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Sunday 15 February 2015

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This week:

Highlighting news stories important to the Civic Republican view,
particularly those that are overlooked or little covered in the main media.

All these newsletters will be catalogued on the website


  • KLEPTOCRACY – The Universal Form of Government of Our Time

Peter Kellow, DRP Leader, writes

    With the latest case in a long list of theft of the funds from the British tax payer by megabank, HSBC, the BBC’s Newsnight could not ignore the story. See BBC Newsnight HSBC Tax Fraud Story. Presenter, Evan Davis, repeatedly asked the question “Why don’t you just put a stop to it?”

    Poor Evan. He seems like a nice guy but he just doesn’t get it. His question is based on the premise that the democratically elected government at Westminster actually runs the country! Oh dear! Yes, there are shenanigans and “gloves off” debates to provide some theatre and "noises off" in the mother of all parliaments. But this is nothing to do with the real power that determines our lives and our politics. Let us examine the state of government and real power globally.

    The "Tax Gap" =unpaid tax
    Official estimate -£34billion [7% of tax due]
    Campaigners' estimate - £120billion [25% of tax due]

    Here I do not want to talk so much about tax fraud, which is just one piece of the puzzle by which people living in western countries are robbed of millions by the minute. To understand the true dimension of the theft you have to see have the whole economy has been structured to favour the superrich. Before dealing with that, let’s take an overview of how this and similar expropriation of the people’s wealth occurs in different countries of the world.

    There are different forms of government in the world, democracies, dictatorships, etc, and indeed there are real differences between them. The form of governments of the western liberal democracies, like Britain, US, France, the Scandinavian countries, for example, represents the best in general although the reasons for this is not the ones usually cited. I will explain what truly makes these exceptional later.

    In spite of differences, by far the most overriding character of systems of governments everywhere can be summed up in one word – kleptocracy. The latest HSBC scandal may seem like a big deal – a gigantic theft - and in common terms it is. But in terms of the interests of kleptocracies everywhere it is peanuts. They are not in the least bit bothered by it or whatever regulatory/political reaction it may provoke. They know their position is solid. They know they have got it all sown up.

    What is a kleptocracy? A kleptocracy is a form of government whereby the state is run in the interests of a small oligarchic group who use the machinery of government to steal directly from the people and also steal indirectly from them by robbing the government.

    This must be distinguished from mere corruption. Kleptocratic activities and the theft they carry out are for the most part legal. The whole apparatus of state is geared to their being able to extract funds legitimately. They habitually operate on the margins of criminality and, as the recent HSBC case shows, they can get found out when their excessive desire for control and money means they cross the line. Getting found out is rare as they operate mostly in jurisdictions, such as the royal tax havens and Switzerland, where secrecy is protected by law. We simply do not know the extent of their rip-offs.

    Before describing in a little more detail how kleptocracies work, let us make an obvious but essential observation. When you steal from a person or a company the amount of your theft is limited to what they own. You can clean them out, but that is all. But the finances of governments are virtually without limit. Their balance sheets, compared to that of even a rich individual, are astronomically great.

    So you see, if individuals start to access funds on a government scale they achieve riches that for an individual have no precedent in human history. When the kings of old robbed their people, that could give the monarch a flamboyant life style and trappings of wealth, and they could even wage the odd war, but it was nothing compared to modern kleptocrats. The mind boggles at the sheer scale of their wealth and power. The recent well-publicised Oxfam report on the concentration of global wealth was a very tangible indicator.

    As I have said, virtually every state in the world is a kleptocracy – a state set up to steal from the people for the benefit of a tiny oligarchy. (There is in fact just one prominent economy which functions less as a kleptocracy than the others and this at I will mention at the end of this piece.) But not all kleptocracies are of the same type.

    There are three types – ex-communists states, third world states and western democracies. Let us look briefly as these in turn

    One. Ex-Communists Kleptocracies.

    With regard to Russia, the usual narrative is that the old Soviet system of communism, with everything state owned and state directed, was replaced around 1991 by a new shiny capitalist system, where private companies could be founded and where healthy competition could exist between rivals. In short a market economy would prevail to the benefit of production and general well-being.

    If things have not worked out as well as hoped then this is due to a failure to mimic perfectly the financial institutions of the west

    This version of events has at best a tangential relation to the truth. The reality is that those close to the levers of power before 1991 did not have this lofty capitalist aim. We are talking here of the old nomenclature and apparatchiks– the Communist Party insiders – who in the late eighties could see the way the tide was turning. They had two choices. They could fade away with the old communist system or they could use their insider position to acquire state assets for themselves at knock down prices.

    We know which way many turned. Some were in a position to raise relatively small sums (a few hundred million dollars) from Russian banks and then purchase state assets worth billions. Also favourably placed were members of Komsomol. Komsomol was a youth organisation set up by Lenin to guarantee a smooth transfer of power within the Communist Party and avoid it being contaminated by ideas not conforming to the party line. So members of the Komsomol were well placed in 1990 to step in and rob the state and this is why some of the high profile new Russian billionaires are so fresh-faced and young looking.

    After the turbulent gangster days of Yeltsin, President Vladimir Putin normalised the system to a degree by using the vast gas and oil wealth of Russia to make the economy run and allow pensions to be paid and eliminate a lot of dire poverty. But this is hardly the kind of capitalist system most people would want.

    Putin has let the coterie of billionaire oligarchs keep their assets and export it as they wish to western playgrounds like London. Oil and gas is mostly in state ownership to make the state viable economically but this means that the economy resembles a banana republic in the sense that it depends on the export of one type of key commodity. In Russia oil and gas take the place of bananas.

    Russia remains a kleptocracy today with a small number of oligarchs, who acquired state assets for next to nothing, constantly fleecing the state and the people. The chance, as things stand, of Russia becoming the economic powerhouse, that the level of her technology, her education and the inventiveness of her people merit, are slim for the near future.

    Two. Third World Kleptocracies.

    These are the kleptocracies most commonly recognised where a despotic leader exerts absolute control on the economy and the politics of his country. President Robert Mugabe in Zimbabwe is only the most familiar example.

    Industry and agriculture are let go to wrack and ruin and what wealth remains is plundered by the leader and his family and friends to be mostly exported to the welcoming arms of the banks in the major western economies - most prominently the corrupt no-questions-asked denizens of the City of London.

    The direct theft is transparent but what is better concealed is the part the western institutions such as the IMF and World Bank play in this process. The leader lumbers his country with massive debts to these bodies which the economy can barely afford and in many cases simply could never be repaid. The burden for repayment does not fall on the kleptocrats but on the people who then have to pay higher taxes to service the debt. This keeps them in poverty and so reinforces the position and isolation of their despotic leader.

    The western banks are willing conspirators in this.

    Three. Western Democratic Kleptocracies.

    The western democratic kleptocracies work rather differently from ex-communist and third world ones. In general, they aim to be discrete so that you don’t know what they are up to. Like all thieves, they shun the limelight.

    But they overextend their greed from time to time and hit the headlines as HSBC has just done. This is not too much of a problem to them as the politicians are in their pocket, the criminal justice system does nothing – or maybe imposes a derisory fine.

    In any case a huge amount of what they do is legal – legal theft. As I have said tax fraud is just one aspect of the whole system. The media may report it when it is thrust in their faces, but what they will never go near is investigation of the whole kleptocracy under which we live.

    And of course many media outlets our owned by members of the kleptocracy, some of whom are household names.

    The western kleptocrats use other even more effective means to rob the people than tax evasion. All these essentially work in the same way – by increasing the number and value of capital assets.

    This is how it works. If capital assets are numerous and valuable they inevitably fall into the hands of the megarich, for the simple reason no one else has the money to buy them. In fact, neither do the megarich have enough money. But they are in a position to acquire "leverage" whereby a friendly bank creates the money they need and then lends it to the megarich player who contributes a small percentage. His or her small sum is ‘leveraged’ by the bank created money to enable the deal. This is the quite normal widespead activity in which the banks and the superrich are ‘all in it together’.

    A large aggregate value attached to the nation’s capital assets means that a greater and greater amount of money can be siphoned off from the working, productive economy. This in turn means lower wages, lower productivity, lower profitability of SMEs (small and medium sized businesses, ie, all but giant corporations), degradation of public services and a bigger public debt.

    In the video I mentioned at the beginning it was claimed that if there were no tax evasion there would be no public debt! Just imagine if all the other klepto-practices were eliminated how rich we would all be. Yes, that’s right. We are an immensely rich country. If it does not feel that we it is because the wealth is being stolen.

    This is the reality that the kleptocracy wants to hide from view. The figures presented on Newsnight are familiar enough and no one ever tries to refute them. They are the simple truth.

    I have described in other newsletters and on the DRP website how various ways are used to balloon the aggregate capital value out of all proportion to the working economy. All the new fangled ‘innovative financial instruments’ serve this purpose.

    Securitisation for instance is the means by which absolutely any regular income stream is converted into a capital asset. Student loans are one such. The privatisation of the collection of parking fines is another small but illustrative example. When the state collects the fines there is no capital asset. You could say in a sense the state owns the asset but you can only really speak of a capital asset once it becomes tradable. It is rather like if you are in good health this is an asset for it benefits you in myriad ways, but it is not tradable and so cannot figure as an asset in the economic system.

    Other instruments such as CDSs (credit default swaps) guarantee (in theory) the risk inherent in any loan by a bank or other lender. Before 1995 these had not been invented but once they had been invented a new income stream was generated and so also a new tradable capital asset.

    The aptly named “synthetic” instruments then came along and guaranteed risk that had not actually been assumed by anyone. This delinking of the asset from the remotest connection with the real economy meant there could be no lid on the number and value of these contracts that could be produced.

    All this meant a bigger aggregate value of capital assets in the economy. Chuck in the fact that the owners of these assets, unlike the rest of us, can shield their incomes from tax by stashing them away in tax havens and it is pretty easy to see that the aggrandisements of these fortunes can continue virtually without limit. The effect of this is what the Oxfam report was seeing. Watch out for the next Oxfam report and how the process of concentration of wealth in the hands of the financial elite has gone even further

    As well as inventing new types of capital assets, the aggregate capital value in the economy can be blown up by increasing the value of existing ones way beyond what the activity in the real economy at large would dictate. The most obvious example of this that touches millions is the value of houses and flats.

    Since Thatcher’s liberalisation the banks have deliberately forced house prices up and increased the aggregate capital value. Make no mistake this has been engineered to increase indebtedness and tip the balance further in favour of the superrich. It is almost nothing to do with real economic factors.

    Now the vital point to understand is that these capital assets do no useful work themselves.

    The postman who delivers a letter has contributed to the productive economy. In effect he or she has created or supported a little bit of wealth. The banker who creates and sells securitised income streams contributes nothing – except to work to skew the economy in favour of the asset holders.

    Capital assets cannot exist in a vacuum and they cannot exist purely by virtue of the clever manipulations of those who deal with, and deal in, them. Ultimately capital assets have to be supported by real wealth creation and that means productive businesses and wage earners.

    Capital assets by their nature have to piggyback off real wealth creators and so, as they become more and more magnified, the burden of them starts to crush the life out of those providing the piggyback ride. In the end the parasite always risks killing the host. The results of this on the ground are declining wages, deprivation, mental stress, illness, early deaths and so.

    As I said above we could all be rich. But we aren’t because we live under a kleptocracy. I think that it is a pity.

    I said earlier on that some western democracies, like Britain, US, France, the Scandinavian countries, for example, are better governed than most of the rest. I also said this is not down to the democratic system. It is also not down to the absence of kleptocracy. What is it down to then?

    We need to distinguish between oligarchic kleptocracies (of which I have spoken about so far) and bureaucratic kleptocracies. Bureaucratic kleptocracy is corruption of the civil service whereby you have to pay its employees bribes. Where such corruption exists you will expect to pay the provider for a driving license permit, for instance, or to keep your tax burden lower you bribe the tax collector as a normal practice.

    Imagine in Britain the reaction you would get from your tax inspector if you asked him or her to reduce your tax bill with the help of a bribe.The reaction would be shock and probably imprisonment for you. In Argentina the shock would be if you did not offer this deal to the public servant.

    In Misinterpreting Modern Russia, Bruno S. Sergi reports that it is estimated that for every two roubles of tax revenue that is paid by a tax payer only one reaches the Russian revenue service.

    An inevitable effect of bureaucratic theft is the profusion of obstacles and licences for the simplest of actions. Hernando de Soto recounts in The Mystery of Capital that in his native Peru, you need 20 different permits to build a house each one only obtainable with the help of a backhander.

    With such theft an everyday and accepted fact of life, there is no chance of a genuinely entrepreneurial economy ever developing. And so the country remains poor and miserable. This kind of bureaucratic kleptocracy keeps Greece, Italy, Spain and all Latin American countries undeveloped or in outright poverty for the mass of people in spite of immense natural and human riches.

    There are only a handful of countries in the world where bureaucratic kleptocracy is not rife. These are the major economies or more precisely those that have a reasonable GNP per head (China and Russia are big economies only because they are massive countries.). Britain, USA, and the others are run by kleptocratic governments but the bureaucracies are clean. It is the armies of scrupulously honest tax collectors and permit issuers that make these countries different.

    The Tories of Britain love to denigrate the civil service and their hero. Margaret Thatcher, made the undermining of the service a personal crusade. The people at the top of the bureaucracy may often jump ship and scandalously sell their information and contacts to the private sector for a small fortune but the people that we all meet in our face to face dealings with the service are overwhelmingly honest and diligent.

    This, as I said, is the case in only a few countries of the world. We are privileged to be one of them. Although we have a government kleptocracy the honest bureaucracy means life in Britain can be good for many and creating and expanding a business may be difficult but not impossible.

    In Britain you can mostly hang on to your wealth and this inviolability of property rights goes back to the great Whig philosopher of the seventeenth century, John Locke. It is ingrained in the Britain psyche.

    I said at the start there is one country that is not a kleptocracy - or at least much less of one than all the others. This also happens to be the most successful economy in the world – Germany.

    How do I know this? Because in Germany you see a country that constantly invests in its industry to become more productive to provide the world with the goods it wants.

    It is a golden rule that kleptocrats place money, they don’t invest it.

    That is to say, they use their wealth to generate more wealth by careful manipulation of markets and protection of it against the exigencies of world events. They like cash cows like privatised water companies or credit card debts. The last thing they want is to dirty their hands in the productive economy and work with entrepreneurs and engage in risk.

    German wealth is much less used this way. A big proportion of the goods Germany produces are not consumer goods but machines for production. So the familiar German goods we see in the shops are only the tip of the iceberg.

    A good honest bureaucracy combined with a weak kleptocracy gives Germany the edge on almost every other country. Unless others like Britain change, Germany’s pre-eminence will increase for the foreseeable future.

    To change, Britain is going to require a revolution. For that to happen things will probably have to get a lot worse than they already are. And simple folk like Evan Davis will have to open their eyes and see.

    Make no mistake there is nothing at present to prevent the kleptocrats increasing their share of the national pie. Watch this space

    But their time will come. The scales will drop from people’s eyes. The standard myths peddled by the mainstream media will be seen through. The knockabout ‘democracy’ will be recognised as a charade.

    Kleptocracy can be defeated. It will be at a price.

    But the gain will be that we will all be showered in riches.


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