Panama Papers. Where to?

Published in Ziarul Financiar, 02 May 2016

« Panama Papers » scandal spread with a huge magnitude over the last months, fuelled by the amounts involved, the legal and financial mechanism that have been published, but also by the states, companies or persons associated with it.

Numerous comments were made with regard to the impact of the event, some of them very passionate. A lot of political and governmental environments rushed to announce measures to prevent a phenomenon that advised bankers, political figures and businessmen knew very well, but did not mention. But these measures will be short-lived if at least the following two factors are not taken into account: the inequality of the capital distribution and the dynamics of capital flows.

The inequality of the capital distribution

Capitals have been unequally distributed all the time in the history. Thomas Piketty’s « Capital in the Twenty-First Century» has rapidly become a landmark for the entire contemporary economic literature. The book methodically reveals the problems of capital flows and the huge inequalities generated by the capitalist market. Piketty focuses minutely on the distribution of income and capital since the 18th century till our days. The dynamics between capital and income produces inequalities and divergences, divergences lead to blockage, ruptures, capital leaks and ultimately to war.

But not only economists should be concerned about capital. Capital should be a matter of concern for every individual who is aware of the economic dimension of his/her life, for every company that is interested to create value for its clients, employees and shareholders, and also for the public authorities interested to turn capital into a force of economic growth. Statistics are not and will never be perfect, leaving room for interpretation. Therefore, we more than ever need a multidisciplinary approach, accounting for the governance model specific for every country.

The studies of many economists revealed the importance of the public institutions in understanding and directing the dynamics of the economic and social phenomena. Irrespective of the century or the degree of “democratic maturity” of a state, the laws of market economy generate an ever increasing concentration of capital and wealth in an environment where the return of investments always tend to surpass the state’s economic growth.

Let’s remember the ROE (return on equity) that many of the large investment banks posted a few years ago… Above 30%… Even now their profits outgrow by far the dynamics of the economy. The big challenge will be to identify ways to direct part of these high returns of the investments on the financial markets into the real economy, in the projects that await financing, depending on the specificities of each country (infrastructure, education, high technology, health, micro-financing…) and the research that will lead the financial services industry to the business models expected by the Digital and Internet World.

The phenomenon is deepened even more by capitalistic monopoles that rich states hold on major parts of the poor and emerging countries, which are turned into economic or military “satellites”. Most of them are already ultra-dependent on the « core » around which they gravitate. Education, culture, technology – they are all placed under this dependency paradigm, while the “local capital crumbs” leave the borders. Almost nothing remains national.

But if we look back into the history, there are countries that developed without the help of massive foreign investments. All these countries financed their investments with internal resources, especially the development of human capital, which represents their true source of economic growth. But these advantages are limited if not doubled by economic openness.

An analysis of the capital inequalities and their metamorphoses from an economic and geo-political point of view will answer our question: Is it more profitable to work to generate income or to accumulate capital and benefit from the rent generated by it? The entry barriers and the inequalities characterizing the labour market (generated by social status, nationality, sex, age and the run for education and technology), but also the wealth distribution (generated mainly by inheritances) do not place the players on the same position. Or, as universally accepted, we all have equal rights. „People are born and remain free and equal in rights. Social distinctions may be founded only upon the public utility.” says the first article of the Declaration of the Human Rights. What remains of the meaning of this emblematic phrase that transformed so many societies?

To reduce the impact of the growing inequalities, Thomas Piketty proposes a solution that he himself describes as difficult to implement in our current world: the progressive and consolidated taxation of the capital worldwide. Is such a measure possible? Unfortunately, history demonstrates that war was the only regulating factor. The unbalances and tensions that undermine European and international relations make this hypothesis all but possible.

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