How the other half per cent live: the Rolls Royce Wraith is unveiled in the windows of Harrods, Knightsbridge. Photo: Getty
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The last thing we need is oligarchs’ money flooding into Britain

Felix Martin explores the question of Russian capital flight to London.

The international response to the crisis in Ukraine has been depressing to watch. It is hard to avoid the conclusion that the west has so far been comprehensively outmanoeuvred by Russia, whose old-school, facts-on-the-ground tactics have been met by a series of feeble and poorly co-ordinated half-measures.

The diplomats dismiss such pessimism. In today’s financially globalised world, they say, there is more to the projection of power than conferences and UN resolutions. As the real measure of their strategy’s success, they point to the revival of modern Russia’s most chronic economic ailment – capital flight.

In the first three months of 2014, $51bn exited Russia, compared to half that a year earlier. In other words the financial markets are doing the diplomats’ job better than they ever could. Investors are voting with their feet. Every dollar of capital fleeing the country is another nail in the coffin of Putin’s policy in the “near abroad”.

The idea that internationally mobile capital has the power to discipline governments – and that this power is benign – is an old one. In the west, it usually crops up in the context of economic policy. The idea is that governments are prone to spend beyond their means and to dole out contracts to their backers and that they generally fail to take the “tough decisions” necessary for long-term economic success. Voters get to punish them for such misdemeanours only every four or five years. The financial markets, by contrast, do it in real time. Their X Factor panel sits in judgement 24 hours a day, with the price of a government’s bonds keeping track of the score.

The diplomats’ excitement is not be-cause they think that Russian capital flight shows up the shortcomings of the Kremlin’s latest budget plans, however. For them, it signifies something much bigger: a major counterweight to Vladimir Putin’s political power. In short, a powerful force for democratisation.

This, too, is an idea with a distinguished pedigree. In the 18th century, Montesquieu observed that since the invention of the bill of exchange – the prototype of the bonds, stocks and currencies traded on today’s international financial markets – Europe’s monarchs had become “compelled to govern with greater wisdom than they themselves might have intended”.

His contemporary the Scottish economist James Steuart put it even more bluntly. The ever-present threat that capital might flee the country, he wrote, was nothing less than “the most effective bridle [that] ever was invented against the folly of despotism”.

The diplomats in Washington and Brussels agree. Yet they should pause before engraving Steuart’s maxim over the gates of the US state department and Berlaymont, the home of the European Commission. Neither the economic nor the political benefits of the international free movement of capital are quite as simple as they look. Both rest on questionable assumptions.

The economic argument relies on the premise that markets accurately assess where capital can most profitably be deployed. The theory suggests, for example, that capital will tend to flow from rich countries – where it is plentiful and therefore earns a low return – to poor ones, where it is scarce and therefore highly productive. What could be more logical than that?

The reality is exactly the opposite. Over the past two decades, capital has tended to flow from poor countries to rich ones and, as the years leading up to the 2008 crisis showed, often into investments that are egregiously wasteful, too. There is, in other words, no economic law of gravity that ensures that capital flows to wherever it would be most productive. In the real world, other factors trump pure financial rationality and so capital often flows uphill.

The political dividend from international capital mobility is more ambiguous still. The unspoken assumption here is that the markets are in essence democratic, while the governments they undermine are corrupt – that’s the reason to applaud the fixing of the bridle to the despot.

What if it is the other way round? What if it is the government that is representative and the forces of capital that are not? Everything hangs on the distribution of wealth. In countries where the ownership of capital is widely dispersed, it may be a fair assumption that investors are a democratic force. But where wealth is concentrated among a tiny elite, it may not hold true at all. Russia is a good example: it is the capital of the country’s oligarchs that is fleeing abroad. The budget option open to the average Russian without a banker in Zurich or an estate agent in London involves a much less exotic itinerary: she buys dollar bills and sticks them under her mattress.

Two hundred and fifty years ago, international capital mobility may indeed have been an innovative force for the eradication of bad government. Today, it is just as often the means for multinational companies to dodge sales taxes or developing-world kleptocrats to siphon off their unearned wealth.

There is also another consideration – particularly for us here in the UK. For every country that capital is fleeing from, there has to be somewhere it is fleeing to.

This month, it was announced that penthouse D in the One Hyde Park development in London has been sold for £140m – unsurprisingly, newspapers reported that the buyer was “thought to be from Ukraine or Russia”. Just a few days earlier, the deputy governor of the Bank of England had warned that the UK’s booming housing market is “dangerous” and “the brightest light” flashing on its dashboard of risks.

An increase in Russian capital flight, I imagine the Bank would agree, is the last thing the UK economy needs.

Macroeconomist, bond trader and author of Money

This article first appeared in the 21 May 2014 issue of the New Statesman, Peak Ukip

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The Prevent strategy needs a rethink, not a rebrand

A bad policy by any other name is still a bad policy.

Yesterday the Home Affairs Select Committee published its report on radicalization in the UK. While the focus of the coverage has been on its claim that social media companies like Facebook, Twitter and YouTube are “consciously failing” to combat the promotion of terrorism and extremism, it also reported on Prevent. The report rightly engages with criticism of Prevent, acknowledging how it has affected the Muslim community and calling for it to become more transparent:

“The concerns about Prevent amongst the communities most affected by it must be addressed. Otherwise it will continue to be viewed with suspicion by many, and by some as “toxic”… The government must be more transparent about what it is doing on the Prevent strategy, including by publicising its engagement activities, and providing updates on outcomes, through an easily accessible online portal.”

While this acknowledgement is good news, it is hard to see how real change will occur. As I have written previously, as Prevent has become more entrenched in British society, it has also become more secretive. For example, in August 2013, I lodged FOI requests to designated Prevent priority areas, asking for the most up-to-date Prevent funding information, including what projects received funding and details of any project engaging specifically with far-right extremism. I lodged almost identical requests between 2008 and 2009, all of which were successful. All but one of the 2013 requests were denied.

This denial is significant. Before the 2011 review, the Prevent strategy distributed money to help local authorities fight violent extremism and in doing so identified priority areas based solely on demographics. Any local authority with a Muslim population of at least five per cent was automatically given Prevent funding. The 2011 review pledged to end this. It further promised to expand Prevent to include far-right extremism and stop its use in community cohesion projects. Through these FOI requests I was trying to find out whether or not the 2011 pledges had been met. But with the blanket denial of information, I was left in the dark.

It is telling that the report’s concerns with Prevent are not new and have in fact been highlighted in several reports by the same Home Affairs Select Committee, as well as numerous reports by NGOs. But nothing has changed. In fact, the only change proposed by the report is to give Prevent a new name: Engage. But the problem was never the name. Prevent relies on the premise that terrorism and extremism are inherently connected with Islam, and until this is changed, it will continue to be at best counter-productive, and at worst, deeply discriminatory.

In his evidence to the committee, David Anderson, the independent ombudsman of terrorism legislation, has called for an independent review of the Prevent strategy. This would be a start. However, more is required. What is needed is a radical new approach to counter-terrorism and counter-extremism, one that targets all forms of extremism and that does not stigmatise or stereotype those affected.

Such an approach has been pioneered in the Danish town of Aarhus. Faced with increased numbers of youngsters leaving Aarhus for Syria, police officers made it clear that those who had travelled to Syria were welcome to come home, where they would receive help with going back to school, finding a place to live and whatever else was necessary for them to find their way back to Danish society.  Known as the ‘Aarhus model’, this approach focuses on inclusion, mentorship and non-criminalisation. It is the opposite of Prevent, which has from its very start framed British Muslims as a particularly deviant suspect community.

We need to change the narrative of counter-terrorism in the UK, but a narrative is not changed by a new title. Just as a rose by any other name would smell as sweet, a bad policy by any other name is still a bad policy. While the Home Affairs Select Committee concern about Prevent is welcomed, real action is needed. This will involve actually engaging with the Muslim community, listening to their concerns and not dismissing them as misunderstandings. It will require serious investigation of the damages caused by new Prevent statutory duty, something which the report does acknowledge as a concern.  Finally, real action on Prevent in particular, but extremism in general, will require developing a wide-ranging counter-extremism strategy that directly engages with far-right extremism. This has been notably absent from today’s report, even though far-right extremism is on the rise. After all, far-right extremists make up half of all counter-radicalization referrals in Yorkshire, and 30 per cent of the caseload in the east Midlands.

It will also require changing the way we think about those who are radicalized. The Aarhus model proves that such a change is possible. Radicalization is indeed a real problem, one imagines it will be even more so considering the country’s flagship counter-radicalization strategy remains problematic and ineffective. In the end, Prevent may be renamed a thousand times, but unless real effort is put in actually changing the strategy, it will remain toxic. 

Dr Maria Norris works at London School of Economics and Political Science. She tweets as @MariaWNorris.