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Pandora Papers: Revelation of a Parallel “Shadow” Economy

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After groundbreaking revelations of Panama papers and other documents pointing to tax-evasion efforts of the global elite, another new revelations namely pandora papers has surfaced raising furore about the secret wealth of the global financial elite, leaders and public officials of numerous countries. This revelations indicate an evident trend among the elite across countries to shield their illicit wealth from the probing eyes of authorities and also discloses a big shady financial affairs to which the general mass had been conveniently kept unaware of.

The Pandora Papers has been revealed by the International Consortium of Investigative Journalists(ICIJ) which involved 600 journalists from 150 media outlets in 117 countries. The dump of more than 11.9 million records, tantamount about 2.94 terabytes of data, came five years following the “Panama Papers” that revealed how money was concealed by the wealthy in ways that law enforcement agencies could not detect. The agency leaked files from 14 offshore service providers which has connection with more than 330 public officials, including 35 world leaders underscoring the disproportionate representation of governance elite in the list.

The offshore financing has become a increasingly ploy of the transnational elite as this provide them with tool to conceal their identity and also give them the window to utilize their ill-gotten illicit money to invest. The process of such financing is complex. Especially, financing in a foreign country is operated through a legal process where a tax-compliant individual of any country have to abide by the due procedures in order to invest his money in another country .However, corruption run rampant among the public officials and the leaders of many countries which put them at a disadvantaged position in utilizing their money. Therefore, they often take resort to devious methods in order to make their financial investments in a foreign country discreet from the responsible authorities .

Against this backdrop, a new clandestine economy has taken shape to cater to the demand of the offshore financing. This economy hinges on the countries where the tax regulation are often lax and where the authorities doesn’t impose stringent financial conditionalities with regards to financing and other economic activities. A group of unscrupulous transnational individual exploit these loopholes in those countries and abet with the errant individuals to conceal their wealth and identity and thereby act as an accomplice in illicit financial gains and tax-evasion.

Although these illicit affairs prevailed since 1970,it was not until the revelation of Panama papers when these outlawed activities had been divulged to the public and had evoked considerable uproar among the citizens. The backlash following the revelation panama paper was such that it had led to toppling of political leaders of different countries most prominently Nawaz Sharif in Pakistan. These revelations therefore, facilitate the accountability of errant elite of the countries and also make general people cognizant of the illicit activities of their officials and leaders. Besides, these revelations also dissuade the potential rowdy activities by the elite as they are fearful of such revelation and prospective reputational risks.

While the whole world is grappling with a crippling pandemic due to a appalling lack of resources to combat the virus ,such revelations is worrisome as it points a grave injustice to general people who are dispossessed of the basic necessities and services. Revenue is one of the fundamental sources of government earning. Often, revenue is commensurate with the earning of the individual which facilitates in the fairness and equitability of the revenue system. Besides, the revenue process also ensure the accountability of earning and investigate the legality of earning of individual. Therefore, money earned from shady sources through corruption and outright embezzlement can’t be utilized domestically. This prompts the unprincipled elite to evade tax and other liabilities and funnel to foreign tax havens .However, these activities inflict severe damages to domestic economy due to two reasons. Firstly, when a person can channel money transnationally to such havens are motivated in future to engage incremental corrupt activities to make more financial fortune. This, propels incentivizes increasing corruption which is detrimental to the economy and society of a country. Secondly, this activities also translate to tax-evasion dispossessing the citizens of the benefits of the revenue and thereby deteriorating government spending in areas of health, education and other indispensable services which makes people susceptible to the any shock such as epidemics as has been blatantly revealed by the Covid-19 pandemic. Moreover, such transnational financial activities isn’t innocuous rather it involves far-reaching socio-economic consequences.

What’s more appalling is the fact that the people embroiled in these activities are the very people entrusted with advocating public interest and shielding people from the adversities. Therefore, their involvement in such nefarious activities, as has been revealed by the Pandora’s Papers that features the public officials and political leaders, is indicative of a deep predicament of governance in these countries. Besides, these revelations also unmask the feigned benevolence of the country’s elites.

A state is a social contract which is devised and driven by a reinforcing social contract between state and the individual. State is represented by its institutions and its apparatuses while citizen binds himself with the state through providing allegiance to the state in exchange of a proportionate guarantee from the state about safety and guarantee from the state. Revenue serves as a fundamental mechanism by which state ensure accountability, undertake redistributive activities, ensure different essential services. Therefore, revenue ensure fundamental rights of the citizens of the state .However, when the powerful and wealthy quarters of the state engage in corrupt dealings and deliberately evade the revenue system, it inflicts a severe harm to the general people as they are deprived of the basic services. Therefore, such instances of tax evasion and shady activities revealed by the Pandora box points to a steady erosion of the social contract between the state and the individual. Besides, this affair is also indicative of emergence of greedy transnational elite who are free of accountability from their government and coordinate transnationally to accumulate greater wealth and their shady activities transcend the borders of state.

While any connection of any Bangladeshi citizen in the leaked documents is yet to be ascertained, it is however indubitable that there are numerous Bangladeshi elite predominantly civil servants who are actively linked with similar kind of nefarious money-laundering activities. In Bangladesh, corruption is unbridled as there is sheer lack of accountability and oversight of the activities of public officials. While government has launched numerous attempts at whitening the black money, there is however still considerable undocumented wealth own by country’s rowdy elite. Therefore, they exploit the opportunities of illicit transfer of the money to the countries where regulation are lax. This money ,however, represents embezzlement of public funds and corruption. This facts aren’t conjectural anymore as the existence of Begum Para has adequately shed light on the contours of transnational capital flight from Bangladesh.

Moreover, the revelations of Pandora Papers unravels the shady business activities of transnational elites who operate across nations and funnel their money to the tax havens where the regulations are often lax. While the developments has elicited enormous public furore for the dramatic effect, it however points to grim situation of governance marked by corruption, greediness and lack of accountability by public authorities who are ironically entrusted with the responsibility to safeguard public interest. Therefore, these shady activities inflict a severe damage on the state’s revenue and erode state’s resources in rendering services to its citizens. Against this backdrop, these revelations contributes to good governance by disclosing the illegal activities and also by subjecting elite activities to public criticism. Moreover, these revelations also underscore a pressing need of a transnational infrastructure to coordinate global governance efforts in order stem the tide of off-shore financing.

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Economy

Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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Platform Modernisation: What the US Treasury Sanctions Review Is All About

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Image source: home.treasury.gov

The US Treasury has released an overview of its sanctions policy. It outlines key principles for making the restrictive US measures more effective. The revision of the sanctions policy was announced at the beginning of Joe Biden’s presidential term. The new review can be considered one of the results of this work. At the same time, it is difficult to find signs of qualitative changes in the US administration’s approach to sanctions in the document. Rather, it is about upgrading an existing platform.

Sanctions are understood as economic and financial restrictions that make it possible to harm the enemies of the United States, prevent or hinder their actions, and send them a clear political signal. The text reproduces the usual “behavioural” understanding of sanctions. They are viewed as a means of influencing the behaviour of foreign players whose actions threaten the security or contradict the national interests of the United States. The review also defines the institutional structure of the sanctions policy. According to the document, it includes the Treasury, the State Department, and the National Security Council. The Treasury plays the role of the leading executor of the sanctions policy, and the State Department and the NSS determine the political direction of their application, despite the fact that the State Department itself is also responsible for the implementation of a number of sanctions programmes. This line also includes the Department of Justice, which uses coercive measures against violators of the US sanctions regime.

Interestingly, the Department of Commerce is not mentioned among the institutions. The review focuses only on a specific segment of the sanctions policy that is implemented by the Treasury. However, it is the Treasury that is currently at the forefront of the application of restrictive measures. A significant part of the executive orders of the President of the United States and sanctions laws imply blocking financial sanctions in the form of an asset freeze and a ban on transactions with individuals and organisations. Decrees and laws assign the application of such measures to the Treasury in cooperation with the Department of State and the Attorney General. Therefore, the institutional link mentioned in the review reflects the spirit and letter of a significant array of US regulations concerning sanctions. The Department of Commerce and its Bureau of Industry and Security are responsible for a different segment of the sanctions policy, which does not diminish its importance. Export controls can cause a lot of trouble for individual countries and companies.

Another notable part of the review concerns possible obstacles to the effective implementation of US sanctions. These include, among other things, the efforts of the opponents of the United States to change the global financial architecture, reducing the share of the dollar in the national settlements of both opponents and some allies of the United States.

Indeed, such major powers as Russia and China have seriously considered the risks of being involved in a global American-centric financial system.

The course towards the sovereignty of national financial systems and settlements with foreign countries is largely justified by the risk of sanctions.

Russia, for example, is vigorously pursuing the development of a National Payment System, as well as a Financial Messaging System. There has been a cautious but consistent policy of reducing the share of the dollar in external settlements. China, which has much greater economic potential, is building systems of “internal and external circulation”. Even the European Union has embarked on an increase in the role of the euro, taking into account the risk of secondary sanctions from “third countries”, which are often understood between the lines as the United States.

Digital currencies and new payment technologies also pose a threat to the effectiveness of sanctions. Moreover, here the players can be both large powers and many other states and non-state structures. It is interesting that digital currencies at a certain stage may present a common challenge to the United States, Russia, China, the EU and a number of other countries. After all, they can be used not only to circumvent sanctions, but also, for example, to finance terrorism or in money laundering. However, the review does not mention such common interests.

The text does propose measures to modernise the sanctions policy. The first one is to build sanctions into the broader context of US foreign policy. Sanctions are not important in and of themselves, but as part of a broader palette of policy instruments. The second measure is to strengthen interdepartmental coordination in the application of sanctions in parallel with increased coordination of US sanctions with the actions of American allies. The third measure is a more accurate calibration of sanctions in order to avoid humanitarian damage, as well as damage to American business. The fourth measure is to improve the enforceability and clarity of the sanctions policy. Here we can talk about both the legal uncertainty of some decrees and laws, and about an adequate understanding of the sanctions programmes on the part of business. Finally, fifth is the improvement and development of the Treasury-based sanctions apparatus, including investments in technology, staff training and infrastructure.

All these measures can hardly be called new. Experts have long recommended the use of sanctions in combination with other instruments, as well as improved inter-agency coordination. The coordination of sanctions with allies has escalated due to a number of unilateral steps taken by the Trump Administration, including withdrawal from the Iranian nuclear deal or sanctions against Nord Stream 2. However, the very importance of such coordination has not been questioned in the past and has even been reflected in American legislation (Iran). The need for a clearer understanding of sanctions policy has also been long overdue. Its relevance is illustrated, among other things, by the large number of unintentional violations of the US sanctions regime by American and foreign businesses. The problem of overcompliance is also relevant, when companies refuse transactions even when they are allowed. The reason is the fear of possible coercive measures by the US authorities. Finally, improving the sanctioning apparatus is also a long-standing topic. In particular, expanding the resources of the Administration in the application of sanctions was recommended by the US Audit Office in a 2019 report.

The US Treasury review suggests that no signs of an easing are foreseen for the key targets of US sanctions. At the same time, American business and its many foreign counterparties can benefit from the modernisation of the US sanctions policy. Legal certainty can reduce excess compliance as well as help avoid associated losses.

From our partner RIAC

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