financial crisis

The G20 Claims it Wants to ‘Recover Together’ – But Does it Really?

The developed economies are largely inwardly focused and have little inclination to think about the impact of their macroeconomic policies on the developing world.

The G20 is often described as a talk shop which is long on intent but short on actionable details. Intent is reflected in the opening lines of its joint communique: “As large economies, we collectively carry responsibilities and … our cooperation was necessary to global economic recovery… and [we must] lay a foundation for strong, sustainable, balanced, and inclusive growth.”

The G20 economies represent 80% of global GDP, 75% of international trade and 60% of the world population. It is therefore a premier forum for global economic cooperation. The theme of the Bali G20 meet under Indonesia’s presidency is “Recover Together, Recover Stronger”.

“Recover Together” is against the backdrop of post-Covid economic crises and disruptions in global production value chains, made worse by the Ukraine war which has created serious food and energy insecurity. The G-20 communique waxes eloquent on these, but does not provide a detailed roadmap for economies to coordinate their macro policies to “Recover Together”.

The developed economies are largely inwardly focused and have little inclination to think about the impact of their macroeconomic policies on the developing world. So where is the element of togetherness in the global recovery mechanism?

Policy in the US, the world’s largest economy, is inwardly focused on taming inflation at any cost by aggressively raising interest rates. It has imposed heavy costs on developing economies, whose currencies are losing value rapidly, making it ever more costly to import food and energy. The food and energy crisis is aggravated by the constant appreciation of the dollar against the currencies of developing nations, which are net importers of energy.

Some US analysts call for extraordinary measures ― market interventions to stem the rise of the dollar beyond a point. This might provide some relief to the developing economies which could recover faster, thus lifting global growth, it was argued.

The rising US dollar and costlier energy imports have put even India’s macroeconomic situation at risk by drastically increasing the current account deficit to over 3% of GDP. For the first time in decades, India will see a large negative balance of payments for 2022-23.

The larger point is that the US and strong EU economies have a very high per capita income base. So if they adjust their policy to enable the low and middle income countries to recover quickly, then the G20 slogan of “Recover Together, Recover Stronger” might hold good.

The communique talks about enabling greater capital flows and trade, but the IMF has forecast GDP growth and global trade to decelerate sharply in 2023. All the macroeconomic strategies of the developed world, including the aggressively hawkish monetary stance of the US, are leading to one destination ― a sharp slowdown or mild recession. In such a situation, developing economies, which do not have an adequate social security net, will be hit hardest. The G20 Presidency is coming to India in the most challenging of times.

In 2008, after the global financial crises, the G20 did recover together because it was easier to get every country to loosen its fiscal and monetary policies. But today, macroeconomic coordination is far more challenging because every economy is under pressure to tighten fiscal and monetary policies, which were loosened a lot during the Covid crisis. The policy direction is opposite to what we saw after the 2008 global financial crisis.

If most G20 economies are tightening up, a sharp global economic slowdown and a lot of pain must ensue. Under India’s stewardship, G20 will have to discuss how this policy of hard landing, especially in the US and EU, can be calibrated to minimise damage to the poor nations. It’s a bumpy road ahead.

This article was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.

IMF Says World Already in Recession, Emerging Markets Need $2.5 Trillion

IMF managing director Kristalina Georgieva told a news conference that emerging market countries need at least $2.5 trillion in financial resources to get through the pandemic.

Washington: The coronavirus has already plunged the global economy into recession, IMF Managing Director Kristalina Georgieva said on Friday, adding immense pressure on emerging markets suffering from lost commerce, reduced exports and massive capital outflows.

Georgieva told a news conference that emerging market countries need at least $2.5 trillion in financial resources to get through the pandemic. Internal reserves and borrowing in local markets will be insufficient to cover these needs, so substantial funding from the IMF, other institutions and bilateral creditors will be necessary.

(Reuters)

Protests Rock Beirut as New Lebanon Govt Wins Confidence Vote

Smoke wafted through the city as riot police fired tear gas at the protesters, who attempted to keep MPs from reaching the heavily barricaded parliament.

Beirut: Lebanon’s new government won a vote of confidence from parliament on Tuesday as protesters trying to block the session clashed with security forces, leaving hundreds injured.

Smoke wafted through the city as riot police fired tear gas at the protesters, who were seeking to keep MPs from reaching the heavily barricaded parliament. The Lebanese Red Cross said it treated 373 people for injuries, with 45 taken to hospital.

Lebanon’s new cabinet, formed last month with the backing of the powerful Hezbollah group, is hoping a financial rescue plan that formed the basis of its confidence vote in parliament can help pull the country from a deep financial crisis.

Protesters have been demonstrating since October over the worsening economy and a political class they say is deeply corrupt and say the new cabinet is part of the elite they want to oust.

“People are suffering and the government is not listening,” said Lama Tabbara, 34, an unemployed protester. “It takes a long time to uproot an old rotten tree and that’s what the government represents.”

One of the world’s most heavily indebted states, Lebanon must quickly decide how it will deal with maturities including a $1.2 billion Eurobond due in March, part of $2.5 billion owed this year.

Speaking just before the vote, Prime Minister Hassan Diab described his government’s task as a “suicide mission” that involves trying to put out a quickly approaching “fire ball”.

“We must be honest and acknowledge that the risk of collapsing is unfortunately not imaginary,” he said.

Parliament Speaker Nabih Berri was quoted saying Lebanon should seek International Monetary Fund (IMF) technical help to draw up an emergency plan but should not “surrender” to the IMF because the nation could not bear its conditions.

In comments reported by an-Nahar newspaper and confirmed to Reuters by a government source, Berri also said Lebanon should decide whether to pay the foreign debt maturing next month based on IMF advice.

Diab said the state’s priority would be to preserve scarce foreign currency reserves for critical imports like food, fuel, and medicine. He said that “all possibilities” were being studied for how to deal with Eurobonds maturing this year.

Eggs and paint

Lebanon’s crisis came to a head last year as slowing capital inflows from abroad led to a hard currency crunch and protests erupted against the ruling elite.

Eggs and paint were hurled at the cars of MPs and ministers arriving near parliament, but the session went ahead despite the scuffles. At the start, Berri said an MP had received stitches after being hit in the face and head by stones.

Protesters rejecting the new government have called for a new one independent of any political parties, as well as for tougher measures against corruption, along with judicial reform and early parliamentary elections.

“If this government keeps thinking this way and doesn’t listen to protesters, then we’re staying out here to say ‘We don’t want you’,” said Tasnim Kobani, 24. “They’ve been here for 30 years and they don’t understand that we don’t want them anymore.”

Men and women, their faces wrapped in scarves, lobbed rocks at security forces deployed at several locations. Police fired water cannon.

Some MPs skirted the clashes, reaching parliament on the back of motorcycles. Crowds chanted revolution, waved Lebanese flags and held signs that said “no confidence”.

A branch of one of Lebanon’s biggest banks, BLOM, was set ablaze. Flames engulfed the bank where people smashed the facade and furniture.

Banks have severely curbed savers’ access to their money and blocked transfers abroad. The Lebanese pound, pegged at the same level since 1997, has lost more than a third of its value.

Credibility

At Tuesday’s session, Diab read out the government’s policy statement, which urges some “painful steps” to address the crisis. It calls for moves including cutting interest rates and seeking foreign help.

His government was formed with backing from the powerful, Iran-backed Shi’ite Hezbollah, Berri’s Amal Movement and the Free Patriotic Movement (FPM) founded by President Michel Aoun.

It won the confidence vote with 63 in favor and 20 against, with some parties either voting against or boycotting such as former Prime Minister Saad al-Hariri’s Future Movement, the major Christian parties Lebanese Forces and Kataeb, and the Progressive Socialist Party.

Senior FPM lawmaker Alain Aoun told Reuters his party was expected to adopt the position that the country needs IMF technical assistance and should draw on IMF advice in its decision on whether to pay the Eurobond.

“We need an international financial institution like the IMF to give it (the government’s financial plan) the credibility it needs, and that will open the door for us if we want to consider debt re-structuring and negotiating with creditors,” Aoun said.

The Rise of Phantom Investments

Financial and tax engineering blurs as a result of phantom investments and shell companies can make it difficult to understand genuine economic integration.

Washington: According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person.

FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. So, is something amiss with official statistics or is something else at play?

FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity through transfers of capital, skills, and technology.

Therefore, many countries have policies to attract more of it. However, not all FDI brings capital in service of productivity gains. In practice, FDI is defined as cross-border financial investments between firms belonging to the same multinational group, and much of it is phantom in nature – investments that pass through empty corporate shells.

These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets – often to minimise multinationals’ global tax bill.

Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.

Also read: Three RBI Surveys Paint a Picture of an Economy Still in a Funk

Better data are needed to understand where, by whom, and why $40 trillion in FDI is being channelled around the world. Combining the Organisation for Economic Co-operation and Development’s (OECD) detailed FDI data with the global coverage of the IMF’s Coordinated Direct Investment Survey, a new study (Damgaard, Elkjaer, and Johannesen) creates a global network that maps all bilateral investment relationships – disentangling phantom FDI from genuine FDI.

Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85% of all phantom investments.

Why and how does this handful of tax havens attract so much phantom FDI?

In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits – such as very low or zero effective corporate tax rates.

Even if the empty corporate shells have no or few employees in the host economy and do not pay corporate taxes, they still contribute to the local economy by buying tax advisory, accounting, and other financial services, as well as by paying registration and incorporation fees. For the tax havens in the Caribbean, these services account for the main share of GDP, alongside tourism.

In Ireland, the corporate tax rate has been lowered substantially from 50% in the 1980s to 12.5% today. In addition, some multinationals take advantage of loopholes in Irish law by using innovative tax engineering techniques with creative nicknames like “double Irish with a Dutch sandwich,” which involves transfers of profits between subsidiaries in Ireland and the Netherlands with tax havens in the Caribbean as the typical final destination.

These tactics achieve even lower tax rates or avoid taxes altogether. Despite the tax cuts, Ireland’s revenues from corporate taxes have gone up as a share of GDP because the tax base has grown significantly, in large part from massive inflows of foreign investment.

This strategy may be helpful to Ireland, but it erodes the tax bases in other economies. The global average corporate tax rate was cut from 40% in 1990 to about 25% in 2017, indicating a race to the bottom and pointing to a need for international coordination.

Globally, phantom investments amount to an astonishing $15 trillion, or the combined annual GDP of economic powerhouses China and Germany.

And despite targeted international attempts to curb tax avoidance – most notably the G20 Base Erosion and Profit Shifting (BEPS) initiative and the automatic exchange of bank account information within the Common Reporting Standard (CRS) – phantom FDI keeps soaring, outpacing the growth of genuine FDI.

In less than a decade, phantom FDI has climbed from about 30% to almost 40% of global FDI (see chart). This growth is unique to FDI. According to Lane and Milesi-Ferretti (2018), FDI positions have grown faster than world GDP since the global financial crisis, whereas cross-border positions in portfolio instruments and other investments have not.

While phantom FDI is largely hosted by a few tax havens, virtually all economies – advanced, emerging market, and low-income and developing – are exposed to the phenomenon.

Most economies invest heavily in empty corporate shells abroad and receive substantial investments from such entities, with averages across all income groups exceeding 25% of total FDI.

Investments in foreign empty shells could indicate that domestically controlled multinationals engage in tax avoidance. Similarly, investments received from foreign empty shells suggest that foreign-controlled multinationals try to avoid paying taxes in the host economy. Unsurprisingly, an economy’s exposure to phantom FDI increases with the corporate tax rate.

Globalisation creates new challenges for macroeconomic statistics. Today, a multinational company can use financial engineering to shift large sums of money across the globe, easily relocate highly profitable intangible assets, or sell digital services from tax havens without having a physical presence.

These phenomena can hugely impact traditional macroeconomic statistics—for example, inflating GDP and FDI figures in tax havens. Prominent cases include Irish GDP growth of 26% in 2015, following some multinationals’ relocation of intellectual property rights to Ireland, and Luxembourg’s status as one of the world’s largest FDI hosts. To get better data on a globalised world, economic statistics also need to adapt.

Also read: Can India’s Rich Wealth Creators Boost the Economy to $5 Trillion?

The new global FDI network is useful to identify which economies host phantom investments and their counterparts, and it gives a clearer understanding of globalisation patterns. Such data offer greater insight to analysts and can guide policymakers in their attempt to address international tax competition.

The taxation agenda has gained traction among the G20 economies in recent years. The BEPS and CRS initiatives are examples of the international community’s efforts to tackle weaknesses in the century-old tax design, but the issues of tax competition and taxing rights remain largely unaddressed.

However, this seems to be changing with emerging widespread agreement on the need for significant reforms. Indeed, this year the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies.

No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalised economic environment.

(IPS)

Economist Surjit Bhalla Resigns from PM’s Economic Advisory Council

Bhalla, who will continue his mainstream media work, joined when the group was set up in September 2017.

Note: Follow The Wire’s live coverage of the 2018 assembly election results here.

New Delhi: Economist and newspaper columnist Surjit Bhalla on Tuesday stated that he had quit as a part-time member of Prime Minister Narendra Modi’s economic advisory council (PMEAC).

“I resigned as part-time member PMEAC on December 1st; also look for my book Citizen Raj: Indian Elections 1952-2019,” Bhalla tweeted on Tuesday morning.

According to government sources, his resignation has been accepted by the Prime Minister.

Bhalla, according to his tweet, will continue to be a contributing editor at The Indian Express and has joined as a consultant for the Network18 Group.

Am in the TV studios CNN IBN ; as I explained in my 6.30 am tweet I resigned from the pmeac and the reasons were also given – consultancy with CNN IBN and work on a book about indian elections since 1952 and my resignation was effective Dec 1 when I joined CNN IBN

— Surjit Bhalla (@surjitbhalla) December 11, 2018

His resignation comes on the heels of a series of exits by government economists over the last year. This includes former Niti Aayog boss Arvind Panagariya, former chief economic adviser Arvind Subramanian and former RBI governor Urjit Patel.

The PMEAC was set up in September 2017 by Modi as a five-member panel. It is currently headed by senior economist and Niti Aayog member Bibek Debroy and also includes other members like Rathin Roy, Ashima Goyal, Shamika Ravi and Ratan Watal.

The council identified ten areas for reviving growth and employment such as jobs, monetary policy, public spending and agriculture.

According to people with knowledge of the matter, Bhalla helped draft a report on employment months before his exit.

This report, sources say, has been criticised through feedback given by third-parties such as Mahesh Vyas of Centre for Monitoring Indian Economy (CMIE).

What Argentina’s Peso Crisis Says About Global Financial Fragility

Argentina is not the only emerging market economy to be facing excessive exchange rate volatility and sudden change in investor sentiment.

On May 4, the Banco Central de la Republica Argentina, the country’s central bank, raised policy interest rates to a whopping 40% to stem the rapid depreciation of the national currency, the peso. The surprise rate increase was the third in a week after the central bank failed to halt the decline in the peso by spending $4.3 billion of foreign exchange reserves in just one week. In addition, the Argentine authorities reduced the fiscal deficit target and announced new measures to calm the markets.

Market observers were confident that rapid-fire rate hikes and other measures will restore currency stability, but the Argentine peso plunged more than 5% to a new all-time low at 23.5 against the US dollar on May 8, thereby prompting the government to seek financial support from the International Monetary Fund (IMF).

It is yet unclear what kind of financial support will be sought from the IMF, but it may entail substantial political cost as many Argentines blame IMF policies for exacerbating the financial crisis of 2001 which deepened the recession and triggered social unrest and political instability. Since IMF loans usually come with tough conditions and policy surveillance, the Mauricio Macri government will find it hard to garner popular support, given the widespread scepticism in the country towards the IMF.

However, one thing is clear: the impacts of the rates hike would be immediately felt by the real economy in terms of higher financing costs and contraction of economic activity in Argentina for some time.

What caused the collapse?

The current bout of currency volatility in Argentina was triggered by a surge in the US dollar along with market expectations that the Federal Reserve might raise interest rates more aggressively than previously expected ‒ due to the rise in bond yields and poor US inflation data. To some extent, the imposition of 5% capital gains tax on LEBACs (peso-denominated central bank notes) held by foreigners also added to the downward pressure on the Argentine peso.

An exogenous tightening of global financial conditions coupled with a reassessment of global risk by foreign investors made Argentina’s economy extremely vulnerable because of its heavy reliance on external borrowings in foreign currency; a large current account deficit that has been financed mostly by debt inflows; and a high inflation rate, currently at 25.4%.

According to the IMF, Argentina’s external debt was $178.9 billion (28% of GDP) in 2015 and is projected to rise to $252.9 billion (38.8% of GDP) in 2018. A combination of these factors made foreign investors jittery about the country’s ability to pay back its dollar-denominated debt with a weakening peso.

Although the ongoing currency turmoil in Argentina has not yet developed into a run on the banking system or a full-blown financial crisis, it has evoked memories of past episodes of currency and financial crises in emerging market economies such as Mexico (1994), East Asia (1997), Russia (1998), Turkey (2000) and Argentina (2001).

Argentina: From darling to dud

The current market turmoil may have come as a surprise to Macri’s investor-friendly government. After coming to power in late 2015, his government dismantled foreign exchange controls and trade restrictions, adopted inflation targeting with a freely floating exchange rate, settled disputes with private foreign creditors, reduced subsidies on public services and undertook other market-friendly reforms to re-join the global capital markets.

From the IMF to global business leaders, all praised pro-market reforms introduced by the Macri government. Just four months ago, the IMF in its 2017 Article IV Consultation with Argentina (issued on December 29, 2017) stated: “The authorities should be commended for removing FX controls and trade restrictions that severely limited Argentina’s integration into the global economy.”

In the financial world, there was a lot of excitement when the government launched market-friendly reforms. Foreign investors poured billions of dollars into equity and debt markets. Argentina returned to global bond markets after a 15-year hiatus following the sovereign debt default in 2001. In April 2016, Argentina sold $16 billion worth of dollar-denominated sovereign bonds in the international markets. Most of the funds raised through these bonds were used to pay off holdout creditors from the 2001 default.

In June 2017, Argentina sold $2.75 billion of dollar-denominated 100-year bonds with a coupon of 7.125%. Flushed with ample liquidity unleashed by quantitative easing policies of advanced countries’ central banks, pension funds, hedge funds and other institutional investors bought these so-called “century bonds” on the expectations that this time things are going to be different.

Fast forward to today, risk perceptions of international investors have changed markedly.

Is the worst over for Argentina? In a word, no. Financial markets will remain volatile throughout the year largely due to exogenous factors, while the prospects of a drastic reduction in inflation rate and fiscal deficit are bleak in Argentina.

In the present context, the imposition of foreign exchange controls may be appropriate to stem rapid capital outflows, but it is unlikely that Macri will contemplate such a policy move because the dismantling of capital controls was one of his key election promises.

Argentina’s President Mauricio Macri arrives for a news conference in Buenos Aires, Argentina, November 23, 2015. Credit: Reuters/Enrique Marcarian/Files

Argentina is not unique

Argentina is not the only emerging market economy (EME) to be facing excessive exchange rate volatility and sudden change in investor sentiment. Other EMEs remain vulnerable to global risk factors such as rising interest rates in the US, higher oil prices, growing trade tensions between the US and China, and heightened geopolitical tensions. In case these risks fully materialise, they could trigger massive capital outflows from EMEs, particularly from those economies that have received large portfolio inflows in the post-crisis period.

An exogenous tightening of global financial conditions and an abrupt change in global risk appetite could prove disruptive to EMEs, leading to “sudden stops” or reversals in foreign capital inflows. Unlike advanced economies, EMEs are more prone to risks of “sudden stops” as they lack the capacity to borrow externally in their domestic currencies.

Countries like Turkey, Brazil, India and Indonesia with sizeable current account deficits are more vulnerable to financial shocks emanating from abrupt changes in the dollar funding conditions. For a country like India, a stronger US dollar coupled with higher oil prices would be a double whammy for its economy. The Indian rupee is the worst performing among a dozen Asian currencies. It declined 3.4% against the US dollar during a one-month period (March-April 2018). No wonder, the foreign portfolio investors have pulled out $2.4 billion from Indian equities and debt markets in the first week of April 2018.

The monetary “policy normalisation” shock

EMEs need to stay extra vigilant as prospective risks emanate from the normalisation of monetary policies in the US and other advanced economies. In the aftermath of the global financial crisis, the massive surge of capital flows to emerging markets was largely driven by ultra-low global interest rates and the high liquidity resulting from the quantitative easing (QE) policies adopted by the US and other advanced countries. Foreign investors were attracted to the higher rates of return and brighter growth prospects in EMEs.

As the US Federal Reserve begins tightening its monetary stance that will eventually raise interest rates, it could exacerbate financial vulnerabilities in EMEs for the simple reason that emerging economies are presently far more interconnected with the global financial system than a decade ago. This means that the monetary “policy normalisation” shock can quickly turn into significant financial turmoil in EMEs.

This is nothing new. In mid-2013, for instance, several EMEs experienced a sharp withdrawal of private capital flows over the prospect of imminent tapering of the US Federal Reserve’s policy of QE programme. The so-called “taper tantrum” led to a sharp sell-off in equities, bonds and other financial assets in EMEs, which put downward pressure on their currencies. The Indian rupee suffered the largest decline among the Asian currencies, depreciating by 23% between May and August 2013. The South African rand and the Brazilian real also touched four-year lows against the US dollar in June 2013.

In recent years, many EMEs have improved their foreign exchange reserve holdings as a buffer against external financial shocks. Even though “self-insurance” via foreign reserve accumulation is the still-dominant strategy of EMEs, it has several well-known drawbacks. Therefore, there is a need for better policy alternatives.

In many important ways, the ongoing currency turmoil in Argentina has shown that freely floating exchange rates do not always guarantee insulation from external shocks.

Due to the lack of global policy coordination, EMEs should further improve their macroeconomic and financial regulatory frameworks to cope with external financial shocks. The emphasis should be on developing sound policy frameworks tailored to national circumstances. This may entail close monitoring of financial markets to identify the potential contagion channels that can transmit US monetary policy shocks to EMEs. Besides, EMEs should not hesitate to take swift policy action by deploying capital controls and macroprudential tools to limit systemic risk.

Needless to add, unlike advanced economies, EMEs have limited capacity to deploy countercyclical fiscal and monetary policies in the event of a financial crisis.

An Argentine 100 pesos bank (above) note, featuring an image of former first lady Eva Peron, is displayed next to a US 100 dollar note in Buenos Aires September 17, 2014. Credit: Reuters/Enrique Marcarian/Files

Rising corporate debt in EMEs

In the current circumstances, the substantial rise in corporate debt burdens in EMEs in recent years also warrants vigilance. Private sector debt issued in a foreign currency needs to be monitored very closely as it exposes borrowers to foreign currency risks. Unlike local-currency debt, foreign-currency debt is considered riskier as exchange rate depreciation can make it difficult for private firms to service their debts if they do not have income or assets in a foreign currency. Besides, high levels of foreign-currency private debt could have wider implications for financial stability and economic growth in EMEs in the light of an economic slowdown.

In the aftermath of a global financial crisis, the bulk of debt build-up in EMEs was driven by non-financial corporations (NFCs). Taking advantage of ultra-low interest rates and easy global financial conditions, NFCs in EMEs issued foreign-currency debt in international markets. CaixaBank Research has calculated that, on average, 44% of emerging corporate debt was in a foreign currency at year-end 2016. According to Fitch estimates, foreign-currency corporate debt as a share of GDP was highest in Turkey at 41%, Russia at 37%, India at 17% and China at 10% in end-June 2015.

The post-crisis surge in the issuance of corporate bonds by NFCs in foreign currencies (mostly US dollar) has rendered EMEs more vulnerable to external financial shocks. A strong dollar and sharp hike in the US interest rates will adversely affect the balance sheets of NFCs that have issued dollar-denominated corporate bonds without properly hedging currency risk. It is important to note that not many NFCs in EMEs have hedged their foreign currency liabilities through natural offsets or by using financial derivatives such as swaps. The depreciation of local currencies against the US dollar will make it difficult for NFCs to service their foreign-currency debt.

Another point to consider: the exchange rate volatility has made the risk of currency mismatch more evident for those NFCs that have created large liabilities in dollars by issuing dollar-denominated corporate bonds, but their assets and revenues are denominated in local currencies. The Asian financial crisis of 1997 has highlighted the problems associated with the twin currency and maturity mismatches that triggered the crisis.

The highly leveraged corporates from Turkey and Brazil plus those involved in non-tradable sectors (real sector, construction and infrastructure) are among the most vulnerable to such risks.

International policy coordination and G20

It is well understood that cross-border systemic risks in an increasingly complex and interconnected global financial system cannot be addressed by national regulators alone. Consequently, there is a scope for global policy dialogues and coordination mechanisms to safeguard macroeconomic and financial stability.

International cooperation is also crucial for global welfare because international spillovers have now become a two-way street and therefore can engender financial fragility in both source and recipient countries.

Ironically, there is very little understanding of potential impact of changes in the monetary policy stance in advanced economies on the private capital flows to EMEs. Recent attempts to persuade central banks in advanced economies to take more responsibility for the effects of their monetary policies on the rest of the world have not been successful. In a recent speech, Jerome H. Powell, chairman of the US Federal Reserve, undervalued the scope for international coordination by arguing that the role of US monetary policy in driving global financial conditions and capital flows is “often exaggerated”. He further observed: “There is good reason to think that the normalisation of monetary policies in advanced economies should continue to prove manageable for EMEs.”

Some may argue that the G20 is well-positioned to address cross-border systemic risks because of its overarching mandate to strengthen financial regulation, but the previous G20 summits have delivered very little in terms of meaningful dialogue and policy coordination on these matters.

Will Argentina and other emerging market members of G20 take the lead in putting these issues on its agenda and build a consensus for greater policy coordination at the next G20 summit that will be held in Buenos Aires at the end of 2018?

Kavaljit Singh works with Madhyam, New Delhi.

In Defence of the FRDI Bill: The Many Misconceptions and Facts

Despite the fears of the public over the ‘bail-in’ clause, the FRDI Bill is an impending necessity in the context of global financial reform.

To suggest that the proposed law gives a free run to financial regulators at the expense of public interest is largely misguided. Credit: PTI/Ashok Bhaumik

Over the past few weeks, much unrest has transpired in the public sphere regarding the proposed Financial Resolution and Deposit Insurance (FRDI) Bill 2017, especially with respect to the now infamous ‘bail-in’ clause found therein.

While it is true that fears concerning the safety and sanctity of regular deposit accounts and other creditor claims are not entirely unfounded, amidst the furore and skepticism which has swayed public opinion in the last days, the real significance and potential of the FRDI Bill has become somewhat indiscernible.

To put it bluntly, the present Bill is not only an appropriate response to accumulated wisdom characterising financial booms and busts, but is also an impending necessity in the context of global financial reform. Arguably, the Bill, as it stands, can certainly be tweaked into making explicit safeguards which are already implicit in the Bill. One can only hope that the standing committee would rigorously look into those.

However, to suggest that the proposed law gives a free run to financial regulators in their quest to ensure an orderly bank resolution at the expense of public interest is largely misguided.

Global best practices

The failure of a bank is no ordinary event. The bigger and more inter-connected the entity, the worse and prolonged are its disruptive effects. Through contagion, instability in one bank can ultimately culminate into a full-blown financial crisis leading to years of recession, unemployment and unsustainable fiscal costs.

Accordingly, banks represent the linchpin of an economy and that explains why regulators need to treat banks differently from ordinary corporate firms, particularly with regard to bankruptcy and liquidation. The global financial crisis was the turning point in terms of a remarkably different approach towards bank failures and resolutions, characterised by separate resolution regimes for banks and other financial institutions, re-think on use of public funds to restructure or resuscitate failing banks and the need for a separate set of authorities to effectuate resolution procedures.

Several economies including the United States and European Union have significantly amended their resolution regimes to allow for more orderly resolutions, while being equally mindful of the public interest at large and the propriety of publicly funded ‘bail-outs’.

In this regard, and in line with global best practices, it is laudable that the FRDI Bill creates an overarching framework for resolving ‘financial service providers’, stipulates a tool-box of several resolution mechanisms, mandates a new entity, the ‘resolution corporation’ to effectuate an orderly resolution process and provides for several safeguards to effectuate such bank resolutions. ‘Public interest’ and ‘protection of consumers’ are recurring themes within the proposed law and is reflected through various provisions that seek to balance the twin goals as against a resolution workout.

Moreover, the Bill integrates the question of liability arising out of deposit claims that are to be insured and protected under the FRDI Bill, including the manner and means of payment of deposit insurance, in the event of a bank failure. It streamlines the procedures for deposit insurance claims and further imposes strict timelines for the disbursal of amounts payable under deposit insurance.

In several ways, the FRDI Bill is a one-stop solution towards the establishment of a veritable resolution framework and a credible deposit insurance mechanism. So what explains the growing suspicion and mistrust towards the Bill? How can one balance the square public denouncement on one hand and the objective of the Bill to protect public interest, on the other? Concerns essentially arise with regard to the apparent power of the resolution corporation to confiscate ordinary deposits for the purposes of effectuating the proposed ‘bail-in’ resolution tool and the diminishing prospects of a government oversight or influence over the resolution corporation. Let’s address these as they are largely misconceived and premature.

The ‘bail-in’ obsession

While the ‘bail-in’ clause indeed provides for imposing costs associated with a bank failure upon creditors, including depositors of the financial institution, in equal measures, the FRDI Bill stipulates several procedural and substantive requirements that ought to be fulfilled before a bail-in is actualised in practice.

For instance, substantively, only upon a determination by either the resolution corporation or the appropriate regulator (RBI for banks) of a ‘critical risk to viability’ of a particular bank alone, can any of the resolution tools be resorted to.

Thus for banks which are not on the ‘verge of failing to meet its obligations to its consumers’ cannot be arbitrarily put into resolution. Crucially, both at the stage of formulating criteria for such determination and in the event of an actual determination itself, not only is consultation with the appropriate regulator a pre-condition, but any differences of opinion that may arise, has to be resolved in accordance with the procedure under the Bill. Additionally, the corporation has to substantively satisfy itself of the very ‘necessity’ of ‘bail-in’ as against an exhaustive set of indicators and as opposed to other resolution tools.

Procedurally, any resort to the ‘bail-in’ clause has to be preceded by bringing the central government and the parliament on board and keeping both institutions informed at all stages of the bail-in process. Two further significant limitations on the use of ‘bail-in’ tool are the obligation to respect the hierarchy of claims as in the case of an ordinary liquidation procedure and the obligation to ensure that creditors are not affected in any manner worse than they would be in the event of an ordinary liquidation.

Thus, the Bill essentially makes the actual use of the ‘bail-in’ tool considerably more onerous and demanding than it is perceived to be. That apart, several concerns regarding the bail-in clause are in any case rather pre-mature. With respect to crucial details such as the classes or the order in which liabilities of banks will be subject to a ‘bail-in’ and the specific form of new ‘bail-in-able’ instruments that will be issued to investors are all left open to the determination of the resolution corporation through subordinate regulation under the FRDI Bill.

Given that all regulations under the proposed law will have to be laid before both the central government and parliament, the Bill provides further scope for the corporation to devise additional safeguards that might be applicable to a ‘bail-in’ procedure.

Lastly, popular media has distressingly highlighted the Cyprus example as the litmus test for ‘bail-in’. True, Cyprus was clearly a case of a disorderly resolution workout where depositors ultimately lost a substantial portion of their total deposits. However, it is important to note that the ‘bail-in’ in Cyprus was undertaken without any explicit law envisaging a ‘bail-in’ procedure. Equally absent were any set of ex-ante rules or regulations at the EU level laying down any set of procedures or providing for any safeguards associated with such a ‘bail-in’. The European Union Bank Recovery and Resolution Directive (BRRD), which now incorporates rules concerning various resolution tools, came into effect only in 2014, while Cyprus was ‘bailed-in’ as early as 2013.

Therefore, Cyprus is largely an aberration and is certainly not the last word on ‘bail-in’. Given that any resolution framework that is adopted in India will be guided by the rules and regulation framed under the FRDI Bill, apprehensions regarding a similarly muddled resolution transpiring in India is both unjustified and speculative.

Public interest and the government’s role

It is entirely misconceived to suggest that the resolution corporation has been given a free hand, removed from both the scrutiny of the government and the parliament. On the contrary, although the Bill accords much flexibility to the ‘corporation’, especially with respect to operational matters, it nonetheless preserves the preeminent role of the government as the ultimate arbiter of public interest.

Accordingly, as noted above, ex-ante, all regulations and authorisations prescribing for a particular resolution tool, including a ‘bail in’ has to be placed before the government. Correspondingly, under the Bill, the central government has been conferred with explicit powers to give ‘policy’ directions to the resolution corporation and the latter is bound by the same in discharge of its functions.

More importantly, the Bill makes its intentions with respect to the role of the government abundantly clear. It allows the central government to entirely supersede the resolution corporation and assume the latter’s functions if circumstances are such that it makes it expedient to do so in ‘public interest’. Therefore, the Bill strikes a careful balance between, on one hand, according institutional and functional independence to the resolution corporation, and on the other, acknowledges the fact that the fundamental nature of a bank resolution can affect ‘public interest’ in manifold ways that cannot always be anticipated through a purely technocratic approach.

That apart, if all else fails, the parliament acts as an ultimate backstop by scrupulously vetting the rules and regulations that are promulgated by the resolution corporation.

Lastly, much dissonance has ensued regarding the ‘bail-in’ versus the ‘bail-out’ option and the power of the government to infuse public funds to save ailing banks over and above the provisions of the Bill outlining an alternative set of procedures. Importantly, although the Bill prescribes for a comprehensive code for the resolution of financial institutions, it does so by defining the role and mandate of the resolution corporation alone, without affecting the government’s authority to pursue alternative strategies outside the purview of the Bill.

Unlike the Dodd–Frank Act in the US which explicitly aims ‘to protect the American taxpayer by ending bail-outs’ or the BRRD in the EU which circumscribes government bail-outs and permits them only under ‘very extraordinary situation of a systemic crisis’, the FRDI Bill does not forestall the government from using public funds so as to ‘bail-out’ a certain bank or prescribe for any set of limitation on the exercise of such prerogative. On the contrary, the government not only retains its budgetary capacities with respect to recapitalising banks, but is also granted enough latitude under the Bill to effectuate such powers, both within a particular resolution framework or outside of it.

Kanad Bagchi (bagchi@mpil.de) is a doctoral research fellow at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg, Germany, and an associate fellow at the ‘Normative Orders Cluster’ at Frankfurt University.

India’s Plan for Bank Mergers Ignores History and International Consensus

Obese banks are generally unhealthy for the economy. But the government is happily fattening banks thinking they are becoming “stronger” in the process.

Increasing the size of SBI is a poor banking policy. Credit: Reuters/Danish Siddiqui/Files

The Union cabinet’s decision to merge-and-consolidate India’s public sector banks (PSUs) is in direct opposition to the post-2008-crisis consensus that big banks are a systemic risk to their national economies. In the US and the UK, political campaigns have been run advocating break-up of big banks.

The term ‘too important to fail’ (TITF) is increasingly used in mainstream media coverage of the global economy. In 2014, the International Monetary Fund (IMF) published a paper listing all the risks associated with big banks, a study explicitly linking bigger size with riskier behaviour, forced government subsidies and even weakening of national sovereignty. After multiple investigations into the 2008 US economic crisis, leading bankers across the world have now said banks stay nimble and serve the economy better when small in size.

One of the most dangerous outcomes of bank consolidation is the embedded incentives in favour of risky behaviour. Once banks get to the TITF stage, they realise that they will be bailed out by respective governments even if their risks backfire. The case for bailing a reckless bank becomes even more compelling when they are systemically important banks (SIBs). An SIB is a financial entity whose collapse can seriously threaten the stability of the national economy.

Effect of TITF protection on a simplified bank balance sheet. Source: Global Financial Stability Report 2014, IMF

The State Bank of India (SBI) has been already denoted as an SIB by the Reserve Bank of India. Increasing the size of SBI is a poor banking policy. Earlier in 2017, SBI has merged operations of five of its associate banks and Bharatiya Mahila Bank signaling a determined push towards consolidation in the sector, following the bad loans crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

The principal advisor to the finance ministry, Sanjeev Sanyal, has reportedly said that the government is seeking ways to reduce the number of existing public sector banks to a range between ten and 15. He has said consolidation will not be taken too far so that the numbers of PSUs come down to four or five, lest the new banks become TITF. However, Sanyal has not clarified the basis on which he has calculated that four-five are TITF and not ten-15.

He has also not clarified how exactly a bank becomes ‘stronger’ when it is bigger, and how exactly size solves the problems of bad loans. Under the Indradhanush plan, the bigger banks will be recapitalised by the government. So if it actually recapitalisation helping banks become stronger, then why not recapitalise existing banks without merging them?

Proponents of bank consolidation argue that size should not be linked to risky behaviour, which they cite as an independent variable. They also cite the role of rating agencies that will flag risky behaviour of banks with lower ratings, thereby monitoring risk. However, as per the IMF, size is absolutely linked with risk – size insulates entities from disciplinary action by the government and if any organization realises there is no downside to risk, it is prone to indulge in it.

Secondly, rating agencies can no longer be trusted for effective vigilance of institutional behaviour. Their disastrous record in the run up to the 2008 financial crisis is well known in international banking circles. Some of the world’s most respected rating agencies had assigned AA ratings to American banks days before the latter collapsed. The reasons, given for this failure of the rating agencies, range from incompetence to collusion.

Media propaganda in favour of bank consolidation

There are a number of other weak reasons supporting big banks, which are repeated by sections of the media eschewing critical examination. For example, a Quartz article quoted the following statement from an auditor without verifying the veracity of the claim or even deconstructing what it meant.

“Consolidation will help by marrying two banks that have similar structures and are chasing the same goal. The banks will be able to better channelise the resources and function more smoothly if they are being controlled by one strong management team.”

This kind of reasoning is basically arguing in favour of monopoly by the service provider, a decision which is not in consumers’ interest. If two entities servicing the same set of people merge, then they naturally lose the incentive to compete with one another. Secondly, as a merged entity they become even more difficult to discipline in case of predatory behaviour. And lastly, if the risky behaviour of the merged entity backfires, then it is difficult to let them self-destruct because they are the only player in the market. Hence, bailouts using taxpayer money follow – a chain which clearly demonstrates that when special interests make mistakes, society bails them out – but when ordinary individuals find themselves in the same position, the invisible hand of the market metes out visible punishments.

The same article goes on to argue

The mergers are also expected to reduce the pressure on the government to secure capital for PSBs. State-owned lenders may need Rs1.8 lakh crore of capital infusion by FY19, it has been estimated. Of this, Rs 70,000 crore will be pumped in by their largest shareholder, the government. The onus to raise the balance is with the banks themselves. The merged, stronger, and competitive entities will, thus, be better placed to attract funds lead to operational efficiency and economies of scale.

The last part of the paragraph warrants scrutiny. If the worldwide consensus has stated undesirability of big banks, two important questions follow. Which institution would invest in an already risky structure? If an institution invests anyway, what guarantees have been given for it to recover money should things go wrong?

Bleaker future

The government’s poor ideas on banking reform do not stop at consolidation and bloated structures. The government is going out of its way to promote risky behaviour by also aiming to diversify holding patterns in bank shares. Finance minister Arun Jaitley has been quoted saying, “… we have announced a policy that government holdings [in banks] to be brought down to 52%.”

This intent if implemented, will also manipulate ownership patterns in a way that incentivises risky behavior. A diverse holding pattern of bank ownership actually creates the free rider problem. This scenario implies that when multiple entities hold ownership in an institution, every individual owner has limited agency in controlling risky behaviour of the management. By divesting their stake, governments insulate themselves from criticism of mismanaging major public institutions. Every major shareholder blames ‘the board’ excluding its own involvement, and when the music stops taxpayers find themselves holding the bag they must now fill.

Sampad Patnaik is a freelance journalist.

Collidoscope: Of Financial Markets, Gambling and Making Friends

This week’s selection from the world of social science research.

Credit: Trina Shankar

Collidoscope is The Wire’s weekly newsletter on social science research, bringing together different views and ways of understanding and analysing society from across the world. You can subscribe to the Collidoscope newsletter here. If you missed the previous editions and would like to catch up, you can find them here.

Social media and financial markets

A 3D printed Twitter logo is seen in front of displayed stock graph in this illustration picture made in Zenica, Bosnia and Herzegovina, February 3, 2016. Credit: Reuters/Dado Ruvic

Can Twitter make the markets crash?

“Breaking: Two Explosions in the White House and Barack Obama is injured,” Associated Press tweeted on April 23, 2013. Of course now we all know that didn’t happen – what did happen was that AP’s Twitter account was hacked (the hack was later claimed by the Syrian Electronic Army). The tweet was retweeted about 4,000 times. But what else happened?

Within seconds of the tweet, the Dow Jones Industrial Average dropped 143.5 points and nearly $136.5 billion of the Standard & Poor’s 500 Index’s value was wiped out. Then, as more and more people questioned whether the information in the tweet was true and it was discovered that it was, in fact, the outcome of a malicious hack, the markets recovered just as quickly as they fell. All it took was one tweet. So how did that happen?

In an article in Theory, Culture & Society, Tero Karppi and Kate Crawford answer not only that but also what that could mean for financial markets – and unfortunately, the world in general. They have two possible theories on how things went down, given the secrecy around financial trading algorithms and decisions, it’s hard to say which one is true.

Case one: AP, a well-known news agency with a certain standing in terms of business news, tweeted something – and that tweet was retweeted (hence legitimised) by thousands of others, including people I recently learnt are called social media “influencers”. Softwares like Dataminr, RavenPack, Gnip and others, that mine social media for news that could affect the markets, had that information as soon as it was out there and sent it to traders, who reacted accordingly. A few minutes later, the softwares figured out that the tweet is fake and send that message out too. “Through real-time analysis of Twitter data, software packages like Dataminr assess emotion, importance and social meaning in order to ‘predict the present’ and thus transform social media signals into economic information and value.”

Case two: The same thing happens, except there are no intermediary softwares. Financial algorithms scanning Twitter came across the tweet and, given all the factors, considered it worth acting upon. These automated trading systems then went on to make trades based on the tweet – before they realised, a few minutes later, that the information was false and reversed their actions. “These arguments are based on the idea that trading algorithms are scanning Twitter data using forms of text and sentiment analysis, and then immediately placing trades… While opinions differ on how much high-frequency trading algorithms draw on Twitter data, it is clear that Twitter now has considerable power to produce effects in the market.”

Of course not just any old tweet would do this. If the tweet came from my handle, for instance, there would have been no impact whatsoever. “This capacity for certain Twitter accounts depends on their legitimacy as a ‘speaker’ – in Marazzi’s terms ‘it depends on the power and the legal designation of whoever “speaks monetarily”‘.”

What this instance does highlight, the authors say, is how the labour of trading has changed dramatically. A lot of the process is now computerised and automated – algorithms are written through which computers read through pages and pages of financial data in seconds and mine information from all over the world, which would otherwise require a huge network of human traders. “In 2012,” the authors write, “roughly 50 percent of the US equity trading volume was accounted for by high-frequency trading (HFT) firms which use complex algorithmic processes to trade securities.” The HFT systems can respond to anything that happens within micro-seconds.

But where does that leave us? It’s difficult to imagine that so many global transactions are based on what a computer thinks is important. The AP “hack crash”, the authors write, is an example of why this is a problem – it wasn’t an example of the system breaking, it was actually an example of the system doing exactly what is was supposed to do.

“These processes of imitative repetition moved and adapted from one system to another. Human and non-human traders responded to what appeared to be an authoritative news message, a performative utterance with monetary legitimacy. The discourses around the Associated Press hack crash reveal the power of networked social and financial systems to connect autonomously and to produce a present without human oversight or governance.”

But it’s not like there is no governance system at. The governance system, however, goes well beyond what we traditionally saw as the domain of finance. Modern systems of communication like Twitter – which are basically (if you disregard robot accounts, because that’s a whole other spiral) humans talking to humans – have found their way into the financial system, whether for better or for worse.

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Financial gambling in Spain

A Spanish flag flutters above the Madrid Stock Exchange, Spain, June 1, 2016. Credit: Reuters/Juan Medina/Files

How do you go from being a ‘good’ financial trader to a looked-down-upon gambler?

If you’re living in post-crisis Spain, according to Jorge Núñez’s article in Cultural Anthropology, it’s pretty easy. Núñez argues that part of neoliberalism’s response to the 2007-2015 financial crisis in Spain was to shift the blame from the financial system to individuals, thereby protecting the system. Individuals working in the system were the problem, apparently, because they had a ‘gambling disorder’.

The system was good, the system had to be bailed out, Spanish authorities believed, according to Núñez’s article. It was the individuals working in the system (of course only the mid- and low-level ones, though) who were all wrong. This logic seems to believe that speculative practices are bad when individuals perform them – but okay for banks.

In fact not only is it ‘wrong’ for individuals to indulge in such practices, it’s classified as a mental illness, an addiction.

Several traders in Spain were diagnosed with a ‘gambling disorder’ during or after the crisis, according to Núñez. Many former independent traders, who used leverage (borrowed money) to play the market, now have criminal cases against them – like Núñez’s case study Sylvia.

Sylvia started working for a bank in 2000; by 2005 she had moved to the headquarters in Barcelona as a sales trader in charge of retail clients. She then moved to the investment division during the rise of the housing bubble – it has been argued that Spain mimicked the US subprime mortgage model. That bubble burst in 2007 and Sylvia’s bank was bought over by an Italian financial group. She didn’t like the new management and had also reached the “gender ceiling of high finance”, so she negotiated an exit package and moved back to her hometown to become a freelance trader. She did well; her confidence grew. By 2009, she was accepting money from other people to trade on their behalf, in exchange for a small commission.

Caitlin Zaloom in her book Out of the Pits: Traders and Technology from Chicago to London talks about the feeling that digital trading instils in traders – the numbers you’re dealing in no longer seem real, everything happens so fast that it feels more like a high-adrenaline game that anything else. (When I first read Zaloom’s book I also watched the documentary Floored: Into the Pit, that looks at the hyper-masculine, competitive culture among traditional floor traders and the crisis in identity that affected some with the move to digital trading – I still have a hard time convincing myself that people in the documentary are real, but it’s a fascinating, if scary, watch.)

Back to Sylvia – according to Núñez, what Zaloom describes is very similar to what happened with traders in Spain.

“This scholarship resonates deeply with the experience of freelance traders in Barcelona. These traders also stitch their attention to on-screen markets, un-flaggingly tracking prices that yo-yo up and down in psychedelic colors. They too develop trading habits around idealized states of awareness. Silvia, for her part, lived in a quiet neighborhood near a park, but rarely left her apartment to wander. Her routine was carefully organized around the opening and closing times of the German and Spanish stock exchanges. She woke up very early in the morning, had breakfast, read every single financial newspaper, and sat at her workstation. By 9 a.m. she was placing her first round of trades. …As Silvia noted, underscoring the rigor of her timetable, “I had to schedule my meals and snacks—otherwise I forgot to eat.”

Silvia recalled that her trading behavior became more erratic and sloppier with time. “I started acting like a bolsera,” she said. In Spanish market argot, the label bolsero/a has negative social and behavioral connotations. It indicates lower class status, on the one hand, and an almost irrational approach to financial markets, on the other.”

Soon, things “started to fall apart”, according to Sylvia. She lost her mother’s retirement money. Lawsuits began to pile up. Her sister connected her to Nuria – a psychiatrist at the Catalonia University Hospital. Sylvia has been seeing Nuria for more than two years now and lives with her mother; her sister given her a small amount of money and keeps a close eye on what she’s spending on.

Sylvia’s case is far from unique – though she is one of the few women to be in this situation, given the gendered nature of stock markets. But it represents a pattern in Spain, according to the author – “small fry” individuals are handed the guilt of a system that is broken, the guilt is associated with a mental health problem or addiction in certain individuals without looking at the issue as larger, both politically and systemically, Núñez writes. The fix, too, is seen in medical terms pertaining to individuals. The unchecked financial system which breeds the culture that would have celebrated individuals like Sylvia (before her downfall), however, is not questioned.

Friends and gamblers in urban India

The Supreme Court has various reasons to rule that betting on sports is not illegal. Credit: PTI

Representative image. Credit: PTI

Can you be friends with the people you gamble against?

“My friends are all gamblers and among gamblers you cannot be friends,” someone at the Delhi Race Course told Stine Simonsen Puri while he conducted research for his article in the Journal of South Asian Studies. The purpose of Puri’s study isn’t to say how many bettors he met have a gambling addiction (though he does indicate that most of them would fall under that category). He, instead, looks at how the men who place bets at the Delhi Race Course interact and engage with each other, what their relationships are like.

Puri also notes the relationship that Núñez pointed to in Spain: “The ‘work’ of betting, as it is called by bettors, has clear similarities with the ‘work’ of speculation in stock exchange futures markets; I have found strong correlations in betting strategies and the social environment between betting at the Delhi racecourse and speculation in futures markets in the United States as described by Caitlin Zaloom.”

Close to 300 bettors come to the Race Course every day, according to Pur, betting anything between Rs 10 and Rs 5 lakh. Given that for many of them betting is somewhat of a full-time activity – their job are either related to it or secondary – much of their social interactions are also at or around the races. But do these interactions qualify as a friendships?

For the bettors Puri spoke to, they didn’t. They called these interactions ‘hanging out’ and ‘having fun’, but would not go as far as to classify them as friendships. They know all about each other’s monetary situations – what they’ve won or lost, how empty their bank accounts are looking, how upset their family is with them for wiling away the money. But they also hid things from each other – they would never meet each others’ families or even explicitly ask about them. Puri describes these unconventional relationships:

“What I observed in Delhi was gambling in an urban setting, which was innately a social act that was all about establishing relationships. These were nevertheless relationships limited to a single domain. What I find interesting is how the Delhi racecourse exists as a place of hyper-sociality, where everyone pays attention to everyone else and explores the possibilities for friendship with others, yet where gambling is not done primarily to establish relationships, but where relationships are used to enable gambling. One way that friendships enable gambling is through loans.”

This money was loaned interest free, in contrast with the moneylenders who also sit at the Race Course and charge interest between Rs 100 and Rs 200 a day. Repayments to friends could also happen by making bets on their behalf – so the amount they got back could be very different from what they had given. But being “indebted to a friend at the Delhi racecourse did not translate into an emotional bond of trust and generosity that extended beyond the gambling context. At the racecourse, debt between friends concerned the possibility for credit. It was not so much the economic practice of making loans that supported the social practice of friendship or alliance, but, rather, the social practice of friendship that supported the economic practice of giving interest-free loans.”

Puri’s description of these relationships is hard to relate to – they do seem to be friendships, and I guess similar to what people call ‘work friendships’, that are centred around your jobs. But here there is the added intimacy of knowing a lot about each others personal financial lives. Puri’s conclusion makes sense: “Friendships at the racecourse are immersed in the precariousness associated with the game the bettors are sharing in.”

That’s it for this week! If you liked what you read, please consider subscribing to this weekly newsletter.

If you have any comments or suggestions on what could be carried in this column, write to me at jahnavi@cms.thewire.in

Growing Inequality Under Global Capitalism

The main benefits of economic growth are being captured by a tiny elite. Despite global economic stagnation in the last decade, the number of billionaires in the world has increased to a record 2,199.

The main benefits of economic growth are being captured by a tiny elite.

The World Economic Forum (WEF) has described severe income inequality as the biggest risk facing the world. Credit: IPS

Sydney and Kuala Lumpur: Income and wealth inequality has increased in recent decades, but recognition of the role of economic liberalisation and globalisation in exacerbating inequality has never been so widespread. The guardians of global capitalism are nervous, yet little has been done to check, let alone reverse the underlying forces.

Global elite alarmed by growing inequality

The World Economic Forum (WEF) has described severe income inequality as the biggest risk facing the world. WEF founder Klaus Schwab has observed, ‘We have too large a disparity in the world; we need more inclusiveness… If we continue to have un-inclusive growth and we continue with the unemployment situation, particularly youth unemployment, our global society is not sustainable.’

Christine Lagarde, IMF managing director, told political and business leaders at the WEF, “in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability”. Similarly, World Bank president Jim Yong Kim has warned that failure to tackle inequality risked causing social unrest. “It’s going to erupt to a great extent because of these inequalities.”

In the same vein, the influential US Council of Foreign Relations’ journal, Foreign Affairs carried an article cautioning, “Inequality is indeed increasing almost everywhere in the post-industrial capitalist world…. if left unaddressed, rising inequality and economic insecurity can erode social order and generate a populist backlash against the capitalist system at large.”

Much ado about nothing?

Increasingly, the main benefits of economic growth are being captured by a tiny elite. Despite global economic stagnation for almost a decade, the number of billionaires in the world has increased to a record 2,199. The richest 1% of the world’s population now has as much wealth as the rest of the world combined. The world’s eight richest people have as much wealth as the poorer half.

In India, the number of billionaires has increased at least tenfold in the past decade. India now has 111 billionaires, third in the world by country. The largest number of the world’s abject poor also live in the same country – over 425 million, a third of the world’s poor, and well over a third of the country’s population.

Africa had a resource boom for a decade until 2014, but most people there still struggle daily for food, clean water and healthcare. Meanwhile, the number of people living in extreme poverty, according to the World Bank, has grown substantially to at least 330 million from 280 million in 1990.

In Europe, poor people bore the brunt of draconian austerity policies while bank bailouts mainly benefited the moneyed. 122.3 million people, or 24.4% of the population in the EU-28, are at risk of poverty. Between 2009 and 2013, the number of Europeans without enough money to heat their homes or cope with unforeseen expenses, i.e., living with ‘severe material deprivation’, rose by 7.5 million to 50 million people, while the continent is home to 342 billionaires.

In the US, the income share of the top 1% is at its highest level since the eve of the Great Depression, almost nine decades ago. The top 0.01%, or 14,000 American families, own 22.2% of its wealth, while the bottom 90%, over 133 million families, own a meagre 4% of the nation’s wealth. The top 5% of households increased their share of US wealth, especially after the 2008 financial crisis. Meanwhile, the richest 1% tripled their share of US income within a generation.

This unprecedented wealth concentration and the corresponding deprivation of others have generated backlashes, arguably contributing to the victory of Donald Trump in the US presidential election, the Brexit referendum, the strength of Marine Le Pen in France and the alternative for Germany, and the ascendance of the Hindutva right in secular India.

‘Communist’ China and inequality

Meanwhile, China has increasingly participated in and grown rapidly as inequality has risen sharply in the ostensibly communist-ruled country. China has supplied cheaper consumer goods to the world, checking inflation and improving living standards for many. Part of its huge trade surplus – due to relatively low, albeit recently rising wages – has been recycled in financial markets, mainly in the US, which helped expand credit at low interest rates there.

Thus, cheap consumer products and cheap credit have enabled the slowly shrinking ‘middle class’ in the West to mitigate the downward pressure on their living standards despite stagnating or falling real wages and mounting personal and household debt.

China’s export-led development on the basis of low wages has sharply increased income inequality in the world’s largest country for more than three decades. Beijing is the new ‘billionaire capital of the world’, no longer New York. China now has 594 billionaires, 33 more than in the US.

Since the 1980s, income inequality in China has risen faster than most. China now has one of the world’s highest levels of income inequality, rising mainly in the last three decades. The richest 1% of households own a third of the country’s wealth, while the poorest quarter own only 1%. China’s Gini coefficient for income rose to 0.49 in 2012 from 0.3 over three decades before when it was one of the most egalitarian countries in the world. Another survey put China’s income Gini at 0.61 in 2010, greatly exceeding the US’s 0.45.

(IPS)