The World Financial Review Jan/Feb 2017

The World Financial Review

Where Next for Syria ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

Demonetisation: A Few Disturbing Questions ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

Tax Avoidance: Between Temptation and Trouble ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

The Philippines “BRIC” Plan: From Regime Change Ploys to Accelerated Economic Development

January - February 2017 worldfinancialreview.com

LIFE with s Plu

TRUMP

Trump’s Great Game: Playing Russia Against China Why America’s Democrats Lost

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The World Financial Review empowering communication globally JANUARY - FEBRUARY 2017

Trump’s Great Game: Playing Russia Against China? p.18

US Politics 8

Why America’s Democrats Lost in 2016 and How They Can Recover Allan J. Lichtman

11

Life After Trump Boris Kagarlitsky

18

Trump’s Great Game: Playing Russia Against China?

Dan Steinbock

South Asia 45

Middle East 50

Where Next for Syria James Denselow

54

Cracking the Arab World’s Development Puzzle: Oil or Politics?

Ibrahim Elbadawi and Hoda Selim

59

The Economy of Dubai Raimundo Soto

China 21

The Coming War on China John Pilger

Philippines 27

31

Taxation

The Philippines “BRIC” Plan: From Regime Change Ploys to Accelerated Economic Development Dan Steinbock

63

Korea

68

Stronger Ethics for Better Leadership Using Confucianism and Systems Theory Sunnie Giles

India 37

Demonetization: Few Disturbing Questions Pratip Kumar Datta and Saumya Chakrabarti

41

Understanding India as a Rising Power: An Open Economy and Interdependence Framework Aseema Sinha

An Unsettling New Normal for India-Pakistan Relations Michael Kugelman and Vandana Seth

Tax Avoidance: Between Temptation and Trouble Matthias Kasper and Erich Kirchler

Russia Expatriates Changing Societies: The Case of Russia Vladimir V. Karacharovskiy, Ovsey I. Shkaratan and Gordey A. Yastrebov

Africa 73

Managing Human and Intellectual Capital for Sustaining African Organisations Hamid H. Kazeroony, Yvonne du Plesses and Bill Buenar Puplampu

Production & Design: Angela Lamcaster Print Strategy: Stefan Newhart Production Accounts: Lynn Moses Editors: Elenora Elroy, David Lean Managing Editor Europe & Americas: Yetunde Olupitan Group Managing Editor: Jane Liu Editor in Chief: The World Financial Review Publishing Oscar Daniel READERS PLEASE NOTE: The views expressed in articles are the authors' and not necessarily those of The World Financial Review. Authors may have consulting or other business relationships with the companies they discuss. The World Financial Review: 3 - 7 Sunnyhill Road, London SW16 2UG, Tel +44 (0)20 3598 5088, Fax +44 (0)20 7000 1252, info@worldfinancialreview.com, www.worldfinancialreview.com No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. Copyright © 2017 EBR Media Ltd. All rights reserved. ISSN 1756-3763

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From the Editors United You Don't Stand!

T

he latest news about Israel is again about some on-going land grab. This is not new news. This has been going on for over 70 years. And in and of itself historically Israel is not unique in conducting this type of land grab for those it regards as its own people, and from those it regards as the other.

That is how the United States came into existence.

The United States was created on the back of a huge and systemic land grab. The land taken from the indigenous peoples, the American Indians, was initially classified by us as terra nullius. The indigenous peoples disagreed of course. Similar land grabs also took place in Australia, New Zealand, Canada and South Africa.

No, the real news, and once again not new news, is the enduring hypocrisy of a large number of Arab states, who perpetually give lip service to support for the Palestinian cause. This is usually to keep their own masses drunk with platitudes of solidarity.

The fact is that the Middle East is at war with itself.

It is easy to blame the United States and or NATO for regularly intervening either in terms of colour revolutions or hybrid wars or outright war as in Iraq and Libya, or war by proxy agents as in Syria.

The fact is that the Middle Eastern states are at ideological war against each other. Why? Only God knows!

Europe moved towards harmonious relations (apart from the Napoleonic Wars and World Wars I & II) after the signing of the Treaty of Westphalia in 1648, which marked the end of an era of ideological rift and recognised the supremacy of the nation state as a political construct. Incidentally, this 30 Years' War started when the Holy Roman Emperor, Ferdinand II decided to impose Roman Catholicism upon the people within his domains.

Saudi Arabia and the Gulf monarchies, allied closely to the United States and NATO regard Iran as a disruptive influence within the Middle East.

One might note here that Saudi Arabia and the Gulf monarchies are not democracies. They are fairly antiquated, repressive regimes that might see the Iranian

republic as a disruptive influence only because their own positions are at present guaranteed by the patronage of the US and NATO, whereas Iran regards the United States as a meddler in the region often purely for the benefit of Western multinational oil companies who don't want to pay Iran or any of the other states in the region a fair price for the exploitation of their oil and gas reserves.

Furthermore, Iran is seen globally as representing symbolically and tangibly the essence of resistance to what many call American Imperialism.

An imperialism made that much more fluid by the collaboration of nation state actors, for example, who align themselves against Iran and Syria for reward from the United States and NATO countries in the form of weapon sales and the bolstering of their regimes.

We should really forget about Israel for now. Though any suffering caused to any peoples within the parametres of that state is inexcusable.

The real issue, the real news, is that there can be no peace within the Middle East until there is unification of the mind set of the leaders of the various states in the Middle East and a determination to be united and harmonious.

After all, though this may sound stilted, the European Union as a fairly harmonious economic, cultural and social entity was not created by warring states or those dramatically bleeding from ideological wounds.

Feature Photo: David Longstreath / AP

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7

US Elections

Why America’s

Democrats Lost in 2016 and How They Can Recover

BY ALLAN J. LICHTMAN

In this article the author argues that Obama’s failure to build a strong Democratic Party during his Presidency, and a lack of a coherent theme during Hillary’s campaign were among the reasons that contributed to the Democrats losing.

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He outlines how he thinks they can recover after Trump’s triumph.

T

he blame-game among Democrats and pundits began soon after Hillary Clinton’s defeat. Per the new conventional wisdom, Clinton

The World Financial Review January - February 2017

lacked inspirational qualities. She ran a too tightly controlled and defensive campaign. She failed to develop a coherent theme for her candidacy. She committed a major gaffe by calling half of Donald Trump’s supporters “deplorables”. She failed to pay sufficient attention to the states of Wisconsin and Michigan, presuming they would be safe for any Democratic nominee.

This commentary is meaningless after-the-fact rationalisation. Just 24 hours earlier, these same pundits and Democratic operatives had informed the world that Hillary Clinton was poised to complete a historic victory as the first woman to be elected president of the United States. Clinton and her campaign did not suddenly change overnight. It was the same candidate and the same campaign that the commentators previously anointed as sure-fire winners.

The pundits twisted themselves into pretzels to justify why what they

assured us would happen – a Clinton victory – had not happened. The Clinton blame game provided an easy substitute for hard thinking about how presidential elections work and how to rebuild the Democratic Party.

Using my prediction system, the Keys to the White House, I first predicted a Trump victory in a Washington Post interview on September 23 and then doubled-down on that prediction on October 28, just before the release of the letter from FBI Director James Comey on possibly new relevant Clinton emails (see, https://www. washingtonpost.com/news/the-fix/wp/2016/09/23/ trump-is-headed-for-a-win-says-professor-whos-predicted-30years-of-presidential-outcomes-correctly/ and https://www. washingtonpost.com/video/politics/professor-doubles-downon-trump-win/2016/10/28/32b618fe-9ca3-11e6-b552b1f85e484086_video.html).

The Keys uncovered the fundamental problems facing Democrats in their effort to win a third consecutive term in the White House. These included grievous losses in the midterm elections of 2014, a divisive primary contest, the lack of a major domestic policy accomplishment or foreign policy triumph in President Barack Obama’s second term.

This superficial assault on the Clinton candidacy creates the illusion that the Democratic Party can rescue itself from near oblivion by finding its own Donald Trump facsimile: the man on a white horse who will lead their party to victory. After their 2016 triumph, the opposition Republicans control the White House, the US Senate and House, and most state governments. Republicans are likely to control the Supreme Court for the next generation at least.

Today, the Democrats are a shattered party and the Obama legacy is on fading life-support.

Far more blame for the sorry plight of the Democrats must go to Barack Obama than to Hillary Clinton. As president, Obama learned only half the lesson taught by the greatest of Democratic leaders, Franklin Delano Roosevelt. Obama learned from FDR the importance of policy innovation, but failed to learn from him the value of party building.

FDR knew that his New Deal reforms were not last without a strong Democratic Party.

He inherited a shattered party that had lost three consecutive presidential elections by average margins of more than 20 percentage points and failed to gain control of either chamber of Congress. However,

FDR, through his liberal New Deal reforms that gave hope and benefits to ordinary Americans and his building a grassroots base in the burgeoning union movement, completed a realignment that led to Democrats winning all but two presidential elections from 1932 to 1964, and controlling Congress for all but four of these years.

Although in substance an excellent president, Obama has neglected his duties as party builder.

Today, the Democrats lack either a compelling message or thriving political organisations. In every election during his tenure except when he headed the ballot in 2012, the Democrats took a beating at all levels of government. Obama’s lack of a strategic political sense was also evident in the campaign.

He resorted to conventional political campaigning rather than following the two essential tasks for an incumbent president. First, he should have been selling his domestic and foreign policy initiatives to the American people to overcome his party’s disabilities on these two critical keys to the White House.

Second, he should have publicly decried in the most dramatic possible way the unprecedented Russian manipulation of the presidential election. Instead, he says he told Russian president Vladimir Putin to “cut it out”, which surely had Putin just quaking with fear. And he made the consummate political error of assuming that Hillary Clinton would win despite the Russian campaign against her.

A rebuilding Democratic Party cannot play the pundit’s blame game. The party must offer a progressive alternative to the Republicans that speaks directly to the needs of ordinary Americans, irrespective of race. Bernie Sanders provided a blueprint during the primary campaign with a focus on the transformation to a new green economy and on rectifying America’s yawning disparities in wealth and income. However, the Democratic Party cannot follow Sanders down the rat hole of protectionism.

To the great detriment of his party, Senator Sanders has somehow transformed protectionism

Far more blame for the sorry plight of the Democrats must go to Barack Obama than to Hillary Clinton. As president, Obama learned only half the lesson taught by the greatest of Democratic leaders, Franklin Delano Roosevelt. www.worldfinancialreview.com

9

US Elections

Far more blame for the sorry plight of the Democrats must go to Barack Obama than to Hillary Clinton. As president, Obama learned only half the lesson taught by the greatest of Democratic leaders, Franklin Delano Roosevelt.

Photo: Getty Images

The future of American jobs lies not in protectionism, but in the transformation from a fossil fuel economy to the new economy of the future, based on clean, renewable sources of energy.

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from an icon of America’s right-wing into a “progressive” panacea. In fact, the Democrats can never beat their opponents on the issue of trade, which favoured Donald Trump in this year’s campaign. Sanders claimed that free trade agreements have cost the jobs of many Americans, because US businesses can’t compete with low-wage operations abroad. Yet there is little or no concrete proof that free trade agreements cost Americans substantial numbers of jobs. But a return to protectionism would mean much higher prices for consumer goods, with working class Americans feeling the most pain.

Although economists rarely agree on anything, the clear majority affirm that on balance free trade is good for the American economy. A 2006 survey of American PhD economists published in The Economist’s Voice, found that, “the overwhelming majority (87.5%) agree that the U.S. should eliminate remaining tariffs and other barriers to trade”.

In truth, the future of American jobs lies not in protectionism, but in the transformation from a fossil fuel economy to the new economy of the future, based on clean, renewable sources of energy. The old smokestack and mining jobs are not coming back to America. Companies scarcely need coal miners anymore; they just blow off the tops of mountains to get at the coal.

The World Financial Review January - February 2017

The rebuilding of America’s infrastructure offers additional prospects for job creation.

Infrastructure repair was a major focus of President Obama’s stimulus package, which many Republicans opposed. Somehow, Democrats have let Donald Trump seize this issue for himself, even though he remarkably proposes to spend vast sums on infrastructure while also cutting taxes, expanding the military, and reducing the deficit. However, Republican opposition to Trump’s program may give Democrats an opportunity to retake the initiative on job-creating infrastructure projects.

As part of its rebuilding, the Democratic Party needs to rededicate itself to grassroots organising. Democrats failed to deliver the kind of turnout they needed at least in part because its ground game emanated from the top down.

The widespread anger and protests among its base voters in the wake of Trump’s victory provides an opening for lasting bottom-up organising. But protests will be like smoke going up a chimney unless participants translate their anger into political action.

As FDR’s example demonstrates, The Democratic Party has in the past risen from the ashes. Only another New Deal and the development of a grassroots party base will rescue the Democratic Party from near oblivion. It need not take another Great Depression to initiate a new era of progressive change.

Featured image courtesy: Justin Sullivan

Allan J. Lichtman is Distinguished Professor of History at American University in Washington, DC. He has published more than 200 scholarly and popular articles and nine books that have won numerous national awards.

Dr. Lichtman has provided commentary for all major US television and radio networks, the Voice of America, and many foreign broadcast companies. He has been an expert witness in more than 80 federal civil rights cases.

US Politics

Life After Trump

BY BORIS KAGARLITSKY

Trump’s election is not just a separate random episode of current politics. It is also not an indicator of American exceptionalism. It rather suggests that similar processes are under way in the US and in Western Europe.

And is it just the West that is affected?

T

he vote of the United States Electoral College has finally put an end to the 2016 presidential campaign. Attempts to prevent Donald Trump from becoming the US president

continued until the last moment: the electors were called upon to ignore the will of their states and voters; however none of these attempts have succeeded.

It is important; nevertheless, to understand why the liberal part of the American society reacts so hysterically to the Trump victory. President-elect did not even assume the office, but a fierce propaganda campaign, unprecedented in recent American history keeps raging; mass protests against his policies which are not only not being

implemented, but also have not been formulated yet, are being organised. A grotesque and demonic figure of Trump haunts the consciousness of the liberal public, the evaluation of his words and actions is based on the presumption of guilt. This includes the words he never said, but could have said, and actions that he did not carry out, but according to the liberals, would certainly have to perform. In other words, the president -elect is being criticised not for what he has done, and even not for what he plans to do, but largely for what he is supposed to do according to the ideas of American liberals on how the absolute evil should behave.

Does it mean that the attacks on Trump are absolutely baseless and without merit? Certainly not. However, they simply reflect an unconscious fear by part of an American (and not only American) society of spontaneous objective processes, which are unfolding in the country and in the world, and

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11

US Politics

which are beyond their comprehension and control.

Trump’s victory is only one of the multiple symptoms of these processes, but this is the fact, which lies on the surface. As people often do, they confuse the cause with the consequence.

The panic reaction to Trump’s success is caused by the fact that the liberal circles have no grasp of the colossal tectonic shift currently under way in the world economy. There is also no understanding of the irreversibility of this shift. But there is a completely justified perception of its catastrophic nature: we are talking about the end of a social-economic order, which persisted for more than a quarter of a century, about destruction of the institutional base of neoliberal capitalism, which was systematically and consistently being constructed throughout this time.

Trump’s election is not just a separate random episode of current politics. It is also not an indicator of American exceptionalism. It rather suggests that similar processes are under way in the US and in Western Europe. And is it just the West that is affected?

British vote to exit European Union, similar vote in Italy against the government, referendum in Holland rejecting Ukraine association with EU, and many other political facts, which hit us almost every week, are interpreted, at best, as a rebellion of mistreated and uneducated lower classes discarded by the system. But why did the rebellion start now?

Why is it becoming more and more successful, and, most importantly, why does it grow, inspiring millions of people, who, according to the establishment ideologues, should not get involved? Marginalised ideas suddenly became mainstream.

The ideological control, which, in the framework of Western democracy, is conducted through a meaningful consensus of all main parties, suggested a formal diversity of opinion accompanied by a compulsory uniformity of conclusions. In other words, you can support or oppose capitalism, have different opinions on the historical roles of de Gaulle and Stalin, but when thinking about specific issues, regardless of the starting point of your argument,

In other words, Trump is being criticised not for what he has done, and even not for what he plans to do, but largely for what he is supposed to do according to the ideas of American liberals on how the absolute evil should behave.

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The World Financial Review January - February 2017

you are obliged to conclude that there is no alternative to the policies of the European central bank, to the Eurozone membership and fiscal discipline.

As a result of these differences, the European Union entered the stage of institutional breakdown without going through the phase of “perestroika”, as did the USSR, which means that the psychological effects of this transition are even more traumatic and brutal. Everything started to crumble not “fast”, but “at once”, leaving people completely at a loss, especially those who still hope for the preservation of the existing order.

Such turn of events boggles their minds and causes panic. But the scope of the transition is not the only problem. The transition is accompanied by a collapse of an unprecedented ideological hegemony inherent to the western society of the past dozens of years. Neoliberal politics in its right, conservative, as well as the left, politically correct version, always relied on the small part of the society. No, this is not the notorious 1%, which entered the public consciousness thanks to the “Occupy Wall Street”.

These are quite a few people who are part of the system in different ways, and who benefit from this system (including, by the way, a significant portion of the young radicals, whose symbolic protest was a kind of shadow of the official ideology).

This part of the society, who in Western Europe receives benefits from the clientele programs of Brussels bureaucracy, and in the US works to promote various politically correct practices, in a large part relies on the re-distribution of resources from the real sector of the economy. Nobody likes the Wall Street bankers or European Central Bank functionaries, but it is the symbiosis of the liberal public institutions and creative class with the financial capital that is the pillar of the current model of capitalism.

At the same time as the real sector (including not only the industry, but also science, public education, and social infrastructure) was degrading, jobs were disappearing, and workers were losing their livelihoods, the liberal class which earns their living from sharing profits of the financial capital under the guise of participation in “creative economy” and “civil society” was formed. This, mostly parasitic minority lived with a comfortable confidence that they were the majority, moreover, they were the core and the most progressive part of the society, while people holding viewpoints which differed from theirs were a

All the talk about the privilege of the white males – workers, farmers, bureaucrats, small business owners, barely making the ends meet – was to substitute and stop all questions about the interests of the ruling class. tiny marginal minority, which should not be taken into account.

This group spontaneously reproduced the dominating ideology in its different varieties, including the one of the radical left kind. In all versions of this ideology the problems of the economical structure and real politics were overshadowed by the cultural issues, making tolerance more important than the wages; protectionism and jobs were excluded from a serious discussion, and ecology became a quasi-religious symbol of faith. In this approach it is only important that you believe in climate change: the discourse left the framework of political pragmatism, and turned into a semblance of a religious dispute. What is important is not how you propose to solve the problem, but if your symbolic interpretation is the “correct” one, and if you are ready to repeat the correct words.

The absence of practical alternative guaranteed preservation of status quo, in the framework of which both the critics of the system and the conservatives played their roles, as if they were dancing a never-ending dance in one place.

The politics of targeted help, oriented towards the support of specific “minorities”, advocated by the left liberals, was a quite conscious and consistent attempt to split the society and undermine solidarity, not only the class solidarity, but any solidarity – professional, corporate, or regional. Clientelism became a substitute for the solidarity. Horizontal bonds between people belonging to the same social groups were blurred and weakened, while ties to the community leaders who are part of the liberal elite, were systematically strengthened.

The rhetoric of “justice” and even “resistance” was duly reproduced, but it became completely separated from the real social processes. Separate acts of solidarity with different “struggles” calmed the humanistic conscience of the left liberals, allowing them not to think about the complex

strategy of the transformation of the society. This approach resulted in abandonment of not only class politics, but politics in general (if you understand it as an activity aimed at transformation of social institutions and relations).

A myth about “white males” who allegedly were the main privileged group of the society, who stayed in the way of the progressive changes, and oppressed the minorities, became the key ideological rationale for this approach. It didn’t matter that the myth was constructed by the representatives of the liberal elite, who are predominantly white, and are mainly male.

Their main goal was to substitute social and class criteria by gender and ethnicity, analysis of the economic contradictions – by discussion of cultural differences. All the talk about the privilege of the white males – workers, farmers, bureaucrats, small business owners, barely making the ends meet – was to substitute and stop all questions about the interests of the ruling class. On the other hand, the role of the main victim of the system was assigned to immigrants. They were seen not as active participants of the labour market, but exclusively as passive victims. The discussion about the direct connection between the encouragement of illegal immigration and systematic oppression of the migrants by the employers, which are two sides of the same coin, was an absolute taboo. The fact that these are the earlier arrivals who are interested in the limits on the flow of immigration the most, because it undermines their position on the labour market, was never discussed.

Thus the liberal left criticism of the system was in fact an essential ancillary of the conservative social and economic policy pursued by the ruling class.

However, the system still has slipped into a crisis, simply because it completely exhausted its capabilities for development. The endless growth of the global market, accompanied

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US Politics

Republican National Convention, July 21, 2016.

by increasingly depressed conditions of national markets and the weakening of societies on the national level, turned out to be impossible. The financial expansion does not only generate bursting bubbles, but also leads to an objective necessity for debt relief, and nationalisation of financial institutions. The era of free market naturally prepares the conditions for the onset of protectionism, while dismantling of the welfare state breeds conflicts on the scale and in the forms long forgotten, returning us not even into the first half of the 20th century, but in the beginning of the 19th century, when socialist parties or trade unions which could help to normalise the class struggle, and give it a sensible ideological perspective, did not exist. The protest of the masses really assumes the form of a riot, in the words of Pushkin, “senseless and merciless”, but it cannot be any different, because the ideological field is completely occupied by the supporters of the established order, while the order itself is crumbling, not

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under the assault from its opponents, but from its own contradictions.

In such a situation only radical forces, which are not afraid of dramatic and unpredictable turn of events, have a chance to succeed. Catastrophic consequences will arrive everywhere regardless of who takes the power in the next one or two years. In this sense, Donald Trump with his indifferent readiness to achieve his goals through the scandals, crises and shocks, is psychologically much more adequate in the role of the president of the United States than any of his allies or critics. It is quite a different question if his recipes will be helpful to find a solution to the unfolding crisis.

The desire of conservatives to preserve things the way they are at any cost, to maintain the status quo, remains the main motive of their actions, moreover, there is no difference between conservative Republicans, liberal establishment and their critics for that matter. Some are happy with the existing system, others – with

The World Financial Review January - February 2017

their role in the system. In fact, the West has worked out a very comfortable and convenient division of labour between the respectable right-wing and respectable left-wing. The former conducted their economic policies dismantling the welfare state, and state regulations, unlocking the markets of goods and capital for transnational corporations and banks. The latter advocated for multiculturalism, political correctness, affirmative action, positive discrimination, the rights of minorities, while understanding perfectly that they do not offer an alternative to the existing neoliberal economic order, but rather work to complement it. Economic policies of the right and cultural and social policies of the left together are two sides of a single logic and a single strategy aimed at fragmenting of the society.

That is why the seeming paradox often mentioned by the liberal intellectuals who write for The Nation and The Guardian, has become possible: the decades before Trump’s victory were not only the years of neoliberal economic reforms – deregulation, privatisation, and redistribution of resources from the real sector to the financial capital, but also the time when many progressive victories were won: from passing medical marijuana legislation to gay marriage bills to putting ever increasing number of women and minorities in positions of power, and, finally, electing the first black president. This, however, is not just a coincidence, there is a direct link between these two processes.

The ideology of political correctness served and supported the economic practice of neoliberalism.

Economic policies of the right and cultural and social policies of the left together are two sides of a single logic and a single strategy aimed at fragmenting of the society.

Alas, the situation started to change drastically once the economic crisis kicked in. The measures that the ruling class were undertaking to stabilise the situation (regardless of which party occupied the White House) only created new problems, making the situation even worse. Since nobody offered a systemic alternative, the crisis only deepened as the time passed. The economic problems, in turn, inevitably led to the exacerbation of social contradictions, not the imagined ones, the constructed differences between identities, but the real ones, perceived on the level of everyday social life.

An awakening, revealing the harsh reality, which had nothing to do with the beautiful dreams, finally came.

The minority, which perceived itself as a majority, found out how the things really are. But it was the suddenness and the harshness of the awakening that predetermined the reaction: instead of attempts to find a solution we see panic and determination to defend their positions from the “aggressive majority”, which all of a sudden stopped being “obedient”.

The liberal public already started to realise that it found itself in an opposition to the majority of the society, or, at least, to the lower classes. But it does not realise that it is in a conflict with the objective logic of the economic development and with the course of history.

This moment gave a chance for the revival of the left movement in the developed industrial countries.

A sudden ascendance of the politicians and organisations which yesterday appeared to be too radical for the majority of the society speaks for itself: Jeremy Corbyn becomes a leader of the Labor Party in Great Britain, Alexis Tsipras, the head of a radical left party SYRIZA becomes a prime-minister of Greece, while in the United States a little known provincial senator, a self-proclaimed socialist, Bernie Sanders becomes a serious contender for the White House.

However, this success of the Left was short lived, and it was their fault. None of the leaders who have risen to the top, thanks to the sudden wave of public unrest, had courage to break away from the liberal establishment. The burden of these ties drowned them. Tsipras capitulated in the face of the demands of the EU and European Central bank leadership, and imposed on Greek people a much more harsh and dishonourable agreement than anything ever signed by the right-wing governments. Jeremy Corbyn made concessions to the right-wing of his own party, and refused to support the demand for the seceding of

Britain from the EU, supported by the majority of the British people. Finally, Bernie Sanders, refused to fight for the presidential nomination despite the fact that many of his supporters were convinced that the primaries were unfair and rigged by the party establishment who favoured Hillary Clinton. He refused to run as an independent as well, arguing that such a move would benefit Trump.

These actions made Trump’s victory inevitable.

And it’s not just about the number of votes.

Trump turned out to be the only candidate who went against the establishment, the only one who represented the objective and urgent need to get out of the framework of crumbling system. When Sanders left the stage he created a situation in which there was no alternative to Trump. Not because Trump is good, but because all other political forces are stubbornly unwilling to accept the idea that the old world, the old way of life, and the old rules of the game are gone, and that the attempts to preserve them will inevitably result in political losses.

In the meantime, a new anti-liberal majority is forming in America and Europe. It is based on corporate solidarity, not class solidarity. On one hand, the workers and the lower classes are quite ready to unite with the real sector entrepreneurs to confront not only financial oligarchy, but also cultural and political establishment. On the other hand the politics of breaking society into competing minorities does not work anymore, because liberal policies carried out in the last quarter century has led to the stratification inside ethnic, religious, cultural and other minorities where small privileged groups receiving various benefits, are more and more clearly in an opposition to the rest who are suffering from the economic policies, and are indifferent to the issues of political correctness, affirmative action and positive discrimination. The role of loyal sub-elites, integrated into the establishment is to ensure support of the current economic system by the corresponding communities. but they are losing control little by little. Social contradictions within the communities not only have become more important than the opposition to the mythical “white males”, but also are being realised by the masses of people. Solidarity begins to transcend communal barriers.

It seems that the eight years of an African American president in the Oval Office became a turning point: they showed that the success of a black politician from Illinois did not help millions of

Trump turned out to be the only candidate who went against the establishment, the only one who represented the objective and urgent need to get out of the framework of crumbling system.

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US Politics

The main goal should not be the defense of the minority rights, but overcoming of fragmentation of the society.

© Nick Lowndes

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black workers and unemployed all over the United States. Moreover, while his success was celebrated, African American middle class suffered a setback.

People have come to realise, little by little, that the economic and social interests of the majority of African Americans as well as “white males” are quite the same: they need jobs, security and confidence in the future. Of course, the political machine of the Democratic Party insured support for Clinton by the majority of African Americans and Latinos, still Trump received a record number of votes from these groups when compared to other Republicans who ran for presidency in the recent years. It was this shift that predetermined Trump’s success in the swing states.

Finally, a considerable share of the vote came from Sanders’ voters, who were angry with the apparatus of the Democratic Party who actually stole the victory from their candidate. Bernie himself, as well as the rest of the left political elite capitulated and called on their supporters to vote for Clinton. But this capitulation only demonstrated how limited the capabilities of the intellectuals are: the majority of left rank-and-file did not follow them. They stayed at home, voted for Trump, or gave their vote to the Green candidate Jill Stein.

A new anti-liberal majority is a political fact in the United States and Western Europe. Aggressive campaign against Trump launched by the liberal circles in the US only works to consolidate this majority. Even if Trump’s policies won’t work, he will just strengthen his position in this situation, since his confrontation with the establishment and the efforts of his opponents to block his agenda are too obvious. How this majority will evolve is still an open question. Liberal propaganda, which makes every effort to present this huge mass of people who oppose the current order as uneducated and vicious racists, eventually plays in the hands of the right, leaving them to be the sole force that offers ideological forms, which allow the expression of the accumulated discontent.

The lamentable experience of the Clinton campaign has shown the consequences of cooperation of the

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Left with the liberals. Despite the diligent refusal of Bernie Sanders and intellectuals around him to mount an independent political struggle after the end of the primaries, despite their desperate calls to support the former first lady, it all ended in failure. Clinton’s campaign drowned, pulling all those who joined her down to the bottom. And as long as this lesson is not learned, it will be repeated again and again.

If the Left really wants to stop the sliding of the US and Western Europe to the right they should not support the liberal regime as a “lesser evil”, but, on the contrary, they should take an active part in its dismantling. They should start a dialogue with the disaffected protesting masses, support their legitimate demands and work to form a new culture of solidarity, overcoming the barriers of political correctness and multiculturalism.

Unfortunately, what we currently see in reality is the triumph of the opposite tendencies. The Left turned itself into pawns of the liberal-conservative establishment. More over, in the global strategy of the elite they received a role of a strike force which has to be mobilised to destabilise Trump’s administration. However, the more successful these efforts will be, the faster they will lead to a direct confrontation between the liberal middle class and the working class.

The Left should not play the game offered by the establishment and make every effort to block the attempts of Trump to get the society out of the impasse. Instead, they should demand more reasonable, and more socially oriented policies, which the new president and his team are not likely to deliver.

Bernie Sanders partially demonstrated a correct approach when he announced that he was ready to collaborate with the new president on certain conditions for the goal of improving the lives of working families. However, he was not consistent, did not make logical conclusions, and did not formulate an integral political strategy. The main goal should not be the defense of the minority rights, but overcoming of fragmentation of the society. When the society is completely integrated, and minorities become an organic part of the majority, when the principles of equality are carried out consistently and rigorously, then any discrimination, including positive discrimination, becomes impossible.

To make this a reality, instead of counteracting Trump, the Left should demand that he fulfills his

own promises, push him toward more radical, deep and extensive change based on a new historical perspective of development.

Will the Trump administration be able to fulfill these demands? It is unlikely. But this will create preconditions for the transition to a new stage of change, when all outstanding issues and unmet needs will be put on the agenda understood by society. The work on the dismantling of neoliberal order which will inevitably start during the term of the 45th president of the United States is necessary in order to pull the society out of impasse. Trump himself will be unable to accomplish it due to his class, cultural and ideological limitations. He is just preparing conditions for more serious changes, which are inevitable in the unfolding situation of confrontation. Only the new social forces which will take shape in the nearest few years will be able to complete this process.

This is a second chance for the Left. After their indecisiveness and readiness to support the “lesser evil� led to the interception of initiative by the right populists, they might be able to return to the political arena. But a complete, open, and demonstrative beak up with the liberal establishment is the necessary precondition. Ideologues and leaders of the contemporary Left in the US and Western Europe, with a rare exception, are unlikely to be able to do it. They are too integrated into the current political order. But this is the only possible platform for the consolidation of the left movement.

All of this is relevant not only for the United States, but also for the majority of the European countries, including Russia. The growing discontent everywhere takes form of populist movements, which have a potential to be led by the right and left alike, but in both cases they are aimed at the dismantling of liberal institutions and politics in the form they have developed in the last three decades. The changes in the United States open unprecedented opportunities for change in other countries: the more US is busy solving its own problems, the less they interfere in the affairs of other countries, the more opportunities for the people of the world to solve their problems independently. It was the liberal America with its hypocritical interventionism who served as the global conservative force blocking the natural needs of social evolution in other countries. This was the politics, which paralysed the grass-roots growth of social movements and democratic initiatives, and bore the

The victory of Trump in the US presidential elections marks the point of no return for the history of the world.

radical Islamism and other movements which substitute social mobilisation by violent reprisals against those who are perceived as the culprit of current troubles and problems. Rejection of interventionism

by US will not put an end to conflicts and wars, but these problems will be solved by local forces, based on the balance of local and regional interests.

As for Russia, Trump’s victory does not bring good news for her ruling circles. The attitude of Donald Trump towards Vladimir Putin does not matter, the protectionist agenda of the new leadership in Washington nullifies the economic strategy of Kremlin, which continues to believe that the flow of cheap money from the US and the flow of Chinese goods to the US market will help to maintain the price of oil at the level which allows them to avoid any internal political reforms. Alas, this time is over.

US sanctions and aggressive hysteria of Obama and Clinton helped to stabilise current Kremlin regime, maybe even prolonging its existence for a few years.

But this is coming to an end, too.

The victory of Trump in the US presidential elections marks the point of no return for the history of the world. Saving the old order becomes impossible.

And, most likely, even the American president is not aware of how large-scale the transformation process will be, the process he has started by the very fact of his arrival into the White House. But very soon everyone will feel it. Not only in America but also in Western Europe, in China and in Russia.

Boris Kagarlitsky is a sociologist living and working in Moscow. He served as an adviser to the chair of Federation of Independent Trade Unions of Russia in 1992-1994 and later worked for Russian Academy of Sciences at the Institute for Comparative Political Studies and is currently the director of the Institute for Globalization and Social Movements (IGSO) and a professor at Moscow School for Social and Economic Sciences. His recent books in English are Empire of the periphery: Russia and the World-System (Pluto, 2008) and From Empires to Imperialism: States and the Rise of Bourgeois Civilization (Routledge, 2014).

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US Politics

Trump’s Great Game: Playing Russia Against China?

BY DAN STEINBOCK

Trump has pledged to reset the White House policies on “America First” basis. In Asia, it may mean an effort to balance with Russia against China and the reverse of US China approach in the 1970s.

A

fter inauguration, Donald Trump will move from Trump Plaza in mid-Manhattan to White House in Washington, where he will enjoy extraordinary execution power. Today, Republicans will control the White House, the Senate and the House of Representatives.

Consequently, whatever the administration will decide to do is likely to be bigger and bolder, move ahead faster

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and have greater consequences.

In Asia, that may translate to a double pivot.

Pivoting Away from China Through his campaign, Trump voiced strong opposition against Obama-led Trans-Pacific Partnership (TPP), while labeling the North American Free Trade Agreement (NAFTA) a disaster.

He has also suggested that he would renegotiate or reject other US international commitments.

In particular, he has threatened to use 35-45% import tariffs (although currently Trump’s team has been floating a 10% tariff) to force some countries, particularly Mexico and

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China, to change what he calls their “unfair trade practices”. Indeed, he is likely to press talks on trade practices, while forcing Beijing to enforce intellectual property rights.

High-level trade appointments suggest that he is likely to walk the talk. He chose Peter Navarro – the author of The Coming China Wars (2005) and Death by China (2011), and What China’s Militarism Means for the World (2015) – to head the newly-created National Trade Council (NTC), which will oversee industrial policy in the White House. Navarro’s fellow China critic Dan DiMicco, former CEO of Nucor, America’s largest steel company, became Trump’s trade advisor. In turn, the new US Trade Representative will be former Reagan administration official Robert Lighthizer, a staunch critic of China’s trade practices.

Trump’s trade warriors will work closely with Secretary of Commerce Wilbur Ross, another billionaire investor. Trump’s trade warriors will begin by targeting those countries China, Germany, Japan and Mexico that currently enjoy the heftiest trade

surplus with the US. In turn, the demise of NAFTA would hurt not just Mexico, but Canada.

Meanwhile, US-led free trade plans have been shelved, which has left China an opportunity to redefine trade in Asia Pacific. That effort, however, may have to cope with Trump’s double pivot.

UNLIKE OBAMA, TRUMP IS OPEN TO LIFTING SANCTIONS ON RUSSIA AND IS LIKELY TO MEET PUTIN SOON AFTER HE TAKES OFFICE. Pivoting Toward Russia If President Obama’s major foreign policy goal was a pivot to Asia, President Trump is likely to pivot toward President Putin and Russia. Indeed, Trump’s efforts to improve relations with Russia led to a last-minute counter-attack by the US intelligence community, based in part on facts but largely on circumstantial and unsubstantiated evidence. To Trump, the intelligence dossiers, including one about him, represent the kind of neoconservative fiction that served as a pretext for the Iraq War. Unlike Obama, Trump is open to lifting sanctions on Russia and is likely to meet Putin soon after he takes office.

In contrast to Russia, Trump has used China as a scapegoat for US trade deficit, offshoring and manufacturing decline. He has also shown willingness to challenge the basis of US-China ties since 1979, as evidenced by the recent “one China” policy debacle. Ultimately, these efforts go back to neoconservative visions in the 1990s to use imperial “divide and rule” efforts in China’s special administrative regions (Hong Kong and Macao), Taiwan, and certain autonomous regions (Xinjiang, Tibet), in order to foster dissension within the mainland.

Regionally, these efforts are likely to mean greater assertiveness, most likely in the name of “freedom of navigation” (FON) operations. In his confirmation hearing, secretary of state, Rex Tillerson, former CEO of ExxonMobil, said that he would take a strong stance on China’s claims over the South China Sea adding that US should “send China a clear signal that, first, the island-building stops, and second, your access to those islands also is not going to be allowed”.

In details, Tillerson is said to have misspoken, however.

Any forceful effort of the US to circle one or all the islands would result in an open conflict with China, which is not in the US interest. Nonetheless, the new administration is opting for a somewhat new regional stance.

Playing Russia Against China Indeed, there may be a curious logic underlying Trump’s efforts to foster a pivot toward Russia but away from China.

Usually, the two geopolitical moves have been analysed separately. In fact, they are linked.

In the past few weeks, Trump has had several meetings with Henry Kissinger, who remains close to both Moscow and Beijing.

In the early 1970s, President Richard Nixon and his security adviser Kissinger sought to undermine Soviet Union’s might by making a historical opening to Beijing. What is less known is that Kissinger then observed that “in 20 years your successor, if he’s as wise as you, will wind up leaning towards the Russians against the Chinese”. He argued that the US needed “to play this balance of power game unemotionally”. Right now, the US needed the Chinese to insulate the Soviets. “But in the future, it would be the other way around,” he added.

The Trump administration may presume that, from the US standpoint, such a balancing game would weaken or contain China, while, to Russia, it would ensure closer cooperation with Europe.

Yet, the assumption may prove flawed on three counts.

Today, Putin’s economic, political and military ties with China are strategically too critical to endanger. Moreover, after the betrayal of its promise to avoid NATO enlargement in Russia’s regional neighbourhood, US has also implemented several ill-conceived rounds of sanctions against Russia. In the process, Washington has lost all credibility among Russians. Finally, as China has been transformed in the past four decades, Kissinger himself has maintained close ties with both Russia and China.

Nevertheless, Trump’s recent geopolitical moves – non-interventionist rhetoric but neoconservative advisers, the effort to challenge “One China” principles, the stated shift toward greater assertiveness in East and Southeast China and his double pivot vis-à-vis China and Russia – indicate that his longer-term goal may be to include Putin’s Russia in a “Common European Home” from the Atlantic to the Urals that Gorbachev promoted in 1987.

The problem is that the Cold War ended almost three decades ago, however.

Dr. Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/

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China

THE COMING WAR on China

BY JOHN PILGER

The world is inexorably shifting east; but the astonishing vision of Eurasia from China is barely understood in the West. The rise of China as an economic power is declared an “existential threat” to the divine right of the United States to rule and dominate human affairs.

W

hen I first went to Hiroshima in 1967, the shadow on the steps was still there. It was an

almost perfect impression of a human being at ease: legs splayed, back bent, one hand by her side as she sat waiting for a bank to open. At a quarter past eight on the morning of 6 August 1945, she and her silhouette were burned into the granite. I stared at the shadow for an hour or more, unforgettably. When I returned many years later, it was gone: taken away, “disappeared”, a political embarrassment.

I have spent two years making a

documentary film, The Coming War on China, in which the evidence and witnesses warn that nuclear war is no longer a shadow, but a contingency.

The greatest build-up of American-led military forces since the Second World War is well under way. They are in the northern hemisphere, on the western borders of Russia, and in Asia and the Pacific, confronting China.

The great danger this beckons is not news, or it is buried and distorted: a drumbeat of mainstream fake news that echoes the psychopathic fear embedded in public consciousness during much of the 20th century.

Like the renewal of post-Soviet Russia, the rise of China as an economic power is declared an “existential threat” to the divine right of the United States to rule and dominate human affairs.

To counter this, in 2011 President Obama announced a “pivot to Asia”, which meant that almost two-thirds of US naval forces would be transferred

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China

to Asia and the Pacific by 2020. Today, more than 400 American military bases encircle China with missiles, bombers, warships and, above all, nuclear weapons. From Australia north through the Pacific to Japan, Korea and across Eurasia to Afghanistan and India, the bases form, says one US strategist, “the perfect noose”.

A study by the RAND Corporation – which, since Vietnam, has planned America’s wars – is entitled, War with China: Thinking Through the Unthinkable.

Commissioned by the US Army, the authors evoke the cold war when RAND made notorious the catch cry of its chief strategist, Herman Kahn –“thinking the unthinkable”. Kahn’s book, On Thermonuclear War, elaborated a plan for a “winnable” nuclear war against the Soviet Union.

Today, his apocalyptic view is shared by those holding real power in the United States: the militarists and neo-conservatives in the executive, the Pentagon, the intelligence and “national security” establishment and Congress.

The current Secretary of Defense, Ashley Carter, a verbose provocateur, says US policy is to confront those “who see America’s dominance and want to take that away from us”.

For all the attempts to detect a departure in foreign policy, this is almost certainly the view of Donald Trump, whose abuse of China during the election campaign included that of “rapist” of the American economy. On 2 December, in a direct provocation of China, President-elect Trump spoke to the President of Taiwan, which China considers a renegade province of the mainland. Armed with American missiles, Taiwan is an enduring flashpoint between Washington and Beijing.

“The United States”, wrote Amitai Etzioni, professor of international Affairs at George Washington University, “is preparing for a war with

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China, a momentous decision that so far has failed to receive a thorough review from elected officials, namely the White House and Congress.” This war would begin with a “blinding attack against Chinese anti-access facilities, including land and sea-based missile launchers … satellite and anti-satellite weapons”.

The incalculable risk is that “deep inland strikes could be mistakenly perceived by the Chinese as pre-emptive attempts to take out its nuclear weapons, thus cornering them into ‘a terrible use-it-or-lose-it dilemma’ [that would] lead to nuclear war.”

In 2015, the Pentagon released its Law of War Manual. “The United States”, it says, “has not accepted a treaty rule that prohibits the use of nuclear weapons per se, and thus nuclear weapons are lawful weapons for the United States.”

In China, a strategist told me, “We are not your enemy, but if you [in the West] decide we are, we must prepare without delay.” China’s military and arsenal are small compared to America’s. However, “for the first time,” wrote Gregory Kulacki of the Union of Concerned Scientists, “China is discussing putting its nuclear missiles on high alert so that they can be launched quickly on warning of an attack … This would be a significant and dangerous change in Chinese policy … Indeed, the nuclear weapon policies of the United States are the most prominent external factor influencing Chinese advocates for raising the alert level of China’s nuclear forces.”

Professor Ted Postol was scientific adviser to the head of US naval operations. An authority on nuclear weapons, he told me, “Everybody here wants to look like they’re tough. See I got to be tough … I’m not afraid of doing anything military, I’m not afraid of threatening; I’m a hairy-chested gorilla. And we have

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gotten into a state, the United States has gotten into a situation where there’s a lot of sabre-rattling, and it’s really being orchestrated from the top.”

I said, “This seems incredibly dangerous.”

“That’s an understatement.”

In 2015, in considerable secrecy, the US staged its biggest single military exercise since the Cold War. This was Talisman Sabre; an armada of ships and long-range bombers rehearsed an “AirSea Battle Concept for China” – ASB – blocking sea lanes in the Straits of Malacca and cutting off China’s access to oil, gas and other raw materials from the Middle East and Africa.

It is such a provocation, and the fear of a US Navy blockade, that has seen China feverishly building strategic airstrips on disputed reefs and islets in the Spratly Islands in the South China Sea. Last July, the UN Permanent Court of Arbitration ruled against China’s claim of sovereignty over these islands.

Although the action was brought by the Philippines, it was presented by leading American and British lawyers and could be traced to US Secretary of State Hillary Clinton.

In 2010, Clinton flew to Manila.

She demanded that America’s former colony reopen the US military bases closed down in the 1990s following a popular campaign against the violence they generated, especially against Filipino women. She declared China’s claim on the Spratly Islands – which lie more than 7,500 miles from the United States – a threat to US “national security” and to “freedom of navigation”.

Handed millions of dollars in arms and military equipment, the then government of President Benigno Aquino broke off bilateral talks with China and signed a secretive Enhanced Defense Co-operation Agreement with the US. This established five rotating US bases and restored a hated colonial

In 2014, under the rubric of “information dominance” – the jargon for media manipulation, or fake news, on which the Pentagon spends more than $4 billion – the Obama administration launched a propaganda campaign that cast China, the world’s greatest trading nation, as a threat to “freedom of navigation”.

China certainly does object by word and deed to what it perceives as U.S. abuse of the right of freedom of navigation and threats to use force © Airman Benjamin Dennis / US Navy

provision that American forces and contractors were immune from Philippine law.

The election of Rodrigo Duterte in April has unnerved Washington. Calling himself a socialist, he declared, “In our relations with the world, the Philippines will pursue an independent foreign policy” and noted that the United States had not apologized for its colonial atrocities. “I will break up with America,” he said, and promised to expel US troops. But the US remains in the Philippines; and joint military exercises continue.

In 2014, under the rubric of “information dominance” – the jargon for media manipulation, or fake news, on which the Pentagon spends more than $4 billion – the Obama administration launched a propaganda campaign that cast China, the world’s greatest trading nation, as a threat to “freedom of navigation”.

CNN led the way, its “national security reporter” reporting excitedly from on board a US Navy surveillance flight over the Spratlys. The BBC persuaded frightened Filipino pilots to fly a single-engine Cessna over the disputed islands “to see how the

Chinese would react”. None of these reporters questioned why the Chinese were building airstrips off their own coastline, or why American military forces were massing on China’s doorstep.

The designated chief propagandist is Admiral Harry Harris, the US military commander in Asia and the Pacific. “My responsibilities”, he told the New York Times, “cover Bollywood to Hollywood, from polar bears to penguins”. Never was imperial domination described as pithily.

Harris is one of a brace of Pentagon admirals and generals briefing selected, malleable journalists and broadcasters, with the aim of justifying a threat as specious as that with which George W Bush and Tony Blair justified the destruction of Iraq and much of the Middle East.

In Los Angeles in September, Harris declared he was “ready to confront a revanchist Russia and an assertive China …If we have to fight tonight, I don’t want it to be a fair fight. If it’s a knife fight, I want to bring a gun. If it’s a gun fight, I want to bring in the artillery … and all our partners with their artillery.”

These “partners” include South Korea, the launch pad for the Pentagon’s Terminal High Altitude Air Defense system, known as THAAD, ostensibly aimed at North Korea. As Professor Postol points out, it targets China.

In Sydney, Australia, Harris called on China to “tear down its Great Wall in the South China Sea”.

The imagery was front page news. Australia is America’s most obsequious “partner”; its political elite, military, intelligence agencies and the media are integrated into what is known as the “alliance”.

Closing the Sydney Harbour Bridge for the motorcade of a visiting American government “dignitary” is not uncommon. The war criminal Dick Cheney was afforded this honour.

Although China is Australia’s biggest trader, on which much of the national economy relies, “confronting China” is the diktat from Washington.

The few political dissenters in Canberra risk McCarthyite smears in the Murdoch press. “You

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China

One of the most important US bases is Pine Gap near Alice Springs. Founded by the CIA, it spies on China and all of Asia, and is a vital contributor to Washington’s murderous war by drone in the Middle East. in Australia are with us come what may,” said one of the architects of the Vietnam war, McGeorge Bundy. One of the most important US bases is Pine Gap near Alice Springs. Founded by the CIA, it spies on China and all of Asia, and is a vital contributor to Washington’s murderous war by drone in the Middle East.

In October, Richard Marles, the defence spokesman of the main Australian opposition party, the Labor Party, demanded that “operational decisions” in provocative acts against China be left to military commanders in the South China Sea. In other words, a decision that could mean war with a nuclear power should not be taken by an elected leader or a parliament but by an admiral or a general.

This is the Pentagon line, a historic departure for any state calling itself a democracy. The ascendancy of the Pentagon in Washington – which Daniel Ellsberg has called a silent coup – is reflected in the record $5 trillion America has spent on aggressive wars since 9/11, according to a study by Brown University.

The million dead in Iraq and the flight of 12 million refugees from at least four countries are the consequence.

The Japanese island of Okinawa has 32 military installations, from which Korea, Vietnam, Cambodia, Afghanistan and Iraq have been attacked by the United States. Today,

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the principal target is China, with whom Okinawans have close cultural and trade ties.

There are military aircraft constantly in the sky over Okinawa; they sometimes crash into homes and schools. People cannot sleep, teachers cannot teach.

Wherever they go in their own country, they are fenced in and told to keep out.

A popular Okinawan anti-base movement has been growing since a 12-year-old girl was gang-raped by US troops in 1995. It was one of hundreds of such crimes, many of them never prosecuted. Barely acknowledged in the wider world, the resistance has seen the election of Japan’s first antibase governor, Takeshi Onaga, and presented an unfamiliar hurdle to the Tokyo government and the ultra-nationalist prime minister Shinzo Abe’s plans to repeal Japan’s “peace constitution”.

The resistance includes Fumiko Shimabukuro, aged 87, a survivor of the Second World War when a quarter of Okinawans died in the American invasion. Fumiko and hundreds of others took refuge in beautiful Henoko Bay, which she is now fighting to save. The US wants to destroy the bay in order to extend runways for its bombers. “We have a choice”, she said, “silence or life”. As we gathered peacefully outside the US base, Camp Schwab, giant Sea Stallion helicopters hovered over us for no reason other than to intimidate.

Across the East China Sea lies the Korean island of Jeju, a semi-tropical sanctuary and World Heritage Site declared “an island of world peace”.

On this island of world peace has been built one of the most provocative military bases in the world, less than 400 miles from Shanghai. The fishing village of Gangjeong is dominated by a South Korean naval base purpose-built for US aircraft carriers, nuclear submarines and destroyers equipped with the Aegis missile system, aimed at China.

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A people’s resistance to these war preparations has been a presence on Jeju for almost a decade. Every day, often twice a day, villagers, Catholic priests and supporters from all over the world stage a religious mass that blocks the gates of the base. In a country where political demonstrations are often banned, unlike powerful religions, the tactic has produced an inspiring spectacle.

One of the leaders, Father Mun Jeong-hyeon, told me, “I sing four songs every day at the base, regardless of the weather. I sing in typhoons – no exception. To build this base, they destroyed the environment, and the life of the villagers, and we should be a witness to that. They want to rule the Pacific. They want to make China isolated in the world. They want to be emperor of the world.”

I flew from Jeju to Shanghai for the first time in more than a generation. When I was last in China, the loudest noise I remember was the tinkling of bicycle bells; Mao Zedong had recently died, and the cities seemed dark places, in which foreboding and expectation competed. Within a few years, Deng Xiopeng, the “man who changed China”, was the “paramount leader”. Nothing prepared me for the astonishing changes today.

China presents exquisite ironies, not least the house in Shanghai where Mao and his comrades secretly founded the Communist Party of China in 1921.

Today, it stands in the heart of a very capitalist shipping district; you walk out of this communist shrine with your Little Red Book and your plastic bust of Mao into the embrace of Starbucks, Apple, Cartier, Prada.

Would Mao be shocked? I doubt it.

Five years before his great revolution in 1949, he sent this secret message to Washington. “China must industrialise.” he wrote, “This can only be done by free enterprise. Chinese and American interests fit together,

economically and politically. America need not fear that we will not be co-operative. We cannot risk any conflict.”

Mao offered to meet Franklin Roosevelt in the White House, and his successor Harry Truman, and his successor Dwight Eisenhower. He was rebuffed, or willfully ignored. The opportunity that might have changed contemporary history, prevented wars in Asia and saved countless lives was lost because the truth of these overtures was denied in 1950s Washington “when the catatonic Cold War trance,” wrote the critic James Naremore, “held our country in its rigid grip”.

The fake mainstream news that once again presents China as a threat is of the same mentality.

The world is inexorably shifting east; but the astonishing vision of Eurasia from China is barely understood in the West. The “New Silk Road” is a ribbon of trade, ports, pipelines and high-speed trains all the way to Europe. The world’s leader in rail technology, China is negotiating with 28 countries for routes on which trains will reach up to 400 kms an hour. This opening to the world has the approval of much of humanity and, along the way, is uniting China and Russia.

“I believe in American exceptionalism with every fibre of my being,” said Barack Obama, evoking the fetishism of the 1930s. This modern cult of superiority is Americanism, the world’s dominant predator. Under the liberal Obama, winner of the Nobel Peace Prize, nuclear warhead spending has risen higher than under any president since the end of the Cold War. A mini nuclear weapon is planned. Known as the B61 Model 12, it will mean, says General James Cartwright, former vice-chairman of the Joint Chiefs of Staff, that “going smaller [makes its use] more thinkable”.

In September, the Atlantic Council, a mainstream US geopolitical thinktank, published a report that predicted a Hobbesian world “marked by the breakdown of order, violent extremism [and] an era of perpetual war”. The new enemies were a “resurgent” Russia and an “increasingly aggressive” China. Only heroic America can save us.

There is a demented quality about this war mongering. It is as if the “American Century” – proclaimed in 1941 by the American imperialist Henry Luce, owner of Time magazine – has ended

without notice and no one has had the courage to tell the emperor to take his guns and go home.

John Pilger has been a war correspondent, author and documentary film-maker. He is one of only two to win British journalism’s highest award twice, for his work all over the world.

He received the United Nations Association Peace Prize and Gold Medal, and the prestigious Sophie Prize for “thirty years of exposing deception and improving human rights”.

For his documentary films, he has won an American television academy award, an Emmy, and a British Academy Award, a BAFTA, and the Royal Television Society Award for documentary films.

His 1979 documentary, the epic Cambodia Year Zero is credited with alerting the world to the horrors of the Pol Pot regime. Year Zero is ranked by the BFI as among the ten most important documentaries of the 20th century. His Death of a Nation, about East Timor, had a similar impact in 1994. He has made 58 documentary films. He is the author of numerous best-selling books, including Heroes and A Secret Country, The New Rulers of the World and Hidden Agendas.

“John Pilger unearths, with steely attention to facts, the filthy truth and tells it as it is” – Harold Pinter.

“John Pilger’s work has been a beacon of light in often dark times. The realities he has brought to light have been a revelation, over and over again, and his courage and insight a constant inspiration.” – Noam Chomsky.

“

This article was first published on counterpunch on 2 December 2016.

THE WORLD IS INEXORABLY SHIFTING EAST; BUT THE ASTONISHING VISION OF EURASIA FROM CHINA IS BARELY UNDERSTOOD IN THE WEST. www.worldfinancialreview.com

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Philippines

The Philippines “BRIC” Plan: From Regime Change Ploys to Accelerated Economic Development

BY DAN STEINBOCK © ABS-CBN News

While the Obama White House prepared plans for regime change in the Philippines, President Trump is working on an assertive strategy in Asia.

Meanwhile, President Duterte is accelerating the country’s economic growth – dramatically.

A

fter the election triumph of President Rodrigo Duterte, the Philippines has initiated a series of economic reforms to accelerate development, decentralise governance and a tough but controversial struggle against corruption and drugs.

The early economic signals are promising. Recently, Finance Secretary Carlos Dominguez III announced that the government is set to sustain growth at close to 7% in 2017, despite “political noise”, by banking on higher infrastructure spending, tax and other reforms, improved peace and order.

The big question is President Trump’s strategy for the region. With his keen interest in history, Duterte knows only too well that, while the US is a powerful regional ally, American security state and imperial

dreams, including torture, originate historically from the Philippines. Yet, few expected the Obama State Department to respond as palpably as it reportedly did.

Regime Change Plan After the controversial US Ambassador Philip Goldberg left the Philippines, he wrote a “blueprint to undermine Duterte within 18 months”.

According to the document, which was leaked to The Manila Times early in the year, Goldberg advocates fostering public discontent with Duterte by isolating the Philippines through military assistance and economic “blackmail” relative to other ASEAN member countries.

While Goldberg thinks that “(deposing Duterte) would be a challenge for the opposition”, his goal is imperial “rule and divide” among Philippine congressmen and senators; the ASEAN states; and international multilateral organisations. Moreover, the pro-US opposition should be strengthened through aids and grants. The plan calls on Washington to deploy economic, political and military strategies against Duterte “to bring him to his knees and eventually remove him from office”.

According to Daniel Russel, State Department’s assistance secretary for East Asian affairs, the allegations

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Philippines

In geopolitics, human rights and non-governmental organisations (NGOs) have only too often been used as geopolitical instruments. The Philippines is no exception. of a blueprint are false. However, Russel himself is a key figure in the US pivot towards Asia. US-based sources have also tried to discredit the blueprint as coming from China’s Philippine Ambassador Zhao, which the executive editor of The Manila Times Dr. Dante Ang calls a “fantasy”.

It is not the first time Goldberg is associated with regime change efforts.

In 2008 President Evo Morales and the Bolivian government gave him 3 days to leave the country after declaring him persona non grata – following efforts to fund the opposition leaders, separatists

and think-tanks with millions of dollars.

Yet, President Obama rewarded Goldberg by appointing him assistant secretary of state for Intelligence and Research; one of the 16 elements of the US Intelligence Community. That made Goldberg the middleman between US intelligence and US diplomacy. Thereafter he was sent to the Philippines, which he left in less than three years after efforts to intervene with the election outcome.

Exploiting Opposition, Human Rights and NGOs The regime plan ensued after election last May, when President Aquino’s designated successor – former interior minister Manuel Roxas, an ex-investment banker and Liberal Party leader – failed to deliver a democratic victory.

Known as “Mr. Market”, Roxas appealed to elites in Manila and Washington but Duterte got almost 40% of the national vote, nearly twice as much as Roxas.

MEETING IN CHINA. Philippine President Rodrigo Duterte shakes hands with his Chinese counterpart Xi Jinping after they witness the signing of documents on cooperation in trade, agriculture, tourism, maritime security, and infrastructure. Photo by Toto Lozano/PPD

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The World Financial Review January - February 2017

Since elections, there remain nagging questions about the rise of a “narco state” and “drugs generals” during Roxas' watch as interior minister. One of them is a vocal Roxas supporter, retired national police chief general Marcelo Garbo Jr., a “protector of drug syndicates”. To set such perceptions aside, Goldberg’s plan argues that the political opposition “would need all the political weapons in their arsenal to replace Duterte”. The plan advises “restraint in expressing public support for former President Fidel Valdez Ramos and Vice President Leni Robredo, and other opposition leaders “so as not to alarm the Duterte administration of an impending destabilization or a coup”.

These plans rely on the center-right Philippine Liberal party, which is known for its market-friendly neoliberal policies and firm support of the US pivot to Asia.

Ramos was trained at US West Point in 1960. In the 1980s, he was in President Marcos’s inner circle of national police and military. Following the fall of Marcos, he served as President Corazon Aquino’s military chief. In turn, Leni Robredo is a lawyer and social activist, who the Duterte administration sees more loyal to opposition and possibly the Goldberg plan. Her relationship with the Cabinet fell apart in December, when she was informed “to desist from attending all Cabinet meetings”.

In geopolitics, human rights and non-governmental organisations (NGOs) have only too often been used as geopolitical instruments. The Philippines is no exception. In the Benigno Aquino III era until mid-2016, complacency with drug lords and narco politicians went hand in hand with the rise of 3.7 million addicts.

International media was quiet about both.

However, when Duterte started his war against drugs and corruption, which has cost over 6,000 lives, international concern escalated rapidly.

In the public debate, the point person has been Senator Leila de Lima,

Aquino’s former Secretary of Justice, who chaired a senate inquiry into the extrajudicial killings of drug suspects. She has been glorified by the BBC as “the woman who dares to defy Philippine president Duterte” and as an outspoken advocate of “justice". For the same reason de Lima was invited to and awarded in the US as one of the “leading 100 global thinkers” by the Democrats’ Foreign Policy. In the Philippines, many see her awards as perversions of justice, however.

Last August, de Lima was found to have a 7-year affair with her lucratively-rewarded driver Ronnie Dayan who served as her money collector for drug protection and campaign financing.

When she was still Justice Secretary, the Discovery Channel presented an unsettling documentary Inside the Gangster’s code on ruthless gangs exerting control over the notorious New Bilibid Prisons, while being coddled by the Aquino administration. Oddly enough, de Lima was removed from the Senate committee last September, but her international accolades ensued after the disclosure of her activities. International media has largely ignored her abuse of public office and public funds.

Non-governmental organisations (NGOs) also play a role in US-Philippines geopolitics, along with wealthy US Filipinos linked with the Aquino circles, such as billionaire philanthropist Loida Nicolas-Lewis, who served as an attorney for the US Immigration and Naturalization Services in 1979-90. Her sister is former chairwoman of Commission on Filipinos Overseas, Imelda Nicolas. Both are Robredo supporters.

A more influential source of funds is billionaire George Soros, who Duterte says has bankrolled local NGOs against him as he has been portrayed as a “mass murderer” in the West. International media has relied on these NGOs and think-tanks in their demonisation of Duterte.

Last November, the US-based Millennium Challenge Corporation (MCC) did not renew its $430 million aid grant to the Philippines. While the Duterte's criticism about “aid conditions” was reported as “tirades against America” in the West, the MCC is hardly independent. It is chaired by State Secretary John Kerry and Treasury Secretary Jacob Lew. It also deploys indicators that precondition aid on neoliberal policies.

The MCC debacle is overshadowed by the economic implications of US-Philippine military ties. Until 2010, the country’s military expenditures decreased two decades from 1.6% to 0.8% of GDP. During the Aquino era, which coincides with the US pivot to Asia, the expenditures soared to almost 1.4%

of GDP, according to SIPRI – which in dollar terms is over five times the proposed aid package in just one year.

Ambitious, Transformational Economic Efforts Under Duterte’s leadership, Manila’s economic development has been dramatically accelerated. Again, international media has largely ignored the story. According to Ernesto Pernia, director general of the National Economic and Development Authority (NEDA), the Philippines must ramp up its total investment spending to some 30% of GDP to achieve its development goal.

The effort is to become an upper middle-income economy by the end of Duterte’s term in 2022, which would pave the way for a high-income economy by 2040. If peaceful conditions prevail in Southeast Asia and the Philippines remains united, such ambitious objectives could be viable.

Last July, I argued in the Philippines Foreign Service Institute (FSI) that, in order to accelerate growth, the country should drastically increase both its domestic and foreign investment, seek funds not just from the Asian Development Bank (ADB) but from the Asian Infrastructure Investment Bank (AIIB); and not just from US and European multinationals but from Chinese companies. Nor can the Philippines any longer afford to export its people, I added. Although some 10% of the GDP can be attributed to remittances, no BRIC-like emerging economy can misallocate its human capital in such a manner. Even the most favourable demographics will be wasted, if there are not enough jobs.

It is this “BRIC-like” transformation that Manila is now trying to achieve. As a result, the public share of investments would have to climb from 5.4% of GDP in the ongoing year to 7% onward until 2022. As private and public investment is expected to contribute 18.6% and 5.4% of GDP, respectively, that would boost total investment to 24% of GDP. The Duterte administration is intent to restore the kind of growth track that the Philippines enjoyed in the early postwar era when its living standards were still second to those of Singapore in Southeast Asia.

However, even the ambitious infrastructure program will not be enough to eradicate poverty and become a highincome economy by 2040. To achieve its ultimate objective, the Philippines needs to raise total investments from the hoped-for 24% this year to 30% of GDP, of which only 7% would be contributed by the public sector.

Additionally, Manila needs to implement broad and deep

The Duterte administration is intent to restore the kind of growth track that the Philippines enjoyed in the early postwar era when its living standards were still second to those of Singapore in Southeast Asia. www.worldfinancialreview.com

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Philippines

Despite the controversial drugs war, Duterte's approval and trust ratings in the Philippines remains 83%.

Only 5% of the nation disapproves of Duterte.

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reforms in tax policy and administration to raise enough revenue to fund the government’s huge spending plan. According to ASEAN, in 2015 FDI in the Philippines was around $5.7 billion, significantly behind Indonesia, Thailand and Vietnam, which attracted FDI of $16.9 billion, $8.0 billion and $11.8 billion, respectively.

As real GDP growth rate is accelerating, Manila is pushing for legislative reform, which would streamline the regulatory environment, and the pivot to China, which translates to the participation of AIIB in Philippine projects and has already led to $24 billion in aid pledges. At the same time, the longstanding maritime dispute has been set aside. At the same time, Japan, a historical investment partner, is planning to raise its FDI in the Philippines with $1.8 billion in business deals plus a pledge from conglomerate Marubeni to invest $17.2 billion in water, power and infrastructure.

Unlike his predecessors, Duterte has little interest in exporting more people. “We have to improve the economy so you will not come back here”, said Duterte during his recent visit in Japan to migrant workers. “If ever you will return to Japan, it will be for a vacation.”

Finally, in my FSI presentation, I also argued that the Duterte administration’s efforts to negotiate sustained peace deals with its Communist and Islamist insurgents could be seen as part of the new economic strategy. A “no-conflict” approach within and around the country would boost stability and thus increase the potential for prosperity.

And that precisely has been Duterte’s objective, particularly in the troubled regions and islands in the south; particularly in Mindanao, whose natural resources hold great potential for future economic development.

ratings of opposition figures have fallen. At the same time, the legal battle about vice-presidency is heating.

Leni Robredo won vice-presidency with a narrow margin against former senator Ferdinand “Bong Bong” Marcos, former President Marcos’s son. In his electoral protest, Marcos says that the Liberal Party rigged the 2016 elections in favour of Robredo. That kind of fraud would no longer be surprising.

The stakes in the Philippines are no longer just domestic. Today the country’s stability is strongly supported by Beijing as well. Amid the news about the “ouster plot”, foreign ministry spokeswoman Hua Chunying said China was confident on Duterte’s leadership and would continue to support his policies.

Soon President Trump’s administration must reassess Goldberg’s regime-change scenarios in light of his own pledge to redefine “America First” policies in Asia and China. Before the US elections, Trump and Duterte had a brief but friendly phone conversation.

While Duterte may get better along with Trump than former President Obama, the new White House’s Philippines plans are subject to its broader Asia and China strategy which – as secretary of state Rex Tillerton’s confirmation hearings suggest – could mean greater assertiveness in the region.

In the Philippines, any US-led regime change effort would face firm domestic, regional and international opposition. Only the Philippines can determine its own future. Unipolar regime change plans should have no role in the multipolar 21st century – especially in Asia which is critical to global growth prospects.

From Obama’s Regime Changes to Trump Uncertainty In the Philippines, the alleged plan of Vice President Robredo’s supporters to create dissent against Duterte has become a national issue. If a Ramos-Robredo scenario were to fail, Golberg advises exploiting possible rifts “among Duterte supporters”, or assisting “Robredo led opposition groups” coupled with the Catholic Church, business sector and NGOs. Despite the controversial drugs war, Duterte’s approval and trust ratings in the Philippines remains 83%, according to the Pulse Asia survey. Only 5% of the nation disapproves of Duterte. However, the

Dr. Dan Steinbock is an internationally recognised expert of the nascent multipolar world. Dan Steinbock is the founder of the Difference Group. He has also served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). In the Philippines, he has addressed leading foreign policy, economic and climate change, as well as competition and innovation institutions. For more information, see http://www.differencegroup.net/

The World Financial Review January - February 2017

Korea

STRONGER ETHICS FOR BETTER LEADERSHIP Using Confucianism and Systems Theory

BY SUNNIE GILES

The lack of high ethical standards in Korea as noted in its current presidential corruption scandal destabilises its political system, produces suboptimal organisational performance, and results in high economic and human costs.

Part of this phenomenon can be traced to Confucian and collectivistic sources, where speaking against authorities or group norms

is viewed as disrespectful and disharmonious. However, ethical standards in Korea can be strengthened by organised leadership development programs that address current limitations, incorporate complex adaptive systems concepts, reflect neuroscience principles, and harness the Confucian principles that underpin cultural norms and societal expectations.

M

uch has developed since a previous article was published on the political crisis of President Park of South Korea (http:// www.worldfinancialreview.com/?p=11543 and http://www.koreatimes.co.kr/www/news/ opinon/2016/11/197_217694.html). Such developments include the allegation by the Prosecutor’s Office that Park not only allowed Ms. Choi Soon-sil, her personal friend of forty years, to have access to highly sensitive national intelligence, but proactively extorted contributions from top chaebols to the non-profit organisations Choi was using as a front to accumulate personal wealth. This alleged extortion incited massive public demonstrations to the tune of over one million protestors and propelled impeachment movements from the opposition parties.

According to the latest World Economic Forum Corruption Index,1 Korea is ranked the 9th most corrupt

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Korea

Korea ranks 29th out of 61 countries evaluated in overall competitiveness.

country among the world’s 35 wealthiest countries of the OECD (Organisation for Economic Co-operation and Development). These revelations of corruption at the highest levels of Korean government and business call for a critical review of: • The relationship between ethics and governmental leadership • The relationship between ethics and business leaders • Organised leadership development practices in the Korean government • Guidance on the implementation of such practices Ethical standards in Korea can be strengthened by organised leadership development programs, but these programs must: • Address the inherent limitations of current prevailing leadership development approaches • Incorporate the systemic nature of people and organisations • Reflect neuroscience principles, especially the implicit need for safety • Harness the deep cultural roots and social norms of Confucianism and collectivism (the current misguided application of which contributes to the lack of strong ethical standards in Korea).

Leadership development organised with these components will not only improve ethical standards in business and government practices, but will also improve Korea’s capacity for innovation.

1. Ethics and Leadership Although most of us agree ethics are critical to business and military leadership,2 we don’t have a clear understanding why. My recent research on global leadership for innovation, published in Harvard Business Review, revealed the reason: demonstrating strong moral and ethical values establishes safety because both parties agree on a common set of rules of how the game will be played.3 People handle losing the game a lot better than not knowing the rules.

When we see leaders being inconsistent between their words and actions, and who don’t demonstrate high ethical values, our sense of safety is violated, and our brain stem working with the amygdala activates those suboptimal responses.

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According to neuroscience principles, our need for safety undermines any other needs we have, including those for connection and learning. Safety is established in the brain stem — the oldest, most primitive part of our brain — and is governed through the autonomic nervous system. The determination of safety happens within eight milliseconds after the incoming signal is received. That same signal takes up to 2 seconds to reach our cognitive cortex brain, where we assign meaning, and activate the amygdala if the executive decision-making function determines that our safety is threatened. Before our cognitive brain is even fully aware, we have already reacted to the threat with a suboptimal response of contracting, withdrawing, attacking, or saying what we think they are looking for with no intention of following through. These are suboptimal reactions because the best part of the human brain — the cortex, where executive decision-making and innovation happens — doesn’t even get a chance to engage when we are battling for safety in the lower, less-evolved regions of the brain. And all of this happens below our conscious awareness.

When we see leaders being inconsistent between their words and actions, and who don’t demonstrate high ethical values, our sense of safety is violated, and our brain stem working with the amygdala activates those suboptimal responses. Strong ethics activate a sense of safety; we can then move to the higher regions of the brain, where we form connection and use our best executive decision-making capabilities.

Thus, ethical leaders create more cohesive teams and gain influence and commitment by demonstrating strong personal characteristics and values.

2. Ethics and Business Results In 2015, one of the stories seen most frequently on the front pages of Korean newspapers was how 78 people died from using dehumidifier disinfectants sold by Oxy Reckitt Benckiser (ORB, the Korean office of Reckitt Benckiser) and three others manufacturers in Korea. Government investigators found that ORB manipulated the safety research report by bribing the professors who conducted the research to advertise the disinfectant as safe to the public.

They also found evidence of false advertising of safety by other manufacturers. Subsequently, some of the leaders of these organisations have been sentenced to prison terms.

Fast forward one year, to the analysis of why Korea slid four places in a prominent international corruption report since last reported in 2015. The Korea Institute of Public Finance (KIPF) made the connection between the decline in national competitiveness and low business ethics, as well as lack of transparency, explicit.4 KIPF specifically cited the heavily publicised disinfectant scandal as they partially attributed the ranking decline to damaged business ethics.5 According to the 2016 World Competitiveness Yearbook, published by the International Institute for Management Development in Switzerland, Korea ranks 29th out of 61 countries evaluated in overall competitiveness.6 Studies have shown that countries with higher levels of corruption have lower levels of human development, as measured in terms of education, health, and gross national income.7 An increase of corruption by one index point dampens GDP growth by somewhere between 13 and 90 basis points (.13 - .90%) and lowers per capita GDP by $425. These are important indicators that call for organised development programs to strengthen moral and ethical behaviours and improve transparency in business dealings.

3. Organised Leadership Development Programs Given that all seven South Korean presidents preceding Park have been embroiled in some sort of corruption scandals, that many corporate corruption scandals have plagued the Korean economy, and that corruption has a direct link to human development and national income, a different approach to leadership development is called for in Korea: that of an organised leadership development program in both public and private sectors.

This leadership development program must address the following four

President Park of South Korea Photo courtesy: Washington Times

limitations of the current prevailing leadership development approaches: • Current leadership development efforts focus only on what is visible, and only on certain parts of the system as opposed to the whole. Accordingly, the results are temporary and limited in scope. All living organisms — people, termites, trees, economies, and organisations — are complex systems.

Because we are systems, any change must be approached at the systemic level to be effective. Any individual change isolated from the system s/ he is part of runs into the system’s resistance; hence, the effect of change is limited and short-lived. Current learning models aim to change individual components in isolation from the system and its environment, and so are ineffective.

• Most current leadership development approaches do not consider the rapidly changing business environment. They are primarily about the individual behaviour and/or belief systems of the leader, including personal leadership, and his/her relationship with

followers. This approach is flawed because what is happening in the environment sets the criteria for effective leadership competencies. For example, the leadership development programs in Circuit City and Borders Books didn’t protect the companies from their demise partly because the goal of the programs was not tied to winning in the rapidly changing environment.

• Leadership development efforts must focus on changing the beliefs and behaviours of individuals.

Organisational change happens when individuals change beliefs and behaviours. Problems and desired behaviours must be clearly defined; individuals must understand tangible actions they can take to improve.

• Most current leadership development approaches provide no quantitative mechanism to understand the bottomline impact of the necessary change.

This is where an ethical dilemma is likely to turn into an ethical lapse.

Clearly establishing the bottom-line impact of desired leadership competencies helps leaders understand that

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Korea

Seoul Skyline © Gary Craig https://flic.kr/p/3oJqk1

We are not islands; we work and live in a context of team, organisation, society, country, world, and universe, all of which work as systems that influence and are influenced by each other.

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being good produces good business. For instance, if leaders are given change goals to improve their leadership competencies and they are up against a quarterly close, without a solid understanding of the bottom-line impact of the change they are trying to bring about, they are all too likely to fall into the trap of “Just this once” or “Once I have met my quarterly goals, then I will…”

To address these limitations, a leadership development approach must reflect the systemic nature of people and organisations in the context of an environment.

We are not islands; we work and live in a context of team, organisation, society, country, world, and universe, all of which work as systems that influence and are influenced by each other.

Therefore, any leadership development efforts that do not address this systemic, constructive nature of complex adaptive systems will likely produce suboptimal results. Systemic thinking and considering consequences of their decisions many steps ahead and on other constituencies, not just the immediate rewards, will likely strengthen ethical behaviours.

A leadership development program must be based on neuroscience principles of hierarchical input processing of safety, connection, and executive decision-making (in that order).

Leaders must be taught what constitutes a sense of safety among their employees, and that safety trumps all other needs: all goals are likely to be underachieved if safety needs are not met.

The World Financial Review January - February 2017

Leaders must be taught that demonstrating high ethical and moral standards and consistency between words and actions is critical for establishing safety. These neuroscience principles also help us understand that some of the defenses we build in response to past perceived threats to safety tend to outlive their usefulness, producing suboptimal, often irrational over-reactions.

When people recognise how their previous misguided beliefs affect their interactions with others, and consciously choose more adaptive beliefs, the result is a dramatic transformation of interpersonal dynamics, leading to breakthrough growth at both individual and organisational levels. A holistic pattern emerges, in which two people or teams can create a whole much greater than the sum of their parts.

Effective leadership development programs must also specify the bottom-line impact of each tangible behaviour or belief change.

For example, when leaders understand the impact of the behaviour they are attempting to change (eg: consistency between words and actions) in terms of turnover of the employees they oversee, which translates into operating expense, they are much more likely to prioritise the change, even if they face a higher level of stress at quarter end.

4. Cultural Norms and Social Expectations Confucian principles of filial piety, kinship, loyalty, and righteousness have subtle but far-reaching influence over culturally accepted business practices in Korea. Collectivism prioritises group goals before individual goals; individual needs are sacrificed for the good of the group. These beliefs set the norms and expectations for how relationships are governed, such as between ruler and follower, father and son, older brother and younger brother, husband and wife, and friends. Part of what makes it challenging to establish strong business ethics in Asian countries is rooted in the deep Confucian and collectivistic belief that challenging the hierarchal order and confronting the behaviour of those in power is viewed as disrespectful and disharmonious. This belief makes the whistle-blower wrong. The Confucian principle that reciprocation is expected when kindness

is offered is also distorted in practice, as people in authority expect something in return when they make decisions that benefit others.

Due to their ubiquitous influence over societal norms and cultural expectations, effective design and implementation of leadership development programs must harness Confucianism and collectivism to establish strong ethics.

Confucianism presents two archetypal leaders – gunja (gentleman) and soin (small person). Gunja refers to a leader who possesses moral scruples, strong personal characteristics, political capabilities, and cultured humanistic viewpoints.1 He is a leader who constantly censors himself and aims to perfect his moral compass. His ultimate goal, in all his dealings with others and self, is in (mercy). He fulfills his duty as a leader, follower, parent, child, husband, older brother, younger brother, and friend. He practices the Confucian Golden Rule: he does not force on others something that he himself dislikes. Gunja is also characterised by ye (courtesy, or proprieties of behaviour).

On the other hand, soin literally means a small person, and refers to a leader who seeks personal gain even if it means harming others in the process. Soin does not practice mercy or courtesy.

Unfortunately, somewhere along the process, some of these Confucian principles have been distorted and other parts exaggerated out of balance, resulting in the current lapse of strong ethics in leaders in high office. Returning to these Confucian roots, which underpin the Korean collective subconscious, and bringing them to the forefront of leadership development, can raise the overall ethical standards.

Conclusion The recent presidential corruption scandal in Korea calls for organised leadership development programs that address some of the inherent limitations of current practices in both business and government. These programs must incorporate complex adaptive systems principles which factor in the current environment as well as the interactions between the members of a unit. They must also utilise neuroscience principles, especially the primal need for safety, to unleash the full potential of the human brain. Although part of the corruption observed in Korea can be traced to its Confucian roots, returning to core Confucian principles and capitalising on the concept of

Due to their ubiquitous influence over societal norms and cultural expectations, effective design and implementation of leadership development programs must harness Confucianism and collectivism to establish strong ethics. the Confucian Golden Rule and gunja can be a powerful tool in restoring the high ethical standards originally intended in Confucianism.

Featured image: Millions of people have taken to the streets, calling for President Park to resign [Kim Hong-Ji/Reuters] Photo courtesy: http://www.aljazeera.com

Dr. Sunnie Giles is President of the Quantum Leadership Group, which is based in the United States.

She works as an executive coach, leadership development consultant, and organisational scientist. She has an MBA from the University of Chicago and Ph.D. in Marriage and Family Therapy from Brigham Young University.

She worked as an executive in several Fortune 500 companies, including Samsung, IBM, and Accenture.

For more information, visit www.sunniegiles.com.

References 1 In this section, gunja and soin are referred to as third-person male to be true to the original text, written 2,500 years ago when leadership positions were held almost exclusively by men 1. http://www.businessinsider.com wef-corruption-index-the-most-corruptcountries-in-the-oecd-2016-9/#10-poland-2 2. Ciulla, Joanne B., ed. Ethics, the heart of leadership. ABC-CLIO, 2014.

3. https://hbr.org/2016/03/the-most-important-leadership-competenciesaccording-to-leaders-around-the-world?

4. http://www.kipf.re.kr/TaxFiscalPubInfo/TaxFiscalPubTrends_ DomTrends-View/2016%EB%85%84-IMD-%EA%B5%A D%EA%B0%80%EA%B2%BD%EC%9F%81%EB%A0 %A5-%ED%8F%89%EA%B0%80-%EA%B2%B0%EA%B3%BC/523928 5. https://ko.wikipedia.org/wiki/%EA%B0%80%EC%8A%B5%EA%B8%B0_ %EC%82%B4%EA%B7%A0%EC%A0%9C_%EC%82%AC%EA%B1%B4 6. http://www.imd.org/uupload/imd.website/wcc/scoreboard.pdf 7. Rose-Ackerman, Susan, and Bonnie J. Palifka. Corruption and government: Causes, consequences, and reform. Cambridge university press, 2016.

8. Rose-Ackerman, Susan, and Bonnie J. Palifka. Corruption and government: Causes, consequences, and reform. Cambridge university press, 2016.

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India

DEMONETISATION: A Few Disturbing Questions

BY PRATIP KUMAR DATTA AND SAUMYA CHAKRABARTI

In this article, the authors discuss the recent demonitisation policy introduced by the Indian government in November 2016, and what it means for the Indian economy now, and in the future.

D

emonetisation policy, announced by the honourable prime minister of India and executed on and from midnight on the 8th of

November 2016, has provoked a lot of political, social and economic debates across the country and abroad. Social media too didn’t lag behind. Leaving aside debates, in the aftermath of its execution, we have been facing a lot of uncomfortable, unwanted situations.

The crunch came when we were either made to wait for hours together in long, serpentine queues in front of a bank to get our legitimate savings (in the

form of Rs 500 & Rs 1000 currency notes) exchanged and in the process waste precious working hours or to hunt all over to find an ATM equipped with sufficient cash to cope with the mounting demand. While parents who have fixed their sons’ or daughters’ marriages have been subjected to untold woes for want of cash, people engaged in the informal sector and small businesses have been experiencing a unique “cashless peace”. In the euphoria of demonetisation what seems to have been forgotten is that everything in our daily life boils down to cash in the end.

The over optimistic among us dream that all the big fish of the black market will be hanged on a roadside light post.

But the little logical fallacy that bugs them the most is that the “big fish” live next door – a doctor/professor/ teacher/lawyer! They attribute the cause of their distress to the neighbours

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who enjoy extravagant lifestyles. “I cannot buy a car but Dr. X has more than one car”; maybe, “the daktarsaab (medical practitioner) has huge ‘parallel income’”. “I don’t have a job but Mr. Y has just secured one – Oh! It’s obvious, he has enough political connections”, and so on and so forth. Our government exploits this very mindset quite adroitly while introducing an unwise policy measure like demonetisation.

Let us consider the two cogent arguments put forward by our government in support of demonetisation – (a) it would arrest the fake currency, circulating in our economy and, (b) black money would be unearthed and eventually, underground parallel economy would be abolished.

On the face of it, the first argument appears to be more convincing than the second one. But, unless the exact amount of fake currency notes circulating in the economy is proved to be considerable, welcoming such policy may prove to be suicidal for us in near future. It is because, those middle, lower middle and poorer sections of our population, who have preferred to stand in the queue, sacrificing their one or several days’ income, are huge in number and so, loss of their income opportunity as a whole will be colossal.

Recent studies of the Indian Statistical Institute have shown that there are only 250 fake currency notes out of every 10 lakh (1 million) in circulation. In other words, fake notes worth Rs. 400 crore (1 crore = 10 million and current exchange rate is 1 USD = Rs. 68) are in circulation at any point of time within our economy (http://indianexpress. com, dated: 08.06.2016). In sharp contrast, there were, as per the figures of 2012, almost 3 crore workers in India (including highly skilled, semi-skilled and unskilled ones) and the average minimum wage rate in India was about Rs. 400 only (www.tradingeconomics.com). Given such a situation, if one worker stands in a queue for just a day, then in a macro sense, the economy would lose the opportunity of earning worth Rs. 120 crore per day! Recent report of CMIE (Centre for Monitoring Indian Economy) estimated a total GDP loss of 1.28 lakh crore as a result of demonetisation. Although they said that the estimation is only partial keeping in mind the fifty days deadline of the honourable prime minister. What a big loss to tackle just 400 crore worth of fake currency!!

Let us now come to the second logic of the government machinery. What is black money? In short, it is the money undisclosed to the government. The government propaganda

says, the huge money stock kept inside a pillow cover is black!

Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder! But, unfortunately, it is unethical propaganda and completely wrong in terms of economic theories.

Yes, there are many doctors, lawyers, teachers, professors who earn black income, by evading income tax. However, most ironically, the major portion of the black money emerged via evasion of corporate tax, excise duty, and customs duty.

It emerges from export sector, film industry and from illegal businesses like smuggling, drug peddling, women trafficking, prostitution, crime etc. It has appeared within the economy in the form of bribes and illegal commissions, informal interest earning from informal credit market etc. So, by assuming that cancellation of a few high-value currency notes will restrict all these means of black earnings, it seems like day dreaming (cancellation of 1000 rupee notes would restrict child trafficking – sorry to say, but we cannot be so optimistic!).

Interestingly, government propaganda tries to convey the impression that every white money transaction takes place via cheque and that entire black money is hoarded in the form of liquid money. But the fundamental question is, why can’t the black money be invested further in a black (or even white) business? Why should it be kept inside a pillow cover?

Unfortunately, we don’t have any recent data on black money. According to Prof. R. Vaidyanathan’s estimate (2007), there were about 70 foreign tax havens, where about Rs 70 lakh crore Indian black money was resting in peace, although, at that time, India’s GDP was only Rs. 43 lakh crore (http:// www.iimb.ernet.in). In 2006, Prof. Friedrich Schneider estimated that the amount of internal black money was only 23% to 26% of our GDP (http://ftp.iza.org/dp2315.pdf) and the major portion of it was kept in the form of permanent assets (preferably gold and not cash inside the pillow!). A recent quote in the Huffington Post (dated: 14.1.2016), from the data provided by the Income Tax Department, suggests that only 6% of the total black income is kept in the form of liquid cash.

So, it is plain and clear that demonetisation policy has definitely hit a section of black money holders hard but the big guns, like politicians, owners of legal/illegal business houses who are able to convert their black income into assets or are able to transfer black cash to foreign tax havens, will remain untouched. Therefore, this policy will presumably pick up

The government propaganda says, the huge money stock kept inside a pillow cover is black! Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder!

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only a pinch of ice from the tip of the iceberg.

Unfortunately, the cost of picking up so little amount of ice is enormous in terms of GDP loss, in terms of growth sacrifice of the economy or in terms of absolute distress of the middle, lower-middle and poorer economic classes.

Simple macroeconomic logic suggests that overnight contraction of 86% of money supply cannot prove to be efficient for an economy. We should keep in mind that 86% shrinkage of liquid money supply came into action at a single point of time but the process of fulfilling the same has a time dimension. Moreover, per day bank withdrawal of a person has an upper limit. This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt. We are already within a world-wide problem of demand shortage and this “big bang” policy will accelerate the pace and gravity of the problem. Petty businessmen, like small road-side vegetable sellers or fish sellers, who sell perishable commodity will face a deflationary problem.

On the other hand, shrinkage of liquid cash effectively reduces the working capital of the petty businessmen and thus they will be induced

This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt. to reduce their supply to the market. Millions of small firms and farmers are getting suffocated due to scarcity of cash and they are unable to pay their day-labourers. The poor day labourers have already started losing jobs in millions! This will have an obvious snowballing effect on petty agricultural and non-agricultural production, creating painful shortages in the next cycle. Needless to say, the marginal buyers will not be able to purchase their daily livelihood commodities as they are far behind the process of plastic money transaction.

Most probably, transport will be the sector where the impact of this policy will be most severe, where almost 80% of transactions occur in terms of liquid cash. As per government rule, one goods carrying vehicle can spend only Rs. 35 thousand as

An interview for #HumansofDeMonetisedIndia: “We have no work.” The demonetisation scheme has put people in the unorganised sector out of work. People don’t have work, money and are barely surviving. © CounterCurrents

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Our government is executing demonetisation policy with little or no backup plan and thus, creating huge chaos in our economy; making the lives of common people unsecured.

40

its travelling cost. So, if a transport businessman has ten such vehicles, then the upper limit of his travelling expense would be 3 lakh and 50 thousand – which is well over the upper limit of his withdrawal ceiling from the bank (http://www.businessinsider.in).

The degree of impact of such sudden shrinkage of the economy would depend upon how long our government will take to make the money supply normal. Keeping in mind the enormous number of ATM machines installed in every nook and corner of our country, it seems the task will not be so easy for the government.

A third logic is hovering around us in support of demonetisation policy. This is the argument we have heard, in most of the cases, whenever any new policy has been introduced. It is the logic of future benefit.

But how and to what extent will we benefit in future?

The answer seems to be not much comprehensible.

The famous economist, J. M. Keynes, in his article, The Tract on Monetary Reform, made a remarkable comment: “But this long run is a misleading guide to current affairs. In the long run, we are all dead.” In fact, how many roads we have to walk down before we reach the long run, is unknown to everybody.

Someday, money supply will be normalised, banks will start performing normally; ATM machines will start dispensing money as they did just before the “big bang” announcement of the PM, Mr. Modi; currency notes worth of Rs. 500, Rs. 1000 along with Rs. 2000 will continue flowing within our economy; black incomes will continue flowing from home to foreign countries; scams will continue creating tremors in the tea cup. In a word, nothing amazing will happen in the long run.

After all, we are not that interested in fundamental institutional and structural changes; nor are we interested in changing the ethical foundation of our society – where unfortunately, individual money power rules.

An overwhelmingly surprising estimate has been published in India Today (01/12/2016). According to the publication, the policy to unearth black money is going to be insignificantly successful within the fifty days deadline of the Prime Minster. Evaluating the deposit trend of high value currency notes at the bank counters, the article shows that either there is no (or very little) black money in Indian economy or the liquid form of the same has already been transformed into assets or took the flight to any one of the seventy tax havens to enjoy the vacation well before the 8/11 (8th November). Critical minds may

The World Financial Review January - February 2017

say that demonetisation policy is actually framed to submerge black money, not to unearth it.

Lastly, a capitalistic and democratic setup promises to guarantee the right to personal asset. Our bank deposit is secured by the commitment of on demand return of that asset. But our government is executing demonetisation policy with little or no backup plan and thus, creating huge chaos in our economy; making the lives of common people unsecured. The question naturally arises; does any democratically elected government have any right to do all these? Our government probably doesn’t even understand the basics of capitalism.

The authors would like to thank Ardhendu Chatterjee for his support and encouragement during the writing of this article.

Featured image courtesy: SavingsFunda / Blogspot

Saumya Chakrabarti is Associate Professor of Economics at VisvaBharati (University), Santiniketan, India. He has also taught at St Xavier’s College, Kolkata; University of Calcutta; and at Presidency University. Dr. Chakrabarti has been a visiting fellow at Brown University, USA. He has published in journals like Cambridge Journal of Economics, Review of Radical Political Economics, International Critical Thought, Economic and Political Weekly, Indian Journal of Labour Economics, among others; and has written books published by Prentice Hall and Oxford University Press.

Pratip Kumar Datta teaches Economics and Mathematics at Rajatpur Indranarayan Vidyapith (H.S.), Bolpur, India. Apart from teaching, he is engaged in serious research work. He had secured his M.Sc. degree in economics from University of Calcutta in the year 1997. He also secured his B.Ed degree from the same university in the year 2006. He has published papers in journals like Merit Research Journals (www.meritresearchjournals. org), Researcher’s Tandem etc. He has presented research papers at different institutes and universities of India like Burdwan University, Rabindra Bharati University, West Bengal State University, Centre for Studies in International Relations and Development etc.

India

Understanding India as a Rising Power: An Open Economy and Interdependence* Framework

BY ASEEMA SINHA

India’s global priorities have changed and it seeks power and status and acts more actively at regional and global levels. This article offers an open economy and inter-dependence framework that pays equal attention to the changing nature of the global order but also how internal constituencies within

India favour a more engaged and activist agenda.

O

n August 18, 2016, Venezuela’s Foreign Minister, Delcy Rodriguez, visited India on a strange assignment. Venezuela’s foreign minister’s brief was to convince India’s Prime Minister, Narendra Modi, to

attend the Nonalignment summit. She did not succeed although India’s Vice President – Hamid Ansari – did attend the summit. India was the founding member of the nonalignment movement and took strong ownership of the movement in the post-war period.

In contrast, recently, S. Jaishankar, India’s foreign secretary, is reported to have said: “Blocs and alliances are less relevant today and the world is moving towards a loosely arranged order.”1 Pushpesh Pant, former Professor of International Relations at the Jawaharlal Nehru University reflected on India’s decision not to send the PM in a larger historical context: “We have been aligned with the Americans post-globalisation. And it’s not just happened under Modi. Even the UPA (United Progressive Alliance) did it.

They staked their government over the nuclear deal. India’s engagement with the US has been a continuous process; in fact, we can even say PM Modi is reaping the harvests of previous regimes.”2 How do we understand

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these decisions by many Indian leaders to eschew leadership of the developing world? What are the global and domestic sources for this change in India’s behaviour to seek closeness with the United States and adopt a more distant attitude towards the NAM (Non-aligned movement)?

In the cold war era, India was largely bypassed by larger powers and was happy to be isolated.

It boasted of its ability to say no to the US and spoke of carving a new third way. At that time, India was an active nonalignment member. Now, India, acknowledged by many, is a rising power. Its actions at the global level speak of a slow but sure confidence in its economic prowess, and ability to engage with established powers. Now, Indian negotiators negotiate more strongly in global institutions such as the IAEA (International Atomic Energy Agency), the WTO (World Trade Organization), and seek to change the rules of the game of the IMF (International Monetary Fund). As an Indian negotiator said to me: “In the old days, India was a free-rider, now it’s a negotiator.”3 India engages with global players on a case-to-case basis and is hesitant to take the leadership of the developing world without a careful analysis of its changing alliances with countries such as the US, or China.

India’s changing behaviour needs to be understood in the context of larger global changes but also by understanding how India’s domestic priorities have shifted and become more externally oriented.

India’s rising global ambitions and actions have been accompanied by changes at the systemic level and greater activism of other emerging powers such as China. The decline of the Former Soviet Union and Russia has led to a powerful United States alongside with other powers such as the EU, and Japan but also the BRICs: Brazil, India, China and Russia.

The G-7 has been replaced by the G-20, which is a larger grouping. These changes in the larger global

Now, India, acknowledged by many, is a rising power. Its actions at the global level speak of a slow but sure confidence in its economic prowess, and ability to engage with established powers.

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environment have created more space for regional powers such as India to make claims to a larger global role and argue for increased voice and status.

This is most evident in the IMF reform proposed by emerging powers in 2010. In 2010 the IMF started a comprehensive “quota reform” ultimately shifting approximately 6.41% of the quota shares to the Emerging powers. These quota increases were implemented January 26, 2016.4 China’s SDR share increased from 3.8% to 6.41% placing it as the 3rd top IMF member. India’s SDR quota is now 2.76%.

Brazil’s share has increased to 2.32%, and Russia is now 2.71% – placing all the BRICs nations within the top 10 IMF members, in terms of SDR shares.5 The US’s share is 17.45%, still retaining its position as the largest member.6 While emerging powers have become more active at the global level, and the structure of the global system has also become more open and accommodating to the rise of these powers, we also need to explore the domestic changes within countries like India. India’s rise has deeper sources and causes.

My research shows that globalisation has begun to shape India in powerful ways. Recently, I published a book titled, Globalizing India. Some of its findings help us understand these developments. I summarise the main findings of this book below.

How has globalisation changed and shaped India?

India was a slow reformer and started economic reforms later than usual. In 1990, Indian leaders and diverse actors – not only politicians, and civil servants but also media elites and societal actors – were hesitant about open borders and global trade.

A strong consensus in favour of self-reliance and worries about import competition and dangers of the outside world kept India largely closed and inward looking. India trade in goods (merchandise trade) as a share of the GDP was a minuscule 12.7% in 1990. By now (2016), trade in goods and services constitutes almost half of GDP and India’s exporting basket has changed significantly.

India now exports engineering goods, chemicals and pharmaceuticals, and has revived its textile and garment industries. Figure 1 on the next page shows this remarkable change.

How did this change in India’s activities and priorities happen? India’s growth story is now being written by a wide variety of non-state and state actors and many of these diverse actors have

FIGURE 1. Merchandise Trade as % GDP 50 45 40 35 30 25 20 15 10 5

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0

Source: Author’s calculations from World Bank, World Development Indicators, 2015.

begun to act at the global level or be more active supporters of globalisation within India. Indian MNCs have interests tied to export markets and they may lobby and work at the EU or in Geneva at WTO or WIPO (World Intellectual Property Organization). Interestingly India’s global growth story has been pursued with vigor by political actors such as Narasimha Rao, Atal Bihari Vajpayee, and now Narendra Modi but also regional and national politicians such as Kashiram Rana, Arun Jaitley, Arun Shourie, Jairam Ramesh, Yashwant Sinha, Digvijaya Singh, Piyush Goyal and many others.

While the role of technocrats and economists has been well-recognised, recent research reveals the power of political actors in leading the way towards a more open-economy strategic calculus by politicians of varied stripes.7 Transformation amongst India’s political actors is the story beneath the story that we must pay attention to.

Indian state and private actors have begun to shape India’s global integration in powerful ways, modifying the terms of globalisation, and seeking as much autonomy as possible. Indian actors vigorously seek greater global reach and power in economic forums across the world. Yet, some of India’s strengths have been activated and mobilised in response to global effects. It is important

to bridge an analysis of global forces with a deep, fine-grained study of different Indian sectors, actors and state agents.

What does globalisation do? Global forces empower exporters and create new coalitions within a domestic context. They also create new political and economic interests, with stronger ties to the global economy. Where globalisation acts as a constraint, it does so within global markets.

There, global rules of the game impose standards and sanctions, which may reveal new information, but also provide hard incentives for business firms to discipline themselves and upgrade. So, global effects should not be viewed as unilateral, or static or deterministic. The external forces of globalisation can no longer be conceptualised only as pressure or threats. The power of globalisation is based not on coercion, but rather on Indian consent and Indian ambitions, which have been awakened by global interactions.

This idea is different from the dominant consensus running through comparative politics and particularly within the study of Indian political economy, which stresses the homegrown character of India’s reform trajectory. Scholars of India believe that domestic debates and pressures should be analysed independently of global interactions. I,

It is important to bridge an analysis of global forces with a deep, finegrained study of different Indian sectors, actors and state agents.

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in contrast, argue that domestic and international forces are intertwined and shape India’s newfound ambitions and capacities.

Yet, globalisation is not all positive. One possible negative consequence for Indian consumers is that many of India’s firms’ economic decisions are shaped by their global profits rather than oriented towards the welfare of the citizens. These effects are most visible in the field of health where India is the pharmacy of the world but prices its HIV/AIDs drugs within India at higher than global prices.8 So, in this new globalised world the Indian government needs to be even more vigilant and flexible in crafting its national interest and protecting the welfare of its citizens. In order to do so they have to both defend their companies but also bargain with those companies to provide cheaper drugs and goods for the Indian population.

Globalisation is not all positive. One possible negative consequence for Indian consumers is that many of India firm’s economic decisions are shaped by their global profits rather than the welfare of the citizens.

What are the implications of this analysis for global developments and for how we understand countries like India? Economic changes in the global system intersect with traditional security concerns in a more integral way. But importantly, global institutions such as the International Monetary Fund, the World Bank, the World Trade Organization, and the International Atomic Energy Agency have both geo-political and geo-economic implications. Rising powers such as India are beginning to evolve development-security linked strategies in each of their forums, aiming to enhance their domestic growth and development agendas but also seeking to link their participation in these global forums with their strategic calculations about the role of hegemonic powers such as the US and China. Economic goals and aims have begun to intersect with security concerns and both are played out not only in security arenas at the global level but also within global economic institutions. Studies of economic policies and foreign policies need to study the role of non-state and economic actors as foreign

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policy agents. Foreign policy and national interest have become broader and encompasses foreign engagement, security policies, economic policies, and society-to-society interchange. We need to see the world through an interdependence framework* and see India’s security actions through an open economy framework.

Featured image courtesy: The Atlantic

Dr. Aseema Sinha is an Associate Professor and the Wagener Chair of South Asian Politics and George R. Roberts Fellow at Claremont McKenna College. She previously taught at University of Wisconsin-Madison and was a Fellow at the Woodrow Wilson Center in DC. Her research interests relate to political economy of India, India-China comparisons, International Organizations, and the rise of India as an emerging power. She has authored a book, The Regional Roots of Developmental Politics in India: A Divided Leviathan (Indiana: Indiana University Press, 2005), which received a book prize titled, Joseph Elder Book Prize in the Indian Social Sciences. Her book, Globalizing India: How Global Markets and Rules are Shaping India's Rise to Power was just published with Cambridge University Press.

References

* Henry Farrell and Abraham Newman, “Domestic Institutions Beyond the Nation-State: Charting the New Interdependence Approach,” World Politics, Vol. 66, issue 2, April 2014, 331-363.

1. Special Correspondent, “Global Blocs are less Relevant, says Foreign Secretary,” The Hindu, August 18, 2016, accessed at: http://www.thehindu. com/news/national/global-blocs-are-less-relevant-says-foreign-secretary/ article9000079.ece 2. Nikita Doval, “Nardendra Modi Skips NAM Summit, the first Indian PM to do so,” The Livemint, Octber 14, 2016, accessed at: http://www.livemint.com/ Politics/ectxbpHsJ2XUmRkXXqVbpL/Hamid-Ansari-leaves-for-Venezuelato-attend-17th-NAM-summit.html 3. Aseema Sinha, Globalizing India: How Global Rule and markets Are Shaping India’s Rise to Power, Cambridge: Cambridge University Press, 2016.

4. “IMF Members' Quotas and Voting Power, and IMF Board of Governors."

IMF: International Monetary Fund. Accessed at: https://www.imf.org/ external/np/sec/memdir/members.aspx 5. "IMF Reforms: China, India, Brazil, Russia Get Greater Say." The BRICS Post, January 28, 2016. Accessed October 12, 2016. http://thebricspost.com/ imf-reforms-china-india-brazil-russia-get-greater-say/#.V_3HMJMrLeT 6. Ibid 7. Sanjaya Baru, 1991: How P.V. Narasimha Rao Made History, Aleph Book Company 2016.

8. Tricia Olsen and Aseema Sinha. “Linkage Politics and the Persistence of National Policy Autonomy in Emerging Powers: Patents, Profits, and Patients in the Context of TRIPS Compliance,” Business and Politics, Volume 15, issue 3, 323-356.

South Asia

An Unsettling New Normal for India –

Pakistan Relations

BY MICHAEL KUGELMAN AND VANDANA SETH

In the coming months, all-out war between the two nuclear-armed rivals is unlikely. However, prolonged tensions are ensured while limited conflict is highly possible, if not inevitable.

Even cultural safe spaces for bilateral cooperation have been poisoned by politics – an ominous indication of the troubled relationship’s dangerous direction.

T

o say that 2016 was a rough year for India-Pakistan relations might be an understatement.

It began with a brazen assault on an Indian military base in the town of Pathankot. New Delhi blamed Jaish-e-Mohammed (JeM), a Pakistani terror group with links to Pakistani intelligence, for the raid. Seven soldiers died.

In March, Pakistan claimed to have arrested an Indian spy in Baluchistan, a province plagued by a separatist insurgency that Pakistan has long accused India of helping stoke.

The summer months brought an uprising in Jammu and Kashmir. This is the Muslim-majority, India-administered state that Pakistan has long

claimed as its own and has triggered multiple wars between the nuclear-armed rivals. As Indian security forces reacted to the unrest with brutal tactics, including shooting children with pellet guns, Pakistan denounced what it described as an Indian “reign of terror” in Kashmir.1 Islamabad also accused India of meddling in and destabilising Pakistan. India responded to this intensifying rhetorical tit-for-tat by lambasting Pakistan for its military’s abusive actions in Baluchistan.

And then came September.

On the 18th of that month, terrorists assaulted an Indian Army base in the Kashmir town of Uri, killing nearly 20 soldiers in the deadliest single attack on the Indian military in decades. India again blamed JeM. Both sides beat the war drums vociferously amid a backbeat of bombastic and bellicose rhetoric. Then, on the 29th, New Delhi claimed to have carried out what it called a “surgical strike” along the Line of Control (LoC), the disputed border that divides Indiaand Pakistan-administered Kashmir. The operation, according to India, killed multiple Pakistani militants planning to stage more attacks in India.

Pakistan, for its part, denied the attack happened at all.

Also in September, India announced a campaign to isolate Pakistan diplomatically until Islamabad

Security personnel at the perimeter fence of the Indian Air Force base in Pathankot. © Gurmeet Singh

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Fortunately, India and Pakistan didn’t go to war.

And they’re unlikely to go to war anytime soon, thanks in great part to the deterrent of nuclear weapons. takes more robust action against terrorists on its soil. New Delhi prevailed on several member countries of the South Asian Association for Regional Cooperation to join India in boycotting the group’s planned meeting for November in Islamabad, prompting an embarrassed Pakistan to cancel the event. In December, India used another regional summit, the Heart of Asia conference, as a forum to excoriate Pakistan for its failure to curb terror.

Then, in 2016’s final weeks, crossborder firing along the LoC rose to levels of intensity arguably not seen in years.

Fortunately, India and Pakistan didn’t go to war. And they’re unlikely to go to war anytime soon, thanks in great part

to the deterrent of nuclear weapons.

Because Pakistan refuses to adopt a no-first-use policy, it can hypothetically respond to any Indian use of conventional military force with a nuclear strike. The three major wars fought by India and Pakistan all occurred before 1998, when both became declared nuclear weapons states.

Anxious Months Ahead This isn’t to say that tensions on the Subcontinent are about to ease. Rather, bilateral ties will remain on tenterhooks, and limited conflict is highly possible if not inevitable.

The current political dynamics of India-Pakistan relations forestall any immediate prospects for de-escalation.

To be sure, temperatures may cool enough on each side to allow for a resumption of high-level diplomacy. A sustained period of détente, however, is unlikely. India’s Hindu nationalist government has taken a hard line on Pakistan after earlier efforts to extend an olive branch failed to achieve what

On the 18th of September, terrorists assaulted an Indian Army base in the Kashmir town of Uri, killing nearly 20 soldiers in the deadliest single attack on the Indian military in decades © Bharat Rakshak

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The World Financial Review January - February 2017

India wants most – Pakistani crackdowns against anti-India terrorists on Pakistani soil. Instead, Indian outreach may have prompted the opposite effect.

The Pathankot attack came just days after a surprise Christmas Day visit to Pakistan by Indian Prime Minister Narendra Modi.

India has likely concluded that formal dialogue with Pakistan simply makes little sense. Over the last two years, the powerful Pakistani military – which is more hostile to India than is the Pakistani government – has cut an increasingly beleaguered Prime Minister Nawaz Sharif down to size. The premier has been weakened by anti-government protests and revelations in the Panama Papers about his children’s offshore assets. Sharif ’s policy space has shrunk significantly, and the military enjoys full control over the policy of India.

In November, Pakistan’s military experienced a leadership transition when Qamar Javed Bajwa replaced Raheel Sharif as army chief. Bajwa’s arrival is unlikely to change the military’s staunch anti-India position. Indeed, in one of his first speeches, Bajwa vowed that any Indian provocation along the LoC “must be responded to with full force.”2 The new normal of India-Pakistan relations is likely to be one of prolonged tensions, but also one of limited and covert hostilities. India, emboldened by the “surgical strike” it claims to have carried out in September, could launch limited, lightning counterterror strikes (or even strikes on military targets) on Pakistani territory, most likely in Pakistan-administered Kashmir. In retaliation, Pakistan could encourage JeM and other anti-India terror groups to stage attacks in India. This covert war would fall short of nuclear red lines, and it would give each side plausible deniability.

It’s unlikely this form of conflict would lead to a hot war. Still, several potential triggers could prompt troop

mobilisations along the LoC or other escalatory moves. These include an Indian air strike on a major Pakistani military target; a catastrophic terrorist attack in India on the scale of the 2008 Mumbai tragedy, which killed 166 people; or a rapid succession of terrorist assaults in India that renders limited responses politically untenable for New Delhi. In these circumstances, unsettling questions about the strength of the nuclear deterrent – and how much force could be used before running up against nuclear red lines – would loom large.

Economic Implications It’s worth examining not just the security ramifications of a prolonged bilateral stalemate, but also the economic consequences.

Consider the impact of extended tensions on stock markets and investor perceptions. The good news is that stock markets in India have historically not been deleteriously affected by India-Pakistan tensions. They’ve weathered terror attacks quite well – Including catastrophic ones. In a 2016 Investopedia assessment, Elvis Picardo notes that after multiple blasts in the city of Mumbai killed more than 250 people on March 12, 1993 (a Friday), the city “reopened for business as usual on Monday” and there was “little impact” on financial markets and the Indian economy. Additionally, Picardo points out that when Mumbai was hit again in November 2008, India’s Sensex stock market index “hardly registered a blip” on the day of the attack. While it experienced declines in the succeeding days, the Sensex year-end position was higher than on the day before the attack.

The conclusion? “Investors treat terror attacks as one-off events,” Picardo writes, and “their negative effect tends to only be temporary.”3 Similarly, investment analysts contend that one-off acts of limited conflict – such as India’s “surgical strike” – inflict little damage on markets.4 This is reassuring. However, markets may react quite differently if India were to suffer a series of attacks – say several within the same month.

This could shift investor perceptions and cause them to believe that these strikes no long represent one-offs. Another factor driving investor perceptions is the location of attacks. Over the last two years, most major terror strikes in India have occurred in relatively remote regions of Kashmir or in small towns or cities in nearby Punjab state.

Investors treat terror attacks as one-off events,” Picardo writes, and “their negative effect tends to only be temporary.” Similarly, investment analysts contend that one-off acts of limited conflict – such as India’s “surgical strike” – inflict little damage on markets.

However, a rapid-fire series of strikes in a single major city could spook investors in a big way, given that many would regard large urban spaces as their preferred locations to do business. To be sure, an actual shooting war between India and Pakistan would also be damaging for markets and would be extremely worrisome for investors.

Another economic consideration about extended India-Pakistan tensions is the impact on trade.

Historically, the two countries have often continued to engage in bilateral commerce even when relations are strained. In the early 1950s, India was Pakistan’s largest trading partner despite a wilting of political relations. In 1965, a year when the two countries went to war, nine branches of six Indian banks were operating in Pakistan.5 Consider as well that total annual bilateral trade volumes expanded from $345 million in 2003-04 to $2.3 billion in 2014-15 – a period often fraught with tension.

Significantly, however, trade has stalled during the most recent crisis in relations. After reaching $2.7 billion in 2013-14, it fell to $2.6 billion in 2015-16.6 Curtailed trade is bad news because it generates harmful economic consequences. When formal bilateral trade languishes, informal trade flourishes. Indeed, decreased formal trade volumes suggest intensified levels of informal trade. This means reduced financial windfalls for each government, given that informal trade doesn’t generate revenue for governments in the form of taxes, tariffs, and so on. With informal trade, this revenue all accrues to private buyers and sellers, as well as intermediaries and smugglers.

Already, India-Pakistan informal trade exceeds formal trade. Recent projections contend that informal trade is twice that of formal trade.7 These high informal trade tallies underscore the strong potential for more formal trade, but current political tensions constrain efforts to capitalise on these opportunities.

More broadly, India-Pakistan tensions threaten commercial cooperation. This includes the

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47

South Asia

The new normal of India-Pakistan relations is likely to be tense and tumultuous, thereby accentuating the importance of protecting remaining safe spaces for bilateral cooperation.

Pakistan-India Joint Business Forum, an initiative established by each country’s commerce ministry in 2012. Comprised of top business leaders from each nation, it meets periodically to discuss how to facilitate trade normalisation. Despite the crisis in bilateral ties, the group still held a meeting in New Delhi last May.8 Each side vowed “to create a level playing field” for investors.

That pledge came just a few months after India announced new business visa measures for Pakistani entrepreneurs. They allow visiting Pakistani businesspeople to travel to more Indian cities on the same visa than was permitted previously, and they’re no longer obligated to check in at Indian police stations. At the same time, these new policies stipulate that visa applicants must run an enterprise worth at least 10 million Indian rupees (about $150,000) – a regulation that rules out less wealthy Pakistani businesspeople.9 Safe Spaces Under Threat The new normal of India-Pakistan relations is likely to be tense and tumultuous, thereby accentuating the importance of protecting remaining safe spaces for bilateral cooperation.

Many of these safe spaces are found outside official, government-to-government channels.

They’re found in the realm of trade, but also in the cultural sphere. Ominously, these spaces are increasingly getting poisoned by politics. An Indian cricket star recently called for an end to matches between the two countries, while Pakistan has sought to ban Indian television programming.10 The denial of cultural safe space for bilateral exchanges is disappointing, demoralising, and – given the extent of the entrenched enmity between India and Pakistan – dangerously destabilising.

Michael Kugelman is the Senior Associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, DC.

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The World Financial Review January - February 2017

Vandana Seth is a research scholar based in India. She was recently in the United States on a Legislative Fellows Program sponsored by the US State Department.

References 1. “Uri Attack: India Diverting Attention from ‘Reign of Terror’ in Kashmir,” Says Pakistan, Firstpost, September 19, 2016, http://www.firstpost.com/world/ uri-attack-india-diverting-attention-from-reign-of-terror-inkashmir-says-pakistan-3010504.html.

2. “Pakistani Troops Will Respond With ‘Full Force’ To Indian Ceasefire Violations: COAS Gen Bajwa,” Dawn, December 2, 2016, http://www.dawn.com/news/1300046.

3. Elvis Picardo, “Don’t Hide from the Reality of How Terrorism Affects the Economy,” Investopedia, March 24, 2016, http://www.investopedia.com/articles/investing/030215/ how-terrorism-affects-markets-and-economy.asp. Research shows Pakistan’s Karachi Stock Exchange – in a nation that has suffered more terror assaults than India – bouncing back quickly from attacks as well. See Faheem Aslam and Hyoung-Goo Kang, “How Different Terror Attacks Affect Stock Markets,” Defense and Peace Economics 26(6): 634-648.

4. Kartik Goyal and Rajhkumar K Shaaw, “India Markets React After Surgical Terror Strikes in Pakistan,” Bloomberg, September 29, 2016, https:// www.bloomberg.com/news/articles/2016-09-29/indiamarkets-slump-as-nation-attacked-terror-camps-in-pakistan.

5. Michael Kugelman, “The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls,” in PakistanIndia Trade: What Needs To Be Done? What Does It Matter? Eds. Michael Kugelman and Robert M. Hathaway (Washington, DC: Woodrow Wilson Center, 2013), 3.

6. Nisha Taneja, Samridhi Bimal, and Varsha Sivaram, “Recent Trends in India-Pakistan Trade,” ICRIER Data Sheet, http://indiapakistantrade.org/pdf/Data%20Sheet_ India_Pakistan_2015.pdf.

7. Dipti Jain, “The Dynamics of India-Pakistan Trade,” Livemint, July 21, 2016, http://www.livemint.com/Opinion/ JGc3VFdP0JDeU8UdyyNCXM/Delhi-to-Lahore-viaDubai-The-dynamics-of-IndiaPakistan-t.html.

8. Nayanima Basu, “India, Pak Business Forum Vows to Augment Trade Ties,” The Hindu, May 4, 2016, http://www. thehindubusinessline.com/economy/india-pak-businessforum-vows-to-augment-trade-ties/article8557195.ece.

9. “India Toughens Business Visa Rules for Pakistani Entrepreneurs with ‘Rs10 Million Rule,’” Express Tribune, February 3, 2016, http://tribune.com.pk/story/1039385/pakistanis-toget-india-business-card-if-they-run-inr10-million-business/.

10. “Cut All Ties with Pak. Till Terrorism Ends: Gambhir,” The Hindu, October 18, 2016, http://www.thehindu.com/ sport/cricket/Cut-all-ties-with-Pak.-till-terrorism-endsGambhir/article16074864.ece and Syed Raza Hassan, “Pakistan To Block Indian Content on TV, Radio as Tension Simmers,” Reuters, October 21, 2016, http://in.reuters. com/article/pakistan-india-media-idINKCN12K0P6.

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hosts the weekly New York radio show, Alternative Visions, on the Progressive Radio network; is shadow Federal Reserve Bank chair of the ‘Green Shadow Cabinet’ and economic advisor to the USA Green Party’s presidential candidate, Jill Stein. He writes bi-weekly for Latin America’s teleSUR TV, for Z magazine, Counterpunch and other print & electronic publications. Dr. Rasmus studied economics at Berkeley, took his doctorate in the University of Toronto (1977). He currently teaches economics and politics at St. Marys College in California.

IS CENTRAL BANKING TANKING? Central banks, as constituted today, are not only failing their basic functions—in the process becoming more desperate in experimenting with new measures and policies—but have become increasingly the vehicles of the interests of private bankers and investors, and in the process destabilizing the global economy even further.

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Middle East

WHERE NEXT FOR SYRIA?

BY JAMES DENSELOW

The conflict in Syria has been going on for almost six years and despite events in Aleppo would appear to have the potential to go on for even longer. This piece examines the state of play in the country and examines the current trends arguing that the Syria of the past is unlikely to return and a far weaker, fragmented entity is likely to emerge in future.

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O

n the 15th of March 2017, Syrians will mark the sixth anniversary of the crisis that engulfed their country. Many Syrians will mark the date far away from their former homes and the country of their birth. Some have successfully crossed into Europe and are building new lives, others have died trying, yet the vast majority of the nearly five million Syrian refugees remain in the

The World Financial Review January - February 2017

region. Often, these families will be a matter of hours travel from where their lives were once based, but they know the Syria they once knew is gone.

Towards the end of 2016 and the Russian-backed and often LebaneseHezbollah led offensive on oppositionheld east Aleppo led many to speculate that Assad could be on the verge of “winning” the war, but what “winning” in Syria looks like is important to qualify.

Syria has suffered the most dramatic collapse in terms of state and society of the twenty-first century. The numbers are staggering and create an enormity that is sometimes difficult to process. In addition to the nearly 5 million refugees are the over 6.5 million internally displaced, meaning that roughly half the country has been forced from their homes due to the crisis. Estimates of the dead vary from 200,000 to nearly half a million. The forensic evidence based art of counting casualties has become almost impossible

in the black hole that the conflict has created and academics admit they simply don’t know accurately how many have lost their lives.

Whilst the number of dead people may be obscured, the wounded are better understood. The UN assessment published towards the end of 2016 estimated that roughly 30,000 Syrian people were wounded by violence each month and some 9,000 suffered from a permanent disability. The country’s economy has been halved and the World Bank’s conservative estimate is that reconstruction costs alone would add up to some $180bn.

So any “victory” has to be put in the context of the cost to date and what sort of country the nominal victor would inherit. Meanwhile Syria still remains a playground for regional and international interests. The latest UN and Arab League envoy, Staffan de Mistura, the man with arguably the hardest job on the planet, counted twelve countries and 89 armed groups involved in the fighting on the ground.

Just as Syria is no longer a unitary state, its civil war has many facets and conflicts within conflicts. In December 2016, there were three active offensives evolving simultaneously; the most high profile was the Regime and its allies against opposition groups in Aleppo, Idlib and the Damascus suburbs in particular.

Meanwhile “Operation: Euphrates Shield” was a far less reported but still very important push by Turkish-backed forces against ISIS in the north of the country, whilst “Operation: Euphrates Anger” put US-backed mainly Kurdish forces against ISIS in Raqqa, the supposed capital of the “Caliphate”.

The movement of these offensives have been tracked by the Institute for the Study of War whose indispensable maps show the fault lines of the Syria of today and perhaps hint at what the Syria of tomorrow could look like.

The Regime is worth examining closer. Despite the ubiquitous presence of President Assad and his amazingly consistent narrative of the plucky nationalist leader of a country under attack from a conspiracy comprised of enemies from abroad, the reality of where power lies in Syria is more complex.

The loss of so much blood and treasure, whether in terms of the manpower of the army of the resources of the state, forced Assad to compromise in order to survive. Such a compromise did not come at the various Geneva peace conferences that have come and gone but rather to his allies inside the country and crucially in Tehran, Moscow and elsewhere.

Internally, the devolution of power to the National Defense Forces and to groups like the notorious “Shabiha” was a policy born out of necessity. For an authoritarian state to surrender such powers over its monopoly of violence was the only means to hold territory in key areas. The corruption that existed in the regime before 2011, in terms of racketeering and profiting from the informal economy, became something that others could

now exploit in a wartime setting. The most dramatic form this took was control of checkpoints, and the bribes and extortion that was required to deal with them. Checkpoints are a manifestation of a crisis in sovereignty and their proliferation in Syria was a symptom of the rapid retreat of the state.

By the end of 2016, a clear picture was emerging in how the regime, bolstered by Russian airpower, Iranian financial support and Iraqi and Lebanese militias, was looking to restore a more assertive posture. Simply put areas that were home to opposition forces would be sealed off and isolated, almost as if the country was identifying diseased parts of its body to remove. These areas, whether large parts of cities like east Aleppo, towns like Madaya or suburbs like Yarmouk, would then be indiscriminately hammered by artillery and air strikes, with the “barrel bomb” becoming symbolic of the levels that the conflict had descended to.

Where there appeared to be the most directed targeting was against civilian infrastructure and hospitals and bakeries in particular. In order to ensure that the tactic of “starve or surrender” worked, the sieges didn’t discriminate between fighters and civilians living within them, they would all suffer together. Occasional glimpses of the consequences of such a slow death emerged as social media showed emaciated children or relayed stories of people resorting to eating grass to survive.

Meanwhile schools and medical facilities were being forced

The latest UN and Arab League envoy, Staffan de Mistura, the man with arguably the hardest job on the planet, counted twelve countries and 89 armed groups involved in the fighting on the ground.

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51

Middle East

7

th

year

Whether Trump is ready for Syria, or Syria is ready for Trump is perhaps the most interesting question to examine as we enter the 7th year of the Syrian crisis.

52

underground as the laws that govern such protected spaces seemed unable to penetrate the darkness that had enveloped the country.

In December 2016, the UN revised its estimations of Syrians living under siege to almost a million people; double what is was from the year previous. As abhorrent and illegal the collective punishment was, it was a tactic that undoubtedly worked as opposition groups agreed time and again to accept being transferred out to other parts of the country.

The international community was divided at the UN Security Council about how to handle the Syrian conflict. Even agreements around upholding humanitarian law and principles haemorrhaged legitimacy as resolutions made in New York failed to cut through on the ground. Despite nominal agreements to allow aid to reach the millions of Syrians who needed it, the push back of a shadowy bureaucratic system thwarted it time and time again. Things got so bad in the middle of 2016 that suddenly states started pushing for air drops of aid, expensive and impractical methods but at least symbolic of an attempt to show Syrians living in cut off areas that they were not alone.

In December, as the opposition-held areas of east Aleppo collapsed in on themselves in the face of the sheer weight of firepower aligned against them, even more innovative methods of aid delivery began to be discussed. These included edible drones and remote controlled parachutes that could be directed into targeted locations from outside of Syria’s airspace.

Yet it isn’t technical solutions that will solve Syria’s humanitarian dilemmas but rather political will, and Western powers have to date showed both war weariness and a lack of clarity as to what they should bring to the table. Such indecision was perhaps best typified by the Obama White House, whose rhetoric around “red lines” and a desire to see Assad “transition” out of power informed both the tactics and strategy of certain facets of opposition forces. Such misunderstandings were in contrast to Moscow’s commitment to the regime in Damascus a legacy of historic relations – former President Hafez Assad once trained in Russia as a pilot whilst the then Soviets were responsible for much of the country’s infrastructure during the Cold War period – and opportunity to move into a space seemingly ceded by Washington.

Thus as 2017 begins the momentum is clearly heading in one direction, but as described earlier, the

The World Financial Review January - February 2017

course of the Turkish expansion in the north and what happens if ISIS collapses to the east remain huge unanswered questions. Predictions as to how the conflict will evolve are prone to a huge margin of error considering the chaotic nature of events to date but it would still seem realistic to envisage a fragmented and weak state deeply penetrated by foreign actors and presiding over a hugely divided society. One observer once quipped to me that a Syria of the future would look like “Lebanon on crack” as in addition to sectarian cleavages serious questions remain as to the future of the ethnic Kurdish population in the Arab Republic of Syria.

The most unpredictable element in this complicated and bloody equation is of course trying to imagine the foreign policy of President Trump. Whilst some speculate he will fully cede space to Moscow, others wisely hold their judgement on an individual who has made much of actively being unpredictable as a means of achieving results. Whilst Obama’s more lawyerly approached to foreign affairs was masked by his rhetorical skills, Trump is a property magnate who knows that in transactional deals, it doesn’t hurt if your opponents can’t predict what you’ll do next. Whether Trump is ready for Syria, or Syria is ready for Trump is perhaps the most interesting question to examine as we enter the 7th year of the Syrian crisis.

Featured image courtesy: Hosam Katan/Reuters

James Denselow is a writer on Middle East politics and security issues and a Director of the New Diplomacy Platform (NDP). He has worked extensively in the Middle East, including research for foreign policy think tank Chatham House, writing and reporting for several media publications and for communications and advocacy work with international NGOs. He is a contributing author to An Iraq of Its Regions: Cornerstones of a Federal Democracy? and America and Iraq: Policy-making, Intervention and Regional Politics Since 1958 and has advised the British Government on its policy towards the Arab Spring. He is a Research Associate at the Foreign Policy Centre (FPC) and a Fellow at the Centre for Syrian Studies (CSS).

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Middle East

Cracking the Arab World’s Development Puzzle:

Oil or Politics?

BY IBRAHIM ELBADAWI AND HODA SELIM

Is the Arab World cursed by its own institutions rather than by oil wealth?

These institutions, which have predated oil discoveries, have shaped economic incentives that affect how oil revenue is collected and used, and in turn influenced economic outcomes.

Over time, the interaction between oil and politics became intertwined,

54

preventing economic development in Arab countries. As low oil prices risk becoming a new normal, political reforms with checks and balances can turn the curse into a blessing.

Introduction Despite massive hydrocarbon endowments, Arab economies have neither

The World Financial Review January - February 2017

achieved economic prosperity nor became developed. With oil and natural gas discoveries taking place since the first half of the 20th century, Arab countries account for 7 out of the 13 members of the Organization of the Petroleum Exporting Countries (OPEC). They hold close to half of global oil reserves and a quarter of natural gas reserves. They control close to a third of oil production and 14% of natural gas production. And even though the per capita income of some Arab oil-producing economies is high, they would be considered less developed than Norway, a country with more limited oil resources and even Japan, a country without any natural resources.

More worryingly, some oil exporters like Sudan and Yemen remain among the world’s poorest economies and have experienced episodes of violentconflict. More importantly, the low oil price environment, considered by some

forecasters to be the new norm in the medium-term, raises the question of whether current income levels could be sustained in the future.

Many academics have attributed this disappointing performance to a “curse” which refers to the paradox that countries with an abundance of natural resources often fail to grow as rapidly as those without such resources (Sachs and Warner, 1994). The initial interpretation of the curse rested on pure economic grounds arguing that large resource windfalls lead to Dutch disease, overall macroeconomic volatility and debt overhang, among other ills. Yet this explanation fell short of explaining the successful economic performance of Norway, the world’s seventh largest oil exporter and fourteenth largest oil producer. Chile is another good example of an emerging country which is the world’s largest producer and exporter of copper. This realisation motivated a new strand of the literature that argues that “the curse is real but conditional on the presence of bad institutions” (Collier and Goderis, 2007; and, Elbadawi and Soto, 2016).

Dispelling the Oil Curse Myth Despite their diversity in size, demographics and wealth, the macroeconomic performance of Arab countries has been generally vulnerable to the ebbs and flows of oil prices (Table 1 on the right). Yet, this article argues that the Arab world is cursed by weak institutions rather than by oil. In particular, weak political institutions have predated resource discoveries and over time have been able to shape economic incentives that affect how resource rents are collected, allocated and used, and therefore influenced economic outcomes (Galal and Selim, 2013). Over time, the interaction between oil and politics became intertwined, preventing these

countries from embarking on a sustainable development path. In fact, there is a positive association between oil rents and limited freedom in political rights and civil liberties. More worryingly, Figure 1 (next page) shows that oil-rich Arab countries lag behind using these two measures. In 2014 out of the 205 countries covered by Freedom House, 88 were considered “free”, of which none is an Arab oil-rich economy. Only one country is considered partly free, Kuwait. Moreover, most countries, especially in the GCC have not any undertaken meaningful political reform since the 1970s.

In this weak institutional step, oil wealth turned Arab governments into rentier states by providing the means to buy off political consent with economic

privileges. As hydrocarbon revenues account for at least two-thirds of their fiscal revenues, many GCC oil-rich governments can afford not only to apply low tax rates but also efficiently redistribute these revenues through labour markets to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes with the ultimate aim of fostering social stability and authoritarian rule. The absence of significant political unrest in most GCC economies (with the exception of Bahrain) amid regional turmoil over the past 5 years speaks for that. More concretely, when political unrest mounted in 2011, oil revenues allowed GCC governments to generously appease citizens.

Kuwait and Bahrain responded by

Table 1.Selected macroeconomic indicators during oil booms and busts GCC countries

Populous countries

1998

2008

1998

2008

Oil Price

13

97

13

97

GDP Growth

4.3

8.5

5.6

3.4

Real hydrocarbon GDP growth

1.3

6.6

3.4

-3.8

Real non-hydrocarbon GDP growth

3.2

11.2

5.4

5.4

Non-hydrocarbon GDP growth (% of GDP)

74.2

54

88.3

70

Gross national savings (% of GDP)

20.1

48.7

20.2

31.3

Total investment (% of GDP)

25.6

29.8

20.2

23

Merchandise Exports (% of GDP)

41.5

63.9

17.3

30.5

Inflation (% )

0.9

9.3

8.2

13.3

Fiscal Balance (% of GDP)

-3.8

17.3

-3.7

0.6

General Government gross debt (% of GDP)

38.7

79.3

123.5

37.7

Current account balance (% of GDP)

-8.1

18.9

-4.7

3.2

Total reserves (US$ billion)

5.6

88

2.5

43.9

External debt

na

na

119.1

20.3

Source: Authors’ calculations based on WEO and WDI databases, 2014.

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populations like Algeria, Yemen and Sudan are only able to maintain political stability through a repressive security apparatus and have indeed experienced conflict, violence and social unrest at some point in time (Ali and Elbadawi, 2016).

Figure 1. Hydrocarbon rents and Freedom House Scores, 2014 7

Freedom House Scores

6 5 4 3 2 1 0

0

5

10

15

20

25

30

35

40

45

50

55

60

Hydrocarbons rent (% of GDP) Note: The freedom house indicator is based on several subcategories derived from the Universal Declaration of Human Rights which are considered to represent the fundamental components of freedom including: (i) the ability to vote freely in legitimate elections; (ii) participate freely in the political process; (iii) have representatives that are accountable to them. This indicator ranges from 1(the most free) and 7 (the least free).

Source: Freedom House and WDI databases

giving out cash, Bahrain and Oman provided public sector jobs, and Saudi Arabia and Oman raised workers’ wages and benefits. According to Hertog (2012), Saudi Arabia approved an increase in expenditure by US$130 billion to finance the creation of 120,000 new public sector jobs, building 500,000 houses, setting a minimum wage of US$800 in the public sector, provided a one-time bonus to incumbent civil servants and created an unemployment assistance scheme. More generally, the choice of the government to provide high pay to nationals has led to high-reservation wages and creates a disincentive for nationals to invest in skills that are demanded by the private sector. This labour market segmentation crowds out private business and contributes to high unemployment (Alsheikh and Erbas, 2016).

Yet, while it is optimal for resource-rich traditional GCC rulers who govern small populations to offer investment in infrastructure and public sector jobs to effectively remove the incentive to revolt, poorer rentier states with larger

The Economics of the Political Curse Arab economies remain heavily dependent on oil in several aspects including domestic production and export earnings as well as fiscal revenue as mentioned before. In fact, oil exports account for above 60% of total exports. Moreover, the oil sector accounts for the majority of GDP, except in Algeria, Bahrain and Yemen and the UAE. More alarmingly, with a few exceptions being Oman, Qatar and the UAE, the manufacturing sector has either shrunk or stagnated over time, especially in countries where exchange rate overvaluation was persistent and/or significant (Selim and Zaki, 2016). And even in countries which have undertook diversification efforts, the size of the manufacturing sector remains remarkably suppressed (less than 11% of GDP) relative to their wealth. Bahrain is an exception where the manufacturing sector accounts for 15% of GDP but has slightly declined over time.

More worryingly, Suliman (2016) shows that the discovery of oil in Sudan in the late 1980s quickly displaced cotton, as the leading export crop, shifting the economy from a relatively diversified agricultural base to oil dependence and almost eliminating its manufacturing sector.

Meanwhile, economic performance was disappointing. On the one hand, GCC growth was more severely affected by oil volatility but large oil wealth has maintained the financial sector quite liquid which in turn has been able to allocate ample resources for investments, particularly in infrastructure. On the other, limited resources may have somewhat shielded growth in the populous economies from significant volatility but they have contributed to

As hydrocarbon revenues account for at least two-thirds of their ďŹ scal revenues, many GCC oil-rich governments can afford not only to apply low tax rates but also efficiently redistribute these revenues through labour markets to national citizens in the form of well-remunerated public sector jobs and other generous social welfare schemes with the ultimate aim of fostering social stability and authoritarian rule.

56

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devastating economic consequences, whether in terms of excessive borrowing, Dutch disease and limited savings (table 1). Unlike the GCC countries, they have failed to use their natural capital to develop the required physical capital to promote much needed economic diversification. As a result, these economies suffer from massive deficiencies in infrastructure investments and an underdeveloped financial sector.

Saudi Arabia’s oil chief said that there are no links between the kingdom’s decision to oppose production cuts and political objectives. © AMR Nabil

Escaping the Curse Large oil resources, like those present in the Arab world, are a blessing. They have contributed to better standards of living and have most certainly widened the set of policy choices: they did better than they would have done without resource rents.

Notwithstanding this improvement, the economic performance of Arab oil-rich countries has been disappointing, even in the absence of a counterfactual. The modest economic progress made cannot be blamed only on the way the economy was managed or simply on the abundance of oil. It can however be blamed on weak political institutions.

In order to escape the curse and achieve sustained growth and development, first and foremost, Arab countries must introduce effective political reforms accompanied by strong system of political checks and balances to limit abuse of political

power and hence the misuse of resource rents.

As a second best, the adherence to the Extractive Industries Transparency Initiative (EITI) which provides a global standard for transparency in the oil industry and the National Resource Charter (NRC) which offers more comprehensive principles for governments and societies on how to best harness the opportunities for development generated by extractive commodity windfalls, can serve as anchors for enhancing transparency and accountability.

Second, the reform of fiscal institutions would improve resource management, achieve more savings, and release resources for the diversification of the non-oil sector. Because oil is an exhaustible resource, oil countries need to save. Collier (2016) estimates that the GCC must save 30% of their hydrocarbons fiscal revenues starting 2013 which needs to rise to 100% by 2083. The investment of these revenues in financial assets abroad (given few opportunities for domestic investments) through sovereign wealth funds (SWF) is sufficient to ride out revenue volatility. Populous economies which have shorter resource horizons need to save 50% of their hydrocarbons fiscal revenues which needs to rise to 100% by 2043. These countries need both a SWF and a Sovereign Development Fund (SDF) to invest the majority of their wealth in domestic infrastructure either in the form of physical assets or in human capital through improving health care and education of citizens, a process sometimes called “investing in investing” (Collier, 2016). These countries would also greatly benefit from implementing more effective public spending programs to ensure that resources are allocated towards high-quality public investment projects and avoid white elephant wasteful projects.

Moreover, the adoption of fiscal rules would allow governments to determine how much of their resource revenues they can safely spend through the annual budget with the aim of smoothing revenue volatility and potentially mitigating discretionary interventions by governments (Schmidt-Hebbel, 2016). To this end, countries would benefit from setting a target for the structural budget balance on the basis of an estimate of the long-term oil price.

Third, current exchange rate levels are considered to be overvalued in most oil-rich Arab economies, suggesting targeting a competitive

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real exchange rate to promote non-oil exports.

Fourth, another challenge specific to the GCC is to raise educational quality, skills development to raise productivity in order to make nationals more competitive for private sector hiring. As for the populous countries, they need to initiate an aggressive program to encourage economic diversification. To this end, governments should focus on simplifying the complex doing business procedures and improving infrastructure.

To conclude, the best way to turn the curse into a blessing in the Arab World is to improve on the prevailing political institutions, which form the deep roots of the curse and have contributed to poor economic outcomes. Current low oil prices present a window of opportunity for policymakers to undertake many reforms that would embark their economies on a sustainable development.

Ibrahim Elbadawi is the Managing Director of the Economic Research Forum as of January 2017. Previously, he was Director at the Economic Policy & Research Center, the Dubai Economic Council and Lead Economist at the Development Research Group of the World Bank.

He was Research Director of the African Economic Research Consortium (Nairobi). He published on macroeconomic and development policy and the economics of civil wars and post-conflict transitions. He holds a PhD in economics and statistics from North Carolina State and Northwestern universities.

Hoda Selim is a Senior Economist at the Dubai Economic Council since 2016.

Previously, she worked at the Economic Research Forum in Cairo and the World Bank’s Cairo Office. Her recent research focuses on the macroeconomics of oil management and the political economy of development. She holds a PhD from Sciences Po Paris in France.

References 1. Ali, Omer and Ibrahim Elbadawi. “The Political Economy of Public Sector Employment in Resource Rich Countries.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in

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In order to escape the curse and achieve sustained growth and development, first and foremost, Arab countries must introduce effective political reforms accompanied by strong system of political checks and balances to limit abuse of political power and hence the misuse of resource rents.

Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

2. Alsheik, Hend and S. Nuri. 2016. “The Oil Curse and Labor Markets: An Illustration from Saudi Arabia.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

3. Collier, Paul. 2016. “Savings and Investment Decisions from Natural Resource Revenues: Implications for Arab Development.”

In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

4. _________ and Benedikt Goderis. 2007. “Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum.” Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.

5. Elbadawi, Ibrahim and Raimundo Soto. 2016. “Resource Rents, Political Institutions and Economic Growth.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

6. Galal, Ahmed and Hoda Selim. 2013. “The Elusive Quest for Economic Development in the Arab Countries.” Middle East Development Journal 5(1):1-33.

7. Hertog, Steffen. 2012. “Redesigning the distributional bargain in the GCC”. Paper presented at the BRISMES Annual Conference 2012 on Revolution and Revolt: Understanding the Forms and Causes of Change. London. 26-28 March.

8. Sachs, Jeffrey, and Andrew Warner. 1995. “Natural Resource Abundance and Economic Growth”. NBER Working Paper 5398.

Cambridge, Mass.

9. Selim, Hoda and Chahir Zaki. 2016. “The Institutional Curse of Natural Resources in the Arab World.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resourcerich Economies. New York: Cambridge University Press and the Economic Research Forum.

10. Schmidt-Hebbel, Klaus. 2016. “Fiscal Institutions in ResourceRich Economies: Lessons from Chile and Norway.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

11. Suliman, Kabbashi. 2016. “Understanding and Avoiding the Oil Curse in Sudan.” In I. Elbadawi and H. Selim, eds., Understanding and Avoiding the Oil Curse in Arab Resource-rich Economies. New York: Cambridge University Press and the Economic Research Forum.

Middle East

The Economy of DUBAI

BY RAIMUNDO SOTO

The success of Dubai in using resource rents for economic development and higher welfare, nevertheless, does not rule out the fact that some of the symptoms of the resource curse are present. There are three important weaknesses in the sustainability of Dubai’s development path that the authorities would have to address.

I

n less than fifty years, Dubai transformed from a small fishing and trading village into an integrated, modern, and vibrant economy. Camel herds were replaced by endless caravans

of shiny luxurious 4x4s, tents folded as skyscrapers rose from the sand, and small souks were replaced by the world’s largest malls.

Development in Dubai was sparked by oil richness but, unlike other countries and emirates in the Arabian Gulf, it has successfully diversified away from hydrocarbons with the creation of world-class clusters of financial services, tourism, and trading activities. It is estimated that, as of 2015, oil-related activities would amount to less than 5% of total production in the emirate.

Dubai has also escaped the pervasive “oil curse”, that is the paradoxical

case where countries endowed with abundant natural resources suffer from long-standing economic malaises that inhibit their economic and social development. This oil curse operates through varied mechanisms. One mechanism is when the significant inflow of currency brought upon by exporting oil appreciates the currency and reduce the profitability of other economic sectors, thus weakening the productive basis of the economy. Some countries – such as Algeria or Venezuela – literally export only hydrocarbons and nothing else. Economists have labelled this the Dutch Disease, a term coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959. However, no such effect has been observed in Dubai, largely because the dirham has been successfully pegged to the US dollar since the early 1980s, thus avoiding currency misalignments.

Another channel runs via lowering

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GRAPH 1. Real Output per Worker

Real Output per Worker (2015 = 100)

150 140 130 120 110 100 90

physical capital accumulation. High resource rents usually fuel consumption booms and tend to depress national saving. In turn, this leads to lower than optimal accumulation of capital, in particular in non-oil sectors or in infrastructure. During the oil rush of the 1970s and 1980s, when most Arab Gulf countries favoured a model based on a welfare state and a large public sector to absorb the national labour force, Dubai, on the contrary, adopted a strategy based on investing oil revenues on infrastructure and diverse industries, resisting the pressure to have a large, overstaffed public sector. According to the World Economic Forum, in 2015 Dubai had better infrastructure levels than Japan, the US and all of the European Union.

A third mechanism operates when significant natural resource rents in conjunction with institutional weaknesses (including ill-defined property rights, imperfect or missing markets and lax legal structures) lead to rentseeking on the part of producers, thus

60

20 14

20 12

20 10

6

20 08

20 0

20 04

20 02

0 20 0

199 8

4

199 6

199

0

1 99 2

199

198 8

198 6

80

diverting resources away from socially profitable activities. In extreme cases, civil wars break out for the control of such rents. In less extreme cases, the struggle for resource rents may lead to hoarding of economic and political power in the hands of elites that, once in power, would use the rents to placate their political supporters and thus secure their hold on power. Extensive rent-seeking breeds corruption, distorts the allocation of resources and reduces both economic efficiency and social equity. Again, this is not the case of Dubai: according to Transparency International, in 2015 Dubai ranked among the 25 less corrupt economies in the world, on a pair with France.

The success of Dubai in using resource rents for economic development and higher welfare, nevertheless, does not rule out the fact that some of the symptoms of the resource curse are present. There are three important weaknesses in the sustainability of Dubai’s development path that the authorities would have to address.

The World Financial Review January - February 2017

PRODUCTIVITY Economic growth was mainly induced by a significant accumulation of physical capital and massive inflow of foreign workers and not by achieving higher productivity levels.

Employment in Dubai expanded from around 200 thousand in 1985 to 1.75 million in 2015, mostly low-skilled workers from the Indian subcontinent (India, Bangladesh, Sri Lanka, Pakistan, and Nepal). There are also a significant number of very high-skilled expatriates from the UK and continental Europe, usually employed in top management positions. Oil-money as well as ample access to international financial markets have been used to finance both productive investments and extravagant initiatives. And while there are many successful stories – such as the world’s largest man-made port at Jebel Ali or Dubai’s international airport – others attest to the contrary. None more representative than the mega-housing project where hundreds of artificial islands were built in the shape of continents that went bankrupt in 2009 and is slowly being swallowed by the waters of the Arabian Gulf. The bottom line is that massive accumulation of resources is not synonymous with improved efficiency: in fact, total output per worker has remained stagnant for a long period of time, as shown in the figure on the left.

Certainly, some sectors in Dubai are highly productive (e.g., financial sector, logistics, air transport) and can compete in international markets: air transport and the financial sector clearly stand out. Nevertheless, other sectors such as construction, hostelling, and retail lag significantly behind. These sectors employ thousands of unskilled expatriate workers and tend to have very low labour productivity. Here lies one of the key questions for Dubai’s development and for economic policy: if the emirate has no limitations in terms of access to capital and technology and if it is able to

attract the best of human capital from anywhere in the world, why would it choose to organise production so as to be of low productivity and value added?

The answer lies in the peculiar structure of the labour market that characterises not only Dubai but all Gulf countries. Dubai’s workforce is largely shaped by two concurrent phenomena: the sponsorship system (kafala, in Arabic) governing the employment of expatriates and the protection system for nationals embedded in both the Emiratization program and public employment policies. The kafala has been instrumental in bringing in massive amounts of low-skilled expatriate workers that enter the country under the sponsorship of an Emirati national or Emirati-controlled firm.

Since workers cannot change sponsor unless they obtain written consent from its current sponsor, employers enjoy market power and collect sizeable economic rents: the incentive to hire more workers than machines is thereby clear. Certainly employers in Dubai pay substantially more than what these workers could earn in their country of origin, but it is still less than the value of their contribution to production. And because extracting rents is easier the less skilled is the worker, production tends to be not only labour-intensive but also of low productivity. Not surprisingly, the above-mentioned most productive sectors operate mainly in free-trade zones where the kafala (and other regulations) is not binding.

Emirati nationals, on the other hand, are not subject to the sponsorship system but are protected by the rules and regulations emanating from

the Emiratization program. These shelter them from openly competing with expatriates in the labour market but, at the same time, they also reduce their employability, particularly that of young and inexperienced workers.

Since the private sector cannot afford the relatively more expensive national workers, Emirati are mainly employed by the public sector (around 80% are civil servants). Nationals fresh from high schools or universities face much higher unemployment rates, particularly females which are now timidly entering the labour market. The response of the authorities in Dubai – as elsewhere in the Gulf Cooperation Council (GCC) economies – has been to impose labour quotas on the private sector: private firms are mandated to reserve a certain fraction of their manpower for nationals or face a fine and, eventually, closure.

The duality of the labour market is an issue that needs addressing. It may be the case that the path chosen by the authorities is not the best. In keeping the sponsorship as a centrepiece of economic policy, the authorities might have considered that a more flexible labour market would increase costs and reduce the profitability of firms, thereby hampering investments in new, more efficient technologies. Yet, historically, it is when labour becomes scarce and wages soar that entrepreneurs implement new technologies to replace workers by more efficient technologies and machines. Dubai’s story also refutes the connection between higher labour costs and lower investment: private sector profits in Dubai grew significantly since the 1990s and employment expanded massively, but this did not

lead to investment in better technologies and labour productivity stagnated.

One can safely conclude that the sponsorship system is a factor inhibiting technological change because in keeping wages low it has not given entrepreneurs incentives to acquire more advanced technologies. The sponsorship system might have served Dubai in the past, but its time has come to be replaced by a modern labour structure.

VULNERABILITY Dubai exhibits significant vulnerability to oil shocks and domestic production is volatile despite its limited dependence on the hydrocarbon sector.

In spite of oil being unimportant to Dubai, its economic activity has been largely affected by oil-price cycles. One could think this as a consequence of being integrated to oil-rich Abu Dhabi and certainly there may be some effects but they are of secondary importance.

The true reason, indeed, lies in the absence of automatic stabilisers in the economy and the inability to organise macroeconomic policies to isolate economic activities from cycles in the global economy.

In its early days as an independent country the United Arab Emirates (UAE) authorities decided to peg its currency to the US dollar, thereby relinquishing monetary and exchange rate policies and confining the authorities with fiscal policies as their main policy instrument.

But fiscal policy in Dubai is incapable of stabilising the economy since the main automatic stabilisers – income and valueadded taxes – are conspicuously absent.

These ad-valorem taxes automatically dampen the effects of economic cycles

One can safely conclude that the sponsorship system is a factor inhibiting technological change because in keeping wages low it has not given entrepreneurs incentives to acquire more advanced technologies. www.worldfinancialreview.com

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because in the upswing tax collection mechanically increases while in downturns collection decreases. In Dubai, the tax system cannot perform its countercyclical role since it is largely based on fixed fees and rental prices and not on ad-valorem levies. Furthermore, government expenditures tend to be highly pro-cyclical as a result of the lack of modern consolidated, multi-annual budget procedures. The bulk of fiscal adjustments is borne by capital expenditures – always easier to adjust than laying off public servants – thus potentially hampering long-run growth.

This, naturally, raises the key question of why would a country organise fiscal policies in such a way to allow passing oil-induced fluctuations directly to its internal economy thereby hampering long-run growth. In particular, it is difficult to understand why have GCC authorities consistently postponed the implementation of value-added taxes, an issue under discussion for at least a decade.

Whatever the reasons for the current policy design, fiscal reforms in Dubai cannot be postponed. During the heydays of oil prices, the exuberance of economic activity could easily mask fiscal inefficiencies. Nowadays, the prospects are for a long period of depressed oil prices, slower economic activity, and more unstable global markets. Fiscal latitude is largely gone in Dubai and the shadow of its large external debt lurks over.

ACCOUNTABILITY Contrary to its historical reliance on the private sector, to a large extent economic growth in Dubai in the decade leading to the global crisis was driven by massive government investment.

In fact, government investment was in the hands of largely unsupervised government related entities (GREs) operating in real estate and construction. These entities are responsible for a myriad of Dubai’s iconic buildings such as the Burj Khalifa (the tallest building

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on earth), the Palm Jumeirah (an artificial archipelago created using land reclamation), and the Burj Al Arab (a luxury hotel in the shape of the sail of a ship).

But GREs are also responsible for the development of the highly successful industries such as Emirates Airlines, Emirates Aluminium, Dubai Ports, and Jebel Ali Free Zone (JAFZA). There is no doubt of the formidable entrepreneurial capacities of these entities.

The increasing importance of GREs in key economic sectors, nevertheless, has become a major weakness of Dubai’s economic strategy. On one hand, to maintain the soundness of fiscal policy additional efforts are needed to mitigate the risks arising from both the timing and amounts of the debt repayments and the perception of opaqueness in the performance of most GREs. According to the IMF, the debt of Dubai GREs stood at around 70% of Dubai GDP in 2015 and their debt-servicing capacity is relatively low.

Total public debt (including GREs’ debt) is high at 126 percent of Dubai’s GDP, with large maturities due by 2018 (US$51.6 billion of Dubai’s debt will come due in 2016-18).

On the other hand, economic incentives are needed for such GREs to perform efficiently and, most importantly, to avoid the implicit guarantee of government bail-outs every time they run into trouble. GREs, which largely enjoy monopolistic power and privileged access to land, crowd-out the private sector which finds itself unable to compete with firms that have preferential treatment. The development of businesses in Dubai is not only about allowing investors to operate in good conditions but also about setting rules of the game that are clear, transparent and conducive to an environment where only the most productive businesses survive. Producers – both private and public – must be free to fail because

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what matters for development is not more business, but more productive businesses. Predicting which businesses will be best for Dubai is not a task for the government but it can help in preparing and levelling the ground and it can even facilitate the development of certain sectors: ultimately competition will reveal what works and what don’t.

It has become a cliché to say that a country or a society is “at a turning point”.

In Dubai’s case the cliché is certainly appropriate. After a very successful run of fifty years of sustained economic growth, the development strategy needs an overhaul. A substantial one, capable of overturning the dismal productivity record of the economy, that can provide for effective isolation for oil-price fluctuations and instil discipline and accountability to the government’s most formidable arm: its entrepreneurial capacity. There is no time to waste on changing gears: so far, Dubai has enjoyed the benefits of being the first to develop in the Gulf of Arabia, but other emirates and Gulf economies – such as Qatar, Bahrein, and Kuwait – are not far behind.

Featured image Info About Industries of World

Raimundo Soto is Associate Professor of economics at Pontificia Universidad Católica de Chile. He received his PhD in economics from Georgetown University. Professor Soto served as president of the Chilean Economic Association and, between 2010 and 2012, he was Director of International Development at the Dubai Economic Council. His most recent publication is The Economy of Dubai published by Oxford University Press in 2016.

Taxation

TAX AVOIDANCE:

Between Temptation and Trouble

BY MATTHIAS KASPER AND ERICH KIRCHLER

Fostering tax compliance is a key challenge for global politics. Public revenues need to be protected, and confidence needs to be restored in a system that is deemed ineffective.

C

onservative estimations indicate that the revenue loss from profitshifting, a form of corporate tax planning, amounts to USD 100 to 240 billion annually. This is 4 to

10% of global corporate income tax (CIT) revenues (OECD, 2015).1 For developing countries, which rely strongly on revenues from CIT, this ratio is even higher. Consequently, fostering tax compliance is a key challenge for global politics in order to protect public revenues and to restore confidence in the system. But as compliance behaviour is a complex, multi-faceted phenomenon, this is not an easy task.

Multinational corporations have several opportunities to reduce their tax burden. One common and highly effective practice is to shift profits to low tax jurisdictions. Dyreng et al. (2008)2 show that more than a quarter of US multinationals pays less than 20% in corporate income taxes and Oxfam, a UK based not for profit organisation, estimates that the 50 largest US companies hold USD 1.4 trillion in cash offshore to avoid paying taxes in the US (Oxfam, 2016).3 In theory, the law distinguishes between legal tax avoidance and illegal tax evasion, but in practice this distinction is often blurred.

Global firm structures and complexity in tax law make the allocation of profits an extremely difficult task and many countries lack capacity to protect their tax bases from profit shifting. But moreover, corporate tax avoidance weakens the payment morale of non-corporate taxpayers who perceive that multinationals are not paying their fair share.

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Taxation

With their reputation at stake, firms become increasingly careful around the pitfalls of international tax planning. Graham et al. (2014),4 for instance, analyse the effects of reputational concerns and the risk of adverse media attention on corporate tax planning.

70% of the executives in their sample state that reputation is an “important” or “very important” factor in their decision not to engage in aggressive tax planning strategies. Their findings indicate that particularly large, profitable public firms are concerned about the reputational effects of tax planning. This is in line with findings from Hanlon and Slemrod (2009)5 who find that stock prices of multinational firms respond negatively to revelations about their involvement in tax shelters. But as corporations are still struggling to find the “optimal” level of tax avoidance, the fight against aggressive tax planning is gaining momentum and clearly, tax transparency is on the rise. To establish a framework for the allocation of corporate income, the G20 have joined forces with the OECD and developed an action plan to reduce base erosion and profit shifting (BEPS, OECD 2013).6 Likewise, the European commission is urging for a common consolidated corporate tax base (CCCTB) based on formula apportionment, which would limit multinationals’ opportunities to artificially reduce their tax payments. But while research indicates that documentation requirements successfully mitigate profit shifting (Beer & Loeprick, 2015)7 and the CCCTB might further impede corporate tax planning, the revenue effects of tax harmonisation within the EU remain to be seen (Devereux & Loretz, 2008).8 In any case, changing the rules of international tax will not be enough to restore and maintain high levels of compliance. Social psychological research shows that social norms have a significant impact on behaviour (Fehr et al., 2002)9 and particularly peers shape our compliance choices (Alm et al., in press).10 In order to curb aggressive tax planning, it is thus crucial to build a sense in society that tax avoidance has severe consequences. A social norm of cooperation needs to

In order to curb aggressive tax planning, it is crucial to build a sense in society that tax avoidance has severe consequences. A social norm of cooperation needs to be established and taxpayers’ identification with this norm needs to be strengthened.

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be established and taxpayers’ identification with this norm needs to be strengthened. To achieve this, a sound understanding of the determinants of taxpayer behaviour is crucial. Psychological research indicates that tax authorities’ power to enforce the law as well as taxpayers’ trust in authorities drive compliance behaviours. Against this background, policy makers and revenue bodies need to understand the dynamics between trust and power in order to establish a climate that promotes trust and fosters cooperation.

Attitudes Towards Taxes Tax revenues fund public goods. They are used to stimulate or impede certain behaviours and allow redistributing wealth. But while taxes are imperative, taxpayers’ attitudes towards taxation are, at best, mixed.

Sussman and Olivola (2001)11 show in a series of experiments that many consumers are tax averse: they rather avoid paying taxes than avoiding equally large, or even larger, non-tax costs. This tendency showed to be particularly strong among individuals who identify with political parties that favour less taxation. However, their tax aversion diminished when asked to consider positive effects of taxation, suggesting that policy makers should highlight the positive implications of taxes in order to increase compliance.

Undoubtedly, the vast majority of taxpayers are willing to pay their taxes correctly (Frecknall-Hughes & Kirchler, 2015).12 Unfortunately, however, most tax systems are incredibly complex and tax system complexity is one of the most serious impediments to voluntary compliance. The US tax code, for instance, comprises more than 4 million words. Its’ volume has increased steadily since 1955 (Owens & Hamilton, 2004)13 and the Taxpayer Advocate Service, a federal institution that assists taxpayers in solving their issues with the IRS, stresses that, on average, more than one provision is added to it daily. Tax law complexity imposes substantial compliance costs on corporate taxpayers. Moreover, it undermines taxpayers’ ability to understand their payment obligations. This, in turn, challenges fairness perceptions and stimulates misunderstandings, breeding suspicion, fear, and mistrust. Consequently, it is not surprising that many taxpayers find tax avoidance acceptable.

Two studies conducted in Austria (Kirchler, 199815; Kasper et al., in press16) asked taxpayers to describe and evaluate tax evaders, honest taxpayers, and typical taxpayers. The more recent study also

Figure 1a: Evaluation and description of different types of taxpayers. Kirchler (1998)

Typical taxpayer Honest taxpayer Tax evader

Lazy (-)

Hard-working (+)

Stupid (-)

Intelligent (+)

Negative (-)

Positive (+) -2

-1

0

1

2

Figure 1b: Evaluation and description of different types of taxpayers. Kasper et al. (2016)

Typical taxpayer Honest taxpayer Tax evader Tax avoider

Lazy (-)

Hard-working (+)

Stupid (-)

Intelligent (+)

Negative (-)

Positive (+) -2

-1

incorporated taxpayers legally avoiding taxes.

Results from the 1998 study, depicted in Figure 1 (above), show that tax evaders were evaluated neutrally and perceived as intelligent, and rather hard-working.

Honest taxpayers, on the other hand, were evaluated positively and described as hard-working, but less intelligent than tax evaders. Surprisingly however, typical taxpayers were judged negatively, relatively lazy, and not very intelligent.

As the recent data shows, the evaluation of these types of taxpayers has not changed much over the last two decades.

And despite the ongoing debate on corporate tax planning, taxpayers who legally avoid paying taxes are perceived as hard-working and intelligent.

0

1

Refining these results, a study from Germany17 shows that the majority of taxpayers finds it important and necessary to comply. However, many taxpayers perceive their tax burden to be high and the tax system to be unfair. They criticise complexity in tax law, compliance costs, and poor effectiveness of public spending. In order to increase taxpayers’ willingness to comply, it is thus crucial to reduce tax law complexity, to provide sound taxpayer services, but also to invest public funds more sustainably.

Coercion or Voluntary Cooperation?

On a theoretical level, taxpayers’ choices to pay their taxes honestly or to evade is

2 a decision under risk, where compliance certainly reduces the gross income, while the consequences of evasion depend on the audit probability and fines for non-compliance. Indeed, various studies indicate that audit rates and punishment for non-compliance impact on compliance. But as audit probabilities are often low while aggregate compliance levels show to be relatively high, other factors seem to matter too.

A substantial body of evidence from economic psychology and behavioural economics finds that audits and fines are less effective than theoretically expected.

For instance, a recent study shows that tax audits may have negative effects on reported income of sole proprietors, if

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Both trust and power are important to establish high levels of compliance and the framework predicts lowest compliance levels if taxpayers do not trust the authorities and agencies lack capacity to detect and prosecute non-compliance.

Implications and Outlook Psychological research indicates that tax compliance behaviour is a complex, multifaceted phenomenon. Policy makers begin to realise that deterrence and coercion alone are not enough to establish high compliance levels. Instead, they develop cooperative relationships with multinational corporations aiming to reduce compliance costs and increase legal certainty. But sound legal frameworks and a more service-oriented approach to tax administration are not only crucial for businesses. They also impact on perceived fairness in taxation, which in turn has positive effects on tax morale and taxpayers’ willingness to pay.

Research on taxpayer behaviour indicates that modern tax administration needs to take a nuanced approach. First, most tax laws are overly complex and simplification is much needed.

Second, it is essential to provide comprehensive taxpayer services, because many people do not understand the intricacies of tax law and consequently find it hard to comply with their payment obligations. Third, various studies show that a trustworthy relationship between authorities and taxpayers promotes voluntary compliance.

Figure 2: The slippery slope framework of tax compliance

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Voluntary compliance

Enforced compliance +

Tax compliance

they do not result in additional tax assessments (Beer et al., 2015),18 indicating that reliability in detecting non-compliant taxpayers is a crucial feature of effective audit schemes. On the other hand, audits may lessen taxpayers’ willingness to comply, if they perceive audits as arbitrary.

Linking audit frequencies to different measures of tax compliance, Mendoza et al. (2015)19 find that that audits might weaken voluntary compliance when they are conducted excessively. This line of research suggests that breaching the psychological contract between citizens, authorities, and the state has negative effects on tax compliance behaviour.20 Taken together, these findings show that promoting a cooperative relationship between revenue bodies and taxpayers is crucial. Instead of relying exclusively on audits and fines to increase compliance, tax authorities should aim to provide comprehensive taxpayer services and to build trust.

The slippery slope framework formalises research on the determinants of tax compliance behaviour.21 As indicated in Figure 2 (on right) it assumes that tax authorities’ power, that is their capacity to enforce the law, can elevate compliance levels. In this case, however, taxpayers comply because they fear punishment rather than because they are convinced of doing the right thing. Conversely, trust in tax agencies stimulates voluntary cooperation. Both trust and power are important to establish high levels of compliance and the framework predicts lowest compliance levels if taxpayers do not trust the authorities and agencies lack capacity to detect and prosecute non-compliance. If trust levels and revenue bodies’ power are high, on the other hand, taxpayers cooperate voluntarily because they believe paying taxes is the right thing to do and because they feel protected from free-riders.

A series of laboratory and survey studies confirms the assumptions of the slippery slope framework. Kogler et al. (2015),22 for example, find strong correlations between compliance levels and trust, respectively power among 500 self-employed taxpayers in Austria (Figure 3 on next page). Trust in authorities shows to be closely linked to voluntary cooperation, while perceptions of high power translate to enforced compliance. As expected, lack of trust and power decrease compliance levels to a minimum.

-

+

+

Power of authorities

-

-

Trust in authorities

Figure 3: Enforced compliance and voluntary cooperation

Voluntary cooperation

Enforced compliance

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6 4

4

Power of authorities

2

2

It is therefore important that taxpayers perceive revenue collection, but also the redistribution of public funds transparent and fair. Fourth, because social norms shape compliance behaviour, it is necessary to strengthen taxpayers’ identification with the community in order to stimulate cooperation.

Featured image courtesy: Flickr/Dominic Alves

Matthias Kasper is Assistant Professor at the University of Vienna, Austria.

His research analyses financial decision-making and the determinants of tax compliance behaviour.

Erich Kirchler is Professor of applied psycology at the University of Vienna, Austria.

His research focuses on tax behaviour and money management in households.

Trust in authorities

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6 4

4

Power of authorities

References 1. OECD (2015). Measuring and Monitoring BEPS, Action 11 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.

2. Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008).

Long-Run Corporate Tax Avoidance. The Accounting Review, 83 (1), 61-82.

3. Oxfam (2016). Oxfam Media Briefing April 14, 2016. https://www.oxfamamerica.org/static/media/files/Broken_ at_the_Top_FINAL_EMBARGOED_4.12.2016.pdf 4. Graham, J. R., Hanlon, M., Shevlin, T., and Shroff, N. (2014). Incentives for Tax Planning and Avoidance: Evidence from the Field. The Accounting Review, 89 (3), 991-1023.

5. Hanlon, M., and Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93, 126 - 141.

6. OECD (2013). Action Plan on Base Erosion and Profit Shifting, OECD Publishing, Paris.

7. Beer, S., & Loeprick, J. (2015). Profit shifting: drivers of transfer (mis)pricing and the potential of countermeasures.

International Tax and Public Finance, 22 (3), 426-451.

8. Devereux, M., & Loretz, S. (2008). The Effects of EU Formula Apportionment on Corporate Tax Revenues.

Fiscal Studies, 29 (1), 1-33.

9. Fehr, E., Fischbacher, U., and Gaechter, S. (2002). Strong reciprocity, human cooperation, and the enforcement of social norms. Human Nature, 13 (1), 1-25.

10. Alm, J., Bloomquist, K. M, McKee, M. (in press). When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance. Fiscal Studies, in press.

11. Sussman, A. B., & Olivola, C. Y. (2011). Axe the Tax: Taxes Are Disliked More than Equivalent Costs. Journal of Marketing Research, 48 (SPL), 91-101.

12. Frecknell-Hughes, J. & Kirchler, E. (2015). Towards

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Trust in authorities

a general theory of tax practice. Social and Legal Studies, 24 (2), 289-312.

13. Owens, J., and Hamilton S. (2004). Experience and innovations in other countries. In H. J. Aaron and J. Slemrod (eds.), The Crisis in Tax Administration (pp. 347-388).

Washington, DC: Brookings Institution Press.

14. Taxpayer Advocate Service (2012). Annual Report to Congress 2012, Volume 1, v.

15. Kirchler, E. (1998). Differential representations of taxes: analysis of free associations and judgments of five employment groups. Journal of Socio Economics, 27, 117-131.

16. Kasper, M., Olsen, J., Kogler, C., Stark, J., & Kirchler, E. (in press). Attitudes and social representations about taxation, tax avoidance and tax evasion. In N. Hashimzade & Y. Epifantseva (Eds.), Routledge Companion to Tax Avoidance. London: Routledge.

17. Forschungsstelle für empirische Sozialökonomik (2014). Steuerkultur und Steuermoral in Deutschland 2014. Bund der Steuerzahler Nordrhein-Westfalen e.V. http://deutsche-wirtschafts-nachrichten.de/wp-content/ uploads/2014/07/Statement_2014_Folien1.pdf 18. Beer, S., Kasper, M., Kirchler, E., and Erard, B. (2015).

Audit Impact Study. Taxpayer Advocate Service Annual Report to Congress 2015, Volume 2. http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ ARC15_Volume2_3-AuditImpact.pdf 19. Mendoza, J. P., J. L. Wielhouwer, and Kirchler, E. (2015).

The backfiring effect of auditing on tax compliance. http:// ssrn.com/abstract=2597479 20. Rousseau, D. (1995). Psychological Contracts in Organizations: Understanding written and unwritten agreements. Newbury Park, CA: Sage.

21. Kirchler, E. (2007). The Economic Psychology of Tax Behaviour. Cambridge: Cambridge University Press.

22. Kogler, C., Muehlbacher, S., & Kirchler, E. (2015). Testing the “slippery slope framework” among self-employed taxpayers. Economics of Governance, 16(2), 125-142.

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Russia

Expatriates Changing Societies: THE CASE OF RUSSIA

BY V. KARACHAROVSKIY, O. SHKARATAN AND G. YASTREBOV

Expatriates are admitted to analytics, decision making or strategic control in foreign (or partially foreign) companies. In Russia, such companies account for roughly one third of domestic turnover. The article discusses the role expatriates play in transforming Russia’s business and work culture, and the complex character of cross-cultural interactions between expatriates and local workers

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Russia and the West: The Pulse of Relationships “We need Europe for a few decades, and then we must turn our back on it”1 – this phrase attributed to the famous Russian tzar Peter the Great perfectly characterises Russia’s approach to modernisation in the past. Ironically though, the history has proven that Russia’s crush with Western culture, Western institutions

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and technologies (in state administration, military affairs, industry and science) was not simply a temporary devotion, but a persistent feature of its many attempts in modernisation ever since Peter the Great.

Russia’s impressive economic growth in the beginning of the 20th century (in fact, the fastest at that time) was highly dependent on foreign capital and highly skilled foreign specialists. Many foreign companies, including Siemens & Halske, Siemens-Schuckertwerke, Rosenkrantz, Lessner, Parviainen, Langensiepen, set up their factories and offices in Russia.

Many Russian military factories, such as Obukhovsky, Baltiysky, Izhorsky, Petrogradsky and others, also actively employed foreign engineers.

However, the revolution of the 1917 has forced many foreign companies and specialists to leave Russia. Between 1897 and 1926 the number of specialists from English speaking countries has decreased by almost 10 times, from France and

Sweden – by 6-7 times, Germany and Italy – by 1.5-2 times.2 But the Soviet leadership has soon recognised that it needed Western technologies and expertise to conduct its massive industrialisation, and pragmatically benefitted from the Great Depression by “sheltering” many companies and specialists who were seeking opportunities outside of the Western world. Furthermore, after the end of the Second World War as part of post-war reparations USSR willingly adopted Western equipment and technologies that was necessary for advancing its industry.

Obviously, foreign influence on Russian society depended to a large extent on the state of relationships between the USSR, Europe and the USA. Surprisingly though, even during the mutual political isolation of the Cold War and Iron Curtain period, Russia and the Western world did not remain that far from each other. The Soviets strived to assimilate with the West not only in the technological domain: ordinary Soviet people endorsed Western and particularly American culture through movies, music and books. Ironically, the superficial taboos imposed by political elites could not withhold an idealised romantic perception of the Western civilisation among Soviet Russians.

As these taboos waned in the 1990s following Russia’s transition to market economy, the country was flooded with foreign mass culture, as well as foreign companies and expatriates. Later with the economic upswing in the beginning of 2000s and booming GDP growth (from 6% in 2001-2005 to 7% in 20062008) Russia became particularly attractive to foreigners. The number of expatriates continuously increased since 2000. Between 2000 and 2008 the number of expatriates from the US increased by 2.7 times, from UK, Germany, France and Italy by 3.4-3.7 times, and EU countries in general by 1.6 times.3 In multinational companies, the clash of abstract romanticised values was replaced by the clash of specific labour and management practices. This forced Russians and expatriates to step over their habits and stereotypes, because in the context of competitive market economy economic efficiency was at stake.

And yet as the first decade of 2000s was coming to an end, the tendency has reversed

again. Following the economic crisis and then the stagnation of economic situation in Russia, many expatriates fled the country. Since 2009 the inflow of expatriates from Western countries has been continuously decreasing (from UK and USA it decreased by 5-7 times, from Germany and France by 3-4 times). And although in 2014-2015 the net outflow has again been replaced by the inflow of expatriates, the current number – around 12 thousand people from EU and US – remains far below even the level of 2000. The current cooling of political relationships and economic sanctions against Russia also work against this tendency.

As Samuel Huntington wrote it in his famous book The Clash of Civilizations, “initially, Westernisation and modernisation are closely linked, with the non-Western society absorbing substantial elements of Western culture and making slow progress toward modernisation. As the pace of modernisation increases, however, the rate of Westernisation declines and the indigenous culture goes through a revival.”4 Could this be exactly what is happening in Russia now? Or could it be that expatriates have already fulfilled their task of transforming the Russian society and that it is now following its own path of development? But what kind of path is it?

“Russians Are Not A Welcoming Society” Vs. “Russia Is An Adventure”: Heterogeneity Among Expatriates and Their Influence On Russians We have identified three groups of expatriates in Russia, which differ in terms of their integration in the Russian society and their perception of Russians. This diversity also implies distinct relationship with the local culture, including the capacity to transform it.

We labeled these three groups as “ideologists”, “utilitarians” and “modernisers”.

IDEOLOGISTS. These are foreign

We have identified three groups of expatriates in Russia, which differ in terms of their integration in the Russian society and their perception of Russians. www.worldfinancialreview.com

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Russia

“ RUSSIA IS CONSIDERED TO BE

A PROMISING MARKET; THERE ARE BUSINESS AND CAREER DEVELOPMENT OPPORTUNITIES HERE. I AM HERE FOR THIS...

professionals and managers who came to Russia usually with the specific purpose of implementing Western models of management and work organisation in Russian companies.

They form a relatively isolated stratum of expatriates, who “stay out of the society” and strive to maintain their essentially Western identity. Interestingly, for them keeping identity and distance with the locals is not only a matter of personal choice, but sometimes a part of contract with employers.

Such expatriates are characterised by what we labeled as Cold War type of perception: they perceive Russia largely as a hostile culture that needs to be rectified: “Russians are not a welcoming society. <…> Russians are aggressive generally” or “If they [the Russians] fear, they will do it, but if you ask them, they will think that you are weak” (UK, adviser to the chairman of the board of a bank).

Expatriates with such type of perception can be effective in implementing their tasks, especially if their companies explicitly set the goal to assimilate with Western business models for the purpose of attracting foreign investment, expanding on the international (Western) markets, etc. To fulfill this task “ideologists” do not need to establish the common grounds with the locals, rather they are required to impose a certain type of labour and management discipline according to a predefined template. The less connected are such expatriates with the local culture, the better they will be able to carry out their tasks. The disadvantage of this approach, however, is that it increases the risk of internal conflict between local and expatriate workers. Such conflict, often in a latent form, forces local workers to imitate rather than adopt the new Western discipline imposed by managers, and hence the intervention only has a temporary effect.

UTILITARIANS. These are expatriates who came to Russia for pragmatic reasons, i.e. as part of their effort in building careers in transnational companies or in search for new business opportunities: “Currently expatriates are here [in Russia] simply for the sake of earning money. They have no other goals. <...>. In the past, however, they were more open to other things like culture. <...> They were falling in love with Russia in the 1980-1990s.

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But now they seek nothing, but money” (UK, chief editor of a journal, citation translated from Russian). Unlike “ideologists” they more often positively evaluate their experiences in Russia or simply keep neutral: “It took me a long time to decide whether I really want to switch a stable good job in Germany for an ‘adventure’ in Russia” (Germany, top manager of a recruiting agency, citation translated from Russian). But even if they do recognise certain negative and inefficient aspects of the local culture, they are either reluctant to influence the situation or express pessimism about the capacity of the local culture for any positive evolution: “There are many ways to make it more efficient [speaking of business organization]. But it is futile. This is not going to happen. It's been like this over a thousand years.” (USA, analytical reports editor at a Russian bank).

“Utilitarians” can, nevertheless, succeed in transforming the local culture of companies and Russian workers they work with, if, rather than keeping distance, they try to keep a reasonable balance between their approaches to task solving and their understanding and knowledge of the local context (we called them the Balancing type). However, they rarely set an explicit goal of improving the system, especially when they see that they can be quite effective simply by exploiting their knowledge of the local specifics. In that sense their positive influence on the local culture is more an unintentional one.

A different, peculiar kind of “utilitarians” is represented by expatriates, who almost completely replace their Western identity with the Russian one (the Assimilated type). These, however, rarely include top managers and other higher rank expatriates in major companies, and mostly comprise of professionals and small entrepreneurs, most of which have already had connection with Russia in the past as part of earlier experiences (such as travels, education, romantic affairs, etc.). They often think and act almost like Russians and therefore have the weakest potential to influence the local culture.

Nevertheless, they can be a source of positive influence for the locals in the sense that they set a certain benchmark of market conduct and efficiency for their competitors.

MODERNISERS. We found this the most valuable stratum of expatriates, which enables the true evolutionary transformation of the local culture. “Modernisers” perceive Russia neither as a static, nor as a corrupt system, rather they clearly recognise its specifics and try to approach them constructively. Instead of seeking pragmatic balances with the local culture (like “utilitarians”) or imposing Western worldview and mindset on the locals (like “ideologists”), they act both as teachers and learners with respect to the local culture, and seek out the ways, in which the strengths of Western and Russian cultures can be combined to create new, more effective models of work organisation.

They often positively perceive Russians and their experiences in Russia: “They [Russians] are drivers for results. If you give them a task, they will have it done” (USA, manager, research and development department, an FMCG company) or “I like it here. It was my choice. The country is interesting, and I find that the people are interesting, good, and kind.

I am never bored here. The city is lively and the people are lively” (The Netherlands, head of the Russian office of a consulting company). Such expatriates also often perceive Russia as a more challenging environment as contrasted with the context of their countries of origin: “I think I will never live in America again. I love being American. I'm definitely American, I've been American all my life, but America for me is very boring” (USA, editor and columnist of an on-line newspaper).

Importantly, “modernisers” are not naïve idealists, because they do not expect the local culture to be easily transformable. Just like “utilitarians” they identify the culture’s weaknesses and adequately evaluate its capacity to resist external pressures. What makes them valuable though is that they endorse the challenge of changing it and changing themselves.

Changing-By-Collaborating: Does It Work?

The situation in multinational companies in Russia is characterised by a high level of ambiguity.

On the one hand, Russians and expatriates mutually criticise each other for possessing the traits that they find counter-productive. Expatriates often note that their Russian colleagues lack motivation, are unwilling to take initiative, have poor self-organisation and poor time management, and often push the guilt towards somebody else rather than accept responsibility and resolve problems on their own. In turn, Russians criticise expatriates for thinking in templates, excessively high selfopinion and assurance, and excessive reliance on pre-defined rules and regulations even when this is deemed inefficient and unreasonable. A frequent point of criticism is also such quality of expatriates as “impersonal” attitude to work, their unwillingness to consider various “personal circumstances”, as well as “personalities” when dealing with business. Interestingly, this situation is fundamentally different from the orthodox perception of “Western” values and “Western” experience as universal and absolute categories – a trend that had

formed in Russian culture back in the 1990s.

On the other hand, Russians and expatriates mutually evaluate many of each other’s business qualities as positive and worth adopting.

For instance, Russians are frequently attracted by such qualities of expatriates as their persistent faith in success (as opposed to more wide spread skepticism and pessimism among Russians), exceptionally good organisation and time management, diplomatic skills and political correctness (even in the most routine business issues), high enthusiasm (as opposed to regarding work as an inevitable “burden”) and professional integrity (as opposed to oriental “professional cunning”). Furthermore many of them explicitly state that they try to adopt and develop these qualities in themselves. Expatriates also appreciate and try to adopt certain qualities of their Russian colleagues. These often include higher tolerance for stressful and extreme situations, ability to reach compromises, back-up planning, and more individualised and personalised approach to teamwork. Moreover, they find these qualities useful not only within the specific Russian context, but also for their future international careers.

However, not everything can be changed. Our analysis reveals that many current judgments of expatriates about the business qualities of Russians are consistent with much earlier observations by several other scholars about the qualities of an

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UNLIKE THEIR WESTERN COUNTERPARTS RUSSIANS PUT FAR GREATER EMPHASIS ON INDIVIDUAL INTERESTS THAN ON COLLECTIVE ONES. “average” Russian worker (dating back more than 30 years ago). We thus hypothesise that there exists an invariant set of characteristics, i.e. a specific core of the Russian work culture, which will continue to persist in spite of external influences. One such quality is Russians’ general passivity and indifference in carrying out routine work. This is, however, very different from the extreme enthusiasm, with which they approach problems of either very personal or very global (i.e. state or societal level) concern.

Their second persistent feature is the emergency-style manner of work, which can actually explain the paradoxical combination of “laziness” and hard work: most of the times Russians prefer to remain idle, but they apply incredible effort to deliver their work on time in the last moment. Finally, Russians remain highly conservative in their attitudes towards power and authority in the sense that they are always “ready to be given direction” (as cited from one of our interviews with expatriates).

More formal measurements of cultural differences (we relied on the CVSCALE approach, which is a variant of the famous Hofstede’s methodology) have also shown that a typical Russian professional is consistently different from typical Europeans and Americans. Unlike their Western counterparts Russians put far greater emphasis on individual interests than on collective ones (which is not surprising – the dualistic and syncretic nature of collectivism in Russia is already well studied in the literature).

In addition to that, they are also characterised by a much lower level of uncertainty avoidance (i.e. disrespect for regulations and control) and a much higher power distance (i.e. respect for power). A formal analysis has also shown that this cultural profile also appears to be persistent irrespective of duration of cross-cultural interactions with expatriates.

The Fortunes of Westernisation As history often shows, sooner or later westernisation

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comes across a stable core of the national culture, after which further change is deemed highly unlikely.

However, we believe that the transformation of the local non-Western cultures does not necessarily end here; rather it sets the stage for new models of cross-cultural cooperation, and quite possibly – asymmetrical ones with respect to the classical westernisation scenario. By drawing on the case of cross-cultural interactions between Western expatriates and Russian professionals we have tried to show that it is indeed possible, as it appears to be already taking place in Russia.

Vladimir V. Karacharovskiy, Associate Professor, Deputy Head of the Laboratory for Comparative Analysis of Development in Post-Socialist Countries, National Research University Higher School of Economics.

Ovsey I. Shkaratan, Tenured Professor, Head of the Laboratory for Comparative Analysis of Development in PostSocialist Countries, National Research University Higher School of Economics.

Gordey A. Yastrebov, senior research fellow at the Laboratory for Comparative Analysis of Development in PostSocialist Countries, National Research University Higher School of Economics, deputy editor-in-chief of the Mir Rossii journal.

References The results of original studies were published in Karacharovskiy V. V., Shkaratan O. I., Yastrebov G. Towards a New Russian Work Culture. Can Western Companies and Expatriates Change Russian Society? Stuttgart: ibidem-Verlag, 2016. It is based on a series of in-depth and structured interviews with expatriates and Russians working in multinational environments in several Russian cities conducted between 2013 and 2014 (see the book for more details on methodology). These studies were gratefully supported by Khamovniki Foundation for Social Research, the Russian Foundation for Humanities and the Basic Research Program of the National Research University Higher School of Economics in Moscow.

1. Cit. ex Gumilev L.N. From Rus' to Russia: Essays on ethnic history. M.: Ecopros,1994. p. 287.

2. According to Russian censuses. Data taken from Demoscope Weekly (http://demoscope.ru).

3. From here onwards we rely on official statistical data published by the Federal Statistics Service.

4. Huntington, Samuel P. The Clash of Civilizations and the Remaking of World Order, New York, Simon & Schuster, 1996. pp.75–76.

Africa

Managing Human and Intellectual Capital for Sustaining African Organisations

BY HAMID H. KAZEROONY, YVONNE DU PLESSIS, BILL BUENAR PUPLAMPU

In this article, the authors examine the needs of African organisations for human and intellectual capital and suggest how they should work with governments and the educational system to acquire, retain, and develop higher performing talent. Such efforts would create more dynamic and productive organisations to serve African growth.

A

frican organisations to function and compete effectively in the global marketplace require particular focus on managing human and intellectual capital.

African continent, since the end of colonial era, which calumniated in the collapse of apartheid in South Africa in 1994, completing the transition, has undergone numerous social, political, economic, and cultural changes impacting management and organisational processes. The transitions within this period gave rise to a new set of human and organisational challenges in each African country in addition to the emergence of social and economic demands by various stakeholders for managing various resources (Kazeroony, 2016).

To address their human and intellectual capital needs, African organisations – as stakeholders in

Professor Adebayo Olukoshi, Director of the African Institute for Economic Development and Planning, in discussion with Ghana's Kofi Annan, former UN Secretary-General. © University of Ghana

their respective countries – should work with their governments and higher education institutions to expand capacity and address social, political, and cultural influencers in the development of human capital. They should continually examine their internal organisational dynamics and organisational practices and relate these to the current and emerging African market conditions within the global economy (Kazeroony, Du Plessis, & Puplampu, 2016). It is only through such focused attention that human capacity may be enhanced to serve African organisations. In this paper, we share a few thoughts on how these may be realised.

Macro and Micro Issues in Human Capital Development At the macro level, public organisations such as the African Capacity Building Organization (ACBF) (What Do We Do, n.d.) help with a variety of financial and expertise resources to advance capacity building for governmental and private actors directly, addressing the human and intellectual needs of organisations for growth and innovation. In addition, organisations such as the African Development Bank Group have been very active in supporting the growth of human capital by engaging in projects that would benefit gender diversity to maximise the human capital utilisation while expanding support for higher

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education developments in enlarging the intellectual capital pool for African organisations (Capacity Building, n.d.). These represent tangential efforts by non-State actors to influence skill development.

However, as the President of Liberia, Ellen Sirleaf noted, African governments may develop policies quickly to address capacity building, however, implementation, prioritisation, and governance issues pose difficult obstacles (Ratcliffe, 2013).

At the micro level, individuals attempting to build their intellectual capacity, face multiple obstacles such as lack of family financial means, lack of educated family members understanding particular needs for success, and limited pathways for access to and progress through higher education.

Higher Education Institutions are the actors who connect the human and intellectual capital requirements of organisations to the individuals who seek skill development and the marketplace which “consumes” talent.

African Higher Education Institutions currently face many challenges including policy gaps, resource constraints, and brain drain. Each of these challenges underscore the need for reform and changes in public policies, collaboration with the private sector, and attention to the gaps between foundational knowledge gained at the elementary and secondary schools and the curricula for developing human and intellectual capital at the higher education end of the spectrum.

Public funding of higher education as a part of the infrastructure crucial to the development of human and intellectual capital has remained uneven and subject to governments’ revenue stream. For example, for two decades, the Botswana government, using its mineral revenue, supported the development of higher education to grow its human and intellectual capital (Mpabanga, 2016). However, as commodity prices declined, the Botswana government along with many others in Africa could not sustain high expenditures on Higher Education (HE) in Ghana freezes on wages, recruitments and percentage allocation of government budget

resources have been used to deal with dwindling resource options. In addition, regulatory liberalisations have been used to allow private operators into the HE sector to reduce the pressure on government spending.

There is no evidence of systematic integration of current and future industry skill needs with universities’ curricula design processes for sustainable development of human and intellectual capital.

However, there are isolated cases where particular universities have adopted limited integration of some aspects of required industry skills into their programs.

Examples can be found at Strathmore University Business program in Kenya; Central University in Ghana and Pan African University in Nigeria.

Finally, political issues such as terrorism in Somali and north-western Africa, and Nigeria, war in countries such as South Sudan and Central African Republic, and party in-fighting in places such as South Africa has had debilitating effects on primary and secondary education, destroying bridges to the higher education, and diminishing the higher education capacity to build the human and intellectual capital required by African organisations. The current “Fees Must Fall” protests (News24, 2016) within higher education institutions in South Africa are crippling opportunities for many scholars and do not contribute positively to the developmental landscape in the country and the African continent.

We are at present witness to the political and policy impasse in South Africa regarding the “fees-mustfall” conundrum confronting that country.

Role of Agencies and Organisations in Building Human Capital While international agencies such as the World Bank and the African Development Bank, just to name two, have been helping to build the higher education infrastructure in Africa (African Development, 2009; Africa, 2015), the African needs for sustainable human and intellectual capital requires localised attention in each country. For example, while some universities have benefited from prestigious

As the President of Liberia, Ellen Sirleaf noted, African governments may develop policies quickly to address capacity building, however, implementation, prioritisation, and governance issues pose difficult obstacles.

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Education and human capacity must be built in ways which recognise and require uniquely African constructs embedded in African symbolisms, values, and cultures.

Š World Bank Photo Collection / Flickr

accreditations status publicly stating their capacity to produce high quality human and intellectual capital to conform to international standards others have not had the resources nor support from existing policy frameworks to be as effective.

Many countries in Africa have national accreditation systems which oversee the HE sector. It is increasingly important that the educational policy directives issued by political actors in government address the gradual integration of Africa into global economy.

It is also important that African organisations create their own sphere of influence to inform educational policy. In Ghana, there is a National Accreditation Board and a National Council on Tertiary Education.

As an example, these two agencies ought to examine the peculiar African dilemmas and needs and build up credible human capital approaches which are context located rather than follow the Western organisational models. Education and human capacity must be built in ways which recognise and require uniquely African constructs embedded in African symbolisms, values, and cultures (Puplampu, 2016). It is also important that civil society actors must develop research models

which expose the unique skill needs of different places in Africa. Research bodies must spearhead active and interventionist research which offers direct access to information which can be used to change educational policy. This would require links with industry, business regulators, scientific agencies and HEs. Unlike Western organisational models where relationships are built around the core values of organisation, rooted in organisational culture and enforced by a set of organisational policies and procedures outlined in their human resource manual, African organisations are communities where relationships are imperative to the operation of the work as manifested by the concept of Ubuntu (Bobina & Grachev, 2016). In addition, concepts such as Burungi bwansi (coming together in addressing the community needs) and Kirinju (the one with a grey hair) provide unique African perspectives regarding relationships and hierarchy within African organisations (Mutungi, Mutungi, & Fuentes, 2016). It is; therefore, important for scholars in management in Africa to work to unearth the complicated but viable nexus between some of the traditional cultural nuances noted above and the global demands for formalised procedure and organisational structures as well as the flexibilities demand by globalisation, ICTs and fast changing market situations. These understandings will be crucial if HEs are going to develop the required talent for the future of African organisations and if these organisations are aiming to successfully acquire, retain, and develop the necessary human and intellectual capital to become competitive in their respective industries.

The Sustainable Path to the Future The prospects and views we share above will be important to enable organisations to work with higher educational institutions to shape curricula for developing the required human and intellectual capital.

We contend that managing human and intellectual

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capital for sustaining African organisations require a holistic approach which 1. addresses the need for alignment between primary, secondary, and higher education curricular development and implementation, 2. aligns and dedicates public funding and private foundations for projected human and intellectual capital for responding to each countryâ&#x20AC;&#x2122;s organisationsâ&#x20AC;&#x2122; needs going forward 3. supports the conduct of internal diagnostics by organisations to determine their inner dynamics and organisational models and assess their human capacity needs and translate these into practical curricula for universities 4. facilitates the development of organisational processes to actively help recruit, retain, and develop internally and 5. promotes relevant stakeholder dialogues which communicate and synergises organisational, economic, social and political agendas and with human capital needs so as to inform public policy and relevant actors.

Hamid H. Kazeroony is Professor of the PhD Management program at Walden University, he is the co-editor of Sustainable Management Development in Africa (Routledge, 2016), Capitalism and Social Relationship (Palgrave, 2014), The Routledge Companion to International Management Education (Routledge, 2013), and The Strategic Management of Higher Education Institutions (Business Expert Press, 2011).

Yvonne du Plessis is Professor of Organizational Behavior and Strategic Human Resource Management at School of Business and Governance at the North-West University, South Africa.

Bill Buenar Puplampu is Professor of Organizational Behavior and Chartered Psychologist of the British Psychological Society and the Pro Vice-Chancellor (Academic Affairs) Central University, Ghana.

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References

African organisations are communities where relationships are imperative to the operation of the work as manifested by the concept of Ubuntu.

1. Africa [Fact sheet]. (2015, October 22). Retrieved December 7, 2015, from http://www.worldbank.org/en/ region/afr/overview#1 2. African Development Bank. (2009). African Development Strategy for Higher Education, Science, and Technology.

Retrieved June 15, 2014, from African Development Bank Group website: http://www.afdb.org/fileadmin/ uploads/afdb/Documents/Policy-Documents/yol%20 %C3%A9duc%20eng.pdf 3. Bobina, M. & Grachev M. (2016). African Social, Cultural, and Political Influences. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp.

99-122). New York: Routledge.

4. Capacity Building [Fact sheet]. (n.d.). Retrieved October 2, 2016, from African Development Bank Group website: http://www.afdb.org/en/knowledge/africandevelopment-institute/capacity-building/ 5. Kazeroony, H. H. (2016). Framing Sustainable Management Development in Africa. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp. 1-6). New York: Routledge. Kazeroony, H. H., Du Plessis, Y., & Puplampu, B. B. (2016). Sustainable management development in Africa: Building capabilities to serve African organizations. New York: Routledge.

6. Mpabanga, D. (2016). Public Policy and Higher Education: The Case of Botswana. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp.

9-46). New York: Routledge.

7. Mutungi, S., Mutungi, E., & Fuentes, R. (2016).

Management Theories: The Relegated Strengths-Based African Practices. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp. 188-201). New York: Routledge.

8. News24(2016) FeesmustFall protests, retrieved October 5 2016 from http://www.news24.com/SouthAfrica/News/ counting-the-cost-of-feesmustfall-protests-20160412 9. Puplampu, B. B. (2016). Alternative Approaches to Management Research in Africa. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp. 171-187). New York: Routledge.

10. Ratcliffe, A. (2013, April 26). Capacity building is key to delivering development in Africa. The Guardian.

Retrieved from https://www.theguardian.com/globaldevelopment-professionals-network/2013/apr/26/ development-delivery-aid-agencies 11. What Do We Do [Fact sheet]. (n.d.). Retrieved October 2, 2016, from http://www.acbf-pact.org/what-we-do/ our-work

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