Robert Wade on Corruption Poverty

8/13/2019 Robert Wade on Corruption Poverty

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http://triplecrisis.com/poverty-corruption-and-the-changing-world-1950-2050/

POVERTY, CORRUPTION AND THE CHANGING WORLD

Robert Wade

On May 29 2013 James Wolfensohn, president of the World Bank from 1995 to 2005, gave the Amartya

Sen lecture at the London School of Economics, on the subject, Reflections on a changing world, 1950-

2050.

His reflections on the changing world were mainly reflections on what he achieved as World Bank

president. He emphasised five.

Re-focusing the World Bankand the whole development community on poverty as thecentral issue of development.

Elevating corruption as a major development problem, instead of sweeping it underthecarpet.

Writing-down countries debt (especially African) so that World Bank loans no longer wentstraight out the door to western banks and instead were used for investment in the country.

Putting Bank operations in a particular country in the context of a broad vision of the economysfuture development path five to ten years ahead, in the format of his Comprehensive

Development Framework (CDF).

Decentralizing World Bank operations, so that more of the total staff operated from regional orcountry offices rather than from headquarters in Washington DC, and more meetings with

shareholding states were held in borrowing countries rather than in Washington or Paris.

Here I comment on the first two: poverty reduction as the central goal of development, and corruption

as an explicitly stated problem. I put them in historical context, not least because the World Bank

operates without memory of its own historyas seen in the fact that most Executive Directors (the civil

servants of member countries who constitute the 25 seat Executive Board, which governs the Bank on a

day-to-day basis) and also most staff have never even heard of, let alone read any of The World Bank: Its

First Half Century, the independently written but semi-official history published by Brookings Institution

in 1997. For most of the time since it was published the World Bank book shop has not even stocked it,on the ostensible grounds that the Bank did not publish it. Or to be more exact, these are my findings

from asking just about every staff member and Executive Director Ive met since 1997 about the two-

volume history, and from enquiring about its availability on every visit to the Bank. I have a vested

interest, as author of chapter 13, Greening the Bank: The struggle over theenvironment, 1970-1995,

volume 2, pp.611-734.

Poverty reduction and inequality
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Wolfensohns elevation of poverty reduction as the central goal echoes then World Bank president

Robert McNamara in 1973, forty years ago, who solemnly proposed in a speech in Nairobi, Kenya, a

new strategy. The ambitious objective of the new strategy was to eradicate absolute poverty by the

end of this century (that is, 2000). He explained that this goal was possible because if courageous

decisions are made, then the pace of development can accelerate.

In fact much of what Wolfensohn and the Bank said about poverty reduction in 1995-2005 could have

been taken almost verbatim from what McNamara said twenty to thirty years before; which raises the

obvious question of why the world poverty problem looked as daunting when Wolfensohn re-asserted

its importance as when McNamara identified it as the central objective of his new strategy in 1973.

But McNamara showed awareness of a closely related issue that remained eclipsed in the Wolfensohn

era: income and related inequalities. He said in 1973, despite a decade of unprecedented increase in

the gross national product of the developing countries, the poorest segments of their population have

received relatively little benefit [because] rapid growth has been accompanied by greater

maldistribution of income in many developing countries. He went on to say that the growth of GNP is

essentially an index of the welfare of the upper income groups. It is quite insensitive to what happens to

the poorest 40%, who collectively receive only 10-15% of the total national income. McNamaras

nondescript successors Clausen, Conable, Prestondisplayed little interest even in poverty

reduction, let alone inequality reduction.

In 2005, when a group of World Bank staff proposed to write the next World Development Report 2006

on inequality and development, their proposal was rejected by the Executive Board, on grounds that

inequality (in contrast to poverty) was inherently a political subject, which the Bank as an

apolitical organization should not become involved with. Executive Directors from Russia and China

made this argument particularly strongly. And so the group redrafted the proposal to focus not on

inequality of outcomes but inequality of opportunities. The Board said, expanding opportunities, thats

not political, and gave permission for what becameWorld Development Report 2006:Equity and

Development, to be written. The team had to write it in a way which pretended it was all about

opportunities, though much of the data and argument was about outcomes.

Why this asymmetry of attention? Partly because taking poverty reduction as the central objective

makes the elites (at the Bank, in the western development community, in developing countries) feel

good about themselves. Whereas taking inequality reduction as a central objective comes

uncomfortably close to home, because it raises questions about the legitimacy of the overall structure of

income distribution of which elites are prime beneficiaries. Not just the Bank but the whole

development community and the whole of the western economics discipline has given far more

attention to poverty reduction than to inequality reduction, even as income concentration at the top

has soared in the West and in most developing countries since the 1980s. Wolfensohn on 29 May made

no mention of inequality as a problem.[1]

Statistically, differences between countries in the incidence and severity of poverty are explained much

more by differences in average GDP than by differences in the degree of income inequality (as
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conventionally measured). But the degree of inequality does affect the magnitude of the effect of

growth in GDP on poverty incidencethe higher the inequality the smaller the effect of GDP growth on

poverty reduction. This is not only from the arithmetical point made by McNamara abovethat in high

inequality countries the growth of GDP is sensitive mainly to the growth of the top decile or two in the

income distribution. It is also, more substantively, that the high degrees of inequality typical in

developing countries plausibly worsen a whole range of economic, political and social conditions,

including through the positive feedback from inequality to social prejudice. Those at the top stereotype

those lower down in ways that justify their superior riches, their low taxes, and their decisive influence

across broad swathes of public policy, in a positive feedback loop. These issues continue to be

remarkably understudied in development economics, including at the World Bank.

Corruption

On corruption, I begin with my own engagement with the Bank. Having done research on the operation

and maintenance of large irrigation canals in India, I was invited to give a seminar about this subject to

the India Irrigation Division at the World Bank (in Washington headquarters) in 1981. The India Irrigation

Division at that time was lending more than any other division in the whole of the Bank, and it and its

division chief enjoyed high prestige. The day before the seminar I conferred with the staff member who

organized the seminar, and explained that I was going to show how the engineers operated and

maintained the canals in line with the incentives of a well-institutionalized system of bureaucratic

corruption (based on auctions for the franchises to particular posts in particular places, at each rank);

and that the resulting practices lowered the productivity of canal-irrigated agriculture. The staff

member blanched, and implored me not to mention corruption. He said, Michael Cernea *the Banks

sole sociologist at that time, dealing with resettlement of people affected by a World Bank project]

covers that sort of thing. If you want to talk about corruption, get Michael to organize a seminar in his

part of the Bank. Tomorrow we want you to concentrate on the institutional aspects of canaloperation.

The next day, to the elite staff of the division (predisposed as engineers to be suspicious of a so-called

social scientist), I sketched an outline of what I was going to say. Ten minutes into the talk the division

chief a hard-charging Israeli irrigation engineer named Gabriel (Gabby) Tibor, held in awe in the

whole South Asia region of the Bank because he was reputed to be the only division chief with a direct

line to McNamara pushed back his chair, rose to his feet, and stormed out, slamming the door behind

him, notwithstanding that he was chairing the meeting. Other senior figures soon followed. The more

junior staff who remained, embarrassed, made no comments at the end, though a corpulent Pakistani

irrigation chief engineer visiting the division, adorned with gold chain, gold rings and a Rolex, remarked

with satisfaction that while the sort of things I described might go on in India he had never heard of such

things in Pakistan.[2]

Despite this inauspicious start, I worked as a World Bank staff economist from 1984 to 1988. One day in

1986 a British Young Professional (YP) at the Bank rushed into my office (in the Agriculture and Rural

Development Department) waving a copy of his newly published World Bank Discussion Paper. He


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exclaimed jubilantly that his Discussion Paper was the very first World Bank publication to be allowed to

include corruption in the title. In 1986.[3]

Fast forward to Wolfensohn on 29 May. He told us that early on in his presidency (which started in 1995)

he prepared a draft speech to a major meeting of Bank shareholders, in which he talked about

corruption as a major development problem. He sent the draft to the chief legal counsel. The lattersoon appeared in his office, saying that he wanted an urgent word with himoutside in the

foyer. Wolfensohn pointed out that his office was perfectly comfortable, and suggested they sit down

and talk there and then. No, said the legal counsel, we must talk outside. Outside in the presumably

bug-free foyer the legal counsel whispered to him that he must on no account use the c

word. Why?, asked Wolfensohn. Because half of the people you will be speaking to are up to their

eyeballs in it, replied the legal counsel, or words to that effect. Wolfensohn went ahead and spoke

about corruption, then and throughout his presidency.

Earlier in his talk Wolfensohn told us that as a young employee of an American multinational company in

1960 he had gone to newly independent Nigeria to explore business opportunities, and specifically to

meet with the chief justice of the Western Region in that connection. While taking photographs in the

parliament he was detained by the police and put into a holding cell. Frightened, he asked to make one

telephone call. Permission granted, he rang, of course, the chief justice of the Western Region, who

promptly secured his released. No hint of corruption in Wolfensohns dealings with the chief justice,

apparently. Whereas had a Nigerian businessman the same ready access to the chief justice, then we

westerners .

These anecdotes make the point that corruption is one of the most misused words in the social

science vocabularymisused because treated as inherently bad, as the source of all manner of

development problems, while given no analytical boundaries. Its use becomes tautological, almost as

elastic as It is gods will.

The evaluation of corruption as inherently bad is sustained by stopping the enquiry at the point where

corruption takes place, and not continuing to ask what the recipients do with the illegal payments. That

reflects the assumption that if private resources go illegally to public officials, the transfer represents a

transfer from more productive to less productive uses, the private sector being inherently more

productive than the public sector. But the developmental effects must depend on whether the public

officials use illegally obtained private resources to invest in enterprises, or childrens education, or to

buy higher status in the after-life through temple donations, or to buy their next post.

Corruption is normally defined as a violation of public trust. This builds-in the assumption thatcorruption does not exist in private-private transactions, on grounds that privates are responsible only

to their shareholders, not to the public. And corruption is commonly identified with the activities

of domesticfirms (in developing countries) in their dealings with government. Whereas international

(American, European) firms operating in developing countriesdoing what Wolfensohn did in Nigeria

tend to be given a free pass. Here we see the truth of the Swahili proverb, Until the lions have their

own historians, the history of hunting will always glorify the hunters. (Thanks to colleague Professor


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Ken Shadlen, also at Wolfensohnslecture, for this point about the presumed locus of corruption with

domestic firms.)

Corruption is often conflated with rent-seeking, and the two concepts certainly overlap. But rent

seeking can be perfectly legal; it refers simply to non-directly-productive use of resources aimed at

obtaining privileged access to public resourcessuch as the importer who wines and dines the licensingauthority, or gives his daughter in marriage to the same. See Anne Kruegers seminal article in

theAmerican Economic Review1974, which purports to show that the private gains from rent seeking

are roughly equal to economy-wide losses.[4]

But Krueger is a neoliberal economist trying to understand a political economy phenomenon. The cost of

corruption is (probably) not mainly its direct effects on resource allocation to non-productive ends, but

its swamping of normal incentives to economic and political action. As Michael Lipton says (personal

communication), corruption corrupts, and in the same process empowers. Much the same applies to

inequality. As suggested earlier, higher inequality reduces the effect of growth on poverty not mainly by

the arithmetic translation of growth into poverty reduction, but by creating and sustaining economic

and power structures in which the poor have few income opportunities and few competitors for their

political support. Corruption helps to perpetuate these economic and power structures.

The rise of the Rest

Wolfensohn ended by emphasising the shift in economic weight in the world economy. For decades

before 2000 the West plus Japan (the old OECD) had around 80% of world GDP for less than 20% of the

worlds population; the rest of the world had around 20% of world GDP for more than 80% of the

worlds population. By 2050 the West plus Japan will have about 35% of world GDP, and the rest will

have 65%. The future of many of youhe told his very international audiencelies out there in the

Rest, and you better get used to it.

To illustrate the western resistance to the idea of the inevitability of radical shifts of wealth and power

away from the West, Wolfensohn told of a G8 meeting in France in 2003. The G8 graciously invited the

presidents of several big developing countries to address them for not more than 12 minutes each.

President Lula of Brazil proposed to them that they hold the next G8 meeting in Brazil, because pretty

soon three or four of the existing G8 would no longer be at the top table and their seats would be taken

by some of the presidents now addressing them, or their successors, and so the surviving members of

the G8 better get used to travelling into the developing world for their get-togethers. Lula said it as a

kind of joke, but several of the G8 heads of government did not laugh.

Wolfensohns confidence in his figures for the rise of the Rest reminded me of J. K. Galbraiths dictum,

Astrology was invented in order to make economic forecasting look good. Serious analysts in the

1950s to the 1970s forecast that the Soviet Union would overtake the US in average income by 2000.

The rise of the Rest is generally presented in statistical terms, as Wolfensohn did. But a distinction

should be made between (a) increases in the relative size of GDP and GDP per capita in some populous

developing countries, and (b) a different balance of power between capital, labor and other social


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interests in those rising developing countries. If the rising powers bring the same political economy

balance as in the Westheavily tipped towards capital, especially financial capitalthen their ascent to

global political influence will bring less change to the structure and functioning of the world economy

than if they bring a different political economy balance into international circles. So one has to scrutinize

China, Brazil, India, Russia, South Africa and some others to find signs of an existing or emerging

difference in class balance from the West. Likewise, one has to scrutinize the faltering center of the

world economy for signs that it itself is undergoing changes in class configuration as it falters. Economics

as a discipline has virtually nothing to say about such structural changes.

Governance of the World Bank

Wolfensohn said little about the present-day Bank. I asked him in the Q & A what he would say now to

borrowing country and non-borrowing country governments, if he were still president, about how they

might break the American monopoly of the presidency ever since 1945. I had in mind the appointment

of the current president Jim Yong Kim, an American citizen, over the heads of two candidates from

developing countries who were almost everywhereincluding in European governmentsconsidered

much better qualified than Kim. Behind my question lay my argument that however much the member

states of the World Bank chorus that the selection of the president should have no nationality restriction

the American monopoly will endure as long as:

(1) the US government retains its veto over certain kinds of decisions in the Bank (the only government

to have a veto);

(2)the West and East Europeans together wish to keep the European monopoly on the Managing-

Directorship of the IMF (and so support whoever the Americans nominate for the World Bank, knowing

that the Americans will reciprocate);

(3) the Banks high income (non-borrowing) countries maintain a majority of the votes. Even after the

arduously negotiated voice reforms of 2008-2010 the high income countries keep a large majority

their share fell from the pre-reform 65.3% to the post reform 61.6%.[5]

[1]See further, Robert Wade, Why has income inequality remained on the sidelines of public policy for

so long?, Challenge, 55, 3, May-June, 2012, 21-50.

[2]I published my analysis of the corruption systemwhich operated in other government departments

too and not just the Irrigation Departmentin The system of political and administrative corruption:Canal irrigation in South India,Journal of Development Studies,18(3), 1982, 287-328; reprinted

in Development Studies Revisited: Twenty Five Years of the Journal of Development Studies, (eds.)

Charles Cooper and E.V.K. FitzGerald, Frank Cass: London, 1989 (one of 19 papers selected from 700

papers published by JDS in the first 25 years); and The market for public office: Why the Indian state is

not better at development,World Development, 13(4), 1985, 467-497. Reprinted in Corruption,

Development, and Inequality: Soft Touch or Hard Graft?,(ed.) Peter Ward, London: Routledge, 1989
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[3]Richard Jolly, former director of the Institute of Development Studies (IDS) at Sussex University

relates (personal communication) that in 1975 an IDS Fellow, Bernard Schaffer, proposed to run a study

seminar on corruption. (IDS study seminars normally lasted several weeks, and brought participants

from around the developing world.) The permanent secretary at the Overseas Development Agency (the

UK aid agency) rejected the idea, telling the IDS decision-making body that corruption isnt a subject.

So someone was dispatched to the library and returned with five books on the topic. Well, even if it is

an academic subject, it would be an embarrassing one, replied the permanent secretary. Schaffer

persisted, pointing out that Nigeria had recently set up a commission on corruption. The permanent

secretary announced, flatly, Well, ODA still wont support a study seminar on the subject. IDS went

ahead and funded the study seminar out of reserves.

[4]Anne Krueger, The political economy of the rent-seeking society, American Economic Review, 64,

3, 1974: 291-303.

[5]Vestergaard, J. and Wade, R. (2013). Protecting power: How Western states retain their dominant

voice in the World Banks governance reforms. World

Development, http://dx.doi.org/10.1016/j.worlddev.2013.01.031. Also, Jakob Vestergaard and Robert

Wade, 2012, Establishing a new Global Economic Council: governance reform at the G20, the IMF and

the World Bank,Global Policy, 3, 3, September, 57-69. Robert Wade, 2013, The art of power

maintenance: how western states keep the lead in global organizations,Challenge, 56, 1, January-

February, 5-39. Robert Wade, 2013 (forthcoming), Protecting power: western states in global

organizations, David Held and Charles Roger (eds), Global Governance At Risk, Cambridge: Polity.

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The Island Dispute Between China and Japan

http://triplecrisis.com/the-island-dispute-between-china-and-japan-the-other-side-of-the-story/

The current dispute between China and Japan over a few barren islands inhabited by goatscalled

Diaoyu in Chinese and Senkaku in Japaneselooks at first sight to be a mere territorial spat. But it has

escalated to a very dangerous level in recent months first words, then actions of police forces, now

actions of air forces, and, behind all these, both sides have mobilised all their military, political,

economic, diplomatic, and cultural energies to engage in the dispute. It is more fundamental than

normal territorial disputes, because the very identities of the two countries are at stake.

A strong narrative has taken hold in the West and much of East Asia about Chinas behaviour, which

starts with the proposition that China is the provocateur. Examples include,China sows new seeds of

conflict with neighbours;[1]

China has adopted an increasingly sharp-elbowed approach to its

neighbors, especially Japan;[2]

Chinahas launched a new campaign of attrition against Japan over theSenkaku islands. Beijing has sought to challenge Japans decades-old control, despite the risk that an

accident could spiral out of control.[3]

Proposition two is that Chinas more sharp-elbowed approach is driven by the governments wish to

divert public attention from Chinas internal problems, notably slowing economic growth; not by actions

of other states.

Proposition three is that Chinas bold, brash, and brazen behaviour has prompted the United States

recent high-profile pivot to Asia as it winds down wars in West and Central Asia. In the words of

an International Herald Tribunereport, the United States forges ahead with efforts to counter Chinas

influence in Asia, now welcomed in by previously more ambivalent allies. In both Japan and South

Korea, the perception of China has changed to being a threat and that has made the U.S. seem much

more favourable as a source of security.[4]

The allies are also expanding security ties with each other

as a way to offset Chinas growing presence. But analysts say Japan will need to reverse a decline in

military spending before Washington is convinced Tokyo is doing enough to keep Chinas aspirations in

check.[5]

We should be suspicious of a narrative that presents the US and Chinas neighbors as innocent victims of

Chinas bullying. By presenting the US pivot to Asia as a response to the invitation from Asian countries

worried by China, it obscures the US strategy of re-asserting hegemony over East Asia; it too easily

elevates China in place of the Soviet Union as the looming external threat to peace-loving democracies,helping the leaders of those democracies to boost their internal support; and it too easily justifies a

military build-up all around China, to the benefit of militaries everywhere.

Claims and Counter-claims of Sovereignty

The islands lie 120 nautical miles northeast of Taiwan, 200 nautical miles east of the Chinese mainland,

and 200 miles southwest of the Japanese-controlled island of Okinawa.
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Japan formally annexed the islands in 1895, claiming they were not in anybodys ownership or effective

control. The Chinese government rejects the annexation as illegitimate. It claims that it had possession

of the islands for 500 years before 1895, as charted on Chinese maps and recorded in Chinese ships

logs. More specifically, records of Chinese tributary-system missions to ordain the kings of the Ryukyu

kingdom (covering islands in the chain from southwest Japan to northeast Taiwan, of which Okinawa is

the largest) state that the Diaoyu/Senkaku are on the Chinese side of the boundary between the two

entities.

China says that the Imperial Japanese military seized the islands in its defeat of the Chinese military in

the first Sino-Japanese war of 1894-5. Hence the islands should be returned to China (with ambiguity

as to the government of the mainland or the government of Taiwan) as part of the post-1945 return of

territories seized by Imperial Japan.

Japan counter-claims that the fact that Chinese maps presented the islands as Chinese and that Chinese

ships visited gave no legal basis for ownership. The only other basis for ownership, other than

annexation, is to have people there, which China did not. So Japans annexation in 1895 is determining.

Furthermore, for the first 75 years of Japans control, from 1890 to the late 1960s (when evidence came

to hand of undersea oil deposits nearby), China made no complaints about Japanese control.

Until 2010 the two governments left the settlement of their mutually exclusive claims undefined. This

was the agreement that came out of the diplomatic recognition and friendship talks between the

government of Japan and Zhou Enlai in 1972 and again Deng Xiaoping in 1978, who famously suggested

that contentious issues like Senkaku should be left to the wiser heads of later generations.

However, the government of Japan denies that there ever was such an agreement, and the Japanese

governments official records of Premier Tanakas normalisation talks with Zhou Enlai in 1972 do not

mention it. The China side replies that the memoirs of Tanakas personal assistant (who attended thetalks) say that the agreement was made, as do accounts of the Chinese representatives. Moreover

Japans silence on the issue of sovereignty of the islands for almost twenty years after Dengs

announcement of the agreement in his 1978 visit to Japan can be interpreted as an implicit recognition

of the agreement.

In practice, Japan accepted the islands limbo state and did not try to colonize them, exercising

practical control only by shooing away non-Japanese fishing boats.

The Current Dispute

The current dispute began in 2010 when the Japanese government arrested a Chinese fishing boat indefiance of the Fisheries Agreement not to apply domestic laws to trespassing fishermen, and proposed

to put the captain on trial. This provoked an unexpectedly furious Chinese reaction, which stiffened the

Japanese governments determination not to appear weak in its dealings with China. Then in 2012 the

right-wing nationalist Governor of Tokyo purchased the islands from their nominal owner, a Japanese

citizen, and proposed to colonize them on his own behalf. To undercut him the government nationalized

thembought them as property of the Japanese state; in effect, asserted Japanese sovereignty. In


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Chinas eyes, this broke the later, wiser heads agreement, and provoked widespread anti-Japanese

riots, anti-Japanese consumer strikes, and suspension of diplomatic relations. The government of China

felt compelled to assert its claims to sovereignty, or face humiliation in the eyes of its own public.

But much more than humiliation is at stake. China wants to wrestle sovereignty back, or at least restore

the status quo ante of undefined sovereignty, for both military and economic reasons. It values theislands for their location in the first island chain, a string of islands south of Japan including Taiwan

and smaller ones controlled by Vietnam and the Philippines. This first island chain currently prevents

Chinas ballistic submarine fleet from having unobserved access to the Pacific Ocean. If China controlled

the Diaoyu/Senkaku, or if no-one did, that would give China a break in the chain. The islands also have

value as a platform for radar and missiles in the event of a war between China and Japan; and may well

be valuable for oil and gas in surrounding seas.

The US Pivot to Asia

These factors weight all the more on account of the really big recent change in Chinas external

environment: the USs high-profile pivot from Europe and West and Central Asia to East Asia. The shift is

open-ended, with no specification of what it means beyond containing China and boosting military

alliances with Chinas neighbors. It resumes the emerging strategy of the early years of the President

George Bush Jnr years, when the US identified China as a strategic rival. But after 9/11 the US became

pre-occupied with Central and West Asia and needed Chinas help in the war on terror.The US

diversion allowed China 10 more years of Dengs strategy of building strength in a hidden way, avoiding

confrontations.

In his first term, when the US was still mired in West Asia and Afghanistan, Obama tried to enlist China

as junior partner in a G2, only to be rebuffed. As the US began to withdraw from West and Central

Asia and wind down the war on terror, it elevated China as the new threat to world peace. HenceObamas first overseas trip after re-election was to Myanmar, Thailand and Cambodia, after which he

announced that they were potential military allies, as though in expectation of another war. Secretary

of State Hilary Clinton also made a long swing through East and Southeast Asia; and senior US defence

officials have done the same. None has visited China, at least not publicly.

The US administration also announced the deployment of naval forces closer to China the 7thFleet in

the West Pacific and the 5thFleet to the south of China; stationing of Marines in Australia; and opening

of new drone bases in several Southeast Asian locations. (Imagine if China announced military alliances

with Cuba, Venezuela, Mexico, Costa Rica.)

All this looks like a US-led strategy to contain the rise of China, in Chinese eyes. What is more, the

noose being constructed around it is not just military. The Trans Pacific Partnership (TPP) now under

negotiation includes a long list of states on both sides of the Pacific: the US, Canada, Mexico, Peru,

Chile, Australian, New Zealand, Malaysia, Singapore, Brunei, Vietnam; with Japan, South Korea, Taiwan,

Philippines, Laos, Colombia and Costa Rica as potential members. The key feature is that the US is

included and China is excluded. Among the TPPs membership criteria, countries must commit to free


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trade, and commit to dismantle sizable state-owned enterprises. The latter condition is tailor-made to

justify Chinas continued exclusion.

Japanese Politics

US subordinate allies, especially Japan, see the USs return to Asia as a golden opportunity, maybe the

last one, to assert their territorial claims vis--vis China. In Japan, some also see it as an opportunity to

strengthen the Japan-US military relationship; for which purpose provoking China to hostile statements

and actions is useful for securing public support for closer ties to the US, which could not otherwise be

taken for granted. There has been a perennial conflict in the Japanese political and bureaucratic class

between the submissive to America group and the independent foreign policy group; a conflict

recently heightened by the success of the political party led by Shintaro Ishihara, which rails against

what it sees as the Japanese nations servility to the US. However, both those who want closer US ties

and those on the nationalist Right who do not, agree on the need to change the nations postwar

Constitution to allow Japans military to undertake more than purely defensive combat; and therefore to

increase military expenditure. The US is encouraging the government to increase its military spending,

much of which would presumably be spent on US weapons systems.

Chinese strategists interpret Japans recent actions with respect to the Diaoyu/Senkaku islands as a

move useful for both the submissive to America and the independent foreign policy groups. By

breaking the pre-condition (sovereignty left undefined), the Japanese government provoked China to

assert its claims, which could be presented to the Japanese public and the world as aggression and

made to justify both higher military spending and closer US ties.

Chinas Humiliation in the Postwar Settlement

But Chinas claims rest not only on the location and history of engagement with these particularrocks. They also rest on much further-reaching understanding of Chinas engagement with the West

since the Second World War, and the need to reassert a status which the West has consistently denied

it. The core of the issue is the contradictionin Chinese eyesbetween the two treaties settling the

Second World War in the East, the Potsdam Declaration and the Treaty of Peace with Japan, generally

known as the Treaty of San Francisco.

The Potsdam Declaration (Declaration Defining Terms for Japanese Surrender) of 1945 set the terms of

Japans unconditional surrender. It was issued jointly by the Allied powers the US, Britain, and China

(the Nationalist or Kuomintang government); and the Soviet Union later adhered to the

declaration. The Japanese government explicitly accepted it. The declaration said that Japan should

retain no overseas territories.

A later conference issued the Treaty of San Francisco in 1951, to mark the final settlement of the war in

East Asia and the official end of the Allied (American) Occupation of Japan. The US excluded China from

the conference, which by then was governed by the Chinese Communist Party. (The US also excluded

the Nationalist government, then resident in Taiwan but still claiming to rule the mainland.) The treaty


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allocated to Japanhundreds of islands south of Japan, comprising the whole of Okinawa prefecture,

including the Senkaku.

In Chinas eyes the Treaty of San Francisco and its restoration of offshore islands to Japan is invalid,

because (1) it broke the Potsdam Declarationthe foundation of the post-war order in East Asia and

(2) it resulted from a negotiation in which the government of China (one of the four Allied Powers) wasnot represented. None of the overseas territories seized by Imperial Japan, including the Senkaku,

should have been restored to Japan.

In practice the US continued to administer the whole Okinawa island chain until it agreed to restore

them to Japans control, in 1972. But neither in the Treaty nor subsequently did the US define the

sovereignty of the Senkaku, leaving that to be decided later. However, at the time of the Treaty of San

Francisco the US saidrather vaguely that the US-Japan security treaty would cover the islands,

implying that the US would come to their defence. Recently, with its pivot to Asia, the US clarified that

the US-Japan treaty does cover the islands, which China interprets as a provocative move.

In short, China sees the Diaoyu/Senkaku dispute through the lens of a long pattern of Japan and the US

breaking agreements, to Chinas detriment; including the Treaty of San Francisco breaking the Potsdam

Declaration, the Japanese governments 2010 arrest of a Chinese fishing boat in defiance of the Fisheries

Agreement, and the Japanese governments 2012 unilateral claim to sovereignty over the islands,

breaking the Tanaka-Zhou agreement of 1972.

In a civilized world both parties would agree to submit their claims to the International Court of Justice;

but neither side is willing to consider such a move. Meanwhile, wisdom on the Chinese side lies in

recognizing the truth of Joseph Nyes point, Unless China is able to attract allies by successfully

developing its soft power, the rise in its hard military and economic power is likely to frighten its

neighbors, who will coalesce to balance its power.[6]But political leaders and the media in the US andJapan also have a responsibility to act on Nyes other point, We should ensure that China doesnt feel

encircled or endangered. They are conspicuously failing in this respect.

Robert H. Wade is professor of political economy at the London School of Economics

- See more at:http://triplecrisis.com/the-island-dispute-between-china-and-japan-the-other-side-of-

the-story/#sthash.JE635TyF.dpuf

Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.

[1][email protected],24 November 2012

[2]Martin Fackler, U.S. plans complicated by allies with uneasy ties, International Herald Tribune, 22-

23 Dec 2012, p.1 and 4.
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[3]Brahma Chellaney, 2012, East Asias defining moment, International Herald Tribune, 22-23

December, p.8.

[4]Martin Fackler, 2012, p.4.

[5]Martin Fackler, 2012, p.4

[6]Joseph Nye, Dont try to contain China, International Herald Tribune, 28 January 2013, p.9.

- See more at:http://triplecrisis.com/the-island-dispute-between-china-and-japan-the-other-side-of-

the-story/#sthash.JE635TyF.dpuf
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Misleading Measure of Income and Wealth Inequality: the standard Gini coefficient

It is by now generally accepted that the sharp rise in income and wealth inequality in the US and much

of Western Europe over the 1990s and 2000s was one of the bulldozer forces behind the rise in financial

fragility. And it has long been accepted that the Gini coefficient is the workhorse measure of

inequality. But it is not generally recognized that the coefficient is normally defined in a way which

biases the measure in a downwarddirection, making inequality seem less large than another version of

the coefficient would suggest. By this alternative measure inequality is much higher than is generally

thought. The standard measure is misleading us into thinking that economic growth is more inclusive

than it is.

Recall that the Gini coefficient is a number between zero and one that measures the degree of

inequality in the distribution of income in a given society (named after an Italian statistician, Corrado

Gini). The coefficient is zero for a society in which each member receives exactly the same income; it

reaches its maximum value (bounded from above by 1.0) for a society in which one member receives all

the income and the rest nothing.

As normally defined the Gini says that inequality remains constantgrowth remains inclusiveif all

individuals (or countries by average income) experience the same rateof growth, and rises only when

upper incomes grow faster than lower incomes. So inequality remains constant if a two person (or two

country) distribution x = (10, 40) becomes y = (20, 80). Yet the income gap has grown from 10 to 40.

It is at least as plausible to say that inequality remains constantgrowth remains inclusivewhen all

individuals (countries) experience the same absoluteaddition to their incomes; say from x = (10, 40) to

y* = (20, 50). If upper income individuals (countries) experience bigger absolute additions, inequalityincreases, and growth is not inclusive.

The normal Gini could be called the Relative Gini. The Gini based on absolute changes could be called

the Absolute Ginidefined as the Relative Gini multiplied by the mean income. In the above illustration,

the Relative Gini for both distributions is the same, at 0.3. But as mean income doubles from 25 to 50 in

the transition from x to y, the Absolute Gini doubles, from 7.5 to 15.0.

The Absolute Gini typically rises much more frequently and by much more than than the Relative Gini,

and its use would make income inequality into a more salient political issue. For obvious reasons, the

Relative Gini could be called a rightist measure, and the Absolute Gini a leftist measure (Kolm

1976aand 1976b).

Economists long-standing nonchalance about income inequality is reflected in the fact that the Absolute

Gini is rarely used in empirical work. Its unpopularity also reflects the fact that cross-country

comparisons of the Absolute Gini are more complicated than for the Relative Gini, because the former

depends on the mean of each distribution. This requires that we convert incomes into the same

currency (for example, to compare absolute inequality in India with that in the US we have to convert


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the two means and income distributions either into rupees or into dollars). And to perform comparisons

across time we also need to correct for inflation. The choice of appropriate exchange rates and price

deflators becomes crucial for making reliable comparisons of absolute inequality.

These inconveniences have often been held up as justification for sticking with relative measures of

inequality. But as Kolm explains, these problems are exactly thesame ones which are traditionallyencountered in the comparisons of national or per capita incomesand they can be given the same

traditional solutions. Anyway, convenience could not be an alibi for endorsing injustice (1976a: 419

20).

The bottom line isall these technical complexities asidethat students of inequality should not ignore

trends in absolute income gaps when making inequality comparisons, as most of the literature does.

Thanks to S. Subramanian, Madras Institute of Development Studies, for help on the Absolute Gini.

- See more at:http://triplecrisis.com/our-misleading-measure-of-income-and-wealth-inequality-the-

standard-gini-coefficient/#sthash.6RavYUef.dpuf
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http://triplecrisis.com/the-west-must-allow-a-power-shift-in-international-organizations/#more-9028

The West must Allow Power shifts in international organizations

Jakob Vestergaard and Robert H. Wade, Guest Bloggers

More than three years after the International Monetary Fund (IMF)s governing body agreed to reform

the organizations governance so as to better reflect the increasing economic weight of dynamic

emerging market economies in the world economy, only microscopic changes have been made.

Emerging market and developing countries (EMDCs) have become increasingly frustrated with Western

states as the latter have clinged to their inherited power in the IMF and other important international

economic governance organizations. The emerging cooperation among the BRICS (Brazil, Russia, India,

China, South Africa)as seen in the advanced-stage negotiations to establish a Development Bank and a

Contingent Reserve Arrangementsends a wakeup and smell the coffee message. The West will carry

a heavy responsibility for eroding global multilateral governance if it continues to drag its heels on the

needed adjustments.

Part 1 of a two-part series.

Overview of the Current Stalemate

Everyone agrees, in principle, that the global governance organizations established after the Second

World Warnotably the IMF and the World Bankmust adapt their governance to the fact of a now

more multipolar world. Everyone agrees, in principle, that member countries share of votes in the

governing boards should reflect their present-day relative economic weight.

At first glance the IMF has already taken a big step towards raising the voting power of emerging

market and developing countries (EMDCs). In 2010, its member countries agreed both to boost thelending power of the IMFand to shift 6.2% of quota shares, and hence voting power, in favour of

dynamic EMDCs. In March 2010, then-Managing Director Dominique Strauss-Kahn hailed this

agreement as the most fundamental governance overhaul in the IMFs 65-year history and the biggest-

ever shift of influence in favor of emerging market and developing countries.

However, more than three years later the shift has yet to be implemented, largely because the U.S.

Congress has still not approved what the countrys executive branch agreed to (it remains an open

question, though, whether the executive branch is using the Congress as an excuse for its own

unwillingness to act).

Moreover, the key shift from developed countries to EMDCs is only 2.6%, the rest being shiftswithinthe

category of emerging market and developing countries from over-represented EMDCs to

underrepresented EMDCs. Such a small change comes nowhere close to aligning share of votes with

any plausible measure of economic weight.

If economic weight is measured by gross domestic product (GDP), then the agreed 2010 reforms will still

leave very large discrepancies between share of economic weight and share of voting power. Voting
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Given their marching orders by the G20, the Executive Directors set out to negotiate the shift. In 2010

they announced a major success: an agreement to shift6.2 % in quota shares (hence voting power) from

overrepresented to underrepresented countries.

But this was misleading, to put it politely. Less than half of the mentioned figure is what really matters: a

shift of voting power from advanced economies to EMDCs. The G7 countries, as a group, concede only1.8 percentage points of their voting power, in aggregate. Table 1 presents the voting power of 15 large

countries, as it currently stands (December 2013) and as it will be if or when the 2010 voice reforms take

effect.

As can be seen, most changes are microscopic. For only two out of 15 large countries will the change in

voting power be larger than half a percentage point (China, with a 2.26 percentage point increase, and

poor Belgium, with a 0.56 percentage point loss).

Table 1: Voting power, selected large economies

Note: A selection of 15 of the worlds 30 largest economies, based on a 50/50 GDP blend (i.e. giving 50

% weight to GDP at market prices and 50% weight to GDP in purchasing power parity terms), World

Development Indicators 2012 (November). Data for current voting power are July 2013 actual voting

shares.

- See more at:http://triplecrisis.com/the-west-must-allow-a-power-shift-in-international-

organizations/#more-9028

Part 2

The IMFs existing quota formula allocates shares to member countries onthe basis of four variables

(with their weights in the formula given in parentheses):

Size of a members economy, as measured by GDP (50%); Members integration into the world economy, or openness (30 %);
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Members potential need for Fund resources, measured in terms of variability of currentreceipts and net capital flows (15%); and

Members financial strength and ability to contribute to the Funds finances, as measured by itsforeign exchange reserves (5%).

Instead of announcing a new formula in January 2013, as planned, the Executive Board of Directors

(EBD) reported to the Board of Governors on the outcome of the Quota Formula Review (IMF 2013). The

main conclusions were:

(a) it was agreed that GDP should remain the most important variable, with the largest weight in the

formula and scope to further increase its weight; and

(b) there was considerable support for dropping variability from the formula (IMF 2013: 2-3).

Beyond these, the Executive Directors could agree on little.

Then, in October 2013, following the IMFs annual meetings, the council of ministers which steers the

IMF (International Monetary and Finance Committee) declared in its communiqu : we urge the

Executive Board to agree on a new quota formula *and+ reaffirm that any realignment in quota shares

is expected to result in increased shares for dynamic economies in line with their relative positions in

the world economy.

But again, in the subsequent period from October to December 2013 the Executive Board has made no

progress, and will almost certainly postpone the latest deadline to sometime well beyond January

2014. The whole negotiation process has been put on hold until U.S. Congress approves the 2010

reforms.

Voting power imbalances remain massive

Most member states agree that voting share should be closely linked to GDP share, as the simplest, least

unambiguous measure of economic weight. Table 2 shows voting power-to-GDP ratios, both as of today

and if and when the changes agreed in 2010 are put into effect. If voting power were aligned with GDP

share, we should expect all countries to cluster close to 1.As can be seen, the voting power-to-GDP

ratios show a wide dispersion. They vary five-fold, from 0.45 in the case of China to 2.15 for Belgium.

Not just China but also India (0.60) and Brazil (0.73) are underrepresented, while the larger European

countries are over-represented by this criterion.

On average, a dollar of GDP in the EU4 countriesGermany, France, UK and Italyis worth more thantwice as much as a dollar of GDP in one of the BRIC countries, in terms of voting power in the Fund. This

means that the aggregate voting power of the EU4 is higher (15.6 %) than the aggregate voting power of

the BRICs (13.5 %), despite the fact that the GDP of the BRICs, as a share of world GDP, is almost twice

as large (24.5 %) as the GDP of the EU4 (13.4 %).

Table 2 Voting power-to-GDP ratios, selected large economies


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BRICS are well along in the negotiation of a BRICS Development Bank and a BRICS Contingent [Foreign

Exchange] Reserve Arrangement (for currency swaps or pooling), scheduled to be signed at the next

BRICS summit in 2014.

It is difficult to escape a sense that Western governments are allowing their drive to cling to power to

obscure the bigger issues at stake. Western governments must go beyond their rhetorical commitmentto shift voting power towards EMDCs, and actually do itfor the sake of boosting the effectiveness of

multilateral economic governance and checking the present drive towards coalitions of the willing in

plurilateral arrangements, a drive which raises the prospect of a return to the competing power blocs

of 18th

to 20th

century Europe and the chronic instability they generated.

Policy recommendations

The IMF should realign quota shares to address long-standing voting power imbalances, notablythe overrepresentation of European countries and underrepresentation of emerging market

economies.

The IMF should agree to a new quota formula that establishes a much closer link (than does thecurrent formula) between relative economic weight in the world economy and voting power in

the IMF.

To preserve the voting power of the poorest developing countries, the share of basic votes intotal votes should be doubled (from 5.5 % to at least 10%), so as to restore them to the same

level as when the IMF was founded.

The responsibility for taking these steps rests primarily with the Western states, which havebenefited from the beginning of the IMF by a series of high hurdles against loss of voice in Fund

governance.

Further readings

IMF (2010). IMF Quota and Governance Elements of an Agreement. Report of the Executive Board to

the Board of Governors. Washington, DC: International Monetary Fund.

IMF (2013). Report of the Executive Board of Governors on the Outcome of the Quota Formula Review.

Washington, DC: International Monetary Fund.

Lesage, D., Debaerre, P., Dierckx, S. and Vermeiren, M. et al (2013). IMF reform after the

crisis.International Politics, 50 (4): 553-578.

Vestergaard, J. and Wade, R. (2013). Protecting power: How Western states retained their dominant

voice in the World Banks governance reforms.World Development, 46: 153-164.

- See more at: http://triplecrisis.com/the-west-must-allow-a-power-shift-in-international-organizations-

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Documents

Robert Wade on Corruption Poverty