Wednesday, 30 October 2013

Russian business in developing countries: challenges and perspectives

By Yuriy Zaitsev

The engagement of the Russian Federation into the system of international development assistance, as well as its accession to DAC OECD, implies that Russian authorities plan to allocate extra resources to implement development assistance projects in developing countries.

This is in line with DAC principles, as well as with the principles of innovative development finance. In light of the fiscal problems that the Russian economy is experiencing, the increase of public resources for development aid seems to be an incredible scenario.  That is why new sources of finance are required.

Such sources can be generated by Russian businesses operating in developing countries. It is not only Overseas Development Aid (ODA), but also private capital, which makes a major contribution to the development of capital-scarce developing countries and helps to smooth spending throughout the business cycle in the recipient country.  From a theoretical perspective business and government can be mutually reinforcing in terms of the implementation of corporate social responsibility (CSR) and ODA-related projects in developing countries. What is more, public-private partnership (PPP) can also be a splendid mechanism to unite public and private resources for developing countries. However, in practice Russian businesses lack incentives to engage in development assistance-relevant projects and are underrepresented at the developing countries’ markets.

Public-private partnership (PPP) and corporate social responsibility (CSR) are those mechanisms which could complement the existing and further development assistance programs implemented by Russia and other international donors, as well as to provide positive socioeconomic effects to support business activity. Such kind of cooperation would contribute not only to strengthening the position of national companies in foreign markets, but also to the development of the investment climate, which provides a basis for economic growth.

Nowadays Russian businesses and the government do not have a partnership position on cooperation in developing countries. On the one hand, the Russian government should develop conditions to engage businesses into international development assistance programs. On the other hand businesses should express their own vision regarding where governmental support is needed, providing information on planned projects which correlate with governmental projects in the field of international development assistance.

The mechanisms of PPP and CSR could expand the business’ stimulus to participate in international development assistance programs. The engagement of business into development assistance-related projects could contribute to the establishment of the Russian system for international development assistance, which assumes business to be one of the key partners of development.

Dr. Yuriy Zaitsev is a researcher at the Institute of Applied Economic Studies, Russian Academy of National Economy and Public Administration, Moscow. Dr. Zaytsev is also a Visiting Research Fellow for "Rising Powers in International Development Programme", Institute of Development Studies at Sussex University

You can read the full article, ‘Russian Business Investments in Developing Economies: Problems and Outlook, by Dr Yuriy Zaitsev on the Russian International Affairs Council (RIAC) website.

Thursday, 24 October 2013

More surprises from the IMF?: tax the rich, tax the multinationals

By Carlos Fortin

The IMF's standard policy prescription for dealing with fiscal imbalances in both developed and developing countries is well-known: reduce public expenditure, expand the base of the value-added tax (VAT), curb evasion. Critics have for a long time argued that this approach has a built-in unequalising bias; spending cuts have a more harmful effect on the poor than on the rich; VAT, as a consumption tax, is regressive; and multinational corporations and their wealthy owners are much more able to frustrate efforts at curbing evasion than the ordinary tax payer.

Such criticisms have historically fallen on deaf ears; until now, that is; or so it would seem.

In a previous blog I commented on a June 2013 IMF Working Paper on the distributional effects of fiscal consolidation which finds that fiscal consolidation through reductions of spending Increases inequality. This was seen as a move in the direction of unorthodoxy, albeit a very cautious one and unofficial to boot.(1)

But now an official IMF report seems to take the move further.(2) To be sure, the basic message is still orthodox:
"the scope to raise more revenue is limited in many advanced economies and, where tax ratios are already high, the bulk of adjustment will have to fall on spending … Broadening the base of the value-added tax ranks high in terms of economic efficiency … and can in most cases easily be combined with adequate protection for the poor. In emerging market economies and low-income countries, where the potential for raising revenue is often substantial, improving compliance remains a central challenge."(3)
There is however a frank recognition of the fact that tax systems around the world have become steadily regressive since the 1980s: they rely more on indirect taxes, and within direct taxes the progressivity of the personal income tax has declined, reflecting steep cuts in top marginal tax rates. Therefore, the report says,
"scope seems to exist in many advanced economies to raise more revenue from the top of the income distribution (and in some cases meet a nontrivial share of adjustment needs), if so desired. And there is a strong case in most countries, advanced or developing, for raising substantially more from property taxes … taxes on wealth also offer significant revenue potential at relatively low efficiency costs."(4)
The report goes even further in connection with the need to stop tax evasion and avoidance by multinational corporations which employ devices like base erosion and profit shifting to reduce their tax liabilities. It mentions cases in which the revenue lost to developing countries through tax planning by multinationals is as much as 20 per cent of all tax revenue. This is made possible by the fact that "the international tax framework is broken" and in need of a fundamental overhaul. The conclusion of this analysis: "The chance to review international tax architecture seems to come about once a century; the fundamental issues should not be ducked."

Fighting talk indeed, and certainly very welcome.

Carlos Fortin is an IDS Research Associate currently working on the relationship between the emerging international trade regime and human rights.

1. IMF Working Papers carry a disclaimer that reads: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy".
2. International Monetary Fund, Fiscal Monitor. Taxing Times, World Economic and Financial Surveys, Washington D.C., October 2013
3. Ibid., p. vii
4. Ibid., p. viii

Monday, 21 October 2013

From crisis to transformation? 40 years after the 1973 oil crisis

By Aurelia Figueroa
Photo of Aurelia Figueroa
Both devastating and inspiring, the 1973 oil crisis presented an opportunity to make a change. Like the Fukushima Daiichi nuclear disaster in March 2011, it opened a rare door through which public opinion and policy makers could meet with the common purpose of emerging from a crisis. Looking back today, the 1973 oil crisis can be seen as a turning point in the energy policy debate and the genesis of the energy transition.

Paid in US Dollars, oil exporting nations were negatively impacted by the demise of the Bretton Woods system and sought to improve their profits. The related negotiations between producing nations and western oil companies that preceded the crisis had resulted in failure. Against this backdrop, Western support for Israel in the Yom Kippur War became the ex facie cause of the oil export embargo to the US, the Netherlands, and other allies of Israel.

The crisis had financial impacts at all levels of society in embargoed nations and beyond. Prices at the petrol pump skyrocketed following the first of several production cuts and price hikes implemented by Middle East oil producing nations on 16 October 1973, raising the price of a barrel of oil by 70 per cent. The World War II refrain Don’t Be Fuelish was revived as lines at gas stations snaked into the streets.

The 1973 oil crisis brought remarkable financial gain for producing nations. In developing economies, the oil crisis had a drastic impact on economic development. The immediate impacts of this were lessened by borrowing through petrodollar recycling, whereby the current account surpluses of exporting nations funded the oil imports of developing nations.

In the wake of the crisis, energy security and independence were eagerly sought. The underlying conditions which spurred the upheaval were not transitory – crisis could soon knock again. With the urgency of high fuel prices and uncertain supply, public calls were made for energy independence through improved energy efficiency, renewable energy and increased fossil fuel exploration within domestic borders or Western-friendly nations.

At the international level, it inspired the establishment of the International Energy Agency in 1974 which sought to prevent future oil crises by coordinating oil stocks of Member countries. At the national level, energy standards were spurred, such as the Corporate Average Fuel Economy (CAFE) standards in the US.

Short-term change or long-term transformation?
The changes prompted by the 1973 oil crisis seemed to vindicate the Club of Rome Limits to Growth report published the year before and have left many legacies which continue to impact energy policies and markets today. It is partly responsible for the creation of the German term Energiewende and sparked a debate of a global energy transition which is progressing today at varying speeds among countries and regions.

Perhaps the importance of energy efficiency and conservation would have had a more pervasive effect had the oil crisis lasted longer. The oil price shock lasted for less than a year and as it faded away, so did the urgency of the search for alternative energy sources and energy efficiency in some countries.

Still, technological advancement sparked by the 1973 oil crisis has gradually improved the cost-benefit calculus in favour of energy efficiency and renewable energy. Yet much progress is still to be made regarding technical and non-technical barriers on the path to implementation. Low carbon development must emerge within a world based on fossil fuel infrastructure. This compounds the innovation challenge and makes the emergence of low carbon energy technologies all the more difficult.

40 years on
In 1973, Western decision makers were blessed and cursed with the mandate to achieve energy independence and security. In that instant, the oil crisis was the deus ex machina in the energy policy saga. Yet with the exit of its workings of high energy prices in some countries, so did the potential for it to change the storyline also fade.

The change that began in 1973 in the heat of crisis has since followed the trend of energy prices; the urgency to implement energy efficiency and find alternative fuel sources rises and falls largely in sync. This unstable movement creates a market full of uncertainty for low carbon development and compounds the risk for potential investors and consumers.

The 1973 oil crisis formed the basis for the energy transition, the progress of which has been uneven. While the energy security challenges of the crisis lie dormant in relatively stable times, the urgency of implementing a resilient energy transition persists. Today as 40 years ago, energy efficiency and renewable energy sources remain key elements of a resilient energy system that is prepared for the next crisis – whenever that comes.

Aurelia Rochelle Figueroa is a researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), a strategic partner of IDS for work on the green transformation. Aurelia specialises in the energy sector and is a member of the Emerging Leaders in Energy and Environmental Policy Network.

A version of this blog post appeared online on 14 October 2013 in DIE’s The Current Column.

Monday, 14 October 2013

Why Are ‘They’ So Interested In ‘Us’? Distance, myths and imagination between China and the West

By Xiuli Xu

When I first started my journey into development studies, the field held little interest in China. In various buzzing international conferences on popular topics such as governance, gender, natural resource management, decentralisation and participation, most cases were from Africa, Philippines, Mexico, Brazil, India, etc., with much less reference to China’s experiences.

Ten years later, I suddenly find the pendulum has swung the other way.

The burgeoning academic and public debates on China’s internal development experiences and, in particular, its engagement in Africa are increasingly preoccupying journal articles and the global media. The role of China in both the traditional Bretton Woods system, and newly initiated G20 and BRICS architecture, as well as various thematic summits on climate change, food security, and poverty reduction, has attracted wide attention.

Contention has often arisen around demands from the West for China to be a 'responsible stakeholder' 1, or allegations from the West that China’s engagement in Africa is a ‘new form of colonialism’ (through resource grabbing, labour rights abuses, erosion of good governance, environmental pollution, etc) .

How can China better understand this global shift in dialogue and power, communicate better with the West, and ultimately shape the future international system? This has posed a great challenge for the Chinese government and academia, most of whom, up until now, have focused their attention on internal affairs.

‘Distance’, myths and imagination between China and the West

Much of the West was astonished to see China’s robust economic growth continue consistently over the last three decades, particularly in recent years, emphasized by a boom in overseas mergers and acquisitions. Many Chinese have, in turn, been shocked to see China depicted as an expressionless huge powerful man with army uniform in the shadow behind piles of overseas assets  in the global media. Both responses are fuelled by the ‘distance’, myths and imagination between China and the West.

Distance creates myths, and myths stimulate imagination which may be far from the reality. This distance is not just physical, but also social, cultural, and ideological.

Since the late Ming Dynasty, and following ongoing disruption from unbalanced trade relationships with and invasion by western powers from the 1840s, China chose to focus on domestic issues. This was accentuated by the ‘closed door policy, particularly to the West, implemented in Mao’s era alongside the powerful discourse of ‘independence and self-reliance’ (duli zizhu, zili gengsheng). It was not until after the reform at the end of the 1970’s that the ‘open door’ (gaige kaifang) policy was reintroduced.

China's 'Introducing in' and 'going out' policies

China started to attract foreign direct investment and aid, referred to this as ‘introducing in’ (yinjinlai), from western countries. Gradually China participated in more and more international organisations, such as the UN, World Bank, IMF, WTO, G20, etc.  China also started to enhance its overseas investment and aid under the strategies of ‘going out’ (zouchuqu), particularly since the turn of this century. In China’s 12th Five-year for Economic and Social Development (doc) (shierwu fazhanguihua), for the first time, the strategy of ‘going out’2  ranks ahead of ‘introducing in’(yinjinlai).

However, ‘going global’ is just starting.

In fact, for many Chinese the world is still quite stereotyped and dichotomised. Their conception of the “outside world”, typically Europe and the USA, is of one that is more advanced than China, meaning that China needs to work hard to catch up. This collective belief was born and reinforced by the invasion of China by modern powers, and was a move away from the ancient Chinese worldview of ‘tianxia’ which has China as the center of the world. In this view, there is no objectification of “self” and the “world”, since boundaries between the ancient Chinese empire and other lands had not yet been drawn.

As more and more Chinese gain overseas experiences through tourism, business, and education, so will collective beliefs become more dynamic and diverse.

Encounter and intertwinement 3 : the complexity of ‘them’ and ‘us’

Phrases such as ‘development encounter’, ‘knowledge encounter’ and ‘cultural encounter’ have evolved, partially in response to the rise of BRICS countries, with China at the forefront, and its implications for the current international development system. However, in reality since the 1980s, globalisation has been more an intertwinement than an encounter.

In Professor Nolan’s new book, ‘Is China Buying the World’, he describes how the new round of international business revolution, characterised by cascade effect with ‘systems integrator’ down to suppliers, is resulting in  mutual embeddedness of multinational corporations (MNCs) both from western countries and from China. He argues that high-income countries consider their giant firms to be deeply embedded in the Chinese business system, whereas Chinese firms have a negligible presence in high-income countries - “we are ‘inside them’ but they are not yet ‘inside us’”. However, he also reminds us of the complexity of ‘us’ and ‘them’ in the era of capitalist globalisation, emphasising that China’s ‘going out’ has only just started.

The nature of mutual embeddedness and fusion in the new globalisation era, not only in business and investment but also, to varying degrees, in aid, has reshaped the nature of international relationships. Encounters and intertwinement between China and the West are already bridging distances and creating spaces for mutual understanding and learning, through interaction, and thus is contributing to the demystification and reshaping of mutual imagination about each other in the long term.

With the above context in mind, an awareness of this ‘interest’ from the West, an understanding of ‘why they are so interested in us’, and an ability to communicate and react properly to the West’s ‘interest’ in China, might serve as a good start for the Chinese, and vice versa.

1. This proposition asking China to be a ‘responsible stakeholder’ was first raised by Robert Zoelick, the former president of World Bank, in 2005.
2.  Narrowly defining, ‘going out’ means China’s overseas investment in particular. Broadly defining, ‘going out’ includes overseas investment, aid, trade and even sending expertise or labors.
3.  Ackowledgements to Jin Zhang from Judge Business School of the University of Cambridge for the discussion on encounter and intertwinement, where I got some enlightenment in writing.

Professor Xiuli Xu is Associate Professor of Development Studies at the Research Center for International Development (RCID), College of Humanities and Development Studies (COHD), China Agricultural University, Beijing, China (CAU). She was recently a Visiting Fellow at IDS as part of the Development Studies Learning Partnership (DSLP), Rising Powers in International Development Programme (RPID).