Deja Voodoo–Trump’s Tax Reform


October 20, 2017

Deja Voodoo–Trump’s Tax Reform

by Joseph E. Stiglitz*

http://www.project-syndicate.org

A Trump administration staffed by plutocrats – most of whom gained their wealth from rent-seeking activities, rather than from productive entrepreneurship – could be expected to reward themselves. But the Republicans’ proposed tax reform is a bigger gift to corporations and the ultra-rich than most had anticipated.

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NEW YORK – Having failed to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”), US President Donald Trump’s administration and the Republican congressional majority have now moved on to tax reform. Eight months after assuming office, the administration has been able to offer only an outline of what it has in mind. But what we know is enough to feel a deep sense of alarm.

Tax policy should reflect a country’s values and address its problems. And today, the United States – and much of the world – confronts four central problems: widening income inequality, growing job insecurity, climate change, and anemic productivity growth. America faces, in addition, the need to rebuild its decaying infrastructure and strengthen its underperforming primary and secondary education system.

But what Trump and the Republicans are offering in response to these challenges is a tax plan that provides the overwhelming share of benefits not to the middle class – a large proportion of which may actually pay more taxes – but to America’s millionaires and billionaires. If inequality was a problem before, enacting the Republicans’ proposed tax reform will make it much worse.

Corporations and businesses will be among the big beneficiaries, a bias justified on the grounds that this will stimulate the economy. But Republicans, of all people, should understand that incentives matter: it would be far better to reduce taxes for those companies that invest in America and create jobs, and increase taxes for those that don’t.

 

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After all, it is not as if America’s large corporations were starved for cash; they are sitting on a couple of trillion dollars. And the lack of investment is not because profits, either before or after tax, are too low; after-tax corporate profits as a share of GDP have almost tripled in the last 30 years.

Indeed, with incremental investment largely financed by debt, and interest payments being tax-deductible, the corporate tax lowers the cost of capital and the returns to investment commensurately. Thus, neither theory nor evidence suggests that the Republicans’ proposed corporate tax giveaway will increase investment or employment.

The Republicans also dream of a territorial tax system, whereby American corporations are taxed only on the income they generate in the US. But this would only reduce revenue and further encourage American companies to shift production to low-tax jurisdictions. A race to the bottom on corporate taxation can be prevented only by imposing a minimum rate on any corporation that engages in business in the US.

America’s states and municipalities are responsible for education and large parts of the country’s health and welfare system. And state income taxes are the best way to introduce a modicum of progressivity at the subnational level: states without an income tax typically rely on regressive sales taxes, which impose a heavy burden on the poor and working people. It is thus perhaps no surprise that the Trump administration, staffed by plutocrats who are indifferent to inequality, should want to eliminate the deductibility of state income taxes from federal taxation, encouraging states to shift toward sales taxes.

Addressing the panoply of other problems confronting the US will require more federal revenues, not less. Increases in standards of living, for example, are the result of technological innovation, which in turn depends on basic research. But federal government support of research as a percentage of GDP is now at a level comparable to what it was 60 years ago.

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While Trump the candidate criticized the growth of US national debt, he now proposes tax cuts that would add trillions to the debt in just the next ten years – not the “only” $1.5 trillion that Republicans claim would be added, thanks to some growth miracle that leads to more tax revenues. Yet the key lesson of Ronald Reagan’s “voodoo” supply-side economics has not changed: tax cuts like these do not lead to faster growth, but only to lower revenues.

This is especially so now, when the unemployment rate is just over 4%. Any significant increase to aggregate demand would be met by a corresponding increase in interest rates. The “economic mix” of the economy would thus shift away from investment; and growth, already anemic, would slow.

An alternative framework would increase revenues and boost growth. It would include real corporate-tax reform, eliminating the tricks that allow some of the world’s largest companies to pay miniscule taxes, in some cases far less than 5% of their profits, giving them an unfair advantage over small local businesses. It would establish a minimum tax and eliminate the special treatment of capital gains and dividends, compelling the very rich to pay at least the same percentage of their income in taxes as other citizens. And it would introduce a carbon tax, to help accelerate the transition to a green economy.

Tax policy can also be used to shape the economy. In addition to offering benefits to those who invest, carry out research, and create jobs, higher taxes on land and real-estate speculation would redirect capital toward productivity-enhancing spending – the key to long-term improvement in living standards.

An administration of plutocrats – most of whom gained their wealth from rent-seeking activities, rather than from productive entrepreneurship – could be expected to reward themselves. But the Republicans’ proposed tax reform is a bigger gift to corporations and the ultra-rich than most had anticipated. It avoids necessary reforms and would leave the country with a mountain of debt; the consequences – low investment, stalled productivity growth, and yawning inequality – would take decades to undo.

Trump assumed office promising to “drain the swamp” in Washington, DC. Instead, the swamp has grown wider and deeper. With the Republicans’ proposed tax reform, it threatens to engulf the US economy.

*Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former senior vice president and chief economist of the World Bank and chair of the US president’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University.His most recent book is The Euro: How a Common Currency Threatens the Future of Europe.

 

Jomo Kwame Sundaram–Need to Speak Truth to Power


October 16, 2017

Jomo Kwame Sundaram–Need to Speak Truth to Power

by Malaysiakini Team

http://www.malaysiakini.com

Tomorrow: Jomo on why Malaysians are worse off today

INTERVIEW | Jomo Kwame Sundaram, former Assistant Secretary-General for Economic Development at the United Nations, talks about the need to “speak truth to power,” among others.

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Question: In a recent speech, Prime Minister Najib Razak accused you of taking “every opportunity to attack me and my policies, from our participation in the TPPA, to the administration of welfare payments, to foreign investment in Malaysia.” What do you have to say?

Jomo: What can I say? One should not read him out of context. He said this as proof of freedom of speech and democracy in the country. Obviously, I appreciate his commitment to freedom of speech, and presumably, freedom after speech [laughs]. In fact, some people now tease me as the PM’s “poster boy” for free speech in Malaysia.

But unfortunately, his fact-checkers did not do their homework, or perhaps facts don’t matter in this age of fake news. As many know, I have also been criticised by the PM’s critics for supporting several of his policy initiatives, most notably BR1M (Bantuan Rakyat 1Malaysia) and the minimum wage policy.

BR1M goes directly to beneficiaries and is hence much appreciated by recipients. Understandably, as with the mid-year deal for Felda settlers, opposition politicians see BR1M as bribing the electorate, but one should not condemn BR1M itself.

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However, labour market interventions, such as the minimum wage policy, have been far more significant for improving a lot of low-income earners although the public may not realise it.

I recently lauded the Health Ministry initiative to get an affordable Hepatitis C treatment, for a small fraction of the US price, for the almost half million Malaysians who suffer from it.

So factually, his speechwriters were wrong. But he was right to say that I do not blindly support everything his government has done, and have been critical of specific policies, which I have done for decades, long before he became PM.

Najib said you have been critical of the Trans-Pacific Partnership Agreement (TPPA).

Jomo: He is correct that I have long been critical of the TPPA. Before I came back to Malaysia last year, I joined some UN colleagues to critically assess the TPPA. The report was launched in Washington DC in early 2016, soon after I left the UN.

That work was not focused on Malaysia, and simply pointed out that the methodology used simply assumed away the problems the TPPA would generate, including for the US. In the US, both Democrats and Republicans cited our work to oppose the TPPA.

After returning to Malaysia, I felt obliged to point out that the gains promised by the TPPA, even by its most fervent US advocates, were actually very modest and exaggerated by its Malaysian proponents.

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I also pointed out that most of the gains to the US were at our expense. Strengthened intellectual property rights (IPRs) would raise the costs of medicines, for example.

The TPPA’s investor-state dispute settlement (ISDS) provisions would allow private tribunals to make rulings in favour of powerful foreign corporations at potentially great expense to the Malaysian government.

Even now, although the TPPA is dead in law because President (Donald) Trump rejected it, there are those trying to push TPP 11 through while the government and public are distracted by other matters.

This would be worse as it would sell out the national and public interest for next to no gain. My concern throughout has been the Malaysian public interest, including the government interest.

What about foreign investments?

Jomo: As for foreign investment, again he is correct that I am concerned about how the government is encouraging foreign portfolio investment, as in the period before the 1997-98 crisis.

Unlike Thailand and Indonesia then, the government and Malaysian corporations had not borrowed very heavily from abroad. But we were vulnerable because of the sudden exit of mainly foreign holdings from the Malaysian stock market.

Such investments have grown so much in the last decade that some estimates suggest that they exceed foreign share ownership in the mid-1970s, more than four decades ago. It is also misleading to think that because Malaysians have been encouraged to invest abroad, we should encourage foreign portfolio investments here.

 

Greenfield foreign direct investments are a different story as they may bring in new productive capacities and capabilities, including technology, management and market access. But my concern remains that Malaysian industrial capacities and capabilities remain modest, and we still have relatively few internationally competitive industrial firms.

My concerns have been expressed with the country’s interests and future progress foremost. I pray that the space for such discussion and debate will be expanded, not diminished. The PM’s affirmation of freedom of speech should, therefore, be welcomed, not feared.

So, what inspires you to do what you do?

Jomo: Many people have inspired me. Those who fought to free us from imperialism, oppression and exploitation. While in school, especially at the Royal Military College, I was inspired by Malcolm X, Martin Luther King, Yasser Arafat, Kwame Nkrumah, Ho Chi Minh and Nelson Mandela.

And yes, I do not identify with the other man I was named after – Jomo Kenyatta, father of Kenya’s current president, who was unfairly jailed by the British from 1952 until 1959, but became increasingly corrupt and tribalistic after becoming president in 1963.

Chinua Achebe’s writings turned from the disruptive colonial impact to the gangrene of corruption. Then, in 1983, I was shaken by the brutal torture and murder of my senior in school, the late Jalil Ibrahim, in Hong Kong.

We are all enjoined to “speak truth to power.” Initially, when I was at UKM (Universiti Kebangsaan Malaysia) with the late Ishak Shari, Osman Rani and Ismail Muhd Salleh, and later with others after I moved to Universiti Malaya.

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During Dr Mahathir (Mohamad)’s long tenure, I was also known as a critic, even though I appreciated many aspects of particular policy initiatives. Although I was quite outspoken in those days, BN politicians did not harass me.

 

Rather, petty university administrators who had ambitions or agendas of their own were the vindictive ones. But most left me alone as I had no ambitions in terms of university positions.

Also, there is no personal animus on my part towards the Prime Minister. As is well-known, I greatly admire his late father (Tun Abdul Razak )for many reasons. In fact, I wrote an article early last year, just after leaving the UN, on the occasion of the 40th anniversary of his untimely passing.

As a student then, in the cold winter of early 1976, we organised a memorial meeting at MIT (Massachusetts Institute of Technology) to honour his contributions soon after he passed.

Tomorrow: Jomo on why Malaysians are worse off today

‘Minister of Finance Inc’ – A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez


September 30, 2017

‘Minister of Finance Inc’ A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez

by M Krishnamoorthy @www.malaysiakini.com

 

Dr. Terence Gomez, in his latest book, “Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia”, traces the government’s role in the corporate sector. He provides an assessment of Malaysia’s new political economy, with a focus on ownership and control of the corporate sector.

Gomez, who is a Professor of Political Economy at Universiti Malaya, is also the author of “Politics in Business: UMNO’s Corporate Investments”, a pioneering publication in 1990, which traced how UMNO secured a huge equity interest in Malaysia’s corporate sector.

 

In “Minister of Finance Incorporated”, Gomez (photo above) and his team of researchers offer another pioneering assessment of Malaysia’s corporate sector, though their focus is now government-linked investment companies (GLICs), a type of state enterprise that has long prevailed in the economy but has not been analysed.

Gomez argues that corporate power is now concentrated in these GLICs that are ultimately controlled by the Minister of Finance. Interestingly, Gomez admits that these GLICs are well-managed by highly qualified professionals, though these people can be subservient to the dictates of the Minister of Finance.

By focusing on the GLICs, “Minister of Finance Incorporated” ignites interesting debates about the role of the government in the economy, an issue that requires thoughtful consideration given their dominant presence in the corporate sector. Through in-depth research, novel insights are provided into this question of government ownership and control of corporate Malaysia.

This review is presented as a question-and-answer dialogue with the author, to draw attention to this study’s major findings. Much of what is outlined below is from this book.

The Interview

Professor Gomez, in your latest book, “Minister of Finance Incorporated”, what are your major findings?

Malaysia’s political economy has undergone a major transition since the 1990s that has escaped public attention.

Corporate power has shifted from UMNO and well-connected businessmen to the government. Huge business groups controlled by the government have emerged, seen in the dominance that a mere seven GLICs have over the corporate sector.

During this transition, one extraordinary outcome was the removal of UMNO, its members and the business associates of party leaders as owners of publicly-listed government-linked companies (GLCs).

 

UMNO now has direct equity ownership of only one quoted company, the media-based Utusan Melayu, while no UMNO member figures as a major corporate player.

UMNO’s absence from the corporate sector has major implications. The power nexus involving politics and business has fundamentally shifted at the federal level.

If this political-business nexus once involved numerous powerful UMNO politicians who had enormous influence over the corporate sector, economic power is now concentrated in the Office of the Minister of Finance.

Who are the GLICs?

Seven institutions have been classified by the government as GLICs. These are the Minister of Finance Incorporated (MoF Inc), the government’s holding company, which participates actively in corporate manoeuvres and owns a diverse range of firms known as government-linked companies (GLCs).

The sovereign wealth fund, Khazanah Nasional Berhad, is policy-based and implements major plans, including venturing abroad to support the government’s business internationalisation effort.

 

 

The investment trust fund, Permodalan Nasional (PNB, or National Equity Corporation), is portfolio-oriented, though with a policy agenda to redistribute wealth more equitably between the nation’s ethnic groups.

Two savings-cum-pension-based funds, the Employees’ Provident Fund (EPF) and the Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated), are portfolio-based with an equity interest in a vast number of companies.

Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Fund Board) is also a savings-cum-pension-based fund but is active in the management and development of large businesses in various sectors.

 

 

Lembaga Tabung Haji (LTH, or Pilgrims Fund Board), though portfolio-based, has an organic form of enterprise development, active in the development of Islamic-based products and services.

How are these GLICs owned and controlled?

The Ministry of Finance sits at the apex of a complex business group structure comprising its holding company, MoF Inc, as well as other GLICs, quoted GLCs and a huge number of unquoted private firms.

MoF Inc is the “super-entity”, given its enormous influence over the corporate sector through its substantial ownership and control of the other GLICs and the financial sector, comprising Malaysia’s leading commercial banks. Through its ownership of these commercial banks, the government can control the economy indirectly by acting as a lender to private firms.

However, MoF Inc’s vast network of business interactions constitutes only one part of the government’s complex system of control over the corporate sector. State governments have a similarly sizeable interest in the corporate sector.

In this system, the Board of Directors are important. Directorships function as a primary avenue through which the government can dictate decision-making within GLICs and GLCs.

Our comparison of ownership and directorate patterns in 1996 (prior to the 1997 currency crisis) and 2013 revealed a new phenomenon.

 

Only a small number of UMNO members remain as directors of these government-owned enterprises. These findings are particularly astonishing as Umno remains a party riddled with money politics, patronage and rent-seeking.

How did Malaysia get to this point?

Three major events have contributed to these transitions where the Prime Minister and GLICs have emerged as economic powerhouses. The first was the implementation of the New Economic Policy (NEP) in 1971, which allowed these enterprises to gradually acquire a major presence in the corporate sector.

The involvement of the GLICs in the corporate sector diminished with the active promotion of privatisation from the mid-1980s. With this spate of privatisations, major enterprises fell under the ownership and control of UMNO and well-connected businesspeople.

The second defining event was the 1997 currency crisis and the momentous intra-elite political feuding that ensued the following year. The GLICs’ bailout of ailing well-connected companies and their takeover of firms associated with ousted Umno leaders led to their re-emergence as major actors in the corporate sector.

 

The third defining moment was when reform of the GLICs and GLCs was initiated by Dr. Mahathir Mohamad in the late 1990s, though actively implemented by Abdullah Ahmad Badawi (photo) from 2003. Najib Abdul Razak continued these reforms when he took office in 2009 as Prime Minister.

The current concentration of economic power in the office of the Prime Minister is particularly salient because when Najib took office in 2009 he voiced his intention to transfer GLCs to the private sector, arguing that the private sector should function as the primary engine of growth.

Unlike Mahathir, Najib appeared personally uninterested in business as a government tool for economic and corporate development when he came to power. Najib, however, soon came to realise the significant economic influence that the GLICs have over the corporate sector.

Why was this type of corporate control structure created?

This complex system of ownership and control of the corporate sector is not one that was designed or envisioned by ruling elites.

In fact, since the 1980s, all Prime Ministers – Mahathir, Abdullah and Najib – have persistently advocated privatisation of the GLCs on the assumption that these enterprises would function far more effectively and productively if under private ownership.

Even when the NEP was conceived, the plan was to transfer corporate equity acquired by the GLICs to bumiputeras, in order to redistribute wealth more equitably among the ethnic groups.

When Mahathir’s vision of creating business groups led by corporate captains was dismantled by the 1997 currency crisis, the GLICs and GLCs were deployed to bail out well-connected ailing, debt-ridden enterprises.

 

When a bitter feud ensued between Mahathir and his Minister of Finance, Anwar Ibrahim, over these bailouts, Anwar was ousted from public office and his business allies lost control of their corporate assets.

When a similar feud ensued between Mahathir and Daim Zainuddin, Anwar’s replacement as minister of finance, companies controlled by his allies and UMNO were channelled to the GLICs. Having had persistent feuds with his trusted allies who he had appointed as Minister of Finance, prime minister Mahathir then took charge of this ministry.

The new structure of Malaysia’s political economy has also arisen out of the need for the UMNO President to reduce the influence of party warlords.

UMNO’s major businesses now under the GLICs include media companies that own the major newspapers, The New Straits Times and Berita Harian, as well as TV3, the party’s cooperative KUB, the huge construction-based UEM Group, the hotel-based Faber Group (now UEM Adgenta) and the Bank of Commerce, now a part of Malaysia’s third largest banking enterprise, CIMB Group. Control of these companies ultimately falls under MoF Inc.

If UMNO members once had many sources of patronage, what is the situation now?

UMNO members now have only one source if they wish to obtain access to federal government-generated economic concessions. This is profoundly problematic in terms of public governance as the minister of finance concurrently holds the position of prime minister, a situation that does not prevail in democracies.

In this governance structure, there is the possibility of checks and balances being deeply undermined, opening space for abuse of power that can have serious implications on the economy and the corporate sector.

Who is accountable for the running of the companies?

The board of directors of these companies are accountable. While most of these directors are professionals who manage the GLCs in a productive manner, since they are appointed by the minister of finance, they can be compelled to follow his dictates.

There are also serious concerns in some GLICs. In LTH, a number of its directors, including its chairperson, are UMNO members who are elected representatives but hold no position in government. LTAT is led by Lodin Kamaruddin (photo), a longstanding close business associate of Prime Minister Najib.

 

There is sufficient evidence that these GLICs could be vulnerable to political interference unless sufficient oversight measures and institutional reforms are introduced to ensure they are well-insulated from such abuse.

In the boards of directors of the GLICs and GLCs, what has also increased is the number of former bureaucrats. These ex-civil servants, like the professional elite, have no political influence. However, they also appear to function as mere figureheads.

The most influential decision-makers are the chairpersons of these boards and the managing directors who, when necessary, take the cue from the Minister of Finance, further indicating his overwhelming influence over the corporate sector.

There is evidence of “inner circles” among the GLICs. One inner circle revolves around Nor Mohamad Yakcop, until recently the deputy chairperson of Khazanah. Professional managers groomed by him lead the GLICs and GLCs.

An inner circle is also evident in the media sector. An obscure private firm, Gabungan Kesturi, controls the leading media enterprise, Media Prima, along with PNB.

The directors and shareholders of Gabungan Kesturi are Shahril Ridza Ridzuan and Abdul Rahman Ahmad, both groomed by Nor Mohamad. Shahril is the CEO of EPF, which also owns a huge interest in Media Prima. Rahman was appointed the CEO of PNB in 2016.

The use of private companies like Gabungan Kesturi obscures the identity of the ultimate shareholder, the Minister of Finance, as well as the extent of the state’s control over major media companies.

Did our leaders groom and place executives in GLICs for their vested interests?

Daim Zainuddin (photo) groomed and placed professionals he had trained as executives and owners of companies associated with UMNO.

 

A similar practice of grooming young professionals as executives and CEOs emerged in the late 1990s after well-connected firms came under the control of the GLICs. Professionals trained by Nor Mohamed took over the management of these enterprises.

However, while Nor Mohamad and Daim groomed and placed professionals in control of major quoted enterprises, their reasons for doing so differed.

As Minister of Finance, Daim, also UMNO’s Treasurer and a longstanding businessperson, appeared intent on securing enormous control over the corporate sector to serve his vested business interests. The professional-managerial team groomed by Nor Mohamed was not necessarily trained to manage the GLICs and GLCs.

What are the possible repercussions of this ownership and control mechanism?

Through this pyramiding system, with the Minister of Finance at the apex, the GLICs and GLCs can be subjected to considerable abuse. This pyramiding system allows the minister to secure numerous political and business benefits from the GLICs and GLCs, as well as abuse them.

It is noteworthy that MoF Inc has ownership and control of controversial companies such as 1MDB and the National Feedlot Corporation (NFC).

The GLIC-based business groups have control over companies through majority equity ownership, which accords them significant voting rights. This has serious implications for minority shareholders, and the economy, in the event of abuse of the companies.

Our study noted that the EPF appears to have been forced to take control of RHB Capital from a firm linked with the former Chief Minister (and now Governor) of Sarawak, Abdul Taib Mahmud (photo above ). This financial institution has long been an enterprise that has come under the control of a number of well-connected people and GLCs.

Politics evidently matters, influencing how these enterprises are run. Policies also matter as they shape the different ways in which these institutions are managed.

There can be a link to between politics and policies, especially redistributive policies and enterprise development strategies when determining how these enterprises are employed.

After his party fared badly in the 2013 General Election, Najib announced that contracts and other concessions would be channeled through GLICs and GLCs to bumiputeras, justified by his new ethnically-based affirmative action policy that targeted this ethnic group. This was evidently to consolidate the political support of this ethnic community. 

What reforms are required to deal with this issue?

These powerful GLICs are a clear manifestation of high concentration of corporate ownership in the state. This concentration of corporate wealth is justifiable only if GLICs are managed in an accountable and transparent manner.

Inevitably, to inspire confidence among private investors, political reforms are imperative to enforce stringent institutional checks and balances by independent oversight institutions.

 

The technocratic professional elite at the epicentre of this GLIC-GLC network can remain, but must be subjected to close scrutiny by parliamentary action committees led by the Opposition. And the Prime Minister cannot also serve as the Finance Minister since it is an obvious case of conflict of interest.

China’s Resource Diplomacy: It’s not Charity for sure


August 5, 2017

China’s Resource Diplomacy: It’s not Charity for sure

By Jealous Chishamba

http://allafrica.com/stories/201708040279.html

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Resource diplomacy refers to the diplomatic activity designed to enhance a nation’s access to resources and its energy security.

It normally happens when great powers contend for supremacy. There are several interlinked components of resource diplomacy. Generally, resource security has three components namely insuring a stable supply of energy and resources; keeping resource supplies at acceptable prices; and being able to transfer those resources to fixed locations, not necessarily to the home country but where they can be processed or consumed.

In economic context, if recipient countries negotiate for a win-win outcome, resource diplomacy can work positively in supporting infrastructure growth for developing countries. However, in most instances, the inhibiting factor for a balanced outcome is that beggars cannot be choosers.

China’s enormous overseas spending has slowly allowed it to write the rules for 21st Century commerce as part of this resource diplomacy.

The increased overseas purchases of resources makes other countries dependent on China’s economy for their own growth, thereby expanding China’s global influence.

 

The transformation of the BRICs acronym from an investment term into a household name of international politics and, more recently, into a semi-institutionalized political outfit (called BRICS, with a capital ‘S’ after South Africa’s inclusion), is one of the defining developments in international politics of the first decade of the 21st century.

 

Beijing’s aim is to help displace the United States and Europe as the leading financial power in large parts of the developing world. To some extent, Beijing may wield some economic power over other competing global economies given that history has never set any precedent that an empire is capable of governing the world forever. Currently, international order is being restructured where traditionally-dominant economies have undergone adjustments and restrictions necessitated by the global financial crisis and its aftermath.

As if endorsing the foregoing assertion, the International Monetary Fund (IMF) unavoidably blessed the Chinese Renminbi as one of the world’s elite currencies, alongside the Dollar, Euro, Pound and Yen. Developing countries especially in Africa are increasingly finding that they must operate in China’s orbit to support their growth.

China and the African continent collectively contain a third of the global population and have recorded the fastest growth rates in the world over the past 15 years.

In some countries across Africa, a deeper relationship with China is already paying dividends. For example, the findings from Afrobarometer’s 2014/2015 surveys in 36 African countries, which included a special series of questions on China, suggest that generally 63% of the respondents have favourable views on economic and assistance activities by China.

Although there are several caveats to using this data to corroborate economic sense, the exactness of these survey results is less important than what the actual numbers signify. The recent exponential growth in China-Africa trade corridor numbers support the view that China and African countries are developing commercial ties that are more balanced, diversified, and beneficial to both regions.

China Development Bank and the Export-Import Bank of China have financed big-ticket projects in Asia and Africa as compared to Bretton Woods Institutions (the World Bank and IMF).

In addition, the birth of the Asian Infrastructure Investment Bank where China has significant power was a result of the difficulties China faced to get veto power in Bretton Woods Institutions. In 2015, the BRICS bank was also formed and China holds a clear dominance within the BRICS group (Brazil, Russia, India, China and South Africa).

BRICS bank is highly regarded as a competitor or alternative to the IMF and World Bank. China’s economic clout in Africa has strengthened and there are fears that Beijing would use these development banks as another tool to exert its influence across the global economy.

Although China-Africa relationship has evolved greatly over the past few years, critics and common pessimistic perceptions have not kept pace with changing realities. Traditionally, the Chinese are not very transparent about their flows of overseas loans.

China is not a member of the Organisation for Economic Co-operation and Development (OECD) and thus they do not participate in the OECD’s Creditor Reporting System, which is the source for much of the data on official flows from the wealthier countries.

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China and Nigeria

While Chinese policy bank officials do release data from time to time on their African loan commitments, this is not systematic in either their parameters or specificity. As is the case with the United States Export Import Bank and other export credit agencies, Chinese banks also rarely publish information regarding specific financing agreements.

It is also uncommon for the recipients of such financing to fully disclose the details of the finance they receive. More often, the loans are tied to the use of Chinese contractors on the projects.

In this regard, China’s investment has been cast as an exploitative neo-colonial business partner with little interest in forging genuine win-win deals in African nations.

Sometimes, the pessimists’ views have some merit given the opaque, government-to-government nature of China’s relationship with the continent. Other schools of thoughts opine that the behind-closed-doors, government-to-government approach of the Chinese state entities lacks transparency and it has therefore been criticised for compromising the expected economic and social benefits of such deals for African countries.

According to China Africa Research Initiative, loans or grants from Chinese government agencies to African counterparts have traditionally outweighed foreign direct investment.

For example, from 2000 to 2015, the Chinese government, banks and contractors extended US$94,4 billion worth of loans to African governments and state-owned enterprises (SOEs).

The figures speak for themselves that indeed the burgeoning of Sino-African links is unprecedented and is becoming the main topic of interest in Africa’s international relations. African governments typically agree to long-term concessionary loans from the Export Import Bank of China to fund major infrastructure projects. They do so because other sources of financing are lacking or are too slow to meet immediate infrastructure needs.

China has realised that Africa is unique and that the approach by Bretton Woods is tied to archaic and largely ineffective Africa investment models hence the danger of missing out on the double digit returns that successful African investments provide.

Wenjie Chen, an economist in IMF’s African Department found that whereas Western investment favours the better governance environments, Chinese investment in strong and weak governance environments is about the same, but its share of foreign investment is higher in the weak governance states.

Thus, the capital flows behind this system of infrastructure financing, often results in illogical comparison between United States, European, and Chinese forms of investment in Africa. Zimbabwe has also been the loci for Chinese investments.

In July 2017, Zimbabwe made an application an application for US$153 million from China Export Import Bank for the upgrade of Harare International Airport. Loans pledged by Exim Bank are in excess of US$1 billion.

In 2016, China’s Premier surprised several global powerhouses when he visited Zimbabwe and pledged around US$4 billion of China-led Foreign Direct Investment (FDI). If executed, this level of commitment contrasts starkly with the action or lack thereof from Bretton Woods banks in Zimbabwe.

Post the visit of China’s President Xi Jinping in Zimbabwe, Fay Chung, did a balanced analysis in his correspondent article entitled Unpacking China’s USD4bln Zim investment.

It is unfortunate that some of the innumerable challenges mentioned as investment deterrents in Chung’s article have not been addressed hence the delays in real China-led FDI flow in the country. It is worth emphasising that given the shifting global dynamics, what ultimately comes from China’s promises depends largely on what we do ourselves.

Sustainability relies not only on goodwill from the East and the West, but also on us being able to add value, negotiate and focus on long-term goals as already achieved by other neighbouring countries whose China-led FDI flows are comparatively high despite vast opportunities in-country.

China has backed its proposal for real win-win cooperation between China and Africa by committing US$60 billion of new investment in major projects which can help develop local economic capacity if the country religiously pursues these opportunities.

Pursuing the opportunities embedded in China-Africa trade corridor is a low hanging fruit for Zimbabwe given that China’s investment in Africa often eschews conditionality as compared to Bretton Woods Institutions.

As for Zimbabwe, the compelling returns will be gained by setting up an investment-led task force to take advantage of China’s resource diplomacy and unlock massive investment potential for the benefit of the country.

The enormity of infrastructure gaps that Zimbabwe needs to resolve requires exploring these strategic opportunities offered by these “all-weather” friends.

Chishamba is a Zimbabwean banker with experience in treasury and corporate banking. He writes in his personal capacity.

Malaysians are forgetful


July 25, 2017

Malaysians are forgetful about scandals, that is why they keep coming back from Mahathir to Najib Razak

by R.Nadeswaran

http://www.malaysiakini.com

 

Forex, Maminco, Cowgate, Mara, FGV, 1mdb…what next?

 

COMMENT | Dr Mahathir Mohamed recited a sajak (poem) entitled ‘Melayu Mudah Lupa’ (Malays forget easily) at the 2001 UMNO General Assembly. After 16 years, is it still appropriate or does one word need to be changed?

Replacing “Malays” with the “Malaysians” would better describe how events and scandals of yesteryears have been consigned to the burial grounds and entombed.

But even the dead can be awakened for political expediency. After 30 years, the ghost of the foreign exchange market (forex) losses, said to run into billions of ringgit, has arisen from the grave – with hopes of it demonising the leading opposition figure, Mahathir.

So, a Royal Commission of Inquiry (RCI) has been set up and will soon start the proceedings, in the hope of establishing a host of facts. There’s certainly nothing wrong with this – perfectly legal. Using provisions provided in the Federal Constitution, the system allows Joe Public to have privy and access to the reasons for decisions to the commitments made by our leaders and their reasons for doing so.

But what can RCIs do? What does our government do with the findings? What happens after the findings? Will they bring about changes or will they be consigned to gather dust in some steel cabinet in Putrajaya?

There have been many, but let’s look back at just two. The first was on the VK Lingam video and the other was the RCI on illegal immigrants in Sabah.

V.K. Lingam–Vincent Tan’s Correct, Correct, Correct Lawyer–Fixing the Judiciary with Tun Ahmad Fairuz

In 2007, a five-man panel chaired by the former Chief Judge of Malaya, Haidar Mohamed Noor, examined a video clip allegedly of lawyer VK Lingam (photo) being involved in the manipulation of judicial appointments.

Subsequently, Lingam was barred from practising in 2015, but he has since challenged the decision of the Bar Disciplinary Committee, which found him guilty of interfering with judicial appointments. The case is scheduled to be heard next month.

In 2013, the former Chief Judge of Sabah and Sarawak, Steve Shim, chaired a five-man panel to investigate “Project IC”, in which citizenship was allegedly given unlawfully to illegal immigrants in Sabah during the Mahathir administration for electoral support.

‘Project IC probably existed’

After hearing 211 witnesses and recording more than 5,000 pages of evidence, the panel concluded that “Project IC” probably existed. It recommended the formation of a permanent secretariat, along with either a management committee or a consultative council, to address the issue of illegal immigration in Sabah.

But the immigrant problems still continue to prosper across the porous borders between Malaysia and The Philippines.

Against such backdrops, what would yet another RCI bring about? For a while, the proceedings will be the talk of the town, after which, it will enter into a sleep mode to be awakened when yet another scandal surfaces on our shores.

The Cowgate Scandal–The Gatekeeper got awa ,thanks to UMNO

Can someone update Malaysians on the National Feedlot Corporation (NFCorp)? On July 25, 2013, NFCorp chairperson Mohamad Salleh Ismail (photo) told a press conference that Japanese company, Kirimitonas Agro Sdn Bhd, had agreed to purchase its entire shares and related companies, and accordingly take over all the assets and liabilities, including the RM250 million loan with the Malaysian government.

Two weeks earlier, the then Finance Minister II Ahmad Husni Hanadzlah, told Parliament that the government had recovered RM79.9 million from the RM250 million it loaned NFCorp.

Ahmad Husni said the government also sealed NFCorp’s assets worth RM23.3 million – two pieces of land in Putrajaya, two units of real estate in Menerung Township Villa and three plots of land in Gemas.

“Out of the RM250 million, close to RM80 million has been received and RM170 million is yet to be received,” he said when winding up the debate for his ministry on the motion of thanks for the Royal Address in the Dewan Rakyat then.

Ahmad Husni said the Finance Ministry took three steps to resolve the NFC project controversy, namely bringing the case to court, taking over or getting back the amount owed and the assets, and finding a new company to continue the project.

And they drive around in their Porsches…

What happened to the real estate that was seized? Can someone give Malaysian taxpayers a status report on the case? After all, RM250 million belonging to the people was given in loans and surely, the least we can expect is some decent, truthful answers. No need for an RCI to tell us how the money for cattle breeding was used to buy luxury condos and property.

Almost two years ago, Mara, its associated companies and senior officials were caught with their hands in the cookie jar. They were involved in a multi-million ringgit scandal where buildings (student accommodation) in Melbourne were bought at inflated prices and the difference filtered down to some people’s pockets.

Police reports were made; the Malaysian Anti-Corruption Commission briefly detained a couple of people, and the Mara Chairperson was replaced. So, what happened to the investigations? Have the crooks been brought to book? Some of them are driving around their Porsche cars, acting as if nothing ever happened.

The construction of the Port Klang Free Zone (PKFZ) was the biggest financial scandal in the country prior to the emergence of an entity called 1Malaysia Development Bhd (1MDB). Six people were charged and all were acquitted. But, if no one is guilty, then the question is: Where did our money go?

The government continues to service the loans taken by the developer. Even as this is written, the Port Klang Authority (PKA) owes the Treasury billions of ringgit. By the year 2051, PKA’s commitment will accumulate to RM12.4 billion. How is it going to get the money? As a regulatory body, its revenues are meagre. Did anyone think about an RCI to get to the bottom of the issue? Bottom line: The loan will be written off and we, the people, will have to bear that burden.

Image result for The Mother of All Malaysian ScandalsThank You MCA and MIC–Gua Tolong Lu, Lu Tolong Gua

There are dozens of other instances or issues that may not be of the magnitude of the forex losses but have made headlines that require some form of inquiry. The obvious one is the 1MDB, which has made headlines all over the world for the wrong reasons.

But does the government have the political will and determination to get the bottom of all these, especially the Mother of all Scandals?

 

Vietnam: A Promising Partner for the Trump Administration


July 12, 2017

Asia Pacific Bulletin

Number 387 | July 11, 2017
ANALYSIS

Vietnam is a Promising Partner for the Trump Administration

By Huong Le Thu

Image result for Vietnamese Prime Minister Nguyen Xuan Phuc and President Donald TrumpVietnamese Prime Minister Nguyen Xuan Phuc and US President Donald Trump held talks in Washingotn DC on May 31 (local time), discussing ways to develop bilateral ties in a more substantive manner.

 

Vietnamese Prime Minister Nguyen Xuan Phuc was the first Southeast Asian Head of State – and the third from Asia (after Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping) – to meet with President Donald Trump since he took office. During his late May three-day visit, he also visited New York to commemorate the 40th anniversary of Vietnamese membership in the United Nations before traveling to the White House. Phuc’s mission was to forge a personal relationship with President Trump, who has yet to form any consolidated view on policy towards Southeast Asia, including the South China Sea.

President Trump, during the May 31 meeting with Prime Minister Phuc, said that he is glad to see a more “balanced” trade relationship with Vietnam. This new trend of seeking what Trump considers to be more fair trade relationships might be challenging for any Southeast Asian state with smaller size and capacity. However, Vietnam aims to demonstrate goodwill by meeting the White House halfway on such expectations.

Switching Contexts

Almost exactly a year ago, the bilateral relationship reached a new high, with then-President Obama’s visit to Vietnam where he announced the total annulment of the arms embargo that had been in place since the war. In fact, Vietnam’s relations with the United States had been warming significantly over the past few years, coinciding with China’s increasing assertiveness in the South China Sea and with the Obama administration’s rebalance policy.

Trump’s victory in the presidential election last November generated some unease in Hanoi that the promising momentum could be lost. Just like other Southeast Asian states, Vietnam rarely figured in Trump’s campaign speeches if at all. He put Vietnam in the same category as China – unfair traders that were dumping their cheap products into the American market. Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP) posed an existential challenge to the whole project and was a hard hit for Vietnam. Vietnam – the least developed economy of the 12 TPP members – was widely predicted to benefit the most from the trade agreement. More importantly, TPP served as a tool for Vietnamese policy makers hoping to “escape China’s orbit” by reducing economic dependency on Chinese trade. The Trump administration’s declaration that the rebalance is dead only further exacerbated Vietnam’s strategic anxiety.

But Vietnam is no stranger to such difficult circumstances. The visit can be seen as Vietnam’s proactivity in seeking engagement with the United States. With a mission to seek US continuity in its commitment to regional affairs – especially regional maritime disputes – Phuc aimed to lay out benefits for Washington to induce it to keep ties with Hanoi strong. The prime minister tailored his economic agenda for Trump’s business mindset. Phuc – who is viewed domestically as a hands-on economic reformer – was a better fit for the role than conservative party Secretary General Trong or President Quang, who is a former Minister of Public Security.

A “Carrot” for Trump?

Despite Hanoi’s strategic concerns, bilateral economic relations have been doing well. America remains Vietnam’s largest export market; however, it ranks sixth among trade partners with which the United States has the largest trade deficits. Bilateral trade from January through May 2017 amounted to $16 billion, which constitutes an increase of 9.9% over the previous year. US exports grew by 22% compared to last year. The visit aimed at alleviating some of the Trump administration’s concerns about the growing deficit with Vietnam, which totaled $32 billion last year, a fraction of the deficit with China – $347 billion.

Among the deals Phuc signed was a $15-17 billion agreement on the exchange of technological goods and services. President Trump described this win-win outcome as “more jobs for America, more equipment for Vietnam.” In contrast to the US-Vietnam leaders’ exchange one year ago, this meeting avoided values-based talk and was highly transactional in nature. Leaders in Hanoi have taken note of this shift. With such transactional gestures to generate good will, Vietnam hopes not only to boost bilateral relations, but also to draw Trump’s attention to geo-economic and geo-strategic regional developments.

During the Obama administration, Vietnam – along with other Southeast Asian neighbors – was considered a major beneficiary of American engagement in the region, both strategically and economically. The TPP was seen as a “carrot.” Under this administration, countries like Vietnam may need to come up with their own “carrots” to attract Washington’s attention, or at least ameliorate the perception of relative loss.

A New Model for Great Power-Small Power Relations?

Vietnam remains Southeast Asia’s most vigilant actor thus far during the first months of the Trump administration. Despite the apparent challenges – particularly the White House’s low level of engagement in the region – Hanoi can look to a number of advantageous factors. First of all, Southeast Asia’s US treaty allies – Thailand and the Philippines – are growing increasingly distant from Washington and closer to Beijing. Manila’s shift under Duterte is consequential, particularly for Vietnam, because of its role in the South China Sea disputes. The recent 30th ASEAN Summit showed Manila’s reluctance to even raise the maritime issues publicly. Under these changing regional circumstances, Washington should reconsider modes of strategic cooperation beyond the traditional treaty ally framework. While Singapore also remains a US-reliant regional partner, Hanoi will be more hard-pressed to get the relationship right. This means that Vietnam might be the keenest regional actor to invest in this relationship and become Trump’s “America First” connection in Southeast Asia.

Moreover, while the issue of human rights represented an enduring obstacle for the Obama administration, Trump’s less values-based approach means that the government in Hanoi is likely to be more comfortable with Washington’s new foreign policy direction.

Best Timing Ever

For America this could be a golden opportunity to engage with Hanoi. Despite previous efforts, domestic responses to American defense engagement in Vietnam still encounter a level of resistance. At this juncture, however, there seems to be consensus among Hanoi’s domestic leadership that the region cannot afford America’s absence. Thus, Phuc’s trip – as well as his reciprocal invitation for Trump to visit Vietnam – signals more openness than ever before, and certainly a better negotiating position.

The Trump administration needs to realize that the previous lasting investments in this relationship should not be sacrificed for short-term business gains. In fact, it is the Trump administration that is likely to harvest the fruits that previous administrations carefully seeded. Vietnam is now a key actor in the region, and if the United States wants to retain its position in Asia, it should understand that long-term gains from this relationship are worth more than revenues. If Trump’s “Make America Great Again” slogan has a global meaning, then securing the support of partners should come first. And a promising partner is Vietnam.

About the Author
Dr Huong Le Thu is a visiting fellow at Strategic and Defence Studies Center, Coral Bell School of Asia Pacific Affairs, Australian National University. She can be contacted at LeThu.Huong@ANU.edu.au.

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