Interview with Sony Kapoor

1. You have rather uniquely been a banker (including with the infamous Lehman Brothers), a derivatives trader, worked with several of the world leading NGOs and advised several governments – so what is the story?Having seen how the opening up of the Indian economy in the 80s expanded opportunities for everyone, I am a big believer in the ability of private enterprise to deliver prosperity – a red blooded capitalist if you will. Capitalism’s strength lies in its ability to improve the lot of the ordinary man which is why the system has outlasted all others. And the financial system is the brain of such a system – hence my decision to go into banking.

While the work I did was intellectually fascinating and sometimes fulfilling, I was surprised by how dissociated from the real economy finance and banking had become. The thing that shocked me most was how rules and regulations were perverted as a matter of course. Financial capitalism, I found out, was undermining capitalism.

I quit focusing on reforming finance and making it work for the real economy and found a natural home in Think Tanks and Non-Governmental Organizations. I co-founded the international Tax Justice Network to campaign against tax havens and tax avoidance – back in 2003 before the tax agenda was fashionable; advised governments and civil society on the cancellation of multilateral debt for poor countries and developed a positive agenda to harness the financial system for good.

I also spent five frustrating years warning against the build-up of financial risks and campaigning for financial reform trying to convince the likes of the IMF, the UK treasury, central banks and regulators but to no avail. It was only in 2008, after Lehman crashed, that I became fashionable again.

As I had worked in more than 10 countries by then on issues ranging from financial reform to fiscal policy, from green investments to international development including as strategy adviser to the Norwegian government, I was well placed to be one of the few people to do well out of the crisis.

I had not changed my mind about the need for financial reform, or counter-cyclical macroeconomic policy, or the need to act against tax havens etc. but the world around me changed and I got invited by the likes of the European Commission, the European Parliament as well as EU central banks and finance ministries to advise them. This is how Re- Define, the Think Tank I run, came to be one of the most influential institutions in the Eurocrisis, on Financial Reform and on broader economic policy.

2. That’s quite a story – tell me more about Re-Define and its work. Who do you work with, on what issues, and where?We were set up in early 2008 to do three things 1) Provide independent expertise on finance and economics to governments 2) Apply our knowledge of finance and politics to devise solutions for the challenges and problems faced by NGOs and businesses and 3) Be a think tank promoting Financial Reform, Improving Tax and Macroeconomic Policy, fostering Development and Tackling Climate Change.

We work with all the key European institutions including the parliament and the commission, several international institutions such as the IMF and the UN, many national governments both in the EU and in Asia – particularly finance ministries, central banks, development ministries and the ministries of environment. We also advise several international NGOs on the one hand and are consulted by large pension funds, financial institutions, regulators and sovereign wealth funds on the other. So we span the spectrum between private business, civil society and policy making, and between developed and emerging economies.

3. You have so far been on the right side of most issues on the Eurocrisis including on your position on excessive Austerity. Are you still working on it? On the Eurocrisis, we continue to advise European governments, regulators and central banks on how best to square the circle of the apparently irreconcilable interests of creditor and debtor countries within the limits posed by social and political sustainability. We are also working with investor and business groups trying to manage the risks and opportunities arising from this excruciating process.

Because we have been proven right by the turn of events, and have a deeper understanding than most others of the key drivers and personalities in this crisis, we are heavily engaged in finding a politically feasible solution, but things do not look very good.

4. You have been going on about the need to tackle tax havens, address tax avoidance and have better international co-operation on taxes for the past ten years. Are things changing?Re-Define has worked with European institutions, the OECD, finance ministries, MNCs, the UN and the IMF over several years in helping shape the critical tax agenda which has finally started dominating headlines. Particularly at a time when the tolerance for corruption has fallen, financial stability and the transparency of financial flows has assumed critical importance, developing countries try to tackle capital flight and OECD economies scramble to maintain their welfare states, this agenda will only become more important. As we advise many of the key governments and institutions driving the tax policy agenda on these issues, we are also helping businesses understand the key drivers of the agenda.

We also advise how best to tackle reputational risks and prepare for new realities and significant policy changes on how the national and international aspects of tax policy work. We believe that this is just the start of the fiscal wars which will continue to heat up.

5. What are you doing on financial reform and the financial system?Having been deeply involved in the design of new financial regulations and having championed financial reforms since before they became fashionable, we have a strong stake in ensuring that the regulatory changes make the financial system work for the real economy. Unfortunately, some of the reforms that have been proposed are wrong- headed and other critical ones have been ignored or successfully lobbied against.

Nevertheless, even those reforms that have been agreed will have a far reaching impact on the financial system. The macroeconomic environment, particularly in the EU and the shift of economic power to Asia, is also changing the shape of the financial system.

Re-Define continues to work with the European Authorities, international bodies as well as central banks in promoting more sensible reforms, where we emphasize the quality of regulations over quantity.

At the same time we are working with financial institutions, investors and regulators on understanding the large systemic changes underway in the financial system and what can be done to manage these in a manner that is least disruptive for the fragile real economy. In particular, several business models are becoming obsolete even as new opportunities arise. Understanding this does not just provide a competitive advantage but may actually be crucial for survival.

6. Investors face several headwinds not least the Eurocrisis, are you working with them?The world has always been risky and uncertain, but it would be fair to say the present environment poses special challenges, particularly to long- term investors. The Eurocrisis, the generally fragile state of the global economy, the slew of new financial regulations, the shift of economic power towards the emerging world and the rising importance of political economy all mean that investors now need to understand the key drivers behind these changes and how these are likely to evolve.

We help them navigate these complex issues by offering the insights we glean from working with policy makers on the likely shape of new regulations, on political trends, on matter of tax policy and reputational risk and on new opportunities arising in the developing world, as well as the risks associated with them. Investors find our unique insights into the interplay between politics and economics in the Eurozone particularly helpful in their asset allocation decisions.

7. While it’s fascinating that you work across so many countries, does it actually help your work?Absolutely! Our biggest program in the Eurocrisis was “Lessons from developing countries for the EU”. The premise, which you will sympathise with, is that the EU has had a good run and was only now, for the first time in its history, facing the scale and scope of challenges that it does – from excessive levels of indebtedness to unprecedented levels of unemployment. Developing countries, on the other hand, have struggled with these for a long time and have tried several policies in response to these challenges. Inevitably, some have been successful and others have failed spectacularly but both hold important lessons for the EU.

As an example, our work on sovereign debt restructuring in the developing world helped us advise the EU on the restructuring of Greek debt. Our work on conditionality in IMF and World Bank programs in Africa and Latin America was in turn useful for designing conditionality for Greece, Portugal and Spain.

At the same time, emerging economies such as India and Myanmar, where we also work with governments, can benefit enormously from the work we have done on the financial systems, on taxation and on trade and industrial policy in the EU. Even within the EU, the work we do across several countries provides insights into best practices.

8. You have recently started advising governments in Asia. It’s the darling of the investment world now – are things really so rosy?The current situation in many Asian countries is bad – many are still corrupt, poor and suffer from bad infrastructure and rising inequality. However, in contrast to many countries in the Eurozone, tomorrow looks better than today and this is an important dynamic. While I am confident that the 21st century will be Asia’s century, the risks that things can go wrong are substantial. The political transition in China, the infrastructure gap in India and the ethnic tensions in Myanmar, for example, pose huge challenges to which there may not be any easy answer.

We are working with the Asian governments not just on infrastructure and finance, but also on the very critical softer issues of governance, corruption and inequality. In these matters in particular, the lessons from European economies such as those in Scandinavia are very useful.
Overall, Asia is the one eyed king in the land of the blind.