C.P. Chandrasekhar and Jayati Ghosh

Indonesia, like India, has a brand new government. Expectations are running high for the new President Joko Widodo (or Jokowi, as he is popularly known) who has promised not only to restore output growth to the high rates previously experienced before the latest downturn, but also to do so cheaply (in fiscal terms). The economic recovery is widely expected to come about through measures like ending corruption and easing the rules for doing business so as to attract new foreign investment. Meanwhile the poor are to be assisted through an expanded programme of social transfers and protection in terms of health insurance and similar measures.

How successful such a strategy will be in achieving its declared goals is yet to be seen. Yet it is important to remember that output growth per se cannot and should not be the aim, especially if it is speedily shown to be unsustainable because of reflecting boom-bust commodity or credit cycles, or if it is not associated with a sustained diversification away from primary production that is necessary for improving aggregate labour productivity and wage incomes. In this matter, there are salutary lessons to be drawn not only from other developing countries, but from Indonesia’s own experience over the past three decades. Historically Indonesia was an exporter of primary commodities, dominantly fuel as well as agricultural goods such as rubber and palm oil. In the period from 1980 to just before the East Asian crisis, however, it experienced a significant increase in the share of relatively labour-intensive manufactured goods exports. These were dominantly textiles and clothing, footwear and furniture, but there were also some “high-tech” manufactured goods such as electronic goods and components and some machinery.

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Addressing Illegal Export of Honestly Acquired Capital

James K. Boyce and Léonce Ndikumana

This is part 2 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Encouraging “home bias” in investment

The development of profitable investment opportunities not only helps keep capital onshore, but also can help attract private capital held abroad, including remittances from the African diaspora. In the case of African countries, there is considerable scope for reducing the costs of production and trade through increasing the quantity and quality of infrastructure—especially power, transportation, and communication. Measures to accelerate the development of domestic and regional financial markets could also help to shift African investors’ preferences in favor of domestic markets. Domestic-currency government infrastructure bonds, for example, have provided an important source of financing for public infrastructure in Kenya (Brixiova and Ndikumana, 2013).

Many African countries have resorted to fiscal incentives to promote domestic investment. These include tax allowances on capital investment, tax exonerations on investment-related imports, and generous tax holidays for major investment projects. A major drawback of this strategy, however, is that it can entail significant tax revenue losses in a continent where most countries face large financing gaps. A second problem is that the implementation of investment tax incentives is plagued by corrupt practices that result in an inefficient allocation of investment as well as excessive foregone revenue. A third concern is that tax incentives often are skewed in favor of foreign direct investment, putting domestic investors at a competitive disadvantage.

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Mark Weisbrot, Guest Blogger

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). He is also president of Just Foreign Policy (www.justforeignpolicy.org).

When it comes to economic policy, the ideas of the public can matter a lot. Elected governments have to worry about being re-elected, and this is certainly the case in Venezuela, where the electorate is polarized and the last presidential election was close.

Venezuela is facing a number of economic problems right now, including annual inflation over 60 percent, shortages of some consumer goods, capital flight, and an economy that is projected to shrink for the year. Most of these problems can be traced to the country’s dysfunctional exchange rate system. Yet polls show that a vast majority of the public—in some recent polls as much as 80 percent—does not want a devaluation that could fix this system. And it appears to be this pressure from the electorate—not from special interests—that is preventing the changes necessary to restore economic health.

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Investment Treaties Bring More Risk Than Benefit

Kevin P. Gallagher

Kevin P. Gallagher is the author of the new book Ruling Capital: Emerging Markets and the Reregulation of Cross-border Finance. He is a professor on the Pardee School of Global Studies, Boston University.

As they negotiate a mega-trade and investment deal with the United States—the Transatlantic Trade and Investment Partnership (TTIP)—Germany and the rest of Europe have recently started to question the merits of signing treaties that allow private investors to sue their governments over new regulations to promote economic prosperity. This is old news to emerging market and developing countries that have experienced an onslaught of corporate suits against their governments as they have attempted to foster policies for human rights and environmental protection that create inclusive growth for their citizens. While Europe debates the costs and benefits of singing a deal with the U.S. that allows such loopholes, pioneering nations such as South Africa and Ecuador offer sober lessons.

Both South Africa and Ecuador have been subject to pasts where ultra-right regimes favored foreign driven elites. By the turn of the century both countries had toppled such regimes in favor of new governments focused on correcting past inequities and putting their countries on a path of broad-based equitable prosperity.

Yet, to allay fears, once these new regimes took office, South Africa and Ecuador both signed or inherited whatever they could to send the “right” signals to the world investment community that they were open for business and that the boat wouldn’t be rocked.

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James K. Boyce and Léonce Ndikumana

This is part 1 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Understanding types of capital flight

Private capital stashed abroad by Africans is not a homogeneous pool of resources. Some of it is clean capital, licitly acquired and licitly transferred, but a substantial part is illicit by virtue of its mode of acquisition and/or transfer.

As can be seen in Table 1, African private wealth held abroad includes some capital that was honestly acquired in Africa and legally transferred abroad as capital outflows duly recorded in national statistics in the country of origin. This is clean capital. Some legally acquired capital is transferred abroad by clandestine means, however, circumventing regulations and reporting requirements on the cross-border movement of capital. The motivations for such transfers include tax evasion, as well as more legitimate concerns about the security of property rights or illegitimate taxation. We refer to this as smuggled capital, and it is one component of capital flight.

Table 1: Legal and Illegal Capital Held Abroad

Illegally acquired capital originates from corruption, theft, bribery, counterfeit, trafficking of illegal goods and services, and other illicit transactions. The perpetrators of these economic and financial crimes have two additional motives for moving their stolen assets out of the country: to conceal evidence of their crimes, and to hide the proceeds where they are less likely to be recovered by legal authorities, and more accessible should they find it prudent to move abroad themselves.

In some cases, stolen assets find their way into the country’s legal financial system, either by taking advantage of the laxity of controls or by corrupting the officials responsible for verifying the origins of the funds. This laundered capital may then exit the country using legal routes. Because outflows of laundered capital are recorded in the official statistics—despite the illicit origins of the funds—they not enter into measured capital flight.

Although domestic money laundering makes it easier to move funds out of and back into the country, it entails risks and transaction costs, and it exposes assets to the view of tax authorities. For these reasons, most illegally acquired capital that leaves the country of origin does so clandestinely. This is what we call dirty capital. The strong correlations between capital flight and external borrowing, and between capital flight and natural resource extraction, suggest that dirty capital constitutes a substantial fraction of total African capital flight.

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Sunita Narain

The Indian government must not use “equity” to block climate change negotiations. It must be proactive on equity and put forward a position on how to operationalise the sharing of the carbon budget—accounting for countries’ contribution to past emissions and allocating future space—in climate talks.

I wrote this last year when the UPA government was in power. I am repeating this as the NDA government prepares for the next conference of parties (CoP) to be held in December in Peru.

Equity is a pre-requisite for an effective agreement on climate change. In the early 1990s, as the negotiations began, Anil Agarwal, environmentalist and director of the Centre for Science and Environment, and I put forward the argument that since the atmosphere is a global common, we need equal entitlements to the space. We argued the only way countries would commit to reducing emissions—connected to economic growth—would be if there were limits for all, based on contribution to the creation of the problem.

The 1992 UN Framework Convention on Climate Change is built on this premise—the group of countries (Annex 1) responsible for creating the problem must create space for the rest to grow. But since the objective is to have a different growth pattern to avoid emissions of long-life carbon dioxide, developing countries would get money and technology.

The current situation is very different.

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Tomaso Ferrando, Guest Blogger

Tomaso Ferrando is a Ph.D. candidate in law, and currently a Visiting Fellow at the Institute for Global Law and Policy, Harvard Law School. This article is a condensed version of a chapter that appears in “Shifting Power: Critical perspectives on emerging economies,” published by the Transnational Institute (August 2014).

The BRICS countries’ relationships with other countries in the South are often said to be distinguishable from those of traditional Northern donors. In particular, it is often claimed that South-South development cooperation does not attach policy conditionalities, provides assistance based on a win-win paradigm, and places emphasis on how to ensure economic sustainability of the receiving country.[1] A closer look at the issue of investing in land abroad, and the use of investment agreements to secure those investments, suggests though that there is much less of a gulf between the practices of governments in North and South than we might like to think.

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Jeff Madrick

The title of this post, by regular Triple Crisis contributor Jeff Madrick, references the adage “It’s the economy, stupid!”—coined by leaders of Bill Clinton’s successful 1992 presidential campaign, as a reminder to emphasize economic issues. Madrick, however, argues that both major political parties in the United States are afflicted by bad economic ideas, especially simplistic “invisible-hand thinking.” These bad ideas, he argues, result in bad policy, including a view of government deficits as an unmitigated evil, a fixation with very low inflation rates, and a tolerance of excessive inequality.

How much do ideas in economics matter? I raise the issue because I just published a book called Seven Bad ideas: How Mainstream Economists Have Damaged America, and some commentators have doubted the potency of ideas themselves. At the heart of the damage I describe—stagnant wages, inequality, a dearth of public investment, a growing class culture, repeated financial crises—is an over-simplified faith in the invisible hand, which in mainstream thinking not only rules individual markets fairly but also the entire economy with no interference from government. Demand and supply will meet as prices shift to establish a balance between then two. The faith in such general equilibrium continues strong because partly it makes economics so much easier to do. It also conforms to the ideological turn in America against trust in government.

There is absolutely no proof that general equilibrium actually exists, however, which Jonathan Schlefer has taken pains to point out. I’d argue the Democrats got a whipping in the mid-term elections because of such faith in the invisible hand and related ideas—to put it simply, because of bad economic ideas. I will explain further.

Economists will always deny that they take the invisible hand that seriously. They acknowledge that for it to work as Adam Smith suggested requires many assumptions: a free flow of information, complete lack of monopoly power, a pure and simple mechanism to discover the right price. It is a metaphor for how markets could work, not how they do work.

But as I stress in the book, it is too alluring an idea. Kenneth Arrow, who understands its limitation better than anyone, called it one of the most important contributions in history of intellectual thought. James Tobin called it one of the greatest economic ideas of all time. But, as I say, this idea is so beautiful, it overpowers good sense.

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Jeff Madrick

The title of this post, by regular Triple Crisis contributor Jeff Madrick, references the adage “It’s the economy, stupid!”—coined by leaders of Bill Clinton’s successful 1992 presidential campaign, as a reminder to emphasize economic issues. Madrick, however, argues that both major political parties in the United States are afflicted by bad economic ideas, especially simplistic “invisible-hand thinking.” These bad ideas, he argues, result in bad policy, including a view of government deficits as an unmitigated evil, a fixation with very low inflation rates, and a tolerance of excessive inequality.

How much do ideas in economics matter? I raise the issue because I just published a book called Seven Bad ideas: How Mainstream Economists Have Damaged America, and some commentators have doubted the potency of ideas themselves. At the heart of the damage I describe—stagnant wages, inequality, a dearth of public investment, a growing class culture, repeated financial crises—is an over-simplified faith in the invisible hand, which in mainstream thinking not only rules individual markets fairly but also the entire economy with no interference from government. Demand and supply will meet as prices shift to establish a balance between then two. The faith in such general equilibrium continues strong because partly it makes economics so much easier to do. It also conforms to the ideological turn in America against trust in government.

There is absolutely no proof that general equilibrium actually exists, however, which Jonathan Schlefer has taken pains to point out. I’d argue the Democrats got a whipping in the mid-term elections because of such faith in the invisible hand and related ideas—to put it simply, because of bad economic ideas. I will explain further.

Economists will always deny that they take the invisible hand that seriously. They acknowledge that for it to work as Adam Smith suggested requires many assumptions: a free flow of information, complete lack of monopoly power, a pure and simple mechanism to discover the right price. It is a metaphor for how markets could work, not how they do work.

But as I stress in the book, it is too alluring an idea. Kenneth Arrow, who understands its limitation better than anyone, called it one of the most important contributions in history of intellectual thought. James Tobin called it one of the greatest economic ideas of all time. But, as I say, this idea is so beautiful, it overpowers good sense.

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Gerald Epstein

Regular Triple Crisis contributor Gerald Epstein, of the University of Massachusetts and the Political Economy Research Institute, speaks with The Real News Network’s Sarmini Peries about the 2010 Dodd-Frank Wall Street Reform law. Prof. Epstein notes two key problems with the law’s final rules: While Dodd-Frank includes a provision to prevent banks from merging, it does nothing to reduce the size or complexity of banks that are “already too big, they’re already too complex, they’re already too hard to manage.” Meanwhile, the new law’s rules about banks holding onto risky securities, he suggests, is a “red herring,” since the real problem is that “too big to fail” banks expect to be bailed out in the event of a crisis.

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