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Monday, February 11, 2019

Crooked timber: Democracy and inequality as a global foreign policy agenda [feedly]

Not many problems can be fixed in  a single country anymore -- Crooked Timber is a social science/philosophy/political science blog with a good number of UK, Australian and US contributors -- mostly social democratic in outlook.

Democracy and inequality as a global foreign policy agenda
http://crookedtimber.org/2019/02/11/democracy-and-inequality-as-a-global-policy-agenda/

[The below text is a short memo I presented for a workshop on a left-liberal financial foreign policy for the US last week.]

The US left is starting to come to grips with the relationship between democracy and inequality. This builds on a variety of academic work over the last several years – most prominently Thomas Piketty's book, but also work by other academics such as Emmanuel Saez and Gabriel Zucman – which maps the growth in wealth and income inequality across rich countries, and how marked it has been in market-liberal countries such as the US. But these are no longer academic debates: they are being taken up by politicians within the Democratic party, creating a new dynamic of intra-party competition. Proposals by left-leaning politicians such as Bernie Sanders and Elizabeth Warren are not only notable in themselves, but in how they are shifting the center of gravity, so that more centrist politicians too are taking them up.

To date, most of the political attention has been on the domestic aspects of income inequality. What discussion of global trends there has been has focused on the fact that global inequality is falling as some developing countries catch up. I identify an alternative set of empirical findings that highlight how global networks shape patterns of inequality in the US and elsewhere. I argue that these findings have crucial implications for how we think (a) of inequality within the US, and (b) for the corrosive impact of inequality on democracy elsewhere. Finally, I suggest that there is an important policy agenda that might take up this work, and use it to start to reshape global structures so as to shore up and promote democracy.

Global structures reinforce domestic inequality

People think of economic inequality mostly as a domestic issue. They shouldn't. Global economic structures play a key role in generating inequality of wealth and influence.

They affect who gets what in the global economy. For example, international rules on intellectual property, laid down in a variety of multilateral and bilateral treaties help ensure the continued dominance of businesses in the US and Europe. ISDS rules notoriously favor the interests of international corporate investors over those of citizens, strengthening the ability of business to extract political concessions. The political left has paid some attention to these problems (although certainly not enough).

They also affect who gets taxed on what they get and who does not. Corporations and the very rich are able to take advantage of a whole industry devoted to crafting tax shelters that are designed to slip between the loopholes of different countries' rules, or exploit the willingness of some countries to harbor dodgy money. Some of this money stems not from tax evaders but from corruption and other forms of crime. Out-and-out tax havens have been criticized by rich powerful states looking to prevent leakage of money from their own jurisdictions. However, this grossly understates the problem. These problems are only beginning to be addressed by the US left.

Academic research is helping to map out the problem

Academic research suggests that the problem goes far beyond a small number of "tax haven" countries. Alex Cooley and Jason Sharman, for example, have carried out extensive research on kleptocratic corruption. They find that the standard picture of a world where there are relatively honest rich countries, and relatively corrupt poor ones, is quite wrong. Corruption and tax evasion is not a problem of bad countries but transnational networks. Different jurisdictions are connected together by the channels of (1) banks, (2) shell companies, (3) foreign real estate, and (4) second citizenship and investor visa programs. Notably, much corrupt activity is conducted by and through respectable banks, lawyers and accountants. In an experiment, Sharman and his colleagues pretended to be money launderers, corrupt officials, and terrorist financiers, and worked with specialist firms to set up shell companies to hide their illicit money. Sharman and his colleagues found that it was much easier to do so with firms based in Wyoming and Delaware than in notorious tax havens such as Panama.

Other scholars are trying to estimate how much money is hidden from authorities. Gabriel Zucman at the University of California in Berkeley has estimated that approximately 8% of global wealth, or US$7.6 trillion, is hidden in offshore arrangements, designed to either avoid or evade taxes.

These networks have stark implications for democracy in developing countries. As Branko Milanovic argues:

[the traditional] view that robber barons may demand the rule of law and the protection of property rights once they have acquired property seems reasonable—so long as we assume that there is no globalization. But with globalization, it is not necessary to fight for the rule of law in one's own country. …  A much easier course of action is to take all the money and run away to London or New York, where the rule of law already exists and where nobody will ask where the money came from. A number of plutocrats from Russia, and increasingly from China, are taking this route.

 

They have substantial, albeit less immediately dire implications for democracy in advanced industrialized countries, where they reinforce domestic financial and institutional arrangements that make it increasingly hard to trace money. Again, they make it easier for wealthy individuals in these countries to hide money from taxation authorities, weakening the state. In more recent estimates, Zucman and his colleagues find that a significant percentage of US GDP is held offshore (although far less than for some other countries; over 70% of the UAE's GDP is held offshore). These estimates are at best rough, building as they do on known patterns of wealth holding and extrapolating from them. The fact that offshore wealth is so difficult to measure is a substantial part of the problem.

Such networks can have other negative consequences for democracy. Unexplained international money flows played a substantial role, for example, in supporting the "Leave" vote in Brexit. There is good reason to suspect that they play a significant role in the politics of other industrialized countries. There is much speculation about the role of Vladimir Putin and Russia in financing these flows: such speculation may or may not be correct, but is almost beside the point. The obscuring networks and structures that enable political manipulation are open to a wide variety of domestic and international actors, allowing oligarchic forces to exercise substantial political influence with little or no political accountability.

This research has strategic implications for the left

The scholarship on global wealth flows and illicit financial networks is highly imperfect. It shows that there is a problem, that it is a big one, and sketches some of its contours. That is all it can do, given limitations of available data. It has clear strategic implications nonetheless.

First, and most obviously, it indicates that the problem of US wealth inequality is an international as well as a domestic one. If the left increases taxes on personal income, investment income or wealth in the US, it will surely lead to much greater efforts by those affected to minimize their tax burden. The existence of global networks – and of institutional arrangements in the US that greatly facilitate these networks, such as shell corporations – will help them do this. Therefore, reforming international networks is an urgent domestic challenge.

Second, such networks have wide implications for global democracy outside the US too. Before the Trump administration, the US made great noises about its commitment to spreading democracy. However, the US 'liberal order' also involved the massive expansion of global financial arrangements that have very plausibly undermined democracy and the rule of law in developing countries (by allowing political elites to expatriate their wealth to jurisdictions where they can enjoy security, rather than developing such institutions in their own home countries). In short, elements of this order were mutually contradictory – extensive global financial exchange aided oligarchs to stash money overseas, undermining their commitment to the rule of law.  A new left that is genuinely committed to supporting and spreading democracy worldwide must necessarily also be committed to the root and branch reform of the international financial system that the US has done so much to support.

Third – the left has options – especially in the US and Europe. The US has developed a very extensive set of tools intended to gather information from global economic networks and to use them to prevent actors from engaging in various forms of behavior that the US disapproves of. There is no reason in principle that such tools cannot be employed e.g. to gather information on global tax evasion and to punish financial actors that engage in it. Such tools have been used in limited ways to prevent US tax evasion (e.g. by punishing Swiss banks), but could be employed at scale in pursuit of a broader agenda of shoring up democracy. As Nicholas Mulder notes in a recent article for The Nation, there are enormous problems associated with economics sanctions. However, as he also says, the world would be quite different if the US went after international tax cheats with even a little of the fervor it has dedicated to pursuing businesses selling microchips to Iran. At a minimum, stronger data gathering could provide a much better sense of the extent of the problem – and its particular characteristics than is currently available, allowing better crafted policy measures. More ambitiously, they could be the seeds of a different and more politically robust international financial architecture. Obviously, such powers could be overused, provoking their own counter-reactions – they should be viewed as the building blocks of a different international order, based unlike the current one on liberal democracy rather than free market liberalism.


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