Foreign

Following Chancellor Rishi Sunak’s announcement in his Spending Review that foreign aid would be cut from 0.7 to 0.5%, a reduction of some £4 billion, the debate surrounding this issue has reignited. One junior minister, Baroness Sugg, resigned following the decision, calling the cut “fundamentally wrong” in such a time of global crisis, with Sunak defending the decision as a response to the economic fallout of the pandemic. 

Although this cut would remove the UK from the top of the G7 with regards to overseas aid spending as a percentage of national income, with Germany taking the lead with its 0.6%, Sunak argues that the UK would remain the second-highest donor. However, this would not be the case for long, as France may soon overtake the UK, following President Macron’s announcement that he plans to raise France’s official development assistance (ODA) from 0.44 to 0.55% by 2022. This would undeniably reduce the UK’s international reputation as the leader in overseas aid and development. 

So, if the UK were to lose global reputation as a result of this reduction in overseas aid spending, that reputation would have to be recovered by other means, not necessarily outside the realm of foreign policy. Perhaps the solution lies in what the UK can achieve in dealing with the vast amounts of corruption prevalent within the sphere of foreign aid. The level of corruption was made utterly undeniable with the release of a shocking report by the World Bank, which revealed that as much as a sixth of foreign aid funds intended for some of the world’s poorest countries had been lost to corruption. 

In the Elite Capture of Foreign Aid study (released in February), it was discovered that there was a leakage of aid funds at around 7.5% for countries that received more than 2% of their GDP in aid, with this money seemingly turning up in ‘offshore financial centres known for bank secrecy and private wealth management’. This percentage was seen to increase to 15% for countries receiving more than 3% of their GDP in aid, highlighting how the countries which are most dependent on our help are the ones which are suffering the most from these corrupt practices. 

This report clearly points to serious corruption within the aid process, which is emphasised by the fact that attempted fraud against the Department for International Development (DFID) has almost doubled in three years, becoming bolder and more expansive. Despite this drastic increase in scale however, the official numbers of fraud losses by DFID have dropped in the past few years, causing some to raise questions concerning oversight and governance. The fact that fraud and corruption appear to be on the rise in the aid process truly highlights the need for proper investigation and perhaps reform in order to prevent such a scale of misconduct from continuing or getting worse. 

This is the battle in which the UK must be on the frontline, especially in light of the recently announced cuts. If there is to be less funding for foreign aid as a result of the current economic crisis, then it is all the more important that the money actually goes to those who need it most, rather than lining the pockets of corrupt elites. Furthermore, a portion of the foreign aid budget could be set aside specifically for ensuring that aid funds for a certain country do not fall victim to corruption, although perhaps not until the temporary cuts are lifted. The removal of such wasted spending within the overseas aid budget would certainly seem advisable given the current economic situation. In fact, the Institute for Fiscal Studies predicts that a fiscal tightening of £40 billion in tax revenue a year by the time of the next election will be needed to balance the books.

Therefore, it seems that the rooting out of corruption concerning foreign aid funds would not only benefit those who are in need of the economic relief provided by those funds, but also the UK, with taxpayer money being more effectively and efficiently spent. The arguably necessary cut in funding must not be seen as the beginning of the end of British aid, but rather as the beginning of a new era for the foreign policy of the UK: one based on compassion and honesty, rather than corruption and misconduct.

Oli is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Number 10]

Shinzo Abe, who resigned last month as Japan’s Prime Minister for health reasons, leaves behind a mixed legacy on the economy. His administration’s policies, nicknamed ‘Abenomics’, kept the economy afloat in the short term, but largely failed to address its two core problems.  

The first is a plummeting population, set to shrink from 125.7m in 2019 to 88m people by 2065. The second is stagnant productivity. In 2018, Japan’s productivity was the lowest among the G7 members. This has been the case since 1970. Given the imminent demographic crunch, Japan desperately needs to jumpstart its productivity if its economy is to stay afloat.

Fortunately, the appointment of the new Prime Minister, Yoshihide Suga, is an opportunity for a fresh approach to the economy. Don’t expect anything revolutionary in the short term. Since Prime Minister Suga will have to face an election in the next year, he is likely to focus on getting quick wins for now. However, in the longer term, ‘Suganomics’ should prioritise tackling the fundamental drag on Japan’s productivity: unproductive small and medium-sized enterprises (SMEs). 

According to a 2019 paper by the IMF, SMEs in Japan have had significantly lower productivity growth than larger firms. This has crippled Japan’s overall productivity because SMEs represent a significant share of the economy. In 2014, they employed 70.1% of the private sector workforce. Boosting SME productivity is key to lifting overall productivity and preventing the demographic crunch from sinking the economy.

To understand how Suga’s government can raise SME productivity, we must first examine why it is so low.

One reason is that many SMEs face financing constraints. This is because Japanese lending practices put SMEs at a disadvantage. When extending loans to SMEs, Japanese banks rely largely on fixed-assets collateral and personal guarantees, rather than risk-assessments based on business value. This makes it difficult to secure loans for SMEs with good growth prospects but insufficient collateral. Interviews by the Economist Intelligence Unit suggest that these financing constraints are an important reason for many Japanese SMEs spending so little on innovation.

To solve this issue, the government should promote alternative forms of financing for SMEs, such as venture capital. It should also encourage banks to improve their methods of assessing credit-risk, for instance by using IT more and asking prospective borrowers to provide audited financial statements. 

The second reason for low SME productivity is the overly generous Credit Guarantee System for SMEs. Set up in 1950, the system aims to help SMEs access finance and protect them from bankruptcy. Here’s how it works: government-run Credit Guarantee Corporations (CGCs) guarantee many loans made to SMEs by banks. If an SME with a guaranteed loan goes under, the CGCs compensate the lending bank for up to 80% of its losses.

While well-intended, this system’s harmful impact on productivity is a classic example of the law of unintended consequences arising from government intervention in the economy. There are two notable unintended consequences in this instance. 

First, the system creates perverse incentives for banks. While banks are overly cautious when making regular business loans to SMEs, as discussed above, the opposite is true for guaranteed loans. Since the CGCs bear the brunt of the losses when guaranteed loans go sour, banks have a weaker incentive to screen and monitor guaranteed-borrowers. 

This enables non-viable SMEs to secure loans that they would not otherwise have access to. These loans act like life-support, keeping inefficient ‘zombies’ in the market and shielding them from bankruptcy. As a result, an abnormally low percentage of non-viable firms exit the market and the annual rate of firms exiting the market is low compared to other developed countries.

This is disastrous for productivity. Productivity growth hinges on an efficient allocation of resources, which is driven by the dynamic process of firms exiting and entering the market. When zombies continue operating, they hold onto staff who could be employed more productively by more efficient firms. They also drain customers and profits from these firms, making it difficult for efficient SMEs to afford investment. This has reduced investment in Japan, which has harmed productivity. Also, the continued presence of zombies has likely discouraged potential market entrants with higher productivity from entering the market.

A second unintended consequence of the Credit Guarantee System is that it deters SMEs from expanding. Since firm expansion is key to productivity, this equates to discouraging productivity.

In a market economy, firms typically seek to expand in order to increase profits. This entails hiring more staff and investing in extra capacity, which enables them to exploit economies of scale and become more productive.

However, in Japan, many SMEs choose not to grow. This is because growing past a certain threshold in terms of staff headcount or amount of capital means losing the SME status. This entails losing the generous benefits of the Credit Guarantee System. Many SMEs, avid to hold onto these benefits, prefer to simply stay small, even if it means eschewing productive investments. A 2016 study found that this was an important deterrent to Japanese SMEs investing in capital. 

To fix these problems, the government should significantly reduce the loan coverage offered by the Credit Guarantee Corporations. The Abe administration admirably reduced the top coverage rate from 100% to 80% in 2018, but this remains too high. The new government should be more ambitious. 

A reduced rate would make banks bear a greater proportion of the losses when SMEs with guaranteed loans go bankrupt. This would force them to screen guaranteed-borrowers more effectively, monitor them more carefully and perhaps offer struggling borrowers advice on business revitalisation. 

Admittedly, this reform may not be appropriate while the COVID crisis continues to ravage the economy. The pandemic has left many SMEs vulnerable, including productive ones, and the government has rightly stepped in to support them. However, once the crisis abates, the Suga administration should push ahead with this reform.

How likely is this? The precedents are not particularly encouraging – successive Japanese governments have done little to solve this longstanding issue. Moreover, reforms to the Credit Guarantee System will face fierce resistance. SMEs have a strong vested interest in the status quo and do not want to see their benefits cut.

Nonetheless, the chances of SME reform are now better than ever. The new PM has made his eagerness to reform the economy clear. Additionally, one of his closest advisors, David Atkinson, is an ardent proponent of reforming the Credit Guarantee System. If he is to remedy Japan’s chronically low productivity, Suga should put SME reform at the heart of his economic plan.

James is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue.

As the COVID-19 pandemic continues to take its grip on the world, the political blame game has kicked off and is in full swing. 

President Trump and his officials have referred to COVID-19 as the “Chinese virus”, or the “Wuhan virus”, and a diplomatic spat has emerged between the White House and the World Health Organisation.  The British Government has seemingly indicated that “China faces a ‘reckoning’” over their handling of the COVID-19 outbreak, covering-up the start of the outbreak. A China Research Group has recently been set up by senior Conservative MPs, led by Tom Tugendhart MP who explains that the group is needed to “promote debate and fresh thinking” in relation to China’s economic ambitions and global role, adding that the group would not be “anti-China”.

There is an increasing amount of commentary calling for the Chinese Communist Party (CCP) to take responsibility for the cover-ups and delayed responses which – it is argued by many – has caused COVID-19 to have a far wider reach than it would have had if the CCP had taken action before the mass exodus of those in China for Chinese New Year from the middle to the end of January 2020.

On top of any allegations regarding the role of the CCP in allowing COVID-19 to become a global pandemic, we who work in the field of human rights are more than alert to the many incidents of human rights violations perpetrated by the CCP against Tibetans, Uyghurs, pro-democracy Hongkongers, and anyone who speaks out against the regime or embarrasses party officials. However, it should be remembered that the CCP is not the same as China or her peoples, and that criticism of the CCP should never be mistaken as criticisms of China or her peoples. As such, we stand resolutely together in saying that we are both pro-China, and we both love the country and the peoples of China.

The Chinese Ambassador, Liu Xiaoming, recently wrote in the Financial Times that: “Those who seek to stigmatise China owe Chinese people an apology.”  China is said to have a history of 5,000 years, although the earliest written records of China is thought to date from as early as 1250 BC during the Shang Dynasty. In contrast, the CCP’s history only spans back to 1921, and the CCP has only controlled mainland China since 1949, establishing the People’s Republic of China. The CCP’s 70-year rule of China so far is but a small fraction of China’s long history.

The well-oiled CCP propaganda machine regularly churns out rhetoric across state-controlled media that to be patriotic, you must also love the CCP. However, any criticism of the CCP and its policies is, in reality, no more a criticism of China and her peoples as a criticism of the Royal Family and the Crown, or 10 Downing Street and the governing party, being equivalent to a criticism of the United Kingdom and her peoples as a whole. In a recent conversation one of us had with a media editor in China, the question was raised: “In your personal opinion, do you need to love the CCP to love China?” The editor’s answer: “No. But here is how people are educated, thus to enhance the government’s ruling.”

In the Nicomachean Ethics, Aristotle describes political science as that which is concerned with investigating “fine and just actions”, and what constitutes good, fine and just actions will be subject to “variety and fluctuation of opinion”. The ultimate aim of participating in politics is to promote good (Arist. EN I.3.). By participating in any political dialogue in criticising the CCP, our aims are purely to promote what we feel are “fine and just actions” for China and her peoples. Highlighting how one can love one’s country but oppose the serving government, Dr Sun Yat-sen, who opposed the Chinese Government of his day leading the overthrow of the Qing Dynasty in 1911, is even revered by the People’s Republic of China and mentioned by name in the preamble of the Constitution of the People’s Republic of China.

Whilst we consider that the CCP must be held accountable, especially those that have resulted in wholesale breaches of human rights, it should also be remembered that this does not make the Chinese people complicit. Indeed, it is the people of China who are the primary victims of the regime’s inhumanity. The unfortunate fact is that the CCP’s propaganda machine prevents many people from knowing the truth of what has happened, and what is happening. World famous dissident artist, Badiucao, did not know of the Tiananmen Square massacre until he came across a documentary embedded in a film that he and his friends at university had downloaded. 

Deng Xiaoping, on 10 April 1974, gave a speech at the United Nations. Towards the end of his speech, he said: “If one day China should change her colour and turn into a superpower, if she too should play the tyrant in the world, and everywhere subject others to her bullying, aggression and exploitation, the people of the world should identify her social-imperialism, expose it, oppose it and work together with the Chinese people to overthrow it.” We speak out because, as Deng Xiaoping said, we are identifying, exposing, and opposing the CCP’s social-imperialist policies.  We speak out because of our desire to fight injustice, and because of our love for China and her peoples.

Benedict Rogers is founder and Chair of Hong Kong Watch and Deputy Chair of the Conservative Party Human Rights Commission, and works for the international human rights organisation CSW.

Perseus (a pseudonym) is a Hong Konger based in the UK. He is a freelance photographer specialising in journalistic photos, street photography and portrait work. He is also a qualified lawyer practicing in human rights and public law.

Views expressed in this article are those of the author, not necessarily those of Bright Blue.