Category Archives: International Relations

Tax: can we find someone to blame?

If you’re a regular reader, you may know that I work in Luxembourg, and in tax. To many, those key words are enough to see dollar signs rolling in front of your eyes. So when the ‘LuxLeaks’ scandal broke out, it provided justification to many around the world: “those quasi-tax haven countries are unjust”; “they cheat”; “they’re becoming more and more powerful”; “they’re being utilised more and more by an increasingly wealthy elite to evade tax”. Do you think that’s true? Then did you also think the same about Panama?

A journalist organisation recently unleashed nearly 40 years of a Panamanian law firm’s records, which exemplifies how many prominent political figures and wealthy people have used offshore bank accounts to conceal assets. The Prime Minister of Iceland lost his job over the scandal. But it’s also tarnished the reputation of more than 140 other politicians and public officials from around the world – Ukraine, Argentina, Russia, China, Britain, and many others.

Some people ask so what? They quote Judge Learned Hand:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

It’s a great quote, since it unveils the hypocrisy of many critics. Yes, people do make voluntary donations to the state. But they’re the minority. Most people use every available legal tool to lessen their tax burden, and if they had the wealth to invest somewhere with less tax, would do so in a heartbeat. What’s more, capitalism encourages people to do whatever is legally permissible in order to maximise their capital assets. Thus within the rules of the game, it is not only perfectly reasonable, but more than that positive, to see people increasing their wealth with tax. Is there someone to blame?

Let’s take the example of British Prime Minister David Cameron’s late father. As a multi-millionaire stockbroker, he registered his own investment fund in Panama, and personally managed it until his death. Through this fund, the elder Cameron was a client of Mossack Fonseca – the Panamanian law firm in question. And even the fund’s prospectus explicitly stated that the fund intended to remain resident outside of the UK for tax purposes. So did the elder Cameron do wrong by using taxes to maximise his capital within a system called capitalism? Or is that system at fault?

Richard Hay, a specialist legal counsel to various British offshore centres, summarises the question well:

“There’s no surprise that criminals carry on activities in financial centres, because that’s where the money is. The real question is whether it is systemic.”

One of the main reasons why this story in Panama has attracted such attention is the widespread assumption that such criminal, or at least borderline criminal, activity is widespread. Although Mossack Fonseca itself claims that it applied all KYC (Know Your Customer) and AML (Anti-Money Laundering) due diligence procedures, the ICIJ (International Consortium of Investigative Journalists) reported that many banks, law firms and third parties involved in the transactions referred to failed to adhere to legal requirements. In other words, they did not carry out sufficient due diligence to ensure that their clients weren’t involved in criminal enterprises, tax evasion (illegal), or political corruption. Some of the documents even show that intermediaries deliberately acted to conceal certain transactions.

As a FATCA and CRS specialist, it’s my job to put due diligence procedures in place, and ensure they’re 2016-04-28 (2)implemented. So I have sufficient insight into this world to understand that it is not only possible, but indeed highly probable that sufficient due diligence was not carried out. Yet please don’t read any sort of conspiracy into what I say. It’s great that more focus is being given to the issues at hand in the press, and by politicians. But international cooperation on this matter is already getting better at a break-neck pace, and has has been for many years – especially following the 07/08 financial crisis. Indeed you need only take a random snippet from the FATF recommendations (international standards on combatting money laundering and the financing of terrorism and proliferation) to have a guess at how many institutions around the world will/will not be able to accord with such requirements in the next couple of years:

“Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.”

Given the number and complexity of new laws and regulations that companies need to comply with, and the fact that none of the due diligence work is funded by governments, it’s no wonder that application varies from one institution to the next. And can individual countries even monitor all the data that’s currently being requested? Of course they can’t!!

Therefore, although responsible individuals always have to take blame, I have to say that the ultimate fault, or problem, lies with the system itself. Yes, the days when secrecy was one of the main selling points for ‘tax havens’ is fast becoming history. But nonetheless the lack of a truly global tax organisation – similar to the WTO, but for tax purposes – is a significant hindrance to any truly synchronised efforts at tackling tax evasion. Such a tax organisation (and no the OECD does not, and cannot fill this requirement) would bring FATCA, CRS, UK CDOT, BEPS, and perhaps even model tax conventions, and bilateral tax agreements under its umbrella. With such oversight it could easily replace many of the complicated requirements with a simpler, and at the same time more rigorous, set of compliance requirements. But more than that, it could work towards rebalancing the existing inequities of the international tax system, which presently give huge bias to certain countries (and not just tax havens).

Does the State Have Real Power to Intervene in the Economy Today?

The latest Journal of Labour Economics (Uni of Chicago Press) features an essay entitled “The Detaxation of Overtime Hours: Lessons from the French Experiment.” The data does show an increase in the number of overtime hours claimed, which was the intention of the law. However data gathered about the number of hours worked (the particular focus is on trans-border workers, who should theoretically come to work less overtime than French workers after October 2007) shows that:

“The detaxation of overtime hours has had no significant effect on length of time worked.”

The law did nothing to change earlier laws or regulations concerning the working week (which was capped prior to 2007). It simply changed the cost of working overtime. And as such, according to the authors (Pierre Cahuc and Stephane Carcillo), despite the popularity of this same policy in other European countries (e.g. Austria, Belgium, Italy and Luxembourg), its result is simply to aid tax optimisation.

French 35 Hr Working WeekWithin the context of the French socio-economy this article and argument may strike you as being one among many overtly, and obviously political manoeuvres in what is today a highly divided society between the left and right wings of politics. However, there is a wider point at play, and a more international one. In an increasingly globalised world (and by globalised I actually refer to devolution as well as internationalisation), how much power do state politicians truly have over the economy (it’s a big enough topic already so please stick to economics if you comment)? And if such powers are different in extent to how they were in the past, then what is the shape of that trend? Are we on a plateau today? Or will the future see politicians at the state level become completely redundant?

According to a growing consensus, the result of modern globalisation has been a dominance of the markets and capitalists over the power of democracy and state governance. But in many ways this consensus is a shame, because it means that few people discuss the extent of government power anymore; they only discuss whether it is good or bad that it has declined, and will continue to do so. Furthermore, there is evidence to suggest that globalisation is not always the prime culprit behind such reduced power.

In the above example Cahuc and Carcillo do not argue that exempting overtime income from tax is ineffective because the global markets have a more powerful impact on the amount of overtime demanded or supplied. They argue that it is ineffective because it ignores some of the most fundamental principles of fiscal planning. If taxation is to be efficient then it must define a tax base that the authorities can easily verify, and checking the amount of overtime actually worked, as opposed to how much is declared, is almost impossible for the Tax Authorities and/or withholding agent, to accurately verify. Indeed, although they do not mention it in the article, one could go to the very roots of the subject. In ‘Wealth of Nations’ Adam Smith proposed four canons (principles) by which tax can be assessed: efficiency, fairness, certainty and convenience. It could be argued that exempting overtime income fails all four of these.

  1. Efficiency has been discussed already. It requires an easily identifiable tax base.
  2. On the matter of fairness, some have less verifiable hours than others, and often these people tend to be richer to start off with.
  3. The criteria of certainty is all about simplicity. The more complex the tax system becomes, and the less that the general public know about which parts of their income are taxed in which way, the less certain everything becomes.
  4. Convenience is about how easy it is to find out what’s owed, and how easy it is to collect the money. As already discussed, overtime hours hours not recorded but actually worked, is incredibly difficult to actually check.

Failures in these four areas suggest that rather than globalisation, it may often be sheer incompetence on the government’s side which causes an ineffectiveness of economic intervention. Clearly this is a subjective view, and it’s not necessarily one that I am advancing. However remember that the term ‘globalisation’ was barely even discussed before the late eighties. And yet the ability of governments to manage, plan and/or regulate their economies has been limited since well before.

Policy Area How did it Affect Economic Governance?
The Rise of Monetarism & Fall of Keynesianism Since the late seventies Keynesian macro-management has been largely discredited, Monetary Policy has taken precedence over Fiscal Policy, and Monetary Policy decision making has been outsourced to independent Central Banks.
Tax Resistance The ‘race to the bottom’, in which governments compete to attract rich residents with low rates of tax, is not the only reason for tax resistance. Think about the Boston Tea Party – what started the American Revolution was essentially tax resistance. And what about Hoover’s tax cuts in 1929? He cut marginal tax rates to the lowest point in modern history, a long time before modern globalisation.
Privatisation Speaking historically, privatisation was less about increased efficiency, and more about simple costs. Looking at examples like British Steel, privatisation occurred prior to globalisation, and was implemented as a way of getting rid of subsidies from the Exchequer.
Moves to Restrict Social Provisions and Benefits These also started prior to the modern period of globalisation. Extensive taxation, designed to redistribute wealth from poor to rich, was rejected by electorates around the world, particularly, and probably firstly, in the US.

According to Robert Skidelsky, an academic often referred to as today’s most prominent biographer of John Maynard Keynes:

“Globalisation is as much a consequence, as a cause of declining government power.”

Such a statement starts one thinking about the Japanese fiscal stimulation of the 90s, and those employed by many Economic Intervention Antisince the 08-09 financial crisis. It brings to mind the rise of China. And it also brings to mind left wing leaders from Latin America like Hugo Chavez and Evo Morales. In 2005 the BBC reported that out of 350 million people in Economic Intervention ProLatin America, 3 out of 4 lived in countries with left leaning Presidents. It’s become so significant a trend in Latin America that it has been given a name – “the pink tide”. And despite what many have said about their success, there have been successes.

So, does the state have real power to intervene in the economy in the modern, globalised world of today?

Human Conflicts come from Structural Disequilibrium

Sigmund Freud assumed that humanity bares a sinister instinct of self-destruction, which acts as the counterpart to all other instincts preserving life. It’s a psychological argument that human agency is at fault for all conflict, and as K.Waltz (Man, the State and War) once said, in trying to explain everything with psychology, such proponents ended up explaining nothing; for how can we stop two innately violent people fighting, other than by keeping them apart? Konrad Lorenz (scientist and author of ‘On Aggression’) put such weight on the importance of agency that he ended his book with the hope that we will evolve beyond our more base instincts.

“I believe that reason can and will exert a selection pressure in the right direction. I believe that this, in the not too distant future, will endow our descendants with the faculty of fulfilling the greatest and most beautiful of all commandments [that love and friendship should embrace all of humanity].”

Your FaultSuch arguments see the locus of the important causes of war to be found in the nature and behaviour of humanity. Confucius put it even more simply when he said

“There is deceit and cunning and from these wars arise.”

It’s actually a little bit of a blame game. But what if we weren’t programmed to be violent? What if violence and tensions arose only as a result of imbalances/disequilibria between different structures?

The causes of civil war was the topic of my undergrad dissertation. It was in fact a terrible piece as I only had a few days to write it up. But my research was extensive, and I hadn’t since challenged my basic premise that no single cause of war should be highlighted above the others – until this last weekend. Up until then I separated individual agency from the structures that they lived within, and so had to admit that our innate tendency towards violence could be one explanation of conflict. But I was wrong.

I was refuting (or trying to) an argument that we should base our diets on what the eco-system permits, by arguing that morality should supersede economic logic. I said that each way of thinking, whether it be economic in the thought process employed, or moral, or whatever else, is a lens through which we see the world. Sometimes, after an event has taken place, someone might call you stupid, and provide you with an argument that in hindsight seems obvious, but for some reason you completely overlooked at the time. It doesn’t mean you’re stupid; you were capable of thinking of that on your own. You just weren’t seeing through that particular lens at the time. Put simply, we don’t employ all lenses equally, because we have built them as internal structures within our mind, and used them since birth to make decisions.

lenses through which we see the worldIn every day life we are required to think economically, politically and socially. It’s essential to the tasks that modern economies expect us to perform. And yet it’s quite hard to discover who is moral and who is not. Perhaps more scarily, for many societies it’s as socially acceptable to joke about not being moral as it is to joke about not being clever. And when we do hear someone joking about not being very clever, we usually have an instinctive judgement reaction. We’re able to agree or disagree, even if we don’t actually say what we think. But what about when someone jokes about not being a good person? Then, it can be very hard to judge. Our moral lens is simply less frequently used than our economic one, and as a result it’s slower to adapt.

Right now you exist within an economy. You probably go to work, pay the bills, pay your taxes. In short, you lead quite a rigid lifestyle economically speaking. And yet put into the state of nature, with no economic structure in sight, you’re very likely to start thinking in terms of survival. ‘OK. I need food, water, shelter, safety, warmth.’ Given such a scenario even a devout moral vegetarian will become immediately aware that their eco-system has changed. They’re placed firmly back into the food chain, and will probably hunt and eat meat. But, will they have spent time to make a moral justification? Or will they be fine with the economic one, that their survival rests on their eating meat? Perhaps eventually that person will think of a truly moral justification. But it takes more time for that moral structure to adapt, and thus our immediate economic actions aren’t always the most moral.

It was when I made this argument about the different modes of thinking, and the speed of adaptation for each, that I realised I was thinking structurally. And when in the above example one structure adapts at a different speed to another, there arises a disequilibrium between the internal moral structure for decision-making, and the internal economic one. When the need arises we do what we have to, even if the next day we may feel guilty. Or in other words, these lenses through which we perceive the world are structural components of our thought processes, just as the economy, state, society, and international arena are all structural components of the world order. When those structures are imbalanced, or moving at different speeds, the result is an outpouring of emotions, and potentially aggressive behaviour (this behaviour can be aimed inwards or outwards). Just because we have a natural potential for aggressive behaviour does not mean that natures forces our hand. Even the actions of individual agencies are ruled by structures.

Just in the interests of explanation think about an economy which rapidly grows, while the state structure remains relatively stagnant, and although social expectations rise, little socially actually changes. Russia at the outbreak of the First World War fits this example perfectly. Socio-political expectations rose along with the economic reality, and yet when these expectations weren’t met, frustration and aggression was the result. So when it entered WW1 it entered with severe structural disequilibria, and when it left, it did so to civil war.

Plate SpinningThe best way to think about how structures cause conflict is to picture a game of Plate Spinning (a game where plates are kept from falling to the floor by spinning them atop of a series of poles). If one of the plates begins to spin at a slower speed than all of the others then it begins to wobble. There is an immediate disequilibrium between the different plates, and potential for damage if the plate is allowed to fall. My contention is that each of these plates represents a different structure; or rather each of the poles and people spinning represents a different structure, and the plates represent the visible agencies who are seen to be causing conflict, but are in reality only reacting to structures which have changed their behaviour out of sync with their partners.

What do you think?

21st Century Thought in IR

WW2 VictoryThe effects of World War Two in International Relations are numerous, with only the most obvious below.

  1. The loss of life led to obvious demographic, socio-psychological and economic impacts
  2. Decolonisation after the war led to a re-mapping of the geo-political environment
  3. The international power centre shifted from Europe to the US and USSR
  4. New international bodies emerged e.g. the Bretton Woods Institutions

These effects are well known. Indeed it was the biggest war that humanity has ever experienced, directly involving  over 100 million people, and from more than 30 different countries. So such effects are even expected.

However, one of the most enduring impacts of WW2 has also been one of the least talked about: the entrenchment of political thought. Appeasement is now seen as wrong. There is seen to be no choice other than capitalism or socialism, democracy or dictatorship and liberalism or conservatism; when in reality the number of options that we have is far far larger. And all of these entrenchments seem to based upon two dangerous assumptions: the assumption of knowledge, and the assumption of righteousness i.e. the arrogance of assuming that ‘we’, the subject(s) of contemplation, are always in the right.

It could be argued that we have always held these assumptions, and that they are an implicit part of human nature. And yet not only are they very illiberal and non-cosmopolitan assumptions to hold; it is also a fairly safe thing to say that there have been more conflicts since WW2 than before, year on year. The U. of Michigan’s “Correlates of War” project documents every conflict since 1816, and according to their calculations
there have been a total of 194 actual “wars” between 1945 and 2001, and that does not include the more than 3000 different disputes that occurred in the period. So was it just circumstance that caused these polarisations, divides and tensions? Or was there a fundamental change in the way we think?

The American philosopher Avital Ronell believes that increased moralistic interventions abroad do stem from such assumptions.

The other is so in excess of anything you can understand or grasp or reduce, this in itself creates an ethical relatedness… A relation without relation, because you can’t presume to know or grasp the other. The minute you think you know the other, you are ready to kill them! You think oh! They are doing this or this.. they’re the axis of evil…let’s drop some bombs!. But, if you don’t know, don’t understand this alterity, it’s so other that you can’t violate it with your sense of understanding; then you have to let it live.”

According to Derrida we cannot be moral if we think that we are in fact moral. In other words, if you’re arrogant enough to think that you’re fulfilling what Peter Singer would call your moral obligations to help others, then you’re not questioning yourself enough, and not pushing yourself enough. Thus we could push the argument of Avital Ronell still further (since she cited Derrida’s above argument when saying the above), to suggest that the increase of military interventions in international relations marks a decline in international morality.

Personally, I wouldn’t buy the notion that we are becoming less moral. After all, we don’t need to know someone else to kill them; indeed being able to kill someone when you do have such knowledge seems even more immoral to many people. We can kill instead based on an educated guess. In fact humans act on guesswork all the time. What Ronell is really saying is a values statement that when we know the risks are large, and yet the probabilities of reaching our desired outcome are unknown, we should be risk averse. Just because liberal interventionists are less risk averse, or choose to weigh the unknown probability of success against the unknown probability that more will die if intervention is not carried out, it does not make them less moral than non-interventionists. And indeed the opposite argument could also be made.

Assume NothingThe more pertinent question therefore, is whether these assumptions of knowledge and righteousness are more present, and/or having a greater impact on international affairs today or not. After all, modern examples seem very easy to find. It is why the logic behind why Samuel Huntington’s thesis on the ‘Clash of Civilisations’ seems so compelling. It is the reason why despite the fact that the world is becoming increasingly globalised and cosmopolitan, we see signs of the ‘other’ everywhere. It is the logic behind liberal interventionism, the interventions in the Middle East, Zionist militarism, and even the calls from those inside the affected countries e.g. Syria, for outside help.

Whatever its source, they are dangerous assumptions to hold if we let them dominate twenty-first century thought. The extent to which this is true can be seen in the handling of Russia’s Crimean intervention. The calls are not for Russia to come to the negotiation table, delay the annexation of Crimea, or organise a new referendum conducted under UN supervision. These options are seen as weak, and a form of appeasement, which, despite the fact that Hitler is dead, would only create a new Hitler. So instead, the calls on Russia are for them to simply back down, reject their long cultural history of expansionism and pan-Slavism, and see them adopt the culture and tactics of the United States – the single country which it would most humiliate Russia, and particularly Putin, to be seen emulating. Keynes wrote a pamphlet in 1919, arguing how the world’s tough approach to Germany would cause trouble. And of course he was right. Are we learning the wrong lesson(s) from history?

Do you believe that the assumptions of knowledge and righteousness dominate 21st century diplomatic thought more than they did prior to WW2? What has changed that led us here? And where will it lead us in the future?

“Never believe that a few caring people can’t change the world. For, indeed, that’s all who ever have.” Is she right?

Margaret MeadMargaret Mead was a twentieth century anthropologist, whose work greatly influenced those campaigning for equal rights in the sixties and seventies. The above quote is perhaps her most famous, and in recent years this message has appeared all over popular media, and throughout much of twenty first century culture.

The 2006 music video for “If Everyone Cared” by Nickelback ends with her quote. It’s used in the TV series the West Wing. And it was essentially the central philosophy of Barrack Obama’s presidential campaign: “Yes we can. Change we can believe in. Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.”

Yet when we’re thinking about these quotes, we’re not thinking about the sorts of changes that President Obama has managed to realise (don’t misunderstand me here; I’m a huge Obama fan). We’re thinking about pivotal changes in human history; the sort that historians are likely to refer back to. In this modern world, can such momentous changes still be realised by a “few caring people”?

As an example, Liberal Interventionism has been one of the hottest topics in the media throughout this century. In 1999 the UK Prime Minister Tony Blair, in his Chicago speech, outlined his doctrine of Liberal Interventionism. And a Liberal Interventionyear later the UK’s intervention in the Sierra Leone Civil War was seen as a great success. Furthermore, orders for intervention in Sierra Leone did not come from a huge collective government, but in fact from a renegade Brigadier David Richards, who saw the chance to intervene, and took it without permission. So you could even argue that a few, or even one person, really did change the world here. Subsequent interventions have also been justified on moral grounds e.g. Afghanistan, Iraq and Libya, with much less consensus as to the success of these missions. But more to the point, there has been a common thread throughout each of these interventions. And that thread of logic echoes the thought of American pragmatists, of Japanese leaders during WW2, of Napoleon during the Napoleonic Wars, and even right back to the works of Thucydides, an ancient Greek historian who wrote the History of the Peloponnesian War, and is also cited as an intellectual forbearer of ‘realpolitik’. That thread of thought is quite simply, the importance, and dominance, of power.

Hobbes’ method of reasoning provides a good example of this realist motivation for intervention. He started his argument, in his famous work ‘Leviathan’, with a kind of Cartesian thinking. Similar to the way Descartes started with his base assumption that thought proves existence, Hobbes said that as little as we can be sure of, we can at least be sure that humans are attracted to pleasure, and repelled by pain. As we can be sure of this much, said Hobbes, it goes to reason that what we all seek, and will always continue to seek, is the power to act on these attractions and repulsions. It is why he reasoned that in a state of nature life would be “nasty, brutish and short”, since without any kind of civilisation we would all be out to increase our own power.

Why do I use these examples? Because the world’s focus on Ukraine is indicative of all the above. The message from western interveners is that the Russian intervention and referendum in the Crimea was illegitimate, and abused Ukrainian sovereignty i.e. we want to help people, and we believe that we can change the world and make it more peaceful. In reality however, such intervention is both an example of power politics, and also quite frankly playground politics. The Russian intervention bears a lot of similarities to recent Western interventions. It is debatably legal in terms of international law. And although the referendum in Crimea should have been organised in different times, and under the supervision of the UN, I have not heard Westerners suggest this. Instead, they simply reject any sort of referendum, and in a blatantly childish manner, simply assume that what’s needed is a good old fashioned, gun-slinging approach of anti-appeasement i.e. if we show we’re the stronger party, we’ll win; life is a competition and we want to be the biggest bully in the playground.

It’s unlikely much of this is blatant, or even realised. The simple fact that the EU managed to achieve unanimity in deciding that they would impose sanctions on Russia goes to show that Western decision makers do believe they are in the right, and are acting morally. But our resources, and our ability to act, is finite. And what about the places where we can really help? How many children need to be decapitated in the Central African Republic before we intervene there? The UN says there is a real risk of genocide. But how many rapes are needed? How many mutations and acts of torture? How many murders are needed before we even start to think in such a way?

We can't changeThere is no power to gain in the Central African Republic. There is in re-igniting old Cold War tensions. So what would it take for us to change this much? What would it take for countries to actually intervene for moral reasons, as opposed to reasons of power? If Margaret Mead is right, then a few caring people can achieve such a change in international relations, and perhaps, depending on whether you agree with Hobbes, even a change in human nature. Do you think she was right? Are these changes really possible?

What is the world’s biggest security threat today?

Are we talking of a possible World War 3? Are we talking about global warming? Or are we talking the Great Recession (my name for the current economic turmoil)? Each one is a huge security risk, and I’d love to hear your personal views. But as for mine, the first two are long term concerns, whereas the latter has multiple concerns that in my view have even greater need of immediate action. Below, I’ve listed my thoughts about some of what I feel to be the biggest concerns:

Iran

The oil prices are going up; there’s been a recent threat to close the Straits of Hormuz, which would push up oil prices even further; there looks to be no more chance of coming to an agreement on what we all suspect to be Iran’s nuclear weapons development; relations with Israel are no better; and those with the power to back up existing sanctions on Iran are massively over-extended. So Iran seems to be a concern on many levels.

The Eurozone Debt Crisis

So many people cite this as a problem that it’s hardly worth mentioning it anymore. But it is nonetheless a significant problem area, and perhaps the world’s biggest. If Greece pulls out of the Eurozone it’s not the end of the world. Even if the Eurozone ceases to be there could still be hope for the world economy. But Greece is almost certain to default if current trends are continued, and the markets have known this for a long time, which is precisely the problem. Governments and politicians are not responding to economic changes fast enough, or even acknowledging basic economic lessons until weeks or even months after everyone else seems to have done. So yes the Eurozone Debt Crisis is an enormous security risk to the world. But it makes my top list largely because it’s so simple a problem. It is a basic economic fact that fiscal and monetary policy need to be balanced. So we knew years before this crisis came along that one day the Eurozone would have to choose to either split up, or embark upon closer fiscal integration. The fact that so few politicians are strong enough to stand up and admit this basic fact is frightening indeed!

Chinese Property Crash

Continued high levels of growth in China has been one of the main supports for the troubled world economy. Remove that support and who knows what kind of turmoil awaits us.

A professor of political science from Beijing University thinks that within a couple of years property holders in Beijing could be on their knees begging people to buy their properties. He recently said that in the “last couple of years people cried wolf, but this time it’s real.” Prices in Beijing and Shanghai are already on the slide. And China is already adding the equivalent of the entire housing stock of Spain every year. This is unsustainable, considering that the pace of urbanisation looks likely to slow in coming years. In fact the professor quoted above, can’t actually afford a house in Beijing. If professors can’t then who can?

Of course to a very large degree this is a policy induced slowdown in response to China’s economy overheating. Within China there are a lot of people who want to buy property; they just want to make sure that they’re buying when prices are going up, and not down. So in part this threat to the Chinese property market is a short term cyclical one. If the government acts to support the property market, and decides to remove restrictions on property transactions, such as the amount of deposit that needs to be put down and the number of properties you can buy, then there seems to be reason to believe that the property market will continue along its recent growth trends.

However, China’s economic concerns are the world’s economic concerns, and as far as this one goes it’s a big one. You may think that China is far away, and maybe that you’re not employed in the property sector. But if you are thinking that then think again. Construction directly amounts to around 10% of the Chinese economy. If you then add all the secondary industries like building materials and services we’re in fact looking at closer to 25-30% of the economy. Imagine what a big slump in this big a part of the world’s number 2 economy would do for your confidence levels if you were an investor. Declining confidence levels would probably have the biggest impact around the world economy. But more directly, think of all the industries related to property. There are hundreds right? And many of these are situated outside of China, or support other businesses outside of China. Next imagine all the companies linked to these hundreds, and then those linked into them. We live in a globalised world, which means that whatever happens to one country’s economy will have an influence on every other economy. So even if your job’s secured, this would affect you.

Security Concerns in the Pacific

In addition to the potential for a Chinese property market crash there is a great deal of concern stemming from the Pacific region. Simply from China there is a fundamental, growing gap between rural and urban regions, less investment opportunities than there once seemed to be, huge levels of over-investment from the state (for example the 2008 Olympics area is now already in a state of disrepair), and knowledge that in the not too distant future China’s one child policy will be creating extreme demographic pressures.

In North Korea, so little is known about the new leader (Kim Jong Un) that we all have to be on our toes with regards to Asia’s trouble maker.

And the opposition candidate (from the Democratic Progressive Party) in Taiwan’s upcoming Presidential election is far less pro-China than the incumbent, meaning that we could see a much more tense relation between Taiwan and China in the coming years.

All of this grants reason to believe that the US’s recent decision to name the Pacific region as an increased risk was not the act of a regional “trouble maker” as an officially sanctioned statement from one of China’s top generals said. However this kind of language, and these kinds of events that are open for different interpretations, are commonplace between China and the US. So we should also be looking at possible future tensions over territorial zones such as the South China Sea (through which $5 trillion in trade sails annually).

Indeed, China’s military capabilities and deployment is growing daily. And the new US defence policy will be expanding US military presence in Asia too (though shrink the overall size of the force worldwide). Australia’s Washington Correspondent even had to reassure listeners that “it’s not a containment strategy”.

All these factors are reasons for concern by investors. And yet I’ve barely scratched the surface. But hopefully it’s food for thought. What do you think about the world’s biggest security threat(s) today?

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