Wednesday, August 04, 2010
TAX OFFSHORE LOOT! A Modest Proposal for Improving Global Tax Justice NOW James S. Henry
(Note: The following article also recently appeared in Forbes.)
How can we get the world's wealthiest scoundrels – arms dealers, dictators, drug barons, tax evaders – to help us pay for the soaring costs of deficits, disaster relief, climate change, and development?
Simple: levy a modest withholding tax on untaxed private offshore loot
Many above-ground economies around the world are struggling, but the global economic underground is booming. By my estimate, there's $15 to $20 trillion of private wealth sitting offshore in bank accounts, brokerage accounts, and hedge fund portfolios, completely untaxed.
Much of this offshore wealth derives from capital flight and the proceeds of past and present tax evasion. Another key source is crime. At least a third comes from developing countries -- more than their outstanding foreign debt. This wealth is incredible concentrated. Nearly half of it is owned by 91,000 people -- 0.001% of the world's population. Ninety percent is owned by the planet's wealthiest 10 million people.
This "global scofflaw tax" could be used to help pay our own staggering unpaid bills for debt service, retirement insurance, and heath care, as well as the developing world's bills for disaster relief and climate change.
By reducing incentives for capital flight and tax evasion, a tax on illicit, anonymous wealth would also help countries to depend less heavily on debt, inflationary finance, and regressive taxes.
Is it feasible? Yes. The majority of these assets are managed by the top 50 global banks. As of September 2009, these banks accounted for $8.1 trillion of all offshore assets under management -- 72% of the offshore industry's total. The top 10 banks manage 40 percent.
In other words, the real "tax haven" problem is not tiny island havens on the periphery of the system. The real problem is the global "pirate banking" industry, with an assist by the best lawyers, accountants, and lobbyists money can buy. At its core are the world's true tax havens: institutions like JPMorganChase, UBS, Credit Suisse, Citigroup, Morgan Stanley, HSBC, Deutsche Bank, Barclay's, Bank of America, BNP Paribas, Pictet & Cie, Goldman Sachs, and ABN Amro. They are all based, not in picturesque principalities or remote tropical paradises, but in New York, London, Amsterdam, Zurich, Geneva, Frankfurt, Hong Kong, and Singapore. They fall firmly under the jurisdiction of First World government agencies.
Capital may be "mobile," but it rarely travels without an escort. For decades these institutions have operated "Capital Flight Air," recruiting clients and teaching them how to hide wealth offshore, launder it, and access it remotely.
Now they are going to help us tax it.
These highly-visible institutions should be required to withhold a modest 0.5% tax, prorated each quarter, on the value of their clients' assets – which they already track on a daily basis. The proceeds could be turned over to First World tax authorities, with a disproportionate share dedicated to development aid.
Only anonymous wealth should be taxed. If the beneficial owners can show they're paying taxes on their offshore assets back home, they can claim rebates. Most will just pay up.
But that's a long war. The haven system has taken decades to build, and it will probably take decades to dismantle. Right now there's something simple that OECD countries can do to collect badly-needed revenue from the world's wealthiest crooks – no questions asked.
Tuesday, March 09, 2010
THE ROBIN HOOD TAX
Why Doesn't Obama Support This Very Modest Progressive Tax? Just Guess Who Opposes It! James S. Henry
THE ROBIN HOOD TAX
While we wait patiently for any signs whatsoever of progressive change in America, progress is still being made, deo gratis, elsewhere. Of course this is no thanks to the banker-minded Spartans who still occupy the Trojan Horse that is become the US Treasury Department.
Today the European Parliament adopted a resolution supporting the kind of global financial transactions tax that is discussed in the extraordinary performance by Bill Nighy below. For more information about the European action, please follow this link.
Tax Justice Network International,
Global Financial Integrity,
have all been working hard to support this proposal. They could use your active involvement and support -- right now.
As the Puritan minister Stephan Marshall once said in a sermon addressed to Parliament in 1641, "You have great works to do, the planting of a new heaven and a new earth among us, and great works have great enemies."
(If for some odd reason the video does not appear below, please travel here to get it.)
Monday, November 02, 2009
"WHO KNEW?": WILMINGTON NAMED WORLD'S WORST HAVEN
Wild Protests in Geneva, Vaduz, and Guernsey James S. Henry
"WHO KNEW?": WILMINGTON NAMED WORLD'S WORST HAVEN
(Geneva) Thousands of angry private bankers from Switzerland, Liechtenstein, and the Channel Islands have taken to the streets to denounce Delaware's official designation as the world's worst "financial secrecy center" by the heretofore-renowned international critic of tax havens, TJN International.
"Surely this is one contest that we deserved to win," said a leading Geneva private banker. "We feel like Chicago after the Olympics selection."
A Guernsey banker echoed his sentiments. "I smell a rat. Just because the US VP is from Delaware, the fix must have been in. Our assets have been flowing out since 2005. Now we know where they've gone."
"Wilmington. Who'd' a thunk it?"
For the past few years jurisdictions like Switzerland, Liechtenstein, and the Channel Islands have indeed been competing vigorously for the prize of the "world's worst haven."
According to Dubios Pictet von Hentsch, another long-time Swiss banker, "I don't know what they want from us. We have tried everything -- including having many senior bankers from our largest banks get indicted and convicted for helping thousands of wealthy foreigners evade taxes!
"This was supposed to be OUR YEAR!"
"We've also been laundering all those smarmy Euros for decades! This is the thanks we get? Meh! "
"What's happened to "pay-for-performance" in financial services?"
A Vaduz-based private banker from BIL, the legendary Liechtenstein private money-laundering bank owned by the Crown Prince's family, also expressed shock and dismay.
"We're just a tiny developing country (even if we do happen to have the world's highest per capita income.) How's our Crown Prince supposed to feel after this? After all our efforts to help wealthy foreigners all over the planet evade taxes over the last decade, we lose to...Wilmington? Meh!"
"All the really dirty money has been flowing to an even tinier, more obscure place than we are: this place called Wilmington. And we didn't even know about it. We are obviously a little embarrassed."
A Singapore banker commented, "Wilmington? Uh, where is that, exactly? Surely If its number one, it must be packed with non-doms, wealthy sheiks, fancy hotels and shops, and of course lots and lots of ultra-ancient, ultra-discrete private banks, law firms, and accounting firms."
"How is the skiing and the diving, by the way? Not good? Meh!"
Other sources confirm that until it was disclosed by TJN, Wilmington's role in global financial chicanery was one of the world's best kept secrets.
"Apparently all the truly sophisticated dirty money goes there," said a Panama lawyer.
"It's a facade-- purposefully understated, if you will."
"I tell you, you Americans are something else. For years you have been pointing the fingers at the rest of us, while secretly preparing this bid.
Now it turns out to be you who are the real winners. Meh!"
THE WAY THE WORLD WORKS
The Luxembourg private banker agreed to expand a bit on why he thinks the first prize for Wilmington is just so unfair.
"Ok, sure, yeah, everybody has known for some time that First World countries like the US, the UK, Switzerland, Austria, the Netherlands, and Luxembourg are the world's largest ultimate havens -- at least since that book Banqueros Y Lavadolares (1996) laid out the whole story. Foreign money has been flowing out of higher-tax places and developing countries for decades.
"Part of it is just natural risk-diversification. For example, what moron wants to keep all his hard-earned shekels in a place like Mexico? The place is a cesspool of corruption, on the front lines of the drug wars, with lots of kidnappings, and the courts for sale to the highest bidder. You wanna keep all your money there or pay taxes to a government like that? Knock yourself out."
"But it isn't just a question of diversifying away from country risk, because that doesn't explain why all the money gets invested in FIRST WORLD banks.
We First World havens also worked really hard to become the world's top laundromats, so the money would come here."
THE BEST TAX CODE THAT MONEY CAN BUY.......
"First of all, we got the tax laws right, hiring the best lawyers on the planet to design them to attract capital flight and tax evasion, as well as any criminal proceeds that happen to come along for the ride.
None of these rich countries wealthy foreign investors on, say, the interest income they get from, say, bank deposits at UBS or HSBC or Citigroup, or our 200 offshore banks in Luxembourg. And sure we'll respond if the US Department of Justice comes a callin'."
"But we sure as hell don't report this income to, say, the Mexican IRS.
"So all the wealthy foreigners from developing countries investing in First World banks?"
"There are no big customers secrets! The banks know who they are!
"We have to. They are all our private banking clients!"
"So Angel Gurria can keep his lousy foreign accounts in New York and Geneva, we ain't gonna tell nobody."
You see -- even if the US IRS knew the "beneficial owners" of every offshore account in Luxembourg, and New York, and London, and Wilmington, the income these owners earn isn't taxable here. And under the rules we've set, no First World government is going to turn over this information to some no-count Third World country Hey, there's big bucks at stake! "
"It isn't about "secrecy," my friend. It's about tax laws and the people who write them. Or at least that's what we always thought -- until now!"
....WRITTEN BY PRIVATE BANKERS
Number two, we build a vast global pirate banking industry. We put together top fifty most powerful First World Banks, law firms, and accounting firms in the world, and unleashed them on the developing world, where most of this
"Who do you think made all these tax and banking laws, Elwin? Did they just sorta pop up?"
"Naw, this haven stuff is a big business.
"So our lobbyists went to work and designed all these tax laws, plus the banking laws that accomodated them. If we don't get it done with lobbyists, we get a Treasury Secretary or two -- like Robert Rubin, who came from Goldman Sachs and went back to work at Citigroup, or former US Senator Phil Gramm, who was Chairman of the Senate Banking Committee for five years before he left the Senate to become Vice Chairman of UBS.
"Understand one thing: the City of London, Geneva, Zurich, and New York City would barely exist without this offshore banking/ investments businesses. Naturally Singapore and Hong Kong and Dubai now want a piece of action."
THE IRRELEVANCE OF "SECRECY" TO TAX JUSTICE
"You see, my friend -- that's why we're so troubled by Wilmington's victory here.
We don't understand how all the pure "corporate secrecy" in the world has anything necessarily at all to do with being an outstanding tax haven -- or the flip side, with taking money out of poor countries and keeping it outside, tax free. Or with "tax justice."
"We always thought: we take care of the tax laws and have an aggressive private banking industry, then we will win."
On the other hand, you could have all the most perfect information on beneficial owners in the world, and if you can't get First World governments to either (a) tax foreigners on their investments or (b) share the information with developing countries, it won't matter. "
REDOMICILIATION - WAH?
"But now, according to this index, it isn't enough for us havens not to tax foreigners. It isn't enough for us to have the world's most aggressive private bankers."
"Now we gotta get down and compete with Wilmington Delaware on all the 14 technical/legal factors in this stupid index! You look closely at this fancy index, which took two years to complete.
"You find, for example, that Luxembourg lost first place to Delaware just because Delaware corporate law allows redomiciliation and ours doesn't?
"What private banking client ever heard of redomiciliation in Delaware? Of redomiciliation anywhere? Tax rates? Sure. Information exchange? Sure. Great private banking services? Absolutely. Redomiciliation??
Are you shitting me?"
"Any corporate lawyer worth his salt knows you can accomplish the same thing in lots of other ways."But now that CNN is talking about it, you're gonna have every two bit crook in the world running around saying "Redom....redom....Nah nah nah-nah nah...You ain't got it, we're heading to Wilmington!"
Who are they working for, the Delaware Secretary of State?"
A NEW DAY DAWNS IN WILMINGTON
Meanwhile, in Wilmington, the town's 72,000 residents woke up this morning to discover that the world had literally shifted under their feet.
"Our cover has finally been blown," said one local banker. "I'm not sure this is a prize we wanted to win. Certainly it comes as a huge surprise to most of our community -- except for the tiny, carefully selected group that have been in on the secret. "
"The VP was not one of them, so we think he's in the clear. Hopefully."
"TJN really knows their stuff. I think they even sent a small squad of undercover investigators here last summer -- a group of Brits, mainly.
"We immediately suspected them of being up to something, but we didn't know until now just how much sleuthing they were doing. We thought they were here for the nightlife, the boys and girls. It never pays to try and fool those folks."
"After all, after having had a hand in the design of offshore havens in Anguilla, Antigua, Aruba, Bahamas, Barbados, Barbuda, Belize, Bermuda, BVI, the Cayman Islands, the Cook Islands, Cyprus, Gilbraltar, Guernsey, Hong Kong, the Isle of Man, Malaysia, Mauritius, Nauru, Niue, St. Kitts, St. Lucia, St. Vincent, Singapore, the Turks and Caicos, and the UAE, they really know a good haven when they see one."
"Naturally our heart goes out to all the other secretive financial centers in the world. It's never fun to go to bed one night thinking you were number one, and discover that some tiny town that no one has heard of has beaten you to a pulp."
"The downside? Well, it'll probably be much harder to be a secretive financial center, obviously. And now we'll have all those smarmy Euros, plus a lot of Florida cosmetic surgeons coming here with their bags of cash. Meh!"
"Personally I'm already thinking about moving to Wyoming."
(c) JSH 2009
Monday, October 26, 2009
"WHAT MIDDLE CLASS"? Global Wealth Inequality (2007-08 Average) James S. Henry and Brent Blackwelder (Click chart)
Saturday, February 28, 2009
TOO BIG NOT TO FAIL? James S. Henry
(A version of the following story appeared in the Nation on February 23, 2009, here )
Or has the administration just been fighting the last war,paying far too much attention to ancient history, special interests, political correctness, and its own pre-recession agenda, in its programs to stimulate the economy, fix the banks and providing debt relief to homeowners?.
For lifelong students of the Great Depression like Federal Reserve Chairman Ben Bernanke and Larry Summers, it probably seems that Obama's economics team is on track.
In less than a month, Obama has pushed his record $787 billion stimulus bill through a highly partisan Congress. The resulting projected federal deficits will be even larger as a share of of national income than those incurred under FDR, until World War II. At a time when unemployment is rising sharply, this should be good news for the economy--- if the plan is sufficiently stimulating.
On February 10, Treasury Secretary Timothy Geithner announced a bold, if somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy assets once and for all. Combined with trillions in other loans and guarantees from the US Treasury and the Federal Reserve, this is designed to avoid another costly Great Depression-type error, in which scores of banks were allowed to fail and credit markets seized up. If the plan really is expected to work, that should also be good news for the economy.
Bernanke also concluded from his lengthy studies of the Great Depression that the Federal Reserve had blown it way back then by keeping monetary policy too tight. So ever since last summer he's made the US money supply as loose as loose can be, ballooning the Fed's balance sheet to nearly $1 trillion and driving real interest rates down to zero, while pressuring his counterparts in Europe and Japan to folllow suit.
Obama's team also has emphasized the importance of avoiding the beggar-thy-neighbor "protectionism" of the 1930s--aside from a little "Buy American" language in the stimulus bill and a few remarks from Geithner about China. If loose monetary policy and tighter lips are sufficient for recovery, it should be just around the corner.
Finally, in the course of Obama's drive to pass the stimulus, he traveled to troubled communities in Indiana, Florida and Arizona and heard first-hand that millions of American homeowners and small businesses could use a little financial aid of their own right now. So Obama has committed $275 billion of the remaining TARP/"Financial Stability" funds to this purpose. In principle, this should also be good news for the economy--if we really believe that the plan has what it takes to stem the galloping pace of foreclosures and bankruptcies.
Obama and his team may really believe that their first month in office compares favorably with FDR's in 1933. Historical pitfalls have been avoided, and there has been no shortage of good intentions, optimism and action. The new president has also assembled a team that includes, by its own admission, the nation's brightest economists and its most experienced veterans of the Fed and the Treasury.
But something seems to be missing. During FDR's first few months in office, and well into his second term, he received an overwhelmingly positive response not only from the public at large but also from the stock market, despite the fact that FDR and Wall Street generally detested each other.
In contrast, the reaction of global stock markets and market analysts to Obama's flurry of policy initiatives has been overwhelmingly negative. In the past week alone, since the passage of the stimulus, the announcement of the Geithner plan and the president's new plan for mortgage relief, the stock market has declined more than 10 percent. Indeed, the country's largest banks and auto companies, which were supposed to be the beneficiaries of much of these new programs, are on the brink of bankruptcy.
So what's the problem? Actually there are several problems. The first, as I noted in part one of this series, "The Pseudo Stimulus," there really is much less to Obama's stimulus than meets the eye and far less than will be needed to head off the dramatic increase in unemployment that is fast approaching.
For reasons of political convenience and a desire to move quickly, Obama and his advisors decided to appease a handful of key Republican senators, rather than seize the bully pulpit and rally support around a larger, more direct spending package with more debt relief for homeowners.
Ultimately Obama succeeded in getting just three "moderate" Republican senators and zero House Republicans to support the package. (Eleven House Democrats also voted against it.) These votes were costly. The final bill ended up slashing almost $40 billion from the package, while boosting the share of tax cuts to nearly 40 percent--including almost half of all relief provided in the critical first year when it is essential to get the downturn under control.
Most macroeconomists still believe that under conditions of excess capacity, tax cuts generate much less employment per dollar of lost revenue than almost any kind of spending, because upper-income types will save the proceeds or use them to pay down debts. Furthermore, many of the tax cuts in Obama's bill are regressive, even allowing for his favorites, "Make Work Pay," the earned income credit and child care credit. This means their impact on jobs will be even more limited.
For example, of $214 billion of individual tax cuts in the first two years, $100 billion will go to the top 20 percent, while the bottom 60 percent gets $81 billion. Indeed, for one of the largest single tax cuts in the bill, the $70 billion reduction in the "alternative minimum tax," 70 percent will go to the top 10 percent, while the bottom 60 percent--including most unemployed workers--get .5 percent. So Obama's vaunted plan relies on this premier-class AMT cut, plus another $100 billion of business tax breaks, for 27 percent of its first two years of "stimulus."
On top of this, Republicans like Arlen Specter also have shown that they give no ground to Democrats when it comes to sausage-making. I won't repeat part one's list of trinkets, except to note that almost all the worst projects survived, and indeed were only enhanced by the solons' scrutiny.
As a former Minnesotan I'm all in favor of free WiFi for each and every one of the nation's two million farmers; I've also recently written here in glowing terms about the merits of government- sponsored research and development and "green housing." But this kind of spending has little to do with putting millions of unemployed people--most of whom are in urban areas--back to work.
All told, at least $200 billion of this stimulus spending, on top of the $200 billion of wasteful tax cuts, is not remotely related to the urgent goal of creating as many jobs as possible in the next twelve to eighteen months. The cause of recovery was hijacked by a weird coalition of environmentalists, energy companies, venture capitalists, public-sector unions, state governors, tax-cut nuts and other special interests.
The stimulus program was supposed to realize Obama's declared goal of saving or creating at least 4 million new jobs by 2012--even then, at the average cost of $200,000 per job. According to the Congressional Budget Office, even that level of job creation would only reduce the US unemployment rate by an average of less than one percentage point a year by 2012, for a cumulative reduction of 2.5 to 3 percent relative to the CBO's projections of what unemployment will look like without the program.
By the time the Senate got through with it, Obama's stimulus became much weaker. So most economists now agree that it will be lucky to create or save even an extra 2.5 million jobs by 2012--about a 1.5 to 2 percentage-point cumulative reduction in the official unemployment rate by 2012, at an average cost to taxpayers of $315,000 per job.
The contrast with FDR's focus on spending programs that really did put people back to work, is striking.
THE REAL UNEMPLOYMENT RATE
All the standard measures of unemployment are woefully inadequate, but the shortcomings change with the times. In good times, with tight labor markets, conservative economists find it satisfying to remind us that the degree of "involuntary" unemployment is probably overstated, because workers can afford to game the welfare system--for example, by collecting unemployment insurance while refusing reasonable job offers.
In hard times like these, however, official unemployment rates seriously understate the degree of slack and hardship in labor markets. For example, in addition to the 13 million people now unemployed (that's 8.5 percent of the labor force) another 7.8 million workers report that they are underemployed; at least 2.1 million to 5.9 million more (none of whom are collecting unemployment) say they're not in the labor force because they've given up looking. By another measure, the peak labor force participation rate, established when labor markets were very tight in 1999 and 2000, shows the potential supply of labor not counted as unemployed is even larger--10.6 million right now.
All told, this means by now there are already at least 23 million to 33 million American adults who are already experiencing increased unemployment, up from 13 million to 17 million from a year ago. By the end of 2009, as the official unemployment rate passes 10 percent and the other indicators of slack labor markets grow as well, this figure will swell to 40 million American adults--at least 9 million to 18 million more under-utilized workers than we have now.
A majority of these people have families. Furthermore, the unemployed population constantly turns over, with a median duration of joblessness that now exceeds ten weeks. This means that during the next year, up to one-third of the entire US population will personally encounter someone facing the harsh realities of involuntary unemployment, and perhaps homelessness and poverty as well.
These figures omit several other kinds of "hidden" unemployment that are not recorded in conventional labor force and unemployment statistics: the 1.44 million people on active duty in the military and the unemployment they would face if and when they return to civilian life; the 2.3 million inmates in federal, state and local prisons, all of whom are omitted from labor force and unemployment statistics; and the estimated 8.1 million undocumented workers in the United States who are in the labor force.
In many ways undocumented workers are the most vulnerable victims of the crisis. Most support families either abroad or home. Many also have been working hard here for years and have now lost their jobs, without any unemployment insurance, healthcare, rights to Social Security or other benefits. And since Congress has not been able to agree on a decent immigration reform bill, they may not even be able to count on achieving US citizenship, after years of working and waiting. Now they face a hard choice between remaining here, unemployed, or returning to violent, corruption-ridden "Bantustans" in Mexico, Central America, the Philippines and elsewhere.
It's important to take these factors into account when we consider how this downturn compares with earlier financial crises. Unemployment statistics for the 1930s are difficult to compare with our current situation, given the different statistical procedures employed and the very different demographics in the two eras. But my analysis shows that it is possible that this crisis may turn out to be comparable to the situation in 1933, when unemployment peaked at roughly 25 percent of the US labor force.
This analysis provides a context for assessing Obama's original goal of creating/saving 3 million to 4 million jobs by 2012. The fact is, even that original goal simply wasn't anywhere close to being ambitious enough--and it certainly won't be met under the sadly compromised final "stimulus" plan. The negative reaction of global stock markets markets to Obama's plans so far appears to confirm this. We're going to have to stop the political games and get serious.
GEITHNER'S TARP II
Markets reacted negatively to the plan not because investors necessarily opposed his new toxic asset buyback scheme. Most analysts felt that his long-anticipated statement was long on rhetoric about "stress tests and transparency" but short on digestible content--like being invited to dinner and then served pictures of food.
Indeed, like his website, FinancialStability.gov, Geithner's plan remains under construction. But critics may have missed the point--this lack of detail actually may be a political necessity. If the American people understood just how high a price the Obama adminstration may be willing to pay simply to keep our country's largest failing private banks private, we might need a few more guards at the Winter Palace.
Tim Geithner is not a former Wall Street insider in the Paulson/Rubin mold, nor was he ever for a single day a community organizer. He's an ambitious and cautious policy technocrat, whose lucrative private-sector career and board seats are still in front of him. We'd be hard-pressed to find anyone who, at age 47.5, had already punched more establishment tickets. His grandfather was a Ford Motor executive and Eisenhower adviser; his father is a Ford Foundation officer who raised Tim on three continents. He graduated from Dartmouth and Johns Hopkins, became a consultant for Kissinger Associates, a protégé of Robert Rubin and Larry Summers at Treasury in the 1990s, an IMF policy director in 2001-2003, a Council on Foreign Relations fellow and finally head of the Federal Reserve of New York. As of the end of 2008, he was still a member of the CFR, the Group of Thirty and the Economic Club of New York, organizations not routinely associated with sponsoring deep reforms in post-capitalist economies.
Geithner has seen his share of banking crises firsthand: Mexico in 1995, when the entire banking system had to be re-nationalized; Thailand, Indonesia and Russia in 1997-98; Argentina in 2001; and now the biggest one of all right here. All of the Third World crises just noted ended badly--costly, poorly-managed fiascos that did nothing to enhance the reputations of the US Treasury and the IMF. But perhaps Geithner was just an apparatchik. He worked closely last year with Hank Paulson and Bernanke on Bear Stearns bailout, the Lehman/Merrill decisions, the AIG takeover and TARP I. So he probably understands full well not only the gory details of program design but also two fundamental political realities.
The first is that while nationalizing top-tier global banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, it is still viscerally opposed by most members of the power elite in New York and Washington--including most of his former club members.
The second is that by now, most American taxpayers have simply had it with huge Wall Street bailouts, supine members of Congress, overpaid banker chutzpadiks and high-handed Treasury secretaries. If they were ever asked, there is no way in Naraka that taxpayers would ever approve yet another open-ended injection of public capital into banks--especially one costing three times the entire "stimulus" and three-and-a-half times TARP I.
So the trick is to not ask them. With bank stocks sinking every day, the credit crunch hampering recovery and high expectations about policy changes, Geithner had to say something. But not too much. The whole subtext of his vague announcement was to finesse the question of precisely where all the money would come from. The hope was that this would buy time to line up private capital, perhaps by negotiating some kind of insurance subsidy that would induce it to participate. The hope was that this would do enough to stem the decline in bank stock prices and redirect attention away from the new "N"-word--nationalization.
WELFARE FOR BIG BANKERS
Of this, more than half went to the top fifteen banks in the country. This includes $145 billion of capital injections awarded to Citigroup, Bank of America, JP Morgan and Wells Fargo, the top four US commercial banks; another $10 billion each for Goldman Sachs and Morgan Stanley, two worthy investment banks that decided to become commercial banks to avail themselves of federal aid; and a grand total of $84 billion to the rest of the US banks. There was also $40 billion in capital injections and $113 billion in credit in AIG, the profligate insurance company that sold so many flaky credit derivative swaps to investment banks like Goldman that it pioneered a whole new new "too fraudulent to fail" rule. In addition, by now US banks have also received at least $1.82 trillion of federal loan guarantees and $872 billion in federal loans.
These sums need to be viewed in the context of the staggering amount of government assistance that has recently been provided to private financial institutions all over the world. By February 2008, by my reckoning, banks and insurance companies have already absorbed at least $817 billion of government capital injections, $251 billion of toxic asset purchases, $2.6 trillion of government loans and $5.9 trillion of government debt guarantees. If we added the guarantees for once quasi-private entities like Fannie Mae and Freddie Mac, the loan guarantees double to $10.9 trillion.
To put all this in perspective, the 1980s savings and loan crisis cost taxpayers from $150 billion to $300 billlion in comparable 2007 dollars. The 1998-99 Asian banking crisis cost $400 billion. Japan's prolonged banking crisis in the 1990s cost $750 billion. And the total amount of debt relief received by all Third World countries on the $4 trillion of dodgy foreign debt that they incurred from 1970 to 2006 was just $310 billion.
Those crises are completely over, while this one is still unfolding, so its ultimate cost is still uncertain. Already it is clear that ordinary taxpayers around the world are on the hook for total losses that will easily dwarf all the costs of all these other recent banking crises combined--including $2 trillion to $4 trillion of further bank write-offs beyond the $1 trillion of losses already recognized. Since no government on earth has the surpluses on hand needed to fund such largesse, this means that we will be paying for this bailout one way or another for the rest of our lives, and probably for our children's lives as well, through increased inflation, taxation and reduced government services.
Never has so much been given to so few by many. Yet despite all this public generosity, much of the US banks' recent behavior been execrable. For example, in December we learned that the US Treasury got preferred securities in exchange for the first $254 billion of TARP funds that, right off the bat, were worth $78 billion less than the funds they received.
We've also watched with amazement as they've continued to fund corporate jets and other perks, and as several of the largest recipients of TARP funds have paid extravagant bonuses to senior executives for "performance" in 2008--a year when the banking industry contributed mightily to the tanking of the entire global economy. Nor have most banks been forthcoming about what they've actually done with all the TARP money--except to to concede that they haven't done much new net lending. After all, they say, in this economic environment, with regulators suddenly breathing down their necks about leverage and toxic assets, they are not eager to take risks.
That's all well and good at the micro level, but at the level of the overall economy, we badly need banks to swallow hard and start churning out new loans--and not just to gold-plated borrowers who don't really need the money. Since TARP I funds were not dedicated to new lending, and, indeed, since policy makers like Paulson, Bernanke and (presumably) Geithner decided to leave TARP I's use entirely up to the banks' discretion, this period of extreme largesse and low interest rates has also coincided with tight credit markets--except for well-off corporations and elite borrowers and refinancers, who have actually been the main beneficiaries of Bernanke's low-interest rate policy.
So while both the Federal Reserve and the Treasury have been busy demonstrating that they have finally taken the lessons of the Great Depression to heart, and have been setting records for generosity and loose lending, at the end of the day they still allowed the private banking system to keep its elephant in the hallway, blocking the road to recovery.
Since October 2008, the net worth of the entire US banking system-- all 8,367 domestic-owned US banks--has declined by $420 billion, to just $540 billion. In other words, TARP was one of the worst investment decisions in corporate history--the banks' net worth has declined by more one dollar of equity value for each additional dollar of TARP funds injected.
Indeed, the net worth of two of the largest banks in the system, Citigroup and Bank of America, is now around $30 billion, less than half of the $70 billion in government capital that they have received from TARP I, on top of $424 billion of federal loan guarantees. Not only has their own "value added" during this period evidently been negative. For a fraction of the funds we've given these two banks, we could have stopped begging them to clean up their balance sheets, restructure their mortgages, stop wasting money, change their compensation plans and initiate sensible new lending programs. We could have bought a controlling share, hired new management from the droves of idle bankers now out on the street and re-privatized them at a profit for taxpayers in two to three years--just as successful "turnaround nationalization" programs have done again and again in these situations, from Norway to Chile.
No wonder that growing numbers of critics--not just hard-core lefties and Nobel laureates like Paul Krugman and Joseph Stiglitz but even pragmatic politicians like South Carolina Republican Senator Lindsey Graham--have started to break the taboo and talk explicitly about "nationalization."
But in an important sense the taboo had really already been shattered by TARP I, last year's expansion of FDIC deposit insurance and all the other new federal loan guarantees for the bank. In effect, these already "nationalized" the banks' debts. Now we're just talking about the other side of the balance sheet, where there might at least be some value, if only under new management.
Geithner is hardly unaware of this short-term nationalization approach to the credit crunch, or of the success it has in many other markets. But he has apparently rejected it in favor of a much more costly and uncertain route--establishing a public-private bailout fund that will somehow entice the banks to sell off their lousy assets and still have enough equity left to survive as private entities.
The limitations of this approach are best understood by taking another close look at Citigroup and Bank of America, two of the most troubled institutions in this story. On their most recent balance sheets reported to the FDIC, these two big banks alone accounted for $4.1 trillion of official on-balance-sheet "assets"--mostly loans and federal securities, but also a hefty amount of potentially dodgy mortgage-backed securities and other asset-based securities.
Right off the bat, therefore, at least by the accounting numbers, these two top banks alone now account for more than 30 percent of all the assets outstanding in the entire US banking industry. Indeed, the top fifteen banks account for over 60 percent. This represents an incredible increase in banking industry concentration since the early 1990s, when Citibank and Bank of America held just 7 percent of all US bank assets, and the top fifteen banks held 21 percent.
This increase in industry concentration was hardly an accident. It originated in the desires of bank executives to grow, boosting market share, short-term earnings, stock prices and the executive bonuses driven by those metrics. But it also reflected the gloves-off stance that Congress, regulators and antitrust enforcement took toward bank expansion during this period. And that, in turn, was probably related to the more than $1 billion contributed by the financial services industry, their lobbyists and law firms, to politicians of both major parties since 1990, which turned the Senate Banking Committee the House Financial Services Committee and other key Congressional committees, in effect, into wholly owned subsidiaries of the banking industry.
Now how much might all these assets on the banks' balance sheets actually be worth? There is no active exchange for most bank assets, especially those that are hardest to value in this environment, like mortgage-backed securities. And by law, the banks are permitted to value the assets on their books at "fair market value"--in essence, whatever their accountants tell them they are likely to be worth, given historical experience with loan losses. But the difference between these accounting numbers and today's market value for these assets may be huge--up to half or more of book value. And the banks have a strong incentive to hold on to the loans and hope that things get better, rather than sell them off right now at whatever the market will bear. After all, as soon as they start selling down one loan bundle, they may be required to "mark to market" all similar ones. And the resulting writedowns might well be enough to wipe out all stockholder equity, leading to insolvency.
This whole situation is reminescent of the 1980s Third World debt crisis, when banks like Citibank, Morgan and Chase resisted for years the demands of policy makers and developing countries to write down or sell off the billions of overvalued loans on their books--for no other reason than, as one former Chase banker put it, "a rolling loan gathers no loss." Similar behavior occurred during the prolonged Japanese debt crisis of the 1990s, when banks stubbornly resisted the efforts to get them to "mark to market" because several of them realized they would be bankrupt and no longer with us if they did so.
There's not really much moral culpability here. At ground level, from the standpoint of any individual bank, this behavior is understandable. After all, they have just gone through a period of careless underwriting, and are trying to reduce their loan losses and improve their capital ratios--just like most bank regulators want them to do. The larger banks have balance sheets that are best described as follows: "On the left side (assets), nothing is right; on the right side (deposits and other capital), nothing is left." And since the economy is still slipping at an unpredictable pace all around them, no loan officer is eager to take on more risks. So it is hardly surprising that in the last quarter of 2008, even as the TARP money started to flow, US bank lending suffered its sharpest decline since 1980. It also makes perfect sense for them to resist selling off its loans and securities at what may eventually turn out to have been fire-sale prices.
While all this may be well and good for bankers, however, for rest of us it means that even after all those trillions in federal bailouts and loan guarantees, the economy is still starved for credit. The fact that major banks as a group continue to sit on all these lousy loans at book value, rather than selling them off and writing them down, means that they don't have much room on their balance sheets and in their capital/asset ratios for new loans. So the credit crunch continues. And banks that we eventually may find out were really insolvent may walk around in a trance for months or even years, like a scene from Night of the Living Dead. We're not talking about restoring the loose lending of the 2005-2007 bubble; we're talking about the essential liquidity needed to keep the wheels from coming off, stimulate demand and stem the decline in housing prices.
But these potentially troubled categories of assets only add up to about $1.6 trillion; why is Geithner talking about a $2.5 trillion program? The FDIC's latest statistic a provides a clue. It reveals the dominant role that the country's top banks have also played in issuing derivatives, including not only interest rate and currency swaps, but also in more notorious debt-based over-the-counter derivatives. As of September 2008, JPMorganChase, Citigroup and Bank of America accounted for an incredible 90 percent of $7.9 trillion of these "off-balance sheet" credit derivatives that have been guaranteed by these banks themselves--including $2.6 trillion guaranteed by B of A and Citi. So when Secretary Geithner was talking about running "stress tests"--scenarios for future housing prices, default rates and interest rates--against the balance sheets of particular banks, he was not talking about First Federal of Tuscaloosa or Suffolk County National in Riverhead. They've probably never guaranteed a credit derivative in their lives, much less tucked anything away in some Cayman Island "special purpose vehicle." Clearly, Geithner had his friends on Wall Street in mind.
REALLY A POLITICAL PROBLEM
In short, we have a choice to make: we can spend perhaps $150 billion to $200 billion buying out the equity of a handful of leading banks that have gotten themselves in this mess and reform them. This would involve taking them over immediately, installing new managers, giving their creditors a haircut, writing down the toxic assets (which the government-owned bank could do without fear of market reactions) and then preparing them for privatization when the market recovers.
Or we can follow Secretary Geithner's lead, fiddle around for months, throwing trillions more of government capital, loan guarantees and portfolio insurance at the problem, without any guarantee that the resulting cockamamie approach to creating a "public-private" toxic bank will ever work--while the same old troubled institutions are left standing, no longer encumbered by their dodgy assets perhaps, but still encumbered by dodgy managements.
There are lots of technical issues to be weighed in making this choice. But after reviewing all the objections to the kind of short-term, temporary, partial nationalization, I'm convinced that the most important issues are simply political, a choice between our commitment to a failed, hands-off model of bailouts and banking regulation and decisive, FDR-like action.
It is precisely because it is so hard to value these dodgy assets at all that we are even having this discussion. Given the absence of competitive markets for the assets, the uncertain environment and their dependence on taxpayer subsidies and insurance, the prices established are intrinsically political. Either they will be set so low that banks will have to take such massive writedowns that their shareholder equity will disappear entirely anyway, or--more likely--the prices or insurance arrangements will be set so that even more taxpayer wealth is transferred to these very same top-tier banks.
Meanwhile, the whole economy is hostage to this decision. We have no time to waste. We should get on with it, making use of one of the clearest market signals available in this situation--the current value of Citibank and Bank of America shares.
This argument is not at all anti-market, or necessarily even anti-bank. At their best, private markets, entrepreneurship and innovation are absolutely essential. My real objection is to a very specific kind of bank-dominated political economy. To call this "capitalism" is to have Ayn Rand and Friedrich von Hayek turning somersaults in the crypt. Time and again, this pathological form of pro-bank development has jeopardized the prosperity, stability and innovation of the small businesses, inventors and would-be savers who are the backbone of market economies. Bank-dominated political economies don't really deserve to be called "capitalism," since big bankers have never really been entrepreneurs who are content to stick to the capitalist rules of the game. Instead, they periodically demand the divine right to take unlimited risks, privatize the resulting gains and stick the rest of us with any resulting losses.
It is time for accountability, we are told by our new president. If so, we should start by holding the world's largest banks, hedge funds, insurance companies, mortgage brokers and private equity firms, together with their many friends in accounting, law, public relations, credit rating, central banking and higher office accountable for this crisis--if in no other way than by refusing to award them this even more massive TARP II bailout, permitting them to rob us, once again, with both hands.
Wednesday, February 04, 2009
(This article appeared in The Nation on February 4, 2009 here.)
First of a three-part series on the economic crisis.
You, telling me the things you're gonna do for me.
I ain't blind and I don't like what I think I see.
--Michael McDonald, The Doobie Brothers,
"Takin' It To the Streets"
So now that President Obama is in office, his economic team is in place, the largest stimulus package in US history is nearly complete, real interest rates are negative and the Treasury is about to announce a "big bang" version of TARP that provides even more capital to private banks, we're good, right?
Lo siento, no, as shown by last week's steep stock market slide, even after his program passed the House. For once, the Republican wingnuts may be right. There really is much less to Obama's stimulus than meets the eye.
His new plan for ridding the banks of toxic assets--"cash for trash," as economist Joseph Stiglitz has aptly described it--is also likely to be way too kind to bank executives and shareholders, and he appears to be remarkably ignorant about the indisputable successes that capitalist countries like Norway, Chile, and Japan have had with temporary, partial bank nationalizations that make the taxpayers "owners of last resort."
There has been far too little debt relief provided to the growing number of homeowners facing foreclosure, small business owners facing bankruptcy, and other debtors. This step is urgently needed to stem the free fall in housing prices and the rising tide of layoffs among small businesses, where most of the country's jobs are.
There are rumors afloat that Obama's team may soon announce something like this, but the numbers that we've heard from key Congressmen--$50 billion to $100 billion--are far too modest. We need to pressure the president for a "People's TARP," no less generous than the ones that the banks are receiving.
Finally, while US policymakers have been throwing gargantuan sums of borrowed money at the wall, mollycoddling Wall Street, and dithering on debt relief for the rest of us, the global crisis has deepened. All across Europe and Asia--from Athens, Chongqging, London, Moscow, Paris and Prague, to Rekyavik, Riga, Seoul, Sofia and Vilnius--people have become completely fed up with their governments and are taking it to the streets.
So here's a message for our new president, from someone who worked hard for his election long before it was fashionable: if you dally and temporize, the very same thing could easily happen here--perhaps just in the form of a massive tax strike, in solidarity with Messrs. Geithner and Daschle.
While Americans are usually much less militant and certainly less well organized than our comrades around the world, the serious deficiencies in the first drafts that we've seen of Obama's stimulus and financial plans really do need to be corrected in short order.
We also need to see much tougher action with the financial services industry, which bears a disproportionate share of the responsibility for this nightmare. At a minimum, this means a return to a more orthodox and tightly regulated banking system, a renewed assault on tax havens and the anarchy of the world's financial order, strict limits on executive pay plans that reward unbalanced risk-taking, and a 1930s Pecora Commission-style investigation of the industry's misbehavior--complete with subpoena power.
In the words of FDR's first inaugural address in March 1933--which, by the way, was harder-hitting and much more memorable than Obama's--it is time for the "money changers" to be forced to flee from "their high seats in the temple of our civilization" once and for all. The only thing we have to fear is Obama's temerity.
By now everyone has had just about enough bad economic news, but just to set the stage for the discussion, it is important to review the basics.
It's is already a cliché to describe this crisis as "the deepest global downturn since the Great Depression." Actually in many ways it threatens to become even worse--faster, sharper and far more global. Here at home there are already more than 11.1 million unemployed, close to the 11.4 million peak that was reached in 1933, when 20 percent of the population still lived on farms and, apart from the Dust Bowl and bank repossesions, could at least count on having a place to grow their own food. In 2008 alone there were already 2.3 million residential foreclosures filed and 861,664 completed in the US, compared with the 600,000 total that was recorded from 1930 to 33. Obviously, relative to the size and wealth of the economy, conditions were worse back then, partly because the social welfare system provided less help and more bank depositors got wiped out. But in absolute terms the sheer number of our fellow citizens who are already experiencing serious hardship is really disturbing. And we are only a few months into this.
Since October, growth rates have plummeted and unemployment has soared worldwide. Just last week, the International Monetary Fund cut its latest forecast for world growth in 2009 to .5 percent, and for the United States to negative 1.6 percent, as fourth-quarter US growth plunged by over 5 percent, apart from inventory accumulation. Other credible observers are far more gloomy.
Each day brings news of massive layoffs, corporate losses, foreclosures, the bankruptcies of well-known brands like Waterford Wedgwood and Circuit City, continuing house price declines, bank failures, abandoned projects, soaring government deficits and bailouts and widening spreads on loans to some First World countries, not to mention financial frauds, robberies, suicides and other indexes of deep financial distress.
This is the world's first post-globalization debt crisis, and the
worldwide effects are catastrophic. From Labuan, Jakarta and
Guangdong to Chicago and Detroit, London and Moscow, the ranks of the
unemployed are expected to swell by 51 million by mid-2009, and of those
living in dire poverty by at least 176 million. Beyond impersonal
statistics, there are also innumerable tragic stories of personal
hardship, involving people and families that have suddenly lost jobs,
careers, businesses, homes, life savings, healthcare, scholarships
and, most important, hope for the future.
WHAT ARE WE STIMULATING?
Given this situation, the US economy's influence on the global situation, and the importance of resetting expectations, the stakes for Obama's very first economic initiatives are enormous. Unfortunately, the first drafts already adopted by the House and under debate in the Senate are disappointing.
Surely, at these prices we deserved a much more carefully targeted anti-Depression program. Instead, over 63 percent of Obama's $825 billion-plus in new spending and tax cuts won't even be felt for at least a year, and more than $100 billion won't show up until 2012 or beyond. Even if the plan works as advertised, it would only reduce unemployment by less than one percentage point a year, relative to the more than 9 percent baseline projection we are facing.
But this plan will almost certainly not work as advertised. It has been weighed down with $275 billion in tax cuts that would have very modest short-term multipliers. At least 21 percent to 25 percent of Obama's tax credits would go to recipients in the top 20 percent, with incomes above $113,000. These folks are more likely to save the money than those with lower incomes--and right how what we need is spending, not saving.
Evidently these tax cuts were included out of some broad-minded attempt to reach out to Republicans and Blue Dog Democrats. One might have thought they were already sated by a decade of record tax cuts for upper-income groups, starting with Bill Clinton's sharp reduction of capital gains taxes in 1997--even larger, by the way, than George W. Bush's. But Obama's diplomatic gesture yielded not a single Republican vote in the House last week, and also failed to win over eleven Democrats. Welcome back to Earth, Mr. President.
Even Obama's $550 billion of extra spending will not be sufficiently stimulative. First, around $200 billion will be channeled through state aid. On average, this will have an even lower multiplier than tax cuts, because of bureaucratic delays and the fact that our political system always channels a disproportionate share of aid to less-needy states. At one end of the spectrum, six states with unemployment rates above 9 percent now account for about one-fourth of the nation's unemployment--2.8 million people. Under Obama's program these states would get less than 20 percent of all this state-channeled aid, an average of $8,623 per jobless person. But ten mainly Western states with unemployment rates below 5 percent will get nearly $20,000 per unemployed person.
Second, despite the sales rhetoric about promoting recovery and saving jobs, these were clearly not the plan's only--or even its most important--objectives. If they had been, there'd be far more up-front spending on direct job creation and programs with higher multipliers and faster paybacks, like unemployment benefits and populist debt relief. There'd also be more top-down control.
Instead what we have is a dog's breakfast of pet projects, spread across 104 federal agencies, from the Administration on Aging and the Bureau of Indian Affairs to Fish and Wildlife and the National Endowment for the Arts. Dozens of projects were evidently extracted from various liberal wish lists, dusted off and dressed up in the latest "recovery-jobs" couture. Almost anything can qualify so long as it carries a big enough price tag: digital TV conversion ($640 million, on top of the $1.3 billion already spent for this worthy cause), port security ($600 million), research on biomass and geothermal ($1.2 billion), constructing the "smart grid" ($4.4 billion), climate science ($390 million), fixing Amtrak ($800 million), developing satellites ($460 million), restoring wildlife habitats ($400 million), preserving forest health ($850 million), special education ($13.3 billion), immunization ($954 million), STD prevention ($350 million), water projects ($13.7 billion), preparing for a flu pandemic ($620 million), grants to local police ($4 billion), advanced batteries ($2 billion), wireless broadband ($6 billion), a new data center for Social Security ($400 million)...
The overall impression is a parody of bloviated corporate liberalism. It is as if every deep-sea creature in the ocean suddenly came to the surface at the same time. There they all are, writhing and waiting for someone to make sense of the overall game plan.
Road and bridge repair be damned! Why worry about being unemployed when there's so much else to do? Soon we'll all be firing up the clean-coal stoves and sewage-fired generators, recharging our federally subsidized Volts and the underground battery farms and heading on over to new neighborhood health centers, where we'll download some interactive broadband training on aging and avoiding STDs. Then perhaps we'll plant a tree or apply for grants to "weatherize" or found a "rural enterprise." By then it will be time to pick up Little Dorothy at Early Head Start, get her vaccinated, say hey to the new federally funded "local" police chief, artists and high school teachers, then kick back in front of the converter box with a long cool draught of federal H2O and a generous helping of nutritious cuisine from the "local" Emergency Food store--making sure that the CO2 that we generate is properly sequestered and not bubbling up through the neighbor's brand new geothermal system.
By the laws of probability, of course, at least a few of these schemes may actually turn out to have some merit. But it is clear that Washington's finest lobbyists and law firms--second only to Wall Street in terms of sheer venality--have already been hard at work to insure that no key client has been left behind: electric utilities, the coal industry, telecoms, agribusiness, the IT industry, the teachers unions, the Asphalt Pavement Alliance, the Portland Cement Association ("we pour strength into our recovery"), commercial real estate developers and even venture capitalists, are all lined up to profit from Obama's extraordinary spending spree.
I'm beginning to sound like a Republican wingnut. But really, at lightning speed, we've gone from booting single mothers off the dole in the interests of "personal responsibility" (saving a grand total of--what, Bill Clinton?--maybe $5 billion per year at most, while finding jobs for only half of the 60 percent who got the boot) to having almost every single key interest group in the country lining up with a tin cup, right behind the banks.
More important, from a global perspective, Obama's program takes the eye of the ball. What the world economy desperately needs most right now from the US economy--remember, we're the ones who originated this debacle--is not "reinvention," or some hastily-assembled collection of alternative energy demonstration projects, but a good, old-fashioned healthy US market recovery.
Once that is in place, there will be plenty of time and money to save the planet. But unless that is in place, there will be no serious worldwide attention paid to climate change, global warming or alternative energy, nor will there be necessary funds and economic incentives that are required to really fix the the problem. At a time when tens of millions are having a hard time feeding their families, these are luxury goods. I defer to no one in my hardcore environmentalism--but Obama's plan has had a little bit too much input from Al Gore's "green limousine" set, and is putting the green cart before the debt-ridden horse
In fact, this program somehow manages to be neither reinvention nor recovery. Nor is it very thoughtful. Rather, it is a Jackson Pollack approach to social and economic policy. That kind of action painting may have been OK for hip Hamptons artists way back in the 1950s, but in these times it is dangerously blithe. It also risks discrediting everything that progressives should stand for, if we want to see government taken seriously again as an agent of social change. If we continue with this scattershot, favorite-liberal-interest-group approach, creditors like China may soon begin to wonder whether we've become just another Banana Republic--not the chain store, but the political pathology--or an aging superpower that has an acute case of ADHD.
Of course it is easy to criticize. The real test is to come up with a superior, politically feasible alternative. Later on in this series, I'll suggest one--a combination of high-multiplier spending and serious popular debt relief that would command more support, provide a much greater direct stimulus, stem the decline in housing prices and small business closings and placate foreign creditors who are worried about our sanity. It might even permit Obama to finally win a few Republican votes for his program.
Thursday, July 24, 2008
"ATTACK OF THE GLOBAL PIRATE BANKERS!" The Great White Sharks at UBS and LGT James S. Henry
(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)
Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.
Thursday's standing-room-only hearing on tax haven banks and tax compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber
The theatrics included videotaped testimony by Heinrich Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.
There were also several other potential witnesses whose importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.
His lawyer, the renowned Washington fixer Robert S. Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)
Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.
LGT Group declined to follow UBS's contrite example and also failed to appear.
Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.")
While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.
While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.
This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.
UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.
This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.
To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.
Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.
In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.
Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.
With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.
As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.
The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.
LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.
As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.
In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.
So what do we learn from all this? Many will consider these revelations shocking. After all, just as the US government is facing a $500 billion deficit, millions of Americans are fighting to save their homes, cars, and college educations from the consequences of predatory lending, and inequalities of wealth and income are greater than at any time since the late 1920s, we learn that for decades, the world's largest banks have been helping wealthy Americans steal billions in tax revenues from the rest of us. At the very least, this suggests that it may be time to put the issue of big-ticket tax evasion, offshore and on, back on the front burner. But we also need historical perspective. Those who have studied this subject for decades also realize that achieving reform in this arena is not a matter of a few criminal prosecutions. It is a continuous game, requiring persistence and constant adaptations to the opponents, because we are playing against some of the world's most powerful vested interests, with huge fortunes at stake.
After all, offshore tax evasion by wealthy Americans is hardly new. For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr. wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax revenues had failed to meet his expectations despite a sharp rise in tax rates. Some rich folks didn't mind paying up, given the hard times so many Americans were facing during the Depression. As Edward Filene, the Boston department store magnate, famously remarked, "Why shouldn't the American people take half their money from me? I took all of it from them." However, according to Morgenthau, many other rich people busied themselves inventing new ways to dodge taxes, notably by secreting funds offshore in brand new havens like the Bahamas, Panama, and.... Newfoundland!
Scroll forward to the Castle Bank and Trust case of the early 1970s, when another IRS investigation of offshore banking disclosed a list of several hundred wealthy Americans who'd set up trusts in the Bahamas and Cayman Islands. Just as the investigation was picking up steam and the names were about to be publicized, a new IRS Commissioner came in and shut it down--officially because the otherwise-lawless Nixon Administration suddenly got concerned about due process. Few names on the list--a copy of which appears in my forthcoming book, Pirate Bankers, were ever investigated.
Scroll forward now to the late 1990s, when the Organization for Economic Cooperation and Development (OECD), the European Union and the US Treasury once again became excited about offshore tax havens. As the EU launched its "savings tax directive" on cross-border interest, a Cayman banker surfaced to report that more than 95 percent of his nearly 2,000 clients were Americans, and the IRS discovered 1 million to 2 million Americans using credit cards from offshore banks. Meanwhile, the OECD's favorite tool became the "blacklist." A list of thirty-five to forty "havens" was evaluated on the basis of abstract criteria like the quality of anti-money laundering programs and the willingness to negotiate information sharing agreements.
Unfortunately this "name and shame" approach didn't have much success. First, the OECD had no success against jurisdictions like Monaco, Andorra, and Liechtenstein that are basically shameless. Second, the OECD's definition of "haven" was highly selective. It omitted many emerging havens like Dubai, the Malaysian island of Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently increased. As we'll see, it also ignored the role of major onshore havens like London and New York, which have been very attractive to the world's non-resident rich, especially from the developing world.
Third, blacklisting havens focused on the wrong dimension. As Senator Levin's hearing has underscored, the real problem is a global pirate banking industry that cuts across individual havens, and includes many of our largest, most influential commercial and investment banks, hedge funds, law firms, and accounting firms. From their standpoint, it doesn't much matter whether a particular haven survives, so long as others turn up to take their place in providing anonymity, security, and low-tax returns. Up to now, despite blacklisting, the supply of new tax haven vehicles has been very elastic.
On the other hand, as the UBS and LGT cases show, the dominant players in global private banking are relatively stable institutions--which makes sense, given their clients' need for stable sanctuaries. This suggests that it makes more sense to focus on regulating institutions than regulating or blacklisting physical places.
Until the UBS case, this seemed to be much more difficult than, say, beating up on some tiny and distant sultry island for shady people. Even now, after the Birkenfeld case supplied the first private banker prosecution, we have yet to see the first criminal prosecution of a top-tier private bank--apart from BCCI in the early 1990s, which had already failed and was hardly top-tier.
This is not because of a shortage of despicable behavior. For example, UBS, like most of its competitors in global private banking, has a long history of engaging in perfidious behavior, apologizing for it, and then turning back to the future. This includes UBS's involvement in South Africa's apartheid debt and the accounts scandals of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the 1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003 Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers scandal, for which it was fined $100 million by the Federal Reserve; the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld matter. Furthermore, as the Committee report noted, UBS has a history of violating even its own policies. From this angle, unapologetic LGT is at least not hypocritical.
It is also well to remember that UBS and LGT are hardly the only global private banks involved in recruiting wealthy clients to move money offshore. The Committee report indicates a long list of other banks that also provided offshore services to American clients involved in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays (Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of Montreal. In addition, there are dozens of other non-US and US banks that are also active in the offshore US private banking market. This suggests the shortcomings of a case-by-case prosecutorial approach, and the value of designing regulations to improve behavior and provide ongoing feedback about taxpayer compliance.
In principle, one can imagine many such improvements in regulation, assuming a compliant Congress. For example, as proposed in the "Stop Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by Senators Levin, Coleman, and Obama, there would be a rebuttable presumption that offshore shell corporations and trusts are owned by those who establish them. This would eliminate the "Q.I. rule" exception, which allowed hundreds of UBS clients to avoid reporting to the IRS simply by moving their assets to into shell companies.
We could also institute many other changes, including an increase in the painfully short, three-year statute of limitations for investigating and proposing changes in offshore tax liabilities; tightening up on anti-money laundering legislation; levying withholding taxes against hedge funds; raising the penalties for abusive tax shelters, and requiring banks that open offshore entities for US clients to report them to the US Treasury.
However, most of these proposed rule changes have the flavor of stopgaps, technical gimmicks that are still far too focused on individual taxpayers rather than the private banking industry--the advisers, enablers, and systems operators. If we're right that this industry had become an unregulated, untaxed black hole--a multi-billion-dollar global "bad"--we need to focus on two key tasks.
The first is to create appropriate incentives for the global private banking industry to do the right thing. We need to find ways to tax the behavior of tax-evading institutions, their CEOs, senior managers, and even shareholders, to punish them for more misbehavior, and perhaps also reward them for bringing the money home with a brief one-time tax amnesty. In the short run, there have to be more Bradley Birkenfelds, more exposés, and more penalties for banks and bankers alike. Mere apologies, however heartfelt, should not be enough.
The second challenge is to organize a global alliance around this issue. This is more difficult, although steps are already being taken. Global organizations like Tax Justice International, Oxfam GB, Friends of the Earth, Global Witness, and Christian Aid are converging on a new global campaign around the issue of havens and offshore tax evasion. They've been enlisting support for this effort from countries like Norway, Chile, Brazil, Spain, and France, organizations like the UNDP, the World Bank, and even the International Monetary Fund.
This is very exciting, but the organizers face one critical problem--the fact there are serious conflicts of interest among developed and developing countries. The fact is that the United States, the UK and other developed countries not only lose tax revenue to haven banking; they also profit from it, because their own banks are so deeply engaged in it, especially when it involves developing countries.
Back in April 1986, this author broke the story that Citibank was actually taking far more capital out of Latin America and other developing countries than it was lending to them, despite its reputation as the largest Third-World lender. Indeed, the business of helping Third-World elites decapitalize their own countries had become so large and lucrative that Citi's private banking group was the bank's single most profitable division.
To achieve that feat, Citigroup resorted to skullduggery and the flouting of local laws all over the planet. This included repeatedly sending teams of private bankers undercover to countries like Brazil, Argentina, and Venezuela; helping to set up thousands of shell companies and bank accounts in offshore havens and secretly transferring funds to them; teaching its clients money-laundering tricks like mis-invoicing and back-to-back loans; designing ways to communicate with clients that kept their financial secrets safe; and overall, concealing vast sums of flight capital from Third World tax authorities (and their competitors), while lobbying Congress to insure that any foreign capital that arrived in the United States enjoyed near-zero taxes and near-Swiss secrecy. For a time the resulting tax breaks and lax banking rules that applied to "nonresident aliens" from other countries made the United States, in effect, one of the world's largest tax havens.
In short, from the 1970s to the 1990s, banks like Citigroup, BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas and Barclays, etc.) were behaving throughout the Third World just as badly as UBS has recently been behaving here. And their very success laid the foundations for the global, private-haven banking industry with which the IRS is now struggling.
At the time, it seemed that their behavior was hurtful mainly to the developing world, which wasn't strong enough to hold Senate hearings and put Citibankers in jail. But lately it has become clear that the system has grown large enough to consume its creators.
In the last thirty years, fueled by the globalization of financial services, lousy lending, capital flight, and mind-boggling corruption, a relatively small number of major banks, law firms, accounting firms, asset managers, insurance companies, and hedge funds have come to launder and conceal at least $10 trillion to $15 trillion of private untaxed anonymous cross-border wealth.
Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations, and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them--or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it.
Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.
Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks? Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?
Well, in these straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar, private debt at record levels, and rising unemployment, just imagine that every extra dollar for that yacht tender is coming right out of the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay. Meanwhile, $1 spent on a yacht tender goes right to the bottom, while $1 spent on food, salaries, or even roads has a much greater multipler, and benefits a more deserving class.
Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.
About James S. Henry
James S. Henry is a New York-based investigative journalist who has written widely on the problems of tax havens, debt, and development. His most recent book, The Blood Bankers (Basic Books, 2005), examined where the money went that was loaned to eight developing nations. His forthcoming book, Pirate Bankers (2009), examines the history and structure of the global private banking industry.
Friday, December 15, 2006
Blood Diamonds Part 1: The Empire Strikes Back! by James S. Henry
"...(O)ne of the great dramas of Africa: extremely rich areas are reduced to theaters of misery...."
-- Rafael Marques, Angolan journalist (July 2006)
"For each $9 of rough diamonds sold abroad, our customers, after cutting them, collect something like $56..."
-- Sandra Vasconcelos, Endiama (2005)
"We found the Kalahari clean. For years and years the Bushman have lived off the land....thousands of years...We did not buy the Kalahari. God gave it to us. He did not loan it to us. He gave it to us. Forever. I do not speak in anger, because I am not angry. But I want the freedom that we once had."
-- Bushman, Last Voice of an Ancient Tongue, Ulwazi Radio, 1997
The global diamond industry, led by giants like De Beers, RTZ, BHP Bililton, and Alrosa Co Ltd., Russia's state-owned diamond company, a handful of aggressive independents like Israel's Lev Leviev, Beny Steinmetz's BSG Group, and Daniel Gertier's DGI, a hundred other key "diamantaires" in New York, Ramat-Gan, Antwerp, Dubai, Mumbai, and Hong Kong, and leading "diamond industry banks" like ABN-AMRO, is not exactly renowned for its abiding concern about the welfare of the millions of diamond miners, cutters, polishers, and their families who live in developing countries.
But the industry -- whose top five corporate members still control more than 80 percent of the 160 million carets that are produced and sold each year into the $70 billlion world-wide retail diamond jewelry market -- certainly does have an undeniable long-standing concern for its own product's image.
Indeed, for decades, observers of the diamond industry have warned that it was teetering on the brink of a price collapse, because the industry's prosperity has been based on a combination of artificial demand and equally-artificial -- but often more unstable -- control over supply.
Most of the doomsayers have always predicted that the inevitable downfall, when it came, would arrive from the supply side, in the form of some major new diamond find that produced a flood of raw diamonds onto the global market.
The precise culprits, in turn, were expected to be artificial diamonds (in the 1960s and 1970s), "an avalanche of Australian diamonds" (in the 1980s,) and Russian diamonds (in the 1990s.)
This supply-side pessimism has lately been muted, given the failure of the earlier predictions and the fact that raw diamond prices -- though not, buyers beware, retail diamond resale prices!! -- have recently increased at a hefty 10-12 percent per year. There is also some evidence that really big "kimberlite mines" are becoming harder and harder to find.
However, there are still an awful lot of raw diamonds out there waiting to found, and one does still hear warnings about the long-overpredicted Malthusian glut, now from new sources like deep mines in Angola, Namibia's offshore fields, Gabon, Zambia, and the Canadian Northwest.
THE REAL THREAT?
Meanwhile, the other key threat to the industry's artificial price structure -- where retail prices are at least 7 to 10 times the cost of raw diamonds -- comes from the demand side. This is the concern that diamonds may lose the patina of glamour, rarity and respectability that the industry has carefully cultivated since the 1940s.
It is therefore not surprising that the industry has been deeply disturbed by the December 8, 2006, release of Blood Diamond, a block-buster Hollywood film that stars Leonard DiCaprio, Jennifer Connelly, and Djinmon Hounsou.
While extraordinarily violent and a bit too long, the film is entertaining, mildly informative, and far from "foolish" -- the sniff that it received from one snide NYT reviewer -- who clearly knew nothing about the subject matter, other than, perhaps, the fact that the Times' own Fortunoff- and Tiffany-laden ad department didn't care for the film.
Indeed, this film does provide the most critical big-screen view to date of the diamond industry's sordid global track record, not only in Africa, but also in Brazil, India, Russia, and, indeed, Canada and Australia, where diamonds have often been used to finance civil wars, corruption, and environmental degradation, and indigenous peoples often been pushed aside to make room for the industry's priorities.
Surely the film is a
small offset to decades of the diamond cartel's shameless exploitation of Hollywood films, leading ladies like Marilyn Monroe, Elisabeth Taylor, and Lauren Bacall, and scores of supermodels, rock stars, and impresarios.
INDUSTRY WHITE WASH
Dismayed at the potential negative impact of the film ever since the industry first learned about Blood Diamond in late 2005, it is reportedly spending at least an extra $15 million on a PR campaign that responds to the film -- in addition to the $200 million per year that the World Diamond Council already spends on regular marketing.
For example, if you Google "blood diamonds," for example, you'll see that the industry has purchased top billing for its own version of the "facts" regarding this film. Always eager for a new marketing angle, some diamond merchants have also seized the opportunity to pitch their own product lines as "conflict diamond - free."
DEF JAM'S BLACK WASH
This shameless PR campaign has also included a "black wash" effort by the multimillionaire hip hop impresario Russell Simmons, who launched his own diamond jewelry line by way of the Simmons Jewelry Co. in 2004, in partnershp with long-time New York diamond dealer M. Fabrikant & Sons.
Simmons, who admits to "making a lot of money by selling diamonds," rushed back to New York on December 6 from a whirlwind nine-day private jet tour of diamond mines in South Africa and Botswana -- but, admittedly, not in conflict-ridden Sierre Leone, Angola, the Congo, the Ivory Coast or Chad.
Simmons was originally scheduled to travel with one of his latest flames, the 27-year old Czech supermodel and Fortunoff promoter, Petra Nemcova. But Petra reportedly preferred to stay home and accept a huge diamond engagement ring of her own from British singer/soldier James Blunt, whose 2005 pop hit "You're Beautiful" was recently nominated the "fourth most annoying thing in Britain," next to cold-callers, queue-jumpers, and caravans.
The timing of Simmons' trip, which he filmed for UUtube, just happened to coincide with the December 8 release of the Warner Brothers feature.
Upon his return, Simmons held a press conference, accompanied by his estranged wife Kimora Lee Simmons and Dr. Benjamin F. Chavis Mohammed, a former civil rights activitist and fellow investor in the jewelry company who is perhaps best remembered for being fired as NAACP Director in 1994 after settling a costly sexual harassment suit, and for joining the Rev. Louis Farrakhan's Nation of islam. Simmons' astounding conclusion from his wonder-tour: "Bling isn't so bad."
Whatever the credibility of Simmons and his fellow instant experts, it was evidently not enough to save M. Fabricant & Sons, which filed for Chapter 11 in November.
THE GODS MUST (STILL) BE CRAZY
Simmons managed to tour a few major diamond mines on his African safari, but apparently he lacked time to examine the contentious land dispute between the Kalahari San Bushmen,
the members of one of Africa's oldest indigenous groups, and the Botswana
Government -- with the diamond industry's influence lurking right offstage.
In the 1990s, after diamond deposits were reportedly discovered on the Bushmen's traditional lands, the Botwana Government -- which owns 15 percent of De Beers, is a 50-50 partner with De Beers in the Debswana diamond venture, the largest diamond producer in Africa, and derives half its revenue from diamond mining -- has pressured the Bushmen to leave their tribal lands.
The methods used were not subtle. To force the Bushmen into resettlement camps outside the Reserve, the Botswana Government closed schools and clinics, cut off water supplies, and subjected members of the group to threats, beatings, and other forms of intimidation for hunting on their own land -- all of it ordained by F.G. Mogae, Botswana's President, who declared in February 2005 that he 'could not allow the Bushmen to return to the Kalahari." Those who have been resettled have been living in destitution, without jobs and little to do except drink. (See a recent BBC video on the subject.)
Thankfully, on December 13, 2006, Botswana's High Court ruled that in 2002, more than 1000 Bushmen had been illegally evicted by the Botswana Government from the Central Kalahari Game Reserve, where they'd lived for 30,000 years.
The Botswana Attorney General has already attempted to attached strict conditions to the ruling, so this struggle is far from over. But at least the first prolonged legal battle has been won -- thanks to the determination of the Bushmen, public-spirited lawyers like Gordon Bennett, their legal counsel, courageous crusaders like Professor Kenneth Good, and NGOs like Survival International, which has supported the legal battle.
In the wake of this decision, as usual, the global diamond industry, led by De Beers, has denied that any responsibility whatsoever for the displacement of the Bushmen.
However, the fact is that De Beers and other companies has been prospecting actively in the Kalahari Reserve, especially around the Bushman community of Gope (see this video), where De Beers has falsely claimed that no Bushmen were living when it started mining. It has actively opposed recognizing the rights of indigeneous peoples in Africa. In 2002, at the time of the eviction, Debswana's Managing Director -- appointed by De Beers -- commented that "The government was justified in removing the Basarwa (Bushmen)….’.
De Beers' behavior in Botswana has so outraged activists that they have joined together with prominent actors like Julie Christie and several Nemcova-like supermodels who used to appear in De Beers ads, in an appeal for people to boycott the now-UK-based giant -- which has lately been trying to move downstream into retail diamonds.
However, De Beers is far from alone in this effort. Indeed, as has often been the case with "conflict diamonds," less well-known foreign companies have been permitted to do much of the nastier pioneering.
In Botswana's case, these have included Vancouver-based Motapa Diamonds and Isle of Jersey-based Petra Diamonds Ltd. both of which have have obtained licenses to explore and develop milliions of acres, including CKGR lands. Petra is not unfamiliar with "conflict diamonds;" it is perhaps best known for a failed 2000 attempt to invest in a $1 billion diamond project in the war-torn DR Congo, in which Zimbabwe's corrupt dicator, Robert Mugabe, reportedly held a 40 percent interest.
In the case of Botswana, in September 2005 Petra acquired the
country's largest single prospecting license -- covering 30,000 square
miles, nearly the size of Austria -- by purchasing Kalahari Diamonds Ltd, a company that was 20 percent owned by BHP Billiton and 10 percent by the World Bank/IFC
-- which apparently saw the sponsorship of CKGR mining as somehow
consistent with its own financial imperatives, if not its developmental
mission. (!!!). Petra has also licensed proprietary explorations
technology from BHP Billiton, and offered it development rights, a
front-runner for the Australian giant.
Meanwhile, at least 29 of the 239 Bushmen who filed the lawsuit have perished while living in settlement camps, waiting for the case to be decided, and many others are impoverished.
Perhaps the diamond industry's $15 million might be better spent simply helping these Bushmen return to their homes -- and also settling up with the Nama people in South Africa, the Intuit and Kree peoples in Canada, and the aborigines in Australia.
Meanwhile, as we'll examine in Part II, despite the "Kimberly Process" that was adopted by many -- but not all -- key diamond producers in 2003, the fact is that diamonds continue to pour out of conflict zones like the Congo, Ghana, and the Ivory Coast, providing the revenues that finance continuing bloodshed.
The industry's vaunted estimate that they account for just "1
percent" of total production is based on thin air -- there are so many loopholes
in the current transnational supply chain that there is just no way of
knowing. Of course, given the scale of the global industry, and the poverty of the countries involved, even a tiny percent of the global market can make a huge difference on the ground.
Furthermore, in cases like Angola, the Kimberly Process has provided an excuse for corrupt governments to team up with private security firms and diamond traders to crack down on independent alluvial miners.
Finally, the diamond industry still has much work to do on other fronts -- pollution, deforestation, and, most important, the task of creating a fairer division of the spoils, in an industry where the overwhelming share of value-added is still captured by just a handful of First World countries.
The objective here is not to kill the golden goose. In principal, the diamond industry should be able to reduce world inequality and poverty, since almost all retail buyers are relatively-affluent people in rich countries, while more than 80 percent of all retail diamonds come from poor countries.
But beyond eliminating traffic in "blood diamonds," however, we should also demand that this industry starts to redress its even more fundamental misbehaviors.
Saturday, August 19, 2006
BEYOND DEBT RELIEF The Next Stage In the Fight for Global Social Justice James S. Henry
“Third World debt relief” has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.
At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.
There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good.
This is partly because debt relief tends to reinforce questionable policies and bad habits that get developing countries into hock in the first place. It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental.
Finally, debt relief is also often a very poor substitute for other forms of aid and development finance.
Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.
This is not to suggest that the debt relief campaign has been utterly pointless.
It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It has occasionally reminded us of the persistent problems of global poverty and inequality.
From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."
Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.
“Fact Check, Please”
Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.
It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983, and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996.
On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.
Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).
Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score countries that are eligible.
Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries, the debt burden – as measured by the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.”
By our estimates, as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World banks, bondholders, and multilateral institutions.
That includes $41 billion a year that was paid by the world’s 60 poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.
As discussed below, most heavy debtors also have very little to show for all this debt. So these payments are, in effect, a “shark fee” paid to First World creditors for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.
Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion.
China and India alone now account for about $.5 trillion of this developing country “PV debt.” Both countries were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge. They can easily afford it -- thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.
Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies.
These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.
After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year, more than they spend on education or health, and far more than they receive in foreign aid.
III. Where’s the “Relief”?
These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club, not to mention debt relief activists, been up to all these years? How much debt relief have they actually secured, who received it, and how helpful has it been?
To begin with, it is not easy to measure “debt relief.” The definitions of debt relief employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies. This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.
As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis.
Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.
From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.
The relief ratio for the world’s 60 poorest countries has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received about $161 billion of debt relief – more than half of all the debt relief to date. This is now saving the recipient countries about $15.3 billion per year of debt service.
This is certainly nothing to sneeze at. But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.
It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.
Debt Relief Sources – Low-Income Countries
Our analysis shows that 30 percent of this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was owed by Afghanistan.
Finally, another $65 billion of debt relief for low-income countries was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD. These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects. They are now eager to have the EGCs forgive still more loans, at taxpayer expense, in order to clear the way for another round of project finance.
On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs, Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief, mostly by way of the HIPC program.
In the 1970s and early 1980s, of course, these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible.
Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs. Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.
For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s, these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates. For low-income countries, private bankers were more often called upon to recycle the proceeds of loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs.
Overall, therefore, from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.
We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.
B. Middle-Income Relief
So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding. As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and the Brady Plan.
This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them.
That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned. It was viewed primarily as a ‘crisis’ for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines – except for the countries involved.
Debt Relief Sources – Middle-Income Countries
Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.
The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.) On its own, the Baker Plan actually increased middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.
From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest, and no net impact on “PV debt” levels.
In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.
So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans, often at very high interest rates. Given their reluctance to raise taxes, especially on capital, most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion. In effect, the bailouts actually ended up increasing overall country debt levels, just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.
Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income. Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries. This is another strategic choice that debt relievers may want to reconsider.
The Political Economy of “Debt Relief”
So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have been more effective?
A. The Roots of the “Debt” Crisis
To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.” This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed more than $6.8 trillion of foreign loans, aid, and investment, much more foreign capital than they had ever before received.
A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies and the First World’s most important suppliers, customers, and potential competitors.
Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries. In general, compared with the winners, they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF). For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many, disastrous.
In effect, these countries have conducted a very risky policy experiment for several decades. By now the results are clear. Across country income levels, these countries have paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.
Lousy Regimes and Unproductive Debts
Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004 either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright.
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries. As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand, because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief.
Low-Income Heavy Borrowers
In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s, the real value of these countries’ debts increased by 70 percent in just six years. By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent. Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of this group’s debt increase from 1980 to 1986.
All these top low-income borrowers were not only desperately poor to begin with, but they were also either “weak open states” run by kleptocratic dictators, or were caught up in bloody civil wars – in most cases, both at once. Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.
Extending this analysis to the key middle-income debtors noted above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.
All this suggests that the heaviest debtors got into troubles for reasons that only were only superficially related to the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.” Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement, their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.
From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms, simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!
The Debt/Flight Cycle
Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues, draining funds that were badly needed for health, education, and other forms of public investment, and helping to produce crisis after financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors -- to generate enough foreign exchange to service the loans.
Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.
Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,” and the absence of global income tax enforcement.
But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets.
We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.”
Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place. From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments. It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending.
All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.
Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002, €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.
An even larger amount of capital flight was accounted by private “elite” funds that were spirited to offshore banking havens – often, it turns out, with the clandestine assistance of the very same First World banks, law firms, and accounting firms.
The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000), each year, on average, from 1977 to 2003.
Furthermore, a great deal of this flight capital was permitted to accumulate offshore in tax-free investments, especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt.
Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing -- the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding foreign debts.
For so-called “debtor” countries, therefore, the real problem was never simply a “debt” problem; it was an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot. All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.
Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.
Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries. In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital -- from whatever source derived -- on the other.
Human Capital Flight
This underground river of financial flight was also accompanied by an increased outflow of “human capital” as well, as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006, is $2.5 to $3.0 trillion.
This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.
Summary – Roots of the Crisis
Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating. Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005. While growth has revived since then, especially among commodity exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility.
In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality, environmental degradation, insecurity, crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.
Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico, the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.
All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure, there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by. (continued on page 27)
B. “Can’t Get No Relief!”
Whatever one thinks of neoliberal policies, therefore, it is very hard to make this track record look like an achievement. This perspective should help us to view “debt relief” in a different light.
Given this history, we might well have expected that at least by now, First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial responsibility, pitched in, and offered to share a large portion of the bill.
Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout.
Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service. More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own, Third World debtors as a whole have never been able to marshal the collective will needed to take this step.
Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.
Several key factors are at work here:
• Sticks. Most developing countries believe they are too dependent on the trade finance and aid to risk outright defiance of international creditors.
• Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments. Beyond that, there is a whole range of other incentives, including offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.
• The Banking Cartel. Compared with the debtor countries, the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators have come and gone. Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.”
• Declining Political Competition. After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s. Meanwhile, First World banks completed write-downs of Third World loans, and the BWIs and other official institutions displaced them as the principle source of new low-income loans. With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.
With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.
The Best-Laid Plans…
One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.
Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks, debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.
These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was one of cautious incrementalism -- a series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the saving grace that at least no powerful financial interests would be offended.
A. The Baker Plan
The majority of today’s Third World population was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working. Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.
The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.
By 1989, the Baker had produced a grand total of $32 billion of new loans, mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt, it actually constituted negative debt relief.
Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited, and partly because at that point, the notion of writing down “development loans” was still anathema to the World Bank and the IMF.
B. “Market-Based” Debt Relief
While observers were waiting for the Baker Plan to work in the late 1980s, private banks were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however.
C. The Brady Plan
When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent, and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming.
Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries.
By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan. With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies. To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.
Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment. However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.
Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels.
Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.
D. “Traditional” Bilateral Relief – Low Income Countries
As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding.
These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent a decade earlier. And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level. Finally, from 1985 on, private bank lending to low-countries had only been exceeded by lending by development banks and export credit agencies.
One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce their “debt overhang” – the present value of their expected future debt service payments. This was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again, that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.
Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade, it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets. By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility -- had produced another $95 billion of debt relief.
In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.
Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels, relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent, or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen. On the other hand, it would have also omitted future HIPCs like Malawi, Guyana, and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.
For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered. Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief. When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt -- and just 23 percent of all low-income country residents.
This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions. It is always very concerned about securing its own cash flow and debt rating.
In principle, contributions from the BWI’s First World members could always make up any shortfalls. In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.
Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value. Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs. Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp.
So debt relief turned out to be something that the BWIs had to fund on a “pay as you go” basis, through bond sales and periodic contributions from its First World members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.
As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded.
On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana, a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.
Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club. (continued below)
All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.
Overall, the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.
The Long March
Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.
Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose a long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.
This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports.
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.
However, from the standpoint of delivering debt relief in a timely fashion, the BWI’s strictures clearly went beyond the pal. Many BWI technocrats adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all, the BWIs are substantial creditors. They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive neutral role that, say, a “trustee in bankruptcy” would typically play in bankruptcy proceedings.
Combined with country backwardness, this creditor-cum-neoliberal-reformer mentality had predictable results. Indeed, if HIPC’s true goal was to avoid giving meaningful debt relief, it almost succeeded! By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion of debt relief to these six countries. Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years, and Guyana will still be collecting $1 million per year of debt relief in 2050!
Would that First World creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been about administering debt relief!
In June 1999, following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,” supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.” Of the other original nine, just one was both ready to qualify and interested in participating.
To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline.
All told, compared with the original target group, at the end, HIPC was down to providing debt relief to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.
The HIPC Sweepstakes
Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II, a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99. This sum was divided among for all 27 countries that had reached their completion or decision points.
Some countries did much better than others. For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs – compared with the “HIPC 38’s” average of just $75 per capita. Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens, from all debt relief programs to date.
Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen.
In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground, which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.
In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.
Compared with our original list of “war-torn debt-heavy dictatorships,” there is a huge overlap: The top ten low-income borrowers in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006. On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms.
This per country/ per capita debt relief analysis, presented here for the first time, underscores several of the most serious problems with using debt relief as a substitute for development aid.
Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions) will be applied to worthy causes. (“The Control Problem.”)
Even apart from that, as noted in the accompanying tables, the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)
The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending, and so forth. Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.
But there is nothing that HIPC could do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words, inevitably means that some of the worst-governed, most profligate countries in the world may reap the greatest rewards.
Overall HIPC Results
As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.
However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed, to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!
Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it. So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line.
What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60 billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding.
Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached the “decision point.” The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming. Indeed, the timing and levels of relief are still highly uncertain for half of the 11 “decision point” countries.
Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.
The High Costs of HIPC Relief
Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.
Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings. On closer inspection, this debt relief plan was even less impressive and generous than HIPC.
By 2004, many debtor countries and First World NGOs had finally had it with HIPC. However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.
With HIPC already set to expire, and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts. The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director.
These connections no doubt smoothed the reception for Brown’s proposals in the NGO world, but they ultimately failed to achieve very much incremental debt relief for poor countries.
To begin with, the actual cash value of the debt relief provided by MDRI is far less than the "$40 to $50 billion" that was widely touted in the press.
The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible for cancellation adds up to about $38.2 billion.
But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop. Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.
This may appear to be a modest sum to First World residents who are used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries. But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.
Still, the G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.
It also compares rather unfavorably with the $1.3 billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.
Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan -- may never meet these qualifications.
Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.
Finally, even assuming - optimistically - that MDRI’s 42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.
In fact, from the standpoint of World Bank and African Development Bank bondholders, they may well prefer to have their member countries to take them out of these "dog countries."
Indeed, that might even be a very profitable deal for the World Bank, since its cost of funds is not the 3-3.5 percent paid – if and when they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion to $15 billion of cold hard cash may look like a pretty good deal for the Bank. Certainly it is better than having to play bill collector to all those nasty hell-holes.
And I bet you thought “debt relief” was all about generosity!
VI. Summary – A Modest Proposal
So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?
1. Beyond the BWIs.
As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts.
If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt deserve a chance to wipe the slate clean, once and for all, then our conventional approach to debt relief, as administered by the IMF, World Bank, the US Treasury, and the Paris Club, is a failure. Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of delays, administration, and excessive conditionality.
Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order to avoid having to continue paying for it for the rest of their lives.
In particular, the huge World Bank and IMF bureaucracies have proved to be far better at rationing debt relief than at making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.
Indeed, Russia alone – which is itself still heavily-indebted -- has been far more generous and expeditious with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief.
2. Beyond Narrow Debt Relief.
It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.
What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.
This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.
But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.
To make a real difference, the debt relief movement needs to get much tougher on two closely-related but necessarily more contentious aspects of the “debt” problem:
(1) Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding.
(2) The huge stock of anonymous, untaxed Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions, privatization rip-offs, and other financial chicanery.
Most of this wealth – estimated at $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for the global private banking industry.
Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it. Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.
If the debt relief movement had the will to tackle such problems, there is much that could be done.
For example, we could imagine:
(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;
(2) Revitalization of the “odious debt” doctrine, which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.
(3) Promotion of international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!
(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and tax evasion.
(5) The enactment of a uniform, minimum, multilateral withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief.
Many other ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.
3. The Limits of Debt Relief
Earlier in this essay, we expressed serious doubts about the "more sand, same rat-holes" approach to wiping out debts, increasing aid and "ending poverty."
As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.
The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines, and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and the redistribution of social assets like political power, land, education, and technology. These are concepts that BWI technocrats, let alone film stars and rock stars, may never understand.
On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever. In that spirit, it would be wonderful to see the debt movement, the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief.
As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.
(c) SubmergingMarkets, 2006
Sunday, December 18, 2005
EVO'S HISTORIC VICTORY Bolivia's Democratic Revolution James S. Henry LaPaz, Bolivia
The mood at Tuto Quiroga's well-appointed campaign headquarters at the Hotel Radisson in downtown LaPaz was funereal, while across town at MAS Party headquarters in the former Brazilian Embassy, and later on in the impoverished township of El Alto, people were chanting and singing in the streets late into the night. Not long after the polls in Bolivia closed late this Sunday afternoonn, it was already clear that the country's impoverished majority had finally elected one of their own as the country´s next President -- and by a much larger margin than any foreign policy expert, journalist, or Latin America political pundit had expected.
This is easily one of the most surprising and important elections in the history of Latin American democracy. For fans of the "neoliberal," free-market approach to development, as well as coca eradication, it is also a time for soul-searching.
Evo Morales, the 46-year old working-class meztizo, cocalero organizer, and leader of the neo-left "Movement Toward Socialism" party, has soundly defeated the seven other Presidential candidates in the race, capturing close to 50 percent of the nationwide vote.
While the final vote tally still has to be certifed by Bolivia's Electoral Court, this clearly puts Evo within reach of becoming the first Bolivian President ever to have won a first-round victory outright -- without having the choice default to Bolivia`s fractious, "rent-seeking" Congress.
From an historical perspective, Evo's performance is an all-time record for a Bolivian Presidential candidate, far surpassing the 31 percent received by the second-place candidate, the free-market oriented-former President, Tuto Quiroga. It also surpasses the previous all-time high registered by Hernan Solis in 1982, as well as the 34 percent captured by neoliberal businessman "Goni" Sanchez de Lozada in 1993.
For that matter, relative to other recent elections in the Western Hemisphere, Evo has also outperformed the victory margins achieved by the US´President Bush, Brazil´s Lula, and Argentina's Kirchner. Whatever one thinks of Evo's economic platform -- and it certainly contains more than a little wishful thinking-- there is no doubt that, at least for the moment, he has far more credibility with the Bolivian people than his opponents.
A DEMOCRATIC REVOLUTION?
Even more important than the historical records, Bolivians have clearly voted en masse in favor of at least three fundamental changes in Bolivia`s social and political landscape -- all of them supported by MAS.
- Reasserting public control over Bolivia`s natural resources, especially its huge natural gas reserves -- already, in official terms, the second largest in Latin America, and quite possibly much more.
Evo's vague, rhetorical shorthand for this is "nationalization," but there is a whole range of policy options that MAS is considering to increase the public`s share of the income generated by its natural resources, and add more value, and generate more jobs by using these resources at home. Whether or not any of these will make practical economic sense is far from clear. But it is hard to argue that this program will necessarily be any more disappointing for ordinary people than the last two decades of neoliberal policies.
- Rejecting (US-backed) coca eradication programs. This supply-side approach to cocaine trade has been pursued by Bolivia since at least the mid-1980s, especially under the Banzer-Quiroga administration from 1997 to 2002.
Unfortunately, as most observers outside the "drug enforcement complex" now agree -- including good solid conservatives like Milton Friedman and Steve Forbes -- the impact on ultimate cocaine supplies have been limited at best.
At the same time, the social, political, and economic impacts on countries like Bolivia, Columbia, and Peru have been disastrous.Oddly enough, with respect to drug enforcement, Evo is the true "neoliberal." He believes that a poor country like Bolivia has a right to grow crops like coca if it makes economic sense, that punishing them for doing so is like punishing Dupont because some of its chemicals end up in illicit drugs, and that Bolivian farms should not be made to pay for the fact that Americans and Brazilians can't control their bad habits.
From this angle, his election is just one in a growing series of "corrective interviews" that Andean countries are giving to Washington on the huge costs of the failed supply-side drug control strategy. To summarize the matter quickly -- wouldn't the American people really have preferred to be buying several million cubit feet per day of LNG from Bolivia this winter, rather than pursue coca eradication policies in Bolivia that have had little impact on drug supplies while fostering a hostile political movement?
- Much greater effective representation for Bolivia´s impoverished, excluded, indigenous and meztizo majority. In this case the cliche happens to be true -- for centuries, the Bolivian people have stood by and watched the country´s incredible raw materials -- silver, tin, iron ore, guano, rubber, and now natural gas -- being expropriated by private interests or elite-controlled state companies, while the vast majority have remained dirt poor.
Futhermore, since the 1990s, Bolivia has been a virtual laboratory for neoliberal economics, as well as coca eradication. The country ended up with its most valuable assets in private hands, while more than half the population remained poor and inequality increased dramatically. Evo´s election sends a message, loud and clear, that Bolivians have had enough. Indeed, from this standpoint, their voting behavior is not particularly radical -- in capitalist terms, they are simply a group of shareholders who have finally decided to show incompetent managers the door.
This is a message that will reverbrate throughout the region -- in next year's elections in Peru, Colombia, and even Mexico, for example. This is a message that the US, in particular -- so obsessed with implanting "democracy" in the Middle East, and recently so careless about paying attention to Latin America's troubled democracies closer to home -- ignores at its peril.
There is an old Russian proverb that says, "Keep an eye on your friends -- your enemies will take care of themselves."
Of course it is to be expected that hard-line America haters like Venezuela's Hugo Chavez and Cuba's Fidel Castro, as well as leading Latin leftlists like Lula and Kirchner, will take pleasure in Evo's victory, just as many simple-minded American neoconservatives will regard it as an unmitigated setback.
But Evo's erstwhile left-wing allies should be careful not to celebrate too soon.
In Fidel's case, the key question is, how soon is he prepared to give Cubans the same democratic rights that Bolivians have just exercized?
In Hugo's case, the question is, is he prepared to make up all for the economic aid, debt relief, and lost exports that Bolivia will lose if it alienates the US and the international community by adopting policies like coca legalization and gas nationalization? Isn't it just possible that he may well prefer for Bolivia's gas to stay in the ground, where it can't compete with Venezuela's proposed pipeline to Brazil and its proposed LNG exports to the US?
In the case of Lula's Brazil and Kirchner's Argentina, the question is, are they really willing to renegotiate the lucrative gas export contracts they now have with Bolivia, helping Evo by sharply increasing the prices that they pay, while increasing their Bolivian investments? Assuming that Bolivia is going to export at least part of its gas, shouldn't it consider competitors to Brazil and Argentina, rather than continue to be a captive supplier to these monopsonists?
Overall, therefore, it is easy for Latin America's kneejerk Left to celebrate Evo's rise as yet another defeat for Yankee imperialism -- and, indeed, there is just enough truth in that story to keep the brew bubbling.
But every day that Evo wakes up, he needs to remind himself that it was not the Yankees who are responsible for the fact that his country is one-half the size that it was 150 years ago; that it is not Yankees who consumed most of his country's silver and other resources; that it is not Yankees that are consuming up to 30 million cubic feet per day of Bolivian gas at prices less than a fifth of US market levels (but Brazil and Argentina -- and Chile, by way of Argentina); that it not Yankees who are content to keep Bolivia landlocked. On the other hand, it IS Yankees who have provided Bolivia with more foreign aid per capita than almost any other Third World country since 1948 -- much of which was admittedly wasted, but much of which undoubtedly did some good.
In short, now that Evo is President, and not just an angry outside critic of the system, he will have to take responsibility for governing, and admit that Venezuelan, Brazilian, Argentine, and Chilean imperialism -- or, indeed, Chinese imperialism -- are no better than gringo imperialism.
As I`ll argue in Part II, none of these changes will be easy for Evo to implement within the bounds of Bolivia's existing political system, with its increasing regional polarities.
Indeed, he faces an extraordinary list of challenges -- the least of which will be to become an effective head of government. He will need a great deal of help. The US could usefully start by lifting its ban on holding discussions with him, and by granting him a visa.
Despite all the obstacles, it is not too early to pronounce the strong, unified outpouring in favor of this program a ¨democratic revolution.¨
And what is perhaps most striking about this particular one is that Bolivia's people have made it on their own -- without the costly outside intervention that has been required to construct Lego-democracy in other well-known energy-rich developing countries.
Wednesday, November 30, 2005
MONGOLIA'S FOUR HOURS A Special Report from the Front in Ulaan Bataar Joachim Nahem**
Not usually known as a world traveler, President George W. Bush has recently been behaving like an itinerant Lonely Planet ghost writer. On November 21, he and his 300-person entourage -- including Ms. Bush and US Secretary of State Condi Rice -- stopped off in Mongolia for four hours on the last leg of an 8-day whirlwind tour through Asia.
With the mass protests of early November in Buenos Aires and Seoul still ringing in their ears, it must have been a relief to be greeted in Ulaan Bataar by just three well-mannered lonely souls with one placard, urging the US to sign the Kyoto Agreement.
The President could also take enormous pride in the fact that he is the very first US President in history to have visited Mongolia -- a land-locked, Alaska-sized grassy flatland with a per capita income below $500 and 2.8 million people, a third of whom herd sheep, live in round huts called "yurts," and dine on endless varieties of mutton stew.
Later, in a speech before a packed assembly of Mongolian troops and lawmakers, Bush declared that the US is now Mongolia’s “third neighbor.” According to the President, the two countries are “standing together as brothers in the cause of freedom…..” He added that Mongolia is "an example of success for the region and for the world… a free society in the heart of Central Asia.”
No, really. These hyperbolic assertions must have been somewhat perplexing to Mongolia's neighbors, Russia and China. But they no doubt amused and delighted the Mongolians, who gave Bush a thunderous ovation.
What was this mutual admiration all about? Does Mongolia really deserve all this praise because it has indeed established a thriving market democracy?
Or do the tributes perhaps have more to do with the fact that Mongolia has volunteered for two very difficult assignments -- a prolonged series of neoliberal economic policy experiments, and die-hard duty in the rapidly dwindling "Coalition of the Less-and-Less Willing?"
Many of those in the audience must have understood that President Bush's
special visit was not only determined by Mongolia's profound contributions to liberal democracy.Bush reminded them that
there are still 160 Mongolian soldiers stationed with the Polish
battalion in Iraq -- relative to population size, the third largest
country contribution to the “Coalition of the Willing.” This is the largest Mongolian contingent in Iraq since the Mongols sacked Baghdad in 1258.
Bush also paid a special tribute to two Mongolian soldiers in the audience who had shot and killed a would-be suicide-bomber outside Baghdad this year, preventing him from driving explosives into an army mess hall.
With France and Germany AWOL right from the start of the Iraq War, Spain long since buggering out, and other US “allies” like Italy, South Korea, Japan, and the UK now actively debating the withdrawal of their troops next year, this US-spawned effort is threatening to become a “Coalition of One."
So it is not surprising that the Empire has finally decided to pay more attention to its most loyal, if distant and geographically insignificant, allies.
In fact Mongolia has recently been treated to a surfeit of such state visits, including US Defense Secretary Donald Rumsfeld, Joint Chiefs Chairman Richard B. Meyers, and a US Congressional delegation led by House Speaker Dennis Hastert -- who reportedly spent most of his time in the country discussing wrestling moves with his Mongolian counterparts.
Mongolians are also aware that providing just a few hundred troops in Iraq and Afghanistan is bringing the country many other rewards. Earlier this year, President Bush announced a new “Solidarity Initiative,” offering financial assistance to Mongolia and other developing countries that ‘are standing with America in the war on terror.’ Under this initiative, Mongolia is already receiving $11 million to improve its military.
The United States has recently become Mongolia’s second largest foreign aid donor. Indeed, it will probably soon eclipse Japan as the largest donor – the country has already qualified for aid under the Bush Administration’s new “Millennium Challenge Account (MCA) funding. Although the MCA was ostensibly set up to assist countries that ‘govern justly, invest in their people, and promote economic freedom,’ Mongolia certainly did not hurt its chance by contributing its soldiers to Iraq.
On paper, from a distance, Mongolia is a
post-communist success story, which has made a rapid recent transformation to democracy
and market economy. Indeed, compared with its Central Asian neighbors like
Uzbekistan and Tajikistan, it is a virtual Switzerland -- minus the alps, Davos, and private banking, of course.
However, Bush’s accolades notwithstanding, the truth is a little
more complicated. Most Mongolians are acutely aware that their erstwhile “democracy” is still very far from perfection.
Mongolia was not only the first Asian country to adopt communism – it was also the first to abandon it. When the Soviet Union collapsed in the early 1990s, Mongolia turned to the West for political and financial advice on how to restructure the country. Agencies like the IMF, the World Bank, and the Asian Development Bank insisted that Mongolia follow virtually the same neo-liberal formula of shock therapy and rapid privatization that had just been applied --- with very mixed results -- in Russia and Eastern Europe.
These economic policies were coupled with a radical overhaul of the political system, which led to free elections, a liberal constitution, and human rights for all citizens – at least on paper.
Fifteen years later, the results of this neoliberal experiment with “market democracy” are now in, and they have been mixed at best.
- In a recent nation-wide survey, a majority of the population reported that the transition has not improved their lives.
- By most measures, poverty has increased significantly since communism, with more than a third of the population living on less than two dollars a day.
- Rapid migration from the country-side has created large pockets of extreme poverty in Ulaan Baatar, the capital, where up to 300,000 people live in Ger (traditional Mongolian felt tents) slums without access to electricity or proper sanitation.
- Endemic corruption, low trust in the political system, increasing crime rates, collapse of the welfare system, and growing disparities are just a few of the other pressing issues that are threatening to undermine Mongolia’s democratic transition.
- As in many other developing countries, so-called austerity programs, and the privatization of state assets recommended by multilateral financial institutions like the World Bank and the IMF, have left ordinary Mongolian citizens and the most vulnerable.
- Nomads and other pastoralists have experienced tremendous hardship during this period. For example, natural disasters (‘dzuds’) in 2000 and 2001 wiped out much of their livestock, and the livelihoods of several thousand families. In the “New Mongolia,” they have no safety net.
WEALTH FOR WHOM?
Meanwhile, vast mining riches have recently been discovered in Mongolia. In principle, this might offered this country a much-needed break, but by most account these new natural resources have actually compounded development issues – as in many other developing countries.
Rather than using profits from these resources (record high prices for commodities like copper and gold make this a very lucrative business) on much needed social spending and infrastructure, most of the revenues has gone to foreign mining companies and the tiny elite of Mongolians who often control or influence mine licensing.
The Mongolian economy grew by almost 11% last year, yet the lion’s share of this “growth” actually benefited international mining investors and the Mongolian arrivistes who dominate the urban landscape with their brand-new Hummers™ and Land-Cruisers™.
The privatization of land and environmental degradation caused by mining is also disturbing Mongolia’s traditional social and demographic patterns, with pastoralists forced to leave what has traditionally been communal areas used for herding livestock. Artisan mining (which takes place illegally in areas that mining companies own but usually do not exploit) has become a way out of poverty for many Mongolians. But the human costs have been huge, with incredible health hazards and little access to public services -- entire families move to mining areas during the warmer seasons, where much of the work is done by child labor.
Although no one is longing for a return to the Communist past in Mongolia, there is growing apathy and discontent. Recent protests by pensioners and students show that a political backlash is quite possible, in what is generally seen as a very stable country.
The issue is not so much the country’s commitment to democracy in the abstract, but the way the political process actually functions. Neo-liberal policies -- including privatization and the general shrinking of the state -- have proved to be disastrous, with a tiny elite managing to capture most of the political and economic benefits of this transition. Evidence from other developing parts of the world, especially Latin America, tends to show that this elite capture becomes entrenched over time, leading to even greater disparities between rich and poor.
Perhaps if Mr. Bush and his entourage had a stayed a few more hours in Mongolia, they might have begun to appreciate some of these troubling realities. They might have begun to understand that ‘democracy’ and ‘counter-terrorism’ have little meaning to most Mongolians, who are struggling harder than ever just to make ends meet. But after four hours of speeches, carefully-scripted receptions, a little mutton and Mongolian beef, and reassurances that Mongolians will continue to fight on in Iraq, they got back on the plane and headed home.
**Joachim Nahem is a development specialist for the UN Development Programme and a SubmergingMarkets Contributing Editor, currently based in Ulaan Bataar. All articles for this website, however, are written in his personal capacity and do not in any way represent the views of UNDP.
(c) SubmergingMarkets, 2005
Saturday, November 05, 2005
BUSH HEADS SOUTH Receives Rousing Welcome In Argentina... Fox News Analysis
President Bush received an incredibly warm welcome at the 34-nation Summit of the Americas in Mar de la Plata, as thousands of ordinary people from all over the Continent turned out to hail his presence.
The effervescent US President was clearly buoyed by polls that showed that he still commands the support of an incredible 80 percent of Republicans -- otherwise known as his "base."
True, "non-base" support is reportedly a little less certain. Overall, in this week's latest polls, 59 percent expressed "disapproval," while 42 percent expressed "strong" disapproval." A quarter of the US population surveyed reported "violent morning sickness...."
However, knowledgeable insiders have called this a "temporary setback" that will be easily corrected if and when Presidential advisor Karl Rove, recently distracted by the Pflame investigation, starts covering the bases again.
The President, speaking through an interpreter, voiced optimism that "Free trade and liberal investment policies, plus a few billion dollars on defense, corn subsidiies, and our brand new military base in Paraguay" would completely change the lifestyles of the estimated 100 million Latin Americans who remain below the $1 per day world poverty line.
Said Bush, "These policies have only been tried for a decade or two. They need to be given a chance. Right here in Argentina, you've seen how well they've worked, right?"
Bush's sentiments were echoed by Vincente Fox, Mexico's amazingly popular lame-duck President, and Paul Martin, the astonishing Canadian PM, whose own popularity ratings have recently been taken to record levels by the Gomery Report, which documented the disappearance of $250 million of government funds, mainly by way of Mr. Martin's own party.
Said Martin: "We are quite pleased to have become a wholly-owned subsidiary of US multinationals. We didn't think we'd like the sensation, but it has become an experience that we really look forward to every night. You will also learn to enjoy it. Now if only the US would pay us that $3.5 billion...."
Said Fox: "Yes, it is true, millions of Mexican small farmers have been wiped out by free trade. But this criticism is baseless. Just look at all the remittances they are sending back home from the US !"
Meanwhile, the US President had an especially warm greeting from Diego Maradona, the famous Argentine soccer star, now in recovery. Maradona used a colloquial Argentine expression to describe just how delighted he is to finally have this particular American President visit his country.
Elsewhere, Cuba's Fidel Castro, who was not permitted to attend the summit, was reported to have decided to remove all restrictions on US trade and investment with Cuba, after having listened to President Bush's persuasive arguments.
Said the aging inveterate leftist leader, "I knew we were doing something wrong. Now I finally know what it was. We were way off base!"
After a prolonged negotiating session on Saturday, in which Summit delegates basically agreed to continue to debate the merits of free trade for a long time to come, Bush departed for a Sunday meeting in Brasiia with yet another embattled President, Luis Ignacio da Silva ("Lula.")
Brasilia is a pretty lonely, desolate, and distinctly un-Brazilian place on a Saturday night, because all the whores and politicians have flown back to Rio or Sao Paulo for the weekend, and one is just left with all these 1950s-vintage monuments to Brazil's cement industry. But perhaps President Bush will find a little solace taking a moonlit walk on the empty esplanades, wandering through the otherwise flat, lifeless landscape that Robert Campos once called "the revenge of a Communist architect against capitalist society."
Friday, July 08, 2005
"PICTURES OF FOOD?" The G-8's Incredible Deal James S. Henry
Aging poverty rockers Bob Geldof and Bono are apparently quite satisfied with today's G-8 announcement on aid, trade, debt relief, and global warming.
Sir Bob, 51, called it "a great day...Never before have so many people forced a change of policy onto a global agenda."
On the other hand, the global NGOs that follow the subjects of debt, development, and trade reform most closely disagree vehemently. For example:
- The Jubillee Debt Campaign said the "the G-8 stand still on debt, when a giant leap is needed."
- Global Call to Action on Poverty said that "the people have roared, but the G-8 has whispered. The promise to deliver by 2010 is like waiting five years to respond to the tsunami."
- Friends of the Earth UK said that on the issue of climate change, the G-8 accord represented "more talk, no action...a very disappointing finale."
- ActionAid said of the deal, "It is still too little, too late, and much of it is not new money. Fifty million children will die before the aid is delivered in 2010."
So whom are we to believe?
Should we believe the NGOs that are full-time specialists in these issues, but also, in a sense, have a vested interest in the glass being perpetully half-full?
Should we believe the professional celebrities and politicians who also have a huge stake in the equally-curious notion that the way to "end poverty" is rely on their episodic cycles of concern and their undeniable ability to periodically whip us all into a guilt-ridden frenzy?
Or should we and the world's poor perhaps begin to do some thinking on our own about what "ending poverty" really means, and how to go about it?
Friday, June 24, 2005
GREEN-'HOUSING' GAZANS James S. Henry and Andrew Hellman
The US government, the Palestinians, and indeed most Israelis are delighted that the Sharon Government has finally stood up to some settler extremists, and is still on track to pull out of the Gaza Strip by mid-August.
However, we should all pay closer attention to the precise way that the Israelis are leaving. There appear to be several missed opportunities to leave a much healthier economic base for Gaza's 1.4 million Palestinians when the Israelis leave-- a necessary, if not sufficient, condition for eventual peace.
In particular, Israel is now on a path to dismantle or destroy over 1500 homes and 1000 acres of greenhouses, which already provide thousands of jobs for Palestinians, and might provide thousands more....
At current course and speed, Israel may be missing a huge opportunity to help Gaza become something more than – in the words of Muhammad Dahlan, the Palestinian disengagement coordinator – "a giant prison camp," with 35 percent unemployment, 77 percent poverty, a youthful population whose median age is 16, no seaport, a unusable airport, and few visible means of support other than foreign aid, rock-throwing, and amateur rocket-building.
No wonder that Hamas has been able to recruit a huge base of
supporters there. It won seven out of ten local council seats in Gaza's municipal elections last December, and would likely have soundly defeated Mahmoud
Abbas' Fatah Party in the Palestinian parliamentary elections that were
originally scheduled for July 17th, but were postponed by Abbas indefinitely in
One missed opportunity is housing. At a recent press conference, Secretary of State Rice stated that 1,600 Israeli settler’s houses will be destroyed. The official rationale is that such single-family homes are not economically viable for the Palestinians in Gaza.
In reality, however, that rationale was just for public consumption, insisted upon by the Sharon Government for PR purposes. With more than 1 million Gazans to consider, surely there are of course quite a few elderly couples, young couples, and smaller families who might have used the houses. They also have other potential uses -- business and government offices, clinics, even guest houses for visiting tourists, if the area ever stabilized.
The truth is that the houses will be destroyed for much less defensible reasons. First, it is widely viewed as one of the easiest ways to insure that the 8,500 Israeli settlers actually leave once and for all.
Only 284 families had signed up for compensation under the Evacuation Compensation Law, and officials are expecting more violence between Israelis and Palestinians as the August 15th disengagement approaches.
From Israeli's standpoint, the destruction also prevents the politically dangerous image of victorious Palestinians waving Hamas flags on the roofs of former settler's homes, celebrating another Lebanon-like eviction.
Greenhouses could be an even more important missed opportunity. Currently, there are about 1000 acres of Israeli-owned state-of-the-art greenhouses in Gaza. They are worth up to $80 million and employ about 3,500 Palestinians. The fruits and vegetables that they produce account for 15% of Israel’s agricultural exports, mainly to Europe. According to agricultural experts, they might potentially provide as many as 7,000 regular jobs, supporting, in turn, up to 30,000, and perhaps stimulating the growth of related industries.
In short, figuring out a way to keep the greenhouses going could provide stable jobs and incomes for tens of thousands of Gazans, continued good business for Israel, and also offer an opportunity for Israelis and Palestinians to show a little badly-needed cooperative spirit.
However, while the fate of these greenhouses is still being negotiated, and the idea of preserving them has some advocates, the outlook for them at this late date is grim.
According to two Israeli sources in a position to know, the most likely scenario is for the greenhouses to be dismantled and relocated elsewhere, or just demolished and replaced with new greenhouses at new settlements in Nitzanim, just 12 miles from Gaza.
These sources mentioned several key obstacles to a Gaza greenhouse idea.
First, with no seaport and Israel unwilling to permit Gaza to have air rights, and no highway to the West Bank, the perishable goods produced in these greenhouses could not reach the international market unless other transport arrangements are made.
Second, Israel's settler certainly have no good will toward the Gazans, and Israel's agro-businesses don't want to, in effect, put the Palestinians into business to compete with them. A deal would have to be worked out for joint marketing and profit sharing, as well as compensation for the value of the greenhouses. Presumably the World Bank or USAID might be willing to finance such a solution, as they've indicated. Indeed, James Wolfensohn, former World Bank President and Special Envoy for Gaza Disengagement, has evidently been trying to work out such a solution. The Dutch Government has also offered to buy them for the Palestinians.
More generally, there is no question that Israelis and Palestinians have little love lost for each other. Right now the Israeli Government is focused on leaving as quickly and safely as possible, and the Palestinians are focused on just having them go. Left to their own devices, there will be no "win-win" solution.
Wednesday, June 01, 2005
"Why Can't the World Bank Be More Like a Bank?" Background to WSJ Op Ed Piece, June 1, 2005 James S. Henry and Laurence J. Kotlikoff
With Dr. Paul Wolfowitz's ascension to the World Bank's Presidency this month, we've continued the proud tradition of having the Bank run by white male Americans whose primary careers and reputations have had virtually nothing to do with economic development, certainly not in poor countries.
Previous World Bank presidents have included a long line of successful Wall Street investment bankers (James Wolfensohn (Salomon), George D. Woods (First Boston)), commercial bankers (A.W. Clausen (B of A), Lewis T. Preston (Morgan), Eugene R. Black (Chase), car company executives/ Defense Secretaries (Robert S. McNamara), newspaper publishers (Eugene Meyer (Wash Post)), Wall Street lawyer-bankers (John J. McCloy (Chase)), and long-time US Congressmen (Barber B. Conable).
Such backgrounds may have honed their management skills -- although commercial banks, newpapers, car companies, and the US Congress have never been noted for managerial excellence. But all of these gentlemen certainly needed a great deal of on-the-job learning with respect to all other aspects of the World Bank job. As a group, they were also rather more sensitive to the concerns of Wall Street than of Poor Street.
In Dr. Wolfowitz's case, there has at least been, thanks be, no Wall Street in-breeding. He also has a strong background in international relations, not only as Deputy Secretary of Defense and Dean of the John Hopkins School of International Relations, but also as Assistant Secretary of State and Ambassador to Indonesia back in the 1980s.
He may have been a bit palsie-walsie with former dicators like Indonesia's Suharto and the Lee family dynasty that still runs Singapore. But that is hardly unique among World Bank Presidents. And we also know that, in the best neo-Straussian tradition, he is also capable of being a radical Wilsonian democrat when it suits him -- at least in the case of Iraq and several other carefully-selected Middle Eastern countries.
Finally, regardless of what we may think of Wolfowitz' naivete' about Iraq, the fellow is clearly a quick study, and is evidently not shy about rethinking conventional strategies and shaking up entrenched bureaucracies. These attributes, rather than specific experience, may be precisely what the World Bank needs most at this point.
They may also be precisely what the G-8 needs, as it meets in July in Scotland to consider some rather fuzzy-headed proposals to sharply expand the First World's commitment to development aid.
Of course "ending poverty" is a noble, apple-pie objective that is as good as any other at getting former Deputy Defense Secretaries, Treasury Secretaries, economists, and rock stars alike to wander through African backstreets and huddle down around the camp fire, singing "Cum By Ya."
But the point is that unless we deal with the structural reasons that poverty exists in the first place, some of which -- like First World agricultural subsidies, lousy lending, and "pirate banking's" role in Third World tax evasion -- are not very pretty, and will not be solved just by increasing aid budgets -- we won't "end" poverty. We will simply pour more money down the same "development industry" rat holes that now consume more than half of every "phantom aid" dollar.
Indeed, in the long run, we may even risk expanding poverty, because handing out doles to a perpetual underclass is a recipe, not for ending poverty, but for eventually ending aid.
In the spirit of welcoming Dr. Wolfowitz to his new position, BU's Professor Larry Kotlikoff and I have suspended disbelief, and have produced the following semi-Swiftian proposal for "Making the World Bank a Real Bank." Download WSJArticle.pdf
Of course our proposal needs refinement. It is intended in part just to stimulate debate. However, it is not as if the existing international systems for financing development and distributing aid to the world's poor, much less marshalling their life savings and helping to transmit their remittances back home are perfect. If they were, there would be no need for this discussion in the first place.
(c) SubmergingMarkets.Com 2005
Maximizing Gross National Happiness Rethinking the Economics of Growth and Inequality James S. Henry
Each year, by the terms of Jeremy Bentham's 1832 will, his mummified corpse is wheeled out to sit with faculty and students at the University of London. Apart from this peculiar celebration, however, few people today remember the 18th-century economist and social critic whose life's work consisted of trying to make the British legal system serve "the greatest happiness of the greatest number."
Indeed, most modern economists, under the influence of the Chicago School's homespun version of behaviorism and positivism, have long since abandoned the direct study of "human happiness."
In the economic development arena, this has led many economists to focus on technical policies that are supposed to increase overall efficiency, output, and measured growth, without regard to their distributional consequences.
In this "neoliberal" view, one person's subjective pleasure is another's pain, and utility functions are unobservable, so interpersonal comparisons of utility are impossible. Distributional questions are therefore purely matters of "personal preference," to which "positivist economics" has nothing to add.
Perhaps not surprisingly, several studies of ethical behavior among graduate students have even found that those who study economics are more prone to "free-riding" and less ethical than others.
One suspects that this narrow-minded, intrinsically conservative approach causes poor old Jeremy Benthem -- who dedicated his life to identifying social polices that would increase human happiness -- to turn somersaults in his Auto-Icon.
Fortunately, modern psychologists, anthropologists, and public opinion pollsters have recently stepped in where most neoliberal economists have feared to tread.
NEO-BENTHAMITE PSYCHOLOGY AND ECONOMICS
Using a combination of survey research techniques, "objective" indicators of economic and social status, and biometrics, these social scientists have begun to study the determinants of subjective happiness levels directly -- both within and among countries.
Among their most important findings:
- Beyond a certain level of per capita measured income -- about $15,000 per year -- reported happiness levels don't improve very much across countries. There is also a great deal of variation in reported subjective happiness levels poorer countries at similar income levels. In other words, making "measured growth" the sine qua non of economic policy makes little sense.
- High-income groups report somewhat higher "very happy" levels within countries at any given point in time. But among First World countries, increases in average real per capita income have not led to increased happiness levels over time.
- Indeed, since the late 1940s, increased real income levels among First World countries have been accompanied by rising levels of alcoholism and drug addiction, depression, and crime -- an indication of a growing gap between trends in income and happiness.
- Changes in real income may lead to short-time increases in subjective happiness at the individual level. But people become "habituated" to new levels of material income quickly -- in less than a year. Since they also tend to underestimate such "habituation" effects, they probably also spend too much time on the job, and too little time with their families.
- Measured income has much less impact on subjective happiness than many other determinants of happiness -- especially employment, job security, family status, and health. The country of Bhutan has reportedly already recognized this fact by declaring that its national goal is to maximize "Gross National Happiness" rather than GDP per capita.
- Relative incomes and "rivalry" are other important determinants of subjective happiness. This depends on one's reference group. For example, reported happiness levels among residents of East Germany plummeted after 1990, when they went from having the highest incomes among Soviet-type economies to the lowest incomes in Germany.
- While genetic factors may help to explain differences among individuals in subjective happiness within any country, differences among neighboring countries -- say, within Europe -- are far too substantial and persistent to account for on the basis of such factors.
From the standpoint of Bentham's original goal of designing social institutions to maximize human happiness, the implications are many.
They include new justifications for:
(1) Progressive income and wealth taxation;
(2) Polices that help to provide job security, social security, and health insurance;
(3) Using non-material incentives to reward people for doing a good job;
(4) Encouraging people to spend more time with their families; and
(5) Paying more attention to "non-material" development goals like democracy, family values, work force participation, and human rights -- in striking contrast to the materialist path that now seems to unite both China and the World Bank/IMF on the goal of blindly maximizing measured GDP per capita.
In other words, all this adds up to a pretty interesting justification for -- in effect -- Europe's "high tax/social insurance/long vacation" welfare state version of capitalism.
From a competitive standpoint, however, the US, China, and other ruthless global competitors are unlikely to adopt such a model any time soon. Indeed, they have been moving in precisely the opposite direction. So the real question is whether any of these Neo-Benthamite policy implications stand a snowball's chance in hell. They may, but only if those of us who are located in the neoliberal vanguard countries are able to push social policies in a more progressive -- and happier! -- direction.
(For a concise summary of the literature, see the following three lectures by LSE's Professor Richard Layard:)
Monday, April 18, 2005
WHAT'S SO F'IN FUNNY? From One Wolfie to Another "We Have a New Pope!"
Send your proposed entries to firstname.lastname@example.org. Good luck!
A note to our Faithful Readers: Our Editor is on book leave, writing a long-awaited tome on international private banking. Meanwhile, we will pass the time by offering free "Submerging Market" hats to the best proposed captions. Here's the first. Question: Why are two these fellows smiling?
Send your proposed entries to email@example.com. Good luck!
Sunday, January 23, 2005
Harvard's President Summers and the Resurgence of "Scientific Sexism" Part I. This Is a Recruiting Strategy?
As if we did not already have enough reactionary "noise pollution" in this society, Lawrence H. Summers, Harvard University's President, has managed to put his foot in it again.
Summers has been compelled to apologize for the remarks on the subject of gender inequaIity that he made in front of an academic conference in Boston on January 14.
After all, the University has recently committed $25 million of special funds to help recruit underrepresented groups, including female and minority faculty.
Furthermore, the attendees at the Boston conference included a select group of some of the most talented female academics in the country -- including several that Harvard wanted to recruit!
So this was hardly an object lesson in labor market strategy.
”Hey, I’ve got an idea! Why don’t we get 50 of the country’s brightest women in the country together in the same room and patronize the hell out of them! That'll work!”
As noted below, this recent incident is just the latest in a long line of unfortunate missteps by President/Herr Professor Summers, a highly-intelligent but congenitally-insensitive former economist.
It also turns out that the President of Harvard was woefully simplistic about the latest academic literature on gender inequality, and rather patronizing and counter-productive in his attempt to "provoke" further research by speculating from the hip about it -- without consulting the best minds in the field, many of whom were seated in the audience!
Whatever we may believe about gender differences and sexual discrimination in academic institutions, therefore, this episode clearly raises serious questions about whether President Summers has the judgment and emotional maturity to occupy one of the most prominent academic offices in the land.
This remains true, whether or not his persistent judgmental errors are explained by his genetic endowment, his childhood experiences, his child-rearing choices, or his astrological sign.
To be continued in Part II: "The Market for Provocation"
Tuesday, January 04, 2005
SO-CALLED “NATURAL” DISASTERS Part II. The Need for a Global Disaster-Relief Agency James S. Henry
So far, the Boxing Day 2004 Sumatra tsunami is still not quite the most destructive earthquake-related disaster in history, but this may soon change. Until now, the casualty records have been held by the 7.8 Richter-scale earthquake that leveled Tangshan, China, in 1976, claiming at least 244,000 lives, and by the 1556 earthquake in China’s Shanxi province that claimed 830,000.
However, the Sumatran quake has already resulted in more than 150,000 deaths, including 94,081 confirmed dead in Indonesia, nearly 9000 dead or missing in Thailand, 15160 in India, (andup to 20,000 more in the Andaman and Nicobar Islands), 44,000 in Sri Lanka, and 396 in Tanzania, Somalia, the Seychelles, Madagascar, the Maldives, Burma, Malaysia, and Bangladesh. Furthermore, the latest reports from UN observers in the region indicate that even these death tolls may grow “exponentially.”
For the bankers and investors in the audience, the purely economic impact of the Sumatra tsunami is expected to be relatively slight, since most of its victims were indigenous poor people in remote areas, and the region's tourist industry will quickly recover. Japan’s 1995 Kobe earthquake, in contrast, caused more than $100 billion of property damage.
However, in terms of lives lost, injuries, displaced people, and damage caused beyond the boundaries of the country where the earthquake originated, Sumatra is already a record-setter. While other tsunamis have taken lives outside their countries of origin, this one’s long-distance impact has already taken more lives in more countries than all other tsunamis since 1800. The potential human and geopolitical impact of all this is much more significant than the destruction of over-valued Kobe high-rises.
In other words, this is one of the most profound transnational disasters ever. It is therefore not surprising that, as discussed below, it has already commanded an overwhelming global response from the world's aid donors -- at least on paper.
For the moment, at least, the developing world may have finally succeeded in capturing our attention, if by nothing more than the sheer power of its own suffering. Perhaps we will finally now come to understand that both the relief and the prevention of such disasters are appropriate global responsibilities.
We may also wish to reserve some of our benevolence and good will for the victims of more "routine" Third World perils -- for example, the two million children who die from drinking dirty water each year, the 1.6 million people who still die each year from tuberculosis, and the 1.2 million who die from malaria. These continuing disasters may not be as dramatic, sudden, and visible as tsunamis and earthquakes, but they are no less worthy of our concern.
TO THE RESCUE?
Après le fait, the world community has mounted a huge relief effort to provide clean drinking water, food, medicine, energy, medical care, and temporary shelter for 5 million displaced people.
The most rapid progress has been made on fund-raising. In one week, 45 governments and international institutions pledged more than $3.2 billion in humanitarian aid, more than the world spent on all such disasters from 2002 on. The tsunami pledges so far include an incredible $680 million from Germany, $500 million from Japan ($3.91 per capita), $350 million from the US ($1.19 per capita), $182 million from Norway ($39.13 per capita), $96 million from the UK ($1.59 per capita), $76 million from Sweden ($8.39 per capita), $76 million from Denmark ($14 per capita), $250 million from the World Bank, $175 million from the Asian Development Bank, $309 million from other EU member countries ($1.06 per capita), $66 million from Canada ($2.06 per capita), about $60 million apiece from Australia ($3 per capita) and China (5 cents per capita), $50 million from South Korea, and $25 million from Qatar. Somewhat less generously, Saudi Arabia and Kuwait have each contributed $10 million, New Zealand $3.6 million, Singapore $3 million, Venezuela, Libya, Tunisia, and UAE $2 million, Turkey $1.25 million and Mexico $100,000.
Furthermore, there are also discussions underway among G-8 countries to provide debt relief for Indonesia, Sri Lanka, and the other victim countries, which might yield another $3 billion a year -- so long as these countries agreed to spend it on aid for tsunami victims.
Three days after the quake, President Bush had promised just $35 million. As several observers noted, that was just 12 cents per capita, less than 10 percent of Canada’s per capita effort. As Vermont Senator Patrick Leahy said, “We spend $35 million before breakfast in Iraq.”
Furthermore, in 2004, the US Congress had provided $13.6 billion to Florida’s hurricane victims, 5.6 times more than the $2.4 billion that the US spent on all global humanitarian assistance that year. Colin Powell rebuked the critics in public, reminding them that the $2.4 billion was 40 percent of the entire world’s budget for humanitarian relief in 2004. Apparently he also quietly lobbied the President to increase the official US aid.
Meanwhile, in addition to the pledges of official government aid, more than fifty private relief agencies have also pitched in, from Action Against Hunger, CARE, Catholic Relief, Doctors Without Borders, Islamic Relief, Oxfam, the International Red Cross, and Save the Children to UNICEF, World Action, and WorldVision. The American Red Cross alone reports that it has already received more than $79 million in private aid pledges for tsunami victims, while CARE US has received $3.5 million, Doctors Without Borders $4 million, Save the Children $3 million, Americares $2 million, Oxfam US $1.6 million, Catholic Charities $1.1 million, and World Vision $1 million.
Private donors from European countries have also been exceptionally generous. For example, Swedes’ 9 million people have contributed more than $60 million, in addition to the $76 million that their government has offered – more than $15 per capita. And Norway’s 4.6 million people have raised nearly $33 million in private donations, in addition to their government's $180 million -- a $46 per capita global record for tsunami relief.
...THE PAPER THEY’RE PRINTED ON?
...THE PAPER THEY’RE PRINTED ON?
Unfortunately, the historical record shows that such official government disaster aid pledges are cheap -- they often do not result in “new money,” and many countries actually renege on their official pledges completely.
For example, in the case of Iran’s Bam earthquake in December 2003, 40 donor countries also responded to a similar “UN flash appeal,”pledging $1.1 billion of aid. However, one year later, less than 2 percent ($17.5 million ) of that has been forthcoming. Most foreign aid workers and journalists came and went in less than a month, and Bam’s reconstruction problems have long since disappeared from the headlines. While significant progress has been made in restoring basic services like water and electricity, most of the city’s 100,000 former residents are still unemployed and living in tents.
Such reneging by the world community has also been the pattern in most other recent disasters, including Mozambique’s 2000 floods, Central America’s Hurricane Mitch in 1998, and similar crises in Somalia, Afghanistan, and Bangladesh.
We will just have to see whether the victims of the Sumatran tsunami experience something similar. UN Secretary General Kofi Annan has predicted that it will take a decade for many of the countries affected by the tsunami to recover.
ANOTHER AD HOC RELIEF EFFORT?
ANOTHER AD HOC RELIEF EFFORT?
Each time there is a crisis, the world’s aid organizations have to scramble to pass the hat.
The outpouring of all this assistance for the tsunami’s victims on short notice has been impressive. But perhaps we should not be so proud of ourselves. The reality is that this effort has been yet another ad hoc, “aid pick-up-game," where the world waits until there is already a life-and-death crisis with millions of people in peril to swing into action, raise money, and rush assistance to the front lines.
This reactive approach has many unfortunate side-effects:
~ Each time there is a crisis, the world’s aid organizations have to scramble to pass the hat, even as they are also scrambling to organize assistance.
~ The actual delivery of relief on the front lines is much slower than it needs to be.
As usual, in the case of the Sumatra tsunami, most of the victims are located in remote areas with poor transportation, sanitation, water, and health care systems, and many other problems. Several key regions – in this case Indonesia’s Aceh province, Sri Lanka’s eastern regions, and Somalia – also have active guerilla movements or local warlords. Some countries -- India, in this case – have also insisted that they don’t need any foreign assistance, showing more concern for nationalism than their own people.
However, when it comes to disaster relief, all of these problems are just par for the course, and predictable. What is inexcusable is the world has once again had to organize yet another massive relief effort from scratch.
One result is that in most of the affected countries, it has taken more than a week to get medical aid and substantial quantities of food, blankets, and clean water – to the victims. In a situation where hundreds of thousands are injured and each incremental day costs hundreds of lives, only Finland and Norway had relief planes in the air by Tuesday December 28, two days after the disaster. Most other donors needed a whole week.
~ Given the semi-voluntary nature of the relief process, national interests, domestic politics and media exposure play an excessive role in deciding how much aid is given, who manages the assistance, and how much goes to any particular crisis – as compared with raw human need.
~ One by-product of all this was last week’s unseemly spectacle, where donors like the US, the UK, and Japan conducted a veritable public auction for the value of their aid pledges. The results may have little to do with actual aid requirements. We can only hope that this time around most the pledges will be honored.
~ There is a tendency for global aid efforts to be limited by the media’s attention span – as Bam’s victims, the residents of Sudan’s Dafur region, and the victims of other disasters have learned the hard way. When the number of “new bodies” tapers off, so does the attention – and the aid.
THE NEEDS FOR A GLOBAL AID ORGANIZATION
THE NEEDS FOR A GLOBAL AID ORGANIZATION
If global humanitarian aid were run on a more business-like basis,
~ There would be an ample global “reserve” set aside for such emergencies. This would be funded by a global tax in proportion to objective measures of donor capacity like population size and wealth.
~ In case of an actual calamity, we would not try to assemble “aid brigades” on short notice from dozens of different organizations all over the globe and expect them to work well together under impossible conditions. There would be already be a solid global organization in place, ready to respond rapidly, with coordination agreements and contingency plans already worked out with local governments.
This organization would also have basic stocks of transportation equipment and relief supplies pre-positioned in key regions of likely need. After all, the US military alone now has 890 bases around the world that are on ready-alert, prepared to fight wars at a moment’s notice. The world community has zero “aid bases,” prepared to fight to save human lives at a moment's notice.
Given the increasingly global nature of so-called “natural” disasters, the current approach to global humanitarian relief is no substitute for a permanent, well-funded, global aid organization.
Saturday, January 01, 2005
SO-CALLED “NATURAL” DISASTERS Part I. Overview James S. Henry
For the second year in a row, December comes to a close with a dramatic reminder of the precariousness of daily life in the developing world -- and the continuing failure of the international community to provide adequate early warning systems, pre-crisis funding, and rapid, effective global relief for the victims of so-called “natural disasters” -- most of which are actually quite predictable, at least in the aggregate.
This year, on December 26, 2004, it was the 9.0Rs earthquake off the western coast of northern Sumatra, Indonesia’s second largest island, the fifth largest earthquake recorded since 1900.
One year ago to the day, on December 26, 2003, the disaster in question was the 6.6Rs earthquake that devastated the city of Bam in southeast Iran, at a cost of 26,500 lives, 25,000 injured and 80,000 homeless.
The death toll from this year's Sumatra quake is likely to exceed 150,000, with thousands of people still missing, several hundred thousand who have been seriously injured, and more than five million -- most of whom were impoverished to begin with -- suffering from thirst, hunger, homelessness, lost employment, and the threat of mass epidemics.
Furthermore, as we were also reminded in Bam, among the worst consequences of such catastrophic events are the longer-term traumas associated with disease, losing friends, family, fellow citizens, livelihoods, communities, and whole ways of life.
As usual -- and as was true in the case of 9/11, for example -- much of the initial media coverage of this Sumatra tsunami has focused on body counts, other dire visible consequences, and the massive relief effort that has followed.
That is to be expected. But before our attention span drifts too far off in the direction of some other new Third World calamity, it may be helpful to step back and examine some of the systematic factors that contribute to the high costs of such mishaps over and over again, and the extraordinary costs of this "natural" tsunami disaster in particular.
Our overall theme is that there is really no such thing as a “natural disaster” per se. This is not to say that man-made forces were responsible for Saturday’s tsunami. But, as discussed below, the degree to which any such event results in a social and economic “disaster” is often to a great extent under our control.
In the case of this particular tsunami, its high costs:
- Were entirely foreseeable, at least in a “sometime soon” sense, based on both long-term and recent experience with tsunamis in the Indonesian arena;
- Were actually foreseen by several geological experts, some of whom have been advocating (unsuccessfully) an Indian Ocean tsunami early warning system for years;
- Could have been substantially mitigated if US, Japanese, and other scientists around the globe who monitor elaborate earthquake- and tsunami-warning systems, and had ample warning of this event, had simply shown a reasonable degree of human concern, imagination, and non-bureaucratic initiative;
- Might have been avoided entirely with a relatively modest investment in tsunami “early warning systems” for Indonesia and the Indian Ocean.
Furthermore, the global response to this horrific disaster has been long on the size of aid pledges, dignitary press conferences, and “oh – the horror” press coverage.
It has been conspicuously short on actual aid getting through to the front lines. Today, almost a week after the disaster, aid efforts are well-funded, but they remain sluggish, disorganized, and ineffective, with at least as many additional lives in jeopardy right now for want of aid as perished in the original waves.
This is partly explained by the sheer difficulty of getting aid through to remote regions like northern Sumatra. But, as explained below, it is also due to political factors, and the fact that the world community still runs its humanitarian relief efforts like a “pick-up” softball game.
Fortunately, this particular crisis seems to have captured the attention of the world's donor community. At this point, with more than $2 billion in aid pledged by governments, multilateral institutions, and more than 50 private relief organizations, the real problem is not money, but organization.
But we may want to demand that the UN, the US Government, the EU, and all these relief organizations get their acts together, and establish a permanent, well-run, well-funded global relief organization that can move more quickly the next time around. Along the way, they should also pay far more attention to preventive systems that can help save the future victims of such disasters, before all the relief becomes necessary.
© James S. Henry, Submerging Markets™, January 05
Friday, December 24, 2004
THE HORROR OF CHRISTMAS II The Social Pathologies of Our Grandest "Holiday" James S. Henry**
When I was a kid in Minnesota, my family had a huge Scandinavian feast every Christmas Eve, complete with more than two dozen relatives, three feet of snow, a mountainous evergreen that was trimmed to the top with popcorn balls, candy canes, tinsel, and hundreds of precious once-a-year decorations, a six-course dinner with lutefisk, ham, turkey and eight or ten pies, long-winded after-dinner stories about baseball, the space race, and World War II, and, of course, lots of brightly-wrapped presents.
It has taken more than three decades of rigorous training in economics and law and life on the East Coast for me to shake off the nostalgia of those warm, festive occasions. But I am now willing to say out loud what I expect many Americans are muttering all across the country at this time of year: Christmas is a real net loser as a socio-economic institution.
Although for decades the observance of Christmas has been justified on the grounds that it is “merry,” rigorous quantitative analysis proves that precisely the opposite is the case. Despite numerous claims by its proponents that this holiday promotes a desirable “spirit,” and makes people “jolly,” the hard data clearly demonstrate that the yuletide period is marked by environmental degradation, a sharp increase in unfortunate encounters with hazardous products, massive congestion, tedious, time-consuming travel, and the abuse and inefficient use of vast numbers of animals, birds, trees, and many other valuable resources.
Moreover, the number of people who are rendered truly “joyous” by Christmas is almost certainly exceeded by the number who are made to feel rather blue. Nor does Christmas truly fulfill its purported distributional objective: the transfer of gifts to those who really need them.
Finally, it turns out that this so-called “holiday” may make a significant contribution to America’s dwindling savings rate, unsustainable trade deficit, declining competitiveness, and the motivation for a great many property crimes.
In short, although Christmas may be an important source of religious inspiration for some, and a genuine source of wintertime fun for others -- mainly children, who would probably be having fun anyway -- it fails the test of social cost effectiveness. It is high time for those of us who are serious adults to take a good long holiday from this overblown annual ritual.
Christmas consumes vast resources in the dubious, really quite uncharitable pursuit of “forced giving.”
To begin with, let us recall the countless hours that we have wasted on Christmas – all that precious time spent searching for “just the right gifts” for people we barely know; writing and mailing cards or emails to “friends” that one ignores the entire rest of the year; hanging ornate decorations on so-called “evergreen” trees that will become un-decorated, un-green fire hazards in less than a month; attending all those semi-compulsory, over-produced parties that are saturated with cholesterol-rich food, drink, and false cheer; and the tedious task of returning all those mismatched presents after the New Year, just as their retail values plummet.
Assuming conservatively that each American adult spends an average of two days a year on such activities, this represents a wasted investment of 1.2 million person-years per season. At a per capita “shadow wage” of $38,000, that works out to a “deadweight Christmas loss” of $45 billion per year -- even apart from any extra spending associated with these dubious activities.
Just as important is the amount that Americans spend on gratuitous gifts each year - at least $50 to $60 billion per season, by my careful estimates. All this extra consumer spending is sometimes considered beneficial because it stimulates the economy. But a closer look reveals that this massive yuletide spike actually creates many harmful side-effects.
Misfit gifts are one key example. According to New York department stores, at least 15-20 percent of all retail purchases at Christmas are returned after the holidays. Allowing for the inability of young children to return undesired gifts, and the fact that many other misfit gifts are retained involuntarily because recipients feel obliged to disguise their true feelings, perhaps as much as a third of all Christmas season purchases may be unwelcome.
This means that Christmas is really a throwback to a barter economy, where people have to try and match each other’s wants to their own offerings. The whole institution of money was invented precisely to solve this inefficiency – the so-called “double coincidence of wants” problem. In the case of Christmas, one simple solution might be to require people to give each other cash. But that would expose the absurdity of the whole institution.
All this “forced giving” artificially pumps up consumption and reduces savings, since it is unlikely that all the silly, expensive presents given at Christmas would be given at other times of the year. One particularly noxious aspect of surplus consumption is “conspicuous giving” -- luxury gifts like Tiffany eggs, gold toothpicks, crystal paperweights, $30,000 sable stoles, and $15,000 watches. Such gifts are designed precisely for those who are least in need (e.g., “for the person who has everything”). And most of these high-priced gifts are given at Christmas. According to a sample of New York department stores, the fourth quarter of the year provides more than half of the year’s diamond, watch, and fur sale, and an even higher share of their annual profits.
No doubt all this gratuitous spending delights these retailers, and many other “dealers” in the Christmas racket. To the neo-Marxists in the crowd, this suggests that the holiday is explained by economic determinism -- what we have here is not just a coherent, self-sustaining religious ideology, but a powerful set of underlying economic interests, with a huge stake in perpetuating this season’s fatuous gift-giving mythology.
Lower Savings, Higher Debt
Meanwhile, for the nation as a whole, the fact is that Christmas just reduces our already-flagging personal savings rate -- now just a paltry 1 to 2 percent of personal income. It also adds to the burden of consumer debt. Almost a quarter of Christmas season sales are financed by credit cards or charge accounts, and January has become the peak month for credit card delinquencies. It turns out, in other words, that Christmas is quite literally a festival that we can no longer afford.
For parents, another exasperating aspect of Christmas binge spending is toy fetishism. The holiday season accounts for more than 60 percent of the US’ annual $31 billion expenditure on toys and video games. Much of this new toy capital depreciates rapidly, if it works at all. The surfeit of hyper-stimulating toys is no doubt a major contributor to the ADD scourge among young Americans, and to our pitifully low youth savings rates. It is also educationally unproductive. According to the National Toy Industry Association, the US now spends nearly three times as much each year on mindless video games ($10 billion), action figures ($1.2 billion) like the Hulk, Harry Potter, and Anne Coulter, and dolls ($2.8 billion), as on all retail book sales for children ($1.5 billion). Toys in the “learning and exploration” category account for a mere half billion dollars.
Over time, all this free-wheeling spending on unproductive child toys also encourages heavy spending on unproductive “adult toy capital,” like Porsches, J-120 sail boats, and synthetic Vice Presidential candidate action figures with Southern accents and really thick hair.
Since a large share of the leading Christmas toys in the US market are now made by Chinese companies, the toy binge is also making the US dangerously dependent on foreign toy imports. This opens the door to insidious, all-too-poorly-understood cultural influences that may take decades to reverse.
Many Christmas toys are also hazardous -- snowboards, skates, sleds, hockey sticks, Roller Blades, bicycles, baseball bats, boxing gloves, even iPods when put in the wrong hands. The US Consumer Product Safety Commission reports that last year there were 17 deaths and 203,000 emergency room admissions in the US due to hazardous toys. There were also more than 11 million toy recalls. If we allocate these deaths, injuries, and recalls in proportion to seasonal sales, Christmas is clearly the dominant problem. (The comparable figures for deaths caused by books and book recalls were zero and zero, respectively.)
Finally, one only has to visit any Toys ‘R’ Us or Walmart at this time of year to see the holiday’s negative impact on parent-child relations. The store floors are replete with distraught mothers and fathers dragging their tiny, toy-addled munchkins kicking and screaming away from the latest high-priced, must-have offerings. All this unproductive consumption would be much better spent on mathematical drill books, computer learning, alarm clocks, pencil sharpeners and green eyeshades.
Christmas creates massive congestion at the worst possible time of year.
At least in large urban areas, Christmas is by far the most unpleasant time of year to shop, travel, dine out, or visit a bathroom in a mall. Just when stores are the most crowded, shopping becomes mandatory; just when everyone else in the nation is making their de rigueur, mid-winter, cross-country trek to “be with” friends and family, we also are drafted into this forced march.
December 21 and 22 are the year’s peak dates for air travel, according to the Air Transport Association of America, with more 2.1 million Americans per day jamming the nations airports, (twice the annual daily average.) Nearly forty million people will travel during the period from December 17 to January 3, just when the weather is the worst, airlines, buses, and trains are charging the highest prices, and security threats from the growing ranks of our non-Christian enemies around the globe are peaking.
According to the US Postal Service, the volume of mail traffic triples at Christmas time, to more than 288 million letters and 8.6 million parcels per day during the week before Christmas. This batters a delivery system that is barely profitable to begin with, and has already been weakened in the previous two months by tens of millions of extra direct-mail catalogs and advertisements.
Telephone calls can reach more than 200 million per day during the month from Thanksgiving to New Years’ Eve, and there is also a seasonal surge in Internet traffic. At many businesses, stores and offices, costly second- and third shifts have to be added to handle the excess demand. All this “peak loading” means that airlines, Internet services, mail delivery, stores, banks, warehouses, telephone systems, roads, and parking lots must carry more excess capacity than if these activities were distributed more evenly throughout the year. This is peak load capacity that we consumers ultimately have to pay for – it is a waste of our nation’s precious capital.
Christmas destroys the environment, plus untold numbers of innocent animals, birds, and other wildlife.
These have perhaps not been mainstream concerns for hardnosed economists like myself. But if one takes account of all the Christmas trees, letters, packages, increased newspaper advertising, wrapping paper, catalogs and cards, as well as the millions of animals slaughtered for feast and fur at the holidays, it becomes clear even to an economist that this holiday is nothing less than a catastrophe for the entire ecosystem.
According to the US Forest Service, 23.4 million natural Christmas trees are now consumed in the US alone. This number has recently been growing fast, driven by resurgence in hard-shell Christianity and the trend toward more than one tree per household – related, in turn, by our rapidly expanding average home sizes. Americans also now use 18 million artificial Christmas trees each year, half of which are purchased brand new.
All this produces nothing less than an environmental calamity. Since natural Christmas trees have to be grown from scratch each year, millions of forest acres are now subject to an artificially-short rotation period. Recent evidence from countries like Denmark, now the world’s second largest producer of Christmas trees, suggests that the resulting “industrialization” of non-organic Christmas tree production creates massive problems with groundwater pollution. And the piles of needles these natural trees produce shorten the lives of untold numbers of vacuum cleaners and household pets.
Given the growing role of foreign tree producers like China and Denmark in the global Christmas tree trade – the emerging “tree cartel” – the resulting “Christmas tree gap,” on top of the “foreign toy gap,” also adds to our burgeoning trade deficit.
As for the impact on our feathered and furry friends, Christmas has become nothing less than a giant abattoir. This year, according to the Animal Protection Institute, 5.3 million foxes, 36 million minks, 100,000 polecats, 70,000 chinchillas, 330,000 nutrias, 352,000 seals, 4 million Persian lambs, and hundreds of thousands of sable, plus millions of leather-producing cows, will be butchered around the world just to satisfy the seemingly-insatiable human lust for real fur coats, stoles, hats, and leather coats and shoes. While many of these animals meet their fates for the sake of other occasions than Christmas, a disproportionate share are feeling Herod’s sword.
To anyone who has ever visited a turkey, pig, or chicken farm, Christmas and Thanksgiving take on a whole new meaning. Every single day during the run-up to these festivals, thousands of bewildered, de-beaked, growth-hormone-saturated, inorganic birds are hung upside down on assembly-line racks and given electric shocks. Then their throats are slit and they are dropped into pots of boiling water.
After they are cooked and on the table, a few poor dead animals do have an opportunity to take revenge on their human persecutors. According to one health expert, day-old turkey contains more than 2100 separate strains of bacteria. Even washing a turkey before cooking it just helps to spread all these bugs around the kitchen.
Christmas introduces seasonal fluctuations into the demand for money, and may also lead to a seasonal slump in labor productivity.
Christmas is the peak season for carrying big bills around in the wallet, and cash is also a very popular Christmas gift. The volume of currency in circulation peaks each year in December, then declines by 4 to 5 percent. As noted below, this probably helps to stimulate robberies at this time of year. It also forces the US Federal Reserve and the banking system to work hard to supply all this currency, and to cushion the resulting cycles in money demand.
As for work force productivity, many American companies completely shut down for the two-week period from Christmas to New Year’s. Even those that remain open often find that on-the-job performance suffers because of seasonal high jinks and absenteeism. Armies of illegal aliens from Mexico and Central America also sneak back across the border to their homelands just to visit their families at Christmas time – a costly subterranean migration that may be touching, but deprives us of cheap labor.
Meanwhile, our Asian competitors – except for the Philippines and South Korea, which have large Christian populations -- are insulated from these Christmas-induced distortions. They continue beavering away while we party.
Far from being “the season to be jolly,” Christmas is really the season of sadness and despair.
The season’s compulsory merriment, hyper-commercialism, heavy drinking, and undue media emphasis on the idealized, two-child, two-parent, orthodox Christian family makes those who don’t happen to share such lifestyles or religious sentiments feel left out, lonely, and even somewhat un-American.
Even in so-called normal families, media hype about the season’s merriments raises expectations beyond reasonable levels, and sets up many of us for disappointment. According to a leading East Coast psychiatrist, many women exhaust themselves trying to meet both the demands of full-time jobs and more traditional expectations about what holidays are supposed to be like - in many cases, established by their (non-working) mothers.
There is also a great deal of emotional stress associated with overspending and involuntary displays of affection. While it is apparently a popular myth that US suicide rates are higher during the holiday season, police, psychiatrists, and hospitals do report that there is a dramatic rise in alcoholic “slips,” drug overdoses, domestic quarrels, hotline calls, and emergency medical calls at this time of year. “Any redolent setting can be very sad for people who don’t have a dancing partner,” says the psychiatrist. “Christmas is one of those times.”
Christmas is one of the most hazardous times of the year for humans and our pets.
The combination of trees, lights, blazing hearths, yuletide passion, and other indoor festivities results in more household fires at this time of year than any other. The fire department in Washington, D.C., reports that fire calls in December are 40 percent above its monthly average; New York City had 2,600 residential fires last December, as compared with a 2,300-per-month average.
According to the National Highway Traffic Safety Administration, December is the peak month for drunk driving and “DWI” arrests, which totaled 1.5 million last year. It is also the peak month for accidents-because of drunkenness, congestion, and bad weather - with more than 585,000 last year, compared with a monthly average of only 527,000.
In the three days around Christmas last year, 513 people died on the nations highways. The only consolation is that last year’s Thanksgiving was even worse, with 560 deaths. Of course bad weather is a compounding factor. For those of us in colder climes, life would be much easier if we could at least agree to observe Christmas in the summer, when the lutefisk is ripe.
December is also the peak month of the year for robberies, and a pretty good month for auto theft and burglary, too. Police suspect that much of this property crime is because many criminals are also motivated by the need to fill their families’ stockings. December also has a disproportionate number of murders -- almost 1500 last year – and aggravated assaults, many of which are committed by friends and families against each other in the course of holiday revels. “Christmas is a crazy season,” says one former police chief. “It’s a potpourri of emotional extremes -- either extremely quiet, or all hell breaks loose. There are more assaults, bar-room brawls, and family altercations.”
Excessive eating and drinking are used to compensate for all these Christmas tribulations. According to the Distilled Spirits Counsel and the Department of Agriculture, in the six short weeks from Thanksgiving through New Year’s, last year we consumed more than $20 billion of alcohol - including 109 million gallons of hard liquor - plus more than 2 billion pounds of turkey, and a huge quantity of ham, cookies, pies, eggnog, stuffing, plum pudding, and other trimmings.
All this indulgence does little for the nation’s waistline: the Christmas season is the single most important contributor to obesity. The average American consumes at least 3,500-5000 calories at Christmas Day dinner alone, a three-days supply of calories.
Naturally, January is the peak month for diet plans, many of which end up in failure and despair. This helps to account for the recent trend toward obesity in America – at last count, 65 percent of all American adults and 16 percent of all children were overweight.
Other Hazards to Adults
There are also many products associated with Christmas that are especially hazardous. For example, among those that are potentially very harmful to pets and small children are angel hair (spun glass), artificial snow (poisonous), plants like holly, ivy, mistletoe and poinsettia, the Christmas Rose, the Christmas Cactus, dieffenbachia, Lily, the Star of Bethlehem, Yew, Jerusalem Cherry, Hibiscus, and Jequirity Bean; tree decorations like tinsel, metal hooks, ornaments, and glass balls, candles, ribbons, aluminum foil, pine cones, and other packaging, electronic lights, turkey bones, and chocolate.
Furthermore, a high fraction of candles still have lead wires in their wicks, and many aromatherapy candles produce carcinogenic soot.
There is also a sharp increase in the number of household accidents at Christmas time, from scalded fingers and sliced thumbs to scissor stabs, bike spills, and ladder accidents. All this produces a sharp increase in Christmas-related hospital admissions each year. Among the vintage Christmas accidents reported recently:
1. Turkeys exploding in microwave ovens;
2. Children and pets swallowing Christmas tree bulbs whole;
3. Painful glass cuts resulting from attempts to Xerox one’s lower extremities at the annual office party;
4. Children who ran into the street and were hit by cars while their parents were distracted by Christmas shopping;
5. The fellow who drowned after he tried to walk on the “ice” – actually, open water -- after a few holiday party drinks.
6. The fellow who tied a rope to the family car and around his waist, then climbed up on the roof and started down the chimney with presents. Unfortunately, he neglected to tell his wife, who got in the car and drove off.
7. The unfortunate would-be Chinese immigrant whose body was recently discovered in a shipping container filled with artificial Christmas trees.
8. The fellow whose sweater caught on fire when he fell into a tree with lit candles.
9. The 5800 other Americans who suffered injuries last year while decorating their Christmas trees – all of which were serious enough to require visits to the emergency room;
From a distributional standpoint, Christmas aggravates social and economic inequality.
This is because almost all gift-giving at Christmas time takes place within the family, or at least within the same social class, and doesn’t reach the folks who really need our help.
In fact, Salvation Army drum-beating aside, Christmas almost certainly reduces our capacity for charity, by draining us of wealth that might otherwise be given to the truly needy, and by exhausting our charitable impulses in costly bouts of spending, getting, and giving to “we happy few.” Having just spent thousands on gifts and dinners for Muffy, Ben, Mom, and the kids, we are not eager to make sizeable contributions to perfect strangers, no matter how deserving.
Presumably this is not the outcome that the Person for whom this holiday was named would prefer.
SUMMARY – STICK A FORK IN IT
Overall, the message is clear: Christmas is hazardous to our health and safety, imposes a huge efficiency tax on the economy, and does little to further social justice.
Furthermore, these harms may well be growing. An analysis of long-term changes in the seasonality of the US economy suggests that the Christmas buying season has been getting longer, more costly, and more intense.
Of course, Christmas commercialism really is a rather modern innovation. The ancient Christians did not even observe the holiday until the fifth century. Medieval Christians observed it much more modestly, and the Puritans quite sensibly refused to celebrate it at all. Only in the last fifty years, with the perfection of mass-market advertising, department store merchandising, and the commercialization and expansion of pop-Christianity, has Christmas become such a command performance.
In short, from a purely economic and social standpoint, Christmas is an experiment that has been tried and found wanting. In a sense, it has become the flipside of the positive contribution that the “Protestant Ethic” once made to capitalism: Christianity’s second highest holiday now almost certainly makes most of us worse off.
What is to be done? We have a modest proposal: a 3- to 5-year moratorium on the whole affair, to let us pay our bills and recover some of the fellow feeling that we’ve lost. After this interval, we can evaluate the “lessons learned” and the economic impacts again, and devise a new celebration strategy.
This may sound like tough medicine, especially to youngsters. It will also probably offend the many interest groups that have acquired a large commercial stake in this ritual, from bulb manufacturers and tree floggers to ambulance drivers, bar tenders, Park Avenue door men, professional Santas, tinsel makers, and booze peddlers.
But the truth is that the rest of us can no longer afford it. If we celebrate this holiday at all this year, we should do so mainly because it is over for one more year.
**This is an update and revision of an article by the author that first appeared as a cover story for The New Republic on December 31, 1990. Research assistance by Andrew Hellman. © Submerging Markets™, 2004.
Friday, December 10, 2004
Global Growth, Poverty, and Inequality Part I. A Little Christmas Cheer? James S. Henry and Andrew Hellman
The Christmas season is a very special time of year, when Americans, in particular, engage in a veritable month-long orgy of holiday revels and festivities, including eggnog sipping, Santa sitting, package wrapping, neighborhood caroling, tree decorating, menorah lighting, turkey stuffing, and generally speaking, spending, getting, and giving as much as possible, at least with respect to their immediate friends and family.
We certainly don’t wish to question the legitimacy of all these festivities. After all, as this November’s Presidential election has reminded us, ours is surely one of the most powerful, vehement, unapologetic Judeo-Christian empires in world history. Like all other such empires, it has every right to celebrate its triumph while it lasts.
According to the latest opinion surveys, this is indeed an incredibly religious nation, at least if we take Americans at their word. More than 85% of Americans adults consider themselves “Christians,” another 1.5% consider themselves “Jews," 84% pray every week, 81% believe in life after death, 60% believe the Bible is “totally accurate in all its teachings,” 59% support teaching creationism in public schools, and fully 32% -- 70 million people, including 66% of all evangelicals -- would even support a Constitutional Amendment to make Christianity the official US national religion.
In light of all this apparent religious fervor, it is disturbing to read several recent analyses by OXFAM and the UN of certain persistent, grim social realities around the world – and our paltry efforts to redress them. Is the intensity of our religious rhetoric and this season's celebrations just a way of escaping these unpleasant realities?
· According to the UN’s International Labor Organization (December 2004), among those still waiting for economic justice are nearly three-quarters of the world’s population – 4.7 billion people -- who somehow manage to survive on less than $2.50 per day. These include 1.4 billion working poor, half of the 2.8 billion people on the planet who are employed.
· According to the UN’s Food and Agricultural Organization (December 2004), the world’s poor now include at least 852 million people who go to bed hungry each night – an increase of 20 million since 1997. The continuing problem of mass famine has many side-effects – including an estimated 20 million low-birth-rate babies that are born in developing countries each year, and another 5 million children who simply die of malnutrition each year. In some countries, like Bangladesh, half of all children under the age of six are malnourished.
· Overall, for the 5.1 billion residents of low- and middle-income countries, average life expectancy remains about 20-30 percent shorter than the 78 year average that those who live in First World countries now enjoy. By 2015, this will produce a shortfall of some 50 million poor children and several hundred million poor adults. But at least this will help us realize the perhaps otherwise-unachievable “Millennium Development Goals” for poverty reduction.
· According to UNICEF (December 2004), more than 1 billion children – half of all children in the world -- are now growing up hungry, in unhealthy places that are suffering from severe poverty, war, and diseases like HIV/AIDs.
· According to Oxfam (December 2004), First World countries have basically reneged on their 1970 promise to commit .7 percent of national income to aid to poor countries. Last year such aid amounted to just .24 percent of national income among OECD nations, half the 1960s average. And the US commitment level was just .14 percent, the lowest of any First World country, and less than a tenth of the Iraq War’s cost to date.
· This month’s 10th UN Conference on Climate Change (COP-10) in Johannesburg reviewed a growing body of evidence that suggests that climate change is accelerating, and that the world’s poor will be among its worst victims. Among the effects that are already becoming evident are widespread droughts, rising sea levels, increasingly severe tropical storms, coastal flooding and wetlands damage, tropical diseases, the destruction of coral reefs and arctic ecosystems, and, God forbid, a reversal of the ocean’s “thermohaline” currents.
Overall, as the conference concluded, for world’s poorest countries – and many island economies – the threat of such effects is much more threatening than “global terrorism.”
So far, however, the US – which with less than one-twentieth of the world’s population, still produces over a fifth of the world’s greenhouse gases -- seems determined to do nothing but stand by and watch while energy-intensive “economic growth” continues. This year’s oil price increases have slowed the sales of gas-guzzling SUVs somewhat, yet more than 2.75 million Navigators, Hummers, Land Rovers, Suburbans, and Expeditions have already been sold. The US stock of passenger cars and light trucks, which accounts for more than 60 percent of all US oil consumption, is fast approaching 220 million -- almost 1 per person of driving age.
Meanwhile, leading neoconservative economists and their fellow-travelers in the Anglo-American media continue to tout conventional measures of “growth” and “poverty.” Indeed, according to the most corybantic analysts, a free-market-induced “end to poverty as we have defined it” has either already arrived, or will only require the poor to hold their breath just a little bit longer – until, say, 2015.
As we will see in Part II of this series, this claim turns out to be -- like so many other elements of modern neoconservative dogma – a preposterous falsehood. But it does help to shelter our favorite dogmas – religious and otherwise -- from a day of reckoning with the truth.