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The Trump-Ryan Healthcare Act: Some Economic Consequences

House Speaker Paul Ryan, center, speaks at a news conference regarding the American Health Care Act, on Capitol Hill in Washington, March 7, 2017. (GABRIELLA DEMCZUK / NYT)

By Jack Rasmus

While Republicans on the Right and the Far Right wrangle over whether to repeal the Obamacare Affordable Care Act (ACA), or just revise it, the Ryan proposal does both. How can that be? Revise and yet repeal?

The repeal is every dollar and cent that the Obamacare Act taxed the rich and their corporations. The rest, the non-funding features is what’s being revised.

Only in the past 24 hours is the corporate press even discussing the tax increases under the ACA now being totally repealed by the Ryan-Trump bill. That’s because they can no longer ignore it, since it was reported today by the Congressional Budget Office (CBO). But they knew the details weeks ago. So did the Democrats in Congress. Yet they said nothing. How much in tax cuts for the wealthiest individuals and their corporations are we talking about? Over $590 billion over the decade.

About a fourth of the total cost of the ACA, was paid by tax cuts on wealthy households. That included a repeal of the 3.8% tax on earned income of the wealthy. Another repeal of the tax on net investment income by the same. Both are gone by the end of this year. Add to that the following business tax cuts also now totally repealed: the tax on prescription drug makers that provided $25 billion in annual revenue. The $145 billion repeal of the annual fee on Insurance companies. And the $20 billion on medical device makers. That’s another $190 billion tax cuts for businesses. But there’s still more ‘tax’ repeal. The employer mandate is also repealed. If companies didn’t provide their own employer health insurance, they too had to pay into the system. The CBO report estimates the mandates – employer and individual (also repealed) amounted to $156 million in 2017 alone. That’s inflation adjusted. So the market price is at least 5% higher, for a total of around $165 million. The mix in the employer-individual contribution from the mandates, let’s assume, is 50-50. So the corporate tax cut is at least $82.5 million from the repeal of the employer mandate. Added all up, the total reductions for businesses and the wealthy, according to the CBO’s own estimate, is $592 billion, “mostly by reducing tax revenues”.

What we have in exchange for the $592 billion tax cuts on the rich is a de facto tax hike on the 10 million plus consumers who bought plans on the exchanges, in the form of the elimination of the subsidies that had been provided to help them purchase plans. Subsidy repeal is just a tax hike by another name. How much ‘savings’ per the CBO from the repeal of all premium subsidies and assistance under the ACA? CBO estimates $673 billion.

By the way, here’s another business-health care trivia item: companies that provide employer health insurance get to write off their contribution costs. Their workers don’t get to write off their share deducted from their wages, but the companies do. Their tax cut savings amounts to $260 billion a year.

So the Ryan-Trump Taxman taketh $673 billion from the 10 million consumers who bought plans and he giveth $592 billion to the wealthy and their corporations who, heavens knows, need it more than the rest of us. After all, their corporate profits only tripled since 2010 and the wealthy captured only 95% of all the national income gains since 2010, according to studies by the University of California, Berkeley economists (based on IRS data). And the rest of us have done so much better! (By the way, here’s another business-health care trivia item: companies that provide employer health insurance get to write off their contribution costs. Their workers don’t get to write off their share deducted from their wages, but the companies do. Their tax cut savings amounts to $260 billion a year). Employers already providing health plans were supposed to pay an excise tax on their plans, but even the Obama administration put that one off, so the Ryan-Trumpcare delay of that excise tax hike until 2026 is not really a new tax cut or part of the $592 billion.

As the slick marketers on the online sales channels say, ‘But wait, there’s more. There’s a two for one offer!’ The double whammy offer in the Ryan-Trumpcare plan is an additional whopping $880 billion cut in Medicaid spending by the government. Another 10 million of those citizens most in need of health care services – composed mostly of the elderly, the disabled, and single mothers heads of households – will be now thrown under the Trumpcare bus as virtually the entire change in Medicaid will be, yes, repealed.

The ‘Multiplier Effect’ Is Bad News for Ryan-Trumpcare

So how does the $673 billion in subsidy assistance spending cuts and $880 billion in Medicaid spending cuts, plus $592 billion in wealthy-corporate tax cuts, and the new spending of $303 billion, impact the US economy in net terms? It will be a big negative hit on economic growth as measured in Gross Domestic Product terms. Here’s why.

There’s this thing called the ‘multiplier effect’ in calculating GDP. It’s not a theory. It’s an empirical observation. A fact. A dollar in spending gets spent several times over and the total at the end of the year adds up to more than a dollar added to GDP. Spending on lower and middle income groups results in a bigger ‘multiplier’. Spending on the wealthier a smaller. They save more than the net change in income they receive than do lower income households. Furthermore, empirical observation shows that tax cuts of any kind (business, investor, or consumer) have less a ‘multiplier’ effect than do spending, and tax cuts for the wealthy and for corporations even less an effect than consumer tax cuts. Ok. That’s all ‘economics 101’ but it’s true.

The Ryan-Trumpcare plan gives the wealthy and their corporations $592 billion in tax cuts. Will they spend all that? No. Their ‘multiplier’ is about 0.4 according to best estimates. Give the rich a tax cut, in other words, and they’ll spend 40% of it. That 40% means they will spend in the US economy about $230 billion over the course of the decade, or $23 billion a year on average due to their tax cuts. (They may spend more offshore, of course, especially the corporations, but offshore spending adds nothing to US economy and GDP growth).

Unlike the wealthy and corporations, the average consumer has a multiplier of at least 2.0, and the poor on Medicaid higher than that. But let’s conservatively estimate the government spending multiplier for consumers on the $673 billion spending for insurance subsidies and the $880 billion in Medicaid spending is only 2.0. That means a contribution to GDP of $1.55 trillion ($673 billion plus $880 billion) is times two, or $3 trillion total over the decade. That’s $300 billion a year contribution to GDP. But that subsidies and Medicaid spending is now repealed so it’s a reduction of $3 trillion, or $300 billion a year.

In net terms, we therefore get $23 billion a year in wealthy-corporate added contribution to GDP due to their tax cuts and $300 billion a year reduction in GDP due to the repeal of the subsidies and Medicaid. That’s a net reduction of about $275 billion a year from GDP, which occurs in 2018 and every year thereafter (on average) until 2026.

Based on the US current $20 trillion annual GDP, $275 billion annual net reduction is a little over 1% of the total GDP growth, which according to official government estimates is about 2% annually. The annual reduction in GDP from the multiplied and secondary effects is likely around .2% per year. That reduces annual US GDP to 1.8%.

That GDP reduction includes further ‘knock on’ effects to consider as well.

Premium and Price Inflation

The Ryan-Trumpcare proposal will almost certainly result in higher premiums and higher out of pocket costs for healthcare services. The higher inflation will reduce consumer household disposable income. That will leave households less income to spend on other items. Since the inflation in health care spending adds nothing to ‘real’ GDP, there’s no gain in GDP from that. But the reductions in household other items, in order to afford paying for the higher cost health insurance, will reduce ‘real’ GDP. So the net inflationary effect is significantly negative, depending on how much health insurance premiums (and deductibles, copays, etc.) actually rise.

The Ryan-Trumpcare proposal will almost certainly result in higher premiums and higher out of pocket costs for healthcare services. The higher inflation will reduce consumer household disposable income.

Ryan and Republicans claim that premiums are already rising rapidly under Obamacare, which is true, especially the past year. But that is likely to continue. The Health Insurance companies have been ‘gaming’ the system and the Obama administration did little to stop them. They will continue to do so in the transition to Ryan-Trumpcare and under it going forward as well.

The Ryan-Trumpcare proposal allows insurance companies to hike premiums for older customers up to five times more than premiums charged to younger customers. That’s up from three times under Obama. Trumpcare also now allows insurers to offer ‘barebones’ plans, with lower premiums but with hardly any coverage whatsoever. This trend was a growing problem under Obamacare, as consumers were signing up for super-high deductible plans ($3 to $5,000 per year) just to be able to afford the lower premiums. They were essentially ‘disaster-only’, called “leaners”, super-stripped down health care plans. The new ‘barebones’ policies will cover even less. This less and less coverage for the same (and sometimes higher) premium is in effect a price hike. Less for the same price is a de facto price hike in premiums. The Trumpcare plan also now permits insurers to charge a 30% surcharge for consumers who drop and then re-enroll. It assumes that premiums will decline, according to the CBO, after 2020. Sure, after 30 years of constant health insurance premium hikes, sometimes double digit, now the insurance companies four years from now will start reducing premiums! If anyone believes that, there’s a bridge on sale in Brooklyn they might look into.

Trumpcare also now allows insurers to offer ‘barebones’ plans, with lower premiums but with hardly any coverage whatsoever.

What About the US Budget and Deficits?

The Ryan-Trumpcare proposal takes $673 billion and $880 billion out of spending by government and households (not counting “knock on” negative effects on household consumption) and another $592 billion out in tax cuts for the wealthy and their corporations. That’s a $2.145 trillion hit to the US budget over the next decade. The Trumpcare advocates claim the wealthy-investor-corporate tax cuts will stimulate the economy and therefore tax revenues. But the 0.4 multiplier effect suggests only a fraction of that will positively affect the economy and tax revenue growth.

The Trumpcare advocates also claim their plan proposes to give tax credits costing $361 billion to consumers to buy insurance. But that starts only in 2020, so it’s really only $180 billion averaged over the decade. They further point out that another $80 billion in spending will occur in a grant for New Patient State Stability Fund to the States to spend, plus another $43 billion in government spending to hospitals to cover Medicare costs. So that’s about a total of $303 billion new spending to offset the $1.553 trillion spending cuts. Even if the spending additions of $303 billion have a multiplier of 2.0, the net deficit and national debt increase of Ryan-Trumpcare is still more than $900 billion.

So there’s hundreds of billions in net loss from the tax cuts and the net spending. That means massive increases in the US Budget deficit, and consequent rise in US debt, now more than $20 trillion. The CBO summarises the net deficit growth of only $336 billion. That is ridiculously low.

It should be noted that this net deficit, driven by tax cuts for the wealthy and their corporations, will be quickly followed by another, more massive general corporate tax cut now working its way through Congress as well. That one is estimated to cost more than $6 trillion over the coming decade. It and the Trumpcare tax cuts are in addition.

No wonder the wealthiest 1% households captured 95% of all income gains since 2009? And if Ryan-Trump have their way, they’ll get to keep at least that much for another decade.

And both Trumpcare and the daddy of all tax cuts coming follows on more than $10 trillion in business-investor-wealthy tax cuts that have already occurred under George W. Bush and Barack Obama.

No wonder the wealthiest 1% households captured 95% of all income gains since 2009? And if Ryan-Trump have their way, they’ll get to keep at least that much for another decade. America is addicted to tax cuts for the rich, perpetual wars around the world, and the destruction of decent employment and what’s left of any social safety net for the rest. The current political circus in Washington is just the latest iteration of the policy shift to the wealthy and their corporations at the expense of the rest. There’s more yet to come. And it will be even worse.

Feature image: House Speaker Paul Ryan, center, speaks at a news conference regarding the American Health Care Act, on Capitol Hill in Washington, March 7, 2017.  (© GABRIELLA DEMCZUK / NYT)
https://www.thestar.com/opinion/commentary/2017/03/14/is-health-care-really-just-a-shopping-opportunity-salutin.html

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About the Author

jack_rasmus-webDr. Jack Rasmus is author of the forthcoming book, “Central Bankers on the Ropes”, by Clarity Press, June 2017, and the recent 2016 publications, also by Clarity, “Looting Greece: A New Financial Imperialism Emerges”, and “Systemic Fragility in the Global Economy”. He blogs at jackrasmus.com, where reviews are available. (For a further analysis of the Ryan-Trumpcare proposal in comparison to the Obamacare ACA it will replace, listen to the Alternative Visions radio show of March 10, at: http://alternativevisions.podbean.com

Le Pen-ization of France Europe’s Changing Landscape

By Dan Steinbock            

In France, President Hollande’s utter failure to foster broad consensus for structural reforms has paved the way for the most contested election in decades. While public debate focuses on the 2nd round winner, the real story is that Marine Le Pen’s agenda has already shifted the French political landscape.

 

In recent polls, the French presidential rivalry involves 3-4 viable candidates, which together account for 85-90 percent of the total vote. Until recently, the leader of the Front National, Marine Le Pen, and the centrist Emmanuel Macron, have each garnered about 25 percent in the polls. The two are followed by the centre-right François Fillon, who has about 20 percent, and the socialist Benoît Hamon, with 15 percent.

While Le Pen may win the first round, she is not likely to win the second round, in which her popular triumph would be likely contained by a coalition of her adversaries. Yet, the future belongs to Le Pen’s agenda which the next president must coopt to win – and coopt to sustain victory.

 

Who’s Afraid of Marine Le Pen

The French presidential election will take place in late April, but the real winner will be chosen in the second round in early May. Even if Le Pen won the first round, the consensus is that a centrist or a centre-right candidate will win the second round.

Marine Le Pen (49) is the youngest daughter of the veteran FN leader Jean-Marie Le Pen, a French far-right politician who supported euro-skepticism, opposed immigration and pushed for law and order, traditional culture and values. As long as he led the FN, it was a marginal far-right, anti-Semitic party with politically incorrect neo-Nazi associations. In the past decade, Marine Le Pen has successfully “mainstreamed” FN away from the margins and extremism. Nevertheless, she has had difficulties funding her campaign because of the opposition of every French bank to her political platform.

In her campaign, Le Pen continues to support traditional values, law and order, while opposing immigration and the EU. As her campaign kicked off, Le Pen pledged a fight against “two totalitarianisms, globalisation and Islamism” that seek to “subjugate France”. Running in the name of the French people, she reaffirmed the FN’s anti-immigration, protectionist and anti-EU stance. “The divide is not between the left and right anymore, but between patriots and globalists,” she said. “Financial globalisation and Islamist globalisation are supporting each other. Those two ideologies want to bring France to its knees.”

Her France needs greater independence, believes in a multipolar world and neo-gaullist geopolitics.

Le Pen wants to pull out of the Euro and a return to French franc, a referendum on EU membership within 6 months, and taxes on imports and the employment of foreigners in France. Building on Gaullist legacies, she is a critic of and wants to pull France out of the NATO. She would like to revise French relations with the US and has denounced French bandwagoning toward Washington. Her France needs greater independence, believes in a multipolar world and neo-gaullist geopolitics.

The Three Anti-Pen Musketeers

Emmanuel Macron (40) is a self-proclaimed proponent of a “third way” and the product of the elitist École nationale d’administration (ENA). After a stint as an investment banker at Rotschild & Cie Banque, he served in Hollande’s socialist governments, where he advocated business-friendly reforms that were a poor fit with Hollande’s socialist constituencies. Like Blair and the Clintons, Macron tends to support whatever is expedient at the time, whether it has been Rotschild’s neoliberal profits or Hollande’s bureaucratic socialism.

Married with his 24 year older high school teacher he first met at 15, Macron’s personal life and policy stances remain ambiguous. Last November, he declared that he would launch a social liberal bid under the banner of En Marche!. In public, this was legitimised as a new Clintonesque-Blairian ideology; in practice, it was necessary because Macron had alienated socialists while failing to gain enough support among conservatives; he lacked a party platform.

Of the key candidates, Macron is the ultimate Europhile and federalist, although he sees himself as EU-agnostic. He supports integration and structural reforms. In controversies about immigration, secularism, security and terrorism, Macron has favoured a balancing act, which accounts for the perception that he avoids taking any stances. Ironically, that makes him valuable to neoliberal business, Brussels and Washington.

Born into privilege, François Fillon (63) became nationally known as President Sarkozy’s Prime Minister. Already years ago, he undertook controversial reforms of the labor code and the retirement system. He represents conservative Republicans (previously Sarkozy’s Union for a Popular Movement, UPM), France’s largest center-right party. Last fall, Fillon still seemed to appeal to the conservative “silent majority” in France, but that was before a widening embezzlement investigation following charges that he had paid his wife and children almost 1 million euros from the public payroll for little or no work. Rather than resign, Fillon attributed all blame to a “smear campaign” and has stayed in the game.

Just as Fillon thought he could get on with his presidential campaign, he was recently hit by more claims of financial irregularities as Canard Enchaine disclosed that he has also received an interest-free, undeclared loan of 50,000 euros from a French billionaire tycoon in 2013. If Fillon can remain afloat, he could prove a minority kingmaker in the second round – unless centrist forces can agree on a unifying candidate.

Known as an “Anglophile”, Fillon is a French Thatcherite. He would like to balance the budget and abolish the wealth tax. He would raise retirement age to 65 and reduce the public sector by cutting half a million civil-service jobs. He holds tough views about immigration, Islamic radicalism and terrorism. As a believer in realpolitik, he has called for dialogue with al-Assad’s Syria and Putin. “In a Trump era,” he says, “Europe must spend more on military.” While he stands for the West, he sees the expansion of NATO to Russia’s borders in the 1990s as a provocation that was bound to alienate Moscow and foster redundant friction.

The last viable candidate is Benoît Hamon (49), a French socialist (PS) who defeated the centrist and business-friendly Manuel Valls in the party primaries. While he is portrayed as a new figure, he is a veteran party bureaucrat and has served in the European Parliament (2004-9), Hollande’s Junior Minister for the Social Economy (2012-4) and Minister of National Education (2014).

Hamon supports a basic income to all French citizens, a 35-hour workweek, legalisation of cannabis and euthanasia, and huge investments in renewable energy. Unlike recent socialist leaders who have managed to widen the gap between business-friendly and pro-NATO social democratic leadership and the socialist and NATO-skeptical grassroots constituencies, Hamon represents the left wing of the PS and is an admirer of US Democrat Bernie Sanders. He is critical of neoliberal myths and the NATO.

In contrast, the more leftist Jean-Luc Mélenchon, who heads the new “Unsubmissive France”, would like France to leave both the euro and NATO. While Mélenchon has barely 10%+ support in France, the two might align to achieve a unified left position in May. Nevertheless, after years of Hollande’s failed policies and plunging ratings, all socialist candidates face a steep uphill.

 

Coming Shifts in French Policy Stance

Whether Le Pen wins the elections or not may not be the question. The real story is that the winning agenda that the next French president has been re-defined by the rise of Marine Le Pen. Domestically, the new president will push for (subdued) structural economic reforms with or without the consent of the unions, while taking a stricter view of immigration and a tougher stance against Islamic fundamentalism.

The real story is that the winning agenda that the next French president has been re-defined by the rise of Marine Le Pen.

France will have a more critical stance toward further EU integration, and the euro. As even Hollande recently acknowledged, “for a long time, the idea of a differentiated Europe, with different speeds and distinct paces to progress, has provoked a lot of resistance. But today this idea is necessary. Otherwise, Europe will explode.” If Le Pen wins, Paris will also start a process that could ultimately result in a “Frexit”.

In foreign policy, the new president will be more cooperative with Russia and President Putin, from the Middle East to Ukraine and energy issues. While France may actually invest more in defence spending, the return of Gaullisme is predicated on greater skepticism toward the NATO and harder push for French national priorities. While Macron’s team has already suggested that Russia may be intervening in the French election, France is not as vulnerable to Russo phobia as the United States.

Furthermore, recent Wikileaks disclosures prove that it is not so much Moscow that Paris should be concerned about. In the 2012 French presidential election – as classified CIA “tasking orders” indicate – the agency engaged in a spying campaign ahead of the election. The documents reveal that all major French political parties were targeted for infiltration by the CIA’s human and electronic spies in the seven months leading up to France’s 2012 presidential election. According to the most recent WikiLeaks documents, televisions, smartphones and even anti-virus software are all vulnerable to CIA hacking, which makes any effort to shape the outcome of the impending elections and referendums in Europe relatively easy. Washington and Pentagon favour pro-NATO candidates and will walk the talk.

Even more important will be the net effect of the new economic policies. In Brussels, the greatest fear involves Le Pen’s quest to unilaterally take France out of the Euro in just 6 months, which would be followed by the effective redenomination of €1.7 trillion of French public debt into francs (80% of this debt is not under international law and thus FN would have the right to change the currency). Unsurprisingly, the ratings agencies have already warned that the net effect would be the largest sovereign default on record, nearly 10 times larger than the €200 billion Greek debt restructuring in 2012. Like biblical prophets, Le Pen’s adversaries have warned that her victory would mean a French Armageddon, the plunge of euro, and chaos to the world financial system.

Like biblical prophets, Le Pen’s adversaries have warned that her victory would mean a French Armageddon, the plunge of euro, and chaos to the world financial system.

In contrast, the FN argues that reintroducing a national currency that would fall in value against the euro would lower France’s total debt burden and thus allow Paris to begin competitive devaluation.

 

Domestic Dead-End, International Spillovers

The struggle for France is the direct result of half a decade of policy failures, which climaxed last summer in a failed effort to reform the French labour code. It was not the first time. Years ago, huge strikes forced President Chirac to back down from proposed changes in the pension system, just as they led to fierce union opposition when President Sarkozy raised the retirement age. However, under Hollande, a Socialist government has been pitted against unions and the ultra-left, which has fostered apprehension, disappointment and fragmentation on the left.

When the socialist Hollande replaced the conservative Sarkozy as the French president in May 2012, the latter’s ratings had plunged but Hollande’s popularity hovered at around 58 percent. By late 2016, his ratings had plunged to less than 5 percent. So his decision not to seek a second term was hardly a surprise. While France cannot avoid the overhaul of its labor legislation in the future, a socialist president cannot drive a neoliberal labor agenda; and that’s what Hollande tried to do.

After half a decade of near-stagnation, French economy has been benefiting from a cyclical rebound, thanks to a more accommodative external environment, especially lower oil prices, a depreciated euro, record low interest rates and the European Central Bank’s quantitative easing. Nevertheless, these shifts cannot compensate for France’s longstanding internal rigidities, which overshadow the economy’s medium-term potential. In the 1980s and 90s, French growth still exceeded 2.2 percent; in the 2000s, it hovered around 1.8 percent; now it is around 1.1 percent and likely to decelerate to less than 1% by early 2020s. In the past decade, French competitiveness, as reflected by the country’s share in world export markets, has declined significantly as well.

What’s worse, French real wage growth has been solid, despite declining productivity growth. The equation is unsustainable; it means that French economy is penalising future generations for its current distortions. If the external environment grows still more adverse, while reform progress is hardly evident, French banks, given their size and interconnectedness, could generate adverse effects not just domestically but through spillovers, especially in Italy and emerging Europe.

France remains the world’s sixth largest economy. If it begins to shake, Italy cannot avoid a quake and ailing Eastern European economies could take multiple hits. That, in turn, would have adverse implications across the Eurozone and globally.

Feature image: © Jeff Pachoud, AFP | French far-right presidential candidate Marine Le Pen gives a campaign speech in Lyon on February 5, 2017
http://www.france24.com/en/20170205-france-marine-le-pen-far-right-speech-brexit-trump-immigration-lyon

 

 

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dan-steinbock-webDr. Dan Steinbock is an internationally recognised expert of the nascent multipolar world. In 2010, he predicted that Brussels opted for misguided policies to overcome the European sovereign debt crisis, which would prolong rather than resolve the challenges. In spring 2016, he forecast the UK Brexit and the outcome of the Italian referendum.

Dr Steinbock is the founder of DifferenceGroup. He has served as Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see www.differencegroup.net

 

 

Trump – The Enigma

By Peter Koenig

In this article, Peter Koenig discusses a few of the bountiful contradictions and controversies of the new Trump Administration. The Donald, less than 50 days in office, deserves the benefit of the doubt, as anybody would who dares oppose and attack the “fake news” lie culture of western media.

 

President Trump may be wondering himself about the miracles and mysteries and confusions he creates. As a megalomaniac, he is the only one who knows everything. His ideas range and flash from right to left, crisscrossing the political spectrum to favour the globalised world – and yet he is largely acting against globalisation – and in the “interest of people”. That would be great.

He also seeks truth by telling truth; that Obama and Hillary created ISIS and the CIA created Al Qaeda, that 9/11 was not the way the Nine-Eleven Commission says it was, and that the Government lies about statistics. Poverty, unemployment and inflation figures are much higher than those published by the various US statistical offices. He loves BREXIT, congratulating Theresa May for it, and joyfully predicts the end of the European Union and of the Euro. It would be a good thing for the world. But does he mean what he says? – As a megalo he loves to be an Enigma.

The non-intervention policy – as candidate Trump he said he would not intervene in other countries’ affairs. Fair enough. That’s what most of the world wants; that’s what most of the Americans who voted for him want. Yet, Donald Trump, the almighty, along with his chief vassals of Europe, France, Germany and the UK, has just tried imposing new sanctions on Syria, among other deceitful allegations, because of some military commanders’ use of toxic gas attacks. By now, most of the informed world knows that this is a lie and nothing but a UN proven lie – a lie that has been repeated since the beginning of the CIA imposed war on Syria in 2011 to justify “regime change”.

Both China and Russia opposed the motion. Mr. Putin went on a news conference saying that sanctions would not be helpful for the new peace negotiations in Geneva. – Of course, not. But that’s precisely what they are supposed to do – undermine the peace process. There are enough “outside” negotiators in Geneva with brainwashed, preconceived ideas that Bashar Al Assad is a mass murderer, having killed “hundreds of thousands of his own people”. Literally.

That’s the concept of some of the western negotiators. It is an outright shame that such people are allowed to help negotiate peace – even worse, they claim the right to rewrite Syria’s Constitution for a country without President Assad, who still has 80% of Syrians’ backing. Seriously? – Yes, very seriously. If it wouldn’t be a grave breach on a country’s sovereignty, it would be laughable. Who is sponsoring such nonsense anyway? The western world once again proves without impunity that they have no respect for human and civil rights, for those they consider below their boots. What would those foreigners say who are “negotiating” a new Constitution for Syria, if foreigners were to decide on their own country’s Constitution? – Trump should know better. Is this the same Trump, who pledged non-intervention in foreign lands?

Trump, Netanyahu’s puppet – Or is it the “new” Trump? The even more submissive Trump – submissive to Netanyahu’s Israel? Outranking by far his predecessor. – The little boy Trump we saw during the joint Press Conference with Bibi in Washington last month? – So sad and almost insulting to the American people, witnessing the President of the United States in total adulation of the Zionist-in-Chief. Surely, he may have swayed Trump’s good intentions away from staying out of other peoples’ and countries’ business. – The exceptional nation of the US of A is a sheer vassal of Israel, the Zionist-run 8-million people country in the Middle East, adamant to turn the entire zone into a huge chaos, a zone which they eventually hope to take over from shiny Euphrates to Shiny Nile, much like the Brits did, by killing all the indigenous people in North America to eventually create an empire from Shiny Sea to Shiny Sea? – Not bad. But why would The Donald not know about it? And go along with such atrocities? Who twists his arm? How does one twist the arms of the President of the United States?

Peace with Russia – candidate, as well as President Donald Trump was pledging for a future peaceful relationship with Russia. However, when pressed, he is not a friend of Putin’s and doesn’t know whether he will get along with him. In any case, to deserve a friendly relation with the exceptional nation, Mr. Putin must return Crimea – return to whom? – to Kiev’s Nazi regime? Anybody who hears this must be thinking it’s a joke, or sheer lunacy.

And withdrawing Russian troops from Ukraine? Anybody who says this and propagates it around the world is mad. People who by now haven’t gotten to the truth are insane. Because the truth is everywhere, except in the presstitute. Get away from the presstitute. Crimean people decided by a 97% majority to rejoin Russia, where they were during the past 300 years; and Ukraine – it is by now a little secret that the US Embassy in Kiev, helped by CIA, MI6, NATO and the EU vassal states, instigated the coup in February 2014 against the democratically elected – pro-Russian President Yanukovych. Rather than intervene in Kiev’s Washington and Brussels driven Nazi war against her own people in the Donbass, Putin has explicitly refused the democratically voted demand by the Donbass people also to be reintegrated into Russia. Ukraine for hundreds of years was part of Russia.

Instead, President Putin has initiated the Minsk II Agreement of February 2015. Minsk II was a Russian initiative after Minsk I of September 2014 collapsed, mainly because the warrying parties Kiev and NATO didn’t adhere to the accord. At Minsk II the leaders of Germany and France, Russia and Ukraine’s oligarch President, Poroshenko, shook hands for peace. For the west, this was mere propaganda, as they can say now, that Russia didn’t adhere to the deal. Lie after lie after miserable lie. Mr. Trump, despite his pledges to the contrary – and he said once as much as Obama was responsible for Maidan, the Kiev coup in February 2014 – is back-tracking on his own common sense. Did here too, Netanyahu’s evil wisdom prevail?

Sanctions – Trump was clear during his campaign and in the first days of his Presidency that he didn’t think sanctions were a good idea, especially not applied to Russia. Has he had a change of mind or a twist of arms? – The war industry, of course, does not like the notion of peace with Russia. The President of the United States has nothing to say. Is he a mere marionette of the war and security faction of the Deep State? Naturally, well accompanied by a bunch of stooges from Brussels. Never mind that these sanctions hurt Europe more than they hurt Russia. As Mr. Putin said repeatedly – thanks god for the sanctions. They have helped Russia to become independent again, building her own agriculture and manufacturing capacity – let alone research and development which is already producing cutting edge technology, by far superior to the US-outsourced kind, coming from such low-wage countries like India.

Appointing Nikki Haley Ambassador to the UN – the new mandate for the former Governor of South Carolina, is another ruse that should please Israel. Judging from her first moves in the UN body, Nikki Haley looks not much different from her predecessor, Samantha Power, especially when she flies such lies in the face of the world, like, “It is a sad day on the Security Council when members start making excuses for other member states killing their own people. The world is definitely a more dangerous place,” in response to Russia’s and China’s veto to the new western attempt to impose more sanctions on Syria.

She knows – or should know better. Trump definitely knows better. If he let her get away with this slander propaganda, it’s because he has been told to do so, or wants to bend over backwards to please his friend Bibi, and/or because he himself thinks the UN has become a useless body of bla-bla nations, devoid of any backbone; it should melt away, as it is unreformable in its current structure, like the EU. Both have been hijacked by the world’s Deep State of neocons. It’s time to wake up to this new reality.

The no-nonsense strategist Flynn, who was about to seek harmonious relations with Russia, and would defend Trump’s non-intervention policy, is gone. The masters of the Pentagon, the military industrial complex have won.

Firing Michael Flynn, Mr. Trump’s first choice as National Security Advisor – was a horrible betrayal of a friend and possibly a peacemaker. Did Trump simply follow orders from non-peace-loving Pentagon masters – Deep state warriors? With that unsavvy move the President lost all his respect from people, whose ethics weigh infinitely more than those of the Washington swamp. The no-nonsense strategist Flynn, who was about to seek harmonious relations with Russia, and would defend Trump’s non-intervention policy, is gone. The masters of the Pentagon, the military industrial complex have won. – By firing Flynn, did Trump hand over de facto his Presidency to neocon Vice-president, Mike Pence? Thanks to Pence who created a storm in a water glass about a private citizen talking to the Russian Ambassador, Flynn is out – and Trump has lost his worldwide standing.  

NATO is outdated – superfluous – those were the wise words of candidate Trump. He repeated them, somewhat weakened after his inauguration – but not for long. The puppets in Europe were crying big Crocodile Tears; the newly appointed James “Mad Dog” Mattis, true to his name went to Brussels, telling his subjects that there was nothing to worry about; the US would continue protecting Europe with NATO against the evil Russians – but they had to pay up, sharing more of the cost of this expensive, but highly profitable enterprise, the weapons industry. He didn’t tell them the latter part. That was implicit, though. – We can assume that Mattis didn’t go to Brussels on his own initiative, but as the emissary of his boss, the President and Commander-in-Chief of the United States.

Increasing the Defense budget by US$ 54 billion – Trump’s recent announcement, wasn’t exactly a move towards peace. Earlier, within his first couple of weeks in the White House, Trump went to the Pentagon and told the generals to come up within a month with a plan on how to renew the war equipment, including the nuclear arsenal – sort of confirming Obama’s plan to put a trillion dollars into “nuclear renewal” within the next ten years.

None of this smells of peace, or even of promoting harmonious relations with the rest of the world. It has nothing to do with wanting to become a nation of equals. And it goes way beyond simply “Making America Great Again”. It rather smacks of perpetuating Washington’s status of the exceptional nation – pure insanity.

Iran Bashing – calling her “The World’s Biggest State Sponsor of Terrorism”, – another outrageous lie destined to spread negative propaganda about Iran, to intimidate other countries from renewing their commercial dealings with Iran. After all, the “Nuclear Deal” promised to abandon sanctions. Yet, Trump just started a new regime of sanctions. Trump also wants to “scrap” or rip apart the 5+1 and Iran (Permanent Security Council Members, plus Germany and Iran) “Nuclear Accord” of January 2016. This may not be easy, as there are more players involved than just the exceptional nation.

Any intervention by Russia would be considered an aggression on the US.

Trump and his aids, have been demonizing Iran already during his campaign and reiterated the groundless accusations after his inauguration. – Why? – He knows that there is no substance to back up his claims and that Iran is backed by Russia and China and that a direct confrontation with Iran would mean a clash – nuclear? – with Russia and possibly also with China. Is this a way of getting at Russia (and China) through the back-door? Or is it just one more goody for his Pal, Bibi? – We don’t know yet. But it is not excluded that Israel launches an attack against Iran – supported by Washington, of course. Any intervention by Russia would be considered an aggression on the US.

Truth be told, this appears to be sheer sabre rattling. Nobody dares attacking Iran, which would mean attacking the entire axis of Middle East stability, China-Russia-Iran – and more, attacking the Shanghai Cooperation Organization (SCO), of which Iran is now a member. Confronting SCO would be aggressing one half of the world’s population that commands one third of the world’s GDP. That’s heavy stuff. More than a conventional WWIII. From there, nuclear is just an emotional breath away, or a tiny misunderstanding – who wants to risk that? – Least the war industry. Because once the planet is eviscerated, there is no more need for arms. Those few elitists who may survive, have killed their milk cow. Trump should know that. He is a businessman.

Better is eternal chaos – leaving the arms and bankster business booming – reducing at the margin the world population by continuous merciless killing; by armed conflicts; by artificial food shortages; by clandestine sterilizations through GMOs (plus a myriad of deadly diseases potentially implanted in genetically engineered food seeds); by an out-of-bounds pharma-industry, today already responsible for one third of annual deaths, right after cancer and heart failure – all with the goal of leaving more resources for the few. That’s ideal for the empire and those who are in command of the empire. In the meantime, sabre rattling with nuclear warheads is an excellent tool for intimidation. Scared people are much more submissive.

And on the domestic front….

 

The wall on the Mexican border – a promise, Trump seems adamant to keep. Has he been told how many particularly southwestern US businesses he would kill? Agriculture, hospitality and tourism, small businesses depend on illegal workers. They all do work Americans don’t want to do. So, there is no immediate alternative. Did Trump think this over?

Forced evictions of illegal immigrants from their often longtime homes in the US, fall in the same inhuman category. The trained brutes of US police enjoy this “new freedom” to use force tremendously. A more generous, more civil and more human – and for both sides more beneficiary move would be granting all illegals with no criminal records – at least 97% – amnesty, with work visas or immigration status, depending on their situations.

But The Wall has become so abjectly popular among the non-thinking US rednecks that there seems to be no crawling back. Or is there, Mr. Trump? – Like coming to reason?

Renegotiating NAFTA – or abolish this nefarious trade deal altogether – yes, but done professionally. That should in the long run please both Mexico and Canada, as both of these countries have lost enormously for signing on the 1992 Clinton- imposed dotted line. Mexico alone lost 1.3 million farm jobs, as the US 2002 Farm Bill subsidised US agribusiness by as much as 40% of net farm income, thereby driving countless Mexican farmers into ruin. – So, renegotiating NAFTA would be welcome by Mexico and Canada, but surely that’s not the way Trump sees it. – Or has he or some of his economic advisors told him what is really at stake?

Bringing back jobs and Making America Great Again – the Trump slogan of the year. Probably coined by some members of the Deep State, to emulate Obama’s “Yes we Can” – just coming through other lips, is nothing but the same trick – but with the naked emperor wearing differently shaded clothes. If Trump can pull this through – it would be truly amazing, a true feather in his hat. Of course, it doesn’t happen overnight, and it requires thorough planning. Just giving homecoming corporations tax breaks is not the solution. Analysts say it would take at least 20 years to build up a job base, mainly in the rust belt, that could rival what was there before the big exodus to cheap labor countries in the late 80s and 90s.

Globalisation has had nothing but devastating effects for the large majority of the world population. This would clearly be an unparalleled trump in Trump’s basket.

Not only would it help bring back job sovereignty to the US, it would be a tremendous blow to globalisation; this evil structure created by the neocons and their institutions, FED, IMF, World Bank at the Washington Consensus Conference at the end of the 1980s. Globalisation has had nothing but devastating effects for the large majority of the world population. This would clearly be an unparalleled trump in Trump’s basket. He seems to be serious, as he congratulated the British PM to BREXIT and doesn’t believe in the long-term survival of the European Union and the single currency, the Euro. And he is right.

Canceling the Trans-Pacific Partnership (TPP) agreement – and possibly also the highly controversial TTIP (Trans-Atlantic Trade and Investment Partnership) deal – would be a tremendous achievement for Trump. The people of Europe and of the 11 Pacific Countries might be forever thankful to Trump for his genius move. Never mind that he believes they would have been bad for the US of A. Let him. A good deed to the world, so anathema to his other business- oriented discourse. Here’s to the enigma Trump!

Trade war with China – may it be Trump’s soft version of Obama’s South China Sea aggression? He already announced a 45% import tax for anything coming from China that could be made in the US of A. Of course, this is first meant as an incentive for all the US corporations who outsourced their manufacturing to bring them back home. But, he thinks, by the way it would hurt China as a rising star on the world economic horizon. It hardly would. Especially not in the long-run. More hurt would be the United States if China were to retaliate.

As of the end of 2016 Chinese foreign direct investments (FDI) since 2005 in the US cumulatively amounted to 109 billion dollars, a mere10% of all of China’s FDI, worldwide. But, they are accelerating. China’s FDIs in the US in 2016 with 45.6 billion were about triple those of 2015. This compares with about 644 billion dollars of US FDI in China over the past 15 years. Punishing China with steep import taxes is about as effective as “sanctioning” Russia – namely almost nil. China has huge investments in Asia, in her principal export market. This is one area where Obama wanted to interfere with his pivot to Asia. The other one, of course is militarily, by stationing about two thirds of the US Naval Fleet in the South China Sea. They won’t be twiddling thumbs for long.

Let’s see what the twittering Trump does. Will he get the license to play business with China? Or will the Deep State of the Pentagon-Security clan get the best of him – through an arm-twisting provocation in the South China Sea?
———–
Trump, the enigma. These are just a few of the bountiful contradictions and controversies of the new Trump Administration. If he manages to stop Globalization, the nefarious trade deals set up under Obama, bringing back the work force to the US, rehabilitating his country’s decaying infrastructure and bringing back security to the common citizen, plus decent health care and education – and foremost, keeping wars at bay, then he has achieved more for the US and the rest of the world than any of his predecessors for the last 100-plus years. – To be fair, The Donald, less than 50 days in office, deserves the benefit of the doubt, as anybody would who dares oppose and attack the “fake news” lie culture of western media.

Featured photo courtesy: AP/Carolyn Kaster

 

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About the Author

koenig-webPeter Koenig is an economist and geopolitical analyst. He is also a former World Bank staff and worked extensively around the world in the fields of environment and water resources. He lectures at universities in the US, Europe and South America. He writes regularly for Global Research, ICH, RT, Sputnik, PressTV, The 4th Media, TeleSUR, TruePublica, The Vineyard of The Saker Blog, and other internet sites. He is the author of Implosion – An Economic Thriller about War, Environmental Destruction and Corporate Greed – fiction based on facts and on 30 years of World Bank experience around the globe. He is also a co-author of The World Order and Revolution! – Essays from the Resistance.

 

United You Don’t Stand

From the Editors

The latest news about Israel is again about some on-going land grab. This is not new news. This has been going on for over 70 years. And in and of itself historically Israel is not unique in conducting this type of land grab for those it regards as its own people, and from those it regards as the other.

That is how the United States came into existence.

The United States was created on the back of a huge and systemic land grab. The land taken from the indigenous peoples, the American Indians, was initially classified by us as terra nullius. The indigenous peoples disagreed of course. Similar land grabs also took place in Australia, New Zealand, Canada and South Africa.

No, the real news, and once again not new news, is the enduring hypocrisy of a large number of Arab states, who perpetually give lip service to support for the Palestinian cause. This is usually to keep their own masses drunk with platitudes of solidarity.

The fact is that the Middle East is at war with itself.

It is easy to blame the United States and or NATO for regularly intervening either in terms of colour revolutions or hybrid wars or outright war as in Iraq and Libya, or war by proxy agents as in Syria.

The fact is that the Middle Eastern states are at ideological war against each other. Why? Only God knows!

Europe moved towards harmonious relations (apart from the Napoleonic Wars and World Wars I & II) after the signing of the Treaty of Westphalia in 1648, which marked the end of an era of ideological rift and recognised the supremacy of the nation state as a political construct. Incidentally, this 30 Years’ War started when the Holy Roman Emperor, Ferdinand II decided to impose Roman Catholicism upon the people within his domains.

Saudi Arabia and the Gulf monarchies, allied closely to the United States and NATO regard Iran as a disruptive influence within the Middle East.

One might note here that Saudi Arabia and the Gulf monarchies are not democracies. They are fairly antiquated, repressive regimes that might see the Iranian republic as a disruptive influence only because their own positions are at present guaranteed by the patronage of the US and NATO. Iran regards the United States as a meddler in the region often purely for the benefit of Western multinational oil companies who don’t want to pay Iran or any of the other states in the region a fair price for the exploitation of their oil and gas reserves.

Furthermore, Iran is seen globally as representing symbolically and tangibly the essence of resistance to what many call American Imperialism.

An imperialism made that much more fluid by the collaboration of nation state actors, for example, who align themselves against Iran and Syria for reward from the United States and NATO countries in the form of weapon sales and the bolstering of their regimes.

We should really forget about Israel for now. Though any suffering caused to any peoples within the parametres of that state is inexcusable.

The real issue, the real news, is that there can be no peace within the Middle East until there is unification of the mind set of the leaders of the various states in the Middle East and a determination to be united and harmonious.

After all, though this may sound stilted, the European Union as a fairly harmonious economic, cultural and social entity was not created by warring states or those bleeding from ideological wounds.

Donald Trump and Steve Bannon’s Russia Policy Explained: Bend or Break, Expect Change

By Jeffrey Sommers

For Russians, Mr. Trump presents at least the chance of a new course in US/Russian relations. Putin hopes to see the US stop its liberal interventionist policies – a position in accord with Mr. Bannon’s. A return to chilled relations will reward Russia and the United States’ respective military-industrial-intelligence complexes.

 

The central figure in President Donald Trump’s administration is Steve Bannon, but for how long, nobody knows. Mr. Bannon sees the fate of the US in apocalyptic terms. His world view centres on the supposition that the West, or as he sees it, Judeo-Christendom, is locked into a global fight with Islamic fundamentalist terrorism presenting an existential threat to the United States. Two, and related to point one, (but which goes beyond the scope of this essay), is that there exists a ‘real’ capitalism connected to that Judeo-Christendom. This version of capitalism produces broad-based prosperity. According to Bannon, the United States has departed from this model and must return to it or else collapse into the abyss.

Addressing point one, outreach to Russia becomes readily understandable given Mr. Bannon’s outlook. Under Vladimir Putin’s rule, Russia showed no mercy crushing Islamic separatists in Chechnya. The victory was total and spared no destructive power. Indeed, so much artillery fire was rained down on Chechnya that Russia dipped into still existing World War II surplus ordnance to complete the job. Additionally, Putin helped the United States in Afghanistan by providing rail transport corridors through Russia. Moreover, Russian intelligence picked up on the terror threat posed by the Dagestanis that bombed the Boston Marathon in 2013. The United States failed to act on Russia’s intelligence and consequently suffered. Moreover, Bannon sees Russia as a Christian state, while he thinks Europe has gone secular and soft. Mr. Putin indeed sees Russia as Christian, while also emphatically affirming it is a multi-ethnic federated state. This last point is lost on Mr. Banon’s Brietbart, Alt-Right, adherents, but then nuance is not their strength.

For Russians, Mr. Trump presents at least the chance of a new course in US/Russian relations. Putin hopes to see the US stop its liberal interventionist policies .

Then there is Syria. Again, Russia presents its role here as taking the fight to Islamic terrorists. A corridor has opened connecting terrorists in Syria to the Russian Caucasus, a distance of only several hundred kilometres. This makes Russia in Syria a decidedly serious as a player in the fight against terrorism from the perspective of Mr. Bannon. Meanwhile, the US under President Obama’s administration, referenced the need to support Syria’s “moderate Islamic opposition”. Yet, as Obama-era ambassador to Russia, Michael McFaul, noted in an interview last year, “I’m on TV all the time where I have to use the phrase “moderate opposition”, and I don’t know what it means. The President gave a speech yesterday—we’re supporting ‘Syrian forces’ he said, right? Who are they? What are they?” The US complains Russia has not, as promised, fought terrorism in Syria, but merely targeted the enemies of Bashar Al-Assad’s government. For Mr. Putin the realist, this is synonymous with fighting terrorism, as many of Mr. Assad’s enemies are in fact radical Islamists funded by Saudi Wahhabists (who previously funded the Afghani Mujahadeen that eventually morphed into Al-Qaeda). These same forces in Syria are also funded by the Qatari government. The Qataris (Sunni Muslim allies of the Saudis) wish to run a natural gas pipeline to Europe through Syria. Presently, this project is blocked by Assad’s Alawite Shia government that has given the gas pipeline transit contract to their allies, Shia Iran, even if the former is largely a secular government, while the latter is decidedly not so. Assad knows that if his government is toppled, he could meet a fate similar to that of Libya’s Muammar Gaddafi. Mr. Gaddafi’s video recorded end arrived with him being sodomised by a bayonet, while begging not to be shot, which in due course he was. This was immediately followed by an interview with the then US Secretary of State, Hillary Clinton (who advocated for US intervention in Libya) stating, “We came. We saw. He died”, followed by laughter. While one might make the case that Mr. Gaddafi deserved no better end, the manner of his execution was no doubt seen by Mr. Assad. Mr. Putin has reputedly viewed the tape of Gaddafi’s gruesome execution no less than three times. In short, neither of these leaders intends to exit this life in the same manner and suspect that some US policymakers intended to reprise Gaddafi’s fate with Mr. Assad, if not for Mr. Putin. When it comes to relations with Trump, Mr. Putin is looking for another reset, but likely has few illusions about its prospects given the depth of US hostility to him, from both policy makers and opinion makers in the US. Nonetheless, for Russians, Mr. Trump presents at least the chance of a new course in US/Russian relations. Putin hopes to see the US stop its liberal interventionist policies – a position in accord with Mr. Bannon’s – that destabilised North Africa and the Middle East, thus providing space for groups like ISIL to emerge and spreading their influence to Syria

 

Then there is NATO. Economic conservatives (along with Messieurs Trump and Bannon) often claim Europe gets a free-ride on security via the US. Few NATO countries spend the recommended 2% of GDP on defence. Among exceptions are Greece, a country viewing its fellow NATO oarsman, Turkey, as a future “Ottoman” occupier biding its time for a return. Of course, such heavy defence spending, largely borrowed from Germany to buy German weapons, contributed to Greece’s fiscal woes. This, plus democratic nature of tax evasion (near all Greeks do it, their public sector excepted) in the home of democracy, contributed further to Greece’s debt crisis. While Europe has been subsidised on defence, whenever Europeans have discussed forming an independent defence force, the US has shown displeasure and Europe drops it. Thus, Donald Trump’s statements regarding NATO while understandable, have been reckless in their timing and manner of communication.

President Trump’s NATO comments especially unnerved the Balts and Poles. Poland was partitioned by Russia, Prussia and the Astro-Hungarian Empire in the late 18th century. By 1795, it no longer existed. After a brief return of independence in 1918, it again lost it to Germany’s invasion in 1939, followed by partial Soviet annexation of territory and the imposition of a Soviet proxy government of its remaining territory until 1989. Thus, it is suspicious of Russian intentions. Then there are the Balts. These small countries collectively possess population numbers well shy of New York City’s, yet often punch above their weight in international affairs. Caught in the cross-hairs of WW II, they were occupied by the USSR to provide ‘strategic depth’ in case of war with Germany. Stalin, fully expecting the future return of an aggressive Germany, as happened following WW I, decided to keep the Baltic states for strategic depth in expectation of a WW III. This had tragic consequences. Thousands of Balts in leadership positions were shot. Hundreds of thousands fled their countries as the Red Army returned in 1944. As the Cold War emerged in the late 1940s, hundreds of thousands from the Baltic middle classes were deported to Siberia. Many later returned. Many others died. For the Balts and Poles alike, NATO’s viability is seen in existential terms. Thus, President Trump’s statements regarding the need for NATO members to pay up and expression of doubts whether the organisation is even relevant, have been unwelcome in the extreme. Moreover, comment by Trump surrogates, such as Newt Gingrich, that proximity of Estonia’s capital of Tallinn to St. Petersburg makes it a veritable suburb of the latter, did little to instil confidence among the Balts that the Trump presidency is committed to their security. By mid-February, the Trump Administration’s messaging on this delicate matter improved and Balts came to feel a bit more confident that the US was not going sacrifice them to greater strategic imperatives with Russia.

While devising legitimate plans for self-defence, the US and Baltic countries should be careful not to overreact.

Yet, a possible détente with Russia under Trump has unnerved the Balts. They fear improved relations with Russia will signal that the Baltic states are not important enough to defend and at a point of US crisis or distraction, Russia will seize them. Yet, it would be a mistake for President Trump to structure US policy on the assumption Vladimir Putin has designs on the Baltic states. While devising legitimate plans for self-defence, the US and Baltic countries should be careful not to overreact. The historical circumstances that led to the 1940 Soviet occupation of the Baltics, chiefly an expansionist Germany seeking lebensraum (‘living space’), are absent today. Moreover, Russia no longer needs Baltic ports, since Putin spent vast sums developing northern ports in Russia like Primorsk to reduce their dependence on those in Estonia, Latvia, and Lithuania. Putin also wants to attract European investment in Russia, which would disappear if he annexed countries in the EU territory and potentially launched World War III by invading NATO territory. The US must keep its defence commitments to the Baltics while doing little to unnecessarily ratchet up tensions on Russia’s sensitive border from which invading powers have historically sacked Russia.

Ukraine is the chief flashpoint between the US and Russia. Putin and most Russians see Ukraine as ethnic siblings of sorts. Ukraine is complicated. Its borders are a Soviet legacy. West Ukraine is compromised, in part, of peoples from the old Austro-Hungarian empire that Stalin seized in 1939 and 1945 for oil and strategic depth. These are Ukraine’s most anti-Russian regions. A third of the country (roughly southeast/south) was part of Russia, but was tacked onto Ukraine by Vladimir Lenin in 1922 to add proletarian “balance” to a largely peasant Ukraine. Then, of course, Nikita Khrushchev pasted on Crimea (majority Russian) in 1954, which was under negotiation for return to Russia in 1991, but the Belavezha Accords where the dissolution of the USSR was planned proceeded too quickly to settle the matter. The red line for Putin on the score of defence, is inclusion of Ukraine and Caucasus in NATO. Russia could go to war over this. Thus, the concern going forward is what happens after Putin? If leadership falls to Russian ultra-nationalists, this could result in the creation of and enlarging of “Greater Russia” through annexations. Of course, Russia can’t simply unilaterally ‘correct history’ at its discretion, but at the same time all must act responsibly in Ukraine to avoid war and strengthening the hand of Russian chauvinists.

The pressures for Donald Trump to reprise the traditional hostility between Russia and the United States are immense. Expect Trump to eventually bend or break on this score.

Putin is more realist than ideologue, and while he rules as an autocrat at home, he can be engaged by the United States with interest-based realism. The United States and Russia both have military-industrial complexes (as President Dwight Eisenhower termed them) fuelling the current Cold War version 2.0, with media and intellectuals in both countries playing supporting roles. The situation, however, could quickly spiral out of control. Neither Russia nor the United States should be given a free pass, but neither should they be working to increase tensions. The United States need not support Putin, but they should be mindful that irredentists on his right flank, like Alexander Dugin and Igor Girkin, look to build an enlarged ‘Greater Russia.’ The United States must act cautiously. Putin’s fall might not bring democracy but instead the rise of the revanchists and a Cold War that turns hot.

Steve Bannon (Trump White House Chief Strategist) and General Mike Flynn (former Trump National Security Advisor) held central sway in Donald Trump’s administration and have shared outlooks on Russia. Others, however, such as Trump’s Secretary of Defense, General James (aka, “Mad Dog”) Mattis, perceive Russia in its traditional role from “central casting” as villain to America’s hero. President Trump’s Secretary of State, Rex Tillerson, seems to sit between these two camps. Presently, the only constant on messaging is chaos. The pressures for Donald Trump to reprise the traditional hostility between Russia and the United States are immense. Expect Trump to eventually bend or break on this score. Flynn has already been removed for seeking rapprochement with Russia. Bannon will be targeted next. A return to chilled relations will reward Russia and the United States’ respective military-industrial-intelligence complexes. They depend (both psychologically and for their livelihoods) on this conflict being maintained. The legion of media and policy consultants in both Russia and the US whose careers are linked to maintaining a Cold War environment will flourish in a return to ‘normalcy’ in a Cold War 2.0. Of course, the danger of this path is a Cold War that eventually turns hot.

Featured photo courtesy: AP / Evan Vucci

 

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About the Author

Jeffrey Sommers is Professor of Political Economy & Public and Senior Fellow, Institute of World Affairs of the University of Wisconsin-Milwaukee and Visiting Professor at the Stockholm School of Economics in Riga. His new book new book (with Charles Woolfson), is The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model. 

 

Cracking the Arab World’s Development Puzzle: Oil or Politics?

By Ibrahim Elbadawi and Hoda Selim

Is the Arab World cursed by its own institutions rather than by oil wealth? These institutions, which have predated oil discoveries, have shaped economic incentives that affect how oil revenue is collected and used, and in turn influenced economic outcomes. Over time, the interaction between oil and politics became intertwined, preventing economic development in Arab countries. As low oil prices risk becoming a new normal, political reforms with checks and balances can turn the curse into a blessing.

 

Introduction

Despite massive hydrocarbon endowments, Arab economies have neither achieved economic prosperity nor became developed. With oil and natural gas discoveries taking place since the first half of the 20th century, Arab countries account for 7 out of the 13 members of the Organization of the Petroleum Exporting Countries (OPEC). They hold close to half of global oil reserves and a quarter of natural gas reserves. They control close to a third of oil production and 14% of natural gas production. And even though the per capita income of some Arab oil-producing economies is high, they would be considered less developed than Norway, a country with more limited oil resources and even Japan, a country without any natural resources. More worryingly, some oil exporters like Sudan and Yemen remain among the world’s poorest economies and have experienced episodes of violent conflict. More importantly, the low oil price environment, considered by some forecasters to be the new norm in the medium-term, raises the question of whether current income levels could be sustained in the future.

Many academics have attributed this disappointing performance to a “curse” which refers to the paradox that countries with an abundance of natural resources often fail to grow as rapidly as those without such resources (Sachs and Warner, 1994). The initial interpretation of the curse rested on pure economic grounds arguing that large resource windfalls lead to Dutch disease, overall macroeconomic volatility and debt overhang, among other ills. Yet this explanation fell short of explaining the successful economic performance of Norway, the world’s seventh largest oil exporter and fourteenth largest oil producer. Chile is another good example of an emerging country which is the world’s largest producer and exporter of copper. This realisation motivated a new strand of the literature that argues that “the curse is real but conditional on the presence of bad institutions” (Collier and Goderis, 2007; and, Elbadawi and Soto, 2016).

 

Dispelling the Oil Curse Myth

Despite their diversity in size, demographics and wealth, the macroeconomic performance of Arab countries has been generally vulnerable to the ebbs and flows of oil prices (Table 1 below). Yet, this article argues that the Arab world is cursed by weak institutions rather than by oil. In particular, weak political institutions have predated resource discoveries and over time have been able to shape economic incentives that affect how resource rents are collected, allocated and used, and therefore influenced economic outcomes (Galal and Selim, 2013). Over time, the interaction between oil and politics became intertwined, preventing these countries from embarking on a sustainable development path. In fact, there is a positive association between oil rents and limited freedom in political rights and civil liberties. More worryingly, Figure 1 (below) shows that oil-rich Arab countries lag behind using these two measures. In 2014 out of the 205 countries covered by Freedom House, 88 were considered “free”, of which none is an Arab oil-rich economy. Only one country is considered partly free, Kuwait. Moreover, most countries, especially in the GCC have not any undertaken meaningful political reform since the 1970s.

 

Table 1. Selected macroeconomic indicators during oil booms and busts

Source: Authors’ calculations based on WEO and WDI databases, 2014.

 

Figure 1. Hydrocarbon rents and Freedom House Scores, 2014

Source: Freedom House and WDI databases

 

As hydrocarbon revenues account for at least two-thirds of their fiscal revenues, many GCC oil-rich governments can afford not only to apply low tax rates but also efficiently redistribute these revenues through labour markets to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes with the ultimate aim of fostering social stability and authoritarian rule.

In this weak institutional step, oil wealth turned Arab governments into rentier states by providing the means to buy off political consent with economic privileges. As hydrocarbon revenues account for at least two-thirds of their fiscal revenues, many GCC oil-rich governments can afford not only to apply low tax rates but also efficiently redistribute these revenues through labour markets to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes with the ultimate aim of fostering social stability and authoritarian rule. The absence of significant political unrest in most GCC economies (with the exception of Bahrain) amid regional turmoil over the past 5 years speaks for that. More concretely, when political unrest mounted in 2011, oil revenues allowed GCC governments to generously appease citizens. Kuwait and Bahrain responded by giving out cash, Bahrain and Oman provided public sector jobs, and Saudi Arabia and Oman raised workers’ wages and benefits. According to Hertog (2012), Saudi Arabia approved an increase in expenditure by US$130 billion to finance the creation of 120,000 new public sector jobs, building 500,000 houses, setting a minimum wage of US$800 in the public sector, provided a one-time bonus to incumbent civil servants and created an unemployment assistance scheme. More generally, the choice of the government to provide high pay to nationals has led to high-reservation wages and creates a disincentive for nationals to invest in skills that are demanded by the private sector. This labour market segmentation crowds out private business and contributes to high unemployment (Alsheikh and Erbas, 2016).

Yet, while it is optimal for resource-rich traditional GCC rulers who govern small populations to offer investment in infrastructure and public sector jobs to effectively remove the incentive to revolt, poorer rentier states with larger populations like Algeria, Yemen and Sudan are only able to maintain political stability through a repressive security apparatus and have indeed experienced conflict, violence and social unrest at some point in time (Ali and Elbadawi, 2016).

 

The Economics of the Political Curse

Arab economies remain heavily dependent on oil in several aspects including domestic production and export earnings as well as fiscal revenue as mentioned before. In fact, oil exports account for above 60% of total exports. Moreover, the oil sector accounts for the majority of GDP, except in Algeria, Bahrain and Yemen and the UAE. More alarmingly, with a few exceptions being Oman, Qatar and the UAE, the manufacturing sector has either shrunk or stagnated over time, especially in countries where exchange rate overvaluation was persistent and/or significant (Selim and Zaki, 2016). And even in countries which have undertook diversification efforts, the size of the manufacturing sector remains remarkably suppressed (less than 11% of GDP) relative to their wealth. Bahrain is an exception where the manufacturing sector accounts for 15% of GDP but has slightly declined over time. More worryingly, Suliman (2016) shows that the discovery of oil in Sudan in the late 1980s quickly displaced cotton, as the leading export crop, shifting the economy from a relatively diversified agricultural base to oil dependence and almost eliminating its manufacturing sector.

Meanwhile, economic performance was disappointing. On the one hand, GCC growth was more severely affected by oil volatility but large oil wealth has maintained the financial sector quite liquid which in turn has been able to allocate ample resources for investments, particularly in infrastructure. On the other, limited resources may have somewhat shielded growth in the populous economies from significant volatility but they have contributed to devastating economic consequences, whether in terms of excessive borrowing, Dutch disease and limited savings (table 1). Unlike the GCC countries, they have failed to use their natural capital to develop the required physical capital to promote much needed economic diversification. As a result, these economies suffer from massive deficiencies in infrastructure investments and an underdeveloped financial sector.

 

Escaping the Curse

In order to escape the curse and achieve sustained growth and development, first and foremost, Arab countries must introduce effective political reforms accompanied by strong system of political checks and balances to limit abuse of political power and hence the misuse of resource rents.

Large oil resources, like those present in the Arab world, are a blessing. They have contributed to better standards of living and have most certainly widened the set of policy choices: they did better than they would have done without resource rents. Notwithstanding this improvement, the economic performance of Arab oil-rich countries has been disappointing, even in the absence of a counterfactual. The modest economic progress made cannot be blamed only on the way the economy was managed or simply on the abundance of oil. It can however be blamed on weak political institutions. In order to escape the curse and achieve sustained growth and development, first and foremost, Arab countries must introduce effective political reforms accompanied by strong system of political checks and balances to limit abuse of political power and hence the misuse of resource rents. As a second best, the adherence to the Extractive Industries Transparency Initiative (EITI) which provides a global standard for transparency in the oil industry and the National Resource Charter (NRC) which offers more comprehensive principles for governments and societies on how to best harness the opportunities for development generated by extractive commodity windfalls, can serve as anchors for enhancing transparency and accountability.

Second, the reform of fiscal institutions would improve resource management, achieve more savings, and release resources for the diversification of the non-oil sector. Because oil is an exhaustible resource, oil countries need to save. Collier (2016) estimates that the GCC must save 30% of their hydrocarbons fiscal revenues starting 2013 which needs to rise to 100% by 2083. The investment of these revenues in financial assets abroad (given few opportunities for domestic investments) through sovereign wealth funds (SWF) is sufficient to ride out revenue volatility. Populous economies which have shorter resource horizons need to save 50% of their hydrocarbons fiscal revenues which needs to rise to 100% by 2043. These countries need both a SWF and a Sovereign Development Fund (SDF) to invest the majority of their wealth in domestic infrastructure either in the form of physical assets or in human capital through improving health care and education of citizens, a process sometimes called “investing in investing” (Collier, 2016). These countries would also greatly benefit from implementing more effective public spending programs to ensure that resources are allocated towards high-quality public investment projects and avoid white elephant wasteful projects.

Moreover, the adoption of fiscal rules would allow governments to determine how much of their resource revenues they can safely spend through the annual budget with the aim of smoothing revenue volatility and potentially mitigating discretionary interventions by governments (Schmidt-Hebbel, 2016). To this end, countries would benefit from setting a target for the structural budget balance on the basis of an estimate of the long-term oil price.

Third, current exchange rate levels are considered to be overvalued in most oil-rich Arab economies, suggesting targeting a competitive real exchange rate to promote non-oil exports. Fourth, another challenge specific to the GCC is to raise educational quality, skills development to raise productivity in order to make nationals more competitive for private sector hiring. As for the populous countries, they need to initiate an aggressive program to encourage economic diversification. To this end, governments should focus on simplifying the complex doing business procedures and improving infrastructure.

To conclude, the best way to turn the curse into a blessing in the Arab World is to improve on the prevailing political institutions, which form the deep roots of the curse and have contributed to poor economic outcomes. Current low oil prices present a window of opportunity for policymakers to undertake many reforms that would embark their economies on a sustainable development.

 

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About the Author

Ibrahim Elbadawi is the Managing Director of the Economic Research Forum as of January 2017. Previously, he was Director at the Economic Policy & Research Center, the Dubai Economic Council and Lead Economist at the Development Research Group of the World Bank. He was Research Director of the African Economic Research Consortium (Nairobi). He published on macroeconomic and development policy and the economics of civil wars and post-conflict transitions. He holds a PhD in economics and statistics from North Carolina State and Northwestern universities.

Hoda Selim is a Senior Economist at the Dubai Economic Council since 2016. Previously, she worked at the Economic Research Forum in Cairo and the World Bank’s Cairo Office. Her recent research focuses on the macroeconomics of oil management and the political economy of development. She holds a PhD from Sciences Po Paris in France.

 

References
1. Ali, Omer and Ibrahim Elbadawi. “The Political Economy of Public Sector Employment in Resource Rich Countries.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
2. Alsheik, Hend and S. Nuri. 2016. “The Oil Curse and Labor Markets: An Illustration from Saudi Arabia.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
3. Collier, Paul. 2016. “Savings and Investment Decisions from Natural Resource Revenues: Implications for Arab Development.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
4. _________ and Benedikt Goderis. 2007. “Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum.” Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.
5. Elbadawi, Ibrahim and Raimundo Soto. 2016. “Resource Rents, Political Institutions and Economic Growth.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
6. Galal, Ahmed and Hoda Selim. 2013. “The Elusive Quest for Economic Development in the Arab Countries.” Middle East Development Journal 5(1):1-33.
7. Hertog, Steffen. 2012. “Redesigning the distributional bargain in the GCC”. Paper presented at the BRISMES Annual Conference 2012 on Revolution and Revolt: Understanding the Forms and Causes of Change. London. 26-28 March.
8. Sachs, Jeffrey, and Andrew Warner. 1995. “Natural Resource Abundance and Economic Growth”. NBER Working Paper 5398. Cambridge, Mass.
9. Selim, Hoda and Chahir Zaki. 2016. “The Institutional Curse of Natural Resources in the Arab World.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
10. Schmidt-Hebbel, Klaus. 2016. “Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.
11. Suliman, Kabbashi. 2016. “Understanding and Avoiding the Oil Curse in Sudan.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

 

Where Next for Syria?

A man reacts amid debris after what activists said were explosive barrels thrown by forces loyal to Syria's President Bashar al-Assad in Al-Shaar neighbourhood of Aleppo April 27, 2014. REUTERS/Hosam Katan (SYRIA - Tags: POLITICS CONFLICT TPX IMAGES OF THE DAY) - RTR3MTUG

By James Denselow

The conflict in Syria has been going on for almost six years and despite events in Aleppo would appear to have the potential to go on for even longer. This piece examines the state of play in the country and examines the current trends arguing that the Syria of the past is unlikely to return and a far weaker, fragmented entity is likely to emerge in future.

 

On the 15th of March 2017, Syrians will mark the sixth anniversary of the crisis that engulfed their country. Many Syrians will mark the date far away from their former homes and the country of their birth. Some have successfully crossed into Europe and are building new lives, others have died trying, yet the vast majority of the nearly five million Syrian refugees remain in the region. Often, these families will be a matter of hours travel from where their lives were once based, but they know the Syria they once knew is gone.

Towards the end of 2016 and the Russian-backed and often Lebanese-Hezbollah led offensive on opposition-held east Aleppo led many to speculate that Assad could be on the verge of “winning” the war, but what “winning” in Syria looks like is important to qualify.

Syria has suffered the most dramatic collapse in terms of state and society of the twenty-first century. The numbers are staggering and create an enormity that is sometimes difficult to process. In addition to the nearly 5 million refugees are the over 6.5 million internally displaced, meaning that roughly half the country has been forced from their homes due to the crisis. Estimates of the dead vary from 200,000 to nearly half a million. The forensic evidence based art of counting casualties has become almost impossible in the black hole that the conflict has created and academics admit they simply don’t know accurately how many have lost their lives.

Whilst the number of dead people may be obscured, the wounded are better understood. The UN assessment published towards the end of 2016 estimated that roughly 30,000 Syrian people were wounded by violence each month and some 9,000 suffered from a permanent disability. The country’s economy has been halved and the World Bank’s conservative estimate is that reconstruction costs alone would add up to some $180bn.

The latest UN and Arab League envoy, Staffan de Mistura, the man with arguably the hardest job on the planet, counted twelve countries and 89 armed groups involved in the fighting on the ground.

So any “victory” has to be put in the context of the cost to date and what sort of country the nominal victor would inherit. Meanwhile Syria still remains a playground for regional and international interests. The latest UN and Arab League envoy, Staffan de Mistura, the man with arguably the hardest job on the planet, counted twelve countries and 89 armed groups involved in the fighting on the ground.

 

Just as Syria is no longer a unitary state, its civil war has many facets and conflicts within conflicts. In December 2016, there were three active offensives evolving simultaneously; the most high profile was the Regime and its allies against opposition groups in Aleppo, Idlib and the Damascus suburbs in particular. Meanwhile “Operation: Euphrates Shield” was a far less reported but still very important push by Turkish-backed forces against ISIS in the north of the country, whilst “Operation: Euphrates Anger” put US-backed mainly Kurdish forces against ISIS in Raqqa, the supposed capital of the “Caliphate”.

The movement of these offensives have been tracked by the Institute for the Study of War whose indispensable maps show the fault lines of the Syria of today and perhaps hint at what the Syria of tomorrow could look like.

The Regime is worth examining closer. Despite the ubiquitous presence of President Assad and his amazingly consistent narrative of the plucky nationalist leader of a country under attack from a conspiracy comprised of enemies from abroad, the reality of where power lies in Syria is more complex.

The loss of so much blood and treasure, whether in terms of the manpower of the army of the resources of the state, forced Assad to compromise in order to survive. Such a compromise did not come at the various Geneva peace conferences that have come and gone but rather to his allies inside the country and crucially in Tehran, Moscow and elsewhere.

Internally, the devolution of power to the National Defense Forces and to groups like the notorious “Shabiha” was a policy born out of necessity. For an authoritarian state to surrender such powers over its monopoly of violence was the only means to hold territory in key areas. The corruption that existed in the regime before 2011, in terms of racketeering and profiting from the informal economy, became something that others could now exploit in a wartime setting. The most dramatic form this took was control of checkpoints, and the bribes and extortion that was required to deal with them. Checkpoints are a manifestation of a crisis in sovereignty and their proliferation in Syria was a symptom of the rapid retreat of the state.

By the end of 2016, a clear picture was emerging in how the regime, bolstered by Russian airpower, Iranian financial support and Iraqi and Lebanese militias, was looking to restore a more assertive posture. Simply put areas that were home to opposition forces would be sealed off and isolated, almost as if the country was identifying diseased parts of its body to remove. These areas, whether large parts of cities like east Aleppo, towns like Madaya or suburbs like Yarmouk, would then be indiscriminately hammered by artillery and air strikes, with the “barrel bomb” becoming symbolic of the levels that the conflict had descended to.

Where there appeared to be the most directed targeting was against civilian infrastructure and hospitals and bakeries in particular. In order to ensure that the tactic of “starve or surrender” worked, the sieges didn’t discriminate between fighters and civilians living within them, they would all suffer together. Occasional glimpses of the consequences of such a slow death emerged as social media showed emaciated children or relayed stories of people resorting to eating grass to survive. Meanwhile schools and medical facilities were being forced underground as the laws that govern such protected spaces seemed unable to penetrate the darkness that had enveloped the country.

In December 2016, the UN revised its estimations of Syrians living under siege to almost a million people; double what is was from the year previous. As abhorrent and illegal the collective punishment was, it was a tactic that undoubtedly worked as opposition groups agreed time and again to accept being transferred out to other parts of the country.

The international community was divided at the UN Security Council about how to handle the Syrian conflict. Even agreements around upholding humanitarian law and principles haemorrhaged legitimacy as resolutions made in New York failed to cut through on the ground. Despite nominal agreements to allow aid to reach the millions of Syrians who needed it, the push back of a shadowy bureaucratic system thwarted it time and time again. Things got so bad in the middle of 2016 that suddenly states started pushing for air drops of aid, expensive and impractical methods but at least symbolic of an attempt to show Syrians living in cut off areas that they were not alone.

In December, as the opposition-held areas of east Aleppo collapsed in on themselves in the face of the sheer weight of firepower aligned against them, even more innovative methods of aid delivery began to be discussed. These included edible drones and remote controlled parachutes that could be directed into targeted locations from outside of Syria’s airspace.

Yet it isn’t technical solutions that will solve Syria’s humanitarian dilemmas but rather political will, and Western powers have to date showed both war weariness and a lack of clarity as to what they should bring to the table. Such indecision was perhaps best typified by the Obama White House, whose rhetoric around “red lines” and a desire to see Assad “transition” out of power informed both the tactics and strategy of certain facets of opposition forces. Such misunderstandings were in contrast to Moscow’s commitment to the regime in Damascus a legacy of historic relations – former President Hafez Assad once trained in Russia as a pilot whilst the then Soviets were responsible for much of the country’s infrastructure during the Cold War period – and opportunity to move into a space seemingly ceded by Washington.

Thus as 2017 begins the momentum is clearly heading in one direction, but as described earlier, the course of the Turkish expansion in the north and what happens if ISIS collapses to the east remain huge unanswered questions. Predictions as to how the conflict will evolve are prone to a huge margin of error considering the chaotic nature of events to date but it would still seem realistic to envisage a fragmented and weak state deeply penetrated by foreign actors and presiding over a hugely divided society. One observer once quipped to me that a Syria of the future would look like “Lebanon on crack” as in addition to sectarian cleavages serious questions remain as to the future of the ethnic Kurdish population in the Arab Republic of Syria.

Whether Trump is ready for Syria, or Syria is ready for Trump is perhaps the most interesting question to examine as we enter the 7th year of the Syrian crisis.

The most unpredictable element in this complicated and bloody equation is of course trying to imagine the foreign policy of President Trump. Whilst some speculate he will fully cede space to Moscow, others wisely hold their judgement on an individual who has made much of actively being unpredictable as a means of achieving results. Whilst Obama’s more lawyerly approached to foreign affairs was masked by his rhetorical skills, Trump is a property magnate who knows that in transactional deals, it doesn’t hurt if your opponents can’t predict what you’ll do next. Whether Trump is ready for Syria, or Syria is ready for Trump is perhaps the most interesting question to examine as we enter the 7th year of the Syrian crisis.

Featured image courtesy: Hosam Katan/Reuters

 

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About the Author

James Denselow is a writer on Middle East politics and security issues and a Director of the New Diplomacy Platform (NDP). He has worked extensively in the Middle East, including research for foreign policy think tank Chatham House, writing and reporting for several media publications and for communications and advocacy work with international NGOs. He is a contributing author to An Iraq of Its Regions: Cornerstones of a Federal Democracy? and America and Iraq: Policy-making, Intervention and Regional Politics Since 1958 and has advised the British Government on its policy towards the Arab Spring. He is a Research Associate at the Foreign Policy Centre (FPC) and a Fellow at the Centre for Syrian Studies (CSS).

 

Understanding India as a Rising Power: An Open Economy and Interdependence* Framework

By Aseema Sinha

India’s global priorities have changed and it seeks power and status and acts more actively at regional and global levels. This article offers an open economy and inter-dependence framework that pays equal attention to the changing nature of the global order but also how internal constituencies within India favour a more engaged and activist agenda.

 

On August 18, 2016, Venezuela’s Foreign Minister, Delcy Rodriguez, visited India on a strange assignment. Venezuela’s foreign minister’s brief was to convince India’s Prime Minister, Narendra Modi, to attend the Nonalignment summit. She did not succeed although India’s Vice President – Hamid Ansari – did attend the summit. India was the founding member of the nonalignment movement and took strong ownership of the movement in the post-war period. In contrast, recently, S. Jaishankar, India’s foreign secretary, is reported to have said: “Blocs and alliances are less relevant today and the world is moving towards a loosely arranged order.”1 Pushpesh Pant, former Professor of International Relations at the Jawaharlal Nehru University reflected on India’s decision not to send the PM in a larger historical context: “We have been aligned with the Americans post-globalisation. And it’s not just happened under Modi. Even the UPA (United Progressive Alliance) did it. They staked their government over the nuclear deal. India’s engagement with the US has been a continuous process; in fact, we can even say PM Modi is reaping the harvests of previous regimes.”2 How do we understand these decisions by many Indian leaders to eschew leadership of the developing world? What are the global and domestic sources for this change in India’s behaviour to seek closeness with the United States and adopt a more distant attitude towards the NAM (Non-aligned movement)?

Now, India, acknowledged by many, is a rising power. Its actions at the global level speak of a slow but sure confidence in its economic prowess, and ability to engage with established powers.

In the cold war era, India was largely bypassed by larger powers and was happy to be isolated. It boasted of its ability to say no to the US and spoke of carving a new third way. At that time, India was an active nonalignment member. Now, India, acknowledged by many, is a rising power. Its actions at the global level speak of a slow but sure confidence in its economic prowess, and ability to engage with established powers. Now, Indian negotiators negotiate more strongly in global institutions such as the IAEA (International Atomic Energy Agency), the WTO (World Trade Organization), and seek to change the rules of the game of the IMF (International Monetary Fund). As an Indian negotiator said to me: “In the old days, India was a free-rider, now it’s a negotiator.”3 India engages with global players on a case-to-case basis and is hesitant to take the leadership of the developing world without a careful analysis of its changing alliances with countries such as the US, or China. India’s changing behaviour needs to be understood in the context of larger global changes but also by understanding how India’s domestic priorities have shifted and become more externally oriented.

 

India’s rising global ambitions and actions have been accompanied by changes at the systemic level and greater activism of other emerging powers such as China. The decline of the Former Soviet Union and Russia has led to a powerful United States alongside with other powers such as the EU, and Japan but also the BRICs: Brazil, India, China and Russia. The G-7 has been replaced by the G-20, which is a larger grouping. These changes in the larger global environment have created more space for regional powers such as India to make claims to a larger global role and argue for increased voice and status. This is most evident in the IMF reform proposed by emerging powers in 2010. In 2010 the International Monetary Fund (IMF) started a comprehensive “quota reform” ultimately shifting approximately 6.41% of the quota shares to the Emerging powers. These quota increases were implemented January 26, 2016.4 China’s SDR share increased from 3.8% to 6% placing it as the 3rd top IMF member. Brazil’s share has increased to 2.32%, India’s SDR quota is now 2.76%, and Russia is now 2.71% – placing all the BRICs nations within the top 10 IMF members, in terms of SDR shares.5 The US’s share is 17.45% still retaining its position as the largest member.6

While emerging powers have become more active at the global level, and the structure of the global system has also become more open and accommodating to the rise of these powers, we also need to explore the domestic changes within countries like India. India’s rise has deeper sources and causes. My research shows that globalisation has begun to shape India in powerful ways. Recently, I published a book titled, Globalizing India. Some of its findings help us understand these developments. I summarse the main findings of this book below.

How has globalisation changed and shaped India? India was a slow reformer and started economic reforms later than usual. In 1990, Indian leaders and diverse actors – not only politicians, and civil servants but also media elites and societal actors – were hesitant about open borders and global trade. A strong consensus in favour of self-reliance and worries about import competition and dangers of the outside world kept India largely closed and inward looking. India trade in goods (merchandise trade) as a share of the GDP was a minuscule 12.7% in 1990. By now (2016), trade in goods and services constitutes almost half of GDP and India’s exporting basket has changed significantly. India now exports engineering goods, chemicals and pharmaceuticals, and has revived its textile and garment industries. Figure 1 below shows this remarkable change.

FIGURE 1. Merchandise Trade as % GDP

Source: Author’s calculations from World Bank, World Development Indicators, 2015.

 

How did this change in India’s activities and priorities happen? India’s growth story is now being written by a wide variety of non-state and state actors and many of these diverse actors have begun to act at the global level or be more active supporters of globalisation within India. Indian MNCs have interests tied to export markets and they may lobby and work at the EU or in Geneva at WTO or WIPO (World Intellectual Property Organization). Interestingly India’s global growth story has been pursued with vigor by political actors such as Narasimha Rao, Atal Bihari Vajpayee, and now Narendra Modi but also regional and national politicians such as Kashiram Rana, Arun Jaitley, Arun Shourie, Jairam Ramesh, Yashwant Sinha, Digvijaya Singh, Piyush Goyal and many others. While the role of technocrats and economists has been well-recognised, recent research reveals the power of political actors in leading the way towards a more open-economy strategic calculus by politicians of varied stripes.7 Transformation amongst India’s political actors is the story beneath the story that we must pay attention to.

It is important to bridge an analysis of global forces with a deep, fine-grained study of different Indian sectors, actors and state agents.

Indian state and private actors have begun to shape India’s global integration in powerful ways, modifying the terms of globalisation, and seeking as much autonomy as possible. Indian actors vigorously seek greater global reach and power in economic forums across the world. Yet, some of India’s strengths have been activated and mobilised in response to global effects. It is important to bridge an analysis of global forces with a deep, fine-grained study of different Indian sectors, actors and state agents.

What does globalisation do? Global forces empower exporters and create new coalitions within a domestic context. They also create new political and economic interests, with stronger ties to the global economy. Where globalisation acts as a constraint, it does so within global markets. There, global rules of the game impose standards and sanctions, which may reveal new information, but also provide hard incentives for business firms to discipline themselves and upgrade. So, global effects should not be viewed as unilateral, or static or deterministic. The external forces of globalisation can no longer be conceptualised only as pressure or threats. The power of globalisation is based not on coercion, but rather on Indian consent and Indian ambitions, which have been awakened by global interactions.  

This idea is different from the dominant consensus running through comparative politics and particularly within the study of Indian political economy, which stresses the homegrown character of India’s reform trajectory. Scholars of India believe that domestic debates and pressures should be analysed independently of global interactions. I, in contrast, argue that domestic and international forces are intertwined and shape India’s newfound ambitions and capacities.

Yet, globalisation is not all positive. One possible negative consequence for Indian consumers is that many of India’s firms’ economic decisions are shaped by their global profits rather than oriented towards the welfare of the citizens. These effects are most visible in the field of health where India is the pharmacy of the world but prices its HIV/AIDs drugs within India at higher than global prices.8 So, in this new globalised world the Indian government needs to be even more vigilant and flexible in crafting its national interest and protecting the welfare of its citizens. In order to do so they have to both defend their companies but also bargain with those companies to provide cheaper drugs and goods for the Indian population.

What are the implications of this analysis for global developments and for how we understand countries like India? Economic changes in the global system intersect with traditional security concerns in a more integral way. But importantly, global institutions such as the International Monetary Fund, the World Bank, the World Trade Organization, and the International Atomic Energy Agency have both geo-political and geo-economic implications. Rising powers such as India are beginning to evolve development-security linked strategies in each of their forums, aiming to enhance their domestic growth and development agendas but also seeking to link their participation in these global forums with their strategic calculations about the role of hegemonic powers such as the US and China. Economic goals and aims have begun to intersect with security concerns and both are played out not only in security arenas at the global level but also within global economic institutions. Studies of economic policies and foreign policies need to study the role of non-state and economic actors as foreign policy agents. Foreign policy and national interest have become broader and encompasses foreign engagement, security policies, economic policies, and society-to-society interchange. We need to see the world through an interdependence framework9 and see India’s security actions through an open economy framework.

Featured image courtesy: CNNMoney

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About the Author

Dr. Aseema Sinha is an Associate Professor and the Wagener Chair of South Asian Politics and George R. Roberts Fellow at Claremont McKenna College. She previously taught at University of Wisconsin-Madison and was a Fellow at the Woodrow Wilson Center in DC. Her research interests relate to political economy of India, India-China comparisons, International Organizations, and the rise of India as an emerging power. She has authored a book, The Regional Roots of Developmental Politics in India: A Divided Leviathan (Indiana: Indiana University Press, 2005), which received a book prize titled, Joseph Elder Book Prize in the Indian Social Sciences. Her book, Globalizing India: How Global Markets and Rules are Shaping India’s Rise to Power was just published with Cambridge University Press.

 

References

* Henry Farrell and Abraham Newman,” Domestic Institutions Beyond the Nation-State: Charting the New Interdependence Approach,” World Politics, Vol. 66, issue 2, April 2014, 331-363.
1. Special Correspondent, “Global Blocs are less Relevant, says Foreign Secretary,” The Hindu, August 18, 2016, accessed at: http://www.thehindu.com/news/national/global-blocs-are-less-relevant-says-foreign-secretary/article9000079.ece
2. Nikita Doval, “Nardendra Modi Skips NAM Summit, the first Indian PM to do so,” The Livemint, Octber 14, 2016, accessed at: http://www.livemint.com/Politics/ectxbpHsJ2XUmRkXXqVbpL/Hamid-Ansari-leaves-for-Venezuela-to-attend-17th-NAM-summit.html
3. Aseema Sinha, Globalizing India: How Global Rule and Markets Are Shaping India’s Rise to Power, Cambridge: Cambridge University Press, 2016.
4. “IMF Members’ Quotas and Voting Power, and IMF Board of Governors.” IMF: International Monetary Fund. Accessed at: https://www.imf.org/external/np/sec/memdir/members.aspx
5. “IMF Reforms: China, India, Brazil, Russia Get Greater Say.” The BRICS Post, January 28, 2016. Accessed October 12, 2016. http://thebricspost.com/imf-reforms-china-india-brazil-russia-get-greater-say/#.V_3HMJMrLeT
6. Ibid
7. Sanjaya Baru, 1991: How P.V. Narasimha Rao Made History, Aleph Book Company 2016.
8.Tricia Olsen and Aseema Sinha. “Linkage Politics and the Persistence of National Policy Autonomy in Emerging Powers: Patents, Profits, and Patients in the Context of TRIPS Compliance,” Business and Politics, Volume 15, issue 3, 323-356.
9. Henry Farrell and Abraham Newman, “Domestic Institutions Beyond the Nation-State: Charting the new Interdependence Approach”, World Politics, Vol. 66, issue 2, 331-363.

Stronger Ethics for Better Leadership Using Confucianism and Systems Theory

By Dr. Sunnie Giles

The lack of high ethical standards in Korea as noted in its current presidential corruption scandal destabilises its political system, produces suboptimal organisational performance, and results in high economic and human costs. Part of this phenomenon can be traced to Confucian and collectivistic sources, where speaking against authorities or group norms is viewed as disrespectful and disharmonious. However, ethical standards in Korea can be strengthened by organised leadership development programs that address current limitations, incorporate complex adaptive systems concepts, reflect neuroscience principles, and harness the Confucian principles that underpin cultural norms and societal expectations.

 

Much has developed since a previous article was published on the political crisis of President Park of South Korea (http://www.worldfinancialreview.com/?p=11543 and http://www.koreatimes.co.kr/www/news/opinon/2016/11/197_217694.html). Such developments include the allegation by the Prosecutor’s Office that Park not only allowed Ms. Choi Soon-sil, her personal friend of forty years, to have access to highly sensitive national intelligence, but proactively extorted contributions from top chaebols to the non-profit organisations Choi was using as a front to accumulate personal wealth. This alleged extortion incited massive public demonstrations to the tune of over one million protestors and propelled impeachment movements from the opposition parties.

According to the latest World Economic Forum Corruption Index,1 Korea is ranked the 9th most corrupt country among the world’s 35 wealthiest countries of the OECD (Organisation for Economic Co-operation and Development). These revelations of corruption at the highest levels of Korean government and business call for a critical review of:[unordered_list style=”bullet”]

  • The relationship between ethics and governmental leadership
  • The relationship between ethics and business leaders
  • Organised leadership development practices in the Korean government
  • Guidance on the implementation of such practices
[/unordered_list]

Ethical standards in Korea can be strengthened by organised leadership development programs, but these programs must:[unordered_list style=”bullet”]

  • Address the inherent limitations of current prevailing leadership development approaches
  • Incorporate the systemic nature of people and organisations
  • Reflect neuroscience principles, especially the implicit need for safety
  • Harness the deep cultural roots and social norms of Confucianism and collectivism (the current misguided application of which contributes to the lack of strong ethical standards in Korea).
[/unordered_list]

Leadership development organised with these components will not only improve ethical standards in business and government practices, but will also improve Korea’s capacity for innovation.

 

1. Ethics and Leadership

Although most of us agree ethics are critical to business and military leadership,2  we don’t have a clear understanding why. My recent research on global leadership for innovation, published in Harvard Business Review, revealed the reason: demonstrating strong moral and ethical values establishes safety because both parties agree on a common set of rules of how the game will be played.3  People handle losing the game a lot better than not knowing the rules.

According to neuroscience principles, our need for safety undermines any other needs we have, including those for connection and learning. Safety is established in the brain stem– the oldest, most primitive part of our brain – and is governed through the autonomic nervous system. The determination of safety happens within eight milliseconds after the incoming signal is received. That same signal takes up to 2 seconds to reach our cognitive cortex brain, where we assign meaning, and activate the amygdala if the executive decision-making function determines that our safety is threatened. Before our cognitive brain is even fully aware, we have already reacted to the threat with a suboptimal response of contracting, withdrawing, attacking, or saying what we think they are looking for with no intention of following through. These are suboptimal reactions because the best part of the human brain – the cortex, where executive decision-making and innovation happens – doesn’t even get a chance to engage when we are battling for safety in the lower, less-evolved regions of the brain. And all of this happens below our conscious awareness.

When we see leaders being inconsistent between their words and actions, and who don’t demonstrate high ethical values, our sense of safety is violated, and our brain stem working with the amygdala activates those suboptimal responses.

When we see leaders being inconsistent between their words and actions, and who don’t demonstrate high ethical values, our sense of safety is violated, and our brain stem working with the amygdala activates those suboptimal responses. Strong ethics activate a sense of safety; we can then move to the higher regions of the brain, where we form connection and use our best executive decision-making capabilities. Thus, ethical leaders create more cohesive teams and gain influence and commitment by demonstrating strong personal characteristics and values.

 

2. Ethics and Business Results

In 2015, one of the stories seen most frequently on the front pages of Korean newspapers was how 78 people died from using dehumidifier disinfectants sold by Oxy Reckitt Benckiser (ORB, the Korean office of Reckitt Benckiser) and three others manufacturers in Korea. Government investigators found that ORB manipulated the safety research report by bribing the professors who conducted the research to advertise the disinfectant as safe to the public. They also found evidence of false advertising of safety by other manufacturers. Subsequently, some of the leaders of these organisations have been sentenced to prison terms.

Fast forward one year, to the analysis of why Korea slid four places in a prominent international corruption report since last reported in 2015. The Korea Institute of Public Finance (KIPF) made the connection between the decline in national competitiveness and low business ethics, as well as lack of transparency, explicit.4 KIPF specifically cited the heavily publicised disinfectant scandal as they partially attributed the ranking decline to damaged business ethics.5 According to the 2016 World Competitiveness Yearbook, published by the International Institute for Management Development in Switzerland, Korea ranks 29th out of 61 countries evaluated in overall competitiveness.6

Studies have shown that countries with higher levels of corruption have lower levels of human development, as measured in terms of education, health, and gross national income.7 An increase of corruption by one index point dampens GDP growth by somewhere between 13 and 90 basis points (.13 – .90%) and lowers per capita GDP by $425.  These are important indicators that call for organised development programs to strengthen moral and ethical behaviours and improve transparency in business dealings.

 

3. Organised Leadership Development Programs

Given that all seven South Korean presidents preceding Park have been embroiled in some sort of corruption scandals, that many corporate corruption scandals have plagued the Korean economy, and that corruption has a direct link to human development and national income, a different approach to leadership development is called for in Korea: that of an organised leadership development program in both public and private sectors.

This leadership development program must address the following four limitations of the current prevailing leadership development approaches:[unordered_list style=”bullet”]

  • Current leadership development efforts focus only on what is visible, and only on certain parts of the system as opposed to the whole. Accordingly, the results are temporary and limited in scope. All living organisms – people, termites, trees, economies, and organisations – are complex systems. Because we are systems, any change must be approached at the systemic level to be effective. Any individual change isolated from the system s/he is part of runs into the system’s resistance; hence, the effect of change is limited and short-lived. Current learning models aim to change individual components in isolation from the system and its environment, and so are ineffective.
  • Most current leadership development approaches do not consider the rapidly changing business environment. They are primarily about the individual behaviour and/or belief systems of the leader, including personal leadership, and his/her relationship with followers. This approach is flawed because what is happening in the environment sets the criteria for effective leadership competencies. For example, the leadership development programs in Circuit City and Borders Books didn’t protect the companies from their demise partly because the goal of the programs was not tied to winning in the rapidly changing environment.
  • Leadership development efforts must focus on changing the beliefs and behaviours of individuals. Organisational change happens when individuals change beliefs and behaviours. Problems and desired behaviours must be clearly defined; individuals must understand tangible actions they can take to improve.
  • Most current leadership development approaches provide no quantitative mechanism to understand the bottom-line impact of the necessary change. This is where an ethical dilemma is likely to turn into an ethical lapse. Clearly establishing the bottom-line impact of desired leadership competencies helps leaders understand that being good produces good business. For instance, if leaders are given change goals to improve their leadership competencies and they are up against a quarterly close, without a solid understanding of the bottom-line impact of the change they are trying to bring about, they are all too likely to fall into the trap of “Just this once” or “Once I have met my quarterly goals, then I will…”[/unordered_list]

To address these limitations, a leadership development approach must reflect the systemic nature of people and organisations in the context of an environment.

We are not islands; we work and live in a context of team, organisation, society, country, world, and universe, all of which work as systems that influence and are influenced by each other. Therefore, any leadership development efforts that do not address this systemic, constructive nature of complex adaptive systems will likely produce suboptimal results. Systemic thinking and considering consequences of their decisions many steps ahead and on other constituencies, not just the immediate rewards, will likely strengthen ethical behaviours.

A leadership development program must be based on neuroscience principles of hierarchical input processing of safety, connection, and executive decision-making (in that order). Leaders must be taught what constitutes a sense of safety among their employees, and that safety trumps all other needs: all goals are likely to be underachieved if safety needs are not met. Leaders must be taught that demonstrating high ethical and moral standards and consistency between words and actions is critical for establishing safety. These neuroscience principles also help us understand that some of the defences we build in response to past perceived threats to safety tend to outlive their usefulness, producing suboptimal, often irrational over-reactions.

When people recognise how their previous misguided beliefs affect their interactions with others, and consciously choose more adaptive beliefs, the result is a dramatic transformation of interpersonal dynamics, leading to breakthrough growth at both individual and organisational levels. A holistic pattern emerges, in which two people or teams can create a whole much greater than the sum of their parts.

Effective leadership development programs must also specify the bottom-line impact of each tangible behaviour or belief change. For example, when leaders understand the impact of the behaviour they are attempting to change (eg: consistency between words and actions) in terms of turnover of the employees they oversee, which translates into operating expense, they are much more likely to prioritise the change, even if they face a higher level of stress at quarter end.

 

4. Cultural Norms and Social Expectations

Confucian principles of filial piety, kinship, loyalty, and righteousness have subtle but far-reaching influence over culturally accepted business practices in Korea. Collectivism prioritises group goals before individual goals; individual needs are sacrificed for the good of the group. These beliefs set the norms and expectations for how relationships are governed, such as between ruler and follower, father and son, older brother and younger brother, husband and wife, and friends. Part of what makes it challenging to establish strong business ethics in Asian countries is rooted in the deep Confucian and collectivistic belief that challenging the hierarchal order and confronting the behaviour of those in power is viewed as disrespectful and disharmonious. This belief makes the whistle-blower wrong. The Confucian principle that reciprocation is expected when kindness is offered is also distorted in practice, as people in authority expect something in return when they make decisions that benefit others.

Due to their ubiquitous influence over societal norms and cultural expectations, effective design and implementation of leadership development programs must harness Confucianism and collectivism to establish strong ethics.

Due to their ubiquitous influence over societal norms and cultural expectations, effective design and implementation of leadership development programs must harness Confucianism and collectivism to establish strong ethics.

Confucianism presents two archetypal leaders – gunja (gentleman) and soin (small person). Gunja refers to a leader who possesses moral scruples, strong personal characteristics, political capabilities, and cultured humanistic viewpoints.1 He is a leader who constantly censors himself and aims to perfect his moral compass. His ultimate goal, in all his dealings with others and self, is in (mercy). He fulfils his duty as a leader, follower, parent, child, husband, older brother, younger brother, and friend. He practices the Confucian Golden Rule: he does not force on others something that he himself dislikes. Gunja is also characterised by ye (courtesy, or proprieties of behaviour).

On the other hand, soin literally means a small person, and refers to a leader who seeks personal gain even if it means harming others in the process. Soin does not practice mercy or courtesy.

Unfortunately, somewhere along the process, some of these Confucian principles have been distorted and other parts exaggerated out of balance, resulting in the current lapse of strong ethics in leaders in high office. Returning to these Confucian roots, which underpin the Korean collective subconscious, and bringing them to the forefront of leadership development, can raise the overall ethical standards.

 

Conclusion

The recent presidential corruption scandal in Korea calls for organised leadership development programs that address some of the inherent limitations of current practices in both business and government. These programs must incorporate complex adaptive systems principles which factor in the current environment as well as the interactions between the members of a unit. They must also utilise neuroscience principles, especially the primal need for safety, to unleash the full potential of the human brain. Although part of the corruption observed in Korea can be traced to its Confucian roots, returning to core Confucian principles and capitalising on the concept of the Confucian Golden Rule and gunja can be a powerful tool in restoring the high ethical standards originally intended in Confucianism.

 

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About the Author

Dr. Sunnie Giles, is President of the Quantum Leadership Group, which is based in the United States. She works as an executive coach, leadership development consultant, and organisational scientist. She has an MBA from the University of Chicago and Ph.D. in Marriage and Family Therapy from Brigham Young University. She worked as an executive in several Fortune 500 companies, including Samsung, IBM, and Accenture. For more information, visit www.sunniegiles.com.

 

References

*In this section, gunja and soin are referred to as third-person male to be true to the original text, written 2,500 years ago when leadership positions were held almost exclusively by men
1. http://www.businessinsider.com/wef-corruption-index-the-most-corrupt-countries-in-the-oecd-2016-9/#10-poland-2
2. Ciulla, Joanne B., ed. Ethics, the heart of leadership. ABC-CLIO, 2014.
3. https://hbr.org/2016/03/the-most-important-leadership-competencies-according-to-leaders-around-the-world?
4. http://www.kipf.re.kr/TaxFiscalPubInfo/TaxFiscalPubTrends_DomTrends-View/2016%EB%85%84-IMD-%EA%B5%AD%EA%B0%80%EA%B2%BD%EC%9F%81%EB%A0%A5-%ED%8F%89%EA%B0%80-%EA%B2%B0%EA%B3%BC/523928
5. https://ko.wikipedia.org/wiki/%EA%B0%80%EC%8A%B5%EA%B8%B0_%EC%82%B4%EA%B7%A0%EC%A0%9C_%EC%82%AC%EA%B1%B4
6. http://www.imd.org/uupload/imd.website/wcc/scoreboard.pdf
7. Rose-Ackerman, Susan, and Bonnie J. Palifka. Corruption and government: Causes, consequences, and reform. Cambridge university press, 2016.

 

Better Capitalised Banks Lend More and Lend Better

"The Royal Stock Exchange, City of London, UK, at night"

By Stephen G. Cecchetti & Kermit L. Schoenholtz

Are higher capital requirements really a drag on economic growth? Many people seem to think so. We disagree. In this essay, we describe how better capitalised banks experience lower funding costs, and how undercapitalised banks have an incentive to “evergreen” loans to low-quality firms. Our conclusion is that higher capital requirements are good for economic growth, resulting in both more lending and better lending.

 

Many people seem to think that when capital requirements increase, banks lend less. Adherents of this view go on to argue that, since credit is essential for economic growth, we should not impose overly tough constraints on banks. This is the basis for the conclusion that we have gone too far in making the financial system safe and the cost is lower growth and employment.

US Treasury Secretary-designate Steven Mnuchin appears to share the view that financial regulation has restrained the supply of credit: in a recent interview, he is quoted as saying “The number one problem with Dodd-Frank is that it’s way too complicated and cuts back lending.”1 One interpretation of this is that Secretary-designate Mnuchin will support proposals like House Financial Services Chair Jeb Hensarling’s Financial CHOICE Act to allow banks to opt for a simple capital standard as an alternative to strict regulatory scrutiny.2

Our reaction to this is three-fold. First, for most US banks, which are very small and pose little threat to the financial system, a shift toward simpler capital requirements – so long as they are high enough – may be both effective and efficient; for the largest, most systemic intermediaries, higher capital requirements should still be accompanied by strict oversight. Second, we see no evidence that higher bank capital is associated with lower lending. In fact, quite the opposite. Third, given that the 2007-09 financial crisis was the result of too much borrowing, not all reductions in lending are bad. We take each of these points in turn.3

Recently, we wrote about the Minneapolis Plan to End Too Big to Fail and its proposal to sharply increase required equity in the 13 largest US banks.4 Specifically, the Minneapolis Plan calls for a pure leverage ratio – the ratio of common equity to total assets – of at least 15% and possibly as high as 24%. The current requirement is 6%, and the CHOICE Act would require only 10%. Unlike the CHOICE Act, the Minneapolis Plan also embraces important aspects of current regulation (including stress tests and living wills) to contain the systemic risks of the largest, most complex, and most interconnected banks, while simplifying regulatory compliance for small banks that do not pose a threat to the financial system. We believe that the Minneapolis Plan provides a solid basis for legislation that would advance the public goal of making the financial system safe in a cost-effective way.

 

Important in this conclusion is our judgment that higher capital does not hamper the aggregate supply of credit. The alternative view appears to posit a choice between bank balance sheet consolidation, on the one hand, and credit growth, on the other. In fact, there is no inconsistency between making banks safer and ensuring long-run growth of credit. To see why, recall that from the bank’s perspective, equity capital is one of the sources of funds while loans and securities acquisitions are uses of funds. That is, the former is a liability while the latter are assets. In theory, an increase in bank equity can be used to fund an increase in credit provision.

But that’s theory, what about experience? Here, the evidence is compelling: strong banks lend to healthy borrowers, weak banks don’t. On the quantity of lending, countries with better capitalised banking systems prior to the start of the crisis in 2006, experienced stronger lending growth during and after the crisis.5 That is, higher capital did not slow recovery. Furthermore, research at the BIS has established that better capitalised banks experience lower funding costs, higher growth of debt funding, and higher growth of lending volumes.6

Turning to the quality of loans, scholarly studies examine both Japan and Europe. Caballero, Hoshi and Kashyap describe how, in the 1990s, regulatory forbearance delayed a thorough recapitalisation of Japan’s banks for more than a decade.7 Instead, insolvent Japanese banks made loans to keep insolvent Japanese borrower afloat. In their study of the impact of the ECB’s recent actions, Acharya et al. conclude that extremely accommodative monetary policy had a similar impact.8 That is, undercapitalised euro-area banks had an incentive to evergreen loans to
“low-quality” firms.

These results rely on data from a range of countries. What happens in the United States when bank capitalisation rises and falls? To answer this question at an aggregate level, we have plotted below bank credit (relative to GDP) on the vertical axis and bank capital (relative to assets) on the horizontal axis. The filled-red circle at the top right is the most recent observation from the third quarter of 2016.

 

Source: Federal Reserve Board, H.8 and Bureau of Economic Analysis, National Income and Product Accounts.

The results are striking: rather than the downward-sloping relationship that critics of higher bank capitalisation anticipate, the relationship is strongly positive. That is, greater reliance of banks on equity funding is associated with an increase of credit!

Finally, there is the fact that decreases in lending are not necessarily bad. In fact, quite the opposite. That is what the studies of Japan and Europe highlight: loans to zombie firms made by weak banks reflect an inefficient allocation of savings and lead to slower economic growth. And surely no one wishes to see a return to the over-indebtedness of US households that contributed to the vulnerability of the financial system in 2007.

We also believe that, given the experience of the financial crisis, it is essential to ensure that borrowers are able to repay, both to protect the financial system and to protect taxpayers.9 The latter concern applies to mortgage borrowing, which is now effectively guaranteed by the US government through the government-sponsored enterprises (GSEs). It also applies to student loans, which (in addition to being guaranteed by the federal government) account for nearly half of consumer credit and create decades-long financial burdens that are virtually impossible to escape even through personal bankruptcy. And then there is payday lending, which, while frequently beneficial, can also be exploited to prey on the least well-off in the United States and has been a focus of both the US Department of Defense and the Consumer Finance Protection Bureau.

So, what has happened to US indebtedness since the financial crisis? BIS data show that aggregate credit to the US private non-financial sector peaked at the height of the crisis (the third quarter of 2008) at 169.3% of GDP; the latest reading (first quarter of 2016) puts it at 150.1%. Virtually all of this drop is accounted for by the decline of credit to households – from 97.1% to 78.4%. And, since only a bit more than one fourth of the decline reflects a fall in bank credit, most of it arises from the behaviour of nonbank intermediaries.

Data from the Federal Reserve Bank of New York highlight this changing mix of intermediation that, in our view, has made the financial system more resilient and less vulnerable since the crisis. The following chart depicts the evolution since 1960 of the liabilities of three important components of the financial system: commercial banks; broker-dealers and bank holding companies (BHCs); and shadow banks (net of their own holdings of other shadow banks’ liabilities). While the commercial banking system has grown since 2007, the other segments have shrunk. Specifically, over this nine-year period, shadow banking has plunged from 120% of GDP to 76% of GDP (that’s from a peak of $18.0 trillion to a current level of $13.4 trillion). A substantial portion of this correction occurred before the July 2010 enactment of the Dodd-Frank Act, reflecting the crisis-driven demise of the underlying business model of wholesale banking without deposit insurance or a lender of last resort.

 

BHC Bank holding company. Source: Financial Accounts of the United States; Adrian, Tobias, Daniel Covitz, Nellie Liang (2013) Financial Stability Monitoring, Federal Reserve Bank of New York Staff Report 601. Updates courtesy of the FRBNY.

 

We conclude: (1) higher capital levels are associated with more lending, with better lending, or with both; and (2) to the extent that enhanced regulation hampers lending, it is often of the type that makes the financial system less safe and can leave taxpayers on the hook.
From this evidence, we conclude: (1) higher capital levels are associated with more lending, with better lending, or with both; and (2) to the extent that enhanced regulation hampers lending, it is often of the type that makes the financial system less safe and can leave taxpayers on the hook.

To be clear, we do see great scope for improving and simplifying US financial regulation. Among other things, the system could use massive streamlining; the GSEs still need restructuring; living wills and the resolution mechanism should compel systemic intermediaries to self-insure (in order to avoid bailouts); government guarantees need to be properly priced; and the financial infrastructure could be more resilient.10 But, if we’re to make the financial system both safe and efficient, we need not only much higher capital requirements, but also a strict regulatory regime that makes credible the government’s (and legislators’) promise not to bail the most systemic intermediaries.

 

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About the Author

Stephen G. Cecchetti is Professor of International Economics at the Brandeis International Business School, Research Associate at the NBER, and Research Fellow at the CEPR, former Chief Economist at the Bank for International Settlements, and former Director of Research at the Federal Reserve Bank of New York.

Kermit L. Schoenholtz is Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business, Director of NYU Stern’s Center for Global Economy and Business, a member of the Financial Research Advisory Committee of the U.S. Treasury’s Office of Financial Research, and former Global Chief Economist at Citigroup.

References
1. Schlesinger, Jacob M., “Trump Treasury Choice Steven Mnuchin Vows to ‘Strip Back’ Dodd-Frank,” Wall Street Journal, 30 November 2016.
2. See http://financialservices.house.gov/choice/
3. See Schularick, Moritz and Alan M. Taylor, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008” American Economic Review, Vol. 102, No. 2, April 2012, pp. 1029-61.
4. See Cecchetti, Stephen G. and Kermit L. Schoenholtz, “Ending Too Big to Fail,” www.moneyandbanking.com, 28 November 2016 and The Minneapolis Plan to End Too Big to Fail, Federal Reserve Bank of Minneapolis, 16 November 2016.
5. See Cecchetti, Stephen G. and Kermit L. Schoenholtz, “Higher capital requirements didn’t slow the economy,” www.moneyandbanking.com, 15 December 2014.
6. Cecchetti, Stephen G. and Kermit L. Schoenholtz, “Bank Capital and Monetary Policy,” www.moneyandbanking.com, 20 June 2016; and Gambacorta, Leonardo and Hyun Song Shin, “Why Bank Capital Matters for Monetary Policy,” BIS Working Paper No. 558, April 2016.
7. See Caballero, Ricardo J., Takeo Hoshi and Anil K Kashyap, “Zombie Lending and Depressed Restructuring in Japan,” American Economic Review, Vol. 98, No. 5, December 2008, pp. 1943-77.
8. See Acharya, Viral A., Tim Eisert, Christian Eufinger, and Christian W. Hirsch, “Whatever It Takes: The Real Effects of Unconventional Monetary Policy,” unpublished manuscript, October 2016.
9. See Cecchetti, Stephen G. and Kermit L. Schoenholtz, “Rolling the dice, again,” www.moneyandbanking.com, 21 October 2014.
10. For a broader list and discussion of Dodd Frank’s accomplishments and failings see Cecchetti, Stephen G. and Kermit L. Schoenholtz, “Dodd-Frank: Five Years After,” www.moneyandbanking.com, 15 June 2015.

 

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