Déjà vous

Posts Tagged ‘G20’

When the G20 Summit was taking place last week in London focusing on the current economic crisis and the reforming of global financial institutions, there is a seemingly being-forgotten issue of the Africa, the black continent that is being even gloomer during this tough times. The only two African representors in G20 gathering were Males Zenawi, Chairman of the New Partnership for Africa’s Development and Ethiopian Prime Minister, and Kgalema Motlanthe, South African President. Ridiculously, Zanawi and Motlanthe were not even paid-up members of the G20 and were simply invited by Gordon Brown to make the gathering “more presentative”.

In fact, Africa used to be a hot topic on the global geopolitics table. It used to be among the top agenda of the G8 conference in 2005 even though the IMF published a report entitled “Aid will not lift growth in Africa” weeks before. After four years, aid from Western countries to Africa has likely made the poor poorer and the growth slower. More than $US1 trillion of aid has flowed into this continent for 60 years, including charity-based aid, government-to-government aid and aid from such large development institutions as the World Bank but Africa’s per-capita income today is even lower than it was in the 1970s and more than 50 per cent of its population (meaning more than 350 million people) still live on less than $US1 per day. An increasing aid does not correspond to a solution for Africa’s problems.

The most obviously major reason is that aid from the Western has trapped Africa in serious corruption. With more and more few-or-no-strings-attached aid flowing into African nations, these governments do not need to do anything more, such as raising taxes or encouraging domestic manufacturing and exports. What they really need to do is to court and cater their foreign donors to stay in power as long as possible. While on the contrary, what the people in these poorest countries really need is job, social and economic stability, and a belief in their country’s future. Those goals seem to be unachievable with a stream of free but no-goal money.

In 2002, a figure estimated by the African Union showed that corruption has cost this continent $US150 billion a year.  Mobutu SeseSeko, the King and President of Zaire (former name of Democratic Republic of Congo) from 1965 to 1997, has stolen at least $US5 billion, more than one tenth of this country’s current GDP. Recently, Malawi’s former president Muluzi was reputed to have embezzled $US 12 million of aid money. Chiluba, the former president of Zambia, is also in the court case. Most of the money that they have stolen would be used for health, education and infrastructure development of their own country.

A complementary consequence of corruption is civil strife and war, making Africa the most unstable continent in the world. Civil conflicts are often caused by the want of seizing the seat of power. In such battles, the victor will gain the right to access, and also take into its pocket, the enormous amount of foreign aid. Mauritania, Guinea and Guinea Bissau have been experienced political movements in just the past few months. Madagascar’s people were also living through a coup over throwing its government few months ago. Even now each of them has greatly relied on foreign aid.

Another reason is the issue of “Dutch disease“, a term describing the decline of a country’s export sector due to a large amount of natural resources or capitals inflows from foreign countries. The increasing supply of foreign currency leads to the appreciation of domestic currency. As a result, its goods are too expensive to export and the domestic manufacturing is ruined gradually. Workers in foreign-based companies or factories are paid lower than they were before. Thus, the government has to issue bonds to balance liquidity and to control inflation. For instance, Uganda had to issue bonds worth $US700 million in 2005. Such bonds would cost the country future interest payments.

These aid has also nothing to do to improve the civil service, an important factor of a developing economy, in these bureaucratic cronyism countries, which are rooted to the red tape and complex regulations for businesses. Whereas it only needs 40 days and 19 procedures in US or even 2 days in Australia to start a business, it takes 426 days to perform 15 procedures to obtain a business licence in Cameroon. It means that fewer investors dare to risk their money in a country that ‘is unable to stand on its own feet and manage its own affairs in a sustainable way’ (Dambisa Moyo).

In short, pushing more aid to Africa is not only unable to provide a solution for this continent but also raising others latent consequences linked to rampant corruption, an uncompetitive domestic market and the risk of civil conflict and unrest. Such kind of aid can only deal with immediate suffering but won’t be able to make a prolong sustainable growth. What the Africa needs is the pro-market government and increasing foreign trade with such partners as China. And the Western donors should be more modest to claim more aid to ‘the cycle of giving something for nothing.’

Reference:

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (Dambisa Moyo)

Demonstrators against the G20 summit had their first march in last Saturday with an estimated 35,000 people to demand economic and environmental reforms. This week’s summit is the first major summit in London since a G7 gathering in 1991.

The organisers of the protests are environmental campaigners, anti-capitalist and religious groups. According to an activist, “greedy corporate leaders were responsible for the economic crisis and and they were still trying to fill their own pockets despite the biggest economic collapse in decades.” Up to now, the crisis has pushed millions of worker into unemployment and hundreds million into poverty.

Whereas most of the countries have been suffering the biggest economic crisis since the 1930s’ Great Depression and some of them have carried out bail-out plans to rescue their big banks and they need every cent of taxation revenue to pay for the bailouts, some other ones are just saving the hot money coming in as a flow of tax from all over the world. They are considered as tax havens, where certain taxes are levied at a low rate or not at all.

Some strong economies such as Switzerland, Singapore, Hong Kong, Belgium, Luxembourg and Australia are widely recognised as tax havens or, more theoretically, secretive offshore finance centres although they have well-regulated and relatively transparent banking system. As being considered as tax havens by OECD, some of them have certain tax rates which are not high enough or have protection of personal financial information rules such as Switzerland preventing the taxpayers from scrutiny of foreign tax authorities.

Other tax havens recognised by OECD are smaller territories that have low tax rates and poor regulation and most of them are or were British territories. Most of the world’s hedge funds were registered in the Caymans island, an overseas territory of Britain and many shadow banking system, many of the most debt instruments and big banks that got into trouble are managed offshore or did much of their business through offshore subsidiaries. Ignoring the European calls for greater regulation, Britain seems to help many of them, like Bermuda and the Caymans, to become tax havens as an aim to support its own financial industry. For example, every single law passed in those places has to be signed by the Queen, meaning it is actually signed by British ministry of constitutional affairs. As being said by Murphy, a British tax accountant and anti-haven campaigner, “London is the biggest tax haven in the world because all these other places are just branches of London”.

However, in current situation tax havens is likely a problem rather than a solution. First, even though financial crisis was caused largely by the collapse of the US subprime mortgage market rather than tax evasion, “havens also play an important role in amplifying the crisis because they are regulatory havens as well as tax havens,” said Murphy. Secondly, seemingly supporters of tax havens such as Gordon Brown now need the revenue from tax than ever before to pay for his government’s bail-out plans. So, during planning for the G20 summit in next week, the tax haven issue has generated the strongest consensus, which is about the deal with the problems of offshore tax heavens and the cross-border supervision to prevent them.

These action has created a threat to Switzerland, the first “true” tax haven. After the World War I, whereas many other countries increased the tax paid to raise revenue for reconstruction, Switzerland still maintained a lower tax rate and therefore, Swiss banks had become capital havens for the foreigners. But now when the governments need tax revenue, such places as Switzerland are no longer on protection. It is leading a rush of offers to exchange tax information to other governments. These actions is unlikely to take enough action on havens because the governments would need to provide proof of tax fraud (which is somehow and sometimes not considered as a fraud in Switzerland) and the list of the accounts and people involved. During some years the Swiss needs to take to negotiate and legislate for the agreements, its bank can reform with new structures and even new bases.

Whatever difficulties they face, these actions show that the current economic crisis are producing a heavy pressure on tax havens. Obviously, the benefits from tax havens are now outweighed by the need for taxation dollars to pay for the government’s deficits. In the near future, there will be few tax havens that can survive and the winner is the one who are better regulated, more transparency and more willing to exchange personal financial information of tax payers to other governments. Hong Kong, Singapore, Dubai, Jersey and Bermuda will likely be the survivors. At that time, perhaps Switzerland will be a transformed place.

Reference:

Wilson, p 2009, ‘Pirates of the Caribbean’, The Australian, 27 March, p. 11.

The term “beggar thy neighbor” refers to protectionism policies which have become more popular in this economic crisis. Due to heavy deflation, which causes unemployment and illness of the domestic market, some countries have to carry out policies seeking for their own benefits first, rather than to contribute to the global economic balance and stability.

As opposed to free trade, protectionism restrains trade among nations. Those policies aim to enhance domestic market and to reduce the rate of unemployment. Protectionism governments might impose either tariffs or quotas on imports to restrain imports and by doing so, they shift demand onto domestic production. Two instances are from Mexico and Russia. Another measure which is often used by protectionists is to devaluate the domestic currency, or to use exchange rate manipulation. Doing so will raise the cost of imports and lower the cost of exports, thus improve that country’s trade balance. (Noted that this policy can lead to inflation.) China is one of the recent examples that use this policy.

The benefits of free trade can be explained by David Ricardo’s comparative advantage theory, as the illustration below.

P[world] is the original price of the product and P[tariff] is the higher price after imposing a tariff. Because of the tariff, a tax revenue is created and consumer surplus decreases by a higher rate than the increase of producer surplus. As a result, there is societal loss as the two pink pieces.

In this crisis, a cure for the economics downturn is to inhance the global trade, which was predicted two days ago in the WTO’s most pessimistic report in its 62-year history. This report estimates that the global trade will slump by 9 per cent in this year and the falling rate in developed countries will be higher than that of developing ones, which is just 2-3 percent. Therefore, protectionism policies as a barrier against free trade should be prevented by all the countries. According to World Bank, it is estimated that 17 of the 20 countries coming to London on April 2 had already broken free-trade promises. So, the firm stand against protectionism which many expect the G-20 to take seems having lack of the support from its own members.

Update (27/3): Hanoi plans to support its export by widening the daily trading band for VND, which means allowing the dong to deppreciate faster. (@Financial Times)

As I’ve said in yesterday’s entry, it is expected that the IMF will at least double its budget to $US500 billion to deal with the increasing toxic assets from banks, especially recently emerging ones from banks in central and eastern Europe. This issue will be one of the themes of next week’s G-20 leaders meeting. But the concern is how to refund the resources of the IMF. The answer of this tricky question is relied on some dynamically emerging economies such as China, India, Russia and Brazil. Whereas the EU accounts for 32 per cent of IMF’s budget, the US 17 percent, China’s stake is only 3.7 per cent. So for the bigger institution where the world are currently working together and specifically for their greater voting rights, developing countries has to share the bigger stakes in IMF’s resources.

Among the developing world, why is China a better place to rely on? It is because of China’s sound fiscal position, low public debt burden, huge surplus and significant amount of foreign currency holdings (which was about $US2 trillion in last year).

However, playing an increasingly important role in global financial ground China also realizes that how risky it is when putting up more cash on such an instrument of some wealthy nations which are now injured the most by the current economic tumour. China wants an international economic order less dominated by the US and several other developed countries. Moreover, the unique role of the US dollar as the world’s standard bothers China’s leaders much.

As reponse to the financial crisis and to the near-coming G-20 summit, China central bank governor Zhou Xiaochuan has proposed the creation of a new global reserve currency in place of the US dollar, according to The People’s Bank of China. He explained that China has been holding a great deal of US government bonds, together with a huge amount of foreign currency reserve on its account; therefore, any fluctuations in the value of the dollar and changes in US economic policies will have a sharp influence on China economy and the exchange rates. In short, China wants more control on the factors which drive its national fund. It wants more freedom on this anti-monopoly ground. Of course, Obama’s administration (and Kevin Rudd also) rejected the Chinese call.

(In fact, the prelude of using a world single currency was the use of SDRs, which stands for “special drawing rights”. It was created by the IMF in the 1960s and is valued by a basket of major currencies such as US dollar, the euro, Japanese yen and the pound.)

Although Mr Zhou’s suggestion is unfeasible in a short- to-medium term, this idea shows the China’s desire, or even request, for having a louder voice on the debating table.

Update (26/3):

• After the Chinese call about the replacement global currency, Obama, Geithner (Treasury Secrtary) and Bernanke (chief of Federal Reserve) showed their defence behind the greenback yesterday. Also, economists assert that the shift away from dollar would create a great credit turmoil.
• China presently holds about $US1 trillion in US debt and $US1.95 trillion inits total foreign reserves.