ASEAN and the Lessons of Greece


July 25, 2015

ASEAN and the Lessons of Greece

by Dr. Munir Majid

http://www.thestar.com.my

“Thank God we don’t have a Common Currency and never should have.”

There are therefore nascent possibilities and challenges which should concentrate ASEAN minds as they consider the Greek drama in the EU’s eurozone beyond “Thank God, we do not have a single currency, and never should have.” We cannot be immunised from the unintended and unanticipated consequences of community-building. We have to have the institutions and imagination to manage them.–Dr. Munir Majid

Dr Munir MajidEUROPE has been glued to the Grexit television screen for the longest time. Going on and on for at least five years, each episode of whether Greece will remain in the eurozone or not has run longer than the longest Tamil movie of yore (although we have our own MIC version, with 1MDB trying to play catch-up).

What are the lessons for ASEAN of the EU’s Greek tragedy? No doubt the first thing that will trip out is: Thank God we do not have a common currency. However, this is only the tip of the iceberg. Beneath the surface there are deep issues involved, so many currents, cross-currents and counter-currents in the management of regional integration.

I will highlight three of the more profound: fiscal discipline; national sovereignty; and community negotiation process.

Fiscal Discipline

Fiscal discipline is actually easy to define, but so difficult to uphold when the freewheeling genie has been out of the bottle for so long with no inclination of coming back in. Under the EU’s Stability Growth Pact government deficit has to be not more than 3% of GDP and debt 60%, something characterised more in the violation than the adherence. Nothing has been done about this for years.

In the case of Greece over the last five years they were supposed to be brought down, but the numbers for the fiscal deficit went up again and the country is up to its ears in debt, coming to 200% of GDP after averaging an already unsustainable 177%.

The other side of the austerity equation is unemployment which has hit 25.6%. (Unemployment in Indonesia as a result of the 1997-98 Asian Financial Crisis was 30%; lowest European unemployment is in Germany at 4.7%).

Youth unemployment in Greece stands at 60%. The Greek economy has shrunk by 25% since the first IMF aid package in 2010. The government and people are saying they cannot take any more, but the creditors – on whom the Greeks are dependent for more bailout and interest servicing packages like an opiate – are saying not enough has been done in a sustained fashion to bring debt and the deficit down.

The Greeks have been used to many things which the creditors now insist on taking away from them. You cannot live beyond your means forever. The chicken is coming home to roost.

From the seven main points of the agreement reached on the night of July 13 for a new bailout package of 86 billion euros, it is clear Greece is now being pushed right against the wall – including what many in the country declare to be violation of its sovereignty.

Cutting pensions

While certain requirements such as cutting pension spending and increasing revenue, through seamless imposition of the top VAT rate of 23% for instance, might be considered par for the course in these bailout situations, the insistence on the transfer of up to 50 billion euros of “valuable Greek assets” to a new independently managed fund, as a form of collateral, was felt by Greeks to be rubbing their noses in the dirt.

National Sovereignty

Alexis and Angela

Sovereignty, what sovereignty? If Greece wants to remain in the euro and needs all the bailout money, including money to service existing bailout funds, has the country got any alternative?

The Greek Prime Minister may quote Paul Krugman on the pain and damage all the austerity requirements are causing the economy, or even appeal to a European sense of history by comparing them to the punitive terms of the Peace of Versailles in 1919 (which historians assert were the root cause of the Second World War as Germany struck back to wipe off the shame), but has he got any other option?

If you need the money, what can you do? South-East Asians may remember that picture in 1998 of the then IMF Managing Director Michel Camdessus standing over the cowed former Indonesian President Suharto, as he signed away Indonesian macroeconomic sovereignty. From profligacy, it might be said, to loss of an important part of national sovereignty.

In the negotiation of the new Greek bailout deal this month – which still may undergo many twists and turns – a feature has been the predominance of Germany in the EU and in the eurozone (comprising 19 of the 28 members of the EU). It is after all the largest creditor nation and economy. If pretence was set aside, it is also the most powerful country in Europe (which arrangements at the end of the Second World War were intended to avoid – but that is a different story).

Every member country has a veto of course, but in negotiating the outline and details of the rescue package for Greece, Germany has led the way all this while and its commitment is indispensable, however much the French try to give the impression of having an eminent role as well.

ASEAN EconC

So, how do we look at it all from an ASEAN perspective? The first instinct – thank God we do not have a single currency – is of course to be expected. But the thinking on what has been happening in Europe and on how relevant it is to AASEAN should not end there.

We do have big states and small states. We may say our negotiating and decision-making processes are different – and national sovereignty is untouchable. But this is too pat and shallow. The process of community-building is moving ahead. The voice of bigger countries does carry greater weight. However if it is in the service of what is good for the larger whole, there is not much to be afraid of.

The changeable predispositions of member states, however, have to be managed. Indeed, what a significant member state DOES NOT DO also affects ASEAN – as is the case now with the growing uncomfortable feeling that Indonesia under President Jokowi is not so enamoured of the regional grouping.

Indonesia therefore is critical to ASEAN. What and how it thinks, what happens in that country, have Asean impact. Thus engagement, with Indonesia particularly but also among all member countries, is most important. ASEAN needs, at this stage of its development, to have a Minister for ASEAN Affairs in each member country. The prospects and challenges need to be a focus in every national administration.

Economic management

With respect to economic management, while there is no single currency, there are threats to ALL ASEAN economies of mismanagement in ONE, especially a significant economy. Contagion is always a risk. With increased intra-regional trade (although now only a quarter of the total trade), there will be knock-on effects across the region.

Importantly – let us not forget – we are talking of ASEAN as a region, one single economy, with the prospect of the most promising growth in consumer demand and economic size (coming up to 4th in the world by 2050). ASEAN is an asset class. With the herd instincts of markets, reverse flows caused by fear of contagion can quickly develop into a regional crisis.

While global arrangements such as with the IMF remain, let us also not forget we have an untested multilateral currency swap system that includes three East Asian partner countries to address potential and actual balance of payments and short-term liquidity difficulties – the Chiang Mai Initiative Multilateralisation (CMIM). The US$240bil fund is 20% Asean and 80% China, Japan and South Korea. The commitments from each country are really promissory notes, and a country in difficulty can draw up to 2.5 times its committed amount.

Will the support always be forthcoming? Will political differences not get in the way? Not to mention an assessment of whether the country facing difficulty has exercised fiscal discipline in the management of its economy. The CMIM has an institution, AMRO (ASEAN+3 Macroeconomic Research Office), to monitor and analyse regional economies in support of its decision-making process.

The central bank governors deciding on requests for support will also rely on AMRO reports and input, and there could be conditions attached to such support, whether the 6-month Breaking Line or the One-year Stability Facility. There could be expectation, frustration, anger and discord.

There are therefore nascent possibilities and challenges which should concentrate ASEAN minds as they consider the Greek drama in the EU’s eurozone beyond “Thank God, we do not have a single currency, and never should have.” We cannot be immunised from the unintended and unanticipated consequences of community-building. We have to have the institutions and imagination to manage them.

Tan Sri Dr. Munir Majid, Chairman of Bank Muamalat and Visiting Senior Fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB ASEAN Research Institute.

More on Greece’s Financial Debacle


July 21, 2015

Why Greece should QUIT the Eurozone

Shrey’s Finance Blog

A 15 year old’s thoughts about finance, economics and growing up as a trader!

http://shreysfinanceblog.com/

Goldman's current CEO, Lloyd Blankfein.Taking Advantage of Greece

The debate over Greece leaving the Eurozone has been raging for a matter of years now. Some believe that Greece staying in the Eurozone is axiomatic, in that a Greek exit from the Euro would ravage the economy, perhaps causing hyperinflation. Others argue to look at the other side of the coin, and propagate the idea that a Greece exit would attenuate the suffering of the Greek people, as they might only have to suffer for the next 10 years, rather than the next 50. Personally, it is my firm belief; my avowal, if you will, that Greece should leave the eurozone, and start a new era, having ended the old era of economic pain.

Almost at the very command of Angela Merkel, the Greek Prime Minister Alexis Tsipras was forced to impose harsher austerity members than the previous weekend’s “No” vote had suggested. This paves the way for increased value added tax, increased privatisation of organisations previously owned by the state, and an increase in the retirement age, making the years that people have to work longer. The harsh austerity measures outlined in the plan forced on Tsipras make the deterioration of the economy an inevitability, which forces the Greeks to sell public assets. We can all agree on the fact that this is a malfeasance in itself, and that the Greek people should not be subjected to having the public assets sold in the interests of paying down Greece’s loans.

It can be clearly seen that Greece is in the midst of an economic depression. The latest measures imposed on Greece by Merkel will only make this worse, with the economy getting worse by the day. If Greece, however, exits the Euro and returns to the Drachma, they will have a substantially weaker currency on their hands, which will be a massive influence in helping Greece get themselves out of their deflation and debt. If Greece does get out of this negative spiral of deflation, they will be alleviated from the economic stagnation and high unemployment that currently pervades the country. This can only be a good thing, as more people can sustain a living due to an increase in jobs.

Moreover, it is arguable that the Greek economy will find it very hard to recover within the Eurozone. Greece needs a complete devaluation of its currency through a flexible exchange rate in order to make economic growth a likely scenario again. It is clear as a bell that the short term consequences would be quite damning for the Greek people, however this is a far better alternative than the other scenario, in which the people are suffering from hardship and poverty for the next half a century, potentially. This whole saga with Greece has affected other economies as well, which has led to fears of an Italian, or even a Spanish exit. If one of these two countries exits the eurozone, the ramifications of this would be irreversible for the euro and it would likely never bounce back.

Finally, it is a definite fact that this whole drama has caused deep political instability and rifts within the Eurozone, which means that the tension between the people in the Eurozone has never been higher. It was revealed earlier that a majority of German citizens want Greece to exit the Eurozone, and if this is the case, then there will be gargantuan pressure on Angela Merkel to force this to happen (some would argue that she is already exhibiting this). In order to put this tension within the Eurozone to rest, Greece needs to exit so we can have some semblance of peace in the Eurozone. All these factors combined show that it is in the best interests of all the countries involved that Greece does exit the Eurozone, and although this may have significant short-term impacts, it is definitely the best thing to do to secure long term economic prosperity for all involved.

_____________________

Is Greece insolvent, and what would that mean for the euro?

http://www.biznews.com/global-investing/2015/02/03/greece-insolvent-mean-euro

Greece financial crisisAs the new Greek government tries to fumble its way through the business of running a struggling country, more and more questions are being asked about the future of Greece and of the Eurozone. As this column asks, we need to know if Greece is, actually insolvent, and if so, how that can be reconciled with its position within the Eurozone. – FD

By James Saft

Feb 3 (Reuters) – Much hangs on the interpretation of a word, and in the case of Greece and the euro zone that word is: insolvent.

New Greek Finance Minister Yanis Varoufakis has been unusually frank, likening his country’s case to that of a jobless person being advised to take out advances on her credit card to pay the mortgage.

“Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?” Varoufakis said days after taking office under the new Syriza-party-led coalition.

“This is the trouble over the last five years with Greece. Our European partners and the previous Greek government have been extending and pretending.”

Keeping up the pretense that one can honor one’s debts if only given room to maneuver and time is an old if not glorious tradition among the deeply indebted. Coming straight out and coping to insolvency, on the other hand, is not.

That’s because certain things tend to follow from an admission of insolvency. Creditors decline new advances, existing loans, where possible, are called and the debts of the insolvent, Greece, are no longer acceptable as collateral.

Guntram Wolff, Director of the Bruegel think tank, argues that Varoufakis has set a rapid clock ticking, making its debts theoretically beyond the pale for the European Central Bank and creating a pressing need for a new deal.

“When a Finance Minister declares the insolvency of his country, then the quality of all the debt he has issued should fall below the relevant thresholds for Emergency Liquidity Assistance as well as standard monetary policy operations. While I do not believe the ECB will be so consequential as to do this immediately, I also cannot believe that it will just continue lending for a long time,” Wolff wrote in a Bruegel piece.

“By talking about insolvency, he has raised the funding needs for Greece’s banking system and made government fund-raising on capital markets impossible,” Wolff said.

Insolvency is a state,  Default is an event

Important to remember that extend and pretend as a strategy, while obviously unfair to many participants, can sometimes work as a means of keeping an entity ticking over. Many leading U.S. banks were very likely insolvent during the crisis.

Like all relationships, good and bad, extend and pretend requires the participation of two partners, the creditor and debtor. All true, but these things are never simple, and far less when, as in Greece, the insolvency includes a euro member state.

While Greece’s liabilities may shortly exceed its ability to repay, its creditors and partners maintain that with current low interest rates and a very long repayment schedule its ongoing debt maintenance burden is not out of line with that of France, for example.

Varoufakis sees the situation as a debt deflation spiral, in which the conditions imposed on Greece stifle demand, pushing prices and output lower and making the debt ultimately impossible to repay without ruin. There is some justice in this position.

Varoufakis’ slapping down of the insolvency card is best seen as a gambit to bring the other side more rapidly to the table and to extract better concessions.

As for the ECB, it seems to be standing on ceremony, maintaining its hands will be tied as for extending Greek banks more credit when the Greek program extension expires at the end of February.

“We (ECB) have our own legislation and we will act according to that,” ECB council member Erkki Liikanen said.

That angle, that the ECB will have to follow its rules and that Greek debt and its banks will be high and dry, is heavily overplayed, argues Karl Whelan, an economics professor at University College Dublin.

Whelan believes that even in March Greek access to ECB enabled credit will be based on discretionary decisions rather than mechanical outcomes. Greece and its negotiating partners can conceivably limp along together because both the ‘rules’ and the meaning of insolvency are such woolly concepts, offering insulation if not clarity.

Thus we have two sides, both seeking to pressure the other by creating what could be a false urgency to negotiate, and both hoping the other crumples and gives way. Meanwhile, capital, sensibly, flees Greece and the chance rises that an overplayed hand by either side leads to a bank run.

The Greek Lesson: Neither a borrower nor a lender be


July 21, 2015

The Greek Lesson: Neither a borrower nor a lender be

by Martin Khor@www.thestar.com.my

Polonius:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75–77

“NEITHER a borrower nor a lender be.” This famous quote in the play Hamlet makes Shakespeare as relevant as ever.

Of course, it is quite inconceivable how the modern economy could operate without companies getting loans from banks and investors. But it has also become clear that the mountains of debt owed by families, companies and governments threaten not only to derail but also swallow up whole economies.

The bad management of debt, whether by those who borrow or those who lend, can cause societies to be throttled by recession, job losses and social chaos for years on end.

The Greek ProblemEven they can’t save Greece

“In the worst cases, indebted countries can lose their sovereignty and have their policies subjected to the demands and fancies of creditors, who may have no hesitation to dominate and humiliate those they lent to and who could not repay.

Alexis and Angela Angela Merkel will show the way

This surely is a major lesson from the current tragedy of Greece that continues to be played on our TV screens and in daily news reports. After years of austerity policies imposed by its creditors, the situation deteriorated rather than improved. The economy’s output had dropped 25%; the unemployment rate had shot to over 30%; poverty is rampant; and many families can no longer afford health care.

Early this year, the people voted in a party that advocated an anti-austerity programme. Five months of negotiations with its creditors (European countries, the European Central Bank and the International Monetary Fund) did not yield any positive results. Instead, there was increasing acrimony between both sides.

The Greek banks began to run out of cash when the European Central Bank stopped the flow of new cash to them. Since Greece does not have its own currency, it depends on the ECB for the supply of euros. When the banks were thus forced to close, and each person was limited to withdraw only 60 daily from ATM machines, there was high pressure on the radical Greek government to give in.

Though he won a vote of ‘no to the austerity demands’ in a referendum, within a few days Prime Minister Alexis Tsipras had to swallow his pride and negotiate with the other European leaders to get new bailout funds.

His government could have opted for “Grexit”, to leave the Eurozone and go back to issuing its own currency and thus regaining control over its monetary independence and economic policies.But most of the public wanted to stay with the euro, and reverting to its own currency also comes with risks. Thus, the Greek Premier’s main aim was to stay in the eurozone, and the price was to accept the demands of the hard-liners among the other European countries, especially Germany.

In return for 86bil (RM354bil) of new bailout funds, he had to agree to an even tougher policy package than offered by the same creditors a week ago. Much of the new funds will go to repaying existing debt and thus will not be used to revive economic growth. Instead, growth prospects will be undermined by new austerity measures such as a rise in value-added tax and pension cuts.

Proceeds from privatisation of state assets up to 50bil (RM206bil) are to be put in a fund to repay debts and recapitalise banks and will be managed by creditors, who will also supervise the implementation of agreed policies.The Greek Premier and his Finance Minister protested for most of the all-night July 12 summit of European leaders, but eventually caved in on almost all points.

The debtor was utterly humiliated. The hard-line creditor leaders were extremely cruel. This was the conclusion of some of Europe’s main commentators. Reported the Financial Times: “They crucified Tsipras in there,” a senior Eurozone official who attended the summit remarked. “Crucified.”

In an article entitled “The euro family has shown it is capable of real cruelty”, Suzanne Moore in The Guardian said: “The euro family has been exposed as a loan-sharking conglomerate that cares nothing for democracy. “This family is abusive. This ‘bailout’, which will be sold as being a cruel-to-be-kind deal is nothing of the sort. It is simply being cruel to be cruel.”

The Greek leaders had been ready to adopt the new austerity measures, in exchange for debt relief. Instead, they had to accept even more stringent austerity and privatisation policies and did not get debt relief or even debt restructuring due to the objections of Germany and others.

The IMF, one of the creditor institutions, has now shocked the public by releasing the memo it had presented to the European leaders during the weekend of the fateful 12 July summit.

The memo estimated that Greece’s debt would go up to 200% of its economic output in the next two years, well above the 127% at the start of the European crisis.

This implies a worsening of Greece’s financial situation despite the austerity policies it has to endure, and shows the policies are inappropriate.

The IMF argues that only through large-scale debt relief could Greece’s debt be made sustainable. It advocated debt relief measures “that go far beyond what Europe has been willing to consider so far.”

These are the same points that the Greek leaders had been arguing, but unsuccessfully. The European leaders also ignored IMF advice. For years the rich countries have imposed the same austerity measures on indebted developing countries, which depressed their economies and got many of them deeper into debt.

After decades, when it was clear the debts could not be repaid, debt relief was finally given to some 20 highly indebted developing countries, but their people had already suffered and their economies still did not fully recover.

It is now the turn of Greece to learn the lesson that creditors can be and usually are cruel almost beyond belief.The Greek tragedy is still being played out. The drama continues. The people of Greece are very frustrated and angry. Nobody knows what the ending will be.

  • Martin Khor (director@southcen tre.org) is Executive Director of the South Centre. The views expressed here are entirely his own.

Asia’s View of the Greek Crisis–Project Syndicate


July 20, 2015

Asia’s View of the Greek Crisis–Project Syndicate

by Lee Jong-Wha

Lee Jong-Wha, Professor of Economics and Director of the Asiatic Research Institute at Korea University, served as Chief Economist and Head of the Office of Regional Economic Integration at the Asian Development Bank and was a senior adviser for international economic affairs to former President Lee Myung-bak of South Korea.

Read more at https://www.project-syndicate.org/columnist/lee-jong-wha#By2GLqMRmk78jDYz.99

Jong Wha LeeAsian countries have been watching the Greek crisis unfold with a mixture of envy and schadenfreude. When they experienced their own financial crisis in 1997, they received far less aid, with far harsher conditions. But they also recovered much more strongly, suggesting that ever-growing bailouts may not be the best prescription for recovery.

Since the onset of the crisis, Greece has received massive financing from the so-called “troika”: the European Commission, the European Central Bank, and the International Monetary Fund. It received bailout packages in 2010 and 2012 totaling €240 billion ($266 billion), including €30 billion from the IMF, more than triple Greece’s cumulative limit for IMF borrowing. The latest deal promises up to another €86 billion.

By contrast, South Korea’s 1997 bailout package – which was larger than those received by Indonesia, Thailand, or the Philippines – totaled $57 billion, with $21 billion coming from the IMF. At the time, South Korea’s annual GDP was $560 billion; in 2014, Greek GDP amounted to less than $240 billion.

The IMF seems to have lent Greece such a large amount for political reasons. For starters, at the onset of the crisis, then-IMF Managing Director Dominique Strauss-Kahn was a leading candidate to become President of France. More generally, major IMF shareholders, the European Union, and the United States have a vital interest in stabilizing Greece to safeguard French and German banks and preserve NATO unity. Desmon Lachman, a former deputy director of the IMF’s policy department, has called the institution a slush fund, abused by its political masters during the Greek crisis.

To be sure, the economic mess created in Greece – the result of government profligacy, official corruption, and widespread tax evasion – merited some international assistance. And the IMF did impose conditions on its loans to Greece – including fiscal austerity, privatization, and structural reform of its pension and tax systems – most of which were necessary to address the country’s insolvency. The requirements of the latest rescue deal are the toughest yet – even tougher than those that Greek voters overwhelmingly rejected in a referendum earlier this month.

But the scale of the aid remains massive, especially when one considers how little progress Greece has made in implementing the reforms it promised in the past. This contrasts sharply with Asia’s experience in 1997.

Unlike Greece, Asia’s problem was not an insolvency crisis, but a liquidity crisis, caused by a sudden reversal of capital flows. In South Korea, net private-capital inflows of 4.8% of GDP in 1996 swung to net outflows of 3.4% of GDP in 1997. Though the accumulation of substantial short-term debts in the financial system and corporate sector did amplify the shocks, the primary factors fueling the crisis were the lack of international liquidity, panicked behavior by investors, and financial contagion.

Yet the IMF imposed even tougher conditions on Asia than it has on Greece, including fiscal austerity, monetary tightening, and financial restructuring. Some of these requirements were clearly unnecessary, as evidenced by Malaysia, which recovered quickly from the crisis without IMF assistance.

In any case, the actions were temporary. Once confidence began to recover and market conditions stabilized, the East Asian economies shifted their monetary and fiscal policies toward expansion and embraced large-scale exchange-rate depreciation – efforts that enhanced their export competitiveness. Structural reforms, including the immediate closing of financial institutions and the elimination of non-performing loans, also helped to bolster recovery.

In South Korea, for example, real GDP growth quickly rebounded from -6.7% in 1998 to 9.5% in 1999. By mid-2003, some 776 of the country’s financial institutions were closed. And the authorities’ strong commitment to reform restored investor confidence, reviving inflows of private capital and reactivating foreign trade.

Greece, by contrast, has utterly failed to engineer a recovery. Instead of dropping to 110% as planned, the public debt-to-GDP ratio has increased to 170%. Annual per capita real income contracted 4.8%, on average, over the last six years. Unemployment stands at 26%, and hovers around 50% among young people.

Against this background, it was not shocking that Greece, unable to come up with €1.5 billion at the end of June, became the first developed country to miss a payment to the IMF. Belatedly, the Fund acknowledged that its lending and policy advice had failed in Greece.

Greece’s government then demanded more financial support with less stringent conditions. But, as its creditors have now recognized, providing more money will not address Greece’s insolvency. That is why the new deal requires that the government immediately cut pensions, hike taxes (beginning with the value-added tax), liberalize the labor market, and adhere to severe spending constraints. At the same time, a write-down of official debt, like the “haircut” given to private creditors in 2012, will be necessary.

Many have questioned whether agonizing reforms are entirely necessary; if the country returned to the drachma, they suggest, it could implement interest-rate cuts and devalue its exchange rate, thereby engineering an export-led recovery. But, given Greece’s small export sector, not to mention the weakness of the global economy, such a recovery may be impossible. Greece’s best bet is reform.

So far, Greece has shown itself to be unwilling to implement a painful internal-wage adjustment and reform measures forced by outsiders. Perhaps the latest deal, which was reached with Greece on the brink, will prove to be a turning point, with Greece finally committing actively to economic and fiscal reform. Otherwise, Greece’s exit from the eurozone – with all the concomitant social and economic strife – seems all but inevitable.

Asians watch with sympathy the fall from grace of the birthplace of Western civilization. But perhaps Greece should look to Asia for proof that, by taking responsibility for its own destiny, a country can emerge stronger from even the most difficult trials.

Killing the European Project


July 13, 2015

 Killing the European Project

by Paul Krugman–The Conscience of a Liberal
http://www.nytimes.com

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

PM of Greece

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this?

In a way, the economics have almost become secondary. But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line. This has no bearing at all on the underlying economics of austerity. It’s as true as ever that imposing harsh austerity without debt relief is a doomed policy no matter how willing the country is to accept suffering. And this in turn means that even a complete Greek capitulation would be a dead end.

Can Greece pull off a successful exit? Will Germany try to block a recovery? (Sorry, but that’s the kind of thing we must now ask.)

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

In Search of Equitable Wealth Distribution


July 8, 2015

In Search of Equitable Wealth Distribution

by Dr. Lim Teck Ghee

The publication of the book, “Capital in the Twenty-First Century” by French economist, Thomas Piketty in 2013, immediately ignited a controversy among economists on both sides of the Atlantic. This debate still continues today.

Piketty’s findings reveal that the return on capital is greater than overall growth and that the rich have acquired an ever-increasing proportion of the economic pie.

The issues raised by the book touch on the forces that drive and shape the accumulation of capital. This is of special interest to many people primarily because it deals with the key dilemma of how wealth is distributed in society and what should be done to ensure a more equitable distribution.  Such questions have preoccupied social scientists and scholars going back in time to Karl Marx and even before him.

In his work, Piketty analysed data from 20 countries – some going asThomas Pikettt far back as the 18th century – to uncover what are the key economic and social patterns in capital. Among some of his main findings are that the return on capital is greater than overall growth and that the rich have acquired an ever-increasing proportion of the economic pie.

These findings by themselves appear to be unsurprising or controversial although some critics have faulted his data and basic assumptions. What has provoked fierce dissent are his proposals to correct this phenomenon through what is seen as a ‘soak the rich’ approach so as to bring about greater equality.  This strategy proposes counter measures such as higher income and inheritance taxes as well as a progressive tax on wealth levied globally to prevent the rich from evading their contribution to the state coffers.

Piketty’s policy proposals have mostly been dismissed as a non-starter. In the United States, for example, a wealth tax is regarded as illegal as well as unconstitutional whilst in Britain, it has been pointed out that “eating capital is the best way to impoverish a nation, reduce productivity growth and keep wages down…societies where the most successful entrepreneurs are rewarded by the state seizing their assets don’t prosper,” (Allister Heath, “Thomas Piketty’s bestselling post-crisis manifesto is horrendously flawed”, The Daily Telegraph, 29 April 2004).

Illicit Financial Outflows

How these issues and proposals are finally resolved in the West should be of interest to Malaysians as we grapple with our home-grown pattern of capital and wealth formation and distribution. In our case though the spotlight initially should be on the more pressing issue of what has been categorized as illicit financial outflows. This outflow of wealth is where Piketty’s proposal for a global wealth tax could be immediately applicable.

Recently, the Global Financial Integrity (GFI), a US-based anti-corruption watchdog estimated that Malaysia was fifth in the world on cumulative total illicit financial flows (‘IFF’) since 2003. For 2012 alone, this amounted to approximately US$49 billion (approximately RM170.7 billion) and over the cumulative 10 year period from 2003-2012, illicit outflows was estimated at a staggering US$394.87 billion. If taxes were levied on the illegal outflows, the country’s finances could have benefited to the tune of tens of billion US dollars.

Bank Negara Malaysia (Central Bank of Malaysia–Banque Nationale du Malaisie– has disputed the GFI figures, saying that the estimates of illicit outflow were overstated as the estimates in trade mispricing had not been taken into consideration. The central bank argued that the GFI estimates were essentially unrecorded financial flows, which were not necessarily synonymous with illicit financial outflows.

However, Bank Negara left unanswered the key question of what part of the IFF was caused by illicit transfers. In the language of GFI, these are  “cross-border transfers of funds that are illegally earned, transferred, or utilized. These kinds of illegal transactions range from corrupt public officials transferring kickbacks offshore, to tax evasion by commercial entities, to the laundered proceeds of transnational crime.”

While the GFI study has been helpful in providing some hard data on the quantum of the illicit financial outflows, it does not provide much assistance on key details such as who are responsible for the outflow; the countries of fund relocation; etc.  At this stage, we can only hazard a guess as to the likely individuals or parties involved in the non-transfer pricing outflow. The most likely culprits are those who have been able to accumulate considerable wealth and who find it expedient to conceal their wealth accumulation as well as to diversify their wealth havens and assets away from Malaysia.

Names which come to mind will include, for example, Taib Mahmud, the former Chief Minister of Sarawak who together with his immediate family is alleged to have shares in more than 330 companies in Malaysia alone and more than 400 companies in total around the globe worth several billion US dollars.

Various quarters have questioned the legitimacy of this wealth accumulation. A recent article in the blogsite, Sarawak Headhunter,  provides in-depth details into what is alleged to be his income stream. But until a proper and full study is undertaken, we will have to assume that wealth has been legally accumulated and has been taken out of the country with the full blessing of our financial authorities. Even then, such wealth should be eligible for taxation if Piketty’s proposal of a global tax on assets is implemented.

We need bold solutions to our growing problem of inequality. A wealth tax on what is classified as illicit financial outflows would be a good beginning.