The Changing Nature of Country Risk in the Age of Globalisation and Donald Trump

November 23, 2017

In today’s global economy, the concept of Country Risk has been evolving. In this article, the author elaborates on the changing nature of country risk, recent events to be considered, and how socio-political stability is a must for market-based capitalism to achieve sustainability.

1. A Changing and Multi-faceted Concept.

Country Risk stems from a set of interdependent economic, financial and socio-political factors specific to a particular country in the global economy; these factors can affect both domestic and foreign economic agents in terms of savings, investment and credit transactions. But Country Risk is no longer what it used to be. Since the late 1990s and more recently in the wake of the Global Financial Crisis, there have been profound changes in the nature and consequences of Country Risk. Donald Trump’s presidency is about to accelerate these changes, contributing to greater uncertainty and more risk. We can identify six radically new dimensions.

First, country risk managers are used to focussing on country-specific risk features, such as balance of payments deficits, exchange rate, indebtedness ratios and political fragility. But the globalised market economy has added a new component of country risk, namely spill-over effect and crisis contamination. Indeed, the full scope and range of the risks economic agents face in the global economy is precisely that this economy is global. This “echo chamber” that propagates and accentuates imbalances is bound to breed volatility and crises. Worldwide income inequalities within and among countries impede the conditions for stable, sustained growth, feeding instead social disorder, migrations, and political upheaval. Many investors and domestic residents, often in rich countries with poor populations, are plagued by failed states. These changing conditions mean that country risk managers have only done part of their job when they analyse the socio-economic and political situation of a specific country.

Second, the traditional divide between developed/emerging countries is at best obsolete, and at worst, a source of errors in country risk assessment. This divide adds a conceptual myopia to the complexity of economic, financial and socio-political risk assessment. Emerging market countries with large external debt and with little export diversification have been the traditional focus of Country Risk. But liquidity and solvency challenges have shifted north-west, towards developed countries. On average, the solvency ratios (i.e. public debt to GDP) are near or above 100% for the majority of developed countries, while many emerging market countries have boasted substantial current account surpluses since the late 1990s. In recent years, such concerns have led rating agencies to shift the risk focus from emerging to developed markets, with a much larger number of downgrades for the latter.

Developed countries with mature and sophisticated legal, regulatory and institutional frameworks are not immune to turbulence.

Third, for long developing countries with weak socio-political institutions have held the monopoly of political volatility. This is no longer true. Developed countries with mature and sophisticated legal, regulatory and institutional frameworks are not immune to turbulence. Drastic adjustment measures in advanced economies have contributed to socio-political turmoil, notably in the EU. Greece, Spain, Portugal and to a lesser extent Italy and France, have witnessed the emergence of radical political parties as a response to the growing discredit of traditional channels of popular mobilisation. The downgrading of developed countries since the inception of the global crisis has, in many cases, been rooted in political risk. When S&Ps lowered the US long-term sovereign rating in August 2011, the agency spotlighted the political uncertainty of American policymaking. Widening wealth gaps, terrorism threats and immigration-driven political radicalism nurtures social volatility in industrialised nations.

Fourth, country risk managers can no longer rely on traditional yardsticks of risk rating and ranking. Volatility, herd instinct and complexity make quantitative assessment of Country Risk at best biased tools and at worst recipes for simplistic outlooks. Rating agencies almost systematically failed to predict crises over the last three decades. Exchange rate depreciation, falling commodity export revenues, deteriorating creditworthiness, and socio-political upheavals have been followed rather than preceded by rating signals. Country Risk in the age of globalisation thus requires managers to be more agile, broad-minded and innovative than in the past. Only an array of converging analytical approaches can lead to a more rigorous examination of the economic, institutional and socio-political fabric that keeps in line or distorts a country’s development path. The latter requires economic growth coupled with those conditions that make it sustainable, including a legitimate political power base, social mobilisation, sound institutions and robust infrastructures.

Fifth, Country Risk has become the by-product of complex intertwining between the public and private sectors. Financial sector weaknesses constitute a new channel of Country Risk due to large sovereign claims that are held by financial institutions which would suffer from bond value declines, including in supposedly more regulated markets such as Japan, the Eurozone, and the United States. As the IMF has warned: “Sovereign risks have been transformed in a number of important ways as a direct consequence of the crisis and major fault lines in the financial sector. As the public sector intervened to support financial institutions, distinctions between sovereign and non-sovereign and private liabilities have been blurred, and public exposure to private risks has increased.”¹

2. The Domestic Dimension of Country Risk.

Domestic residents also face Country Risk from their own country’s socio-economic and political turmoil. A country’s government can take arbitrary decisions that will alter residents’ economic and social prosperity.

The sixth and last change in Country Risk is probably the most important. For too long the definition of country risk analysis has been restricted to the assessment of a foreign entity’s ability and willingness to meet its external obligations in full and on time. This narrow definition concerns only the cross-border claims of foreign economic agents while excluding domestic residents. The exclusive focus on a foreign country’s uncertainty has proved elusive and in many ways risky. How can we explain the massive private capital outflows of residents of Venezuela who strive to mitigate the risk of an abrupt drop in purchasing power and mounting political turmoil? How can we account for the so-called brain drain in Spain in the aftermath of 2008, when thousands of young engineers, architects, and economists fled to work in Germany, Canada or the United States, to escape massive unemployment and shrinking job opportunities? How should we analyse the 15% drop in the pound exchange rate in the wake of the narrow victory of Brexit in June of 2016, feeding inflation and hurting the competitiveness of British industry?

Each of these examples shows that Country Risk is not the monopoly of foreign creditors, exporters, or investors. Domestic residents also face Country Risk from their own country’s socio-economic and political turmoil. A country’s government can take arbitrary decisions that will alter residents’ economic and social prosperity. Private corporations, banks and insurance companies, as well as households, all face the risk of rising uncertainty and a destabilising business environment that will affect profit, investment and revenue opportunities. The man in the street is faced with Country Risk in times of corruption, volatile tax regulations, heavy bureaucracy, inflation, devaluation and negative real interest rates. The range of risk mitigation tools commonly available is rather limited. Risk hedging policies for those whose real value of savings is at stake include cutting consumption, holding gold and shifting liquid assets abroad. A country’s government can become hostile to its own population. In addition, a deterioration in the perception of risk by capital markets and rating agencies will feed back into domestic residents’ environment and well-being.

3. Country Risk in the Age of Donald Trump’s Presidency.

In the United States, domestic sources of Country Risk have been increasing since the turbulent election of Donald Trump in November of 2016. One can distinguish three main sources of Trump-driven volatility, namely, direct, indirect, and collateral sources of Country Risk:

One source of volatility came from the rising uncertainty of financial investment in the US stock market during the tough election campaign of late 2016 between Clinton and Trump. As noted by an investment bank’s report to its clients: “Trump’s election means that financial markets will have to digest additional monetary uncertainty. He has been saying for some time now that interest rates have been too low for too long and that he does not wish to reappoint Janet Yellen.”² Another cause of volatility could stem from the US Congress’ failure to raise the debt ceiling in the Fall of 2017, triggering a chain reaction of higher bond yields, with dramatic consequences for banks, insurance companies and investors globally. As noted by Aon’s political risk experts: “Although the scope and scale of President Trump’s policies are as yet unclear, proposed policies include trade and investment restrictions, greater government spending and lower taxes, resulting in wider fiscal deficits (and greater debt levels) and restrictions on immigration, which may impact remittances.”³ Another cause of uncertainty is the populist, trade protectionist and anti-globalisation stance of Donald Trump that has created widespread anxiety in US companies with stakes in export and import markets in Mexico and Canada. Brookings data show that “the United States trades as much with Canada and Mexico as it does with Japan, Korea, and the BRICS combined. Millions of jobs in US states depend on exports to Canada and Mexico.”⁴ In addition, many companies rely on supply chains with suppliers in Canada and Mexico to import intermediate inputs for the domestic US market or for re-exporting. At stake is the global competitiveness of US manufacturing whose reliance on a much weaker dollar would make imports more expensive without boosting trade markets. Trump’s harsh anti-globalisation rhetoric and his “Buy American” slogan have led governors and mayors to promote investment pledges aimed at reassuring foreign companies whose supply chains nurture employment. Needless to say, the US dependence on oil supplies from both Canada and Mexico could of course not be offset by a diversification of energy resources from the Middle East and still less from Venezuela. Last but not least, an additional cause of uncertainty is Trump’s deregulation objectives that are applauded by free-market fundamentalists while encouraging the financial sector to take excessive risk.

Perhaps still more dangerous is a deeply-rooted split that is emerging between two forces in the United States’ socio-political arena: on the one hand, the traditional institutional set up, including political parties, “mainstream” media, the federal agencies, academia, and the unions; and on the other, a popular base that claims that these institutional actors are discredited and represent a secretive class of globalist bureaucrats. A so-called “deep state” is accused of constituting a disloyal force and powerful inertia in Washington that defends the interests of globalised business against those of the man in the street. Consequently, the strength of traditional media channels is challenged by alternative conservative media groups (such as Breitbart, Infowars, Sinclair Broadcast Group, and to some extent FoxNews).⁵ Donald Trump’s repeated accusations that the mainstream media are dishonest, coupled with dwindling readership, tend to discredit mass channels of public opinion while substituting the direct thrust of presidential tweets and biased news from his most vocal supporters in conservative-leaning digital networks. As noted by Zingales: “Inquisitive, daring and influential media outlets willing to take a strong stand against economic power are essential in a capitalist society. They are our defence against crony capitalism.”⁶

4. Conclusion:

To reach sustainability, market-based capitalism requires a minimum level of socio-political stability to preserve democratic rights and economic inclusiveness. Today, its two main threats come from widening wealth gaps and radical populism whose fertile ground combines global terrorism, corruption, discredited elites and migration flows. When traditional channels of the public voice such as parties, unions and media are bypassed or prove to be ineffective, a crisis of social mediation is not far from the horizon. Frustration and social demands find shortcuts that result in “the age of brutality”. Civil society’s ability to challenge power is an essential component of modernisation. Today, competitive capitalism has become inherently unstable due to mounting scepticism regarding the fair distribution of its benefits and its stubborn myopia concerning the natural environment. Donald Trump in the White House could not be further from representing an impartial arbiter setting fair rules for the game and enforcing them to help level the playing field. Under his “fire and fury” presidency, uncertainty, volatility and hence Country Risk will continue to rise both in the United States and globally.

Featured Image: © Bloomberg | Getty

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About the Author

Michel-Henry Bouchet is Distinguished Global Finance Professor at Skema Business School. After an international career at BNP, the World Bank and the Washington-based Institute of International Finance, he was founder and CEO of Owen Stanley Financial, a specialised advisory firm dealing with debt restructuring strategy for national governments. His next book entitled “Country Risk in the Age of Globalization” will be published by Palgrave-McMillan in the beginning of 2018, together with C. Fishkin and A. Goguel.

References

1. Definition and Measurement of Sovereign Risk Need to be Broadened, Press Release No. 11/91, IMF, Washington, D.C. March 18, 2011.
2. Kempen Capital Management, Turbulence with Trump: Special Report, 9 November 2016.
3. Aon Political Risk report 2017, page 10.
4. Parilla, J. “How US states rely on the NAFTA supply chain”, Brookings, March 30, 2017.
5. The number of readers of the WSJ weakened from 10,13 million in the Fall of 2009 to only 8,5 in 2015-16. https://www.statista.com/statistics/229986/readers-of-the-wall-street-journal-daily-edition/
6. Luigi Zingales, A strong press is best defense against crony capitalism, Financial Times, October 18, 2015.

Anatomy of the Global Economy and Its Implications for Protectionism

November 23, 2017

By Sa’idu Sulaiman

Can protectionism, a major component of mercantilism which was practiced in Europe from 16^th to 18^th century, be well-suited with the global economy in the era of globalisation? This discourse examines the framework of the global economy in the context of advanced globalisation by citing relevant literature and then explains its implications for protectionism. It shows that the global economy is, among others, characterised by interdependence among nations which does not go well with protectionism, and concludes that the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy.

Introduction

The global economy is the sum total of the economies of individuals, corporations and all nations in existence today. It is influencing the economies of individual nations and at the same time being influenced by macroeconomic policies of the individual nations and the economic policies of world bodies like the World Trade Organization, World Bank, International Monetary Fund, etc. Protectionism, a significant component of the 16^th mercantilist economist system that emerged in Europe, is still being pursued to protect national economies from the perceived and real threats of globalism and international competition. It has repercussions for the global economy. The global economy too, as product of the forces of globalisation, has acquired certain features and components which define its anatomy and strengthens its influence on or reactions to protectionist policies. The goals of this article are examining the anatomy of the global economy in the era of globalisation and explaining its implications for protectionism.

Protectionism as an Essential Component of Mercantilism

To understand why protectionism is an essential component of mercantilism or economic nationalism, one needs to know the history mercantilism and its main characteristics and goals. Mercantilism became popular in Europe during the 1500s. It replaced the older, feudal economic system in Western Europe, especially in Netherlands, France and England. In England, the first large-scale and integrative approach to mercantilism was started during the Elizabethan Era (1558-1603). The most notable people in establishing the English mercantilist system include Gerard de Malynes and Thomas Mun, who first articulated the Elizabethan system which was developed further by Josiah Child. Mercantilism was the economic version of warfare that used economics as a means for warfare. It was a form of economic nationalism.¹

Laura LaHaye, an Adjunct Professor at the Illinois Institute of Technology and former research economist with the General Agreement on Tariffs and Trade, writes that the means of achieving the goals of mercantilism include, among others, imposing high tariffs on the importation of finished goods that competed with local manufacturers, and low or no taxes on the importation of raw materials or exotic products. Other goals are imposing low or no taxes on the export of finished goods, and high taxes on the exportation of raw materials. The mercantile system, she adds, “served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state”.² Mercantilism has advantages and disadvantages. It had a positive impact on Britain helping it to turn into the world’s dominant trader and global power. The Italian city-state of Venice, which monopolised the Mediterranean pilgrim and spice trades, prohibited the importation of finished products and forced all Venetian naval traffic to make a stop in Venice regardless of the cargoes final destination. This ensured additional economic activities within Venice and enriched it at its consumers’ expense.³

The first school of economic thought to completely reject mercantilism was that of the physiocrats, a group of French scholars led by François Quesnay (1694-1774).⁴ As advocates of laissez-faire, the physiocrats saw no distinction between domestic and foreign trade and believed that all trade was beneficial both to the trader and the public, in contrast to the mercantilists who perceived trade as a zero-sum game. Adams Smith, who is considered to be greatest critic of mercantilism, regarded the mercantile system as a gigantic conspiracy by manufacturers and merchants against consumers. He demonstrated that trade, when freely initiated, benefitted both parties and that specialisation in production allowed for economies of scale which improved efficiency and growth. He also pointed out that the collusive relationship between government and industry was harmful to the general population.⁵

A study that involved respondents from 33 countries across five continents investigated how the different characteristics of both individuals and countries determine peoples’ support for protectionism. Part of the results indicate that support for protectionism increases when inflation pressures become high despite the fact that trade liberalisation would rationally push prices down. The researchers’ conclusions, among others, are that the best way to overcome the pessimistic view about free trade is to increase peoples’ skills; more educated people are more likely to support free trade wherever they reside; and finally, supply of transparent information about trade restrictions, trade composition and the significance of export sectors and foreign markets might also reduce peoples’ support for protectionism.⁶

The Anatomy of the Global Economy

As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence.

The global economy has parts or causes that give it a form or structure; in other words, it has an anatomy or framework that characterises its form, direction and essence. As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence. As national economies are increasingly being integrated through global trade, the economic growth of a given nation is also increasingly dependent on the economic welfare of its trade partners.⁷

In the current phase of globalisation, changes in policy and technology has brought vertical disintegration of production in several industries while structural change in the global economy is increasingly connected to functional and spatial fragmentation of production and consumption as well as their reintegration through trade. So trade in intermediate goods has grown faster than trade in final goods, leading to a higher degree in interdependence among national production systems and higher exposure to external shocks as depicted by the 2009 global crisis.⁸

The contemporary world, as D Keet explains, conceives the global economy in four different ways:

1. It is seen as an international economic system within which economies of individual nations rapidly being absorbed and disappearing because the economic system is characterised by porous borders and limited policy options that are losing viability and relevance.

2. It is seen as the sum of complex interactions between national economies.

3. The global economy is conceived as a complex combination of national economies or national economies within regional economies, upon which transnational economic agents and international institutions and regulations operate.

4. It is viewed as a dynamic combination of a distinctive supra-national global economy manifested by the independent operations of transnational economic agencies and actors which act upon and interact with the economies of individual nations and with regional economies.⁹

A good example of the interdependence among nations, which is salient in the anatomy of the global economy, comes from the production of the Boeing 787 Dreamliner which is creating significant new employment in a number of nations. The wings of the aircraft are made in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, while the fuselage is made in Japan, Italy and the United States. The horizontal stabilisers are made in Italy, the landing gear in France while the doors are produced in Sweden and France. The production of this aircraft involves 43 suppliers spread over 135 sites around the world collaborating and cooperating with one another for their mutual benefit.¹⁰

From what has been said, it is clear that economies of individual nations are now being absorbed into the global economy. It is further indicated that national economies are losing viability and relevance. The global economy, as depicted above, is characterised by interdependence and complex interactions between national economies and the global economy. The economy of France, for instance, interacts and is acted upon by the European economy, which is a regional economy and by the global economy and the international economic institutions such as the World Bank and the I.M.F. Macroeconomic policy in France could be less effective without the consideration of the influences of the European economy and the global economy.

The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism.

With the ever increasing forces of globalisation, achieving macroeconomic policy objectives by any single nation is becoming increasingly ineffective. Nations need to fashion out mutually beneficial globoeconomic policies that will also promote peace and understanding among them. Globoeconomics is defined as the study of macro-economic variables and policies of a nation, region or the entire globe as they influence or are influenced by macroeconomic variables and policies of other nations or regions as a result of globalisation.¹¹

Globalisation has been in existence for a long time though being manifested in different forms. It will never cease to exist. It will continue to influence economies of the world in both positive and negative ways. The global economy will prosper when world leaders and policy makers prefer positive globalism to nationalism. The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism. Positive globalism means showing love and concern for humanity in general and taking lawful measures to promote its wellbeing without any form of discrimination, while negative globalism means surrendering the sovereignty of individual nations to an amalgam of a domineering authority or organisation seeking to control them through biased laws and regulations, evil plotting and machinations.¹²

The Implications

One of the main implications of the anatomy of the global economy for protectionism in era of globalisation is that there are little chances for protectionism to yield positive results to individual nations that that adopt it as trade policy, and to their trading partners in the global arena. Another implication is that the global economy, as it is now, is incompatible with protectionist policies because by restricting competition in production of goods and services, protectionism can be counterproductive and by reducing consumer satisfaction and standard of living. It can have negative repercussions on the quality of peoples’ lives.

Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

Geoffrey Garrett recently argues that free trade, which one can see as the opposite of protectionism, improves the living standards of people because it lowers the cost of goods and services and produces economic winners and losers, and that compensating the losers, who are few, concentrated workers that lost their jobs to foreigners, can be away of offsetting its negative effects. He further observes that rapid technological change coupled with economic stagnation in Middle America had caused more pain than free trade. So the biggest challenges for the Trump administration are increasing America’s growth rate and helping more Americans to benefit from the revolution in information technology.¹³

Protectionism can also spur misunderstanding and fan the embers of hatred among members of the international community. Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

Conclusion

Protectionism has been an essential component of the 16^th century mercantilism which had been receiving support and criticisms since that time. The global economy is presently characterised increased interdependence among nations and by complex interactions between national economies and the global economy. With the features it has acquired due to the forces of globalisation, the global economy does not go well with protectionism. Nowadays the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy than the adoption of protectionism or economic nationalism.

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About the Author

Sa’idu Sulaiman is a Chief Lecturer of Economics at the Sa’adatu Rimi College of Education, Kano, Nigeria. He is also an author of books such as 12 Facts about Protectionism and the Global Economy, 9 Requirements for Quality Research and Academic Papers, Unforgettable Experiences in Abuja, Manchester and London, two recent novels, The Desperate Migrant and What Matters Most.

References

1. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism
2. Laura LaHay (2008) Mercantilism. Liberty Fund, Inc. Retrieved on February 16, 2017 from http://www.econlib.org/library/Enc/Mercantilism.html
3. Mercantilism. Retrieved on February 13, from https://en.m.wikipedia.org/wiki/Mercantilism
4. Sulaiman, Sa’idu (2012) The Making of Economics: an Introduction to the History of Economic Thought. Kano: Samarib Publishers.
5. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism and Laura LaHay (2008 ) Mercantilism. Liberty Fund, Inc Retrieved on February 16, 2017 from http://www.econlib.org/library/Enc/Mercantilism.html
6. Melgar, Natalia; Milgram-Baleix, Juliette and Rossi1, Máximo (2013) “Explaining Protectionism Support: The Role of Economic Factors” International Scholarly Research Notices (ISRN) Economics.Volume 2013 (2013), 14 pages. Accessed of September 12, 2017 from https://www.hindawi.com/journals/isrn/2013/954071/
7. AAG Centre for Global Geography Education (undated) Global Economy Module: Conceptual Framework. Retrieved on September 11, 2017
8. Memedovic, Olga and Lapadare, Lelio (2009) Structural Change in the World in the World Economy: Main Features and Trends, Research and Statistics Branch Working Paper 24/2009. United Nations Industrial Development Organization. Retrieved on September 11, 2017 from http://www.unido.org>Pub_free>Structrural_change_in-the_world_economy.pdf
9. Keet, D. 1999, Globalization and Regionalization: Contradictory Tendencies, Counteractive Tactics or Strategic Possibilities. (Braamfontein: The Foundation for Global Dialogue)
10. Organisation for Economic Co-operation and Development (2017) Why open markets matter OECD Direct. Retrieved on September 12, 2017 from http://www.oecd.org/trade/whyopenmarketsmatter.htm
11. Sulaiman, Sa’idu (2004) The Impact of Globalization on Macroeconomic Policies of Nations and the Need for the Adoption of Globoeconomics, unpublished paper.
12. See Sulaiman, Sa’idu (2017) 12 Facts about Protectionism and the Global Economy. Available at https://www.amazon.com/Facts-About-Protectionism-Global-Economy/dp/1544739036
13. For details, see Wharton School of the University of Pennsylvania (2017) Do Trade Agreements Lead to Income Inequality? Retrieved on February 6, 2017 from http://knowledge.wharton.upenn.edu/article/do-trade-agreements-lead-to-income-inequality/

Getting to Yes with China and North Korea

November 20, 2017

By Walter Clemens, Jr.

We are all for world peace and economic stability. But who holds the key? In this article, the author shares his expert insights on how the United States could come to terms with China and North Korea. In the end, rewards, and not sanctions, might just be the key to a better world.

The United States is Number One in “hard power” that can be used to compel and coerce others to change their behaviour. But Washington can also use its military and economic strengths for “soft power” goals – to persuade and coopt others for joint gains. The United States did so in 1947–1950 when it expended nearly three percent of GDP under the Marshall Plan to help friends and former foes to rebuild and ally for shared objectives. The programme incentivised France to cooperate with Germany and the Benelux countries to cooperate with France. When the US economy slowed, trade with revitalised Europeans kept US factories and workers busy. Mutual gain laid the basis for a shared prosperity and military security community that remain strong after nearly seven decades.

Instead of threatening today’s adversaries around the world, the United States could carry a big stick but also offer positive incentives to resolve disputes. As Roger Fisher and William Ury argued in Getting to Yes, we need to search for arrangements that meet the basic interests of each share-holder.

Two of the major conflicts in East Asia concern China’s claims in its offshore waters and its policies to North Korea. China’s claims islands and rocky outcroppings in the South China Sea and has begun to fortify them. An international court at the Hague has ruled that China has no historic or other right to this territorial aggrandisement. What could Washington offer to persuade China to pull back before an arms conflict ensues with US ships demonstrating their right to sail in international waters? First, Washington could back a programme of cooperation among all the littoral nations – China, the Philippines, Vietnam and others – to develop and share the mineral and fishing riches of the disputed waters. Second, the United States could commit to cutting back its intelligence gathering from ships and planes traversing waters close to the Chinese mainland. Neither step would bring material gain to the United States but could save it from a perilous military confrontation.

The United States should also assure China that – no matter what happens there – US troops will never advance further north than the outskirts of Pyongyang.

With regard to North Korea, Beijing and Washington need to plan for alternative futures. If the regime collapses, Beijing and Washington should agree in advance how to dispose of DPRK nuclear weapons and facilities. The United States should also assure China that – no matter what happens there – US troops will never advance further north than the outskirts of Pyongyang. If the two Koreas merged and nuclear weapons removed, US troops could be withdrawn from the peninsula.

Positive incentives helped achieve the Agreed Framework signed by US and DPRK negotiators in 1994. The North agreed to stop production of plutonium in return for construction of two light water power reactors and – until they began operating – regular deliveries of heavy oil. Both sides denounced the accord in 2002. Washington complained that the North cheated by starting to enrich uranium. Pyongyang countered that the United States broke its obligations. Contrary to Japanese Prime Minister Shinzo Abe,¹ by 2002 construction of the reactors had still not begun and oil deliveries often arrived late. Also, Washington had done nothing to normalise political relations with the DPRK as pledged in 1994.

Today, some US leaders say that “everything is on the table” with North Korea. They claim to prefer diplomacy to war, but some say that “we have tried everything with North Korea and achieved nothing”. Some policy analysts conclude that we must use military force or just settle for deterring another nuclear-armed adversary.

The reality is that the United States and its partners have done little to leverage their economic and other strengths to offer Pyongyang positive inducements to change its behaviour. Indeed, after North Korea’s sixth nuclear test, President Donald Trump denounced as “appeasement” the efforts of South Korea’s president to re-engage the North in sports and other forms of cooperation. Many if not most of America’s leaders are short on empathy. They cannot imagine how the world looks when confronted with huge US-South Korean military exercises that include amphibious landings and missions to “de-capitate” the Pyongyang leadership.

What positive actions could Washington and Seoul offer the North? The US could accept the North’s frequent requests to negotiate a peace treaty to supersede the 1953 armistice. Washington could offer to establish diplomatic relations with Pyongyang. The scope of US-South Korean military exercises could be reduced. In tandem with these moves US and South Korean leaders could demand a freeze of the North’s missile and nuclear tests. The aim would be to trade “security” for “arms control”.

Another kind of inducement is suggested by Shepherd Iverson’s new book Stop North Korea! A Radical New Approach to the North Korean Standoff (Tuttle, 2017). A professor for eight years at Inha University in Incheon, Iverson makes the case for a version of economic statecraft – a buy-out of North Korea as if it were an under-performing corporation controlled by a board of short-sighted, rent-seeking bosses. One could debate all the payouts, but Iverson’s principle would remain: the transfer of billions of dollars to the “enemy” to achieve both unification and de-nuclearisation.

Iverson suggests that the South Korean government and its Bank of Korea, joined by chaebols (such as Samsung) and other private investors, create a multibillion dollar Reunification Investment Fund to rescue and integrate the North. The buy-out would cost $175 billion spread out over seven years. Less than 20 percent of this money would go to elites and military officials who benefit from the existing rule, while the rest would be distributed widely. All this could stimulate a new political economy in which all North Koreans would benefit.

Iverson’s proposal, if implemented, could bring about peaceful unification of the two Koreas and de-nuclearisation of the peninsula in a short time. But could it be adopted by prospective donors and accepted by the powers that be in Pyongyang?

An investment of $175 billion would be a trivial outlay if it prevented war and reduced defence expenditures.

In return for outsiders’ largesse, the North would join the South in a united Korea without nuclear arms. The Bank of Korea and other contributors to the fund would soon recover their investments. All Korea’s neighbours plus the United States and Europe could profit from new business opportunities. Russia would obtain a gas pipeline into all of Korea. China would be freed from a perennial headache and could access Korean minerals. A unified Korea would gain peace and stability, more people and territory, more mineral resources, greater energy security and diversification, valuable Pacific ports, along with rail connections to China, Russia, and continental Europe. The greatest gain for all would be elimination of a serious security threat for every nation in the region and the United States. An investment of $175 billion would be a trivial outlay if it prevented war and reduced defence expenditures.

Iverson does not address whatever financial burdens for South Koreans resulted from integrating North and South. Iverson expects that chaebols and smaller enterprises in the South would make huge profits from freely expanding into the North. But some experts estimate that unification could cost South Koreans from half a trillion to a trillion dollars – far more than the cost of the initial buy-out.

Threats and sanctions (loaded with loopholes) have not halted North Korea’s arms buildup or reduced tensions in Northeast Asia. All the key actors in the region need to think how they could use their assets to create positive values and forge a better future for all parties. Rewards, not sanctions, could be the key to greater prosperity as well as stability.

Featured Image: Chinese President Xi Jinping courtesy of zedbooks.net, US President Donald Trump courtesy of The Independent & North Korean Supreme Leader Kim Jong Un courtesy of KCNA Via KNS/AFP/Getty Images

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About the Author

Walter C. Clemens, Jr. is Associate, Harvard University Davis Center for Russian and Eurasian Studies and Professor Emeritus of Political Science at Boston University. He wrote North Korea and the World: Human Rights, Arms Control, and Strategies for Negotiation (Lexington: University Press of Kentucky, 2016). He can be reached at [email protected].

Reference

1. New York Times, September 18, 2017

Everyone Should Know How Long the American IRS Can Audit

November 20, 2017

By Robert W. Wood

The American IRS is known throughout the world, and FATCA, the US global reporting law, has extended its reach. Everyone should know how long the IRS has to audit or collect taxes under several different statutes of limitation.

Around the world, the IRS has a surprisingly long reach. To begin with US citizens and green card holders must report their worldwide income to the IRS. On top of that, companies and investors that have any US source income must report their income to the IRS too. And then there are the non-tax payment forms, such as FATCA compliance and financial account reporting.

When you consider the power of the IRS, it can be daunting for most anyone. Just look at how the IRS and US Justice Department radically reshaped the previously secretive and powerful world of Swiss banking. The IRS collected over $10 billion, and has now moved on to vast numbers of other offshore jurisdictions.

So, knowing how long you could be in the IRS crosshairs can be good business. The overarching federal tax statute of limitations runs three years after you file your tax return. But don’t stop with that simple rule. There are many exceptions that give the IRS six years or longer, in some cases forever.

The statute is six years if your return includes a “substantial understatement of income”. Generally, this means you have left off more than 25 percent of your gross income. The IRS has argued in court that other items on your tax return that have th e effect of more than a 25 percent understatement of gross income give it an extra three years. For years, there was litigation over what it means to omit income from your return.

In US v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the US Supreme Court slapped down the IRS, holding that overstating your tax basis in assets you sell is not the same as omitting income. But Congress overruled the Supreme Court and gave the IRS six years by statute, so that is the current law.

The overarching federal tax statute of limitations runs three years after you file your tax return. But don’t stop with that simple rule.

The IRS is still going after offshore income and assets in a big way, and that dovetails with another IRS audit rule. The three years is also doubled to six if you omitted more than $5,000 of foreign income (say, interest on an overseas account). This rule applies even if you disclosed the existence of the account on your tax return, and even if you filed an FBAR reporting the existence of the account.

Certain other forms related to foreign assets and foreign gifts or inheritances are also important. If you miss one of these forms, the statute never runs. If you receive a gift or inheritance of over $100,000 from a non-US person, you must file Form 3520. If you fail to file it, your statute of limitations never starts to run.

IRS Form 8938 was added to the tax law by FATCA, the Foreign Account Tax Compliance Act. Form 8938 requires US filers to disclose the details of foreign financial accounts and assets over certain thresholds. If you are required to file Form 8938 and skip it, the IRS clock never even starts to run.

If you own part of a foreign corporation, it can trigger extra reporting, including filing an IRS Form 5471. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, incomplete or inaccurate.

This penalty can apply even if no tax is due on the whole tax return. Even worse, if you fail to file a required Form 5471, your entire tax return remains open for audit indefinitely. Forms 5471 are not only required of US shareholders in controlled foreign corporations. They are also required when a US shareholder acquires stock resulting in 10 percent ownership in any foreign company.

What if you never file a tax return or file a fraudulent one? The IRS has no time limit if you never file a return, or if it can prove civil or criminal fraud. Statute of limitation issues come up frequently, and the facts can become confusing.

Consider what happens if an IRS notice is sent to a partnership, but not to its individual partners. The audit or tax dispute may be ongoing, but you may have no personal notice of it. You might think that your statute has run and that you are in the clear, but partnership tax rules may give the IRS extra time.

Also watch for cases where the statute may be “tolled” (held in abeyance) by an tsummons, even though you have no notice of it. A John Doe summons is issued not to taxpayers, but to banks and other third parties who have relationships with taxpayers. You may have no actual notice that the summons was issued. Yet it can extend your statute of limitations.

This can occur if a promoter has sold you on a tax strategy. The IRS may issue the promoter a summons asking for all the names of his client/customers. While he fights turning those names over, the statute of limitations clock for all of those clients is stopped.

Another situation in which the IRS statute is tolled is where the taxpayer is outside the United States. Even after many years, when you return, you may find that your tax problems can spring back to life.

The statute of limitations is sometimes about good record-keeping. Even being able to prove exactly when you filed your return, or exactly what forms or figures were included in your return, can be critical. For that reason, keep scrupulous records, including proof of when you mailed your returns.

The difference between winning and losing a tax case may depend on your records. The vast majority of IRS disputes are settled, and getting a good or mediocre settlement can hinge on your records too. The statute usually begins to run when a return is filed, so keep certified mail or courier confirmation.

If you file electronically, keep all the electronic data, plus a hard copy of your return. As for record retention, many people feel safe about destroying receipts and back-up data after six or seven years. However, you should never destroy old tax returns. Keep copies forever. Also, do not destroy old receipts if they relate to basis in an asset.

For example, receipts for home remodelling 15 years ago are still relevant, as long as you own the house. You may need to prove your basis when you later sell it, and you will want to claim a basis increase for the remodelling 15 years back. For all these reasons, be careful and keep good records.

It pays to know how far back you can be asked to prove your income, expenses, bank deposits and more. Finally, be careful how you respond to the IRS if you are contacted.

Once a tax assessment is made, the IRS collection statute is typically 10 years. This is the basic collection statute, but in some cases that ten years can essentially be renewed. And there are some cases where the IRS seems to have a memory like an elephant. For example, in Beeler v. Commissioner, T.C. Memo. 2013-130, the Tax Court held Mr. Beeler responsible for 30-year-old payroll tax liabilities.

Conclusion. An IRS audit or investigation can involve targetted questions and requests of proof of particular items only. Alternatively, it might cover the waterfront, asking for proof of virtually every item. Even if you do your best with your taxes, taxes are horribly complex. Innocent mistakes can sometimes be interpreted as suspect, and digging into the past is rarely pleasant.

Records that were at your fingertips when you filed might be buried or gone even a few years later. So, the stakes with these kinds of issues can be large. Tax lawyers and accountants are used to monitoring the duration of their clients’ audit exposure, and so should you. It pays to know how far back you can be asked to prove your income, expenses, bank deposits and more. Finally, be careful how you respond to the IRS if you are contacted.

Featured Image: IRS Headquarters in Washington, D.C. © Shutterstock

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About the Author

Robert W. Wood is a tax lawyer representing clients worldwide from offices at Wood LLP, in San Francisco (www.WoodLLP.com). He is the author of numerous tax books, and writes frequently about taxes for Forbes.com, Tax Notes, and other publications. This discussion is not intended as legal advice.

Indonesia Islamic Economic Project: A Disruptive Initiative for a more Just, Inclusive, and Impactful Finance

November 20, 2017

By Banjaran Surya Indrastomo

Indonesia Islamic economic project was initiated in the periphery and has been expanding significantly in different spectrums generating both authentic and Islamic version of financial institutions. With the recent move by the government to accelerate the development, it has to acknowledge its nature to reach its most potential.

Common presumptive mistake that general observer of Islamic economic in Indonesia would typically have is on the belief that Islamic economic is naturally flourished and accommodated in the most populous Muslim country. Although it is not entirely erroneous to have such initial thought, the fact that the penetration of Islamic finance was considerably low in a country of 219.9 million Muslim,¹ with Islamic banking leading at around 5.3% by end 2016, set a contradicting reality on the ground.² Even, Indonesia was not among top five countries of Islamic finance by size. This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand. Nevertheless, one could not take away the condition and the context over which Islamic economic realisations are taking place in different parts of the world and this is where Indonesia’s story is unique in particular. While most of Islamic economics project elsewhere were initiated by either Muslim regime or dominant Muslim group,³ the inception of the concept and its articulation in Indonesia happened through a bottom-up process involving processes of experimentation, collaboration, negotiation, and institutionalisation. This is where the story is becoming interesting as the Indonesian experience depict more of a civil initiative rather than imposed project in the setting where it could be assumed to be at its most welcomed and synchronised environment. In particular, this initiative was fuelled with spirit to realise just, inclusive, and impactful finance.

This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand.

Indonesia is a late comer in the global Islamic economic wave compared to other experiences. While the first experimental trial in the form of social bank came in Egypt in 1963, Indonesia’s experience began in early 1980s with cooperative-acting-as-microfinance providing Islamic-based financing at a time where Islamic Development Bank and the first Islamic-commercial bank in Dubai have already been established. The first Islamic bank of Indonesia was established ten years after in 1992, causing another delay for expansion and consolidation. This delay was not without a reason: at a time when the regime was consolidating the economy through a centralistic approach, such an idea integrating an experiment into a national plan was not a popular path in developmental planning. A negative stigma to initiative that carry Islamic agenda as a result of unpopular political Islam in the past is worsening any attempt to bring this case legitimate. Hence, when it first came into ground as a micro-level experiment, it is out of the initiative of small group of Islamic economic enthusiast influenced by global spread that was aware with the limited opportunity available for pushing for a bigger agenda of a messo-level institution. Therefore, this particular early stage development was uniquely bottom-up pushed within an available opportunity and rather unconducive environment.

Even though global influence was strong in Indonesian case, the initiative moved within the context of local problem that is already in existence in the ground. In coming with cooperative-acting-as-Islamic-Microfinance that later widely known as Baitul Maal Wa Tamwil, this small group of proponents of Islamic economics was aiming at addressing problems aroused from informal money lending practices that is considered zalim (unjust). This condition was substantiated as a problem aroused out of Riba, a forbidden practice within a transaction that was initially touching upon multiplying the payment from the principal that was popular in the medieval time and then later include the practice of interest taking in the modern time.⁴ The solution offered to this unacceptable practice is a partnership type of arrangement that resets the predetermined rate on giving financing by bringing together individual or groups and financial institution to share both potential risks and return under either Mudharabah or Musharakah contract.⁵ This arrangement is expected to eliminate injustice practice that burden those in need of capital through sharing risks rather than transferring risks. With its nature being an experiment, such initiative faced challenges and difficulties, resulting in series of failures.⁶ Nonetheless, the pursuance for a better model continued, triggering for institutional experiment and emergence in differing part of Indonesia with particular concentration in Java. This was indeed an indication of its focus on the impact.

While the micro expansion continued until end of 1980s, early 1990s period marked the beginning of collaborative initiative in developing Islamic economics through Islamic finance. With the lead of Scholar council, coalitional power that consist of civil leaders, technocrat, and Muslim intellectual was formed.⁷ This sparked new form of initiative that not only brought together different spectrum of influences but also targetted a higher objective within meso and macro level. Two achievements can be highlighted out of this: (i) a recognition of sharing practice in banking Act during deregulation process, and (ii) the formation of the first Islamic bank in Indonesia. These achievements were made possible due to consolidated attempts in different lines to assure that all required changes were there to support such action. For instance, a continuous approach to the regime was facilitated by the link and support from the Muslim intellectual circle whose influence was extended to the presidential circle. Indeed, those progresses were not possible without the consent of the regime. When the regime was on board, the president Suharto himself led the fund raising for the establishment of the bank.⁸ Beyond this process, the success of this collaboration took place through contextualising the presence of Islamic meso and macro products with the existing problem. One of the reason for that collaboration was on the fact this initiative was seen as a common solution to inclusivity in finance. This sourced from the belief that low financial deepening was contributed by religious reason related to prohibition of Riba. As such, Islamic bank in Indonesia was foreseen as a solution to this issue by regulator or regime at a time. On the other hand, Islamic bank was seen as a start for empowering Muslim in Indonesia through equitable financing. Hence, common ground could be reached between those with differing motives.

The progress made was an important milestone for proponent of Islamic economics as their marginal aspiration was institutionalised in later stage. This achievement managed to raise confidence level of those who believe with such structure. Albeit the hurdling regulatory environment within the frame of banking and other financial institutions, the continuous expansion of both Islamic banks and Islamic micro-economic institution along with other supporting institutions such as takaful, Islamic-version of insurance, has allowed the project to strengthen their presence. The collaboration even managed to be extended within Islamic finance ecosystem by fund channelling and other harmonisation attempt to back up those within the ecosystem. This collective mobilisation of capacity and resources in supporting each part has brought that recognition for Islamic finance industry as a legitimated industry. When Asian financial crisis hammered Indonesia in 1997-1998, a positive wave for reforming the financial sector has placed the industry on upper hand as the success of its Islamic bank to pass the crisis was seen as an avenue to strengthen the soundness and resilience of financial system.⁹ Since then, the project has seen an active involvement of regulatory body, especially Bank Indonesia, in facilitating further expansion of the industry and creating public awareness with various programmes. The expansion also stretched beyond intermediary institution toward other platform such as capital market. Regulator of capital market also innovated to allow Islamic capital market to grow with Islamic mutual fund and Sukuk to come together with Jakarta Islamic Index. Choiruzzad considered the leadership of regulatory bodies as timely given the decline of Muslim intellectual presence providing resources and authority to further institutionalised Islamic finance mode through collaboration.¹⁰

Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight.

With regulatory body driving the expansion of Islamic finance, the penetration of Islamic finance became visible as institutional presence soar with the market size of both banking institutions and other micro-oriented Islamic financial institution. In 2016, Islamic banks reached 34 units along with 163 Islamic rural banks spread across Indonesia.¹¹Non-banking institutions also grew in numbers with Takaful companies reaching 58 in number while Shari’ah financing companies and venture capital hit 40 and 7 in total. The total assets of Islamic finance in Indonesia accounted for around Rp. 897.1 Trillion by first quarter of 2017.¹² Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight. This does not include around 4,500 to 5,500 BMTs that spread both in urban and remoted areas opening access of financing to those sub-prime individuals and groups.¹³ It remains a mystery of the size of the total assets of these institutions, yet, some have been growing in size up to the level that it could not be categorised as micro institution. Hence, the expansion of Islamic finance not only happened through mainstreaming process but it also consistently pushed in the periphery serving underprivileged beyond middle class urban Indonesian.

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation. In July 27^th, 2017, the government formed Komite Nasional Keuangan Syari’ah (“National Committee of Shari’ah Finance”) as a coordinating body in facilitating the development of Islamic economic and finance involving multiple stakeholders.¹⁴ This committee function to ensure that the masterplan of Shari’ah finance architecture that officially introduced in World Islamic Economic Forum 2016 can be executed. Within this mandate, this committee worked toward synergising regulators, government and industry, creating a synergised and progressive Shari’ah financial system that accommodate development, implementing the agenda of the masterplan, and integrating with halal-based industry.¹⁵ This move marked the beginning of government leading initiative within a movement that was bottom-up in nature. It is indeed a timely move considering the stagnancy of the industry since it is going mainstream which was contributed by structural issue related to regulation and incentive mechanism within taxation system.¹⁶

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation.

Although the formation of KNKS demonstrate government commitment to foster the expansion of Islamic finance in having stronger presence and contribution to other expanding and halal industries, this move should be observed carefully in relation to disruptive nature of its development so far within the motives to reach just, inclusive, and impactful finance. It could not be denied that this alignment has been long awaited by some proponents of this Islamic economic project. Nevertheless, one should realise that this initiative was indeed periphery nature and concern toward reforming finance to go beyond its business as usual providing access and opportunity for greater masses that happened to be Muslim. When this frame was seen as a mode to mobilise capital, the purpose of this process should not only limit toward money making purpose but also toward a contribution that is in line with the goal of Shari’ah, which is Maqasid itself. This brings finance toward a greater dimension of responsibility to account for stakeholders, especially the underprivileged. For instance, in relation to recent discussion over the use of Hajj fund for development,¹⁷ this should be seen as a positive step stone as such funding would not only strengthen the capitalisation of Islamic financial industry but also exposed toward better management and disclosure standard. The challenge would be on its professionalisation to the extent that any allocation of investment should not only consider pay off but also its effect as well as liability management. As perpetual fund with particular mandate, the utilisation of the fund should first map its liability exposure and construct strategy accordingly without neglecting its responsibility toward national development, including in relation to infrastructure project. Such careful consideration is for the purpose of providing necessary space for Islamic economic project to remain disruptive and impactful in nature opposed to being conformist and structurally determined. Hence, a top-down approach should ensure that enabling mind-set should be put forward in facilitating further expansion of Islamic economic project in Indonesia with such a promising prospect in the future.

Featured Image: Bank Indonesia, the central bank of the Republic of Indonesia © Wikipedia

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About the Author

Banjaran Surya Indrastomo is an Islamic Political Economist by training with research focus on Islamic Economics, Islamic Economic Sociology, and Indonesia Islamic Economic experience. He is an Awardee of the Indonesia Endowment Fund for Education (LPDP) and is registered in the doctoral programme in Islamic Finance at Durham University Business School.

References

1. Badan Pusat Statistik, Statistical Yearbook of Indonesia 2016, https://www.bps.go.id/website/pdf_publikasi/Statistik-Indonesia-2016–_rev.pdf, (August 10, 2017)
2. Islamic Finance Service Board, Islamic Financial Services Industry Stability Report 2016, http://www.ifsb.org/docs/IFSI%20Stability%20Report%202016%20(final).pdf, (August 10, 2017)
3. Henry, C., M and Wilson, R., The Politics of Islamic Finance. (Edinburgh: Edinburgh University Press, 2004).
4. Siddiqi, M., N., “Current State of Knowledge and Development of the Disclipline” (Keynote Address, Roundtable on Islamic Economics, Islamic Research and Training Institute, Jeddah and the Arab Planning Institute, Kuwait, May 26-27, 2004).
5. Ahmad, M., Economics of Islam: A Comparative Study (Lahore: Muhammad Ashraf, 1947).
6. Antonio, M., S. “Islamic Banking in Indonesia”, (unpublished doctoral thesis, University of Melbourne, 2004).
7. Choiruzzad, S., A. and Nugroho, B., E., “Indonesia’s Islamic Economy Project and the Islamic Scholars”, Procedia Environmental Sciences 17 (2013): 957-966.
8. Perwataatmadja, K., A., Membumika Ekonomi Islam di Indonesia, (Depok: Usaha Kami, 1996).
9. Indrastomo, B., S., “The Emergence of Islamic Economic Movement in Indonesia”, Kyoto Bulletin of Islamic Area Studies, 9 (March 2016): 62-78.
10. Choiruzzad, S., A., “The Central Bank in the Development of Islamic Economy Project in Indonesia: Role, Motivations, and Moderating Effect”, The Ritsumeikan Journal of International Studies 25, 2 (2012): 125-172.
11. Otoritas Jasa Keuangan, Laporan Triwulanan Triwulan I – 2017, http://www.ojk.go.id/id/data-dan-statistik/ojk/Documents/Pages/Laporan-Triwulan-I—2017/Laporan%20Triwulan%20I-2017.pdf, (August 10, 2017)
12. Ibid
13. Bappenas, Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syari’ah Indonesia (Jakarta, 2017)
14. Geotimes, Presiden Resmikan KNKS untuk Kembangkan Perbankan Syariah <https://geotimes.co.id/presiden-resmikan-knks-untuk-kembangkan-perbankan-syariah/> [accessed 10 August 2017]
15. Bappenas, Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syari’ah Indonesia (Jakarta, 2017)
16. Thomson Reuters, Indonesia Islamic Finance Report: Prospects for Exponential Growth, <https://ceif.iba.edu.pk/pdf/ThomsonReuters-IndonesiaIslamicFinanceReportProspectsforExponentialGrowth.pdf> [accessed 10 August 2017]
17. Suryowati, E. Investasi Dana Haji untuk Infrastruktur Dikhawatirkan Bias Kepentingan http://nasional.kompas.com/read/2017/07/31/12345301/investasi-dana-haji-untuk-infrastruktur-dikhawatirkan-bias-kepentingan [accessed 10 August 2017]

Trump’s Asia Tour: From Old Conflicts to New Prospects

November 16, 2017

By Dan Steinbock

Trump’s gruelling 12-day Asia tour was a quest for mega deals. US policies in Asia are shifting. The stress on competitive strategic visions is being redefined by historic bilateral economic opportunities with China, Vietnam, South Korea, the Philippines and other ASEAN and APEC nations.

Diplomatic history has its ironies. In the Obama era, US President initiated a pivot to Asia that he had little time to visit. In the Trump era, US President has been so busy fortressing America against the world that he has had to spend more time in Asia to tame rumours about US disengagement.

This time President Trump’s strategic objective was in lucrative deal-making, which proved historical. In the future “America First” issues are likely to return with gusto, especially as the White House’s future is overshadowed by the Mueller investigation at home.

Golf, Trade and Arms in Japan

Besides golf with Prime Minister Shinzo Abe, Trump had a good reason to start his Asian tour in Japan. Outside of North America, Japan is America’s third-largest export market and second-largest source of imports. Japanese firms are the second-largest source of foreign direct investment (FDI) in the US, and Japanese investors are the largest foreign holders of US treasuries.

The aging Japan has a critical role in a containment scenario, which Washington would seize against Beijing, should the US-China bilateral relations fall apart.

Ever since Trump withdrew from the Trans-Pacific Partnership (TPP), the White House’s focus has been on a redefined bilateral trade deal with Japan that would also include significant arms deals. Strategically, the alliance rests on the forward deployment of 50,000 US troops and other US military assets in Japan, including the controversial Okinawa base.

After decades of secular stagnation, Japanese politics has been more stable after the victories of Abe’s Liberal Democratic Party in the 2012, 2016 and 2017 elections. But instead of seizing the historic opportunity to use political consolidation to reignite the Japanese economy, Abe has pursued controversial strategic initiatives, including re-militarisation, the US-style 2015 security legislation, and re-nuclearisation.

Ménage à Trois in the Korean Peninsula

Since the early 1950s, the Mutual Defense Treaty has allowed the US to dominate South Korea’s military defence. Today, some 29,000 US troops are based in the country, which is included under the US “nuclear umbrella”.

Realistically, the harder Trump will push Seoul economically, the more he will stand to lose strategically – and vice versa.

However, after the Park impeachment, South Korea opted for a strategic U-turn in economy and strategic relations. Elected in May 2017, President Moon Jae-in is no friend of the US anti-missile system (THAAD); he supports sanctions against North Korea, but only as long as it is aimed at bringing Pyongyang to the negotiating table.Moon does not accept the past Park-Obama “sanctions-only” approach toward North Korea, which the Trump administration has escalated with its “maximum pressure” principle.

South Korea remains the US’s seventh-largest trading partner and the US is South Korea’s second-largest trading partner. The two economies are joined by the Korea-US Free Trade Agreement (KORUS FTA). While the Trump administration has stated its intent to review and renegotiate the deal, it has not specified what it would like to amend.

Realistically, the harder Trump will push Seoul economically, the more he will stand to lose strategically – and vice versa.

Historic Deals to Avoid a Clash with China

In 2016, US-China trade amounted to $579 billion, while Trump’s singular focus is on the $368 billion trade deficit. Yet, merchandise trade is only one aspect of the broad bilateral economic relationship. Today, China is US’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.

During his tour, Trump was accompanied by CEOs of 30 companies. Hungry for huge deals, the last thing they wanted was Trump to undermine access to the $400 billion Chinese market, based on US exports to China, sales by US foreign affiliates in China, and re-exports of US products through Hong Kong to China.

The same goes for services, foreign direct investment (FDI) and US Treasury securities. China is America’s fourth largest services trading partner (at $70 billion), third-largest services export market, and US has a major services trade surplus with China. The combined annual US-China investment passed $60 billion in 2016, but there is room for far more as China has become the world’s third-largest source of global FDI. Finally, China remains the second-largest foreign holder of US Treasury securities ($1.2 billion as of August 2017), which help keep US interest rates low.

In Beijing, the Trump Administration more moderate approach toward China paid off – as evidenced by the historic $254 billion deals.

Nurturing Vietnam as ASEAN’s “Mini-China”

Trump’s tour featured two major Association of Southeast Asian Nations (ASEAN) nations, Vietnam and the Philippines. Since Obama’s military pivot to Asia, Washington has morphed its relationship with Vietnam into a “strategic partnership”.

Vietnam’s rapid growth in bilateral trade can be attributed to the post-1986 domestic economic reforms and US extension of normal trade relations (NTR) status in 2001.

Based on US data, bilateral trade soared from $220 million in 1994 to $45 billion in 2015, which has turned Vietnam into the 13^th-largest source for US imports (but only 37^th-largest destination for US exports). To Washington, Vietnam is a “mini-China”: the second-largest source of US clothing imports, a major source for electrical machinery, footwear, and furniture. While Washington seeks to protect US agricultural interests against Vietnam, the latter sees the regulation of its catfish-like basa imports in the US as protectionism.

Vietnam is hedging its trade bets. While it was a willing participant in the TPP, it is a party to negotiations to the Regional Comprehensive Economic Partnership (RCEP), a pan-Asian regional trade association that currently does not include the US but promotes the interests of emerging nations in Asia Pacific.

Duterte Re-calibration Between US and China

Washington’s ties with its former colony the Philippines grew deep during the controversial Marcos years (1965-86), which led to the end of the US bases in the country (1947-91) and the departure of US forces from the Philippines, and during the Aquino III years (2010-16), which resulted in the Enhanced Defense Cooperation Agreement (EDCA), the return of US forces to the Philippines, rearmament with Pentagon’s support and the escalation of maritime conflicts with China.

Since the 2016 election triumph of Rodrigo Duterte, the US-Philippines relationship has been subject to a recalibration and, in the end of the Obama era, alleged US efforts at destabilisation.

However, the twin periods of close US ties coincided with deep strategic dependency on US, increasing economic polarisation within the country and the spread of drugs, corruption and questionable “narco ties” with the pre-2016 regime.

Since the 2016 election triumph of Rodrigo Duterte, the US-Philippines relationship has been subject to a recalibration and, in the end of the Obama era, alleged US efforts at destabilisation. Duterte’s sovereign foreign policy is less reliant on US security guarantees and benefits from economic relations with China – even as he has been developing more constructive personal ties with the Trump White House.

Duterte has also been able to link the Philippines into the China-supported One Road One Belt (OBOR) initiative, which is vital to his government’s huge “Build, Build, Build” infrastructure program that is paving way to the tripling of the Philippine per capita incomes in the next 25 years.

ASEAN Tribute to the Not-so-benign Hegemon

Trump seeks to review and renegotiate many of the existing trade deals, while challenging the US postwar hub-and-spoke system of security alliances in the region. Unsurprisingly, then, several Association of Southeast Asian Nations (ASEAN), countries – such as Malaysia, Thailand and Singapore – that were not included in the current tour sought to preempt pressures.

During a recent visit, Premier Najib Raza announced that Malaysia’s large national pension fund and provident fund would invest several billion dollars in equity and infrastructure projects in the US as Malaysia Airlines pledged to explore options for acquiring more Boeing jetliners and General Electric engines at $10 billion.

Prime Minister Prayut Chanocha promised Thailand would buy Blackhawk and Lakota helicopters, a Cobra gunship, Harpoon missiles and F-16 fighter jet upgrades, plus 20 new Boeing jetliners for Thai Airways. Siam Cement Group agreed to purchase 155,000 tons of coal while Thai petroleum company PTT will invest in shale gas factories in Ohio. Prayut and Trump signed an MOU to facilitate $6 billion worth of investments that could create over 8,000 jobs in the US.

Tiny but wealthy Singapore followed in the footprints. Prime Minister Lee Hsien Loong showcased Singapore Airlines’ deal with Boeing for buying 39 B787 and B777-9 aircraft, which – as it was said – could create 70,000 jobs in the US.

That is the regional way to offer dollar-tribute to the US hegemon.

US Military Pivot to Asia

Trump’s Asian tour was also about the hard sell of military assets across the region. According to SIPRI, increases in global military spending are now driven by demand in Asia, along with the Middle East. During the Obama military pivot to Asia, Asia/Oceania received most of global imports (43%). Of the 10 largest importers in 2012-16, half were in India, China, Australia, Pakistan and Vietnam.

US dominates imports to its key security allies in East Asia and Oceania; Australia, Japan, and South Korea. In the past, these were thriving economies; today, they are aging and slowing. Growth markets are in emerging Asia, which is less prosperous and thus not willing to pay the US price premium, especially with more cost-efficient arms rivals, such as Russia.

When President Obama gave eloquent speeches about peace, his pivot to Asia contributed to maritime conflicts in the region fuelling demand for weapons. But Pentagon did not cash the profits. Russia accounted for most arms deliveries to Asia and Oceania (37%), followed by the US (27%) and China (10%).

And despite US-India strategic cooperation, Russia dominated arms imports in India (68% of total imports) and Vietnam (88%). Meanwhile, China has become a major arms supplier in Pakistan (68%), Bangladesh (73%), and Myanmar (70%).

From TPP Lite to Real Free Trade in Asia Pacific

After Japan, South Korea, China and Vietnam, Trump attended the Asia Pacific Economic Cooperation (APEC) Summit in Danang, Vietnam, followed by the 50^th Anniversary of ASEAN and 40^th Anniversary of the US-ASEAN Relations in Manila.

While trade ministers from 11 countries announced they would push ahead with a TPP lite, Abe may have seen the newly-named Comprehensive and Progressive Agreement for Trans-Pacific Partnership as a rival to the China-supported RCEP. In reality, it is a shaky TPP lite that will serve as a face-saving measure to him but as a hedge option to other 10 nations.

The US has a role in the ASEAN Economic Community (AEC), APEC and the US-ASEAN Connect Framework – as long as its engagement rests on economic cooperation, not geopolitical destabilisation.

With the failed original TPP, the “America First” doctrine, Washington’s polarisation and the impending impasse of the Mueller investigation, APEC hopes for greater US initiative in the region rest on quick-sand. The best APEC may hope for is long-term US-Chinese cooperation for the Free Trade Area of Asia-Pacific (FTAAP), which focuses on trade and investment and has room for both the US and China.

In this view, the US has a role in the ASEAN Economic Community (AEC), APEC and the US-ASEAN Connect Framework – as long as its engagement rests on economic cooperation, not geopolitical destabilisation. In turn, the ASEAN nations’ integration plan AEC 2025 can benefit from China’s globalisation initiatives, particularly the OBOR and the Asian Infrastructure Investment initiative (AIIP). In contrast, an enforced “America First” doctrine would undermine ASEAN 2025 goals.

A Historical US-Chinese Opportunity

In a defiant address, Trump told the APEC meeting that the US would no longer tolerate “chronic trade abuses”, while Xi announced that globalisation was irreversible. What got lost in the translation was the intriguing fact – and historical opportunity – that the Trump and Xi visions need not be seen as exclusive.

In fact, both the US and Chinese visions support globalisation, but with caveats. Both criticise the old multilateral international banks, though for different reasons. Both believe in rebalancing that is not accompanied by excessive trade deficits and foreign investment that should benefit both investors and destinations.

It is not the competitive US-China visions that offer a new path to the future in Asia Pacific. Rather, it is the inherent commonalities in these approaches that could sustain trade and investment in the region – and globally.

The original commentary was published by China-US Focus on November 15, 2017

Featured Image: President Donald Trump and other leaders do the “ASEAN-way handshake” on stage during the opening ceremony at the ASEAN Summit at the Cultural Center of the Philippines, Nov. 13, 2017, in Manila, Philippines.

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About the Author

Dr. Dan Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS), see http://en.siis.org.cn/. The commentary is part of his SIIS project “China in the Era of Economic Uncertainty and Geopolitical Risk”. For his global advisory activities and other affiliations in the US and Europe, see http://www.differencegroup.net/

It’s Not The Economy, Stupid!

November 13, 2017

By Graham Vanbergen

Europe is slowly spinning out of control. The Centrifugal forces of failing economics and politics are causing populism on the peripheral edges of the bloc. The push for power in Hungary and Poland is also coming to life in Austria and the Czech Republic, which in turn provides oxygen to the ever shrill voices of the secessionist movements that have seen Brexit, the Catalonia crisis and Italy’s Lombardy and Veneto regions calling for independence. They are all connected.

These are the escalating symptoms of political and economic fragility. The concentration of this failure has manifested itself as rising inequality and social injustice. Rights and suffrage go hand in hand and the solidarity of those less fortunate is finally being seen.

Proper analysis of macroeconomics – that is the performance, structure, behaviour and decision-making of an economy as a whole will lead the impartial mind to conclude that average incomes have not just stagnated but declined when factoring in “real” inflation over the last four decades. Whilst citizens see economies recovering from the 2008 bank-driven financial collapse, their own economic experience is now turning into a crisis of daily life. If not for them, then for members of their family, usually the generation below.

Increases in employment have not arrested the fall in living standards for the many whilst corporations see ever-greater levels of capital wealth, enriching their small management teams. This drives an inevitable cycle of lower consumption, that itself pushes down wages and so on.

The employment landscape has also changed considerably over the last four decades. The middle classes have been affected by the rise of high-skill and low-skill work, leaving many no option but to resort to the latter. This large demographic has been “hollowed out”, as so many economists often report today.

Deceptive economic reporting by government masks what is really going on. We might have the lowest unemployment in Britain for forty-four years, but we also have one third of all children living in poverty.¹How can this dichotomy of life in the sixth richest nation on Earth exist?

In 1997, General Motors, Ford, Exxon, Walmart and AT&T were the largest corporations in the USA. Ten years later, not much had changed – it was Walmart, Exxon, General Motors, Ford and General Electric. Another decade on and a seismic shift had already occurred. Apple, Google, Microsoft, Facebook and Amazon are the top dogs with the biggest market capitalisation. Only Exxon Mobil now makes it to the top 10.

General Motors was the largest motor manufacturer in the world from 1931 to 2007. At its peak in the late 1980’s General Motors employed 350,000 workers not including tens of thousands more in the supply chain. In 2016, GM produced 10 million cars with just 200,000 workers.²

These crest fallen corporate manufacturing behemoths that build and sell things, to this day still employ nearly three times as many workers as the so-called frontier firms, now known as tech giants.

Facebook, a company founded in 2004 that employed just 15,000 people ousted GM from the top five US corporations a few years back. And whilst Facebook continues to grow exponentially, its global workforce has barely grown and now sits at just 17,016 (December 2016).

These crest fallen corporate manufacturing behemoths that build and sell things, to this day still employ nearly three times as many workers as the so-called frontier firms, now known as tech giants. The diffusion of wealth is therefore being concentrated into the hands of so few that you can count them on one hand.

This is evidenced by productivity verses wages. Since the beginning of the 1980’s productivity in the US, and many other western economies for that matter, has increased by almost 250 percent.³ In real terms, wages have fallen a very long way behind. From that you can deduct that political influences, those macroeconomic decisions over the economy, have been such that the workforce has not kept up with those productivity gains in any tangible way. Inequality was an unreported output.

In this backdrop, western politicians and economists then forced to “trickle down economic” theory down the throats of its citizens. It hinged on two assumptions: all members of society would benefit from growth, and growth is most likely to come from those with the resources and skills to increase productive output.

As we have since learned, that was the lie of political charlatan’s who were bankrolled by the very corporations who in turn funded shadowy, obscure think tanks and a subservient media to promote nothing more than the economic mirage of excessive neoliberalism.

The “hollowing” out of the middle classes has led to millions entering what Britain politely terms as the “JAM’s” or Just About Managing.⁴ Academics like to refer to these hardworking but poor households as the “precariat” – a social class formed by people suffering from a condition of “existence without predictability or security, which affects both material and psychological welfare”. Nearly 40 percent of all British citizens live in a world dominated by austerity that, by no fault of their own, end up stuck in JAM.

Whilst corporations continue to suck the wealth and well being of nations, the state inevitably picks up the tab for this new and rapidly rising social class who can barely feed their families. Half of all households in Britain are now dependent on state benefits to make ends meet. The shredding of the social contract is leading directly to those centrifugal forces referred to earlier. It is this that is tearing apart the stability of Western democracies.

Economically, this injustice can be demonstrated no better than Amazon’s CEO Jeff Bezos. He is reportedly the world’s richest man, worth a staggering $90 billion. His personal wealth exceeds the annual GDP of two thirds of the world’s economies. To reach such stratospheric wealth his workforce permanently suffers brutally exploitative contracts and low wages the world over. A committee of British MP’s recently concluded that Amazon workers were routinely forced to sign “unintelligible contracts designed to stop them asserting their rights”.

Europe’s real problem is not really immigration, the economy or the threat of the fourth industrial revolution. It is the loss of dignity, the loss of rights and the total loss of social justice as a result of the cynical exploitation of the working and middle classes by those who should know better, by those in power. Blowback is both inevitable and now visibly evident.

When parents cannot feed their children, when families submerge under a sea of un-payable debt, when communities decay, this loss leads to unambiguous frustration and anger. When there is nowhere to go, no choice – anything but the status quo will do. Hence, we see the rise of populism, isolationism and extremism.

Call it what you like, but it’s not the economy on its own that causes these reactionary responses. The economic ideology deployed since the 1980’s is a tool of the selfish and greedy and it has ended up cutting the umbilical chord between the state and its people. Those at the helm have become so corrupted by power and money they still fail to see what ails, fails and ultimately nails everyone else.

History tells us, when the social contract is severed, the state is in deep trouble. If Trump fails to make good on his promise to make America great again, what’s next? If the Conservative party fail to make a good Brexit deal, or indeed, any deal for Britain and the economy sinks into recession, what then?

The American philosopher Richard Rorty gave lectures at University College, London and Trinity College, Cambridge about his controversial 1989 book “Contingency, Irony and Solidarity”. In it Rorty predicted with a high degree of precision that:

“Members of labour unions, and un-organised unskilled workers, will sooner or later realise that their government is not even trying to prevent wages from sinking or to prevent jobs from being exported. Around the same time, they will realise that suburban white-collar workers – themselves desperately afraid of being downsized – are not going to let themselves be taxed to provide social benefits for anyone else.

At that point, something will crack. The non-suburban electorate will decide that the system has failed and start looking around for a strongman to vote for – someone willing to assure them that once he is elected, the smug bureaucrats, tricky lawyers, overpaid bond salesmen and post modernist professors will no longer be calling the shots…

All the resentment which badly educated Americans feel about having their manners dictated to them by college graduates will find an outlet”.

Nearly thirty years later, we have Trump promising to drain the swamp, in a nation fully divided and what many consider to be, on the brink of civil unrest along with its alt-everything’s.

Did Rorty have such foresight as to predict exactly the trajectory of economic theory or did he simply look back in history to see the future?

Pitching workers purely against productivity gains in an age of new technologies will only increase the precarious nature of life already blighting society and community alike.

Bill Clinton’s 1991 election campaign advantageously used the then-prevailing recession in the United States as one of the campaign’s means to successfully unseat George H. W. Bush with the slogan “It’s the economy, stupid.”

Today, taxing what is left of the dwindling middle classes to pay for an austerity they never caused whilst ostentatious billionaires parade across endless front pages of the glossies and financial pages will only accelerate the predictability of Rorty’s thoughts.

At this juncture, politicians still have a choice. Pitching workers purely against productivity gains in an age of new technologies will only increase the precarious nature of life already blighting society and community alike. The tax burden has to revert back to corporate capital. Corporations need to understand their place in society. Society has to be included in economic models that return dignity, rights and justice – because it’s no longer about the economy, stupid!

Featured Image: General Motors’ workers assemble a Cadillac ATS on the assembly line at the General Motors Lansing Grand River Assembly Plant. © Bill Pugliano – Getty Images

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About the Author

Graham Vanbergen’s business career culminated in a Board position in one of Britain’s largest property portfolio’s owned by one of the world’s largest financial institutions of its type. Today, he writes for a number of renowned news and political outlets, is the contributing editor of TruePublica.org.uk and Director of NewsPublica.com.

References

1. (1) BBC – UK Unemployment at 44 year low: http://www.bbc.com/news/business-40947087
2. Fortune 500 – 50 year database: http://archive.fortune.com/magazines/fortune/fortune500_archive/full/1995/
3. The productivity pay gap: http://www.epi.org/productivity-pay-gap/
4. YouGov. Just About Managing: https://yougov.co.uk/news/2016/11/30/who-are-jams-37-britons-say-they-are-just-about-ma/

US-China Trade at Global Crossroads

November 13, 2017

By Dan Steinbock

Despite “America First” policies, President Trump’s economic agenda needs expanding trade with China.

President Donald Trump began his gruelling 12-day Asia tour amid US Special Counsel’s first indictments, which cast a shadow over the White House’s future.

Nevertheless, Trump and President Xi Jinping were able to sign deals worth US$253 billion, which makes the visit to China historic in terms of the value of business agreements struck.

If anything, the visit demonstrates that, despite an insular foreign policy, Trump’s economic objectives cannot be executed without expanding trade with China.

Rapid Trade Expansion

In 2016, US-China trade amounted to $579 billion, while Trump’s singular focus is on the $368 billion trade deficit. Yet, merchandise trade is only one aspect of the broad bilateral economic relationship. Today, China is US’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.

China is the centre for global supply chains, which has greatly lowered US multinationals’ costs and thus prices for US consumers.

The increase of imports from China in the US and the bilateral trade imbalance is largely the result of the shift of production facilities from other, mainly Asian countries to China. Since 1990, the share of US imports from China has soared sevenfold to 26 percent. Today, China is the centre for global supply chains, which has greatly lowered US multinationals’ costs and thus prices for US consumers.

During his tour in Japan, South Korea, China, Vietnam and the Philippines, Trump was accompanied by CEOs of some 30 companies. Determined to sign huge deals during the China visit, they did not want Trump to undermine access to what they see as the $400 billion Chinese market, based on US exports of goods and services to China, sales by US foreign affiliates in China, and re-exports of US products through Hong Kong to China.

The same goes for services, foreign direct investment (FDI) and US Treasury securities. China is America’s fourth largest services trading partner (at $70 billion), third-largest services export market, and US has a major services trade surplus with China.

The combined annual US-China investment passed $60 billion in 2016, but there is room for far more as China is the world’s third-largest source of global FDI.

Finally, China remains the second-largest foreign holder of US Treasury securities ($1.2 billion as of August 2017), which help keep US interest rates low.

Three Scenarios

There are only three probable US-Chinese trade scenarios, after the US directive on steel imports and national security, the recent US-Sino Comprehensive Dialogue, US reliance of Section 301 of the Trade Act of 1974, and the investigation into China over US intellectual property.

In the “Trade Pragmatism” scenario, the White House stance would focus not just on deficits, but other critical bilateral dimensions as well. US multinationals and consumers would continue to benefit from lower costs and prices. Emulating General Electric and Caterpillar, US companies would adopt a more active role in the One Road and One Belt (OBOR) initiatives. Chinese investment would contribute to jobs in America. China-held US Treasuries would keep interest rates moderate. The international role of US dollar would continue to erode, but slowly.

In the “Trade War” scenario, bilateral deficits would dictate the White House’s stance, which would result in progressive deterioration of the bilateral relationship. While corporate giants with major China stakes, such as Apple and Walmart, would be crushed (which would hit hard the US markets), US multinationals would be penalised by higher costs and US consumers by higher prices. American companies would miss historical opportunities in the OBOR initiatives. US would lose Chinese capital and jobs. The bilateral service surplus would shrink.

With the sales of Treasuries, rising interest rates would harm Trump’s $1 trillion infrastructure modernisation. The decline of US diplomacy could threaten the dollar’s global-reserve status, especially as the US petrodollar – dollar spending based on revenues from oil exports – will soon be augmented by China’s petrorenminbi; the use of Chinese yuan in oil transactions.

Until recently, the White House’s stance has reflected a mixture of these two scenarios. But that has come with uncertainty and volatility, which could prove challenging in crisis conditions.

US Reliance on Chinese Market

Private consumption in the US is growing at only 1.6 percent per year; in China, over five times faster.

Over time, America’s reliance on the Chinese market will deepen as per capita incomes in China will double by 2020. According to Credit Suisse, China overtook the US in 2015 as the country with the largest middle class at 109 million adults, as opposed to 92 million in the US.

The future translates to more of the same. Private consumption in the US is growing at only 1.6 percent per year; in China, over five times faster.

The global car industry is a case in point. In the past, American cars dominated the international market. But in 2018-9, unit sales in China will soar to 31 million, which is almost twice the size of the US market. As a result, US companies, from old players such as General Motors to new ones such as Tesla, invest heavily in China, where they sell more cars than in the US.

Other industries will follow in the footprints, the “Trade War” scenario would be a lose-lose proposition not just to the US and China. It would undermine global growth prospects – our future.

The original commentary was released by China Daily on November 10, 2017.

Featured Image: United States President Donald Trump speaks to Chinese leader Xi Jinping, as First Lady Melania Trump and Xi’s wife Peng Liyuan look on, at the Great Hall of the People in Beijing on Nov. 9, 2017. (Jim Watson/AFP/Getty Images)

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About the Author

Dr. Dan Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS), see http://en.siis.org.cn/. The commentary is part of his SIIS project “China in the Era of Economic Uncertainty and Geopolitical Risk”. For his global advisory activities and other affiliations in the US and Europe, see http://www.differencegroup.net/

Iran – President Putin in Tehran – Emissary of Peace and Promoter of Resistance Economy

November 9, 2017

By Peter Koenig

President Putin arrived in Tehran on 1 November for talks with the Ayatollah Khamenei. First, to cement the Nuclear Agreement of 2015 (Vienna), as far as Russia is concerned, thereby sidelining Trump’s attempt at reneging on the agreement. Second, to sign billions worth of tripartite hydrocarbon deals between Russia, Iran and Azerbeijan. And this in ruble. NOT in US dollars, thus, effectively detaching Iran from the dollar hegemony. In other words – helping Iran in de-dollarising her economy – and effectively and drastically contributing to diminishing the dollar’s stance as a world reserve currency. That’s “Resistance Economy” at its best. De-dollarisation is a key principal of the concept of Resistance Economy which also implies economic auto-reliance and trading only with friendly partners.

Iran has full technological, agricultural and intellectual capacity to become self-sufficient. This is a great step towards a new economy – a sea change in economic parameters of freedom and equality. It is in particular a detachment from the uncountable illegal “sanctions” the US is keen on imposing on countries that refuse to follow her dictate. Belonging to another monetary system, trading and investing outside the dollar-dominated western banking system, is like a breath of fresh air.

Other countries may take an example. Venezuela has already done so, by signing hydrocarbon deals with China in Yuan – gold-convertible yuans. Chapeau! – Away from the dollar. For Venezuela, only a few thousand kilometres apart from the border of the great abusive emperor, this is a daring move and a demonstration for Washington of Venezuela’s independence. Venezuela has the support of Russia and China, as both have huge investment and trade agreements in Venezuela, i.e. China in excess of 12 billion dollars of trade agreements alone, one of the largest, if not the largest with any Latin American country.

Washington is aware of it. Threatening Venezuela is therefore more of Trump-type bluff and propaganda than anything else. Besides, US mercenaries and CIA agents were vital in initiating and inciting violent disruptions in Venezuela’s elections, causing more than hundred deaths. Venezuela’s democracy has survived and is a shining example of a peaceful, democratic and sovereign country, despite these vicious outside interferences.

Threatening Venezuela is therefore more of Trump-type bluff and propaganda than anything else.

Iran is also at the point of joining the Shanghai Cooperation Organization (SCO) which comprises China, Russia and most of Eurasia, plus India and Pakistan – embracing about half of the globe’s population and one third of the world’s GDP. The SCO is a strategic economic but also defence association – and foremost, the SCO has an economy free from the dollar dominion. There is a “waiting list” of more countries wanting to join the SCO.

What Mr. Putin said in terms of self-reliance and “sanctions” has worldwide significance. It not only applies to Iran, but to any country across the globe that is tired of corporate globalisation, of the subservience to Washington and of being enslaved by debt. Here are Mr. Putin’s words to the Ayatollah repeated:

“Some Russian producers and traders pray that the US sanctions wouldn’t end, because as a result of them, their capacities have started to attract attention. From 2014, i.e. the start of US sanctions, we devoted our funds to scientific and technological progress, and we had significant growth in the fields of biotechnology, IT, agriculture and space industries. Now, in spite of the initial concerns, we have realised that we can do whatever we decide to.”

These words translate into a new economic paradigm, “local production for local consumption with local money and public banking for a sovereign local economy and sovereign and friendly trading partners”.

The Russian leader also referred to Iran as a vital pillar for stability and peace in the Middle East; he lauded Iran’s role in helping defeat the ISIS/Daesh terror and bringing Syria back into control of Damascus.

In addition, Iran will be part of President Xi (China) initiated New Silk Road, or OBI – “One Belt Initiative” – which is already designed in four routes connecting China and Russia throughout Eurasia, the Middle East – and even Africa – with the western most links of Eurasia, i.e. western Europe – that is, if Europe will finally see the light and accept that the future is in the EAST – also Europe’s future – and that the west, led by Washington into an abyss, is slowly committing suicide by its war atrocities, greed-sponsored terrorism continuous lies. There is no lie that will not be discovered sooner or later – and when that happens a quantum shift in public opinion may take place and the west’s credibility and the fake abusive debt-and-interest based dollar economy will become a collapsing Ponzi scheme.

Iran has chosen – and is well on her way to fully recover from the wrongly and criminally imposed punishments from a nation that has no right whatsoever to police and oppress sovereign nations according to her will.

The One Belt Initiative has the potential for massive economic, scientific and cultural development over the next few centuries, involving trillions of (today’s) dollar in investment and millions of jobs and livelihoods for the populations along the OBI route – with wide-ranging positive socioeconomic repercussions way beyond the geographic OBI sphere. The OBI inspires new dynamics in future socio-economic thinking and relations between nations. Countries are welcome to join the One Belt Road or Initiative, but are never forced, into this new economic direction, one of peace and equality, of a multi-polar world economy and political system.

Iran has chosen – and is well on her way to fully recover from the wrongly and criminally imposed punishments from a nation that has no right whatsoever to police and oppress sovereign nations according to her will. Those times are on a fast track to oblivion.

Featured Image: Russia’s President Vladimir Putin (L) shakes with his Iran’s counterpart Hassan Rouhani in Shanghai on May 2014. (Alexey Druzhini/AFP/Getty Images)

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About the Author

Peter 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.

BRICS – Potential and Future in an Emerging New World Economy

November 8, 2017

By Peter Koenig

The article is based on an interview with Tashreeq Truebody, Radio 786, South Africa. Peter Koenig elaborates on the potential of BRICS in the new emerging global economy where western supremacy would be a thing of the past.

Questions

1. Global Economy and BRICS

Peter Koenig

Let’s put the BRICS in perspective: The BRICS are of course Brazil, Russia, India, China and South Africa. Together they make up for almost 50% of the world population and close to one third of the world’s economic output, or GDP.

This alone would make them fully independent from the western economy, from the western, what I call, fraudulent dollar-based monetary system. And it will happen – it will happen sooner than the world believes. However, with the current political structure of the BRICS, the relative lack of political and economic coherence, safe for Russia and China, this for the moment is just theory.

If you allow me, let’s backtrack a bit in history, to where the term BRIC came from, and who coined it. At the beginning, South Africa was not yet member of the association. In 2001, shortly after the 9/11, in 2001, the chief economist of Goldman Sachs, Jim O’Neill, invented the term BRIC – as he was forecasting that these emerging economies, spread throughout the world, Brazil, Russia, India and China – would overtake the so-called western economy by 2041. The forecast was later revised several times, all the way to 2032 – and now, there is, I believe no formal forecast, but it could easily happen by 2025, or earlier, especially with the new Oil-for-yuan and gold exchange market soon to be opened in Shanghai. Many predict this to be the end of the petro-dollar, and the end of the dollar hegemony.

By 2011, the five countries, Brazil, Russia, India and China – plus South Africa were the five fastest growing emerging markets, and in April 2013, South Africa was added to the BRIC group – to make it formally the BRICS.

Then strangely and formidably the four BRIC countries realised their potential and took things in their own hands. That’s how dynamics work – often totally unpredictably. For sure, Goldman Sachs and their Chief economist had no clue that this would create the western monetary and economic system’s most daunting adversary.

The first BRIC summit was held in Russia in June 2009. That was the formal conference to create the BRICS.

By 2011, the five countries, Brazil, Russia, India and China – plus South Africa were the five fastest growing emerging markets, and in April 2013, South Africa was added to the BRIC group – to make it formally the BRICS.

This just as a little historic introduction – to show that the impetus for the BRIC(S) came actually from a most unlikely western source – Goldman Sachs.

In the meantime, the BRICS are struggling with another reality. For the BRICS to be an effective alternative to the western economy, or the western monetary system, they need a unified political vision, as well as a coherent and unified economic development approach, one that distances itself from the western dollar-euro based system. Unfortunately, today this is not so. But that doesn’t mean it will not happen. Personally, I believe it will. It may just take longer than the majority of the world may have liked.

Both Brazil and India are totally in the hands of Wall Street, the World Bank and the IMF. In the case of India, you will recall last fall’s deadly monetary fiasco, when PM Narendra Modi decided to cancel more than 80% of the countries circulating cash currency, and as an interim step to replace it with other bills and eventually digitalise the Indian economy.

It is not known how many poor Indians perished, those with no access to bank accounts, those who have no alternative means to pay for food. Uncountable small businesses failed – an important impact on the Indian economy. More, much more inhuman was the impact on the poor average Indians. But – Modi followed the dictate of the west, of Wall Street and the IMF – with a programme to test digitalisation in a large emerging economy, implemented by USAID. – How much trust does India under Modi as a BRICS member deserve?

And Brazil under neoliberal Temer, who is under accusation of corruption; he has literally handed his country’s economy to the sharks of Wall Street, the IMF and the WB. So, when Temer and Modi stood there holding hands with the other three BRICS members in Xiamen, China on 4^th and 5^th September – it looked to me like a club that was united only by name.

Yet, the theme of this 9^th BRICS Conference was “BRICS: Stronger Partnership for a Brighter Future”. – I truly hope this objective will be achieved. And it very well may – over time. It is important to approach such an event in a positive and forward-looking spirit.

Perhaps it was along the same philosophy, that ahead of the September summit in Xiamen, President Putin said something crucial, but highly political and highly diplomatic: “It is important that our group’s activities are based on the principles of equality, respect for one another’s opinions and consensus. Within BRICS, nothing is ever forced on anyone. When the approaches of its members do not coincide, we work patiently and carefully to coordinate them. This open and trust-based atmosphere is conducive to the successful implementation of our tasks.”

2. Understanding Industrialisation/Development and the BRICS Bank.

PK

Let’s start with the BRICS development bank, now called New Development Bank (NDB). It emerged as an idea from the Durban BRICS summit in March 2013 and was formally created in 2014, and signed as a Treaty in July 2015.

Under the Agreement the BRICS Development Bank, as it was first called – now the NDB, they set up a “reserve currency pool” of US$ 100 billion. Each of the five-member countries was to allocate an equal share of the US$ 50 billion start-up capital, to be expanded later to the US$ 100 billion.

Contributions per country were, Brazil, $18 billion, Russia $18 billion, India $18 billion, China $41 billion and South Africa $5 billion. The problem is that the initial capital and the Contingency Reserve Arrangement (CRA) of US$ 100 billion was set up in US dollars.

How can they break loose from the western dollar-based monetary system, if their contribution is dollar based?

Contributions per country were, Brazil, $18 billion, Russia $18 billion, India $18 billion, China $41 billion and South Africa $5 billion. The problem is that the initial capital and the Contingency Reserve Arrangement (CRA) of US$ 100 billion was set up in US dollars.

Also, South Africa and Brazil are heavily indebted – in US dollars. South Africa’s current debt is today above 50% (US$ 153 billion) of GDP which stands just below 300 billion.

To comply with their contribution to the dollar-denominated CRA, Brazil and SA may have to borrow from where? – Wall Street, or the IMF, as the CRA is a dollar reserve fund. This puts these countries even more into a dollar bondage, in the hands of the FED and the Bretton Woods Organizations – instead of freeing them from this predicament.

As a parenthesis, South Africa’s interest on foreign debt of $153 billion was about US$ 5 billion (2016). Foreign debt is almost 52% of SA’s GDP of close to US$ 300 billion. The US$ 5 billion debt payments are higher than the country’s spending on tertiary education (about R60 billion/US$ 4.6 billion equivalent). This is also a good reason to detach from a debt-based monetary system – and, as originally was planned by the BRICS – migrate towards a BRICS own monetary and international payment system – similar to the one already introduced to the world by China – the Chinese International Payment System (CIPS).

On Industrialisation – the NDB will certainly help boost industrialisation within each of the BRICS countries, but also among the BRICS countries – and even outside the BRICS nations, as trade will increase.

At present the NDB has approved seven investment projects in the BRICS countries, worth around $1.5 billion. This year, the NDB is to approve a second package of investment projects worth $2.5 to $3 billion in total.

Although it is not clear what precisely these projects entail, the original idea for the NDB was to support infrastructure and energy projects within the BRICS countries. There is a big need for infrastructure and independent energy production. Of course, infrastructure and energy development, means also industrialisation and trade.

3. Economic Diversification

PK

A solid BRICS cooperation, as well as an own development bank, will most likely attract – and through the NDB leverage – new investments. This was one of the goals discussed during the Xiamen summit. The amount of which is difficult to predict, but Indian PM Modi has talked about an expected 40% increase over the next few years. But even if India or any BRICS country receives foreign investments, it will be difficult to discern which investments are directly related to the new BRICS strength, as so fervently expressed in Xiamen.

More important is the diversification of investments, as well as the related trade. There are currently several countries on a – what shall I call it – “wait list” – to become members of the BRICS. For example, South Korea and Mexico (both are OECD members), Indonesia, Turkey, Argentina, have been mentioned.

Trade between emerging and developing markets has already been increasing more rapidly than “globalised average trade” for which WTO imposes the rules. I could imagine that trade – and, thus, diversification – between BRICS countries, or better even, an enlarged BRICS block, could really boom. It would be a sort of “globalisation” with most trade barriers removed, of a peace-oriented economy, one that strives for the well-being of the people, rather than an elite – and of course, an economy that does not work for the war industry, as does the western dollar-based economy.

For that reason, it will be important that the BRICS detach themselves from the western dollar-based economy and eventually have their own currency. At the Xiamen summit, this was discussed in some ways.

The five members have agreed to “promote and develop BRICS Local Currency Bond Markets and jointly establish a BRICS Local Currency Bond Fund, as a means of contribution to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic and regional bond markets.”

This comes pretty close to what the Euro was before it became Fiat money, i.e. it was the European Currency Unit (ECU) that then converted into the virtual Euro, before in January 2002, the Euro became paper and dollar like Fiat money.

By now we know that the US drove this European currency effort – establishing the euro as the foster child of the US dollar – totally unsustainable as a unitary currency of a group of countries that have no common political interests and goals, that have no common Constitution. Their only common denominator is NATO, their permanent drive for war. It was clear from the beginning that such a project will be doomed to fail.

Hopefully – and I trust, the BRICS will learn a lesson from this failed exercise, and only with a strong bond that includes political, economic and defence long-term goals, a common currency can flourish.

In Xiamen, the BRICS also established the Strategy for “BRICS Economic Partnership and initiatives related to its priority areas such as trade and investment, manufacturing and minerals processing, infrastructure connectivity, financial integration, science, technology and innovation, and Information and Communication Technology (ICT) cooperation, among others.” All this for sustainable, balanced and inclusive global growth.

This Strategy already is indicative for a different development and monetary approach than was the one that laid the cornerstone for the European Union.

4. Trade Between BRICS and the Dollar

PK

This will be interesting to see emerging. In the medium term, I see a full integration between the countries of the Shanghai Cooperation Organisation (SCO) and the BRICS. Several countries are already today members of both associations; for example, Russia and China, recently also India joined the SCO. The SCO also comprises most of central Asia, the former Soviet Republics, and also new Iran and Pakistan. The SCO has already a common long-term objective, in economic development, political vision, as well as defence strategy.

During the recent Eastern Economic Forum (EEF) in Vladivostok, President Putin and President Xi announced cementing of the fusion between the Eurasian Economic Union (EUAU) and the new “Silk Road”, also called “One Belt One Road” (OBOR), or for short “OBI” – the One Belt Initiative.

Since OBI is largely driven by SCO, i.e. by China, this also means that the countries of the Eurasian Economic Union are part of SCO. Imagine, the economic power of the entire group SCO, EAEU and BRICS… Western supremacy will be a thing of the past.

This means worldwide trading – but without the dollar hegemony, without an economic and monetary systems that allows Washington to impose “sanctions” – outrageous and illegal punishments on countries that refuse to follow their dictate. Its high time that this high crime stops. And that we reinstate international law – which today is completely “bought” by Washington.

Imagine, the economic power of the entire group SCO, EAEU and BRICS…. Western supremacy will be a thing of the past.

Today it is clear to most progressive and forward-looking economists that the future is the east; the west has practically committed suicide with its constant wars for greed and dominance and disrespect for the very peoples that foot the western empire’s war bills.

5. BRICS Development Bank vs. World Bank

PK

Yes, the original idea was – and I hope still is – that the BRICS New Development Bank will be able to compete with the WB and the IMF. In other words, by applying non-neoliberal economic policies and with loans that do not impose austerity – which, as we know, is devastating for economic development – but will promote peoples’ based development – aiming at a more just income and wealth distribution.

This is not yet the case.

As mentioned before, the problem is that the BRICS bank’s initial capital and the Contingency Reserve Arrangement (CRA) of US$ 100 billion was set up in US dollars.

Also, as said before, South Africa and Brazil are heavily indebted – in US dollars, an existing bondage that is difficult to break. But not impossible!

The same is true for the Chinese Asian Infrastructure and Investment Bank (AIIB), whose capital of currently also US$ 100 billion is also dollar denominated, and of which about US$ 18 billion is paid in.

It is very likely that the NDB and the AIIB will work together in the future – and jointly break the stranglehold of the WB and the IMF.

In order to do so, they both need to totally break loose from the dollar economy – which is about to happen, perhaps soon, with the enactment of the Chinese Petrol exchange in Shanghai, where trading will NOT be in US dollars but in gold-convertible Yuan.

A possible solution is an SCO-BRICS currency basket, similar to the IMFs Special Drawing Rights (SDR) basket which currently consist of 5 currencies – the US-dollar, British Pound, Euro, Yen and since October 2016 also the Chinese Yuan. This may start out as a virtual currency for external trade, while each country preserves her own monetary system.

It looks like a brighter future is ahead.

The article is based on an interview with Tashreeq Truebody, Radio 786, South Africa

Featured Image: The leaders of BRICS nations meet in 2015. Photo: Xinhua

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About the Author

Peter 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.

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