open bidding. Such guidelines should also seek to avoid abuse of PPPs, including by ensuring that public money is not used to subsidize private risk and rents.

Responsible and accountable developed and developing country governments must work together to ensure that they are all better able to cope with this growing trend of state-sponsorship of private corporate expansion, mainly by the North.

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Beware Public Private Partnershipshttp://www.ipsnews.net/2017/11/beware-public-private-partnerships/?utm_source=rss&utm_medium=rss&utm_campaign=beware-public-private-partnerships http://www.ipsnews.net/2017/11/beware-public-private-partnerships/#comments Tue, 28 Nov 2017 17:54:10 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=153228 Public-private partnerships (PPPs) are essentially long-term contracts, underwritten by government guarantees, with which the private sector builds (and sometimes runs) major infrastructure projects or services traditionally provided by the state, such as hospitals, schools, roads, railways, water, sanitation and energy. Embracing PPPs PPPs are promoted by many OECD governments, and some multilateral development banks – […]

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Since the late 1990s, many countries have embraced Public-Private Partnerships for areas ranging from healthcare and education to transport and infrastructure as a solution to persistent underdevelopment. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Nov 28 2017 (IPS)

Public-private partnerships (PPPs) are essentially long-term contracts, underwritten by government guarantees, with which the private sector builds (and sometimes runs) major infrastructure projects or services traditionally provided by the state, such as hospitals, schools, roads, railways, water, sanitation and energy.

Embracing PPPs
PPPs are promoted by many OECD governments, and some multilateral development banks – especially the World Bank – as the solution to the shortfall in financing needed to achieve development including the Sustainable Development Goals (SDGs).

Since the late 1990s, many countries have embraced PPPs for areas ranging from healthcare and education to transport and infrastructure with problematic consequences. They were less common in developing countries, but that is changing rapidly, with many countries in Asia, Latin America and Africa now passing enabling legislation and initiating PPP projects.

Nevertheless, experiences with PPPs have been largely, although not exclusively negative, and very few PPPs have delivered results in the public interest. However, the recent period has seen tremendous enthusiasm for PPPs.

Financing PPPs
Undoubtedly, there has been some success with infrastructure PPPs, but these appear to have been due to the financing arrangements. Generally, PPPs for social services, e.g., for hospitals and schools, have much poorer records compared to some infrastructure projects.

One can have good financing arrangements, e.g., due to low interest rates, for a bad PPP project. All over the world, private finance still accounts for a small share of infrastructure financing. However, concessional financing arrangements cannot save a poor project although they may reduce its financial burden.

PPPs often involve public financing for developing countries to ‘sweeten’ the bid from an influential private company from the country concerned. ‘Blended finance’, export financing, and new aid arrangements have become means for governments to support their corporations’ bids for PPP contracts abroad, especially in developing countries. Such business support arrangements are increasingly passed off and counted as overseas development assistance (ODA).

Undermining rights
PPPs often increase fees or charges for users of services. PPP contracts often undermine consumer, citizen and human rights, and the state’s obligation to regulate in the public interest. PPPs can limit government capacity to enact new policies – e.g., strengthened environmental or social regulations – that might affect certain projects.

PPPs are now an increasingly popular way to finance ‘mega-infrastructure projects’, but dams, highways, large-scale plantations, pipelines, and energy or transport infrastructure can ruin habitats, displace communities and devastate natural resources. PPPs have also led to forced displacement, repression and other abuses of local communities and indigenous peoples.

There are also growing numbers of ‘dirty’ energy PPPs, exacerbating environmental destruction, undermining progressive environmental conservation efforts and worsening climate change. Typically, social and environmental legislation is weakened to create attractive business environments for PPPs.

PPPs often expensive, risky
In many cases, PPPs are the most expensive financing option, and hardly cost-effective compared to good government procurement. They cost governments – and citizens – significantly more in the long run than if the projects had been directly financed with government borrowing.

It is important to establish the circumstances required to make efficiency gains, and to recognize the longer term fiscal implications due to PPP-related ‘contingent liabilities’. Shifting public debt to government guaranteed debt does not really reduce government debt liabilities, but obscures accountability as it is taken ‘off-budget’ and no longer subject to parliamentary, let alone public scrutiny.

Hence, PPPs are attractive because they can be hidden ‘off balance sheet’ so they do not show up in budget and government debt figures, giving the illusion of ‘free money’. Hence, despite claims to the contrary, PPPs are often riskier for governments than for the private companies involved, as the government may be required to step in to assume costs if things go wrong.

Marginalizing public interest
Undoubtedly, PPP contracts are typically complex. Negotiations are subject to commercial confidentiality, making it hard for parliamentarians, let alone civil society, to scrutinize them. This lack of transparency significantly increases the likelihood of corruption and undermines democratic accountability.

PPPs also undermine democracy and national sovereignty as contracts tend to be opaque and subject to unaccountable international adjudication due to investor-state dispute settlement (ISDS) commitments rather than national or international courts. Under World Bank-proposed PPP contracts, national governments can even be liable for losses due to strikes by workers.

Thus, PPPs tend to exacerbate inequality by enriching the wealthy who invest in and profit from PPP projects, thus accumulating even more wealth at the expense of others, especially the poor and the vulnerable. The more governments pay to private firms, the less they can spend on essential social services, such as universal social protection and healthcare. Hence, PPP experiences suggest not only higher financial costs, but also modest efficiency gains.

Government procurement viable
One alternative, of course, is government or public procurement. Generally, PPPs are much more expensive than government procurement despite government subsidized credit. With a competent government doing good work, government procurement can be efficient and low cost.

Yet, international trade and investment agreements are eroding the rights of governments to pursue such alternatives in the national interest. With a competent government and an incorruptible civil service or competent accountable consultants doing good work, efficient government procurement has generally proved far more cost-effective than PPP alternatives. It is therefore important to establish under what circumstances one can achieve gains and when these are unlikely.

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Coping with Foreign Direct Investmenthttp://www.ipsnews.net/2017/11/coping-foreign-direct-investment/?utm_source=rss&utm_medium=rss&utm_campaign=coping-foreign-direct-investment http://www.ipsnews.net/2017/11/coping-foreign-direct-investment/#respond Tue, 21 Nov 2017 19:26:04 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=153137 Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales (Australia). He held senior United Nations positions during 2008-2016 in Bangkok and New York.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Foreign Direct Investment (FDI) can make important contributions to sustainable development, particularly when projects are aligned with national and regional sustainable development strategies. Credit: Ed McKenna/ IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Nov 21 2017 (IPS)

Foreign direct investment (FDI) is increasingly touted as the elixir for economic growth. While not against FDI, the mid-2015 Addis Ababa Action Agenda (AAAA) for financing development also cautioned that it “is concentrated in a few sectors in many developing countries and often bypasses countries most in need, and international capital flows are often short-term oriented”.

FDI flows
UNCTAD’s 2017 World Investment Report (WIR) shows that FDI flows have remained the largest and has provided less volatile of all external financial flows to developing economies, despite declining by 14% in 2016. FDI flows to the least developed countries and ‘structurally weak’ economies remain low and volatile.

FDI inflows add to funds for investment, while providing foreign exchange for importing machinery and other needed inputs. FDI can enhance growth and structural transformation through various channels, notably via technological spill-overs, linkages and competition. Transnational corporations (TNCs) may also provide access to export markets and specialized expertise.

However, none of these beneficial growth-enhancing effects can be taken for granted as much depends on type of FDI. For instance, mergers and acquisitions (M&As) do not add new capacities or capabilities while typically concentrating market power, whereas green-field investments tend to be more beneficial. FDI in capital-intensive mining has limited linkage or employment effects.

Technological capacities and capabilities
Technological spill-overs occur when host country firms learn superior technology or management practices from TNCs. But intellectual property rights and other restrictions may effectively impede technology transfer.

Or the quality of human resources in the host country may be too poor to effectively use, let alone transfer technology introduced by foreign firms. Learning effects can be constrained by limited linkages or interactions between local suppliers and foreign affiliates.

Linkages between TNCs and local firms are also more likely in countries with strict local content requirements. But purely export oriented TNCs, especially in export processing zones (EPZs), are likely to have fewer and weaker linkages with local industry.

Foreign entry may reduce firm concentration in a national market, thereby increasing competition, which may force local firms to reduce organizational inefficiencies to stay competitive. But if host country firms are not yet internationally competitive, FDI may decimate local firms, giving market power and lucrative rents to foreign firms.

Contrasting experiences
The South Korean government has long been cautious towards FDI. The share of FDI in gross capital formation was less than 2% during 1965-1984. The government did not depend on FDI for technology transfer, and preferred to ‘purchase and unbundle’ technology, encouraging ‘reverse engineering’. It favoured strict local content requirements, licensing, technical cooperation and joint ventures over wholly-owned FDI.

In contrast, post-colonial Malaysia has never been hostile to any kind of FDI. After FDI-led import-substituting industrialization petered out by the mid-1960s, export-orientation from the early 1970s generated hundreds of thousands of jobs for women. Electronics in Malaysia has been more than 80% FDI since the 1970s, with little scope for knowledge spill-overs and interactions with local firms. Although lacking many mature industries, Malaysia has been experiencing premature deindustrialization since the 1997-1998 Asian financial crises.

China and India
From the 1980s, China has been pro-active in encouraging both import-substituting and export-oriented FDI. However, it soon imposed strict requirements regarding local content, foreign exchange earnings, technology transfer as well as research and development, besides favouring joint ventures and cooperatives.

Solely foreign-owned enterprises were not permitted unless they brought advanced technology or exported most of their output. China only relaxed these restrictions in 2001 to comply with WTO entrance requirements. Nevertheless, it still prefers TNCs that bring advanced technology and boost exports, and green-field FDI over M&As.

Thus, more than 80% of FDI in China involves green-field investments, mostly in manufacturing, constituting 70% of total FDI in 2001. China has strictly controlled FDI inflows into services, only allowing FDI in real estate recently.

Although long cautious of FDI, India has recently changed its policies, seeking FDI to boost Indian manufacturing and create jobs. Thus, the current government has promised to “put more and more FDI proposals on automatic route instead of government route”.

Despite sharp rising FDI inflows, the share of FDI in manufacturing declined from 48% to 29% between October 2014 and September 2016, with few green-field investments. Newly incorporated companies’ share of inflows was 2.7% overall, and 1.6% for manufacturing, with the bulk of FDI going to M&As.

Policy lessons
FDI policies need to be well complemented by effective industrial policies including efforts to enhance human resource development and technological capabilities through public investments in education, training and R&D.

Thus, South Korea industrialized rapidly without much FDI thanks to its well-educated workforce and efforts to enhance technological capabilities from 1966. Korean manufacturing developed with protection and other official support (e.g., subsidized credit from state-owned banks and government-guaranteed private firm borrowings from abroad) subject to strict performance criteria (e.g., export targets).

Indeed, FDI can make important contributions “to sustainable development, particularly when projects are aligned with national and regional sustainable development strategies. Government policies can strengthen positive spillovers …, such as know-how and technology, including through establishing linkages with domestic suppliers, as well as encouraging the integration of local enterprises… into regional and global value chains”.

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Finance Following Growthhttp://www.ipsnews.net/2017/11/finance-following-growth/?utm_source=rss&utm_medium=rss&utm_campaign=finance-following-growth http://www.ipsnews.net/2017/11/finance-following-growth/#respond Tue, 14 Nov 2017 14:53:53 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=153017 Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales (Australia). He held senior United Nations positions during 2008-2016 in Bangkok and New York.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Recent research suggests that eyond a certain point, the benefits of financial development diminish, with further development possibly even hurting growth. Credit: IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Nov 14 2017 (IPS)

Economists of all persuasions recognize the critical role of finance in economic growth. The financial sector’s stability and depth are widely considered important in this connection.

Thus, many believe that the lack of a well-developed financial sector constrains growth in developing countries. Neoliberals generally attribute this to excessive regulation, especially the role of state-owned financial institutions, interest rate limits and restrictions on short-term cross-border capital flows.

It is often assumed that banks and financial markets allocate capital to the most productive endeavours, and that the financial infrastructure for credit reduces ‘information inefficiencies’, such as ‘moral hazard’ and ‘adverse selection’. Another presumption is that greater financial development will ensure sufficient finance for otherwise excluded sectors, thus raising growth potential.

Financial deregulation
Following the sovereign debt crises of the early 1980s precipitated by the sudden hikes in US Federal Reserve interest rates, neoliberal economists have advocated financial sector deregulation. It was a standard part of the Washington Consensus also including privatization and economic liberalization more broadly.

This agenda was typically imposed as part of structural adjustment programmes required by the Bretton Woods institutions (BWIs), led by the World Bank. However, many developing country and transition economy governments adopted such policies even if not required to do so, following the neo-liberal counter-revolution against Keynesian and development economics.

Financial deregulation, privatization and liberalization also gained momentum in the developed world, especially in the UK and the USA following the elections of Margaret Thatcher and Ronald Reagan in 1979 and 1980 respectively. In the US, such reforms culminated in the repeal of the Glass-Steagall Act in 1999 when President Clinton declared “the Glass-Steagall law is no longer appropriate”.

Initial results of financial liberalization generally seemed encouraging. Deregulating countries experienced rapid financial expansion and innovation. Finally, it seemed that the long elusive elixir of growth had been found. Finance had a free hand, expanding much faster than the real economy.

But soon, with inadequate prudential regulation and supervision, booms became bubbles as excesses threatened financial and economic stability, besides undermining the real economy. Economies became increasingly prone to currency, financial and banking crises such as the 1994 Mexican peso crisis, 1997-1998 Asian financial crisis, 1998 Russian financial crisis and the 2007-2009 global financial crisis.

Tipping point?
Recent research suggests that beyond a certain point, the benefits of financial development diminish, with further development possibly even hurting growth. In other words, the finance-growth relationship is not linear; it may be positive to a point, before turning negative.

Additional finance beyond this tipping point thus becomes increasingly counterproductive. By exacerbating macro-financial fragility, credit growth thus leads to bigger booms, bubbles and busts, ultimately leaving countries worse off. Interestingly, research done at the BWIs also finds that rapid credit growth is commonly associated with banking crises.

The IMF found that three quarters of credit booms in emerging markets end in banking crises. The OECD found that deregulating finance over the past three decades has stunted, not boosted, economic growth. It concluded that further credit expansion beyond exceeding three-fifths of GDP not only dents long-term growth, but also worsens economic inequality.

A commonly used measure of financial development – average private credit to GDP – increased steadily from about 1960. It has grown more rapidly since around 1990 – exceeding 100% in developed economies and 70% in emerging market developing economies (EMDEs).

The OECD report also found that over the past half century, credit from banks and other institutions to households and businesses has grown three times faster than economic activity. But GDP growth per capita changed little before and after 1990, with a strong negative relationship between finance and growth emerging after 1990, especially in the Eurozone.

EMDEs with lower credit-to-GDP ratios benefited from more credit growth, experiencing a positive finance-growth relationship until about 1990. But with higher credit-to-GDP ratios, the finance-growth relationship turned negative in developed economies well before 1990. Hence, thresholds for credit-to-GDP ratios are likely to be higher for EMDEs than for developed economies.

Finance following growth?
The new research also points to the possibility of reverse causality – of financial development necessitated by growth. This seems to support Joan Robinson’s suggestion that “where enterprise leads, finance follows”. More money and credit become available as demand for both increases with economic growth.

After all, money and credit are supposed to lubricate the real economy. EMDEs start from relatively low incomes and therefore have greater growth potential. As they realize that potential, demand for finance leads to greater financial development.

In the case of developed economies, especially the Eurozone, finance continued to grow even as growth slowed. Apparently, savings adjusted slowly to sluggish income growth, resulting in a rising wealth-to-GDP ratio.

This, in turn, creates demand for finance as households seek to ‘park’ their savings, borrow for consumption and buy new consumer durables. Thus, the financial system grows even as economic growth continues to decline. This may result in rising household indebtedness, or increasing debt-to-income ratios, ending in debt defaults.

Policy lessons
Besides being cognizant of “too much finance” beyond a tipping point, policymakers need to be aware that causality may run in both directions. Therefore, financial development must accompany productivity enhancement.

Financial liberalization, or other financial development policies alone cannot spur productivity growth. Without entrepreneurship, finance is likely to prove to be an illusory source of growth.

This is important as short-term capital inflows cannot enhance productive long-term investments. Short-term capital flows are easily reversible, and can suddenly leave, plunging countries into financial crisis.

If the financial sector continues to grow after growth potential falls, it greatly increases the relative size and role of finance, thus accelerating the likelihood of financial instability. Countries need strong macro-prudential regulations to contain such vulnerabilities.

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Emerging Markets at Risk Againhttp://www.ipsnews.net/2017/11/emerging-markets-risk/?utm_source=rss&utm_medium=rss&utm_campaign=emerging-markets-risk http://www.ipsnews.net/2017/11/emerging-markets-risk/#respond Wed, 08 Nov 2017 06:59:41 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=152932 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Very rarely are the root causes of economic crises and vulnerability addressed. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Nov 8 2017 (IPS)

Emerging market governments often draw lessons from previous financial crises – or at least claim to do so – to prevent their recurrence. However, such preventive measures are typically designed to address the causes of the last crisis, not the next one. Hence, some measures adopted may inadvertently become new sources of instability and crisis.

Very rarely are the root causes of crises and vulnerability addressed. In their efforts to prove themselves as worthy emerging markets, they tend to be pro-active in joining the financial globalization bandwagon. But premature financial liberalization – with hasty integration into the international financial system, typically without adequate prudential multilateral mechanisms for speedy and orderly resolution of external liquidity and debt crises – can be very dangerous and costly.

Future currency crises different
Many governments claim to have learnt from the 1997-1998 Asian financial crises and the 2007-2009 global financial crisis. But while measures implemented may be effective in preventing recurrence, they may be inappropriate, inadequate or worse, even counterproductive with changing, deepening financial integration.

After mid-1997, Southeast Asian governments abandoned their informal currency pegs after incurring high costs trying to defend them. Moving to flexible exchange rates ended ‘one-way (sure-win) bets’ for some speculators, while entailing disruptive currency devaluations.

Since the crises, banking regulation and supervision have undoubtedly improved, e.g., reducing currency and maturity mismatches in bank balance sheets. However, in this day and age, stable exchange rates can no longer be ensured with unregulated capital mobility.

In fact, currency crises can occur with either fixed or flexible exchange rates. With flexible rates, inflows cause currency appreciations, encouraging even more inflows, which will inevitably be reversed, often quite abruptly.

Capital inflows into securities markets are far more important today than banks intermediating cross-border capital flows in the 1990s. Corporate bond issues have also grown much faster than international bank lending, whether directly or through local intermediaries. Yet, such measures have not prevented credit and asset price bubbles.

Emerging markets have further liberalized foreign direct investment (FDI) regimes and encouraged foreign participation in equity markets, presuming that equity liabilities are less risky than external debt. Hence, foreign shares of market capitalization have reached unprecedented levels, much higher than in the US. With emerging markets more susceptible, a little foreign investment can ‘make (emerging) markets’, causing large price swings.

Currency mismatches
East Asian authorities have also reduced currency mismatches in their own balance sheets and exchange rate risk exposure by opening domestic bond markets to foreigners and borrowing in their own currencies. Consequently, sovereign debt is now much more exposed to foreign creditors than in reserve currency countries.

Much higher shares of most emerging market sovereign bonds are held by foreigners, usually privately, rather than by central banks. In contrast, most of Japan’s very high sovereign debt is held by Japanese creditors while around a third of US Treasury bonds are held by non-residents.

Encouraging foreign participation in sovereign bond markets has helped pass currency risk to creditors, but also reduced autonomy over long-term rates and increased exposure to interest rate shocks from abroad, e.g., when the US Fed raises interest rates again.

Greater capital account liberalization besides encouraging domestic corporations to borrow from and invest abroad have resulted in massive debt accumulation in low interest rate reserve currencies, especially with recent ‘unconventional’ monetary policies. Thus, reducing sovereign debt currency mismatches has been offset by increased private corporate fragility due to greater exchange rate risks.

Regulatory constraints on resident individuals and institutional investors purchasing foreign securities and real estate have also been relaxed. Capital account liberalization has enabled resident capital outflows claiming these will ‘balance’ foreign inflows. But such private accumulation of foreign assets will not be available to national authorities in case of panicky capital flight.

Hence, national currencies are especially vulnerable when the capital account is open and foreign control of domestic financial assets is significant. As experience has shown, macro-financial volatility may suddenly precipitate massive outflows.

Self-insurance delusion
Since the turn of the century, emerging markets have been seeking ‘self-insurance’ in managing external balances by accumulating ‘adequate’ international reserves from trade surpluses and capital inflows. Hence, foreign reserves in most East Asian countries are often enough to meet conventional external liabilities, but not enough to cope with massive reversals of foreign portfolio investments and capital flight by residents.

Despite the crises of the last two decades, emerging markets’ capital accounts are much freer now than then. Asset markets and currencies of all East Asian emerging markets with ‘enough’ foreign reserves have nevertheless been shaken several times in the past decade.

But such short-lived instability episodes did not cause severe damage as they only involved temporary shifts in market sentiments. Nevertheless, they hint at likely threats when ‘quantitative easing’ in the North could be reversed soon.

As ‘self-insurance’ is probably insufficient to cope with massive capital flight, the usual option is to ‘seek help’ from the IMF and reserve-currency countries. Another involves ‘bailing in’ international creditors and investors using foreign exchange controls, temporary ‘debt standstills’ and other measures to protect jobs and the economy.

But such unilateral measures may be difficult and costly due to resistance from creditor country governments, acting at the behest of the powerful financial interests involved.

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Mounting Illicit Financial Outflows from Southhttp://www.ipsnews.net/2017/10/mounting-illicit-financial-outflows-south/?utm_source=rss&utm_medium=rss&utm_campaign=mounting-illicit-financial-outflows-south http://www.ipsnews.net/2017/10/mounting-illicit-financial-outflows-south/#respond Tue, 31 Oct 2017 15:25:02 +0000 Jomo Kwame Sundaram and Zera Zuryana Idris http://www.ipsnews.net/?p=152831 Jomo Kwame Sundaram and Zera Zuryana Idris are Malaysian economic researchers.

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The latest Global Financial Integrity report shows that illicit financial outflows from developing countries continue to grow rapidly. Credit: Amantha Perera/IPS

By Jomo Kwame Sundaram and Zera Zuryana Idris
KUALA LUMPUR, Oct 31 2017 (IPS)

Although quite selective, targeted, edited and carefully managed, last year’s Panama Papers highlighted some problems associated with illicit financial flows, such as tax evasion and avoidance. The latest Global Financial Integrity (GFI) report shows that illicit financial outflows (IFFs) from developing countries, already at alarming levels, continue to grow rapidly.

Illicit financial flows growing rapidly
With international financial liberalization enabling investments abroad, ‘legitimate outflows’ have also been growing rapidly, heightening macro-financial risks to countries. Many of today’s financial centres compete intensely to attract customers by offering lower tax rates and banking secrecy.

It is generally presumed that IFFs are related to tax evasion and corruption. Such financial flows largely involve financial service providers, law offices and companies with transnational activities, often involving investments in real estate and other assets worth billions. Besides enabling governments and legislation, legal and accounting firms as well as shell companies have been crucial.

The GFI report estimates that developing countries lost somewhere between $620 billion (bn) and $970 bn in illicit outflows in 2014. The Washington-based think tank found IFFs from the South to be 4.2-6.6% of total developing country trade for 2014, while inflows were 9.5-17.4%. Total IFFs of all developing countries in 2014 were estimated at $2,010-3,507 bn.

Illicit financial flows of all developing countries, 2004-2013

During 2005-2014, IFFs from the South were 4.6-7.2% of developing countries’ total trade, while such inflows were 9.5-16.8%. GFI attributes about 3.3% of IFFs over this period to fraudulent trade mis-invoicing or ‘transfer pricing’.

China, Russia, Mexico, India and Malaysia lead all countries in illicit capital flight. Since 2012, emerging and developing countries have lost over a trillion dollars yearly that could invested productively in industry, agriculture, healthcare, education, or infrastructure.

Methodological doubts

GFI estimates have been criticized, e.g., for making unrealistic assumptions about trade-related transport costs and ignoring other explanations for ‘errors’. For instance, estimated GFI outflows include IFFs and trade mis-invoicing estimated from inconsistencies in trade data.

For GFI, ‘leakages’ (errors and omissions) in the balance of payments (BoP) are a type of IFFs. It assumes that all unreported leakages in inflows and outflows of a country are illicit. While long associated with capital flight, such BoP leakages may include legitimate reporting errors, as the report recognizes. But as such leakages only account for a small fraction of total IFFs estimated by GFI, they are not likely to appreciably affect overall estimates.

Criminal activities
IFFs in developing countries may also be due to transnational criminal activities, which GFI estimates globally for 2014 as follows: counterfeiting ($923-1,130 bn), drug trafficking ($426-652 bn), illegal logging, ($52-157 bn), human trafficking ($150.2 bn), illegal mining ($12-48 bn), illegal fishing ($15.5-36.4 bn), illegal wildlife trade ($5-23 bn), crude oil theft ($5.2-11.9 bn), small arms and light weapons trafficking ($1.7-3.5 bn), organ trafficking ($840m-1.7 bn), trafficking in cultural property ($1.2-1.6 bn), totalling $1.6-2.2 trillion.

‘Legitimate outflows’ have also increased rapidly in recent years. Besides the decades-old promotion of tax exemption for ‘free trade’ or export-processing zones, some emerging market economies have recently promoted and enabled outward foreign direct and portfolio investments.

Such capital outflows are said to balance portfolio investment inflows increasing foreign ownership of emerging market economies’ corporate sectors. But such ‘balancing’ provides no protection in the event of financial panic and a rush to exit. The push for ever greater financial liberalization thus exposes them to greater fragility and vulnerability.

Participating in such a ‘race to the bottom’ by offering tax loopholes typically involves making ever more concessions to the rich and powerful. Rich countries have been quite selective in administering anti-bribery rules, and rarely take effective action, e.g., to prevent anonymous companies being abused, as highlighted by last year’s Panama Papers revelations.

International cooperation needed
The nature and scale of illicit flows mean that international cooperation is urgently needed. While progress has been slow at the United Nations, the cooperation of the International Monetary Fund and other multilateral institutions will be vital for progress. If not, rich countries will continue to ‘call the shots’ through the OECD ‘rich country club’, which has been dominant on international tax matters.

Peak national authorities should work closely with different bodies like the central bank, tax revenue authorities, customs authorities and police to enhance tax collection, increase government transparency, improve natural resource control by government, and enable public scrutiny of revenues and other public accounts.

Such efforts will require more evidence and modes of investigation, as well as the cooperation of all relevant parties. Ultimately, political will, especially to take on powerful vested interests, will make the difference.

Further international financial integration after the 1997-1998 Asian financial crises and the 2007-2009 global financial crisis has resulted not only in fast growing financial outflows from the South, but also in greater vulnerability to new sources of volatility and instability.

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Why 1997 Asian Crisis Lessons Losthttp://www.ipsnews.net/2017/10/1997-asian-crisis-lessons-lost-2/?utm_source=rss&utm_medium=rss&utm_campaign=1997-asian-crisis-lessons-lost-2 http://www.ipsnews.net/2017/10/1997-asian-crisis-lessons-lost-2/#comments Tue, 24 Oct 2017 17:10:28 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=152689 Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The initial response to the East-Asian crises was to blame poor macroeconomic and fiscal policies. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Oct 24 2017 (IPS)

Various different, and sometimes contradictory lessons have been drawn from the 1997-1998 East Asian crises. Rapid or V-shaped recoveries and renewed growth in most developing countries in the new century also served to postpone the urgency of far-reaching reforms. The crises’ complex ideological, political and policy implications have also made it difficult to draw lessons from the crises.

Conventional wisdom
The conventional wisdom was to blame the crisis on bad economic policies pursued by the governments concerned. Of course, the vested interests favouring the international financial status quo or further liberalization also impede implementing needed reforms. Such interests continue to be supported by the media.

Citing currency crisis theory, the initial response to the crises was to blame poor macroeconomic, especially fiscal policies, although most East Asian economies had been maintaining budgetary surpluses for some years. Nevertheless, the IMF and others, including the international business media, urged spending cuts and other pro-cyclical policies (e.g., raising interest rates) which worsened the downturns.

Such policies were adopted in much of the region from late 1997, precipitating sharper economic collapses. By the second quarter of 1998, however, it was increasingly recognized that these policies had worsened, rather than reversed the economic deterioration, transforming currency and financial crises into crises of the real economy.

By early 1998, however, as macroeconomic orthodoxy lost credibility, the blame shifted to political economy, condemning ‘cronyism’ as the cause. US Federal Reserve Bank chair Alan Greenspan, US Treasury Deputy Secretary Lawrence Summers and IMF Managing Director Michel Camdessus formed a chorus criticizing Asian corporate governance in quick sequence over a month from late January.

The dubious conventional explanations of the Asian crises were not shared by more independently minded mainstream economists with less ideological prejudices. The World Bank’s chief economist Joseph Stiglitz and other prominent Western economists such as Paul Krugman and Jeffrey Sachs supported Keynesian counter-cyclical policies.

Regional contagion and response
The transformation of the region’s financial systems from the late 1980s had made their economies much more vulnerable and fragile. Rapid economic growth and financial liberalization attracted massive, but easily reversible, footloose capital inflows.

New regulations encouraged short-term lending, typically ‘rolled over’ in good times. Much of these came from Japanese and continental European banks as UK and US banks continued to recover from the 1980s’ sovereign debt crises. But these gradual inflows suddenly became massive outflows when the crisis began.

Significant inflows were also attracted by stock market and other asset price bubbles. The herd behaviour characteristic of capital markets exacerbated pro-cyclical market behaviour, heightening panic during downturns. Fickle market behaviour also exacerbated contagion, worsening regional neighbourhood effects.

Japan’s offer of US$100 billion to manage the crisis in the third quarter of 1997 was quickly stymied by the US and the IMF. Instead, a more modest amount was made available under the Miyazawa Plan to finance more modest facilities, institutions and instruments.

Much later, in Chiang Mai, Thailand, the region’s finance ministers approved a series of bilateral credit lines or swap facilities, conditional on IMF approval. Many years later, the finance ministers of Japan, China and South Korea ensured that these arrangements were regionalized, and no longer simply the aggregation of bilateral commitments, while increasing the size of the credit facility.

New International Financial Architecture
A year after the crisis began in July 1997, US President Clinton called for a new international financial architecture. The apparent spread of the Asian crisis to Brazil and Russia underscored that contagion could be more than regional.

The collapse of Long-Term Capital Management (LTCM) following the Russian crisis led the US Federal Reserve to intervene in the market to coordinate a private sector bailout. This legitimized government interventions to ensure functioning financial systems and sufficient liquidity to finance economic recovery.

After the US Fed lowered interest rates, capital flowed to East Asia once again. The Malaysian government’s establishment of bailout institutions and mechanisms in mid-1998 and its capital controls on outflows from September 1998 also warned that other countries might go their own way.

Ironically, the economic recoveries in the region from late 1998 weakened the resolve to reform the international financial system. Talk of a new international financial architecture began to fade as recovery was presented as proof of international financial system resilience.

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To Eliminate Poverty, Better Understanding Neededhttp://www.ipsnews.net/2017/10/eliminate-poverty-better-understanding-needed/?utm_source=rss&utm_medium=rss&utm_campaign=eliminate-poverty-better-understanding-needed http://www.ipsnews.net/2017/10/eliminate-poverty-better-understanding-needed/#comments Wed, 18 Oct 2017 15:05:31 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152572 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The latest Bank data on global poverty suggests that 767 million people, or 10.7% of the world’s population, live in extreme poverty. Credit: IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Oct 18 2017 (IPS)

As the United Nations’ Second Decade for the Eradication of Poverty (2008-2017) comes to an end, more self-congratulation is likely. Claims of victory in the war against poverty will be backed by recently released poverty estimates from the World Bank, entrusted by the UN system to monitor poverty.

Mismeasuring poverty
The latest Bank data on global poverty suggests that 767 million people, or 10.7% of the world’s population, live in extreme poverty, compared to some 42% of the world’s population in 1981. Earlier figures suggested that most progress was due to East Asia, especially China.

The Bank’s international poverty line was revised from a dollar a day in 1985 to $1.08 in 1993, $1.25 in 2005, and $1.90 in 2011. Poverty estimates for 2011 are available using both $1.90 and $1.25 per day poverty lines. Global poverty has fallen from 14.5% of the world’s population (or 1,011 million people) using the $1.25 poverty line or 14.2% (or 987 million) with the new $1.90 line! Global poverty has thus declined more using the new yardstick, confounding those who expected a statistical explosion in the number of poor with the 52% increase during 2005-2011!

Echoing an earlier complaint, economics Nobel Laureate Angus Deaton believes that the World Bank has an “institutional bias towards finding more poverty rather than less” to ‘keep itself in business’ leading the fight against global poverty. No wonder the World Bank faces a serious credibility problem when it comes to its poverty role.

The World Bank’s poverty estimation methodology is problematic, as admitted by Martin Ravallion who pioneered its dollar-a-day measure. Doubts remain, even after several adjustments. The Bank’s poverty line appears arbitrary as it has not been consistently anchored to a broadly accepted specification of basic human needs.

Asian progress exaggerated
The Asian Development Bank (ADB) argued that the World Bank’s $1.25 yardstick was not representative of Asia, the continent that has supposedly contributed most to the decline in global poverty according to the Bank. There were only two Asian countries, compared to 13 African countries, in the sample with which the World Bank set its $1.25 benchmark.

The ADB deems other factors more relevant, such as living costs for Asia’s poor, food costs rising faster than the general price level, and vulnerability to natural disasters, climate change, economic crises and other shocks. Its estimated extreme poverty rate for Asia in 2010 thus increased by 28.8 percentage points to 49.5% while the estimated number of poor jumped by 1.02 billion to 1.75 billion people!

It is now widely agreed that poverty is multidimensional while the Bank still uses ‘money-metric’ measures. The UN Development Programme’s Human Development Report (HDR) publishes its Multidimensional Poverty Index (MPI) considering multiple deprivations across three dimensions – health (nutrition, child mortality), education (years of schooling, school enrolment) and living standards (cooking fuel, toilet, water supply, electricity, flooring, assets).

About 1.5 billion people in the 102 developing countries currently covered experience such acute deprivations. Close to 900 million people are vulnerable to falling into poverty following setbacks due to financial crisis, natural disaster and other factors.

Globalization reduced poverty?

With little convincing evidence, The Economist (30 March 2017) attributed the world’s “great progress in eradicating extreme poverty” to globalization.

In the Globalization and Poverty book, 15 economists considered whether globalization has helped spread wealth, as often claimed. They conclude that the poor benefit from globalization when appropriate complementary policies, such as investments in human resources, infrastructure, credit promotion, technical assistance and supportive institutions, are in place.

Most supposed evidence is indirect, suggesting poverty reduction is mainly due to growth attributed to globalization. But recent globalization has also seen sharply increased inequality and volatility, including more frequent and deeper financial crises.

Other policies associated with globalization and liberalization, such as privatization, financial sector deregulation and pro-cyclical macroeconomic policies, have also harmed the poor. The efficacy of programmes, such as microfinance and governance reforms, in significantly reducing poverty is now very much in doubt.

Rethinking poverty
The United Nations’ Report on the World Social Situation 2010 – Rethinking Poverty, and our accompanying volume, Poor Poverty, affirmed the urgent need to abandon the market fundamentalist thinking, policies and practices of recent decades in favour of more sustainable development- and equity-oriented policies appropriate to national conditions and circumstances. Such new thinking on poverty and its eradication can be summarized as follows:

• Dominant mainstream perspectives have led to poor, ineffectual policy prescriptions.
• Poverty reduction is helped by sustained growth of output and decent jobs.
• Growth helps raise incomes and fiscal resources for social spending.
• Growth needs to be more stable, with consistently counter-cyclical macroeconomic policies and better capacity to deal with exogenous shocks.
• Progressive structural change and inequality reduction are crucial for development.
• Social provisioning accelerates development and poverty reduction.
• Social protection can better mitigate negative shocks, prevent people becoming much poorer, and help generate economic activities and livelihoods.
• A basic social protection floor is affordable in most countries, although poorer countries will progress faster with donor support.

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Hunger in Africa, Land of Plentyhttp://www.ipsnews.net/2017/10/hunger-africa-land-plenty/?utm_source=rss&utm_medium=rss&utm_campaign=hunger-africa-land-plenty http://www.ipsnews.net/2017/10/hunger-africa-land-plenty/#comments Sat, 14 Oct 2017 23:45:22 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152493 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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A tea farmer in Nyeri County, central Kenya contemplates what to do after his crop was damaged by severe weather patterns. Credit: Miriam Gathigah/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Oct 14 2017 (IPS)

Globally, 108 million people faced food crises in 2016, compared to about 80 million in 2015 – an increase of 35%, according to the 2017 Global Report on Food Crises. Another 123 million people were ‘stressed’, contributing to around 230 million such food insecure people in 2016, of whom 72% were in Africa.

The highest hunger levels are in Sub-Saharan Africa (SSA) according to the Global Hunger Index 2016. The number of ‘undernourished’ or hungry people in Africa increased from about 182 million in the early 1990s to around 233 million in 2016 according to the FAO, while the global number declined from about a billion to approximately 795 million.

This is a cruel irony as many countries in Africa have the highest proportion of potential arable land. According to a 2012 FAO report, for African sub-regions except North Africa, between 21% and 37% of their land area face few climate, soil or terrain constraints to rain-fed crop production.

Why hunger?
Observers typically blame higher population growth, natural calamities and conflicts for hunger on the continent. And since Africa was transformed from a net food exporter into a net food importer in the 1980s despite its vast agricultural potential, international food price hikes have also contributed to African hunger.

The international sovereign debt crises of the 1980s forced many African countries to the stabilization and structural adjustment programmes (SAPs) of the Bretton Woods institutions. Between 1980 and 2007, Africa’s total net food imports grew at an average of 3.4% per year in real terms. Imports of basic foodstuffs, especially cereals, have risen sharply.

One casualty of SAPs was public investment. African countries were told that they need not invest in agriculture as imports would be cheaper. . Tragically, while Africa deindustrialized thanks to the SAPs, food security also suffered.

In 1980, Africa’s agricultural investments were comparable to those in Latin America and Caribbean (LAC). But while LAC agricultural investment increased 2.6 fold between 1980 and 2007, it increased by much less in Africa. Meanwhile, agricultural investments in Asia went from three to eight times more than in Africa as African government investments in agricultural research remained paltry.

Thus, African agricultural productivity has not only suffered, but also African agriculture remains less resilient to climate change and extreme weather conditions. Africa is now comparable to Haiti where food agriculture was destroyed by subsidized food imports from the US and Europe, as admitted by President Clinton after Haiti’s devastating 2010 earthquake.

Lost decades
SAP advocates promised that private investment and exports would soon follow cuts in public investment, thus paying for imports. But the ostensibly short-term pain of adjustment did not bring the anticipated long-term gains of growth and prosperity. Now, it is admitted that ‘neoliberalism’ was ‘oversold’, causing the 1980s and 1990s to become ‘lost decades’ for Africa.

Thanks to such programmes, even in different guises such as the Poverty Reduction Strategy Papers (PRSPs), Africa became the only continent to see a massive increase in poverty by the end of the 20th century. And despite the minerals-led growth boom for a dozen years (2002-2014) during the 15 years of the Millennium Development Goals, nearly half the continent’s population now lives in poverty.

The World Bank’s Poverty in Rising Africa shows that the number of Africans in extreme poverty increased by more than 100 million between 1990 and 2012 to about 330 million. It projects that “the world’s extreme poor will be increasingly concentrated in Africa”.

Land grabs
Despite its potential, vast tracts of arable land remain idle, due to decades of official neglect of agriculture. More recently, international financial institutions and many donors have been advocating large-scale foreign investment. A World Bank report notes the growing demand for farmland, especially following the 2007-2008 food price hikes. Approximately 56 million hectares worth of large-scale farmland deals were announced in 2009, compared to less than four million hectares yearly before 2008. More than 70% of these deals involved Africa.

In most such deals, local community concerns are often ignored to benefit big investors and their allies in government. For example, Feronia Inc – a company based in Canada and owned by the development finance institutions of various European governments – controls 120,000 hectares of oil palm plantations in the Democratic Republic of Congo.

Advocates of large-scale land acquisitions claim that such deals have positive impacts, e.g., generating jobs locally and improving access to infrastructure. However, loss of community access to land and other natural resources, increased conflicts over livelihoods and greater inequality are among some common adverse consequences.

Most such deals involve land already cleared, with varied, but nonetheless considerable socioeconomic and environmental implications. Local agrarian populations have often been dispossessed with little consultation or adequate compensation, as in Tanzania, when Swedish-based Agro EcoEnergy acquired 20,000 hectares for a sugarcane plantation and ethanol production.

Land grabbing by foreign companies for commercial farming in Africa is threatening smallholder agricultural productivity, vital for reducing poverty and hunger on the continent. In the process, they have been marginalizing local communities, particularly ‘indigenous’ populations, and compromising food security.

This article is part of a series of stories and op-eds launched by IPS on the occasion of this year’s World Food Day on October 16.

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World Bank Must Stop Encouraging Harmful Tax Competitionhttp://www.ipsnews.net/2017/10/world-bank-must-stop-encouraging-harmful-tax-competition-2/?utm_source=rss&utm_medium=rss&utm_campaign=world-bank-must-stop-encouraging-harmful-tax-competition-2 http://www.ipsnews.net/2017/10/world-bank-must-stop-encouraging-harmful-tax-competition-2/#comments Tue, 10 Oct 2017 18:29:38 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152413 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Instead of encouraging tax competition, the World Bank should help developing countries improve tax administration to enhance collection and compliance, and to reduce evasion and avoidance. Credit: IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Oct 10 2017 (IPS)

One of the 11 areas that the World Bank’s Doing Business (DB) report includes in ranking a country’s business environment is paying taxes. The background study for DB 2017, Paying Taxes 2016 claims that its emphasis is “on efficient tax compliance and straightforward tax regimes”.

Its ostensible aim is to aid developing countries in enhancing the administrative capacities of tax authorities as well as reducing informal economic activities and corruption, while promoting growth and investment. All well and good, until we get into the details.

Tax less
First, the Report advocates not only administrative efficiency, but also lower tax rates. Any country that reduces tax rates, or raises the threshold for taxable income, or provides exemptions, gets approval.

Second, it exaggerates the tax burden by including, for example, employees’ health insurance and pensions and charges for public services like waste collection and infrastructure or environmental levies that the businesses must pay. The IMF’s Government Financial Statistics Manual correctly treats these separately from general tax revenues.

Third, by favourably viewing countries that lower corporate tax rates (or increase threshold and exemptions) and negatively considering those that introduce new taxes, DB is essentially encouraging tax competition among developing countries.

Thus, the Bank is ignoring research at the OECD and IMF which has not found any convincing evidence that lower corporate tax rates or other fiscal concessions have any positive impact on foreign direct investment.

Instead, they found net adverse impacts of tax concessions and fiscal incentives on government revenues. According to the research, factors such as the availability and quality of infrastructure and human resources were more important for investment decisions than taxes.

Moreover, the World Bank’s Enterprise Surveys do not find paying taxes to be high on the list of factors that enterprise owners perceive as important barriers to investment. For example, the Enterprise Survey for the Middle East and North Africa found political instability, corruption, unreliable electricity supply, and inadequate access to finance to be important considerations; paying taxes or tax rates were not.

Yet, the World Bank has been promoting tax cuts and tax competition as magic bullets to boost investment. Not surprisingly, thanks to its still considerable influence, tax revenues in developing countries are not rising enough, or worse, continue to fall. According to some estimates, between 1990 and 2001, reduction in corporate taxes lowered countries’ tax revenue by nearly 20%.

Instead of encouraging tax competition, therefore, the World Bank should help developing countries improve tax administration to enhance collection and compliance, and to reduce evasion and avoidance. According to OECD Secretary-General Angel Gurria, “developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid”.

Global Financial Integrity has estimated that illicit financial flows of potentially taxable resources out of developing countries was US$7.85 trillion during 2004-2013 and US$1.1 trillion in 2013 alone!

Conflicts of interest
But the Bank’s Paying Taxes and DB reports do little to strengthen developing countries’ tax revenues. This should come as no surprise as its partner for the former study is Pricewaterhouse Cooper (PwC), one of the ‘Big Four’ leading international accounting and consultancy firms. PwC competes with KPMG, Ernst & Young and Deloitte for the lucrative business of helping clients minimize their tax liabilities. PwC assisted its clients in obtaining at least 548 tax rulings in Luxembourg between 2002 and 2010, enabling them to avoid corporate income tax elsewhere.

How are developing countries expected to finance their infrastructure investment needs, increase social protection coverage, or repair their damaged environments? Instead of helping, the Bank’s most influential report urges them to cut corporate tax rates and social contributions to improve their DB ranking, contrary to what then Bank Chief Economist Kaushik Basu observed: “Raising [tax] allows developing countries to invest in education, health and infrastructure, and, hence, in promoting growth.”

How are they supposed to achieve the internationally agreed Agenda 2030 for the Sustainable Development Goals in the face of dwindling foreign aid. After all, only a few donor countries have fulfilled their aid commitment of 0.7% of GNI, agreed to almost half a century ago. Since the 2008 financial crisis, overseas development assistance has been hard hit by fiscal austerity cuts in OECD economies except in the UK under Cameron.

The Bank would probably recommend public-private partnerships (PPPs) and borrowing from it. Countries starved of their own funds would have to borrow from the Bank, but loans need to be repaid.

Governments lacking their own resources are being advised to rely on PPPs, despite predictable welfare outcomes – e.g., reduced equity and access due to higher user fees – and higher government contingent fiscal liabilities due to revenue guarantees and implicit subsidies.

Financially starved governments boost Bank lending while PPPs increase the role of its International Finance Corporation (IFC) in promoting private sector business. Realizing the Bank’s conflict of interest, many middle-income countries ignore Bank advice and seek to finance their investments and other activities by other means. Thus, there are now growing demands that the Bank stop promoting tax competition, deregulation and the rest of the Washington Consensus agenda.

Bank must support SDGs
However, nothing guarantees that the Bank will act accordingly. It has already ignored the recommendation of its independent panel to stop its misleading DB country rankings. While giving lip service to the International Labour Organization (ILO) and others who have asked it to stop ranking countries by labour market flexibility, the Bank continues to promote labour market deregulation by other means.

If the Bank is serious about being a partner in achieving Agenda 2030, it should align its work accordingly, and support UN leadership on international tax cooperation besides enhancing governments’ ability to tax adequately, efficiently and equitably. In the meantime, the best option for developing countries is to ignore the Bank’s DB and Paying Taxes reports.

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Greater Cooperation To Strengthen Taxationhttp://www.ipsnews.net/2017/10/greater-cooperation-strengthen-taxation/?utm_source=rss&utm_medium=rss&utm_campaign=greater-cooperation-strengthen-taxation http://www.ipsnews.net/2017/10/greater-cooperation-strengthen-taxation/#respond Tue, 03 Oct 2017 10:25:09 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=152323 Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Many tax avoidance schemes are not illegal. But just because it is not illegal does not mean it is not a form of abuse, fraud or corruption. Credit: Servaas van den Bosch/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Oct 3 2017 (IPS)

Since the 1950s, there has been a popular dance called the ‘limbo rock’, with the winner leaning back as much as possible to get under the bar. Many of today’s financial centres are involved in a similar game to attract customers by offering low tax rates and banking secrecy.

How Low Can You Go?
This has, in turn, forced many governments to lower direct taxes not only on income, but also on wealth. From the early 1980s, this was dignified by US President Ronald Reagan’s embrace of Professor Arthur Laffer’s curve which claimed higher savings, investments and growth with less taxes.

Following a long hiatus, Laffer is now making a comeback with the recent election of Donald Trump who has espoused a similar claim that lower taxes will lead to higher growth, lifting all American boats. It remains to be seen how President Trump will reconcile this with his promise to build and improve infrastructure in the US, which many hope will finally create the basis for the long awaited recovery following the 2008 financial crisis and the ensuing Great Recession.

With the decline of government revenue from direct taxes, especially income tax, following Laffer’s advice, many governments were forced to cut spending, often by reducing public services, raising user-fees and privatizing state-owned enterprises. Beyond a point, there seemed to be little room left for further cuts, while governments had to raise revenue to fund its functions.

Regression
This increasingly came from indirect taxes, especially on consumption, as trade taxes declined with trade liberalization. Many countries have since adopted value added taxation (VAT), touted in recent decades by the International Monetary Fund (IMF) and others as the superior form of taxation: after all, once the VAT system is functioning, raising rates is relatively easy.

Instead, a progressive tax system would seek to ensure that those with more ability to do so, would pay proportionately more tax than those with less ability to do so. Instead, tax systems have become increasingly regressive, with the growing middle class bearing the main tax burden.

Meanwhile, tax competition among developing countries has not only reduced tax revenue, but also made direct taxation less progressive, while the growth of VAT has made the overall impact of taxation more regressive as the rich pay proportionately less tax with all the loopholes available to them, both nationally and abroad. Although there are many reasons for income inequality, untaxed assets have undoubtedly also increased both wealth and income inequalities at both national and international levels.

After Panama

Following the Panama revelations, most Western government leaders have pledged tough action against tax evasion and avoidance, especially by those using developing country tax havens. In the face of continued failure to deliver on the almost half-century old United Nations commitment to provide aid to developing countries equivalent to 0.7 per cent of their national incomes, then OECD Development Assistance Committee (DAC) chair, Erik Solheim, proposed greater tax cooperation instead.

After all, many developing countries are not devoid of financial assets, but so much has been taken out and hidden by wealthy elites in private financial institutions, especially in ‘offshore’ tax havens.

But since most using tax havens seek assets in OECD countries, the Paris-based organization has historically focused efforts on very limited matters of concern to their members. Hence, they have blocked efforts to give the UN a stronger mandate to advance international cooperation on taxation, culminating in the modest Addis Ababa Action Agenda declared at the third UN Financing for Development conference in July 2015.

As major users of such facilities themselves, many developing country elites have been conspicuously silent in the face of the Panama revelations of what they have long enabled and practiced. After all, much of what is involved is publicly considered illicit, immoral, and even ‘sinful’, even if not illegal. As Warren Buffett and the group of ‘patriotic millionaires’ in the US have noted, the rich currently pay less in tax than most of their lowest paid employees.

Reversing the slide
Many tax avoidance schemes are not illegal. But just because it is not illegal does not mean it is not a form of abuse, fraud or corruption. To tackle the corruption at the heart of the global financial system, tax havens need to be shut down, not reformed. ‘On-shoring’ such funds, without prohibiting legitimate investments abroad, will ensure that future investment income will be subject to tax as in the US and Canada.

If not compromised by influential interests benefiting from such flows, responsible governments should seek to enact policies to:
• Detect and deter cross-border tax evasion;
• Improve transparency of transnational corporations;
• Curtail trade mis-invoicing;
• Strengthen anti-money laundering laws and enforcement; and
• Eliminate anonymous shell companies.

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More Public Spending, Not Tax Cuts, for Sustainable, Inclusive Growthhttp://www.ipsnews.net/2017/09/public-spending-not-tax-cuts-sustainable-inclusive-growth/?utm_source=rss&utm_medium=rss&utm_campaign=public-spending-not-tax-cuts-sustainable-inclusive-growth http://www.ipsnews.net/2017/09/public-spending-not-tax-cuts-sustainable-inclusive-growth/#comments Tue, 26 Sep 2017 15:53:25 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152243 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Tax cuts do not magically improve economic growth. Instead, the government should focus on building more economic capacity with new investments in infrastructure, research and development (R&D), education, and anti-poverty programs. Credit: Amantha Perera/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 26 2017 (IPS)

The Trump administration’s promise to increase infrastructure spending should break the straightjacket the Republicans imposed on the Obama administration after capturing the US Congress in 2010. However, in proportionate terms, it falls far short of Roosevelt’s New Deal effort to revive the US economy in the 1930s.

To make matters worse, reducing budget deficits remains the main economic policy goal of all too many OECD governments. Governments tend to cut social spending if they can get away with it without paying too high a political price.

But OECD governments’ belief that social spending — on health, education, childcare, etc. — is growth inhibiting is sorely mistaken. There is, in fact, overwhelming evidence of a positive relationship between public social spending and growth.

Return of supply-side economics
The cornerstone of all too many OECD government policies is tax cuts, especially for business corporations, ostensibly so that they will invest more with their higher retained earnings. This policy is premised on the long-discredited ‘supply-side economics’ promoted by conservative economists led by Arthur Laffer, popular during the early Reagan-Thatcher era of the 1980s.

But in retrospect, it is clear that the tax cuts by the Reagan administration on high-income households and businesses failed to boost growth in the US. Harvard professor and National Bureau of Economic Research president emeritus Martin Feldstein, President Reagan’s former chief economist, and Douglas Elmendorf, the former Democrat-appointed Congressional Budget Office Director, have shown that the 1981 tax cuts had virtually no net impact on growth.

Similarly, the 2001 and 2003 Bush tax cuts on ordinary incomes, capital gains, dividends and estates also failed to stimulate much growth, if any. In both cases, growth mainly came from other expansionary policies.

The OECD and the IMF also both doubt that tax cuts significantly induce investments. Cross-country research has found no relationship between changes in the top marginal tax rates and economic growth between 1960 and 2010. During this half-century period, although the US cut its top tax rate by over 40 percentage points, it only grew by just over two percent per annum on average. In contrast, Germany and Denmark, which barely changed their top rates at all, experienced similar growth rates.

Thus, tax cuts do not magically improve economic growth. Instead, the government should focus on building more economic capacity with new investments in infrastructure, research and development (R&D), education, and anti-poverty programs. As the IMF’s 2014 World Economic Outlook showed, the impacts of public investment are greatest during periods of low growth.

Social spending for economic recovery
Effective social programs provide immediate benefits to low-income families, enhancing long-term economic growth prospects. Increased income security improves health and increases university enrolment, leading to higher productivity and earnings.

Similarly, nutrition assistance programs improve beneficiaries’ health and cognitive capacities while housing assistance programs have other positive impacts. Investments in education result in a more skilled workforce, raising productivity and earnings as well as spurring innovation. Extra years of schooling are correlated with significant per capita income increases.

Investments in early childhood, including health and education, also enhance economic benefits. The earlier the interventions, the more cost-effective they tend to be; hence, OECD policymakers now promote preschool childcare and education.

Children enjoying early high-quality care and education programs are less likely to engage in criminal behaviour later in life; they are also more likely to graduate from secondary school and university. Reducing preschool costs also effectively raise mothers’ net incomes, inducing them to return to employment.

But the revenue boost from greater growth and productivity due to such social programs may not be enough to prevent rising deficits or debt. However, there are many ways to deal with revenue shortfalls, including new taxes as well as better regulations and enforcement to stem tax evasion. Progressive social protection programs and universal health care provisioning also help improve equity.

The ‘cure’ is the problem
This is not the time to reduce public debt through damaging cuts to social programs when most OECD economies are stagnant and the world economy continues to slow down. Hence, the current OECD priority should be to induce more robust and inclusive growth.

There is simply no robust evidence – old or new – of growth benefits from ‘supply-side’ tax cuts. This is the time for a pragmatic inclusive growth agenda, breaking free of the economic mythology which has held the world economy back for almost a decade.

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Out of Africa: Understanding Economic Refugeeshttp://www.ipsnews.net/2017/09/africa-understanding-economic-refugees/?utm_source=rss&utm_medium=rss&utm_campaign=africa-understanding-economic-refugees http://www.ipsnews.net/2017/09/africa-understanding-economic-refugees/#comments Tue, 19 Sep 2017 15:19:45 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152132 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Young African migrants seek opportunities abroad as the World Bank projects that “the world’s extreme poor will be increasingly concentrated in Africa”. Credit: Ilaria Vechi/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 19 2017 (IPS)

Not a single month has passed without dreadful disasters triggering desperate migrants to seek refuge in Europe. According to the International Organization for Migration (IOM), at least 2,247 people have died or are missing after trying to enter Europe via Spain, Italy or Greece in the first half of this year. Last year, 5,096 deaths were recorded.

The majority – including ‘economic migrants’, victims of ‘people smugglers’, and so on – were young Africans aged between 17 and 25. The former head of the British mission in Benghazi (Libya) claimed in April that as many as a million more were already on their way to Libya, and then Europe, from across Africa.

Why flee Africa?
Why are so many young Africans trying to leave the continent of their birth? Why are they risking their lives to flee Africa?

Part of the answer lies in the failure of earlier economic policies of liberalization and privatization, typically introduced as part of the structural adjustment programmes (SAPs) that many countries in Africa were subjected to from the 1980s and onwards. The World Bank, the African Development Bank and most Western donors supported the SAPs, despite United Nations’ warnings about their adverse social consequences.

SAP advocates promised that private investment and exports would soon follow, bringing growth and prosperity. Now, a few representatives from the Washington-based Bretton Woods institutions admit that ‘neoliberalism’ was ‘oversold’, condemning the 1980s and 1990s to become ‘lost decades’.

While SAPs were officially abandoned in the late 1990s, their replacements were little better. The Poverty Reduction Strategy Papers (PRSPs) of the World Bank and IMF promised to reduce poverty with some modified policy conditionalities and prescriptions.

Meanwhile, the G8 countries reneged on their 2005 Gleneagles pledge to provide an extra US$25 billion a year for Africa as part of a US$50 billion increase in financial assistance to “make poverty history”.

Poor Africa

Thanks to the SAPs, PRSPs and complementary policies, Africa became the only continent to see a massive increase in poverty by the end of the 20th century and during the 15 years of the Millennium Development Goals. Nearly half the continent’s population now lives in poverty.

According to the World Bank’s Poverty in Rising Africa, the number of Africans in extreme poverty increased by more than 100 million between 1990 and 2012 to about 330 million. It projects that “the world’s extreme poor will be increasingly concentrated in Africa”.

The continent has also been experiencing rising economic inequality, with higher inequality than in the rest of the developing world, even overtaking Latin America. National Gini coefficients – the most common measure of inequality – average around 0.45 for the continent, rising above 0.60 in some countries, and increasing in recent years.

While the continent is experiencing a ‘youth bulge’, with more young people (aged 15-24) in its population, it has failed to generate sufficient decent jobs. South Africa, the most developed economy in Sub-Saharan Africa (SSA), has a youth unemployment rate of 54%.

The real situation could be even worse. Discouraged youth, unable to find decent jobs, drop out of the labour force, and consequently, are simply not counted.

Surviving in Africa
Most poor people simply cannot afford to remain unemployed in the absence of a decent social protection system. To survive, they have to accept whatever is available. Hence, Africa’s ‘working poor’ and underemployment ratios are much higher. In Ghana, for example, the official unemployment rate is 5.2%, while the underemployment rate is 47.0%!

Annual growth rates have often exceeded 5% in many African countries in the new century. SAP and PRSP advocates were quick to claim credit for the end of Africa’s ‘lost quarter century’, arguing that their harsh policy prescriptions were finally bearing fruit. After the commodity price collapse since 2014, the proponents have gone quiet.

With trade liberalization and consequently, greater specialization, many African countries are now even more dependent on fewer export commodities. The top five exports of SSA are all non-renewable natural resources, accounting for 60% of exports in 2013.

The linkages of extractive activities with the rest of national economies are now lower than ever. Thus, despite impressive economic growth rates, the nature of structural change in many African economies have made them more vulnerable to external shocks.

False start again?
Africa possesses about half the uncultivated arable land in the world. Sixty percent of SSA’s population work in jobs related to agriculture. However, agricultural productivity has mostly remained stagnant since 1980.

With agriculture stagnant, people moved from rural to urban areas, only to find life little improved. Thus, Africa has been experiencing rapid urbanization and slum growth. According to UN Habitat, 60% of SSA’s urban population live in slums, with poor access to basic services, let alone new technologies.

Powerful outside interests, including the BWIs and donors, have been advocating large farm production, claiming it to be the only way to boost productivity. Several governments have already leased out land to international agribusiness, often displacing settled local communities.

Meanwhile, Africa’s share of global manufacturing has fallen from about 3% in 1970 to less than 2% in 2013. Manufacturing’s share of total African GDP has decreased from 16% in 1974 to around 13% in 2013. At around a tenth, manufacturing’s share of SSA’s output in 2013 is much lower than in other developing regions. Unsurprisingly, Africa has deindustrialized over the past four decades!

One cannot help but doubt how the G20’s new ‘compact with Africa’, showcased at Hamburg, can combat poverty and climate change effects, in addition to deterring the exodus out of Africa, without fundamental policy changes.

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Much more climate finance now!http://www.ipsnews.net/2017/09/much-climate-finance-now/?utm_source=rss&utm_medium=rss&utm_campaign=much-climate-finance-now http://www.ipsnews.net/2017/09/much-climate-finance-now/#comments Tue, 12 Sep 2017 05:57:47 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=152026 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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A seawall in Dominica. A recent report has called for specific measures to protect small islands from sea level rise. Credit: Desmond Brown/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 12 2017 (IPS)

Funding developing countries’ climate change mitigation and adaption efforts was never going to be easy. But it has become more uncertain with President Trump’s decision to leave the Paris Accord. As a candidate, he threatened not to fulfil the modest US pledge of US$3 billion towards the 2020 target of US$100 billion yearly for the Green Climate Fund (GCF).

The GCF was formally established in December 2011 “to make a significant and ambitious contribution to the global efforts towards attaining the goals set by the international community to combat climate change”. In the 2009 Copenhagen Accord, developed economies had promised to mobilize US$100 billion yearly for climate finance by 2020.

However, only a small fraction has been pledged, let alone disbursed so far. As of July 2017, only US$10.1 billion has come from 43 governments, including 9 developing countries, mostly for start-up costs. Before Trump was elected, the US had contributed US$1 billion. Now that the US has announced its withdrawal from the 2015 climate treaty, the remaining US$2 billion will not be forthcoming.

Moreover, the US$100 billion goal is vague. For example, disputes continue over whether it refers to public funds, or whether leveraged private finance will also count. The OECD projected in 2016 that pledges worldwide would add up to US$67 billion yearly by 2020. But such estimates have been inflated by counting commercial loans to buy green technology from developed countries.

Cooperation needed

Even if all the pledged finance is raised, it would still be inadequate to finance a rapid transition to renewable energy globally, forest conservation as well as atmospheric greenhouse gas sequestration. The Hamburg-based World Future Council (WFC) estimates that globally, annual investment of US$2 trillion is needed to retain a chance of keeping temperature rise below 1.5°C.

Obviously, the task is daunting, especially for developing countries more vulnerable to climate change. Therefore, in adopting the Marrakech Vision at the 2016 22nd Conference of Parties (COP22) to meet 100% domestic renewable energy production as rapidly as possible, 48 members of the Climate Vulnerable Forum advocated an “international cooperative system” for “attaining a significant increase in climate investment in […] public and private climate finance from wide ranging sources, including international, regional and domestic mobilization.”

International cooperation is necessary, considering developing countries’ limited abilities to mobilize enough finance domestically. Much foreign funds are needed to import green technology. Additionally, most renewable energy investments needed in developing countries will not be profitable enough to attract private investment, especially foreign direct investment.

Hence, two options, proposed by the UN and the WFC respectively, are worth serious consideration. The UN proposal involves using Special Drawing Rights (SDRs) of the International Monetary Fund (IMF) for a particular kind of development finance, namely climate finance. It involves floating bonds backed by SDRs, not directly spending SDRs. Thus, for example, the GCF would issue US$1 trillion in bonds, backed by US$100 billion in SDR equity.

QE for climate change mitigation
The WFC has proposed that central banks of developed countries continue ‘quantitative easing’ (QE), but not to buy existing financial assets. Instead, they should invest in ‘Green Climate Bonds’ (GCBs) issued by multilateral development banks, the GCF or some other designated climate finance institution to fund renewable energy projects in developing countries.

This should have some other potential benefits. First, it will not destabilize the financial system of emerging economies, whereas QE has fuelled speculation and asset price bubbles. Second, it is less likely to increase inflation as it will be used for productive investments. Third, for the above reasons, it should not exacerbate inequality.

Fourth, it will also help industrial countries as developing countries receiving climate finance will be importing technology and related services from developed economies. Fifth, GCBs can become near permanent assets of central banks due to their very long duration. Sixth, supporting sustainable development in climate vulnerable developing countries will ensure more balanced global development, which is also in the interest of industrialized countries themselves.

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Scaling up Development Financehttp://www.ipsnews.net/2017/09/scaling-development-finance/?utm_source=rss&utm_medium=rss&utm_campaign=scaling-development-finance http://www.ipsnews.net/2017/09/scaling-development-finance/#respond Tue, 05 Sep 2017 15:21:51 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=151937 Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008–2015 in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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The United Nations and others have revived the idea of the International Monetary Fund (IMF) issuing Special Drawing Rights (SDRs) to finance development. Credit: Sriyantha Walpola/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR , Sep 5 2017 (IPS)

The Business and Sustainable Development Commission has estimated that achievement of Agenda 2030 for the Sustainable Development Goals will require US$2-3 trillion of additional investments annually compared to current world income of around US$115 trillion. This is a conservative estimate; annual investments of up to US$2 trillion yearly will be needed to have a chance of keeping temperature rise below 1.5°C.

The greatest challenge, especially for developing countries, is to mobilize needed investments which may not be profitable. The United Nations and others have revived the idea of the International Monetary Fund (IMF) issuing Special Drawing Rights (SDRs) to finance development.

IMF quotas
SDRs were created by the IMF in 1969 to supplement member countries’ official reserves (e.g., gold and US dollars). They were designed to meet long-term international liquidity needs, rather than as a short-term remedy for payments imbalances. The SDR is not a currency, but a potential claim on freely usable currencies (e.g., USD) of IMF members.

Currently, SDRs are allocated among members according to their IMF quotas. IMF quotas determine a member’s maximum financial commitment, voting power and upper limit to financing. Determination of quotas has been influenced by the convertibility of currencies, as it provides the Fund with ‘drawable’ resources. Moreover, the current quota formula is highly influenced by countries’ GDPs and trade.

Despite some reforms over the decades, IMF quotas are biased in favour of rich countries. Thus, arguably, SDR distribution based on IMF quotas is not neutral. Allocating more rights to provide poor countries with development finance would help redress this bias.

Concessional finance
The UN has long argued for creating new reserve assets (i.e., SDRs) to augment development finance instead of current provisions for distribution according to IMF quotas.

Creating new SDRs for development finance has its origins in Keynes’ 1944 proposal for an international clearing union (ICU). The ICU was to be empowered to issue an international currency, tentatively named ‘bancor’. The ICU would also finance several international organizations pursuing desirable objectives such as post-war relief and reconstruction, preserving peace and maintaining international order, as well as managing commodities.

From the late 1950s, Robert Triffin and others urged empowering the IMF to issue special reserve assets to supplement development finance. In 1965, the United Nations Conference on Trade and Development (UNCTAD) endorsed a plan similar to Triffin’s.

According to this plan, the IMF would issue units to all member countries against freely usable currencies deposited by members. The IMF would invest some of these currency deposits in World Bank or International Bank for Reconstruction and Development (IBRD) bonds. The IBRD would then transfer some of these to the International Development Association (IDA) for long-term low-interest loans to the poorest countries.

Objections

However, the proposal was blocked by the Group of Ten developed countries. They argued that the proposal, for permanent transfers of real resources from developed to developing countries, would contradict the original intent of costless reserve creation. Additionally, the G10 argued, direct spending of SDRs would be inflationary.

The creation of SDRs is not an end in itself, but a means to raise living standards. Thus far, the SDR facility has been used to try to ensure more orderly and higher growth in international liquidity, e.g., following the 2008-2009 global financial crisis, when a new allocation of SDR 182.7 billion was approved.

Also, by substituting for gold, which requires real resources to be mined, refined, transported and guarded, with costs of production and administration near zero, SDRs generate social savings, which can be used for internationally agreed objectives.

Jan Tinbergen argued that as the creation of new money always implies that the first recipient gets money without having produced something, this privilege should be given to the poor countries of the world, instead of the rich. But changing the SDR allocation formula requires amending the IMF Articles of Agreement, which requires approval of all powerful developed countries, which seems most unlikely in these times.

Development finance
Another recent UN proposal could help overcome resistance to issuing SDRs for development finance. The proposal involves floating bonds backed by SDRs, not directly spending SDRs. Arguably, leveraging SDRs thus would expose bond holders to illiquidity risks and distort the purpose (i.e., reserve asset) for which SDRs were first created.

Opposition to the proposal should be reduced by only leveraging ‘idle’ SDRs held by reserve-rich countries to purchase such bonds. This would be comparable to countries investing foreign currency reserves through sovereign wealth funds, where the liquidity and risk characteristics of specific assets in the fund determine whether they qualify as reserve holdings. Thus, careful design for leveraging SDRs, while maintaining their reserve function, can mitigate objections.

The proposal is also in line with current donor preference for blended finance, using aid to leverage private investment. Hence, this more modest and less ambitious proposal should face less political resistance from developed countries as it delinks the SDR distribution formula from the debate over amending IMF quotas.

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UN Role in Reforming International Finance for Developmenthttp://www.ipsnews.net/2017/08/un-role-reforming-international-finance-development/?utm_source=rss&utm_medium=rss&utm_campaign=un-role-reforming-international-finance-development http://www.ipsnews.net/2017/08/un-role-reforming-international-finance-development/#respond Wed, 30 Aug 2017 09:31:13 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151841 Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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United Nations Secretariat Building

United Nations Secretariat Building

By Jomo Kwame Sundaram
KUALA LUMPUR, Aug 30 2017 (IPS)

Growing global interdependence poses greater challenges to policy makers on a wide range of issues and for countries at all levels of development. Yet, the new mechanisms and arrangements put in place over the past four decades have not been adequate to the growing challenges of coherence and coordination of global economic policy making. Recent financial crises have exposed some such gaps and weaknesses.

 

Multilateral UN inclusive

Although sometimes seemingly slow, the United Nations (UN) has long had a clear advantage in driving legitimate discussion on reform because of its more inclusive and open governance. Lop-sided influence in the current international financial system is a principal reason why many countries lack confidence in existing arrangements. Rebuilding confidence in such arrangements will require that all parties feel they have a stake in the reform agenda.

The UN Secretariat has a strong track record of identifying systemic threats from unregulated finance, warning against a misplaced faith in self-regulating markets and offering viable solutions to gaps and weaknesses in the international financial system
But the UN is also suited to drive the discussion because of its long tradition of reliable work on international economic issues. The UN secretariat has developed and maintained a coherent and integrated approach to trade, finance and sustainable development, with due attention to equity and social justice issues.

The ongoing ‘secular stagnation’ has again highlighted the interdependence of global economic relations, exposing a series of myths and half-truths about the global economy. These include the idea that the developing world has become “decoupled” from the developed world; that unregulated financial markets and the new financial instruments had ushered in a new era of “great moderation” and “stability”; and that macroeconomic imbalances — due to decisions made in the household, corporate and financial sectors — were less dangerous than those involving the public sector.

 

UN Secretariat different, but competent

The UN secretariat has long doubted such arguments, and warned that any unravelling of global macroeconomic imbalances would be unruly. Also, persistent asymmetries and biases in global economic relations have particularly hit developing countries, both emerging markets and the least developed countries.

Not surprisingly, the UN Secretariat also drew attention to the close links between the financial crisis and the food and energy crises of recent years. A more integrated approach to handling these threats is needed, particularly to alleviate the downside risks for the poorest and most vulnerable communities.

The UN Secretariat has a strong track record of identifying systemic threats from unregulated finance, warning against a misplaced faith in self-regulating markets and offering viable solutions to gaps and weaknesses in the international financial system. Special drawing rights (SDRs), the 0.7 per cent aid target and debt relief, for example, were all conceived within the UN system during the 1960s and 1970s.

From the 1980s, the UN secretariat – both in New York and Geneva — has consistently warned against the excessive conditionalities attached to multilateral lending, promoted the idea of rules for sovereign debt restructuring, and cautioned that the international financial institutions were moving away from their traditional mandates of guaranteeing financial stability and providing long-term development finance.

 

UN has more than earned leadership role

During the 1990s, UN agencies warned against the dangers to economic stability, particularly in developing countries, from volatile private capital flows and the speculative behaviour associated with unregulated financial markets. The UN was among the very few warning Mexico in 1994, the East Asian countries in 1997 and the world in 2008 that excessive liberalization threatened crisis. The UN system was also almost alone among international institutions to identify growing inequality as a threat to economic, political and social stability, and insisted early on measures for a fairer globalisation.

Many of these concerns culminated in the 2002 Financing for Development Conference in Monterrey, Mexico. More recently, the UN has insisted on the importance of policy space for effective development strategies and particularly on the need for macroeconomic policies to support long-term growth, technological upgrading and diversification.

The combination of a strong track record and a core secretariat steeped in its tradition of an integrated multilateral approach to policy-oriented research places the UN in the best position to advance discussions to reform the international financial architecture if given the chance to do so.

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Quantitative Easing for Wealth Redistributionhttp://www.ipsnews.net/2017/08/quantitative-easing-for-wealth-redistribution/?utm_source=rss&utm_medium=rss&utm_campaign=quantitative-easing-for-wealth-redistribution http://www.ipsnews.net/2017/08/quantitative-easing-for-wealth-redistribution/#respond Tue, 22 Aug 2017 08:51:10 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=151760 Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Quantitative Easing for Wealth Redistribution - A man pushes a cartful of garbage near a busy intersection in Yangon, Myanmar. Credit: Amantha Perera/IPS

A man pushes a cartful of garbage near a busy intersection in Yangon, Myanmar. Credit: Amantha Perera/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Aug 22 2017 (IPS)

Following the 2007-2008 global financial crisis and the Great Recession in its wake, the ‘new normal’ in monetary policy has been abnormal. At the heart of the unconventional monetary policies adopted have been ‘asset purchase’ or ‘quantitative easing’ (QE) programmes. Ostensibly needed for economic revival, QE has redistributed wealth – regressively, in favour of the rich.

As its failure to revive most economies becomes apparent, and opposition to growing inequality rises, QE may soon end, judging by recent announcements of some major central banks. Already, the US Federal Reserve and the Bank of England have been phasing out purchases of financial assets, while the European Central Bank (ECB) is publicly considering how quickly to do so from December. Meanwhile, these monetary authorities are considering raising interest rates again.

Evaluated by its own declared objectives, QE has been a failure. Forbes magazine, the self-avowed ‘capitalist tool’, has acknowledged that QE has “largely failed in reviving economic growth”. By ‘injecting’ money into the economy, QE was supposed to induce banks to lend more, thus boosting investment and growth. But in fact, overall bank lending fell after QE was introduced in the UK, with lending to small and medium sized enterprises (SMEs) – responsible for most employment – falling sharply.

Bank failure to finance productive investments was not because corporations were short of cash as they have considerable reserves. Instead, the problem is due to under-consumption or overproduction, exacerbated by protracted stagnation and worsening inequality. After all, producing more when demand is soft or shrinking only leads to excess supply or gluts.

 

QE’s regressive wealth distribution

But QE has transferred wealth and income to the rich in the guise of reviving the world economy. New money created by QE was not invested in new productive activities, but instead mainly flowed into stock markets and real estate, pushing up share and property prices, without generating jobs or prosperity. QE has enriched asset owners, increasing the wealth of the rich, while not generating real wealth.

By effectively devaluing currency, QE has diminished money’s buying power, thus reducing real incomes. However, first-time or new asset purchasers lose, having to spend more to buy more expensive assets such as shares or real property. While increased asset prices have to be paid by purchasers, the additional cost to existing asset owners is partially compensated for by higher prices received for assets sold.

Thus, the claim that QE would encourage investment as well as boost growth and employment has disguised the massive redistribution or wealth transfer to the rich. QE, especially in the US and UK, has seen real wages fall as profits rose. While output may have recovered, real wages have been generally lower.

 

In the South too

QE has had similar effects in the global South, enriching asset owners at the expense of the ‘asset-poor’, while making their economies more vulnerable. QE also caused housing, stock market and commodity price bubbles as speculators rushed to buy up such assets. Until petrol prices fell in late 2014, oil-exporting countries enjoyed cash windfalls, at the expense of oil-importing countries, sometimes with devastating consequences, even if only temporary.

QE triggered huge capital flows into the developing world. Around 40 percent of the US Fed’s first QE credit expansion and a third from QE2 went abroad, mostly to ‘emerging markets’. Much of this went into buying existing assets, rather than into productive new investments. And if their currencies strengthened, their exports were undermined.

On the other hand, QE also exacerbated competitive currency devaluations. By reducing the value of their own currencies, ‘reserve currency’ monetary authorities effectively caused other currencies to appreciate, damaging their exports and trade balances.

 

Be prepared

Unlike productive long-term investments, ‘hot money’ inflows of speculative capital worsen currency volatility. Rising interest rates in the West are likely to trigger a mass exodus of capital from emerging markets, potentially triggering currency collapses in emerging markets again, as in mid-1997.

With various recent developments conspiring to reverse the last several years of unconventional monetary policies in the North, emerging markets and other developing economies are generally poorly prepared for the forthcoming change in circumstances.

While policy options in different scenarios are already being publicly considered in the Western reserve currency economies, an ostrich-like approach of not discussing and preparing for such changes is much more widespread in other economies, with potentially catastrophic consequences.

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