National and International Issues

Globalisation’s Law of Unintended Consequences

Once upon a time we believed in the fairy tale that globalisation would bring equality and good things to all. The original concept to integrate economies through a global network of trade, communication, immigration and transportation, has not quite worked as planned. While there have been many successes the ‘law of unintended consequences’ seems to have intervened.

 

Applying the concepts of globalisation to 198 countries (if we include several countries that are counted differently) and over 6 billion people were always going to be fraught with problems. There have been successes in opening up trade and capital flows between nations but to make sense of the complexities of international trade, financial systems and international agreements, is best left to trade and economic gurus. Migration had also increased the flow of people between countries to seek better job opportunities. More recently, the concept of globalisation has been applied to almost every aspect of international affairs. We can tag it to technology, media, environment and climate change, political, socio-cultural, transnational crime, warfare, and terrorism to name a few.

 

And it is in this sphere we can see where the problems in the globalisation agenda converge. Nowhere is this more obvious at the moment than in Europe and the UK though problems have arisen in most countries. To understand how this has come about, we need to look at some of the winners and losers, and the increasing disaffection of populations with the unforeseen problems that have come with globalisation.

 

The big winners in the last 20 or 30 years have been developed countries and large multi-national corporations. They have the knowledge, expertise, professional services, money and power to work the rules for maximum advantage. The losers are the poorer, developing countries that have not yet been able to properly negotiate their way through the maze of international rules and regulations. There are many reasons for their failure linked to lack of expert capacity, corruption, poor infrastructure, and legal frameworks. For example, on the positive side, multi-national companies open operations and manufacturing plants in developing countries, bringing much needed investment and jobs. But on the negative side, manufacturing industry and jobs in developed countries are lost when these companies move their operations to lower cost jurisdictions.

 

Once established in developing countries, multi-nationals are often accused – sometimes with good reason – of exploitation, corruption, unfair working conditions and wages, poor living and safety standards for workers, a lack of concern for environmental management, and pollution of natural resources. Another nasty ‘side-effect’ has been increase in human trafficking by transnational crime syndicates for the purposes of slave labour; unfortunate souls who have been promised good jobs in other countries only to find that they have become victims of exploitation through bonded or slave labour. According to the International Labor Organisation (ILO), the global profits from all forms of human trafficking for various forms of exploitation totals around $150 billion annually.

 

As the integration of capital flows and international banking rules has opened up, so has the door to increased tax minimization and evasion, corruption, and money laundering through tax havens. Use of tax havens is still mostly legal, but the ethics are debatable. Also, too often, the source of the funds flowing into tax havens is often a result of massive corruption and criminal activity. While Panama has been in the limelight lately, it is just one amongst 50 countries that have financial secrecy and are identified as tax havens. These include Switzerland, Luxembourg, Hong Kong, Cayman Islands, Singapore, the United States, Lebanon, Germany, Jersey, and Japan. Billions of dollars flow in and out of these tax havens every day from both legal and illegal sources. It is worth remembering though, that the biggest users of these tax havens are still multi-national corporations. Shifting of corporate profits, intellectual property rights and patents into tax havens, allows multi-national corporations to end up paying minimal amounts of tax; if any, compared with their huge profits. They do this by taking maximum advantage of the increasing mobility of capital and ease of incorporation of enterprises in foreign territories, gaps in regulatory frameworks, and lack of coordination in taxation policy and investigation across countries. The problem is further exacerbated by the lack of transparency in global financial services and a lack of cooperation between international investigative agencies.

 

For example, Apple made profits of $12.9 billion in the three months to December 2015 off sales of $53.3 billion. In September 2015, they reported sales of $37.5 billion. Of this, UK sales accounted for around $2 billion, which should have earned a tax bill of around $400 million, but in fact, Apple paid only $11.8 million in the UK last year. This was achieved by shifting profit centres around various jurisdictions and tax havens. Needless to say, this caused a public and political outcry and calls for legislative reform to stop such practices by multi-nationals.

 

Apple is certainly not alone in this kind of corporate behaviour. Numerous other well-known giant corporations are masters of the art of taking advantage of globalisation of trade and financial markets to minimize their tax liabilities. But these practices deprive countries of much-needed tax revenue that could be used for their national development including building of schools, hospitals and other community infrastructure.

 

So, if it’s that easy for legitimate corporations to move funds and profits around the world, what then of criminals, particularly large transnational crime syndicates? Transnational crime has flourished in recent years by taking advantage of the very same gaps and irregularities in globalised trade and financial systems to move their illicit cargo (including humans) and money around the world, then to launder their black money through tax havens. Transnational organised crime (TOC), as the name implies, crosses borders and is considered by international crime and national security authorities, to be a serious threat to national and international security. In 2011, the White House released “Strategies to Combat Transnational Organised Crime”, a study by the US National Security Council, on the many aspects and dangers of transnational crime and the impact on national and international security. TOC includes corruption of government and corporate officials, money laundering, funding of crime and terrorism, human smuggling and trafficking, slavery, piracy, drug trafficking, arms dealing, violence, pornography, intellectual property theft, and cybercrime. The Australian Government’s Institute of Criminology estimates that internationally more than $1.5 trillion is laundered by TOC each year. The reality is, there is no way of knowing the real figure but all research studies indicate enormous amount.

 

Terrorist groups also use transnational crime links to fund and sometimes facilitate their activities. If we take ISIL/Daesh for example, we can see how they have used the various components of transnational crime to fund and operate their war and terror attacks in Iraq and Syria, and other places. Daesh has captured oil fields and refineries and sold the oil through international criminal networks, with the assistance of corrupt officials and facilitators. They have also sold antiquities stolen from ancient historic sites like Palmyra in Syria, through the black market. Daesh is also involved in smuggling of arms, drugs, and humans. These criminal activities provide substantial capital and support their reign of terror. Al-Qaeda and the Taliban have also been beneficiaries of transnational crime through drug smuggling and other criminal activities to raise significant funds to launch attacks and to provide financial support to their followers. Current estimates are that the Taliban in Afghanistan are making annual profits of at least 150 million dollars through drug trafficking.

 

And this brings us to another link in the chain. Those fleeing conflict and terror in Afghanistan, Iraq, Syria, and North Africa, along with those who can be classified as ‘economic migrants’ seeking a better life, have been crossing into Europe in huge numbers in the past couple of years. People smugglers have made billions of dollars out of promising these people a safe passage and access to Europe to take advantage of their borderless immigration rules between many countries inside the European Union.

 

Thousands of refugees have drowned crossing the Mediterranean sea in unsafe vessels provided by people smugglers. For those making it safely to land, another perilous journey begins. The plight of these huge numbers of refugees trying to make their way across Europe to safe havens has triggered great sympathy around the world. However, it has also increased resentment by local communities in Europe and the UK, about being ‘taken over’ by refugees. Governments are now coming together to try to resolve the crisis but there is unlikely to be an easy solution. While countries like Germany first welcomed the refugees in large numbers, they, along with other countries, are now limiting or blocking their arrival.

 

But despite the paranoia in Europe and the UK about being taken over by refugees, according to the Global Migration Trends report by the International Organisation for Migration, most refugees are seeking refuge in other poorer countries. Just over one million asylum seekers arrived in Europe by boat last year, equating to 0.2% of Europe’s population of 500 million. Turkey and Pakistan are the main refugee-hosting countries globally (in absolute terms), with, respectively, 1.84 and 1.51 million refugees registered as of June 2015; they are followed by Lebanon (1.2 million), the Islamic Republic of Iran (982,000) and Ethiopia (702,500). These countries have for many years, hosted refugees without the world caring. However, when the refugees are headed towards Europe, it becomes an international crisis.

 

The refugee crisis seems to be developing into a matter of ‘them’ and ‘us’ and a clash of cultures and ideologies. Borders in Europe are closing and governments are under pressure to stem the human tide. The situation is enhancing the divide between non-Muslims and Muslims who form the majority of refugees and economic migrants heading into Europe and the UK. The rising fear for residents of European countries and the UK is that refugees and immigrants will take their jobs and not integrate into the very different culture. This is unfair and also smacks of bigotry and racism. The recent Paris and Brussels attacks, and a belief that extremists are infiltrating refugee groups and are posing a threat to national and international security, have further fuelled their fears.

 

So what will happen from here and how will all this impact globalisation in the future? In the UK a referendum will be held in June for voters to decide whether or not the UK should exit the European Union. The Prime Minister’s position is that staying in the EU, but with re-negotiated terms, stricter migration control, and a reduction in red tape, will be the best outcome. The “Brexit” supporters believe Britain should exit because the country is being held back by its membership of the EU which pushes their rules on the UK and creates unnecessary red tape which impacts on British industry.

 

Weighing into the Brexit debate on a visit to London in April, US President Barack Obama warned that the UK would be at the “back of the queue” in any trade deal with the US if the country chose to leave the EU. Obama contended that it was much more efficient for the US to negotiate with the EU as a bloc, rather than attempt to take on “piecemeal trade agreements”, and suggested that Brexit would send a signal of division to the world. Should the UK leave the EU, it will take years to renegotiate the many trade agreements they already have with the EU and to develop new ones. This would be a nightmare for international trade and investment. The US President did however appear to have sympathy for the Brexit supporters though, when he also stated that uncontrolled migration into Europe was a national security threat to the world.

 

Other issues related to globalisation are also under the government spotlight in the UK. Following the latest financial scandals uncovered by the Panama Papers, governments around the world are now moving to crackdown on corruption, terrorism funding, money-laundering and use of tax havens and to push for opening up banking secrecy and stricter regulations. However, to unpick the complex national and international rules created when financial markets were globalised will be challenging and will take years. But failure by any government to address these issues constitutes a serious breach of duty to its citizens. In May 2016, the UK Government will host the Corruption Summit “to galvanise a global response to tackle corruption.” According to the Summit briefing note: “As well as agreeing to a package of actions to tackle corruption across the board, it will deal with issues including corporate secrecy, government transparency, the enforcement of international anti-corruption laws, and the strengthening of international institutions.”

 

Leading up to the Summit, the UK Government has also launched an Action Plan for anti-money laundering and counter-terrorist financing to make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption. In her comments on the action plan, Home Secretary Theresa May said: “Britain’s world leading financial system is at risk of being undermined by money laundering, illicit finance and the funding of terrorism. The laundering of proceeds of crime through UK institutions is not only a financial crime, it fuels political instability around the world, supports terrorists and extremism and poses a direct and immediate threat to our domestic security and our overseas interests.”

 

The UK and Europe are not alone in trying to address these and other unintended consequences of globalisation. It is up to governments of all countries to resolve the issues and make improvements for a more equitable outcome in future. They must address the problems facing their particular country to ensure good governance, stamp out of corruption and links to transnational criminal activity, implement strong legal and regulatory frameworks, focus on human and economic development, and develop international trade and investment links which protect the interests and future prosperity of their citizens.


The writer is Australian Disaster Management and Civil-Military Relations Consultant, based in Islamabad where she consults for Government and UN agencies. She has also worked with ERRA and NDMA.

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