China and the EU Model

 April 20, 2013

For almost two years now I have avoided dealing on my blog with China’s spats with Japan, its tensions with ASEAN partners or its apparent inability to reign in the excesses of its obstreperous North Korean protégé.

Although China is fast becoming an economic superpower, its foreign policy has remained far less successful than its economic performance. The seeming lack of interest among top Chinese leaders in framing a foreign policy to match their country’s economic might and long-term strategic objectives is disquieting. Their failure to deal with rather minor territorial disputes successfully could indeed jeopardise China’s economic agenda in the long run, as well as undermine stability and prosperity in Asia.

One of China’s leading objectives, for example, had been that of creating by 2015 a common Asian market, emulating the European Union. These days, however, tensions in the South China Sea between it, on the one hand, and Vietnam and the Philippines, on the other, are endangering its economic integration agenda with ASEAN. In fact, had the European Union’s integration model been studied more carefully by the Chinese, they would have noticed that in Europe the process started with France and Germany putting behind them their long-running territorial disputes and deciding to share resources essential to growth, like coal and iron.

The gap that has developed between China’s long-term integration objectives and its rather medieval attitudes in dealing with neighbours and their territorial claims has instead played into the hands of the US, not otherwise known for excellence in the field of diplomacy.

As cheque-book diplomacy or old-style kowtow policies are inappropriate for China’s current status even in our post-modern times, the new Chinese leadership should urgently seek to frame a foreign policy which closely matches their country’s long-term interests and its standing in Asia.

Fiscal Optimisation and the Crisis of EU Democracies

 April 6, 2013

After more than four years of misguided austerity policies, the sharp economic downturn is about to claim its latest victims – Europe’s democracies.

During the sovereign debt crisis, politicians in office – regardless of party ideology – have been forced to resort to hugely unpopular budget cuts and to increase taxes for the middle and working classes. These pro-cyclical policies have generated massive unemployment, leading to street protests, with no change in sight however. Nowadays, major economies like France have stopped growing altogether, whereas Italy, the European Union’s third largest economy, faces its second year of negative growth.

More importantly, the political fall-out could bring about a second implosion of democracies in Europe. Disillusioned with traditional political parties on the left or on the right, European voters in search of solutions are turning to extremist and populist parties, when they bother to vote at all. Thus in Belgium, for instance, the polity has failed to form a government for more than a year; the recent Italian parliamentary elections have ended up in deadlock; and even in France – where the socialists won a clear majority in 2012 at local, regional as well as national level – the popularity of the government is below 30 percent. In Spain, the ruling conservative party can hardly muster more than 25 percent of voting intentions, with the socialist opposition faring worse than that. The same is true for EU members like Bulgaria and Portugal, countries nevertheless hailed as “successful” pupils of the troika.

The breakdown in the social and political consensus in all these countries is the logical result of the tax avoidance strategy adopted during the last few decades by the top 10 percent of income earners, companies and individuals alike. Through what have become known as “tax optimisation” practices, a full one third of the global GDP has been tucked away in some 60 tax havens around the world. This has provoked serious budget shortfalls for many EU member states, which the adoption of austerity policies has only aggravated.

Depriving states of much-needed revenue has ben made possible by favourable laws regarding tax shelters and by the milking of tax loopholes, essentially benefitting the rich. This has enabled the European Union’s largest banks such as Deutsche Bank, BNP Paribas or Credit Agricole to offer their customers the option to avoid paying taxes, by facilitating the opening of offshore bank accounts on their behalf. If we add to this lax or almost inexistent (in the case of Greece) tax collection by fiscal authorities, we could better grasp why and how the sovereign debt crisis came about.

The recent scandal involving the French Budget Minister Jérôme Cahuzac illustrates how fiscal laxity is made possible. Himself the holder of an undeclared Swiss bank account, Cahuzac was supposed to enforce the collection of some 60 billion euros in unpaid taxes per year, representing two thirds of the country’s budget deficit. In practice, however, French fiscal authorities are only able to collect between 10 and 15 billion euros of this sum in a given year. This has pushed the government to impose additional taxes on the hapless other 90 percent of the population, weighing down on those not fortunate enough to benefit from offshore banking services. Across Europe – in Germany for example – similar, meagre tax recovery rates are the norm, leaving VAT collection to make up the bulk of states’ fiscal revenues.

Economists are fond of looking up to northern EU members like Sweden or Denmark, as models of competitive economies. In reality, if we are to avoid another imminent implosion of democracy on our continent, the rest of the Union should emulate the Scandinavian countries for their clean, transparent and efficient political establishments. Failing this, we will witness the rise to power of populist and extremist parties – a process that has already begun in earnest. Start collecting back taxes now !

Time for the EU Parliament to Act on Corporate Taxes

 March 28, 2013

Now that Cyprus has ceased to be an offshore financial centre, Martin Schulz and his colleagues have the opportunity to go a step further and tackle the issue of unpaid corporate taxes within the European Union over the past ten years. According to The Economist, the amount of money spirited away by corporations avoiding taxes has reached the staggering global figure of 20.000 billion dollars, deposited in some 60 financial havens.

National EU governments are powerless to redress such massive tax avoidance practices that currently cause mass unemployment and a dearth of financial resources for their treasuries. Corporations , especially from outside of Europe, have been quick to speculate national politicians’ desire to attract FDI, and have extracted unreasonable concessions from them for establishing operations within the EU.

To contain the public’s outrage, gimmicks like the ones employed by premier David Cameron in Britain – getting some US corporations like Starbucks or Apple to make symbolic financial contributions – are simply not acceptable anymore. Such policies will do nothing to deter corporations, which make their profits off the backs of EU consumers and governments, to renounce their massive tax avoidance schemes in the future.

The European Parliament could thus impose a flat 30 percent tax rate on profits made within the EU and deposited offshore by European, Japanese or US corporations. This rate of taxation could subsequently be adopted as the EU-wide minimal norm.

The sums involved in the recovery of back taxes could be as high as 3.000 billion euros, to be collected by national governments. Some of the money thus recovered could go towards shoring up the EU budget and enhancing the pool of money available to the European Stability Mechanism, enabling the latter to deal with problems experienced by countries like Italy. This prevents the tendency of some governments to want to impose top tax rates of 75 percent or more. By the same token, the European Parliament could forbid countries such as Ireland to act as tax avoidance hosts in keeping their corporate taxes exceedingly low. Finally, the European Parliament is the right institution to legislate and mandate member states to : collect corporate taxes there where profits are being made; outlaw transfer pricing and other tax avoidance techniques; and eliminate tax loopholes from national member-states’ legislation.

To be sure, this is no easy undertaking, but in these disastrous economic circumstances exceptional measures are needed, if we are to avoid the implosion of democracy and the parallel rise of populist and fascist parties in Europe.

Today's Predator Class

 March 26, 2013

The days of Cyprus as an offshore banking centre for rich Russians or Britons are well and truly over. All things considered, however, the 30 billion dollars held by them in Cypriot bank accounts is a paltry amount next to the 20 trillion dollars held by Western corporations and individuals in some 60 fiscal havens. ( The Economist)

For a while now, the G20 political leaders have been promising concerted action against these tax shelters. So far, nothing of substance happened, though such bellicose declarations make for great television .The absence of results in this area will irreparably damage the reputation of concerned politicians, highlighting their utter impotence .

Consider for a moment Apple, for instance. The US corporation holds in its treasury no less than 147 billion dollars. For years, its directors refused to distribute dividends to shareholders, let alone pay normal tax rates. The iconic i-pod and i-phone manufacturer builds them cheaply in China; distributes them at premium prices in the West and stashes away the profits on an island .

Bare a few exceptions, this new breed of entrepreneurs and corporate top brass are, at best, a mixed blessing for the global economy. Sure, a large quantity of consumer goods are being produced and sold around the world. But who benefits from it all? Certainly not the workers, the host states or the consumers . If Henry Ford believed a corporation should pay decent enough wages to workers, to enable them to buy the goods being produced, no such scruples bother today’s business leaders; A large amount of corporate time and money is being devoted instead on devising ways to avoid taxes, circumvent national legislations or fight in court against fines imposed on their excesses in some parts of the world, notably in the European Union

These regressive ways of doing business are mainly responsible for the high unemployment rates in the West, a dearth of financial resources affecting governments, whether rich or poor, and low growth rates, even as enormous amounts of unspent cash sit idle in fiscal havens. Not surprisingly, many leading economists believe that this harmful form of capitalism has to end, although there is not yet a consensus as to how. Failing this, we may very well witness the implosion of the whole system as we knew it for the past few hundred years.

Capitalism and the Great Stagnation

 February 9, 2013

At the latest annual forum in Davos, someone came up with the bright idea of including inequality, a growing concern in the west, on the agenda of the gathering. Naturally, the subject stood no chance of being discussed, as participants claimed to be haunted by the spectre of uncertainty and economic stagnation instead (Time).

The issues of inequality within the western world and of the current state of the capitalist system have been dealt with in The Economist ‘s October 13th, 2012 Special Report. The conclusion of the report was that inequality, as measured by the Gini coefficient, has not only increased at alarming levels over the past 30 years, but that delaying measures of reversing this trend would impair the performance and stability of western countries for decades to come. The policies recommended – providing better education for the poor, ensuring a more efficient allocation of welfare resources, means testing welfare recipients, dealing with crony capitalism – are the hallmarks of progressivism.

The same month in Florence, a gathering of economists from Spain, Italy and France has founded the European Progressive Economists’ Network (E-PEN). The new association is open to economists from all EU member countries and is lobbying for an end to the austerity measures that are ravaging the old continent, for the generalisation of the Tobin Tax and the urgent adoption of policies aimed at kick-starting economic growth. Some progressive economists are calling for the reintroduction of progressive taxation, deeming as optimal an 80 percent rate for the top income bracket.

To be sure, the economic and social climate have deteriorated over the past 5 years to levels not seen since the Great Depression. After 30 years of neoliberalism, most western countries including the United States have turned into industrial wastelands and are affected by stubbornly high unemployment rates, anaemic growth and a sharp fall in the incomes of workers and middle classes alike. While the coffers of many corporations are bulging with liquidities, most long-term investments for developing new products are shelved in favour of financing innovations in labour-saving devices, a fact that could only aggravate unemployment. As a result, the reputation of capitalism as a system is now in tatters. In a December 2010 IFOP survey, only 15 % of the French, 25% of Italians, 40% of Germans and 45% in Britain have expressed support for capitalism.

A mere two decades after the fall of communism, capitalism itself is being exposed as obsolete and, to a large extent, harmful for humanity’s current and long-term development prospects. Its decline has become evident in the 1970’s – today it is proving irreversible. Sure, the conservative revolution begun in the ‘80s – that engendered the mass privatisation of state assets, deregulation, outsourcing, offshoring, downsizing – has, for a while, looked good on paper and exponentially increased the incomes of the global 1 percent, though at the expense of everyone else. To defend these policies on a global scale, David Rockefeller founded in the 1970’s the Trilateral Commission, a kind of Opus Dei of the capitalist system. As history accelerates itself, however, just as it had taken Catholicism a few centuries to lose its power after the Reformation, a few decades of steep decline seem to have done the job for capitalism. The fact that it is still touted as “the end of history” or “the only possible alternative” has to do with denial, inertia, fear of the unknown and a certain laziness affecting our political and intellectual elites.

On the other hand, the working classes have for a long time accepted a flawed vision of capitalism. According to the supporters of the Marxist-Leninist vision, every shopkeeper, every owner of a piece of land, a small factory or a restaurant is, necessarily, a capitalist, when in actual fact they are but minor players of the exchange economy:

“Every day and every moment, small-scale production gives birth to capitalism and to the bourgeoisie, in a spontaneous manner. […] Capitalism appears where small ownership and the free exchange of goods still survive. […] Capitalism starts with the rural markets.” (Lenin, Selected works)

This confusion is largely responsible for the mass tragedies that accompanied the implementation of the Marxist theories in practice within the communist world, until the Chinese experiment.

As Fernand Braudel’s three-volume opus on the history of capitalism demonstrates, the exchange economy precedes capitalism. According to him, only a small number of market players deserve the label of capitalists, or have any real power over the economic system:

“Capitalism is increasingly viewed as a superlative [F.B.] . Who is popular revolt aimed at in France ? Against trusts and multinational corporations. […] The stand I buy my newspaper from is not capitalist-related. […] Nor are artists’ workshops capitalist, or the small independent enterprises – what we in France call the ’49ers’; these enterprises do not want to reach the ominous number of 50 employees, because of the tax and union implications that entails.” (Fernand Braudel, Les Temps du Monde, p.545)

Braudel’s analysis also proves that modern states, bare a few exceptions, have not been mere instruments in the hands of the affluent. Moreover, history proves the existence of a love-hate relationship between the two, which since the 1980’s has steadily tilted towards hate, directed against the state administration and its powers of taxation. (Strangely enough, this is a sentiment that capitalists share with communists, whose founders, as we know, had proposed abolishing the state altogether…)

Braudel’s work is equally important in other respects, for it implicitly disproves capitalism as an evolutionary system. Thus speculating in shares, of Goldman Sachs notoriety, or the betting for and against the same shares by the same operators , as well as recurrent financial crises, had been standard fare during the 17th and 18th centuries on the Amsterdam Stock Exchange . The tax avoidance industry, as well, has been a hallmark of capitalism from its early days, as is the propensity of states to shift the burden of taxation on the working classes via levies on consumption .

As inequalities between states have diminished over the past few decades, they have increased internally within each state, especially in a number of leading western countries. Accordingly, the adoption of policies capable of arresting and reversing such trends is needed and should go beyond band-aid measures aimed at ensuring the survival of the capitalist system.

Update* Lexington’s column published by The Economist on February 23rd, 2013 on page 38 illustrates the inability of western political elites to deal with the current economic stagnation: ” Today, honest politicians feel something closer to impotence: they are unable to bring the old economy back, and have yet to figure out a sustainable replacement. That leaves much of Washington haunted by a guilty dread of voters, and of the populists who successfully channel the public’s anger, fear and disappointment […] Voter anger fuel the tea-party and anti-government groups thatdrag the Republican Party to simplistic solutions on the right. On the left, voter expectations tempt Democrats, starting with Barack Obama, to pander and hint thatonly modest adjustments are needed to entitlement spending. ” QED …

Breaking the Shackles of Short-termism

 December 18, 2012

Until recently, sociologists trained in the tradition of Wright Mills have assumed western economic elites to be rather monolithic in nature. Not anymore. According to The Economist (“Taking the long view”, November 24th, 2012), CEO’s like Paul Polman of Unilever or management experts like Roger Martin, Dean of the Rotman School of Management of the University of Toronto, are attacking the basic principle of neoliberalism: the pursuit of shareholder value.

For Polman, the idea that global companies should primarily be concerned with maximising return to shareholders is out of date. Martin calls it a “crummy principle that is undermining American capitalism”. And Georg Kapsch from the Federation of Austrian Industries has urged the business world to abandon it.

In truth, the ill effects of this theory are there for all to see. In order to increase their pay, managers have resorted to manipulating share prices. The time average investors hold on to shares has decreased from 8 years in the 1960’s to only 4 months in 2010. More alarmingly, however, is the fact that listed companies have invested only 4 percent of their total assets in research and development, which compares poorly with the 10 percent or more invested by privately-owned companies.

Not surprisingly, smooth operators like Warren Buffett or giants like IBM systematically refuse to provide investors with short-term earnings guidance. Big French companies prefer to bribe investors with bonuses if they hang on to their shares for longer than a few months, and up-and-coming entrepreneurial corporations like Google and Zynga have put in place defences such as dual-class voting structures so as to avoid investor pressure for short-term results and cuts to their R & D budgets.

According to The Economist, the solution to short termism is not to abandon the principle of maximising shareholder value, but to follow the advice of business guru…Bill Clinton, who in Delphian manner said “mend it, don’t end it”. Real experts, however, seem to favour the Chinese saying that if a principle doesn’t work anymore, it should be replaced with one that does.

The Idols of the New Left

1/12/2012

Author : Florian Pantazi

Regrettably, Western politics over the past 20 years have become less of a contest between competing politicali visions and more a question of which party is better qualified to implement the agenda of the global one percent( free markets, privatisation, salary reductions, tax minimisation,etc). Not surprisingly, in most Western nations theelectorate has lost confidence in their political leaders.

A few days before Barack Obama’s re-election, Larry Summers published a Reuters commentary reassuring readerst thatthe incumbent President deserved four more years in office, as during his first term he did not stray one bit fromB BillClinton’s political legacy. But were the Clinton years really as magical as all that ?

Together with Britain’s Tony Blair and Germany’s ex-chancellor Gerhard Schroeder, Bill Clinton acquired quite a reputation as the co-founder of the New Left. As I have explained in an article in 1998 (“The Need for Political Realignment” published in Curentul in Bucharest), however, this troika’s political agenda looked strikingly similar to the conservative one.

In the United States, for instance, the Personal Responsibility and Work Opportunity Reconciliation Act adopted in 1996 had put a 2-year cap on the federal aid destined for poor families. Peter Edelman, who resigned in protest, said that“Clinton’s objective was to be re-elected at any price”. Further along in 1999, the Clinton administration repealed the Glass-Steagall Act, henceforward allowing banks to undertake risky investments with depositors’ money. This effectively paved the way for the biggest financial crisis since the Great Depression.

In the same spirit, ex-premier Tony Blair signed British forces up for the Iraqi military intervention, which resulted int thousands of British casualties.

In Germany, the adoption by the Schroeder government of the Hartz Report in 2002 rendered employment precarious for millions of Germans, a principle which has since been touted as the “flexibility” of the workforce. Schroeder’s “competitiveness” drive has badly affected the incomes of some 40 percent of the German workforce. As a result, the latter is unable to act as consumer of last resort. Ultimately, Germany has become as dependent as China on the performance of its exports.

To better understand this trio’s political philosophy, let us imagine that a group of workers are trying to defend their rights in court. To this end, they hire the services of a bunch of high-profile lawyers who pretend to represent their cause . Only to lose the case… On the other hand, the lawyers suddenly come into big money and regularly feature on the guest-lists of the rich and powerful.

Our three lawyers – Clinton, Blair and Schroeder- were quick to take credit for the economic exuberance which followed the fall of the Berlin Wall or the introduction of the European common currency. In fact, as economists like James K. Galbraith pointed out, the economic booms that developed as a result, had very little to do with their economic stewardship skills. They happened to be in the right place at the right time.

These days, the global 1 percent promotes them in the media as idols of the 21st century and regularly provides them with fee-paying audiences in prestigious locations. The strategy works to fuel their megalomania, as well as to encourage other political leaders of the left to follow into their footsteps. 

Sadly, Schroeder and Clinton have ended up as true believers in their own talents and accomplishments. On French television, the former even feels compelled to impart his wisdom to the society at large, as his peers in this country have a much more normal attitude to political survival.

To date, followers of the principles of the New Left are to be found only among the leaders of much smaller countries, as Matthew Yglesias explains:

“If, when you leave power, the small Davos world keeps you in high esteem, a considerable array of jobs are open to you, be it at the European Commission, the IMF or what-have-you, even if you are absolutely reviled by your co-nationals. If anything, this vilification might even work in your favour”.(as quoted by Paul Krugman in “End This Depression Now!; translation from the French edition version by author).

As for this analyst, seeing Schroeder on TV, I could not help agreeing with George Orwell, who was fond of reminding us that “by 50, you get the face you deserve”…

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