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India Is Slowly Evolving Into a Market Economy
by Philippa Kaur 26 May 2021, 18:20
India has come a long way since its independence from colonial rule in 1947. It started as a mixed economy where elements of both capitalism and socialism coexisted uneasily. Jawaharlal Nehru, India’s first prime minister, was a self-declared Fabian socialist who admired the Soviet Union. His daughter, Indira Gandhi, amended the constitution in 1976 and declared India to be a socialist country. She nationalized banks, insurance companies, mines and more.
Gandhi tied Indian industry in chains. She imposed capacity constraints, price controls, foreign exchange control and red tape. India’s colonial-era bureaucracy now ran the commanding heights of the economy. Such measures stifled the Indian economy, created a black market and increased bureaucratic corruption. The Soviet-inspired Bureau of Industrial Costs and Prices remains infamous to this day.
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India also adopted the Soviet five-year plans. A centralized economy emerged with the state controlling the media and telecom, financial, infrastructure and energy sectors. Even in seemingly private sectors such as consumer and industrial, the state handled too many aspects of investment, production and resource allocation.
Opening Up the Economy
In the 1980s, India took gentle strides toward a market economy and opened many sectors to private competition. In 1991, the Gulf War led to a spike in oil prices, causing a balance-of-payments crisis. In response, India rolled back the state and liberalized its economy. The collapse of the Soviet Union that year pushed India toward a more market-oriented economy.
Over the years, state-run monopolies have been decimated by private companies in industries such as aviation and telecoms. However, India still retains a strong legacy of socialism. The government remains a major participant in sectors such as energy and financial services.
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After years of piecemeal reforms, the Indian government is again unleashing bolder measures. These involve the opening up of several state monopolies to private competition. They are diluting state ownership of public sector units. In some cases, they are selling these units to domestic or foreign buyers. In due course, professionals, not bureaucrats, will be running this sector.
The government’s bold move to privatization is because of two reasons. First, India’s public sector has proved notoriously inefficient and been a burden on the taxpayer. Second, the COVID-19 pandemic has made the economy shrink and caused a shortfall in tax revenue. Privatization is a way for the government to balance its books.
As Shwweta Punj, Anilesh S. Mahajan and M.G. Arun rightly point out in India Today, the country “will have to rethink how it sells” its public sector units for privatization to be a success. India’s track record is poor. The banana peels of political opposition, bureaucratic incompetence and judicial proceedings lie in waiting.
Potential Benefits of Privatization
Yet privatization, if managed well, could lead to several benefits. It will lead to more efficiently managed businesses and a more vibrant economy. Once a state-controlled firm is privatized, it could either be turned around by its new owner or perish. In case the company fails, it would create space for better players. Importantly, privatization could strengthen the government’s fiscal position, giving it greater freedom to invest in sectors like health care and education where the Indian government has historically underinvested. Furthermore, privatization could increase investable opportunities in both public and private markets.
Given India’s fractious nature and labyrinthine institutions, privatization is likely to lead to mixed results and uneven progress. One thing is certain, though. Privatization is inevitable and cannot be rolled back. Sectors in which market forces reign supreme and shareholder interests are aligned are likely to do well. State-controlled companies that prioritize policy goals over shareholder value are unlikely to do so. Similarly, sectors that have experienced frequent policy changes are unlikely to thrive.
There is a reason why savvy investors are constructing portfolios weighted toward consumer and technology sectors. So far, companies in these sectors have operated largely free of state intervention. They have had the liberty to grow and function autonomously. Unsurprisingly, they have delivered good returns.
The state-dominated financial services sector also offers promise. Well-managed private companies have a long runway to speed up on. Among large economies, India’s financial services sector offers unique promise. In the capitalist US, the state has limited presence and private players dominate. This mature market offers few prospects of high growth. In communist China, state-controlled firms dominate financial services, leaving little space for the private sector. With the Indian government planning to reduce its stake in a state-controlled life insurance company, as well as sell two state-owned banks and one general insurance company, the financial services sector arguably offers a uniquely important opportunity for investors.
Just as India did well after its 1991 balance-of-payments crisis, the country may bounce back after the COVID-19 pandemic. The taxpayer may no longer need to subsidize underperforming state-owned companies holding the country back. Instead, market competition may attract investment, create jobs and increase growth.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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Expect an Uneven Rebound in MENA and Central Asia
by Philippa Kaur 20 May 2021, 14:28
Projections, no matter how well-grounded in analytics, are a messy business. Three years ago, COVID-19 was unheard of and then-US President Donald Trump’s politics caused uncertainty in international relations, with democracy in retreat across the world. Despite the best-informed prognostications, predictions failed to capture cross-border variables such as immigration and civil conflict that have yet to play out in rearranging local and regional economic prospects.
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No region is more complex in terms of confusing signals than the Middle East and North Africa (MENA) and Central Asia. This is the subject of the latest report by the International Monetary Fund titled, “Regional Economic Outlook: Arising from the Pandemic: Building Forward Better.”
What is clear from a review of the data is that 2020 was an outlier in terms of trend lines earlier in the decade, skewed by the COVID-19 pandemic, erosion of oil prices, diminished domestic economic activity, reduced remittances and other factors that have yet to be brought into an orderly predictive model. Even the IMF had to recalibrate its 2020 report upward for several countries based on rising oil exports, while decreasing marks were given countries slow to vaccinate against COVID-19 and that rely on service-oriented sectors.
Mixed Outlook
The numbers indicate a mixed picture, ranging from Oman growing at 7.2% and the West Bank at 6.9%, to Lebanon receiving no projection and Sudan at the bottom of the range with a 1.13% real GDP growth rate. Yet, so much can impact those numbers, from Oman’s heavy debt burden to continuing turmoil in intra-Palestinian and Palestinian-Israeli affairs.
The good news is that real GDP is expected to grow by 4% in 2021, up from the projection last October of 3.2%. Much of the lift has come from two factors: a more optimistic trend line for the oil producers and the rate of vaccinations in countries that will promote business recovery.
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As CNBC pointed out, Jihad Azour, director of the IMF’s Middle East and Central Asia department, noted that recovery will be “divergent between countries and uneven between different parts of the population.” Key variables include the extent of vaccine rollout, recovery of tourism and government policies to promote recovery and growth.
In oil-producing countries, real GDP is projected to increase from 2.7% in 2021 to 3.8% in 2022, with a 5.8% rise in the region’s sector driven by Libya’s return to global markets. Conversely, non-oil producers saw their growth rate estimates reduced from 2.7% to 2.3%. In fact, Georgia, Jordan, Morocco and Tunisia, which are highly dependent on tourism, have been downgraded in light of continuing COVID-19 issues such as vaccination rollout and coverage.
As the IMF report summary notes, “The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions.” From Mauritania to Afghanistan, one can select data that supports or undercuts the projected growth rates. For example, in general, Central Asia countries as a group seem to be poised for stronger results than others. Meanwhile, Arab countries in the Gulf Cooperation Council face greater uncertainty, from resolving debt issues to unforeseen consequences of negotiations with Iran.
So, how will these projects fare given a pending civil war in Afghanistan and the possible deterioration of oil prices and debt financing by countries such as Bahrain and Oman? Highlighting this latter concern, the report goes on to say that public “gross financing needs in most emerging markets in the region are expected to remain elevated in 2021-22, with downside risks in the event of tighter global financial conditions and/or if fiscal consolidation is delayed due to weaker-than-expected recovery.”
An Opportunity
Calling for greater regional and international cooperation to complement “strong domestic policies” focused on the need “to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies,” the IMF is calling on the countries to see a post-pandemic phase as an opportunity. This would involve implementing policies that promote recovery, sustain public health practices that focus on sustainable solutions, and balance “the need for debt sustainability and financial resilience.”
There is great uncertainty assigning these projections without more conclusive data on the impact of the pandemic, the stress on public finance and credit available to the private sector, and overall economic recovery across borders that relies on factors such as the weather, oil demand, external political shocks and international monetary flows. The IMF report is a very helpful bellwether for setting parameters for ongoing analyses and discussions.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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Corruption, an Unnecessary Evil
by Philippa Kaur 6 May 2021, 14:09
Since the United Nations Convention Against Corruption was adopted in October 2003, International Anti-Corruption Day is observed annually on December 9. In the context of the ongoing pandemic, António Guterres, the UN secretary general, had a clear message: “Corruption is criminal, immoral and the ultimate betrayal of public trust. It is even more damaging in times of crisis — as the world is experiencing now with the COVID-19 pandemic. The response to the virus is creating new opportunities to exploit weak oversight and inadequate transparency, diverting funds away from people in their hour of greatest need.”
Corruption impacts every aspect of society and involves all kinds of companies, large and small, in an array of industries. Certain sectors are seen as carrying a higher risk of corruption — oil and gas, armament, construction, among others — but no industry is spared. The World Bank estimates that more than $1 trillion in bribes is paid each year. In the health sector alone, an estimated $450 billion, or around 6% of total expenditure, is lost to fraud annually. Some argue that bribery is part of doing business, but such practices increase costs and put companies at risk of severe financial, legal and reputational damage.
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For society at large, the effects of corruption are far-reaching and have severe economic repercussions, create unfair competitive advantages and result in the loss or decreased quality of public services. The consequences of this can be devasting. Martin Manuhwa, head of the Federation of African Engineering Organisations, notes that when public contracts are not awarded based on honest and fair bidding, “Infrastructure collapses. Roads develop potholes, and people die. Basically, corruption kills.”
Looking for Accountability
Historically, citizens have expected governments to hold companies accountable for corrupt behavior, but their track record of doing so is spotty. Following the 2008 global financial crisis, the United States began enforcing the Foreign Corrupt Practices Act more vigorously. Since then, the US has been a world leader in prosecutions and investigations of foreign bribery, but countries such as the United Kingdom, Switzerland, Israel, France and Spain have recently increased efforts as well.
However, a recent report from the European Commission found that only 30% of Europeans believe their governments’ anti-fraud efforts are effective. Indeed, Transparency International’s Exporting Corruption 2020 project finds that although high-profile settlements make headlines, the enforcement of foreign bribery laws is very low amongst most Organisation for Economic Co-operation and Development countries; in 2020, only four out of the 47 OECD members actively pursued prosecutions.
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Over the past two decades, there has been a proliferation of company-wide anti-corruption compliance systems and industry-level regulations designed to discourage bribery. Governments are often “quite happy” to pass the cost and responsibility of enforcement off to someone else, but self-regulations are often inadequately administered and lack audits performed by independent, disinterested parties. Tools such as the OECD’s Guidelines for Multinational Enterprises provide companies with recommendations for implementing compliance programs. It is then up to the companies to conduct internal audits and ensure employees and contractors are following their anti-corruption policies. Companies are motivated by a variety of factors: legal requirements, the risk of fines and prosecution, reputational damage and, for some, a genuine desire to act more ethically. But while there are self-reported cases of foreign bribery, the temptation to cover up infractions is compelling.
Various efforts by industries to self-regulate have also emerged. Non-binding, industry-led initiatives or “soft laws” attempt to set anti-corruption norms by asking companies to adhere to a set of principles. For example, the Extractive Industries Transparency Initiative “invites” multinational companies to disclose money they pay states to extract natural resources.
In industry-level self-regulating organizations (SROs), member companies develop policies for a particular industry and they, as opposed to an independent agency or government regulator, monitor and enforce member compliance. One example is the Banknote Ethics Initiative (BnEI). The organization was created by some banknote producers to “provide ethical business practice.” Members agree to abide by BnEI’s Code of Ethical Business Practice and to undergo an audit “carried out by a third-party auditor” in order to become accredited. According to their website, audits are conducted by two entities: GoodCorporation and KPMG. But if there are only two options for auditing members of an SRO, are auditors actually independent?
While SROs can help set standards for industries in the absence of effective government regulation, there is also an inherent conflict of interest. As the NGO Truth in Advertising argues, “Self-regulators are, by definition, funded by the companies they claim to regulate. Don’t for a second believe that any self-regulator wants — or even would be permitted by its constituent members — to do all that it can to prevent harmful or deceptive business practices that are proving lucrative for the industry.” The OECD and the UN Environment Programme add that self-regulatory processes are often burdened by a lack of enforcement and inadequate sanctions of member companies, lower incentives to voluntarily report bad practices and are dominated by a small number of companies that prioritize what is in their best interests.
An International Anti-Bribery Standard
A new development offers hope for addressing the global corruption problem. In 2016, the International Organization for Standardization (ISO) introduced the ISO 37001 Anti-Bribery Management Systems. Created using input from existing recommendations and from countries, non-profits and esteemed multilateral institutions, the standard provides an auditable, independent benchmark of international compliance principles and enables organizations of all sizes, public or private, to prevent, detect and address bribery.
To become certified, an anti-bribery management system meeting the standard’s requirements must be implemented, an individual overseeing compliance needs to be appointed, and financial controls, monitoring and reporting processes need to be in place. Audits are done over a three-year period (to ensure policies are not simply on paper) and are performed by independent certifying bodies.
Numerous companies and governments have since pursued certification as ISO 37001 has increasingly become recognized as the reference for anti-bribery. Anti-corruption lawyer Jean-Pierre Mean says the advantage of certification is benchmarking and reassuring organizations that they have implemented effective measures. Moreover, “It also demonstrates that you have a system that works to stakeholders, personnel, shareholders, and the community at large.”
As a sign of confidence in the standard, prosecutors in Brazil, the US, Denmark, Switzerland and Singapore have required companies to pursue ISO 37001 certification as conditions of settlements in many lawsuits. While certification cannot guarantee bribery will not take place, it is universally recognized proof of a company’s willingness to prevent it. Companies and governments should require ISO 37001 certification from potential partners as a prerequisite to doing business, discarding superfluous and therefore suspicious self-regulation.
Increased efforts to curb bribery have had varying levels of success. Government enforcement of existing laws needs to be strengthened as evidence has shown that self-regulation is flawed. The introduction of ISO 37001 as an independent standard for anti-bribery holds the most promise, but more companies and governments need to pursue certification for change to happen. Corruption may be as old as it widespread, but it can also be avoided.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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Peter Thiel’s Bitcoin Paranoia
by Philippa Kaur 13 April 2021, 17:14
Silicon Valley billionaire Peter Thiel finds himself in a confusing moral quandary as he struggles to weigh the merits of his nerdish belief in cryptocurrency against his patriotic paranoia focused on China’s economic rivalry with the United States. Participating in “a virtual event held for members of the Richard Nixon Foundation,” Thiel, while reaffirming his position as a “pro-Bitcoin maximalist,” felt compelled to call his faith into doubt due to his concern that China may use bitcoin to challenge US financial supremacy.
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According to Yahoo’s Tim O’Donnell, Thiel “thinks Beijing may view Bitcoin as a tool that could chip away at the dollar’s might.” He directly quotes Thiel who wonders whether “Bitcoin should also be thought [of] in part as a Chinese financial weapon against the U.S.”
Today’s Daily Devil’s Dictionary definition:
Financial weapon:
The role any significant amount of money in any one person’s, company’s or nation’s hand is expected to play to assert power and obtain undue advantages in today’s competitive capitalism
Contextual Note
Thiel may be stating the obvious. Money is power and concentrations of money amount to concentrated power. The point of power is to influence, intimidate or conquer, depending on how concentrated the power may be. It is ironically appropriate that the event at which Thiel spoke was organized by the Nixon Foundation. Richard Nixon was known for putting the quest for power above any other consideration. He was also known for opening the relationship with China, which many Republicans today believe led to a pattern of behavior that allowed China to eventually emerge as a threat far more menacing than the Soviet Union during the Cold War. Nixon was also the president who destroyed the Bretton Woods system that set the financial rules ensuring stable international relations in the wake of World War II.
Thiel’s thoughts are both transparently imperialistic. They follow Donald Trump’s “America First” logic, while at the same time revealing Thiel’s uncertainty about how to frame it in the context of Bitcoin. His version of “America First” has less to do with the Trumpian idea that America should worry first about its own internal matters and later deal with the world than with the idea of the neocon conviction that the US must impose itself as the unique hegemon in the global economy. In Thiel’s mind, this sits uncomfortably alongside his made-in-Silicon Valley belief that cryptocurrencies represent the trend toward something that might be called “financial democracy.”
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According to O’Donnell, Thiel “explained that China isn’t fond of the fact that the U.S. dollar is the world’s major reserve currency because it gives the U.S. global economic ‘leverage,’ and he thinks Beijing may view Bitcoin as a tool that could chip away at the dollar’s might.” O’Donnell is guilty of somewhat hypocritical understatement when he claims that it is all about China not being “fond of” the dollar’s status as the world’s major reserve currency. Who besides the US would be “fond of” such a thing? Those are O’Donnell’s words, not Thiel’s. As for the idea that Bitcoin might chip away at the dollar’s might, Thiel avoids making that specific point and prefers a more vaguely paranoid reading of events as he suggests a kind of plot in which China may be using Bitcoin to undermine US hegemony.
Thiel’s phrasing places him clearly in the realm of what might be called diplomatic paranoia. He begins with a statement of speculative uncertainty as he expresses his concern with China’s turning Bitcoin into a financial weapon. Here are his exact words: “I do wonder whether at this point Bitcoin should also be thought in part of as a Chinese financial weapon against the US where it threatens fiat money but it especially threatens the US dollar and China wants to do things to weaken it.”
“I do wonder whether at this point Bitcoin should also be thought … of” expresses a deviously framed insinuation of evil intentions by a Fu Manchu version of the Chinese government. This is a popular trope among Republicans and even Democrats today, who vie with each other to designate China as an enemy rather than a rival. But Thiel’s admission that it’s really about “wondering” tells us that we are closer to Alice’s Wonderland than to the CIA book of facts.
Thiel then adds the temporal detail of “at this point,” which introduces a surreal notion of time that has more to do with a fictional dramatic structure than the reality of contemporary history. It is tantamount to saying: This is where the plot thickens. And his suggestion of how it “should be thought of,” besides being manipulative, indicates that we are invited into accepting the plot of a paranoid fantasy made up of thought rather than reality.
He then explains what he means by “a Chinese financial weapon against the US.” Though he claims to be a believer in the unfettered freedom of cryptocurrency, he accuses it of violating what might be called “the rule of law” insofar as “it threatens fiat money,” which is the privilege of every nation on earth. But that worry has little merit compared to the fact it “especially threatens the US dollar,” which — it goes without saying — China wants to weaken.
Thiel knows where the money is. It lies in the primacy of the US dollar. That is why the US has 800 military bases across the globe.
Historical Note
Since the dismantling in 1971 of the Bretton Woods system by US President Richard Nixon — in whose name the Richard Nixon Foundation was created — the dollar has functioned as the ultimate and most devastating financial weapon in history wielded by a single government. The Bretton Woods agreement, signed in 1944 by 44 countries, allowed the dollar to play a controlled role as the world’s reserve currency thanks to its convertibility with gold. When the growing instability of the dollar, due in part to the Vietnam War, threatened the order established by Bretton Woods, Nixon unilaterally broke the link with gold. Instantaneously, the US was free to weaponize the dollar for any purpose it judged to be in its interest.
Nixon produced one of the greatest faits accomplis in history. As with many successful unnoticed revolutions, Nixon’s administration presented the uncoupling of the dollar and gold as a temporary measure, the response to a momentary crisis. It took two years for the world to notice that Bretton Woods had definitely collapsed. The era of floating currencies began. Money could finally be seen for what it is: a shared imaginary repository of value that could eventually become the focus of what Yuval Noah Harari has called the religion of capitalism in his book, “Money.”
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For many people, Bitcoin has become a kind of alternative religion, or rather a vociferous radical sect on the fringes of the global religion of neoliberal capitalism. Bitcoin as a concept highlights the lesson brought home by the collapse of Bretton Woods: that the value of money people exchange, despite Milton Friedman’s objections, is literally based on nothing and therefore meaningless. That also means — though the faithful are not ready to admit it — that its value is infinitely manipulable. It appears to derive from economic reality but is anchored in little more than what a small group of people with excess cash may think of it on a given day. Elon Musk ostentatiously manipulated its value when he announced that Tesla had purchased $1.5 billion worth of bitcoin.
For anyone with billions to throw around, it’s an easy game to play. The manipulation by Musk, Peter Thiel’s former associate as co-founder of PayPal, doesn’t worry Thiel. Wondering about whether China might, in some imaginary scenario, use Bitcoin for nefarious purposes does trouble him.
Thiel represents our civilization’s new ruling elite. It consists of individuals who sit between two hyperreal worlds, one dominated by the mystique that surrounds means of payment (cash) and the control of financial flows, complemented by another that seeks political control and the hegemony required to enforce the now imaginary “civilized” rules governing financial flow. Since the demise of Bretton Woods, those rules have lost all meaning. That means the rules themselves can be weaponized. It’s a monopoly that Thiel, his fellow members of the Nixon Foundation and most people in Washington insist on reserving for the US.
*[In the age of Oscar Wilde and Mark Twain, another American wit, the journalist Ambrose Bierce, produced a series of satirical definitions of commonly used terms, throwing light on their hidden meanings in real discourse. Bierce eventually collected and published them as a book, The Devil’s Dictionary, in 1911. We have shamelessly appropriated his title in the interest of continuing his wholesome pedagogical effort to enlighten generations of readers of the news. Read more of The Daily Devil’s Dictionary on Fair Observer.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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A New European Financial Landscape Is Emerging
by Philippa Kaur 1 April 2021, 12:12
The United Kingdom’s exit from the European single market on January 1 has sent trade in goods plummeting amid much confusion. By contrast, Brexit was carried out in an orderly manner in the financial sector, despite significant movement of trading in shares and derivatives away from the City of London.
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After five years of radical uncertainty, it has become clear that the European Union and the United Kingdom will be taking separate paths on financial regulations — a financial “decoupling” that means a significant loss of business for the City. Whether the EU financial sector can gain much of what London loses will depend on the EU’s willingness to embrace further financial market integration.
Smart Sequencing Ensured an Orderly Brexit
As with the Y2K problem, the Brexit transition could have gone worse. It took more than luck to avoid financial instability along the way.
First, financial firms on both sides of the English Channel (and of the Irish Sea) worked hard and were able to preempt most of the operational challenges.
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Second, despite all the recurring high-stakes drama between the UK government and the European Commission, the technical cooperation between the authorities actually in charge of financial stability, primarily the Bank of England and the European Central Bank (ECB), appears to have run smoothly.
Third, the negotiators phased the process in a smart way. The Brexit Withdrawal Agreement of January 2020 helped reduce uncertainty by ensuring that the UK government would meet its financial obligations to the EU, avoiding what would have been akin to selective default. That agreement kept the United Kingdom in the single market during the transition period beyond the country’s formal exit from the European Union on January 31, 2020. It also set a late-June deadline for the British government to extend the transition period beyond December 31, 2020. As London decided not to do so, that left six months of effective preparation.
To be sure, whether an EU-UK Trade and Cooperation Agreement (TCA) would be concluded remained unknown until late December. But that mattered comparatively little for financial services, since trade agreements typically do not cover them much. By one count, the 1,259-page TCA (which is still unratified by the European Union) contains only six pages relevant for the financial sector.
The resulting legal environment for financial services between the European Union and the United Kingdom is unlikely to change much any time soon. Contrary to occasional portrayals in the United Kingdom, no bilateral negotiations on financial services are going on, except for a memorandum of understanding expected this month that is not expected to bind the parties on substance.
From the EU perspective, the United Kingdom is now a “third country,” in other words an offshore financial center, following decades of onshore status. UK-registered financial firms have lost the right, or “passport,” to offer their services seamlessly anywhere in the EU single market. From a regulatory standpoint, they have no better access to that market than their peers in other third nations such as Japan, Singapore or the United States.
Equivalence Status for UK Financial Market Segments
Some segments of the financial sector in these other third countries actually have better single market access than British ones, because they are covered by a category in EU law allowing direct service provision by firms under a regulatory framework deemed “equivalent” to that in the European Union. The equivalence decision is at the European Commission’s discretion, even though it is based on a technical assessment. As a privilege and not a right, equivalence can be revoked on short notice.
So far, the European Commission has not granted the UK any such segment-specific equivalence, except in a time-limited manner for securities depositories until mid-2021 and clearing services until mid-2022. For the moment, the commission appears to be leaning against making the latter permanent. In most other market segments, the commission will not likely grant equivalence to the United Kingdom in the foreseeable future. This may appear inconsistent with the fact that almost all current UK regulations stem from the existing EU body of law. But the UK authorities (including the Bank of England) have declined to commit to keeping that alignment intact.
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The commission’s inclination to reduce EU dependence on the City of London is understandable. No comparable dependence on an offshore financial center has existed anywhere in recent financial history. Such dependence entails financial stability risk. In a crisis, UK authorities would not necessarily respond in a way that preserves vital EU interests. Think of the Icelandic crisis of 2008, when Reykjavik protected the failing banks’ domestic depositors but not foreign ones. It is hardly absurd for the European Union to try to reduce such a risk, even if — as appears to happen with derivatives — some of the activity migrates from the United Kingdom to the United States or other third countries as a consequence, and not to the European Union.
At the same time, the argument that keeping EU liquidity pooled in London is more efficient than any alternative is unpersuasive given the European Union’s own vast size. In addition, the European Commission also follows mercantilist impulses to lure activity away from London, even though these generally do not make economic sense. Added up, these factors provide little incentive for the commission to grant equivalence status to more UK financial market segments, unless some other high-level political motives come into play. None are apparent right now.
The UK Is Unlikely to Regain Lost Advantage
How the European Union and the United Kingdom will decouple will not be uniform across all parts of the financial system. Regulatory competition between them may become a “race to the bottom” or “to the top,” depending on market segments and the circumstances of the moment, without a uniform pattern. In any case, such labels are more a matter of judgment in financial regulation than in, say, tax competition.
In some areas, the European Union will be laxer, while in others, it will be the United Kingdom, as is presently the case between the EU and the US. For example, the European Union is more demanding than the United States on curbing bankers’ compensation but easier when it comes to enforcing securities laws or setting capital requirements for banks. At least some forthcoming UK financial regulatory decisions may be aimed at keeping or attracting financial institutions in London, but they are still not likely to offset the loss of passport to the EU single market.
All these permutations suggest that the medium-term outlook for the City of London is unpromising, although the COVID-19 situation makes all quantitative observations more difficult to interpret. Once an onshore financial center for the entire EU single market, and a competitive offshore center for the rest of the world, the City has been reduced to an onshore center for the United Kingdom only and has become offshore for the European Union. That implies a different, in all likelihood less powerful, set of synergies across the City of London’s financial activities.
The few relevant quantitative data points available reinforce this bleak view. Job offerings in British finance, as tracked by consultancy Morgan McKinley, have declined alarmingly since the 2016 Brexit referendum. The ECB (as bank supervisor) and national securities regulators coordinated by the European Securities and Markets Authority are tightening requirements for key personnel to reside mainly on EU territory rather than in the United Kingdom.
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As noted by Financial Times columnist Simon Kuper, many financial firms’ Brexit policy until this year had been to “sit tight and do nothing until post-Brexit arrangements for finance forced [their] hand.” That phase has ended. Firms that drag their feet face regulatory disruption, as happened to broker TP ICAP in late January. Tussles between regulators and regulated entities, rather than between the European Commission and the UK government, are where most of the financial-sector Brexit action is likely to be in 2021. These disputes typically happen behind closed doors, and the regulators typically hold most of the cards.
For all the optimistic talk in London of “Big Bang 2.0 or whatever,” the United Kingdom’s comparative advantage as the best location for financial business in the European time zone is unlikely to recover to its pre-Brexit level. The macroeconomic losses could be moderated or offset by cheaper currency and less expensive real estate in London, making the city a more attractive place to do nonfinancial business. Even so, a gap will likely remain for the UK government, which has for years depended heavily on financial sector–related tax revenue.
The European Union stands to gain financial activity as a consequence of Brexit. How much and where is not clear yet. As some analysts had predicted, Amsterdam, Dublin, Frankfurt, Luxembourg and Paris are the leaders for the relocation of international (non-EU) firms. Dublin and Luxembourg specialize in asset management, Frankfurt in investment banking and Amsterdam in trading. But EU success in terms of financial services competitiveness and stability will depend on further market integration, the pace of which remains hard to predict.
The European banking union is still only half-built because it lacks a consistent framework for bank crisis management and deposit insurance. The grand EU rhetoric on “capital markets union” has yielded little actual reform since its start in 2014. Events like the still-unfolding Wirecard saga may force additional steps toward market integration, even though a proactive approach would be preferable.
The one near certainty is that London’s position in the European financial sector will be less than it used to be.
*[This article was originally published by Bruegel and the Peterson Institute.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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in World Politics
Will American Democracy Perish Like Rome’s?
by Philippa Kaur 28 January 2021, 17:22
A recent The Economist cover pictured the 46th US President Joe Biden in front of the White House with a cleaning mop. The lead, “Morning after in America,” projects that “The outlook for America looks grim, but that could quickly change.” The venerable publication proclaimed from its powerful pulpit that Biden “should stick to his folksy brand of dogged centrism which is so well suited to the moment.” That gives him the “best chance of success.”
The Economist sees good reasons for Biden to succeed. With interest rates so low, the government can virtually borrow for free. This means the Biden administration could roll out a $1.9-trillion stimulus. This could fund a polio-style vaccination program, extend unemployment insurance and expand child tax benefits. An infrastructure bill and investment in clean energy to combat change could create new jobs for the 21st century.
Held Together With String, Can America Hold?
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The Economist’s ebullient optimism might come from the fact that it has been on the winning side of history since its inception in 1843. For more than 178 years of its existence, it stood for Pax Britannica. For the last few decades, this blue-blooded British publication has pivoted to be a trumpeter of Pax Americana. This has led to errors in judgment such as its infamous support for the 2003 Iraq War.
In January this year, The Economist may be making a similar misjudgment. It is prematurely heralding America’s journey to what Winston Churchill memorably termed “broad, sunlit uplands” by using shoddy facts and specious reasoning just as it did in 2003. Its assertion that the US banking system looks sound is not backed by evidence. Its claim that “the economic pain is not widespread” is ridiculously untrue.
On Capitol Hill
On Wednesday, January 6, I read about a mob besieging Capitol Hill as I sat at my desk less than four miles away. Against the advice of my American friends, I left to see firsthand what was going on. They told me the white supremacist mob would beat me to a pulp. I ignored their advice because I was curious. I got off at the Archives metro stop and mingled with Donald Trump’s supporters. Some were heading to the Capitol, while others were walking away from it. Prima facie, the people walking around were not much different than at other Trump demonstrations.
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Although I lost count after 23, I am sure that I spoke to more than 50 people. They were all friendly, sociable and deeply distressed. They told me repeatedly that I was the first journalist who had cared to speak with them. They said that mainstream media was filming them but did not want to listen to them. They asked me whether elections were rigged in India. When I responded that India solved the problem of rigging by creating an independent election commission, some piped in that the US should have one too. That is certainly not what I expected to hear.
To be sure, I met the saner members of the crowd, a mix of what Douglas Murray has called “the strange, the sincere, the silly and the sinister.” I stayed on Capitol Hill grounds talking to one person after another. At some point, tear gas bombs started going off on the terrace and the curfew hour started drawing nigh. I finally beat a retreat and started walking down to the L’Enfant Plaza metro station. Someone stopped me, exchanged words and offered me food. I took a sandwich, granola bars and water while declining the chips. Instead of getting beaten, I had been welcomed and even fed. Even as I sat in the metro and later worked at home, the images and the words of the day stayed with me. Needless to say, I did not sleep well. In fact, I was so troubled that I hit writer’s block and was unable to put down my thoughts on paper coherently for days.
Even though I have long been a critic of Donald Trump, I have been cognizant of the power of his appeal. While explaining Trump’s victory in 2016, I gave facts and figures about increasing income and wealth inequality in America. I also pointed out how social mobility has been falling. For most Americans, life is tough, and prospects for their children increasingly bleak. In 2017, CNN reported that 6 in 10 Americans had savings of less than $500. The great American dream has become a terrible American nightmare for far too many families.
Every Trump supporter I met on January 6 spoke about being left behind. One supporter claimed to be a Catholic bishop from Kentucky. He proudly posed for a photo at my request and blessed me when we parted. The bishop had done missionary work in India and had been to my ancestral hometown of Varanasi. He waxed lyrical about how the political system was broken. The man in holy robes said those on Capitol Hill have long stopped caring about the American people. Instead, they now represent special interests with money.
The Pain
When I think about what the bishop said, I find it hard to disagree. As per CNBC, the 2020 election spending was nearly $14 billion, more than double the 2016 sum. It is an open secret that members of Congress spend more time raising money than legislating. There are numerous studies about declining congressional oversight and surging presidential power. Such has been the divide in Congress that it has been impossible to pass meaningful legislation for a while. Too often, legislation is bloated, poorly drafted and caters to those who can lobby hardest for their interests. Like many other democracies, the US has turned disastrously dysfunctional.
Although most people I met were white and working class, I ran into members of minority communities as well. A preacher of South African origin was singing paeans to Jesus and to America. I ran into two ladies who had immigrated from Vietnam and the Philippines. They believed that Trump was the only leader who could stand up to China and bring back law and order. When I asked if I could photograph them, the Vietnamese lady bolted, taking her friend along.
Later that evening, my friends were referring to the crowd as a “bunch of pigs.” They were appalled by the scenes they had seen on television and what they had read on their smartphones. In their eyes, those in the crowd were not protesters. They were rioters, seditionists, insurrectionists, terrorists and perpetrators of a coup. They were guilty of breaking down democratic institutions, if not treason. They deserved arrest, trial and punishment. Given that the day’s attack on the Capitol was the first in the nation’s history — bar the British invasion of 1814 — their indignation at this assault on their democracy was understandable.
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But they were not on Capitol Hill that day. What I saw is that President Trump, his son, Donald Jr., and his lawyer, Rudy Giuliani, played pied pipers. They riled up the crowd that turned into a mob and overwhelmed Capitol Police. Most people in the mob were misguided instead of malevolent. When I spoke to them, it was clear they had no plan of action unlike those who actually plan a coup. As historian Timothy Snyder observed in his tour de force for The New York Times, “The American Abyss”: “It is hard to think of a comparable insurrectionary moment, when a building of great significance was seized, that involved so much milling around.” At the end of the evening, the mob inevitably melted away. I met families on their way back to Alabama, truck drivers returning to Texas, old ladies headed back to Georgia and even plumbers returning to Democrat-run New York. They had come to Washington, DC, to be heard, stormed what they saw as a modern-day Bastille and were going back to their daily lives.
What struck me most was that everyone I spoke to was convinced that they did not matter to the system and their votes did not count. Since that fateful day, a question has played repeatedly in my mind: When people genuinely believe their votes do not count, what stops them from taking up arms?
A Strange New World
After January 6, I have followed my father’s advice and gone back to the past to peer into the future. A 1987 edition of The Republic with crinkling yellow pages and my brother’s fading notes has made me think. In the words of the late classicist Sir Desmond Lee, Plato was living in “an age which had abandoned its traditional moral code but found it impossibly difficult to create a new one.” Athenian democracy had forced his tutor Socrates to drink hemlock. It had degenerated into chaos and dissension. Needless to say, it did not survive.
A few centuries later, the Roman Republic perished too. At some point, oligarchs took charge. They controlled almost all the land. Form triumphed over substance, and democratic institutions decayed. Populists emerge to lead the mob. One of the better known was Tiberius Gracchus, who attempted agrarian reform, assembled a mob on the Capitol but was clubbed to death in the Senate.
Unlike that long-forgotten Roman revolutionary, Trump did not bring in any radical reform for the people but, like the ancient populist, he has overreached. After years of profiting from Trump’s mass following, Twitter not only silenced him but terminated his account. A political leader who had just got over 74 million votes was obliterated from his favorite public platform by a private company in a jiffy. For all its faults, The New York Times is considered the “newspaper of record.” Its support for the CIA-led 1953 coup in Iran or the case the newspaper made for the 2003 Iraq War is in the public domain. By deleting Trump’s profile, Twitter has demonstrated that a corporation now arbitrates over what constitutes the public domain.
It is not only the question of what constitutes the public domain but also the issue of freedom of speech that is problematic. America’s fabled First Amendment “protects freedom of speech, the press, assembly, and the right to petition the Government for a redress of grievances.” For years, internet giants have claimed to be platforms with no editorial responsibility. The First Amendment has been their first defense against allegations that they were letting falsehood, hate and toxic propaganda run amok. Unlike traditional newspapers, these social media platforms did not restrict what people could say. Suddenly, they have changed tack.
After Trump evaporated from Twitter, more was to follow. Amazon Web Services abruptly kicked out conservative social media platform Parler from its servers. Google and Apple also banned the app. They argued Parler incited violence, breaching their terms and conditions. Like Trump, Parler was effectively shut down in minutes. The companies might have had good reasons to do so. However, the action raises uncomfortable questions. Who decides what is free speech? Is it the legislature, the executive, the judiciary or a billionaire-controlled Silicon Valley company?
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The First Amendment “guarantees freedom of expression by prohibiting Congress from restricting the press or the rights of individuals to speak freely.” Nothing restricts companies from curbing freedom of expression. When the constitution was drafted, big companies did not exist. Today, the situation is dramatically different, and no equivalent of the First Amendment protects Americans from censorship by big companies.
It is now transparent that the balance of power in the US lies with the big corporations. Its CEOs wield far greater power than governors, members of congress, senators and, at times, presidents. In 2008, Barack Obama won a historic election by getting nearly 69.5 million votes. In American history, only Joe Biden, with more than 81 million votes, has gained greater support in absolute numbers than Trump. Still, Twitter has summarily deleted his profile. Not only Trump supporters but also many of his opponents are uneasy with this decision.
The Left-Behind
Despite his crass, erratic and boorish behavior, Trump improved his voting numbers in 2020. He won 36% of the Latino vote, an increase of 4% compared to 2016. Despite Biden’s Catholic faith, Trump won 50% of the Catholic vote, with 57% of the white Catholics casting their ballots for him. The easy explanation is Trump’s appointment of Amy Coney Barrett, the anti-abortion Catholic who studied at Notre Dame, to the US Supreme Court. However, something more might be going on. Trump increased his support among other minorities such as black men and Asians as well.
Why did so many Americans vote for Trump? I got the best answer from some militia members in West Virginia. In an article in November 2020, I mentioned how they conceded that Trump was an unsavory character who lies incessantly, but they credited him for telling one big truth: Things had turned much too ugly for far too many people like them. Far too many Americans have been suffering for much too long, and politicians from both parties have been pretending things are hunky-dory, denying grim realities.
When Trump speaks about making America great again, he is appealing to nostalgia by using one of Ronald Reagan’s lines. He is also acknowledging that things are not so great for many Americans. He is feeding off the anger many Americans feel for what his recently pardoned adviser Steve Bannon has called “the permanent political class.” Bannon is an Irish Catholic from a working-class family who voted Democrat. This Navy veteran graduated from Harvard Business School and worked at Goldman Sachs. Then he went rogue.
Bannon is the ideologue who threw his lot with Trump to smash the status quo. He entered politics by launching the right-wing news site Breitbart. Instead of targeting Obama and the Democrats, he went after the Republican establishment because he saw them as traitors to the American working class. Bannon masterminded Trump’s hostile takeover of the Republican Party, something Bernie Sanders tried but failed to achieve with the Democrats.
Bannon consistently makes the case that trade and immigration are two sides of the same coin. Both suppress workers’ wages. Companies can move factories from Michigan to Mexico for cheaper labor to improve their profits and share prices. When foreigners flood in, whether it is Latinos who mow lawns or Indians who write software on H-1B visas, companies do not have to hire Americans for the same jobs. They can and do pay foreigners less than their American counterparts. Companies do well and so do their shareholders. Executives do better: CEO compensation has soared 940% since 1978. American workers do not. Like Native Americans and African slaves in times past, they are now the left-behind.
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Many economists and politicians ridicule this argument. They stress that immigrants bring in skills that are in short supply. They point to the likes of me who turn entrepreneurs, raise capital, create jobs and boost the American economy. It is true that immigrants give the nation a unique strength. Like Rome, America can draw in the best and brightest of foreigners to give it an edge. Yet not all immigrants are necessarily terribly talented. Many of them are cheap cannon fodder for the unremitting American economic system, where people’s health care is tied to their job, holidays are rare, and 13 million work more than one job. These immigrants increase labor supply and decrease the wages of ordinary Americans.
To add insult to injury, it is these beleaguered workers who have bailed out banks after the financial crash of 2007-08. Both Republicans and Democrats sang from the same hymn book to prevent a recession from turning into a depression but did nothing to curtail or curb the financial class from behaving badly. Only one top banker went to jail. More importantly, taxpayer money ended up as bonus payments for some of the executives who had caused the crash. It was a classic example of capitalism on the upside and socialism on the downside. As a hedge fund manager told me off the record, the bailout was, Heads I win, tails you lose — with “you” being the American taxpayer.
Both the Tea Party and Occupy Wall Street movements opposed these bailouts. They had different philosophies and belonged to two ends of the political spectrum, but they opposed what was a fundamentally unjust government policy. The bailouts were accompanied by quantitative easing, which in simple terms means the central banks cutting interest rates to virtually zero and then flooding the economy with money by buying bonds on the market. The rich have gotten richer. The poor find themselves priced out of the market. Many on both the right and the left have lost faith in the system.
A Very Modern Feudalism
During the COVID-19 pandemic, things have gotten worse. The central bank may be printing money, but it is only ending up in the hands of big boys. After the 2007-08 financial crisis, banks prefer to lend to large businesses or those with guaranteed incomes to reduce credit risk and avoid another meltdown. This means that cash flows into a few big rivers instead of many small streams. Even as small businesses are closing down, the stock market is touching the stratosphere. As William Shakespeare memorably penned in “Hamlet,” “The time is out of joint.”
Such is the state of affairs that even the Financial Times, a paper of choice for the financial elite, is sounding the alarm. On January 3, its Washington correspondent Edward Luce argued that easy money and fiscal gridlock were leading to populism. Today, the top 10% of Americans own 84% of all shares in the US, with the top 1% owning half. About 50% of Americans own almost no stocks at all. As pointed out earlier, they do not have $500 in savings. It is many of these Americans who form the support base of Trump and Sanders.
America today is in a similar situation as Rome during the era of Tiberius Gracchus. The rich were grabbing land from poor farmers and using slaves from Carthage to work their estates. The republic where all Romans were citizens with a say in the affairs of the state was fraying. Rome was creating an imperial economy where the elite grew richer through plunder of conquered territories like Spain and Carthage as well as cheap labor from newly enslaved populations. This made the Roman farmer and worker largely redundant. The Roman plebeian was so exploited and powerless, that he slipped to subsistence or below-subsistence levels of income. On the other hand, the elite grew wealthier and wealthier.
Tiberius Gracchus and his brother Gaius Gracchus attempted reforms, but both were murdered. The Populares rose up to champion their reforms to redistribute a bit of land, ameliorate the plight of the urban poor and reform the political system. The Optimates emerged to fight for the status quo, which preserved the supremacy of the Senate over the popular assemblies and the tribunes of the plebeians. This bitter discord was similar to the Athenian republic Plato found himself in. Roman divisions eventually led to the rise of Julius Caesar.
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This ambitious general believed the dysfunctional system to be leading to ruin. Taking sides with the Populares, he sought to reform the system and redistribute wealth to the plebeians. The Optimates did not budge, a civil war resulted, and the collapse of the Roman Republic ensued.
Both in Athens and Rome, rising inequality and deepening discord obliterated the common bonds that made democracy possible. In America, inequality has reached feudal dimensions. Technology is destroying thousands of working-class jobs while creating far fewer highly paid ones. The “frightful five” — Amazon, Apple, Facebook, Microsoft and Alphabet, the parent company of Google — control the internet and large swathes of the economy. They are strangling the small and medium-sized businesses.
Furthermore, Big Tech’s algorithms, filter bubbles and echo chambers have led to a post-truth world of fake news, conspiracy theories and more. People cannot even agree on basic facts. The constant deluge of data has put their minds in Brownian motion, and they have lost the ability to focus or sift fact from fiction. The irony of the current situation is that the leaders of these companies are self-proclaimed liberals, avowed philanthropists and cheerleaders for progress. Yet they have unleashed Frankensteins that have wrecked journalism, destroyed discourse and damaged democracy.
What Lies Next?
On Monday, January 18, I ventured into the city once again, again against the advice of my friends. I got off at L’Enfant Plaza metro station yet again to walk north and found the streets deserted and the National Mall sealed. I walked for an hour from one checkpoint to another. Eventually, a police officer told me that instructions were changing all the time and I was better off taking the metro. When I did take the metro, it stopped far away from the heart of town. Clearly, 25,000 troops and all the police were not enough to guarantee security in the capital. Authorities took the view that shutting down access to the heart of town was necessary too. The security arrangements seemed a bit of an overreaction but understandable given the events of January 6.
On January 20, I watched the inauguration with some American friends. Some were delighted to see the back of Trump and were celebrating with mimosas already in the morning. With Trump gone, many hoped that the populist genie could be put back in its bottle. I wish I had the same sense of American optimism. I simply cannot forget that despite a raging pandemic and thousands of deaths, over 74 million Americans voted for Trump. They are not going away.
As ancient republics demonstrate, populism flourishes when inequality increases. In tough times, people are also more likely to turn against those they see as threats or competition. In 1873, the US suffered its deepest depression to date. Cotton prices crashed and unemployment rose. A disputed election of 1876 led to the end of post-Civil War Reconstruction and the reintroduction of racial segregation through Jim Crow laws. A campaign of intimidation and violence kept black voters away from the polls for decades to come. Only in the 1960s did the historic civil rights movement end segregation, but black people remain poorer and die earlier than their white counterparts.
In addition to black people, another group suffered after 1873. The 1860s had been the time of the California Gold Rush and the First Continental Railroad. The Irish alone were unable to supply enough labor. Therefore, the 1868 Burlingame-Seward Treaty “ensured a steady flow of low-cost Chinese immigrant labor,” toiling primarily in goldmines and on railroads. The emerging trade unions saw Chinese workers as competitors who lowered everyone’s wages, and so opposed immigration. The Chinese worked for less money and worked harder. They also worked in areas where whites refused to work. White society at that time did not want people of color around. The labor movement was able to crystallize that latent racism.
The media played its part. William Randolph Hearst’s papers popularized the phrase “yellow peril,” and the US Congress passed the Chinese Exclusion Act of 1882, prohibiting all immigration of Chinese laborers. This was the first legislation in American history to place broad restrictions on immigration. And this was the Gilded Age. Rapid economic growth led to millions of European immigrants streaming onto American shores. This lowered the price of labor, and workers suffered. At the same time, the concentration of wealth continued apace, with robber barons and speculators making fabulous fortunes.
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The Gilded Age also led to the emergence of a left-wing agrarian movement called the People’s Party. They came to be known as the Populists, a word that has stuck with us to this day. Despite doing well in the 1896 election, the party eventually disbanded, but some elements of its program were adopted by the likes of Teddy Roosevelt and Woodrow Wilson. It is important to note that this party drew support from white Protestant farmers who were losing out to industrialization, urbanization and mass immigration.
While they advocated many measures of public welfare, the Populists were anti-Semitic, conspiracy-minded and racist. They offer a good insight into what America’s near future might look like. As the predominantly white working-class suffers, some of its members are more likely to wave Confederate flags, blame blacks for sponging off welfare and oppose immigration from Mexico, India or elsewhere. This enrages many urban liberals who argue that the white working class is not the real oppressed. It is Latinos, blacks and Native Americans who have suffered much more. Instead of complaining, members of the white working class could just mow lawns, clean homes or serve coffee. Also, these liberals are furious that many members of the working class pick on poor Mexican immigrants, not rich Wall Street bankers.
This urban elite misses an important point. Many Trump supporters are acting in the same ways as Populists in the 1870s who focused as much on the Chinese as on the robber barons. Part of the reason is simple. Like the robber baron in the 19th century, the banker is not a tangible part of most American lives. He is a character from movies such as “Wall Street” and “The Wolf of Wall Street.” The aggressive banker and the ruthless entrepreneur are archetypes that American culture apotheosizes. They represent the Nietzschean Übermensch, who deserves devotion, not just admiration, in a cult of success that is deep-rooted in America. That cult explains why Harvard has a school of government, not of politics. Success is non-negotiable, a Socrates-style failure unacceptable.
In contrast to the Übermensch who controls the commanding heights of the economy but is rarely seen in the flesh, Mexicans are ubiquitous. They work longer for lesser pay. Every office or apartment building I have visited across the country has had Mexicans or other immigrants from Central America doing the cleaning or taking out the rubbish. They look different, smell different and speak a different language. They excite insecurity. That insecurity rises when increasing numbers compete for fewer jobs.
American elites like immigration for both emotional and practical reasons. After all, America is a land of immigrants. They provide America with cheap labor, technological talent and entrepreneurial energy. Those with capital enjoy having access to all three. It boosts returns on capital. In contrast, the left-behind want less competition and higher wages.
Biden has his task cut out for him as president. An increasingly unequal America with declining social mobility is seething with rage. The rich have turned rentiers, profiting off quantitative easing and rising asset prices. Those without capital or connections can no longer move up in society. The stock market is a bubble waiting to burst. America cannot ignore the last four years, and a significant proportion of the 74 million who voted for Trump have lost faith in the system. Many of them have guns. This is no time for dogged centrism. It is time for bold political and economic reform that decreases inequality and increases social mobility. If Biden fails, a modern-day Julius Caesar will inevitably emerge to bury yet another dysfunctional democracy.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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Sovereign Wealth Funds Bet Big on India
by Philippa Kaur 26 January 2021, 11:37
Since the outbreak of COVID-19, bad news has dogged India on the economic front. By the end of the 2020-21 financial year, which begins on April 1 and ends on March 31, the country’s GDP is estimated to shrink by 7.7%, the biggest contraction since 1952. In the first quarter of the 2020-21 financial year, the economy contracted by a historic 23.9%.
To put things in perspective, India has suffered its first contraction since the 1979-80 financial year. Then, India’s GDP shrunk by 5.2% because of a double whammy. First, the 1979 Iranian Revolution led to a doubling of crude oil prices, hurting an energy importer like India. Second, a severe drought led to crop failure, falling incomes and declining demand. The 2020-21 recession is worse than that of 1979-1980. In fact, India’s contraction is the second-worst in Asia after the Philippines, whose economy has contracted by 8.5%-9.5%.
Green Shoots of Recovery
In 2021, better news has trickled in. India’s manufacturing sector is rebounding. The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, rose to 56.4 in December 2020, up from 56.3 in the previous month. Any figure over 50 signals growth, and manufacturing has now been increasing for five months. More importantly, India’s agricultural sector is expanding strongly. In fact, it grew even during the peak of the COVID-19 pandemic.
Deloitte estimates that “India may have turned toward the road to recovery.” It bases its judgment on recent high-frequency data. India has been fortunate to have lower infection and fatality rates than countries like the US or the UK. It has also launched the world’s biggest coronavirus vaccine drive. This should improve consumer and business confidence and boost economic recovery.
Why Is Foreign Investment Flooding Into India?
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The International Monetary Fund (IMF) is predicting a return to growth in 2021 as are investment banks and large funds. The Indian government is bullishly claiming that India can achieve double-digit growth through increased digital services and the expansion of its manufacturing base. This would be driven by growing demand in the rural sector, the youth and India’s aspirational middle class.
Even if the government claims might be optimistic, many companies and investors have bought into the India growth story. In particular, sovereign wealth funds (SWFs) have been betting on India. In 2020, they invested a record $14.8 billion in the country. In the same period, they invested only $4.5 billion in China, meaning that SWF investment in India is three times that of China. What is going on?
Dark Clouds in Sunny Skies
To understand why SWFs are turning to India, we have to understand their incentives. These funds do not answer to investors who crave quarterly or yearly or even five-year returns. As custodians of a nation’s wealth, SWFs are long-term investors. In their view, India is operating from a lower base than China. So, India’s growth prospects are higher than China’s as it plays catch-up.
Furthermore, unlike venture capital or private equity players, SWFs place a high premium on the long cycle factors like political stability, social cohesion and geopolitical importance. As a robust democracy with many decades of experience in the peaceful transfer of power, India is increasingly attractive in a volatile, complex and ambiguous world. China’s actions in Hong Kong and Xinjiang have shaken up many SWFs that are choosing to park their money in India.
There is another reason for SWFs to invest in India. They agree with IMF Managing Director Kristalina Georgieva, who praised India for taking “very decisive action, very decisive steps to deal with the pandemic and to deal with [its] economic consequences.” Like her, they are impressed by New Delhi’s appetite for structural reforms and the surprising competence India’s much-maligned government has demonstrated during the pandemic.
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On December 31, India’s health ministry revealed that the country’s COVID-19 recovery rate was an astonishing 96.04%. This is one of the highest recovery rates in the world. Despite the economic contraction, the government has fed hundreds of millions, brought in much-needed economic reforms and kept the budget deficit down to reasonable levels. At a time when countries have sunk into unsustainable debt traps, India presents a relatively better investment opportunity for SWFs with strong prospects of sustainable, long-term growth.
There are two dark clouds threatening this sunny economic scenario. First, India faces the twin external threat of China and Pakistan. Both these nuclear powers make territorial claims against India. They have been ratcheting up rhetoric, and tensions are running high. Even at the height of a bitterly cold winter, Indian and Chinese troops have clashed yet again on the border. Once the Himalayan snows start melting in late spring and early summer, troops could start clashing and a military conflict might ensue. This would inflict a tremendous economic setback in the short run. If India is able to defend its territory, then its economy would benefit in the long term. However, there is no guarantee how such a conflict might play out, and this remains a great risk to the economy.
Second, India faces the threat of domestic unrest. The ruling Bharatiya Janata Party has had to deal with numerous protests since its reelection in 2019. The Citizenship Amendment Act triggered protests in many cities across the country. They died down as the pandemic spread. Currently, farmer protests are rocking New Delhi on Republic Day. In a country as large and diverse as India, threats of more protests and unrest are never far away. As long as the government can contain protests, they remain immaterial. However, a breakdown in social cohesion would damage India’s growth story.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More
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It’s Time to Introduce a Universal Basic Income for India’s Farmers
by Philippa Kaur 15 December 2020, 12:35
In September, India passed three bills that immediately led to protests by farmers demanding to repeal the legislation. The new laws seek to remove the government’s minimum support price for produce that shielded India’s farmers from free-market forces for decades. In allowing the farmers to set prices and sell directly to businesses, the reforms are …
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