It was not so long ago that global financial markets were hailed as the bringers of democracy. Yet between that time and now, a couple of crises showed that financial markets not only do not necessarily bring democracy to nations, but also sometimes jeopardise the stability of their economies.

Democratisation of finance was at the heart of the ‘subprime narrative’: efficient markets would promote ‘social housing’ without emptying taxpayers’ pockets, but rather filling those of savers.

Then came the crisis, and the consequent need for ever more massive bailouts, not of this or that operator, not of this or that market, but of markets as such

In fact, for the last thirty years there has been nothing more multinational than financial markets, which have prospered thanks to a systematic campaign aimed at dismantling national barriers against capital mobility, a dismantling carried out and sought precisely by states themselves. And indeed, almost more decisively by ‘left-wing’ governments than by ‘right-wing’ ones.

The representation of globalisation as an apparently inevitable process arises even more directly for finance than for other domains, on the assumption that by promoting the liquidity and depth of markets, capital mobility produces the typical beneficial effects of scale economies. Wide and border-free markets, so it has been claimed for years, on the basis of their alleged allocative efficiency, distribute resources in the most judicious way, since they operate on the basis of mechanisms that are as rational as they are impersonal, i.e. without regard for anyone.

Capital mobility is a mode of voting, carried out by what Noam Chomsky called in 2010 the ‘virtual senate’: “Financial liberalisation also creates what some international economists have called a “virtual senate” of investors and lenders, who ‘conduct moment-by-moment referendums’”.

Chomsky’s not too veiled reference is to Renan’s famous formula: the ‘plébiscite de tous les jours’ (everyday plebiscite). Except that Renan referred to the nation, whereas, with a radical reversal of meaning, here the ‘plebs’ called upon to vote are the global creditors of national economies…

This is the reality of modern capitalism, one would say. It remains to be seen whether this reversal of the balance of power has at least a basis in efficiency. For if the globalised finance of globalised markets could exhibit an evident allocative superiority, there would be nothing left but to surrender to progress. But right here begins the critical part of our discourse.

The efficient markets hypothesis, mainly associated with the name of Eugene Fama, rests on the assumption that, with a greater or lesser degree of precision, markets are able to price the fundamental risk of an asset, with only temporary deviations bound to be reabsorbed. Now, this assumption was challenged very early on, well before the GFC, by Shiller in his famous 2003 article. The irony, or rather the hypocrisy, is that in 2017 the Bank of Sweden’s prize in honour of Alfred Nobel for  economics was awarded jointly to Fama and Shiller.

The great crisis of 2007 took it upon itself to disprove this supposedly efficient assessment capacity of markets.  Particularly in the case of the sovereign debt crisis, a mostly concordant literature argues that a large part of the risks priced in by financial markets are risks created by markets themselves and by vagaries in market sentiment. Here too, a large literature on multiple equilibria now tells us that expectations can heavily distort the evaluations of fundamentals, especially in the case of sovereign debts: “Sovereign bond markets are potentially subject to multiple equilibria. At a low interest rate, the probability that the debt is sustainable is high, justifying the low rate.  Think of this as the good equilibrium. But there may well be another one, in which investors get worried, ask for a higher premium, increase debt service, and in so doing make their worries self-fulfilling and make debt unsustainable. Call it the bad equilibrium. Multiple equilibria can emerge nearly at any time, but they are more likely in the current circumstances when investors are edgy”

Let us now turn to the latest crisis, related to the pandemic. If the advanced economies were able to be saved from collapse, this was essentially due to the joint action of national governments, which passed large deficits, and their central banks, which supported them with systematic asset purchase policies.  The end effect has been, even un Europe, a greater financial stability than during the 2007 crisis.

What is the moral here? That we must shy away from the temptation to absolutize: no one, neither states, nor central banks, nor markets, is capable alone of effectively pursuing the efficiency objectives that all of us rightly deem important in finance. No one: neither national public bodies nor international private actors.

What the pandemic and the exit from the crisis give us is therefore a very specific political task: that of balancing the action of all three players in the name of the goal of a sustained, sustainable and socially acceptable growth.
If quantitative easing policies have saved the day so far, they have done so by vastly increasing inequalities, i.e. at a social price that it is no longer reasonable to continue to pay. New ways have to be found.

L'articolo Global financial markets, present and future proviene da InsideOver.

For decades, first world countries have been engaged in the race to reduce taxation on higher incomes, businesses and capital:  to give an example, between 1980 and 2020 the global average corporate tax rate dropped from 46% to 26%. This trend has deep roots. The so-called “trickle down” policy has long been dominant among policy makers. The assumption is that a redistribution of capital in favour of the wealthier classes  rewards those who make a more productive use of resources, thereby increasing growth and bringing benefits also to the poorer categories.  This theory has systematically been disproved by data, yet it continues to have many supporters; Among them is Emmanuel Macron, who in 2017 commented his tax reform by saying it was a question of supporting “those leading the group” in order to pull the whole group up.  The “trickle down” policy is firmly based on the idea that a reduction in taxes attracts talent and economic activity, increasing international competitiveness (together with wage compression it is an element of the so-called internal devaluation). This is an important topic particularly for European countries as having adopted the single currency they cannot resort to currency devaluation of the exchange rate.

In the race for fiscal dumping we forget, or pretend to forget, that reducing rates and revenues means a decreased spending capacity to support the economy and invest in social protection. For a small open economy thriving on international trade this is not an insurmountable problem; for larger countries however, where domestic demand plays an important role, this leads to the lack of an important stabilizing factor and contributes to putting pressure on public finance. Whether they launch into fiscal dumping or not, they will see their tax revenue decrease and will be forced to cut on social protection. Gabriel Zucman has estimated that tax avoidance costs countries around the world over 200 billion dollars a year in lower revenues; in the case of Italy this corresponds to  20% of the total revenue from company taxes (most of which,  17%, in favour of Europe’s tax havens, Ireland, Luxembourg and the Netherlands). It is important to note that for many this is not an unpleasant side effect of tax competition policies, but should be their guiding principle. It is the modern version of the policy of “starving the beast”, which has been carried out by American conservatives since the 1980s.

However, even from the point of view of a liberal economist, the race for fiscal dumping poses problems as it distorts competition, benefitting large multinational  corporations. Unlike domestic businesses, they have always avoided much of the taxation by allocating costs and revenues between branches located in different countries to take advantage of the difference between tax regimes. The giants of the web, having largely intangible assets, have taken these practices to the extreme.

The international community has for years been trying to combat tax optimization, facing opposition from the countries that benefit from these practices. In 2021 the situation opened up, and 137 countries signed a convention negotiated by the OECD to limit avoidance (Base Erosion and Profit Shifting, BEPS). The signatory countries reached an agreement on both the pillars on which the OECD had been working for years. First, the principle that taxation must at least be partly linked to the place where the activity (production, sale) takes place and not to the tax office. The compromise is in some ways disappointing: it concerns only companies with a turnover of a minimum of 20 billion Euros and a profitability of at least 10%. Between thresholds and exemptions, 70% of profits will remain taxed according to the current regulations, which allow the use of avoidance strategies such as transfer pricing.  However, some clauses of the agreement will be successful in putting a brake on the tax optimization of large corporations: the so-called “segmentation” will allow very profitable branches of large companies to be subject to the rule that even if the parent company does not meet the criteria. For example, the Amazon Cloud service, Jeff Bezos’ golden goose, will be subject to profit sharing, even if the profitability of the conglomerate is below the 10% threshold.

The second pillar is that of a minimum effective taxation rate (the key word here is “effective”, since often large corporations negotiate a preferential treatment which allows them to have much lower rates than statutory ones).  Each country will be able to apply a tax rate to its corporations which is at least equal to the difference between the rate they pay in the country where they have their registered offices and 15%.  This should reduce the incentive to locate the headquarters in tax havens.  Each country is free to set the rate at levels above 15%, and the United States plans to introduce a minimum tax rate of 21%.

However, there is no shortage of problems. The agreement should have provided for a much more ambitious minimum rate. The European Tax Observatory recently estimated that if the rate were 21% as originally proposed by the Biden administration, EU countries would recover $100 billion ($170 billion at the 25% rate as suggested by many think tanks, and only 50 billion at the 15% rate). In addition, the agreement will allow a large part of the revenue to be recovered by developed countries.  In order to benefit poorer countries, which are hardly ever multinational headquarters, the allocation should be made on the basis not only of sales, often low in developing countries, but also on the basis of capital and employment (as proposed by many NGOs but also by the European Commission).  Many observers have also pointed out that the poorer countries have been offered a package that is the result of compromises in the G7 and unamendable.

In conclusion, we cannot speak of a historic agreement, given the too many watered-down compromises, the fact that a substantial part of the profits will still be able to slip through the net and that the poorer countries will only be left with the crumbs.  However, it does represent a significant change of perspective: a country which tries to attract multinational corporations through tax dumping is now seen as a problem by the international community and for the first time a multilateral system aimed at limiting tax competition and combating tax avoidance has been put into place.  Once the historical principle is established, it will be easier in the future to find political consensus to change the numerical thresholds and reduce avoidance.  We must therefore keep our guard up to make the agreement fairer and more effective.

L'articolo Containing multinationals: What can States do? proviene da InsideOver.

For many economists and political commentators, Latin America was the utopia in the mid-2000s when the region was experiencing unprecedented growth and democracy seemed to have more or less consolidated in several countries. 

From Brazil – which saw its aggregate GDP grow by a multiple of over five to $2.616 trillion in 2011, from $508 billion in 2002 – to Venezuela that was cheerfully raking in hundreds of billions of dollars through oil exports, Latin America appeared to be the model continent on a first glance, at least economy-wise, for much of the 2000s and early 2010s as well. 

But cracks began to appear, especially over the past month or so, as the region saw protests erupting almost all across. Be it the socialist Bolivia under Evo Morales or the neoliberal Chile under Harvard-educated economist Sebastián Piñera, hardly anyone has been spared from the wave of angry citizens. 

What started as a brief trailer in Argentina against the food crisis this September eventually transformed into a full movie in other parts of the continent. In Ecuador, it was the government rolling back fuel subsidies as part of fiscal consolidation measures under the International Monetary Fund programme that brought people to the streets. This first forced President Moreno to flee the capital, Quito, before finally withdrawing from the multilateral bailout and restoring old prices. 

Similarly, Chile – often hailed as the free-market oasis in the desert of a socialistic continent – saw huge demonstrations, killing 20 people as per last count, after the government raised the subway fares in the capital by 30 pesos. The president, in response, initially declared a state of emergency and imposed curfew which agitated the public more, thus forcing him to adopt a more reconciliatory tone that has since seen a cabinet reshuffle. He has also promised to put in place social reforms including an increase in minimum wage and state pensions. 

Meanwhile, questions over the fairness of elections in Bolivia, which saw incumbent president winning yet another term, was the main cause behind the agitation. Other regional countries urged for an audit which was agreed upon, with a 30-member Organisation of American States delegation expected to do the review.  

From stability to chaos

The journey from rising living standards and an emerging middle class to being done with their respective governments hasn’t been as drastic as one would imagine even though some have been quick to blame Venezuela’s infamous Nicolas Maduro for exporting this unrest across the borders. The seeds of discontent were sown long ago and have just gotten ripe. 

As the fruits of the post-commodity boom – which saw economic growth thanks to significant investments – became scarcer, the region started showing early signs of a slowdown. Consequently, average per capita income in South America has fallen from $11,170 in 2011 to current levels of $8,160. 

A major chunk of this decrease has been led by Brazil where GDP in current dollar terms has contracted to $1.87 trillion. Likewise, Argentina – the second biggest country – witnessed growth rates alternating between negative and positive 2.5%, both leading to unpredictable developments in their respective elections.

However, an economy stumbling on aggregate basis doesn’t explain the case of individual countries well enough. After all, Bolivia is currently growing at 3.9% and Chile at 2.5%, which is not half bad in the backdrop of global recessionary fears. 

Considering two of the three protests had to do with price increases, one is naturally inclined to immediately seek the cause in inflation, but the data show that there has been a downward trend in consumer prices across the three states. 

Part of the explanation also lies in the growing inequality, an area in which the continent already fares the worst. The Gini coefficient for Latin America and Carribean countries was at 44.06 in 2015 – higher than other grouping – with Chile leading the charts consistently as it outperformed the regional average by 3.64 points. 

Some argue that this doesn’t go far enough, since all three countries have successfully reduced income inequality over the past decade, raising questions if this is the right place to look into. But citizens’ opinions are not perfectly aligned with data and just the perception of inequality is enough to cause unrest, and that seems to be the case as well. 

Any disaggregated analysis of different indicators is based on the assumption that individual parts combined must add to their sum, but the public sentiments work quite differently. Take Chile for example, where disenchantment over the country’s hardcore neoliberal policies had been brewing for a while. Its listed corporations had been doing well for several years while youth unemployment rates touched close to 19%, creating winners and losers of the system. Hence the increase in fares was the boiling point which took people out and as history tells us, the streets have no leader, but faceless voices. 

L'articolo Down With the System: Latin Americans Take to the Streets proviene da InsideOver.

“Liberalism is obsolete,” declared Vladimir Putin to the Financial Times in an interview, published in the respected newspaper only hours before the Osaka G-20 summit. The Russian president is once again center stage in international politics, it seems.

This was also apparent at the Japanese summit itself, during which Putin acted with a new authority. All attempts to try and relegate him to the margins of global geopolitics, as so many of his enemies did, clearly failed.

Putin and the containment of globalization

The motive of opposition, from which the conflict with Putin originated, is another issue on which he is indomitable. His determination to defend Russia’s interests against the dictates of globalization is founded on the demise of nation states.

On his own, Putin “contained” the forces unleashed by globalism, until Brexit and Trump’s victories brought the clash between these forces and the nation-state within the western world.

The war is over: globalization remains, but in a completely different form. This was proved by the Osaka summit, where not just Putin, but all heads of state who took part, spoke for and on behalf of their own country.

Politics has resumed, at least in part, its role, after years during which globalization, having eroded the power of politics and handed it over to finance, had reduced its highest offices to empty catwalks, while the powers governing the world were clearly expressed elsewhere.

Putin’s declaration to the FT on the demise of liberalism should be read within such a context. Not as a challenge but as an observation. This caused a reaction in the West.

Mishra and the clash within the liberal sphere

An acute reading of such reactions can be read in Bloomberg, in an article by Pankhaj Mishra. In response to Putin’s statements, “a contemptuous silence might have been preferable, saving us the embarrassment of Boris Johnson invoking ‘our values’, or European Council President Donald Tusk claiming, against overwhelming evidence, that it was authoritarianism that was obsolete.”

Mishra explains how liberalism expresses itself in two ways: “one offering genuine human freedom, the other entrapping humans in impersonal and often ruthless market mechanisms.”

These liberalisms have run parallel, and often in opposition. With time, however, the second expression won, in fact triumphed, over the first.

So according to Mishra, the self-appointed defenders of liberalism “should examine their reflexively fanatical faith in market mechanisms,” given that the survival itself of liberal freedoms is “endangered by grotesque levels of oligarchic power” and an increasing “inequality”.

Stiglitz and the demise of neoliberalism

On the same wavelength, but positioned more to the left, is an article by Joseph Stiglitz on Project Syndicate, a website which can be traced back to George Soros, staunch supporter of neoliberalism, entitled, “After Neoliberalism.”

Stiglitz writes: “The neoliberal experiment – lower taxes on the rich, deregulation of labor and product markets, financialization, and globalization – has been a spectacular failure”.

“Growth is lower than it was in the quarter-century after World War II, and most of it has accrued to the very top of the income scale.” Given the extent of the tragedy, “neoliberalism must be pronounced dead and buried”.

Everyone has their own recipe. According to Mishra, we should resume a form of liberalism founded on individual freedom. According to Stiglitz, it is necessary that the markets “are governed by the rule of law and subject to democratic checks,” to restore a balance and a more equal distribution of wealth.

But whether it be right wing or left wing, neoliberalism at its core is always convergent. With everything that this entails – new times, or shifting towards different scenarios, we shall see.

We are left with the Russian president’s statement, which has quasi-historical value, like the little boy in the crowd who exclaimed “The emperor has no clothes!”. Putin has Venetian origins, and in Veneto’s dialect, puteo means child.

Today Putin will be in Rome, as was announced during Sergej Lavrov’s visit to San Marino, which took place concurrently with Xi Jinping’s visit to Italy. The president will also be meeting the Pope. It might help.

Translation by Audrey Sadleir

L'articolo Putin, the End of Neoliberalism and His Visit to Italy proviene da InsideOver.