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Je Suis(se) HSBC! – The austerity odd or ad?

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While the wealthy evade billions in taxes, ordinary citizens continue to bear the burden of budget cuts. Meanwhile, those who resist are punished for it. Is our austerity world an upside-down normalcy and reality? Je Suis(se) HSBC!! Isn’t it odd, or it’s just another (unintentional) ad?

“What is rewarded above is punished below … Profits are privatized, losses are socialized.”
Ultimately, major scandals like HSBC’s Swiss tax evasion scheme are merely flash points offering us a clearer view of the hidden dynamics at work in the world economy. Credits: telegraph.co.uk
This week it was revealed that HSBC — Europe’s biggest bank — has been actively running and propagating a massive tax evasion scheme through its Swiss subsidiary, allowing some of its wealthiest international clients to hide over $120bn in undeclared assets in 30.000 secret Swiss bank accounts. Leading British regulators, MPs and government officials were aware of the malpractices and the names of potential tax evaders (including movie stars, drug lords and heads of state), but never pressed criminal charges.

Instead, the UK — like the rest of Europe — ushered in an age of austerity. Where the billions of the rich escaped to Switzerland and the Caymans, the benefits of the poor were cut “to balance the budget.” Last year, David Cameron pledged to slash “wasteful” public spending for another decade, as it “comes out of the pockets of the same taxpayers whose living standards we want to see improve.” The irony of the Prime Minister speaking from a golden throne was hardly lost on anyone. Welcome to the topsy-turvy reality of austerity politics.
As for HSBC, of course the diligent observer will not have been very surprised by the news of the bank’s umpteenth mega-scandal. Already back in 2012, financial journalist Matt Taibbi made it clear that HSBC had been engaged in “more or less the worst behavior that any bank can possibly be guilty of.” So far, the bank has managed to avoid prosecution despite laundering billions of dollars for some of the most notorious Mexican drug cartels as well as a Saudi bank linked to Al Qaeda, and systematically rigging interbank interest rates and reaping lavish profits in the infamous LIBOR scandal.

The decision of US and UK regulators to reach deferred prosecution agreements with HSBC and not to press criminal charges in these scandals signals the double standards at the heart of our contemporary justice systems. In the US, where more than half of the prison population is doing time for minor drug offenses, the white collar criminals who aid and abet the violent traffickers of these same drugs get off with a slap on the wrist. As Taibbi puts it, “for the crimes [HSBC] committed, getting away with just [a fine] — and it’s not even their money, it’s the shareholders’ money — it literally is a get out of jail free card.”

Yet it is very important not to let the criminal behavior of a single bank distract us from the bigger picture. HSBC is but one notoriously scandalous player in a financial system that is dominated by some of the most criminal organizations of our times. Focusing our wrath on individual acts of misbehavior risks missing a deeper dimension. While it is the illegal practices that mostly hit the headlines and cause indignation, the real theft still occurs within the bounds of the law — in the everyday transactions and ordinary financial operations at the heart of these banks’ business models.

In this sense, the greatest scandal of our times is systemic in nature and rests upon the wholesale transformation of the world economy over the past four decades. With the onset of financialization in the 1970s, the international banking system began to act like Galeano’s magnifying glass: grossly amplifying pre-existing inequalities and inverting reality in the process. In the first instance, the system sucks up billions in interest and tax money from below. Starting with the bankruptcy of New York City in 1975 and the Mexican debt crisis of 1982, austerity became the key mechanism whereby the banks effected a historically unprecedented redistribution of resources from the bottom to the top.
At the other end, the magnifying glass created the preconditions under which the world’s wealthiest businesspeople, Third World dictators and white-collar criminals could further increase their accumulated capital — obtained through decades’ worth in pillage and plunder of state resources and common property — and stuff it in offshore bank accounts and foreign assets, where this immense stolen wealth largely escapes taxation, regulation and criminal investigation.

The financial privileges obtained through this process, which has been referred to by David Harvey as “accumulation by disposition”, stand in direct relation to the fiscal deprivation at the bottom. Ultimately, major scandals like HSBC’s Swiss tax evasion scheme are merely flash points offering us a clearer view of the hidden dynamics at work in the world economy: what is taken from one side shows up at the other. In a word, there is no such thing as austerity; there is only an outrageously skewed redistribution of resources. In this upside-down world of financial capitalism, money doesn’t trickle down — it steadily flows upwards.

The result is a stable set of outcomes in which profits are perennially privatized and losses are systematically socialized. Those who question this state of affairs are told that “there is no alternative,” and those who actively resist — like the social movements and progressive governments in Latin America and Southern Europe — are ruthlessly punished for it. First the cops will beat ordinary citizens over the head when they protest, then investors will beat popular governments over the head when they do the same. Foreign capital is withdrawn, bond yields spike up, stock markets collapse. Where the bankers above are rewarded for criminal behavior, those who struggle for justice from below find themselves imprisoned within the narrowing perimeters of the permissible.

It should be clear by now that to this systemic injustice there can only ever be systemic answers. Of course regulators should actively pursue criminal charges against HSBC for its latest mega-scandal, but without powerful anti-systemic movements to carry demands for social justice forward, meaningful change remains unlikely. To turn the looking glass around and put the world back on its feet will require mass mobilization and political organization on a scale we have not been able to imagine so far. Now more than ever we need to take back to the streets and start developing a coherent transnational project to confront the criminal rule of global finance head on.

First published by the ROAR Magazine.

Economy

Khashoggi crisis highlights why investment in Asia is more productive than in the Middle East

Dr. James M. Dorsey

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Growing Western political and corporate reluctance to be associated with Saudi Arabia in the wake of the suspected killing of journalist Jamal Khashoggi spotlights fundamentally different investment strategies and environments in the bulk of Asia and the oil-rich Gulf states, the continent’s most western flank.

The Khashoggi crisis highlighted the fact that much of investment in the Gulf, irrespective of whether it is domestic, Western or Chinese, comes from financial, technology and other service industries, the arms industry or Gulf governments. It is focused on services, infrastructure or enhancing the state’s capacities rather than on manufacturing, industrial development, and the nurturing of an independent private sector.

The crisis has put on display the risks Gulf governments run by adopting policies that significantly tarnish their international reputations. Technology, media, financial and other services industries as well as various European ministers and the US Treasury Secretary have cancelled, in the wake of Mr. Khashoggi’s disappearance and likely killing while visiting the Saudi consulate in Istanbul, their participation in Davos in the Desert, a high-profile investors’ conference in Riyadh later this month.

By contrast, the military industry, with US President Donald J. Trump’s encouragement, has proven so far less worried about reputational damage.

Sponsored by Saudi Crown Prince Mohammed bin Salman, who is suspected of being responsible for Mr. Khashoggi’s likely murder, the conference was intended to attract investment in his Vision 2030 plan to reform and diversify the Saudi economy.

In highlighting differences in investment strategies in the Middle East and the rest of Asia, the fallout of Mr. Khashoggi’s disappearance goes beyond the parameters of a single incident. It suggests that foreign investment must be embedded in broader social and economic policies as well as an environment that promises stability to ensure that it is productive, contributes to sustainable growth, and benefits broad segments of the population.

In contrast to the Gulf where, with the exception of state-run airlines and DP World, Dubai’s global port operator, the bulk of investment is portfolios managed by sovereign wealth funds, trophies or investment designed to enhance a country’s international prestige and soft power, major Asian nations like China and India have used investment to lift hundreds of millions of people out of poverty, foster a substantial middle class, and create an industrial base.

To be sure, with small populations, Gulf states are more likely to ensure sustainability in services and oil and gas derivatives rather than in manufacturing and industry. Nonetheless, that too requires enabling policies and an education system that encourages critical thinking and the freedom to question, allow one’s mind to roam without fear of repercussion, and grants free, unfettered access to information – categories that are becoming increasingly rare in a part of the world in which freedoms are severely curtailed.

China’s US$1 trillion, infrastructure-driven Belt and Road initiative may be the Asian exception that would come closest to some of the Gulf’s soft power investments. Yet, even so, the Belt and Road initiative, designed to alleviate domestic over capacity by state-owned companies that are not beholden to shareholders’ short term demands and/or geo-political gain, contributes to productive economic growth in the People’s Republic itself.

Asian nations, moreover, have been able to manage investors’ expectations in an environment of relative political stability. By contrast, Saudi Arabia damaged confidence in its ability to reform and diversify its oil-based economy when after repeated delays it suspended indefinitely plans to list five percent of its national oil company, Saudi Arabian Oil Company or Aramco, in what would have been the world’s largest ever initial public offering.

The Khashoggi crisis and the Aramco delay followed a series of political initiatives for which there was little equivalent in the rest of Asia. These included the Saudi-United Arab Emirates military campaign in Yemen causing the world’s worst post-World War Two humanitarian crisis; the 16-month-old diplomatic and economic embargo of Qatar by Saudi Arabia, the UAE, Bahrain and Egypt; the detention and failed effort to force Lebanese Prime Minister Saad Hariri to resign; and the diplomatic Saudi spat with Canada in response to a tweet criticizing the kingdom’s human rights record. As a result, foreign direct investment in Saudi Arabia last year plunged to a 14-year low.

All of this is not to say that the rest of Asia does not have its own questionable policies such as Chinese claims in the South China Sea or the Pakistani-Indian feud, and questionable business practices such as China’s alleged industrial espionage. However, with the exception of China’s massive repression of Turkic Muslims in its north-western province of Xinjiang, none of these are likely to fundamentally undermine investor confidence, derail existing social and economic polices that have produced results or produce situations in which avoidance of reputational damage becomes a priority.

At the bottom line, China is no less autocratic than the Gulf states, while Hindu nationalism in India fits a global trend towards populism and illiberal democracy. Nevertheless, what differentiates much of Asia from the Gulf and accounts for its economic success are policies that ensure a relatively stable environment and are focused on social and economic enhancement rather than primarily on regime survival. That may be the lesson for Gulf rulers.

A version of this story was first published by Syndication Bureau

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Economy

Regional Comprehensive Economic Partnership (RCEP) and India

Prof. Pankaj Jha

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Regional or bilateral free trade agreements between India and other countries/institutions have always faced local resistance because of intrinsic anxiety that low cost imported goods would stifle the growth of domestic industry. Commentators have justified this apprehension advocating that domestic industry in India is still unprepared for international competition, and there are no state subsidies that the government provides to the industry for reducing costs and facilitating unfair cost advantage with regard to exports. Within India, sector specific associations are powerful and a result of which many items such as tea, palm oil, coffee and pepper were enlisted as highly sensitive list items (very less reduction in tariffs) when India-ASEAN Free Trade Agreement was signed in 2009. India is witnessing a very high percentage of growth in services sector (contributes nearly two-thirds of India’s GDP)and therefore has always sought to offset the negative balance of merchandise trade with promotion of services sector and investment as an integral component of bilateral or multilateral trade talks.

RCEP is proposed to be one free trade area which will include 3.4 billion people across the East Asian and Oceania region, with a GDP of more than US $22 trillion and the intra RCEP trade would account for more than 30 percent of global trade, as it would integrate the three largest economies of Asia-China, Japan and India. For India, accession to this economic trading bloc would mean opening its large market of 1.25 billion people for the products from 15 countries including 10 ASEAN members and the five dialogue partner countries -China, Australia, New Zealand, Japan, and Korea. During the last few meetings of RCEP negotiations, India has made it very clear that it would not compromise on issues related to trade in services and also addressing concerns related to the small and medium enterprises in the negotiations.

As discussed, RCEP is expected to bring the ASEAN countries and its six dialogue partners under one large geographic and economic landmass which would be one of the largest economic blocs in the world. India has Free Trade agreements or Comprehensive Economic Cooperation/ Partnership Agreements (CECA/CEPA) with Thailand, Singapore, Malaysia, and Korea while it is negotiating terms of bilateral free trade along with services agreement with Australia, and New Zealand. India has proposed to include services sector into the larger negotiation process while many countries do not want to open their market for highly talented and qualified professionals from India. The bone of contention in this regard is Mode IV which ‘deals with movement of natural persons who are service providers or independent professionals’ to another WTO member country. India has pressed for the Mode IV negotiations while negotiating with Malaysia and Singapore. However, both the countries have only opened Mode IV for select individuals such as consultants, accountants, nurses and financial experts. The limited access to the emerging markets have annoyed Indian negotiators to such an extent that at one time India decided not to enter into any free trade negotiations without including services and investment in the negotiation blueprint.

India started economic liberalization process in early 1992, it is yet to integrate with the global economy given the intrinsic problems with regard to tariff structures, customs procedures and the inherent red tape which was a legacy of the license regime. However, putting onus on India for failed attempts with regard to free trade and better terms of trade with other countries across Asia would be unfair. India has not gained the promised advantage while trading with the price competitive economies of the Asian region. On the contrary, the low cost production centres, particularly China, which thrives on state subsidized production has easy access to the India market while it has not bestowed the same privileges to Indian exports. The tariff and non-tariff barriers in China are still not conducive to Indian exports leading to skewed balance of trade. Taking cue from China’s re-routing of its products through ASEAN nations, India has stressed on the stringently following the Rules of Origin (ROO) template with 35 percent of local value addition as a necessary prerequisite.

This year, in the post Wuhan summit bonhomie, Chinese government has opened its pharmaceutical market to select Indian drugs such as anti-cancer, and other lifesaving drugs which are relatively cheaper than Western imports. Overall China has removed import duties on 28 medicines imported from India. The trade frictions between India and China still exists as India has registered a number of anti-dumping and unfair trade practices case in WTO against China. Indian industry particularly Small and Medium Enterprises(SMEs) however accept the fact that cheap Chinese input material in sectors such as steel, pharma and other related industries have brought down the costs, and have also indirectly helped in real estate, automobile spares, and textile sectors. Nonetheless, larger industrial houses are not in favour of such opening up of market as they feel their future endeavors would be jeopardized if Chinese cheap products both in terms of raw materials and semi-finished products would curtail their market expansion plans through new products. These large industrial houses do control the Indian politics through their corporate funds given to various political parties to fight elections and have a sizeable influence among the country’s parliamentarians and legislators. SME sector in India is relatively unorganized, both in terms of associations and political clout.

In order to increase its trade with countries in East Asia and Oceania, India has been trying to adopt international production methods, and be a part of the Regional Value Chain(RVC). However, India’s incremental approach for market liberalization and other market facilitation efforts have not met with active engagement from the regional community. India has not yet been inducted into the Asia-Pacific Economic Cooperation (APEC) which could have prepared the country for business standardization and harmonization of tariffs as per the APEC provisions. This would have created the base for effective implementation of the RCEP trade provisions with necessary structural support. Indian economists have made it very clear that only market access to merchandise trade without any quid pro quo would not be acceptable to the Indian entrepreneurs. It might also create social problems given the fact that Chinese cheap products have already decimated electronics, mobile, toys and silk industry in India. The cascading effect has left very large number of both skilled and unskilled labour jobless. Given the fact that select sectors in India are still labour intensive, retrenchment of workers has a political cost. There are apprehensions projected by industry associations that cheap imports would adversely impact the steel, chemicals, textiles, copper, aluminum, and pharma industry. India is has a sizeable share of global trade in automotive parts, pharma and textile industry, and so negotiations would be a long drawn affair.  Further, strategic experts feel that India must not become an ancillary industry to Chinese production network as it would jeopardize India’s rise in future as a production and skill center in Asia. Also, it will put China as the benefactor of India’s industrial change which might not be palatable to the political class.

Indian negotiators still believe that until and unless the demands with regard to trade in services, investment and also concerns related to SMEs is addressed, the RCEP would be facing an invisible deadlock. Opening up services sector would help the Indian economy and partly offset the effect that would be felt from the cheap products from relatively cheaper production and export centres. Indian economy still faces stiff competition from China and as a result of this the negotiations with China, would be long drawn affairs. However, there is still a silver lining that RCEP would be concluded in 2019 but the deadline from the Indian side would be after the general elections in 2019 when the current Prime Minister Narendra Modi would be looking for a second term to bring about comprehensive set of economic and financial reforms. In case a coalition government comes into power, it would seriously jeopardize the RCEP negotiations because then the different associations and lobbies would be playing the political game to protect their economic interests.

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‘America First’ vs. Global Financial Stability

M Waqas Jan

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The recently concluded annual meeting of the IMF and World Bank group, held in Indonesia last weekend, has highlighted a series of concerning trends with regard to the global economy. It has subsequently left many considering the impacts of a possible global recession that may be looming ahead in the next of couple of years to come.  These fears were evident in the worldwide sell-off in global equities last Thursday that has been widely attributed to the IMF revising down its global growth forecast in its World Economic Outlook (WEO) report. The report highlighted growth in a number of developed economies as having plateaued, with rising trade tensions and policy uncertainty greatly contributing to the slow-down. This includes the ongoing trade war between the US and China, as well as the numerous uncertainties pervading within the Euro-Zone.

All of this has had a significant knock-on effect on emerging markets, including Pakistan which has already been struggling with massive fiscal and current account deficits amid rampant inflationary pressures.  With tensions between the United States and China still on the rise, Pakistan presents a notable example of how deteriorating global macro-economic conditions have been exacerbated by rising geo-political tensions between these two global powers.

For instance, it took Imran Khan’s fledgling government months to accept the reality of another IMF bailout (Pakistan’s 13th in the last 30 years) despite its $68 billion investment commitment with China. This is because the US, being the largest contributor of funds to the IMF has increasingly politicized this bailout in light of its own deteriorating relations with China.  In fact, the US has directly blamed China for Pakistan’s recent debt woes referring to what has been come to known as China’s ‘Debt Trap Diplomacy’. The argument being that the massive loans being doled out by China to developing countries under its Belt & Road Initiative are leading to unsustainable debt levels, eroding their sovereignty while expanding China’s hold over them. Pakistan’s loan obligations to China as part of the China Pakistan Economic Corridor are presented as a case in point.

Despite both Pakistan’s and China’s protests to the contrary, it is widely expected that some of the IMF’s conditions attached to Pakistan’s requested bailout are thus likely to include greater scrutiny and revisions regarding the CPEC initiative. This is likely to form part of the US’s overall objective of limiting and constraining China’s influence over Pakistan and the wider region.  The impact this would have on Pakistan however is likely to prove critical considering its precarious economic as well as geo-political position. Not only would the IMF’s conditions limit the new government’s ability to maneuver its economy around an increasingly unstable world financial system; it would also delay the much needed infrastructure projects being planned and implemented under CPEC with Chinese assistance.  Therefore, the very purpose of the IMF bailout which is to provide some semblance of stability to Pakistan’s ailing economy, would embroil it deeper in uncertainty as a direct result of the US’s unilateral push against China.

It is worth noting here that during its annual meeting, the IMF clearly voiced its concerns regarding escalating trade tensions between the US and China. While calling for increased dialogue and a careful examination of debt induced risks across the world, the IMF seems to be warning both sides over the fragility of prevailing global economic conditions. At the same meeting, China too echoed these concerns and called for increased dialogue with the US to promote open trade and growth. As a country that has for the last few decades championed globalization, China’s vision of shared global growth and win-win partnerships in emerging markets such as Pakistan, have however been directly challenged by the US. A US, that is in contrast aggressively willing to defend the prevailing status quo, as part of President Trump’s mantra of ‘America First’. Hence it was no surprise that US representatives, in response to these concerns brought up by the IMF and China, have continued to downplay the risks of their policies on global economic stability.

With respect to China and numerous emerging markets such as Pakistan, the fact still remains that the world financial system is currently replete with risks and uncertainty as a direct result of US policy. All of this is occurring while the US President continues to boast about surging US equities and record employment figures as a direct outcome of these policies. While the US economy has experienced sustained growth since the 2008 financial crisis, markets and business cycles have a way of correcting themselves, especially when world leaders themselves point to overbought and overextended conditions.

If the US economy truly is on the cusp of a potential downturn, then present geo-political tensions are more than likely to exacerbate the impacts of an impending global recession. For Pakistan, with its precariously low foreign currency reserves and an unsustainable debt to GDP ratio, such a recession is likely to bring on even bigger problems than any of the potential cuts the IMF may propose on CPEC. Thus, while the US may limit China’s rise as an economic power in the short-term, it does so at the expense of emerging markets and global economic stability in the long-run. This lack of foresight is likely to hurt the US more as it realizes how economies cannot exist within a vacuum in an increasingly interdependent world.

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