Corruption thrives in a globalised world

Has corruption become more common? Or simply easier to expose

Gideon Rachman



Remember the Brics? When the concept was first launched by Goldman Sachs in 2001, it was a handy acronym to describe the world’s most dynamic emerging economies. There were always sceptics who questioned just how much Brazil, Russia, India and China have in common. Those doubts only grew when South Africa joined the club.

But it turns out that the Brics do have something in common after all — corruption. In all five countries, popular rage about graft is at the very heart of politics. And because these countries are increasingly important to the world economy, their corruption problems have global implications.

Both Brazil and South Africa have seen presidents forced out of office by corruption scandals — with Jacob Zuma compelled to resign in South Africa this year, and Dilma Rousseff being impeached in Brazil in 2016. In Russia, the ruling United Russia party is widely known as the “party of crooks and thieves”. The rise to power of Narendra Modi was fuelled by his pledge to crack down on corruption among the elites. The Indian prime minister has since taken the drastic step of abolishing about 80 per cent of the country’s currency, in an effort to squash the black economy. In China, President Xi Jinping’s anti-corruption drive has seen more than 100,000 officials arrested. Meanwhile, Chinese exiles have spread online allegations that corruption extends into President Xi’s inner circle.

High-profile corruption scandals are not confined to the Brics. This month Mariano Rajoy was forced to resign as prime minister of Spain after seven years in office, following a scandal in his political party. And last month Malaysia’s ruling party lost power for the first time since the 1950s — after allegations that the prime minister, Najib Razak, had embezzled vast sums.

Corruption has always existed — and it has never been popular. But the frequency and political impact of corruption scandals seem to be growing all over the world. So has corruption become more common? Or has it simply become easier to expose? The answer seems to be that both things are happening simultaneously.

The globalisation of business and finance opened up opportunities to make corrupt profits in fast-growing emerging economies. Industries that often need official involvement, such as natural resources and infrastructure, are particularly lucrative targets. There are contracts to be awarded and development projects that need official approval. And the money for bribes can always be deposited offshore.

But such malpractice can be exposed. Strong, independent prosecutors and judges such as Brazil’s Sérgio Moro and South Africa’s Thulisile Madonsela have done heroic work in driving forward anti-corruption investigations. Press freedom in Brazil and South Africa has also been critical in keeping up the pressure on corrupt politicians.

Even when the national media are muzzled, the internet provides an alternative medium for airing corruption allegations. The “Panama Papers”, which detailed the offshore financial affairs of many prominent politicians, was the result of an international journalistic project and based on hacked documents.

New forms of international co-operation and transparency have also made would-be crooks more vulnerable to exposure. Changes in the Swiss laws on banking secrecy — made under pressure from the US — were crucial to allowing Brazilian prosecutors to uncover the proceeds of corruption. International investigations by the Swiss and Americans also kept up the pressure on Malaysia’s Mr Razak.

But conquering corruption is not something that can be achieved with a single cathartic effort. Lasting progress requires strong institutions that can survive changes in the political climate; independent courts and prosecutors with training and resources; a press that cannot easily be bought off, jailed or killed; efficient civil servants who cannot be fired at the whim of a corrupt boss. Remove any of those elements and corruption seeps back into the system.

Prosecutors in Brazil are haunted by the example of the “clean hands” investigations in Italy in the early 1990s. These swept away many powerful figures — and were seen as a watershed. But within a few years, Silvio Berlusconi, who epitomised shady business practices, had been elected prime minister.

Searching for examples of lasting cultural change in the battle against corruption, Brazilian prosecutors have lighted upon the example of Hong Kong under British colonial rule and the establishment of an Independent Commission Against Corruption in 1974. Even that achievement may now be in doubt, with growing fears that the independence of Hong Kong’s institutions is being compromised by pressure from mainland China.

The concerns over Hong Kong might give pause to those who interpret the eruption of scandals all over the world as evidence that the global battle against graft is being won. An alternative theory is that the growing economic power of countries such as China, India and Russia may be spreading corrupt practices more widely. The US, EU and UK pride themselves on their sound institutions. But western bankers, lawyers, real estate agents, PR firms (and perhaps even presidents) are often all too willing to share in the proceeds of corruption.

The Latest Chapter in the European Migration Crisis


By Jacob L. Shapiro

(click to enlarge)

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How World Cup Sponsorship Mirrors Global Economic Shifts

 

There’s been dramatic shift in the country origin for World Cup sponsorship in recent years. A third of the top sponsors are now from China, versus none before 2014. Kalin Anev Janse (@kaanev), secretary general and also a member of the management board of the European Stability Mechanism, the Eurozone’s lender of last resort, explains how the changes mirror those in the world economy. (This article reflects his personal opinion.)

As a Dutch Bulgarian living in Luxembourg, I thought the 2018 World Cup would be a boring sports event. The three countries I identify with – the Netherlands, Bulgaria, and Luxembourg – played in the same group. So statistically I was hopeful that at least one of them would qualify. But somehow, not one made it to Moscow. From that group, only France and Sweden qualified. My only comfort is that the three are in the good company of Italy.

I contemplated watching other sports events this summer, such as Wimbledon, where Bulgarian Grigor Dimitrov is one of the favorites, or the Women’s Hockey World Cup, which the Dutch might win again. But then, you can’t ignore half of humanity: the World Cup is by far the world’s most-watched sports event, viewed last time by more than 3.2 billion people.

Then I found that watching the World Cup was also interesting from a financial point of view, because the same global shifts in capital markets and in macro-economics I am observing in my job are now becoming visible in how the sponsorship of this event is changing.




More Asia, less North America and Europe

Since 1982, the World Cup was won by a European country six times (twice by Germany, twice by Italy, once by Spain and once by France), and by a Latin American country (twice by Brazil and once by Argentina) three times. But in terms of the biggest sponsors, the geographic distribution looks quite different.

In 1986, four European companies supported the event, as well as four from North America and four from Asia. In the 1990s, there was a rapid increase in North American sponsorship, which then halted at the end of that decade. Even though European countries had been winning the tournament, European companies were backing away from the event. In 2018, only one sole European company was still pouring money into it.

China Replaces Japan as Top Asian Sponsor


If you belong to that one half of the world population watching the World Cup, you might already have seen this trend from the growing number of Chinese billboards around the pitch.

A third of World Cup top partners are now from China, a record for the country. Before 2014, not a single Chinese company was a sponsor. Within the last two installments of the event, there are now as many Chinese top sponsors as there are American.

It is also interesting to see that Chinese companies are replacing Japan as the top Asian sponsor. Until 2006, the Japanese represented the leading Asian brands at the World Cup. This time, they are completely absent.

If you’re not a football fan, it might surprise you that China is so active even without its national team qualifying for the tournament. China played in the World Cup only once, in 2002.




So could the World Cup sponsorship serve as a proxy of future global economic shifts? More than you might think.

In previous op-eds (see links below), I have pointed to the fact that Asia is rapidly overtaking Europe and North America in relative economic power, a trend that will continue for the next decades. A prestigious World Cup sponsorship is a sign of Asia’s rising economic power. It puts a company eye-to-eye with some of the biggest industry giants – in front of an enormous and still growing audience. This year, 200 million more people will watch the World Cup than four years ago.




For now, Asia’s presence at the World Cup reflects its economic power more than its football prowess. Judging by the first results, Europe is still pretty good at football. But that might change. Asians love the sport, too. Most of the viewers of the World Cup 2014 were from Asia, and the number of fans is still growing. More than 1.5 billion people in Asia watched at least a minute of the World Cup in 2014, and more than 750 million watched more than 20 minutes. China has the most viewers: a quarter of a billion. With such a large audience, sponsoring the event by Chinese companies is a smart move. Even if the country has not qualified – yet.




What’s Coming?


The President of China, Xi Jinping, is a big football fan. He has three dreams for China and the World Cup: participate, host and win. China is investing heavily in football schools and exchanges with European counterparts to help it excel at the game. The financial and economic foundations are already there; the infrastructure to get better football results is rapidly being built. With 1.3 billion people, there is a lot of talent to scout.

I really hope that China will one day qualify. Of course, I also hope the same for my beloved Dutch, Bulgarian, and Luxembourg teams. And the economic shifts that are evident in the sponsorship of the game notwithstanding, I will concentrate on the tournament this summer. Why? Because it is simply the most beautiful game in the world. Even if you don’t take part. If you don’t believe me, just ask one of the 3.4 billion people watching the World Cup 2018 right now.


 

The Force Behind Europe’s Populist Tide: Frustrated Young Adults

Struggling to find jobs, and often living at home, younger generations are propelling antiestablishment parties to new heights of power

By Eric Sylvers


Giada Gramanzini moved back to her parents’ home in Naples last year while looking for work. Jobless young people are driving the antiestablishment political shift in Europe.
A youth revolt is upending Italian politics, and it could be a harbinger of things to come.

Western Europe’s largest antiestablishment government came to power earlier this month, driven largely by young Italian voters. Struggling with a persistent lack of job prospects over the past decade, they voted in droves for two parties in the country’s March 4 elections, the 5 Star Movement and the League, an anti-immigration party. 
The result laid bare a stark generation gap, with older Italians, who often have to support their grown children, continuing to vote for mainstream parties.


The same pattern appears across southern Europe, and the forces behind the divide show few signs of slowing. Almost 30% of Italians age 20 to 34 aren’t working, studying or in a training program, according to Eurostat, more than in any other European Union country. Greece is second at 29%, while Spain’s rate is 21%.

“Italy is collapsing and yet nothing has changed in this country for at least 30 years,” said Carlo Gaetani, a self-employed engineer in Puglia. Ten years ago, when he was in his early 20s, he voted for a center-left party that he hoped would push for economic development in southern Italy. When Italy descended into a crippling recession, he felt betrayed by the traditional Italian left-wing parties. He has seen friends struggle to find jobs, and said his own business opportunities are limited to the stagnant private sector, because commissions for the public sector are usually awarded to people with connections he doesn’t have.

Mr. Gaetani, now 33, voted for 5 Star in the 2013 election, a choice he repeated in March with more conviction. “5 Star is our last hope. If they also fail, I think I’ll stop voting,” he said.


SHORT-TERM PROSPECTS
Younger adults who do find employmentmust often accept short-term contracts.

Share of adults age 15-25 with temporary contracts* in 2017

*Generally lasting one year or less.

Source: Eurostat

Trump Trade War Is A Side Show

by: Alan Longbon

Summary

- Added together and compared with total trade figures the tariff cost is marginal.

- The trade war is more show than reality and designed to impress President Trump Rust Belt support base.

- Trump woos his Rust Belt support base while selling them down the river.
 

 

The purpose of this article is to show that the impact of tariffs compared with overall trade flows is very small, but the downside for President Trump could be disproportionately larger.

 

Despite being very small, the trade war hogs headlines and makes President Trump look like he is making progress against foreigners who have "unfairly" stolen American manufacturing Jobs.

 

Putting the Trade War in Perspective.

 

The chart below shows trade and tariffs between America's major trading partners.

 

 

 

The above information, plus China, is shown in the table below in terms of imports and exports between each land and the USA.

 

(Source: Trading Economics dot com plus author calculations for 2017)

 

 

The above information provides some perspective on the matter.

 

Except for China, the impact on US allies from the trade war is relatively minor at between one and five percent of total trade between the nations.

 

The actions against Canada, Mexico, and the EU are more bluff and bluster than a real threat to overall trade and prosperity. Though, no doubt catastrophic for specific companies and sectors of the economy. At the macro level, the trade war impact on these countries is a pinprick.

China is an exception in that the effect of the tariffs is potentially over 15% of total trade between the countries.

 

Foreign countries have taken the strategy of targetting some of their tariffs on products that come from parts of the USA where midterm elections are to take place this year. The purpose of this strategy is to damage Republican election chances and to weaken President Trump. The prospect of a hung Congress and Senate is a good way of dissuading the President from pursuing his damaging trade war strategy in the first instance. If the strategy is successful and the Republican power base is diminished with no majority in either the Congress or Senate, then it makes further trade war action harder to enact in the future.

 

President Trump's Trade War Strategy

 

President Trump is on record and repeats almost daily that the purpose of his trade war is to get a fairer deal for America from its trading partners. This is in view of the fact that America generally imports more than it exports and is running a current account deficit against the rest of the world as a result.

 

The US current account balance is shown in the chart below.

 

 

The numbers look large; however, when one compares the result as a percentage of GDP it again becomes a sideshow.

 

 

 

The rest of the world is content to exchange real goods and services for American dollar credits that are generally saved at the Federal Reserve in the form of Treasury deposits. As a monetary currency sovereign, America can create as many dollar credits out of thin air as it likes in return for real goods and services. The political problem is that the Federal Government does not use its sovereign currency creation privilege to make good the current account deficit with new Federal spending on the domestic economy.

The President's aim is to reduce the current account deficit and achieve a situation where trade with each country is more balanced.

 

The purpose of this strategy is to garner and maintain support from the poor, white, middle-aged, working-class Rust Belt voters who put the President in office at the last election.

 

To pander to this support base, the President now seeks to impose trade tariffs on foreign goods. This makes for big daily headlines, and the President is seen by his support base to be doing something for them.

 

The President must think that the political support he gains from his actions is of greater value than the damage that the trade war causes in real terms.

 

Actual Impact of President Trump's Trade War on His Support Base

 

While the President's trade war may be popular with his Rust Belt support base, it is making their situation worse.

 

The term “trade war” is used to describe a situation in which one country applies tariffs to imports from another country, and the other nation retaliates with tariffs of its own.

 

In some cases, there exists a situation where American goods face a more burdensome tariff than they get in return. Cars and trains are an example:

 

(Source: Trade in goods and customs duties in TTIP)

 

 

There is a case for such irregularities to be ironed out. Make this the focus. All tariffs are a form of income tax on the consumer and should be eliminated.

 

But, a “trade war” is different from a military war. In a military war, the enemy shoots at you, and you shoot at the enemy.

 

In a trade war, the enemy shoots at you and at itself, while you shoot at the enemy and at yourself.

 

With every nation shooting at other nations and at its own people, how do you “win” a trade war?

 

You don’t. All trade wars are lost because the cost base is made higher. Each nation has higher internal nominal costs and receives less real benefits in the form of goods and services.

The hypothetical purpose of a tariff is to protect local businesses from foreign competition. But a tariff hurts the entire economy.

 

One example: Taxing imported cars would raise the price of all cars because domestic car manufacturers would feel less pressure to hold prices down.

 

The two results - both adverse - would be:

1. The entire American public pays more money so that the relatively fewer American car makers can receive more money. The philosophy of tariffs is for many to pay more so the few can receive more.
2. Tax dollars are taken from the economy and sent to the federal government, which being Monetarily Sovereign, and not needing to receive dollars, destroys them. Reducing the money supply is economically recessive.

The arguments for any tariff generally fall into two kinds of goals:

1. To protect vital industries from extinction. Consider, for instance, steel. Steel is a vital defense product for tanks and battleships, and if there ever were a military war, the nation with a monopoly on steel manufacturing would have a distinct advantage.
2. To protect domestic jobs. Every industry that is depleted by foreign competition loses jobs.

Both types of protection = protecting vital industries and job protection - are reasonable goals, but neither needs to be costly to the economy. It is not necessary, or even wise, to “shoot” our own people, in order to protect them from enemy “bullets.”

 

Both goals of protectionism can be accomplished by our Monetarily Sovereign government via:

1. Federal government purchases from domestic suppliers, even at higher than import prices.
2. Federal tax breaks for the selected industries
3. Direct federal cash subsidies to the selected companies.

A Monetarily Sovereign government has the unlimited ability to create its sovereign currency.

It can easily fund any sort of protectionism without tariffs, which has the added value of stimulating the economy instead of depressing the economy, as tariffs do.

 

The table above shows that US consumers will pay an additional $86.9B when they purchase imported goods with a new tariff on them. This is $86.9B that cannot be spent on other goods and services and has increased the cost of existing goods and services and is therefore inflationary.

 

$86.9B is almost 0.5% of GDP and might give the Federal Reserve cause to make a rate increase to stave off this inflationary effect. Then everyone pays more for credit as well.

This is where President Trump will be shooting his support base, the rest of America, and himself in the foot. $86.9B worth of financial damage per annum.

 

It will not take long for the poor, white, middle-aged, working-class Rust Belt voters to feel these additional costs, especially if the other nations are tailoring their reprisal tariffs to target this particular demographic.