Inter Press ServiceFinancial Crisis – Inter Press Service News and Views from the Global South Tue, 16 Jan 2018 17:32:29 +0000 en-US hourly 1 Trade Multilateralism Set Back yet Again Wed, 03 Jan 2018 07:32:06 +0000 Anis Chowdhury and Jomo Kwame Sundaram 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

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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Billionaires, Fiscal Paradise, the World’s Debt, and the Victims Tue, 02 Jan 2018 14:22:59 +0000 Roberto Savio Roberto Savio is founder of IPS Inter Press Service and President Emeritus

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Money, coins and bills. Credit: IPS

By Roberto Savio
ROME, Jan 2 2018 (IPS)

Among Bloomberg’s many profitable activities is a convenient Bloomberg Billionaires Index that has just published its findings for 2017. It covers only the 500 richest people, and it proudly announces that they have increased their wealth by 1 trillion dollars in just one year. Their fortunes went up by 23% to top comfortable 5 trillion dollars (to put this in perspective, the US budget is now at 3.7 trillion). That obviously means an equivalent reduction for the rest of the population, which lost those trillion dollars. What is not widely known is that the amount of the circulation of money stays the same; no new money is printed to accommodate the 500 richest billionaires!

In fact, Forbes, the magazine for the rich, states that there are over 2.000 billionaires in the world, and this number is going to increase and increase fast. China has now overtaken the US, by having 594 billionaires as compared to the US’s 535 – and every three days a new millionaire is born. There is even an exclusive club of billionaires, the China Entrepreneur Club, which admits members only by the unanimity of its 64 members at present. Together they have 300 billion dollars, the 4.5% of the Chinese GNP. As a norm, the Chinese wealth is a family affair, which means that in 10 years they will leave a heritage of 1 trillion dollars, most probably to their sons; and the amount of inherited wealth is going to rise to three trillion dollars in 20 years.

We know from a large study by the French economist Thomas Piketty covering 65 countries during modern times, that the bulk of wealth comes from inherited money. That because, as we all know, money begets money. And Reagan started his campaign: “Misery brings misery, wealth brings wealth”: therefore, we must tax rich people less than poor people. But Trump’s tax law just adopted in the US, cuts taxes to companies, increasing the US deficit by 1.7 trillion dollars over ten years. Nobody is noticing that the US deficit is already at $18.96 trillion or about 104% of the previous 12 months of the Gross Domestic (GDP).

This tax reform will have a deep impact on Europe, by shifting there many of the costs of the reform, through balance of payments and trade. The five most important ministers of finance of Europe, UK included, have written a letter of protest, obviously much to the glee of President Trump, who perceives only the US as winner, and all others as losers.

Roberto Savio

All this staggering amount of money in a few hands (8 people have the same wealth as 2.3 billion people), brings us to three relevant considerations: a) what is happening with the world debt b) how are governments helping the rich to avoid taxes; c) the relation between injustice and democracy. None of those perspectives gives space for hope, and least of all trust in our political class.

Let us start with the world’s debt. I do not remember to have seen a single article on that in the closing year. Yet the International Monetary Fund has alerted: gross debt of the non-financial sector has doubled in nominal terms; since the end of the century to 152 trillion dollars. This is a record 225% of the world GDP. Two thirds come from the private sector, and one third from the public sector. But this increased from below 70% of the GDP last year now to 85%, a dramatic rise in such a short time.

In fact, the respected Institute for international Finance estimates that at the end of this year the global debt, private and public added, would have reached a staggering 226 trillion dollars, more than three times global annual economic output… This doesn’t seem to interest anyone. But let us take the state of the American economy, and a proud President boasting about the index of growth, now estimated at 2.6%. Well, this shows the inadequacy of the GDP as a valid indicator. Growth is a macroeconomic index. If 80% goes to a few hands, and the crumbs to all the others, who pay most of taxes, it is not an example of growth, it is just a problem waiting to explode.

What is more, nobody is thinking about the increase in deficit. The total private debt at the end of the first quarter of 2017 was 14.9 trillion, with an increase of 900 million dollars in three months. While salaries increased from 9.2 billion dollars in 2014 to 10.3 billion dollars in the second quarter of 2017, the debt of families rose from 13.9 billion dollars to 14.9, an increase of one billion dollars, in just four months.

Which growth are we talking about? In fact, we have 86% of the population facing an increasing debt, but poorer at the same time, because of the concentration of wealth in just 1% of the population’s hands. This should be a cause of concern for any administration, left wing or right-wing: in fact, it is not surprising that the 400 richest men of the US, led by Warren Buffet, have written to Trump telling him that they are doing fine and that they do need a tax rebate; and that he should worry about the poorest part of the population.

Now a favourite way of avoiding taxes, is to place money in tax havens, where between 21 and 30 trillion dollars are ensconced. The Tax Justice Network reports that this system is “basically designed and operated” by a group of highly paid specialists from the world’s largest private banks (led by UBS, Credit Suisse, and Goldman Sachs), law offices, and accounting firms and tolerated by international organizations such as Bank for International Settlements, the International Monetary Fund, the World Bank, the OECD, and the G20.

The amount of money hidden away has significantly increased since 2005, sharpening the divide between the super-rich and the rest of the world. And this is why there was a lot of pressure to oblige banks to open their accounts to fiscal inspector, and pressure on the Bahamas, Hong Kong, Panama and other third world countries.

Now, another good example of the reigning hypocrisy: The last meeting of the Ministers of Finance of the European Union (Ecofin), has not been able to take a decision on something heinous: several member countries (Luxemburg, UK, Ireland, the Netherlands, Malta and Cyprus), host tax havens on their territories. The Queen of England has invested 10 million pounds in an English tax heaven. And two US states, in particular Delaware, have tax havens that are impenetrable even to the CIA and FBI. Tax havens such as the Cayman Islands, Jersey and the Bahamas were far less permissive, researchers found, than states such as Nevada, Delaware, Montana, South Dakota, Wyoming and New York. “[Americans] discovered that they really don’t need to go to Panama”, said James Henry of the Tax Justice Network. Ecofin has decided that they will continue to bang Third World countries, until they decided what to do at home.

So, the West proclaims principles of transparency and accountability, as long as it can impose these on others. But there is a paradox for the western governments: if those tax havens were closed, as the majority of the deposit comes from the West, they would be able to get much more taxes. To take just the case of the US: Reed College economist Kim Clausing estimates that inversions in tax havens and other income-shifting techniques reduced Treasury revenues by as much as $111 billion in 2012. And, according to a new Congressional Budget Office projection, the corporate base erosion will continue to cut corporate tax receipts over the next decade. It must be clear therefore that if governments let their revenues from the corporations and high earners shrink, they are not acting in the interest of the average citizen.

So, let us draw our conclusions. Nobody is paying attention to the world debt. It is increasing beyond control, but we are leaving the problem to the next generations, hoping that they will address it. We are mortgaging them with debt, with climate change, and whatever else is possible, to avoid any sacrifices on our part now. Our motto seems to be: Let us protect the riches, and expect less from them and more from the others. In 1952, corporate income taxes funded about 32 percent of the US government. That shrank to 10.6 percent by 2015. While tax havens aren’t the sole cause of this shift, it’s worth noting that the share of corporate profits reported in tax havens has increased tenfold since the 1980s. And now comes from Trump the giant tax gift for companies.

This policy, hidden to citizens, and never legitimized by any formal act of law, is now becoming evident because of the giant increase of inequality, which has no precedence in history. According to Oxfam, Great Britain will have more social injustice in 2020, that at the times of Queen Victoria. The world is moving faster to financial investments and transactions, and not the production of goods and services, which do not fetch instant rewards. It is estimated that with one trillion dollars you can buy the world production of a day of goods and services. That same day, the financial transactions reach 40 trillion dollars. That means, that for every dollar generated by human hands, there are 40 dollars created by financial abstractions.

Globalization is obviously rewarding capitals, not human beings. Well, this is having an impact in politics, and not the best one. There is everywhere an increasing number of losers, especially in rich countries, also because of technological development, and shift in consumption. A classic example are the coal mines that Trump wants to resurrect, to make America great again. But coal is inexorably being phased out because of climate concerns (even if not fast enough), and automatization reduces considerably the number of workers to be employed. Robots will in 2040 be responsible for 42% of production of goods and services, up from the present 16%. Which means around 86 million of new unemployed, in the West alone, according to the International Labour Organization. Those left out from the benefits of globalizations look at the winners, whom they see well connected to the system. This results in the globalization of resentment and frustration, which in a few years has led to the rise of the rightist parties in all European countries, triggered Brexit, and Trump. Once upon a time, the left was the banner-bearer of the fight for social justice. Now it is the right!

Finally, globalization has lost its shine – but not its power. Now, the debate is about how to de-globalize, and what is worrying is that the debate is not about how to bring the process to the service of humankind, but how to deploy populism and nationalism, and xenophobia, to “let us make US great again”, to the increase in clashes and conflicts.

International organizations like the IMF and the World Bank – who have been claiming for two decades that market is the only basis for progress, that once a totally free market is in place, the common man and woman would be the beneficiary – have switched the reverse gear. Now they are all talking about the need for the state to be again the arbiter for regulations and social inclusion, because they have found out that social injustice is a brake not only for democracy, but also economic progress. But despite all the mea culpa, they are rather late in the day. The genie is out of the bottle, and the powers that be do not even try to put it back. Utter hypocrisy, vested interests, and the lack of vision have regrettably replaced policy.

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The Political Responsibility in the Collapse of Our Planet Wed, 27 Dec 2017 20:47:28 +0000 Roberto Savio Roberto Savio is founder of IPS Inter Press Service and President Emeritus

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The premises of a school inundated by floodwater. Shibaloy in Manikganj district, Bangladesh. Credit: Farid Ahmed/ IPS

By Roberto Savio
ROME, Dec 27 2017 (IPS)

On 20 December, Europe’s 28 Ministers of Environment met in Brussels, to discuss the plan for reducing emissions prepared by the Commission, to comply with the Paris Agreement on climate change. Well, it is now clear that we have lost the battle in keeping the planet as we have known it. Now, of course, this can be considered a personal opinion of mine, devoid of objectivity.

Therefore I will bring a lot of data, history and facts, to make it concrete. Data and facts have good value: they focus any debate, while ideas do not. So those who do not like facts, please stop reading here. You will escape a boring article, as probably all of mine are, because I am not looking to entertain, but to create awareness. If you stop reading, you will also lose a chance to know our sad destiny.

As common in politics now, interests have won over values and vision. The ministers decided (with some resistance from Denmark and Portugal), to reduce Europe’s commitment. This is going in the Trump direction, who left the Paris Agreement, to privilege American interests, without any attention to the planet. So, Europe is just following.

Of course, those alive now will not pay any price: the next generations will be the victims of a world more and more inhospitable. Few of the people who made to Paris in 2015, solemn engagements in the name of all humankind to save the planet, will be alive 30 years from now, when the change will become irreversible. And it will be also clear that humans are the only animals who do not defend nor protect their habitat.

While we talk on how to reduce the use of fossils, we are doing the opposite. At this very moment, we spend 10 million dollars per minute, to subsidize the fossils industry. Just counting direct subsidies, they are between 775 billion dollars to 1 trillion, according to the UN

First of all, the Paris’ Agreement was adopted by the 195 participating countries, of which 171 have already subscribed to the treaty, in just two years. Which is fine, except that the treaty is just a collection of good wishes, without any concrete engagement.

To start with, it does not set up specific and verifiable engagements. Every country will set its own targets, and will be responsible for its implementation. It is like to ask all citizens of a country to decide how much taxes they want to pay, and leave to them to comply, without any possible sanction.

Europe engaged in Paris in 2015, to reach 27% of renewable energies (by scaling down the use of fossils), fixing a target of 20% for 2020. Well, from 27%, it went down to 24.3%. In addition, the ministers decided to keep subsidies for the fossils industry, until 2030 instead of 2020, as planned. And while the proposal of the Commission was that fossils plants would lose subsidies if they did not cut their emissions to 500 grams of CO2 per ton by 2020, the ministers extended subsidies until 2025.

Finally, the Commission proposed to cut biofuels (fuels made with products for human consumption, like palm oil) to 3.8%. Well, the ministers, in spite of all their declarations about the fight against hunger in the world, decided to double that, at 7%.

Now let us go back to the real flaw of the Paris Agreement. Scientists took two decades to conclude with certitude that climate change is caused by human activities, despite a strong and well financed fight by the coal and fuel industry, to say otherwise.

The International Panel on Climate Change, is an organization under the auspices of the UN, whose members are 194 countries, but its strength comes from the more than 2.000 scientists from 154 countries who work together on climate. It took them from 1988, (when the IPCC was established), to 2013, to reach a definitive conclusion: the only way to stop the planet deteriorating more rapidly, emissions should not exceed 1.5 centigrade over what was the Earth’ temperature in 1850.

In other words, our planet is deteriorating already, and we cannot revert that. We have emitted too much gas and pollution, that are at work already. But by halting this process, we can stabilize it, but never cancel what we did cause, at least for thousands of years.

The Industrial revolution is considered to start in 1746, when industrial mills replaced individual weavers. But it started in great scale in the second half of the 19th century, with the second industrial revolution.

This involved the use of science in the production, by inventing engines, railways, creating factories, and other means of industrial production. We started to register temperatures in 1850, when this was done with thermometers.

So, we can see how coal, fossils and other fuels started to interact with the atmosphere. What the scientists concluded was that if we went over 1,5 centigrade of the 1.850’s temperature, we would irreversibly cross a red line: we will not be able to change the trend, and climate will be out of control, with very dramatic consequences for the planet.

Roberto Savio

Paris conference is a final act of a process who started in Rio de Janeiro in 1992, with the Conference on Environment and Development, where two leaders have now passe away, Boutros Boutros Ghali and Maurice Strong, ran the first summit of heads of state on the issue of environment.

Incidentally, it is worth remembering that Strong, a man who spent all his life to make environment a central issue, did open up the conference for the first time to representatives of civil society, beyond governmental delegations. Over 20.000 organizations, academicians, activist come to Rio, starting the creation of a global civil society recognized by the international community.

In 1997, as a result of Rio Conference, the Kyoto Treaty was adopted, with the aim to reduce emissions. The results show that during the nearly two decades bringing to Paris, the results are very modest. Coal went from 45,05% in 1950, to 28.64 in 2016, also because of new technologies, but petrol increased from19.46, to 33.91 and renewables were a negligible reality.

So, Paris was left with a very urgent task, after having lost already two decades. And according to the World Bank, in 2014 , there are 1,017 billion people without electricity, with Africa where only 20% of people has access to electricity. For all these people we should provide renewable energy, to avoid a dramatic increase of emissions.

Paris was supposed to be really a global agreement, unlike Tokyo. So, to bring as many countries as possible on board, it is a little known dirty secret that the UN decided to put as a goal not the very tight 1,5 centigrade as a target, but a more palatable 2 centigrade. But unfortunately, the consensus is that we have already passed the 1.5 centigrade. And the United Nations Environment Program (UNEP), has estimated that the engagements taken by the countries in Paris, if not changed, will bring us to 6 centigrade, an increase that according to the scientific community would make a large part of the earth inhabitable.

In fact, in the last four years we had the hottest summers since 1850. And in 2017 we have the highest record of emissions in history, because they have reached 41.5 gigatons. Of those, 90% comes from activities related to human actions, while renewables (cost for which has now become competitive with fossils), still cover only 18% of the energy consumed in the world. And now let us move to another important dirty secret.

While we talk on how to reduce the use of fossils, we are doing the opposite. At this very moment, we spend 10 million dollars per minute, to subsidize the fossils industry.

Just counting direct subsidies, they are between 775 billion dollars to 1 trillion, according to the UN. The official figure just in the G20 is 444 billion. But then, the International Monetary Fund accepted the economists’ view that subsidies are not only cash: it is the use of the earth and society, like destruction of soil, use of water, political tariffs (the so-called externalities, the cost which exists but are external to the budget of the companies).

If we do that, we reach the staggering amount of 5.3 trillion: they were 4.9 trillion in 2013. That is 6.5% of the global Gross National Product…and that is what it costs to governments, society and earth, to use fossils.

That was nowhere in in the news media. Few know the strength of the fossils industry. Trump wants to reopen the mines, not only because that brings him votes by those who lost an obsolete job, but because the fossils industry is a strong backer of the Republican party.

The billionaire Koch brothers, the largest owners of coal mines in the US, have declared that they have spent 800 million dollars in the last electoral campaign. Someone might say: these things happen in the US but according to the respected Transparency International, there are over 40.000 lobbyists in Europe, working to exercise political influence.

The Corporate Europe Observatory, which studies the financial sector, found out that it spends just in Brussels 120 million a year, and employs 1.700 lobbyists. It found that they lobbied against regulations, with more than 700 organizations, which outnumbered trade unions and civil society organizations, by a factor of seven.

The power of the fossils industry explains why in 2009 governments helped the sector with 557 billion dollars, and only 43 to 46 billion dollars to all renewable industry (International Energy Agency estimates).

It is clear that citizens have no idea that a part of their money is going to keep alive, with good profits, a sector which is well aware that they are key in the destruction of our planet.

A sector that knows well that they are now emitting 400 particles of CO2 per million, when the red line was considered 350 particles PM. But people do not know, and this is a spectacular feast of hypocrisy that goes on.

The UN, in 2015, conducted an extensive poll, with the participation of 9.7 million people. They were asked to choose as their priorities six themes out of 16. The first of the themes presented was climate change. Well, the first one chosen, with 6.5 million of preferences, was “a good education”. The second and third, with over 5 million of preferences, were “a better health system”, and “better opportunities for work”. The last of the 16 themes, with less than 2 million, was the “climate change. “And this was also in the preferences of the least developed countries, who are going to be the major victims of climate change.

The 4.3 millions poorest participants, from the least developed countries, put again education first (3 million preferences); climate change was last, with 561.000 votes…Not even in Polynesia, Micronesia and Melanesia, islands which could disappear, climate change was at the first place. This is an ample proof that people do not realize where we are: at a threshold of the survival of our planet, as we have known it for several thousand years.

So, if citizens are not aware, and therefore not concerned, why should the politicians be? The answer is because they are elected by citizens to represent their interests, and they can make more informed decisions.How does this ring in your ears? With lobbyist all over fighting for interests, what can be well sold as jobs and stability?


Holstein cows in a feedlot. Credit: Bigstock


And now, let us bring a last dirty secret, to show how far we are from really addressing the control of our climate. In addition to what we said, there is a very important issue, that has even been discussed in Paris: the agreements are entirely about the reduction of emissions by the fossils’ industry. Other emissions have been left entirely out.

Now, a new documentary, the Cowspiracy: The Sustainability Secret, produced by Leonardo di Caprio, has ordered several data presented by vegans, on the impact of animals in the climate change. They are considered somehow exaggerated. But their dimensions are so big, that they add anyhow another nail to our coffin.

Animals emit not CO2, but methane which is at least 25 % more damaging than C02. There is recognition by the UN, that while all means of transportation, from cars to planes, contribute to 13% of emissions, cows do with 18%…

And the real problem is the use of water, a key theme that we have no way to address in this article. Water is considered even by military strategist to be soon the cause of conflicts, as petrol has been for a long time.

One pound of beef uses 2.500 gallons of water. That means that a hamburger is the equivalent of two months of showers…! And to have 1 gallon of milk, you need 100 gallons of water. And people worldwide, use one tenth of what cows need.

Cattle uses 33% of all water, 45% of the earth, and are the cause of 91% of the Amazon deforestation. They also produce waste 130 times more than human beings. Pig raising in the Netherlands is creating serious problems because theirs waste acidity is reducing usable land. And consumption of meat is increasing in Asia and Africa, very fast,it is considered a mark of reaching the choices of rich societies.

Beside this serious impact on the planet, there is also a strong paradox of sustainability for our human population. We are now 7.5 billion people, and we will reach soon 9 billion. The total food production worldwide could feed 13 to 14 billion people. Of this a considerable part goes wasted, and does not reach people (theme for an article by itself). But the food for animals could feed 6 billion people.

And we have one billion people starving. This is proof how far we are from using resources rationally for the people living on earth. We have enough resources for everybody, but we cannot administer them rationally. The number of obese has reached the number of those starving.

The logical solution in this situation would be to reach an agreement on a global governance, in the interest of the planet of humankind. Well, we are going in the opposite direction. The international system is besieged by nationalism, who make increasingly impossible to reach meaningful solutions.


Globally, 75 percent of coral reefs are under threat from overfishing, habitat destruction, pollution and acidification of the seas due to climate change. Credit: Bigstock


Let us conclude with a last example: overfishing. Its now two decades that the World Trade Organization (which is not part of the UN, and was built against the UN) tries to reach an agreement on over- fishing with mega nets, who scoop up an enormous quantity of fishe: 2.7 trillion, of which they keep only one fifth, and they throw back four fifth.

Well, at the last WTO conference on the 13 December in Buenos Aires, governments were again not able to reach an agreement on how to limit illicit fishing. Big fishes are now down at 10% of 1970.And we are exploiting one third of all stocks.

It is estimated that illegal fishing puts between 10 billion and 23 billion on the black market, according to a study by 17 specialized agencies, with a full list of names. And again, governments spend 20 billion per year to finance the increase of their fishing industry…another example of how interest win on the common good.

I think now we have enough data, to realize the inability of governments to take seriously their responsibilities, because they have the necessary information to know that we are going toward a disaster.

In a normal world, Trump’s declaration that Climate control is a Chinese hoax, and it is invented against the interest of United States, should have caused more global emotion.

Also, because while Trump’s internal policies are an American question, climate is affecting all the 7.5 billion in the planet, and Trump was elected by less than a quarter of eligible voters: nearly 63 million. Too little to take decisions which affect all humankind.

And now European ministers are following, as a proverb says, money speaks and ideas murmur.. And there are many who are preparing to speculate on climate change. Now that we have lost 70% of the ice of the North Pole, the maritime industry is gearing to use the Northern Route, which will cut cost and time by a 17%.

And the British wine industry, since the warming of the planet, is increasing production by 5% each year. The vineyards planted in Kent or Sussex, with a calcar soil, are now bought from producers of Champagne, who plan to move there. The UK is already producing 5 million bottles of wine and sparkling wines, which are all sold. This Christmas, local sparkling wine will exceed champagnes, caves, prosecco and other traditional Christmas drinks.

We have all seen, at no avail, the increase of hurricanes and storms, also in Europe, and a record spread of wildfires. The UN estimates that at least 800 million people will be displaced by climate change making uninhabitable several parts of the world. Where they will go? Not to the United States or Europe, where they are seen as invaders.

We forget that the Syrian crisis came after four years of drought (1996-2000) which displaced over a million peasants to the towns. The ensuing discontent fuelled the war, with now 400.000 dead and six million refugees.

When citizens will awake to the damages, it will be too late. Scientists think that it will become clearly evident after thirty years. So why do we worry now ? That is a problem for the next generation, and companies will continue to make money until the last minute, with complicity of governments and their support,so, let us ride the climate change tide.

Let us buy a good bottle of British champagne, let us drink it on a luxury cruise line over the Pole, and let the orchestra play, as they did in the Titanic until the last minute!

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Production Diversity, Diet Diversity and Nutrition in Sub -Saharan Africa Tue, 19 Dec 2017 14:13:20 +0000 Raghav Gaiha and Shantanu Mathur Raghav Gaiha is (Honorary) Professorial Research Fellow, Global Development Insitute, University of Manchester, England; & Shantanu Mathur is Lead Advisor, Programme Management Department, International Fund for Agricultural Development, Rome, Italy. The views are personal.

The post Production Diversity, Diet Diversity and Nutrition in Sub -Saharan Africa appeared first on Inter Press Service.


Raghav Gaiha is (Honorary) Professorial Research Fellow, Global Development Insitute, University of Manchester, England; & Shantanu Mathur is Lead Advisor, Programme Management Department, International Fund for Agricultural Development, Rome, Italy. The views are personal.

By Raghav Gaiha and Shantanu Mathur
NEW DELHI, Dec 19 2017 (IPS)

Lack of diet diversity is viewed as the major cause of micronutrient malnutrition in Sub-Saharan Africa. Imbalanced diets resulting from consumption of mainly high carbohydrate based-diets also contribute to productivity losses and reduced educational attainment and income. Consequently, micronutrient malnutrition is currently the most critical for food and nutritional security problem as most diets are often deficient in essential vitamins and minerals. In Tanzania, for example, most rural and urban households consume mainly staples as their main food, which are high in carbohydrates, but low in micronutrients and vitamins. Staple food items increase energy availability but do not improve nutritional outcomes if not consumed together with micro-nutrient rich foods.

Raghav Gaiha

A positive relationship between farm production diversity and diet diversity is plausible, because much of what smallholder farmers produce is consumed at home. However, this is more plausible for a subsistence economy than one in which market transactions are prominent. Instead of producing everything at home, households can buy food diversity in the market when they earn sufficient income. Farm diversification may contribute to income growth and stability. Besides, as the majority of smallholder households in developing countries also have off-farm income sources, the link between production diversity and diet diversity is further undermined. Finally, when relying on markets, nutrition effects in farm households will also depend on how well the markets function and who decides how farm and off-farm incomes will be allocated to food. It is well-known that income in the hands of women frequently results in more nourishing food-especially for children.

A recent study analyzed the relationship between production and consumption diversity in smallholder farm households in four developing countries: Indonesia, Kenya, Ethiopia, and Malawi (Sibhatu et al. 2014). These four countries were selected mainly because of availability of recent household data. The results are classified under (i) association between production and diet diversity, (ii) role of market access, and (iii) role of selling and buying food. Farm production diversity is positively associated with diet diversity, but the effect is relatively small. In the pooled sample (of all four countries), producing one additional crop or livestock species leads to a 0.9% increase in the number of food groups consumed This effect, however, varies across the countries in question. In Kenya and Ethiopia, the estimates are very small and not (statistically) significant. In these two countries, average production diversity is quite high; further increasing farm diversity would hardly contribute to higher diet diversity. One indicator of market access is the geographic distance from the farm household to the closest market where food can be sold or bought. The estimated effects are negative, implying that households in remoter regions have lower dietary diversity. Better market access through reduced distances could therefore contribute to higher diet diversity. Reducing market distance by 10 km has the same effect on diet diversity as increasing farm production diversity by one additional crop or livestock species.

Shantanu Mathur

A more pertinent question is whether this also leads to more healthy diets. Depending on the type of food outlets available in a particular context, buying food may be associated with rather unhealthy diet diversification, for instance, through increased consumption of fats, sweets, or sugary beverages. This is examined by using alternative diet diversity scores, including only more healthy food groups. The finding that better market access tends to increase diet diversity also holds with this alternative measure. However, it is not self-evident that this measure is appropriate for two reasons: (i) one is the failure to distinguish between processed and unprocessed, say, vegetables (eg French fries and boiled potato) with vastly different nutritional implications; and (ii) at best, diet diversity (restricted or unrestricted) is an approximation to nutrients’ intake as there are substitutions both within and between food groups in response to income and price changes (a case in point is different grades of rice).

Another approach is to take into account what households sell and buy. This information is only available for Ethiopia and Malawi. If a household sells at least parts of its farm produce, it has a positive and significant effect on diet diversity. It is also much larger than the effect of production diversity. This comparison suggests that facilitating the commercialization of smallholder farms may be a better strategy to improve nutrition than promoting more diversified subsistence production. Furthermore, the negative and significant interaction effect confirms that market participation reduces the role of production diversity in dietary quality.

Better market access in terms of shorter distance and more off-farm income opportunities increase the level of purchased food diversity. If off-farm income opportunities are greater in rural areas with short distances to market, the market access effect can’t be disentangled from the income effect. The interaction between level of farm income and participation in off-farm activities is often complex as small farmers tend to work as labourers in the latter while relatively affluent dominate as owners in more remunerative enterprises. The two important inferences are: (i) increasing on-farm diversity among smallholders is not always the most effective way to improve diet diversity and should not be considered a goal in itself; and (ii) in many situations, facilitating market access through improved infrastructure and other policies to reduce transaction costs and price distortions seems to be more promising than promoting further production diversification. One major caveat, however, remains. Even the alternative measure of diet diversity/quality is merely a crude approximation to nutrition (Gaiha et al. 2014).

In brief, market access through buying/selling food is more closely associated with diet diversity than production diversity. Diet diversity, however, is a weak proxy for nutrition. Indeed, there is no shortcut to empirical validation of the link between diet diversity and nutritional outcomes-especially consumption of micronutrients.

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Shedding Diplomacy, Roberto Savio Speaks about Fear as a Tool to Gain Power Thu, 14 Dec 2017 11:17:39 +0000 Roberto Savio This op-ed by Roberto Savio, IPS founder and President Emeritus is adapted from a statement he made as a panelist on Migration and Human Solidarity, A Challenge and an Opportunity for Europe and the MENA region held on 14 December at the Geneva Centre for Human Rights Advancement and Global Dialogue.

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This op-ed by Roberto Savio, IPS founder and President Emeritus is adapted from a statement he made as a panelist on Migration and Human Solidarity, A Challenge and an Opportunity for Europe and the MENA region held on 14 December at the Geneva Centre for Human Rights Advancement and Global Dialogue.

By Roberto Savio
ROME, Dec 14 2017 (IPS)

At the outset my thanks to Dr Hanif Hassan Ali Al Kassim, and Ambassador Idriss Jazairy who lead the Centre for Human Rights Advancement and Global Dialogue for organizing this panel discussion at a critical moment in history. The Centre, is one of the few actors for peace and cooperation between the Arab world and Europe. As a representative of global civil society, I think it will be more meaningful if I speak without the constraints of diplomacy, and I make frank and unfettered reflections.

Roberto Savio

Roberto Savio

The misuse of religion, of populism and xenophobia, is a sad reality, which is not clearly addressed any longer, but met with hypocrisy and not outright denunciation. Only now the British are realizing that they voted for Brexit, on the basis of a campaign of lies. But nobody has taken on publicly Johnson or Farage, the leaders of Brexit, after Great Britain accepted to pay, as one of the many costs of divorce, at least 45 billion Euro, instead of saving 20 billion Euro, as claimed by the ‘brexiters’. And there are only a few analysis on why political behaviour is more and more a sheer calculation, without any concern for truth or the good of the country.

President Trump could be a good case study on the relations between politics and populism. Just a few days ago the United States has declared that they are withdrawing from the UN Global Compact on Migration. This has nothing to do with the interest or the identity of United States, which has built itself as a country of immigrants. It has to do with the fact that this decision is popular with a part of American population, which is voting for President Trump, like the evangelicals. I have here to show the message they are circulating, after the declaration of Jerusalem as the capital of Israel. This is what it is said in the Bible. If we recreate the world described in the bible, Jesus will make his second coming to earth, and only the just will be rewarded. And therefore they think that Trump brings the world closer to the return of Christ, and therefore he acts for the good of their beliefs. Evangelicals are close to thirty million, and they strongly believe that when the second coming of Jesus will happen, he will recognize only them as the believers who are on the right path. Trump is not an evangelical, and he has shown little interest in religion. But, like each of his actions, he is coherent with his views during the campaign, which brought together all the dissatisfied people catapulting him into the White House. Everything he does, is not in the interest of the world or of the United States. He is just focused on keeping the support of his electors – those who do not come from big towns, academia, media and the Silicon Valley. They come mainly from impoverished and uninformed white electors, who feel left out from the benefits of globalization. They believe those benefits went to the elite, to the big towns and to the few winners, and believe that there is an international plot to humiliate the United States. So, climate change for them and Trump is a Chinese hoax ! During the first year, Trump can well have a shocking approval rating of 32%, the lowest in history for a President of United States. But 92% of his voters would re-elect him. And as only 50% of Americans vote, he can conveniently ignore general public opinion.

It is not the place here to go deeper into American political trends. But Trump is a perfect example to see why a large number of Europeans, or even countries like Poland, Hungary and Czech Republic, are ignoring the decisions of the European Union on migrants, and why populism, xenophobia and nationalism are on the rise everywhere.

Fear has become the tool to get to power.

Historians agree that two main engines of change in history, are greed and fear.

Well, we have been trained, since the collapse of communism, to look to greed as a positive value. Markets (no man or ideas), was the new paradigm. States were an obstacle to a free market. Globalization, it was famously said, would lift all boats, and benefit everybody. In fact, markets without rules was self-destructive, and not all boats were lifted, but only yachts, the bigger the better. The rich became richer, and the poor poorer. The process is so speedy, that ten years ago the richest 528 people had the same wealth of 2.3 billion people. This year, they have become 8, and this number is likely to shrink soon. All statistics are clear, and globalization based on free market is losing some of its shine.

But meanwhile we have lost many codes of communication. In the political debate there is no more reference to social justice, solidarity, participation, equity, the values in the modern constitutions, on which we built international relations. Now the codes are competition, success, profit and individual achievement. During my lectures at schools, I am dismayed to see a materialistic generation, who do not care to vote, to change the world. And the distance between citizens and political institutions is increasing every day. The only voices reminding us of justice and solidarity, and are voices from religious leaders: Pope Bergoglio, the Dalai Lama, Bishop Tutu, and the Grand Mufti Muhammad Hussein, just to name the most prominent. And with media who are now also based on market as the only criteria, those voices are becoming weaker.

After a generation of greed, we are now in a generation of fear. We should notice that, before the great economic crisis of 2009 (provoked by greed: banks have paid until now 280 billion dollars of penalties and fines), xenophobe and populist parties were always minorities (with exception of Le Pen in France). The crisis created fear and uncertainties, and then immigration started to rise, especially after the invasion of Libya in 2001 and Iraq in 2013.We are now in the seventh year of the Syrian drama, which displaced 45% of the population. Merkel is now paying a price for her acceptance of Syrian refugees, and it is interesting to note that two thirds of the votes to Alternative Fur Deutschland, the populist and xenophobe party, comes from former East Germany, that has few refugees but an income, which is nearly 25% lower. Fear, again, has been the engine for change of German history.

Europe was direct lyresponsible for these migrations. A famous cartoonist El Roto from El Pais, has made a cartoon showing bombs flying in the air, and migrant’s boats coming from the sea. “We send them bombs, and they send us migrants”. But there is no recognition of this. Those who escape from hunger and war are now depicted as invaders. Countries who until few years ago, like the Nordic ones, were considered synonymous with civic virtues, and who spent a considerable budget for international cooperation, are now erecting walls and barbed wire. Greed and fear have been so successfully exploited by the new nationalist, populist and xenophobe parties, that now they keep growing at every election, from Austria to the Netherlands, from Czech Republic to Great Britain (where they created Brexit ), and then Germany, and in a few months, Italy. The three horses of apocalypse, which in the thirties were the basis for the Second Wold War: nationalism, populism and xenophobia, are back with growing popular support, and politicians openly riding them.

But what is shocking is that we have now a new element of division: religion, which is widely used against immigrants and should instead unite us. Religion has always been used to get power and legitimacy. Common people never started the wars of religion in Europe but by princes and kings. A few years ago we did commemorate the expulsion first of the Jews, and then of the Moors, from Spain, where they lived in harmony and peace with the Christians, forming a civilization of the three cultures. And a few weeks ago, there was a great march in Warsaw, ignored by the media, with 40.000 people, many coming from all over Europe and the United States. They marched in the name of God, crying death to the Jews and Muslim.

But while Protestant, Catholic, Muslim and Jew religious leaders engage in a positive dialogue for peace and cooperation, a number of self-proclaimed defenders of the faith, are bringing fear, misery and death. And it should be clear that we have no clash of religions. It is a clash of those who use religion for power and legitimacy. And they ride an unrealistic historical dream. To return to a world, which is gone, where mines will reopen, the country will go back to its former glory: a world, that dreams not of a better future, but of a better past. Africa is going to double its population, with 80% of its population under 35 years; while in Europe it will be just 20%. There is no hope for Europe to be viable in a global economy and in a competitive world, without substantial immigration. Yet, to speak about that in the political debate, is now a kiss of death.

In conclusion, I must stress that we face a sad reality, which cannot be ignored any longer, even if it is not politically correct. Ideals have always been used to gain support, even from those who did not believe them. And historians teach us that in modern times humankind has fallen into three traps: In the name of God, to divide and not to dialogue; in the name of the nation, often to rally support and bring citizens to wars; and now, in name of the profit. I think it is time to make new alliances, and launch a great powerful campaign of awareness on the false prophets, with mobilizations of media, civil society and legitimate politicians, to educate citizens that immigration must be regulated, as it is a necessity, with which Europe must live.

We must establish policies, and even after Trumps leaves the global Compact, like he left the Paris Agreement on climate change, he will remain an isolated voice, while citizens will strive for a better world, with no fears, based on common values. We must take an unpopular but vital action for education and participation. It will be unpopular and difficult we know. But if we do not take this road, human beings, who are the only ‘animals’ who do not learn from past mistakes, will again go through blood, misery and destruction.

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Are Value Chains a Pathway to Nutrition in Sub-Saharan Africa? Mon, 11 Dec 2017 08:56:51 +0000 Raghav Gaiha and Shantanu Mathur Raghav Gaiha is (Honorary) Professorial Research Fellow, Global Development Institute, University of Manchester, England; and Shantanu Mathur is Lead Advisor, Programme Management Department, International Fund for Agricultural Development, Rome, Italy. The views are personal.

The post Are Value Chains a Pathway to Nutrition in Sub-Saharan Africa? appeared first on Inter Press Service.


Raghav Gaiha is (Honorary) Professorial Research Fellow, Global Development Institute, University of Manchester, England; and Shantanu Mathur is Lead Advisor, Programme Management Department, International Fund for Agricultural Development, Rome, Italy. The views are personal.

By Raghav Gaiha and Shantanu Mathur
NEW DELHI, Dec 11 2017 (IPS)

Although difficult to ascertain whether it is a trend reversal, two recent FAO reports (2017a, b) show a rise in hunger globally as well as in Africa. The number of undernourished (NoU) in the world suffering from chronic food deprivation began to rise in 2014 –from 775 million people to 777 million in 2015 – and is now estimated to have increased further, to 815 million in 2016. The stagnation of the global average of the proportion of undernourished (PoU) from 2013 to 2015 is the result of two offsetting changes at the regional level: in Sub-Saharan Africa, the share of undernourished people increased, while there was a continued decline in Asia in the same period. However, in 2016, the PoU increased in most regions except Northern Africa, Southern Asia, Eastern Asia, Central America and the Caribbean. The deterioration was most severe in Sub-Saharan Africa and South-Eastern Asia (FAO 2017a,b).

Raghav Gaiha

In 2016, weak commodity prices were partly responsible for a slowdown in economic growth across Sub-Saharan Africa to 1.4 %, its most sluggish pace in more than two decades. With the population growing by about 3 % a year, people on average got poorer last year, and, by implication, more undernourished. The greater frequency and intensity of conflicts and crises further aggravated undernourishment.

Food systems are changing rapidly. Globalization, trade liberalization, and rapid urbanization have led to major shifts in the availability, affordability, and acceptability of different types of food, which has driven a nutrition transition in many countries in the developing world. Food production has become more capital-intensive and supply chains have grown longer as basic ingredients undergo multiple transformations. Expansion of fast food outlets and supermarkets has resulted in dietary shifts. The consumption of low nutritional quality, energy-dense, ultra-processed food and drinks, and fried snacks and sweets has risen dramatically in the past decade.

The concomitant shift to the more market-oriented nature of agricultural policies means that agricultural technology and markets play a more important role in determining food prices and rural incomes, and more food is consumed from the marketplace rather than from own production. The greater market orientation of food production and consumption has increased the bidirectional links between agriculture and nutrition: agriculture still affects nutrition, but food and nutritional demands increasingly affect agriculture. Increasing demands for energy-intensive products exacerbate environmental impacts of food value chains: for example, excessive use of agricultural chemicals to extract more dietary energy from every hectare while contaminating the very food it produces, along with groundwater and the soil; and the greenhouse gas emissions from livestock industries to feed the ever-increasing demand for meat and dairy products (Carletto, 2015).

Shantanu Mathur

Value chain concepts are useful in designing strategies to achieve nutrition goals. Central to this approach is identifying opportunities where chain actors benefit from the marketing of agricultural products with higher nutritional value. However, value chain development focuses on efficiency and economic returns among value chain transactions, and the nutritional content of commodities is often overlooked.

A food value chain involves a series of processes and actors that take a food from its production to consumption and disposal as waste. In a value chain, the emphasis is on the value (usually economic) accrued (and lost) for chain actors at different steps in the chain, and the value produced through the functioning of the whole chain as an interactive unit. A value chain is commodity specific, and thus involves only one particular food that is relevant within a diet.

As value chains are crucial in determining food availability, affordability, quality, and acceptability, they have potential to improve nutrition. What is required is to identify opportunities where value chain actors benefit from supplying the market with agricultural products of higher nutritional value. Value chain development, however, has rarely focused attention on consumers—consumers are simply considered as purchasers driving the ultimate source of demand. In this light, the value chain strategy is likely to be enriched by a stronger consumer focus, and, in particular, a focus on consumer nutrition and health. The empirical evidence on the role of value chains in improving nutrition is, however, scanty and mixed.

Basically, nutrition results from the quality of the overall diet, not just from the nutrient content of an individual food. In value chains, the focus is generally commodity specific, rather than on how to integrate multiple chains to contribute to an enhanced quality of diet. There may be offsetting impacts such that, if one value chain works better and consumption of the associated food increases, consumption of other foods may decline.

On the demand side, the central issue is how to promote consumption of nutritious foods by target populations that may not be able to afford a healthy diet. Similarly, on the supply side, an important concern is the feasibility of targeting the poorest smallholders and informal enterprises along the value chain, particularly, involving women.

An example from Nigeria elucidates the potential of value chains for enhancement of nutritional value and the constraints that must be addressed. Chronic undernutrition is pervasive in Nigeria, with rates of stunting and underweight alarmingly high and little progress over the last decade. There are major disparities in nutrition outcomes between the wealthy and poor, between the north and south, and between urban and rural areas. Micronutrient deficiencies are widespread across social groups. Vitamin A deficiency, for example, is associated with 25% of child and maternal deaths. Together with direct nutrition interventions, it is necessary to improve the functioning of food value chains and provide access to nutrient-dense foods to the urban and rural poor.

Cowpeas make a substantial contribution to the nutrition of poor populations in Nigeria. Cowpea grains contain an average of 24% protein and 62% soluble carbohydrates. They are rich in thiamine, folates and iron, and also contain zinc, potassium, magnesium, riboflavin, vitamin B6 and calcium, as well as the amino acids lysine and tryptophan. Markets for cowpea products are mainly informal, and the majority of products are produced by small-scale businesses and sold locally. Few formal sector businesses have invested in cowpea products, and there is limited innovation in value-added products. A merit of cowpea foods is that they are readily acceptable to diverse populations, widely available across the country and can be distinguished from less nutritious alternatives. However, affordability and availability of cowpeas is constrained by major supply-side problems. Cowpea prices fluctuate between seasons, due to the susceptibility of grains to degradation and low use of improved storage technologies. Although simple, safe and low-cost technologies are available in the form of improved storage bags, these are not prominent in wholesale and transport stages of the value chain. Besides, existing preservation techniques make use of pesticides that create risks of toxic contamination. Improving use of storage technologies along the value chain, including on-farm facilities, transportation and storage facilities in markets would help alleviate this constraint-especially for smallholders.

So the challenges are creating incentives for businesses to focus better on nutritional foods and conditions enabling smallholders to integrate better into these chains.

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Strengthening Governments to Cope with PPPs Tue, 05 Dec 2017 16:47:13 +0000 Jomo Kwame Sundaram 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.


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 Partnerships Tue, 28 Nov 2017 17:54:10 +0000 Jomo Kwame Sundaram 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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A Cop Out at COP23? Thu, 23 Nov 2017 11:16:19 +0000 Tharanga Yakupitiyage Despite a few victories, the UN’s annual climate change conference ended without achieving its goals or injecting a sense of much needed urgency. Over 20,000 people from around the world descended on Bonn, Germany at the beginning of November for the 23rd Conference of the Parties (COP23). Timoci Naulusala, a 12-year-old from Fiji, made a […]

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Despite a few victories, the UN’s annual climate change conference COP23 ended without achieving its goals or injecting a sense of much needed urgency.

French President Emmanuel Macron and German Chancellor Angela Merkel at the COP23 High-Level Plenary. Credit: DPI / Arial Alexovich

By Tharanga Yakupitiyage

Despite a few victories, the UN’s annual climate change conference ended without achieving its goals or injecting a sense of much needed urgency.

Over 20,000 people from around the world descended on Bonn, Germany at the beginning of November for the 23rd Conference of the Parties (COP23).

Timoci Naulusala, a 12-year-old from Fiji, made a passionate call for action at the opening of the COP23, stating: “The sea is swallowing villages, eating away at shorelines, withering crops. Relocation of people…cries over lost loved ones, dying of hunger and thirst…you may think it will only affect small nations…you are wrong.”

French President Emmanuel Macron echoed similar sentiments, noting that the effects of climate change have multiplied and are becoming increasingly intense.

“The point of no return has been crossed,” he said.

The conference set out to develop a rule book for implementing the landmark Paris Agreement. Though the deadline for its completion is next year’s COP in Poland, many noted that not enough was achieved this year.

Unwilling and Unprepared

Among the most contentious issues at COP23 was about finance.

Of the 100 billion dollars that was promised each year in climate finance for developing countries by 2020, developed countries have so far only pledged a little over 10 billion.

Clare Shakya from the International Institute for Environment and Development also expressed concern to IPS that climate finance often does not reach the frontline poorest countries and people.

“They get a far lower share than is their fair share,” she said.

Less than 10 percent of an already limited amount of climate finance reaches poor communities. This impacts countries such as Ethiopia where drought is drastically affecting livelihoods. The

East African nation, which needs approximately 7.5 billion dollars a year to switch to clean energy and adapt to climate change, is so far receiving between 100 million and 200 million per year.

As part of the Paris Agreement, donors must give a future estimate of how much and what kind of climate finance is going to be committed in order for countries to plan and prepare. However, developed countries pushed back on the demands, further delaying discussion and action on the issue.

“You didn’t see the developed countries coming here prepared to engage seriously on ramping up finance…parties knew there weren’t major political decisions that were going to have to be made as they were facing when they went into Paris,” Union of Concerned Scientist’s Director of Strategy and Policy Alden Meyer told IPS.

While over 150 heads of state attended COP21 when the Paris Agreement was negotiated, a little over 25 heads of state attended this year’s conference.

Both Meyer and Shakya expressed frustration on the lack of urgency over the discussion and implementation of the climate accord.

“It was pretty disappointing for vulnerable countries…that want to see more urgency in terms of mobilizing resources to help them in the wake of devastating hurricanes and typhoons that we have seen this year,” Meyer told IPS.

This can be seen through countries’ pledges made under the Paris Agreement which are only one-third of what is required to keep emissions under two degrees Celsius above the pre-industrial level by 2030.

Though countries agreed to examine ways to close that gap next year, the apathy at COP23 does not bode well for the next year of climate discussions.

Shakya noted that the negotiations that did happen during the conference also lacked a holistic approach as the words ‘gender’ were blocked in discussions about technology transfer while ‘finance’ was neglected in the gender action plan.

“There’s some really frustrating elements within the negotiations now that are trying to derail the connections that need to be there,” she told IPS.

No Clear Leadership

As the U.S. has stepped back, even hosting a side event on “cleaner and more efficient fossil fuels” which sparked international outrage, many are now looking to both French President Macron and German Chancellor Angela Merkel to take on a leadership role on climate action.

“They both really have personal commitment to the Paris Agreement and at the moment, we are kind of short on leaders—they are our hope,” said Shakya.

In August, the U.S. announced that it will withdraw all funding to the Intergovernmental Panel on Climate Change (IPCC), a UN body tasked with researching climate change science.

Macron called on Europe and promised to fill in the gap.

“I hope Europe can replace the US as a climate leader and I can tell you that France is ready for that,” he told delegates.

Merkel pledged to double climate finance to support developing countries by 2020 and made explicit pledges to help least developed countries finance adaptation in areas such as climate information systems and catastrophe risk management.

However, attendees were left disappointed when Merkel did not announce a plan to reduce Germany’s dependence on coal. Approximately 40 percent of the German power sector is reliant on coal and if such dependence continues, the Western European nation will not meet its 2020 emissions reactions targets.

In fact, the European Union (EU) will not be able to reach its goal of reducing emissions by at least 40 percent below 1990 levels by 2030 unless policies are changed and more pledges are made.

Though countries made a political commitment to ramp up negotiations, Meyer expressed concern that progress may continue to be slow, especially as Poland is hosting COP in 2018.

Poland is a heavily coal-dependent economy, with approximately 80 percent of its electricity generation coming from coal. The Climate Change Performance Index gave the Eastern European country a ranking of 40 and noted that it continues to fight climate legislation.

In an effort to move away from coal as an energy source, the United Kingdom and Canada created an international “powering past coal” alliance. Another 25 national and subnational governments joined the alliance including France, Ethiopia, Mexico, and the U.S. states of Washington and Oregon.

However, the alliance does not commit signatories to a specific phase-out date.

Several big coal countries also did not join the alliance including Germany, Poland, Australia, China, and India.

Small Steps But Big Wins

Despite slow progress, COP23 did not end without small victories.
Countries agreed to review progress on reducing emissions in 2018 and 2019, as well as conduct assessments on climate finance in 2018 and 2020.

The meeting also expanded its representation, formally including women and indigenous communities for the first time.

Shakya noted that the inclusion of women and indigenous groups in the decision-making process will help bring more focus on frontline poorest communities.

“It is a really significant first step, but it is a first step only. We need to see this being the building blocks for them to be included in the process of policy development and investment,” she told IPS.

Shakya called for more transparency in climate finance and proposed that donors form a leadership group outside of formal negotiations in order to identify and collaborate on solutions to improve the quality of finance and reporting.

Meyer expressed hope that there will be further progress in meetings to happen between now and the next COP, particularly pointing to the One Planet Summit hosted by France in December which aims to bring together political leaders as well as those working in public and private finance to discuss how they can support and accelerate global efforts to fight climate change.

“There is a lot more work to do…if there is political will, there will be a pretty decent outcome. If not, we are not going to see much improvement,” he said.

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Coping with Foreign Direct Investment Tue, 21 Nov 2017 19:26:04 +0000 Anis Chowdhury and Jomo Kwame Sundaram 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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Beyond Piketty: on income inequality Mon, 20 Nov 2017 08:58:28 +0000 Varsha Kulkarni and Raghav Gaiha Varsha S. Kulkarni is Research Affiliate of the Harvard Institute of Quantitative Social Science, Cambridge, MA, U.S. and Raghav Gaiha is (Hon.) Professorial Research Fellow, Global Development Institute, University of Manchester, Manchester, England.

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Varsha S. Kulkarni is Research Affiliate of the Harvard Institute of Quantitative Social Science, Cambridge, MA, U.S. and Raghav Gaiha is (Hon.) Professorial Research Fellow, Global Development Institute, University of Manchester, Manchester, England.

By Varsha S. Kulkarni and Raghav Gaiha
New Delhi, Nov 20 2017 (IPS)

Have demonetisation and the GST aggravated income inequality?

With the Gujarat State elections barely a few weeks away, the debate on the Indian economy has become increasingly polarised. While the official view of demonetisation unleashed in November 2016 elevates it to a moral and ethical imperative, the chaos caused by the goods and services tax (GST) launched on July 1, 2017, is dismissed as a short-run transitional hiccup. Both policies, it is asserted, are guaranteed to yield long-term benefits, unmindful of large-scale hardships, loss of livelihoods, closure of small and medium enterprises and slowdown of agriculture. Critics of course reject these claims lock, stock and barrel. Lack of robust evidence is as much a problem for the official proponents of these policies as it is for the critics. Hence the debate continues unabated with frequent hostile overtones.

Varsha S. Kulkarni

Tracking income inequality

Beneath the debate are deep questions of inequality and its association with poverty. Thomas Piketty produced a monumental treatise, Capital in the Twenty-First Century, demonstrating that rising income inequality is a by-product of growth in the developed world. More recently, Lucas Chancel and Piketty (2017), in ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’, offer a rich and unique description of evolution of income inequality in terms of income shares and incomes in the bottom 50%, the middle 40% and top 10% (as well as top 1%, 0.1%, and 0.001%), combining household survey data, tax returns and other specialised surveys.

Some of the principal findings are: one, the share of national income accruing to the top 1% income earners is now at its highest level since the launch of the Indian Income Tax Act in 1922. The top 1% of earners captured less than 21% of total income in the late 1930s, before dropping to 6% in the early 1980s and rising to 22% today. Two, over the 1951-1980 period, the bottom 50% captured 28% of total growth and incomes of this group grew faster than the average, while the top 0.1% incomes decreased. Three, over the 1980-2014 period, the situation was reversed; the top 0.1% of earners captured a higher share of total growth than the bottom 50% (12% v. 11%), while the top 1% received a higher share of total growth than the middle 40% (29% v. 23%).

Raghav Gaiha

True to its modest objective, it offers a rich and insightful description of how income distribution, especially in the upper tail, and inequality have evolved.

Sharp reduction in the top marginal tax rate, and transition to a more pro-business environment had a positive impact on top incomes, in line with rent-seeking behaviour.

India’s wealth gain

According to Credit Suisse Global Wealth Report 2017, the number of millionaires in India is expected to reach 3,72,000 while the total household income is likely to grow by 7.5% annually to touch $7.1 trillion by 2022. Since 2000, wealth in India has grown at 9.2% per annum, faster than the global average of 6% even after taking into account population growth of 2.2% annually. However, not everyone has shared the rapid growth of wealth.

Our research, based on the India Human Development Survey 2005-12, focusses on a detailed disaggregation of income inequality, along the lines of Chancel and Piketty, recognising that incomes in the upper tail are under-reported; and examines the links between poverty and income inequality, especially in the upper tail, state affluence, and prices of cereals.

Our analysis points to a rise in income inequality. A high Gini coefficient of per capita income distribution, a widely used measure of income inequality, in 2005 became higher in 2012. The share of the bottom 50% fell while those of the top 5% and top 1% rose. The gap between the share of the top 1% and the bottom 50% narrowed considerably.

More glaring is the disparity in ratios of per capita income of the top 1% and bottom 50%. The ratio shot up from 27 in 2005 to 39 in 2012. Far more glaring is the disparity in the highest incomes in these percentiles. The ratio of highest income in the top 1% to that of the bottom 50% nearly doubled, from a high of 175 to 346.

All poverty indices including the head-count ratio fell but slightly.

Poverty and inequality

Higher incomes reduced poverty substantially. Inequality measured in terms of share of income of the top 10% increased poverty sharply but only in the more affluent States. Somewhat surprisingly, higher cereal prices did not have a significant positive effect on poverty. Similar results are obtained if the share of the top 10% is replaced with the Gini coefficient as a measure of inequality.

It is plausible that poverty reduction slowed in 2016-17 because of deceleration of income growth; and huge shocks of demonetisation and the GST to the informal sector have aggravated income inequality. Indeed, depending on the magnitudes of these shocks, poverty could have risen during this period.

In sum, regardless of the longer-term outlook and presumed but dubious benefits of the policy shocks, the immiseration of large segments of the Indian population was avoidable.

This opinion editorial was first published in The Hindu

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Finance Following Growth Tue, 14 Nov 2017 14:53:53 +0000 Anis Chowdhury and Jomo Kwame Sundaram 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 Again Wed, 08 Nov 2017 06:59:41 +0000 Jomo Kwame Sundaram 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 South Tue, 31 Oct 2017 15:25:02 +0000 Jomo Kwame Sundaram and Zera Zuryana Idris 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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Deliberate Famine Should Be a War Crime, UN Expert Says Wed, 25 Oct 2017 16:39:55 +0000 Tharanga Yakupitiyage The deliberate starvation of civilians could amount to a war crime and should be prosecuted, said an independent UN human rights expert. In a new report, the Special Rapporteur on the Right to Food Hilal Elver examined the right to food in conflict situations and found a grim picture depicting the most severe humanitarian crisis […]

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By Tharanga Yakupitiyage

The deliberate starvation of civilians could amount to a war crime and should be prosecuted, said an independent UN human rights expert.

In a new report, the Special Rapporteur on the Right to Food Hilal Elver examined the right to food in conflict situations and found a grim picture depicting the most severe humanitarian crisis since the UN was established.

Hilal Elver. Credit: UN Photo/Evan Schneider

“Contrary to popular belief, causalities resulting directly from combat usually make up only a small proportion of deaths in conflict zones, with most individuals in fact perishing from hunger and disease,” she said.

Conflicts have proliferated around the world and with them has come a rise in food insecurity.

According to the Food and Agriculture Organization of the United Nations (FAO), the proportion of undernourished people living in countries in conflict and protracted crises is almost three times higher than that in other developing countries.

In five conflict-stricken countries alone, approximately 20 million are facing famine and starvation.

Another estimated 70 million people in 45 countries currently require emergency food assistance, a 40 percent increase from 2015.

Since the human right to food is a universal one, Elver noted that countries and other parties to conflicts must act and avoid using food as a weapon of war.

“If the famine [occurs] from deliberate action by state or other players, using food as a weapon of war is an international crime and there is an individual responsibility to that,” she said.

“The international community should make it clear that this is a war crime or a crime against humanity, otherwise we will give a certain permission [to it],” Elver continued.

In Yemen, rates of acute malnutrition have increased dramatically since the beginning of the civil war in 2015, making it the world’s worst humanitarian crisis.

Approximately 60 percent of the population are food insecure while 7 million are at risk of famine and acute food insecurity, a situation that is expected to worsen without an increase in emergency food assistance.

According to the World Food Programme, over 3 million children and pregnant or nursing women are acutely malnourished, making them susceptible to communicable diseases such as cholera.

Already, a severe cholera outbreak that began in April has killed over 2,000 people and has exacerbated the nutrition crisis.

Parties to the ongoing conflict have played a significant and deliberate role in the decreased access to food, including a Saudi Arabia-imposed aerial and naval blockade on a country which previously imported 90 percent of its food.

Airstrikes carried out by the coalition have also targeted the country’s agricultural sector including farms, further limiting access to food, while sieges by Houthi fighters in numerous cities have prevented staple items from reaching civilians.

Ta’izz, the Middle Eastern country’s second-largest city, was besieged by Houthi fighters for over a year, causing blockages in supply routes and dire food shortages.

Elver said that Yemen is a “clear situation” where famine constitutes a crime against humanity in which both the Saudi-led coalition and Houthis are responsible.

She noted however that there is still widespread impunity in situations when famine is deliberately caused and pointed to the International Criminal Court (ICC) as an example which has not prosecuted individuals responsible for such crises.

Though UN Secretary-General Antonio Guterres has included the Saudi-led coalition in his annual shame list for violations against children, Elver called for the creation of legal mandates to prevent famine and protect people’s right to food.

This includes the development of international legal standards to reinforce the norm that deliberate starvation is a war crime or a crime against humanity and the referral of the most serious cases to the ICC for investigation and potential prosecution.

The formal recognition of famine as a crime can prevent the tendency of governments “to hide behind a curtain of natural disasters and state sovereignty to use hunger as a genocidal weapon,” the report states.

“We can see the famine coming, it doesn’t just happen in one day,” Elver said.

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Why 1997 Asian Crisis Lessons Lost Tue, 24 Oct 2017 17:10:28 +0000 Jomo Kwame Sundaram 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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Austrian Elections: The Crisis of Europe Continues Sat, 21 Oct 2017 19:06:32 +0000 Roberto Savio Roberto Savio is co-founder of Inter Press Service (IPS) news agency and its President Emeritus. He is also publisher of OtherNews.

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Roberto Savio is co-founder of Inter Press Service (IPS) news agency and its President Emeritus. He is also publisher of OtherNews.

By Roberto Savio
ROME, Oct 21 2017 (IPS)

The Austrian elections show clearly that media have given up on contextualising events. To do that, calls for a warning about Europe’s future, as a vehicle of European values is required. Europe has been weakened by all the recent elections, with the notable exception of France. Common to all, France included, were some clear trends, that we will hastily, and therefore maybe imperfectly, examine.

Roberto Savio

The decline of the traditional parties.

In every election, since the financial crisis of 2009, the parties we have known to run their country since the end of the Second World War, are on the wane ( or practically disappearing, like in the last French elections). In Austria, the far right Freedom Party of Austria (FPO) secured 26 per cent of the vote, just a few votes behind the Social Democrats who took 26.9 per cent of the votes. The social democrats have been in power practically since the end of the war. And the other traditional party, the conservative Austrian People’s Party (OVP), won the elections with 31.5 per cent. Together the two parties used to have more than 85% of the votes. In the Dutch elections held in March, Geert Wilder’s far-right Party for Freedom PVV, came second after the ruling People’s Party for Freedom and Democracy VVD, at the expense of all other parties. And in September in Germany, the far right anti immigrant Alternative for Germany (AfD) enjoyed historical success, becoming the third party while the two traditional parties, Merkel’s Christian Democratic Union of Germany CDU and the social democrat Social Democratic Party of Germany SPD, suffered the worst results in more than a half a century. According to polls, next year Italian elections will see a populist movement, with the 5 Stars taking over the government.

Austria is the best example to understand how European national politics have changed. It is important to note that no right wing party was really visible in Europe, (except Le Pen in France), before the financial crisis of 2009. That crisis brought insecurity and fear and in the same year the Austrian far right, under the charismatic leadership of Jorg Haider, got the same percentage of votes as of today. And the conservative Prime minister of the time, Wolfgang Schlussel broke a taboo by bringing the Freedom Party into the government. Everybody in Europe reacted with horror, practically isolating Austria. And the FPO, lost all its lustre in the government, going down to 5%, and with the death of Haider even further down. There Are no gasps of horror now in Europe over any far right wing parties getting in to govern.

What has fuelled the decline of the traditional parties

The traditional parties were facing already a loss of participation and trust by the electors at the end of the last century but in 2009 Europe imported the financial crisis which racked the US in 2006. And, 2009 saw hardship and unemployment all over Europe. And that year Greece became the battleground of two visions in Europe. The Southern countries wanted to push out of the crisis with investments and social relief, while the bloc of Northern countries, led by Germany, saw austerity as the only response. Germany wanted to export it’s experience: they were doing well thanks to an internal austerity reform started by Schroeder in 2003, and they did not want to take on other reforms at any cost.

Greece was just 4% of the European economy and could have been rescued without problems. But the German line won and today Greece has lost 25% of its properties; pensions went down by 17%, and there is a massive unemployment. Austerity was the response to the crisis for all of Europe and that aggravated fear and insecurity.

It is also important to remember that until the invasions of Libya, Iraq and Syria, in which Europe played a key role (2011- 2014), there were few immigrants and this was not a problem. In 2010, immigrants numbered 215.000, in a region of 400 millions. But during the invasions, a very fragile balance between Shite and Sunni, the two main religious branches of Islam, collapsed. Civil war, and the creation of ISIS in 2015 pushed many to try to reach Europe to escape the civil wars. So, in 2015 more than 1.2 million refugees, the majority coming from countries in conflict, arrived in Europe, which was not prepared for such a massive influx. And, if we study the elections before then, we can see that the far right parties were not as relevant as they are now.

Therefore it should be clear that austerity and immigration have been the two main factors for the rise of the right wing. Statistics and data show that clearly. Statistics also show that immigrants, of course with exceptions, (that media and populism inflates), basically want to integrate, accept any kind of work, and are law abiding and pay their contributions, which is obviously in their interest. Of course the level of instruction plays a crucial role. But the Syrians who come here were basically middle class. And of course it is an inconvenient truth that if Europe did not intervene in the name of democracy, the situation would be different. NATO estimates that more than 30 billion dollars have been spent on the war in Syria. There are now six million refugees, and 400.00 dead.

And Assad is still there. Of course, democracy has a different value in countries which are closed and rich in petrol. If we were serious about democracy, there are so many African countries which need intervention. Book Haram has killed seven times more people than ISIS; and Mugabe is considering running for re-election after dominating Zimbabwe for nearly four decades. But you will never hear much on those issues in the present political debate.

How the far right is changing Europe

Nigel Farage is the populist who led a far right party, the UK Independence Party (UKIP) which fought for leaving Europe. UKIP received the greatest number of votes (27.49%) of any British party in the 2014 European Parliament election and gained 11 extra Member of the European Parliament MEPs for a total of 24.[55] The party won seats in every region of Great Britain, including its first in Scotland.[56] It was the first time in over a century that a party other than Labour or Conservatives won the mosti votes in a UK-wide election.

But Farage lost the elections held just before Brexit, in June 2016. His declaration to the media was: Infact, I am the real winner, because my agenda against Europe now is the basis for politics in all the traditional parties. Brexit did follow.

And this is what is happening now everywhere. The Austrian elections did not see only the FPO rise. They also saw the conservative OVP taking immigration, security, borders and others part of the far right agenda of the populist agenda in the electoral campaign. A full 58% of the voters went for the far right or the right, with the social Democrats also moving more to the center. The new Dutch governement took a turn to the right, by reducing taxes on the rich people, and to companies. The same turn to the right can be expected by the new coalition led by Merkel, with the liberals aiming to take over the ministry of Finance. Its leader, Christian Lindner, is a nationlist and has several times declared his aversion to Europe. In that seense, he will be worse than the inflexible Schauble, who just wanted to Germanize Europe, but was a convinced European. And it is interesting that the main vote for the far righ party AfD came from East Germany, where immigrants are few. But in spite of investing the staggering amount of 1.3 trillions Euro in the development of East Germany, important differences in employment and revenues with West Germany remain. No wonder that the President of South Korea has warned President Trump to avoid any conflict. They have decided a longtime ago, looking at the German reunification that they would not have the resources required by annexing with success, North Korea.The rocketman, as Trump calls Kim, after the decertification of Iran, can claim that the only way to be sure that US will not intervene, is to show that he has a nuclear intercontinental ability, because US does not respect treaties.

Those considerations done, a pattern is clear everywhere. The agenda of the right wing has been incorporated in the traditional parties; they bring in the governing coalition, like Norway did , or they try to isolate them , as did Sweden. This does not change the fact that everybody is moving to the right. Austria will now tilt to the Visegrad group, formed by Poland , Hungary, Czech and Slovakia, which are clearly challenging Europe and looking to Putin as a political model ( all the right wing does).

The only active European voice is Macron, who clearly is not a progressist guy either. The real progressist, Corbyn, is ambigous about Europe, because the Labour Party has a lot of eurosceptic.

The new German government has already made clear that many of it’s proposals for a stronger Europe are not on the agenda, and austerity remains the way. Unless a strong growth comes soon (and the IMF doubts that), social problems will increase. Nationalism never helped peace, development and cooperation. Probably , we need some populist movement to be in the government to show that they have no real answers to the problems. The victory of 5 stars in Italy will probably do that. But this was the theory also for Egypt. Let the Muslim Brotherhood take the government , and it will be a failure. Pity that the General El Sisi did not let this happen. Our hope is that we do not get any El Sisis in Europe.

If only young people went back to vote, this would change the situation in Europe…this is the real historical loss of the left in Europe.

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Can the Kenyan Lion Kick High Enough to Be the South Korean Tiger of Africa? Mon, 16 Oct 2017 11:52:14 +0000 Mary Kawar and Siddharth Chatterjee Dr Mary Kawar is Country Director of the ILO for Tanzania, Kenya, Uganda, Rwanda and Burundi. Follow her on twitter: @mary_kawar

Mr Siddharth Chatterjee is the UN Resident Coordinator to Kenya. Follow him on twitter: @sidchat1

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Taekwondo a Korean martial art also practiced in Kenya. Credit: Capital FM

By Mary Kawar and Siddharth Chatterjee
NAIROBI, Kenya, Oct 16 2017 (IPS)

In 1953 South Korea emerged from the ravages of a debilitating war, yet the total gross domestic product in nominal terms has surged 31,000 fold since 1953.

Consider this: in 1950 the Gross Domestic Product (GDP) per capita of South Korea was US$ 876 and Kenya’s was US$ 947. In 2016, the GDP per capita of South Korea rose to US$ 27,539 and Kenya’s to US$ 1,455.

South Korea over the past four decades has demonstrated incredible economic growth and global integration to become a high-tech industrialized economy. In the 1960s, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion-dollar club of world economies.

In South Korea the Gini coefficient is 0.30 (extent of inequality) whereas in Kenya it is much higher at 0.45. Despite posting some of the highest GDP growth rates globally, countries in Africa continue to have the worst poverty and unemployment rates, with Kenya being one of those countries where the gap between rich and poor is widening.

While the majority of these Kenyans are occupied in the agricultural industry, technology advances and the rising prominence of the service industry is threatening to render many of these superfluous unless urgent shifts in growth models are undertaken to create quality jobs.

Lessons from economic structural transformation abound especially from the Asian tigers. Once an agricultural country like Kenya, South Korea spent much of the 20th century driving modern technologies and is now regarded as one of Asia’s most advanced economies. Among the focus areas for the country were facilitating industrialization, high household savings rates, high literacy rates and low fertility rates.

What South Korea achieved was fast economic growth underpinned by a strong industrial base that led to full employment and higher real wages. When the 1997 financial crisis threatened employment and welfare of its citizens in 1997, the country engaged in ambitious structural adjustment that introduced social protection measures for workers, the unemployed and poor people, in addition to reigniting the drivers of growth.

The international experience suggests that, for a given increase in the labor force, GDP growth should be at least double that rate to prevent unemployment from rising, and even higher if unemployment is to be reduced. With Kenya’s labor force growing at 3 percent corresponding to one million youth entering the job market each year, GDP should keep growing at 6 percent.

But this may not be enough as there is a lot of slack in the labor market to be absorbed. Kenya has one of the highest informal sector employment rates in the continent. With about three out of four workers employed in casual jobs whose key features include unpredictable incomes, poor working conditions and low productivity.

According to the latest data from the Kenya National Bureau of Statistics (KNBS), employment in the informal economy has grown much faster than in the formal economy, rising by nearly 4 million versus 60,000 since 2009, with the corresponding share of the formal economy in total employment shrinking to 17 percent from 19 percent.

Income inequality remains a challenge in Kenya, with the highest 10 percent earning almost 15 times higher than the lowest 10 percent, which is double of that in South Korea.

There are grounds for optimism, as Kenya seeks to move from being a regional leader to local innovator. In August 2016, Kenya hosted the Sixth Tokyo International Conference on African Development (TICAD), which was the first on African soil. Kenya is also developing policy and institutional reforms to increase export through better trade logistics and greater regional integration.

Kenya Bureau of Standards (KEBS) and Korean Agency for Technology and Standards (KATS) have signed a Memorandum of Understanding (MOU) to boost standardization activities between the two countries. Credit: Citizen TV

In addition, Kenya’s internet prices are low at half of even lower than those in neighboring countries. Innovations in mobile phone-based banking and related technological platforms have resulted in more financial inclusion that has reached 75 percent of the population. A large population of educated youth is already employed in these areas that have high job creation potential.

Kenya’s policies will need to consider the effects of technological innovations on the labor market and their socioeconomic impact. Household incomes improve when the largest number of people get involved in technology-based productive work. Even agriculture needs to be high-tech and include agro-processing.

Underlying this is the ability of the education and training system to adapt and promote the creation of a sustainable and inclusive economy. Kenya’s policies will therefore need to assess the effects of technological innovations on the labor market and their socioeconomic impact.

Kenya is moving ahead on education with its more than 1000 post-secondary institutions, 22 public and more than 30 private universities that produce the largest numbers of highly trained and skilled persons in the East African Community.

However, Kenya has substantial disparities in access to education. According to the Kenya National Bureau of Statistics, children in capital city Nairobi have about 15 times more access to secondary education than those living in Turkana, one of the poorest counties.

In addition to education, that increases employability on the labor supply side but does not in itself create jobs, more emphasis should be given to policies that increase labor demand. With an increasing youthful population, Kenya faces a window of demographic opportunity not only numerically.

Today’s youth are more educated than their parents and are “waiting in the wings”, not yet active but ready and willing to do so. But for this to happen and thus reduce youth and educated unemployment, there is a need to ensure that there are enough opportunities for them to participate actively in the economy and society.

Unfortunately, about 43 percent of Kenya’s youth are currently either unemployed or working yet living in poverty. Not unrelated to the few employment opportunities at home, many job seekers emigrate. The International Organization of Migration (IOM) reports for Kenya a skilled emigration rate of 35 per cent reaching 51 percent among health professionals. These rates are among the highest in the world. A continued lack of decent work opportunities as a result of insufficient or misapplied investments can perpetuate, if not increase, emigration and lead to an erosion of the basic social contract underlying democratic societies.

Still within the area of labor markets, good governance is critical for linking employment growth to decent employment creation. A recent meeting on the Future of Work organized by the Ministry of Labour, the Kenya Federation of Employers and the Kenya Federation of Trade unions in collaboration with the International Labour Organization discussed the implications for the 4th industrial revolution and its impact on Kenya. The discussion confirmed that laws, policies and institutions can be improved through social dialogue that would also include the informal sector.

For women, access to family planning and maternal health services – as well as education for girls is the best bet for improved economic opportunity. Global data shows that the highest benefits from reducing unintended pregnancies would accrue to the poorest countries, with GDP increases ranging from one to eight percent by 2035. There are few interventions that would give as wide-reaching impacts.

Finally, Kenya would need to address the rural/urban divide. Urban population growth is naturally fueled from growth in the population already living in cities but in Kenya, more than in many other African countries, urban growth comes from significant internal migration. This suggests that the country side is becoming increasingly less attractive. The share of population living in slums remains high at 55 percent with no discernible decline since 1990.

In conclusion, increases in real wages and decent employment creation will remain elusive as long as growth is not inclusive while educated job seekers are not employed in sectors that require new skills. The shifting population of Kenya provides many opportunities for growth. With a median age of 18, investing in Kenya’s youth would reap a demographic dividend. Key investments have to be in education and skills, empowerment of women and girls, a Marshal plan of employment and equity. These would help accelerate Kenya’ march to prosperity and help end poverty.

When this happens, Kenya will increase its ability to introduce more comprehensive and effective social protection policies that would add to the income security provided by decent employment. And unlike South Korea, Kenya should not wait to do so after a financial crisis.

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World Bank Must Stop Encouraging Harmful Tax Competition Tue, 10 Oct 2017 18:29:38 +0000 Anis Chowdhury and Jomo Kwame Sundaram 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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Alternative Financing Strategies to Boost Small Businesses in Africa Thu, 05 Oct 2017 12:38:20 +0000 Franck Kuwonu A few years ago, more than half a century after the concept was first proposed, the government of Côte d’Ivoire completed construction of the Henri Konan Bédié Bridge, a span over the Ébrié Lagoon linking the north and south of Abidjan, the country’s main city. The project became a reality after the government received development […]

The post Alternative Financing Strategies to Boost Small Businesses in Africa appeared first on Inter Press Service.


Chef and owner of a restaurant and catering company in Liberia. Credit: UN Photo/C. Herwig

By Franck Kuwonu, Africa Renewal*

A few years ago, more than half a century after the concept was first proposed, the government of Côte d’Ivoire completed construction of the Henri Konan Bédié Bridge, a span over the Ébrié Lagoon linking the north and south of Abidjan, the country’s main city. The project became a reality after the government received development bank and private capital financing.

Similarly, the Dakar-Diamniado Highway in Senegal, although a public structure, was built and is being operated by private companies. Increasing difficulties in obtaining traditional financing, including bank loans for public infrastructure such as roads, railways and dams are forcing African countries to explore alternative financing approaches.

Having the private sector build and operate infrastructure, recoup its investments and later transfer the infrastructure to governments is one way of compensating for the shortfall in official development assistance and banks’ reluctance to provide loans.

Economic backbone

Aid to the least developed countries (LDCs), most of which are in Africa, fell by 3.9% in 2016, according to the Organisation for Economic Co-operation and Development (OECD), which promotes policies that improve economic and social well-being of rich countries.

At the moment, governments are coming up with innovative financing strategies, while big corporations are relying on investments or bank loans to grow and expand their businesses. However, Africa’s small and medium-size (SMEs) enterprises, still struggle for financing.

Governments that seek financing from private partnerships or international financing institutions such as the African Development Bank (AfDB), the International Finance Corporation (IFC), the World Bank and others often realise that the funding available cannot meet the financial needs of the SMEs.

“In Ghana, SMEs can safely be regarded as the backbone of the economy, employing thousands of people,” Ghana’s minister of finance, Ken Ofori-Atta, said at a gathering of Ghanaian entrepreneurs in June.

SMEs represent 92% of all local businesses in Ghana, providing up to 85% of manufacturing jobs in the country and contributing about 70% to the country’s GDP. In Nigeria, 37 million SMEs employ about 60 million people and account for about 48% of the country’s GDP.

South Africa (the most advanced economy south of the Sahara) is home to more than 2.2 million SMEs, about 1.5 million of them in the informal sector. About 43% of South Africa’s SMEs operate in trade and accommodations, according to South Africa’s Small Enterprise Development Agency (SEDA), which, among other functions, implements the government’s small business strategy.

A 2016 SEDA report says that SMEs face challenges in accessing finance and markets. Yet eight out of 10 jobs and nine out of 10 of all businesses in sub-Saharan Africa are related to small business, according to UN figures.


SMEs, especially those in the informal sector, have a hard time accessing bank loans. A majority of African SMEs rely on personal savings or start-up capital from friends and family.

“Even when a bank is willing to lend them some money, the collateral and guarantee they require and sometimes the down payment is just too much for a small company like us,” says Alex Treku, the communications and projects manager at the Togo-based LOGOU Concept Togo (LCT).

LCT manufactures a type of electric food mixer (the Foufou Mix) that is used in place of the traditional mortar and pestle and saves women the energy used in pounding yam for fufu, a West African staple dish.

“The Foufou Mix allows for quick and hygienic yam preparation in approximately eight minutes,” the African Innovation Foundation (AIF) said when it named LCT the runner-up for the Innovation Prize for Africa in 2014.

AIF added that “pounding of yam has traditionally been done by women; this innovation provides a solution not currently being contemplated by international manufacturers. It also opens up possibilities for a whole new industry for manufacturing of such appliances on the continent.”

One-third of Nigerians reportedly eat fufu, making the country of 170 million people an attractive market for the gadget. Yet LCT is able to manufacture only about a hundred mixers a month, according to Mr. Treku. The reason? “We don’t have access to bank credit or funds to grow our business,” he says. LTC currently employs 19 people.

Operational capacities and access to markets are other challenges African MSMEs face, but access to financing is the most critical.

Partnership and innovation

On the occasion of the first-ever MSME Day marked globally on 27 June, the AfDB called for an increase in new and affordable financing schemes. Both the AfDB and the IFC would like SMEs to have increased access to financing.

Last year the AfDB reported helping 156,000 SME business owners through financial intermediaries such as commercial banks, development investment and guarantee funds. That’s a good start, but hardly enough, experts say.

By providing coverage for risks associated with lending to SMEs, an intermediary such as the African Guarantee Fund (AGF) can provide credit guarantee facilities to financial institutions that give loans to enterprises they would normally be reluctant to lend to.

Last June, the AGF announced that through a partnership with the African, Caribbean and Pacific Group of States, the European Union and the UN Development Programme, some 5,000 SMEs in “development minerals” in five countries will have more affordable financing because of AGF’s $12 million credit guarantee.

Two years ago, the IFC and Ecobank, a pan-African commercial and investment banking group, launched a $110 million risk-sharing facility that allows Ecobank to lend money to SMEs operating in fragile and conflict-afflicted states in West and Central Africa. In addition to current efforts by traditional banks to lend to SMEs, experts have urged SMEs in Africa to explore innovative financing, such as cooperative financing and diaspora funds.

The World Bank is said to be exploring other ideas like crowdfunding—an innovative way of financing a project by raising funds from a very large number of people—peer-to-peer lending, social impact bonds and development impact bonds.

But the AfDB wants credit providers to increase lending by at least $135 billion to meet demand by African SMEs. As the overall financing gap in developing countries is currently between $2.1 and $2.6 trillion, new strategies are required to finance the 17 Sustainable Development Goals.

According to the World Economic Forum, “blended finance” could plug this hole. Should these funds become available, the majority of SMEs still operating in the informal sector will have to “take giant steps towards formalisation in order to increase their potential for accessing formal credits,” according to a 17 March study, Financing the Growth of SMEs in Africa: What Are the Constraints to SME Financing within ECOWAS? published in the Review of Development Finance.

The authors of the study maintain that policy reforms are as necessary as available financing. They also suggest requiring companies to provide credit information to boost creditors’ confidence and to make sure that government-sponsored credit schemes are managed efficiently and transparently.

*Africa Renewal is published by the UN’s Department of Public Information

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