Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I: Constitutional Law, Economic Psychology and Quasi-Labor Issues 3030714144, 9783030714147

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Michael I. C. Nwogugu

Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I Constitutional Law, Economic Psychology and Quasi-Labor Issues

Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I

Michael I. C. Nwogugu

Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I Constitutional Law, Economic Psychology and Quasi-Labor Issues

Michael I. C. Nwogugu Enugu, Nigeria

ISBN 978-3-030-71414-7    ISBN 978-3-030-71415-4 (eBook) https://doi.org/10.1007/978-3-030-71415-4 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

1 Introduction  1 1.1 Target Countries, Target Audience and the Emphasis on US Laws in This Book  5 1.2 The Intentional De-Emphasis of Standards-of-­Review (Constitutional Law) 12 1.3 Emergence and Nonlinearity: The Relationship Between Multinational Corporations (MNCs) on the One Hand and Financial/Economic Crisis, Geopolitical Risk and Cross-Border Spillovers 12 1.4 Economic Psychology and the Global Digital Economy: Interactions with and Implications for Constitutional Law, and a Summary Critique of the Literature on Constitutional Economics 17 1.5 Behavioral Bias Indicators 19 1.6 Nwogugu (2012) and Emergence: Constitutional Political Economy, Mechanism Design and Sustainable Growth 20 1.7 The Stare Decisis Doctrine (and Some of Its Economic Psychology Effects) 26 1.8 Causal Factors: Global Value Chains, Preferential Free Trade Agreements and “Joint-Committees” 27 1.9 Causal Factors: Labor and Industrial Relations 29 1.10 The Replicability/Reproducibility Crisis in Academic Research 30 v

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1.11 The Chapters 31 Appendix 1: List of Some Reported Accounting Scandals  37 Appendix 2: The List of Top Corporate Scandals in the World That Occurred Without Any Insolvency  40 Appendix 3: List of Major Corporate Collapses Around the World (up to 2019)  43 Appendix 4: List of the Top-100 Most Successful Startups in the World  50 Appendix 5: List of the Worst Startup Failures in the World (up to 2017)  55 Appendix 6: List of All Major Financial/Economic Crisis Since the Seventeenth Century  67 Bibliography 73 2 Cross-Border Spillover Modeling, Concepts of “Geopolitical Risk” and “Transition Economies”, and the 2010–2020 Financial Stability Recommendations by the IMF, G20/ G30 and the EU 83 2.1 Emergence and Nonlinearity: New Definitions and Dimensions of Geopolitical Risk 84 2.2 New Definitions of “Transition Economies” 88 2.3 Cross-Border Spillovers and the Modeling of Emergence and Nonlinearity: A Critique of the Literature and the Unreliability of Empirical Research in Psychology (Including Mathematical Psychology), Complex Systems, Behavioral Political Economy and Behavioral Operations Research 92 2.4 Emergence and Nonlinearity: Health Effects of Spillovers, Integration and Resulting Shocks 98 2.5 Emergence and Nonlinearity: A Review of the Literature on Social Networks 98 2.6 Emergence and Nonlinearity: Some Social Capital Dimensions of Geopolitical Risk and Cross-Border Spillovers100 2.7 Emergence and Nonlinearity: The Muted Effects of the Rise of Both the Far-Right and Nationalist Movements in the United States, Latin America, Europe and Parts of East/South Asia (as of 2021)103

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2.8 Some Elements of “Global Risk Infrastructure” and the 2010–2020 Recommendations by the IMF, G20/G30 and BIS111 2.9 Some New Theories119 2.9.1 The Policy Contagion Theory119 2.9.2 The Truncated Integration Theory119 2.9.3 The Political Support Theory (or “Bifurcated Political Support Theory”)120 2.9.4 The Monetary-Fiscal Gap Theory121 2.10 Conclusion122 Bibliography122 3 Some Constitutional Law, Competition Law and Economic Psychology Issues Inherent in Some Real Estate Market Mechanisms137 3.1 Existing Literature138 3.2 Geopolitical Risk and Some Economic Psychology and Cross-Border Spillover Effects of MLS, REWs and Rent-­ Control/Rent-Stabilization Statutes140 3.3 Complex Systems, Complexity and the Rule of Law; And MLS and RCRS as Quasi-Labor Regulation146 3.4 The Failure of Mechanism Design Theories149 3.5 Networks and the Network Effects of MLS, REWs and RCRS150 3.6 The Substantial Control Theory153 3.7 The Unconstitutionality of the Multiple Listing Service (MLS)154 3.7.1 Real Estate Transactions and the Commerce Clause of the US Constitution155 3.7.2 MLS: The Right to Privacy Doctrine157 3.7.3 The Right to Freedom of Speech159 3.7.4 The Right of Association Doctrine160 3.7.5 The Right to Contract Doctrine161 3.7.6 Advertising as Constitutionally Guaranteed Free Speech163 3.7.7 The NAR (United States) Policy Pertaining to Real Estate Brokers: The Interstate Commerce and Commerce Clause164

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3.8 Unconstitutionality of Professional Licensing Requirements for Real Estate Websites166 3.9 The Unconstitutionality of RCRS (Rent-­Control and Rent-Stabilization) Laws and the Hukou System in China (and Similar Restrictive Systems in Other Countries)169 3.9.1 Balancing-of-Interests Tests and Alternatives and Supplements to RCRS173 3.9.2 RCRS as Violations of the Takings Clause of the Constitution174 3.9.3 RCRS Violates the Equal Protection Doctrine179 3.9.4 RCRS Violates of the Substantive Due Process Doctrine and the Procedural Due Process Doctrine181 3.9.5 RCRS Violates the Interstate Commerce Clause of the US Constitution182 3.9.6 Labor Dynamics and the Hukou System in China (and Similar Restrictive Systems in Other Countries)183 3.10 General Real Estate Transactions and the Commerce Clause of the US Constitution184 3.11 (US) State Laws That Prohibit or Restrict Real Estate Brokers from Offering Commission Rebates to Home Buyers/Sellers185 3.12 (US) State Laws That Prohibit or Restrict Banks from Participating in Real Estate Brokerage186 3.13 Conclusion187 Appendix A: Summary of RCRS Regimes in Various Countries (Source: Global Property Guide; 2017, http://www. globalpropertyguide.com/faq/inheritance-­law-­and-­taxes; and Associated Contributing Law Firms, ­http://www. globalpropertyguide.com/contributing-­law-­firms) 188 Bibliography198 4 Constitutionality of Real Estate Taxes and Corporate Location Incentives, and Some Associated Economic Psychology and Complex Systems Effects207 4.1 Existing Literature210 4.2 Geopolitical Risk and Some Economic Psychology and Cross-Border Spillover Effects of Real Estate Taxes and Corporate Location Incentives212

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4.3 Corporate Location Incentives and Real Estate Taxes as Quasi-Labor Regulation215 4.4 The Court Erred in Tax Equity Now NY LLC vs. City of New York, et al. (New York State Appellate Division; Feb. 2020) by Ruling That New York City’s Property Tax System Is Constitutional216 4.4.1 The “Change Criteria”217 4.4.2 The Takings Doctrine220 4.4.3 The Equal Protection Doctrine221 4.4.4 The Due Process Doctrines (Substantive and Procedural Due Process Doctrines)222 4.4.5 The Right to Contract Doctrine223 4.5 Other Court Rulings and Developments in Real Estate Taxation in Europe and the United States224 4.5.1 The German Constitutional Court Properly Declared in 2018 That the German Real Estate Tax Regime Was Unconstitutional224 4.5.2 The Spanish Supreme Court Properly Invalidated the Municipal Real Estate Tax on Empty Housing Units in 2020225 4.5.3 The Spanish Constitutional Court Properly Invalidated Parts of the Urban Land Value Increase Tax (“ULVIT” or “plusvalía municipal”) in 2017225 4.5.4 The Delaware Court of Chancery Properly Ruled in 2020 That Delaware State’s Property Tax System Was Unconstitutional227 4.5.5 Inheritance Taxes and Transfer Taxes That Function as Non-recurring Real Estate Taxes227 4.6 Real Property Taxation as a Violation of the Procedural Due Process Doctrine and the Substantive Due Process Doctrine228 4.7 The Existing Regime (as of 2020) of Real Property Taxation by Many US Municipalities Constitutes Violations of the Equal Protection Doctrine231 4.8 Real Property Taxation and Tax-Based Location Incentives Constitute Violation of The Interstate Commerce Clause of the US Constitution and the Dormant Commerce Clause Doctrine233

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4.9 Grants of Corporate Location Incentives by States and Municipalities Constitute Violations of the Equal Protection Doctrine236 4.10 Traditional Common-Law Real Property Taxation Constitutes a Violation of the “Right to Contract” Doctrine238 4.11 Grant of Local Incentives Constitutes a Violation of the “Right to Contract” Doctrine240 4.12 Making Real Property Tax Liens Superior to Prior Mortgages and Loans Regardless of Timing of Nonpayment (Super-Priority Status) Constitutes a Violation of the Substantive Due Process Doctrine and the Interstate Commerce Clause (United States Only)240 4.13 Real Property Taxation Constitutes Violations of the Takings Doctrine243 4.14 Grant of Local Incentives May Constitute Violations of the Takings Doctrine247 4.15 Conclusion249 Bibliography250 5 Optimal Voting and Voting-Districts; and Relationships between Constitutions and the Size of Government257 5.1 Existing Literature258 5.2 Emergence and Nonlinear Effects: Geopolitical Risk, Some Economic Psychology Factors and Cross-Border Spillover Effects of Electoral Systems (Spillovers into Emerging Markets)260 5.3 Complexity, Complex Systems and the Rule of Law262 5.4 Emergence and Nonlinearity: Constitutions, Labor Regulation and Government-Size263 5.4.1 Some Geopolitical Risk Implications of Government-Size266 5.4.2 Labor Regulation, Government-Size and the Constitutionality of Executive Orders268 5.5 Emergence and Nonlinearity: Optimal Electoral/Voting Systems272 5.5.1 Some Geopolitical Risk Implications of Electoral/ Voting Systems276

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5.5.2 Electoral/Voting Systems, Labor Dynamics and Labor Regulation277 5.5.3 Recommended Voting Systems for Popular Public Political Elections278 5.5.4 An In-Legislature Voting System (for Elected Politicians) That Can Reduce or Eliminate the Effects of Vote Suppression/Low Voter Turnout, Incumbency Biases and Partisan Gerrymandering283 5.6 Federalism and Optimal Political Geoboundaries286 5.6.1 The Irrelevance of “Redistricting Algorithms”: Redistricting and “Gerrymandering” in the United States and the US Supreme Court’s Decision in Rucho vs. Common Cause (2019)289 5.6.2 Standard Tests That Legislatures Can Enact and That Courts Can Use to Determine Whether Partisan Gerrymandering Has Occurred and Is Unconstitutional291 5.6.3 Some Properties of Optimal Geography-Based Revenue Allocation in Countries That Have Heterogeneous Populations: The Nigerian Case297 5.6.4 A Simple Dynamic Socioeconomic Model of the Optimal Allocation of Non-cooperating Communities to a State in a Country That Has a Heterogeneous Population299 5.7 Conclusion302 Bibliography302 6 Constitutional Political Economy Dimensions of Sovereign Debt Policy, Foreign Aid and the Politicization of Pension Funds and Sovereign Wealth Funds313 6.1 Existing Literature314 6.2 Complexity, Complex Systems and the Rule of Law316 6.3 Geopolitical Risk and Some Cross-Border Spillover Effects of Foreign Aid, Sovereign Defaults and Politicization of Pension Funds and Sovereign Wealth Funds (Spillover from Developed Countries into Emerging Market Countries): Foreign Aid, FDI and Foreign Investment Are Similar317

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6.4 Emergence and Nonlinearity: Some Geopolitical and Labor Market Influences on Public and Private Pension Funds320 6.5 Emergence and Nonlinearity: Some Geopolitical and Labor Market Influences on Sovereign Wealth Funds (SWFs)323 6.6 Constitutions and Sovereign Debt Policy327 6.6.1 Systemic Risk and Financial Stability330 6.6.2 Constitutionality of the Government’s Borrowing Powers (and Contrary to Public Perception, Government Bonds/Notes/Bills Are Not Securities)332 6.6.3 Foreign Aid, Federalism and Constitutions333 6.6.4 Sovereign Debt Policies and The Efficiency of Foreign Aid: Accountability and Preemption337 6.6.5 Foreign Aid and Sovereign Default Risk: Domestic Capital Markets339 6.6.6 The Efficiency of Government and Significant Conflicts of Interest Within and Ineffective Supervision by Federal Government Agencies; and the Existence of “Spatio-temporal Anti-compliance Cartels” in Both Public and Private Sectors345 6.7 Federalism, Optimal Voting and Optimal Political Geoboundaries369 6.8 Conclusion371 References372 Index383

List of Figures

Fig. 1.1

Fig. 3.1

The percentage composition of official central banks’ foreign exchange reserves from 1995 to 2019. (Source: “Currency Composition of Official Foreign Exchange Reserves [COFER].” Washington, DC: International Monetary Fund. April 11, 2020) Changes in housing in China (1980–2018)

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List of Tables

Table 4.1 Table 6.1 Table 6.2

Real estate taxes in European OECD countries (as of 2018) Comparison of the Nigerian government’s statutory allocations to the Nigerian National Assembly with those made to twenty-one Nigerian state governments Rankings of states’ liquidity

226 365 366

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CHAPTER 1

Introduction

This book is the first of a two-volume series, and focuses on Cross-Border Spillovers in Labor, Financial, Commodities and Real Estate markets and associated Economic Psychology issues (primarily Cross-Border Spillovers from developed countries to Emerging market countries; and to a lesser extent, across industries in the same country). During the last twenty years, geopolitical shocks were a major cause of global market volatility and changes in corporate policies of multinational corporations (MNCs), and thus they have major financial, social and economic implications. Hence, International Political Economy (IPE) issues have been a major change element in global capital markets. Economic Recessions, rapidly changing modes of social interactions, environmental damage in several large countries (e.g. China, Brazil, the United States), the global digital economy, the negative effects of online social networks, the European sovereign debt crisis and the Global Financial Crisis of 2007–2015 exposed weaknesses in financial markets (particularly real estate and fixed income markets), social structures and environmental compliance worldwide and has rekindled economists’ and policy-makers’ interest in the relationships among constitutions, financial/banking regulation, the global digital economy, credit expansion and sustainable growth. More than 110 countries created new constitutions or substantially amended their constitutions during 1990–2010 and many of the new constitutions are based on

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_1

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US- and UK-style constitutions. However, despite international coordination, increased automation, growth of the global digital economy and new laws, economic policy and financial risk regulation remains highly ineffective as manifested by the failures of new financial regulations and government stimulus programs that were implemented or enacted during 2007–2021 in many developed and developing countries. The issues raised in this book are critical in the economic policy, public policy, international political economy, management consulting, academia, environmental, social and governance (ESG) investing, portfolio management, and constitutional political economy fields, and these issues are also relevant to countries that are developing their constitutions and/or capital markets. Such analysis can help improve Computer Science, Physics, Decision Sciences and Artificial Intelligence models that are used to identify or predict economic conditions, public policy and Compliance (as a physical phenomenon), and to model Portfolio Management, Financial Stability, Stock Market Fluctuations or Asset Pricing.1 1  See Brunnermeier, Farhi, et al. (2021) which states in part: “In terms of asset pricing theory, an important avenue for future research is to develop models that explain which agency, behavioral, or regulatory frictions may give rise to sparse portfolios, low elasticities of demand, and volatile latent demand. …Interestingly, the recent work on demand systems suggests that investors do not behave as our models suggest…. Indeed, many of the salient policy and regulatory questions involve quantities: What is the impact of large-scale asset purchases by central banks? …What is the impact of growing environmental, social, and governance (ESG) mandates on asset prices? What is the impact of changing the risk regulation of banks or insurance companies? The recent COVID-19 crisis has highlighted once more the importance of being able to answer these questions quantitatively.... By combining models of the asset demand system with models of corporate decision making, we obtain an integrated model of asset pricing and corporate finance.…. Indeed, and despite decades of international financial integration, there are many more frictions in financial markets across countries than within countries. Third, currencies are more central to international finance than they are to finance…. Fourth, the role of governments is more central to international finance than it is to finance.... Common long-standing problems include the identification of the economic determinants of beliefs Et□⁠,⁠ the economic determinants of risk premia or equivalently of stochastic discount factors Xt,t+1 and X*t,t+1, the economic determinants of portfolios. They also include what I will call the “disconnect” problem: the fact that it seems difficult to connect the stochastic discount factor Xt,t+1 to an actual preference-based marginal rate of substitution MRSt,t+1 of a well-identified marginal investor…. Other common long-standing problems include the identification of the key market failures and externalities….as well as the role and transmission of policy (monetary, fiscal, prudential, etc.).… International finance also faces specific challenges with no counterparts in finance. First, there is the Mussa puzzle…. Second, there is covered-interest-parity (CIP) arbitrage violation.... Third, there is the large degree of home bias in portfolios across countries. Fourth, there are the destabilizing effects of volatile capital flows in emerging markets. Fifth, there are the economic determinants of government behavior in these countries. Sixth, there are the economic determinants and implications of

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With regard to public policy, business policy and affected populations, the issues addressed and the theories introduced in this book affect or can affect more than three billion people worldwide, more than $5 trillion of exchange rate regimes.... Seventh and finally, there are the importance of the international monetary system and the special role of the United States…as the world banker and the exorbitant privilege that comes with it, and the resulting pattern of global imbalances”. See: Kovarsky, P. (2019). Fabozzi: Finance Must Modernize or Face Irrelevancy. https:// blogs.cfainstitute.org/investor/2019/06/03/fabozzi-finance-must-modernize-or-faceirrelevancy/#__prclt=C4ADXq9m. This article stated in part: “………Frank J. Fabozzi, CFA: My criticism of academic economics is that the models built by economists basically treat market agents as robots. They make decisions according to defined rules, and the constructed models are labeled “rational models.” Since finance is a field within economics, the same criticism applies to the models built by financial economists. …….The “rational models” in finance have been attacked by the behavioral finance camp, which has demonstrated the disconnect between model behavior and real-world investor behavior. The concern with academic economics also comes from practitioners.……..The problem with relying on rational models and treating them as the foundation of finance is that new findings that are inconsistent with the bedrock theories are dismissed. This is the major point that Sergio M. Focardi and I made when we argued that economics in its current form does not describe empirical reality but an idealized rational economic world. It is revealing that in financial economics, deviations in empirical prices or returns from theoretical models are referred to as “anomalies.” A true empirical science would revise its models so that they fit empirical data. Financial economics, however, takes the opposite approach and considers deviations from an idealized economic rationality to be anomalies of the true empirical price processes………In the 1970s and 1980s, an academic couldn’t get published in a peer-reviewed finance journal if their research conflicted with prevailing theory, such as the capital asset pricing model (CAPM). For example, in the late 1970s, a prestigious financial journal sought papers written jointly by academics and practitioners. Thinking that the journal’s editorial board was sincere, I co-authored a paper with then-chairman of Merrill Lynch White Weld, Tom Chrystie. Our thesis was that securities can be structured/customized for investors using the asset side of the balance sheet. Basically, it provided the general blueprint for structured finance. The review we received in response was short and went something like — the ideas in the paper did not make any sense because they were inconsistent with CAPM!……... The over-reliance on calculus is symptomatic of the subject’s stagnation and a disservice to the students who aspire to work in asset management. Economists should combine sophisticated mathematical tools and empirical techniques while recognizing the limitations of a field where experiments are rarely possible…..Ultimately, calculus has not been effective in describing economic and financial phenomena…… Econometric models are utterly inappropriate to model the sheer complexity of economic systems……The paradox in economics is that researchers either use non-empirical tools — calculus and sophisticated math — or paleo-statistical tools that were designed before the advent of computers. ……. Other fields have embraced machine learning and other computational methods. But these methods are rejected in economic journals as “black boxes”…..…In the idealized pseudo-rational world of current economic theory, there is no real place for major crises. Financial economics, in particular, is based on the assumption that economic quantities might deviate from their theoretical value, but that market forces will quickly realign them with theoretical values. This assumption has proved to be inadequate…..…..”.

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daily transactions (i.e. loans/mortgages/bonds/bills, credit transactions, trade finance transactions, money markets, swaps/derivatives, real estate, stocks and commodities) and more than the equivalent of $280 trillion of corporate, government and household assets around the world. The approach in this book is entirely theoretical and the book uses and introduces concepts and theories in Economic Psychology, human-computer interaction (HCI), Constitutional Political Economy and Complex Systems theory. The contributions of this book are as follows: 1. Introduces concepts and theories in Constitutional Law, Economic Psychology and Complex Systems Theory. 2. The scope of the book is international, and the theories developed are applicable in many countries. 3. Introduces a new framework that can help in identifying and reducing corruption; and developing the propensity for intrapreneurship. 4. Analysis and development of theories of group decision-making and biases of decision-makers that are facing risks in Transition Economies and responding to economic sanctions. This subject is a huge gap in the literature. 5. Analysis of the role of constitutional economics as a tool for national and global sustainable growth (i.e. economic, social, urban and environmental sustainability) and risk management. 6. Review of some of the financial and constitutional crisis that occurred in Europe, Asia and the United States during 2007–2021. 7. Analysis of the often symbiotic relationship between alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents on the one hand and sustainable growth, financial regulation, and the risk management of financial institutions within the context of the global digital economy on the other. 8. Review of the effects of constitutions and legal institutions on market dynamics (e.g. volatility; market depth; liquidity) within the context of the global digital economy, to analyze economic sanctions in various dimensions. 9. Analysis of some key elements of “sustainable growth” (economic, social, urban and environmental sustainability) in Transition

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Economies within the context of human-computer interaction (HCI) and geopolitical risks that can affect markets (e.g. stock, currency, commodity; fixed income and real estate markets). 10. Explains how constitutions can affect political processes, risk regulation, market volatility, bubbles and crashes, and innovation and sustainable growth within the context of the global digital economy. 11. Explains how International Swaps and Derivatives Association (ISDA), International Capital Market Association (ICMA) and government bailouts are unconstitutional. 12. Explains how constitutions and risk regulations affect economic models within the context of the global digital economy. 13. Develops and introduces theories of sustainable growth and risk management. 14. Analyzes the unconstitutionality of, and weaknesses inherent in, the Dodd-Frank Act (United States) and possible impact on sustainable growth. 15. Analyzes the economic and sustainability consequences of federalism.

1.1   Target Countries, Target Audience and the Emphasis on US Laws in This Book The subject/target countries for which this book debates the relationship among Sustainable Growth, the global digital economy, Constitutions, Economic Psychology and financial/economic risk are: 1. The 110+ countries whose constitutions and constitutional principles are based on, or are similar to the US Constitution. 2. All Commonwealth countries that use common-law systems. 3. European Union (EU) countries (especially those that use common-­ law systems). 4. Transition Economies (e.g. China; Commonwealth of Independent States [CIS] countries; Nigeria; Egypt; Libya; India; Thailand; Vietnam; Myanmar; former military-controlled Latin American countries). 5. Countries that contribute substantially to the Global Digital Economy (and whose national broadband penetration rate exceeds 70%).

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Obviously, the usefulness of this book to civil law countries is limited because the Constitutional Law analysis is done with US laws. The target audiences for this book are as follows: 1. University professors (in Finance, Computer Science, International Political Economy, Macroeconomics, Law-and-Economics, Law-­ and-­Finance, Applied Math, Operations Research and Public Policy). 2. PhD and Masters’ degree students (in Finance, Computer Science, International Political Economy, Macroeconomics, Law-and-­ Economics, Law-and-Finance, Applied Math, Operations Research and Public Policy). 3. PhD holders who work in industry, think-tanks, government agencies and financial services companies. 4. Research/policy professionals who participate in developing artificial intelligence (AI)/machine learning (ML)/data science models of Financial Stability, Systemic Risk, International Trade, Complex Systems (social, political and economic systems), Compliance (as a physical phenomenon), International Portfolio Management, Monetary/Fiscal Policies, Macroeconomic Dynamics and Public Policy. US laws are used throughout this book because of the following reasons: 1. As mentioned, more than eighty countries have copied the US Constitution (including Brazil),2 and many countries have also cop See: Go (2003). Law and Versteeg (2012) noted that the US Constitution is similar to those of many countries including the following countries: Albania, Armenia, Australia, Austria, Azerbaijan, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Croatia, the Czech Republic, Denmark, the Dominican Republic, El Salvador, Estonia, Fiji, Finland, France, Georgia, Germany, Greece, Honduras, Hungary, Iceland, Ireland, Italy, Japan, Jordan, Kazakhstan, Korea, Latvia, Lithuania, Luxembourg, Macedonia, Moldova, Mongolia, the Netherlands, New Zealand, Nicaragua, Norway, the Philippines, Poland, Portugal, Romania, Singapore, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Thailand, Tonga, Turkey, Ukraine, the United kingdom, Antigua and Barbuda, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Botswana, Brunei, Cyprus, Dominica, Gambia, Ghana, Grenada, Guyana, India, Israel, Jamaica, Kenya, Kiribati, Lesotho, Liberia, Malawi, Malaysia, Maldives, the Marshall Islands, the Federated States of Micronesia, Namibia, Nepal, Nigeria, Pakistan, Papua New Guinea, American Samoa, Saudi Arabia, Sierra Leone, the Solomon Islands, Somalia, South Africa, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sudan, Swaziland, Tanzania, Trinidad and Tobago, Uganda, the United Arab Emirates, Vanuatu, Zambia and Zimbabwe. 2

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ied US-style business processes, capital markets processes and financial regulations (e.g. China, Japan, India, Australia). The US Constitution and constitutional principles are similar to those of Commonwealth countries. Law and Versteeg (2012) noted that the US Constitution is similar to those of more than fifty countries. More than 110 countries created or amended their national constitutions during 1990–2020. 2. According to Amadeo (July 2020) and other sources, the US dollar is the dominant international currency and as of 2018–2020,3 it was used in more than 50% of international transactions (finance and trade), used in about 90% of worldwide foreign exchange trading,4 and accounted for more than 60% of Central Bank reserves5 around the world (2000–2020), and more than 40% of existing debts/bonds around the world6 were denominated in US dollars. The global supply (and country-specific supply) of US dollars can be manipulated by changing the US Federal Reserve’s US Dollar Swap Line and/or by changing the Fed Funds Rate and/or by changing access to SWIFT (an international payments system that is controlled by the United States). As of 2015–2020, at least sixty-five countries had officially pegged their domestic currencies to the US dollar. Monetary Policy pertaining to the US dollar is set primarily by the US Federal Reserve. Fiscal Policy that substantially affects the US dollar is set primarily by the US Legislature and the US Treasury 3  See: “Covid Crisis Shows Once Again Why US Dollar Is World’s Dominant Currency—A Lack of Global Alternatives Helps Explain Some of The Dollar’s Role. The Euro’s Status As A Reserve Currency Remains Limited & China’s Currency Is Still Subject To Capital Controls.” By Enda Curran and Finbarr Flynn; October 23, 2020. https://theprint.in/economy/ covid-crisis-shows-once-again-why-us-dollar-is-worlds-dominant-currency/529331/ See: Gifford, C. (Sept. 8, 2020). “The dominance of the US dollar is called into question”. World Finance. https://www.worldfinance.com/markets/the-dominance-of-the-us-dollaris-called-into-question. See: Amadeo, K. (July 2020), “Why the US Dollar Is the Global Currency”. The Bottom Line. July 23, 2020. https://www.thebalance.com/world-currency-3305931. See: Federal Reserve Bank of New  York. “Is the International Role of the Dollar Changing?,” Page 6. https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci16-1.pdf. 4  See: XE. “ISO 4217 Currency Codes”. http://www.xe.com/iso4217.php. 5  See: International Money Fund. “Table 1: World Currency Composition of Official Foreign Exchange Reserves.” https://data.imf.org/regular.aspx?key=41175. 6  See: International Monetary Fund (2019). “Global Financial Stability Report”. https:// www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financialstability-report-october-2019.

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Department. As of 2018–2020, banks in each of the United Kingdom, France and Germany had more US dollar denominated liabilities than liabilities denominated in Euros and their own local currencies.7 According to the Federal Reserve Bank of New York8 and other research,9 at various times during 2005–2020, more than half of the printed US dollars were circulating outside the United States, and a significant percentage of US dollars outside the United States were circulating in Latin American countries and the former Soviet Union countries (CIS and Central and Eastern European [CEE] countries; and as of 2018, a total of about $1.671 trillion of printed dollars were in circulation). At various times during the last thirty years, the US dollar was used as the main currency in foreign countries (such as Poland, Zimbabwe, Panama, Ecuador, Turks & Caicos Islands, Guam, US and British Virgin Islands, El Salvador, Democratic Republic of Timor-Leste, American Samoa, Commonwealth of the Northern Mariana Islands, Federated States of Micronesia, Republic of Palau); and as of 2020, the US dollar was used as quasi-­currency or secondary-currency in many countries and territories (e.g. Canada; Mexico; Russia; Panama; Commonwealth of the Bahamas; Barbados; Bermuda; the Cayman Islands; Sint Maarten; St Kitts and Nevis; the ABC Islands of Aruba, Bonaire and Curacao; the Sint Eustatius and Saba [BES] Islands; Belize; Costa Rica; Philippines; Myanmar [Burma]; Cambodia; Liberia; Nigeria [major cities only]; and Vietnam [major cities only])—that involves more than 330 million people and more than $18 trillion of economic activity. The United States is the top export-destination of both Japan10 and China,11 and as of 2013–2020, each of China and  See: Bank for International Settlements, “The Geography of Dollar Funding of Non-US Banks ”. https://www.bis.org/publ/qtrpdf/r_qt1812b.htm. 8  See: Goldberg, L. (2010). Is the International Role of the Dollar Changing?. Federal Reserve Bank of New York—Current Issues In Economics & Finance. https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci16-1.pdf. 9  See: U.S. Currency Education Program. “U.S. Currency in Circulation.” https://www. uscurrency.gov/life-cycle/data/circulation. 10  See: World Integrated Trade Solutions. “Japan Exports By Country 2020”. See: World Integrated Trade Solutions. “US Exports By Country 2020”. https://wits. worldbank.org/countrysnapshot/en/USA. 11  See: World Integrated Trade Solutions. “China Exports By Country 2020.” https://wits. worldbank.org/countrysnapshot/en/CHN. See: World Integrated Trade Solutions. “US Exports By Country 2020”. https://wits. worldbank.org/countrysnapshot/en/USA. 7

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Japan owned more than US$1 trillion of US government bonds/ notes/bills. Given the foregoing, the huge amounts of US dollars held by non-­ US persons as well as commodities-dependent Emerging Market Countries are at significant risk if: (1) US dollar inflation increases; (2) there is increased US deficit spending and issuance of US Treasuries; and (3) there are economic shocks that reduce the value of US dollar denominated bonds or the US dollar. 3. The United States has the most advanced and comprehensive financial regulations and creates some of the most sophisticated financial products in the world. The United States has been at the forefront of enactment of financial/economic laws at both the federal and state levels. Many developing countries (and developed countries) copied their financial laws from US laws. For example, the Brazilian Constitution is based on the US Constitution; and real estate investment trust (REIT) statutes worldwide are based on US REIT laws. Many countries have created variants of the Dodd-Frank Act and the Sarbanes Oxley Act (SOX). Mortgage/foreclosure laws in many countries are very similar to US mortgage/foreclosure laws. Many developing countries and “transition” countries of Eastern Europe derived their mortgage/foreclosure laws from US laws. 4. During the last twenty years, the United States consistently had the largest national economy in the world, and the US economy directly/indirectly (through international trade, outsourcing, foreign direct investment [FDI], foreign investment [FI], foreign aid etc.) supported the economies of other “First-Level Associated” countries (such as China, Japan, Brazil, Mexico and India), which, in turn, directly/indirectly supported (through international trade, outsourcing, loans, FDI, FI, foreign aid etc.) the economies of “Second-Level Associated” countries (such as Russia, Nigeria, Philippines, Thailand, Association of Southeast Asian Nations [ASEAN] countries, Pakistan, Central American countries and CIS countries). During 1980–2020, the United States was a major participant in major multilateral and bilateral trade agreements; and the US-China Trade War of 2019–present continues to have significant economic/social/psychological Multiplier Effects on many countries. The terms “First-Level Associated” countries and “Second-Level Associated” countries are introduced here as a “mutual-dependency” classification of countries in order to better reflect the often symbiotic relationships between countries with regard to international trade and international capital flows.

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5. The United States is a global technological innovation leader and has consistently been a major contributor to, and beneficiary of, the Global Digital Economy. 6. Labor Unions have been a significant factor in the US economy, US legislative processes and US Foreign Policy, and they have also shaped MNCs, which, in turn, sometimes propagated such influences and resultant effects around the world. 7. The United States has the largest number of large MNCs (multinational corporations) many of which operate in more than five countries, and are highly influential in international trade and finance. 8. The United States (and US law) is fertile ground for the analysis of Geopolitical Risk, Constitutional Law, Economic Psychology and Regulation because: (a) The United States has a federal-presidential system of government (many developing countries are shifting to this system of government). Federalism is a big issue in US politics and economy, as well as in an increasing number of developed and developing countries (such as Germany, Russia, Canada, Australia, China, India, Nigeria and Brazil). (b) The US law was derived from English laws (which also forms the basis for laws in Commonwealth countries). (c) The United States has a relatively diverse population and relatively well-developed and deep capital markets. (d) The United States has been at the forefront of mechanism design in both the private sector and in government. (e) Securitization of assets/intangibles started in the United States, and the securitization laws of many countries were derived from US securitization laws—which include mortgage/foreclosure statutes. (f) The United States has one of the most advanced set of consumer protection laws in the world. The use of consumer credit is prevalent in the US economy—and is related to crime, willingness-to-­ comply and social order. Improper consumer credit was a major cause of the 2006–2009 Subprime Crisis in the United States, which ballooned into the Global Financial Crisis of 2007–2014. (g) In the United States, individual wealth, political capital and social capital are very much linked together. This seems to be a growing trend in some developing countries and in some “transition” countries of Eastern Europe.

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(h) Compared to other “developed” countries, US courts have been more willing to “experiment” in the areas of financial/economic regulation and the interpretation of the Constitution. (i) US political/economic institutions and government agencies seem to be more concerned about various Inequalities (social, wealth, housing and income Inequalities) and Sustainability (economic, environmental etc.), compared to other countries. (j) During 1980–2020, the United States was a major cash contributor to and exerted significant political influence at International Organizations such as the United Nations, World Bank, World Trade Organization (WTO) and World Health Organization (WHO) (Fig. 1.1).

US dollar

Euro

German mark

French franc

Pound sterling

Japanese yen

Chinese renminbi

Other

Fig. 1.1  The percentage composition of official central banks’ foreign exchange reserves from 1995 to 2019. (Source: “Currency Composition of Official Foreign Exchange Reserves [COFER].” Washington, DC: International Monetary Fund. April 11, 2020)

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1.2   The Intentional De-Emphasis of Standards-of-­Review (Constitutional Law) As in Nwogugu (2012), the constitutional law analysis in this book intentionally omits in-depth discussion of choice of standards-of-review for constitutional law issues (i.e. Rational Basis vs. Intermediate Scrutiny vs. Strict Scrutiny, which is typical in US jurisprudence) because: 1. Such classifications by themselves are suspect and can introduce significant and unwarranted discretion and bias in judicial reasoning. 2. Many judges are not technical experts in the matters and statutes being litigated and without such knowledge, it can be difficult to assign a specific standard-of-review to a statute or transaction or a group of persons. 3. When applying standards-of-review, the costs of false-positives and false-negatives in such classifications can be significant, and can exceed any benefits of applying such standards-of-review. 4. Such classifications do not always advance the public interest, social welfare or individuals’ rights. 5. Applying such classifications can result in “double-counting” of the criteria of the standards-of-review, to the detriment of persons whose rights have been infringed.

1.3   Emergence and Nonlinearity: The Relationship Between Multinational Corporations (MNCs) on the One Hand and Financial/Economic Crisis, Geopolitical Risk and Cross-Border Spillovers There has been a significant relationship between MNCs on the one hand and Geopolitical Risk and Cross-Border Spillovers on the other. A review of the world’s major economic and financial crisis during the last 300 years (listed in Appendix 6 herein and below) clearly shows that: 1. A significant number of such crisis was either partly caused by or propagated (across national borders) by MNCs. 2. A significant number of such crisis was either partly caused by or propagated (across national borders) by Regulation, Labor-related issues, Geopolitical risk, Constitutional Political Economy issues, Political factors and Political influence (especially, the attempts to resolve such crisis).

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3. A significant number of such crisis was either partly caused by, or propagated (across national borders) by earnings management. As of 2019, the ten worst “discovered” corporate earnings management scandals of all time in the world and the years they were discovered were: Waste Management (1998; United States); Enron (2001; United States); WorldCom (2002; United States); Tyco (2002; United States); Health South (2003; United States); Freddie Mac (2003; United States); American International Group (AIG) (2005; United States); Lehman Brothers (2008; United States); Bernie Madoff (2008; United States); and Satyam Computer Services (2009; India). Other notable earnings management scandals include Toshiba (2011; Japan) and Tesco (United Kingdom). During the three years before their earnings management was discovered or announced, most of these companies were exposed to substantial Geopolitical Risks and Sustainability issues (economic, social, urban and environmental Sustainability), and they owned or purported to own significant real estate or real-estate-related assets (e.g. mortgages, mortgage insurance premium contracts, assignments-of-rents-and-leases/subleases and loan/mortgage guarantee contracts) or intangible assets (including off-balance-sheet contracts, derivatives and contract rights); they also used substantial amounts of equity-based incentives (EBIs), and many were exchange-traded companies and owed substantial debt. A review of the MNCs (multinational corporations) that perpetrated fraud and/or earnings management and are listed in Appendices 1 and 2 herein and below clearly shows that: 1. Most of such MNCs had significant operations and/or customers and/or suppliers in Emerging Markets, and their operational policies often influenced people and companies in Emerging Markets. 2. A significant number of such earnings management and fraud arose or could have arisen from geopolitical issues (e.g. substantial differences in enforcement, adjudication, regulations, political structures and political lobbying/influences across countries) and Constitutional Political Economy issues. 3. Most of such MNCs were subject to Accounting standards-setting organizations’ regulations (e.g. International Accounting Standards Board [IASB], Financial Accounting Standards Board [FASB]) and were rated by credit rating agencies. 4. Many of such MNCs that had operations in the United States were or would have been subject to the Dodd-Frank Act. 5. Most of such MNCs were or could have been subject to Cross-­Border Spillover effects.

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A review of data about the largest corporate bankruptcies in the world12 also indicates that during the three years before their bankruptcy filings: (i) many of those bankrupt companies were exposed to substantial  See: “2017 Bankruptcies: The Biggest Names And Trends”. Jan. 25, 2018. https://www. creditriskmonitor.com/blog/2017-bankruptcies-biggest-names-and-trends. See: “Twenty-Two Largest Bankruptcies In World History”. February 3rd, 2010. http:// www.instantshift.com/2010/02/03/22-largest-bankruptcies-in-world-history/. This list of largest corporate bankruptcies in descending order as of 2010 included the following: Lehman Brothers (United States; Bankruptcy Date was 2008; Assets were $691 billion); Washington Mutual (United States; Bankruptcy Date was 2008; Assets were $327.9 billion); Worldcom (United States; Bankruptcy Date was July 21, 2002; Assets were $103.9 billion); General Motors (United States; Bankruptcy Date was 2009; Assets were $91 billion); CIT Group (United States; Bankruptcy Date was 2009; Assets were $71 billion); Enron (United States; Bankruptcy Date was 2001; Assets were $65.5 billion); Conseco (United States; Bankruptcy Date was 2002; Assets were $61 billion); Chrysler LLC (United States; Bankruptcy Date was April 30, 2009; Assets were $39 billion); Thornburg Mortgage (United States; Bankruptcy Date was 2009; Assets were $36.5 billion); Pacific Gas & Electric (United States; Bankruptcy Date was 2001; Assets were $36.1 billion); Texaco (United States; Bankruptcy Date was 1987; Assets were $34.9 billion); Financial Corporation of America (United States; Bankruptcy Date was September 9, 1988; Assets were $33.8 billion); Refco (United States; Bankruptcy Date was October 10, 2005; Assets were $33.3 billion); IndyMac Bancorp (United States; Bankruptcy Date was July 31, 2008; Assets were $32.7 billion); Global Crossing (United States; Bankruptcy Date was January 28, 2002; Assets were $30.1 billion); Bank of New England Corporation (United States; Bankruptcy Date was 1991; Assets were $29.7 billion); General Growth Properties (United States; Bankruptcy Date was April 16, 2009; Assets were $29.5 billion); Lyondell Chemical Company (US subsidiary of LyondellBasell Industries) (Netherlands; Bankruptcy Date was 2009; Assets were $29.3 billion); Calpine Corporation (United States; Bankruptcy Date was December 20, 2005; Assets were $27.2 billion); New Century Financial Corporation (United States; Bankruptcy Date was 2007; Assets were $26.1 billion); UAL Corporation (United States; Bankruptcy Date was 2002; Assets were $25.1 billion); Delta Airlines (United States; Bankruptcy Date was September 2005; Assets were $21.8 billion). See: “The Running List Of 2018 Retail Bankruptcies—Retailers Filed For Bankruptcy At A Record Rate Last Year And That Trend Continues In 2018. Here’s a look at which retailers have filed plans to restructure, find a buyer or liquidate through Chapter-11.” April 9, 2018. https://www.retaildive.com/news/the-running-list-of-2018-retailbankruptcies/516864/. See: “Here Are The Eighteen Biggest Bankruptcies Of The ‘Retail Apocalypse’ Of 2017”. December 20, 2017. Kate Taylor. http://www.pulse.ng/bi/strategy/strategy-here-arethe-18-­biggest-bankruptcies-of-the-retail-apocalypse-of-2017-id7755124.html. See: Dun and Bradstreet (2017). Global Bankruptcy Report 2017. https://dnb.ru/media/ entry/56/217433_Global_Bankruptcy_Report_2017_9-20-17.pdf. See: “The Great Recession’s twenty Five Biggest Bankruptcies”. Forbes. https://www. forbes.com/forbes/welcome/?toURL=https%3A//www.forbes.com/pictures/ eegi45llhh/the-great-recessions-25-biggest-bankruptcies-2/&refURL=https%3A//www. google.com.ng/&referrer=https%3A//www.google.com.ng/. 12

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Geopolitical Risks and Sustainability problems (economic, social, urban and environmental Sustainability), and owned or purported to own substantial intangible assets and/or real estate and/or real-estate-­ related assets (e.g. mortgages, mortgage insurance contracts, assignmentsof-rents-and-leases/subleases, loan/mortgage guarantee contracts and contract rights); (ii) many of those companies used substantial equitybased incentives; and (iii) the bankruptcy filings of many of the companies may have been delayed by earnings management and/or asset-­quality management. A review of some of the largest corporate failures/bankruptcies (listed in Appendix 3 herein and below) clearly shows that: 1. Most of such MNCs (multinational corporations) had significant operations, or customers and/or suppliers in Emerging Markets; their operational policies often influenced people and companies in Emerging Markets. 2. A significant number of such corporate distress/bankruptcies were caused by Geopolitical Risk (e.g. substantial differences in enforcement, adjudication, regulations and cultures across countries) and/ or Cross-Border Spillover issues. 3. A significant number of such corporate failures were caused by inadequate/non-viable Social Capital, Social Networks, cash and responses to Geopolitical Risks, Regulatory Risks, Constitutional Political Economy issues and competition. A review of some of the top-100 most successful startups in the world (as of 2020; and listed in Appendix 4 herein and below) clearly shows that: 1. Many of those companies were MNCs and were substantially exposed to regulatory risk, Geopolitical Risks and Constitutional Political Economy issues. 2. Most of such MNCs had significant operations or customers or suppliers in Emerging Markets; and their operational policies often influenced people and companies in Emerging Markets. 3. A significant number of such successful startups were boosted by their Social Capital, Social Networks, adequate cash, access to capital and their responses to Geopolitical Risks, Regulatory Risks and competition.

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A review of the worst startup-company failures in the world (as of 2018), which are listed in Appendix 5 herein and below, clearly shows that: 1. Many of those companies were MNCs and were substantially exposed to regulatory risk and/or Geopolitical Risks and Constitutional Political Economy issues. 2. Some of such MNCs had significant operations, customers and suppliers in Emerging Markets; and their operational policies often influenced people and companies in Emerging Markets. 3. A significant number of such corporate failures were caused by inadequate/non-viable Social Capital, Social Networks, cash and responses to Geopolitical Risks, Regulatory Risks and competition. A review of data of the companies in Appendices 1–6 herein and below reveals that many of those companies: (i) were exposed to substantial Geopolitical Risks and Sustainability problems (economic, social, urban and environmental Sustainability), (ii) used substantial amounts of EBIs (equity-based incentives) for both their employees and senior executives; (iii) owned or purported to own substantial intangible assets (measured as the difference between the company’s stock market value and the Book-­ Value of its equity; and including contract rights etc.) and/or real estate and/or real-estate-related assets (e.g. mortgages, mortgage insurance contracts, assignments-of-rents-and-lease/subleases and loan/mortgage guarantee contracts). Note that in the banking sector, the historical average total annual compensation expense has been about 40–65% of total annual revenues—and most of that consists of human capital. Many of the economic/financial crises were precipitated and/or amplified by substantial Geopolitical Risks and Sustainability problems (economic, social, urban and environmental Sustainability), earnings management, asset-­ quality management and incentive-effects management. Here, the values of Intangibles are measured as: (i) the difference between the company’s stock market value (or private equity value or Venture Capital value) on the one hand and its total “Net Assets” or the Book-Value of its equity on the other, and including contract rights and more; or (ii) the estimated market values of the company’s intangible assets in a non-distress non-­ liquidation sale. Note that Airbnb’s and Uber’s operations (and similar companies) are deemed to be illegal in the United States and many countries, and both Uber and Airbnb are being sued and prosecuted in many courts in many countries for various offenses.

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1.4   Economic Psychology and the Global Digital Economy: Interactions with and Implications for Constitutional Law, and a Summary Critique of the Literature on Constitutional Economics Given the Internet and increasing interconnectedness and communication among companies and individuals across countries, geopolitical risks are increasingly intertwined with and affected by the Internet and are critical to corporate executives, domestic and international investors, policy-makers and politicians. This book argues that: 1. Human-computer interaction (HCI) and the global digital economy remain key elements of daily interactions around the world and have had profound effects on the path of change, constitutional law issues and sustainable growth in most countries and especially in Transition Economies. Some Transition Economies have experienced media censorships, Internet monitoring, rapid growth of their Internet economies (e.g. China, Russia and the Baltics) and so on. In 2018, Russia was voted as having the best eGovernment systems. This book analyzes and develops theories of HCI and the digital economy in aspects of Transition Economies. 2. The “Global Digital Economy”, cross-border standardization and global regulatory-convergence have emerged as interconnected forces that often clash with or limit national constitutions and sustainable growth and can have unifying or destructive consequences, thus requiring better management. 3. Many of the interpretations and outcomes of Constitutional Law issues partly or wholly depend on Economic Psychology factors. 4. Judicial decisions, enforcement efforts and reactions by the public and businesses are inherently affected and determined by Economic Psychology factors. 5. The national constitutions of most countries were written before the Internet era and the Sharing Economy era, and the advent of these two phenomena has also shaped human behaviors, the legislative process, constitutional amendments and associated politics in respective countries.

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This book analyzes how constitutional theory is responding to and/or can respond to challenges and opportunities that arise from automation/ digitization, privatization and globalization. One critical question is whether Constitutional Economics Theory should focus on its nation-­ state tradition in “modern” terms, completely eliminate that framework or restructure it to focus on the Global Digital Economy? The following are some books, book-chapters and articles that address aspects of Constitutional Economics: Kohlscheen (2004), Eicher and Garcia-Penalosa, eds. (2006), Eicher and Turnovsky, eds. (2007), Persson and Tabellini (2005a, b), Congleton and Swedenborg (2006), Bardhan and Mookherjee, eds. (2006), Díaz-Cayeros (2006), Eaton (2004), Wibbels (2005), Cabrillo and Puchades-Navarro (2013), Fratianni et al. (2002), Neate and Nielsen (2007), Brousseau and Curie (2007), Tucker (June 2017, 2018), Antonelli (2011), Van den Hauwe (2005), Zorkin (2007) and Barenboim and Merkulova (2007). However, these foregoing books, book-chapters and articles differ from this book in the following ways: 1. Many of the materials are outdated—the “new” factors include but are not limited to the following: (a) The Global Financial Crisis of 2007–2014. (b) The Dodd-Frank Act and similar new financial regulations in many countries. (c) Increasing and significant adoption of Internet-based finance, media, business processing and ecommerce. (d) Changes in consumer behavior and online social networks etc. (e) The Arab Spring. (f) The rapid growth of the credit default swap (CDS) markets and over-the-counter (OTC) derivatives markets. (g) The failures of government interventions (e.g. government bailouts and bail-ins) in many countries during 2007–2016. (h) The global events of 2012–2020, such as the far-right movements in the United States, Europe and parts of Asia; their success in the United States (Trump’s election); Trade Wars; and EU (Brexit, Hungary, Bulgaria, Italian political gridlock) and the impact of financial regulations.

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2. Many of the books do not address sustainability (economic, social and environmental sustainability) and risk management “institutions” such as Sustainability Accounting Standards Board (SASB)/ IASB/FASB/Governmental Accounting Standards Board (GASB), ICMA, ISDA and Dodd-Frank Act. 3. Most of the books do not address corporate governance and its impact on firm performance and macroeconomic trends. There is substantial academic literature that confirms the significant effects of corporate governance quality on firm performance and evolution and on the macroeconomy. 4. Most of the books do not sufficiently address the optimal demarcation of geographical boundaries for voting or optimal voting methods. 5. The books do not sufficiently address human-computer interaction (HCI), complexity theory, game theory and group-decision issues and how these factors can affect macroeconomic trends and policy. 6. Many of the books do not develop or introduce theories/concepts that are applicable across countries. 7. Some of the books do not critique macroeconomic theories. 8. The books do not sufficiently analyze the behavioral biases and psychology of key decision-makers in government and financial institutions. 9. The books do not adequately analyze the impact of economic sanctions on existing and well-accepted economic theories such as purchasing power parity; interest rate parity; the relationships among interest rates, exchange rates and balance of trade; and the Phillips curve.

1.5   Behavioral Bias Indicators When aggregated at the national economy level, the Economic Psychology and Constitutional Political Economy factors/relationships introduced in this book combine to create a class of complex systems, behavioral operations research and Macroeconomic and Macrofinance indicators that are hereby referred to as the “Behavioral Bias Indicators”. These indicators have not been properly recognized in the economics/finance, International Political Economy, behavioral operations research or psychology

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literatures and are not tracked. Niamir et al. (2018), Acquier et al. (2017) and Schnellenbach and Schubert (2015) concluded or implied that human biases can affect national economies, although the links they established or theorized were indirect and they did not discuss the issue of Behavioral Bias Indicators.

1.6   Nwogugu (2012) and Emergence: Constitutional Political Economy, Mechanism Design and Sustainable Growth Nwogugu (2012) analyzed a broad range of Constitutional Economics, Mechanism Design and Operations Research issues that pertain to real estate instruments/processes (mortgages, foreclosures, titles, bankruptcy, REITs etc.), household economics/psychology, housing/mortgage market development, Systemic Risk and Financial Stability and Sustainable Growth. Nwogugu (2012) also critiqued associated academic articles on Macrofinance, Macroeconomics and Sustainable Growth. Nwogugu (2012) made the following observations: 1. Noted that the existing Constitutional Law Theories are inadequate and inaccurate. 2. Introduced new theories of Constitutional Torts. 3. Introduced new Takings theories (types of Takings), which are as follows: (1) Omissions Takings (page 110); (2) Subordination Takings (page 110); (3) Non-Uniformity Takings (page 110); (4) Core Takings (page 111); (5) Stay Takings (page 145); (6) Prohibitory Takings (page 190); (7) Supplemental Takings (page 191); and (8) Reversible Two-Way Takings (page 246). 4. Defined Quasi-Constitutions. Many jurisdictions like the United Kingdom and the EU do not have formal constitutions but have formal agreements or rules that are generally accepted and have substantial permanence (not subject to costless change in the near future) and thus are “functional” constitutions but not formal constitutions. Similarly, in many common-law jurisdictions, some statutes have the effect of constitutions because of their actual and/or perceived permanence and the implicit costly amendments. These

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two types of statutes are Quasi-Constitutions.13 Hence, the State Action requirement should be expanded to include Quasi-­ Constitutions as statutes that provide enabling constitutional law directives. Nwogugu (2012) noted that some feasible criteria for Quasi-Constitutions are as follows: (1) Permanence (actual and perceived), (2) Costly Amendment, (3) Universal Acceptance, (4) Government Action, (5) Enforceability, (6) Statutory Interpretation and (7) Legislative Intent. 5. Noted that analysis in traditional Institutional Economics has been largely defined by formal models and cost-benefit analysis, which collectively have not solved many modern problems inherent in institutions. 6. Analyzed the existing tests for “constitutionality” of processes, statutes and misconduct and noted that: (a) Currently, such tests do not consider elements of risk and are insufficient in today’s economy (many academicians have criticized Takings literature and methods of constitutional analysis14).

13  See: Kumm and Ferreres-Comella (2004), Ginsburg (2005), Abromeit and Wolf (2005), Wiener (2004), Mancini (2006), Grimm (2005), Shaw (2003), Haltern (2003), Birkinshaw (2004), Thym (2003), Birkinshaw (2005a, b) and Birkinshaw and Kombos (2006). See: German Constitutional Court, BVerfGE 22, 293, 296: “the Treaty quasi (sic) constitutes the constitution of this community.” See: Loizidou vs. Turkey, 310 Eur. Ct. H.R. (ser. A) at 27, 31 (1995) (the Convention is a constitutional instrument of European public order). 14  See: Echeverria (2008) (states in part: “This Article identifies the causes and consequences of a puzzling asymmetry in constitutional law. Of the three facets of adjudicative fact-finding—evidence, procedure, and rules of decision—only two are constitutionalized. Constitutional law regulates procedural and decisional rules—not whether the evidence that fact-finders use is adequate. Allocation of the risk of error by procedures and decisional rules—formulated as burdens of proof—is subject to constitutional scrutiny. Allocation of the risk of error by the rules of evidential adequacy, however, is free from that scrutiny. This constitutional asymmetry is puzzling because all risk-allocation impacts court decisions and, consequently, whether a person is deprived erroneously of her liberty or property…).” See: Zehnder (2007), Eagle (June 2004), Whitman (2007), Claeys (2006), Peterson (1989, 2007a, b), Epstein (2007), Baron (2007), Kanner (2006), Bell and Parchomovsky (2006), Post (2003), Echeverria (2007), Dreher (2006), Kania (1983), Fenster (2006) and Poirier (2002).

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(b)  Equal Protection theories—changes in demographics, the Internet and increased participation by minorities have reduced the usefulness of such discrimination tests.15 (c) The volume of interstate, coordinated and international communications and commerce in many countries has all increased exponentially and the definition of “burden on interstate commerce” as currently construed by courts is overbroad and relatively vague. (d) Federalism is a critical element of enforcement of risk regulations—but the literature on federalism16 does not analyze Constitutional Torts in sufficient detail. (e)  The growth of the Internet and consumer marketing has changed the definitions of, and expectations for, privacy17 and 15  See: Güth et al. (2009), Terry and Callan (1998), Bettencourt et al. (2001), Shah et al. (1998), Korostelina (2007), Haselhuhn and Mellers (2005), Lecat et  al. (2009) and Leonardelli et al. (2010). 16  On the economic ramifications of Federalism and preemption, see the following documents: Nwogugu (2012), Greve (October 2003), Erin and Rice (September 2006), Bardhan (2002), DeFigueiredo and Weingast (2005), Jackson (2008), Mishkin (2007), Persson and Tabellini (2005a, b), Congleton and Swedenborg (2006), Bertola et  al. (2006), Bar-Gill et  al. (2006), Bebchuk and Hamdani (2006), Kahan and Rock (2005), Whalen (2008), Murphy (March 2004), Furletti (March 2004), Kopcke et al. (2006), Peterson (2007a, b), Eicher and Garcia-­ Penalosa (2006), Eicher and Turnovsky (2007), Mendelson (2008), Fisher (2006), and Bagley (2004). See: Watters vs. Wachovia Bank, et al., 550 US ______ (2007; US Supreme Court). See: NationsBank of N.C., N.A. vs. Variable Annuity Life Ins. Co., 513 U.S. 251 (US Supreme Court). See: Atherton vs. FDIC, 519 U.S. 213, 221–222 (1997; US Supreme Court). See: Beneficial National Bank vs. Anderson, 539 U.S. 1, 10 (2003; US Supreme Court). See: Barnett Bank of Marion Cty., N.A. vs. Nelson, 517 U.S. 25, 32 (1996; US Supreme Court). See: Fidelity Fed. Sav. & Loan Assn. vs. De la Cuesta, 458 U.S. 141, 154–159 (1982; US Supreme Court) (pre-emption—mortgages). See: Crosby vs. National Foreign Trade Council, 530 US 363 (2000; US Supreme Court). See: Kansas v. Garcia, _____US _____ (2019; US Supreme Court). See: Arizona v. United States, _____US _____ (2012; US Supreme Court). See: Freightliner Corp. vs. Myrick, 514 US 280 (1995; US Supreme Court). See: Cipollone, 505 U.S., at 517 (US Supreme Court) (pre-emption). See: Florida Lime & Avocado Growers, Inc. vs. Paul, 373 U.S. 132, 142–143 (1963; US Supreme Court) (pre-emption). 17  See: Chellappa and Shivendu (2010), Chellappa and Sin (2005), Chellappa and Shivendu (2008), Tang et al. (April 2005), Hui and Png (2006), and McSherry and Talwar (2007).

1 INTRODUCTION 

23

contract rights, while consumers and governments do not have the resources to pursue lawsuits against offending parties, and thus the interpretations and implementation of the Right to Privacy Clause and the Right to Contract Clause should be cognizant of these changes. (f) In some common-law countries, the nature of application of the Separation-of-Powers Doctrine has changed drastically in the last twenty years—many federal agencies now routinely combine rule-­ making, adjudication and enforcement functions.18 The volume of rule-making by US federal agencies has now surpassed that of the US Congress. (g) Several articles have challenged the usefulness of the “State Action” requirement19 in constitutional law analysis, and although the US Supreme Court has extended “State Action” to include acts by private persons/entities that are encouraged, authorized or supported by the government, in the con18  See: Young (2007) (stated in part: “But as Justice White observed in INS v. Chadha, ‘[f]or some time, the sheer amount of law … made by the [administrative] agencies has far outnumbered the lawmaking engaged in by Congress through the traditional process.’ Whether one views this development as a ‘bloodless constitutional revolution’ or as a necessary ‘renovation’ of the constitutional structure in response to the complexity of modern society, the advent of the administrative state has profound implications for the Constitution’s core commitments to federalism and separation of powers in general and for preemption doctrine in particular. Specifically, preemption doctrine has yet to resolve the extent to which executive action should be treated differently from legislation, or to grapple with the considerable range of diverse governmental activities that march under the banner of executive agency action…Federal administrative action is, in important ways, considerably more threatening to state autonomy than legislation is. As the constitutional limits on national action fade into history, the primary remaining safeguards for state autonomy are political, stemming from the representation of the states in Congress, and procedural, arising from the sheer difficulty of navigating the federal legislative process….”). See: McGreal (“…the Court merely has applied statutory preemption rules to regulatory preemption cases…” without reflecting on the differences between Congress and the agencies). See: Benjamin and Young (2008) and Galle and Seidenfeld (2008). See: Gersen (2006) (authority should be allocated between federal agencies and state regulators so as to create optimal incentives for regulatory innovation and expertise). 19  See: Nwogugu (2012), Tushnet (2003), Currie (1986), Ellman (2001), Jamison (2008), Askin (April 2005), Kania (1983), Heinzerling (1986), Burnham (1989) and Gardbaum (2006). See: Brentwood Academy vs. Tennessee Secondary School Athletic Association, 531 U.S. 288 (2001).

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text of modern-day life and commerce, the State Action requirement remains too narrow and should be expanded. (h) Within the context of Constitutional Law, the term “property interests”20 has not been properly defined by the US Supreme Court, and there continues to be diverse opinions among US courts about the nature and scope of property interests.21 At least thirty-­ five US states have enacted statutes that allow compensation for Takings that do not meet the generally accepted definitions of “property interests” or “Takings”, where there has been a diminution of property value. See Avery (1995). (i) The use of three types of scrutiny for analyzing constitutional law disputes in the United States (strict scrutiny, intermediate scrutiny and rational scrutiny) is not justified and can result in unjustified prioritization of justice (when litigation costs, transaction costs, opportunity costs and enforce costs are considered); and furthermore, it is not clear that (i) the drafters of the Constitutions intended there be such classifications or (ii) such classifications are optimal for social welfare. 7. Introduced the Substantial Inducement Theory and the Substitution Theory as valid alternatives to the “State Action” requirement in Constitutional Law. The Substantial Inducement Theory has two parts.22 In the first part, where the government, institution or person, through specific acts or laws, causes (without requiring) a person to act in a way that results in a violation of constitutional rights, such inducement by the government/institution/person is effectively the equivalent of compulsion and is sufficient basis for constitutional law claims. Such inducement could be established with or without evidence of consideration/benefits/payments. Because there is no affirmative requirement of an act or acts, and it can be argued that the person could just walk away, the second part of this theory consists of a balancing test in which the government’s interest is weighed against the person’s property interests in conduct, privacy, speech or property. 20  See: Alexander (2003), Sheehan and Small (Jan. 2002), Avery (1995), Claeys (2003) and Michelman (2008). 21  See: Sung (2004) and Ginsberg (2005, 2006, 2009). 22  See: Tulsa Professional Collection Services v. Pope, 485 US 478 (1988).

1 INTRODUCTION 

25

8. Explained why the Financial Accelerator Theory is wrong. 9. Introduced new Economic Psychology theories that pertain to property taxation, and property appraisals and housing demand. 10. Explained the many adverse public health, psychological and psychiatric effects of consumer debt, corporate debt and home mortgages across countries. 11. Explained why many aspects of mortgages, foreclosures, subprime lending, Asset Securitization, property titles and REITs are unconstitutional and critiqued associated macroeconomic, microfinance and IPE literatures. 12. Explained the unconstitutionality of the US Bankruptcy Code’s preemption of state-law mortgage foreclosure statutes and critiqued associated macroeconomic, microfinance and IPE literatures. 13. Recommended models/processes for the development of a Mortgage/Mortgage-Alternatives market for the CIS Region, CEE Region and China. 14. Explained why Asset-Liability Matching is a hindrance to lending by banks, insurance companies and finance companies. 15. Explained why the traditional formulas for derivatives in calculus are wrong. 16. Introduced new savings, retirement and mortgage-alternatives products that can (1) drastically reduce households’ transaction costs, uncertainty and rebalancing costs and increase their savings rates and (2) drastically reduce the non-performing loan (NPL) rates, energy costs, reinsurance costs, recovery costs operating costs of banks, finance companies and insurance companies; and also improve their liquidity and profitability. 17. Explained how asset securitization, foreclosures and mortgages affect monetary policies and fiscal policies and critiqued associated macroeconomic, microfinance and IPE literatures. 18. One of the implications of the analysis in Nwogugu (2012) is that the two traditional measures of systemic risk remain woefully inadequate in today’s conditions. These two tests have been applied by governments of many countries when formulating economic policies and regulations to manage system risk. The results so far show that these classes of tests are inaccurate and ineffective in identify-

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ing, defining and/or controlling systemic risk. The two tests are as follows: (a)  The Interconnection Tests—which measure the likelihood and negative impact on the economy, of an institution’s inability to conduct its usual operations. These Systemic Risk measures assess not only the entity’s products and services, but also the economic multiplier effect on other companies/ entities. (b) The Too-Big-to-Fail Tests—which measure the market share or market dominance of a firm, relative to the national or international markets, and within the context of barriers to entry in the industry segment.

1.7   The Stare Decisis Doctrine (and Some of Its Economic Psychology Effects) Stare Decisis is a critical element of modern judiciaries and is needed to maintain consistency, equity and equal protection in adjudication and also to reduce litigation costs and uncertainty costs. Without the rigid application of Stare Decisis, these costs can increase exponentially and will have Multiplier Effects on financial markets and the broad economy. Contrary to some legal researchers, Stare Decisis does not prevent courts from adjusting or changing court decisions to account for recent trends and changes in culture, beliefs and modes of interaction—that is because most Appellate adjudicate issues En Banc to amend their prior decisions. Barrett (2003, 2008, 2015, 2017) noted that application or omission of Stare Decisis raises the Constitutional Law issues of violations of the Due Process Doctrine (substantive and/or procedural) and the Equal Protection Doctrine—but some of the Barrett (2003, 2008, 2015, 2017) arguments are wrong because Stare Decisis is a critical enforcement element and requirement of the Due Process (both procedural and substantive) Doctrine and the Equal Protection Doctrine. For example, an appellate panel should not be able to overrule another panel, and such overruling can be done by the En Banc Appellate Panel (a panel that consists of all the Appellate Judges in that circuit or jurisdiction) or by the US Supreme Court. In addition, the application of Stare Decisis raises the Doctrine of Issue-Preclusion at both judge and litigant levels.

1 INTRODUCTION 

27

Courts’ deviation from Stare Decisis: 1. Has or can have substantial “Information Content” that can affect Financial Market Volatility, Consumer Confidence, Business Confidence, Risk Perception, Market-Contagion and so on. 2. Can be deemed to be evidence that the court considered political factors and/or political pressure. 3. Can be deemed to indicate that the judge/judges involved is/are concerned about his/her/their political standing career prospects (e.g. politically appointed or politically elected judges). That, in turn, raises the issue of changing the processes for the appointment of judges in order to eliminate such influences. 4. Can be deemed to indicate that the judge/judges involved is/are concerned about repercussion from following Stare Decisis (e.g. personal security, loss of Social Capital and isolation). 5. Can significantly increase Systemic Risk, Perceived-Risk, Perceived-­ Inequality, Government’s Credibility, Litigation Costs and Transactions Costs (e.g. insurance fees, insurance payouts, warranty costs, due diligence costs and advisory fees). 6. Can significantly reduce Consumer Confidence, Business Confidence, Consumer Expenditures, Corporate Expenditures, Sustainability Efforts/Projects and Financial Stability.

1.8   Causal Factors: Global Value Chains, Preferential Free Trade Agreements and “Joint-Committees” Given their origins, objectives and structure, Global Value-Chains (GVCs), Preferential Trade Agreements (PTAs) and Joint-Committees directly affect a broad range of issues including effectiveness of Foreign Aid, the Global Pensions Crisis, international investment disputes, Political Lobbying by foreign persons, the efficiency of domestic/international statutes, international capital flows, and productivity. WTO (2019) and World Bank (July 2019) discussed International Trade and GVC (Global Value Chain) issues. Baccini (2019)23 discussed 23  Baccini (2019) stated in part: “According to the Desta dataset (Dür, et al., 2014), there were a little more than 100 PTAs in the 1990s, whereas there are more than 700 PTAs in force to date. Both developed and developing countries are heavily involved in preferential liberalization, and the number of North–South PTAs (i.e., PTAs between developed and developing countries) has boomed since the formation of the North America Free

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Preferential Free Agreements—during 2000–2020, there was an increase in the number and scope of bilateral Trade Agreements (and corresponding decrease in multilateral Trade Agreements). MNCs’ and governments’ reactions to Regional Trade Agreements24 (such as North American Free Trade Agreement (NAFTA), the European Union (EU), Asia-Pacific Economic Cooperation (APEC), Transpacific partnership, and African Continental Free Trade Agreement) and the increase of the number and scope of bilateral Trade Agreements (and corresponding decrease in multilateral Trade Agreements) during 2010–2020 were important causal factors that affected or could have affected cross-border Spillovers. Joint-Committees are a major element of global governance and they differ from Intergovernmental Organizations (IGOs) in the following ways: i) Joint-Committees are most often created via bilateral agreements between two nations, are created for specific purposes/issues and usually don’t have their own fixed/permanent offices, and some Joint-Committees have a specified life-time; ii) in most democracies, the power to create and participate in Joint-Committees is usually vested in the executive branch of the national Trade Agreement (NAFTA). In summary, much of the trade liberalization that we have seen in the past 20 years is preferential rather than unilateral or multilateral. While impressive, the growing number of PTAs is not the most defining transformation in the global governance of trade. Rather, the most important change is that modern PTAs not only reduce tariffs but also regulate investment, intellectual property rights, competition policy, government procurement, and many other matters. In other words, PTAs remove barriers not only at the border but also behind the border, producing what has been referred to as deep integration between countries (Lawrence 1996). An illustration of this change is the contrast between the PTA that the European Union signed with Egypt in 1972, which is 92 pages long, and the 2016 Comprehensive Economic and Trade Agreement between Canada and the European Union, which is1,598 pages long. Since many of the provisions and regulations included in PTAs go beyond World Trade Organization commitments (Horn et al. 2010), it is fair to say that preferential liberalization shapes the global governance of trade in the twenty-first century”. 24  See: Maliszewska, M., Olekseyuk, Z. & Osorio-Rodarte, I. (March 2018). Economic And Distributional Impacts Of Comprehensive And Progressive Agreement For Trans-Pacific Partnership: The Case Of Vietnam. Washington, D.C.: World Bank Group. See: Ruta, M. (2017). “Preferential Trade Agreements and Global Value Chains: Theory, Evidence, and Open Questions”. Policy Research Working Paper Series 8190. World Bank, Washington, DC. See: Mattoo, A., Mulabdic, A. & Ruta, M. (2017). “Trade Creation and Trade Diversion in Deep Agreements”. Policy Research Working Paper Series 8206, World Bank, Washington, DC. See: Osnago, A., Rocha, N. & Ruta, M. (2017). “Do Deep Trade Agreements Boost Vertical FDI?”. World Bank Economic Review, 30(Supplement), 119–125.

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29

government and can typically be exercised without approval from the legislature; iii) Joint-Committees help resolve the actual and potential disagreements, alliances and power imbalances that occur or arise in IGOs; iv) Joint-Committees are usually the main channel to broaden/deepen or curtail agreements or directives reached within IGOs, with respect to the two participating countries; v) Joint-Committees usually reach consensus by mutual agreement. Thus, Joint-Committees can have significant effect on Cross-Border Spillovers, GVCs and associated factors such as international capital flows, Foreign Aid, FDI, household dynamics, stock market volatility, Consumer Confidence, Business Confidence, Government budgets, government expenditures, consumer debt, productivity, long-term planning, and Risk-Perception, consumers’ perceptions of the economy. Thompson, Broude & Haftel (2019) found Joint-Committees in around 3000 bilateral investment treaties. Mitchell et al. (2020) studied JointCommittees in 3000+ international environmental agreements. Laurens & Morin (2019) analyzed “intergovernmental committees” for environmental protection in 690 trade agreements and 2343 environmental treaties. Repasi (July 2017), Lenk (2019) and Wright & Owen (2020) discussed the legitimacy, powers, and roles of Joint-Committees.

1.9   Causal Factors: Labor and Industrial Relations Labor relations and union relations (especially in MNCs and government agencies) and associated inability to reach agreement on wages and benefits can significantly affect Consumer Confidence, Business Confidence, Government budgets, government expenditures, consumer debt, productivity, long-term planning, Risk-Perception, household dynamics, stock market volatility, consumers’ perceptions of the economy, and so on. Bargeron, Lehn & Smith (2015) noted the effects of Employee–management trust in M&A activity. Aklamanu, Degbey & Tarba (2016) analyzed the role of human resources management in and social capital configuration for knowledge sharing in post-M&A integration. Kim & Milner (2019)25  Kim & Milner (2019) noted that “Multinational corporations (MNCs) play significant roles in shaping the global economy. For example, MNCs in the U.S., which has the world’s largest economy, make disproportionate contributions to the national economy. They represent a very small number of total American firms (less than 1%), but a large fraction of GDP, exports, imports, research and development, and private-sector employee compensation; Specifically, U.S. MNC parent companies in 2016 constituted more than 24% of private sector GDP (value-added) and 26% of private-sector employee compensation (Bureau of Economic Analysis 2018a); U.S. MNCs are engaged in more than half of all U.S. exports and 25

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discussed the influence of MNCs on foreign policy and International Trade (and by extension, on labor markets). Autor, Dorn, et al. (2017)26 discussed changes in global labor dynamics.

1.10   The Replicability/Reproducibility Crisis in Academic Research This Replicability/Reproducibility Crisis has been widely discussed in the literature, and thus all the empirical research cited in this book should be read with caution. See the comments in: BEC Crew (August 28, 2015),

more than 40% of U.S. imports (Bureau of Economic Analysis 2018). Likewise, MNCs throughout the world dominate the global economy as well as their national economies. The OECD (2018) estimates that MNCs account for half of global exports, nearly a third of world GDP (28%), and about fourth of global employment. These firms all generate a significant share of their revenue from abroad as well. Importantly, their transnational activities have transformed the nature of international trade, investments, and technology transfers in the era of globalization. The extensive global value chains (GVCs) prevalent in today’s world economy have been driven by how MNCs structure their global operations through outsourcing and offshoring activities. In fact, their decisions have enormous implications for a wide range of policy issues—such as taxation, investment protection, immigration—across many countries with different political and economic institutions. MNCs also may have strong political influence domestically. Indeed, their global economic dominance may go hand-in-hand with their powerful domestic political position”. 26  The abstract in Autor, Dorn, et al. (2017) states as follows: “The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor’s share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labor share will tend to fall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions”. The decline in labor’s share of GDP in many developed countries during 2000–2018 is significant evidence of Globalization and global Market-Integration (of international labor markets).

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Bohannon (August 28, 2015), Schmidt & Hunter (2015), Loken & Gelman (2017), Aguinis, Cascio & Ramani (2017), Replicability Research Group (2015), Cristea & Ioannidis (2018), Open Science Collaboration (2015), Replicability Research Group (2015), Stanford Encyclopedia of Philosophy (2018), Banks, O’Boyle, Pollack, et al. (2016), Baker (2016), Banks, Kepes & McDaniel (2015), Bosco, Aguinis, Field, et al. (2016), Chang & Li (2015), Istvan (2016), and S´wia˛tkowski and Dompnier (2017).

1.11   The Chapters One of this book’s aims is to identify and explain relationships among causal-factors that constitute elements of Complex Systems, and the “Reasoning” and “Preferences” of state/government and corporate actors in order to develop better Economic Psychology, Artificial Intelligence and Machine Learning models of Geopolitical Risk, Public Policy, Banking Policy and International Capital Flows, all of which are increasingly automated and are important decision factors for investment managers, boards of directors, research institutes and government officials. Chapter 2 redefines “Geopolitical Risk” and “Transition Economies” which are important given the rapid changes in the structure of the global economy, interactions among humans and countries, and technological advances. Chapter 2 discusses the literature on Cross-Border Spillovers, Social Capital and Social Networks, all of which are critical elements of Geopolitical Risk. Chapter 2 discusses the “2010–2020 Recommendations” which are important because: (i) they eventually became the basis and foundation for new sweeping financial/economic regulations that were enacted in many countries during 2010–2014 (such as the Dodd-Frank Act in the United States); (ii) unfortunately, the 2010–2020 Recommendations were insufficient and not comprehensive and that probably contributed to the failures of financial regulations and government interventions in many countries (that relied on the 2010–2020 Recommendations) during 2011–2016; (iii) they delineated the “economic powers” in today’s world; (iv) the 2010–2020 Recommendations also affected the balance of power among the “economic powers” and “military super powers” of the world—for example,

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while Russia is a military superpower, it was not very influential in the 2010–2020 Recommendations. This chapter also surveys the reactions of the research departments of large global banks to the 2010–2020 Recommendations and the constitutional crisis of 2009–2012 in the EU. Chapter 3 analyzes the Sustainability, Constitutional Law, Competition Law and Economic Psychology issues inherent in Multiple Listing Service (MLS), Real Estate Websites (REWs) laws and Rent-Control and Rent-­ Stabilization (RCRS) statutes which in many countries, are or may be unconstitutional and can affect the transmission of monetary policy and fiscal policies. MLS, REWs and RCRS were a cause of the rapid changes in housing prices and housing demand that occurred in the United States and other countries during 1995–2010 and 2015–2020. MLS and REWs are fintech systems that are used around the world. There is an increasing and symbiotic relationship between the unconstitutionality and anti-competition effects of MLS, Real Estate Websites (REWs) and RCRS on the one hand and systemic risk and financial stability on the other. MLS, REWs and RCRS can have substantial effects on consumer behavior in credit and asset markets—and this can precipitate structural changes in the financial services, real estate and retailing industries. Hence, all existing housing-demand models and housing-price forecast models are grossly mis-specified primarily because they do not sufficiently incorporate REWs, MLS, RCRS, legal factors and associated economic effects. These factors also affect Cross-Border Spillovers and their effects can vary significantly across countries/jurisdictions. In many countries (such as the United States, Canada and the United Kingdom), MLS and RCRS function as quasi-Labor regulations because they affect labor mobility, real estate brokers’ working conditions, workers’ rights, and employers’ exposure to labor costs and labor unions. Chapter 4 explains why Real Estate Taxes and Location Incentives are unconstitutional and their associated Economic Psychology effects. The inherent constitutional economics issues affect government allocations and spending, consumer confidence, business confidence, rick perception (of individuals, corporate executives and government regulators), corporate expenditures, government tax revenues, social welfare, site selection decisions of large companies, local/regional employment and economic growth, sustainable growth and so on. The magnitude and impact of these factors can vary dramatically across countries/jurisdictions and can be heavily influenced by political factors (political structure, political

1 INTRODUCTION 

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processes, lobbying and political influence etc.). In many countries (such as the United States, Canada and the United Kingdom), Location incentives function as quasi-Labor regulations because they affect labor mobility, working conditions, workers’ rights and employers’ exposure to labor costs and labor unions. Chapter 5 discusses the optimal demarcation of geographical boundaries for political elections at the local government and state government levels; and the impact of constitutions on the size and economic efficiency of national governments and sustainable growth.27 Many countries have bi-cameral risk regulations wherein banking, credit/loan, insurance and securities laws exist at both the federal and state levels (such as in the United States, Mexico, Brazil, Australia and Canada) and sometimes even at the local government levels. In such countries, the enactment and enforcement of risk regulations and constitutional interpretation by government enforcement agencies heavily depend on the geographical demarcations of state government boundaries and local government boundaries. In most countries, the geographical demarcation of states and local government areas and boundaries for senatorial and lower-house elections are critical elements of sustainable growth because they often determine taxation, allocation of capital by banks, government spending, applicability of regulations (environmental, financial etc.), preemption of state/federal laws in litigation, applicability of state government constitutions (distinct for federal constitutions), facility location decisions of companies and government agencies, corporate spending, job creation, household spending, voting patterns and so on. In most developed and developing countries, there is no rational economic basis for the geographical demarcation of states and local government areas and boundaries for governorship, senatorial and lower-congress elections. Most of these geographical demarcations are very rigid and do not respond to changes in populations, national/regional economies and the political preferences of indigenes. This chapter will analyze and introduce conceptual models for making such geographical demarcations in order to be more responsive to group preferences and socioeconomic changes. In many countries, the size of the federal government and state government is determined by their national constitutions (and to a lesser extent, their state constitutions). In some of those countries (such as Nigeria), the annual expenditure on the legislative

 See: Persson and Tabellini (2004), Persson (2003) and Persson and Tabellini (2002).

27

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and executive arms of government consumes a significant percentage of the annual federal budget. All that has an effect on risk regulation and sustainable growth because: (i) clearly, some of those countries (such as Nigeria) cannot afford the types of democratic governments that they operate; (ii) the structure of the federal government in combination with rampant corruption slows down and distorts sustainable growth and economic and policy decisions; and (iii) the resulting government bureaucracy reduces the credibility of the federal and state governments, which in turn reduces FDI, foreign investment, sustainable growth and compliance with risk regulations, and may cause capital flight. In most democracies, the enactment and enforcement of risk regulations and constitutional interpretation by government enforcement agencies heavily depend on the political party in power (and to a lesser extent, the constitutional allocation of power between the federal and state governments) and thus on the voting system. This chapter recommends new voting methods: (i) that are more efficient in conveying the preferences of the masses; (ii) that are more efficient in addressing issues pertaining to sustainable growth and quality of life; and (iii) that address the “Information Gap” problem in traditional voting methods, wherein the least informed persons constitute the majority of voters, while the most informed persons have little say in voting. Political-Campaign spending remains a highly debated issue in most developed countries, and can significantly distort public perceptions, consumer confidence, business confidence and election outcomes, all of which have notable effects on sustainable growth. The impact of advertising and campaign spending, and the strong case for statutory limitations on campaign spending will also be discussed in this book. Chapter 6 analyzes constitutional political economy dimensions of sovereign debt policy, foreign aid and the politicization of pension funds and sovereign wealth fund, and why it is improper to criticize what is termed “Foreign Aid”. Foreign Aid is contrasted with FDI and Foreign Investment (“FI”; which is investments in loans, corporate securities and government securities by foreign investors). Various studies have shown that constitutions have significant effects on government economic policies pertaining to the repayment of sovereign debt,28 28  See: Kohlscheen (2007) (this article states in part: “Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies…the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions (on serial defaults, see Reinhart and Rogoff (2004)).

1 INTRODUCTION 

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economic relations with subsidiary states,29 provision or acceptance of foreign aid,30 ­ foreign investment,31 privatization, government 32 spending, contracting,33 trade deficits, taxation and fiscal policies.34 Without judging the accuracy of the statistical methods used in these studies, the relationship between constitutions on the one hand and economic policy (taxation, debt management, monetary policy, social welfare policy, etc.) on the other is almost intuitive since constitutions determine economic rights and influence (and sometimes determine) governments’ allocations and its economic relationships with subsidiary Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are opportunistic. … Moreover, the result persists if OECD democracies are excluded from the sample…Rather than resulting from the form of government per se, the failure of some countries to repay as originally contracted is related to the in-existence of a representative committee that decides on debt policy. The decision structure found in parliamentary democracies mimics, to some extent, the role such a committee would play.…”). See: Kohlscheen (2004) and Reinhart and Rogoff (2004). 29  See: Valentine (2010). This article states in part: “Unfortunately, the constitutional separation of powers that underpins Canada’s federal system impedes the creation of a national wind power development strategy because Canada’s provinces have constitutional authority over electricity governance….” See: Goldstein (1981). 30  See: Brautigam (1992), Hyden and Reutlinger (1992), Neanidis and Varvarigos (2009) and Ouattara (2006). See: Tingley (2010) (this article states in part: “…a different approach: what are the domestic sources of support for foreign aid? Specifically, how does the donor’s domestic political and economic environment influence ‘aid effort’? …As governments become more conservative, their aid effort is likely to fall. Domestic political variables appear to influence aid effort, but only for aid to low-income countries and multilaterals while aid effort to middle income countries is unaffected. This suggests that models solely emphasizing donor economic and international strategic interests as determinants of donor aid policy may be mis-specified. These results also suggest sources of aid volatility that might influence recipient growth prospects….”). 31  See: Bevan et al. (2004), Ginsburg (2005), Huang (2003) and Goldstein (1981). 32  See: Graham and Idechong (1998). 33  See: Lowenberg and Yu (1990) (this article states in part: “An efficient constitutional environment…requires that the contracting parties possess good alternatives to the constitutional agreement toward which they are negotiating… The existing constitutional environments in both South Africa and Hong Kong are not favorable to the formation of an efficient contract…”). 34  See: Persson and Tabellini (2004), Persson (2003), Persson and Tabellini (2002), Besley and Case (2003) and Bar-Gill et al. (2006).

36 

M. I. C. NWOGUGU

states and citizens. It is somewhat difficult to distinguish among Foreign Direct Investment (“FDI”—loans, joint ventures and equity investments in specific projects), Foreign Investment (“FI”—loans, securities, investments) and Foreign Aid, as illustrated by the following examples and thus many of the criticisms of foreign aid (separate from the structure/efficiency of the constitutions and governments of countries that received such aid) are misplaced or premature. The World Bank and the International Monetary Fund (IMF) are funded primarily by “developed” countries (who in turn are often funded by issuance of sovereign bonds that are purchased by emerging markets persons). A substantial percentage of professional staff of the World Bank and the IMF are citizens of “developed” countries and “emerging” countries such as Korea, Brazil and China. While the United States has been a major provider of Foreign Aid, the United States has issued more than US$2 trillion of US Treasury securities—as of November 2020, each of Japan and China owned more than US$1.05 trillion of US Treasury securities—such debt is not very different from what is now classified as “Foreign Aid”. The European countries that provide “Foreign Aid” routinely fund their national budgets by issuing sovereign debt, some of which is purchased by emerging markets persons. Ironically, most of the funds illegally stolen by leaders of many developing countries are stashed in banks in Europe and are part of “usable/investable capital” in Europe. In the FI and FDI arena, China has been a major investor/creditor in Africa and Latin America. Japan has also invested heavily in the United States and in Latin American countries (FDI and FI)—in ways that are not very different from what is categorized as “Foreign Aid”. The point of these foregoing examples is that in most cases, there are no or little functional differences among FDI, FI and foreign aid. This chapter also reviews some of the geopolitical and Labor Union influences on Pension Funds and Sovereign Wealth Funds.

1988 1989 1989–1998 Deloitte & Touche 1990 1991

1992

1996 1997 1998 1998 1999 2000 2000 2000 2000

2000 2001

Barlow Clowes MiniScribe Livent Polly Peck Bank of Credit and Commerce International Phar-Mor

Informix Corporation Sybase Cendant Cinar Waste Management, Inc. MicroStrategy Unify Corporation Computer Associates Lernout & Hauspie

Xerox One.Tel

KPMG Ernst & Young

Ernst & Young Ernst & Young Ernst & Young Ernst & Young Arthur Andersen PWC Deloitte & Touche KPMG KPMG

Coopers & Lybrand

1976 1980 1986 1980–1982 Ernst & Young 1988 Arthur Young & Co

Lockheed Corporation Nugan Hand Bank ZZZZ Best Northguard Acceptance Ltd. Bankers Trust

Audit firm

Year

Company

Ponzi scheme run by Barry Minkow

Notes

United States Australia

United States United States United States Canada United States United States United States United States Belgium

United States

(continued)

Sanjay Kumar, Stephen Richards Fictitious transactions in Korea and improper accounting methodologies elsewhere Falsifying financial results

Misuse of corporate funds Financial misstatements Michael Saylor

Mail fraud, wire fraud, bank fraud, and transportation of funds obtained by theft or fraud

Hid an $80 million mispricing of derivatives contributing to profits by cutting bonuses United Kingdom Gilts management service: £110 million missing United States Canada Fraud and forgery United Kingdom United Kingdom

United States Australia United States Canada United States

Country

Appendix 1: List of Some Reported Accounting Scandals

1 INTRODUCTION 

37

Year

2011

2011

2001 2001 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002

Company

Amir-­Mansour Aria

Bank Saderat Iran

Enron Swissair Adelphia AOL Bristol-­Myers Squibb CMS Energy Duke Energy Vivendi Universal Dynegy El Paso Corporation Freddie Mac Global Crossing Halliburton Homestore.com ImClone Systems Kmart Merck & Co. Merrill Lynch Mirant Nicor Peregrine Systems Qwest Communications

(continued)

IAO (audit organization) and other audit firms IAO (audit organization) and other audit firms Arthur Andersen PricewaterhouseCoopers Deloitte & Touche Ernst & Young PricewaterhouseCoopers Arthur Andersen Deloitte & Touche Arthur Andersen Arthur Andersen Deloitte & Touche PricewaterhouseCoopers Arthur Andersen Arthur Andersen PricewaterhouseCoopers KPMG PricewaterhouseCoopers PricewaterhouseCoopers Deloitte & Touche KPMG Arthur Andersen KPMG 1999, 2000, 2001 Arthur Andersen, 2002 October KPMG

Audit firm

United States Switzerland United States United States United States United States United States France United States United States United States Bermuda United States United States United States United States United States United States United States United States United States United States

Iran

Iran

Country

John Rigas Inflated sales Inflated revenues Round trip trades Round trip trades Financial reshuffling Round trip trades Round trip trades Understated earnings Network capacity swaps to inflate revenues Improper booking of cost overruns Improper booking of sales Samuel D. Waksal Misleading accounting practices Recorded co-payments that were not collected Conflict of interest Overstated assets and liabilities Overstated assets, understated liabilities Overstated sales Inflated revenues

Business loans without putting any collateral and financial system Financial transactions among banks, and getting a lot of business loans without putting any collateral Jeffrey Skilling, Kenneth Lay, Andrew Fastow

Notes

38  M. I. C. NWOGUGU

Ernst & Young PricewaterhouseCoopers

2008 2009 2009 2009 2009–2011 2010 2010 2011 2011 2012 2012–2014 2015 2015 2016 2016

Source: Wikipedia

Ernst & Young PricewaterhouseCoopers Friehling & Horowitz

2004 2004 2008

Chiquita Brands International AIG Bernard L. Madoff Investment Securities LLC Anglo Irish Bank Satyam Computer Services Biovail Taylor, Bean & Whitaker Monsanto Kinross Gold Lehman Brothers Sino-­Forest Corporation Olympus Corporation Autonomy Corporation Penn West Exploration Toshiba Valeant Pharmaceuticals Alberta Motor Association Odebrecht PricewaterhouseCoopers Deloitte KPMG Ernst & Young Ernst & Young Ernst & Young Deloitte & Touche KPMG Ernst & Young

PricewaterhouseCoopers Arthur Andersen Deloitte & Touche Grant Thornton SpA Ernst & Young Deloitte & Touche

Deloitte & Touche Arthur Andersen

2002 2002 2002 2002 2002 2003 2003 2003 2003

Reliant Energy Sunbeam Symbol Technologies Tyco International WorldCom Royal Ahold Parmalat HealthSouth Corporation Nortel

Ireland India Canada United States United States Canada United States Canada-­China Japan United States Canada Japan Canada Canada Brazil

United States United States United States

United States United States United States Bermuda United States United States Italy United States Canada

Anglo Irish Bank hidden loans controversy Falsified accounts False statements Fraudulent spending Improper accounting for incentive rebates Overstated asset values Failure to disclose Repo 105 transactions to investors Ponzi scheme, falsifying assets Tobashi using acquisitions Subsidiary of HP Overstated profits Overstated profits Overstated revenues Fraudulent invoices Government bribes

Round trip trades Overstated sales and revenues Overstated sales and revenues Improper accounting, Dennis Kozlowski Overstated cash flows, Bernard Ebbers Inflating promotional allowances Falsified accounting documents, Calisto Tanzi Richard M. Scrushy Distributed ill-advised corporate bonuses to top 43 managers Illegal payments Accounting of structured financial deals Massive Ponzi scheme

1 INTRODUCTION 

39

• Australia and New Zealand Banking Group (Australia; https://en.wikipedia.org/wiki/Australia_and_New_Zealand_Banking_ Group)—scandal involving misleading file notes in the Financial Ombudsman Service (Australia) presented to the Victorian Supreme Court. • Australia and New Zealand Banking Group (Australia; https://en.wikipedia.org/wiki/Australia_and_New_Zealand_Banking_ Group)—alleged manipulation of the Australian benchmark interest rates. ANZ is currently being pursued by the Australian Securities and Investments Commission, which filed an originating process in the Federal Court of Australia against ANZ in March 2016. • BAE Systems (United States; https://en.wikipedia.org/wiki/BAE_Systems#Corruption_investigations)—bribery scandal related to the Al-Yamamah arms deal with Saudi Arabia. • Bristol-Myers Squibb (United States; https://en.wikipedia.org/wiki/Bristol-­Myers_Squibb#Scandals_and_allegations)—accounting scandal. • Brown & Williamson (United States; https://en.wikipedia.org/wiki/Bristol-­Myers_Squibb#Scandals_and_allegations)—for chemically enhancing the addictiveness of cigarettes, becoming the leading edge of the tobacco industry scandals of the 1990s, and eventually resulting in the Tobacco Master Settlement Agreement (https://en.wikipedia.org/wiki/Tobacco_Master_Settlement_Agreement). • Chevron-Texaco Lago Agrio oil field (United States; https://en.wikipedia.org/wiki/Lago_Agrio_oil_field)—pollution scandal. • Commonwealth Bank of Australia (Australia; https://en.wikipedia.org/wiki/Commonwealth_Bank)—facts uncovered that showed the insurance arm of the bank denied life insurance policy holders despite having legitimate claims, resulting in calls for a Royal Commission into the Australian insurance industry. • Commonwealth Bank of Australia (Australia; https://en.wikipedia.org/wiki/Commonwealth_Bank_of_Australia)—the company provided unsuitable financial advice to a large number of customers between 2003 and 2012 and continuously delayed in providing compensation to the victims. • Compass Group (https://en.wikipedia.org/wiki/Compass_Group#2005_United_Nations_misconduct_incident)—the company bribed the United Nations in order to win business. • Corrib gas controversy (Ireland; https://en.wikipedia.org/wiki/Corrib_gas_controversy)—Kilcommon, Erris, Co. Mayo, Ireland. • Deutsche Bank Libor scandal (Germany; https://en.wikipedia.org/wiki/Libor_scandal)—Deutsche Bank engaged in LIBOR manipulation and agreed to a combined US$2.5 billion in fines. • Duke Energy (United States; https://en.wikipedia.org/wiki/Duke_Energy#Taxes)—tax scandal.

Appendix 2: The List of Top Corporate Scandals in the World That Occurred Without Any Insolvency

40  M. I. C. NWOGUGU

(continued)

• El Paso Corporation (United States; https://en.wikipedia.org/wiki/El_Paso_Corp.#Price_fixing)—price-fixing scandal. • Fannie Mae (United States; https://en.wikipedia.org/wiki/Fannie_Mae#Accounting_controversy)—earnings management and underreporting of profit. • FlowTex (https://en.wikipedia.org/wiki/FlowTex#Scandal)—that was the largest corporate scandal in German history. • Global Crossing (United States; https://en.wikipedia.org/wiki/Global_Crossing)—fraud. • Guinness share-trading fraud (https://en.wikipedia.org/wiki/Guinness_share-­trading_fraud)—share-trading fraud. • Hafskip’s collapse (https://en.wikipedia.org/wiki/Hafskip). • Halliburton (United States—https://en.wikipedia.org/wiki/Halliburton)—the company was overcharging for government contracts. •  Harken Energy Scandal (United States; https://en.wikipedia.org/wiki/Harken_Energy_Scandal). • HealthSouth (United States; https://en.wikipedia.org/wiki/HealthSouth)—reporting exaggerated earnings. •  Homestore.com (https://en.wikipedia.org/wiki/Homestore.com). • Kerr-McGee (United States; https://en.wikipedia.org/wiki/Karen_Silkwood)—the Karen Silkwood case. •  Kinney National Company (https://en.wikipedia.org/wiki/Kinney_National_Company)—financial scandal. •  Lernout & Hauspie (https://en.wikipedia.org/wiki/Lernout_%26_Hauspie)—accounting fraud. •  Lockheed bribery scandal (United States; https://en.wikipedia.org/wiki/Lockheed_bribery_scandals)—bribery occurred in Germany, Japan, and the Netherlands. •  Livedoor (https://en.wikipedia.org/wiki/Livedoor) scandal. •  Marsh & Mclennan (United States; https://en.wikipedia.org/wiki/Marsh_%26_Mclennan). • Merck Medicaid fraud (United States; https://en.wikipedia.org/wiki/Merck_%26_Co.#Medicaid_overbilling)—investigation about Medicaid fraud. • Mirant (https://en.wikipedia.org/wiki/Mirant). • Morrison-Knudsen (United States; https://en.wikipedia.org/wiki/Morrison-­Knudsen)—the scandal led to William Agee’s ouster. •  Mutual-­fund scandal (2003) (https://en.wikipedia.org/wiki/Mutual-­fund_scandal_(2003)). •  Nestle (https://en.wikipedia.org/wiki/Nestl%C3%A9). •  Nugan Hand Bank (https://en.wikipedia.org/wiki/Nugan_Hand_Bank). • Olympus scandal (Japan; https://en.wikipedia.org/wiki/Olympus_Scandal)—scandal occurred in Japan. •  Options backdating (https://en.wikipedia.org/wiki/Options_backdating)—involving over 100 companies. •  Panama Papers (https://en.wikipedia.org/wiki/Panama_Papers)—international leak of hundreds of thousands of confidential documents pertaining to bank accounts and companies owned by politicians, high-­net-­worth individuals and other people (some in offshore tax havens). The focus was Panama law firm Mossack Fonseca.

1 INTRODUCTION 

41

Source: www.wikipedia.com, https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals

•  Peregrine Systems (United States; https://en.wikipedia.org/wiki/Peregrine_Systems)—its corporate executives were convicted of accounting fraud. • Phar-Mor (United States; https://en.wikipedia.org/wiki/Phar-­Mor)—the company lied to its shareholders; and its CEO was eventually sentenced to prison for fraud and the company eventually became bankrupt. • Qwest Communications (United States; https://en.wikipedia.org/wiki/Qwest_Communications). • RadioShack (United States; https://en.wikipedia.org/wiki/RadioShack)—CEO David Edmondson lied about attaining a B.A. degree from Pacific Coast Baptist College in California, USA. •  Reliant Energy (United States; https://en.wikipedia.org/wiki/Reliant_Energy). • Rite Aid (United States)—accounting fraud. •  Royal Dutch Shell (Netherlands; https://en.wikipedia.org/wiki/Royal_Dutch_Shell)—company overstated its oil reserves twice; and it downgraded 3,900,000,000 barrels (620,000,000 m3), or about 20% of its total holdings. •  S-­Chips Scandals (Singapore; https://en.wikipedia.org/wiki/S-­Chips_Scandals). • Satyam Computers (India; https://en.wikipedia.org/wiki/Satyam_Computers#Controversies). •  7-­Eleven Australia (Australia; https://en.wikipedia.org/wiki/7-­Eleven)—allegations of bullying tactics, underpayment of wages and entitlements. •  Siemens Greek bribery scandal (Germany; https://en.wikipedia.org/wiki/Siemens_Greek_bribery_scandal)—involving cases of bribery on behalf of Siemens toward the Greek Government. •  Société Générale (France; https://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale)—derivatives trading scandal causing multibillion euro losses. •  Southwest Airlines (United States; https://en.wikipedia.org/wiki/Southwest_Airlines)—violations of safety regulations. •  Tyco International (United States; https://en.wikipedia.org/wiki/Tyco_International)—executive theft and prison sentences. • Union Carbide (United States; https://en.wikipedia.org/wiki/Union_Carbide)—the Bhopal disaster. •  ValuJet Airlines (United States; https://en.wikipedia.org/wiki/ValuJet_Airlines)—loading live oxygen generators into cargo hold of passenger jet causing fatal crash. •  Volkswagen emissions violations (https://en.wikipedia.org/wiki/Volkswagen_emissions_violations)—fraud in diesel motor pollution measurements. •  David Wittig (https://en.wikipedia.org/wiki/David_Wittig)—“looting” scandals. • Xerox (United States; https://en.wikipedia.org/wiki/Xerox#Alleged_accounting_irregularities)—alleged accounting irregularities.

(continued)

42  M. I. C. NWOGUGU

Causes

(continued)

Banking

Business

43

At the start of the Great Depression, after rumors about the solvency of the Norddeutsche Wollkämmerei & Kammgarnspinnerei, there was a bank run, and Danatbank was forced into insolvency. Allied Crude United States 16-­Nov-­63 Commodities Commodities trader Tino De Angelis defrauded clients, including the Bank of Vegetable Oil America, into thinking he was trading vegetable oil. He got loans and made Refining Corp money using the oil as collateral. He showed inspectors tankers of water, with a bit of oil on the surface. When the fraud was exposed, the business collapsed. Herstatt Bank Germany 26-­Jun-­74 Banking Settlement risk—counterparty banks did not receive their US dollar payments, where Herstatt had received Deutsche Marks earlier, prior to its governmentforced liquidation. Carrian Group Hong Kong 1983 Real estate Accounting fraud—an auditor was murdered, and an adviser committed (China) suicide. That was the largest collapse in Hong Kong history. Texaco United States 13-­Apr-­87 Oil After a legal battle with Pennzoil, whereby it was found to owe a debt of US$10.5 billion, Texaco went into bankruptcy. It was later resurrected and taken over by Chevron. Qintex Australia 1989 Real estate Qintex CEO Christopher Skase was found to have improperly used his position to obtain management fees prior to the US$1.5 billion collapse of Qintex including $700 million of unpaid debts. Skase absconded to the Spanish resort island of Majorca. Spain refused to extradite him for ten years during which time Skase became a citizen of Dominica. Lincoln Savings and United States 1989 Banking Financial institution that went bust following the Keating Five scandal. Loan Association Polly Peck United 30-­Oct-­90 Electronics, After a raid by the UK Serious Fraud Office in September 1990, the Kingdom food, and company’s share price collapsed. The CEO Asil Nadir was convicted of textiles stealing the company’s money.

Germany

Danatbank

13-Jul-­31

Headquarters Date

Name

Appendix 3: List of Major Corporate Collapses Around the World (up to 2019)

1 INTRODUCTION 

1991

Sweden

Equitable Life Assurance Society

Long-Term Capital Management

Livent

Bre-X

Barings Bank

5-Jul-­91

United Kingdom

Bank of Credit and Commerce International Nordbanken Banking

Banking

Business Breach of US law, by owning another bank. Fraud, money laundering, and larceny.

Causes

After market deregulation, there was a housing price bubble, and it burst. As part of a general rescue as the Swedish banking crisis unfolded, Nordbanken was nationalized for 64 billion kronor. It was later merged with Götabanken, which itself had to write off 37.3% of its creditors, and is now known as Nordea. United 26-­Feb-­95 Banking An employee in Singapore, Nick Leeson, traded futures, signed off on his Kingdom own accounts and became increasingly indebted. The London directors were subsequently disqualified, as being unfit to run a company in Re Barings plc (No 5). Canada 1997 Mining After widespread reports that Bre-X had found a gold mine in Indonesia, the stories were found to be fraudulent. Canada Nov-­98 Entertainment In November 1998, Livent sought bankruptcy protection in the United States and Canada, claiming a debt of $334 million. Garth Howard Drabinsky, co-founder of Livent, was convicted and sentenced to prison for fraud and forgery. A judgment was obtained against Deloitte & Touche LLP in respect of Deloitte’s negligence in conducting the audit for Livent’s 1997 fiscal year. United States 23-­Sep-­98 Hedge fund After purporting to have discovered a scientific method of calculating derivative prices, LTCM lost $4.6 billion in the first few months of 1998 and required state assistance to remain afloat. United 8-Dec-­00 Insurance The insurance company’s directors unlawfully used money from people Kingdom holding guaranteed annuity rate policies to subsidize people with current annuity rate policies. After a House of Lords judgment in Equitable Life Assurance Society v Hyman, the Society closed. Though never technically insolvent, the UK government set up a compensation scheme for policyholders under the Equitable Life (Payments) Act 2010.

Headquarters Date

Name

(continued)

44  M. I. C. NWOGUGU

United States 21-Jul-­01

United States 28-­Nov-­01 Energy

United States 28-­Nov-­01 Food

United States 22-­Jan-­02

United States 13-­Feb-­02 Cable television United States 15-­Jun-­02 Accounting

Italy

WorldCom

Enron

Chiquita Brands Int.

Kmart

Adelphia Communications Arthur Andersen

Parmalat

Retail

Telecoms

Telecoms

24-­Dec-­03 Food

29-­May-­ 01

Australia

One.Tel

Energy

United States 6-Apr-­01

Pacific Gas and Electric Company

15-­Mar-­01 Insurance

Australia

HIH Insurance

(continued)

In early 2000, after increases in the size of the business, it was determined that the insurance company’s solvency was marginal, and a small asset price change could see the insurance company become insolvent. It did. Director Rodney Adler, CEO Ray Williams and others were sentenced to prison for fraudulent activity. After a change in regulation in California, the company determined it was unable to continue delivering power, and despite the California Public Utility Commission’s efforts, it went into bankruptcy, leaving homes without energy. It emerged again in 2004. After becoming one of the largest Australian public companies, losses of $290 million were reported, the share price crashed, and it entered into administration/insolvency. In the court case ASIC vs. Rich, the directors were found not to have been guilty of negligence. After falling share prices, and a failed share buy-back scheme, it was found that the directors had used fraudulent accounting methods to push up the stock price. Rebranded as MCI Inc., the company emerged from bankruptcy in 2004 and the assets were bought by Verizon. Enron’s directors and executives fraudulently concealed large losses in Enron’s projects; and some of them were sentenced to prison. The company accumulated debts, after a series of accusations relating to breaches of labor and environmental standards. It entered a pre-packaged insolvency and emerged with similar management in 2002. After difficult competition, Kmart was put into Chap. 11 bankruptcy proceedings, but soon reemerged. Internal corruption. Some of the Company’s board members were sentenced to prison. A US court convicted Andersen for obstruction of justice by shredding documents related to the Enron scandal. The company’s finance directors concealed its large debts.

1 INTRODUCTION 

45

United Kingdom

MG Rover Group

Business

United States 14-­Mar-­08 Banking

United Kingdom

Bear Stearns

Northern Rock

22-­Feb-­08 Banking

United States 17-­Oct-­05 Brokering

Hedge fund

Refco

Bayou Hedge Fund United States 29-­Sep-­05 Group

15-­Apr-­05 Automobiles

Headquarters Date

Name

(continued)

After diminishing demand, and getting a £6.5 m loan from the UK government in April 2005, the company went into administration. After the loss of 30,000 jobs, Nanjing Automobile Group bought the company’s assets. Samuel Israel III defrauded his investors into thinking there were higher returns and orchestrated fake audits. The US Commodity Futures Trading Commission filed a court complaint and the business was shut down after the company’s board members were caught attempting to send $100 million into overseas bank accounts. After becoming a public company in August 2005, it was revealed that Phillip R. Bennett, the company CEO and chairman, had concealed $430 million of bad debts. Its underwriters were Credit Suisse First Boston, Goldman Sachs, and Bank of America Corp. The company entered Chap. 11 and Bennett was sentenced to 16 years in prison. Bear Stearns invested in the subprime mortgage market from 2003 after the US government had begun to deregulate consumer protection and derivatives trading. The business collapsed as more people began to be unable to meet mortgage obligations. After a stock price high of $172 per share, Bear Stearns was bought by JP Morgan for $2 per share on 16 March 2008, with a $29 billion loan facility guaranteed by the US Federal Reserve. Northern Rock had invested in the international markets for subprime mortgage debt, and as more and more people defaulted on their home loans in the United States, Northern Rock’s business collapsed. It triggered the first bank run in the United Kingdom since Overend, Gurney & Co in 1866, when it asked the UK government for assistance. Northern Rock was nationalized and then sold to Virgin Money in 2012.

Causes

46  M. I. C. NWOGUGU

United States 16-­Sep-­08

AIG

Bernard L. Madoff Investment Securities LLC

Royal Bank of Scotland Group (RBS) ABN-AMRO

United States Dec-­08

Oct-08

Netherlands

Securities

Banking

13-­Oct-­08 Banking

Banking

Insurance

Banking

United Kingdom

Washington Mutual United States 26-­Sep-­08

United States 15-­Sep-­08

Lehman Brothers

(continued)

Lehman Brothers’ financial strategy from 2003 was to invest heavily in mortgage debt, in markets that were being deregulated from consumer protection by the US government. Losses mounted, and Lehman Brothers was forced to file for Chap. 11 bankruptcy after the US government refused to extend a loan. The collapse triggered a global financial market meltdown. Barclays, Nomura and Bain Capital purchased Lehman’s assets that were not encumbered/indebted. Out of $441 billion worth of securities originally rated AAA, as the US subprime mortgage crisis unfolded, AIG found it held only $57.8 billion of these products. AIG was forced to take a 24-month credit facility from the US Federal Reserve Board. After the subprime mortgage crisis, there was a bank run on WaMu and pressure from the FDIC forced the bank to close. After the takeover of ABN-AMRO, and the collapse of Lehman Bros, RBS found itself insolvent as the international credit market seized up. Later, 58% of RBS’ shares were purchased by the UK government. After a takeover battle among Banco Santander, Fortis, and RBS, ABN-­ AMRO was split up and divided between the banking consortium. Fortis and RBS were found to be heavily indebted due to the subprime mortgage crisis. Fortis was split and the Dutch part of Fortis was taken under government ownership by the Netherlands, thus reinstating the company in ABN-­ AMRO. The Belgian part was taken over by BNP-­Paribas. RBS was taken under government ownership by the United Kingdom. Madoff tricked investors out of $64.8 billion through the largest Ponzi scheme in history. Investors were paid returns out of their own money or that of other investors rather than from profits. Madoff told his sons about his scheme and they reported him to the US SEC. He was arrested the next day.

1 INTRODUCTION 

47

Australia

Australia

Canada

Ireland

Germany

Germany

United States 6-Jul-­12

Bankwest

Storm Financial

Nortel

Anglo Irish Bank

Arcandor

Schlecker

Dynegy

23-­Jan-­12

9-Jun-­09

15-­Jan-­09

14-­Jan-­09

Jan-09

2008

Headquarters Date

Name

(continued)

Energy

Retail

Retail

Banking

Telecoms

Financial services

Banking

Business

After the 2007–2008 financial crisis, and allegations of excessive executive pay, demand for this company’s products dropped. After the financial crisis of 2007–2008, the bank was forced to be nationalized by the Irish government. After struggling to maintain business levels at its brand names Karstadt and KaDeWe, Arcandor sought help from the German government and then filed for insolvency. After continual losses mounting from 2011, Schlecker, which had 52,000 employees, was forced into insolvency, but continued to operate. After a series of attempted takeover bids, and a finding of fraud in a subsidiary’s purchase of another subsidiary, Dynegy filed for Chap. 11 bankruptcy. It emerged from bankruptcy on October 2, 2012.

Following the purchase of Bankwest by the Commonwealth Bank of Australia (CBA), there were calls for a royal commission specifically to investigate the conduct of the bank after allegations were made that the CBA engineered defaults of Bankwest customers in order to profit from clawback clauses under the purchase agreement. Collapsed financial services business that cost thousands of persons their livelihoods.

Causes

48  M. I. C. NWOGUGU

Portugal

Australia

Banco Espírito Santo (BES)

Dick Smith (retailer)

5-Jan-­16

3-Aug-­14

27-Jul-­12

Retail

Banking

Medical technology

In 2009, an anonymous letter alleging possible illegal and fraudulent activities by CMED’s management since 2007 was sent to KPMG Hong Kong, then CMED’s auditor, and the allegations were investigated by the law firm Paul Weiss Rifkind Wharton & Garrison. Since July 27, 2012, pursuant to an Order by the Grand Court of the Cayman Islands, CMED has been under the control of Joint Official Liquidators. Post-bankruptcy filing, CMED’s liquidator probed an alleged $355 million insider fraud. In March 2017, the US Department of Justice criminally indicted CMED’s founder and CEO, as well as its former Chief Financial Officer, charging them with securities fraud and wire fraud conspiracy for stealing more than $400 million from investors as part of a seven-year scheme. An audit performed in 2013 for a capital raise uncovered severe financial irregularities and the precarious financial situation of the bank. In July 2014, Salgado was replaced by economist Vítor Bento, who saw BES in an irrecoverable situation. Its good assets were bought by Novo Banco, a vehicle founded by Portugal’s financial regulators for that purpose, on August 3, which hired Bento as CEO, while its toxic assets stayed in the “old” BES, whose banking license was revoked by the Portuguese government. On January 5, 2016, the retailer collapsed and was placed into receivership. McGrath Nicol was appointed as administrator by the company’s board of directors and Ferrier Hodgson was appointed by the company’s major creditors National Australia Bank (NAB) and HSBC Bank Australia.

Source: www.wikipedia.com, https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals

Australia

China Medical Technologies (CMED)

1 INTRODUCTION 

49

Medium Uber 500 px

Hootsuite

Giphy

Quora

9GAG

Canva Slack Prezi Buffer

Big Commerce Fiverr WeTransfer Freelancer WeChat Stripe

2 3 4

5

6

7

8

9 10 11 12

13 14 15 16 17 18

90,936 90,819 90,778 90,764 90,599 90,372

91,717 91,681 91,614 91,422

91,850

92,005

92,086

92,247

93,040 92,995 92,725

93,371

Airbnb

1

United States

United States

Canada

United States United States Canada

United States

Country

Hong Kong/ China Amazingly Simple Graphic Design Software—Amazingly simple graphic design. Australia Where work happens—Slack—On a mission to make your working life simple. United States Presentation Software—Online Presentation Tools. Hungary A Smarter Way to Share on Social Media—Buffer is the easiest way to share United States the great links. Ecommerce Software & Shopping Cart Platform. Australia Freelance Services Marketplace for Entrepreneurs. Israel Cloud-based file transfer service. Netherlands Freelancer is the world’s largest freelancing platform. Australia Free messaging and calling app. China Accept and manage online payments—Stripe is a suite of APIs that powers United States commerce.

Vacation Rentals, Homes, Experiences & Places—Airbnb is a trusted online marketplace for people. Read, write and share stories that matter. Sign Up to Drive or Tap and Ride—Everyone’s Private Driver. The Premier Photography Community—We are the premier community for inspiring photographers. Social Media Management Dashboard—Hootsuite is a social relationship platform. Search and make GIFs—Animated GIF search. The first and largest GIF search platform. A place to share knowledge and to better understand—Quora connects you to everything you want to know. Go Fun Yourself—9GAG is your best source of fun.

Startup Description ranking (SR) score

World Startup rank

Appendix 4: List of the Top-100 Most Successful Startups in the World

2 1 1 3 1 8

1 6 1 7

1

5

4

2

2 3 1

1

Country rank

50  M. I. C. NWOGUGU

Coinbase IFTTT AngelList Teespring Nintendo

Nginx Philips Venture Capital Fund Strava GitLab

Coursera Base Tokopedia Sprout Social

ZipRecruiter Treehouse

TransferWise About.me Mapbox New Relic Zapier Trustpilot

23 24 25 26 27

28 29

32 33 34 35

36 37

38 39 40 41 42 43

30 31

Freepik Blockchain Duolingo Telegram

19 20 21 22

88,639 88,562 88,535 88,534 88,403 88,393

88,759 88,696

89,012 88,884 88,880 88,854

89,051 89,048

89,330 89,052

89,925 89,918 89,874 89,810 89,354

90,078 90,071 89,992 89,987

Free vectors, photos and PSD Downloads. Bitcoin Block Explorer—The world’s most popular Bitcoin wallet! Learn Spanish, French and other languages for free. A new era of messaging—Telegram is the world’s fastest and most secure messaging system. BUY AND SELL DIGITAL CURRENCY—Coinbase is a digital wallet. Do more with the services you love. Where the world meets startups—platform for startups. Find something made for you. Nintendo is a Japanese multinational consumer electronics company that develops game consoles. They learn, you earn—A high performance free open-source web server. Philips Venture Capital Fund is an Eindhoven-­based venture capital fund that invests in technology startups worldwide. Run and Cycling Tracking on a Social Network—Online network for athletes. Code, test and deploy together—GitLab is an open-source code collaboration platform. Free Online Courses from Top Universities. Online shop easy creation for free. Tokopedia is an online marketplace. Powerful Social Media Software—Sprout Social is a social media management tool. Job Search—Millions of Jobs Hiring Near You. Start Learning for Free—Treehouse aims to be the best way to learn web design. Transfer Money Online, Send Money Abroad. Grow your audience and get more clients. The location platform for developers and designers. Application Performance Management and Monitoring. All-in-one web application integrations. Experience the power of customer reviews. 2 20 21 22 23 1

18 19

16 1 1 17

15 3

14 2

9 10 11 12 13

1 1 1 1

(continued)

United Kingdom United States United States United States United States Denmark

United States United States

United States Japan Indonesia United States

United States Netherlands

United States Netherlands

United States United States United States United States United States

Spain United Kingdom Guatemala Russia

1 INTRODUCTION 

51

Ecosia HotJar CloudFlare Bukalapak Freshdesk

Unbounce

DoorDash

Postmates Bol.com

Zomato Tokyo Otaku Mode Minube Socialbakers Mixpanel Designmodo Twilio Skillshare

46 47 48 49 50

51

52

53 54

55 56

57 58 59 60 61 62

Spreaker

45

87,629 87,583 87,572 87,492 87,491 87,465

87,693 87,678

87,846 87,816

87,894

87,979

88,094 88,091 88,040 87,998 87,992

88,133

88,271

Gleam

44

Social Media Marketing, Analytics & Performance. Product analytics for mobile, web, and beyond. Web Design Blog and Shop—Design and Web Development Magazine. APIs for Text Messaging, VoIP & Voice in the Cloud. A learning community for creators.

Mobile fashion discovery and intelligence platform that brings engagement between style lovers and the industry to the next level. Much more than YouTube for radio—Spreaker allows you to create your own online radio. Search the web to plant trees…—Ecosia is the search engine that plants trees! See how visitors are really using your website. The Web Performance & Security Company. Place of selling/buying. Customer support software and helpdesk solution—Freshdesk is a web 2.0 customer support software. Landing Pages: Build Publish & Test Without I.T.—Unbounce is a self-serve hosted marketing tool. DoorDash enables small businesses to provide its customers with local delivery services. On-Demand Delivery—Postmates is transforming the way local goods move. Bol.com is an online retailer involved in providing books, entertainment, electronic devices, and toys for its clients. Delhi NCR Restaurants—Zomato helps you discover more places to eat. Destination for fans of Japanese pop culture—Tokyo Otaku Mode is all about sharing Japanese otaku.

Startup Description ranking (SR) score

World Startup rank

(continued)

Spain Czechia United States United States United States United States

India Japan

United States Netherlands

United States

Canada

Germany United States United States Indonesia India

United States

Australia

Country

2 1 29 30 31 32

2 2

28 4

27

3

1 25 26 2 1

24

4

Country rank

52  M. I. C. NWOGUGU

Bank of Montreal 87,088 (BMO) PeoplePerHour 87,079

Tictail App Annie

Petco

Tinder Traveloka CoSchedule LocalBitcoins

Sticker Mule

Musixmatch ResearchGate

8tracks

70

72 73

74

75 76 77 78

79

80 81

82

71

86,667

86,755 86,699

86,793

86,836 86,820 86,801 86,795

86,869

87,026 86,983

87,294 87,204 87,198 87,193

99designs Sellfy Zoosk Blibli

66 67 68 69

65

ABS-CBN 87,415 GLOBAL LTD. ACT 87,308

64

87,456

DataCamp

63

DataCamp is a young team of data analytics enthusiasts that provide free interactive data science and statistics education to the world. ABS-CBN Global is a major commercial television network in the Philippines. ACT is an independent, non-profit organization that provides more than a hundred assessment, research, information, and program management. Logos, Web, Graphic Design & More—The #1 marketplace for graphic design. Sell digital products, sell downloads. Online Dating Site—Dating Apps—Zoosk is the #1 dating app. AppReal Double Deals Dekstop—Online retailer, Anywhere, Anytime Shopping. Bank of Montreal, a financial services provider, offers retail banking, wealth management and investment banking products and solutions. Hire Freelancers Online & Find Freelance Work—PeoplePerHour is an online marketplace. Buy and sell clothes, jewelry, art, fashion. The App Analytics and App Data Industry Standard—Make better decisions with our app store data. Petco is a pet specialty retailer providing products, services and advice for pet owners. Find your match—Tinder is a mobile app that finds who likes you. Tiket Pesawat Murah—Traveloka.com is an Indonesian flight booking website. Content Marketing Editorial Calendar Software. At LocalBitcoins.com, people from different countries can exchange their local currency to bitcoins. Sticker Mule prints custom stickers for small businesses, startups, bloggers, artists, and companies. The world’s largest lyrics catalog. Share and discover research—ResearchGate was built by scientists, for scientists. Internet radio—Free music playlists. 4

5 1 34 3

33

1

1

United States

Italy Germany

United States

United States Indonesia United States Finland

United States

Sweden United States

(continued)

40

1 2

39

37 4 38 1

36

1 35

United Kingdom 3

Canada

Australia Latvia United States Indonesia

United States

Philippines

Belgium

1 INTRODUCTION 

53

NationBuilder Olacabs Toggl

Pearltrees Babbel Help Scout SendGrid Klarna Truecaller

Ameritrade

Betterment

ConvertKit Domo Kik Bayt.com

mytheresa.com

ThemeIsle

84 85 86

87 88 89 90 91 92

93

94

95 96 97 98

99

100

Source: https://www.startupranking.com/top (April 2018)

86,054

86,068

86,225 86,178 86,157 86,150

86,231

86,247

86,436 86,398 86,393 86,345 86,325 86,264

86,480 86,459 86,449

86,637

SSE Ventures

83

SSE Ventures is an entrepreneurial funding source for students on the Stanford campus. SOFTWARE FOR LEADERS. Book a cab in India—Olacabs is India’s largest online cab aggregator. Toggl offers an online time-tracking software specifically designed for freelancers, graphic designers and consultants. Organize all your interests—Pearltrees is the social curation community. Learn Spanish, French or Other Languages Online. Simple Customer Service Software and Education. Marketing & Transactional Email Service—Email Delivery. Klarna provides e-commerce payment solutions for merchants and shoppers. Phone Number Search—Truecaller is the world’s largest collaborative phone number search system. Ameritrade is a platform for online trading, investment. Guidance for forex, stocks and mutual funds. Betterment is a goal-based online investment company, delivering personalized financial advice paired with low fees and customer experience. Email marketing for professional bloggers—Email marketing for bloggers. Business Intelligence—Dashboards and Analytics. Kik lets you connect with friends. Bayt.com is an online recruitment website for the Gulf and Middle East regions. mytheresa.com is an online store that offers women’s luxury and designer fashion products. WordPress themes with a bang, so get yer guns ready!—ThemeIsle is a WordPress themes shop.

Startup Description ranking (SR) score

World Startup rank

(continued)

Romania

United States United States Canada United Arab Emirates Germany

United States

United States

France Germany United States United States Sweden Sweden

United States India Estonia

United States

Country

1

4

47 48 5 1

46

45

1 3 43 44 2 3

42 3 1

41

Country rank

54  M. I. C. NWOGUGU

$1220.0

$950.0

$929.8

$780.0

Solyndra

Better Place

Jawbone

Webvan Group

Sequoia Capital; Khosla Ventures; Kleiner Perkins Caufield & Byers Sequoia Capital; Softbank Capital

VantagePoint Capital Partners; Lend Lease Ventures

Redpoint Ventures; US Venture Partners

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

United States

United States

Israel

United States

Country

(continued)

This solar energy company failed in 2018 and sold its businesses and licensed its copper indium gallium selenide (CIGS) technology. http:// www.reuters.com/article/2011/08/31/us-­solyndra-­ idUSTRE77U5K420110831; see Wikipedia comments: https://en. wikipedia.org/wiki/Solyndra See Noel, L., and Sovacool, B. (2016). Why Did Better Place Fail?: Range anxiety, interpretive flexibility, and electric vehicle promotion in Denmark and Israel. Energy Policy, 94, 377–386. Also see http:// venturebeat.com/2013/05/26/electric-­car-­company-­better-­place-­ shuts-­down-­after-­burning-­through-­850m/; see Wikipedia comments: https://en.wikipedia.org/wiki/Better_Place_(company);https://www. fastcompany.com/3028159/a-­broken-­place-­better-­place; https://www. sciencedirect.com/science/article/pii/S0301421516301987 The company had failed by July 2017, and it was a maker of a line of headsets, fitness trackers, and wireless speakers; see Wikipedia comments: https://en.wikipedia.org/wiki/Jawbone_(company) The company raised about $800 million of cash but did not have sufficient demand; it had spent excessive cash on infrastructure. http://www.reuters. com/article/2011/08/31/us-­solyndra-­idUSTRE77U5K420110831; see Wikipedia comments: https://en.wikipedia.org/wiki/Webvan; https:// yourstory.com/2014/09/webvan-­e-­tailer/

Comments

Appendix 5: List of the Worst Startup Failures in the World (up to 2017)

$470.0

$324.3

$260.0

$256.2

$252.3

Terralliance

Amp’d Mobile

Caspian Networks

Kozmo.com

KiOR

Country

United States

United States

United States

Artis Capital United Management; Khosla States Ventures; Alberta Investment Management Corporation

Oak Investment Partners; Flatiron Partners

New Enterprise Associates; US Venture Partners

Highland Capital Partners; Columbia Capital; Redpoint Ventures

Kleiner Perkins Caufield United & Byers; Goldman States Sachs; DAG Ventures

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

Investors had invested an estimated total of about US$500 million in Terralliance, which never accomplished much. http://money.cnn. com/2010/03/26/news/companies/terralliance_tech_full.fortune/index. htm#full; http://archive.fortune.com/2010/03/26/news/companies/ terralliance_tech_full.fortune/index.htm; https://www.cbsnews.com/ news/how-­terralliances-­billion-­dollar-­bet-­against-­big-­oil-­failed/ The company had very low cash, and Verizon had requested a court to stop Amp’d Mobile from providing costly airwaves that it could not afford. http://www.engadget.com/2007/07/20/ampd-­in-­death-­ throes-­files-­to-­sell-­off-­assets/; see Wikipedia comments: https://en. wikipedia.org/wiki/Amp%27d_Mobile The company apparently thrived on fads such as “core routing” and then “P2P networking” and “net neutrality”. http://www.lightreading. com/ethernet-­ip/routers/caspian-­closes-­its-­doors/d/d-­id/632170; https://www.complex.com/pop-­culture/2012/10/the-­50-­worst-­ internet-­startup-­fails-­of-­all-­time/caspian; http://startupfundraising. com/10-­expensive-­startup-­failures-­history/ http://www.forbes.com/2001/04/12/0412topnews.html; see Wikipedia comments: https://en.wikipedia.org/wiki/Kozmo.com; https://techcrunch.com/2018/03/21/ kozmo-­com-­is-­back-­from-­the-­dead-­kind-­of/ KiOR was rumored to have made poor hiring decisions (too many PhDs and few people with technical, operational experience). http://fortune. com/kior-­vinod-­khosla-­clean-­tech/; http://www.biofuelsdigest.com/ bdigest/2016/05/17/kior-­the-­inside-­true-­story-­of-­a-­company­gone-­wrong/

Comments

$229.0

$196.0

$185.0

$185.0

Mode Media

Aquion Energy

Quirky

Guvera

United States

United States

AMMA Private Investment

Australia

Kleiner Perkins Caufield United & Byers; Andreessen States Horowitz; RRE Ventures

CapX Partners; Constellation Technology Ventures; Bill Gates

Draper Fisher Jurvetson; Accel Partners; Greycroft Partners

(continued)

The consensus was that the company failed due to suboptimal financial management. Mode Media’s assets were later acquired by BrideClick. http://www.businessinsider.com/mode-­media-­glam-­collapse-­inside-­ story-­2016-­9; see Wikipedia comments: https://en.wikipedia.org/wiki/ Mode_Media; https://techcrunch.com/2017/06/18/ brideclick-­acquires-­mode-­media/ The company filed for bankruptcy and later emerged from bankruptcy proceedings with new owners. https://cleantechnica. com/2017/03/15/aquion-­energy-­files-­chapter-­11-­bankruptcy/; see Wikipedia comments: https://en.wikipedia.org/wiki/Aquion_Energy; https://www.prnewswire.com/news-­releases/aquion-­energy-­inc-­ emerges-­from-­chapter-­11-­bankruptcy-­status-­under-­new-­us-­based-­ ownership-­300492464.html On September 22, 2015, the company filed for Chap. 11 bankruptcy, and its assets were purchased by Q Holdings for $4.7 million. http:// nymag.com/daily/intelligencer/2015/09/they-­were-­quirky.html; see Wikipedia comments: https://en.wikipedia.org/wiki/Quirky (company); http://www.jason-­stevens.com/2010/07/ how-­quirky-­com-­killed-­my-­dreams-­of-­becoming-­an-­inventor/ This Australian music streaming company privately raised $185 million before its $100 million IPO offering was blocked by the Australian Securities Exchange in 2017, and Guvera had made 45 amendments to its IPO prospectus after comments by the Australian Securities and Investments Commission. Guvera generated operating losses of A$81 million and had about A$1.2 million of revenues in FY2016. https:// www.businessinsider.com.au/australian-­streaming-­startup-­guvera-­has-­ shut-­down-­after-­taking-­185-­million-­from-­investors-­2017-­5; see Wikipedia comments: https://en.wikipedia.org/wiki/Guvera; https://www.afr. com/lifestyle/arts-­and-­entertainment/music/the-­great-­guvera-­mystery-­ where-­did-­180-­million-­of-­investors-­money-­go-­20170524-­gwbttm

$176.0

$166.3

$164.0

$157.0

Powa Technologies

eToys

Quixey

Drugstore.com

Country

Amazon; Kleiner Perkins Caufield & Byers; Maveron

Alibaba Group; GGV Capital; Atlantic Bridge Capital

Bessemer Venture Partners; Sequoia Capital

United States

United States

United States

Otto Group; Wellington United Management; Kingdom

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

The company spent more than $200 million and was once valued at about $2.7 billion. http://www.ft.com/cms/s/0/db78778a-­d727-­ 11e5-­829b-­8564e7528e54.html#axzz40pbKitM6; see Wikipedia comments: https://en.wikipedia.org/wiki/Powa_Technologies; http://uk.businessinsider.com/inside-­the-­crash-­of-­londons-­payment­unicorn-­powa-­technologies-­2016-­4?IR=T http://www.nytimes.com/2001/02/06/technology/06ETOY.html; see Wikipedia comments: https://en.wikipedia.org/wiki/EToys.com; https://abcnews.go.com/Business/story?id=88548&page=1; https:// www.reuters.com/article/us-­goldmansachs-­etoys-­settlement/ goldman-­sachs-­finally-­ends-­litigation-­over-­1999-­etoys-­ipo-­ idUSBRE98I0VL20130919 After spending more than $130 million, Quixey shut down partly due to its inability to repay a loan provided by its shareholder Alibaba. http:// www.globalcorporateventuring.com/article.php/16602/quixey-­closure-­ reportedly-­due-­to-­alibaba-­debt-­deal?utm_source=feedburner&utm_ medium=feed&utm_campaign=Feed%3A+GlobalCorporateVenturingArt icles+%28Global+Corporate+Venturing+Articles%29; https://www. axios.com/behind-­the-­fall-­of-­quixey-­2333564105.html; see Wikipedia comments: https://en.wikipedia.org/wiki/Quixey; https://www.axios. com/behind-­the-­fall-­of-­quixey-­1513301224-­05bad4bc-­bae3-­464a-­ b192-­7dd9417b252b.html http://www.chicagotribune.com/business/columnists/ct-­rosenthal-­ walgreens-­kills-­drugstore-­com-­0802-­biz-­20160801-­column.html; see Wikipedia comments: https://en.wikipedia.org/wiki/Drugstore.com

Comments

Alloy Ventures; Walden Venture Capital

$133.5

AllAdvantage. com

United States

United States

Arts Alliance

$135.0

United States

Boo.com

SAIC Motor; Redpoint Ventures; Foundation Capital; Gil Penchina

United States

Oak Investment United Partners; North Bridge States Venture Partners; Intel Capital; Goldman Sachs

$147.7

Beepi

Kleiner Perkins; Atlas Venture; Intel Capital

Cereva Networks $137.0

$150.0

Lilliputian Systems

(continued)

Lilliputian Systems was spun-off from MIT (United States). http:// www.betaboston.com/news/2014/07/31/lilliputian-­systems-­mit-­spin-­ out-­that-­raised-­150-­million-­runs-­out-­of-­fuel/; https://www.xconomy. com/boston/2014/08/14/after-­150m-­spent-­what-­went-­wrong-­at-­ fuel-­cell-­startup-­lilliputian/; https://www.forbes.com/forbes/ welcome/?toURL=https://www.forbes.com/sites/ michaelkanellos/2014/08/21/the-­mit-­curse-­strikes-­again-­lilliputian-­ systems-­runs-­out-­of-­gas/&refURL=https://www.google.com. ng/&referrer=https://www.google.com.ng/ The company benefited from the hype of transportation startups and marketplaces. In 2015, Beepi announced that it wanted to raise a “monster round” of $300 million at a $2 billion valuation. https:// techcrunch.com/2017/02/16/car-­startup-­beepi-­sold-­for-­parts-­after-­ potential-­exits-­to-­fair-­and-­then-­dgdg-­broke-­down/ Due to shrinking corporate IT budgets and lower demand, the company shut down and laid off 140 employees. http://www. taborcommunications.com/dsstar/02/0709/104452.html; https:// www.bizjournals.com/boston/blog/mass-­high-­tech/2002/06/ cereva-­networks-­shuts-­down.html; https://www.networkcomputing. com/data-­centers/cereva-­stalled-­not-­stopped/755248983 Boo.com overspent on advertising and promotions, did not innovate sufficiently and kept out most of its target audience. http://www. ecommercetimes.com/story/3428.html; see Wikipedia comments: https://en.wikipedia.org/wiki/Boo.com; https://www.smartinsights. com/digital-­marketing-­strategy/online-­marketing-­mix/ boo-­com-­case-­study-­a-­classic-­example-­of-­failed-­ebusiness-­strategy/ http://www.bizjournals.com/eastbay/stories/2001/01/29/daily29. html; see Wikipedia comments: https://en.wikipedia.org/wiki/ AllAdvantage; https://www.bizjournals.com/sanfrancisco/ stories/2001/01/29/daily35.html

$130.0

$117.0

$116.5

$116.1

$114.2

$113.6

Pay By Touch

Rdio

OnLive

RealNames Corporation

Coraid

Savaje Technologies

United States

United States

United States

United States

United States

Country

VantagePoint Venture United Partners; RRE Ventures States

Azure Capital Partners; Menlo Ventures

Time Warner Investments; Lauder Partners Draper Fisher Jurvetson; Clearstone Venture Partners

Atomico; Mangrove Capital Partners

Mobius Venture Capital; Rembrandt Venture Partners

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

http://www.businessweek.com/stories/2007-­12-­06/battles-­and-­bids-­ over-­pay-­by-­touchbusinessweek-­business-­news-­stock-­market-­and-­ financial-­advice; see Wikipedia comments: https://en.wikipedia.org/ wiki/Pay_By_Touch; https://venturebeat.com/2007/11/12/ pay-­by-­touch-­in-­trouble-­founder-­filing-­for-­bankruptcy/ Pandora acquired what was left of Rdio for $75 million. http://www. theverge.com/2015/11/17/9750890/rdio-­shutdown-­pandora; see Wikipedia comments: https://en.wikipedia.org/wiki/Rdio; https:// www.theverge.com/2015/11/17/9750890/rdio-­shutdown-­pandora http://kotaku.com/onlive-­the-­first-­big-­streaming-­games-­service-­is-­dead-­ 1695386223; https://www.theverge.com/2012/8/28/3274739/ onlive-­report The company owed Microsoft $25 million. http://searchenginewatch. com/article/2067393/RealNames-­To-­Close-­After-­Losing-­Microsoft; articles.latimes.com/2002/may/14/business/fi-­techbriefs14.4; https://www.computerworld.com/…/realnames-­calls-­it-­ quits%2D%2Dblames-­microsoft.html http://venturebeat.com/2015/04/21/data-­center-­storage-­startup-­ coraid-­is-­now-­officially-­toast/; https://www.linkedin.com/pulse/ coraid-­back-­brantley-­coile; https://www.theregister.co. uk/2017/06/26/coraids_athenian_resurrection/ http://mobile.eweek.com/c/a/Application-­Development/SavaJe-­ Falls-­on-­Hard-­Times/; see Wikipedia comments: https://en.wikipedia. org/wiki/SavaJe

Comments

$110.0

$107.5

$103.0

AOptix Technologies

Calxeda

$99.8

$98.6

Juicero

DeNovis, Inc

Next Step Living $100.4

$108.0

ChaCha

COPAN Systems $108.3

Pets.com

Advanced Technology Ventures; UV Partners

Lehman Brothers; Kleiner Perkins Caufield & Byers; Clearstone Venture Partners Battery Ventures; Flybridge Capital Partners Black Coral Capital; Braemar Energy Ventures; VantagePoint Capital Partners Google Ventures; Kleiner Perkins Caufield & Byers; Thrive Capital

Hummer Winblad Partners; Bowman Capital Globespan Capital Partners; Austin Ventures VantagePoint Capital Partners; Qualcomm Ventures; Rho Ventures

United States

United States

United States United States

United States

United States

United States

United States

(continued)

The company collapsed due to excessive costs, poor media coverage and an ineffective product launch. https://www.bloomberg.com/news/ features/2017-­09-­08/inside-­juicero-­s-­demise-­from-­prized-­startup-­to-­ fire-­sale; https://en.wikipedia.org/wiki/Juicero; https://www. theguardian.com/technology/2017/sep/01/ juicero-­silicon-­valley-­shutting-­down http://www.boston.com/business/technology/articles/2004/10/23/ lexington_software_firm_shuts_down/; https://fail92fail.wordpress. com/tag/denovis-­inc/

http://www.theregister.co.uk/2013/12/19/calxeda_shutdown/; https://en.wikipedia.org/wiki/Calxeda https://www.greentechmedia.com/articles/read/Next-­Step-­Living-­ Out-­of-­Cash-­is-­Shutting-­Its-­Doors-­This-­Week; boston.cbslocal. com/2016/03/18/i-­team-­boston-­next-­step-­living-­closes-­masssave/

The company depended heavily on discounts and was selling most of its products below cost. http://www.businessinsider.com/ petscom-­ceo-­julie-­wainwright-­2011-­2?IR=T COPAN filed for bankruptcy protection and Silicon Graphics International Corporation purchased its assets in bankruptcy. http://it.toolbox.com/ blogs/storage-­topics/the-­unfortunate-­demise-­of-­copan-­systems-­35721 ChaCha did not generate adequate advertising revenue in 2016 and could not pay its debts. It sold its assets and its secured lender took over its bank accounts. https://www.ibj.com/articles/61651-­chacha-­unable-­ to-­find-­financial-­answers-­shuts-­down-­operations; https://en.wikipedia. org/wiki/ChaCha_(search_engine) http://www.lightreading.com/mobile/backhaul/exclusive-­its-­lights-­ out-­for-­aoptix/d/d-­id/720915; https://www.corporationwiki.com/ California/Campbell/aoptix-­technologies-­inc/43330288.aspx

$97.3

$97.0

$95.5

$89.6

$89.4

$87.2

Auctionata

Aereo

Beyond The Rack

Sonitus Medical

Canopy Financial

Soapstone Networks

Accel Partners; Oak Investment Partners

German Startups Group; Bright Capital; e.ventures; Earlybird Venture Capital FirstMark Capital; Highland Capital Partners Silicon Valley Bank; BDC Venture Capital; Highland Capital Partners GE Capital; Aberdare Ventures; Novartis Venture Funds; RWI Ventures GGV Capital; Foundation Capital

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

United States

United States

United States

Canada

United States

Germany

Country

The US SEC filed a complaint against Canopy and it also declared bankruptcy and its officers were sentenced to jail. http://blogs.wsj. com/venturecapital/2009/11/30/embattled-­canopy-­financial-­files-­ch-­ 11-­bankruptcy-­as-­details-­emerge/; https://www.sec.gov/litigation/ complaints/2009/canopy113009.pdf; https://techcrunch. com/2009/11/24/canopy-­financial-­accused-­of-­serious-­financial-­fraud­investors-­burned/ http://clientadmin.lightreading.com/blog.asp?blog_ sectionid=388&doc_id=179804&piddl_msgorder=asc; https://www. bloomberg.com/research/stocks/private/snapshot.asp?privcapId=25333

http://www.mddionline.com/blog/devicetalk/cms-­coverage-­decision-­ killed-­my-­80m-­venture-­backed-­startup-­04-­02-­15; www.hearingreview. com/2015/02/sonitus-­medical-­holds-­auction-­closing-­doors/

http://www.lightreading.com/mobile/backhaul/exclusive-­its-­lights-­ out-­for-­aoptix/d/d-­id/720915; http://montrealgazette.com/business/ local-­business/what-­went-­wrong-­with-­montreals-­beyond-­the-­rack

https://news.artnet.com/market/auctionata-­closes-­insolvency-­ proceedings-­874583; https://en.wikipedia.org/wiki/Auctionata; https://news.artnet.com/art-­world/ auctionata-­insolvency-­proceedings-­822965 http://www.wired.com/2014/11/aereo-­bankruptcy/; https://en. wikipedia.org/wiki/Aereo

Comments

$79.2

$75.0

$73.5

$70.8

$70.1

$70.0

$69.0

38 Studios

Beenz.com

Veoh Networks

Dealstruck

Nirvanix

Expand Networks

$84.0

Claria Corporation SunRocket

United States United States

England

The Challenge Fund-Etgar; Tamir Fishman Ventures

Community Investment Management; Brevet Capital Management; Trinity Ventures; Giles Raymond Valhalla Partners; Mission Ventures

Israel

United States

United States

Shelter Capital Partners; United Spark Capital States

Gefinor Ventures; Apax Partners

Rhode Island Economic United Development States Corporation

US Venture Partners; Crosslink Capital Anthem Capital; BlueRun Ventures

(continued)

http://techcrunch.com/2013/09/27/its-­official-­the-­nirvanix-­cloud-­ storage-­service-­is-­shutting-­down/; https://en.wikipedia.org/wiki/ Nirvanix; https://www.computerweekly.com/opinion/ Nirvanix-­failure-­a-­blow-­to-­the-­cloud-­storage-­model http://www.globes.co.il/en/article.aspx?did=1000710763&fid=1725; https://en.wikipedia.org/wiki/Expand_Networks; https://www. riverbed.com/gb/press-­releases/riverbed-­purchases-­assets-­of-­expand-­ networks.html

http://venturebeat.com/2008/10/06/controversial-­ad-­company-­jellycloud­shuts-­down-­citing-­industry-­consolidation/ http://news.cnet.com/8301-­10784_3-­9745629-­7.html; see Wikipedia comments: https://en.wikipedia.org/wiki/SunRocket; https://www. cnet.com/news/sunrocket-­closes-­its-­doors/ http://www.bostonmagazine.com/2012/07/38-­studios-­end-­game/; https://en.wikipedia.org/wiki/38_Studios; https://techraptor.net/ content/project-­copernicus-­rise-­fall-­38-­studios; https://www.wpri.com/ news/eyewitness-­news-­investigates/qa-­how-­much-­will-­38-­studios-­cost-­ri-­ taxpayers-­when-­all-­is-­said-­and-­done_20180314124518777/1044191311 http://news.cnet.com/2100-­1017-­271741.html; https://en.wikipedia. org/wiki/Beenz.com; https://www.theregister.co.uk/2001/08/16/ beenz_is_dead_official/ http://www.xconomy.com/san-­diego/2010/02/11/shutdown-­ reported-­at-­veoh-­networks-­backed-­by-­bostons-­spark-­capital-­and-­other-­ vcs/; https://en.wikipedia.org/wiki/Veoh https://www.crowdfundinsider.com/2016/12/93348-­finance-­small-­ companies-­still-­broken/; https://www.valuepenguin.com/small-­ business/dealstruck-­small-­business-­loan-­review

$66.8

$65.0

$62.3

$60.3

$56.6

$56.5

$55.5

Ecast

Edgix

LOYAL3

Move Networks

Sprig

DoubleTwist

TerraLUX

Greylock Partners; Social Capital and Sozo Ventures Institutional Venture Partners; Boston Millennia Partners Access Venture Partners; Emerald Technology Ventures

Community Investment Management; Giles Raymond; Brevet Capital Management; Trinity Ventures Hummer Winblad Venture Partners; Steamboat Ventures

Venrock; Battery Ventures

Crosslink Capital; Doll Capital

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

United States

United States

United States

United States

United States

United States

United States

Country

http://www.denverpost.com/2017/08/15/ terralux-­sielo-­longmont-­shuts-­down/

The company ran out of cash. http://www.vendingtimes.com/ME2/ dirmod.asp?nm=Vending+Features&type=Publishing&mod=Publication s%3A%3AArticle&tier=4&id=1FA76E9E03FA4C048872B380ABC03 10E; https://en.wikipedia.org/wiki/Ecast,_Inc. http://www.newsday.com/business/technology/queens-­inc-­edgix-­to-­ close-­lay-­off-­most-­of-­its-­100-­workers-­1.309693; https://www. crunchbase.com/organization/edgix-­corporation https://www.benzinga.com/fintech/17/04/9323918/discount-­brokerage­loyal3-­shutting-­down?utm_source=feedburner&utm_medium=feed&utm_ campaign=Feed%3A%20benzinga%20%28Benzinga%20News%20Feed%29; https://accessipos.com/death-­loyal3/; https://www.valuewalk. com/2017/04/loyal3-­brokerage-­shut-­may/ http://gigaom.com/2010/01/26/the-­fall-­of-­move-­networks/; https://www.prnewswire.com/news-­releases/echostar-­acquires-­assets-­ of-­move-­networks-­leader-­in-­adaptive-­streaming-­for-­over-­the-­top-­video-­ solutions-­113018769.html http://www.pymnts.com/whats-­hot-­2/2017/sprig-­couldnt-­cut-­it-­in-­ food-­delivery-­space/; https://techcrunch.com/2017/05/26/ on-­demand-­food-­startup-­sprig-­is-­shutting-­down-­today/ http://www.bio-­itworld.com/archive/050702/survivor_sidebar_252. html

Comments

$52.0

$52.0

$51.4

$50.0

PepperTap

Karhoo

Flooz.com

Pearl Automation

Accel Partners; Shasta Ventures; Venrock

Oak Investment Partners; Maveron United States

United States

David Kowitz; Jonathan England Feuer; Nick Gatfield

$52.8

Hello

United States United States United States India

United States

United States

Tallwood Ventures; BlueRun Ventures Tallwood Ventures; BlueRun Ventures Cherubic Ventures; Temasek Holdings InnoVen Capital; Sequoia Capital India

$54.7

Akimbo

Commonwealth Capital Ventures; Flybridge Capital Partners; General Catalyst Zone Ventures; Draper Fisher Jurvetson

Sequoia $54.0 Communications govWorks $54.0

$55.4

Sand 9

(continued)

Indian online food/grocery retailer. http://techcircle.vccircle. com/2016/12/09/flawed-­business-­model-­or-­funding-­crunch-­what-­ led-­to-­startup-­shutdowns/; https://www.techinasia.com/raising-­us50-­ million-­indias-­largest-­online-­grocer-­shut-­shop; https://qz. com/669142/peppertaps-­collapse-­shows-­everything-­that-­is-­wrong-­ with-­indias-­young-­internet-­companies/ https://techcrunch.com/2016/11/08/uber-­competitor-­karhoo-­shuts-­ down-­after-­blowing-­through-­250m/; https://www.ft.com/ content/0bb3cba0-­a69b-­11e6-­8898-­79a99e2a4de6; https:// techcrunch.com/2017/01/12/ karhoo-­rides-­again-­nissanrenault-­buys-­failed-­on-­demand-­ride-­startup/ http://www.internetretailer.com/2001/08/28/flooz-­finalizes-­its-­shut-­ down-­amid-­problems-­with-­fraud; https://en.wikipedia.org/wiki/Flooz. com https://www.axios.com/automotive-­startup-­pearl-­is-­shutting-­ down-­2448087174.html; https://en.wikipedia.org/wiki/Pearl_ Automation; https://www.nytimes.com/2017/06/26/technology/ pearl-­automation-­founded-­by-­apple-­veterans-­shuts-­down.html

http://money.cnn.com/magazines/fsb/fsb_ archive/2000/07/01/283696/index.htm http://fortune.com/2017/06/12/hello-­sleep-­tracking-­shut-­down/

http://gigaom.com/2008/05/23/update-­akimbo-­skeleton-­crew-­ looking-­for-­a-­buyer/; https://venturebeat.com/2008/02/29/ akimbo-­failed-­video-­distribution-­company-­tries-­again-­raises-­8m/ http://www.eetimes.com/document.asp?doc_id=1171591

http://www.eenewsanalog.com/news/analog-­devices-­sand-­9-­buyer; https://en.wikipedia.org/wiki/Sand_9

$48.7

$45.0

$44.0

$35.0

Nanochip

Joost

Digg

Pixelon

Comments

United http://blogs.wsj.com/venturecapital/2009/08/05/ States turning-­out-­the-­lights-­memory-­chips-­maker-­nanochip/ Netherlands http://www.crainsnewyork.com/article/20090630/free/906309977; https://en.wikipedia.org/wiki/Joost United http://www.theguardian.com/technology/2012/jul/13/digg-­sold-­ States for-­500000; https://www.computerworld.com/article/2506833/ web-­apps/elgan%2D%2Dwhy-­digg-­failed.html United In April 2018, it was discovered that “Paul Stanley” was the real name of States Michael Fenne, the company’s founder and former chairman, and that he had violated bail conditions after being convicted for stock-swindling and had been on Virginia’s (US state) most-wanted list of criminals for several years. http://www.wired.com/techbiz/media/ news/2000/05/36243; https://en.wikipedia.org/wiki/Pixelon; https://www.nytimes.com/2000/04/15/technology/pixeloncom-­ founder-­was-­fugitive-­from-­virginia.html

Country

Source: Mike Nwogugu; https://www.cbinsights.com/research/biggest-­startup-­failures/

New Enterprise Associates; JK&B Capital Sequoia Capital; Index Ventures Highland Capital Partners; Greylock Partners Advanced Equities

Total announced Some notable investors cash raised by the company (in millions of US dollars)

Company name

(continued)

(continued)

1. The crash of the Tulip Mania Bubble in the Netherlands in 1637 (https://en.wikipedia.org/wiki/Tulip_mania). 2. The crashes of the South Sea Bubble (Great Britain) and the Mississippi Bubble (France) in 1720 (https://en.wikipedia.org/wiki/ South_Sea_Bubble; https://en.wikipedia.org/wiki/Mississippi_Bubble). 3. The Financial Crisis of 1763, which started in Amsterdam and extended to Germany and Scandinavia (https://en.wikipedia.org/ wiki/Amsterdam_banking_crisis_of_1763). 4. The Financial Crisis of 1772 (in London and Amsterdam): twenty important banks in London became bankrupt (https:// en.wikipedia.org/wiki/Crisis_of_1772). 5. France’s Financial and Debt Crisis of 1783–1788: France had incurred large debts for its involvement in the Seven Years’ War (1756–1763) and the American Revolution (1775–1783). 6. The bank run of 1792 in the United States: which was caused by the expansion of credit by the newly formed Bank of the United States (https://en.wikipedia.org/wiki/Panic_of_1792). 7. The crises and mass hysteria of 1796–1797 in Britain and the United States: caused by land speculation bubble (https:// en.wikipedia.org/wiki/Panic_of_1796%E2%80%931797). 8. The Great East Indian Bengal Bubble Crash of 1769 in India—the crash was caused by rapid overvaluation of East India Company (https://en.wikipedia.org/wiki/Bengal_Bubble_of_1769). 9. The economic crises and mass hysteria of 1785 in the United States. 10. The economic crises and mass hysteria of 1792 in the United States (https://en.wikipedia.org/wiki/Panic_of_1792). 11. The bankruptcy of the Danish government in 1813 (https://en.wikipedia.org/wiki/Danish_state_bankruptcy_of_1813). 12. The Financial Crisis of 1818 in England, which also affected the United States—which reduced bank lending. 13. The economic recession and mass hysteria of 1819 in the United States—marked by bank failures and the United States’ first boom-to-bust economic cycle (https://en.wikipedia.org/wiki/Panic_of_1819). 14. The economic recession and mass hysteria of 1825 in Britain—wherein many British banks failed and Bank of England nearly failed (https://en.wikipedia.org/wiki/Panic_of_1825). 15. The economic recession and mass hysteria of 1837 in the United States—marked by bank failures and a subsequent five-year depression (https://en.wikipedia.org/wiki/Panic_of_1837).

Appendix 6: List of All Major Financial/Economic Crisis Since the Seventeenth Century

1 INTRODUCTION 

67

16. Crises and mass hysteria of 1847 in Britain—marked by collapse of British financial markets and the end of the 1840s railroad boom (https://en.wikipedia.org/wiki/Panic_of_1847; https://en.wikipedia.org/wiki/Railroad). Also see Bank Charter Act of 1844 (https://en.wikipedia.org/wiki/Bank_Charter_Act_1844).  17. The economic recession of 1857 in the United States—marked by bank failures (https://en.wikipedia.org/wiki/Panic_of_1857). 18. The Overend Gurney crisis (international financial crises but primarily British)—defined by the failure of Overend, Gurney & Company in London (https://en.wikipedia.org/wiki/Panic_of_1866; https://en.wikipedia.org/wiki/Overend_Gurney_crisis). 19. The Gold Panic of 1869 (https://en.wikipedia.org/wiki/Black_Friday_(1869)). 20. The US economic recession and mass hysteria of 1873—defined by bank failures and the five-year “Long Depression” (https:// en.wikipedia.org/wiki/Panic_of_1873; https://en.wikipedia.org/wiki/Long_Depression). 21. The crises and mass hysteria of 1884 in the United States—affected New York banks (https://en.wikipedia.org/wiki/Panic_of_1884). 22. The Baring Crisis of 1890—defined by the near-failure of a major London bank and the South American financial crises (https:// en.wikipedia.org/wiki/Panic_of_1890). 23. The economic recession and mass hysteria of 1893 in the United States—defined by failures of railroad overbuilding and bank failures (https://en.wikipedia.org/wiki/Panic_of_1893). 24. The Australian banking crisis of 1893 (https://en.wikipedia.org/wiki/Australian_banking_crisis_of_1893). 25. The 1896 acute economic depression in the United States—caused by lower silver reserves and perceptions of its effects on the gold standard (https://en.wikipedia.org/wiki/Panic_of_1896; https://en.wikipedia.org/wiki/Recession; https://en.wikipedia. org/wiki/Gold_standard). 26. The post-Napoleonic depression (post-1815) in England (https://en.wikipedia.org/wiki/Post-­Napoleonic_depression).  27. The Great Depression of the British Agriculture industry during 1873–1896 (https://en.wikipedia.org/wiki/ Great_Depression_of_British_Agriculture). 28. The Long Depression of 1873–1896 (https://en.wikipedia.org/wiki/Long_Depression). 29. The Australian banking crisis of 1893 (https://en.wikipedia.org/wiki/Australian_banking_crisis_of_1893).  30. The US economic recession and mass hysteria of 1907—marked by bank failures (https://en.wikipedia.org/wiki/Panic_of_1907). 31. The economic recession and mass hysteria of 1901 in the United States—which started a tussle for the financial control of the Northern Pacific Railway (https://en.wikipedia.org/wiki/Panic_of_1901). 32. The crises and mass hysteria of 1910–1911 (https://en.wikipedia.org/wiki/Panic_of_1910%E2%80%931911). 33. The Shanghai rubber stock market crisis of 1910 (https://en.wikipedia.org/wiki/Shanghai_rubber_stock_market_crisis). 34. The US economic recession, depression, and mass hysteria of 1920–1921 after the end of World War I (https://en.wikipedia.org/ wiki/Depression_of_1920%E2%80%9321).

(continued)

68  M. I. C. NWOGUGU

(continued)

35. The Wall Street Crash of 1929 and Great Depression of 1929–1939 in the United States—which was the worst depression in modern history (https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929; https://en.wikipedia.org/wiki/Great_Depression). 36. The 1973 global oil crisis and the 1973 OPEC oil price shock—oil prices increased, which caused the 1973–1974 stock market crash (https://en.wikipedia.org/wiki/1973_oil_crisis; https://en.wikipedia.org/wiki/1973%E2%80%931974_stock_market_crash). 37. The 1970s global energy crisis (https://en.wikipedia.org/wiki/1970s_energy_crisis). 38. The 1979 global energy crisis (https://en.wikipedia.org/wiki/1979_energy_crisis).  39. The secondary banking crisis of 1973–1975 in the United Kingdom (https://en.wikipedia.org/wiki/ Secondary_banking_crisis_of_1973%E2%80%931975). 40. The Latin American debt crisis of the late 1970s and early 1980s (https://en.wikipedia.org/wiki/Latin_American_debt_crisis). 41. The early 1980s economic recession (https://en.wikipedia.org/wiki/Early_1980s_recession). 42. The Chilean crisis of 1982 (https://en.wikipedia.org/wiki/Crisis_of_1982). 43. The bank stock crisis of 1983 in Israel (https://en.wikipedia.org/wiki/Bank_stock_crisis_(Israel_1983)). 44. The Nigerian recession and structural adjustments programs of 1983–1986.  45. The Japanese asset price bubble of 1986–1992, which collapsed in 1990 (https://en.wikipedia.org/wiki/Japanese_asset_price_bubble). 46. The stock market crash of 1987 in the United States (Black Monday)—one of the most significant declines of stock markets in history (https://en.wikipedia.org/wiki/Black_Monday_(1987)). 47. The US savings and loan (S&L) crisis of 1986–1995, marked by the failures of 1043 out of the approximately then-existing 3234 S&L banks during 1986–1995 in the United States (https://en.wikipedia.org/wiki/Savings_and_loan_crisis). 48. The African sovereign debt crisis of 1980–1989. 49. The 1991 economic crisis in India. 50. The Scandinavian banking crisis of the early 1990s: Swedish and Finnish banking crises of 1990s (https://en.wikipedia.org/wiki/ Economy_of_Sweden#Crisis_of_the_1990s; https://en.wikipedia.org/wiki/Finnish_banking_crisis_of_1990s). 51. The early 1990s global economic recession (https://en.wikipedia.org/wiki/Early_1990s_recession). 52. The speculative attacks on currencies in the European Exchange Rate Mechanism during 1992–1993 (https://en.wikipedia.org/ wiki/Black_Wednesday; https://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism). 53. The Latin American debt crises of the 1990s. 54. The 1994–1995 economic and financial crisis in Mexico—marked by speculative attacks on the Mexican Peso and defaults of Mexican debt (https://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico). 55. The economic crisis of 1991 in India (https://en.wikipedia.org/wiki/1991_India_economic_crisis). 56. The 1997–1998 Asian financial crisis—marked by currency devaluations and banking crises in Asian countries (https:// en.wikipedia.org/wiki/1997_Asian_financial_crisis).

1 INTRODUCTION 

69

57. The 1998 financial crisis in Russia (https://en.wikipedia.org/wiki/1998_Russian_financial_crisis). 58. The 1998–1999 financial crisis in Ecuador (https://en.wikipedia.org/wiki/1998-­99_Ecuador_financial_crisis). 59. The Thailand financial crisis of 1997.  60. The economic crisis of 1999–2002 in Argentina (https://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)). 61. The Samba Effect of 1999 in Brazil (https://en.wikipedia.org/wiki/Samba_effect). 62. The Turkish economic crisis of 2000–2001 (https://en.wikipedia.org/wiki/2001_Turkish_economic_crisis). 63. The early 2000s global recession (https://en.wikipedia.org/wiki/Early_2000s_recession). 64. The crash of the technology/Internet stock bubble in the United States in 2000—speculation about stock prices of Internet companies (https://en.wikipedia.org/wiki/Dot-­com_bubble). 65. The Uruguay banking crisis of 2002 (https://en.wikipedia.org/wiki/2002_Uruguay_banking_crisis).  66. The Venezuelan general strike of 2002–2003 (https://en.wikipedia.org/wiki/Venezuelan_general_strike_of_2002%E2%80%9303). 67. The Global Financial Crisis and economic crises of 2007–2012, which was caused in part by the subprime mortgage crises of 2006–2008 in the United States. In many countries, government interventions (e.g. government bailouts/bail-ins, new financial regulations and quantitative easing) did not spur economic growth or lending volumes (https://en.wikipedia.org/wiki/ Late-­2000s_financial_crisis). 68. The late 2000s global economic recession (https://en.wikipedia.org/wiki/Late-­2000s_recession). 69. The worldwide energy crisis and oil price bubble of 2003–2009 (https://en.wikipedia.org/wiki/2000s_energy_crisis). 70. The Thailand financial crisis of 2008. 71. The worldwide oil price bubble of 2013–2015. 72. The subprime mortgage crisis of 2006–2010 in the United States (https://en.wikipedia.org/wiki/Subprime_mortgage_crisis). 73. The US housing bubble and housing market correction of 2003–2011 (https://en.wikipedia.org/wiki/United_States_housing_ bubble; https://en.wikipedia.org/wiki/United_States_housing_market_correction). 74. The automotive industry crisis and government bailouts of 2008–2010 in the United States (https://en.wikipedia.org/wiki/ Automotive_industry_crisis_of_2008%E2%80%932010). 75. The Icelandic financial crisis of 2008–2012 (https://en.wikipedia.org/wiki/2008%E2%80%932012_Icelandic_financial_crisis). 76. The 2008 financial crisis in Indonesia. 77. The Irish banking crisis of 2008–2010 (https://en.wikipedia.org/wiki/2008%E2%80%932010_Irish_banking_crisis). 78. The Russian financial crisis of 2008–2009 (https://en.wikipedia.org/wiki/Russian_financial_crisis_of_2008%E2%80%932009). 79. The Latvian financial crisis of 2008 (https://en.wikipedia.org/wiki/2008_Latvian_financial_crisis).

(continued)

70  M. I. C. NWOGUGU

(continued)

 80. The Venezuelan banking crisis of 2009–2010 (https://en.wikipedia.org/wiki/ Venezuelan_banking_crisis_of_2009%E2%80%9310). 81. The Venezuelan economic recession and financial crises of 2013–present (https://en.wikipedia.org/wiki/Crisis_in_Bolivarian_ Venezuela; https://en.wikipedia.org/w/index.php?title=2012-­2017_Venezuela_crisis&action=edit&redlink=1).  82. The Spanish financial crisis and sovereign debt crisis of 2008–present (https://en.wikipedia.org/wiki/2008-­16_Spanish_financial_crisis). 83. The Mexican financial crisis of 2008. 84. The mass hysteria and financial crisis of 2008–2009 in South Korea. 85. The mass hysteria and financial crisis of 2008 in China. 86. The Nigerian mass hysteria, banking crises and economic crises of 2007–2012, marked by high bank NPL-rates, bank failures and excessive loan interest rates. 87. The European sovereign debt crisis of 2010–2019 (https://en.wikipedia.org/wiki/2010_European_sovereign_debt_crisis). 88. The Russian financial crisis of 2014–2015: the rubble crisis (https://en.wikipedia.org/wiki/2014_Russian_financial_crisis). 89. The economic crisis and mass hysteria of 2014–2017 in Argentina—marked by mass protests, economic recession, and sovereign debt default. 90. The Nigerian currency/financial/economic crises of 2014–2018, marked by the crash of the stock market in 2014–2015, 150%+ currency devaluation and economic recession. 91. Crashes of the Chinese stock markets in 2015 (https://en.wikipedia.org/wiki/2015_Chinese_stock_market_crash). 92. The crashes of global commodity prices during 2015–2017. 93. The Greek government-debt crisis of 2009–present (https://en.wikipedia.org/wiki/Greek_government-­debt_crisis). 94. The Portuguese financial crisis of 2010–2014 (https://en.wikipedia.org/wiki/2010-­14_Portuguese_financial_crisis). 95. The Ukrainian crisis of 2013–2014 (https://en.wikipedia.org/wiki/Ukrainian_crisis). 96. The Ukrainian/Crimea war and economic crises of 2016–2018. 97. The Brazilian economic crisis and mass hysteria of 2014–2017, which was marked by popular mass protests, the jailing of two former Brazilian presidents and radical changes in government (https://en.wikipedia.org/wiki/2014-­2017_Brazilian_economic_crisis). 98. The 2013 financial crisis in Indonesia. 99. The crashes of worldwide commodity prices during 2015–2017. 100. The Malaysian financial crisis, mass hysteria and 1  MDB scandal of 2014–2020, which resulted in the re-election of a former President and the jailing of another former President of Malaysia. 101. The worldwide cryptocurrency mania, bubble and frauds of 2015–present. 102. The worldwide “Sharing Economy” mania, stock bubble and frauds of 2014–present. 103. The US housing bubble of 2016–present.

1 INTRODUCTION 

71

Source: https://en.wikipedia.org/wiki/Financial_crisis

104. The United Nations, US and EU economic sanctions that were imposed on Russia, North Korea and Iran during 2010–2018. 105. The US-China trade disputes of 2018–present. 106. The economic crisis and debt crisis of 2017–2018 in India (excessive debt owed by companies, which affected the growth of the Indian economy). 107. The economic, financial (peso) and political crisis and mass hysteria (of 2014–present) in Argentina 108. The 2014–2017 mass hysteria, political crisis and economic crisis in Brazil, which resulted in the impeachment of President Dilma Rousseff and in widespread protests about political system and the Brazilian economy. 109. The Spanish financial/economic crisis of 2008–2014. 110. The Russian financial crisis of 2014–present. 111. The Turkish currency and debt crisis of 2018–present. 112. The EU economic sanctions that were imposed on Belarus from 2016 to 2019. 113. The debt crisis (excessive debt especially in the private sector) of 2017–present in China and India. 114. The EU economic sanctions that were imposed on Egypt during 2015–2019. 115. The US, UN and EU economic sanctions that were imposed on Russia during 2010–present. 116. The US and EU economic sanctions that were imposed on China during 2019–present. 117. The EU economic sanctions that were imposed on the Democratic Republic of Congo during 2015–2018. 118. The mass hysteria and socioeconomic and political crisis of 2012–present in Venezuela. 119. The mass hysteria and 2015–2018 economic recession and financial crisis in Japan. 120. The EU and US economic sanctions that were imposed on Iraq during 2009–2011. 121. The US-China Trade War of 2018–present. 122. The Japan-US Trade War of 2018–present. 123. The EU-Japan Trade War of 2019–present. 124. The COVID-19-related financial and economic crises of 2019–present (including at least two worldwide stock market crashes in 2020). 125. The Latin American mass hysteria and economic crisis of 2019–present, marked by mass public protests, food shortages, currency devaluations, political conflicts and so on. 126. The Icelandic financial crisis of 2008–2011.

(continued)

72  M. I. C. NWOGUGU

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CHAPTER 2

Cross-Border Spillover Modeling, Concepts of “Geopolitical Risk” and “Transition Economies”, and the 2010–2020 Financial Stability Recommendations by the IMF, G20/G30 and the EU

This chapter provides an over-due: i) review of the 2010–2020 Recommendations (the “2010–2020 Recommendations”) by the International Monetary Fund (IMF), the G20/G30 and the European Union (EU), ii) critique of the Cross-Border Spillover literature; iii) critique of the traditional definitions of Geopolitical Risk (GPR) and Transition Economies, which is relevant given the major political, social, economic and psychological global crises that occurred during the last fifteen years (COVID-19; Wars in Afghanistan and Syria; the Taiwan Question; Regulatory Convergence; Trade Wars; Protectionism; the rise of the Far-­ Right and Nationalist movements in various countries; the Global Financial Crisis of 2007–2014; constitutional amendments in various countries etc.). This 2010–2020 Recommendations (the “2010–2020 Recommendations”) by the International Monetary Fund (IMF), the G20/G30 and the European Union (EU) formed the foundation for new financial/economic regulations that were enacted by many countries during 2010–2020 and that pertain to Systemic Risk, Financial Stability and Economic Growth. The 2010–2020 Recommendations also informally heralded a shift in the balance of global political and economic power among © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_2

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the then “G20/G30” countries. This chapter also reviews the reactions of the investment research departments of large global banks to the 2010–2020 Recommendations and the constitutional crisis of 2009–2012 in the European Union (EU).

2.1   Emergence and Nonlinearity: New Definitions and Dimensions of Geopolitical Risk This book (and the associated Volume-2 of this two book series which will be published by Palgrave Macmillan) argues that Geopolitical Risk has been too narrowly defined around the world. For example, as of 2019, Blackrock was the largest asset management company in the world based on assets under management (AUM—Blackrock was managing more than US$7 trillion) and its BlackRock Geopolitical Risk Indicator (BGRI) (https://www.blackrockblog.com/blackrock-­g eopolitical-­r isk-­ dashboard/) stated that as of 2018, its estimated top ten Geopolitical Risks were as follows and in descending order of importance: 1. US-China tensions 2. Global trade tensions 3. Gulf tensions 4. Fragmentation of the European Union 5. Latin American populism 6. Major cyber-attacks 7. North Korea conflicts 8. South China sea conflict 9. Russia-NATO conflict 10. Major terror attacks The BlackRock Geopolitical Risk Indicator (BGRI) (https://www. blackrock.com/corporate/insights/blackrock-­i nvestment-­i nstitute/ interactive-­charts/geopolitical-­risk-­dashboard) stated that as of January 2020, its top ten global Geopolitical Risks had changed and were as follows and in descending order of importance: . Gulf (Middle East) tensions 1 2. Global trade tensions (Trade Wars) 3. Fragmentation of the European Union 4. South Asian tensions

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5. US-China competition 6. Russia-NATO conflict 7. Major cyber-attacks 8. North Korea conflict 9. Latin America policy 10. Major terror attacks However, the BGRI overemphasizes war-related and conflict-related issues that are overly vague (with respect to affected populations; social/ psychological/economic costs; policies of directly/indirectly affected and non-affected governments and multinational corporations [MNCs]; and impact on employment and global trade). Thus, traditional and current definitions of Geopolitical Risk omit potentially significant Geopolitical Risks such as the following: 1. Constitutional impasse/crisis in major and large democratic countries such as the United States, India, Indonesia, Nigeria, Russia and the European Union, which can affect foreign policy, trade/ fiscal/monetary policies, international capital flows and trade, wars/conflicts and so on. For example, (i) most of the conflictrelated GPRs listed by BGRI revolve around the constitutional powers of the executive and legislative branches of democratic national governments and the nature/intensity of political lobbying, and in the United States and in January 2020, the US Congress tabled a “War Powers Bill” that would limit President Trump’s ability to order military attacks on Iran and other countries; and (ii) similarly, Trade Wars, Protectionism, economic reforms/policies, Social Welfare Programs, government budgets/ spending and international trade negotiations revolve around the constitutional powers of the executive and legislative branches of national governments and their subsidiary state governments (and associated competition and conflicts) and the nature/intensity of political lobbying and political influence. 2. Constitution-influenced Sovereign Debt defaults or deterioration of perceived sovereign credit risk (which affects foreign investors and international capital flows and trade). 3. Unilateral Economic Sanctions including those that are masked as trade tariffs (e.g. those that have substantially affected the economies of Russia, Iran, Venezuela, Myanmar, Libya, Sudan, Japan, North Korea and China).

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4. Pandemics/Epidemics such as the COVID-19 virus of 2019– present. 5. Failures of the global financial/banking system—which is subject to political influence and Constitutional Law (including international administrative laws/regulations that have become “Global Constitutions”) and is largely regulated on a national basis rather than a global basis (but coordinated with international organizations). 6. Private and judicial interpretations of the constitutional powers of governments to tax, control trade, provide services, spend money and/or borrow. 7. Spillovers of Systemic Risk and Financial Instability (which are largely regulated on a national basis and are affected by political decisions) across national borders. 8. Mainstream anti-globalization, anti-immigrant and nationalism movements in the United States, Europe, Russia, India, China and Latin American countries—which affect government policies, politics, Sustainable Growth, international trade and international finance. 9. Mainstream religious movements in countries such as India (anti-­ Muslim), China (anti-Muslim), MENA (pro-moderate Islam), the United States (anti-Muslim) and so on—which affect government policies, politics, Sustainable Growth, Social Welfare, international trade and international finance. 10. The risk of depletion/reduction of global remittances (from citizens living abroad) to Emerging Market countries—due to financial regulations, Trade Sanctions and so on. 11. Reductions in foreign aid to Emerging Market countries or funding of multilateral organizations such as the International Finance Corporation (IFC), the IMF, the European Bank for Reconstruction and Development (EBRD) and the International Bank for Reconstruction and Development (IBRD), as a result of domestic politics and/or constitutional impasse. 12. The Global Energy Crisis and decisions by an Organization of the Petroleum Exporting Countries (OPEC) member or non-member to substantially increase or decrease oil production. 13. Politically influenced decisions that substantially change agriculture production/output in Brazil or the United States. 14. Substantial and increasing Environmental Pollution and continued failures of international environmental pollution agreements combined with national political disagreements that preclude renegotiation and international coordination.

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15. The rise of “Oligarch Governments” in significant democracies and non-democracies such as the United States, Canada, Brazil, Thailand, Nigeria, Brazil, the Democratic Republic of Congo, Pakistan and so on. The term “Oligarch Governments” is introduced here and refers to situations where the Presidency and/or the executive branch of the central/federal government of a country are successively controlled or heavily influenced by a group of persons related by family ties or by persons that have similar educational/work backgrounds—such as the following: (a) The two Bush Administrations, the Clinton Administration (and Hilary Clinton in the Obama Administration) and the family ties in the Trump Administration in the United States (b) The Ivy-League-educated Presidents and federal ministers in the United States (c) The administrations of Thaksin Shinawatra and his sister Yingluck Shinawatra in Thailand (d) The two Obasanjo Administrations, the two Buhari Administrations, the Gowon Administration, the Abacha Administration, the Babangida Administration and the Abubakar Administration in Nigeria (all were then-current or former military generals) (e) The family ties in the Bhutto Administrations in Pakistan (f) The family ties in the Bolsonaro Administration in Brazil (g) The ruling monarchies in Morocco, Saudi Arabia, Oman, Kuwait, the United Arab Emirates, Qatar, Bahrain, the United Kingdom, Monaco and other countries (some of these countries had Parliamentary Monarchies) (h) The Administrations of Joseph Pierre Trudeau and his son Justin Trudeau in Canada (i) The Communist Party Council of seven leaders in China (j) The family ties of the Dos Santos Family in the Dos Santos Administration in Angola (1979–2017) (k) The Administrations of Laurent Kabila and his son Joseph Kabila in the Congo Republic (l) The Administrations of Heydar Aliyev (President of Azerbaijan, 1993–2003) and Ilham Aliyev (President of Azerbaijan) (m) The Administrations of Sheikh Mujibur Rahman (first President of Bangladesh, 1971; Prime Minister of Bangladesh, 1972–1975) and Sheikha Hasina Wazed in Bangladesh

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16. The rise of “Oligarch Economies” in countries such as Russia, Nigeria and India. The term “Oligarch Economies” refers to national economies where wealth is highly concentrated in the hand of extremely few people (e.g. India and Russia) or the national economy is controlled or largely influenced by a few oligarchs (e.g. Russia and Nigeria). Such conditions have direct and lasting effects on international trade, capital flows, economic growth, sustainability, education, Sustainable Growth, Social Welfare, employment, quality of life, Rule of Law and Inequality. 17. Balkanization and/or Regionalization of modern internationaltrade negotiations and agreements—wherein (i) “illegal” Unilateral Sanctions are the norm and (ii) large-scale trade agreements and arrangements have functionally broken down and there is a continuing shift toward bilateral trade agreements/negotiations (many post-2015 trade negotiations are bilateral negotiations or “regional” negotiations and many post-2015 trade agreements are bilateral agreement or “regional” agreements).

2.2   New Definitions of “Transition Economies” Constitutional Political Economy (CPE) has profoundly affected the evolution of Transition Economies, partly because (i) CPE affects their systems of governments and allocation of resources by national and state governments and hence, economic and social policies; (ii) regulation is significant, and CPE affects economic relations and social capital; and (iii) Income Inequality, Housing Inequality and Wealth Inequality are or can be significant in most Transition Economies. Transition Economies are countries that have been transitioning from communist, socialist or military government regimes, monarchies and non-market economies (or “mixed economies” like Nigeria) to capitalist or “market” economies and/or democratic government/economic systems. That is, transition is often measured in two dimensions, which are political and economic dimensions. Transition Economies include Russia, China, Poland, Nigeria, Kazakhstan, Bolivia, Venezuela, Iran and many Central and Eastern European (CEE)/Commonwealth of Independent States (CIS) countries. The European Bank for Reconstruction and Development’s (EBRD’s) transition indicators are as follows: (i) large-­ scale and small-scale privatization; (ii) governance and enterprise

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restructuring; (iii) price liberalization; (iv) trade and foreign exchange system; (v) competition policy; (vi) banking reform and interest-rate liberalization; (vii) securities markets and non-bank financial institutions; and (viii) infrastructure reform. Unfortunately, most of these economic or political indicators fail to adequately measure social, political, psychological and environmental changes and sustainability. Social and psychological changes can drastically affect worker motivation and productivity, savings rates, household dynamics/spending/allocations, consumer confidence, personal investment in education, labor mobility, capital flight and so on. This book argues that: 1. Many more countries qualify as Transition Economies than are indicated by the IMF and the EBRD, such as (1) countries that are transitioning from military rule of more than eighteen months (e.g. Egypt, Pakistan, Nigeria and Thailand); (2) countries that have been ruled by a dictator for more than twenty years (e.g. the Philippines and Angola); (3) countries that are transitioning from a mixed economy or closed economy to a primarily market economy and/or open economy (e.g. India and Nigeria); and (4) countries that are transitioning from a dominant monarchy to a market economy or mixed economy (e.g. Saudi Arabia and Brunei). In all or most of these instances, “transition” involves a significant overhaul of the regulatory system, political system, rights, capital allocation, social norms, contracting patterns and the economic system and significant psychological effects on the country’s indigenes. 2. There are primary, secondary and tertiary-level transition economies, and lower-level Transition Economies often depend on upper-level Transition Economies in their region—for example, (1) the relationship between China and each of Pakistan, Mongolia, Myanmar, Vietnam and Bangladesh; and (2) the relationship between Russia and each of Uzbekistan, Turkmenistan, Kyrgyzstan and Kazakhstan; and (3) the relationship between Nigeria and each of Niger, Chad and Benin Republic. 3. Economic Sanctions have been the most defining element of the sustainable growth and financial markets of most Transition Economies (many of which are directly or indirectly dependent on other “primary” Transition Economies) rather than structural adjustment programs and other macroeconomic policies. For example, Russia has been subjected to various types of economic

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sanctions for at least ninety years, which have devastated its economy. The impact of economic sanctions and transition have been significant in the capital markets of the Transition Economies, many of which remain grossly under-developed in terms of regulation, size, depth, liquidity, sensitivity to forex, geopolitical and interest-rate shocks, credit quality and so on. 4. While there have been many books and articles that describe economic sanctions and analyze the illegality of economic sanctions under international law and various United Nations charters, there has not been any meaningful analysis of “Sanctions Response Models” of countries that have been targeted and grievously harmed with economic sanctions. Many legal scholars have concluded that most unilateral economic sanctions are illegal under international law and various United Nations charters.1 5. Many Transition Economies have “Constitutional Courts” unlike most developed countries and most Western countries. The majority of Economic Sanctions during the last forty years have been imposed on Transition Economies and Emerging Market countries (mostly by “Western” countries and the UN). Economics Sanctions are very much a Constitutional Law issue. The United Nations Charter is an International Constitution and a new layer of International Administrative Law, which prohibits most Unilateral Economic Sanctions. 6. The impact of economic sanctions and transition on political and economic systems has not been measured properly—in some cases, the outcomes have included political problems such as wars and/ or declaration of independence (e.g. Croatia and the new countries created from Yugoslavia); mass hysteria and increases in health problems; changes in consumer perception/cognition; the overthrow of a dictator (e.g. Romania); the overthrow of a civilian democratic government (e.g. Nigeria); the collapse of a government (the Soviet Union); integration with another country (e.g. East Germany); highly centralized “coordination” in a region (e.g. among the CIS countries); and macroeconomic upheavals and transition turmoil (e.g. Vietnam, Thailand and Nigeria). 1  See: Echa (2014) (providing analysis and citing articles and books that support the position that unilateral economic sanctions are illegal under International Laws and the United Nations Charter).

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7. It is no longer sufficient to measure national growth and progress by using only or mostly economic indicators. More comprehensive measures of “sustainable growth” should be implemented (i.e. economic, social, political, urban and environmental sustainability). 8. What is really needed are “Coordinated Self-sustaining Systems” that can create, maintain and expedite Sustainable Growth (economic, social, urban and environmental sustainability). 9. Given the many failures of pure capitalist systems, some Transition Economies may actually be doing better than capitalist-democratic economies when measured in terms of comprehensive factors of sustainable growth (economic, social, political, urban and environmental sustainability). 10. Cross-listed companies and the growth of GDRs/ADRs have had significant effects on the capital markets of Transition Economies and have evolved into partial policy responses to economic sanctions, transition problems, changes in international relations and the balance of economic, political and military powers, and knowledge among developed countries and the BRICS (Brazil, Russia, India, China and South Africa) countries. 11. Endemic corruption has also had major impact on sustainable growth, financial markets and the quality of life in most Transition Economies. 12. Transition Economies are much more sensitive to geopolitical shocks and risks than both developed and developing countries, primarily because of their capital base, un-sophisticated capital markets and the uncertainty created by changes in economic, political and social structures in transition. 13. Multinational corporations (MNCs) are greatly affected by economic sanctions, are at the forefront of foreign policy clashes, trade wars and sustainability issues, and should be studied more broadly and closely within such contexts (rather than the usual emphasis on financial performance). 14. Geopolitical risk has been too narrowly defined around the world. For example, Blackrock is the largest asset management company in the world based on AUM (see the discussion above about its BlackRock Geopolitical Risk Indicator [BGRI] [https://www. blackrockblog.com/blackrock-­geopolitical-­risk-­dashboard/]).

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2.3   Cross-Border Spillovers and the Modeling of Emergence and Nonlinearity: A Critique of the Literature and the Unreliability of Empirical Research in Psychology (Including Mathematical Psychology), Complex Systems, Behavioral Political Economy and Behavioral Operations Research The significant unreliability and distortion of empirical research and the “Reproducibility/Replicability Crisis” in Science, Behavioral Operations Research, Economic Psychology and Behavioral Political Economy was addressed in Cairney and Geyer (2017), Open Science Collaboration (28 August 2015), Bohannon (August 28, 2015), Ioannidis (2005), Banks et al. (2015), Banks et al. (2016; in press), Bosco et al. (2016; in press), John et al. (2012), Masicampo and Lalande (2012), O’Boyle et al. (2016, in press), Schmidt and Hunter (2015), Świa ̨tkowski and Dompnier (2017), Loken and Gelman (2017), Johnson (2013), Aguinis et  al. (2017). Drummond (2009), Replicability Research Group (2015), Baker (2016), Chang and Li (2015), Collins (2016), Cristea and Ioannidis (2018), Feest (2016), Wasserstein and Lazar (2016), McShane et  al. (2018), Stanford Encyclopedia of Philosophy (Dec. 3, 2018) and BEC Crew (August 28, 2015).2 Thus, the empirical research cited in this book is subject to the limitations and issues mentioned in the foregoing articles. This book focuses on spillovers across national borders and across “industries” in one or more nations (primarily from developed to developing countries), as well as integration between or among financial markets of different countries (both developed and developing countries), all of which have become increasingly important because of worldwide concerns about interconnectedness of Financial Systems and Economic Systems, Global Financial Stability, Global Sustainable Growth and Global Systemic Risk. 2  This article stated in part: “A landmark study involving one hundred (100) scientists from around the world has tried to replicate the findings of 270 (two hundred and seventy) recent findings from highly ranked psychology journals and by one measure, only 36% (thirty six percent) turned up the same results. That means that for over half the studies, when scientists used the same methodology, they could not come up with the same results…. and earlier this year, a separate study found that the prevalence of irreproducible preclinical research exceeds 50% (fifty percent), ‘resulting in approximately US$28,000,000,000 (twenty-eight billion US dollars) per year spent on preclinical research that is not reproducible—in the United States alone’….”

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Gkillas et al. (2018) noted that while standard Granger Causality tests did not identify any relationships between Geopolitical risks (GPRs) and stock market volatility, a nonparametric causality-in-quantiles test found significant evidence that GPRs predicted volatility jumps of the Dow Jones Industrial Average (DJIA) over its entire conditional distribution. The literature on Market Integrations and Spillovers is significant and can be divided into two broad sections (each of which has the following sub-sections): 1. The Interconnectedness/Integration literature, which can be sub-­ divided into the following segments: (a) Financial market Interconnectedness/Integration among developed countries—see Baruník and Kr ̌ehlík (2018), Diebold and Yilmaz (2016) (equities) (volatility in stock markets), Carson (2020), Demirer et al. (2018) (banks) and Diebold and Yilmaz (2015) (financial and macroeconomic connectedness). (b) Asset Market Interconnectedness/Integration between developed countries and emerging markets, or between emerging market countries—see Bekaert and Mehl (2019), Eiling and Gerard (2015) (equity), Carson (2020), Nwogugu (2012), Ji et  al. (2019) (cryptocurrencies) and Huang et al. (2016). (c) Interconnectedness/Integration of the real economies of both developed countries and emerging market countries—see Baur (2012) (real economies), Vithessonthi and Kumarasinghe (2016) ­(International Trade), Crowe et al. (2013) (real estate) and Vandenbussche et al. (2015) (housing). (d) Interconnectedness/Integration of two asset markets—see Ferrer et al. (2018) (energy stocks and crude oil). (e) Methods—Caporin et  al. (2018) (measurement of sovereign contagion), Billio et  al. (2017) (measures of Integration), Briciu et  al. (2020) (sovereign credit spreads), Yuksel et  al. (2010), Orhan and Koksal (2012) and Nwogugu (2006a, b, 2007a, 2013, 2019a). (f) On Behavioral Macroeconomics (including Behavioral Expectations), Complex Systems and “Learning” in macroeconomics, see Nwogugu (2017) (macroeconomic Multiplier

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Effects of Net Present Value), Nwogugu (2019a, b) (ComplexSystems Multiplier Effects of Multi-sided Incentives), Nwogugu (2012), De Grauwe and Kaltwasser (2012), Anufriev et  al. (2013), Kurz et al. (2013), Bertasiute et al. (2018), Hommes et al. (2019) and Woodford (2013). (g) On Political Risk and international valuation, see Bekaert et al. (2016) and Huang et al. (2015). (h) Corporate Governance Convergence—see Bhaumik et al. (2020), Sayari and Marcumb (2018) and Thenmozhi and Narayanan (2016). 2. The Cross-Border Spillover literature, which can be sub-divided into the following segments: (a) Spillovers of economic (trade, monetary and fiscal) policies—see Davoine and Molnar (2020) (fiscal policy), Rohit and Dash (2019) (monetary policy), Apostolou and Beirne (2019) (unconventional monetary policy), European Central Bank (May 2019b) and Klobner and Sekkel (2014) (policy uncertainty). (b) Spillovers of market-volatilities in the same global market—see Gómez-Pineda (2020) (volatility Spillovers), Bekaert et  al. (2014) (equities), Carson (2020) (volatility in stock markets), Gkillas et al. (2018) and Gillaizeau et al. (2019) (bitcoin). (c) Spillovers of volatilities/shocks across different asset markets—see Mensi et  al. (2017) (stocks and precious metals), Wang and Wang (2019) (crude oil and Chinese stocks) (volatility in stock markets) and Tiwari et al. (2018) (global asset classes). (d) Spillovers of Corporate Governance, technology and corporate Operations Policies—see Hua et al. (2020) (technology), Eapen et  al. (2019) (finance constraints and technology), Abosedra et al. (2020) (GDP growth volatility), Bhaumik et al. (2020) (Corporate Governance), Sayari and Marcumb (2018) (Corporate Governance), Martynova and Renneboog (2008) (Corporate Governance) and Thenmozhi and Narayanan (2016) (Corporate Governance). (e) Methods—Dieppe et  al. (2018) (central bank macro model), Gillaizeau et al. (2019) (Bitcoin), Caporin et al. (2018) (measurement of sovereign contagion), European Central Bank

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(May 2019a), and Diebold and Yılmaz (2012) (prediction of volatility spillovers), Yuksel et  al. (2010), Orhan and Koksal (2012) and Nwogugu (2006a, b, 2007, 2013, 2019a). (f) On Behavioral Macroeconomics (including Behavioral Expectations), Complex Systems and “Learning” in Macroeconomics, see Nwogugu (2017) (macroeconomic Multiplier Effects of Net Present Value), Nwogugu (2019a, b) (macroeconomic and Complex-­Systems Multiplier Effects of Multi-sided Incentives), Nwogugu (2012), De Grauwe and Kaltwasser (2012), Anufriev et al. (2013), Kurz et al. (2013), Bertasiute et  al. (2018), Hommes et  al. (2019) and Woodford (2013). (g) On Political Risk and international valuation, see Bekaert et al. (2016) and Huang et al. (2015). However, the theories and models in many of the foregoing articles are wrong and/or mis-specified partly because of the following reasons: 1. Most of the theories and empirical models of Cross-Border Spillovers and Integration do not incorporate the issues (regulations, variables, human biases, transactions etc.) discussed in this book—these issues can create Multiplier Effects, changes in Risk Perception, Regret, Consumer Confidence, Business Confidence and other biases/behaviors that are not captured by the models in these articles. 2. Most of the literature focuses on financial markets and not on the real economies of countries—even though many shocks and volatilities in the global financial markets originate from, and are hedged together with, entities in the real sector. 3. Nwogugu (2006a, b, 2007, 2013, 2019c) critiqued many types of models used in analyzing Cross-Border Spillovers, Contagions and Integration. Nwogugu (2007) critiqued bankruptcy prediction models (LOGIT/PROBIT, regressions, Neural Networks etc.) and Nwogugu (2006a) critiqued ARCH/GARCH/ARMA/SV models—these methods are used in Machine Learning models and in identifying Financial Contagion in markets. 4. Most of the empirical studies of Cross-Border Spillovers, Contagions and Integration cannot be generalized and may be valid only for a specific time period or a specific country-pair or group of countries. That is partly because of the sample-selection methods and the nature of the models used.

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5. Cross-border Integration does not always result in Cross-border Spillovers, and many of the prediction/identification models of Cross-­Border Spillover often confuse Integration with Spillovers and vice versa. 6. Most Spillover/Integration identification/prediction models do not sufficiently isolate causal factors, and the models sometimes use variables that are or can be correlated. 7. Most of the empirical and theoretical studies on Cross-Border Spillovers and Integration mistakenly focus excessively and exclusively on the “results” of Spillovers/Integration (e.g. CDS spreads, bond-yield spreads, bid-ask spreads and financial returns), but omit the raw causal factors (such as regulation, compliance, transaction volumes, FDI/FI/Foreign Aid, remittances, Geopolitical Risk factors, Constitutional Political Economy issues, Social Capital, Social Networks, Policy Transmission Channels and Contagion Transmission Channels). Nwogugu (2017) identified biases in financial returns—which typically occur in equity returns, commodities returns, CDS spreads and bond-yield spreads. See: Gkillas et al. (2018). 8. In most empirical and theoretical studies of Integration and Cross-­ Border Spillovers, a major problem is that the definitions of Spillovers and Integration (occurrence, properties, duration etc.) are not correct or comprehensive or uniform/generally accepted. Using monthly equity market data for three different country groups (developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, Billio et al. (2017) compared different Cross-Border Integration models and noted that (1) all measures give rise to a very similar long-­run integration pattern; (2) the standard correlation explains variations in diversification benefits as well as or better than more sophisticated measures; and (3) the Billio et al. (2017) results were robust to various robustness checks. Billio et al.’s (2017) conclusions support this book’s position that most of the empirical models use similar and insufficient models and variables (including correlated variables) and the Mean-Variance Framework. 9. Most of the methods used in empirical and theoretical studies of Integration and Cross-Border Spillovers are based on the Mean-

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Variance Framework, but Nwogugu (2013, 2019c) explained why the Mean-­Variance Framework is wrong. 10. Caporin et al. (2018) was purportedly the first to use a Bayesian quantile regression with heteroskedasticity to measure contagion. Regressions in general were critiqued in Nwogugu (2007, 2006a, b), and the Caporin et al. (2018) approach does not resolve the econometric problems. 11. Galariotis et al. (2016) used a Panel Vector Autoregressive (PVAR) model (which combines traditional VAR modeling with paneldata approaches) to model Spillover effects. Both VAR and Paneldata methods have been separately critiqued significantly in the econometrics and finance literatures. 12. Karadam (2018) analyzed the nonlinear effects of debt on growth—that is not reflected/analyzed in many studies of CrossBorder Spillovers and Integration. 13. Barroso et  al. (2018) studied the identification of systemic risk drivers in financial networks—that is not reflected/analyzed in many studies of Cross-Border Spillovers and Integration. 14. Fong et al. (2018) analyzed the role of global and domestic risk factors in determination of sovereign tail risk in Emerging Market Countries—that is not reflected/analyzed in many studies of Cross-Border Spillovers and Integration. 15. Mama (2018) analyzed nonlinearity in the relationship between innovative efficiency and stock returns—these factors are omitted in many studies of Cross-Border Spillovers and Integration. 16. Lopera and Marchand (2018) analyzed peer effects and risk-taking among entrepreneurs, but many empirical studies of CrossBorder Spillovers and Integration omit Social Networks and Social Capital in both domestic and foreign economies. 17. Sjoberg (2001) analyzed the relationship between political decisions and public risk perception—these factors are omitted in many studies of Cross-Border Spillovers and Integration. 18. Perc et  al. (2017) and D’Orsogna and Perc (2015) studied the Statistical Physics of Human Cooperation and Crime, respectively—but these factors are omitted in many studies of Crossborder Spillovers and Integration.

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2.4   Emergence and Nonlinearity: Health Effects of Spillovers, Integration and Resulting Shocks Balcilar et al. (2018) analyzed the relationships between Geopolitical risks and stock market dynamics of the BRICS countries. Zhang et  al. (2018) analyzed the linear and nonlinear relationships between Twitter’s daily happiness sentiment and international stock returns. Cross-Border Spillovers and Integration often result in shocks and increased volatility in equities, debt labor, finished-goods and commodities markets, all of which can cause various types of illnesses—such as anxiety, depression, schizophrenia, smoking and ADHD, some of which can evolve into more serious illnesses such as overweight, diabetes, heart disease, hypertension and strokes. The negative health effects caused by market volatility are well documented in the literature—see Ma et  al. (2011), Cotti et  al. (2015), Lin et  al. (2013, 2014, 2015), Liu (Nov. 2015), Cotti and Simon (2018) and Ratcliffe and Taylor (2015).

2.5   Emergence and Nonlinearity: A Review of the Literature on Social Networks Social Networks are pervasive in most economies, and especially in Emerging Market countries where the incidence of Corruption and lawlessness is higher, and people value and emphasize “apparent wealth” more than nonwealth achievements. The literature on Social Networks in international business is significant and various studies have analyzed the relationships between Social Networks on the one hand and Corporate Governance Contagion, Earnings Management, corporate credit ratings, human psychology, consumer and corporate debts and corporate cash management on the other—see Nwogugu (2016, 2007b), Hashimzade et al. (2014), Andrei et al. (2014), Rotondi et al. (2017), Bault et al. (2017), Bougheas et al. (2015), Javakhadze and Rajkovic (2018), El-Khatib et al. (2015), Davidson et al. (2015), Benson et al. (2018), Brown and Drake (2014), Cao et al. (2019), Bhattacharya and Kaski (2019), Quattrociocchi et  al. (2014), Coviello et al. (2014) and Nwogugu (2005a, b, 2008a, b, 2006c, d, 2007c, 2009). Also, Benson et al. (2016) and Hanneke et al. (2010) analyzed the structure and prediction of Networks (including social networks). Cranmer et al. (2014) and Minhas et al. (2016) analyzed networks in International Relations and Economic Sanctions. Limas (2019) and Martins et al. analyzed

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international trade and exchange rates. Kitchovitch and Liò (2010), Ongkowijoyo and Doloi (2018), Kok et al. (2016), Bossaerts et al. (2018) and Paulus and Kristoufek (2015) analyzed the propagation of risk, Corruption Perception and Risk Perception in Social Networks. The Super-Symbiotic relationship between Social Networks on the one hand and Geopolitical Risk and Cross-Border Spillovers on the other is significant and is summarized as follows: 1. Various studies have analyzed and noted the effects of Social Networks on Corporate Governance Contagion, Earnings Management, corporate credit ratings, corporate cash management, lending, cost of networks and so on, all of which have or can have substantial effects on Geopolitical Risk and Cross-Border Spillovers. 2. The viability of and returns from FDI/FI/Foreign Aid are often functions of the Social Networks of the foreign investors and those of their domestic business associates and domestic government regulators. 3. Social Networks are or can be a critical determinant of the development and implementation of governments’ foreign policies, business policies of MNCs (multinational corporations) and institutional investors’ investment decisions, each of which varies across countries, is affected by political processes and IPE considerations, and has or can have substantial effects on Geopolitical Risk and Cross-Border Spillovers. 4. Social Networks are a critical determinant of consumer and corporate defaults and bankruptcies (which, in turn, are affected by political processes and IPE considerations, and vary drastically across countries/jurisdictions), and thus have or can have Multiplier Effects on Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, consumer solvency, Risk ­Perception/Risk-Taking, Savings/investments, transfers of personal issues/framing to the workplace, remittances and donations to Emerging Markets, transfers of Human Networks to emerging markets, international network flows and so on. 5. Social Networks affect firms’ cost of capital, Risk Perception/ Risk-­Taking, tax compliance/avoidance and employee compensation policies and thus have or can have Multiplier Effects on Consumer Confidence, Consumer Expenditures, consumer sol-

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vency, Savings/investments, transfers of personal issues/framing to the workplace, remittances and donations to Emerging Markets, transfers of Human Networks to emerging markets, international network flows and so on. 6. Social Networks have been shown to vary dramatically across countries and within regions/jurisdictions in countries, and thus Social Networks are a substantial Geopolitical Risk. 7. Social Networks can affect individuals’ psychology and decision processes, individuals’ borrowing and debt capacity, human health, job searches, marriage markets, risk perception, Savings/ Investments and so on, all of which are critical determinants of remittances to Emerging Markets, Consumer Confidence, Business Confidence, Consumer Expenditures, Corporate Expenditures, immigrants’ welfare, Foreign Investment and so on. 8. The development, implementation, effectiveness and value of Economic Sanctions (e.g. imposed by the United Nations, the EU, Japan, the United States and China) are based on Social Networks and Social Capital. See Cranmer et al. (2014). 9. Social Networks have been empirically shown to affect corporate leverage and debt capacity, innovation, formation of strategic alliances, access to capital and corporate credit ratings and so on, all of which are critical determinants of remittances to Emerging Markets, immigrants’ welfare, corporate FDI, Foreign Investment, Consumer Confidence, Business Confidence, Consumer Expenditures, Corporate Expenditures, immigrants’ welfare, Foreign Investment and so on. 10. Social Networks affect voting patterns.

2.6   Emergence and Nonlinearity: Some Social Capital Dimensions of Geopolitical Risk and Cross-Border Spillovers Social Capital is a relatively new topic in the Geopolitical Risk, Complex Systems and Spillover literatures. Social Capital is also pervasive in most economies and especially in Emerging Market countries where the incidence of Corruption and lawlessness is higher and people place more emphasis on apparent wealth than on non-wealth achievements. Various studies have analyzed the effects of Social Capital on Corporate Governance

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Contagion, Earnings Management, corporate credit ratings, corporate cash management, lending, cost of capital and so on. The literature on Social Capital in International Business and Social Welfare is significant— see Kanazawa and Savage, Nwogugu (2006c, d, 2007b, c, 2008a, b, 2009), Bosworth (2013), Agarwal et  al. (2011), Ferris et  al. (2017), Kanagaretnam et  al. (2018), Fogel et  al. (2018), Guiso et  al. (2011), Gupta et  al. (2018), Hasan et  al. (2017a, b), Hoi et  al. (2018, 2019), Huang and Shang (2019), Javakhadze et al. (2016), Jha (2019), Jha and Cox (2015), Jin et al. (2017). Gupta et al. (2018) attempted to associate Social Capital with declines in firms’ cost of equity. Hasan et al. (2017b) noted that companies based in high-social-capital jurisdictions are more likely to comply with their contractual obligations and thus had lower bank-loan spreads than firms based in low-social-capital jurisdictions. Huang and Shang (2019) concluded that social capital reduces agency problems by reducing the need for corporate borrowing. Hasan et  al. (2017a) concluded that social capital negatively affects tax evasion. Jha (2019) noted that companies in high-social-capital counties were less likely to perpetrate financial misconduct. Jin et al. (2017) noted that companies based in high-social-capital jurisdictions were less risk-taking before the global financial crisis of 2008–2014, had fewer corporate failures during the Global Financial Crisis, and had more transparent accounting practices after the Global Financial Crisis. Hoi et  al. (2019) concluded that CEOs of companies in high-social-capital jurisdictions were more likely to have lower compensation packages. Jha and Chen found that external auditors were less likely to trust (and thus more likely to charge an audit fee premium to) companies whose headquarters were located in low-social-capital jurisdictions. Hoi et al. (2018) and Jha and Cox (2015) found that companies in high-social-capital jurisdictions were more socially and environmentally responsible. The often symbiotic relationship between Social Capital on the one hand and Geopolitical Risk and Cross-Border Spillovers on the other is or can be significant: 1. Various studies have analyzed and noted the effects of Social Capital on Corporate Governance Contagion, Earnings Management, corporate credit ratings, corporate cash management, lending, cost of capital and so on, all of which have or can have substantial effects on Geopolitical Risk and Cross-Border Spillovers.

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2. The viability and returns from FDI/FI/Foreign Aid are often functions of the Social Capital of the foreign investors and those of their domestic business associates and domestic government regulators. 3. Social Capital is or can be a critical determinant of the development and implementation of governments’ foreign policies, business policies of MNCs (multinational corporations) and institutional investors’ investment decisions, each of which varies across countries and has or can have substantial effects on Geopolitical Risk and CrossBorder Spillovers. 4. Social Capital is a critical determinant of consumer defaults and bankruptcies, individuals’ psychology and decision processes, and individuals’ borrowing and debt capacity and thus has or can have Multiplier Effects on Consumer Confidence, Consumer Expenditures, consumer solvency, Risk Perception/Risk-Taking, Savings/investments, transfers of personal issues/framing to the workplace, remittances and donations to Emerging Markets, transfers of Human Capital to Emerging Markets, international capital flows and so on. 5. The development, implementation, effectiveness and value of Economic Sanctions (e.g. imposed by the United Nations, the EU or the United States) are based on Social Networks and Social Capital. See Cranmer et al. (2014). 6. Social Capital affects firms’ cost of capital, Risk Perception/Risk-­ Taking, tax compliance/avoidance, corporate leverage, corporate debt capacity and employee compensation policies, and thus has or can have Multiplier Effects on Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, Government Expenditures, Risk Perception, consumer solvency, Savings/investments, transfers of personal issues/framing to the workplace, remittances and donations to Emerging Markets, transfers of Human Capital to Emerging Markets; international capital flows and so on. 7. The individual and aggregate effects of Social Capital can vary dramatically across countries and within regions/jurisdictions in countries, and thus Social Capital is a substantial Geopolitical Risk and Spillover Risk.

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2.7   Emergence and Nonlinearity: The Muted Effects of the Rise of Both the Far-Right and Nationalist Movements in the United States, Latin America, Europe and Parts of East/South Asia (as of 2021) As of 2021, the far-right and nationalist movements (two distinct and often cooperating movements) were alive and well in the United States, Latin America, Europe and parts of Asia, and can be considered a relevant Geopolitical Risk and have cross-border coordination and Spillover elements (i.e. cross-border communications and coordination, similarities in political/economic/policy agendas). Strangely and surprisingly, the rise of both the far-right and nationalist3 movements in the United States, Latin America4 (e.g. Venezuela, Colombia, Uruguay, Paraguay, Chile, Peru and Argentina), Europe5 (France, Hungary, Austria, Switzerland, Denmark, Belgium, Italy, Finland, Sweden, Ukraine, Georgia, etc.) and parts of

 See: Wimmer (2019) and Legrain (March 2020).  See: Siekmeier (Feb. 2015) and Johnson (2020). See: “Disorder in Latin America: Ten Crises in 2019”. https://acleddata. com/2020/03/12/disorder-in-latin-america-10-crises-in-2019/. See: “Democracy Is At Risk In Latin America and The Far Right Is Moving In—Here’s How It Went Wrong For The Left”. November 9, 2018. https://theconversation.com/ democracy-is-at-risk-in-latin-america-and-the-far-right-is-moving-in-heres-how-it-wentwrong-for-the-left-106025. 5  See: Kyle, J. & Meyer, B. (February 2020). High Tide? Populism in Power, 1990–2020. Tony Blair Institute For Global Change. https://institute.global/sites/default/ files/2020-02/High%20Tide%20Populism%20in%20Power%201990-2020.pdf. See: “Europe and right-wing nationalism: A country-by-country guide”. https://www.bbc. com/news/world-europe-36130006. Source: https://www.bbc.com/news/world-europe-36130006. Source:https://blogs.lse.ac.uk/europpblog/2019/05/30/right-wing-populist-parties-madeonly-modest-electoral-gains-in-the-ep-elections-but-­their-influence-is-now-unprecedented/. Source: https://freedomhouse.org/report/freedom-world/2020/leaderless-struggledemocracy. 3 4

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East/South Asia6 (e.g. India, Pakistan, the Philippines, Indonesia, Myanmar, Sri Lanka, Singapore, Taiwan and China) during 2010–2020 did not have a significant or unexpected impact on risk regulation and constitutions in many countries because of the following reasons: 1. The G20/G30 and the United States have dominated post-crisis (Global Financial Crisis) coordinated efforts for reforms and new regulations. Source: https://freedomhouse.org/report/freedom-world/2020/leaderless-struggledemocracy. 6  See: Heinrich Böll Foundation (Nov. 2018). Nationalisms and Populisms in Asia. https://www.boell.de/sites/default/files/v2_web_perspectives_asia_2018.pdf. See: “Key Elections To Focus On Nationalism—While Pundits Monitor The Rise of Populism, The Real Debate Is Between Nationalism and Internationalism”. by Bill Emmott. April 2, 2019. https://asiatimes.com/2019/04/key-elections-to-focus-on-nationalism/. See: Svitych, A. (2019). The Rise of the Capital-State and Neo-Nationalism—Lessons From The Asia-Pacific. https://www.iias.asia/the-newsletter/article/rise-capital-state-and-neonationalism-lessons-asia-pacific. See: “Has the coronavirus proved a crisis too far for Europe’s far-right outsiders?”. July 17, 2020. https://theconversation.com/has-the-coronavirus-proved-a-crisis-too-far-for-europesfar-right-outsiders-142415.

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2. Many countries have copied the Dodd-Frank Act and SOX; and many “global institutions” and their regulations and policies remain dominant (such as the WTO, World Bank, Financial Stability Board, ISDA, ICMA, FASB, IASB, SASB, BIS, IBRD, Asian Development Bank and African Development Bank). 3. The US dollar remains the dominant currency in the world and accounts for more than 59% (as of 2021) of global reserves of governments and the US Federal Reserve remains the “central bank of the world”. That can affect and limit the economic, Social Welfare and legal policies and political agendas of many countries. 4. In many countries, there are significant underlying (in many instances, long-term) socioeconomic problems that seem to have transcended far-right and nationalist movements such as inequality, taxes, jobs, affordable housing, employment benefits, COVID-19, food ­shortages, inflation, access to healthcare, retirement/pension benefits and cost of education. Around the world, the far-right and nationalist movements have not proffered or implemented meaningful solutions to these problems—and that limits their ability to win elections, to raise campaign funds and to push their radical agendas through national legislatures, courts of law and courts of public opinion. 5. The Internet and the rapid exchange/dissemination of information that it facilitates have reduced the uncertainty, doubts and biases that are created needed by far-right and nationalist movements (in order to execute the radical social/political/economic changes they pursue). 6. The rapid penetration of the Internet around the world also facilitates “Rapid Personal Comparison” by ordinary people, which can drastically reduce their Willingness to Protest and propensity to adopt nationalist views/philosophies. “Rapid Personal Comparison” is conjectured here to be a process or processes wherein individuals conduct online searches for information about similar people in other countries and informally compare their economic/social/ political situation. 7. While far-right and nationalist movements may appeal to a broad range of voters in a country, it is conjectured here that “Decision Reality” precludes such voters’ adoption of and voting for farright and nationalist candidates. Decision Reality is a process wherein the individual voter considers the often limited information he/she has, considers the current pressing problems that his/

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her household faces, weighs his/her personal circumstances against the risk of the unknown being proposed by the far-right/ nationalist groups and, in many cases, decides to choose the status quo and vote for “regular” politicians and “center or leftist policies”. 8. While far-right and nationalist movements may appeal to a broad range of voters and the popular press in a country, most of such persons have limited education, lack the sophistication to realistically debate financial regulation, immigration, welfare benefits, labor reform and economic reform, and often “informally delegate” the resolution of these critical issues to leaders of far-­right and nationalist movements. That creates a “Reform & Legislation Gap” wherein the announced policies and reform agenda of far-right and nationalist movements may differ from and/or may not sufficiently satisfy the needs/aspirations of their sympathizers among the general public. 9. More than one hundred countries created or amended their national constitutions during 2000–2020, and many of these new constitutions are based on or are similar to the US Constitution and/or the UK laws. Around the world, there seems to be inertia among populations and ordinary politicians with regard to constitutional amendments, and far-right and nationalist movements have not been sufficiently dominant and politically powerful enough to change these national constitutions. 10. In many countries, far-right and nationalist movements have focused on, and have been driven by, mostly immigration, religious-disparity and racial-disparity issues. These issues are highly controversial, and people hold long-term beliefs about them that are not easy to change. It appears that in many countries, these issues are being reflected and addressed in local-level politics and electoral voting, and have not become nationwide campaign topics and/or major voting criteria in nationwide elections except in a few countries such as India, the United States, Austria and Hungary. 11. In many countries, the far-right and nationalist movements are often dominated by one or a few national leaders and his/her “ideological entourage”, which sometimes creates frictions and factions among such groups and makes it difficult for them to provide unified policies. The far-right and nationalist movements have limited ability to lobby governments or the media/press. Even when the far-right and nationalist movements succeed in gaining national power (as in the Trump Administration in the United States and the Modi

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Administration in India or the 2020 government in Hungary), their ability to enact and implement new laws, economic policies and Social Welfare policies was often limited by national and state legislatures, courts of law, the popular press and protesters. 12. In many developed and developing countries, electoral fraud (rigging, vote buying, bribery, etc.) and fake news remain major problems that can severely limit the far-right and nationalist movements in those countries. 13. In many developed and developing countries, there are often “vested interests” (companies and influential families and politicians that need to protect the status quo and their social/economic/political interests) that severely limit the far-right and nationalist movements in those countries. These Vested Interests are typically better funded than competing far-right and nationalist movements. 14. In most countries, far-right and nationalist movements are relatively new, have substantial fund-raising constraints7 and are subject to strict campaign finance laws/regulations, all of which affect their 7  See: The Global Machine Behind The Rise of Far Right Nationalism. By Jo Becker. August 10, 2019. https://www.nytimes.com/2019/08/10/world/europe/sweden-immigration-­ nationalism.html. See: Davey, J. & Ebner, J. (2017). The Fringe Insurgency: Connectivity, Convergence and Mainstreaming of the Extreme Right. ISD. See: Keatinge, T., Keen, F. & Izenman, K. (2019). Fundraising for Right-Wing Extremist Movements: how they raise funds and how to counter it. RUSI. See: “How business is responding to the rise in populism—Companies don’t usually get involved directly in politics. But, say Enrique de Diego and Simon Caulkin, that is now changing”. Enrique de Diego and Simon Caulkin. 04 November 2019. https://www.london.edu/ think/how-business-is-responding-to-the-rise-in-populism. See: A New Eurasian Far Right Rising—Reflections on Ukraine, Georgia, and Armenia. April Gordon, Senior Program Associate, Europe & Eurasia, Freedom House. https://freedomhouse. org/report/special-report/2020/new-eurasian-far-right-rising. See: The American dark money behind Europe’s far right—From Britain to Hungary to Italy, the far right is on the rise; investigations over the past year have revealed the vital role of US Christian conservatives. By Mary Fitzgerald & Claire Provost. 11 July 2019. https:// www.opendemocracy.net/en/5050/the-american-dark-money-behind-europes-far-right/. See: “Russia’s Involvement in Far-Right European Politics”. By Rossella Cerulli. Jul 12, 2019. https://www.americansecurityproject.org/russias-involvement-in-far-righteuropean-politics/. See: Sheehy, A. (Feb 11, 2017). The Rise of the Far Right. Harvard Political Review. https://harvardpolitics.com/world/rise-of-far-right/.

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ability to develop coherent policies and win elections. In many countries, far-­right and nationalist movements often rely mostly on small contributions from individuals, unlike their more established political adversaries that have more money and a much broader range of political donors that donate in larger cash amounts. In addition, many countries have been tightening their political campaign funding regulations. 15. The more recent Trade Wars (e.g. the US-China Trade War of 2019–present, the US-Japan Trade War of 2018–present, the EU-Japan Trade War of 2019–present) and the Economic Sanctions imposed by the United States, the EU and the United Nations on many d ­ eveloping countries (such as Russia, Venezuela, China and the Philippines) have had significant economic and social effects on indigenes of those target countries and on Emerging Market countries as a group. 16. In many countries and because of their radical positions, far-right and nationalist movements have not been able to build meaningful political coalitions, voting blocs and power-sharing arrangements with other political parties and elected politicians, and that severely limited their ability to influence legislation and economic reforms. 17. In many countries, the violence and the negative extremist statements/views8 by far-right and nationalist movements have put off See: “Income inequality, financial crisis and the rise of Europe’s far right”. Issued on: 20/11/2018. https://www.france24.com/en/20181116-income-inequality-financial-crisiseconomic-uncertainty-rise-far-right-europe-­austerity. 8  See: Intelbrief: Far-Right Extremists and White Supremacists Grow More Emboldened (2019). See: European Union (2019). European Union Terrorism Situation and Trend Report 2019 (TE-SAT). European Union. See: UNDP (2019). Preventing Violent Extremism through Promoting Inclusive Development, Tolerance and Respect For Diversity. United Nations Development Programme: A development response to addressing radicalization and violent extremism. file:///C:/ Users/dellpc/AppData/Local/Temp/Discussion%20Paper%20-%20Preventing%20 Violent%20Extremism%20by%20Promoting%20Inclusive%20Development.pdf. See: United Nations—Right-Wing Extremism. https://www.un.org/sc/ctc/wp-content/ uploads/2020/04/CTED_Trends_Alert_Extreme_Right-Wing_Terrorism.pdf. See: US Department of Homeland Security (2011). The Organizational Dynamics of Far-­ Right Hate Groups in the United States: Comparing Violent to Non-Violent Organizations. Final Report to Human Factors/Behavioral Sciences Division, Science and Technology Directorate, U.S. Department of Homeland Security, December 2011. https://www.dhs. gov/sites/default/files/publications/944_OPSR_TEVUS_Comparing-Violent-­ Nonviolent-Far-Right-Hate-Groups_Dec2011-508.pdf.

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both the public and the politicians and have made governments to allocate more resources to anti-terrorism investigations and enforcement. 18. The rapid growth of the far-right and nationalist movements primarily through the media and the Internet9 may have created the same forces that prevent or slow the rapid adoption of their proposed policies and governance styles.

2.8   Some Elements of “Global Risk Infrastructure” and the 2010–2020 Recommendations by the IMF, G20/G30 and BIS The Global Financial Crisis and the subprime mortgage problems that occurred in the United States during 2005–2014 had had rippling effects on the economies of many countries and highlighted the many problems inherent in the legal infrastructure for global risk regulation and associated economic implications. Kunst and Wagner (2011) discussed the concept of Constitutional framework and its role in establishing order in society. Kingston and Caballero compared various theories of institutional change in terms of causes, processes and outcomes of institutional change, habit, learning and bounded Rationality, and institutional inertia and path-dependence. Metelska-­Szaniawska (2010) found substantial positive correlations between constitutional rules and the economic reform process in post-socialist countries of Europe and Asia after 1989. Metelska-Szaniawska (2010) is among many studies that have confirmed similar relationships in developed countries. Doring and Schnellenbach (2010) compared federalism in Germany and the United States and See: Koehler, D. (2016). Right-Wing Extremism and Terrorism in Europe—Current Development and Issues for the Future. PRISM Journal, 6(2). See: Byman, D. (2019). Five initial thoughts on the New Zealand terrorist attack. The Brookings Institution. 9  See: Koehler, D. (2019). Violence and Terrorism from the Far Right: Policy Options to Counter an Elusive Threat. ICCT, the Hague. See: Davey, J. & Ebner, J. (2017). The Fringe Insurgency: Connectivity, convergence and mainstreaming of the Extreme Right. ISD. See: Conway, M., Scrivens, R. & MacNair, L. (2019). Right-Wing Extremists’ Persistent Online Presence: History and Contemporary Trends. ICCT—The Hague. See: Conway, M. (2019). Violent Extremism and Terrorism Online in 2018: The year in Review. Network of Excellence for Research in Violent Online Political Extremism.

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concluded that a constitutional framework of competitive federalism does not prevent the long-term centralization of competencies, that formal institutions affect the pathways of government centralization, and that informal political institutions may have a substantial effect on the preservation of state and local autonomy. These informal political institutions include trade associations, standards organizations (such as FASB and IASB), specific statutes (such as Sarbanes Oxley Act), quasi-government agencies and so on. Blomquist and Ostrom (2009) Witt and Schubert (2009) and Mistri (2007) studied elements of constitutional political economy and risk management. Vanberg (2011) and Eicher et  al. (2018) considered Constitutions as elements of “social infrastructure”. Risk management, as defined and used in this book, pertains only to systemic risk, Financial Stability and the financial risk and operational risk of companies. “Institutions”, as defined in this book, include not only organizations, but also transactions, mathematical models, assets/liabilities, methods, accounting regulations, constitutions, generally accepted business processes and so on. Some critical “Risk Management Institutions” are government agencies that regulate financial services (such as the US SEC, the US CFTC, the US Federal Reserve System, the German Bundesbank, the FSA in the United Kingdom, the Chinese securities regulatory agency, the Chinese PBOC, the Chinese central bank, the Reserve Bank of India and the European Central Bank), accounting firms, accounting standards organizations (such as IASB, PCAOB and FASB), the credit rating agencies, Stock Exchanges, debt trading platforms, Securities Clearing Houses, the International Swaps and Derivatives Association (ISDA), multilateral organizations (e.g. EBRD, Asian Development Bank, IBRD and IMF) and standardized “macro” transactions (such as securitizations, Swaps and Options, and global bond offerings), and Bankruptcy Courts. Under US laws (which are similar to the laws of the Commonwealth countries), many institutions involved in the risk management process have substantial deficiencies and/or are unconstitutional. These violations of the US Constitution create increased information asymmetry, increased transaction costs and compliance costs, negative externalities, inefficiency in real estate transactions and increased agency problems. The issue of constitutional rights and effective compliance cannot be separated from property rights and is increasingly critical in the post-Internet era because many transactions are either structured or offered or sold or funded in part by persons (individuals and companies) in different countries/

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jurisdictions.10 Hence, constitutional torts and property rights have become a major foundation for economic growth and transactions. However, the issue of Constitutional Torts and the magnitude of government liability and associated political consequences may have dampened any attempts to implement changes. Although the analysis in this book is based on the US Constitution, the principles and theories developed herein are applicable in most Commonwealth countries and common-law countries,11 many of whose Constitutional laws, real estate laws and mortgage laws were derived from English laws and US laws. Similar Constitutional Tort issues have arisen or are likely to arise in many “Transition Countries” that have created and implemented real estate and mortgage statutes within the last twenty five years.12 10  See: Salomon (2007, 2010), Fukuda-Parr and Salomon (May 2009), Shinada and Yamagishi (2007), Marko (2010), Sitaraman (2002), Nelson and Ellen (2006), and Robinson (June 2007). 11  See: Barenboim (2001), Whytock (2008), Cooter and Ginsburg (1996), Harding (2004), Saunders (2006), Scheppele (2003), Jackson (2008), Krishnamurthy (2008), Verdier (2008), Janczyk (1977). 12  In many jurisdictions/countries, housing accounts for 20–40% of the economy. As of June 2010, outstanding mortgages were the equivalent of 2% of the gross domestic product (GDP) of Saudi Arabia and 55%, 20%, 50% and about 40% of GDPs of the United Kingdom, Malaysia, the United States and the EU respectively. (https://www.zawya.com/story.cfm/ sidZAWYA20100622032352; http://finance.mapsofworld.com/mortgage/). See: Peiovic (2001), Nikiforov (2005), Kyner (2005), Giovarelli and Bledsoe (Food & Agriculture Organization—Economic and Social Development Department) (Oct. 2001). See: “Collateral Law—Stimulating Secondary Market For Assets Acquired through Foreclosure”. Contract #: PCE-I-00-98-00015-00 TO 821. Submitted to: USAID/Bosnia and Herzegovina Economic Restructuring Office. Submitted by: Chemonics International Inc., Deloitte Touche Tohmatsu Emerging Markets Ltd., and National Center For State Courts. http://pdf.usaid.gov/pdf_docs/PNADI321.pdf. See: European Commission (July 2005). Mortgage Credit in the EU. http://eur-lex. eur opa.eu/smar tapi/cgi/sga_doc?smar tapi!celexplus!pr od!DocNumber&lg= en&type_doc=COMfinal&an_doc=2005&nu_doc=327. See: European Commission (April 2007). Green paper On Retail financial services In The Single Market. http://europa.eu/legislation_summaries/consumers/protection_of_consumers/l32055_en.htm. http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexpl us!prod!DocNumber&lg=en&type_doc=COMfinal&an_doc=2007&nu_doc=226. See: European Commission (April 2004). The Integration of EU Mortgage Credit Markets—Report By The Forum Group On Mortgage Credit. http://ec.europa.eu/internal_ market/finservices-retail/docs/home-loans/2004-report-integration_en.pdf. See: Acharya, V., et al. (2009). A Bird’s-Eye View: The Financial Crisis of 2007–2009.

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The “2010–2020 Recommendations” by the IMF, the G20/G30 and the European Union (collectively, the “2010–2020 Recommendations”) are important because: 1. they eventually became the basis and foundation for new sweeping financial/economic regulations that were enacted in many countries during 2010–2014 (such as the Dodd-Frank Act in the United States), some of which included constitutional amendments in some countries and could have affected or can affect the interpretations of national constitutions; 2. unfortunately, the 2010–2020 Recommendations were insufficient and not comprehensive and that probably contributed to the failures of financial regulations and government interventions in many countries (that relied on the 2010 Recommendations) during 2011–2016; 3. they delineated the “economic powers” in today’s world; 4. the 2010–2020 Recommendations also affected the balance of power among the “economic powers” and “military super powers” of the world—for example, while Russia is a military superpower, it was not very influential in the 2010–2020 Recommendations. In July 2010, the International Monetary Fund (IMF)13 issued a set of recommendations for strengthening risk regulations in the United 13  According to this July 2010 IMF document, the IMF’s recommendations about risk regulation in the United States were as follows:

1. Institutionalize and strengthen systemic risk oversight (a) Establish a council of the regulatory agencies, the Fed and the Treasury, with a mandate for financial stability and powers inter alia to designate potentially systemic financial firms for enhanced regulation and supervision focused on systemic risk. (b) Define the Fed as the lead executor of this council and the consolidated supervisor of designated potentially systemic financial firms, to work with other regulators. (c) Provide the Fed oversight authority over systemically important payment, clearing and settlement infrastructure.

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2. Redesign the regulatory architecture (a) Strengthen the Fed’s role in consolidated regulation and supervision, including by enhancing coordination with bank and functional regulators and restricting deference requirements. (b) Unify safety-and-soundness regulation and supervision of commercial banks and thrifts in a single federal agency and eliminate the federal thrift charter. (c) Unify federal securities and derivative market regulation into one federal agency. (d) Establish an independent and accountable federal consumer protection agency, removing this responsibility from the other agencies to enhance their focus and effectiveness in their primary roles. (e) Establish a federal office tasked with promoting greater regulatory uniformity in the insurance sector. 3. Strengthen micro-prudential regulation and supervision Banking (a) Enhance the capacity for group-wide oversight of banking groups and conduct regular inter-agency horizontal assessments of complex groups (possibly by establishing domestic supervisory “colleges”). (b) Boost timeliness and forcefulness of supervisory and regulatory interventions to address weaknesses in enterprise-wide risk management practices. (c) Strengthen channels for cooperation, coordination and learning from best practices—within and among the federal banking agencies (FBAs), market regulators and the states—to close regulatory gaps and prevent regulatory arbitrage, including with regard to charter conversions. Securities and derivative markets (a) Enhance enforcement and oversight capacities and re-examine capital rules and other prudential requirements, such as risk management standards, to ensure that risks are fully addressed. (b) Implement the recommendations of the Joint Report to enhance investor protection and improve cooperation between the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC); close legislative and regulatory gaps identified in the Joint Report. (c) Complete the consolidation of equity and equity option market surveillance into a single entity taking into account issues of dark pools, high-frequency trading, predatory algorithms and other technology based practices. (d) Promote standardization of OTC derivatives in order to increase market reliance on exchange trading and multilateral clearing and require proper collateralization of all derivative transactions, whether held at a clearinghouse or bilaterally. (e) Improve transparency of OTC derivative and securities markets by requiring timely reporting of transactions and providing better information to investors.

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Shadow banking and other short-term funding markets (a) Discourage the use of deposit-like instruments outside the formal banking sector and ensure appropriate liquidity management by sectors potentially falling within the systemic liquidity safety net. (b) Set minimum haircuts for repo transactions and address incentives for the repo clearing banks to extend intraday credit in the clearing and settlement cycle. (c) Require money market funds to make real-time disclosures of their actual (as opposed to “stabilized”) net asset values. Insurance (a) Develop the supervision of insurance groups through consolidated financial reporting and establish policies and procedures for the regulation of systemically important institutions, markets and instruments in the insurance sector. (b) Increase information sharing and coordination between state regulators and federal authorities, including through representation of state regulators in national bodies with responsibilities for system-wide oversight. (c) Strengthen regulation of bond insurance and securities lending and modernize solvency requirements. (d) The National Association of Insurance Commissioners (NAIC) and state legislatures should undertake reforms covering the terms of Commissioners’ appointments, the rulemaking powers of state insurance departments and their funding and staffing to bolster specialist skills. 4. Strengthen oversight of market infrastructure (a) Allow systemic payment, clearing and settlement infrastructures to have accounts at the Fed in order to settle in central bank money and to have emergency access to Fed liquidity under terms and conditions established by the Fed’s Board of Governors as an additional buffer against systemic risk. (b) The Fed should continue to assess payment, clearing and settlement infrastructures for their ability to cope with extreme liquidity stress and explore the introduction of a queuing and offsetting mechanism in the Fedwire Funds Service similar to those in other G10 countries’ large value payment systems. (c) Clearing and settlement infrastructures should enhance their risk management procedures by increasing the frequency of stress testing from monthly to weekly and strengthening liquidity back-up facilities. 5. Enhance crisis management, resolution, and systemic liquidity arrangements (a) Extend the special powers of the Federal Deposit Insurance Corporation (FDIC) to enable receivership or conservatorship of BHCs and systemically important financial firms (b) Review the funding arrangements for the Deposit Insurance Fund by removing the ceiling on the size of the fund and increasing its size.

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States, in the light of the EESA and the then-pending Financial Stability Act of 201014 (which later became the Dodd-Frank Act). The G20,15 the G3016 and other regulatory entities17 also issued their own recommendations for financial stability, all of which have not been effective.18 (c) Implement “living will” requirements for large and complex financial groups, and address group structures that appear likely to severely impede effective resolution. (d) Consider widening the range of counterparties and collateral used for open market operations (OMO) and articulating policies for future Fed lending to non-bank financial firms to enhance the scope and predictability of systemic liquidity provision. 6. Address too-big-to-fail issues and the future of the GSEs (a) Discourage size and complexity by subjecting systemic financial institutions to more stringent prudential requirements. (b) Provide regulators the authority to take preemptive actions when vulnerabilities build at potentially systemic financial firms. (c) Reform the housing GSEs, possibly by privatizing their retained asset portfolios and re-assigning responsibilities for social objectives/system support to an explicitly guaranteed public utility. 14  See: IMF (July 9, 2010). United States: Financial System Stability Assessment. http:// www.imf.org/external/pubs/ft/scr/2010/cr10247.pdf. 15  The G20 was created in 1999 and consisted of the following countries: Germany, India, Mexico, Russia, Saudi Arabia, South Korea, Turkey, the United Kingdom, Indonesia, Italy, Japan, Argentina, Australia, Brazil, Canada, China, France, South Africa and United States, the European Union and the European Central Bank. The United Nations, World Bank, International Monetary Fund (IMF) and Financial Stability Board (FSB) often attended G20 meetings. See: G20 (April 2, 2009). The Global Plan for Recovery and Reform—Final Communiqué, G20 London Summit, London, United Kingdom, 2 April 2009. Available at: http://www. g20.org/Documents/finalcommunique.pdf. See: Group of Thirty (2009). Financial Reform: A Framework for Financial Stability (Washington DC, Group of Thirty 2009). See: de Larosière J., et al. (2009). High Level Group on Financial Supervision in the EU: Report (Brussels, European Commission, 2009). See: Lord Turner (2009). The Turner Review: A Regulatory Response to the Global Banking Crisis (London, Financial Services Authority, 2009). 16  See: Group of Thirty (2009). Financial Reform: A Framework for Financial Stability (Washington, DC, Group of Thirty, 2009). 17  See: de Larosière J., et al. (2009). High Level Group on Financial Supervision in the EU: Report (Brussels, European Commission, 2009). See: Lord Turner (2009). The Turner Review: A Regulatory Response to the Global Banking Crisis (London, Financial Services Authority, 2009). 18  See: Arner D. & Taylor M. (June 2009). The Global Financial Crisis and the Financial Stability Board: Hardening the Soft Law of International Financial Regulation? AIIFL Working Paper No. 6, June 2009. Asian Institute of International Financial Law Faculty of Law, The University of Hong Kong. www.AIIFL.com. Available at: http://law.hku.hk/

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aiifl/documents/AIIFLWorkingPaper6June2009_000.pdf. Arner and Taylor (June 2009) state in part: “The FSB and the BIS currently serve the primary role in coordination of the process of standard-setting. As noted, the FSF was established under the auspices of a G7 mandate in February 1999, with a threefold purpose: (1) promote international financial stability; (2) improve the functioning of markets; and (3) reduce systemic risk through enhanced information exchange and international cooperation in financial market supervision and surveillance. The FSF, as originally constituted, included five different types of members: national authorities, international financial institutions, other international organizations, international financial organizations and committees of central bank experts… The FSF agreed upon twelve key standards areas (See http://www.financialstabilityboard.org/ cos/key_standards.htm)… Lord Turner provides the following recommendations: International coordination of bank supervision should be enhanced by: • The establishment and effective operation of colleges of supervisors for the largest complex and cross-border financial institutions. • The preemptive development of crisis coordination mechanisms and contingency plans between supervisors, central banks and finance ministries. … A recent report from the Group of Thirty is more expansive in setting out four specific issues for enhanced cooperation: National regulatory authorities and finance ministers are strongly encouraged to adapt and enhance existing mechanisms for international regulatory and supervisory coordination. The focus of needed enhancements should be to: (i) better coordinate oversight of the largest international banking organizations, with more timely and open information sharing, and greater clarity on home and host responsibilities, including in crisis management; (ii) move beyond coordinated rule making and standard setting to the identification and modification of material national differences in the application and enforcement of such standards; (iii) close regulatory gaps and raise standards, where needed, with respect to offshore banking centers; and (iv) develop the means for joint consideration of systemic risk concerns and the cyclicality implications of regulatory and supervisory policies. The appropriate agencies should strengthen their actions in member countries to promote implementation and enforcement of international standards. … Specifically, the FSB’s new mandate is to: • assess vulnerabilities affecting the financial system and identify and oversee action needed to address them; • promoting coordination and information exchange among authorities responsible for financial stability; • monitor and advise on market developments and their implications for regulatory policy; • advise on and monitor best practice in meeting regulatory standards;

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Hence, a new cadre of international administrative law is emerging.19

2.9   Some New Theories These new theories are also stated in, and are related to, the issues discussed in Chap. 6 of Vol. 2 of this book. 2.9.1  The Policy Contagion Theory See Chap. 6 of Vol. 2 of this book. 2.9.2  The Truncated Integration Theory Truncated Integration is a sub-set or variant of both Cross-Border Spillovers and Market Integration; and can explains financial-market and economic conditions in some developed countries and emerging Markets countries at various times during 2019–2021 and 2007–2013. . a major global or continental economic and political shock occurs; 1 2. politicians announce remedial actions (e.g. economic, fiscal and social welfare policies);

• undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps; • set guidelines for and support the establishment of supervisory colleges; • manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and Collaborate with the IMF to conduct Early Warning Exercises…. … The WTO provides the international framework for foreign participation in financial services. However, unlike areas such as trade in goods, in the area of financial services, commitments made by members are exclusive rather than inclusive. Therefore, liberalisation is at the discretion of individual WTO members and remains quite limited in most cases… The second major international institutional structure is that of the IMF…” See: Bertezzolo (2009), Meyer (2009), Hamann and Fabri (2008), Arner (2007) and Weber and Arner (2008). 19  See: Kingsbury (2009), Cassese (2005), Zaring (2008) and Barr and Miller (2006).

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3. around the world, financial, commodities, finished-goods and labor markets exhibit weak or moderate Cross-Border Spillovers and or Market Integration across countries; 4. financial markets and/or commodities markets and/or labor markets initially react negatively to such global or continental shock(s); 5. financial and commodities markets subsequently recover and start to rise again, and aggregate international trade volumes initially decline but subsequently recover and start to rise again for various reasons; 6. but such trends are limited or truncated by the following among other factors: (a) differences across countries in government implementations of financial/economic/social welfare policies; (b) differences in expectations among indigenes of countries; (c) differences in number, scope and policies of MNCs that are based in each country; (d) differences in the political structure of national governments and the distribution of power in both national and state governments in each country. 2.9.3  The Political Support Theory (or “Bifurcated Political Support Theory”) This theory can explain: a) economic conditions in some developed countries and emerging Markets countries during 2019–2021 and 2007–2013; b) failures of international coordination efforts for Risk Regulation; c) the effects of domestic politics on economic/financial dynamics. Political Support (a sub-set or variant of both Cross-Border Spillovers and Market Integration) occurs when (i) there has been a major global or continental economic and political shock; (ii) around the world, macroeconomic and microeconomic indicators deteriorate significantly; (iii) politicians announce remedial actions (e.g. economic, fiscal and social welfare policies); (iv) financial markets and/or commodities markets and/or labor markets initially react negatively to such global or continental shock(s); but financial and commodities markets in different countries subsequently recover and start to rise again simultaneously almost solely based on popular “Expectations” (about both political and

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economic issues/trends) and the perceived effectiveness and political implications of announced government policies and also the fear of politics-driven government reprisals (against market participants such as brokers)—Bifurcated Political Support occurs when the increases/ improvements in financial and commodities markets are non-uniform (in each country) across each of these three foregoing causal factors (i.e. shocks’ remedial actions by politicians; “Expectations”); and (v) aggregate international trade volumes initially decline but subsequently recover and start to rise again almost solely based on popular “Expectations” (of both political and economic trends/policies/reactions) and the perceived effectiveness of MNCs’ corporate policies (not government policies) and the political conditions in the major (i.e. top twenty national economies in the world) economies. 2.9.4  The Monetary-Fiscal Gap Theory The Monetary-Fiscal Gap (a sub-set or variant of both Cross-Border Spillovers and Market Integration) occurs when (i) there has been a major global or continental/regional economic and political shock; as a result and around the world, economic conditions deteriorate immediately and significantly; (ii) politicians in various countries announce and implement monetary, fiscal and social welfare policies but the implementation is often done without existence and or sufficient consideration of feedback loops (an example was the US government’s TARP program of 2008–2014); (iii) financial markets and/or commodities markets and/or labor markets initially react negatively to such global or continental shock(s); and financial and commodities markets in different countries subsequently recover and start to rise again simultaneously almost solely based on popular “Expectations” and the perceived effectiveness of announced government policies; (iv) financial-market (stocks; bonds; derivatives) volatilities are significant and are sometimes disconnected from (ie. don’t react to) the national government’s monetary/fiscal policies; (v) aggregate international trade volumes initially decline but subsequently recover and start to rise again almost solely based on popular “Expectations” about the reactions of households and MNCs to monetary and fiscal policies, and the “gap” between reality and monetary/fiscal policies (vi) in relatively many countries, the announcement and

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implementation of monetary policies and fiscal policies create almost opposite or conflicting effects (which may be time-varying) with respect to economic growth, social welfare Risk-Perception, Financial-Contagion, and so on. This theory can explain: a) economic conditions in some developed countries and emerging Markets countries during 2019–2021 and 2007–2013; b) failures of international coordination efforts for Risk Regulation.

2.10   Conclusion This chapter has provided new and perhaps long over-due redefinitions of Geopolitical Risk and Transition Economies. Social Networks and Social Capital are critical elements and channels of Geopolitical Risk and Cross-­ Border Spillovers. Unfortunately, most identification/prediction models of Cross-Border Spillover and Cross-Border Market Integration are grossly mis-specified and focus on the results and not the causes of both phenomena. Although the 2010–2020 G20/G30 Recommendations were the foundations for most Financial Reform statutes in many countries, they appeared to have signaled a change in financial/economic power and Geopolitical Influence among the Super-Power nations (i.e. the United States, China, Russia, United Kingdom, the EU, Japan and India). However, the subsequent financial reforms such as the Dodd-Frank Act (United States) and EMIR (EU) have not generated sustainable growth and have not been able to prevent or adequately manage subsequent economic/financial crises such as the EU Sovereign Debt Crisis, the COVID-19-related economic crisis, the effects of global Trade Wars (2017–2021) and so on, all of which have social-welfare, Inequality, political and psychological dimensions.

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CHAPTER 3

Some Constitutional Law, Competition Law and Economic Psychology Issues Inherent in Some Real Estate Market Mechanisms

Under Common-Law principles, Multiple Listing Service (MLS), Real Estate Websites (and associated statutes/regulations; collectively, “REWs”) and Rent-Control and Rent-Stabilization (RCRS) statutes in many countries are or may be unconstitutional and can significantly affect the transmission of monetary policy and fiscal policies, and may have affected the rapid changes in housing prices and housing demand that occurred in the United States and other countries between 1995 and 2020. There is an increasing and symbiotic relationship between the unconstitutionality and anti-competition effects of MLS, REWs and RCRS on the one hand and systemic risk and financial stability on the other. MLS, REWs and RCRS are fintech systems and can have substantial effects on consumer behavior, risk-perception and regulatory responses in credit and asset markets, which in turn, can precipitate structural changes in the financial services, real estate and retailing industries. Hence, all existing housing-demand models and housing price forecast models are grossly mis-specified primarily because they do not incorporate these foregoing legal and fintech factors and associated economic effects. This chapter uses US statutes and case law to analyze issues, but the principles and conclusions are also applicable in most common-law and Commonwealth countries and in the seventy-plus countries whose

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_3

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constitutions are similar to the US Constitution. See: Law & Versteeg (2012). The United States has the largest or second-largest economy and one of the most developed legal systems in the world. Analysis of incentives and Institutional Economics has been largely defined by formal models and cost-benefit analysis, which collectively have not solved many modern problems inherent in institutions. Milberg and Spiegler (2009) explain how this traditional approach to Institutional Economics has been insufficient and state that there is more explanatory power in “quasi-models” which are a vaguer, nuanced and narrative version of the formal models of Institutional Economics. In economics, law and psychology, analysis of institutional dynamics often does not include constitutional economics. Analysis of systemic risk and financial stability has often ignored constitutional political economy.

3.1   Existing Literature The existing literature has not addressed the constitutional economics problems inherent in some market mechanisms in the global real estate industry such as MLS, REWs and RCRS statutes. However, the literature on constitutionality in general and Constitutional Torts1 is well developed. MLS, REWs and RCRS2

1  On the analysis of constitutionality in general, and Constitutional Torts, see the following materials: Bardsley and Sausgruber (2005); Zaring (2008); Preis (2008); Rosenthal (2007); Park (2003); Bell and Parchomovsky (2001a); Bell and Parchomovsky (2001b); Bell and Parchomovsky (2005); Myerson (2000); Blankart and Koester (2007); Eicher and GarciaPenalosa (2006); and Persson and Tabellini (2005). 2  See: Qian, McQuade and Diamond (2019). See: Pereira, I. (11 January 2015). “Battle looms over NYC rent stabilization law”. Newsday. https://www.amny.com/news/nyc-rent-stabilization-a-battle-looms-1.9796335. See: Weiner, A. (12 December 2014). “Losing Control – D.C.’s rent control laws are supposed to keep housing affordable. So how do landlords keep getting around them?” Washington City Paper. https://www.washingtoncitypaper.com/news/article/13046333/ losing-control-dcs-rent-control-laws-are-supposed-to-keep. See: Cutler, K. (14 April 2014). “How Burrowing Owls Lead To Vomiting Anarchists (Or San Francisco’s Housing Crisis Explained)”. TechCrunch. https://techcrunch. com/2014/04/14/sf-housing/. See: Bergman, B. (12 September 2014). “LA Rent: Has rent control been successful in Los Angeles?”. Southern California Public Radio. https://www.scpr.org/news/2014/ 09/12/45988/la-rent-has-rent-control-been-successful-in-los-an/.

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are intricately intertwined with Inequality,3 Labor dynamics4 and sustainable economic growth5 (real estate and housing “are the economy” in many developed and developing countries). On rent control in Emerging Markets countries, and reforms of rent control around the world, see: Zhou & Ronald (2017), Kettunen & Ruonavaara (2020), Allen (2006), and Deschermeier, Haas, Hude & Voigtländer (2016). On other Housing Market issues, see Kettunen (2018), Dewilde & De Decker (2016), Oust (2018), Soaita & Dewilde (2019) and Zimmer (2017). On MLS, REWs, real estate markets and government interventions (in real estate markets) in the context of COVID-19, see: Balemi, Füss & Weigand (2021), Ling, Wang & Zhou (2020), Liu & Su (2020), D’Lima, Lopez & Pradhan (2020), D’Lima & Thibodeau (2020), Bhoj (2020), and Agrawal, Ambrose, Lopez & Xiao (2020). On “Social Infrastructure”, see Vanberg (2011) and Eicher et al. (2018).

See: Ingber, S. (27 February 2019). “Oregon Set To Pass The First Statewide Rent Control Bill”. NPR. org. https://www.npr.org/2019/02/27/698509957/oregon-set-to-passthe-first-statewide-rent-control-bill. See: Murphy, K. (2 November 2017). “Rent-control policy ‘likely fueled the gentrification of San Francisco,’ study finds – As California debates rent caps, economists offer a cautionary note”. The San Jose Mercury News. https://www.mercurynews.com/2017/11/02/ rent-control-policy-likely-fueled-the-gentrification-of-san-francisco-study-finds/. See: Delgadillo, N. (14 February 2018). “Does Rent Control Do More Harm Than Good? – A New Study Suggests That Policies Meant To Keep Rents Down Actually Jack Them Up Overall, Reduce The Rental Stock And Fuel Gentrification”. http://www.governing.com/topics/urban/gov-landlordsrent-control-stanford.html. See: Misra, T. (29 January 2018). “Rent Control: a Reckoning”. CityLab. https://www. citylab.com/equity/2018/01/rent-control-a-reckoning/551168/. 3  See: Bampinas et  al. (2017); Carpantier et  al. (2018); Hyötyläinen and Haila (2018); Modai-Snir and Van Ham (2018); Lukas and López-Morales (2018); De Stefani (2020); Coulson and Tang (2013); Almås and Kjelsrud (2017); Zhao and Ge (2014); Johnson (2014); Chen (2018); Ost (2014); Seko and Sumita (2007); Horn and Merante (2017); Hartmann et al. (2017); Johnson (2012); Hyde et al. (2015). 4  See: Johnson (2014); Jansson (2017); Courchane et al. (2015); Hyde et al. (2015); Jacob (2011); MacDonald (2013); Rougoor and Van Marrewijk (2015). 5  See: Nwogugu (2005a, b); Nwogugu (2012); Nwogugu (2017); Rougoor and Van Marrewijk (2015); Kauppinen and Vilkama (2016); Monnet and Wolf (2017).

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3.2   Geopolitical Risk and Some Economic Psychology6 and Cross-Border Spillover Effects of MLS, REWs and Rent-Control/ Rent-Stabilization Statutes The significant literature on Social Networks, Social Capital and Cross-­Border Spillover Effects is discussed in Chap. 1 of this book. MLS, REWs and RentControl/Rent-Stabilization (RCRS) are major Geopolitical Risk factors and cause cross-border Spillover Effects because of the following reasons: (1) While most MLS are for residential real estate, there are commercial real estate MLS such as Costar (http://www.costar.com/), 42Floors (https://42floors.com/) and Officespace (https:// www.officespace.com/) in the United States. There are also commercial REWs such as loopnet.com. Some residential REWs also display information/web-pages/links about commercial mortgage loans and commercial real estate. (2) Many foreign investors and out-of-state investors now actively invest in “foreign” real estate markets and mortgage markets through many types of vehicles and strategies. (3) MLS and REWs are used as marketing tools to lure foreign investors and out-of-state investors (e.g. invest in real estate and mortgages). Thus, MLS and REWs affect International Capital Flows. (4) The imposition or elimination of Rent Controls by state, local or federal governments has significant effects on the investment returns and monitoring costs of foreign investors and out-of-state investors. (5) In many developed and developing countries, many or most first-­ generation immigrants live in Rent-Controlled/Rent-Stabilized apartments or houses. In some instances, landlords intentionally refuse to comply with local/municipal ordinances partly because of the cost-benefit of such compliance and to remove RCRS tenants (in order to return the housing units to “market-rate” rents). Thus, changes to RCRS statutes/regulations and landlords’ compliance 6  On associated Economic Psychology and Behavioral IPE (International Political Economy) issues, see: Hardardottir (2017); Paradiso et al. (2014); Birz (2017); Dixon et al. (2014); Ochsen and  Welsch (2012); Qian et  al. (2019); Debelle (2004); Schniter et  al. (2020); Garcia et al. (2020); Bavetta et al. (2020); Torgler and Schneider (2009); Nguyen and Claus (2013); Haferkamp et al. (2009); Banker et al. (2020); and Blaufus et al. (2019).

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with RCRS statutes have direct effects on income/savings and well-­ being of immigrants, remittances to Emerging Market countries, investments/FDI/FI in Emerging Market Countries, Consumer Confidence, Business Confidence, consumer expenditures and corporate expenditures (both of which usually affect exports from Emerging Market countries), government revenues (which affects Foreign Aid and FDI in Emerging Market Countries) and so on. (6) MLS, REWs and RCRS are major investment criteria for both foreign investors and out-of-state domestic investors. Thus MLS, REWs and Rent Control invariably affect International Capital Flows and risk perceptions. (7) MLS, REWs and Rent Control can have significant negative social, antitrust, economic, psychological, political and environmental consequences. On antitrust problems, see Nwogugu (2008). (8) Some REWs are regulated and Rent Control consists of regulations, and there are significant differences in compliance rates around the world and even within countries. (9) Foreign companies and domestic companies respond differently to MLS, REWs and Rent Control across countries. (10) There are significant differences in MLS, REWs and Rent Control around the world and that is sometimes a function of the existing political system, Federalism and Preemption Doctrines in each country. (11) There can be different rates of economic growth and sustainability improvement (among countries and among states within a country) based solely on MLS, REWs and Rent Control in each country. (12) In many developed and developing countries, Property Taxes account for more than 30% of the annual revenues of most local governments (and that is driven by MLS, REWs and Rent Control) and thus affect the provision of infrastructure and basic services by local governments, and also affect the credit ratings of municipal bonds. In the United States, municipal bonds are usually tax free to many types of investors and also attract foreign investors. (13) The impact of MLS, REWs and Rent Control on infrastructure and critical systems varies dramatically around the world and is sometimes a function of the existing political system in the country. (14) There are or there can be significant differences in the reactions of stock, bond, currency and commodity markets to MLS, REWs and Rent Control in various countries.

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(15) In many common-law democratic countries, MLS, REWs and Rent Control are highly contentious issues in political elections and affect election outcomes at the state and local levels. An example is the debates and lawsuits about the structure, functions and rights of MLS, REWs and Rent Control systems in the United States during 1980–2020. These uncertainties affect global capital markets and allocation of capital to emerging market countries. (16) In many countries, state and local governments have the right to unilaterally and arbitrarily shut down MLS, REWs and Rent Controls, which in turn affects local economies and the relocation, site selection and real estate lease-renewal decisions of companies and government agencies. These uncertainties affect global capital markets and allocation of capital to emerging market countries. (17) Only the fear, uncertainty and anxiety caused by the prospects of changes in the structure of, functions of or applicable statutes for MLS, REWs and Rent Control are sufficient to crash commercial real estate values, municipal bond prices/markets and exchange rates. These uncertainties affect global capital markets and allocation of capital to emerging market countries. (18) During Epidemics and other Crises, state and/or federal governments can choose to freeze real estate contracts and business contracts and shut down REWs and MLS—which, in the case of real estate, will terminate monthly rents, make it more difficult to recruit tenants and make real estate ownership unaffordable for both domestic and foreign investors. Such uncertainties affect global capital markets and allocation of capital to emerging market countries. (19) MLS and REWs are fintech systems that are widely used in the global real estate industry and by both domestic and international players—and thus they are also critical policy transmission channels that have financial stability and systemic risk implications, which, in turn, affects global capital markets and allocation of capital to emerging market countries. (20) MLS and REWs have become important global financial intermediation/disintermediation mechanisms (i.e. disintermediation of traditional banks and real estate brokers)—they offer links to nonbank mortgage bankers and finance companies. In many developed countries like the USA, although the majority of homebuyers find homes online, they still use real estate brokers to close the transactions.

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(21) In most countries that have them, the introduction and evolution of MLS, REWs and RCRS were, or precipitated structural changes7 (in the real estate, retailing and financial services industries and related industries). The structural changes, financial instability and rapid price increases/decreases that occurred in housing markets in the United States and other countries during 1995–2020 created some important legal issues and were partly the product of legal issues. The Global Financial Crisis of 2007–2014 originated from the US real estate industry was a major structural change propagated by REWs and MLS, and has highlighted the need for the re-evaluation and restructuring of incentives, regulation, traditional institutions and analysis of institutions. (22) The unconstitutionality of MLS, RCRS and REW licensing requirements has significant implications for competition and antitrust policy in the global real estate markets, mortgage markets and capital markets, and vice versa. (23) The unconstitutionality of MLS, REW licensing and/or RCRS can create deadweight losses in the demand and supply of real estate and/or legal enforcement. (24) MLS and REWs amplify the demand for, and volumes of, consumer debt around the world (both for domestic residents and for foreigners—real estate is increasingly international in scope), and 7  See: “The Economics Of Residential Real Estate Brokerage”. Book Chapter in Arbuckle, G. & Bartel, H., eds. (2004), “Readings in Canadian Real Estate” (Captus Press). See: Stone, B. (July 29, 2014). “Hear Here”. San Francisco Chronicle (US newspaper). h t t p : / / w w w. p r e s s r e a d e r. c o m / u s a / s a n - f r a n c i s c o - c h r o n i c l e / 2 0 1 4 0 7 2 9 / 282097749840262. See: Wright, A. & Gilliland, C. (Jan. 1989). Analysis of Structural Changes in the Texas Housing Market. (texashistory.unt.edu/ark:/67531/metapth654209/m1/5/). University of North Texas Libraries. See: Stone, B. (March 7, 2013). Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers. Bloomberg. https://www.bloomberg.com/news/articles/2013-03-07/ why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers. Source: https://www.bloomberg.com/news/articles/2013-03-07/why-redfin-zillowand-trulia-havent-killed-off-real-estate-brokers.

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the negative psychological, social and economic effects of consumer debt are well documented in the literature. The rapid increases in the volume of consumer debt around the world have macroeconomic implications and also affect economic growth, worker productivity, consumer confidence, business confidence, risk-perception, the cost of capital of firms. A significant portion of such debt is caused by, or originated through, MLS and REWs. See Meen (2011) and Debelle (2004). (25) MLS, REWs and RCRS directly and indirectly affect the volumes of worldwide construction activity (e.g. Construction Starts, the sales/purchases of real estate and mortgage financings, and conversions of RCRS properties to market-rate properties). In many developed and developing countries, the construction industry employs relatively many immigrants and also imports large volumes of construction materials and home furnishings from Emerging Market countries. Thus, changes in MLS, REWs and RCRS directly and indirectly affect immigrants’ income/savings/well-being, remittances to Emerging Market countries, immigrants’ investments in Emerging Market countries, Consumer Confidence, Business Confidence, consumer and corporate expenditures, trade balances, FDI/FI/Foreign Aid, government tax revenues and so on, in both foreign countries and Emerging Market countries. (26) MLS, REWs and RCRS directly and indirectly affect the volumes of retail trade, restaurants, hotels, business services, repairs/maintenance, healthcare/home-care services and other businesses that employ relatively large numbers of immigrants in many countries (and/or import substantial volumes of goods from Emerging Market countries). Thus, changes in MLS, REWs and RCRS directly and indirectly affect immigrants’ income/savings/well-being, remittances to Emerging Market countries, immigrants’ investments in Emerging Market countries, Consumer Confidence, Business Confidence, consumer and corporate expenditures, trade balances, ­FDI/FI/Foreign Aid, government tax revenues and so on, in both foreign countries and Emerging Market countries. (27) Real estate is an increasingly important component of nations’ GDP, the global services industry and global banking assets (in some countries, “housing is the economy”). The significant and

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increasing amounts of real estate debt, increased government intervention in real estate markets and increased urbanization in many countries (during 2000–2021) were or could have been amplified by MLS and REWs, and remain major unresolved policy issues. (28) MLS, REWs and RCRS and their associated Social Networks and Social Capital dynamics have or can have significant effects on government tax policies, perceived Tax Equity, Tax Sensitivity and Tax Compliance (by individuals and companies), all of which can affect savings/investments, remittances (to emerging Markets), loan volumes (to Emerging Markets), FDI/Foreign Investment/Foreign Aid, Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, Government Expenditures, Risk Perception and so on. (29) Some associations that sponsor or manage or regulate MLS and REWs, such as NAR (the National Association of Realtors in the United States), have been investigated or sued in court by government antitrust regulators and others for antitrust8 misconduct. See Nwogugu (2008).

8  See: “DOJ Files Antitrust Case & Simultaneous Settlement With The National Association of Realtors”. CPI. November 19, 2020. https://www.competitionpolicyinternational.com/ doj-files-antitrust-case-simultaneous-settlement-with-the-national-association-of-realtors/. This article stated in part: “The Department of Justice today filed a civil lawsuit against the National Association of REALTORS® (NAR) alleging that NAR established and enforced illegal restraints on the ways that REALTORS® compete. The Antitrust Division simultaneously filed a proposed settlement that requires NAR to repeal and modify its rules to provide greater transparency to home buyers about the commissions of brokers representing home buyers (buyer brokers), cease misrepresenting that buyer broker services are free, eliminate rules that prohibit filtering MLS listings based on the level of buyer broker commissions, and change its rules and policy which limit access to lockboxes to only NAR-affiliated real estate brokers. If approved, the settlement will enhance competition in the real estate market, resulting in more choice and better service for consumers. ‘Buying a home is one of life’s biggest and most important financial decisions,’ said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division. ‘Home buyers and sellers should be aware of all the broker fees they are paying. Today’s settlement prevents traditional brokers from impeding competition—including by internet-based methods of home buying and selling—by providing greater transparency to consumers about broker fees. This will increase price competition among brokers and lead to better quality of services for American home buyers and sellers.’”

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3.3   Complex Systems, Complexity and the Rule of Law;9 And MLS and RCRS as Quasi-Labor Regulation The complexity pertaining to these issues is or can be manifested in the following ways: ( 1) Nonlinearity in relation to rule-of-law development (2) Self-organization of institutions and organizations, and enforcement of laws by both private entities and public entities (3) Change and theories of change (4) Nonlinearity in relation to deadweight loses in the demand for, and enforcement of, laws (5) Nonlinearity in relation to compliance with statutes and enforcement of laws (6) Complex networks (7) Network effects and the associated growth-and-evolution effects (on the mechanism/system and the users and their usage patterns) The legal and economic environment in which MLS, RCRS and REWs function (defined by MLS, REWs, RCRS, organizations, regulations, regulators, financial institutions, real estate brokers, customers, Internet systems etc.) is a complex adaptive system because it has some or all of the following attributes: (1) The relations between the system and its environment are nontrivial and/or nonlinear. (2) The system can be influenced by, or can adapt itself to, its environment. (3) The system has feedback or memory and can adapt itself according to its history or feedback. (4) The system is highly sensitive to initial conditions. (5) The number of parts (and types of parts) in the system and the number of relations between the parts are non-trivial.

9  See: Andrews et al. (2017); Byrne and Callaghan (2014); Bamberger et al. (2016); Room (2011); Kirman (2016); Salzano and Colander (2007); OECD (2016); Finch, ed. (2013); Durlauf (2012); Bayoumi et al. (2016); Kuhlman and Mortveit (2014); Melnik et al. (2013); Miklashevich (2003); Perc et  al. (2013); Post and  Eisen (2000); Cooper (2011); Datz (2013); Sherblom (2017); Tse et al. (2016); Gates (2016); and Bardoscia et al. (2017).

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In many countries (such as the United States, Canada and the United Kingdom), MLS, RCRS and Professional Licensing for REWs function as quasi-Labor Regulation because: (1) MLS, RCRS and REW Professional Licensing can affect Tax Compliance, labor mobility and individuals’ perceptions of the regional/national economy, Labor Markets and tax equity. (2) MLS, RCRS and REW Professional Licensing directly affect real estate brokers’ (and affiliated/ancillary workers’) working conditions. (3) MLS, RCRS and REW Professional Licensing can affect workers’ rights, compensation-structure and litigation options—including the rights of brokers and ancillary workers such as lawyers, appraisers and insurance agents. (4) MLS, RCRS and REW Professional Licensing can affect employers’ exposure to labor costs (such as employee salaries/commissions, employee taxes and social security taxes). (5) MLS, RCRS and REW Professional Licensing can affect labor unions and the collective bargaining processes in the real estate (MLS and RCRS) and construction (RCRS) industries. (6) In most countries that have them, MLS are created and maintained by real estate trade associations (via collective bargaining) such as the NAR in the United States, subject to applicable statutes/regulations that govern MLS. The National Association of REALTORS® (NAR) is America’s largest trade association and had more than 1.4 million members during 2021. These trade associations dictate working conditions for real estate brokers such as brokerage commissions, fees, licensing requirements and practice standards. These trade associations also act as Collective Bargaining units in lawsuits and negotiations with government agencies.10 Thus, some of these trade associations are effectively Labor Unions. 10  See: People vs. National Association of Realtors [Civ. No. 18380. Court of Appeals of California, Fourth Appellate District, Division One. June 16, 1981]. (“For 20 years San Diego Board of Realtors (SDBR) with the approval of the California Association of Realtors (CAR) and the National Association of Realtors (NAR) (collectively: the “Associations”) openly encouraged its members to maintain uniform commission rates on residential sales (generally 6 percent) and a standard percentage at which to split sales commissions between listing and selling brokers (generally 50/50) within the greater San Diego market. The rates were originally set by an express agreement among members of the SDBR, the La Mesa Board of Realtors and the El Cajon Board of Realtors (all presently combined in a multiple

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(7) MLS, REWs and RCRS affect the allocation of labor resources across industries and industry sectors. (8) Professional Licensing of Real Estate Websites (REWs) is a significant Labor Regulation issue because it controls working conditions and, ultimately, compensation terms for the thousands of REWs (and associated professionals) that operate in various countries. Such REWs often perform brokerage/intermediary and referral functions ­(brokerage of real estate, mortgages, insurance policies etc., and referrals of lawyers, appraisers, accountants etc.). listing service.) SDBR publicized the uniform rate to its membership, consisting of competing real estate brokers and salespersons. After similar actions were held to violate federal antitrust laws (Sherman Act), the associations each adopted an official ‘hands off’ policy [120 Cal. App. 3d 466] regarding the fixing of commission rates by their members. NAR formally adopted such a policy in November 1971 and SDBR soon followed suit.…”) See: Moehrl vs. National Association of Realtors, et al. (2020; United States District Court for the Northern District of Illinois; USA). (“Plaintiffs allege that Defendants’ conspiracy has centered around NAR’s adoption and implementation of a mandatory rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the ‘Buyer Broker Commission Rule’) when listing a property on a MLS.  Most MLSs (including all MLSs at issue in this case) are controlled by local NAR associations, and access to such MLSs is conditioned on brokers following all mandatory rules set forth in NAR’s Handbook on Multiple Listing Policy, including the Buyer Broker Commission Rule….”) See: “REALTORS®’ CEO Meets U.S.  Labor Secretary on Association Health Plans”. October 31, 2019. (“National Association of REALTORS® CEO Bob Goldberg was among a handful of trade association representatives invited to meet with U.S. Department of Labor Secretary Eugene Scalia on Wednesday. Goldberg was selected to speak on behalf of America’s REALTORS® working as independent contractors during a conversation focused on association health plans and the department’s new association retirement plan rule. The meeting came just two months after real estate industry executives—including Goldberg—met with acting Labor Secretary Patrick Pizzella to discuss the direction of the department under new leadership. The department continues to rely on input from the real estate industry in the fight to protect its AHP rule, particularly as it looks to continue defending a legal challenge brought by a dozen state attorneys general. ‘NAR has spent the past decade advocating for reform of health insurance markets that provide coverage to the self-employed and to small employers. These efforts have only intensified as nearly a quarter-million REALTORS® remain unable to secure affordable coverage in expensive individual ACA markets,’ Goldberg said following Wednesday’s meeting. NAR filed an amicus brief, a legal document filed by nonlitigants who have a strong interest in the subject matter, in defense of the department’s lower court appeal in early June. More than 200 state and local REALTOR® associations supported NAR’s opinion. ‘A reversal of the lawsuit challenging AHPs will ensure REALTORS® and their families can begin accessing these critical and potentially life-saving health insurance options,’ Goldberg continued….”) See: “Realtor group settles with DOJ in effort to make broker fees clearer to home buyers”. By Anna Bahney, CNN Business. November 20, 2020. https://edition.cnn.com/2020/11/20/ success/national-association-of-realtors-doj-settlement/index.html.

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On associated Economic Psychology and IPE issues, see the comments in Haferkamp et al. (2009), Ochsen and Welsch (2012), Debelle (2004), Garcia et al. (2020), Bavetta et al. (2020), Vanberg (2011), Eicher et al. (2018) and Torgler and Schneider (2009).

3.4   The Failure of Mechanism Design Theories See the critique of mechanism design theory in Nwogugu (2012: 13–16). Rent-Control/Rent-Stabilization (RCRS) laws are market mechanisms and, during 2000–2020, were moderating factors in some housing markets, but some landlords got around these laws, and some cities renewed/ extended rent control laws. During 2000–2020, and in an environment of rapidly rising rents and prices, rent control became a type of Regulatory Takings. In most countries, RCRS is an allocation mechanism developed by state and local governments to (a) provide affordable housing to low-­ income persons/families and (b) influence prices and rents in real estate housing markets. RCRS is evidence that the traditional Mechanism Design Theory is inaccurate: (1) Not all eligible persons participate in RCRS, and in some instances, any one person who participates is affiliated with two to four other potential qualified participants. (2) Many participants do not, and cannot, reveal their true preferences. (3) Even where participants can and do reveal their true preferences, the RCRS mechanism does not incorporate or consider such preferences, and the output/decision rules of the RCRS mechanism are largely determined by other factors such as political considerations, budget considerations and capital market conditions. (4) The decision processes and participation strategies of each participant are heavily influenced by other persons, and their participation strategies cannot accurately be represented solely by their “actions” and “preferences”. (5) RCRS is unconstitutional. The traditional Mechanism Design theory does not incorporate regulatory considerations sufficiently. The two traditional measures of systemic risk are as follows: (1) The Interconnection Tests—which measure the likelihood, and negative impact on the economy, of an institution’s inability to conduct its usual operations. These Systemic Risk measures assess not

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only the entity’s products and services, but also the economic multiplier effect on other companies/entities. MLS, REWs and RCRS laws increase interconnection in real estate markets. ( 2) The Too-Big-to-Fail tests—which measure the market share or market dominance of a firm, relative to the national or international markets, and within the context of barriers to entry in the industry segment. MLS and REWs substantially increase the market impact of property brokerage firms—and note that such impact also includes and affects mortgage brokers, lawyers and insurance brokers, all of whom are usually recommended by the property broker. These two tests have been applied by governments of many countries when formulating economic policies and regulations to curb or manage system risk. The results so far show that these classes of tests are inaccurate and ineffective in identifying, defining and/or controlling systemic risk.

3.5   Networks and the Network Effects of MLS, REWs and RCRS It is conjectured here that MLS, REWs and RCRS have created Network Effects. REWs have created regional and national networks (i.e. brokers, buyers/sellers, renters, lawyers, insurance agents, regulators, banks, finance companies, insurers) that have significantly increased the psychological, political and social interconnectedness (collectively, “Virtual Interconnectedness”). MLS systems have created Network Effects in the global financial services industry, in financial systems and in real estate markets. See Ahdieh (2003) and Awrey (2014). RCRS has also created Network Effects in local and regional real estate markets—that is, the more people that use RCRS, the higher the value of RCRS to some of them, and the more they depend on RCRS. See Ahdieh (2003) and Awrey (2014). Such network effects are sometimes negative because they increase the probability of abandonment of properties and the resulting price declines across regional real estate markets. Such network effects also decrease Financial Stability because they increase the probability of declines in real estate prices. In most developed countries and some developing countries (such as China and Singapore), during 2000–2014, a large percentage of rural and suburban dwellers moved to

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large cities—which has increased the apparent need for RCRS but many such people live in slums and sub-standard housing—see Fig. 3.1. Many authors have criticized RCRS:11

Fig. 3.1  Changes in housing in China (1980–2018)

11  See: “What Are the Effects of Rent Control?”. http://homeguides.sfgate.com/effects-­ rent-­control-8380.html. See: “The High Cost of Rent Control”. National Multifamily Housing Council, USA. http:// www.nmhc.org/News/The-High-Cost-of-Rent-Control/. See: Goetze, R. (1994). Rent Control: Affordable Housing for the Privileged, Not the Poor. Report prepared for the Small Property Owners Association of Cambridge, 1994. See: Ault, R., et al. (1994).

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(1) Rent controls can result in a decrease in the supply of housing units. (2) In California, United States, a state law called the Ellis Act allows landlords to go out of the rental business, either permanently or up to at least five years, which enables them to completely avoid rent control by converting apartments into TICs (tenants in common units), or to vacate their buildings for a period of five years and then put the building back into the market with market-rate rents. (3) Rent-controlled housing is often maintained at a lower quality than it would have been had the units not been subject to rent control. (4) RCRS usually increases abandonment of buildings by landlords. (5) In most cities, RCRS only applies to buildings of certain types, locations or date of construction and not to specific people (within specific income, wealth or age brackets), and thus RCRS is inefficient and its benefits accrue unevenly across the tenant population (henceforth, the “RCRS Efficiency Gap”). (6) RCRS reduces Property Tax Revenues. (7) The administrative costs of RCRS are significant. (8) RCRS reduces Consumer Mobility. (9) In most large cities, the costs of consumer entry into RCRS units can be high—consumers usually have to wait for years to qualify or to be notified of vaccines; and some have to pay formal fees and “bribes” to access RCRS units. (10) The costs of rent control fall disproportionately on the poor—these costs include a decline in the quality of existing rental housing and substantially reduced access to new housing, and sometimes reduced government allocations to social services for the poor. There is empirical evidence that higher-income households (not the poor) are the principal beneficiaries of most rent control laws. (11) RCRS increases Housing Discrimination. (12) According to CMHC data, in some cases in Canada, rents in cities with rent control actually went up more than in non-rent-controlled cities—for example, during 2008–2010, average two-bedroom rents in cities without rent control (such as St. John’s, Halifax, See: Davidson, A. (July 23, 2013). The Perverse Effects of Rent Regulation. New  York Times. http://www.nytimes.com/2013/07/28/magazine/the-perverse-effects-of-rentregulation.html.

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Regina, Edmonton and Calgary in Canada) increased a total of 4% over the two-year period, whereas in Toronto and Ottawa (Canada), rents in similar units increased by almost 6% over the same period. (13) In some cities, RCRS has created a permanent under-class that has low geographical mobility and has few incentives for upward mobility. Kingston and Caballero compared various theories of institutional change in terms of causes, process and outcomes of institutional change, habit, learning and bounded rationality, and institutional inertia and path-dependence.

3.6   The Substantial Control Theory The National Association of Realtors (NAR) is a national organization in the United States that wields substantial control over real estate brokers in the United States. In Canada, the CREA has similar control. In North America, (1) an MLS may be owned and operated by a real estate company, by a county or a regional real estate board of realtors or association of realtors, or by a trade association; (2) the MLS systems are governed by private entities and there is no state or federal oversight except for individual state real estate regulations/rules; (3) MLS systems are subject to nationwide rules created by the NAR or the CREA; but MLS set their own rules for membership, access and sharing of information; (4) membership of the MLS is not required for the practice of real estate brokerage, but NAR and CREA members must participate in their local MLS. Thus, the NAR and the CREA both have “federal-government type” power and control over real estate brokerage and brokers, and such power is essentially the same as government control and/or “state action” required to prove violations of the US Constitution. Hence, a new doctrine of constitutional analysis named the “Substantial Control Theory” is introduced here. The elements of the Substantial Control doctrine are as follows: (1) a private entity, (2) a national, international, local or state organization, (3) market participants that are not affiliated with this organization will find it difficult but not impossible to conduct business in the industry, (4) the rules of the organization are binding on its members and or on the general public, and (5) the rules of the organization are implicitly or explicitly sanctioned by and are often adopted by federal, state or local governments. The Substantial Control Theory is a viable alternative to

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the State Action12 requirement of constitutional law and is different from the Substantial Inducement Theory (an alternative to the state action requirement), which was introduced in Nwogugu (2012),13 and the Substitution Theory (an alternative to the state action requirement), which was also introduced in Nwogugu (2012).14

3.7   The Unconstitutionality of the Multiple Listing Service (MLS) The constitutional law issues discussed in this section affect or indirectly affect the following in real estate markets and mortgage markets: information production, cost of funds, transaction volumes, information asymmetry, risk sharing and allocation efficiency, disintermediation, transparency and agency conflicts. Typically, the MLS lists virtually all homes in its trade area that are for sale through a participating broker and thus serves as a comprehensive compilation of listings.15 The configuration of MLS systems has evolved from a printed MLS book (1920s) to faxed MLS listings to the Internet-­ based MLS systems of today. Brokers have introduced Virtual Office Web Sites (VOWs) for use by clients seeking information. There are at least 850 MLS systems in the United States. The birth of the web-based MLS systems created a new business model: discount real estate brokers who gave their clients password-protected access to the local MLS on the Internet. Web-based brokers encourage home buyers to research homes on the Internet, and this reduces agents’ workloads, resulting in lower commissions paid by buyers. On September 8, 2005, the NAR announced a set of rules called “Internet Listing Display”, or ILD. Unlike a previously proposed rule, the ILD policy does not let brokers selectively withhold listings from competitors they dislike, but it allows brokers to withhold 12  See: Evans vs. Newton, 382 U.S. 296 (1966; US Supreme Court). See: Evans vs. Abney, 396 US 435 (1970; US Supreme Court). See: Burton vs. Wilmington, 365 U.S. 715 (US Supreme Court). See: Moose Lodge vs. Irvis, 407 U.S. 163 (1972; US Supreme Court). See: Edmonson vs. Leesville Concrete, 500 US 614 (1991; US Supreme Court). See: Marsh vs. Alabama, 326 U.S. 501 (1946; US Supreme Court). See: Screws vs. US, 325 U.S. 91 (1945; US Supreme Court). See: Ellman (2001), Gardbaum (2003), Tushnet (2003) and Gardbaum (2006). 13  See: Nwogugu (2012: 9). 14  See: Nwogugu (2012: 198). 15  See: Wu and Colwell (1986).

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listings from all rivals’ websites. This rule, called “blanket opt-out”, had been in effect for three years, without any investigation by the US Justice Department. But the ILD policy also allows sellers to “selectively optin”—even when a broker uses the blanket opt-out, a seller can ask to have a home listed on competitors’ websites. The National Association of Realtors (United States) has set policies that permit brokers to show limited MLS information on their websites under a system known as IDX (Internet Data Exchange). The NAR has an ownership interest in Move Inc., the company which operates a website that has been given exclusive rights to display significant MLS information. In September 2005, the US Department of Justice filed an antitrust lawsuit against the NAR for (1) the NAR’s policy that allowed brokers to restrict access to their MLS information from appearing on the websites of certain brokers that operate solely on the web (this policy applied to commercial entities that are also licensed brokerages, such as HomeGain, which solicit clients by Internet advertising and then provide referrals to local agents in return for a fee of 25–35% of the commission); and (2) the NAR rules that exclude certain kinds of brokers from membership in MLS.  The case was settled in May 2008, with the NAR agreeing that Internet brokerages would be given access to all the same listings as traditional brokerages. 3.7.1  Real Estate Transactions and the Commerce Clause16 of the US Constitution In many instances, real estate transactions and transactions in MLS involve interstate commerce—any two parties among the lender, buyer, seller,  See: Tate (1990); Hellerstein (June 1996), Larbalestier (1990), Merrill (2000) and Sedler (1985). See: Dennis v. Higgins, 498 U.S. 439, 447–450 (1991; US Supreme Court); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 280 (1978; US Supreme Court); Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985; US Supreme Court); Oregon Waste Systems, Inc. vs. Department of Environmental Quality of Oregon, 511 U.S. 93 (1994; US Supreme Court); Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976; US Supreme Court); Reeves, Inc. v. Stake, 447 U.S. 429 (______; US Supreme Court); United Haulers Assn., Inc. v. OneidaHerkimer Solid Waste Management Authority, 550 U.S. 330 (2007; US Supreme Court); Edgar v. MITE, 457 US 624 (1982; US Supreme Court) (state law declared unconstitutional); Dynamics Corp. Of America v. CTS Corp., 679 Fsupp 1022 (affirmed) 794 F2d 250 (reversed) 481 US 69 (state law declared unconstitutional); Tyson Foods v. McReynolds, 865 F2d 99 (CA6, 1989) (state law declared unconstitutional); Department of  Revenue of Kentucky et al v. Davis et. ux., (May 19, 2008; No. 06-666; US Supreme Court); Pike vs. 16

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broker or insurance company reside in different states. See Tate (1990), Hellerstein (June 1996), Larbalestier (1990), Levinson (2002), Merrill (2000), Hirsch (1994) and Huhn (2004). However, in the United States, most laws pertaining to real estate transactions are governed by state laws—such as usury, creditor-debtor laws, land laws and mortgages. This constitutes a violation of the Commerce Clause of the US Constitution because state laws cannot regulate interstate commerce. The relevant state Bruce Church, Inc., 397 U.S. 137, 142; Shaper vs. Tracy, 97 Ohio App. 3d 750, 647 N. E. 2d 550 (1994); Bonaparte vs. Tax Court, 104 U.S. 592 (1882; US Supreme Court); New Energy Co. of Ind. vs. Limbach, 486 U.S. 269 (1988; US Supreme Court); Fulton Corp. vs. Faulkner, 516 U.S. 325 (1996; US Supreme Court); Oklahoma Tax Comm’n vs. Jefferson Lines, Inc., 514 U.S. 175 (1995; US Supreme Court); Hughes vs. Oklahoma, 441 U.S. 322 (1979; US Supreme Court); Garcia vs. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985; US Supreme Court); Philadelphia vs. New Jersey, 437 U.S. 617 (1978; US Supreme Court); Alexandria Scrap, 426 U.S., at 810 (US Supreme Court) (the “market participant” exception); Reeves, 447 U.S., at 436 (US Supreme Court) (the “market participant” exception); White v. Massachusetts Council of  Construction Employers, Inc., 460 U.S. 204 (1983; US Supreme Court) (the “market participant” exception); Fulton Corporation vs. Faulkner, 516 U.S. 325 (US Supreme Court) (struck down higher tax on  the  stock of  corporations with  little or no presence in  the  State); New Energy Co. of Indiana vs. Limbach, 486 U.S. 269 (US Supreme Court) (invalidated tax credit to sellers of  ethanol available only for  ethanol produced in  the  State); Bacchus Imports, Ltd., 468 U.S. 263 (US Supreme Court) (struck down tax exemption that applied only to sales of certain locally produced liquors); Lewis vs. BT Investment Managers, Inc., 447 U.S. 27 (1980; US Supreme Court) (invalidated prohibition on out-of-state banks owning in-state businesses that provided investment advisory services); Boston Stock Exchange vs. State Tax Commission, 429 U.S. 318 (1977; US Supreme Court) (struck down higher tax on  sale of securities by nonresidents if the securities were sold in an out-of-state transaction); Dean Milk Co. vs. Madison, 340 U.S. 349 (1951; US Supreme Court); Hunt vs. Washington State Apple Advertising Commission, 432 U.S. 333 (1977; US Supreme Court); Fort Gratiot Sanitary Landfill, Inc. vs. Michigan Dept. of Natural Resources, 504 U.S. 353 (1992; US Supreme Court); C & A Carbone, Inc. vs. Clarkstown, 511 U.S. 383 (1994; US Supreme Court); Philadelphia vs. New Jersey, 437 U.S. 617 (1978; US Supreme Court); Hughes v. Oklahoma, 441 U.S. 322 (1979; US Supreme Court); New England Power Co. vs. New Hampshire, 455 U.S. 331 (1982; US Supreme Court); Bacchus Imports, Ltd. vs. Dias, 468 U.S. 263 (1984; US Supreme Court). Contrast: Bonaparte vs. Tax Court, 104 U.S. 592 (1881; US Supreme Court). Compare: United Haulers Assn., Inc. vs. Oneida-Herkimer Solid Waste Management Authority, 550 U.S. 330 (2007; US Supreme Court) (the Pike vs. Bruce Church scrutiny). Compare: Northwest Central Pipeline Corp. vs. State Corporation Comm’n of Kansas, 489 U.S. 493 (1989; US Supreme Court) (the Pike vs. Bruce Church scrutiny). Compare: Minnesota vs. Clover Leaf Creamery Co., 449 U.S. 456 (1981; US Supreme Court) (the Pike vs. Bruce Church scrutiny).

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action is the enactment of those statutes by state governments and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts—see Nwogugu (2012)). The Substantial Inducement Theory17 also applies. Furthermore, to the extent that any of these laws do not apply to out-of-state companies/individuals, or that they unduly burden interstate commerce (e.g. impose additional costs on out-of-state residents), or that they apply only to out-of-state companies/individuals, they can be construed as illegal restrictions on interstate commerce or as discrimination against interstate commerce. 3.7.2  MLS: The Right to Privacy Doctrine MLS can be construed as a violation of the right to privacy of the homeowner where he/she does not want third parties to find out about his/her intent to sell the property and the offering prices. See Wu and Colwell (1986). Contrast: Amelkin vs. McClure.18 The state actions are (1) the mandatory use of MLS for property transactions19 (all licensed brokers in the MLS jurisdiction must list properties under contract in MLS) and the implicit support of this policy by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government

17  The Substantial Inducement theory and the Substitution Theory were introduced on pages 9 and 198  in Nwogugu (2012) as alternatives to the State Action Requirement in Constitutional Law. 18  Contrast: Amelkin vs. McClure, 168 F. 3d 893 (CA6; 1999 US Court of Appeals). 19  See: Evans vs. Newton, 382 U.S. 296 (1966; US Supreme Court). See: Evans vs. Abney, 396 U.S. 435 (1970; US Supreme Court). See: Burton vs. Wilmington, 365 U.S. 715 (1961; US Supreme Court). See: Moose Lodge vs. Irvis, 407 U.S. 163 (1972; US Supreme Court). See: Edmonson vs. Leesville Concrete, 500 U.S. 614 (1991; US Supreme Court). See: Marsh vs. Alabama, ___US ___ (1946; US Supreme Court). See: Screws vs. US, 325 US 91 (1945; US Supreme Court). See: Ellman (2001), Gardbaum (2003), Gardbaum (2001), Currie (1986) and Tushnet (2003).

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to act where it has a duty to act creates constitutional torts20). The Substantial Inducement Theory,21 the Substantial Control Theory and the Substitution Theory also apply. The homeowner has a constitutionally protected property interest in privacy as to the information about his home sale, estimated sale price and/or intent to sell, and such interest arises from custom/norms, state constitutional laws, state contract laws (privity of contract, confidentiality terms in contract etc.) and state tort laws (covenant of good faith and fair dealing etc.). Property listings by themselves carry information content and, thus, have monetary value, privacy value and economic/utility value. The market value of the property partly depends on how widely the sale notice and terms are disseminated—and some types of properties sell at higher prices where marketing is restricted. Furthermore, in some neighborhoods, condo complexes or co-op complexes, an owner who wants to sell quickly at below-market prices may want restricted marketing in order not to distort/reduce neighbors’ home values. The seller might want to keep the sale and price information confidential because of estate or divorce issues or because the seller has conflicts with neighbors. The state and the NAR also have property interests in promoting homeowners’ privacy. While the state and the NAR have interests in fostering efficient and transparent real estate markets, mandatory listing in MLS is not the only method to achieve their objectives, because (a) sellers often list and show their properties on other websites in addition to MLS systems; (b) the astute buyer and/or broker is very likely to search the web for comparable properties and will probably see the property or comparable properties; (c) the MLS is restricted to one town and is likely to cause detrimental over-reliance, because it does not contain comparables in neighboring towns, which are increasingly useful in an era of Internet use and inter-town physical and Internet mobility; (d) same-market transparency and price efficiency can be achieved by voluntary MLS systems, voluntary listings on real estate websites and computerization of terms of completed sales at county offices.

 See: Nwogugu (2012).  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action Requirement), see pages 9 and 198 in Nwogugu (2012). 20 21

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3.7.3  The Right to Freedom of Speech22 MLS constitutes a violation of the homeowner’s Free Speech rights under the US Constitution23 because the method, form and place of listing a property for sale is essentially a form of constitutionally protected speech by the homeowner, because it is a form of self-expression and a legal manifestation of thought processes. The relevant state action is the combination of the mandatory use of MLS for property transactions,24 the implicit 22  See: Livestock Marketing Assn. v. U.S. Dept. of Agriculture, 335 F.3d 711 (US 8th Cir., 2003); U.S. v. United Foods, Inc., ______ S.Ct. _______(2001 WL 703953, Sup. Ct., 2001; US Supreme Court); Folsom v. City of Jasper, _____ S.E.2d ______ (2005 WL 949242, Sup. Ct., GA, 2005); Greater New Orleans Broadcasting Assn. v. U.S., 119 S.Ct. 1923 (1999; US Supreme Court); Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. at 765, 770 (US Supreme Court); City of Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 419-420 (1993; US Supreme Court); Greater New Orleans Broadcasting Assoc., Inc. v. United States, 527 U.S. 173, 188 (1999; US Supreme Court); Thompson v. Western States Medical Center, 122 S.Ct. 1497, 1507 (2002; US Supreme Court); City Of Boerne v. Flores, 521 US 507 (1997; US Supreme Court); Bartnicki v. Vopper, 532 US 514 (2001; US Supreme Court); National Endowment Of  The  Arts v. Finley, 524 US 569 (1998; US Supreme Court); Rosenberger v. University Of Virginia, 515 US 819 (1995; US Supreme Court); Rust v. Sullivan, 5001 US 173 (1991; US Supreme Court); 44 Liquormart, 517 U.S. 484 (1996; US Supreme Court); Buckley v. Valeo, 424 U.S. 1 (1976; US Supreme Court); First National Bank Of Boston v. Belotti, 435 US 765 (1978; US Supreme Court); Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990; US Supreme Court); FEC v. Massachusetts Citizens for Life Inc., 479 U.S. 238 (1986; US Supreme Court); Buckley v. American Constitutional Law Foundation, 525 U.S. 182 (1999; US Supreme Court); Nixon v. Shrink Missouri Government PAC, 528 U.S. 377 (2000; US Supreme Court); Pacific Gas & Electric v. Public Utilities Commission, 475 US 1 (1986; US Supreme Court); Lorillard Tobacco v. Reilly, 533 U.S. 525 (2001; US Supreme Court); Nike Inc. v. Kasky, 539 U.S. 654 (2003; US Supreme Court); BASF Corp v. Peterson, 544 U.S. 1012 (2005; US Supreme Court); Virginia Board of Pharmacy v. Virginia Citizen’s Consumer Council Inc., 425 US 748 (1976; US Supreme Court); Reno v. ACLU, 521 U.S. 844 (1997; US Supreme Court); Buckley v. American Constitutional Law Foundation, 525 U.S. 182 (1999; US Supreme Court). See: Ely (2004) and Butler and Ribstein (1994). 23  See: Marketing Assn. v. U.S. Dept. of Agriculture, 335 F.3d 711 (8th Cir., 2003). See: U.S. v. United Foods, Inc., ____ S.Ct. ____ (2001 WL 703953, Sup. Ct., 2001). 24  See: Evans v. Newton (1966)(supra). See: Evans v. Abney (1970) (supra). See: Burton v. Wilmington (1971) (supra). See: Moose Lodge v. Irvis (1972) (supra). See: Edmonson v Leesville Concrete (1991) (supra). See: Marsh vs. Alabama (1946) (supra). See: Screws v. US (___) (supra).

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support of this policy by the federal and state governments and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts25). The Substantial Inducement Theory26 and the Substitution Theory also apply. The homeowner’s associated property interests in choice/method/place of listing arise from the state constitutions, norms/culture, expectations and state contract law. Such speech is not offensive, politically motivated, illegal or unnecessary. Allowing such speech does not materially damage or invalidate the government’s interests in providing affordable housing, in creating transparent real estate markets and in developing efficient real estate transaction processes. 3.7.4  The Right of Association Doctrine27 MLS systems in most jurisdictions constitute violations of licensed brokers’ constitutionally guaranteed Right of Association and free speech rights,28 because the systems require mandatory participation by all licensed brokers that are members of the national realtors’ associations (such as the NAR and the CREA), and the systems typically exclude brokers from out-ofstate and other jurisdictions. This constitutes “state action” for constitutional law analysis.29 That is, the relevant state action is the combination of See: Ellman (2001), Gardbaum (2003), Gardbaum (2001), Currie (1986) and Tushnet (2003). 25  See: Nwogugu, M. (2012). 26  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action requirement in constitutional law), see pages 9 and 198 in Nwogugu (2012) (supra). 27  See: Healey vs. James, 408 US 169 (1972) (freedom of  association); Brotherhood of Railroad Trainmen vs. Virginia, 377 US 1 (1964) (right of association). 28  See: Livestock Marketing Assn. vs. U.S. Dept. of Agriculture (2003) (supra). See: U.S. vs. United Foods, Inc., ___ S.Ct. ___ (2001 WL 703953, Sup. Ct., 2001). 29  See: Evans vs. Newton (1966) (supra). See: Evans vs. Abney (1970) (supra). See: Burton vs. Wilmington (1971) (supra). See: Moose Lodge vs. Irvis (1972) (supra). See: Edmonson vs. Leesville Concrete (1991) (supra). See: Marsh v. Alabama (1946) (supra). See: Screws v. US (___) (supra). See: Ellman (2001), Gardbaum (2003), Gardbaum (2001), Tushnet (2003) and Currie (1986).

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the enactment of the policy, and the implicit support of the policy by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts30). The Substantial Inducement Theory,31 the Substantial Control Theory and the Substitution Theory also apply. Each licensed broker has a constitutionally guaranteed right to associate with any broker of choice—this right arises from state constitutional law, state contract law and property law. The NAR has defined property interests in protecting its members, increasing the transparency of real estate markets and transactions, and implementing efficient processes for real estate transactions. However, the mandatory broker participation element of MLS systems does not necessarily advance the NAR’s or the state’s interest in developing an efficient system for real estate transactions, because: (1) while listing in MLS provides a more “comprehensive” exposure, its highly probable that a diligent seller, buyer or broker can easily locate comparable properties on the Internet; (2) use of the MLS system may result in detrimental over-reliance, because the MLS system may be very limited because it typically contains information in one town, whereas inter-town real estate activities are substantial, and prices in one town affect home prices in neighboring areas. 3.7.5  The Right to Contract Doctrine32 MLS can also be construed as a violation of the property owner’s and the real estate broker’s constitutionally guaranteed Right to Contract. The  See Nwogugu (2012).  The Substantial Inducement theory and the Substitution Theory were introduced on pages 9 and 198  in Nwogugu (2012) as alternatives to the State Action Requirement in constitutional law. 32  See: Energy Reserves Group vs. Kansas Power & Light (KPL), _____US ____(_____; US Supreme Court); Nollan v. California coastal Commission, 483 US 825 (1987; US Supreme Court); Dolan vs. City of Tigard, 512 US 374 (1994; US Supreme Court). See: Lochner vs. New York, 198 US 45 (1905; US Supreme Court); Keystone Bituminous Coal Ass’n. v. DeBenedictis, 480 U.S. 470, 505 (1987; US Supreme Court); Boys Scout of  America vs. Dale, 530 US 640 (2000; US Supreme Court); Regan v. Taxation With Representation, 461 US 540 (1983; US Supreme Court); Trustees of Dartmouth College vs. Woodward, 17 U.S. (4 Wheat.) 518 (1819; US Supreme Court); United States Trust Co. 30 31

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relevant state action33 is the combination of the creation of the MLS, the implicit support of the MLS policy by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts34). The Substantial Inducement Theory,35 the Substantial Control Theory and the Substitution Theory also apply. The property owner and the broker have constitutionally protected rights to contract with each other to list the property in any manner that is suitable and/or preferred. The associated property interest arises from state contract law (freedom to contract, privity of contract, enforcement of contractual terms etc.), state constitutional law, expectations and norms. The state and NAR have interests in fostering efficient real estate markets, but their objectives can still be achieved in other ways: (1) voluntary MLS, (2) tax breaks for listing property in private websites, and (3) bringing county property sales records online and so on. Voluntary MLS does not materially detract from the efforts of the state and the NAR.  It is highly probable that a diligent seller, buyer or broker can easily locate comparable properties on the Internet. Use of the MLS system may result in detrimental over-reliance, because it typically contains information about one town, whereas inter-town real estate ­activities and mobility are sometimes substantial, and prices in one town affect home prices in neighboring. v. New Jersey, 431 U.S. 1 (1977; US Supreme Court); Energy Reserves Group vs. Kansas Power & Light 459 U.S. 400 (1983; US Supreme Court); W. B. Worthen Co. vs. Thomas, 292 U.S. 426 (1934; US Supreme Court) (proceeds of  life insurance policies); Edwards v. Kearzey, 96 U.S. 595; Bank of Minden v. Clement, 256 U.S. 126; Home Building & Loan Assn. v. Blaisdell, 290 US 398 (1934; US Supreme Court) (foreclosure and  right of redemption). 33  See: Evans vs. Newton (1966) (supra). See: Evans vs. Abney (1970) (supra). See: Burton vs. Wilmington (1971) (supra). See: Moose Lodge vs. Irvis (1972) (supra). See: Edmonson vs. Leesville Concrete (1991) (supra). See: Marsh vs. Alabama (1946) (supra). See: Screws vs. US (___) (supra). See: Ellman (2001), Gardbaum (2003), Gardbaum (2001), Currie (1986) and Tushnet (2003). 34  See: Nwogugu, M. (2012). 35  The Substantial Inducement Theory and the Substitution Theory were introduced on pages 9 and 198 in Nwogugu (2012) as alternatives to the State Action requirement in constitutional law.

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3.7.6  Advertising as Constitutionally Guaranteed Free Speech NAR member boards forbid VOWs from displaying advertising on any website on which MLS information is displayed. However, the rule does not apply to the ability of brokers to include advertisements in the packages of printed listings they provide to their customers. The policy provides for sanctions and remedies for violation of the policy, which include financial penalties and the termination of MLS privileges. This rule constitutes a violation of the free speech rights of the brokers that offer VOWs.36 The relevant state actions37 are the combination of the enactment of the policy by the NAR, and the implicit support of the NAR policy by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts38). The Substantial Inducement Theory39 and the Substitution Theory also apply. VOWs are personal property. The broker’s property interest in placing reasonable, legal and non-offensive advertising on the VOW arises from state property laws, state contract laws, state constitutional laws, norms and expectations. In this instance, advertising is a form of constitutionally protected expressive free speech, which is not harmful or abusive. The NAR’s interests in serving the public, protecting the interests of its members, and providing an efficient framework for the functioning of real estate markets are not advanced or enhanced by banning advertising on the VOWs. Given the efficiency of the Internet, the

36  See: Folsom v. City of Jasper, _____ S.E.2d ______ (2005 WL 949242, Supreme Court of Georgia, USA; 2005). See: Greater New Orleans Broadcasting Assn. vs. U.S., 119 S.Ct. 1923 (1999; US Supreme Court). 37  See: Evans vs. Newton (1966; US Supreme Court). See: Evans vs. Abney (1970; US Supreme Court). See: Burton vs. Wilmington (1971; US Supreme Court). See: Moose Lodge vs. Irvis (1972; US Supreme Court). See: Edmonson vs. Leesville Concrete (1991; US Supreme Court). See: Marsh vs. Alabama (1946; US Supreme Court). See: Screws vs. US (____; US Supreme Court). See: Ellman (2001), Gardbaum (2003), Gardbaum (2001), Tushnet (2003) and Currie (1986). 38  See Nwogugu (2012). 39  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action requirement in Constitutional Law), see Nwogugu (2012: 9 & 198).

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NARS should instead develop ways to leverage the efficiency of Internet-­ based search in order to lower overall transaction costs. 3.7.7  The NAR (United States) Policy Pertaining to Real Estate Brokers: The Interstate Commerce and Commerce Clause As mentioned previously, some associations that sponsor or manage or regulate MLS and REWs, such as the NAR (National Association of Realtors) in the United States, have been investigated or sued in court by government antitrust regulators and others for antitrust40 misconduct. See Nwogugu (2008). Such antitrust misconduct burdens or can burden Interstate Commerce. In the United States, participation in most MLS systems is limited to licensed brokers (who are members of national realtors’ trade associations such as the NAR or the CREA) in one town, whereas real estate is increasingly an interstate and international activity. The relevant state action is the combination of the enactment of the policy by NAR, the implicit support of the NAR policy by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts41). The Substantial Inducement Theory,42 the Substantial Control Theory and the Substitution Theory also apply. This NAR policy pertaining to brokers violates the Interstate Commerce Clause of the US Constitution because it unfairly discriminates against out-of-state (and in most cases, out-of-town) brokers and home buyers who cannot participate in MLS systems.43 40  See: “DOJ Files Antitrust Case & Simultaneous Settlement With The National Association Of Realtors”. CPI.  November 19, 2020. https://www.competitionpolicyinternational.com/ doj-files-antitrust-case-simultaneous-settlement-with-the-national-association-of-realtors/. 41  See Nwogugu (2012). 42  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action requirement in constitutional law), see Nwogugu (2012: 9 & 198). 43  See: Tate (1990), Hellerstein (June 1996), Larbalestier (1990), Merrill (2000), and Sedler (1985). See: Edgar vs. MITE, 457 US 624 (US Supreme Court) (state law declared unconstitutional). See: Dynamics Corp. Of America vs. CTS Corp., 679 Fsupp 1022 (affirmed) 794 F2d 250 (reversed) 481 US 69 (US Supreme Court) (state law declared unconstitutional). See: Tyson Foods vs. McReynolds, 865 F2d 99 (CA6, USA; 1989) (state law declared unconstitutional).

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See: Dennis vs. Higgins, 498 U.S. 439, 447–450 (1991; US Supreme Court). See: Moorman Mfg. Co. vs. Bair, 437 U.S. 267, 280 (1978; US Supreme Court). See: Metropolitan Life Ins. Co. vs. Ward, 470 U.S. 869 (1985; US Supreme Court). See: Oregon Waste Systems, Inc. vs. Department of Environmental Quality of Oregon, 511 U.S. 93 (______; US Supreme Court). See: Hughes vs. Alexandria Scrap Corp., 426 U.S. 794 (_____; US Supreme Court). See: Reeves, Inc. vs. Stake, 447 U.S. 429 (_____; US Supreme Court). See: United Haulers Assn., Inc. vs. Oneida-Herkimer Solid Waste Management Authority, 550 U.S. ___ (_______; US Supreme Court). Contrast: Bonaparte vs. Tax Court, 104 U.S. 592 (_____; US Supreme Court). See: Department of Revenue of Kentucky et al. v. Davis et al., (May 19, 2008; No. 06-666; US Supreme Court). See: Pike vs. Bruce Church, Inc., 397 U.S. 137, 142 (US Supreme Court). See: Shaper vs. Tracy, 97 Ohio App. 3d 750, 647 N. E. 2d 550 (1994). See: Bonaparte vs. Tax Court, 104 U.S. 592 (1882; US Supreme Court). See: New Energy Co. of Ind. vs. Limbach, 486 U.S. 269 (1988; US Supreme Court). See: Fulton Corp. vs. Faulkner, 516 U.S. 325 (1996; US Supreme Court). See: Oklahoma Tax Comm’n vs. Jefferson Lines, Inc., 514 U.S. 175 (1995; US Supreme Court). See: Hughes vs. Oklahoma, 441 U.S. 322 (1979; US Supreme Court). See: Garcia vs. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985; US Supreme Court). See: Philadelphia vs. New Jersey, 437 U.S. 617 (1978; US Supreme Court). Compare: United Haulers Assn., Inc. vs. Oneida-Herkimer Solid Waste Management Authority, 550 U.S. ___, ___-___ (2007; US Supreme Court) (the Pike vs. Bruce Church scrutiny). Compare: Northwest Central Pipeline Corp. vs. State Corporation Comm’n of Kansas, 489 U.S. 493 (1989; US Supreme Court) (the Pike vs. Bruce Church scrutiny). Compare: Minnesota vs. Clover Leaf Creamery Co., 449 U.S. 456 (1981; US Supreme Court) (the Pike vs. Bruce Church scrutiny). See: Alexandria Scrap, 426 U.S. at 810 (US Supreme Court) (the “market participant” exception). See: Reeves, 447 U.S. at 436 (US Supreme Court) (the “market participant” exception). See: White vs. Massachusetts Council of Construction Employers, Inc., 460 U.S. 204 (1983; US Supreme Court) (the “market participant” exception). See: Fulton Corporation vs. Faulkner, 516 U.S. 325 (US Supreme Court) (struck down higher tax on the stock of corporations with little or no presence in the State). See: New Energy Co. of Indiana vs. Limbach, 486 U.S. 269 (US Supreme Court) (invalidated tax credit to sellers of ethanol available only for ethanol produced in the State). See: Bacchus Imports, Ltd., 468 U.S. 263 (US Supreme Court) (struck down tax exemption that applied only to sales of certain locally produced liquors). See: Lewis vs. BT Investment Managers, Inc., 447 U.S. 27 (1980; US Supreme Court) (invalidated prohibition on out-of-state banks owning in-state businesses that provided investment advisory services).

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3.8   Unconstitutionality of Professional Licensing Requirements for Real Estate Websites The constitutional law issues discussed in this section affect or indirectly affect the following in real estate markets and mortgage markets: information production, cost of funds, transaction volumes, information asymmetry, risk sharing and allocation efficiency, disintermediation, transparency and agency conflicts. During 1995–2010 and in the United States, real estate transaction websites (“REWs”—such as www.ziprealty.com, www. forsalebyowner.com, www.homestore.com, ForSaleByOwner.com, BuyOwner.com, PrivateSale.com and FSBO.com etc.) played an important role in the transmission of information about home prices and macroeconomic indicators, in improving market transparency, and in providing transaction support/processing. These REWs offer online advertising and information to homeowners and, collectively, represent as much as 20% of the housing market activity. Prospective homebuyers can obtain information from the web about mortgage, insurance, home repair costs, recent home sales, insurance, appraisals and most elements of the home purchase/sale decision. As Internet use grows, REWs will become more critical in various processes in the housing market and in the commercial real estate market, from loan applications/approvals to closings and insurance processes. Various industry reports have estimated that using information technology to its full potential could cut the transaction costs of home buying by more than 50%.

See: Boston Stock Exchange vs. State Tax Commission, 429 U.S. 318 (1977; US Supreme Court) (struck down higher tax on sale of securities by nonresidents if the securities were sold in an out-of-state transaction). See: Dean Milk Co. vs. Madison, 340 U.S. 349 (1951; US Supreme Court). See: Hunt vs. Washington State Apple Advertising Commission, 432 U.S. 333 (1977; US Supreme Court). See: Fort Gratiot Sanitary Landfill, Inc. vs. Michigan Dept. of Natural Resources, 504 U.S. 353 (1992; US Supreme Court). See: C & A Carbone, Inc. vs. Clarkstown, 511 U.S. 383 (1994; US Supreme Court). See: Philadelphia vs. New Jersey, 437 U.S. 617 (1978; US Supreme Court). See: Hughes vs. Oklahoma, 441 U.S. 322 (1979; US Supreme Court). See: New England Power Co. vs. New Hampshire, 455 U.S. 331 (1982; US Supreme Court). See: Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984; US Supreme Court).

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Some jurisdictions have tried to regulate the activities of REWs.44 In 2003, California (United States) passed a law that requires REWs to obtain a real estate broker’s license to publish real estate advertising and information.45 In Forsalebyowner.com vs. Zinneman, 347 F. Supp. 2d 868 (E.D. Cal. 2004). (November 18, 2004), a US federal judge in Sacramento ruled that REWs should not be required to obtain a real estate broker’s license to publish real estate advertising and information. The court concluded that the California law, which requires websites to obtain a license but specifically exempts newspapers that publish the same information, was “wholly arbitrary” and violated the free speech and freedom of the press clauses of the US Constitution. The court stated that there was no justification for the distinction between the two media, and it rejected the state’s contention that newspapers are more trustworthy than websites. ForSaleByOwner.com had brought the lawsuit—the company is an online service that charged a flat fee to property owners who wanted to advertise their properties for sale on its website, and provided real estate information on inspections, insurance and other property transfer details, challenged the California law as violating the First Amendment of the US Constitution. Restrictive licensing laws and laws that inhibit advertising and the free flow of information only compound the harm to consumers and the economy,46 and this is reflected in the US Supreme Court’s rulings in the 44  See: City of Cincinnati vs. Discovery Network, Inc., 507 U.S. 410 (1993; US Supreme Court). See: Greater New Orleans Broadcasting Assoc., Inc. vs. United States, 527 U.S. 173, 190-191 (1999). See: Western States Medical Center, 122 S.Ct. at 1507 (US Supreme Court). See: R.A.V. vs. City of St. Paul, Minnesota, 505 U.S. 377 (1992; US Supreme Court). See: Greater New Orleans Broadcasting, 527 U.S. at 193-4 (US Supreme Court). See: Discovery Network, Inc., 507 U.S. at 423 n. 19 (US Supreme Court). 45  See: Cal. Bus. & Prof. Code §§ 10130, 10131(a), 10131.2. See: Cal. Bus. & Prof. Code § 10153.2. 46  New York state requires “Apartment Information Vendors”—companies that sell lists of available apartments in print or online—to obtain a license. See NY RPL §§ 446-a(2), 446-­ c(1), 446-c(2), 446-c(5)(b); 19 NYCRR § 190.8. California has similar laws that affect advance fee apartment listing services. See Cal. Bus. & Prof. Code § 10167 et. seq. Laws such as these make online subscription databases and classified ad services virtually impossible. In Texas, realtors are opposing a proposed regulation that will require all agents to participate in price negotiations, and this will severely limit their ability to offer online advertising and information services to consumers who wish to sell their homes themselves. See: Kry (2000).

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First Amendment context, which has generally sought to increase information flow and transparency.47,48 The California law that states that companies like ForSaleByOwner. com must obtain a real estate broker’s license as a condition of doing business in the state violates the First Amendment of the US Constitution in several ways. Taucher vs. Born, ___US ___ (2004; US Supreme Court) and Lowe vs. Securities and Exchange Commission, 472 U.S. 181 (1985) (; US Supreme Court) are the controlling court cases. First, the law is an unconstitutional “prior restraint” on speech and an invalid regulation of commercial speech because it improperly discriminates against certain persons based solely on the methods they use to convey information. Second, the California law amounts to regulation of commercial speech in a manner that imposes a “substantial and permanent compliance burden” on the actors and, hence, violates their Due Process rights. The history, purpose and traditional interpretation of the First Amendment (by US Courts) implies that regulation of commercial speech should be the last resort, and the government must be protecting some major interest as a basis for such regulation, and its laws must be reasonable. Obtaining a real estate broker’s license in California requires up to two years of college-­level courses and apprenticeship before taking the broker’s examination. Hence, the California law was a violation of the procedural and substantive due process rights of REWs that sought to do business in California. Companies like foresalebyowner.com have constitutionally protected property interests in fair procedures for obtaining permits to do business in other states. Requiring often underfunded emerging growth businesses like ForSaleByOwner.com to incur substantial costs and spend valuable time to obtain real estate training and experience that they will not use is unreasonable. Third, the California law is unconstitutional because it is overbroad. The law applies to real estate brokers and non-brokers alike and, thus, harms consumers by increasing transaction costs and compliance costs, which are passed on to consumers. Professional licensing laws that regulate free 47  See: Virginia Bd. of Pharmacy vs. Virginia Citizens Consumer Council, Inc., 425 U.S. at 765, 770. See: City of Cincinnati vs. Discovery Network, Inc., 507 U.S. 410, 419-420 (1993; US Supreme Court). See: Greater New Orleans Broadcasting Assoc., Inc. vs. United States, 527 U.S. 173, 188 (1999; US Supreme Court). See: Thompson vs. Western States Medical Center, 122 S.Ct. 1497, 1507 (2002; US Supreme Court). 48  See: Cox, B. (April 21, 2003). “Wanted: Regulations That Serve but Don’t Protect”. C:SPIN (Competitive Enterprise Institute).

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speech may be deemed reasonable only if the professionals involved are directly responsible for the affairs of individual clients and provide advice. Fourth, the California law is unconstitutional because it constitutes viewpoint/content discrimination, and there was no rational basis or over-­ riding government interests to justify such content discrimination. Forsalebyowner.com provided advertising and information to willing consumers, just like newspapers and many real estate how-to books did. The California law also constituted a violation of the Commerce Clause of the US Constitution, because the law unfairly discriminated against (a) out-of-state real estate web companies that sought to do business in California, but imposed much higher transaction costs and compliance costs on them—that is, costs of exams, training, classes, hiring staff and so on; and (b) Internet companies that sought to provide advertisements and real-estate-related information via the web by imposing higher than normal transaction costs on these companies; similar companies that provided the same categories of information for other industries did not have to comply with the same type of licensing regime that California made mandatory.

3.9   The Unconstitutionality of RCRS (Rent-­Control and Rent-Stabilization) Laws and the Hukou System in China (and Similar Restrictive Systems in Other Countries) The constitutional law issues discussed in this section directly or indirectly affect the following in household finance/economics, real estate markets and mortgage markets: information production, transaction volumes, information asymmetry, asset pricing (models of housing prices, housing demand and mortgage prices), risk sharing and allocation efficiency, household budgets and spending, cost of funds (for both companies and individuals) and agency conflicts (i.e. real estate brokers, REWs). RCRS is prevalent in some major cities in the United States, Asia, Europe, Latin America and the Middle East. 49 Appendix A 49  See: Cruz, P. (Jan. 19, 2009). Investment Analysis: The pros and cons of rent control. Global Property Guide. http://www.globalpropertyguide.com/investment-analysis/ The-pros-and-cons-of-rent-control. See: Hong Kong Legislative Council Secretariat (Information Services Division) (2014). Information Note  – Tenancy control in selected places. http://www.legco.gov.hk/research-­ publications/english/1314in18-tenancy-control-in-selected-places-20140702-e.pdf. See: Jenkins, B. (2009). Rent Control: Do Economists Agree?. Econ Journal Watch, 6(1), 73–112. Available from:

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summarizes tenant and landlord ratings in various countries. Appendix B summarizes RCRS conditions in various countries. RCRS is becoming more relevant in emerging markets as cities in countries like China, Brazil and India become grossly over-populated and as a greater percentage of housing shifts to private ownership (as in China where private ownership of housing increased from about 50% in 1980 to 98% in 2016). As noted above, RCRS affects systemic risk and financial stability. In the United States, RCRS statutes have been enacted mostly by the local governments, while various forms of housing financial assistance laws have been enacted at both the state and local government levels. Thus, while RCRS and the associated litigation and community activism appear to be a local phenomenon, it is a regional or national issue because: (1) RCRS has substantial impact on smaller towns around (within a fifty-mile radius of) major cities, consumer mobility, and the formation and stability of households; (2) the large cities that have RCRS laws usually account for a substantial percentage of national GDP of their country and often contain the headquarters of the large companies that account for a substantial percentage of national GDP; (3) RCRS affects and reduces construction volumes and that is usually a regional activity. According to industry group National Multifamily Housing Council, in the United States, only the states of California, Maryland, New Jersey, New York and the District of Columbia had rent control laws as of 2016. As of 2016, thirty-five US states including Washington state had laws that specifically prohibited or

http://econjwatch.org/articles/rent-control-do-economists-agree. See: Laws & Regulations Database of The Republic of China. (2011). Land Act. Available from: http://law.moj.gov.tw/Eng/LawClass/LawAll.aspx?PCode=D0060001 [Accessed July 2014]. See: London School of Economics and Political Science (2011). Towards a sustainable private rented sector: The lessons from other countries. Available from: http://www.lse.ac.uk/ geographyAndEnvironment/research/london/events/HEIF/HEIF4b_10-11%20newlondonenv/prslaunch/Book.pdf. See: UK Parliament (2014). Rent control in the private rented sector (England). Available from: http://www.parliament.uk/briefing-papers/SN06760.pdf. See: Arnott (1995), Basu and Emerson (1998), Raess and Von Ungern-Sternberg (2002), New York City Rent Guidelines Board (2017) and Epstein (1989).

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preempted (local government laws) rent control statutes and eleven US states did not have any rent control or preemption laws. This is the result of significant lobbying by the real estate industry. Many US states have various forms of housing financial assistance (housing vouchers etc.) and they administer the federal Section-8 housing assistance program. In some states such as New York and California, RCRS laws give landlords some protection such as (1) the right to reclaim the apartments for their own use under some circumstances; (2) the right to demolish RCRS buildings so long as the landlord does not replace it with housing; (3) the right to evict an unsatisfactory tenant; and (4) the right to increase rents when a tenant moves out of a housing unit (“vacancy decontrol”). Interestingly, during the last forty years and contrary to Epstein (2012),50 the US Supreme Court has generally not been consistent in its rulings about the constitutionality of RCRS laws.51 Many authors such as Epstein (2012) have also noted the inconsistency of the US Supreme Court and lower US courts in Takings cases. In Fisher v. City of Berkeley (1986),52 the US Supreme Court held that rent control laws and the 50  See: Epstein (2012) (noting that “…modern takings law is in vast disarray because the Supreme Court deals incorrectly with divided interests under the Takings Clause of the Fifth Amendment… under current takings law, a physical occupation with trivial economic consequences gets full compensation. In contrast, major regulatory initiatives rarely require a penny in compensation for millions of dollars in economic losses…, the arguments are not sufficient to defend the distinction. Quite simply, the distinction between physical and regulatory takings does not pay its own way, which becomes more evident when we ask two key questions: Why draw this line? How should we draw this line…”). 51  See: Harmon v. Markus, 412 F.App’x 420 (CA2; 2011) (cert. den.) ___ US ___ (2012; US Supreme Court). See: Block v. Hirsh, 256 U.S. 135 (1921; US Supreme Court) (holding that regulation of rents in the District of Columbia was constitutional). Compare: Chastleton Corp v. Sinclair, 264 U.S. 543 (1924; US Supreme Court) (reversing holdings in Block v. Hirsh). 52  See: Marcus Brown Holding Co. v. Feldman, 256 U.S. 170 (1921; US Supreme Court) (dealing with New York City’s rent control laws). See: Yee v. City of Escondido, 503 U.S. 519 (1992; US Supreme Court). (The case involved a physical takings claim; the US Supreme Court held that where owners of rent-regulated mobile home lots had offered their property for rental to others (the initial pad renters), they could not “assert a per se right to compensation based on their inability to exclude particular individuals”, including those who purchased mobile home units from prior tenants, and thus succeeded them in their right to a rent controlled pad. The court explicitly decided not to review a regulatory takings claim which had not been raised at trial.) See: Pennell v. San Jose, 485 U.S. 1 (1987; US Supreme Court) (US Supreme Court did not find any violation of the constitution in a rent control ordinance which permitted the

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Sherman Act (a US federal antitrust statute) were compatible. Nwogugu (2008) explained how RCRS laws violate antitrust statutes—thus, RCRS statutes are unconstitutional. The terminal courts in some US states have not been consistent in their rulings on the constitutionality of RCRS statutes.53

consideration of tenant hardship in a mechanism for special rent adjustments, and merely protected tenants from “burdensome rent increases” allowed landlords a reasonable return on investment). See: Greene v. Mirabel, 485 U.S. 983 (1988; US Supreme Court) (US Supreme Court dismissed takings claim case because of lack of a substantial federal question where the litigant challenged the 7-1/2% statutory limit on annual rent increases under New York’s rent-­ control law). See: Manocherian v. Lenox Hill Hospital, 84 N.Y.2d 385 (1994; NY Ct. of Appeals) (cert. den.) 514 U.S. 1109 (1995) (New York Court Of Appeals held that the extension of rent-­ stabilization protections to leases held by not-for-profit hospitals for ultimate use by hospital employees as subtenants resulted in a regulatory taking). See: Seawall Associates v. City of New York, 74 N.Y.2d 92 (NY Ct. of Appeals)(cert. den.) 493 U.S. 976 (1989) (where a moratorium was imposed on the alteration, conversion or demolition of SROs, but the law allowed an exemption for those who were willing to pay $45,000 per unit into a low-income housing fund, and required that unused units be repaired and rented out, the court The New York Court of Appeal found that the buy-out provision amounted to a form of “ransom” and that the rent-up provision resulted in a forced physical occupation of the property, and the law resulted in an unconstitutional taking). See: Fisher v. City of Berkeley, 475 U.S. 260 (1986) (rent control and the Sherman Act are compatible). 53  See: Parrino v. Lindsay, 29 N. Y. 2d 30 (1971; NY State Court of Appeal) (a temporary local law which generally froze rents for elderly persons with household incomes of less than $4500, was constitutional). See: Property Owners Association of North Bergen v. North Bergen, 378 A.2d 25 (1977; NJ Supreme Court) (a North Bergen ordinance which provided that elderly tenants earning less than $5000 annually would be immune from rent increases was an unconstitutional taking). See: Federal Home Loan Mortgage Corporation v. New York State Division of Housing and Community Renewal, 87 N.Y. 2d 325 (1995) (the New York Court of Appeals held that units in a formerly rent-stabilized building which underwent conversion to co-op units will regain the protection of rent stabilization if the building loses its cooperative status upon foreclosure of an underlying mortgage). See: Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), #12-4131, U.S. Court of Appeals for the Second Circuit (Manhattan) (below-market lease is exempt from creditor claims in bankruptcy because it is a public benefit). See: Santiago-Monteverde v. Pereira, (New York State Court of Appeals; 2014) (rent-­ stabilization rights are an exempt asset in bankruptcy proceedings because it is a form of public assistance, which a bankruptcy trustee cannot sell).

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3.9.1   Balancing-of-Interests54 Tests and Alternatives and Supplements to RCRS Some alternatives to RCRS include, but are not limited to, the following: (1) Increase taxes on landlords’ rental income, proceeds of housing sales, proceeds of mortgage loans, and luxury apartment unit sales/ purchases, and use the proceeds to provide rental subsidies (e.g. housing vouchers) and tax credits to verified low-income and middle-income households. Such subsidies should be usable in all towns/cities within a state or region (instead of just one town/city). (2) Increase taxes on landlords’ rental income, proceeds of housing sales, hotel revenues and sales of luxury apartments and goods, and use the proceeds to provide tax credits and subsidized land to real estate developers that provide RCRS housing units; and to each landlord that rents an apartment below a percentage (e.g. 60%) of the median rent in a specific neighborhood, where such area-specific median rent is determined each calendar year or quarter. (3) Provide significant non-tax incentives to real estate developers to build more apartment units (such as free/subsidized land, expedited planning approvals, subsidized ancillary construction services etc.). (4) In 2015 and in Berlin, Germany, a new RCRS law was enacted. Instead of imposing a blanket rent cap across all apartments in Berlin, the system calls on an observatory to calculate the typical rent per square meter for a given area, create different rates for apartments deemed “simple”, “medium” or “good”, while also factoring in the building’s age. During the next five years, no new rental contract is allowed to exceed these rates by more than 10%. (5) The federal, state and local governments should build and lease more housing units (where the rents are based on cost recovery rather than cost-plus-profit models). This can eliminate the profit motive (of real estate developers and landlords), which always inflates housing rents and prices. Such construction can be funded by increased taxes on luxury apartment rentals, luxury household 54  See: Railway Express v. New  York, ____US___(1949); Kotch v. Bd. of  River Port Pilot Commissioners, ___ US ___(1947); Skinner v. Oklahoma, ____ US ___(1942); Korematsu v. United States, ___ US ___(1944); Loving v. Virginia, ____US ____(1967); Washington v. Davis, ____ US ___ (1976); Arlington Heights v. MHDC, _____US ____ (1977); City of Phoenix v. Kolodziejski, 399 U.S. 204 (1970).

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fixtures/goods, hotel room-revenues, corporate profits and entertainment revenues. (6) Eliminate burdensome regulatory barriers to housing construction and renovation. Some supplementary measures for RCRS statutes are as follows: (1) There should be mandatory quarterly or semi-annual income verification of all RCRS tenants by landlords in order to ensure that only low- and moderate-income households benefit from RCRS. Non-­complying landlords and tenants should be penalized. (2) RCRS status/designation on buildings can be rotated among multifamily buildings in cities/towns. For example, a multifamily building does not remain in RCRS status for more than six years during any contiguous ten-year period and does not remain in RCRS status for more than twenty-five years during any contiguous forty-year period. In such a case, tenants in any RCRS building for which RCRS designation is being removed will be automatically granted RCRS apartments in buildings that get new RCRS designation. RCRS status/designation should be applied to a specific maximum percentage (e.g. 60%) of units in a building. These measures can help evenly distribute the economic and social burdens of RCRS among landlords and to reduce abandonment and low maintenance of RCRS buildings by landlords. (3) Provide incentives for landlords to convert RCRS buildings into co-­ops/condos and permit RCRS tenants to use housing assistance benefits to pay for such condos/co-ops. In balancing-of-interests tests in constitutional law analysis, these foregoing alternatives and supplementary measures support the repudiation of most RCRS statutes. 3.9.2  RCRS as Violations of the Takings55 Clause of the Constitution RCRS constitutes uncompensated takings by governments, and hence violations of the Constitution. The Takings Clause of the Fifth 55  See: Federal Republic of Germany et al. vs. Philipp et al. (No. 19–351; February 3, 2021; US Supreme Court). https://www.supremecourt.gov/opinions/20pdf/19-351_o7jp.pdf. See: Republic of Austria vs. Altmann, 541 U.S. 677 (US Supreme Court).

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Amendment to the US Constitution (which is made applicable to the US states through the Fourteenth Amendment) states that private property shall not be taken for public use without just compensation. However, McDonough (2007), Stout (1990) and Hirsch (1987) concluded that RCRS is a type of Regulatory and Physical Taking. But for very different reasons, this chapter also finds that RCRS is an unconstitutional taking. The relevant state actions are the combination of the enactment of the RCRS statutes by the governments and the implicit support of the statutes by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts56). The Substantial Inducement Theory57 also applies. Under the accepted interpretation of the US Constitution, government regulation of private property constitutes a “taking” if (1) it does not substantially advance a legitimate state interest, and (2) the regulation is not imposed with adequate compensation for the property owners for any resulting economic losses. In the case of rent control, the takings elements are as follows. The Landlord of an RCRS building has a constitutionally guaranteed property interest in charging whatever rent he/she deems appropriate. This property interest arises from state contract laws, state property laws, and state constitutional laws, norms and expectations. The restrictions (usually state/federal/local laws) on raising rents constitute an economic limitation and hence an economic loss to the landlord—market rent minus statutory rent—and thus a “taking”. See comments in Bardsley and Sausgruber (2005); Dolde and Tirtiroglu (1997); and Garvill et  al. (1992). The monetary amount involved is transferred to “public use” in various forms: (1) below-market rents for tenants in the rent-stabilized or rent-controlled building, (2) a “market rent effect” in which above-average rent increases in similar properties decline or don’t occur, (3) a “market value effect” in which values of similar properties don’t increase above average growth rates or as quickly as they would have because such increases are not warranted on a comparability basis, and (4) a “tax reduction effect” in which property tax See: Bolivarian Republic of  Venezuela vs. Helmerich & Payne Int’l Drilling Co., 581 U.S. _____ (2017; US Supreme Court). 56  See Nwogugu (2012). 57  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action requirement in constitutional law), see Nwogugu (2012: 9 & 198).

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rates are likely to be lower. The said taking can be construed as being for “public use” because the property taken (the difference between the market rents and the statutorily determined rent) is for “public” use— the general public benefits from rent control/stabilization in terms of actual lower rents for tenants of that specific building and lower property taxes. The “public” includes not only all people and households that qualify for rent control and rent stabilization, but also all renters and homeowners who are affected by changes in rents and property prices. The landlord of the RCRS building is not compensated for said taking where the landlord does not receive any special benefit and/or compensation such as tax credits (i.e. the federal low-income housing tax credits), housing vouchers (e.g. Section 8 vouchers) or tax abatements (local property tax abatements granted in exchange for construction of subsidized housing). The government has some interest in providing and maintaining affordable housing for its residents, and “takings” advance the government interests to some extent—but facilitation of such benefits and interests is limited by the number of regulated housing units and the ability of tenants to pay the statutory RCRS rents. However, this is more of a fiscal policy and monetary policy issue, and the government has many other ways to solve the housing shortage problem, such as (1) building government-operated housing, (2) providing housing vouchers, (3) increasing corporate income taxes, and (4) providing tax breaks for companies that build housing for their employees. The RCRS taking is a government intervention that has substantial economic multiplier effects that may even affect neighboring towns. RCRS often results in neglect and/or abandonment of properties by landlords, which in turn substantially reduces property values and demand for property maintenance services. See Bardsley and Sausgruber (2005); Dolde and Tirtiroglu (1997); and Garvill et  al. (1992). There is substantial evidence that home equity accounts for 65–80% of the net worth of 60–80% of US households. Further, in most US towns, rent stabilization laws typically can be waived if the unit is not a primary residence, and the laws can be permanently circumvented if the market rent for the unit exceeds a specified amount (e.g. New  York City Rent Stabilization Laws), and both conditions can be easily achieved by arranging for a tenant to lease the space and then sub-lease the space. Hence, the government’s interest in ensuring adequate affordable housing for its residents is far outweighed by the collective property interests of the town’s landlords in setting market rents for their properties.

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During 1995–2007, in some markets like New York City, despite extensive long-term rent controls (more than 60,000 units in New York City) and rent-stabilization laws (more than one million housing units in New York City), housing prices still increased dramatically in most boroughs. See comments in Glaeser and Gyourko (2005). This is further evidence of the impact of psychological factors on housing prices. However, in other markets, RCRS helped provide artificial temporary caps on annual increases in housing prices. There have been several key US Supreme Court decisions on the takings issue, although none directly addresses rent control and rent stabilization.58 In Kelo v. City Of New London,59 the US Supreme Court effectively reversed much existing Takings case law and ruled that eminent domain can be used to obtain property for what can reasonably be deemed “private” use—this effectively eliminates the “public use” requirement in eminent domain and takings cases. Furthermore, the issue of definition of “public use” and “private use” within the context of takings remains 58  See: Federal Republic Of Germany et al. vs. Philipp et al. (No. 19–351; February 3, 2021; US Supreme Court). https://www.supremecourt.gov/opinions/20pdf/19-351_o7jp.pdf. See: Republic of Austria vs. Altmann, 541 U.S. 677 (US Supreme Court). See: Bolivarian Republic of Venezuela vs. Helmerich & Payne Int’l Drilling Co., 581 U.S. _____ (2017; US Supreme Court). See: Agins vs. City Of Tiburon, 447 US 255 (1980; US Supreme Court). See: Monterrey vs. Del Monte Dunes At Monterrey, 526 US 687 (1999; US Supreme Court). See: Lawton v. Steele, 152 US 133 (1894; US Supreme Court). See: Dolan v. City Of Tigard, 512 US 374 (1994; US Supreme Court). See: Nollan v. California Coastal Commission, 483 US 825 (1987; US Supreme Court). See: Kaiser Aetna v. United States, 444 US 164 (1979; US Supreme Court). See: Penn Central Transportation v. New York City, 438 US 104 (1978). See: Rowan v. Post office Department, 397 US 728 (1970; US Supreme Court; US Supreme Court). See: Williamson County Regional Planning Commission v. Hamilton Bank Of Jefferson City, 473 US 172 (1985; US Supreme Court). See: Palazzolo v. Rhode Island, 533 US 606 (2001; US Supreme Court). See: Lucas v. South Carolina Coastal Council, 505 US 1003 (1992; US Supreme Court). See: Loretto v. Teleprompter Manhattan CATV Corp., 458 US 419 (1982; US Supreme Court). See: Andrus v. Allard, 444 US 51 (1979; US Supreme Court). See: First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 US 304 (1987; US Supreme Court). 59  See: Kelo v. City Of New London, ___ US ___ (2005; US Supreme Court). See: Lingle v. Chevron, 544 US ___ (2005; US Supreme Court). See: SWIDA v. National City Environmental, 768 N.E.2d 1 (Sup. Ct., Ill., 2002).

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somewhat unresolved. Some courts have held that Takings Clause is most naturally construed to authorize takings for public use only if the public or government actually uses the taken property. Furthermore, any interpretation of “public use” and “private use” in takings cases must recognize that in the US and many countries, most takings cases are adjudicated by state courts, and in the USA, state court judges are not as independent as federal judges, because they are sometimes elected, and are often influenced by elected officials and elected officials. The language, the inferable legislative intent of, and the historical application of the Takings Clause by most US courts and the tendencies of US judges in takings cases support this point of view. In Lingle v. Chevron USA, 544 US 528 (2005; US Supreme Court), the US Supreme Court (1) determined that the “substantially advances” formula that was previously applied in Takings cases is actually a Due Process question that should not be considered in Takings decisions; and (2) defined four classes of takings claims: ( 1) A physical taking (2) A Lucas-type total regulatory taking (3) A Penn Central taking (4) A land-use exaction violating the Nollan and Dolan standards RCRS does not conform to any of the abovementioned types of takings because (a) there is no physical occupation, (b) there is no total regulatory taking, (c) there are no exactions that violate the Nollan and Dolan standards, and (d) there is no Penn Central type taking. However, Bell and Parchomovsky (2001a, b)60 provide a different set of definitions for Takings and Givings. See comments in Merrill and Smith (2001) and Bell and Parchomovsky (2005). The major cases that control RCRS are Lingle v. Chevron and Loretto v. Teleprompter Manhattan CATV.61 Unfortunately, the US Supreme Court has historically construed the Takings Clause rather very narrowly. On the contrary, the language, purpose,  See: Bell and Parchomovsky (2001a, b) (supra).  See: Lingle v. Chevron (supra). See: Loretto v. Teleprompter Manhattan CATV, 458 U.S. 419 (1982; US Supreme Court). See: Vulcan Materials Co. v. City of Tehuacana, 369 F.3d 882 (CA5, USA; 2004). See: Bernard v. Scharf, 675 N.Y.S.2d 64 (Sup. Ct., App. Div., New York; 1998). 60 61

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actual/inferable legislative intent of the Takings Clause, “regulation demand” and the historical interpretation/application of the Takings Clause by most US Courts imply much broader application of the Takings Clause to cover not only physical takings, regulatory takings and full Takings, but also any appropriation of any type of property interest (including intangible property) by the government without sufficient compensation. The net effects of Kelo v. City of New London and Lingle v. Chevron are (a) to effectively strip most protections for, and reduce property rights of, property owners; (b) to reduce property values; (c) to increase the effect of political processes on property values; (d) to increase the influence of local developers, (e) to increase the importance of specific appraisal techniques in Takings cases—in such instances, appraisals are more likely to be based on replacement costs (as opposed to sales comparables or the income approach), which most accurately reflects the economic occurrence/displacement implicit in Takings; (f) to eliminate the “substantially advances” requirement from Takings cases, thereby increasing transaction costs, litigation costs and the burden of proof on homeowners in Takings cases. Prior to these two cases and during 1995–2003, Takings case law (federal and state courts) provided support and basis for rapid increases in housing prices and land values; there were no evident trends in federal and state court rulings toward the results in Kelo and Lingle. The key issue is that the economic effects of Takings must consider the economic loss suffered by property owners, the negative effect of ownership uncertainty on property values and the “new value” created by economic development and new construction that typically accompanies Takings (most Takings are related to economic development). 3.9.3  RCRS Violates the Equal Protection Doctrine62 RCRS laws violate the equal protection doctrine of the Constitution because of the following: (1) RCRS unfairly discriminates between wealthy 62  See: FCC v. Beach Communications, ___US ____ (1993; US Supreme Court); Logan v. Zimmerman Brush Co., ___ US ____ (1982; US Supreme Court); Schweiger v. Wilson, ___ US ____ (1981; US Supreme Court); U.S. Railroad Retirement Board v. Fritz, ___ US ____ (1980; US Supreme Court), New Orleans v. Dukes, ___ US ____ (1976; US Supreme Court), McDonald v. Board of  Election Commissioners, ___ US ____ (1969; US Supreme Court); U.S.  Railroad Retirement Board v. Fritz, ___US ____ (1980; US Supreme Court); N.Y.C. Transit Authority v. Beazer, ___US ____ (1979; US Supreme Court); Massachusetts Board of Retirement v. Murgia, ___ US ____ (1976; US Supreme Court); Dept. of Agriculture

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households who have resided in RCRS housing units for a long time and poor households who have not—simply on the basis of their occupancy tenure; (2) RCRS results in unfair discrimination between RCRS tenants (who are often denied access to amenities) and market-rent tenants (who are not denied access to amenities) that live in the same apartment complex;63 (3) RCRS unfairly discriminates between wealthy households who have adult or teenage children that can take over the leases of RCRS housing units and poor households who do not; (4) RCRS increases housing discrimination wherein landlords are much less likely to rent housing units to tenants who have RCRS instruments such as housing vouchers and government-provided housing assistance; (5) RCRS reduces housing quality and increases abandonment by landlords—rent-controlled housing is often maintained at a lower quality than it would have been had the units not been subject to rent control; (6) in most large cities across the world, RCRS only applies to buildings of certain types, locations or date of construction, and not to specific people (within specific income, wealth or age brackets), and thus RCRS is inefficient and unfairly discriminates among housing types, and its benefits accrue unevenly across the tenant population; (7) in most large cities, the costs of consumer entry into RCRS units is high and consumers have to pay formal fees and “bribes” to access RCRS units, and thus RCRS causes unfair discrimination (based on social circles and income) among classes of prospective tenants. The relevant state action is the combination of the enactment of the RCRS statutes by the government, and the implicit support of the statutes by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to v. Moreno, ___US ____ (1973; US Supreme Court); Adarand Constructors, Inc. v. Pena, ___ US ____ (1995; US Supreme Court); Metro Broadcasting, Inc. v. FCC, ___US ____ (1990; US Supreme Court); Richmond v. J.A. Croson Co., ___ US ____ (1989; US Supreme Court); Wygant v. Jackson Board of Education, ___US ____ (1986); Fullilove v. Klutznick, ___ US ____ (1980; US Supreme Court); Regents of  Univ. of  California v. Bakke, ___US ____ (1978); Bernal v. Fainter, ___US ____ (1984), Ambach v. Norwick (1979; US Supreme Court); In re Griffiths (1973); Graham v. Richardson (1971); United States v. Virginia (The VMI Case) (1996); Williamson v. Lee Optical Co, 348 US 483 (1955); Dandridge v. Williams, 397 US 471 (1970; US Supreme Court); City of  Phoenix v. Kolodziejski, 399 U.S. 204 (1970; US Supreme Court); First National Bank v. Louisiana Tax Commission, 289 U.S. 60 (1933; US Supreme Court); Griffith v. Connecticut, 218 US 563 (1910; US Supreme Court); Cipriano v. City of  Houma, 395 U.S. 701 (1969; US Supreme Court); Home Building & Loan Assn. v. Blaisdell, 290 US 398 (1934; US Supreme Court) (foreclosure and right of redemption). 63  See Wittlin (2015).

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act creates constitutional torts; see Nwogugu (2012)). The Substantial Inducement Theory64 also applies. 3.9.4  RCRS Violates of the Substantive Due Process Doctrine and the Procedural Due Process Doctrine RCRS violates the Substantive Due Process Clause because (1) the social, economic and psychological costs of RCRS fall disproportionately on the poor—these costs include a decline in the quality of existing rental housing, discrimination, poverty, stress/hypertension and substantially reduced access to new or affordable housing; (2) RCRS results in a decrease in the supply of housing units; (3) in most cities, RCRS only applies to buildings of certain types, locations or date of construction, and not to specific people (within specific income, wealth or age brackets), and thus RCRS is inefficient and its benefits accrue unevenly across the tenant population; (4) RCRS tends to reduce property maintenance and increases abandonment of buildings by landlords; and (5) RCRS increases housing discrimination by landlords. RCRS violates the Procedural Due Process Clause because (1) the administrative costs of maintaining RCRS programs in substantial; (2) in most cities, RCRS only applies to buildings of certain types, locations or date of construction, and not to specific people (within specific income, wealth or age brackets), and thus RCRS is inefficient and its benefits accrue unevenly across the tenant population; (3) in most large cities, the costs of consumer entry into RCRS units is high—consumers have to pay formal fees and “bribes” to access RCRS units; (4) RCRS significantly reduces Consumer Mobility because in most large cities around the world, RCRS can only be used within a state or town or neighborhood or a specific building—that in turn has negative effects on job availability, marriage and consumers’ social circles; and (5) RCRS results in unfair discrimination between RCRS tenants (who are often denied access to amenities) and market-rent tenants (who are not denied access to amenities) that live in the same apartment complex. See Wittlin (2015). The government’s interest in controlling housing rents in order to improve social welfare is far outweighed by the economic/social/psychological damage, increases in market rents and reduction in housing supply caused by RCRS. 64  The Substantial Inducement Theory and the Substitution Theory were introduced on pages 9 and 198 in Nwogugu (2012) as alternatives to the State Action requirement in constitutional law.

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The relevant state actions are the combination of the enactment of the RCRS statutes by the government, the implicit support of the statutes by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts65). The Substantial Inducement Theory66 also applies. 3.9.5  RCRS Violates the Interstate Commerce Clause of the US Constitution RCRS violates the Interstate Commerce Clause because of the following reasons. In some countries that have local/municipal governments, state governments and a federal government, RCRS unfairly discriminates between in-state (who can apply for housing benefits) and out-of-state persons (who typically cannot apply for local housing benefits). RCRS burdens interstate commerce and it significantly reduces Consumer Mobility because around the world, RCRS can only be used within a state or town or neighborhood or a specific building—that, in turn, has negative effects on job availability, marriage and consumers’ social circles. RCRS unfairly discriminates between in-state real estate developers and property management companies (who are subject to state-specific RCRS laws and requirements) and out-of-state real estate developers and property management companies (who may or may not be fully subject to such laws). Various studies in several countries have concluded that RCRS reduces the volume of new construction of housing units, and thus, RCRS reduces interstate commerce because such construction usually involves parties that are out of state. The government’s interest in controlling housing rents in order to improve social welfare is far outweighed by the economic, social and psychological damage, increases in market rents, reduction in housing supply and reduction in interstate commerce caused by RCRS. The relevant State Action is the combination of the enactment of the RCRS statutes by the government, and the implicit support of the statutes  See Nwogugu (2012).  On the Substantial Inducement Theory and the Substitution Theory (which are alternatives to the State Action requirement in constitutional law), see pages 9 and 198  in Nwogugu (2012). 65

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by the federal and state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts—see Nwogugu (2012)). The Substantial Inducement Theory67 also applies. 3.9.6  Labor Dynamics and the Hukou System in China (and Similar Restrictive Systems in Other Countries) Restrictive housing systems such as the Hukou system in China are also types of Rent Control, partly because they effectively reduce rents by reducing/eliminating overcrowded housing units and potentially significant increases in housing demand in cities (which could have increased rents). However, as of 2020, the Chinese government had been reforming and phasing out Hukou.68 See the comments in Harris and Cohen (2015), Chan (January 2019) and Cui and Cho (2020). The Hukou system statutorily barred families from living outside or owning property outside their place of birth or registered town of residence.

67  On the Substantial Inducement Theory and the Substitution Theory (which are alternatives to the State Action requirement in constitutional law), see Nwogugu (2012: 9 & 198) (supra). 68  See: China’s Hukou Reforms and the Urbanization Challenge  – China Is Speeding Up Hukou Reform, But That Won’t Be Enough To Solve The Migrant Worker Problem. By Spencer Sheehan, February 22, 2017. https://thediplomat.com/2017/02/chinas-hukou-reformsand-the-urbanization-challenge/. See: Melander, A. & Pelikanova, A. (2013). Reform of the hukou system: a litmus test of the new leadership. ECFin Economic Brief. https://ec.europa.eu/economy_finance/publications/economic_briefs/2013/pdf/eb26_en.pdf. See: 100 million have settled in urban areas as part of China’s hukou system reform. CGTN. 12:20. 08-Oct-2020. (“China has helped at least 100 million rural population to settle down in towns and cities, elevating the nation’s urbanization rate of registered households from 35.9 percent in 2013 to 44.4 percent in 2019, according to the Ministry of Public Security. Meanwhile, the dual ‘hukou’ system, which has lasted for over half a century and divided the people into rural and non-rural population was abolished. It was a very important move in the country’s goal of hukou reform from 2016 to 2020, marked as the 13th ‘Five-Year Plan’ in China’s development….”) See: Wang (2014).

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Restrictive housing systems that are similar to Hukou also exist in Japan (koseki), Russia (propiska), Vietnam (Hộ khẩu) and North Korea (Hoju). These governments’ significant interest in preventing overcrowding, crime, overburdened public services, crime, public health problems and reduction in quality of life in large/medium-sized cities may in some circumstances outweigh individuals’ Rights to freedom of movement, Right to Contract and Rights of Association. Such mitigating circumstances revolve around Labor Dynamics (among other factors) and include, but are not limited to, the following: (1) Very poor prospective migrants who do not have enough savings and/or earning power to support themselves in large/medium-­ sized cities (2) Prospective migrants who have extremely low “Social Scores” (e.g. in China) and/or criminal records (3) Prospective migrants who have minimal education and or job training and or transferable-job-skills (and thus do not have or are unlikely to gain marketable skills) (4) Prospective migrants whose occupations already have too many professionals in large/medium-sized cities (i.e. the unemployment rate in that profession in the target city is extremely high) (5) Prospective migrants who carry, or are at great risk of contracting, infectious diseases

3.10   General Real Estate Transactions and the Commerce Clause of the US Constitution In many instances, real estate transactions and transactions in MLS involve interstate commerce—any two parties among the lender, buyer, seller, broker or insurance company reside in different states.69 However,  See: Tate (1990); Hellerstein (June 1996), Larbalestier (1990), Levinson (2002), Merrill (2000), Hirsch (1994) and Huhn (2004). See: Edgar vs. MITE, 457 US 624 (state law declared unconstitutional). See: Dynamics Corp. Of America vs. CTS Corp., 679 Fsupp 1022 (affirmed) 794 F2d 250 (reversed) 481 US 69 (state law declared unconstitutional). See: Tyson Foods vs. McReynolds, 865 F2d 99 (CA6, USA; 1989) (state law declared unconstitutional). 69

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in the United States, most laws pertaining to real estate transactions are governed by state laws—such as usury, creditor-debtor laws, land laws and mortgages. This constitutes a violation of the Commerce Clause of the US Constitution because state laws cannot regulate interstate commerce. The relevant state action is the enactment of those statutes by state governments, and the failure of the federal and state governments to act to remedy the situation (it is well established in the literature that failure of the government to act where it has a duty to act creates constitutional torts70). The Substantial Inducement Theory71 also applies. Furthermore, to the extent that any of these laws do not apply to outof-state companies/individuals or that they unduly burden interstate commerce (e.g. impose additional costs on out-of-state residents) or that they apply only to out-of-state companies/individuals, they can be construed as illegal restrictions on interstate commerce or as discrimination against interstate commerce.

3.11   (US) State Laws That Prohibit or Restrict Real Estate Brokers from Offering Commission Rebates to Home Buyers/Sellers US GAO (2005)72 noted that in at least fourteen US states, state laws prohibit or restrict real estate brokers from offering rebates on commissions to home buyers and sellers. These laws may be unconstitutional because they may constitute violations of any of the following: (1) The Equal Protection Doctrine (where similar regulated trades/ professions are allowed to offer such rebates) (2) The Interstate Commerce Doctrine (where banning such rebates increases customers’ transaction costs and operations costs, and or reduces competition, brokers’ opportunity-sets and business volumes in interstate commerce)  See: Nwogugu (2012: 9 & 198).  On the Substantial Inducement theory and the Substitution Theory (which are alternatives to the State Action Requirement), see Nwogugu (2012: 9 & 198). 72  See: US Government Accountability Office (GAO) (2005). Real Estate Brokerage: factors That May Affect price Competition. Reprinted in American Antitrust Institute Invitational Symposium on Competition in The residential Brokerage Industry. 70 71

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(3) The Right-To-Contract Doctrine (where such rebates are critical elements of brokers’ contracts with their clients) (4) The Freedom-of-Speech Doctrine (to the extent that brokerage fees and or advertising/offering fees can be considered types of speech) (5) The Substantive Due Process Doctrine

3.12   (US) State Laws That Prohibit or Restrict Banks from Participating in Real Estate Brokerage White (2005)73 and Hahn et al. (2005) noted that in the United States, the NAR has successfully lobbied the US Congress to prevent the enactment of statutes that would allow banks to enter the real estate brokerage industry. The Dodd-Frank Act of 2010 also did not make any changes that would allow banks to become real estate brokers. US GAO (2005) noted that where banks were allowed to participate in real estate brokerage, the effects were limited. Such laws (that prohibit or restrict banks from acting as real estate brokers and or receiving real estate brokerage fees) may be unconstitutional because they may constitute violations of any of the following: (1) The Equal Protection Doctrine (where similar regulated trades/ professions such as insurance professionals, lawyers and CPAs are allowed to offer such services) (2) The Interstate Commerce Doctrine (where banning such brokerage by banks increases customers’ transaction costs and operations costs, and/or reduces competition, banks’/brokers’ opportunitysets and business volumes in interstate commerce)

73  See: White, L. (2005). The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like? In American Antitrust Institute Invitational Symposium On Competition In The residential Brokerage Industry.

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(3) The Right-To-Contract Doctrine (where such brokerages by banks are critical elements of banks’ contracts with their clients and/or brokers’ contracts with their clients) (4) The Freedom-of-Speech Doctrine (to the extent that real estate brokerage, brokerage fees and/or advertising/offering real estate brokerage can be considered types of speech) (5) The Substantive Due Process Doctrine (where such statutes are discriminatory) The reality is that in most US states (and indeed in most capitalisteconomy countries), retail banks are better positioned to provide real estate brokerage services (than traditional real estate brokers) because: (1) Banks have much more customer data and market data and thus are better able to verify prospective buyer/seller information (2) Retail banks have local branch networks (unlike most traditional real estate brokers) (3) Retail banks provide a broad range of services and products in the property buying value chains (e.g. mortgages, guarantees, custody, appraisals), and thus can charge much lower fees to buyers/sellers

3.13   Conclusion Several market mechanisms such as the Multiple Listing Service, REWs, professional licensing requirement for REW, Rent-Control/Rent-­ Stabilization laws, subprime lending and foreclosure processes are unconstitutional and very inefficient. The implications of the foregoing analysis are that all existing housing models (pertaining to housing demand, pricing etc.) are inaccurate—and Real Estate laws, constitutional political economy, complexity, Constitutional Law and these market mechanisms (MLS, REWs and RCRS) are major determinants of housing demand and housing prices.

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Appendix A: Summary of RCRS Regimes in Various Countries (Source: Global Property Guide; 2017, http://www.globalpropertyguide.com/faq/ inheritance-­law-­and-­taxes; and Associated Contributing Law Firms, http://www. globalpropertyguide.com/contributing-­law-­firms) Country

Key provisions

1. Rent control in Asia India There are two types of tenancy agreements in India: Lease Agreements which are covered by rent control laws, and Lease and License Agreements which are not. A Lease (or Rental) Agreement is covered by restrictive rent control laws. The amount of rent that can be charged is based on a formula devised by the local executive, legislative or judicial government, as the case may be. For Delhi, the maximum annual rent is 10% of the cost of construction and the market price of the land, but the cost of construction and the price of land are both based on historical values and not the current market valuation. The older the property, the smaller the rent can be charged. Rents can only be increased by a fraction of the actual cost the landlord has incurred in improving the property. Pakistan In the Islamabad Capital Territory, rents can be freely agreed between the landlord and the tenant. The rent of a building is automatically increased at the end of every three years of the tenancy by 25% of the rent already being paid by the tenant, unless the landlord and tenant agree to increase the rent by an agreement in writing. Five other areas (Punjab, NWFP, Baluchistan, Sindh and Cantonment areas) are covered by distinctive provincial legislation. The Rent Controller is empowered to fix a fair rent, on application by the tenant or landlord. The following factors are considered in deciding a fair rent:  •  The rent of the same building or a similar accommodation in the locality at the time, and during the 12 months prior to the application;  •  The rise in the cost of construction, repairing charges and taxes;  •  The rental value of the building in the Property Tax Assessment Register of the Taxation Department (or the assessment list of the Cantonment Board) in the Cantonment areas. In the Cantonment areas, and in Punjab/NWFP/Baluchistan, if the fair rent exceeds the rent being paid by the tenant on the date of filing the application, the maximum rent increase is 25%. In Sindh, where a fair rent has been fixed, no increase may be affected for three years. In any event, the increase in rent may not exceed 10% per annum on the existing rent. (continued)

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(continued) Country

Key provisions

Philippines

According to the Rent Control Act of 2005, a maximum of 10% annual rent increase is allowed for properties with monthly rent not exceeding PHP10,000 in urban areas such as Metro Manila and PHP7500 in other areas. (It is worth noting that properties covered by Rent Control law are exempt from 12% VAT.) Taiwan The Land Act (last amended in 2001) limits the annual rent to 10% of the property value. 2. Rent control in the Caribbean Aruba The Ordinance on the Rent Assessment Advisory Committee (1991), known as the “Ordinance”, applies to houses with a building value (including the ground value) of less than AWG100,000 (approx. US$55,000), which includes residential housing, shops, bars, restaurants, hotels and offices, with the exception of buildings located in hotels, airports and seaports. According to the mandatory rules of law, the Rent Assessment Advisory Committee—known as “the Committee”—is charged with the determination of the rent and with any requests to increase such rent. The Committee will base the rent on the percentage of the building costs. Bahamas The Rent Control Act of 1975 applies to dwellings with a total value less than BSD25,000 (1B$=1US$). Rent shall not exceed 15% of the assessed value of the house and land, 20% when furniture is included. According to one parliamentary minister, no house right now in the Bahamas is worth below B$25,000. Belize The Rent Restriction Act limits the amount of rent increase to 10% annually or to a prescribed level mandated by the Rent Assessment Board of each judicial district. Bermuda All homes and apartments (flats) with an Annual Rental Value (ARV) of less than BM$24,600 are subject to rent control, according to the Rent Increases (Domestic Premises) Control Amendment Act 2004. Rent increases must be agreed upon by the landlord and the tenant. In case the tenant refuses to agree, the landlord must ask for an approval from the Rent Commissioner. Dominica The Tenancies and Rent Control Act applies to dwelling houses where the rent is less than EC$800 (US$300) per month, and to residential land where the rent is less than $100 (US$37) per year. Dominican There is a universal rent control in Dominican Republic, with maximum Republic monthly rent fixed at 1% of the value of the rental property. The tenant can request the Rent Control Authority to reduce the rent if it exceeds the allowed maximum. If the landlord wishes to increase the rent, a permit must be filed and approved by the authorities, subject to appeal to a special commission. (continued)

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(continued) Country

Key provisions

Grenada

Rent increases can be reviewed under the Rent Restriction Act, Chapter 286 of the Revised Laws of Grenada, 1990 edition. Guadeloupe Similar to France, rent increases are tied to the INSEE construction cost index. Jamaica The landlord must make an application to the Rent Assessment Board. The latter sends a Valuation Officer to inspect the rental property. The Assessment Officer issues a Certificate of Assessed Rent, which contains the standard rent applicable to the premises. The standard rent is an annual percentage of the assessed value of the premises and is prescribed by the Minister. The current rent ceiling is 7.5% each year. The Board takes into consideration any increases in property taxes, improvements to the property and other related factors. Trinidad and Furnished dwelling houses with a monthly rent of TT$1000 (US$161.29) Tobago or less are subject to rent restriction. Unfurnished dwellings with a monthly rent of TT$1500 (US$241.93) are likewise covered. Under the Rent Restriction Act, rent adjustments for covered dwelling houses are subject to the approval of the Rent Assessment Board. Either the landlord or the tenant may apply for a review of rent. Every tenant and landlord, whether or not the dwelling house is covered by the Rent Restriction Act, is required to register with the Rent Assessment Board. The landlord has to register only once, but the tenant must register every time he signs a contract. If the tenant is unregistered, he loses most of his rights. US Virgin According to the Virgin Islands Code (Title 28, Ch. 31, Sec. 834), rents Islands in the US Virgin Islands are frozen at their 1947 level. For housing accommodations, the maximum rent ceiling is the rent that was in force and effect on July 1, 1947. For buildings created and/or rented after July 1, 1947, the maximum rent allowed is the first rent charged for the unit. However, the rent law is generally ignored. 3. Rent Control in Europe Austria In the unbefristet (unlimited contract) and the befristet (contract limited to a specified number of years), rent is subject to being set by the local authority, at the request of the tenant. Belgium The parties may freely agree on the rent. However, rent increases above the rate of inflation cannot be written into the contract. In fact, the law provides that if the contract is in written form, the rent will automatically be adapted once a year in accordance with the cost of living. In cases where there is disagreement, the Justice of Peace (Juge de Paix) has jurisdiction. The judge can allow a rent modification if new circumstances have provoked a rise or decrease in the normal rental value 20% above or below the rent previously agreed. (continued)

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(continued) Country

Key provisions

Cyprus

The rental market can be divided into two broad categories: Houses controlled by the Rent Control Law (1983) and the free market. The Rent Control Law and its updated amendments apply to tenancies of residential or business premises, which lie within what the law defines as “Controlled Areas”, that is, towns, suburbs and rural centers, which were completed before December 29, 1995. After the first tenancy has expired or been terminated, the law allows for an agreed increase of a maximum 14% of the existing rent, but not before the lapse of two years from the date of the last application, or the date of the last voluntary increase. In case of refusal by the tenant, the Rent Control Courts will determine a “reasonable rent”, taking into account the opinion of the official valuer and factors such as age, dimensions, location and condition. About 90% of the population still lives in controlled rental housing:  a.  controlled rents: rents are pegged per square meter according to the size of the town and the category of flat (there are four categories); or  b.  materially regulated rents: rents are calculated according to costs. Foreigners, renters of housing built after 1993 and new renters of houses with vacant possession live in the rent-free market. Rents on dwellings constructed after 1991 are exempt from rent control. There are five different forms of rent control in Denmark; the system is very complex. The system is based on the idea that landlords must not be allowed to profit from renters. Landlords are only allowed to pass on costs (property taxes excepted) incurred in the day-to-day operation of the property, and a prescribed charge to cover maintenance costs. They can also pass on a capital charge, which can vary between 7% and 14%, with properties built after 1963 getting higher amounts. However, the capital charge is calculated on the basis of the value of the house in 1973—with no allowance for inflation. Properties of less than seven dwellings are covered by different rules relating to the “value of the rented property”, but the result is much the same. If the Rent Tribunal fails, cases can go to a special division of the Country Courts called the Housing Courts (boligretter). A demand for a rent increase by a landlord must be made in writing sent three months prior to the date of effectivity. The notice has to state the reasons for increase and remind the tenant that he/she may raise an objection to the notice. The increased rent should not significantly exceed similar rents.

Czech Republic

Denmark

(continued)

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(continued) Country

Key provisions

France

The initial rent can be freely agreed between the owner and the renter. However, the rent can be revised only once a year, and only if a clause in the contract (carefully drafted) specifies it. The increase cannot be above the increase of the four-quarterly average of the INSEE index of construction costs. Index clauses and periodic clauses must comply with this. The law differentiates between two types of rental agreements—free and controlled (“obligatory rent”). In cases that fall in the “obligatory rent” sector, for example, residences owned by the municipality or the state, the rent is stipulated by law. The tenancy contract may be signed without even mentioning the rent. The rent shall be notified in writing by the Landlord (i.e. the municipality or state) to the Tenant within eight days of moving in. If the Tenant does not object to the notified rent in writing within eight days of delivery, the notified rent will become the actual rent. If no agreement is reached on the rent, both contracting parties may go to court to determine it. If the Landlord has notified the Tenant of a higher rent than provided by law, the court will order him to repay the difference. An increase or reduction in the rent can also be modified by law or by the court. Rents may initially be freely negotiated, but may not be increased after the initial four-year contract by more than 75% of the cost of living. Rentals are regulated. Dwellings built or substantially renovated after September 10, 1944, cannot produce for the landlord more than a 5% return on the capital invested in the building. The “capital invested” is the amount spent on the physical construction, either valued at the time of construction or re-valued at the date of entry into effect of the law. Those who cannot document their cost of construction must accept the opinion of the Commission on Rented Apartments. The landlord can propose to the tenant to use the acquisition price, but if the tenant objects, the view of Commission on Rented Apartments will prevail. If the construction took place more than twenty years ago, the value invested capital is deemed reduced by 10%. Rentals thus fixed may only be altered every three years. The rent of furnished apartments cannot be more than double the previous rates. Pre-1944 dwellings of more than 9 sq.m. may not be rented for more than 600 francs if they are “sans confort”, 1000 francs if they are “avec confort” and 1500 francs if they are “avec confort moderne”. The rentals of smaller dwellings are proportionately reduced. These limits do not apply to independent houses, villas and apartments occupied by one single household with at least seven rooms and “confort moderne”.

Hungary

Italy Luxembourg

(continued)

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(continued) Country

Key provisions

Netherlands

The rent paid can be freely agreed between the landlord and the tenant, for properties above the “liberalization rent limit” of 604.72 per month. Properties below this limit are subject to rent control under the Residential Tenancies (Rent) Act 1979, by which according to a “residential accommodation” points system (points matrix), features such as floor area, position, quality, and facilities earn points. A maximum rent is chargeable for a total number of points. Rent tribunals oversee situations of rent disputes and have the power to reduce rents. The Minister Vogelaar for Housing, Communities and Integration (WWI) sets the maximum percentage of increase. The maximum allowable rent increase from July 1, 2007, to June 30, 2008, is 1.1%, equivalent to the inflation in 2006. Dwellings in old pre-war housing with four or more units in Central Oslo have low, regulated rents, but this regulation was removed by 2010. The amount of the rent can usually be freely agreed between the parties, with the exception of low-cost housing (“conditioned rent” and “supported rent”). Rent reviews can also be freely agreed (although they must take place annually), and with careful drafting, cost of living, rent increases and suchlike can be agreed (although in some types of non-residential lease such freedom depends on the existence of a first term of five years for the lease). If no specific agreement exists, the rent may be adjusted by the landlord annually according to scales periodically established by law. The contracting parties can update rent on a yearly basis during the first five years of the contract only according to the variations of the Consumer Price Index (Indice de Precios al Consumo, IPC). Once this period of time has elapsed, the contract can be renewed at a new rent, which must not be more than 20% higher than the current rent. If the landlord makes improvements, he is entitled to increase the annual rent on the basis of the legal interest rate, incremented by three points, applied to the total investment, less any public subsidies. But the rent increase cannot exceed 20% of the rent. Rents in all dwellings must match rents for alternative, comparable dwellings, based on size and “attractiveness”, primarily rents in low-rent municipal houses. The system is enforced by Rent Tribunals. The rules apply to all rented dwelling units, with few exceptions. The rules are mandatory—if the tenant waives his rights, this must be approved by either the Rent Tribunal or form part of a collective contract agreed between landlord and the Swedish Union of Tenants. The landlord is required to notify the tenant if he proposes to increase the rent. If the tenant agrees, or is passive for more than two months, the new rent will be applied. But a tenant has the right to reject any rental increase, and the landlord has to appeal to the Rent Tribunal for the increase to take effect. Index clauses and progressive rent-increase clauses are invalid.

Norway Portugal

Spain

Sweden

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(continued) Country

Key provisions

Switzerland

The initial rent amount can be freely agreed between the landlord and the tenant. However, within thirty days after the takeover of the rented property, the tenant can appeal against the rent as abusive, if he was forced into agreeing to the rent due to serious personal or familial difficulties, due to the conditions of the local residential property and business premises market, or if the new initial rent is significantly higher for the same rented property than the old rent. This happens very rarely, because the judge is supposed to intervene only in extremis. For a tenancy that has been arranged for an indefinite period, several formal prerequisites have to be met by the landlord in order for a rent increase to be permitted. Besides these formalities, there are only a few legally admissible reasons for increasing the rent. It is easier to increase the rent in case of a fixed-term contract that has come to an end, but still, if the new rent is significantly higher than the old rent, it runs the risk of being seen as abusive. A progressive rent clause is possible, but only for tenancies that have been signed for a minimum of five years. The rent amount must then be adjusted in line with the Swiss Consumer Price Index. If the rental agreement is fixed for at least three years, rents can also be agreed to increase annually by a fixed formula. 4. Rent control in North America and Latin America Canada Rent increases are regulated in four provinces, the maximum allowable increase being determined annually. British The maximum allowable rent increase set by the Residential Tenancy Columbia Office in 2008 is 3.7% (based on provincial inflation plus 2%). Manitoba In Manitoba, rent increases are indexed to inflation plus an economic adjustment factor. For 2008, rent in Manitoba can be increased by 2.5%, according to the Residential Tenancies Branch. Ontario In Ontario, the Landlord and Tenant Board authorities have fixed the maximum allowable rent increase to 2.1% for 2008. Rent increases are based on the province’s inflation. Prince Rent increases are tied to the property, not the tenant. The Office of the Edward Director of Residential Rental Property sets the allowable rent increase Island annually. For 2008, only 1% rent increase is allowed. Additional increases must be approved by the respective rental authority. (continued)

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Key provisions

Colombia

Lease agreements can be made orally or in writing, and rents can be set freely by agreement between the landlord and the tenant, though the monthly rent cannot exceed 1% of the commercial value of the dwelling or of the part of the dwelling subject to the lease. Such commercial value cannot exceed two times the cadastral value of the dwelling at the time of the contract. There can be increases in the rent every twelve months of execution of the lease agreement. The increase cannot exceed 100% of the Consumer Price Index for the immediately preceding calendar year. In any case, the new rent has to conform to the parameters set forth above as to the limits of the initial rent. If the tenant believes that the increase made by the landlord exceeds market prices, he has six months to request a revision before the Mayor’s Office of the city where the dwelling is located. For housing purposes, the annual rent increase cannot be higher than 15%. To increase rent by more than 15%, the inflation rate must be higher than 15%, and the rent increase must be based on a certification of the inflation rate issued by the State. To increase the rent, parties should agree upon the amount of increase on a yearly basis. If there is no agreement, a claim can be filled by the landlord to increase the rent on a yearly basis. The Registry of Rents in each city sets maximum chargeable rents, determined by calculating the twelfth part of 10% of the commercial cost of each property, which is set by each city council. Normally, rents agreed by contract cannot be increased until the end of the contractual term. However, the landlord may request an increase in the rent, before the Registry of Rents, when the property has gone through improvement works, or when two years have gone by since the last time the rent was agreed between the parties. The law does not allow for any increase in the rents due to increases in cost of living. According to the Tenancy Law, if the value of the leased property is below US$2000, the Administrative Department of Lease Issues has certain rules and procedures for the regulation of rents. In general, lease agreements can freely incorporate increases in the rent every certain amount of years, as agreed between the parties. Nevertheless, rents equal to or lower than US$150 per month, which are regulated by Law No. 93 of October 4, 1973, can only be increased with prior a written authorization of the Ministry of Housing, which will issue its approval depending on the fairness of the sums charged to the tenant and the reasonableness of the return on the landlord’s investment.

Costa Rica

Ecuador

Honduras

Panama

(continued)

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(continued) Country

Key provisions

Uruguay

Rent increases fall under two different regimes: (1) Lease agreements regulated by Decree-Law 14.219 (DL), where rent increases are governed by an index set by the Statistics and Census National Division (Instituto Nacional de Estadisticas y Censos), the so-called Readjustable Rent Unit (Unidad Reajustable de Alquileres) (RRU). During the first year of DL contracts, rents cannot be increased. After the first year, the rent is multiplied by the change in the RRU. (2) Lease agreements regulated mainly by the Civil Code rules and by Law 8.153 of December 16, 1927 (Free Contracting), where rent increases may be freely set by the landlord and the tenant by mutual agreement, without restrictions.

US California

Washington, D.C.

New Jersey

New York

In San Francisco, California, the San Francisco Rent Board limits the allowable annual rent increase. If the landlord adjusted rents between March 1, 2008, and February 28, 2009, the Allowable Rent Increase was 2%, higher than the 1.5% allowable increase from March 2007 to February 2008. Under the law, the allowable rent increase should not exceed 7% annually. The Rent Stabilization Program (Occupancy and Rent Guidelines) prescribes maximum allowable rents and rent increases. For most units, the allowable annual rent increase is CPI plus 2 percentage points, but not more than 10%. For elderly and disabled tenants, maximum rent increase is equal to the CPI but not more than 5%. If the unit is vacated, the rent can be increased by a maximum of 10%. A landlord in Washington, D.C., can also ask for a Hardship Petition, which allows the landlord to increase the rent to a level that allows a 12% rate of return. There are other measures in place to provide incentives for the construction and maintenance of rental units. Local governments in New Jersey, such as Jersey City and Camden, impose maximum rent increases. For Jersey City, the annual maximum allowable increase is 4% or the Consumer Price Index (CPI-W), whichever is less. A hardship Rental Increase is also allowed to give landlords a fair return on their investments. Fair return is defined as 6 percentage points above the savings interest rate. In Camden, the annual allowable increase is the CPI or 6%, whichever is less. For the state of New York, rent control applies to buildings constructed before February 1947 in fifty-one municipalities including New York City. Generally, the number of tenants under rent control is getting smaller each year. Rent stabilization, on the other hand, applies to apartments with a monthly rent of less than $2000. As an example, the allowable rent increase for rent-stabilized apartments in New York City is 2.75% for leases lasting for one year with heating provided by the landlord. Landlords can also apply for Comparative Hardship or Alternative Hardship, where they can be allowed to increase rents up to 6% annually. (continued)

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5. Rent control in the Middle East Egypt It is practically impossible to obtain rent increases in tenancies governed by the old socialist laws, Law No. 49/1977, Law No. 136/1981 or any earlier legislation. These laws apply to contracts entered into before the reforms in 1996 including contracts assigned to household members of the original tenant. When Law No. 49/1977 applies, an increase in rent depends on a reassessment of the official administrative value of the property, which will only take place in special circumstances, for example, in the event of an increase in the height of the building or the addition of a new building. Qatar Rents are frozen at their current level with the new Lease Law (No. 4 of 2008) while the government is determining the new rent increase cap. From February 2006 to February 2008, rent increases were limited to 10% annually under law No. 4 of 2006, which was replaced by the new Lease Law. Syria Rents may be freely agreed between the landlord and the tenant, except in the case of contracts entered into before the coming into force of Law No. 6 of 2001 and which remain occupied either by the original tenant or by his household members. The annual rent is fixed by law at 5% of the market value of the real estate if the purpose of the rental agreement is residential, and 7% if it is commercial. Rents payable under contracts governed by the old laws may only be increased by securing a reassessment of the market value of the real estate. The landlord is required to file a case with the local reconciliation court, which will appoint a real estate expert to assess the market value of the real estate. The rent will then be adjusted by applying the 5% (or 7%) rate to the ascertained market value of the real estate. Tunisia For contracts governed by Law No. 76–35 of February 18, which grants security of tenure, the initial rent can be freely agreed between the owner and the tenant, but rents are automatically subject to an annual increase of 5%. UAE In Dubai, annual rent increase permitted in 2008 is 5%. Abu Dhabi likewise set the rent cap for 2008 at 5%. 1. Source: Global Property Guide (2017; http://www.globalpropertyguide.com/faq/inheritance-­law-­ and-­taxes) and associated Contributing Law Firms (http://www.globalpropertyguide.com/ contributing-­law-­firms) 2. Source: Global Property Guide (2017), and associated Contributing Law Firms 3. Source: Global Property Guide (2017; http://www.globalpropertyguide.com/faq/inheritance-­law-­ and-­taxes ), and associated Contributing Law Firms (http://www.globalpropertyguide.com/ contributing-­law-­firms) 4. Source: Global Property Guide (2017), and associated Contributing Law Firms 5. Source: Global Property Guide (2017); and associated Contributing Law Firms

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Modai-Snir, T., & van Ham, M. (2018). Neighbourhood Change and Spatial Polarization: The Roles of Increasing Inequality and Divergent Urban Development. Cities, 82, 108–118. Monnet, E., & Wolf, C. (2017). Demographic Cycles, Migration and Housing Investment. Journal of Housing Economics, 38, 38–49. Myerson, R. (2000). Economic Analysis of Constitutions. University of Chicago Law Review, 67, 925–945. New York City Rent Guidelines Board. (2017). History of the Board and the Rent Regulation System (Part III): Noteworthy Aspects of Selected Court Cases. Retrieved from http://www.nycrgb.org/html/about/intro/History(3).html. Nguyen, V., & Claus, E. (2013). Good News, Bad News, Consumer Sentiment and Consumption Behavior. Journal of Economic Psychology, 39, 426–438. Nwogugu, M. (2005a). Legal, Economic And Corporate Strategy Issues In Housing In The ‘New’ Economy’: New Theories Of Industrial Organization And Structural Change. Working paper. Available at: https://www.researchgate.net/publication/228163582_Legal_Economic_and_Strategy_Issues_in_Housing_in_the_ New_Economy. Nwogugu, M. (2005b). Structural Changes in the US Retailing Industry and Legal, Economic and Strategy Implications for the US Real Estate Sector. Working paper. Nwogugu, M. (2008). Some Antitrust Problems and Related Economic Issues in Real Estate Brokerage, Professional Licensing for Real Estate Websites and Rent-Control/Rent-Stabilization. Corporate Ownership & Control, 6(1), 398–417. Nwogugu, M. (2012). Risk in the Global Real Estate Market. John Wiley. Nwogugu, M. (2017). International Capital Flows, Complexity and the Illegality of the “Sharing Economy” and Digital Currencies. Working Paper. www.ssrn.com. Ochsen, C., & Welsch, H. (2012). Who Benefits from Labor Market Institutions? Evidence from Surveys of Life Satisfaction. Journal of Economic Psychology, 33(1), 112–124. OECD, ed. (2016, September 29–30). New Approaches To Economic Challenges – Insights Into Complexity And Policy. 2016. OECD Headquarters, Paris. Retrieved from https://Www.Oecd.Org/Naec/Insights%20into%20 Complexity%20and%20Policy.Pdf. Ost, C. (2014). Economic Incentives, Housing Allowance, and Housing Consumption: An Unintended Consequence of a Shift in Housing Policy. Journal of Housing Economics, 23, 17–27. Oust, A. (2018). The Removal of Rent Control and its Impact on Search and Mismatching Costs: Evidence from Oslo. International Journal of Housing Policy, 18, 433–453. Paradiso, A., Kumar, S., & Marganic, P. (2014). Are Italian Consumer Confidence Adjustments Asymmetric? A Macroeconomic and Psychological Motives Approach. Journal of Economic Psychology, 43, 48–63.

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CHAPTER 4

Constitutionality of Real Estate Taxes and Corporate Location Incentives, and Some Associated Economic Psychology and Complex Systems Effects

This chapter explains why the present regime of real property taxation and Corporate Location Incentives in the United States, Germany/EU and many common-law countries are unconstitutional, and can negatively affect economic growth and sustainability. The inherent constitutional economics issues affect government allocations and spending, corporate spending, site selection decisions of large companies; local/regional employment and economic growth, labor dynamics, household spending, business confidence, consumer confidence, sustainable growth and so on. Real Property Taxation is a major element of municipal finance in most countries—for example, during 1990–2020, most towns/cities in the United States generated more than 30% of their annual revenues from real property taxes. The purchase/sale of real property and the analysis/prediction of trends in real estate markets and housing markets are also very much dependent on real property tax dynamics. During 1980–2020 and This chapter is a substantially revised version of the following article: Nwogugu, M. (2008). Un-constitutionality of Real Property Taxation and Location Incentives and Some Associated Economic Effects. Corporate Ownership & Control, 5(3), 390–404. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_4

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in many democratic and Common-Law countries, real property taxes were a highly controversial and politicized issue and a critical success factor in state and local government elections. State governments in many developed countries routinely offer Corporate Location/Relocation Incentives1 to coerce firms to relocate. These incentives are typically in the form of full or partial exemptions 1  See: “NYC’s mass exodus to Florida, Texas driven by economic incentives: Ex-NYSE CEO ‘[Texas and Florida] demonstrated to companies that they want their business …and they’ll do everything they can to incentivize their relocations’”. By Caleb Parke, FOX Business, January 14, 2021. https://www.foxbusiness.com/economy/new-york-florida-texas-coronaviruspandemic-move-exodus-dick-grasso. See: Bartik, T. (2017). A new panel database on business incentives for economic development offered by state and local governments in the United States. W.E.  Upjohn Institute for Employment Research for Pew Charitable Trusts. Kalamazoo, Michigan. Retrieved from https://research.upjohn.org/reports/225/. See: Ryan, G. (2017). In a first, state claws back EDIP job creation tax incentive from Warren Buffett-owned firm. Boston Business Journal, (1/21/17), 1–2. See: Russo, J. (2014). START-UP NY: a game changer For The “New” New York. Site Selection Magazine, May. http://siteselection.com/issues/2014/may/sas-empire-state.cfm. See: Migdal, B. (2016). Weighing economic incentives in the location decision. Area Development. Q1. http://www.areadevelopment.com/taxesIncentives/Q1-2016/ Weighing-Economic-Incentives-Location-Decision-345566.shtml. See: Hicks, M. (2014). Why tax incentives don’ t work: the altered landscape of local economic development. http://projects.cberdata.org/reports/TaxIncentivesDontWork-paper.pdf. See: Grabar, H. (2017). Corporate incentives don’t work and cost the U.S. $45 billion in 2015. http://www.slate.com/blogs/moneybox/2017/03/10/corporate_incentives_ don_t_work_and_cost_the_u_s_45_billion_in_2015.html. See: Chen, W. (2016). Biomedical industry development project approved: the government plans to invest NT$10.94 billion in the industry next year to develop large-scale healthcare firms, new drugs and new medical devices. Taipei Times, Nov 11, Page 1. http://www. taipeitimes.com/News/front/archives/2016/11/11/2003659017. See: Chapman, J. (2016, December). Evaluating the effectiveness of State tax incentives, 5–7. Kauffman Foundation Thoughtbook, pp.  4–7. http://www.kauffman.org/thoughtbook2015/exploring-and-engaging#entrepreneurshipstartsathome. See: Understanding Economic Subsidies & Incentives for Corporate Relocations. By Michael Lewis. https://www.moneycrashers.com/economic-subsidies-incentives-corporate-relocations/. (“The following examples are representative of the mega-deals documented by the Good Jobs First organization:

• AMD Microchip Factory in New York. New York State provided $1.2 billion in grants and tax reductions for a new microchip factory and 1200 jobs. Cost per job created was $1 million. • Nike Operations in Oregon. In 2012, Nike got the State of Oregon to guarantee the company would enjoy single sales factor breaks (only taxed on Oregon sales) for 30 years with an estimated worth of $2 billion if the company agreed to keep its

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(from real property taxes); Tax Credits (e.g. Research and Development Tax Credit, Corporate Income Tax Credits and Investment Tax Credits), Discounted Utility Deals grants, Cash Grants, Sales Tax abatements, Corporate Income Tax Credits, Sales Tax Exemptions and Reductions, Single Sales Factor Tax Deals and so on. Corporate Relocations often have political implications such as the following: (1) In countries where the numbers of elected representatives allocated to each state or local-county are determined by population, Corporate Relocations can increase populations and change the allocation of elected-representative seats at the federal, state and local government levels. (2) Corporate Campaign contributions are likely to vary based on the locations of the headquarters of large and medium-sized companies. (3) Corporate Lobbying and the issues lobbied for are sometimes based on the locations of the headquarters of large and medium-­ sized companies. (4) The siting/location of large development/infrastructure projects by federal and state governments (and the associated political processes and Political Capital) often partly depends on the locations of large/medium companies. (5) State and federal government budgets and the associated political processes, negotiations and political lobbying are or can be affected by the actual and anticipated locations of companies. operations in Oregon. The number of new or retained jobs according to public information was 500; cost per job was $4.04 million. • Nissan Automobile Assembly Plant in Mississippi. Nissan received $1.25 billion in subsidies for creation of 4000 jobs; cost per job was $300,000. • Toyota Auto Assembly Plant Expansion in Kentucky. The company received $146.5 million in subsidies for 750 new jobs; cost per job was $195,333. • Prudential Financial Headquarters Relocation to New Jersey. Company received $210.8 million in subsidies in 2012; number of jobs involved is not publicly available. • Cheniere Energy Sabine Pass Natural Gas Liquefaction Plan in Louisiana. Company received $1.69  billion in incentives in return for 225 new jobs; cost per job was $7.5 million. Subsidies do not just exist when companies move across state lines—there is similar competition between cities, counties, and regions within a state. In 2011, two companies— Panasonic and Pearson Educational—received $184.5 million in incentives even though they moved within the State of New Jersey….”).

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(6) The enactment/rescission of Industry-Specific taxation and regulations (by federal and state governments) often partly depends on the locations of large/medium companies. US states and state governments in most commonwealth countries generally have broad discretion in tax policy.2 While the analysis in this chapter pertains to US and German/EU state/local laws/regulations (governing tax assessment, tax collection, tax foreclosures and incentives offered to firms to relocate to states), it is applicable in most common-law jurisdictions.

4.1   Existing Literature There have been some studies of the constitutionality of Corporate Location Incentives in the United States—these studies have provided mixed conclusions—in almost all instances, while the US Supreme Court cases effectively invalidated all Location Incentives, the authors proffer unreasonable and un-supported alternative rationale for the legality of Corporate Location Incentives. The literature on the constitutionality of Corporate Location Incentives3 and associated Political Economy issues in the United States is extensive—see Enrich (December 1996), Vanistendael (1996), Hale (1985), Nechyba (1997), Hellerstein (1994, June 1996), DeLysa (1992), Burstein and Rolnick (1994), Choper and Yin (1998), Tate (1990), Enrich (December 1996), Gihring (1999), Lirette and Viard (2015), Knoll and Mason (2017), Knoll and Mason (2021), Plastaras (2018), Brill et al. (2018), Mason (2019) and Zelinsky (2016).

 See: Lehnhausen vs. Lake Shore Auto Parts Co., 410 U.S. 356 (1973, US Supreme Court). See: Kahn vs. Shevin, 416 U.S. 351 (1974; US Supreme Court). See: City of Pittsburgh vs. Alco Parking Corp., 417 U.S. 369 (1974; US Supreme Court). 3  See: Complete Auto Transit vs. Brady, 430 US 7274 (1977; US Supreme Court). See: Tyler Pipe Industries vs. Department Of Revenue, 438 US 232 (1987; US Supreme Court). See: Armco vs. Hardesty, 467 US 638 (1984; US Supreme Court). See: C&A Carbone vs. Town of Clarkstown, 114 S.Ct. 1677 (1994; US Supreme Court). See: Fort Gratiot Sanitary Landfill Inc. vs. Michigan Department of Natural Resources, 504 US 353 (1992; US Supreme Court). See: Nippert vs. City of Richmond, 327 US 416 (1946; US Supreme Court). 2

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On Economic Psychology issues pertaining to Corporate Location Incentives, see Knoll and Mason (2017) and Springer (2018). On Economic Development processes and issues pertaining to Corporate Location Incentives, see Phillips and Sheikh (2020), Rutherford (2012), Lester et al. (2014) and Jansa and Gray (2016). On “Social Infrastructure”, see Vanberg (2011) and Eicher et al. (2018). Mason an Knoll (2014) discussed tax discrimination in the United States and EU.  On the constitutionality of wealth taxes, see Dunbar (February 1901), Andres (2018) and Plastaras (2018). Surico & Trezzi (2019) confirmed the relationship between real estate taxes and consumer spending. Changes in real estate taxes also affect incomes of landlords. Outstanding Real estate taxes and tax liens can affect household dynamics and consumption patterns. On consumption responses to shocks, also see: Bunn, Roux, et al. (2017), Cloyne & Surico (2017), Oliviero & Scognamiglio (2016) and Mian & Sufi (2016). On property tax reform in Emerging Markets countries, see: Asia Development Bank (ADB) (Dec. 2020), Booth (2014), Li, Anderson & Schmidt (2020), Norregaard (2013), Ahmad, Brosio & Jimenez (2019), Lincoln Institute (2021), Jibao & Prichard (2015), Fairfield (2013), Cheibub (1998), Weingast (2014), and Barrios, Ivaškaitė-Tamošiūne, et al. (2020). With regard to the political economy issues associated with the constitutionality of real property taxes, it seems that the constitutional law issues are very much intertwined with economic issues pertaining to real property taxes—on Economic Psychology and Political Economy issues, see Cypher and Hansz (December 2003), Bryson and Comia (2003), Wunderlich (1997), Sacher (1993), McCluskey et  al. (1998), Adern (2000), Hale (1985), Byrne (2006), Fischel (April 2000), Cornia and Slade (2005), Poterba (1984), Glaeser (1996), Moomau and Morton (1992), Nechyba (1997), Miller (1993) and Kades (2002). Nwogugu (2008) explained why the real estate tax system in most US states is unconstitutional. The literature on the constitutionality of real property taxes is extensive—see the cases cited in this chapter, and also see Alexander (2002), Wunderlich (1997), Alexander (2000), Chicoine et al. (1981), Tushnet (2003), Cornia and Slade (2005), Poterba (1984) and Lundquist (1970).

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4.2   Geopolitical Risk and Some Economic Psychology4 and Cross-Border Spillover Effects of Real Estate Taxes and Corporate Location Incentives The extensive literature on Social Capital, Social Networks and Cross-­ Border Spillovers is summarized in Chap. 2 of this book. Real Estate Taxes and Corporate Location Incentives are major Geopolitical Risk cross-­ border Spillover Risk, and Economic Psychology factors because of the following reasons: (1) Many foreign investors now actively invest in foreign real estate markets through many types of vehicles and strategies. Many countries and their subsidiary states use Property tax abatements and Corporate Location Incentives to lure foreign investors (e.g. Foreign Investment and Foreign Direct Investments—to invest in companies, specific infrastructure projects; real estate projects; manufacturing projects; stock markets). Thus, Property Taxes and Corporate Location Incentives invariably affect International Capital Flows. (2) Real estate taxes and Corporate Location Incentives are major investment criteria for both foreign investors and out-of-state domestic investors, especially in capital-intensive industries. Thus, real estate taxes and Corporate Location Incentives affect International Capital Flows and Risk-Perception. (3) Property Taxes and Corporate Location Incentives can have significant negative social, economic, psychological, political and environmental consequences and which can also have Multiplier Effects on risk perception, consumer psychology and preferences. There can be different rates of economic growth and sustainability improvement (among countries and among states within a country) based solely on real estate taxes and Location Incentives. 4  On associated Economic Psychology, International Labor Market and  Behavioral Macroeconomics issues, see Hardardottir (2017), Birz (2017), Dixon et al. (2014), Qian et al. (2019), Debelle (2004), Ochsen and  Welsch (2012), Paradiso et  al. (2014); Garcia, Opromolla, & Marques (2021); Bavetta et  al. (2021); Torgler and  Schneider (2009); Nguyen and Claus (2013); Pántya et al. (2016); Vanberg (2011), Eicher et al. (2018), Jacob (2011), MacDonald (2013), Banker et al. (2020); Blaufus e al. (2019); Cypher and Hansz (December 2003), McCluskey et al. (1998), Moomau and Morton (1992), Nechyba (1997), DeLysa (1992), Wunderlich (1997), Sacher (1993), Gervais (2003), and  Rubinfeld and Polinsky (April 1978).

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(4) There are significant differences in compliance rates (for real estate taxes and Location Incentives) around the world and even within countries. (5) The impact of Real estate Taxes and/or Corporate Location Incentives on infrastructure and critical systems varies dramatically around the world there are significant differences in Real estate Taxes and/or Corporate Location Incentives around the world and both factors are sometimes a function of the following: (i) the existing political system, political influences and political lobbying in the country, Federalism and Preemption Doctrines in each country; (ii) regional political alliances; (iii) politics of Foreign Aid; and (iv) membership of international organizations such as the WTO. (6) In many developed and developing countries, many tax liens arise from non-payment of real estate taxes. The processes of settlement, litigation and auctions of such tax liens can have significant effects on real estate prices, real estate demand, risk perception, consumer psychology, policy formulation and so on. (7) In many common-law democratic countries, Real estate Taxes and or Corporate Location Incentives are highly contentious issues in political elections and affect election outcomes at the state and local/municipal government levels. (8) In many developed and developing countries, real estate taxes account for more than 30% of the annual revenues of most local/ municipal governments, and thus affect the provision of infrastructure and basic services by local governments; and also affect the credit ratings of municipal bonds and government bonds. Reductions of such government revenues tend to also reduce services provided by state and local governments which in turn affect immigrants’ savings/income/well-being, remittances to Emerging Market countries, Consumer Confidence, Business Confidence, Construction Starts, Consumer and Corporate expenditures, investments/FDI/FI/Foreign Aid in Emerging Market countries, imports from Emerging Market countries and so on. In the United States, municipal bonds are usually tax free to many types of investors and also attract foreign investors. (9) There are or there can be significant differences in the reactions of stock, bond, currency and commodity markets to real estate Taxes and Corporate Location Incentives in various countries.

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(10) In many countries, state and local governments have the right to unilaterally and arbitrarily raise real estate taxes, which in turn affect local economies and the relocation, site selection and real estate lease-renewal decisions of companies and government agencies. (11) Only the fear, uncertainty and anxiety caused by the prospects of increased real estate taxes are sufficient to crash commercial real estate values, municipal bond prices/markets and exchange rates. (12) During Epidemics/Pandemics, economic/financial Crisis and other Crisis, state and/or federal governments can choose to freeze real estate contracts and/or business contracts—which in the case of real estate will terminate monthly rents and make real estate ownership unaffordable for both domestic and foreign investors. Governments can also freeze real estate taxes as a type of intervention and relief. (13) Real Estate taxes and Corporate Location Incentives and associated assessment processes, tax liens and tax foreclosures are critical Economic Psychology factors that affect housing demand/supply; mortgage demand/supply; risk perceptions, household financial decisions and public policy. Real estate Taxes and Corporate Location Incentives and associated assessment processes, tax liens and tax foreclosures significantly affect household budgets and economics—the home is usually the biggest investment of more than 75% of all households in most countries, and typically account for more than 70% of the retirement wealth/savings of senior citizens in many developed countries. (14) For countries that experience substantial amounts of FDI and Foreign Investment and countries that heavily depend on tourism, the methods and timing of property tax assessments and the actual real estate tax rate can become foreign policy issues and International Relations controversies. (15) The methods and timing of property tax assessments and the actual real estate tax rate are or can be politically influenced in countries that operate democratic systems of government and even in authoritarian regimes. (16) Many foreign companies are expanding to other countries. For such companies, real estate taxes and Corporate Location Incentives are major selection criteria, and their foreign expansion decisions also affect exports/imports from Emerging Market countries, remit-

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tances to Emerging Market countries, investments/FDI/ FI/Foreign Aid in Emerging Market countries, corporate/government bond credit ratings in, and capital-flows to/from Emerging Market countries and so on. (17) The imposition or elimination of Real estate Taxes and/or Corporate Location Incentives by state, local or federal governments can have significant effects on the investment returns and monitoring costs of foreign investors and out-of-state investors.

4.3   Corporate Location Incentives and Real Estate Taxes as Quasi-Labor Regulation In many countries (such as the United States, Canada and the United Kingdom), Corporate Location Incentives function as quasi-Labor-­ Regulation because: (1) Corporate Location Incentives and real estate taxes can affect labor mobility. (2) Corporate Location Incentives and real estate taxes directly affect real estate brokers’ working conditions and payoffs. (3) Corporate Location Incentives can affect workers’ rights—including the rights of brokers, ancillary workers such as lawyers, appraisers and insurance agents. Real estate taxes can also affect such worker rights through tax liens, tax compliance requirements for property sales, professional responsibility codes/standards that pertain to tax compliance and so on. (4) Corporate Location Incentives and real estate taxes affect employers’ exposure to labor costs (such as employee salaries/commissions, employee taxes, employee benefits, other employee payment/ deductions and social security taxes). Real Estate taxes also affect employer’s labor-dynamics exposures through actual/perceived caps on employee costs, tax abatements granted to such employers and so on. Thus, Corporate Location Incentives can also affect workers’ morale and motivation. (5) Corporate Location Incentives and real estate taxes can affect labor unions, Industry Associations and collective bargaining processes in the real estate, construction and other industries (manufacturing, services etc.). That is, Labor Unions and Industry Associations sometimes participate in negotiation of Corporate Location

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Incentives and are subject to state/location Executive Orders, Regulations and agreements that pertain to such Corporate Location Incentives. Also, Labor Unions and Industry Associations can lobby state or municipal governments for reductions of real estate taxes (to benefit their members). (6) Corporate Location Incentives affect the allocation of labor resources across industries and industry sectors. See the comments in Ochsen and Welsch (2012), Haferkamp et  al. (2009), Qian et  al. (2019), Torgler and Schneider (2009) and Pántya et al. (2016).

4.4   The Court Erred in Tax Equity Now NY LLC vs. City of New York, et al.5 (New York State Appellate Division; Feb. 2020) by Ruling That New York City’s Property Tax System Is Constitutional In Tax Equity Now NY LLC vs. City of New York, et al., the plaintiffs made a strong case for the unconstitutionality of New York City’s (NYC’s) property tax regime. The court ruled that: (1) The New York City (NYC) real estate tax system could cause discrimination—but the court rejected the claim that any such discrimination was “Arbitrary” such that it violated the Equal Protection Doctrine; and that the NYC real estate tax system didn’t violate “Equal Protection” Clause as defined by current legal standards.

5  See: Tax Equity Now NY LLC vs. City of  New York, et  al. (New York State Appellate Division; USA; 1st Department; No. 2019-3610; Feb. 27, 2020). See: NYC Property Tax System Survives Court Challenge. Feb. 27, 2020. Updated: Feb. 28, 2020. By John Herzfeld. https://news.bloombergtax.com/daily-tax-report/ nyc-property-tax-system-survives-court-challenge. See: Mason and Knoll (2014) (stating: “In an article published in 2012, entitled ‘What Is Tax Discrimination?’, we offered two main arguments. First, we argued that tax discrimination, prohibited by European Union (EU) law, is not (as other scholars have argued) an incoherent concept…”).

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(2) The elements of the NYC tax system that were alleged to be unfair or discriminatory had a rational basis and advanced a legitimate government purpose. (3) TENNY members had enough property interests at stake in the NYC real estate tax system and thus had “standing” to file lawsuits. The NYC property tax advisory commission (NYCPTAC) was created in 2018 to investigate revisions to the NYC property tax system. The NYCPTAC report was issued on January 31, 2020, and it recommended the following (the “NYCPTAC Recommendations”): ( 1) Property tax assessments should be based on market values. (2) All caps on property tax assessments should be eliminated. (3) Co-ops and condos should be placed into the same tax class as small residential properties. Individually and collectively, the NYCPTAC’s Recommendations indicate that the NYC real estate tax system is inequitable and unconstitutional. 4.4.1  The “Change Criteria” Real estate taxes affect property values and landlords’ incentives to maintain such real estate—actual and perceived high taxes and/or Tax Inequity may cause landlords to abandon their properties and that usually leads to a cycle that causes neighborhood declines, dilapidated housing units and more crime. There is a very urgent need to change the method of classifications, tax calculations and application of real estate tax statutes6 because unlike in the past: (1) Today, actual and prospective property owners are much more sensitive to real estate taxes. In many countries, real estate taxes are not tax-deductible items and cannot be, or are usually not insured. The nature of homeownership and the financing of real estate have  See: Matter of Walsh vs. Katz, 17 NY3d 336, 343 [2011]; Foss vs. City of Rochester, 65 NY2d 247, 256 [1985]; Trump vs. Chu, 65 NY2d 20, 25 [1985]; Nordlinger vs. Hahn, 505 US 1, 11 [1992]; Lehnhausen vs. Lake Shore Auto Parts Co., 410 US 356, 359 [1973]. See: “NYC’s property tax assessment system is unconstitutional: suit”. By Lois Weiss. April 25, 2017. https://nypost.com/2017/04/25/nycs-property-tax-assessment-system-isunconstitutional-suit/. 6

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changed drastically compared to the 1960s, 1970s and 1980s. In the United States and most developed countries, (1) greater percentages of housing units and commercial real estate are now owned by foreigners, companies, women and immigrants; (2) more foreign investors, immigrants and women are involved in the debt and equity financing of the construction and acquisitions of all types of real estate; (3) more debt/mortgages (both the number of loans and the dollar-volume/principal-amounts) are used in the acquisitions of real estate; (4) overall consumer/household debt levels are much higher than in the past; (5) concepts and perceptions of Tax Equity are much less homogenous than before; (6) the utility gained from homeownership is much less homogenous than before. Thus, real estate tax issues are amplified/propagated across national borders by these factors. (2) Real estate taxes have been overly politicized in many countries and remain highly controversial issues. (3) The real estate tax statutes of most cities/states in developed countries (and in many emerging markets countries) were enacted more than forty years ago (and haven’t been substantially amended) when technology, politics, values and media trends were very different. Today, the Internet and media make property taxes and associated controversy, commentary and perceived Tax Inequity quickly and readily available to the public, which can have damaging effects on real estate values and even the bond markets, stock markets and construction activity (Construction Starts are affected by actual/perceived trends in the real estate sector). (4) Real estate tax is a key decision criterion for persons and companies that are considering relocation to other cities/neighborhoods and has a direct and significant effect on government tax revenues, consumer expenditures, corporate expenditures, landlords’ income and consumption, Consumer confidence and Business Confidence. (5) In the realm of the New York City real estate tax statutes (and similar tax statutes in other countries/jurisdictions), several Constitutional rights are simultaneously implicated and violated such as Equal Protection rights, Takings7 rights, Due Process rights and the Right to Contract. 7  See: Federal Republic of Germany et al. vs. Philipp et al. (No. 19–351; February 3, 2021; US Supreme Court). https://www.supremecourt.gov/opinions/20pdf/19-351_o7jp.pdf. See: Republic of Austria vs. Altmann, 541 U.S. 677 (US Supreme Court).

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(6) As of 2020, the real estate tax system in New York City was similar to those in many other countries (and New York City is one of the largest global financial centers in the world, and its real estate trends can have cross-border Multiplier Effects), but the economic and psychological consequences of such real estate tax systems were and remain significant and damaging in terms of price discovery, anxiety/depressions of homeowners, perceived Tax Inequity, distortions in property values, inflated prices of high-priced real estate, relatively understated prices of lower-priced real estate, volatility in stock markets and bond markets etc.. (7) The New York City real estate tax statutes (and similar taxing statutes around the world) impose classifications on the basis of one or more suspect classes and also impair at least two fundamental constitutional rights of property owners (as explained herein and below). (8) In the case of the New York City real estate tax statutes, the challenged classification (of real estate and property owners) wasn’t rationally related to the achievement of a legitimate State purpose because it can be argued that the tangible/monetary and nontangible/nonmonetary harm and negative Multiplier Effects caused by such misclassification: (i) is significant enough to warrant a change in real estate tax statutes; and/or (ii) far outweighs any real estate tax revenues collected by the New York government. In Tax Equity Now NY LLC vs. City of New York, et al. (New York State Appellate Division; USA; 1st Department; No. 2019-3610; Feb. 27, 2020), the court didn’t base its decisions on any study and quantification of the economic, psychological, social and political costs of the then current real estate tax statutes in New York City; or on any study of the Economic Psychology effects of the challenged real estate tax regime.

See: Bolivarian Republic of Venezuela vs. Helmerich & Payne Int’l Drilling Co., 581 U.S. _____ (2017; US Supreme Court).

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While neither the US Federal Constitution nor the New  York State Constitution “prohibit[s] dual tax rates or require[s] that all taxpayers be treated the same” (Foss vs. City of Rochester, 65 NY2d 247, 256 [1985]), they require “that those similarly situated be treated uniformly”; but on the contrary, the classification of taxpayers (by the New  York City real estate tax statutes) was highly arbitrary, discriminatory and unreasonable and the taxes imposed were non-uniform within each class of property owners. The foregoing indicates that the New York City tax statutes violate the Equal Protection Doctrine, the Takings Doctrine and other constitutional law doctrines. 4.4.2  The Takings8 Doctrine The State Action is the enactment and implementation of New York City real estate tax statutes. The following issues noted by the NYCPTAC Recommendations are the problems inherent in the NYC real estate laws that create Takings: (1) Property tax assessments should be based on market values that are established by both the government and private sector appraisers. Any other method creates unjustified Takings. (2) All caps on property tax assessments should be eliminated. Imposing caps benefits owners of higher priced real estate (inflates their property values) and imposed Takings on owners of lower-priced real estate. (3) Co-ops and condos should be placed into the same tax class as small residential properties. While the assessment caps serve a legitimate purpose, they are not applied in a proportionate way to: (1) people that own fast-appreciating real estate versus those that own slow-appreciating real estate; (2) wealthy homeowners who should pay proportionally higher taxes or should have higher property tax rates versus non-wealthy wealthy homeowners who 8  See: Federal Republic Of Germany et al. vs. Philipp et al. (No. 19–351; February 3, 2021; US Supreme Court). https://www.supremecourt.gov/opinions/20pdf/19-351_o7jp.pdf. See: Republic of Austria vs. Altmann, 541 U.S. 677 (US Supreme Court). See: Bolivarian Republic of Venezuela vs. Helmerich & Payne Int’l Drilling Co., 581 U.S. _____ (2017; US Supreme Court).

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need the assessment caps more. Thus, the assessment cap unfairly discriminates against classes of NYC property owners—for example, those whose property values are in the lower 50th percentile and less-wealthy property owners. By charging owners of lower-valued real estate proportionally higher real estate taxes compared to owners of higher-valued real estate, the NYC government: (1) creates distortions in property values (disproportionate reduction in market values of lower-valued real estate, and inflation of market values of higher-valued real estate); (2) in effect implements a Takings for which such property owners are not compensated. Such Takings doesn’t advance any government interests. The government’s interest in collecting property taxes is far outweighed by the discriminatory effects of the NYC tax statutes on owners of lowervalued real estate and the distortion (in property values) that it causes. Epstein (2012)9 noted the distortions in the modern US Takings law. 4.4.3  The Equal Protection Doctrine The State Action is the enactment and implementation of NYC tax statutes. The “NYCPTAC Recommendations” address key issues in the NYC tax statutes that violate the Equal Protection Doctrine: (1) Property tax assessments should be based on market values in order to be equitable. Not doing so will cause discrimination in favor of owners of fast-appreciating properties and against owners of slow-­ appreciating properties. (2) All caps on property tax assessments should be eliminated. The key issue is that while the assessment caps serve a legitimate purpose, they are not applied in a proportionate way to: (1) people that own fast-appreciating real estate versus those that own slow-­appreciating real estate; (2) wealthy homeowners who should pay proportionally higher taxes or should have higher property tax rates versus non9  See: Epstein (2012) (noting that “modern Takings law is in vast disarray because the Supreme Court deals incorrectly with divided interests under the Takings Clause of the Fifth Amendment….under current takings law, a physical occupation with trivial economic consequences gets full compensation. In contrast, major regulatory initiatives rarely require a penny in compensation for millions of dollars in economic losses…, the arguments are not sufficient to defend the distinction. Quite simply, the distinction between physical and regulatory takings does not pay its own way, which becomes more evident when we ask two key questions: Why draw this line? How should we draw this line…”).

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wealthy wealthy homeowners who need the assessment caps more. Thus, the assessment cap unfairly discriminates against classes of NYC property owners—for example, those whose property values are in the lower 50th percentile, and less-wealthy property owners. Such discrimination doesn’t advance any government interests. (3) Co-ops and condos should be placed in the same tax class as small residential properties—otherwise owners of both types of properties may be unfairly discriminated against because real estate taxes affect property values. The government’s interest in collecting property taxes is far outweighed by the discriminatory effects of the NYC tax statutes on owners of lowervalued real estate and the distortion (in property values) that it causes. 4.4.4  The Due Process Doctrines (Substantive and Procedural Due Process Doctrines) The State Action is the enactment and implementation of NYC tax statutes. The “NYCPTAC Recommendations” address key issues in the NYC tax statutes that violate the Due Process Doctrine: (1) The method of calculating NYC real estate taxes was inherently discriminatory. Property tax assessments should be based on market values in order to be equitable. Not doing so will cause discrimination in favor of owners of fast-appreciating properties and against owners of slow-appreciating properties; and in favor of high-priced real estate and against low-priced real estate. (2) All caps on property tax assessments should be eliminated while the assessment caps serve a legitimate purpose, they are not applied in a proportionate way to: (1) people that own fast-appreciating real estate versus those that own slow-­ appreciating real estate; (2) wealthy homeowners who should pay proportionally higher taxes or should have higher property tax rates versus non-wealthy wealthy homeowners who need the assessment caps more (and usually own lower-priced real estate). The second issue is lack of proportionality, and opportunities for corruption, errors and bias in the application of assessment cap. Thus, the assessment cap unfairly discriminates against classes of NYC property owners—for example, those whose property values are in the lower 50th percentile, and less-

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wealthy property owners. Such discrimination doesn’t advance any government interests. (3) Co-ops and condos should be placed into the same tax class as small residential properties—otherwise owners of both types of properties may be unfairly discriminated against because real estate taxes affect property values. The government’s interest in collecting property taxes is far outweighed by the discriminatory effects of the NYC tax statutes on owners of lowervalued real estate and the distortion (in property values) that it causes. 4.4.5  The Right to Contract Doctrine The State Action is the enactment and implementation of NYC tax statutes. The “NYCPTAC Recommendations” address key issues in the NYC tax statutes that violate the Due Process Doctrine: (1) The method of calculating NYC real estate taxes was inherently discriminatory. Property tax assessments should be based on market values in order to be equitable. Not doing so affects buyers’/ sellers’ contracting-rights and opportunity-sets (which are often based on perceived market values), and will cause discrimination in favor of owners of fast-appreciating properties and against owners of slow-appreciating properties, and in favor of high-priced real estate and against low-priced real estate. (2) All caps on property tax assessments should be eliminated because while the assessment caps serve a legitimate purpose, they are not applied in a proportionate way to: (1) people that own fast-appreciating real estate versus those that own slow-­ appreciating real estate; (2) wealthy homeowners who should pay proportionally higher taxes or should have higher property tax rates versus nonwealthy wealthy homeowners who need the assessment caps more (and usually own lower-priced real estate). The second issue is lack of proportionality and opportunities for corruption, errors and bias in the application of assessment cap. Thus, the assessment cap unfairly discriminates against classes of NYC property owners—for example, those whose property values are in the lower 50th percentile, and less-wealthy property owners. Such discrimination doesn’t advance any government interests.

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(3) Co-ops and condos should be placed into the same tax class as small residential properties—otherwise owners of both types of properties may be unfairly discriminated against because the amounts, calculation-methods and timing of real estate taxes affect real estate prices. The government’s interest in collecting property taxes is far outweighed by the discriminatory and limiting effects of the NYC real estate tax statutes on owners of lower-valued real estate and the distortion (in property values) that it causes.

4.5   Other Court Rulings and Developments in Real Estate Taxation in Europe and the United States 4.5.1  The German Constitutional Court Properly Declared in 2018 That the German Real Estate Tax Regime Was Unconstitutional10 In 2018, the constitutional court of Germany (the Bundesverfassungsgericht) correctly ruled that the German property tax system was unconstitutional, and its main points were as follows: (1) The then current unitary valuations violated the Equal Protection Doctrine under German Basic Law. (2) Just like in the New York City property tax litigations of 2019–2020 (discussed herein and above), property tax assessments in Germany were based on outdated property valuations that were done decades ago (1964 in West Germany and 1935 in East Germany). Section-­21 of Germany’s property tax law requires that reassessment of property 10  See: BVerfG, Judgment of  the  First Senate of  10 April 2018  - 1 BvL 11/14 -, paras. (1–182). http://www.bverfg.de/e/ls20180410_1bvl001114en.html. https://www.bundesverfassungsgericht.de/SharedDocs/Entscheidungen/EN/2018/04/ ls20180410_1bvl001114en.html;jsessionid=BFF6E14EA6BF0903041EB920654 AF4B6.2_cid361. See: Hall, K. (April 11, 2018). Germany Constitutional Court Declares Country’s Property Tax Regime Unconstitutional. https://www.jurist.org/news/2018/04/germanyhigh-court-declares-countrys-property-tax-regime-unconstitutional/.

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valuations should be done every six years, but that wasn’t done since 1964 because of political and bureaucratic problems. German municipal governments set the property tax rates at increasing levels over time in order to compensate for the absence of rent property assessments; but comparable properties within a municipality were taxed at different rates depending on the year in which they were built. (3) The court ruled that the legislature should enact (by the end of 2019) and implement (by the end of 2024) a new property tax regime, and until then, the current, now-unconstitutional system would continue to be used. However, the German Constitutional Court didn’t address other relevant violations of Constitutional Law Doctrines such as the Due Process Doctrine (both substantive and procedural), the Takings Doctrine and the Right to Contract Doctrine—see the discussion herein and above about the NYC real estate tax statutes (and also see Table 4.1). 4.5.2  The Spanish Supreme Court Properly Invalidated the Municipal Real Estate Tax on Empty Housing Units in 2020 In 2020, the Spanish Supreme Court11 invalidated the real estate tax on empty housing units (mostly owned by banks and real estate investment vehicles). The court stated that such taxes were more like penalties rather than real estate taxes. 4.5.3  The Spanish Constitutional Court Properly Invalidated Parts of the Urban Land Value Increase Tax (“ULVIT” or “plusvalía municipal”) in 2017 In 2017, the Spanish Constitutional Court12 properly invalidated as unconstitutional, portions of the ULVIT that was a transfer tax on real estate transactions. 11  See: “Spain: The Supreme Court Repeals The Municipal Tax On Empty Housing”, August 4, 2020, by Jordi Alimany. https://www.mondaq.com/tax-authorities/972686/ the-supreme-court-repeals-the-municipal-tax-on-empty-housing?type=related. 12  See: “Urban Land Tax declared partially unconstitutional by Spanish courts”. By Eugenio García. 08 March 2017. https://www.bdo.global/en-gb/blogs/real-estate-construction-­ blog/march-2017/urban-land-tax-declared-partially-unconstitutional. (“The Spanish Constitutional Court (hereinafter, ‘the Court’) issued a Judgment on 16 February 2017 in

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Table 4.1  Real estate taxes in European OECD countries (as of 2018) Country

Austria (AT) Belgium (BE) Czech Republic (CZ) Denmark (DK) Estonia (EE) Finland (FI) France (FR) Germany (DE) Greece (GR) Hungary (HU) Iceland (IS) Ireland (IE) Italy (IT) Latvia (LV) Lithuania (LT) Luxembourg (LU) Netherlands (NL) Norway (NO) Poland (PL) Portugal (PT) Slovak Republic (SK) Slovenia (SI) Spain (ES) Sweden (SE) Switzerland (CH) Turkey (TR) United Kingdom (GB)

Property tax as share of private capital stock (%)

Real property or land tax

Real property or land taxes deductible from corporate income tax

0.09 0.55 0.09 0.71 0.13 0.36 1.25 0.20 1.09 0.29 1.02 0.37 0.58 0.41 0.20 0.05 0.53 0.23 0.91 0.43 0.22 0.26 0.52 0.35 0.08 0.13 1.93

Tax on real property Tax on real propertya Tax on real property Tax on real property Land tax Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property Tax on real property

No Yes Yes Yes No Yes Yes Yes No No No Yes No Yes Yes Yes Yes Yes Yes Yes Yes No No Yes Yes Yes Yes

Source: Calculations for “Property Tax as Share of Private Capital Stock” are based on 2018 data from OECD, “Global Revenue Statistics Database: 4100 Recurrent taxes on immovable property” (last updated July 2020, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL); and IMF, “Investment and Capital Stock Dataset: Private capital stock (current cost)” (https://www.imf.org/external/np/fad/ publicinvestment/#5). For the type of property tax and whether it is deductible, see PwC, “Worldwide Tax Summaries”, https://taxsummaries.pwc.com/ (2020 data) Tax on the imputed rent of properties. Applies to machinery

a

which it declared the tax commonly known as ‘plusvalía municipal’ as partially in breach with Article 31.1 of the Spanish Constitution. The Urban land value increase tax (‘ULVIT’) is a duty collected by local municipalities. ULVIT is levied upon ownership of urban land and the tax is triggered at the moment the property right over such land is transferred by any type of arrangement (i.e. sale and purchase, gift, inheritance, contribution in kind, etc.). The main

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4.5.4  The Delaware Court of Chancery Properly Ruled in 2020 That Delaware State’s Property Tax System Was Unconstitutional In 2020, the Delaware Court of Chancery13 properly ruled that Delaware State’s (a state in the United States) real estate tax system was unconstitutional. More specifically, three Delaware State counties calculated their real estate tax bills with property values that are were very outdated such that some taxpayers got an unfair discount while others paid disproportionately larger taxes on a larger share of their property’s actual worth, all of which violated the state’s Equal-Protection constitutional requirement that property owners be taxed equally. 4.5.5  Inheritance Taxes and Transfer Taxes That Function as Non-recurring Real Estate Taxes In many countries, Inheritance Taxes14 and Transfer Taxes (taxes payable on transfers or sales of real estate) are imposed on personal and business real estate and thus function as one-time (non-recurring) real estate taxes. Across Europe, the consensus has been that Inheritance Taxes are highly controversial and generally unfair and need to be reformed.

characteristic of this tax is that it is assessed by taking into consideration a potential value increase rather than the actual increase in value of the land that may have occurred during ownership. Therefore, the tax is not assessed on the basis of the difference between the sales price and the acquisition cost, but based on the cadastral value of the land at the date of its transfer.… The Judgment of 16 February 2017 refers only to the Law applicable in Guipuzcoa rather than the law applicable in the rest of Spain. Nevertheless, taking into consideration that a further eight questions of unconstitutionality are currently pending before the Court, regarding the Law applicable in the Common territory (i.e. all Spanish regions except the Basque Region and Navarre), it will likely not be long before the Court declares the partial unconstitutionality of the law applicable in the rest of Spain too, in line with the arguments expressed above….”). 13  See: “Judge rules Delaware property tax system unconstitutional; major changes to residents’ bills could follow”. Delaware News Journal. By Xerxes Wilson and Jeanne Kuang. https://www.delawareonline.com/story/news/2020/05/08/judge-delaware-propertytax-system-unconstitutional-changes-coming/4889814002/. 14  See: “UK Inheritance Tax Reform: Lessons From Europe”. January 8, 2021. By Charlie Tee, Mara Monte and Alicia Polley. Withers LLP. https://www.mondaq.com/uk/tax-­ authorities/1023592/uk-inheritance-tax-reform-lessons-from-europe?type=popular. See: “UK Inheritance Tax Reform: Rates, Reliefs And Responsibility”. January 8, 2021. By Charlie Tee, Mara Monte and Alicia Polley. Withers LLP. https://www.mondaq.com/uk/inheritance-tax/1023548/uk-inheritance-tax-reform-rates-reliefs-and-responsibility?type=popular.

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Dachis, Duranton & Turner (2012) and Kopczuk & Munroe (2015) and other studies confirmed that Transfer Taxes affect real estate prices and demand. Carroll & Goodman (2017) analyzed the potentially significant effects of Property Tax delinquency and Foreclosures on residential property sales. Fritzsche and Vandrei (2019) noted that increases in the German real estate transfer taxes generally reduces transaction volumes (for single-family homes) due to the lock-in effect; and that inefficient market distortions are created by real estate transfer taxes. Wrede (2014) noted that tax planning affects the level of the inheritance tax rate that is perceived to be “fair”, and in Germany, tax planning was found to increase the “fair tax rate” by approximately four percentage points. Wrede (2014) then proposed that in the context of inheritances and gifting: (1) families with prosocial motives should be taxed less than those without pro-social motives; (2) taxation should not prevent individuals with joy-of-giving motives from contributing substantially more to the social good than individuals who do not share these motives. Fisman et al. (2020) surveyed individuals’ preferences over jointly taxing income and wealth in the United States and found that: (1) there was a roughly linear desired tax rates on income of about 14% and Respondents’ suggested tax rates indicate positive desired wealth taxation; (2) when there is a distinction between sources of wealth, in line with recent theoretical arguments, subjects’ implied tax rate on wealth is 3% when the source of wealth is inheritance, which was far higher than the 0.8% rate when wealth was from savings; (3) respondents’ justifications for their tax rates imply limited concern for the elasticity of tax bases with respect to net-of-tax rates. Dunbar (February 1901) discussed the constitutionality of US inheritance taxes.

4.6   Real Property Taxation as a Violation of the Procedural Due Process Doctrine and the Substantive Due Process Doctrine Under the tax regimes during 1980–2019 and in most jurisdictions/towns in the US (and many Commonwealth countries and common-law countries), Real property taxation constituted a violation of the Due Process Clause (Procedural and Substantial).15 The state actions involved were the 15  See: Tate (1990); Wunderlich (1997); Houghton and Hellerstein (2000); Alexander (2000); Hale (1985); Glaeser (1996) and Zelinsky (1998). On the Substantive Due Process

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property appraisal, determination of applicable tax, billing, collection of taxes and processing of any tax liens by government agencies (and or their appointed agents).16 The process of setting real property taxes involves property appraisal by government appraisers, and this process usually doesnt permit any appeal. In many cases, these appraisers are not licensed or certified appraisers, and their work experience may be questionable. Typically, there are no state laws governing appraisal methods for such valuations—and various appraisal methods (incomes, sales, replacement cost, discounted cash flow, liquidation value) may produce drastically different values. Several studies have shown that such property appraisals can have significant information effects (perceptions of prices, investor psychology, reinforcement, anchoring effects etc.) and create moral hazard problems.17 This procedure is grossly inadequate in terms of protecting the rights of property owners and constitutes violations of both the procedural due process rights of property owners. Real property taxation may also constitute violations of the Substantive Due Process Doctrine where: (1) The real property tax rate differs substantially from those of similar towns in the same geographic area. Doctrine, see: Washington v. Glucksberg, 521 U.S. 702, 719 (US Supreme Court; 1997) (“The Due Process Clause guarantees more than fair process, and the ‘liberty’ it protects includes more than the absence of physical restraint.”); Obergefell vs. Hodges, 576 U.S. 644 (US Supreme Court; 2015); Lawrence vs. Texas, 539 U.S. 558 (US Supreme Court; 2003); United States vs. Vaello-Madero, _____ US ____ (Case#: 20-303; US Supreme Court; pending as of 2021); DeNolf vs. U.S., _____ US _____ (US Supreme Court; pending as of 2021) (https://static1.squarespace.com/static/5b660749620b85c6c73e5e61/ t/608d544886d55300e492a619/1619874888658/2021-22+AMCA+Case.pdf); DeNolf vs. U.S. (Case#: 01-76320; US 14th Circuit, 2020) (https://static1.squarespace.com/ static/5b660749620b85c6c73e5e61/t/608d544886d55300e492a619/161987488865 8/2021-22+AMCA+Case.pdf); and Planned Parenthood of Southeastern Pennsylvania v. Casey, 505 U.S. 833 (1992). 16  See: Evans vs. Newton, ____US____ (1966; US Supreme Court); Evans vs. Abney, ___ US ____ (1970; US Supreme Court); Burton vs. Wilmington, ___ US ____ (1971; US Supreme Court); Moose Lodge v. Irvis, ___ US ____(1972; US Supreme Court); Edmonson vs. Leesville Concrete, ____ US ___(1991; US Supreme Court); Marsh vs. Alabama, ___US ___ (1946, US Supreme Court); Screws vs. US, 325 US 91 (___; US Supreme Court). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Currie (1986) and Goldberg (2005). 17  See: Bryson and Comia (2003), Cypher and Hansz (December 2003), Sacher (1993), Wunderlich (1997), McCluskey et al. (1998), Adern (2000), Mikesell (1980), Byrne (2006), Fischel (April 2000), Glaeser (1996) and Nechyba (1997).

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(2) Any changes to real property taxes are not preceded by pub lic hearings. (3) The procedure for assessment of real property taxes and/or any tax appeal are discriminatory and or differs dramatically from those in neighboring towns. (4) Tax assessments for different properties are not re-evaluated at the same time or in the same manner. (5) The real property tax rate differs drastically by property type. (6) In many states, municipalities use differential classifications of property that results in widely disparate tax levels for even similar properties.18 Many issues pertaining to notice requirements in tax lien foreclosures are discussed in Alexander (2000)19—the notice provisions for tax lien foreclosure in many US jurisdictions are often inadequate and violate the Due Process Doctrine. In some US jurisdictions, tax lien foreclosure processes don’t involve any adversarial hearings.20 This lack of a structured process for what is effectively a transfer of ownership constitutes a violation of Procedural Due Process Doctrine.21 The government has an interest in using processes/ procedures that are fair and efficient in order to maximize social welfare and reduce overall transaction costs. However, property owners also have property interests in hearing before deprivation of property, and in fair and efficient procedures for transfers of assets and for adjudication of claims on their property—such property interests arise from state constitutional law, state laws, expectations and norms. The property owners’ property interests far outweigh the state’s interest in applying supposedly cost-effective procedures for tax lien foreclosures. The primary issues are that: (1) the probability of unjust outcomes can be very high under the present regime of tax lien foreclosures;  See: Alexander (2000: 754).  See: Alexander (2000: 751). See: Alexander (2002), Tatarowicz and Mims-Velarde (1986), Zelenak (1999) and Nakamura (1990). 20  See: Alexander (2000). 21  See: Fuentes vs. Shevin, 407 US 67 (1972; US Supreme Court); Sniadach vs. Family Finance Corp., 395 US 337 (1969; US Supreme Court); US. vs. James Daniel Good Real Property, 510 US 43 (1993; US Supreme Court); Matthews vs. Eldridge, 424 US 319 (1976; US Supreme Court). 18 19

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(2) the cost of correcting errors arising from application of deficient procedures is very substantial; (3) the collective information effects, economic effects and psychological effects on market participants are not justified by any cost savings achieved by the use of such unfair foreclosure procedures.

4.7   The Existing Regime (as of 2020) of Real Property Taxation by Many US Municipalities Constitutes Violations of the Equal Protection Doctrine The existing regimes of real property taxation constitute violations of the Equal Protection doctrine because they discriminate between parties that have different types of ownership interest in the same property.22 The state action involved is the discrimination by the government in the application of tax laws.23 Real property taxation is usually administered at the municipal/local level; although most of the governing laws are promulgated at the state level. However, the real property taxation systems in the United States are based on fee-simple ownership of property—the laws assume that there is only one type of ownership interest. That is, the real property taxes are billed to the fee-simple owner of the property, who retains final responsibility for payment of such taxes. This tax system was reasonable several hundred years ago, when there weren’t any sophisticated financial instruments. Today, there are many financial instruments (leases, contracts, derivatives/ 22  See: United States vs. Vaello-Madero, _____ US ____ (Case#: 20-303; US Supreme Court; pending as of 2021); Espinoza vs. Montana Department of Revenue, _____ US ____ (US Supreme Court; pending as of 2021); FCC vs. Beach Communications Inc., 508 US 307 (1993; US Supreme Court)(legislative classifications within the context of governmental purposes); McGowan vs. Maryland, 366 US 420 (1961; US Supreme Court); Williamson v. Lee Optical Co., 348 US 483 (1955) (economic regulation); Dandridge vs. Williams, 397 US 471 (1970; US Supreme Court) (allocation of state resources); Plyer vs. Doe, 457 US 202 (1982; US Supreme Court); Newport New Shipbuilding & Dry DockCo. vs. EEOC, 462 US 669 (1983; US Supreme Court). 23  See: Evans vs. Newton, ____US____ (1966; US Supreme Court); Evans vs. Abney, ___ US ____ (1970; US Supreme Court); Burton vs. Wilmington, ___ US ____(1971; US Supreme Court); Moose Lodge vs. Irvis, ___ US ____(1972; US Supreme Court); Edmonson vs. Leesville Concrete, ___ US ___(1991; US Supreme Court); Marsh vs. Alabama, ___US ___ (1946; US Supreme Court); Screws vs. US, 325 US 91 (___; US Supreme Court). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986) and Goldberg (2005).

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options, participations) that essentially bestow all benefits/risks of ownership to parties other than the fee-simple owner. That results in a drastically different economic reality than was intended by real property tax laws. For purposes of equal protection analysis, there is a necessary classification between the fee-simple owner of the property and all other parties that own other types of interests in the property. This classification is relevant and advances legitimate government interests—most regulation is based on this classification. There is a need to define the “absolute owner(s)” (feesimple ownership) and “economic-owner(s)” (owners of economic rights in the property) of the property in the normal course of events. A property owner that is overtaxed or taxed inappropriately has certain statutory legal remedies. Hence, with the advent of these new financial instruments, entities/ persons who have substantial interests in property (but are not fee-simple owners) are not afforded the same level of legal protection as the fee-­ simple owner, even where both parties have the same economic magnitude of property interests. Furthermore, the tradeoff between the level of legal protection and the magnitude of the property interest/right is not symmetrical or constant (i.e. ∂y/∂x ≠ 1; ∂2y/∂x2 < 1; where y = the magnitude of protection provided by laws and x = the magnitude of the property interest in the asset). Most Real Estate Tax laws in the United States are typically “partially proportional”—that is, the magnitude of real property taxes was intended to vary with mostly the assessed value (and in fewer instances, the market value) of the subject property. This partial-proportionality rule is a form of protection for property owners, which can be traced back to English jurisprudence and tax law drafting for several hundred years.24 With the advent of new financial instruments, real property taxation is no longer proportional. Hence property owners who don’t have the knowledge/opportunity/sophistication to enter into value-enhancing contracts will effectively lose the equal protection afforded by proportionality—this consequence of the existing real property tax regime constitutes a violation of the Equal Protection Doctrine. The process of setting and collecting real property taxes may be deemed violations of the Equal Protection Doctrine, where: (1) Such processes differ from generally accepted standards in similar towns in the same state (or even in the same country).  See: Vanistendael (1996).

24

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(2) The protections (provided to property owners and the public) in such processes are insufficient within the context of state/federal statutes and common laws. (3) The processes conflict with existing laws. (4) Such processes are applied differently to different classes of properties and or property-owners. (5) Such process expose a class of properties and or property-owners to harm.

4.8   Real Property Taxation and Tax-Based Location Incentives Constitute Violation of The Interstate Commerce Clause of the US Constitution and the Dormant Commerce Clause Doctrine Various authors have analyzed the economic and competition/Antitrust effects of Corporate Location Incentives—see Wyman (2005), Hellerstein (2006), Enrich (2006) and McCord (2007). The state action involved are (a) real property taxation processes and (b) the granting of Corporate Location Incentives to companies.25 Real property taxation by US municipalities and the provision of tax-based Location Incentives by states/ municipalities constitute violations of the Interstate Commerce Clause of the US Constitution for several reasons.26

25  See: Evans v. Newton, ____US____ (1966; US Supreme Court); Evans v. Abney, ___ US ____ (1970; US Supreme Court); Burton v. Wilmington, ___ US ____ (1971; US Supreme Court); Moose Lodge v. Irvis, ___ US ____(1972; US Supreme Court); Edmonson v Leesville Concrete, ____ US ___(1991; US Supreme Court); Marsh v. Alabama, ___US ___ (1946; US Supreme Court); Screws v. US, 325 US 91 (___; US Supreme Court). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986) and Goldberg (2005). 26  See: Western & Southern Life Ins. Co. vs. State Bd. Of Equalization, 451 U.S. 648, 667 (1981; US Supreme Court) (reaffirming the rule that taxes discriminating against foreign corporations must bear a rational relation to a legitimate state purpose). See: McGoldrick (2020). On the Interstate Commerce Clause, also see: DeNolf vs. U.S., _____ US _____ (US Supreme Court; pending as of 2021) (https://static1.squarespace.com/ static/5b660749620b85c6c73e5e61/t/608d544886d55300e492a619/161987488865 8/2021-22+AMCA+Case.pdf); DeNolf vs. U.S. (Case#: 01-76320; US 14th Circuit, 2020) (https://static1.squarespace.com/static/5b660749620b85c6c73e5e61/ t/608d544886d55300e492a619/1619874888658/2021-22+AMCA+Case.pdf); Perez vs. United States, 402 U.S. 146, 150 (1971) (Congress can ban loansharking that threatens interstate commerce); Gonzales vs. Raich, 545 U.S. 1, 18 (US Supreme Court; 2005); United States vs. Lopez, 514 U.S. 549 (US Supreme Court; 1995).

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First, ownership and control of property often involves interstate commerce—people often own property in other states and pay taxes. Hence, under the Commerce Clause, one possible school of thought is that real property taxation laws should be promulgated by the US Congress and not state/municipalities27 because: (1) uniformity of real property taxation can drastically reduce transaction costs and divergencies in property values and property valuation methods; and (2) real estate taxation is critical to municipal financing and budgets—US towns/municipalities typically derive more than 30% of their total annual revenues from real property taxes. However, the potential involvement of the US Congress in real property taxation raises some issues—the real property tax is a direct tax and under Article 1 of the US Constitution, direct taxes must be levied by the rule of apportionment, which effectively precludes levy of any federal real property tax (thus there seems to be an inherent conflict between the Apportionment Rule and the Interstate Commerce Doctrine).28 With regards to the Dormant Commerce Clause Doctrine, real property taxes places undue burdens on interstate commerce, interstate transactions and interstate relationships. Because real property tax laws that are enacted at the state level (assessment, collections, enforcement etc.) vary dramatically among states and even within states, and because the real property tax laws can be complicated, the existence and application of real property taxes increases transaction costs in interstate transactions. In interstate real estate transactions: (1) more effort is required (compared to intra-state transactions) to decipher the criteria/basis of tax assessment, real property taxes due in the future and procedures/laws for tax liens; (2) there are higher monitoring costs—to ensure compliance and, if necessary, appeals;

See: Jones vs. Flowers (04-1447; US Supreme Court, April 26, 2006) (sufficiency of notice for tax sale). See: Brown-Forman Distillers Corp. vs. New York State Liquor Auth., 476 U.S. 573, 579 (1986; US Supreme Court) (when a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-­ state interests, the Court has generally struck down the statute without further inquiry). 27  See: Einhorn (2001), Alexander (2000), Smith (1986), Byrne (2006) and Mikesell (1980). 28  See: Hellerstein (1996).

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(3) some lenders charge higher transaction fees for out-of-state real property transactions and such higher fees are sometimes based on real property tax differentials. Real property taxes are critical in acquisitions/sales of property—any delinquencies create automatic liens that cloud title to the property. Hence, real property taxes and associated tax-lien foreclosure processes place greater burdens on out-of-state goods/activities/enterprises than on competing in-state goods/activities/enterprises. Furthermore, state real property tax incentives and location incentives clearly violate the Commerce Clause of the US Constitution.29 Such incentives are typically in the form of exemptions from payment of real property taxes for a pre-specified period of time, Incentive Tax Credits, Research and Development Tax Credits and so on. Hellerstein (1996), Enrich (December 1996) and Choper and Yin (1998)30 provide succinct analysis of the issues. The key US court cases are New Energy Co. vs. Limbach;31 Oregon Waste Systems vs. Department of Environmental Quality;32 Boston Stock Exchange vs. State Tax Commission;33 Bacchus Imports vs. Dias.34 The interpretation of these key US Supreme Court cases must be liberal, and the collective holdings are that state tax-based incentives are unconstitutional. Such interpretation of US Supreme Court case law is justified because: (1) the interpretation is in line with the legislative intent of the Commerce Clause and the passage of time or changes in the structure of the US economy, or changes in business norms have not rendered such intent moot or inapplicable or irrelevant; 29  See: Frickey (July 1996), Mazerov (June 30, 2005), Hellerstein and Coenen (1996), Tatarowicz and Mims-Velarde (1986), Michael (1985) and Hirsch (1994). 30  See: Choper and Yin (1998), Enrich (December 1996), Smith (1986) and Zelinsky (1998). See: New Energy Co. vs. Limbach, 486 US 269 (1988; US Supreme Court); Oregon Waste Systems vs. Department of Environmental Quality, 114 S.Ct. 1345 (1994; US Supreme Court); Boston Stock Exchange vs. State Tax Commission, 429 US 318 (1977; US Supreme Court); Bacchus Imports vs. Dias, 468 US 263 (1984; US Supreme Court); and Freeman vs. Hewitt, 329 US 249 (1946; US Supreme Court). 31  New Energy Co. vs. Limbach, 486 US 269 (1988; US Supreme Court). 32  Oregon Waste Systems vs. Department of Environmental Quality, 114 S.Ct. 1345 (1994; US Supreme Court). 33  Boston Stock Exchange vs. State Tax Commission, 429 US 318 (1977; US Supreme Court). 34  Bacchus Imports vs. Dias, 468 US 263 (1984; US Supreme Court).

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(2) the economic realities of such transactions are in line with the outcomes of such liberal interpretations of US Supreme court case law—the real property tax incentives create very strong economic incentives for state/municipal governments to discriminate in favor of in-state commerce and in-state entities; (3) the dormant Commerce Clause doctrine applies because the issue involves substantial discrimination with significant economic impact; (4) the tax incentives implicate the coercive powers of the state. Hellerstein (1996) attempted to make a distinction between real property tax incentives that are reductions of existing tax liability, and on the other hand, real property tax incentives that exemptions from or reductions of additional tax liability to which the taxpayer would be subjected only if the taxpayer were to engage in the targeted activity. This distinction has no basis in fact or law, and both circumstances are economically similar.

4.9   Grants of Corporate Location Incentives by States and Municipalities Constitute Violations of the Equal Protection Doctrine The existing regimes of Corporate Location Incentives constitute violations of the Equal Protection doctrine because such incentives unfairly discriminate between in-state entities and similarly situated out-of-state entities.35 The state action involved is the actual granting of Corporate Location Incentives to out-of-state companies.36 Corporate Location Incentives are typically issued by state governments and/or state 35  See: FCC vs. Beach Communications Inc., 508 US 307 (1993; US Supreme Court) (legislative classifications within the context of governmental purposes); McGowan vs. Maryland, 366 US 420 (1961; US Supreme Court); Williamson vs. Lee Optical Co., 348 US 483 (1955; US Supreme Court) (economic regulation); Dandridge vs. Williams, 397 US 471 (1970; US Supreme Court) (allocation of state resources); Plyer vs. Doe, 457 US 202 (1982; US Supreme Court); Newport New Shipbuilding & Dry DockCo. vs. EEOC, 462 US 669 (1983; US Supreme Court). 36  See: Evans vs. Newton, ____US____ (1966; US Supreme Court); Evans vs. Abney, ___ US ____ (1970; US Supreme Court); Burton vs. Wilmington, ___ US ____(1971; US Supreme Court); Moose Lodge vs. Irvis, ___ US ____(1972; US Supreme Court); Edmonson v Leesville Concrete, ____ US ___(1991; US Supreme Court); Marsh vs. Alabama, ___US ___ (1946; US Supreme Court); Screws vs. US, 325 US 91 (___; US Supreme Court). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986) and Goldberg (2005).

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legislatures and/or municipal/local governments.37 Corporate Location Incentives typically arise from relatively temporary or permanent differentials in state taxation of corporate entities and their transactions—for example, different US states have different laws pertaining to real property transactions, corporations and taxation.38 On the Equal Protection Doctrine, see: United States vs. Vaello-Madero, _____ US ____ (Case#: 20-303; US Supreme Court; pending as of 2021), and Espinoza vs. Montana Department of Revenue, _____ US ____ (US Supreme Court; pending as of 2021). For purposes of equal protection analysis, there is a necessary classification between in-state and out-of-state entities. This classification is relevant and advances legitimate government interests—most related regulation is based on this classification. The state governments have significant interests in attracting out-of-state companies and businesses to their jurisdiction—in order to create jobs, stimulate their economies and earn tax revenues. However, there are certain economic and social problems inherent in attracting out-of-state companies to relocate:39 (1) incoming companies sometimes displace workers employed by in-­ state companies—by automation, greater efficiency, economies of scale, outsourcing and/or reorganizations; (2) the tax revenues earned from incoming companies are much less than the tax incentives provided to them; (3) incoming companies sometimes consume more resources than the state can affordably provide—more energy requirements, more housing requirements—and this may lead to temporary or permanent increases in prices of basic goods and services; (4) the cash lost by the state government has an opportunity cost— provision of services to state residents.

 See: Enrich (December 1996; Notes 47 & 48) and Smith (1986).  See: Enrich (December 1996; Notes 44, 45, 46). Compare: R J Reynolds Tobacco v. City Of New York Dept. Of Finance, 643 NYS2d 865 (New York Supreme Court, 1995) (declaring Sections 11-602.8(b)(11) and 11-602.8(j) of the New York City Administrative Code unconstitutional). Compare: Beatrice Cheese Inc. vs. Wisconsin Department of Revenues, 1993 WL 57202 (Wisconsin Tax Appeal Commission, February 24, 1993) (declaring Wisconsin Statute 71.04 (15)(b) unconstitutional). 39  See: Zelinsky (1998); Moomau and Morton (1992); Nechyba (1997); Hellerstein (1994). 37 38

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Hence, the resident’s property interests in fair and reasonable municipal budgeting and the state’s provision of adequate services far outweigh the state’s interests in attracting new business. Furthermore, the exemptions and subsidies granted to incoming companies are a form of “protection” that is usually not available to in-state companies. Incoming companies: ( 1) can increase labor costs for in-state companies. (2) can under-bid in-state companies to obtain projects. (3) can increase the effective income tax rates of instate companies— where anticipated incremental tax revenues are deemed low. (4) can increase operating costs of in-state companies—by increasing demand for utilities, housing, healthcare, real estate etc. (5) can drastically reduce profits of in-state companies by lowering prices by automation, outsourcing and so on. Hence, the in-state companies have significant property interests in elimination of Corporate Location Incentives and such property interests arise from expectations and norms. The in-state companies’ property interests in elimination of and non-issuance of Corporate Location Incentives far outweigh the state government’s interests in attracting companies to the state.

4.10   Traditional Common-Law Real Property Taxation Constitutes a Violation of the “Right to Contract” Doctrine Under most state/municipal laws in the United States and some Common-­ law jurisdictions, the real property tax liability cannot be assigned or transferred in any way—the property owner retains final liability for payment of the real property tax. This is in contrast to other forms of tax that can be assigned in many common-law and civil-law jurisdictions: (a) liability for corporate income tax can be contractually assigned; (b) liability for capital gains tax can be contractually assigned/transferred; (c) liability for sales tax can be contractually assigned. It can be reasonably inferred from the wording of the real property tax laws in many US states that the intent is to preclude transferability of the real property taxes.

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As in most commercial transactions, transferability of real property taxes is or can be a critical element of financial instruments and transactions. The state action involved is the statutory prohibition that limits the rights of interest-holders and the fee-simple owner to contract (e.g. to be able to contractually transfer real property tax liability).40 The Real property taxes impose restrictions on the property owner’s ability to contract about the property, because: (1) real property taxes are intertwined with the title—payment/non-­ payment of real property taxes affects clarity of title that will be transferred upon sale; non-payment of real property taxes affects clarity of title that will be transferred upon sale, (2) the probability of contracting about the property is a direct function of (a) the frequency of tax assessment, (b) type/nature of tax assessment, (c) identity of tax assessor; (3) the magnitude of the property owner’s right to contract about the property varies drastically and is a direct function of the following: (a) the frequency of tax assessment, (b) type/nature of tax assessment and (c) existence of tax liens. In an ideal world, the property owner’s right to contract should be completely independent of the real property tax system/regime. Given the increasing availability and sophistication of financing/riskmanagement instruments, the governments interest in property taxation and associated revenues can, in some circumstances be outweighed by the benefits of modern risk-transfer/risk-management tools and the right-tocontract about real property.

40  See: Evans v. Newton, ____US____ (1966; US Supreme Court); Evans v. Abney, ___ US ____ (1970; US Supreme Court); Burton v. Wilmington, ___ US ____(1971; US Supreme Court); Moose Lodge v. Irvis, ___ US ____(1972; US Supreme Court); Edmonson v Leesville Concrete, ____ US ___(1991; US Supreme Court); Marsh v. Alabama, ___US ___ (1946; US Supreme Court); Screws v. US, 325 US 91 (___; US Supreme Court). On the Right-ToContract Doctrine, see: Energy Reserves Group, Inc. vs. Kansas Power and Light Co., _____ US ____ (US Supreme Court; 1983); and Sveen vs. Melin, ___ US ____ (US Supreme Court; 2018). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986) and Goldberg (2005).

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4.11   Grant of Local Incentives Constitutes a Violation of the “Right to Contract” Doctrine The obvious State Action is the state or municipal government’s Executive Order and/or regulations/statutes/notices that grant the Corporate Location Incentives. The grant of Corporate Location Incentives under most state/municipal laws in the United States and some Common-law jurisdictions constitutes or may constitute violations of the “Right to Contract” of local companies in that state/city/town: (1) where such Corporate Location Incentives effectively preclude the local companies from entering into some types of contracts—for example, Contracts that they routinely execute such as labor agreements; (2) where such Corporate Location Incentives drastically reduce the customer-base and operations of local companies, and/or intentionally drive business to the incoming Beneficiary Company (beneficiary of the Corporate Location Incentives); (3) where such Corporate Location Incentives drastically changes the local/regional market in ways that harm local workers and/or local companies. On the Right-To-Contract Doctrine, see: Energy Reserves Group, Inc. vs. Kansas Power and Light Co., _____ US ____ (US Supreme Court; 1983); and Sveen vs. Melin, ___ US ____ (US Supreme Court; 2018).

4.12   Making Real Property Tax Liens Superior Mortgages and Loans Regardless of Timing of Non-payment (Super-Priority Status) Constitutes a Violation of the Substantive Due Process Doctrine and the Interstate Commerce Clause (United States Only) to Prior

The super-priority status of tax liens constitutes a violation of the due process clause and the interstate commerce clause for several reasons. In the United States, the super-priority status is granted by statute in most states.41 In other cases, the super-priority status is granted by case law42— such case law is also void and unconstitutional as violations of the Interstate Commerce Clause. Where the super-priority status is granted by statutes, such statutes are unconstitutional because they impose substantial burdens  See: Alexander (2000; Note 129).  See: Alexander (2000; Note 130).

41 42

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on interstate commerce—that is, mortgagors or mortgagees who are outof-state will incur disproportionately larger transaction costs (compared to in-state mortgagees or mortgagors), if the tax lien is granted super-priority status. The incremental transaction costs include due diligence costs, legal fees and transportation fees. The super-priority status of tax liens constitutes a violation of the Substantive Due Process doctrine because it is not based on the economic reality of the transaction. The super-priority is typically valid regardless of the size of the tax lien. The economic reality is that under present US laws (and laws in some Common-law jurisdictions), the mortgagee’s interest in the property is the most senior interest in the property, although the borrower/mortgagor’s fee-simple interest is what the tax lien is based on. If the mortgagee’s interest is large enough, then the mortgagee is the “effective owner” of the property. Hence, the super-priority status completely disregards the mortgagee and clouds mortgagee’s participation in, and interest in the property regardless of whether or not the mortgagee can pay the tax lien. Consider the following example. The mortgagee has a $100,000 mortgage; the mortgagor’s equity is $10,000, and the unpaid property tax is $10. In most common-law jurisdictions, this $10 unpaid tax balance will create an automatic tax lien that is sufficient to foreclose the property, regardless of whether or not the mortgagee can pay that outstanding tax. In the event of a tax foreclosure, the mortgagee stands to lose substantial amounts of money—and that can have Multiplier Effects such as reduced availability of mortgages/loans, “redlining” of neighborhoods, high mortgage interest rates, property abandonment; etc... Hence, the super-priority status deprives the mortgagee of Due Process rights, is inefficient and causes unnecessary foreclosures and property-abandonment. A more efficient property tax rule will: (1) grant the mortgagee a statutory right-of-first-refusal to pay the tax liens in order to retain its interest, (2) grant the same level/type of priority to the unpaid real estate tax and the mortgage or (3) subordinate the unpaid tax to the first mortgage if the unpaid tax is less than a threshold amount. The super-priority status of Tax liens contravenes the substantive due process doctrine because it contravenes several principles of tax law—such as Proportionality, Equity and Non-retroactiveness:43

 See: Vanistendael (1996).

43

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(1) Proportionality—the super-priority status does not change with the magnitude of the tax lien such that a $10 tax lien has the same foreclosure impact as a $500,000 tax lien on the same property. (2) Equity—the super-priority status does not provide any second chances for payment or a grace period before the lien status comes into effect. (3) Non-retroactiveness—the super-priority status effectively makes any outstanding real property tax retroactive in time and senior to any mortgage. In commercial law and property law in many common-­ law jurisdictions, the priority of liens is typically based on timing of filing/notice. On the Interstate Commerce Doctrine, see: DeNolf vs. U.S., _____ US _____ (US Supreme Court; pending as of 2021) (https://static1.squarespace.com/static/5b660749620b85c6c73e5e61/t/608d544886d5530 0e492a619/1619874888658/2021-22+AMCA+Case.pdf); DeNolf vs. U.S. (Case#: 01-76320; US 14th Circuit, 2020) (https://static1.squarespace.com/static/5b660749620b85c6c73e5e61/t/608d544886d5530 0e492a619/1619874888658/2021-22+AMCA+Case.pdf); Perez vs. United States, 402 U.S. 146, 150 (1971); Gonzales vs. Raich, 545 U.S. 1, 18 (US Supreme Court; 2005); and United States vs. Lopez, 514 U.S. 549 (US Supreme Court; 1995). On the Substantive Due Process Doctrine, see: Washington v. Glucksberg, 521 U.S. 702, 719 (US Supreme Court; 1997) (“The Due Process Clause guarantees more than fair process, and the ‘liberty’ it protects includes more than the absence of physical restraint.”); Obergefell vs. Hodges, 576 U.S. 644 (US Supreme Court; 2015); Lawrence vs. Texas, 539 U.S. 558 (US Supreme Court; 2003); United States vs. Vaello-Madero, _____ US ____ (Case#: 20-303; US Supreme Court; pending as of 2021); DeNolf vs. U.S., _____ US _____ (US Supreme Court; pending as of 2021) (https:// static1.squarespace.com/static/5b660749620b85c 6c73e5e61/t/608d544886d55300e492a619/1619874888658/20 21-22+AMCA+Case.pdf); DeNolf vs. U.S. (Case#: 01-76320; US 14th Circuit, 2020) (https://static1.squarespace.com/static/5b660749620b 85c6c73e5e61/t/608d544886d55300e492a619/161987488865 8/2021-22+AMCA+Case.pdf); and Planned Parenthood of Southeastern Pennsylvania v. Casey, 505 U.S. 833. 848 (1992).

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4.13   Real Property Taxation Constitutes Violations of the Takings Doctrine The State Action involved is either the imposition of the tax or statutory limitation on the property owner’s remedies or right of appeal.44 Under US laws, the standard tests for takings cases include but are not limited to the following: (1) “Reduction-of-value” test (ability to profit before and after takings is evaluated and there must be impairment (2) “Cause-of-harm” test (shows that one person’s use causes harm to another’s property, and there is state action) (3) Government-invasion theory (shows that government takes possession of property) (4) Noxious-use test In some jurisdictions, real property taxation can be deemed a violation of the Takings Doctrine where: (1) The tax assessed is excessive by historical standards, by comparison to similar towns/properties and more. The “public use” requirement is satisfied because any benefits (fulfillment of municipal needs, excess tax revenues etc.) are used by the local government public purposes. (2) The property owner does not have any right of appeal to complain about the assessed real property tax. The “public use” requirement is satisfied because any benefits (fulfillment of municipal needs, excess tax revenues etc.) are used by the local government presumably for public purposes. (3) The assessment of real property taxes is based not entirely on property values, but on local municipal needs. The “public use” require44  See: Evans v. Newton, ____US____ (1966; US Supreme Court); Evans v. Abney, ___ US ____ (1970; US Supreme Court); Burton v. Wilmington, ___ US ____ (1971; US Supreme Court); Moose Lodge v. Irvis, ___ US ____(1972); Edmonson v Leesville Concrete, ____ US ___(1991; US Supreme Court); Marsh v. Alabama, ___US ___ (1946; US Supreme Court); Screws v. US, 325 US 91 (___; US Supreme Court). See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986) and Goldberg (2005).

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ment is satisfied because any benefits (fulfillment of municipal needs, excess tax revenues etc.) are used by the local government for public purposes. (4) The real property tax is not proportional to the property value. (5) The government does not assess the value of the property regularly. See Mikesell (1980). (6) The government’s assessed value is substantially higher than market value of the property. Under the accepted interpretation of the US Constitution, government regulation of private property constitutes a “Taking” if: (1) it does not substantially advance a legitimate state interest, and (2) the regulation is not imposed with adequate compensation for the property owners for any resulting economic losses. The Takings elements are as follows: (1) The property owner has constitutionally guaranteed property interests in fair tax assessment and tax enforcement processes. These property interests arise from state contract laws, state property laws, and state constitutional laws, norms and expectations. (2) The losses to the property owners constitute an economic loss to the landlord and thus a “taking”. These losses include: (1) differences between market value and assessed value, (2) losses arising from delays in reassessment of the property, (3) losses from ­application of a tax rate that is based not on property values but on the economic needs of the municipality. The monetary amount involved (loss incurred by property owners) is transferred to “public use” in various forms such as funding of schools, and for other municipal expenditures; and a “market value effect” in which higher assessed taxes slows the rate and magnitude of increases in property values. The said taking can be construed as being for “public use” because the property taken is for “public” use—the general public benefits from over-taxation. The “public” includes not only all people and households that qualify for rent control and rent stabilization, but also all renters and homeowners who are affected by changes in municipal services. (3) The property owner is not compensated for said taking where the landlord does not receive any special benefit and/or compensation such as tax credits (i.e. the federal low-income housing tax credits

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in the United States), housing vouchers (e.g. Section 8 vouchers in the United States) or tax abatements. (4) The government has some interest in collecting taxes to finance municipal services, and “takings” advance the government interests to some extent—but facilitation of such benefits and interests is limited by the number of property units and the fairness of the real property tax processes. However, the government has many other ways to solve the real property tax problem. The real property tax taking is a government intervention that has substantial economic multiplier effects that may even affect neighboring towns. There is substantial evidence that home equity accounts for 65–80% of the net worth of 60–80% of US households. Hence, the government’s interest in imposing and collecting taxes is far outweighed by the collective property interests of the town’s property owners in fair tax assessment and tax collection procedures. There have been several key US Supreme court decisions on the takings issue, although none directly addresses the real property tax issue.45 In Kelo vs. City of New London,46 the US Supreme Court effectively reversed much of the existing Takings case law and ruled that eminent domain can 45  See: Agins vs. City Of Tiburon, 447 US 255 (1980; US Supreme Court); Cedar Point Nursery vs. Hassid, ____ US ____ (US Supreme Court; pending as of 2021); PennEast Pipeline Co. vs. New Jersey, ___ US ____ (US Supreme Court; pending as of 2021); Murr vs. Wisconsin, 137 S.Ct. 1933 (US Supreme Court; 2017); California Bldg. Industry Ass’n vs. City of San Jose, Calif., 136 S.Ct. 928 (US Supreme Court; 2016) See: Koontz vs. St. Johns River Water Management District, 570 U.S. 2588 (US Supreme Court; 2013); Lucas vs. South Carolina Coastal Council, 505 U.S. 1003 (US Supreme Court; 1992); Monterrey vs. Del Monte Dunes At Monterrey, 526 US 687 (1999; US Supreme Court); Dolan vs. City Of Tigard, 512 US 374 (1994; US Supreme Court); Nollan vs. California Coastal Commission, 483 US 825 (1987; US Supreme Court); Penn Central Transportation vs. New York City, 438 US 104 (1978; US Supreme Court); Rowan vs. Post office Department, 397 US 728 (1970; US Supreme Court); Williamson County Regional Planning Commission vs. Hamilton Bank Of Jefferson City, 473 US 172 (1985; US Supreme Court); Palazzolo vs. Rhode Island, 533 US 606 (2001; US Supreme Court); Lucas vs. South Carolina Coastal Council, 505 US 1003 (1992; US Supreme Court); Loretto vs. Teleprompter Manhattan CATV Corp., 458 US 419 (1982; US Supreme Court); Andrus vs. Allard, 444 US 51 (1979; US Supreme Court); First English Evangelical Lutheran Church Of Glendale vs. County of Los Angeles, 482 US 304 (1987; US Supreme Court). 46  See: Kelo vs. City Of New London, ___ US ___ (2005; US Supreme Court); Lingle vs. Chevron, 544 US ___ (2005; US Supreme Court); SWIDA vs. National City Environmental, 768 N.E.2d 1 (Sup. Ct., Illinois, 2002).

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be used to obtain property for what can reasonably be deemed “private” use—this ruling effectively eliminates the “public use” requirement in eminent domain and takings cases. Furthermore, the issue of definition of “public use” and “private use” within the context of takings remains somewhat unresolved. Some courts have held that Takings clause is most naturally construed to authorize takings for public use only if the public or government actually uses the taken property. Furthermore, any interpretation of “public use” and “private use” in takings cases must recognize that most takings cases are adjudicated by state courts, and state court judges are not as independent as federal judges, because they are sometimes elected, and are often are influenced by elected officials who typically like redevelopment projects. The language of the Takings Clause, the inferable legislative intent of the Takings Clause, the historical application of the Takings Clause by most US courts and the nature of judges in takings cases support this point of view. In Lingle vs. Chevron USA, 544 US ___ (2005), the US Supreme Court: (1) Determined that the “substantially advances” formula that was previously applied in Takings cases is actually a Due Process question that should not be considered in Takings decisions. (2) Defined four classes of takings claims that are as follows: (a) A physical taking; (b) a Lucas-type total regulatory taking; (c) a Penn Central taking; (d) a land-use exaction violating the Nollan and Dolan standards. The Takings implicit in real property taxes don’t conform to any of the aforementioned classes of takings because: (1) there is no physical occupation, (2) there is no total regulatory taking, (3) there are no exactions that violate the Nollan and Dolan standards, (4) there is no Penn Central type taking. However, Bell and Parchomovsky (2001a, b)47,48 provided a different set of definitions for Takings and Givings; and Nwogugu (2012: 109–112; 144–145; 190–191; 246–257) introduced six new Takings theories and definitions.  See: Bell and Parchomovsky (2001a, b, 2005).  See: Bardsley and Sausgruber (2005), Bell and Parchomovsky (2001a, b, 2005), Garvill et  al. (1992), Glaeser and Gyourko (2005), Hellerstein (June 1996), Merrill and Smith (2000a, b, 2001). 47 48

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The net effects of Kelo v. City of New London and Lingle v. Chevron are: (1) reduction of property rights of and constitutional protections for property owners. (2) reduction of property values. (3) greater importance of specific appraisal techniques in Takings cases—in such instances, appraisals are more likely to be based on replacement costs that most accurately reflect the economic occurrence/displacement implicit in Takings. (4) Elimination of the “substantially advances” requirement from Takings cases, thereby increasing transaction costs, litigation costs and the burden of proof on homeowners in Takings cases. Prior to Kelo v. City of New London and Lingle v. Chevron and during 1995–2003, Takings case law (federal and state courts) in the United States provided support and basis for rapid price increases in housing prices and land values; but there were no evident trends in federal and state court rulings toward the results in Kelo and Lingle.

4.14   Grant of Local Incentives May Constitute Violations of the Takings Doctrine The State Action involved is either the state/federal/municipal government’s Executive Order and/or regulations/statutes/notices that grant the Corporate Location Incentives, and/or statutory limitations on the affected persons’ (companies; workers; unions) remedies or right of appeal.49 As mentioned earlier, under US laws, standard tests for takings cases include but are not limited to the following:

49  See: Evans v. Newton, ____US____ (1966; US Supreme Court); Cedar Point Nursery vs. Hassid, ____ US ____ (US Supreme Court; pending as of 2021); PennEast Pipeline Co. vs. New Jersey, ___ US ____ (US Supreme Court; pending as of 2021); Murr vs. Wisconsin, 137 S.Ct. 1933 (US Supreme Court; 2017); California Bldg. Industry Ass’n vs. City of San Jose, Calif., 136 S.Ct. 928 (US Supreme Court; 2016); Koontz vs. St. Johns River Water Management District, 570 U.S. 2588 (US Supreme Court; 2013); Lucas vs. South Carolina Coastal Council, 505 U.S. 1003 (US Supreme Court; 1992); Evans v. Abney, ___ US ____ (1970; US Supreme Court); Burton v. Wilmington, ___ US ____ (1971; US Supreme Court); Moose Lodge v. Irvis, ___ US ____(1972); Edmonson v Leesville Concrete, ____ US ___(1991; US Supreme Court); Screws v. US, 325 US 91 (___; US Supreme Court).

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(1) Reduction-of-value test (ability to profit before and after takings is evaluated and there must be impairment (2) Cause-of-harm test (show that one person’s use causes harm to another’s property, and there is state action) (3) Government-invasion theory (show that government takes possession of property) (4) Noxious-use test In some countries/jurisdictions, Corporate Location Incentives can be deemed a violation of the Takings Doctrine where: Such Corporate Location Incentives effectively preclude the local companies from entering into some types of contracts—for example, Contracts that they routinely execute such as labor agreements; Such Corporate Location Incentives drastically reduce the customer-­ base and operations of local companies, and/or intentionally drive business to the incoming Beneficiary Company (beneficiary of the location Incentive); Such Corporate Location Incentives drastically changes the local/ regional Labor Market in ways that harm local workers and/or local companies Such Corporate Location Incentives drastically affects the psychology of local indigenes in ways that harm local workers and/or local companies— for example, Perceptions of unfairness (which can result in low Tax Compliance and low worker morale); reduced Business Confidence and Consumer Confidence. (1) The benefits granted to the Beneficiary Company by the Location Incentive is excessive by historical standards (by comparison to similar towns/properties etc.) and/or the “public use” ­requirement is not satisfied because most benefits (fulfillment of municipal needs, excess tax revenues etc.) flow to the Beneficiary Company and not the government and/or local indigenes. (2) The affected local persons (companies and individuals) do not have any right of appeal to complain about the imposed Local Incentives.

See: Tushnet (2003), Ellman (2001), Gardbaum (2003), Gardbaum (2006), Currie (1986), and Goldberg (2005).

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(3) The assessment of real property taxes is based not entirely on local needs, but on political lobbying, politician’s public relations efforts and private interests. Under the accepted interpretation of the US Constitution, government regulation of private property constitutes a “Taking” if (1) it does not substantially advance a legitimate state interest, and (2) the regulation is not imposed with adequate compensation for the property owners for any resulting economic losses. The Takings elements are as follows: (1) The property owner has constitutionally guaranteed property interests in Right to Contract, Equal Protection and Right of Association and fair enforcement processes. These property interests arise from state contract laws, state property laws, and state constitutional laws, norms and expectations. (2) The economic, psychological and political losses incurred by local indigenes and/or company owners constitute an economic loss and thus a “taking”. These losses are explained above. The monetary amount involved (loss incurred by property owners) is transferred to “public use” in various forms such as benefits gained by the government. The said taking can be construed as being for “public use” because the property taken is for “public” use—the general public includes local indigenes/companies who are affected by the Local Incentives and governmental benefits. (3) The property owner is not compensated for said taking because the local indigenes/companies incur the foregoing losses. (4) The government has some interest in granting Corporate Location Incentives, and the “takings” advance the government interests to some extent—but facilitation of such benefits and interests is limited by the losses incurred by local indigenes/companies.

4.15   Conclusion The major implication of the foregoing analysis is that real property taxation and Corporate Location Incentives in the United States, Europe and many countries are partially or wholly unconstitutional. That has or can have significant ramifications for municipal finance, Labor Regulation, Consumer Confidence, Business Confidence, local government budgets

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and state governments, and ultimately, regional Economic Growth, Financial Stability and Cross-Border “Spillovers”. These issues have not been sufficiently addressed in the existing literature.

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CHAPTER 5

Optimal Voting and Voting-Districts; and Relationships between Constitutions and the Size of Government

In most democracies, the enactment and enforcement of risk regulations and constitutional interpretation by government enforcement agencies heavily depend on the size of government (the “Government-Size”) and the political party in power (and to a lesser extent, the constitutional allocation of power between the federal and state governments), and thus on the voting system. In many Emerging Markets countries, GovernmentSize and government expenditures (both of which partly depend on voting systems) account for a significant percentage or majority of cash and economic activity in the national economy—and that can affect household dynamics, Enforcement, Consumer Confidence, Business Confidence, Risk-perception, etc.. This chapter recommends new voting methods: (1) that are more efficient in conveying the preferences of the masses; (2) that are more efficient in addressing issues pertaining to sustainable growth and quality of life; (3) that can address the “information gap” problem in traditional voting methods, wherein the least informed persons constitute the majority of voters while the most informed persons have little say in voting; and (4) that can address the uncertainty, transaction costs and volatility inefficiencies in capital markets that are created by political processes such as elections and pre-election dynamics and deliberations. This chapter discusses the relationships among the voting process, the representative government and ways to encourage sustainable growth

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_5

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through financial regulation. Campaign spending remains a highly debated issue in most developed countries and in many Emerging Market countries and can significantly distort public perceptions, Consumer Confidence, Business Confidence, risk perception and election outcomes, all of which have notable effects on sustainable growth. The strong case for statutory limitations on campaign spending have become evident in many countries.

5.1   Existing Literature Various studies have shown that constitutions have significant effects on government economic policies pertaining to the repayment of sovereign debt,1 economic relations between federal and state governments,2 provision or acceptance of foreign aid3 and investment,4 privatization, government spending, private contracting,5 the size of governments (“Government-Size”), foreign direct investment (FDI),6 foreign investment (FI),7 public policy,8 economic growth,9 trade deficits and taxation and fiscal policies.10 Kunst and Wagner discussed the concept of Constitutional framework and its role in ordering society. Goelzhauser and Konisky (2019), Goelzhauser and Shanna (2017), Saba et al. (2018), Bawn and Rosenbluth (2006), Hübscher (2016) and Becker and Mulligan (2003) discussed various dimensions of Government-Size. Metelska-Szaniawska (2010)11 found substantial positive correlations between constitutional rules and the economic reform process in post-­ socialist countries of Europe and Asia after 1989. Metelska-Szaniawska  See: Kohlscheen (2007), Kohlscheen (2010), Enderlein et al. (2009) and Basu (2016).  See: Valentine (2010) (“Unfortunately, the constitutional separation of powers that underpins Canada’s federal system impedes the creation of a national wind power development strategy because Canada’s provinces have constitutional authority over electricity governance…”). See: Goldstein (1981). 3  See: Ouattara (2006) and Tingley (2010). 4  See: Bevan et al. (2004) and Goldstein (1981). 5  See: Lowenberg and Yu (1990) (this article states in part: “An efficient constitutional environment …requires that the contracting parties possess good alternatives to the constitutional agreement toward which they are negotiating…. The existing constitutional environments in both South Africa and Hong Kong are not favorable to the formation of an efficient contract….”). 6  See: Jensen and McGillivaray (2005). 7  See: Tate (1990). 8  See: Besley and Case (2003), Persson and Tabellini (2005a, b) and Congleton and Swedenborg (2006). 9  See: Persson and Tabellini (2005a, b). 10  See: Persson and Tabellini (2004) and Persson (2003). 11  See: Metelska-Szaniawska (2010). 1 2

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(2010) is among many studies that have confirmed similar relationships in developed countries. Doring and Schnellenbach (2010) compared federalism in Germany and the United States and concluded that a constitutional framework of competitive federalism does not prevent the long-term centralization of competencies, that formal institutions affect the pathways of government centralization and that informal political institutions may have a substantial effect on the preservation of state and local autonomy. These informal political institutions include trade associations, standards organizations (such as Financial Accounting Standards Board [FASB] and International Accounting Standards Board [IASB]), specific statutes (such as Sarbanes Oxley Act), quasi-government agencies and more. Blomquist and Ostrom (2009) analyzed how courts were used as settings for deliberation and institutional change in the management of water institutions in Southern California—similarly courts and adherence to constitutional law principles can be used to change the management of financial risk in financial institutions and operational risk in companies, in order to avoid disasters such as the global financial crisis of 2007–2011. Witt and Schubert (2009) argued that constitutional interests of individuals are often improperly or insufficiently defined and that within the context of innovative activities with pecuniary and technological externalities, the citizens’ constitutional interests vary with their risk preferences, and thus the nature of the appropriate social contract depends on the risk preferences of individuals. The Electoral System (Voting and geographic demarcation of Voting Districts) is also an important Geopolitical Risk because it determines the allocation of constitutionally derived powers, Social Capital, Social Networks and political lobbying that drive the economic policies of, and the allocation of resources by, governments and companies (and indirectly, by households). Electoral voting has been shown to affect Social Information,12 Compliance,13 Public Goods provision,14 Tax compliance,15 choices for the supply of services16 and so on.

 On Social Information, see: Bischoff and Egbert (2013).  On Compliance, see: Morgan et al. (2019). 14  On provision of public goods, see: Morgan et al. (2019). 15  On Tax Compliance, see Casala et al. (2016). 16  On lay preferences for government or private sector supply of services, see: Mahoney Kemp and Webley (2005). 12 13

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5.2   Emergence and Nonlinear Effects: Geopolitical Risk, Some Economic Psychology17 Factors and Cross-Border Spillover Effects of Electoral Systems (Spillovers into Emerging Markets) The extensive literatures on Cross-Border Spillovers, Integration, Social Networks and Social Capital are summarized in Chap. 2 of this book. The following are some of the Cross-Border Spillovers from developed countries to Emerging Market countries: (1) As mentioned herein and above, in many countries, GovernmentSize is a key determinant of various issues including but not limited to the following: jurisdictional competition, economic growth, Political Decentralization, corruption, risk-taking (by individuals, banks, government agencies and private sector companies), Inequality, Public Governance and International Relations, private investment and FDI (Foreign Direct Investment), thrift culture, export performance, Life Satisfaction and public debt. These factors in turn have or can have significant direct/indirect Multiplier Effects on Consumer Confidence, Business Confidence, Corporate Expenditures, Consumer Expenditures, Savings/investments, Consumer Cognition, group decisions, Foreign Aid/FDI/FI (from governments), International Trade policies, national/ regional immigration policies, Risk Perception (of companies, households and government regulators), remittances (to Emerging Markets), transfers of technology and Human Capital to Emerging Markets and so on. (2) Voting methods and patterns determine political outcomes, which in turn determine or influence governments’ economic policies and Social Welfare interventions, Tax Policy and Tax Compliance. These policies/interventions and trends have or can have a dispro17  On associated Economic Psychology and Behavioral IPE (International Political Economy) issues, see: Hardardottir (2017), Birz (2017), Dixon et  al. (2014), Ochsen and  Welsch (2012), Qian et al. (2019), Paradiso et al. (2014), Schniter et al. (2020), Garcia et al. (2021), Bavetta et al. (in press), Torgler and Schneider (2009), Nguyen and Claus (2013), Pántya et  al. (2016), Haferkamp et  al. (2009), Banker et  al. (2020) and  Blaufus Möhlmann and Schwäbe (2019).

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portionately larger effect on immigrants, Foreign Relations and Emerging Market countries in terms of International Trade Policies (e.g. Trade Tariffs and trade agreements), Foreign Aid/ FDI/FI (from governments), immigration policies, Welfare Transfers to immigrants, Consumer Confidence, Business Confidence, Corporate Expenditures, Consumer Expenditures, Tax Compliance, perceived Tax Equity, Risk Perception (of companies, households and government regulators), remittances (to Emerging Markets), transfers of technology and Human Capital to Emerging Markets and more. (3) Voting methods and patterns differ across countries and sometimes even within countries, and given their economic, social and psychological effects, they are major Geopolitical Risks. (4) In some democratic countries, voting methods and patterns are a function of the national or state/regional constitution. (5) In many or most democratic countries, Government-Size is a function of the national or state/regional constitution. GovernmentSize affects a broad range of issues whose severity and economic/ psychological and political impact vary or can vary dramatically across countries. (6) As mentioned herein and above, the Electoral System (Voting and geographic demarcation of Voting Districts) is also an important Geopolitical Risk because it determines the allocation of constitutionally derived powers, Social Capital, Social Networks and political lobbying that drive the economic policies of, and the allocation of resources by, governments and companies (and indirectly, by households). Voting has been shown to affect Social Information, Compliance, Public Goods provision, Tax compliance, choices for the supply of services and more. (7) Electoral Systems and their associated Social Networks and Social Capital dynamics have or can have significant effects on government tax policies, perceived Tax Equity, Tax Sensitivity and Tax Compliance (by individuals and companies), all of which can affect savings/investments, remittances (to Emerging Markets), loan ­ volumes (to Emerging Markets), FDI/Foreign Investment/ Foreign Aid, Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, Government Expenditures, Risk Perception and more.

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5.3   Complexity, Complex Systems and the Rule of Law18 The Complexity pertaining to these issues is or can be manifested in the following ways: ( 1) Nonlinearity in relation to rule-of-law development (2) Nonlinearity in the growth of economies (3) Self-organization of institutions and organizations—such as private and public enforcement groups and rule-making. (4) Self-organization of aid donors, aid facilitators, government agencies and aid recipients (5) Change and theories of change (6) Nonlinearity in relation to deadweight losses in the demand for, and enforcement of, laws (7) Nonlinearity in relation to compliance with statutes and enforcement of laws (8) Complex Networks—aid donors, aid recipients and so on (9) Network Effects The legal and economic environment in which Government-Size, Voting Methods, foreign aid and constitutions function (defined by aid donors, aid recipients, legislatures, regulations, regulators, financial institutions, Internet systems etc.) is a complex adaptive system because it has some or all of the following attributes: (1) The relations between the system and its environment are nontrivial and/or nonlinear. (2) The system can be influenced by, or can adapt itself to, its environment. (3) The system has feedback or memory and can adapt itself according to its history or feedback. (4) The system is highly sensitive to initial conditions. (5) The number of parts (and types of parts) in the system and the number of relations between the parts are non-trivial. 18  See: Andrews et  al. (2017), Byrne and  Callaghan (2014), Bamberger et  al. (2016), Ramaligan (2015), Room (2011), Kirman (2016), Salzano and Colander (2007), OECD (2016), Finch (2013), Durlauf (2012), Bayoumi et  al. (2016), Melnik et  al. (2013), Miklashevich (2003), Perc et  al. (2013), Post and  Eisen (2000), Ruhl and  Ruhl (1997), Williams and Arrigo (2002) and Arthur (1999).

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5.4   Emergence and Nonlinearity: Constitutions, Labor Regulation and Government-Size Around the world, Government-Size has emerged as a key determinant of, and/or result of, various Geopolitical, Sustainability, Economic Policy and Social Welfare issues including but not limited to the following: jurisdictional competition,19 economic growth (and economic modeling),20 Political Decentralization,21 corruption,22 risk-taking (by banks and private sector companies),23 Inequality,24 Public governance25 and International Relations, population size,26 private investment and FDI27 (Foreign Direct Investment), Deadweight Costs,28 multinational investors,29 thrift culture,30 Institutional Quality,31 export performance,32 Political Polarization, electoral accountability,33 government openness/ transparency,34 Life Satisfaction35 and public debt.36 In many countries (i.e. parliamentary democracies, presidential democracies, parliamentary monarchies, socialist systems, and even in some autocracies), the sizes of the federal government and state

 On jurisdictional competition, see: Sorens (2014).  On economic growth and economic modeling, see: Afonso and Furceri (2010), Akram and Rath (2020), Divino et al. (2020), Hajamini and Falahi (2018), Nirola and Sahu (2019), Asimakopoulos and Karavias (2016) and Kim et al. (2018). 21  On Political Decentralization/Centralization, see: Fan et al. (2009), Fiva (2006), Qiao et al. (2020), Goelzhauser and Shanna (2017), Goelzhauser and Konisky (2019), Bernardi et al. (2013), Akeem (2011), Weingast (February 2000), Purfield (2004) and Fiva (2006). 22  On corruption, see: Fan et al. (2009) and Kotera et al. (2012). 23  On risk-taking by banks and private companies, see: Uddin, Chowdhury, et al. (2020). 24  On Inequality, see: Dotti (2020). 25  On Public governance, see: Su and Bui (2017), Vianna and Mollick (2018), Kim et al. (2018), Makin et al. (2019) and Krieger and Meierrieks (2021). 26  On population size, see: Krieger and Meierrieks (2021). 27  On private investment and FDI, see: Su and Bui (2017) and McCloud et al. (2018). 28  On Deadweight Costs, see: Becker and Mulligan (2003). 29  On multinational investors and FDI, see: McCloud et al. (2018), Su and Bui (2017) and Jensen and McGillivaray (2005). 30  On thrift culture, see: Pham et al. (2018). 31  On Institutional Quality, see: Uddin et al. (2020). 32  On export performance, see: Bournakis and Tsoukis (2016). 33  On electoral accountability, see: Bawn and Rosenbluth (2006). 34  On government openness/transparency, see: Vianna and Mollick (2018). 35  On Life Satisfaction, see: Obydenkova and Salahodjaev (2017). 36  On public debts, see: Whajah et al. (2019) and Ferris (2014). 19 20

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government37 are expressly and impliedly determined by their national constitutions (and to a lesser extent, their state constitutions) because: (1) The national constitution grants powers to various arms of the government for the allocation of resources and responsibilities. (2) The Constitution provides necessary checks-and-balance on powers and activities of the executive, legislative and judicial branches of government. (3) Government-revenue shocks, oil/energy shocks, government spending shocks, intergovernmental grants, changes in tax efficiency and changes in government-­spending program efficiency all revolve around powers granted by constitutions. In many developed countries and Emerging Market countries, and in modern times, national and state governments have grown significantly and non-uniformly in non-standard ways such as the following: ( 1) e-Government strategic alliances. (2) Government contracts for the delivery of services and governments’ Procurement Agreements. (3) Concessions (auctioned by governments). (4) Tolls. (5) The outcomes of taxation. (6) Subsidization of the private sector. (7) Tax credits issued by state, local or federal governments. (8) Nonprofit organizations that are tightly regulated by governments. (9) The scope, implementation and degree of enforcement of statutes/regulations. Such non-traditional growth of Government-Size has had or can have the following unintended effects, which can differ in magnitude, occurrence and duration across countries: ( 1) Quality, amount and duration of services delivered to the public. (2) Voting patterns. (3) Political lobbying and political influence.

 See: Persson and Tabellini (2004) and Persson (2003.

37

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(4) Amounts, timing and efficiency of FDI, Foreign Investment and Foreign Aid. (5) Consumer Confidence, consumer-debt and Consumer Expenditures. (6) Business Confidence and Corporate Expenditures. (7) Social Networks and Social Capital. (8) Government expenditures. (9) Risk-Perception and “Expectations”. (10) Contagion in markets. (11) “Social-Contagion” and perceptions of the economy and Tax-Equity. (12) Voting patterns in political elections (as incidence of associated problems such as “Re-districting”). In some countries (such as Nigeria), the annual expenditure on the legislative and executive arms of government consumes a significant percentage of the annual federal budget. All that has an effect on risk regulation and sustainable growth because: (1) clearly, some of those countries (such as Nigeria) cannot afford the types of democratic governments that they operate; (2) the structure of the federal government in combination with rampant corruption slows down and distorts sustainable growth, Sustainability efforts and economic and policy decisions; and (3) the resulting government bureaucracy reduces the credibility of the federal and state governments, which in turn reduces FDI, foreign investment, sustainable growth and compliance with risk regulations, and may cause capital flight. In some democratic and common-law countries (such as the United States), national and/or state constitutions and “Fiscal Rules” (regulations enacted by the executive or legislative branches of government) impose strict limits on Government Expenditures and budgets, which in turn limits Government-Size. See Beck and Możdżeń (2020), Heinemann et al. (2018), Dove (2015, 2016), Bae et al. (2012), Brooks, Halberstam and Phillips (2016) and Remmer (2003). In this context, “constitution” includes express written national/state constitutions and limiting statutes and regulations that are enacted by national/state legislatures and/or the executive branch (that specifically limit government spending). The purposes and rationale of such “constitutional” limits typically include avoidance of sovereign/municipal default, accountability/rationalization, efficiency of government, reduction in corruption, Economic Policy, public perceptions and so on.

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Blume and Voigt (2013) found that: (1) constitutionally mandated spending limits are correlated with lower total government expenditure; (2) the transparency of a nation’s budget is correlated with higher government effectiveness and lower corruption; and (3) the deficit limits entrenched in the Maastricht Treaty were correlated with higher, rather than lower, overall government expenditure. 5.4.1  Some Geopolitical Risk Implications of Government-Size Government-Size can have Geopolitical Risk effects through various ways including but not limited to the following: (1) The ability of federal and state governments to provide FDI, FI and Foreign Aid to other countries. (2) Sovereign Default Risk and municipal bond default risks, and associated debt renegotiations. (3) Perceived and actual Political Risk and associated Insurance costs. (4) Actual and perceived International Influence of national governments. (5) Ability of national governments to prosecute wars abroad. (6) Ability of national governments to engage in Trade Wars and to effectively negotiate, renegotiate or withdraw from International Trade Agreements. (7) The capacity/ability of national and sub-national governments to authorize, fund and execute capital projects and economic development projects—which in turn provides employment for immigrants and foreign companies that typically send remittances to their home countries (emerging markets). In many countries, the affected ­industries (such as construction, retail trade, restaurants/ hospitality and transportation) typically employ substantial numbers of immigrants. (8) In many countries, government agencies: (i) employ immigrants (as full-time/part-time staff and consultants) who send remittances to their home countries (emerging markets); and (ii) hire and outsource work to companies that employ immigrants who send remittances to their home countries (emerging markets).

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(9) In many countries, government agencies make expenditures that support industries that import significant volumes of goods and services from emerging market countries. (10) Government’s ability to formulate and execute Economic Policy and Social Welfare Policy. (11) Changes in Consumer Confidence and Business Confidence and associated Multiplier Effects. (12) National governments’ cash contributions to International Organizations—such as the UN, WTO and World Bank. On associated Economic Psychology and International Political Economy (IPE) issues, see the comments in Haferkamp et  al. (2009), Ochsen and Welsch (2012), Garcia et al. (2021), Bavetta et al. (in press), Vanberg (2011), MacDonald (2013), Eicher et al. (2018) and Torgler and Schneider (2009). Government-Size and the nature of government expenditures within the context of government revenues can have substantial impact on the effectiveness of Foreign Aid and sovereign default risk. Nigeria now has 36 states, more than 100 federal senators, more than 400 members of the federal House of Representatives and 774+ Local Government Area councils (whom, together with their assistants and counselors/advisors constitute the third layer of government). For example, in Nigeria, according to the Central Bank of Nigeria (2018), the state/local/federal governments spent more than 70% of their revenues on salaries and entitlements of civil servants, and at least 25% of the overheads of the Federal Government budget was spent on the National Assembly in Abuja (the overhead of the National Assembly as a percentage of the Federal Government budget in 2010, 2009 and 2008 were 25.1%, 19.87% and 14.19%, respectively). During 2010–2020, the Nigerian federal government spent an average of 70% of its annual budget on recurring expenditures and that does not leave enough funds for infrastructure and other expenses that can boost the economy and increase tax revenues. Given the current conditions and the structure and cost of government, it is clear that most foreign aid simply will not work well within Nigeria and Emerging Market countries that have similar government structures and problems. Many countries have bi-cameral risk regulations wherein banking, credit/loan, insurance and securities laws exist at both the federal and

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state levels (such as in the United States, Mexico, Brazil, Australia and Canada), and sometimes even at the local government levels. In such countries, the enactment and enforcement of risk regulations, and constitutional interpretation by government enforcement agencies heavily depend on the geographical demarcations of state government boundaries and local government boundaries. In most countries, the geographical demarcation of states and local government areas and boundaries for senatorial and lower-house elections are critical elements of sustainable growth because they often determine taxation, allocation of capital by banks, government spending, applicability of regulations (environmental, financial etc.), preemption of state/federal laws in litigation, applicability of state government constitutions (distinct for federal constitutions), facility location decisions of companies and government agencies, corporate spending, job creation, household spending, voting patterns etc. In most developed and developing countries, there is no rational economic basis for the geographical demarcation of states and local government areas and boundaries for governorship, senatorial and lower-congress elections. Most of these geographical demarcations are very rigid and do not respond to changes in populations, national/regional economies and the political preferences of indigenes. This chapter will analyze and introduce conceptual models for making such geographical demarcations in order to be more responsive to group preferences and socioeconomic changes. 5.4.2  Labor Regulation, Government-Size and the Constitutionality of Executive Orders In many countries, a pervasive problem that pertains to Government-Size is that most government employees don’t face much career-risk, incomerisk and reputational-risk, and that often results in inefficiency and lowquality government services. The problem is intertwined with Labor Regulation in government agencies, and the structure of compensation/ incentives of government employees (most of which is as salaries, encouraging corruption, use of ghost-workers, and bloated government agencies). Ideally, (i) government employees should be paid bonuses and incentives that are tied to the achievement of agency priority-objectives and financial performance of related agencies; (ii) a portion of the monthly

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base-salaries of government employees should be variable and should be tied to achievement of agency objectives; (iii) governments should consider creating one “union-neutral” entity (not or minimally affected by Labor Union activity) that will provide employee-benefits (e.g., health insurance, discounts) to government-employees instead of using private companies. Most academic studies of Government-Size completely omitted the effects of Labor Regulation and Executive Orders on Government-Size. In most democratic systems, Executive Orders (by Presidents, Prime Ministers and state Governors) can have significant effects on GovernmentSize through the following: (1) The classification of government employees (temporary vs. political vs. career government employees) (2) Hiring/firing processes for government workers (3) Collective Bargaining processes. (4) The scope and timing of labor union activities (5) Whistleblower activities (6) Pre- and post-retirement benefits for government workers and the like (7) Government workers’ entitlements (e.g. healthcare and vacations) In addition, such Executive Orders can have Multiplier Effects such as the following: ( 1) Motivation and morale of government employees. (2) Ability of government employees to formulate and effectively implement policies. (3) Delivery of Social Welfare benefits. (4) Day-to-day efficiency of government agencies. (5) Public perceptions of the quality of government services, fairness of political systems and national economies, overall Inequality and so on.

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These Executive Orders can typically be challenged in court or revoked by subsequent Executive Officers. That raises the issue of the constitutionality of Executive Orders—which was discussed in Nwogugu (2021) (Chap. 7 of Part II of this book). An example of the potentially extensive effect of Executive Orders on Government-Size is the three Presidential Orders that were issued by US President Trump in 2018,38 and an associated Memorandum39 that he issued in 2019 (collectively, the “Trump Labor Orders”). 38  See: Executive Order 13836 of May 25, 2018 (Developing Efficient, Effective, and Cost-­ Reducing Approaches to Federal Sector Collective Bargaining). See: Executive Order 13837 of May 25, 2018 (Ensuring Transparency, Accountability, and Efficiency in Taxpayer-Funded Union Time Use). See: Executive Order 13839 of May 25, 2018 (Promoting Accountability and Streamlining Removal Procedures Consistent with Merit System Principles). 39  See: US President Trump (Oct. 11, 2019). “Presidential Memorandum on Executive Orders 13836, 13837, and 13839. BUDGET & SPENDING”. Issued on: October 11, 2019. https://www.whitehouse.gov/presidential-actions/presidential-memorandum-executive-­ orders-13836-13837-13839/. (The Memorandum stated as follows: “On May 25, 2018, I signed three Executive Orders requiring executive departments and agencies (agencies) to negotiate collective bargaining agreements that will reduce costs and promote government performance and accountability. These Executive Orders, Executive Order 13836 of May 25, 2018 (Developing Efficient, Effective, and Cost-Reducing Approaches to Federal Sector Collective Bargaining), Executive Order 13837 of May 25, 2018 (Ensuring Transparency, Accountability, and Efficiency in Taxpayer-Funded Union Time Use), and Executive Order 13839 of May 25, 2018 (Promoting Accountability and Streamlining Removal Procedures Consistent with Merit System Principles), were partially enjoined by the United States District Court for the District of Columbia on August 25, 2018. The District Court’s injunction barred enforcement of sections 5(a), 5(e), and 6 of Executive Order 13836, sections 3(a), 4(a), and 4(b) of Executive Order 13837, and sections 3, 4(a), and 4(c) of Executive Order 13839. On July 16, 2019, the United States Court of Appeals for the District of Columbia Circuit held that the District Court lacked jurisdiction and vacated its judgment, and the Court of Appeals has now issued the mandate making its judgment effective. Provisions of the Executive Orders that had been subject to the District Court’s injunction set presumptively reasonable goals that agencies must pursue during bargaining; directed agencies to refuse to bargain over permissive subjects of negotiation; and established Government-wide rules that displace agencies’ duty to bargain with unions over contrary matters, regardless of whether the Federal Service Labor-Management Relations Statute would otherwise require bargaining absent those rules. Sections 4(c)(ii) and 8(a) of Executive Order 13837 and section 8(b) of Executive Order 13839, however, recognized agencies’ ability to comply with collective bargaining agreements containing prohibited terms so long as such agreements were effective on the date of the Executive Orders. While the District Court’s injunction remained in effect, agencies retained the ability to bargain over subjects covered by the enjoined provisions. The Executive Orders, however, did not address collective bargaining agreements entered into during this period. As a result, it is necessary to clarify agencies’ obligations with respect to such collective bargaining agreements. Agencies

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The May 2018 Trump Labor Orders: • Instructed US government agencies to desist from negotiating or bargaining any dispute over a decision to remove an employee for misconduct or unacceptable performance. shall adhere to the terms of collective bargaining agreements executed while the injunction was in effect. Agencies that remain engaged in collective-bargaining negotiations, to the extent consistent with law, shall comply with the terms of the Executive Orders. However, where, between the date of the Executive Orders and the date of the Court of Appeals’s mandate, the parties to collective bargaining negotiations have executed an agreement to incorporate into a new collective bargaining agreement specific terms prohibited by the Executive Orders, an agency may execute the new collective bargaining agreement containing such terms, and terms ancillary to those specific terms, notwithstanding the Executive Orders. To the extent it is necessary, this memorandum should be construed to amend Executive Orders 13836, 13837, and 13839. The Director of the Office of Personnel Management is hereby authorized and directed to publish this memorandum in the Federal Register…DONALD J. TRUMP…”). See: US White House (January 22, 2021). “Executive Order on Protecting the Federal Workforce”. Presidential Actions US White House, Washington, D.C., USA. https://www. whitehouse.gov/briefing-room/presidential-actions/2021/01/22/ executive-order-protecting-the-federal-workforce/. See: “Biden to Sign Executive Order Killing Schedule F, Restoring Collective Bargaining Rights”. January 22, 2021. https://www.govexec.com/management/2021/01/biden-­ sign-­executive-order-killing-schedule-f-restoring-collective-bargaining-rights/171569/. (“Fulfilling a campaign promise, President Biden is expected to sign an executive order Friday afternoon rescinding a series of orders issued by former President Trump aimed at gutting federal employee unions and stripping federal workers of their civil service protections. The Trump administration was aggressive in its approach to the federal workforce, and labor groups in particular. In 2018, Trump signed a series of executive orders seeking to make it easier to fire federal workers, streamline labor-management negotiations and restrict the scope of collective bargaining, and severely restricting the use of official time. And last fall, Trump signed an executive order establishing a new job classification within the government’s career civil service called Schedule F for ‘employees in confidential, policy-­determining, policy-making or policy-advocating positions,’ and calling on agencies to identify and convert eligible employees to the new classification. Employees converted to Schedule F would lose virtually all of their civil service protections and could be fired without cause. Although it appears agencies did not act quickly enough to convert any career civil servants to the new job classification before the end of Trump’s term, it is unclear whether any agencies were able to use the executive order to burrow political appointees into career positions, as many experts fear…. According to a summary of Biden’s executive order released Friday morning, the directive will rescind the three anti-union orders, as well as the order establishing Schedule-F…In addition to revoking the Trump administration’s workforce executive orders, it instructs agencies to ‘bargain over permissible, non-mandatory subjects of bargaining when contracts are up for negotiation,’ and it directs the Office of Personnel Management to develop recommendations ‘to pay more federal employees’ and contractors at least $15 per hour….”).

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• Instructed US government agencies to limit (via collective bargaining agreements) the scope of union activities by limiting the amount of work-time that employees can allocate to Labor Union activities. • Instructed US government agencies to negotiate only mandatory bargaining topics when bargaining with Labor Unions. • Changed the worker classification systems (i.e. Schedule F). • Increased the ability of US government agencies to fire government workers. • Weakened workers’ rights and Collective Bargaining by Labor Unions that are active in US government agencies. • Affected and could potentially reduce accountability/transparency. Each of the foregoing impacts can affect Government-Size. The legality and constitutionality of the Trump Labor Orders were challenged in the US District Court and also litigated at the US Court of Appeals, which ruled that the US District Court did not have any jurisdiction over the matter. However, on or around January 22, 2021, President Biden issued a Presidential Order that canceled the Trump Labor Orders.

5.5   Emergence and Nonlinearity: Optimal Electoral/Voting Systems In many democratic countries, the Electoral System is partly or significantly determined by the national and/or state constitution. In the United States, the Elections Clause of the US Constitution grants each state government the power to determine the “Times, Places and Manner of holding Elections…” There is substantial evidence of significant relationships among Electoral Systems, Electoral Uncertainty, Sustainable Growth and macroeconomic conditions and the associated literature is as follows: Heckelman (2002), Nwangwu and Ononogbu (2016), Bormann and Golder (2013), Wagner and Plouffe (2019), Ziegfeld (2013), André et al. (2016), Betz (2017), Blume et al. (2009), Redmond and Regan (2015), Crisp et al. (2010), Ito (2015), Knutsen (2011), Menocal (2011), Rogowski and Kayser (2002), Thames and Edwards (2006), Singer (2011), Fossati (2014), Chang et al. (2008) and Wagner (2014). The significant relationships between Electoral Systems on the one hand and corporate growth, R&D (research and development in

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technology/biotech industries) and corporate governance on the other have been substantially documented in the literature—see Camyar and Ulupinar (2013, 2019), Barker (2010), Callaghan (2009), Camyar (2014), Suh (2012), Kruminas (2019), Yeung and Zuazu (2020) and Ferris (2020). The following are noteworthy: (1) Electoral Uncertainty can affect government budgets; Government, Corporate and Consumer expenditures (households and companies sometimes defer or accelerate expenditures in response to anticipated or scheduled political elections); Business and Consumer Confidence; Risk Perception; FDI/Foreign Aid, Savings/Investment; household decisions (e.g. marriage, relocation, home purchase, car/vehicle purchase, continuing education, health expenditures and leisure); financial market volatility and so on, each of which can have negative Multiplier Effects and/or Cross-Border Spillover effects. (2) Similarly, Electoral Systems affect economic policies, Government Spending, Corporate Expenditures, Business Confidence, Consumer Confidence, Consumer expenditures, Risk Perception, FDI/Foreign Aid, Savings/Investment and more, each of which can have Multiplier Effects and/or Cross-Border Spillover effects. (3) As mentioned above, Electoral Systems are often dictated by, and/ or intertwined with national constitutions and/or state constitutions; and the associated rights can generate significant public activism, public controversy and lawsuits that affect RiskPerception, investment, Expectations and economic outcomes at the household, state government and federal government levels. (4) Electoral Systems affect government protectionism, politicians’ election promises and employment protection. (5) Electoral Systems and their implementation and associated enforcement, Deadweight Costs, Multiplier Effects and Cross-Border Spillover effects vary or can vary significantly across countries and within countries (e.g. the United States, Canada, Australia and other countries, which have dual/multi-level electoral systems at the federal and state government levels) and thus, is a major Geopolitical Risk.

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Optimal Electoral Systems for political elections remain a controversial subject around the world. Some of the problems inherent in all political Electoral Systems in democratic countries around the world are as follows: (1) Electoral Uncertainty. (2) Economic uncertainty and financial market volatility. (3) Vote Rigging and fraud. (4) Corruption. (5) Excessive spending on elections and pre-election political lobbying (and minimal restrictions on campaign spending), each of which can substantially distort the electoral processes and economic policies. (6) Post-election corruption, conversion and fraud—wherein politicians and their donors try to recover their campaign expenditures. (7) Appointment of unqualified “political appointees” as government officials. (8) Suboptimal government monetary, fiscal and social policies that are often designed to influence election outcomes. (9) Mismanagement of government resources. (10) Wrong or fraudulent judicial decisions—in many countries (such as in parliamentary democracies and presidential democracies) and especially in emerging market countries, the executive branch often informally influences the judiciary through budget allocations, withholding of statutory cash allocations, direct control of security personnel that are assigned to judges; etc. (11) Abandoned and suboptimal Sustainability efforts. (12) Lack of adequate feedback from Voting Systems—in many countries, politicians must wait until the end of the electoral cycle to get comprehensive feedback from voters. Some countries have solved this problem by holding “In-Term Snap Elections” (which are national elections that are called by the executive or legislative branches of the national governments during a political term). (13) The one-person-one-vote model in public elections is inefficient and does not account for substantial differences in education, information processing capabilities and Knowledge among voters; or vote buying and corruption. The end result is that misinformed or under-­informed voters often make the wrong decisions, which typically cannot be corrected until the next election cycle in two to six  years. Similarly, the one-person-one-vote model in voting by elected legislators is or can be inefficient and provides wrong

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incentives for Gerrymandering, electoral fraud, vote suppression and other problems. (14) Information Asymmetry—wherein, in many developed and developing countries, most of the voters are uninformed or under-informed, and the least informed voters not only have the greatest impact on voting outcomes, but also bear the bulk of the bad decisions that are made by elected politicians, all of which is suboptimal. (15) The significant costs of political elections—in terms of time, economic costs, psychological costs, conflicts, litigation, distortions of economic policies (that otherwise would not occur) and so on. (16) In most existing Electoral Systems, Incumbency40 can cause an increase in the probability of the incumbent winning an election, often without regard to the incumbent’s performance trackrecord and whether it is a multi-seat jurisdiction. (17) Most existing Electoral Systems provide strong incentives to both elected politicians and contesting politicians to engage in Personal Vote Seeking and Personal Reputation Seeking, both of which can significantly distort policy-making and legislative processes in both the executive and legislative branches of governments. (18) Significant pre-election and post-election uncertainty about the Tax Policies of governments (local, state and federal) and large Multinational Corporations (MNCs), Tax Equity and Tax Compliance. (19) Usual problems such as election fraud, Vote Suppression, low voter turnout, bribery, Negative Incumbency and Partisan or racial Gerrymandering.

40  Redmond and Regan (2015) correctly noted: “The existence of a large incumbency advantage in the winner-takes-all plurality system of the United States is well documented. It is unclear whether incumbents in proportional systems should enjoy such a large advantage. Multi-seat constituencies make it difficult for individual incumbents to claim credit for the provision of local public goods and services. Moreover, multiple incumbents may dilute media attention thereby limiting name recognition advantage.… Incumbency causes an eighteen percentage point increase in the probability that a candidate in Ireland’s lower house of parliament wins a seat in the next election. Our results indicate that the protection of vulnerable incumbents from intra-party competition may be a source of incumbency advantage in multi-member district elections….”

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5.5.1  Some Geopolitical Risk Implications of Electoral/ Voting Systems Voting Systems can have Geopolitical Risk effects in various ways including but not limited to the following: (1) National government’s Foreign Policy and the actual and perceived International Influence of national governments. (2) The ability/capacity of federal and state governments to provide FDI, Foreign Investment and Foreign Aid to other countries. (3) Sovereign Default Risk and municipal bond default risks and associated debt renegotiations. (4) Perceived and actual Political Risk and associated Insurance costs. (5) Ability of national governments to prosecute military wars abroad. (6) Ability of national governments to engage in Trade Wars and to effectively negotiate, renegotiate or withdraw from International Trade Agreements. (7) The capacity/ability of national and sub-national governments to authorize, fund and execute capital projects and economic development projects—which in turn provides employment for immigrants and foreign companies that typically send remittances to their home countries (emerging markets). In many countries, the affected industries (such as construction, retail trade, restaurants/ hospitality and transportation) typically employ substantial numbers of immigrants. (8) In many countries, government agencies: (i) employ immigrants (as full-time/part-time staff and consultants) who send remittances to their home countries (emerging markets); and (ii) hire and outsource work to companies that employ immigrants who send remittances to their home countries (emerging markets). (9) In many countries, government agencies make expenditures that support industries that import significant volumes of goods and services from emerging market countries. (10) Government’s ability to formulate and execute Economic Policy and Social Welfare Policy. (11) Domestic Policy—which includes immigration, immigrants’ Welfare Benefits and Remittances (to foreign countries). (12) Employment and working conditions of “career government officers” who can have long-term effects on policy-making and enforcement.

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(13) The scope and effects of Political Lobbying and campaign contributions. (14) Changes in perceptions of fairness and performance of the political system and economic system. (15) Changes in Consumer Confidence and Business Confidence and associated Multiplier Effects. (16) National governments’ cash contributions to International Organizations (such as the United Nations, WTO and World Bank), which in turn affects economic development and Social Welfare around the world. (17) As noted above, there is substantial evidence of significant relationships among Electoral Systems and Electoral Uncertainty on one hand, and, Sustainable Growth, corporate growth, R&D, corporate governance and macroeconomic conditions—and these relationships can vary across countries, voting systems and political systems in terms of timing, magnitude and effects. (18) Labor Regulation and enforcement of Labor Laws. On associated Economic Psychology, International Labor Market and IPE issues, see the comments in Haferkamp et  al. (2009), Ochsen and Welsch (2012), Garcia et  al. (2021), Bavetta et  al. (in press), Vanberg (2011), MacDonald (2013), Eicher et  al. (2018) and Torgler and Schneider (2009). 5.5.2   Electoral/Voting Systems, Labor Dynamics and Labor Regulation The relationship between Electoral Systems and Labor Dynamics is somewhat symbiotic: (1) Labor unions are active participants in political campaigns, and sometimes publicly support specific political parties and/or politicians. (2) Labor unions hire political lobbyists to advance their positions and to help enact new legislation. (3) In some countries such as Germany and China, Labor Union representatives or employees’ representatives sit on boards of directors of medium and large companies.

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(4) The effectiveness and implementation of political systems and voting systems is significantly dependent on large active advocacy groups such as labor unions who often function as independent enforcers of statutory/constitutional obligations and file lawsuits to redress actual/perceived wrongdoings.

5.5.3  Recommended Voting Systems for Popular Public Political Elections The COVID-19 Pandemic and the series of devastating economic/financial crisis that occurred around the world during the last fifty years confirm that most (if not all) political systems have failed and also illustrate and confirm the need for efficient, knowledge-based (informed decision-­ making) and more responsive electoral/voting systems. The following are new types of voting methods that can reduce the problems inherent in current voting systems around the world: (1) Partial or Complete Cumulative Voting with Incentives and Restricted Campaign Spending—for each major elected position (or for a specific minimum percentage of elected positions) at the state, federal and local government levels, voting is done annually, and at the end of each election cycle (i.e. political term), the candidate that has the highest cumulative votes wins. Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/statutes, jail-terms and civil/criminal penalties that substantially reduce the Net Worth of offending persons and companies. Individuals who vote in each election will get an incentive (e.g. small tax credits or a token cash payment) from the government. Political parties that strictly comply with Campaign Spending and electoral-­conduct regulations in each state/region will get incentives (e.g. small tax credits, a one-time increase in permitted election contributions/gifts or a token cash payment) from the government. Thus, each political party organization in each state/region will be treated as a distinct accounting entity for tax and accounting purposes during each election cycle. (2) Complete Cumulative Stratified Voting And Multi-Seat Jurisdictions (For Legislature Positions) with Incentives and Restricted Campaign Spending—for each major elected position (or for a specific percentage of elected positions) at the state, federal and local government

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levels, voting is done annually. The voters are classified into three groups based on their education and access to government information: (i) elected persons and government officials (“Group 1”); (ii) persons who have earned a university degree (“Group 2”); and (iii) all other eligible voters (“Group 3”). The votes of persons in Groups 1 and 2 are given more weight (e.g. 2–4 times more weight) than those of persons in Group 3, in order to account for often substantial differences in education, information processing capabilities and Knowledge among voters. At the end of each election cycle (e.g. political term of four or five years), the candidate(s) that has/have the highest cumulative votes wins. For elected legislative positions, each voting-jurisdiction will have multiple seats (two or more seats). Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/statutes, jail-terms and civil/criminal penalties that would substantially reduce the Net Worth of offending persons and companies. Individuals who vote in each election will get an incentive (e.g. small tax credits or a token cash payment) from the government. Political parties that strictly comply with Campaign Spending and electoral-­conduct regulations in each state/region will get incentives (e.g. small tax credits, a one-time increase in permitted election contributions/gifts or a token cash payment) from the government. Thus, each political party organization in each state/region will be treated as a distinct accounting entity for tax and accounting purposes during each election cycle. ( 3) Complete Stratified-Voting, Multi-Seat Jurisdictions (For Legislative Positions), And Military-Civilian Combinations with Incentives and Restricted Campaign Spending—in many Emerging Market countries, Corruption, tribalism, religious disputes/discrimination/factionalism and lack of discipline of elected politicians are significant problems. In recent times and in some countries (such as Nigeria, Myanmar, Thailand, Venezuela, Benin, Burkina Faso, Ethiopia, Cuba, Egypt, Madagascar, Sudan, El Salvador, Brazil, Iraq, Lebanon, North Korea, Singapore, Syria and Vietnam), the government has been managed by the military forces (military junta or Stratocracy) or the military forces directly or indirectly played an active part in politics and/or the political processes. In many Emerging Market countries, large percentages of their military forces are paid salaries but remain relatively dormant (not engaged in active military activities or conflicts). In this suggested

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electoral system, for each major elected position (or for a specific percentage of elected positions) at the state, federal and local government levels, voting is done annually. At each level of government (state, federal and local), the elected “executive branch” positions (and associated “executive branch” positions) are classified into three groups and each group of positions will be taken by either military officers (appointed or elected) or elected civilians (e.g. in each state government, the Deputy Governor, Speaker of the State Senate and 50% of the commissioners/ministers will be appointed military officers; and 50–65% of the forgoing persons will be out-of-state indigenes). For elected legislative positions, each voting-jurisdiction will have multiple seats (two or more seats). All voters will be classified into three groups based on their education and access to government information—for example: (i) elected persons, government officials and military persons (“Group 1”); (ii) persons who have earned a university degree (“Group 2”); and (iii) all other eligible voters (“Group 3”). The votes of persons in Groups 1 and 2 are given more weight (e.g. 1.5–3 times more weight) than those of persons in Group 3, in order to account for often substantial differences in education, discipline/commitment, information processing capabilities and Knowledge among voters. Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/statutes, jail-terms and civil/criminal penalties that would substantially reduce the Net Worth of offending persons and companies. Political parties that strictly comply with Campaign Spending and electoral-conduct regulations in each state/region will be granted incentives (e.g. small tax credits, a ­one-­time increase in permitted election contributions/gifts or a token cash payment) by the federal government. Thus, each political party organization in each state/region will be treated as a distinct accounting entity for tax and accounting purposes during each election cycle. ( 4) Coalition-Based Stratified-Voting with Incentives and Restricted Campaign Spending—in many democratic countries, national and even state governments are often created by coalitions of political parties that choose to share power, partly because there is not any “dominant” political party. However, the nature and structure of such power-sharing arrangements is often left up to the leaders of each political party and may produce results that do not reflect the

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choices of the general population. Thus, there is a need for a Voting System that allows the general public to determine or influence the nature of coalition-based governments. One such method is as follows. For each major elected position, votes will be cast for specific political parties (not candidates). In each state/region, the three political parties that gain the highest numbers of votes for a specific percentage of contested elected positions will share power in such state/region on a rotating basis. That is, each of the three political parties will be assigned specific politically elected positions for 33.33% or 50% or 100% of the electoral term (or other statutory percentages), after which another of the top-three political parties will be assigned the same position. A similar process will also be applied at the federal government level, wherein the three political parties that gain the highest numbers of votes for a specific percentage of contested elected federal positions will share power on a rotating basis. That is, each of the three political parties will be assigned specific politically elected positions for 33.33% or 50% or 100% of the electoral term (or other statutory percentages), after which another of the top-three political parties will be assigned the same position. The voters are classified into three groups based on their education and access to government information: (i) elected persons and government officials (“Group 1”); (ii) persons who have earned a university degree (“Group 2”); and (iii) all other eligible voters (“Group 3”). The votes of persons in Groups 1 and 2 are given more weight (e.g. 2–4 times more weight) than those of persons in Group 3, in order to account for often substantial differences in education, information processing capabilities and Knowledge among voters. For each major elected position (or for a specific percentage of elected positions) at the state, federal and local government levels, voting is done annually, and at the end of each election cycle (i.e. political term), the topthree political parties that have the highest cumulative votes will go through the same process. Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/statutes, jail-terms and civil/criminal penalties that would substantially reduce the Net Worth of offending persons and companies. Individuals who vote in each election will get an incentive (e.g. small tax credits or a token cash payment) from the government. Political parties that strictly comply with Campaign

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Spending and electoral-conduct regulations in each state/region will get incentives (e.g. small tax credits, a one-time increase in permitted election contributions/gifts or a token cash payment) from the government. Thus, in each political party, its organization in each state/region will be treated as a distinct accounting (and/or legal) entity for tax and accounting purposes during each election cycle. (5) Panel Voting with Incentives and Restricted Campaign Spending— each “Local Government Area” or each state/region in the country will be divided into “Voting Communities” with roughly equal population. Each Voting Community will appoint or elect a “Voting Panel”, wherein at least 65% (or another minimum percentage) of members must be university-educated persons. The Voting Panel will be reconstituted annually, and will participate in mandatory semi-­ annual or annual non-electoral opinion polls sponsored by state, local, or federal governments—such polls will provide information about indigenes’ preferences for various issues and policies. The Voting Panel will vote on behalf of the Voting Community each year and at the end of each election cycle (i.e. political term) the election candidate that has the highest cumulative votes wins. Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/ statutes, jail-terms and civil/criminal penalties that would substantially reduce the Net Worth of offending persons and companies. Individuals who vote in each election will get an incentive (e.g. small tax credits or a token cash payment) from the government. Political parties that strictly comply with Campaign Spending and electoral-conduct regulations in each state/region will get incentives (e.g. small tax credits, a one-time increase in permitted election contributions/gifts or a token cash payment) from the government. Thus, each political party organization in each state/ region will be treated as a distinct accounting entity for tax and accounting purposes during each election cycle. ( 6) Weighted Panel Voting with Multi-Seat Jurisdictions, Incentives and Restricted Campaign Spending—each “Local Government Area” or each state/region in the country will be divided into “Voting Communities” with roughly equal population. For elected legislative positions, each voting-jurisdiction will have multiple seats (two or more seats). Each Voting Community will appoint or elect

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a “Voting Panel”, wherein at least 65% (or another minimum percentage) of members must be university-educated persons. The Voting Panel will be reconstituted annually and will participate in mandatory semi-annual or annual non-electoral opinion polls sponsored by state, local or federal governments—such polls will provide information about indigenes’ preferences for various issues and policies. The votes cast by Voting Panels in states/regions that have more educated people and the votes cast by Voting Panels that have more university-­educated members will be given more weight (e.g. 2–4 times votes of other less-educated Voting Panels). The Voting Panel will vote on behalf of the Voting Community each year, and at the end of each election cycle (i.e. each political term lasts for more than one year), the election candidates that have the highest cumulative votes wins. Campaign spending and electoral fraud/misconduct will be strictly regulated with summary judicial proceedings/statutes, jail-terms and civil/criminal penalties that will substantially reduce the Net Worth of offending persons and companies. Individuals who vote in each election will get an incentive (e.g. small tax credits or a token cash payment) from the government. Political parties that strictly comply with Campaign Spending and electoral-conduct regulations in each state/region will get incentives (e.g. small tax credits, a one-time increase in permitted election contributions/gifts or a token cash payment) from the government. Thus, each political party organization in each state/region will be treated as a distinct accounting entity for tax and accounting purposes during each election cycle. 5.5.4  An In-Legislature Voting System (for Elected Politicians) That Can Reduce or Eliminate the Effects of Vote Suppression/Low Voter Turnout, Incumbency Biases and Partisan Gerrymandering Svec and Hamilton (2015)41 introduced endogenous voting weights for elected representatives that purportedly can reduce the negative effects of 41  The Svec and Hamilton (2015) abstract in part “… analyzes the merits of a novel method of eliminating the power of a gerrymanderer that involves an endogenous weighting system for elected representatives. This endogenous weighting system ties the voting weight of elected representatives in the legislature to the share of the voters who voted for that representative’s party and to the share of representatives elected from that party. If the weights are set correctly, it can be shown in the simple voting model of Gilligan and Matsusaka

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Gerrymandering—but their method is inefficient and may not work because it does not account for causal factors and relationships. It is clear that in national and federal legislatures, the one-person-one-vote system for elected politicians is highly ineffective and rewards Vote Suppression, Gerrymandering and electoral fraud. The following new voting system for elected members of national or state legislatures/parliaments can reduce or eliminate the effects of Vote Suppression/low voter turnout, Incumbency, Gerrymandering and electoral fraud by making adjustments. This new voting system is for legislatures wherein in each Voting Jurisdiction, one or more persons is/are elected. Each such elected politician typically has a single vote in the legislature. Let: v1 = the Vote Adjustment Factor for Partisan Gerrymandering, which is the percentage of total voters in the Voting-Jurisdiction that voted for the politician’s party during the election for legislature representatives (without regard to boundaries of in-state Voting Districts). 0 ≤ v1 ≤1. The associated weighting factor for this is w1. v2 = the Vote Adjustment Factor for Vote Suppression/Low Voter Turnout, which is the weighted average (x3) of the following: (1) percentage of total eligible voters in the elected politician’s own Voting-Jurisdiction that voted in the subject election exercise; and (2) percentage of total government-­ registered voters in the elected politician’s own VotingJurisdiction that voted in the subject election exercise. v2 should typically have a stated threshold (x4; e.g. 0.75) so that it applies (v2 = x3) only if x3 is below the threshold (x3   x4) then v2  =  1.0  ≤  v2  ≤1. In all instances, the associated weighting factor for this is w2. v3  =  the Vote Adjustment Factor for Electoral Fraud, which is the weighted average of the following: (1) the percentage of total voting booths for which election results are not contested; (2) the uncontested votes as a percentage of total votes cast (votes that were not certified for recount by either a court of law or the government election agency); and (3) the total number of registered voters divided by the total votes cast in the Voting District (to be used only if less than one). v3 should typically (Public Choice 100: 65–84, 1999) that redistricting has no influence on the policy passed by the legislature. In effect, the endogenous weighting system converts a single-member plurality political system into one with proportional representation….”

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have a stated floor—such as 0.5 ≤ v3 ≤ 1. The associated weighting factor for this is w3. There is a positive relationship between Electoral Fraud and Partisan Gerrymandering. v4 = the Vote Adjustment Factor for Boundary Changes, which is 1−x1. Here, x1 is equal to one minus the percentage of in-District government-­ registered voters (voters registered with the government) in the Voting Jurisdiction that were assigned to a new Voting District in the most recent election cycle. v4 = 1−x1; and 0 ≤ v4 ≤ 1. The associated weighting factor for this is w4. Here, a distinction is made between government-registered voters (voters registered with the government) and party-registered voters (voters registered with a political party). Gerrymandering focuses on party-­registered voters. v5 = the Vote Adjustment Factor for Incumbency Biases, which is 1−x2. Here, x2 is the percentage of the immediate past five or six full election terms that were won by the incumbent elected politician (a full election term is equal to the election cycle used for national presidential or prime minister voting). v5 = 1−x2; and 0 ≤ v5 ≤ 1. The associated weighting factor for this is w5. The rationale is that: (1) incumbency provides significant incentives for politicians to perpetrate Gerrymandering; (2) empirical studies have shown that in political elections, incumbency provides at least an 18% “unearned advantage” to incumbents; (3) where one political party has enough votes in a legislature to trigger and/or manipulate the Redistricting process, incumbency is likely to be an issue for many elected legislators; and (4) long-term incumbency increases the probability of an overconfidence of the elected politician, reluctance to consider opposing views, electoral fraud, complacency, propensity for electoral misconduct and so on. Thus, there is a positive relationship between incumbency and Partisan Gerrymandering. w1…wn  =  the weights assigned to each Vote Adjustment Factor. The sum of all the weights is one. 0 ≤ wi ≤ 1. vt = the percentage of the regular elected politician’s single vote that will be allocated to that elected politician. vu = the percentage of the regular elected politician’s single vote that will be allocated to the top-three (or another number of) opposing political parties in that state in proportion to their total percentage votes in the election. For example, if eight political parties in the state contested for the federal legislature (and only the top-three opposing political parties are eligible for the Vote Adjustment program) and Parties 1, 2, 3, 4, 5, 6, 7, and 8 scored 10%, 20%, 8%, 15%, 15%, 10%, 12% and 10% of total

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state-­ wide votes in the national legislature elections, respectively, and Party 3 won the seat for that Voting District, and vt = 40% and vu = 60%, then the 60% fractional vote (vu) will be shared among Parties 2, 4 and 5 in a 20:15:15 ratio. The application of vu in legislature voting ensures that the state is not under-represented in any voting in the national legislature. vu = 1−vt.



vt   v1 w1    v2 w2    v3 w3    v4 w4    v5 w5  0  vt  1



The variables to be considered when setting the weights include the population distributions, government budgeting processes, existence and influence of political action committees (PACs), types of Electoral Systems, sources of government revenues at the state level and the geographical distribution of voters.

5.6   Federalism and Optimal Political Geoboundaries Many countries have bi-cameral risk regulations wherein banking, credit/ loan, insurance and securities and Social Welfare laws exist at both the federal and state levels (such as in the United States, Mexico, Brazil, Australia and Canada), and sometimes even at the local government levels. In such countries, the enactment and enforcement of risk regulations and constitutional interpretation by government enforcement agencies heavily depend on the geographical demarcations of state government boundaries and local government boundaries. In most countries, the geographical demarcation of states and local government areas and boundaries for senatorial and lower-house elections are critical elements of sustainable growth because they often determine taxation, allocation of capital by banks, government spending at both the state, federal and municipal levels), applicability of regulations (environmental, financial etc.), preemption of state/federal laws in litigation, applicability of state government constitutions (distinct for federal constitutions), facility location decisions of companies and government agencies, corporate spending, job creation, household spending, voting patterns and so on. In most developed and developing countries, there is no rational economic basis for the geographical demarcation of states and local government areas and boundaries for governorship, senatorial and lower-congress elections. Most of these geographical demarcations are very rigid and do not respond to

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changes in populations, national/regional economies, and the political preferences of indigenes—and thus “Redistricting” may have some advantages. Thus, there is a need for conceptual models for making such geographical demarcations in order to be more responsive to group preferences and demographic and socioeconomic changes. That is particularly true in some Emerging Market countries that have highly heterogeneous populations and inter-tribal conflicts, and are heavily dependent on exported commodities (such as oil/gas, minerals/metals, agriculture products). For example, the effectiveness of the formula for the allocation of “revenues” among the federal, state and local governments (e.g. in Nigeria, where the government derives a significant percentage of its annual revenues from oil and gas) affects the efficiency of foreign aid (traditional aid, FDI and FI) government e­ xpenditures, corporate expenditures, Business Confidence, Consumer Confidence, RiskPerception, and sovereign default risk. To date, the debate about the effectiveness of governments and Constitutions and associated corruption revolves around: i) federalism,42 ii) Political Geoboundaries (designated geographical boundaries for states, and senatorial and Representatives’ zones) and iii) constitutional powers of the elected government officials in these zones. Most of the articles and books on the effectiveness of governments and Constitutions have not sufficiently addressed the following issues (within the context of the foregoing three factors): (1) The nature of fiscal federalism and the constitutionally defined economic relationship between the federal government on the one hand and the state or local governments on the other hand. (2) The efficiency of government at the state, federal and local government levels. (3) The magnitude of enforcement efforts and resources at the federal, state and local governments—which is often determined by Geoboundaries. (4) The effectiveness of the formula for the allocation of “revenues” among the federal, state, and local governments—which often is 42  See: Shah (2014), Bernardi et al. (2013), Akeem (2011), Purfield (2004), Blanchard and Shleifer (2001), Jensen and McGillivaray (2005), Weingast (February 2000), Bardhan and Mookherjee, eds. (2006), Díaz-Cayeros (2006), Wibbels (2005) and Radin (2007). See: De Rugy, V. (March 17, 2010). The Death of Fiscal Federalism: It’s been a long time since economic policy was forged in the states. Reason Magazine, http://reason.com/.

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based on Geoboundaries (e.g. in Nigeria, where the government derives more than 60% of its revenues from oil and gas). (5) The constitutionally defined power of the central/federal government to regulate various types of domestic and international commerce. (6) The allocation of power over government spending to the executive and legislative branches of the central/federal government and same branches of the state governments. This refers not only to the budget process, but also to the actual allocation of contracts to specific persons/companies, and to the approval of infrastructure projects, and disbursement of federal funds for non-routine expenditures. (7) The size of the government and the nature of government expenditures. (8) The degree of accountability of the executive branch of government to the legislative branch of government. (9) The power of federal government agencies to preempt or limit transactions or rule-making by state and local governments. (10) The constitutionally defined powers and Social Capital of federal government agencies that are in charge of monitoring and preventing corruption and theft (such as the Economic and Financial Crimes Commission [EFCC] in Nigeria) also affect the effectiveness of foreign aid. (11) The constitutionally defined Police Powers of the central/federal government. (12) The constitutional rights to Privacy. (13) The optimal geographical demarcation of states in a country. (14) The optimal allocation of non-cooperating communities to a state in a country remains a major question that has not been addressed in almost all democracies in the world. Tate (1990) analyzed the constitutionality of state governments’ attempts to regulate Foreign Investment. Persson (2002) analyzed the extent to which political institutions shape economic policies.

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5.6.1  The Irrelevance of “Redistricting Algorithms”: Redistricting and “Gerrymandering” in the United States and the US Supreme Court’s Decision in Rucho vs. Common Cause (2019)43 Redistricting and “Gerrymandering” in the United States have been the subject of huge volumes of litigation and research, and both incur significant economic, social, psychological and political costs and affect Consumer Confidence, Consumer expenditures, Government Expenditures (at state, local and federal levels), Business Confidence, Corporate Expenditures, Risk Perception and more. See Vickrey (1961), Issacharoff (2002), García et al. (2015), Chen and Rodden (2013) and Altman et al. (2015). However, during the last thirty years and as in Rucho vs. Common Cause, the US Supreme Court has: (1) consistently ruled that “Partisan Gerrymandering” is not a justiciable issue and (2) made a distinction between malapportionment or Racial Gerrymandering (which the court has previously acknowledged as judiciable) on the one hand and Partisan Gerrymandering on the other. Furthermore, and in the United States, there are no clear and generally accepted legal standards and Gerrymandering detection tests to apply to Redistricting cases (no generally accepted detection test has been developed or announced by the legislature, or the judiciary, or the executive branch in the United States). It can be reasonably inferred that the US Supreme Court implied that resolving or preventing Partisan Gerrymandering should be left to the legislature and/or the executive branches of government. What is puzzling is that as of 2020, the US Congress (and the legislatures of many developed countries) had not enacted new redistricting laws and standards for Gerrymandering misconduct. That can be attributed to the inherent conflicts of interests—the same politicians who benefit from Gerrymandering can be expected to be reluctant to create laws against it, and/or laws that can be used as a basis for invalidating Gerrymandering. It is also puzzling that while the US Supreme Court has introduced tests for “Preemption” in a series of cases (see Nwogugu [2012: 132–135]), it declines to  See: Rucho vs. Common Cause, 139 S.  Ct. 2484 (2019) (No. 18–422; US Supreme Court, June 27, 2019). See: Davis vs. Bandermer (1986; US Supreme Court); Veith vs. Jubelirer (2004; US Supreme Court); and LULAC vs. Perry (2006; US Supreme Court). See: Commentary (Nov. 8, 2019). Rucho vs. Common Cause – Leading Case: 139 S. Ct. 2484 (2019). Harvard Law Review, 133, 252–257. https://harvardlawreview. org/2019/11/rucho-v-common-cause/. 43

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introduce tests for Gerrymandering (and Preemption has even greater political, economic and social effects than, and can be or is equally as difficult or more difficult to characterize as Gerrymandering). Although countries such as Mexico have used computer models for delineating Voting Districts (see Ponsich et  al. [2017], Altman et  al. [2014] and Guest et al. [2019]), attempts to use computer models and Algorithms44 to indirectly or directly solve the Gerrymandering Problem have not been successful because: (1) They have not developed viable standards/tests for determining whether and when Gerrymandering is partisan and/or unconstitutional. (2) Most of these computer models erroneously focus on the Spatial Compactness of Voting Districts, and/or on the population distributions of Voting Districts. On the contrary, the demographics and voting preferences of the subject areas can change relatively frequently, which renders such studies and models almost meaningless. (3) While Gerrymandering focuses on dynamically reallocating “registered voters” (registered with the government to vote) and “Partisan voters” (registered with a political party) to Voting Districts in order to gain political advantages (i.e. “cracking” and “packing”), the computer models focus on allocating “Eligible voters” (people who are old enough to vote) to Voting Districts, and that does not solve the Gerrymandering Problem. (4) Some of the computer detection models and districting models erroneously focus on “Compactness”, which may be relevant only if both Eligible Voters and “Potential Eligible Voters” (people who could qualify as Eligible Voters during the forthcoming two election cycles) are evenly geographically distributed across the Voting Jurisdiction/District.

44  See: Becker and Solomon (2020), Asgari et al. (November 2020), Guth et al. (November 2020) and Duchin et al. (July 2020).

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5.6.2  Standard Tests That Legislatures Can Enact and That Courts Can Use to Determine Whether Partisan Gerrymandering Has Occurred and Is Unconstitutional45 Cervas and Grofman (2020), Grofman and Cervas (2018), Grofman (2018, 2019), McGann et  al. (2015), McGhee (2014), McDonald and Best (2015), Elmendorf (2018) and Wang (2016) discussed and proposed detection tests for Partisan Gerrymandering (few have been proposed). Best et  al. (2018) reviewed five proposed standards for reducing gerrymandering. Retired US Supreme Court Justice John Paul Stevens proposed a constitutional amendment to reduce Partisan Gerrymandering—see Stevens (2014). Also see Chen and Rodden (2013) and McGann et al. (2016). The following are elements of tests that can be used to determine whether a given Redistricting is unconstitutional, and the national/state legislatures of countries can enact these elements as statutes: (1) The appointment process and composition of Redistricting Committee(s) in each state/jurisdiction should be transparent (publicly disclosed and monitored), should not have any conflicts of interests (e.g. politicians should not be involved) and should represent the subject population. There should be special considerations for the Procedural and Substantive Due Process Doctrines, the Equal Protection Doctrine and the Interstate Commerce Doctrine problems. (2) The “actionable” effects of a given Redistricting should be limited to four years after the Redistricting (i.e. quasi-statute of limitations). (3) The Redistricting procedure and processes (both legislative and non-legislative) should be defined and constitutionally credible and should not be changed except if ordered by a court or a legislature. There should be special considerations for the Procedural and Substantive Due Process Doctrines, the Equal Protection Doctrine and the Interstate Commerce Doctrine problems. (4) Intent and State-of-Mind should be required elements of proof. (5) Conspiracy should be a required element of proof. 45  See: Wang, S. (2015). “Brief of Amicus Curiae Samuel S. Wang, Ph.D. in Support of Appellees”. U.S. Supreme Court, Harris vs. Arizona Independent Redistricting Commission (14–232).

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(6) Means should be a required element of proof. (7) Purpose/objective should be a required element of proof. (8) Economic Impact (on the affected Voting Districts) should be a required element of proof—that is, effect of Redistricting on the provision of Social Welfare and public services to residents, threat of “Red-Lining” in financial services, demarcation of school districts and effect on quality of education and choice of schools, effect on housing prices, effect on investments by out-of-state persons, effect on in-bound relocation by out-of-state companies, effect on federal government allocations of capital/resources to the affected Voting Districts and so on. (9) Social Impact (on the affected Voting Districts) should be a required element of proof—that is, increased risk of community isolation, under-representation of a racial/ethnic group, increased risk of race-­based decision-making in both business and government in the state/region and so on. (10) Voting Impact (on the affected Voting Districts) should be a required element of proof—demonstration of impact should not require a court of law to speculate about the future and/or alternative scenarios. The issues are as follows: (i) there must be a non-negligible post-Redistricting change in the distribution of both registered voters and members of individual political parties (the extent to which there is Cracking and Packing of party-registered voters); and (ii) a non-negligible post-Redistricting increase in the concentration of an ethnic group in a voting district. (11) Ideally, Redistricting should be done no more than once in every specific time period (e.g. once every four years), and the Redistricting timing/cycle should be sufficiently temporally different from the election cycle, such that there should not be any reasonable connection between Redistricting processes and elections. (12) The Seat-Vote Ratios in the affected Voting Districts should be sufficiently within normal ranges. (13) “Compactness” and the shape of Voting Districts have been extremely and unnecessarily overemphasized and overhyped as evidence of Gerrymandering but the following are noteworthy:

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(a) As noted/implied in Cervas and Grofman (2020), both “Compactness” and the shape of Voting Districts can frequently result in false-positives and false-negatives. (b) “Compactness” may be relevant only if both Eligible Voters and “Potential Eligible Voters” (people who could qualify as Eligible Voters during the forthcoming two election cycles) are evenly geographically distributed across the state (e.g. the same number of Eligible Voters per square mile or square half-mile throughout the state)—which is impossible or extremely rare. (c) There are more important criteria, and the Polsby-Popper Score and the “Efficiency Gap” are not very efficient and should not be the primary criteria for detection of Gerrymandering. Even if both measures indicate the presence of gerrymandering, the Social Impact and Economic Impact factors/elements listed herein and above may outweigh any such perceived/actual Gerrymandering. On Partisan Gerrymandering and the Efficiency Gap, see: Nicholas & McGhee (2015). (d) Alexeev and Mixon (2017)46 noted that mathematical formulas for detecting gerrymandered Voting Districts will flag only bizarrely shaped Voting Districts as being gerrymandered 46  See: “Stop criticizing bizarrely shaped voting districts. They might not be gerrymandered after all”. December 1, 2017. https://theconversation.com/stop-criticizing-bizarrely-shapedvoting-­­districts-they-might-not-be-gerrymandered-after-all-86510. (“My colleagues and I imagined a case in which both of the following occur simultaneously. First, one party (say, blue) has a slight majority over the entire state. Second, the voters from both parties (blue and red) are very well-distributed. In this case, a mapmaker would have to exercise a lot of care in order to ensure that red doesn’t waste all of its votes. Since the voters are well-­ distributed, naively drawn districts will give blue a slight majority, thereby producing a huge efficiency gap in favor of blue. In fact, any simple recognizable shape like a circle or rectangle won’t be competitive politically. We found that this occurs whenever a district has a Polsby-­ Popper score that isn’t too small. In other words, a geographically compact district (in the Polsby-Popper sense) will necessarily waste every red vote and almost no blue votes in this case. There is a fundamental tension between the Polsby-Popper score and the efficiency gap…. But are strange shapes necessarily bad? Consider Illinois’s Fourth Congressional District, which is frequently lambasted for its peculiar ‘earmuffs’ shape. This odd shape doesn’t necessarily demonstrate bad intentions. In this case, the district was ‘gerrymandered’ so as to connect two majority Hispanic parts of Chicago, thereby providing a common voice to this demographic. So it’s not unprecedented to sacrifice shape in favor of a more substantive ideal….”)

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whereas non-bizarrely shaped Voting Districts can also be Gerrymandered (“paradoxically, voting districts will sometimes need to exhibit bizarre shape in order to avoid the appearance of partisan gerrymandering…”)—that reasoning also can apply to other formulas for detecting Gerrymandering. See: Arnold (2017).

See: Nwogugu (2010; revised 2015) (introduced new models of Voter-Determined Districts). See: Arnold (2017). See: “Let the Voters Choose: Solving the Problem of Partisan Gerrymandering”. A Policy Brief by the Committee for Economic Development of The Conference Board. March 13, 2018. https://www.ced.org/reports/solving-the-problem-of-partisan-gerrymandering. See: “Voter-Determined Districts: Ending Gerrymandering and Ensuring Fair Representation”. By Alex Tausanovitch, May 9, 2019. https://www.americanprogress.org/ issues/democracy/repor ts/2019/05/09/468916/voter-determined-districts/. (“Currently, districts in most states are drawn in ways that are gerrymandered—meaning the lines are manipulated to favor one group over another—because the process allows elected representatives to choose their voters rather than allowing voters to choose their representatives. The first step in addressing this problem is to create a process for drawing districts that is not controlled by incumbent politicians.… But changes to the process are not enough. Independently drawn maps can have the same effect as intentional gerrymanders if they are not drawn according to the right set of criteria. In fact, proposals that have gained widespread acceptance do not directly address the misalignment between voters and their representatives. Fortunately, there is a solution, and it is surprisingly simple: purposefully drawing districts to reflect the political choices of voters—what this report terms ‘voter-determined districts.’ Voter-­determined districts are based on the principle that the makeup of the legislature should reflect the preferences of voters statewide….”). However, see the VoterDetermined Districts that was introduced by Michael C.  Nwogugu in Nwogugu (2010; revised 2015) and is also described in this chapter. The following tables pertain to US elections: Source: https://www.americanprogress.org/issues/democracy/reports/2019/05/09/ 468916/voter-determined-districts/. Source: https://www.americanprogress.org/issues/democracy/reports/2019/05/09/ 468916/voter-determined-districts/.

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(e) There can be bizarrely shaped non-Gerrymandered Voting Districts, and there is no viable statistical evidence that shows that a bizarrely shaped Voting District is more likely to have been Gerrymandered than a “normally” shaped Voting District. That is because in most states, the distribution of eligible voters is random (not uniform/even) across the Voting Districts and the state. (f) Gerrymandering can be beneficial—for example, where Gerrymandering connects two to five minority communities to a Voting District in order to give them voice and a chance of electing their chosen politician, where they could not do so before. Another example is when Gerrymandering increases the distribution of elected legislators among two dominant political parties in a state so that the state can attract more federal government investment, FDI and relocating corporations. However, the number and the extent of subdivisions of counties/ municipalities (the number of pieces into which each county or municipality has been divided) should be considered as secondary evidence. Grofman noted that avoidance of county splits is incorporated into the language of many state constitutions in the United States. Ansolabehere et al. noted that splitting of counties/municipalities can affect local and national election outcomes, and a county’s relationship with the federal government. See the topic Voter-Determined Districts that was introduced by Michael C. Nwogugu in Nwogugu (2010; revised 2015) and is also described in this chapter. 5.6.3  Some Properties of Optimal Geography-Based Revenue Allocation in Countries That Have Heterogeneous Populations: The Nigerian Case During 1990–2017, the formulas for Nigeria’s federal government’s allocation of funds to states and local governments were based on geographical borders and population and were very inefficient and did not provide adequate incentives for innovation in government, or for the state and local governments to collect taxes, or to generate revenues

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from new/other sources.47 The federal government allocation formulas encouraged overdependence on the federal government and oil/gas revenues, looting/conversion of government funds, stagnation and lack of innovation. During 2000–2017, and in Nigeria, most of the state governments and local governments derived more than 60% of their revenues from cash allocations from the federal government.48 In its allocation scheme, the Nigerian federal government did not use matching grants or performance-­based grants, did not provide sufficient incentives to state governments for generating new sources of revenues or additional revenues and did not punish state governments for misuse/misallocation of funds. For example, if a state government is deemed to be misusing or misallocating its allocated funds based on agreed-upon criteria, part of the quarterly/monthly federal allocation for that state should be immediately placed in escrow until that state government meets the required criteria for use of funds and/or until there is a new governor in the state. In another example, the Nigerian government can give matching grants to state governments that develop new sources of revenues or generate minimum benchmark revenues from specific sources/sectors in their

47  See: Revenue Allocation and the Nigerian State: Of Derivation, Dichotomy and Debt Issues. http://www.dawodu.com/aluko16.htm. See: Boosting Revenue Generation by State Governments in Nigeria: The Tax Consultants Option Revisited. http://www.eurojournals.com/ejss_8_4_02.pdf. See: Lessons in arithmetic of Nigeria’s revenue allocation formula (March 2012). http://www. vanguardngr.com/2012/03/lessons-in-arithmetic-of-nigerias-revenue-allocation-formula/. See: http://info.worldbank.org/etools/docs/library/5783/State_and_Governance_ Nigeria.htm. See: “Local Councils…When Grassroots Government Is Far from the People”. By Onyedika Agbedo, Tobi Awodipe, Maria Diamond, et al. The Guardian (Nigerian daily newspaper). May 15, 2021. https://guardian.ng/saturday-magazine/cover/local-councils-whengrassroots-government-is-far-from-the-people/. See: Maduabuchi, E., Akinsuyi, T. & Opesetan, T. (2014). “Tenure: Local Governments’ Triumph Over Governors”. Sunday Independent, July 27th, 2014, pp. 15–17. 48  See: “New Revenue Formula: RMAFC Begins Verification”. http://www.thisdaylive. com/articles/new-revenue-formula-rmafc-begins-verification/114881/. See: “Nigeria: More Revenue Allocation Not Solution to Your Problems, FIRS Boss Tells States”. http://allafrica.com/stories/201107150543.html. See: Iliyasu, A. (2011). “Revenue Allocation Formula In Nigeria: Issues And Challenges”. Being a Paper Presented at the Retreat Organized for Members of the Revenue Mobilization Allocation and Fiscal Commission at Le Meridien, Ibom Hotel and Golf Resort, Uyo, Akwa Ibom State, Monday, February 14–Friday, February 18, 2011.

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state. In a third example, if a state government is not managing a sector/ ministry (e.g. the Ministry of Works) properly, the federal government should have the power to take over that state ministry until it is restored to normal function. In the United States and some countries, (1) state governments offer tax, relocation and other incentives for FDI and FI; (2) state governments borrow in capital markets; (3) state governments have their own banking, finance, labor, secured transactions, debtor-creditor and securities laws; and (4) some state governments offer aid to failing industries and companies. The basic economic and political characteristics of optimal revenue-­ allocation models in countries that have heterogeneous populations are as follows: (1) Stability Incentive—the model must enhance political and economic stability and unity. (2) Resource Control—the model must account for, and provide preferences for states/regions that have resources from which the federal government generates revenues. (3) IGR Incentives—the model must provide incentives for states to generate internal revenues from diversified and stable sources. (4) Time Varying. (5) Deficit Neutral—the model must address and be sensitive to budget deficits at both the state and federal government levels. (6) Trade Neutral—the model must account for differences in domestic and foreign trade by individual states. (7) Scale Invariance. (8) Super Additivity. (9) Reduction of Deadweight Losses and Deadweight Costs. 5.6.4  A Simple Dynamic Socioeconomic Model of the Optimal Allocation of Non-cooperating Communities to a State in a Country That Has a Heterogeneous Population The optimal allocation of non-cooperating communities to a state in a country remains a major question that has not been addressed in almost all democracies in the world; and that often affects sovereign debt policy, systemic risk and the effectiveness of foreign aid. Nigeria and the United States are good examples—the United States has fifty states and there is no rational explanation as to how the number of US states was determined,

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how communities were allocated to US states and why the United States has a bi-cameral legislature at both the state and federal levels (which is relatively expensive). Unfortunately, Nigeria copied the US system of government, and similarly, there was no rational or publicized method for determining the number of states in Nigeria or the number of communities (local governments) in each state. In countries that have heterogeneous populations (mostly emerging market countries), there is often actual or perceived tribalism, which has a substantial effect on the central/federal government’s allocation of contracts to indigenes, and/or the federal/central government’s allocation of capital to subsidiary state governments and local governments. While most countries that overcame poverty during the last thirty years (like South Korea, Thailand, Mexico, Malaysia and Taiwan) have relatively homogenous populations, the civil wars in Rwanda, South Sudan, Chad and Liberia that occurred during 1995–2015 were caused by ethnic strife and tribalism. Nigeria is a prime example because it has more than 200 ethnic tribes. In order to reduce the ethnic conflicts that have ruined some African countries, and continues to affect economic development in Nigeria, the Nigerian federal government should change the geographical demarcation of states in Nigeria so that each state contains at least two and up to four distinct ethnic tribes (different language, culture, origin), and also reduce the number of states. Hence, “clusters” of states like Anambra, Enugu, Abia, Ebonyi, Delta and Imo should be considered homogenous and combined with other states. Similar “clusters” of culturally related states in the Southwest, the Northeast, the Northwest, West-Central (around Kogi/Niger) and East-Central (Adamawa/Plateau/Nassarawa) can also be diversified. The “Clusters” have industrial organization implications because: (1) socio-cultural similarities among states may affect individual and group perceptions about wealth creation, entrepreneurship and corruption; (2) the rate of new business formation is likely to be affected by corruption in government; (3) states in such clusters are more likely to copy and compare each other’s policies and regulations, all of which will affect regulated industries and growth/coordination/transparency in other non-regulated industries; and (4) in clusters that have Sharia law, the effectiveness and enforcement of regulations may affect business formation and survival rates. Diversity at the state level breeds necessary scrutiny, accountability and unity (compare the economic and living conditions in Nigeria during the 1970s with twelve “diverse” states, many of which had at least two different or “related” tribes, and had non-indigenes

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as governors; and Nigeria during 2000–2012 with thirty-six states, most of which contain only one tribe or several closely related tribes and were governed by only indigenes). Ideally, every state should be a microcosm of the diversity in Nigeria—and currently, only the federal legislators, the executive branch of the federal government, the federal judiciary, the Police and some officers in ministries have in-depth exposure to “national” issues and cross-cultural issues. As mentioned, during 2000–2017, and in Nigeria, the state governments and local governments derived more than 60% of their revenues from cash allocations from the federal government. Since so much of the politics, tribalism, acrimony and allocation of funds (to states and local governments by the federal government in Nigeria) revolves around the geographical demarcation of states, the author suggests that the geographical boundaries of local governments should remain fixed and serve as political building-blocks; and the state capitals should also remain fixed while the state government geographical boundaries and federal-senate geographical boundaries should be changed every two to six  years (the Boundary-Rotation Cycle). This structure: (a) solves the problems of the “optimal number” of states and the optimal allocation of non-cooperative and ethnically diverse communities to distinct states; (b) facilitates/ increases “efficient matching” of community needs, community resources, human capital (government officials) and government resources within the context of specific constraints (e.g. time, coordination costs and transaction costs); (c) can increase communication among geographically and ethnically diverse communities; (d) reduces “in-bred” and intra-tribe corruption, discrimination and inefficiency that are partly attributable to lack of adequate oversight/intervention by outsiders/non-insiders; (e) provides substantial incentives for communities (LGAs) to bargain, form coalitions, cooperate and select the most suitable government with minimal/reduced geographical constraint—all of which can substantially reduce intra-tribal and cross-tribal ethnic conflicts and ethno-political risk; and (f) can promote “administrative agility”, adaptation, accountability, transparency and positive evolution and help reduce ethnic and socio-­ political conflicts. Ideally, the state and federal government should be structured such that the number of states is irrelevant—but the constraints are ethnic diversity, corruption, low transparency, the costs of state government and so on. However in some countries (especially those that have conflicting and highly-heterogeneous populations), this State-neutral structure is more feasible if the bulk of the governance is done at the local

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government level or at the federal level. Also, the boundary-rotation cycle may or may not be the same at the election cycle (for the governorship and federal/state Senate positions). The Nigerian government can implement Minimum Boundary-­Rotation percentages—for example, at least 40% of all local government areas must rotate into another state and/or senate zone in each Boundary-­Rotation Cycle. This arrangement implies that largescale and long-term infrastructure projects must be undertaken by several states, and/or there must be a way of transferring a state’s interest in a project if the project is rotated out of jurisdiction (e.g. this can be done by adjusting the federal allocations and by a system of “Transferable Project Credits” that are redeemable for cash).

5.7   Conclusion Clearly, Constitutions have or can have significant direct and Multiplier Effects on the sizes of governments and Electoral Systems regardless of the type of government. That has implications for a broad range of economic, political and psychological factors and indicators—such as taxation, Tax Sensitivity, Tax Compliance, government spending, Sustainability efforts, economic growth, subsidies, R&D and Innovation, Consumer Confidence, Business Confidence, Corporate Expenditures and unemployment.

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CHAPTER 6

Constitutional Political Economy Dimensions of Sovereign Debt Policy, Foreign Aid and the Politicization of Pension Funds and Sovereign Wealth Funds

This chapter explains the relationships among Constitutions, Sovereign Debt management, Foreign Aid and Systemic Risk (which is somewhat complex, symbiotic and evolving), and the politicization of other “national” capital sources such as public/private Pension funds and Sovereign Wealth Funds (SWFs). This chapter also explains why it is improper to criticize what is termed “Foreign Aid” to Emerging Markets countries. Foreign Aid is contrasted with FDI and FI (“foreign investment”; which is purchases of both corporate securities and government securities by foreign investors) within the context of constitutional limitations of state and federal governments. This chapter illustrates the perceived differences by comparing the United States with other countries. FDI, FI and traditional foreign aid operate within the context of constitutional limitations of state and federal governments. This also introduces simple socioeconomic models of fiscal federalism (in revenue allocation and governance within countries). In most cases, there are no or This chapter contains excerpts from the following article: Nwogugu, M. (2010; revised 2015, 2020). Complexity, Constitutions, Economic Policy and Foreign Aid. Available at SSRN: https://ssrn.com/abstract=2937337 or http://dx.doi. org/10.2139/ssrn.2937337. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4_6

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little functional differences among FDI, FI and foreign aid. Similarly, there are few differences among the following types of “Ironic” government aid: 1. Aid to foreign countries that the donors (foreign governments and companies) cannot afford (affordability without budget-deficits) 2. Military spending, foreign wars and foreign military bases that the donors cannot afford (affordability without budget-deficits) 3. Domestic welfare systems that should be overhauled 4. Various types of government aid to both domestic and foreign (local branches/subsidiaries) companies 5. Research grants that governments cannot afford (affordability without budget deficits)

6.1   Existing Literature Nwogugu (2010/revised 2015) analyzed the relationships between Constitutions on one hand and Foreign Aid efficiency, Optimal Voting Districts and Government-Size on the other hand. Camyar (2019) and Beaulieu et al. (2012) analyzed the significant relationships between sovereign debt, regime-type and the “Democratic Advantage” (with regard to both credit ratings and capital markets dynamics). Chen and Chen (2018) analyzed the relationship between the quality of government institutions and spreads on sovereign credit default swaps. Breen and McMenamin (2013) studied political institutions, credible commitment and sovereign debt in developed countries. Various studies have shown that constitutions can have significant effects on government economic policies pertaining to the repayment of sovereign debt,1 economic relations between federal and state 1  See: Kohlscheen (2007, 2010), Enderlein et al. (2009), Camyar (2019), Beaulieu et al. (2012) and Basu (2016). See: Kohlscheen (February 2006) (stated: “Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies…. the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions (on serial defaults, see Reinhart and Rogo (2004)). Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are opportunistic…. Moreover, the result persists if OECD democracies are excluded from the sample…. Rather than resulting from the form of government per se, the failure of some countries to repay as originally contracted is related to the in-existence of a representative committee that decides on

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governments,2 provision or acceptance of foreign aid,3 foreign investment,4 privatization, government spending,5 private contracting,6 the size of governments,7 foreign direct investment (FDI), foreign investment (FI),8 public policy,9 economic growth,10 trade deficits, taxation and fiscal policies.11 Kunst and Wagner (2011), Metelska-Szaniawska (2010), Doring and Schnellenbach (2010), and Witt and Schubert (2009) analyzed constitutional economics, and the various effects of constitutions and federalism.

debt policy. The decision structure found in parliamentary democracies mimics, to some extent, the role such a committee would play…”). See: Kohlscheen (2004). 2  See: Valentine (2010). (“Unfortunately, the constitutional separation of powers that underpins Canada’s federal system impedes the creation of a national wind power development strategy because Canada’s provinces have constitutional authority over electricity governance.…”) See: Goldstein (1981). 3  See: Neanidis and Varvarigos (2009) and Ouattara (2006). See: Tingley (2010) (“a different approach: what are the domestic sources of support for foreign aid? Specifically, how does the donor’s domestic political and economic environment influence ‘aid effort’?….As governments become more conservative, their aid effort is likely to fall. Domestic political variables appear to influence aid effort, but only for aid to low income countries and multilaterals while aid effort to middle income countries in unaffected. This suggests that models solely emphasizing donor economic and international strategic interests as determinants of donor aid policy may be mis-specified. These results also suggest sources of aid volatility that might influence recipient growth prospects….”). See: Neanidis and Varvarigos (2009) and Ouattara (2006). 4  See: Huang (2003). 5  See: Graham and Idechong (1998). 6  See: Lowenberg and Yu (1990) (“[a]n efficient constitutional environment…requires that the contracting parties possess good alternatives to the constitutional agreement toward which they are negotiating….The existing constitutional environments in both South Africa and Hong Kong are not favorable to the formation of an efficient contract….”). 7  See: Persson and Tabellini (2002). 8  See: Tate (1990). 9  See: Persson and Tabellini (2005a, b). 10  See: Persson and Tabellini (2005a, b). 11  See: Persson and Tabellini (2004) and Persson (2003).

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6.2   Complexity, Complex Systems and the Rule of Law12 The Complexity pertaining to these issues is or can be manifested in the following ways: . Nonlinearity with regards to rule-of-law development 1 2. Nonlinearity in the growth of economies 3. Self-organization of institutions and organizations—such as private and public enforcement groups and rule-making 4. Self-organization of aid donors, aid facilitators, government agencies and aid recipients 5. Change and theories of change 6. Nonlinearity in relation to deadweight losses in the demand for, and enforcement of laws 7. Nonlinearity in relation to compliance with statutes and enforcement of laws 8. Complex Networks and Social Networks—for example, aid donors and aid recipients 9. Network Effects The legal and economic environment in which foreign aid and constitutions function (defined by aid donors, aid recipients, legislatures, regulations, regulators, financial institutions, Internet systems, donors’ indigenes, donees’ indigenes, etc.) is a complex adaptive system because it has some or all of the following attributes: 1. The relations between the system and its environment are non-­ trivial and/or nonlinear. 2. The system can be influenced by, or can adapt itself to, its environment. 3. The system has feedback or memory and can adapt itself according to its history or feedback. 4. The system is highly sensitive to initial conditions. 5. The number of parts (and types of parts) in the system and the number of relations between the parts is non-trivial. 12  See: Andrews et  al. (2017), Byrne and  Callaghan (2014), Bamberger et  al. (2016), Ramaligan (2014), Room (2011), Kirman (2016), Salzano and Colander (2007), OECD (2016), Finch (2013), Durlauf (2012), Bayoumi et  al. (2016), Melnik et  al. (2013), Miklashevich (2003), Perc et al. (2013), Post and Eisen (2000), Ruhl and Ruhl (n.d.).

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6.3   Geopolitical Risk and Some Cross-Border Spillover Effects of Foreign Aid, Sovereign Defaults and Politicization of Pension Funds and Sovereign Wealth Funds (Spillover from Developed Countries into Emerging Market Countries): Foreign Aid, FDI and Foreign Investment Are Similar The significant literature on Social Networks, Social Capital and Cross-­ Border Spillovers (from developed countries into Emerging Market countries) is summarized in Chap. 2 in this book. Some of the Cross-Border Spillover (Spillover from developed countries into Emerging Markets countries) processes and channels such as Foreign Aid, and the politicization of Pension Funds and Sovereign Wealth Funds, are as follows: 1. The relationships among Constitutions, Sovereign Debt default policies, Foreign Aid and systemic risk are somewhat complex, symbiotic and evolving. During 1970–2020, Foreign Aid remained functionally, politically and economically the same as or very similar to both foreign direct investment (“FDI”) and foreign investment (“FI”—i.e. foreign investors’ purchases of both corporate securities and government securities) as illustrated by the following examples and thus many of the criticisms of foreign aid (separate from the structure/efficiency of the constitutions and governments of countries that received such aid) are misplaced or premature. 2. The World Bank and the IMF and other International Organizations that provide Foreign-Aid are funded mostly by “developed” countries (who in turn are often funded by issuance of sovereign bonds that are purchased by Emerging Markets countries and their indigenes—for example at various times during 1990–2021, China, Brazil and India purchased substantial amounts of US Treasury bonds/notes and EU bonds). A substantial percentage of professional staff of the World Bank and the IMF are citizens of “developed” countries and Emerging Markets countries such as Korea, India, Brazil and China. 3. While the United States has been a major provider of Foreign Aid, during 2000 and 2018, there was about $2.9 trillion and $15.8 trillion respectively, of issued US Treasury bonds/notes/bills, and as of November 2020, each of Japan and China owned more than US$1.05  trillion of US Treasury bonds/bills/notes—such debt isn’t very different from what is now classified as “foreign aid”.

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The European countries that provide “Foreign Aid” routinely fund their national budgets by issuing sovereign debt, some of which is purchased by Emerging Markets countries. Many of these Emerging Markets countries invest in government bonds/notes of developed countries for diversification and “perceived safety”, to get “Influence” in the investee-developed-countries and to polish their image in International relations. Ironically, most of the funds illegally stolen by leaders of many developing countries are stashed in banks in Europe and are part of “usable/investable capital” in Europe. 4. In the FI and FDI arena, China has been a major investor/creditor in the US, Africa and Latin America and parts of Asia. Japan has also invested heavily in the United States and in Latin American countries (FDI and FI)—in ways that are not very different from what is categorized as “Foreign Aid”. The cash proceeds of such FI and FDI are used for the same purposes as “traditional” foreign aid. Such FDI and FI have boosted the economies of the United States, South Korea, the United Kingdom, European countries and Emerging Market countries such as China, Brazil, Nigeria, Mexico, India and Malaysia—but the resulting Sovereign Debt crisis seems to be spreading.13 Thus, it’s improper to criticize what is termed “Foreign Aid”, although the allocation and or use of such aid funds may be problematic. 5. FDI, FI and traditional foreign aid operate within the context of constitutional limitations of state and federal governments. This chapter addresses some of these issues and also introduces simple socioeconomic models of federalism in revenue allocation and governance within countries. In this context, there are no or little functional differences among FDI, FI and foreign aid.

13  See: The Economist (November 14, 2015). The Never-Ending Story: First America, Then Europe. Now The Debt Crisis Has Reached Emerging Markets. http://www.economist.com/ news/leaders/21678220-first-america-then-europe-now-debt-crisis-has-reachedemerging-­­markets-never-ending. See: Dabla-Norris et al. (April 6, 2011).

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6. Around the world, Sovereign debt yields/prices14 are used as benchmarks for pricing CDS, swaps, corporate bonds and equities; and that affects international capital flows, FDI/FI/Foreign Aid, Business Confidence, Consumer Confidence, Corporate ­Expenditures, Consumer Expenditures, Risk Perception, Savings/ investments, consumer leisure and so on. Around the world, the credit ratings of Sovereign debt are used as decision criteria of multinational corporations (MNCs), governments and investment funds. Sovereign defaults have significant effects on households, companies and state/local/federal governments. All that affects or can affect international capital flows, FDI/FI/Foreign Aid, household dynamics, remittances (to Emerging Market countries), Business Confidence, Consumer Confidence, Corporate Expenditures, Consumer Expenditures, Risk Perception, Savings/investments, consumer leisure and more. 7. Pension funds and SWFs can access foreign and Emerging Markets’ investments by direct investment or ordinary funds or “synthetic funds” (funds created using derivatives and which mimic investments in Emerging Markets, but wherein Emerging Markets typically don’t receive any cash investment). Thus, Pension funds’ and SWFs’ investment decisions can affect international capital flows, FDI/FI/Foreign Aid, Business Confidence, Consumer Confidence, Corporate Expenditures, Consumer Expenditures, Risk Perception, Savings/ investments, consumer leisure and more. 8. Around the world and for the last fifteen years, there continues to be a “Global Retirement Crisis” wherein: (a) many or most public and private Pension Funds are grossly underfunded and will not be able to make their scheduled future payouts to their beneficiaries; (b) the current (and perhaps future) assets of many retirees and middle-­aged persons won’t be sufficient to support them financially in the future. Individually and collectively, these foregoing factors and channels can create or amplify Cross-Border Spillovers and are Geopolitical Risks because they can vary dramatically across countries. 14  The Economist (November 14, 2015). The Never-Ending Story: First America, Then Europe. Now The Debt Crisis Has Reached Emerging Markets. http://www.economist.com/ news/leaders/21678220-first-america-then-europe-now-debt-crisis-has-reachedemerging-­­markets-never-ending.

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6.4   Emergence and Nonlinearity: Some Geopolitical and Labor Market Influences on Public and Private Pension Funds Bradley et  al. (2016), Andonov et  al. (2018) and Steinberg and Shih (2012) discussed the political influences on public and private Pension Funds. Such political influences typically arise from the following: 1. The constitutional powers and obligations of state, local and federal governments to reduce or eliminate actual/perceived Pension Deficits at public and private pension funds—through legislation, regulations or Executive Orders of State Governors, or municipal government officers or national President/Prime Minister. As mentioned above, for the last fifteen years, there has been a “Global Pension/Retirement Crisis”. 2. The constitutional powers of state, local and federal governments to delineate and/or influence the investment criteria and capital-­ allocations of public and private Pension Funds—through legislation, regulations or Executive Orders (of State Governors, or municipal government officers or national President/Prime Minister) or by appointment of persons to the boards of public Pension Funds. This includes the use of public Pension Funds’ funds for investments and infrastructure projects in a particular geographic area. 3. The effect of Pension Deficits on voting patterns, political action committees (PACs) and negotiations between state/local/federal governments and labor unions. 4. The state/local/federal government’s obligations, if any, to cover any deficits of Public Pension Funds, and the impact of doing so on government budgets, government expenditures, “expectations”, credit ratings of municipal bonds, Risk-Perception, Consumer Confidence, Business Confidence, etc… 5. Voters’ prioritization and preferences during elections. 6. There is empirical evidence that politicized Pension Funds usually earn lower returns than non-politicized Pension Funds. 7. The typical opacity of public and private Pension Funds creates significant uncertainty and political debates that can affect Consumer ­ Confidence, Consumer expenditures, Business

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Confidence, Corporate Expenditures and Risk Perception (many Pension Funds don’t disclose their assets, performance and investment objectives). 8. Pension Funds sometimes consider (and professional responsibility requires them to consider) both domestic and foreign political factors in their investment decisions. Andonov et al. (2018), Kaminski (2017) and Dinc and Gupta (2011) discussed the effects of political influences on SWFs’ and Pension Funds’ participation in the financing and execution of infrastructure investments and Privatization. 9. There is Political Lobbying by interest groups and pertaining to the control and investments of Pension Funds. See Steinberg and Shih (2012). In many countries (e.g. Mexico, the United States, Canada, the United Kingdom and India), the relationships between Labor Regulations and Labor Unions on one hand, and Pension Funds is symbiotic, often significant and time-varying, and is manifested many ways including but not limited to the following: 1. Pension Funds (and associated worker/employer contributions) are affected by Labor Mobility. 2. Pension Funds affect and are directly affected by workers’ working conditions and payoffs (i.e. employer contributions, employee contributions/withdrawals, employees’ healthcare insurance coverage, employee morale, Consumer Confidence, Business Confidence and effects of collective bargaining agreements). 3. Pension funds can affect workers’ rights—including the lawsuits about payouts of retiree benefits and ability of workers/retirees to access their pension benefits under collective bargaining agreements. 4. In some countries, labor unions directly or indirectly influence the investments of their Pension funds and sometimes are contractually or statutorily allocated seats in the Boards of Directors of their Pension Funds and/or companies (i.e. companies that maintain/ manage their own pension fund). 5. Pension funds affect employers’ exposure to labor costs (such as employee salaries/commissions, employers’ contributions, employee taxes, employee benefits, other employee payment/deductions and social security taxes). Thus, Pension funds can also affect workers’ morale and motivation.

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6. Labor Unions and Trade Associations sometimes participate in negotiation of terms of Pension Funds and are subject to s­tate/ location Executive Orders, Regulations/Statutes and agreements that pertain to such Pension Funds. 7. Through their investments and shareholder-activism, Pension Funds can affect the allocation of labor resources, working conditions, the enforcement of labor regulations and Corporate Governance standards across industries, industry sectors and countries. Thus, Pension Funds are an important International Labor Market institution. 8. Around the world, Pension reforms15 have been a major driver of increased labor force participation, global investment, household dynamics and enforcement. 9. The ongoing and significant Global Pension Crisis (underfunded pension liabilities, and low and volatile pension assets and returns) is a major Global Labor Market and Labor Regulation problem. 10. In some countries, Labor Unions create/sponsor and administer long-term healthcare benefits (and even Pension Funds) for workers. 11. Quasi Pension Funds (such as Mutual Funds and ETFs): (1) directly affect workers’ welfare, (2) are also affected by labor market issues (workers’ compensation and benefits, Labor Unions and Collective Bargaining Agreements etc.), and (3) can affect the allocation of labor resources, working conditions, the enforcement of labor regulations and Corporate Governance standards across industries and industry sectors through their investments and shareholder activism. On Economic Psychology, International Labor Market and IPE dimensions, see the comments in Ochsen and Welsch (2012), Torgler and Schneider (2009), Pántya, Kovács, et al. (2016), Freeman (1983), Gospel and Pendleton (2014), Vanberg (2011), Eicher et  al. (2018), Jacob 15  See: Pension plans that have applied to cut benefits under the Multiemployer Pension Reform Act. August 31, 2020. Pension Rights Center. http://www.pensionrights.org/ publications/fact-sheet/pension-plans-have-applied-cut-benefits-under-multiemployerpension-reform-a. See: Retirees’ worst nightmare: Federal backing of pension funds at risk—Looming insolvency of Central States pension plan has stakeholders calling for bipartisan solution. By Doug Sword. February 28, 2020. https://www.rollcall.com/2020/02/28/retirees-worst-nightmarefederal-backing-of-pension-funds-at-risk/.

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(2011), MacDonald (2014), Hassel et  al. (2019) and Bodnár and Nerlich (2020). On Pension Reforms around the world and their impact on International Labor dynamics, Inequality, household dynamics and economic growth (and by extension, international capital flows), see: Hinrichs (2021), Kuitto & Helmdag (2021), Wang et al. (2016), Duran‐Valverde, Urban et al. (2018), Riekhoff (2020), Holzmann (2013), Natali (2020) and Jensen et al. (2018). On the relationship between International Labor Market policies and pension policies (both government and private sector policies) on one hand, and work-life, Inequality, social structure and employment choices, see: Bennett & Möhring (2015), European Commission & Social Protection Committee (2018), Kuitto & Helmdag (2021), Möhring (2021), and Mosquera et al. (2019). Individually and collectively, these foregoing factors and channels: (1) can affect Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, Government Expenditures, Risk Perception, risk management processes, Savings/Investments and more, all of which can create or amplify Cross-border Spillovers, and (2) are Geopolitical Risks because they can vary dramatically across countries and political systems.

6.5   Emergence and Nonlinearity: Some Geopolitical and Labor Market Influences on Sovereign Wealth Funds16 (SWFs) The literature on the geopolitical influences on Sovereign Wealth Funds (SWFs) is extensive—see Steinberg and Shih (2012), Bernstein et  al. (2013), Grira et al. (2018), Rose (2019), Martinu and Scalera (2016) and Bortolotti et al. (2015). Reddy (2019) discussed the investment strategies and political investment criteria of SWFs. Fini (2011) and Salman et al. (2020) discussed the political constraints of SWFs. The consensus in the literature is that SWFs consider political factors in their investment decisions, and SWFs are influenced by domestic political factors. However, the literature doesn’t fully discuss the channels by which domestic politics

16  See: “Norway bank chief warns on  politicising wealth fund—Debate growing on  what US$1 trillion sovereign oil fund should invest in”. By Richard Milne. February 13, 2020. https://www.ft.com/content/311760de-4e66-11ea-95a0-43d18ec715f5.

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affects SWFs, and how that results in Spillovers into Emerging Markets. Martinu and Scalera (2016) found that: (1) fund opacity, fund politicization, strategic industry targets and majority ownership choices lead to a more likely use of vehicles, while bilateral trade agreements negatively affect such investment strategy; (2) fund opacity increases the likelihood to use SWF-controlled vehicles, while fund politicization, strategic industry targets and majority ownership choices increase the likelihood to use a corporate vehicle; (3) bilateral trade agreements reduce the use of corporate vehicles; (4) politicized foreign SWFs are more likely to invest through vehicles located in third countries; (5) when strategic industries are targeted, investment vehicles are likely to be located in the target country; (6) this empirical study control for SWFs’ strategic goals, SWF experience (reliance on external managers or advisors, fund size), type of funding sources, crisis period, deal-specific effects and legal and institutional differences across countries and over time. The political influences on SWFs are similar to those of Pension Funds and typically arise from various factors and sources including but not limited to the following: 1. The constitutional powers of state, local and federal governments to reduce or eliminate actual/perceived government budget deficits and Pension Deficits (at public and private pension funds)— through legislation, regulations or Executive Orders of State Governors or the national President/Prime Minister. As mentioned above, during the last fifteen years, there has been (and there continues to be) a “Global Retirement Crisis”. 2. The constitutional powers of state, local and federal governments to delineate and/or influence the investment criteria and capital-­ allocations of SWFs—through legislation, regulations or Executive Orders (of State Governors or national President/Prime Minister) or by the appointment of persons to the boards of public Pension Funds. This also includes influencing the use of SWFs’ funds for investments and infrastructure projects in a particular geographic area. 3. The effect of current budget deficits, credit ratings (government and municipal bonds) and Pension Deficits on voting patterns, PACs (political action committees), and on negotiations between state/local/federal governments and labor unions.

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4. The state/local/federal governments’ statutory or perceived moral obligations, if any, to cover any deficits of Public Pension Funds and the impact of doing so on government budgets and government expenditures. 5. Voters’ prioritization and preferences during elections—including International Relations issues, immigration, Trade Imbalances, Foreign Aid, government FDI and labor union conditions/ negotiations. 6. SWFs consider political factors in their investment decisions and are also influenced by domestic political factors. There is evidence that politicized SWFs earn lower returns than non-­politicized SWFs.17 7. The opacity of SWFs creates significant uncertainty and political debates that can affect Consumer Confidence, Consumer expenditures, Business Confidence, Corporate Expenditures and Risk Perception. 8. Castells and Solé-Ollé (2005), Andonov et  al. (2018), Kaminski (2017) and Dinc and Gupta (2011) discussed the effects of political influences on SWFs’ and Pension Funds’ participating in the financing and execution of infrastructure investments and Privatization. 9. The constitutional powers of federal governments to directly and indirectly use SWFs as tools of foreign policy. SWFs are more likely to invest in foreign countries and foreign companies and Emerging Markets than ordinary Mutual Funds, Pension Funds, Private Equity Funds and Venture Capital Funds. 10. Political Lobbying by interest groups, foreign banks and foreign governments and pertaining to the control and investments of SWFs. 11. Expectations are a significant issue, and SWFs are expected to be involved in the financing of social enterprises and major domestic projects. Such expectations by the public often translate into and/ or affect voter sentiment, public opinion and Consumer Confidence and changes in expenditures and remittances.  See: “Politicized government investors are bad for business”. By Matthew Biddle, November 18, 2015. http://www.buffalo.edu/news/news-releases.host.html/content/shared/mgt/ news/politicized-government-sovereign-wealth-fund-investors-bad-for-business. detail.html. See: “‘Politicized’ Sovereign Funds Earn Lower Returns—Study Says Shares in companies rose less following a purchase by a sovereign fund with strict government oversight”. By Simon Clark. December 23, 2015. https://www.wsj.com/articles/politicized-sovereign-funds-earnlower-returns-study-says-1450866422. 17

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In many countries (such as the United States, Canada, India, Brazil and the United Kingdom), the relationships among Labor, Labor Regulations and Labor Unions on one hand, and SWFs is symbiotic, and is or can be manifested in many ways including but not limited to the following: 1. SWFs Funds are directly affected by Labor Mobility (in-country Labor Mobility and immigration/emigration) and the distribution of labor resources (including international outsourcing)—all of which affect government revenues. 2. SWFs affect and are directly affected by workers’ working conditions and payoffs (i.e. employer income taxes; employee income taxes, government benefits for employees, tax subsidies, employee morale, Consumer Confidence, Business Confidence and effects of collective bargaining agreements)—all of which affect government revenues. 3. SWFs can affect workers’ rights—including the lawsuits about SWFs’ investments and shareholder activism. 4. In some countries, labor unions directly or indirectly influence the investments of SWFs and sometimes are contractually or statutorily allocated seats in the Boards of directors of SWFs. 5. SWFs sometimes participate in negotiation of terms of Pension Funds and are subject to state/location Executive Orders, Regulations/Statutes and agreements that pertain to such Pension Funds. 6. Through their investments and activism, SWFs18 can affect the allocation of labor resources, and the enforcement of labor regulations and Corporate Governance standards across industries and industry sectors. On IPE, International Labor Market and Economic Psychology issues, see the comments in Ochsen and Welsch (2012), Torgler and Schneider (2009), Pántya, Kovács, et al. (2016), Goergen et al. (2018), Gospel and Pendleton (2014), Vanberg (2011), Eicher et al. (2018), Jacob (2011), MacDonald (2014), Bischoff and Wood (2019) and Cumming et al. (2019). 18  Financial Times (2016). Companies listen when Norway’s oil fund shouts. Active engagement with Volkswagen offers lessons to sovereign investors. Financial Times (UK), May 16. Retrieved from https://www.ft.com/content/caec9fee-1b6b-11e6-a7bcee846770ec15.

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Individually and collectively, these foregoing factors: 1. can affect Consumer Confidence, Consumer Expenditures, Business Confidence, Corporate Expenditures, Government Expenditures, Risk Perception, risk management processes, Savings/Investments and more, all of which can create or amplify Cross-Border Spillovers; 2. are Geopolitical Risks because they can vary dramatically across countries; and 3. are transmission channels.

6.6   Constitutions and Sovereign Debt Policy Sovereign Debt policy refers to a nation’s economic policies regarding debt owed by its federal and/or state governments and if, how and when to repay such debt. The issue of foreign aid to developing countries remains a hotly debated topic that has many misconceptions. See Kohlscheen (2007, 2010), Enderlein et  al. (2009), Camyar (2019), Beaulieu et al. (2012) and Basu (2016)—and the general consensus is that Constitutions and political systems affect sovereign default rates and sovereign debt policies. The main motivation of this chapter is the relationships among constitutions, foreign aid, sovereign default and systemic risk, which are a class of dynamic Games and public goods games (henceforth referred to as Constitutional Games), which has often been debated in rather fragmented ways and has become more relevant due to rising inequality within and between nations, the significant impact of sovereign defaults on national economies, the COVID-19 pandemic, the politics of foreign aid and declining prospects of some developing countries. Excessive sovereign debt remains an issue in both developed and developing countries19—such as the United States, the United Kingdom and China. Many developed countries were financially distressed during 2000–2018—for example, during 2000–2017, many US state 19  See: “Thirty-two (32) States Now Officially Bankrupt: $37.8 Billion Borrowed from Treasury to Fund Unemployment; CA, MI, NY Worst”. http://www.zerohedge.com/ ar ticle/32-states-now-of ficially-bankr upt-378-billion-borrowed-treasur y-fundunemployment-­­ca-mi-ny-w. (listing bankrupt US states). See: “Forty U.S. States Cannot Afford to Pay All Their Bills”. September24, 2018. Mayra Rodriguez Valladares. https://www.forbes.com/sites/mayrarodriguezvalladares/2018/ 09/24/fortyusstatescannotaffordtopayalloftheirbills/?sh=21c86b57718a.

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governments and local governments were formally bankrupt or insolvent. Italy, Greece, Spain, Argentina and Venezuela have been financially distressed for a long time. As of 2017, the governments of the United States and Greece and other governments were technically insolvent. Various studies such as Kohlscheen (2004, 2010), Van Rijckeghem and Weder (2009), Enderlein et al. (2009), Basu (2016), Schäfer (2012), Basu and Stiglitz (2015) and Hatchondo et al. (2012) found that constitutions have significant effects on governments’ economic policies that pertain to the borrowing and repayment of sovereign debt. Weidemaier and Gulati (2015, 2017) and Qian and Strahan (2007) analyzed the role of law in creating and implementing sovereign default policy. Tate (1990) analyzed the constitutionality of state governments’ attempts to regulate Foreign Investment. Persson (2002) and Persson and Tabellini (2003) studied the extent to which political institutions affect economic policy. Several authors have analyzed some of the political economy issues inherent in sovereign default policy. Kohlscheen (2007) stated in part: Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies….the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions (on serial defaults, see Reinhart and Rogo (2004)). Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are

See: Bankrupt Cities, Municipalities List and Map (November 2014; USA). https://www. governing.com/archive/municipal-cities-counties-bankruptcies-and-defaults.html (listing of bankruptcy cities in the USA). See: DeYoung et al. (2013) and Jackowicz et al. (2013). See: Taylor (2012). By analyzing 1870–2008 data about a sample of fourteen advanced economies, Taylor (2012) noted the following: (i) economic/financial crisis that is caused by excessive government borrowing (as in Greece during 2012–2020) was much less common than economic crisis that was preceded by the development of excess credit (as in Ireland and Spain during the last six years); (ii) fiscal strains by themselves often don’t result in financial crisis; (iii) there has been statistically significant relationship between the growth of private sector credit and the likelihood of financial crisis; (iv) the relationship between crisis and the magnitude of private debt is stronger than the relationship between economic crises and growth in the broad money supply, the current account deficit, or an increase in public debt; (v) high levels of government debt amplify the problems caused by massive private debt, because debt-burdened governments are less likely to be able to help the economy.

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opportunistic…. Moreover, the result persists if OECD democracies are excluded from the sample…. Rather than resulting from the form of government per se, the failure of some countries to repay as originally contracted is related to the in-existence of a representative committee that decides on debt policy. The decision structure found in parliamentary democracies mimics, to some extent, the role such a committee would play.

Dhillon and Sjöström noted that: (i) when leaders can be replaced as in democracies, the incentives for repayment are mainly the ego-rents from office and the possibility of being replaced by a corrupt leader, but in dictatorships the cost of sovereign default is the permanent loss of reputation and the loss of future access to credit; (ii) there is a trade-off between repayment and risk sharing; (iii) when ego-rents are low, and the value of reputation to dictators is high, then democracies repay more often and have lower risk premia than dictatorships. Laasch et al. (2009) surveyed the recent literature on sovereign debt and the evolution of associated legal principles and found limited support for theories that explain the feasibility of sovereign debt based on either external sanctions or exclusion from the international capital market and more support for explanations that emphasize domestic costs of default. Montigny (December 2011) analyzed the impact of political changes on sovereign default and distinguished between “politically motivated sovereign default” and “creditbased sovereign default”. Constitutions can affect the perceived and actual validity of sovereign debt—through perceptions of the state and federal governments’ legal ability to borrow; and constitutionally or statutorily mandated “SpendingLimits” and “Debt-Ceilings”. Constitutions determine the true state of the federal government (e.g. democracy vs. plutocracy vs. dictatorship) and the credibility of the leader (i.e. prime minister, president), and the Executive Branch’s (of government) sovereign debt policies. The fiscal rules in many countries are often embedded in or are affected by their Constitutions and laws. The nature of constitutional checks on executive authority affects the ease with which governments obtain credit and the applicable interest rates, and the government’s willingness-to repay such debt. The balance of power between owners of capital and users of capital is often determined by the Constitution. In many jurisdictions, the power of governments to refinance debt and resolution of sovereign debt are also determined by the Constitution.

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6.6.1  Systemic Risk and Financial Stability As noted above, studies have shown that constitutions have significant effects on government economic policies pertaining to the repayment of sovereign debt; economic relations among federal, local and state governments; provision or acceptance of foreign aid by various levels of government; foreign investment; privatization; authorization for government spending; government contracting, trade deficits, taxation and fiscal policies; all of which indirectly and directly affect financial stability and the regulation and reduction of systemic risk. Without judging the accuracy of the statistical methods used in these studies, the relationship between constitutions and economic policy (taxation, debt management etc.) is almost intuitive since constitutions determine economic rights, and influence (and sometimes determine) governments’ allocations and its economic relationships with subsidiary states and citizens. In some countries, the national constitution20 determines one or more elements of systemic risk and financial stability such as the following: (i) which branch of the (state or federal) government has the power to borrow money; (ii) the government’s debt limits (e.g. the debt-ceiling debate in the United States); (iii) the applicability and enforcement of consumer protection laws that pertain to debt and corporate laws that pertain to corporate debt; (iv) the nature of government bailouts, and the branch of government that can authorize or execute bailouts; (v) the nature of, venue for, and procedural protections for, and the dissemination of information about the resolution of loan defaults; (vi) the regulation of financial institutions and financial markets and the enforcement of financial laws; (vii) the psychological and economic impact of market crashes on households and companies; (viii) which branch of government monitors financial stability and systemic risk.

20  See: Persson and Tabellini (1996), Rodden (2003), Kohlscheen (2008), Bargo (2016), Rodriguez-Tejedo and Wallis (2010), Mandrou (March 12, 2017), Nwogugu (2015) and Lawson (2010). See: Grey, B. (June 2009). The GM Bankruptcy and the Supreme Court. http://www. americanthinker.com/2009/06/the_gm_bankruptcy_and_the_supr.html. See: Bianco, K. & Pachkowski, J. (2008). The Economic Bailout: An Analysis of the Economic Emergency Stabilization Act. http://www.cch.com/press/news/CCHWhitePaper_ Bailout.pdf. See: Levy, R. (October 20, 2008). Is the Bailout Constitutional? Cato Institute, USA. http://www.cato.org/pub_display.php?pub_id=9729.

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Sovereign debt-management policies obviously affect systemic risk because they are a major economic indicator for foreign investors; credit rating agencies typically don’t rate companies’ debt above the sovereign ratings of their countries, and sovereign defaults and/or downward rating transitions of Sovereign debt often trigger mini crashes of stock markets and/or bond markets (as was illustrated during the Russian Crisis of 1998–1998, the Latin American Debt Crisis of the 1980s and 1990s, the sovereign defaults of Greece and Spain during 2010–2015 and the COVID-19 economic/financial crisis of 2019–present). Fluctuations in Commodity prices and the COVID-19-related problems have been causing significant economic/financial crisis in Emerging Market21 countries during the last five years. In many Emerging Market countries, external debt (debt that is legally governed by foreign law and is often denominated in foreign currency) constitutes a substantial portion of sovereign debt. Reinhart and Rogoff found that external debt surges are an antecedent to banking crises; that banking crises (domestic and those in financial centers) often precede or accompany Sovereign debt crises; and that public borrowing surges ahead of external sovereign default, because governments have “hidden domestic debts” that exceed the better documented levels of external debt. In many developed countries, the housing industry accounts for up to 35% of the GDP; housing-related debt has become a major source of systemic risk;22 and sovereign debt is used to support the housing industry directly (subsidies, government guaranteed mortgages, government mortgages, tax credits etc.) and indirectly (governments’ loans to banks; and government’s purchases of mortgages from banks).

21  See: Elliott, L. (September 21, 2016). “United Nations warns over global fallout from debt crisis in poor countries”. The Guardian (UK). https://www.theguardian.com/business/2016/sep/21/united-nations-unctadwarns-debt-crisis-poor-developing-countries-­ oil-prices. (“Fears of a fresh debt crisis in developing countries that would send shockwaves through the global financial system have been highlighted by a United Nations report stressing the vulnerability of poor states to falling commodity prices and higher interest rates…. Developing country external debt stocks alone rose from US$2.1  trillion in 2000 to US$6.8 trillion in 2015, while overall debt levels rose by over US$31 trillion between 2000 and 2014, with total debt-to-GDP ratios in many developing countries reaching over 120% and in some emerging economies over 200%.”) See: Aluko and Arowolo (2010). 22  See: Dann, L. (June 10, 2016). Nation of Debt: Ready, set, crash—Could New Zealand be next to fall? http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id= 12&objectid=11653661.

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6.6.2  Constitutionality of the Government’s Borrowing Powers (and Contrary to Public Perception, Government Bonds/Notes/ Bills Are Not Securities) In some countries, the borrowing powers of the federal and state governments are directly or indirectly enshrined in their national constitutions. Government borrowing has significant impact on overall risk regulation and risk perception because: 1. Government borrowing often funds government enforcement and legislative efforts. 2. The sovereign credit ratings issued by the big-three CRAs (credit rating agencies) are often a “cap” on the credit ratings of domestic companies in each country. 3. Government borrowing is a critical economic indicator that affects FDI, foreign investment, corporate expenditures, government expenditures. 4. Government bonds/notes are used for the pricing of swaps/derivatives, loans/mortgages and corporate bonds and other financial instruments. 5. The government bond markets and municipal bond markets around the world are large and significant and affect real estate, stock and commodity markets. 6. Government spending in most developed countries and some developing countries is large and government deficits are funded by borrowing. These foregoing issues can have significant implications for sustainable growth and risk regulation. In analyzing the Constitutional Law and economic-policy implications of the borrowing powers of federal governments and state governments (which often causes frictions between the executive and legislative branches of both governments in some countries), the following are important considerations: 1. Allocation of power (rule-making and enforcement) between the executive and legislative branches of the national government; and between federal/central and state governments. 2. The statutory distribution of federal government revenues among federal, state and local/municipal governments.

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3. The definition of a “constitutional” limitation on government borrowing. Fiscal rules (e.g. Tax & Expenditure Limitations, or TELs) are or can be formal or informal or implicit constitutions. See the comments in Heinemann et al. (2018) and Brooks et al. (2016). 4. The “Unobservable” Economic Effects of TELs, Fiscal Constitutions and explicit Constitutional Restraints on Governmental Spending— these are difficult-to-measure effects such as household dynamics, housing Inequality, Social Inequality, enforcement (especially labor and financial laws), Social Capital, Political Capital, Political Extortion, Political Collusion and Deal-making. Some “observable” economic effects are explained in Bae et al. (2012), Dove (2015) and Burret and Feld (2017). 5. The “Informal and Non-statutory” Budgetary Processes of the federal and state governments—these include but are not limited to Social Capital; power effects of Term-Limits; Political Capital; Political Extortion, Political Collusion and Deal-making; effectiveness of political representation; dynamics of legislature committees; and long-term senior employees in the executive branch of governments. Some “Formal and Statutory” Budgetary Processes are analyzed in Beck and Możdżeń (2020) and Dove (2016). 6. The nature of voting in and political control of the legislature. 7. The nature/scope of the veto powers of the legislature and the executive branches of government. See Dove (2016). The issue of government’s borrowing powers raises the question of the classification of government bonds/bills/notes. As explained in Nwogugu (2019) and under US Constitutional Law and generally accepted common-­ law constitutional principles, most Government Bonds/Notes/Bills (e.g. United States, Canada, EU countries, India and China) are not securities. 6.6.3   Foreign Aid, Federalism and Constitutions During 1987–2019 and in most Emerging Markets countries, the traditional model was that foreign aid (loans and grants) was negotiated with and granted only to the federal/central government—instead of granting foreign aid to private companies, state governments or local governments. This model triggers constitutional law issues such as federalism, the separation of powers doctrine, delegation doctrine and the statutory powers of states/sub-regions and government agencies to negotiate and receive

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foreign aid. In more recent times (i.e. 2010–2019), this Foreign Aid model has been changed in some countries, and in ways that resemble Foreign Investment (FI) and FDI—for example, in some African countries, the Chinese government agencies have contracted with state governments to build major projects, and have invested in joint ventures with private entities. Also, NGOs have been providing aid to local populations, while foreign government agencies (such as USAID) have provided aid directly to government and private facilities. In Bangladesh, Latin America and some African countries, Microfinance has been used to provide capital to smallscale entrepreneurs (although the long term and benefits of Microfinance and its ability to facilitate “scaling” are somewhat very limited). Foreign Aid also affects actual and perceived systemic risk because it’s a major economic indicator for foreign investors, and foreign-currency denominated debt constitutes significant risks for many emerging market countries (their currencies are susceptible to shocks and rapid devaluation). In some emerging market countries, even moderate reductions in foreign aid create substantial government deficits, reduce economic activity and asset values and can cause mini crashes of capital markets.23 Lower foreign aid can reduce commodity prices (in emerging market countries) which leads to increasing pressure on indebted miners, drillers and traders, who collectively owed around US$3 trillion in 2017. Lower foreign aid reduces the demand for goods produced in developed countries and the profits of multinational companies. Dabla-Norris et al. (2011) found that: (i) there is a nonlinear relationship between aid flows and the business cycle in both donor and recipient countries; (ii) high public debt levels in donor countries are associated with a contraction in aid flows in the aftermath of donor recessions; (iii) bilateral aid flows are pro-cyclical with respect to the recipient output cycle, but countercyclical when the recipient is hit by large adverse shocks, including terms-of-trade shocks or growth collapses On the relationship between Foreign Aid and Government-Size, see Remmer (2003). To date, the debate about the effectiveness of foreign aid, sovereign default risk and associated corruption revolves around federalism,24 23  See: World Bank (2009). “World Bank Calls on Donors to Boost Aid for Developing Countries”. Remarks by the President of the World Bank Robert Zoellick at the International Conference on Financing for Development in Doha, Qatar. November 27, 2009. 24  See: Shah (2014), Bernardi et al. (2013), Akeem (2011), Purfield (2004), Blanchard and Shleifer (2001), Weingast (February 2000), Bird and Ebel (n.d.), Bardhan and Mookherjee (2006), Díaz-Cayeros (2006), Eaton (2004), Wibbels (2005), De Rugy (March 17, 2010), and Radin (2007).

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constitutional powers and the efficiency of governments (discussed in Chap. 5 in this book)—most of the articles and books on the subject have not addressed the following issues: 1. The constitutional power of state and local governments to negotiate and accept foreign aid or to issue debt and securities. 2. The nature of fiscal federalism and the constitutionally defined economic relationship between the federal government on the one hand and the state or local governments on the other hand. 3. The efficiency of government at the state, federal and local/municipal government levels. 4. The effectiveness of the formula for the allocation of “revenues” among the federal, state and local governments (e.g. in Nigeria, where the government derives more than 60% of its revenues from oil and gas). For example, the 2000–2020 formula(s) for the Nigerian federal government’s allocation of funds to states and local governments was very inefficient and did not provide adequate incentives for innovation and revenue generation in government or for the state and local governments to collect taxes or to generate revenues from new/other sources. The FRN federal-to-­ state/LGA allocation formula encourages overdependence on the federal government and oil/gas revenues, looting/conversion of government funds, stagnation and lack of innovation. In its allocation scheme, the FRN federal government does not use efficient matching grants or performance-based grants, does not adequately reward state governments for generating new sources of revenues or additional revenues, and does not punish state governments for misuse/misallocation of funds. For example, if a state government is deemed to be misusing or misallocating its allocated funds based on agreed-upon criteria, part of the quarterly/monthly federal allocation for that state should be immediately placed in escrow until that state government meets the required criteria for use of funds and/or until there is a new governor in the state. In another example, the FRN government should give matching grants to state governments that develop new sources of revenues or generate minimum benchmark revenues from specific sources/sectors in their state. In a third example, if a state government is not managing a sector/ministry (e.g. Ministry of Works) properly, the federal

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government should have the power to take over that state ministry until it is restored to normal function. 5. The constitutionally defined power of the central/federal government to regulate various types of domestic and international commerce. 6. The allocation of power over government spending to the executive and legislative branches of the central/federal government and same branches of the state governments. This refers not only to the budget process, but also to the actual allocation of contracts to specific persons/companies, and to the approval of infrastructure projects, and disbursement of federal funds for non-routine expenditures. 7. The size of the government and the nature of government expenditures within the context of government revenues can have substantial impact on the effectiveness of foreign aid. For example, Nigeria now has 36 states, more than 100 federal senators, at least 400 members of the federal house of representatives and 774 Local Government Area chairmen (whom, together with their assistants and councilors constitute the third layer of government). According to the Central Bank of Nigeria (November 2012), the state/local/ federal governments spend 70% of their revenues on salaries and entitlements of civil servants; and 25% of the overheads of the Federal Government budget was spent on the National Assembly in Abuja (the overhead of the National Assembly as a percentage of the Federal Government budget in 2010, 2009 and 2008 were 25.1%, 19.87% and 14.19%, respectively). Given the current conditions and the structure and cost of government in Nigeria, it’s clear that most foreign aid simply won’t work well within Nigeria. 8. The degree of accountability of the executive branch of government to the legislative branch of government; and the constitutionally designated power of the judicial branch of the government to limit the activities of the executive branch and/or the legislative branch of the federal and state governments. Such powers also affect the enforceability of contracts with governments, and the effectiveness and allocation of foreign aid in developing countries. 9. The power of federal government agencies to preempt or limit transactions or rule-making by state and local governments—this is particularly relevant for regulated industries. Such federal government powers can limit state governments from receiving direct foreign aid, from issuing/selling bonds and other securities to foreign

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persons and from entering into potentially beneficial long-term contracts (e.g. infrastructure contracts) with foreign governments and companies that can finance projects. 10. The constitutionally defined powers and Social Capital of federal government agencies that are in charge of monitoring and preventing corruption and theft (such as the EFCC and the ICPC in Nigeria) also affect the effectiveness of foreign aid. 11. The constitutionally defined Police Powers of the central/federal government. 12. The constitutional rights to Privacy. 13. The optimal geographical demarcation of states in a country and the optimal allocation of non-cooperating communities to a state in a country remains a major question which has not been sufficiently addressed in almost all democracies in the world. Tate (1990) analyzed the constitutionality of state governments’ attempts to regulate Foreign Investment. Persson (2002) analyzed the extent to which political institutions shape economic policies. 6.6.4  Sovereign Debt Policies and The Efficiency of Foreign Aid: Accountability and Preemption The degree of accountability of the executive branch of government to the legislative branch of government, and the constitutionally designated power of the judicial branch of the government to limit the activities of the executive branch and/or the legislative branch of the federal and state governments affects the effectiveness of foreign aid and sovereign default risk. Such powers also affect the enforceability of contracts with governments, and the effectiveness and allocation of foreign aid in both developed and developing countries. The power of federal government agencies to preempt or limit transactions or rule-making by state and local governments affects sovereign default risk, and the effectiveness of FDI, FI and foreign aid—and this is particularly relevant for regulated industries. Such federal government powers can limit state governments from receiving direct foreign aid, from issuing/selling bonds and other securities to foreign persons and from entering into potentially beneficial long-term contracts (e.g. infrastructure contracts) with foreign governments and companies that can finance projects.

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A prime example of accountability and preemption is the TARP and HAMP programs that were developed and implemented by the US government during 2006–2013. The US government financed TARP and HAMP by issuing US Treasury securities to foreign and domestic investors. Thus, HAMP and TARP are products of FI and foreign aid. Many authors and researchers have noted that the US Government’s TARP and HAMP programs failed, and the Dodd-Frank Act of 2010 (United States) didn’t sufficiently address or resolve such market failures. After TARP and HAMP failed, the US Congress eventually held many hearings to try and resolve and improve both programs but that didn’t work. There remain the questions of whether HAMP and/or TARP should have been implemented by US state governments (or by both federal and state governments) given that in the United States: (i) state laws govern mortgage transactions, foreclosures and related issues; (ii) state laws also govern corporations and debtor-creditor relations, and both the state and federal governments enacted banking laws. There is also the question of whether a non-partisan committee of the US Congress should have participated in developing or monitoring TARP and HAMP from inception. According to Black and Hazelwood (2012),25 TARP failed: 1. Big bailed-out banks subsequently issued riskier loans than equivalent banks that did not get taxpayer money from the Troubled Asset Relief Program (TARP), the Huffington Post reports. 2. Smaller banks that were bailed out subsequently took fewer risks because the increased requirements for capital affected smaller firms more than big ones. 3. The large banks that got the bailout money subsequently provided lending than their counterparts who did not get TARP money. 4. TARP’s goal of reducing risk-taking and increasing the flow of credit appears subsequently failed on both counts.

25  See: Lamont Black and Lieu Hazelwood (2012). The Effect of TARP on Bank Risk-­ Taking. Board of Governors of the Federal Reserve System. International Finance Discussion IFDP 104; March 2012 http://www.federalreserve.gov/pubs/ifdp/2012/1043/ ifdp1043.pdf.

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5. Relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending. 6.6.5  Foreign Aid and Sovereign Default Risk: Domestic Capital Markets Most academic and practitioner analysis of the efficiency of foreign aid and sovereign default probabilities have typically not included appropriate analysis of domestic fixed income markets of the recipient country which is a critical success factor. This is particularly relevant in bank-based economies. In the case of Nigeria, as of 1995–2017, the domestic fixed income markets were not functioning properly, and the foreign aid was not be used well, and sovereign default risk was high. The term structure of various interest rates in Nigeria during 2010–2021 provides some insights into current problems: 1. The fact that the relatively high bank-deposit interest rates in Nigeria during 2013–2020 (1.30–7% per annum depending on the type of deposit; see http://www.cenbank.org/rates/mnymktind.asp; and http://www.deposits.org/world-­deposit-­rates.html) and the high Nigeria Treasury Bill Rates haven’t attracted significant foreign investors to the Naira is evidence that foreign investors are very concerned about inflation risk, credit risk, Geopolitical Risk and ethno-­ political risk in Nigeria.26 2. The extremely high commercial loan interest rates in Nigeria (15–28% per annum) are also evidence of domestic concerns about inflation risk, credit risk, ethno-political risk and inadequate legal infrastructure for resolution of commercial loan disputes.

26  See: FGN Bond Suffers Low Patronage on NTB Auction. http://www.thisdaylive.com/ articles/fgn-bond-suffers-low-patronage-on-ntb-auction/125797/.

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3. The extremely high interbank rates in Nigeria during 2005–2020 (12.5–14%; see http://www.cenbank.org/rates/mnymktind.asp; and compare data in http://markets.ft.com/RESEARCH/ Markets/Interest-­Rates) do not encourage lending and investment, indicate that many Nigeria banks have substantial credit risk and/or are near bankruptcy, and also implies that Asset Management Corporation of Nigeria (AMCON) has not been functioning properly. 4. The substantial and negative spread between the commercial loan rates and the interbank rates (during 2005–2021) does not encourage lending and investment (this spread is usually positive in developed and growing countries). 5. In addition, the relatively wide spreads between the Interbank Rate(s) and the bank-deposit rates are negative (this spread is positive in developed and growing countries) and this indicates that there are some inefficiencies in banks, and there are domestic concerns about inflation risk, credit risk and legal infrastructure for resolution of commercial loan disputes; and it’s also evidence of significant information asymmetry between consumers/depositors and banks. In developing and developed countries whose banking industry is troubled, foreign aid in the form of FI or FDI or sales of government bonds will likely not be used efficiently—two examples are Nigeria and the United States. This has been confirmed in the United States where despite sales of more than $600 billion of US Treasury bonds between 2007 and 2012, the US economy was not doing well during 2008–2013 and the increases in asset prices (real estate; stock markets) that occurred during that period could be attributed to artificially very low interest rates. The Nigerian federal government (“FRN”) created the Asset Management Corporation of Nigeria (“AMCON”—which is similar to the Resolution Trust Corporation in the United States, and various asset management corporations created/sponsored by governments in India and Malaysia) to purchase troubled assets from Nigerian banks which had very high non-­ performing loans (NPLs) during 2006–2010. After AMCON acquired these NPLs from Nigerian banks during 2011–2013, a similar pattern of high NPLs and mismanagement of banks occurred again during

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2016–202027,28 (as of 2017, the NPL rate for Indian banks was about 10%). During 2011–2013, AMCON did not have a truly independent 27  See: “Bank directors liable for 40% of ₦1.85 trillion bad loans—NDIC boss”. February 24, 2017. Vanguard (Nigerian daily newspaper). http://www.vanguardngr.com/2017/02/ bank-directors-liable-40-n1-85-trn-bad-loans-ndic-boss/. In February 2017, the Nigerian Deposit Insurance Corporation (NDIC) announced that:

1. As of December 2016, the twenty-five Deposit Money Banks (DMBs) in Nigeria had total loan portfolios of ₦18.53  trillion out of which ₦1.85  trillion (or 10%) were NPLs where ₦740  billion or 40% constituted Insider/Directors-related loans (this was above regulatory threshold of 5% for the DMBs); 2. as of December 2016, there were 978 microfinance banks (MFBs) in Nigeria with total deposits liabilities of ₦158 billion and total loans and advances amounting to ₦195 billion out of which ₦87.75 billion (or 45%) were NPLs where ₦68.25 billion or 35% consisted of insider-related and Directors’ loans; 3. as of December 2016, there were forty-two primary mortgage banks (PMBs) which had total deposits liabilities of ₦69 billion but with total loan portfolio of ₦94 billion (which indicated over-lending, accumulated interests, and poor corporate governance) and a high NPL ratio which was ₦51.7  billion or 55% out of which ₦42.3 billion or 45% were Insider-related and Directors’ loans. See: “Of First Bank and Bad Debtors; A System’s Throbbing Headache”. Friday, April 30, 2021. https://www.proshareng.com/news/Debtors---Recovery/Of-First-Bank-and-BadDebtors--A-System-/57065. This article stated in part: “………With the recent decision of the Central Bank of Nigeria (CBN) to remove the Boards of FBN Holdings and FirstBank and replace them with newly constituted alternatives, several issues creep behind the facade of finicky corporate ethics. The banking windowpanes appear clear behind dusty operational curtains. The revelation by Nigeria’s Central Bank Governor, Mr. Godwin Emefiele, that FirstBank had been under a regime of forbearance since 2016 and was peppered with problems of recovering insider-related loans was an admission of regulatory fogginess. Indeed, bank analysts have noted that this was one of the clearest examples of what industry professionals call ‘adverse selection’ or a situation where assistance or preference is given to the least qualified person or institution based on sentiments rather than evidence-based governance and logic, especially where, for example, a regulator like the CBN has more information than investors, depositors and the general public. ……”. 28  See: “Inside Story of Skye Bank Management Takedown by the Central Bank of Nigeria”. July 4, 2016. Sahara Reporters. http://saharareporters.com/2016/07/04/inside-story-­ skye-bank-management-takedown-central-bank-nigeria. In 2016, the Central Bank of Nigeria took over Skye Bank and replaced all of its Board Members and some senior management because of mismanagement, bad loans and insider malpractices by Skye bank’s board members and some senior executives. See: “Nigeria’s banking sector: Thriving in the face of crisis”. December 14, 2020. https:// w w w. m c k i n s e y. c o m / f e a t u r e d - i n s i g h t s / m i d d l e - e a s t - a n d - a f r i c a / n i g e r i a s banking-sector-thriving-in-the-face-of-crisis. See: Anthony Osae-Brown, “Nigeria Sets Up Task Force to Recoup US$15 billion of AMCON Debt”. Bloomberg | Quint, July 30, 2019, bloombergquint.com.

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Board of Directors, and some of its procedures may be deemed questionable (due process), and hence, there are issues of conflicts of interest, objectivity and vested interests.29 The members of the Board of Directors of AMCON are appointed by the President; AMCON was funded partly by the Central Bank of Nigeria and was not politically or economically independent. AMCON can be used to harm or de-value banks that are owned or controlled by members of competing political parties. AMCON did not provide and is not providing adequate incentives and penalties to deter troubled banks from making the same/similar lending mistakes—such as lending to similar borrowers or to the same defaulting borrowers, or to See: Chijioke Ohuocha, “Nigerian Banks to Restructure Over a Third of Loans—MPC Member”. Reuters, June 25, 2020, reuters.com. This article notes that Nigerian banks have to restructure more than 33% of their loan portfolios. This issue highlights the often misleading “NPL rates” in emerging markets which focus on defaulted loans that are beyond restructuring. See: “New cash reserve requirement credit-negative for Nigerian banks”, Fitch Ratings, January 29, 2020, fitchratings.com. See: “The CBN Take-Over of Some Banks in Nigeria: Serious Legal Questions Remain Unanswered”. HG.org. September 2009, vol. 22, Issue #9. https://www.hg.org/legal-­ articles/cbn-take-over-of-nigerian-banks-unresolved-legal-issues-19248. (“The alleged basis for these radical measures undertaken by the CBN Governor is that the affected banks, in the opinion of the CBN Governor, appears to meet the criteria of a ‘failing bank’ as contemplated by Section 35 of the Banks and other Financial Institutions Act, Cap B3 Laws of the Federation of Nigeria, hereinafter, BOFIA.  This newsletter addresses three key questions, namely: 1. Whether under the enabling legislation, the CBN Governor has the power or vires to remove any officer or officers of the affected banks and appoint new officers on the grounds that the banks are ‘failing’ under the definition contained in section 35 of the BOFIA? And if so, whether under the present circumstances, the CBN Governor exercised such powers judiciously; 2. Whether having regard to the laws of Nigeria the CBN Governor and/or the Central Bank of Nigeria may lawfully position itself to hold and/or control shares in Nigerian banks; 3. Whether it is lawful for the CBN Governor and/or investigative agencies in Nigeria to monitor and or question the aforesaid sacked officials of the affected banks. The full extent of the powers of the CBN Governor and the CBN itself to regulate banks registered in Nigeria is contained in two pieces of legislation, namely, the Central Bank of Nigeria (Establishment Act) Act, Cap C4 Laws of the Federation of Nigeria 2006, hereinafter, CBN Act and BOFIA, respectively….). 29  See: http://tribune.com.ng/index.php/tribune-law/10584-challenging-the-assetmanagement-corporation-of-nigeria-amcon-­act-2010.

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persons/companies in the same sector; and the negligent bank officers are not punished. When AMCON purchases a troubled asset from a Bank at a discount, that bank typically has to record a significant loan-loss, and also has to record higher capital reserves, all of which reduces the bank’s actual and perceived credit quality; and also reduces liquidity in the Interbank Market due to credit concerns.30 Also, the combination of an operating loss due to an AMCON asset purchase and extension of loans by the FRN Central Bank to the subject bank can greatly reduce the bank’s perceived credit quality. AMCON’s asset-buying activities have not materially increased lending by banks in FRN, and have not materially reduced the Interbank Rates. By buying shares held by banks as collaterals for loans, and by holding such shares, AMCON has not necessarily reduced the perceived selling pressure on such shares, because the reality is that there has never been a real “market” for such shares (no/low demand without access to bank loans; and no willing buyers) and the decline in share prices is also caused by other factors such as macroeconomic concerns. AMCON’s asset purchases were essentially Fraudulent Conveyances because it’s the bank’s creditors that bear most of the losses from asset purchases by AMCON, and the bank’s shareholders also benefit whereas the negligent bank officers can still earn large bonuses and equity compensation and continue to lend to the same defaulting borrowers or similar borrowers! The shareholders benefit most because: 1. equity markets react more quickly and in greater magnitude to such asset purchases than credit markets; 2. the resulting change in asset; 3. the resulting recognition of loan losses has greater negative impact on the bank’s perceived credit quality than on its equity value—loan losses reduce equity accounts and increase leverage-ratios and reduce operating performance ratios, but unlike debt obligations, the reduced absolute amount of equity still has much greater “expectations value” which makes up for such reduction; 4. within the asset-liability management (ALM) framework the resulting reduction in duration and modified duration, and the resulting reduction of perceived mismatch of assets and liabilities increases 30  See: Kodres, L. (September 28, 2012; via iMFdirect). Not Making the Grade: Report Card on Global Financial Reform. http://blog-imfdirect.imf.org/2012/09/28/ not-making-the-grade-report-card-on-global-financial-reform/#more-5554.

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perceived equity values much more than the value of the bank’s obligations; 5. many of the affected banks are deposit banks, and a substantial percentage of their liabilities are customer demand deposit accounts and short-term CDs, and the bank cannot not possibly meet any bank-run. On the contrary, it should be the bank’s shareholders and senior officers that should bear such loan losses. AMCON’s buying activities improperly shield banks from facing reality and free-market forces; the history in various countries has been that bailing out banks only gives them incentives to repeat the same errors and that such bailouts benefit only senior bank executives and very few customers.31 During 2008–2010, the US Federal Reserve repurchased troubled loans from banks and also invested cash in both stable and troubled US banks while hoping that those banks would increase their lending, but the banks didn’t increase their lending volumes substantially (TARP—http://projects.propublica.org/bailout/ list/index). In 2010, the US government enacted the Dodd-Frank Act32 which emphasizes free markets and less government intervention in financial markets and requires liquidation of troubled banks in some circumstances (instead of bailouts!). AMCON’s issuance of bonds to finance its purchase of distressed bank assets may have been redundant and unnecessary33—and if most of these new AMCON bonds were purchased by these 31  During the Global Financial Crisis (2007–2009), the US government allocated more than $10 trillion for recapitalization of US banks (the “Troubled Asset Relief Program” or TARP eventually failed) and the Chinese government recapitalized Chinese banks; the UK government invested more than £850 billion in British banks via preferred stock; and EU governments invested more than €2.5 trillion in their banks. See: http://en.wikipedia.org/ wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act; and http://en.wikipedia.org/wiki/2007%E2%80%932012_global_financial_crisis. 32  See: http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_ Consumer_Protection_Act; and http://en.wikipedia.org/wiki/2007%E2%80%932012_ global_financial_crisis. 33  See: Nigeria: AMCON’s N1.7 Trillion Bond Will Help Investors Diversify Portfolio. Available at http://allafrica.com/stories/201104220295.html. See: Andrews, M. (2003). Issuing Government Bonds to Finance Bank Recapitalization and Restructuring: Design Factors that Affect Banks’ Financial Performance. IMF, Washington, DC, USA. http://www.imf.org/external/pubs/ft/pdp/2003/pdp04.pdf.

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same troubled Nigerian banks, then: (i) with or without the Federal Government’s explicit guarantee of AMCON bonds, the credit ratings of the banks are not likely to improve without major capital infusions; (ii) the secondary market prices of the AMCON bonds are very likely to decline; (iii) since most of the AMCON bonds are zero-coupon bonds, they don’t improve the banks’ liquidity. AMCON officials have stated that the rescued banks will still have to raise capital to meet minimum capital adequacy levels even after asset purchases by AMCON—this is only further confirmation of the inefficiency of the AMCON asset-purchase processes. Ideally, after an asset purchase by AMCON, such rescued bank should meet/exceed statutory capital requirements and its credit ratings should increase—this has not been the case. 6.6.6  The Efficiency of Government and Significant Conflicts of Interest Within and Ineffective Supervision by Federal Government Agencies; and the Existence of “Spatio-temporal Anti-compliance Cartels” in Both Public and Private Sectors The context and motivation for this section is somewhat varied. First, both the Nigerian Financial Crisis of 2005–2012 (and 2016–2020) and the Global Financial Crisis of 2007–2014 exposed significant weaknesses in Corporate Governance standards in organizations, and strategic decision-­ making by Boards of Directors. During the Nigerian Financial Crisis, many Nigerian banks had very high NPL rates (9–80%) and were technically insolvent, and eventually, the Nigerian federal government created AMCON in 2010 to help restructure and recapitalize Nigerian banks (AMCON had to purchase loans from and provide capital to Nigerian banks). Second, many countries have adopted the British/Commonwealth or US corporate governance models, both of which have inherent weaknesses (which have not been addressed sufficiently in the literature and can create Deadweight Losses). As in many emerging market countries, the financial sector is often a major indicator of and vehicle for economic development. Third, both individual and institutional investors around the world are increasingly emphasizing the quality and implementation of corporate governance standards and Board Dynamics within companies as a major investment criterion. Fourth, historically, Nigeria has had weak institutions. Azinge and Owasanoye (2009) documented many instances of abuse of power by the executive, legislative and judicial branches of the Nigerian government; and the relatively frequent and publicized

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power-­clashes among these three branches of government at both the federal and state levels. Fifth, the issues raised and theories introduced herein are applicable to many companies and government agencies in many emerging market countries. Amucheazi and Onwuasoanya (2008: 283–302) documented problems in enforcement of statutes, compliance and exercise of statutory powers in Nigeria—and such problems have been ongoing for the last forty years. Ayua et al. (2000) confirmed that both the 1999 Constitution of Nigeria and the presidential system of government in Nigeria were derived from the US Constitution and the presidential system of the US respectively; and they also analyzed transparency and Accountability within the context of governance and noted problems inherent in the 1999 Constitution. Such weak institutions facilitate earnings management, asset-quality management and incentive-effects management. Nwogugu (2003), Melendy and Huefner (2011) and Nwogugu (2004) analyzed corporate governance, Policy, strategy and compliance problems in US companies. Bliss et al. (2012), Nwogugu (2009), García-Pérez et al. (2014) and Grechuk and Zabarankin (2014) analyzed strategic decisionmaking in organizations. The “efficiency” of various layers of government is a major determinant of the usefulness and efficient allocation of foreign aid and the probability of sovereign default—and again, Nigeria is a prime example. Many researchers have critiqued the “local/municipal government” as a unit of, or system of government.34 In Nigeria, Social Welfare can be improved by restructuring and reducing the Local Government layer of government which has become inefficient, corrupt and a major source of diversion/theft of government funds. It was only in 2019, that the Nigerian federal government began directly paying monthly statutory allocations directly to local governments (previously, the funds of both

34  See: Odo (2014), Sansom (2016), Meadowcroft (2001), Van de Bovenkamp & Vollaard (2019), Schatz & Rogers (2016), Kuhlmann (2007), Obamwonyi & Aibieyi (Feb. 2015), and Akeem (2011). See: “Local Councils……..When Grassroots Government Is Far From The People”. By Onyedika Agbedo, Tobi Awodipe, Maria Diamond, et. al.. The Guardian (Nigerian daily newspaper). May 15, 2021. https://guardian.ng/saturday-magazine/cover/local-councilswhen-grassroots-government-is-far-from-the-people/. See: Maduabuchi, E., Akinsuyi, T. & Opesetan, T. (2014). “Tenure: Local Governments’ Triumph Over Governors”. Sunday Independent, July 27th, 2014, pp. 15–17.

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state and local governments were mixed in one account and directly or indirectly controlled by state governors). In Nigeria, the average local government executives are somewhat far removed from the state-level legislative process and state-wide issues. In one scenario, the Nigerian federal government can allocate funds for use at the local government level which should be administered by a combination of the applicable state legislator(s) and the executive arm of the state government. That is, the “local government” will be a regional office of the state government that is managed by a “Council” that consists of the elected federal legislators (senator and representative for that area), state legislators (that represent that area) and two to three appointed officers of the state government (who are not indigenes of the subject Local Government Area) and who report to the state governor. The local government can have its allocation directly from the federal government plus (without maintaining any joint accounts with the state government—that has been very problematic in Nigeria) an additional allocation from the state government. This hybrid governance approach can provide state legislators with hands-on regional municipal government experience, improves their legislative skills, reduces the often notorious conflicts between the executive and legislative branches of the state government and provides a pool of talent from which Governor, Deputy governor and federal senate positions can be filled (during 1999–2005, most state Governors, Deputy Governors and federal Senators in Nigeria never had any prior experience in either legislation or regional government before they assumed office). Also, the Nigerian government should consider eliminating the state Houses of Representatives—which is redundant (there has been relatively low state-level political activism about rule-­making) and hampers the effectiveness of federalism. Such action can help in the following ways: (i) shift more legislation to the federal level; (ii) encourage uniformity across states and reduce the costs and proliferation of legislative processes and state laws; (iii) reduce government expenditures, transactions costs and coordination costs; and (iv) reduce delays in state legislative processes. The ten countries that had the lowest per capita growth rates during 1980–2002 (all negative growth rates) had a median aid-to-GDP ratio of 10.98%. In the ten countries that had the highest per capita growth rates during 1980–2002, the median ratio of aid-to-GDP was just 0.23%. However, the data is somewhat misleading because these same high-­ growth “emerging market” countries (such as China, Malaysia and South Korea): (i) have relatively more homogenous populations (and thus less

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tribalism, ethnic strife and corruption); (ii) have enacted and implemented relatively very harsh penalties for corruption (e.g. death penalties for corruption in China); (iii) have allocated adequate resources for tax collection and for enforcement of anti-corruption campaigns; (iv) have much more effective systems of government that are better at allocating capital/ resources to infrastructure projects, and to subsidiary state and local governments; (v) have government intervention in most sectors of the economy; and (vi) have recently (1980–2010) undergone socioeconomic and cultural revolutions that encourage mass pro-capitalist thinking that is critical for worker productivity. Furthermore, as explained by Djankov et  al. (2008), the differences in the growth of countries can be partly explained by differences in their debt enforcement procedures. In many emerging market countries that have historically low regulation and low enforcement, Conflicts of Interest often abound and are precursors/foundations for Corruption and inefficient allocation of resources—and Nigeria is a typical example. This next section reviews the many types of Conflicts of Interest that hinder effective regulation of the Financial Services industry in Nigeria. This section discusses and implies the existence of “Spatio-Temporal Anti-compliance Cartels” within both the government and the financial services industry in Nigeria—which resemble informal and un-documented collusive Strategic Alliances. One emerging or resulting phenomenon is that Corporate Governance guidelines/regulations and some statutes are “Non-public Goods”—that is, the number of actual or potential users of such rules is directly proportional to the degradation and ineffectiveness of the rules/statutes and instances of non-compliance. The second result is that Corporate Governance Contagion occurs in both random and defined patterns, and is partially or fully Spatio-Temporal in nature. During 2005–2020, some Nigerian federal government agencies and privately owned companies perpetrated and/or suffered from substantial conflicts of interest, some of which are summarized as follows: 1. Type 1: A Board member or officer of a private capital markets institution (that has a quasi-governmental role) or a government regulatory agency also works for or is a Board Member or officer or shareholder of an entity that is regulated by the same government agency. For example, Aliko Dangote was the former President of the Nigerian Stock Exchange (NSE) at the same time that his companies (in which he directly/indirectly has majority owner-

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ship) were listed on the NSE (as of August 2014, Aliko Dangote was a member of the BOD of NSE). Second, as of August 2014, one member of the Board of Directors of the Securities and Exchange Commission of Nigeria was simultaneously a member of the Board of Directors of Mainstreet Bank, whose securities brokerage subsidiary named Mainstreet Bank Securities Ltd., was regulated by the Nigerian SEC. Third, in August 2014, Sarah Alade, Deputy Governor of the Central Bank of Nigeria (CBN), was elected as the new Chairman of the Board of Financial Market Dealers Quotation (FMDQ) Plc. FMDQ is involved in, or intends to soon be involved in Commercial Paper, restructuring of the “Repo” market, securities lending and development of the loan sale market. FMDQ is owned by CBN, Finance Dealers Association, twenty-­five banks and the Nigerian Stock Exchange (NSE). Fourth, in 2010, the then Chairman of the Securities and Exchange Commission of Nigeria (SEC) Senator Udo Udoma, was also appointed as chairman of UACN Plc, which is listed in the NSE and was regulated by the SEC—at that time, Senator Udoma was also a BOD member of UACN and was also vice-chairman of Linkage Assurance Plc, which was listed in the NSE. The publicly announced excuse for this potentially abusive conflict-of-interest was that Section 11 of the Investment and Securities Act (ISA) only required Senator Udoma to declare any perceived conflict of interest. 2. Type 2: Board members of financial institutions regularly default on loans they take from such banks and remain on the Boards of Directors of such banks. During February 2017, the Nigerian Deposit Insurance Corporation (NDIC) announced that:35 (a) as of December 2016, the twenty-five Deposit Money Banks (DMBs) in Nigeria had total loans portfolio of N18.53 trillion out of which N1.85  trillion (or 10%) were NPLs where N740  billion or 40% constituted Insider/Directors-related loans (this was above regulatory threshold of 5% for the DMBs); (b) as of December 2016, there were 978 microfinance banks (MFBs) in Nigeria with total deposits liabilities of N158  billion and total loans and advances 35  See: “Bank directors liable for 40% of N1.85 trillion bad loans—NDIC boss”. February 24, 2017. Vanguard. http://www.vanguardngr.com/2017/02/bank-directors-liable-40-n185-trn-bad-loans-ndic-boss/.

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amounting to N195 billion out of which N87.75 billion (or 45%) were NPLs where N68.25  billion or 35% constituted insider-­ related/Directors loans; (c) as of December 2016, there were forty-two primary mortgage banks (PMBs) which had total deposits liabilities of N69 billion but with total loan portfolio of N94 billion (which indicated over-lending, accumulated interests, poor corporate governance) and a high NPL ratio which was N51.7 billion or 55% out of which N42.3  billion or 45% were Insider-­ related/Directors loans. 3. Type 3: A government agency is managed by an individual that was a senior officer (within five years immediately preceding his/her appointment to the agency) of or retains substantial equity/debt interests (e.g. shares of stock) in one of the companies that are being supervised and/or regulated by that government agency. For example, Sanusi (former CBN Governor) was the MD/CEO of First Bank of Nigeria immediately before his appointment as CBN Governor. Also, Godwin Emefiele (the CBN Governor during 2014–2015) was the MD/CEO of Zenith Bank just before he was appointed to the CBN Governor position in 2014 (he separated from Zenith Bank in 2014). The CBN directly regulates both FirstBank and Zenith Bank. Similarly, the appointments of Robert Rubin (by the Clinton Administration in the United States) and Henry Paulson (by the Bush Administration in the United States) as the US Treasury Secretary were major conflicts of interest because both persons were employed as senior executives (CEO) of Goldman Sachs immediately before they became the US Treasury Secretary. Before and after their appointments as US Treasury Secretary, Goldman Sachs was directly regulated by the US Treasury Department; Goldman Sachs participated in auctions of US Treasury bonds/bills by the US Treasury Department; Goldman Sachs provided advisory services to the US Government. On the contrary, each of the Governors of the US Federal Reserve System during the last fifteen years never worked in any regulated bank or financial services company during the ten years immediately preceding their appointment as Governor of the US Federal Reserve. 4. Type 4: One government agency has the statutory or administrative power to nominate or appoint a significant number of BOD members of another government agency that either is not a sub-

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sidiary or is supposed to be “independent”, or a government agency that performs a remedial function (e.g. Asset Management Corporation of Nigeria or “AMCON”) is controlled by another government agency (e.g. CBN) whose laxness/errors caused the problems that led to the creation of the remedial agency. The CBN nominates six of the ten AMCON Board Members (and the President of Nigeria makes the formal appointments). For example, whereas it was the CBN’s omissions/errors/laxness that partly caused the significant bank NPL problems of 2007–2014 in Nigeria, the CBN nominated six of the ten AMCON BOD members and AMCON is statutorily required to obey CBN’s written policies. Thus, the lack of remedial independence is both astonishing and destructive; and the CBN has the power to not only cover-up its past regulatory mistakes and errors that may form the basis of AMCON’s takeover of a bank (or AMCON’s request for mandatory purchase of loans from such bank); but the CBN can also compel AMCON to use government funds to resolve such errors/omissions to the detriment of the government, taxpayers and social welfare. 5. Type 5: A capital markets “institution” (or private company that has a quasi-governmental role) or a government agency single-­handedly provides, “partners” with, or “sponsors” an unrelated private company to provide services or “opinions” that directly affect entities regulated by that private entity or government agency. For example, in October 2014, the Nigerian Stock Exchange (NSE) announced that it would “partner” with Convention on Business Integrity (CBI) to provide corporate governance ratings of companies whose shares are traded on the NSE. 6. Type 6: The President of Nigeria has the sole power to appoint and remove the Heads/Chairpersons and board members of a regulatory government agency. For example, as explained herein, the Nigerian President’s power to appoint the Board Members of AMCON (subject to ratification by the Nigerian Senate) and to remove them is unconstitutional and is a conflict of interest. Also, under relevant statutes in effect as of 2014/2015, the President of Nigeria had the sole power to appoint and remove the Heads/ Chairpersons and Commissioners of the Economic and Financial Crimes Commission (“EFCC”) and the Independent Corrupt

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Practices Commission (“ICPC”), except for criminal misconduct reasons, and to appoint and remove the Inspector General of Police of Nigeria. These Appointment-and-Removal Options are conflicts of interest and are unconstitutional because they are overbroad; they violate the Checks-and-Balances principle on which the Nigerian Constitution is based. More importantly, these presidential powers enable the President of Nigeria to manipulate the EFCC and ICPC and the Nigerian Police for political purposes and personal vendettas. 7. Type 7: The regulatory jurisdiction of two or more government agencies overlap/intersect, such that enforcement by one agency (or omission of enforcement by such agency), may adversely affect the interests of the other agency; and/or create a Conflict of Interest. For example, in Nigeria, although the Economic & Financial Crimes Commission (“EFCC”) and the Independent Corrupt Practices Commission (“ICPC”) and the Financial Reporting Council (“FRC”) were created by federal statutes, their jurisdictions (and enforcement activities) and that of the Nigerian Police substantially overlap such that conflicts of interest and disputes about enforcement and jurisdiction are very likely. Many authors have criticized the independent existence of the EFCC, FRC and ICPC and have suggested that these agencies should be merged or eliminated.36 Fishim and Abuah (2008) and Soyele (December 2011) commented on these issues. Also, during the last fifteen years, the CBN and the NDIC (Nigerian Deposit Insurance Corporation) routinely clashed about jurisdiction.

36  See: Nwannekanma, B. (August 2011). Duplication of Enforcement Agencies Breeds Corruption. The Guardian, August 2, 2011. See: Fishim and Abuah (2008) stated in part: “We think that the EFCC Act of 2004 is a needless addition to the Corpus Juris. It does injury to the orderly development of our laws and adds nothing helpful to fight corruption. If the EFCC Act has new dimensions to fight corruption, such new dimensions should be added to existing legislation, as amendments or consolidations. Given the textual content of the EFCC Act of 2004, it has no place in our statute books. Its presence thereon is a political statement masquerading under a legal toga.…”

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8. Type 8: A senior government official who has been formally notified that he/she is statutorily unqualified for his/her job continues to work in office and is not removed. For example, a 2012 recommendation by the Nigerian House of Representatives37 stated as follows: “.........According to some of the ratified recommendations:…“That the appointment of Ms. Arunma Oteh as DG of SEC be terminated forthwith as her appointment is in violation of section 3(2) and section 38(1)b, 2 and 3; Section 315 of the Investment and Security Act, 2007 in that she did not have 15 (fifteen) years experience in the Nigerian Capital Market as required; That she has shown incompetence in the management of human and material resources at her disposal in SEC; lacked transparency in managing Project-50, regulatory failure in some of the recent mergers, acquisitions and approvals of transactions by SEC and general inability to carry along her staff, Board, and Management in decision making in SEC and questionable staff recruitment policies….“That with respect to the missing N8 Billion from the Union Bank Plc public offer, a case of fraudulent diversion having been established, the past Board and Management of the bank, the Chief Executive Officer of the Issuing House/Financial Adviser, the present members of the Board and Management, including the Managing Director of the bank Mrs. F. Osibodu should be investigated by the EFCC with a view to establishing and recovering the missing amount. Also, the management of AMCON and SEC including their Chief Executive officers should be investigated by EFCC considering their roles in attempting to conceal the fraudulent diversion and missing fund.............”. 37  OnTV Publisher (July 2012). “Representatives Want Trial to Be Set for the Heads of CBN, SEC, and AMCON”. Available at: http://www.ontvsite.com/stories/659/House-Of-­ Representatives-Want-Trial-To-Be-Set-for-the-Heads-of-CBN-SEC-and-AMCON. This article mentioned that members of a Committee of the Federal House Of Representatives recommended that the Heads of CBN, SEC and AMCON be subjected to court trials; and the article also stated in part:

…According to some of the ratified recommendations:… “That the transactions involving AMCON, Seawolf and Geometric respectively should be reversed by AMCON’s Management and Board and be investigated by EFCC for possible fraud and violations of existing regulations and laws….In its findings, the Committee’s report had revealed that the Asset Management Corporation of Nigeria, AMCON was a time bomb waiting to explode….The report also stated that the consolidation of banks in 2004/2005 contributed to the near collapse of the capital market and that most of the money raised for re-capitalization came from the Nigerian Capital Market….The Committee in the report noted that “it was shocked at the way and manner that the non-performing loans were being manipulated by AMCON. While some AMCON balances were marked at very ridiculous values, others were stated at values higher than their book values”….

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9. Type 9: A senior government official refuses to comply with orders of the Nigerian National Assembly in matters over which the National Assembly has jurisdiction and such government official is not prosecuted and continues in office without penalties. For example, a 2012 recommendation by the Nigerian House of Representatives38 stated in part: The House took the decision while adopting the recommendations of its Adhoc Committee on the near collapse of the Capital Market. The Report was laid before the House last Tuesday by the committee’s Chairman Ibrahim El-Sudi. The plenary session of the House adopted almost all the recommendations of the Committee….According to some of the ratified recommendations: “The Governor of Central Bank, Sanusi Lamido Sanusi; the Managing Director Asset Management Corporation of Nigeria (AMCON), Mustafa Chike-Obi; Director-General Securities Exchange Commission (SEC) Ms. Arunma Oteh are hereby cited for contempt of the House and they should be prosecuted by the Attorney-General of the Federation under sections 4 and 11 (b) of the Legislative Houses Powers and Privileges Act and Section-89 of the amended 1999 Constitution for r­efusing to produce documents as requested and demanded by the Adhoc Committee.

10. Type 10: The self-regulation of some financial institutions that in developed countries, would be strictly regulated by the Central Bank. For example, African Finance Corporation (AFC) is a self-­ regulated infrastructure finance company that supposedly complies with international best practices (i.e. IFRS, Corporate Governance, capital and leverage tests). AFC’s primary business is similar to wholesale banking. However, AFC’s shareholders are African countries, many of whom cannot afford the loss of their investments in AFC. The failure of AFC can have significant and adverse economic effects on some of these African countries. 11. Type 11: A member of the National Assembly or a government agency owns an interest in or sits on the BOD of a private company that the National Assembly or such government agency regulates (i.e. through one or more of its committees).

38  See: http://www.ontvsite.com/stories/659/House-Of-Representatives-Want-Trial-ToBe-Set-for-the-Heads-of-CBN-SEC-­and-AMCON.

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12. Type 12: An Order or regulation issued by a federal government agency is unconstitutional and can cause conflicts of interest partly or wholly because of its discriminatory nature. For example, in January 2011, the CBN issued the “Framework for the Regulation and Supervision of Institutions Offering Non-interest Financial Services in Nigeria” (the “NIFI Framework”). The CBN also released the “Guidelines on Shariah Governance for Non-interest Financial Institutions in Nigeria” and the “Guidelines on Noninterest Window and Branch Operations of Conventional Banks and Other Institutions” (collectively, the “Shariah Guidelines”). Several authors such as Ogbu (2013) have noted that the NIFI Framework and the Shariah Guidelines are unconstitutional because they violate Section 10 of the 1999 Constitution of Nigeria (the regulations promote Islamic values) and Section 42 of the 1999 Constitution of Nigeria (the regulations discriminate against nonMuslims). Ogbu (2013) also noted that the NIFI Framework and the Shariah Guidelines also violate Section 39(1) of the Banking and Other Financial Institutions Act of 1991 (“BOFIA”; as amended) because they permit the registration of banks that are qualified by religious and other terms. 13. Type 13: A monitoring mechanism that is created by federal statute causes substantial conflicts of interest. In most countries, the Audit Committees of BODs of companies are responsible for preventing fraud and corruption and supervising the annual/periodic external audits of the company. For example, the Audit Committee of “public” Nigerian companies is mandatorily required Section 359 (3 and 4) of the Companies and Allied Matters Act of 1990 (“CAMA”; as amended in 2004) (the “Audit Committee Statute”) and differs from the Audit Committees of UK and US companies. The Audit Committees of Nigerian companies are statutorily required to be made up of the BOD members (50%) and shareholders’ representatives (50%) in equal amounts. Thus, the statutorily required Nigerian Audit Committees represent major conflict of interests because: (1) BOD members in the Audit Committee essentially supervise themselves; (2) “insiders” (Executive Directors and the Managing Director) typically account for 30–50% of BODs of such Nigerian companies, and they have strong incentives to prevent the release of damaging information about the company’s financial position; and (3) shareholders representatives in the Audit

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Committee lack the requisite independence because they represent shareholders and have strong incentives to prevent the release of damaging information about the company’s financial position. Ofili (2013) criticized the Audit Committee Statute and noted that it conflicts with the “Code of Corporate Governance for Public Companies in Nigeria, 2011” (hereafter, the “Governance Code”) (the Audit Committee Statute requires the Audit Committee to present its recommendations on the Auditor’s reports to the shareholders’ annual general meeting instead of the BOD). Ofili (2013) also noted that the Governance Code lacks enforcement support because compliance with the Governance Code is not mandatory and recommended that the Audit Committee should consist of a maximum of six members and its majority should be “independent of the executive management”. However, such limited and qualified “independence” is insufficient, and ideally, the Audit Committee should consist of “independent” BOD Members and/ or “Independent” Persons (who are not BOD members) who are Chartered Accountants or have significant managerial experience in auditing (internal and external) and/or financial management and are also independent of external auditing firms (no affiliation with or ownership in auditing firms within the preceding ten years) and the subject company and its executives and shareholders. Thus, Section 359 (3 and 4) of the Companies and Allied Matters Act of 1990 (as amended) should be changed. Also given the foregoing, Sections 3 & 4 of the Companies and Allied Matters Act of 1990 (as amended) is unconstitutional because it violates the Substantive Due Process Doctrine (it can unfairly discriminate between any two companies that select different combinations of persons to their Audit Committees), the Equal Protection Doctrine (same) and the right to contract doctrine. “Independent BOD members” are defined here as persons who are non-employees, non-shareholders and non-creditors of and have no material relationship with the company and are not compensated by the company (except for direct expenses incurred for performing BOD duties). “Independent Persons” are Audit Committee members who are not BOD members, while “Outside BOD members” are non-­employees/consultants who are BOD members. 4. Type 14: the BOD members or senior executives of a government 1 regulatory agency directly participate in and approve the improper

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recruiting of their relatives and family members to work at the same government agency; or they directly participate in and approve the recruitment of their relatives into positions that they are not qualified for at the same government agency. 15. Type 15: Executives of companies that are regulated by government agencies make excessive or significant donations to political parties and/or to candidates for high political offices (there are no caps/limitations on the amounts and timing of such donations). During the Obasanjo, Yaradua and Jonathan administrations, individuals and companies that had recent or current business dealing with the federal and/or state governments routinely and publicly made large cash donations to PDP and other political parties. The Nigerian government does not require political parties to report or publicly disclose political donations/contributions and does not limit political donations/contributions. 6. Type 16: Executives of some companies are allowed to participate 1 in cabinet-level federal government meetings on a selective and discriminatory basis. For example, during 2007–2013, Aliko Dangote and Femi Otedola physically participated in the Nigerian President’s meetings of the Federal Executive Council (which should not have been open to select private companies). In the United States, that would have been the equivalent of allowing the CEOs of Monsanto and Procter & Gamble to participate in US Cabinet Meetings in the White House on a regular basis. At that time, companies owned by both Otedola and Dangote were doing business with, and were regulated by, state and federal governments in Nigeria. Each of Femi Otedola and Aliko Dangote have been beneficiaries of more than twenty years of significant, continuous and direct Nigerian (federal and state) government patronage in the form of contracts, subsidies, opportunities to purchase government assets/companies, import-waivers and more. 7. Type 17: During the Obasanjo, Yaradua, Jonathan and Buhari 1 administrations in Nigeria, the State Governor position was transformed into a territorial franchise with perverse and excessive powers formally and informally granted to state governors (both within the ruling political party and within the federal government and the state governments). Such powers included the powers to allocate funds from federal government (including funds statutorily allocated to Local Government Councils); award contracts (with and without due process); unilaterally nominate individuals for

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federal government positions and state government positions; unilaterally detain persons without due process (as in the case of the Imo State statute that was enacted in 2020) and more. During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, state governors routinely submitted lists of and directly lobbied for their nominees for federal ministerial positions and federal-agency executive positions. This was literally the only way for people to get such appointments; and it fostered and facilitated corruption, inefficiency, cronyism and partisan politics to the detriment of the general public. In May 2015, President-elect General Buhari rejected lists of ministerial candidates (candidates for Federal Minister positions) that were submitted by a group of state governors led by Governor Rochas Okorocha of Imo State. During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, many state governors routinely withheld or spent cash that was statutorily allocated to their local government councils, and some governors illegally sacked elected local government officials and/or dissolved the Local Government Councils (that is equivalent to the Governor of Texas State sacking the elected Mayor of Houston and dissolving the Houston City Council in the United States). In July 2014, the Supreme Court of Nigeria ruled that it was illegal for the Governor of Abia State to have sacked 148 elected local government officials during 2006 and that such action amounted to “official recklessness” by the governor (the Supreme Court ordered the Abia State Government to pay the sacked 148 elected officials their salaries and entitlements for twenty-three months). Obamwonyi and Aibieyi (February 2015)39 and Maduabuchi et al.  Obamwonyi and Aibieyi (February 2015) stated in part:

39

Local governments in Nigeria have become the weeping child of state governors. The elected officials have been rendered almost useless as they are at the beck and call of state governors. At every slightest opportunity, they sack or dissolve local governments at will. This is to the detriment of both the people who elected the local council officials and democracy. In an attempt to examine the entire scenario, this paper employed the historical and content analysis method in exploring the activities of state governors against local governments. The paper reveals that since the year 1999 when the fourth republic came on board, at least seven state governors have sacked or dissolved local government councils in the country. The paper further revealed that besides sacking of elected local government officials, state governors deny local government access to their statutory allocations, or deny them their full allocations; this is partly responsible for their non-performance. The paper recommends that the Supreme Court judgment which states that state governors have no power to sack elected local government officials be inserted into the constitution when

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(2014)40 noted some of the problems. The result has been conflicts amended and the local people who elected them be given power to sack them….Another glaring factor negating democracy in the local governments in the country is the issue of state governors working against the interests of local governments in their states to the detriment of development in their local governments. The state governors either misappropriate the funds of local governments or reduce them to perform other functions meant for the state government. For example, in November 2009, a total of N1.7 billion was allocated to twenty local governments in Ogun state, but only N700 million was released to them by the state governor and the amount was less than half of their financial requirement (Akaeze 2012). In the various states, the governors deduct primary school emoluments from the allocations to local governments. This ought not to be so…. See: Akaeze, A. (2012). How the Local Governments are Robbed of Funds. Newswatch Magazine, April 2, 2012, p. 15. See: Oladesu, E. (2014): “Fragile Councils groaning under fledging federalism”. The Nation, Tuesday, February 25, 2014, pp. 43 & 44. See: Ugborgu, V. (2012): “Tug of Politics” Newswatch Magazine, August 6, 2012, p. 22. See: Azuh, S. (n.d.). EFCC and Ex-Governors’ Parley: Another Reversed Hazard Ranking. http://www.gamji.com/article6000/NEWS7137.htm. 40  See: Maduabuchi, E., Akinsuyi, T. & Opesetan, T. (2014): “Tenure: Local Governments’ Triumph Over Governors”. Sunday Independent, July 27, 2014, pp. 15–17. According to Maduabuchi, Akinsuyi and Opesetan (2014), some of the Nigerian states where the state governors sacked elected local government officials or dissolved local government councils are as follows: 1. Abia State: On 16 June 2006, the governor dissolved the local government officials elected by the people and sacked 148 (one hundred and forty eight) local government chairmen and councilors. This action led to gamut of legal battle which brought about the Supreme Court judgment of Friday, 11 July 2014. 2. Imo State: In 2011, the governor, sacked elected local council officials as soon as he was sworn in on June 2011 as governor of the state. He later appointed Transitional Committee chairmen to run the affairs of the twenty seven local councils. This led to court action by the aggrieved officials. The court reinstated them, but he refused to obey the court order; he said he appealed the judgment. 3. Rivers State: In 2012, the governor suspended eleven local council chairmen indefinitely. The suspension was a fall out of the local government chairmen to attend a meeting called by the governor. Eleven out the 23 (twenty three) local government council chairmen refused to attend the meeting. 4. Delta State: The governor sacked the Chairman of Burutu Local government of Delta State, five months before the end of his first tenure in office. 5. Ondo State: In 2008, the governor of the state, on assumption of office and as part of his first official assignment in office, sacked the local government chairmen. He claimed that he had filed a suit against the election that brought them into office. 6. Ekiti State: On 29 October, 2010, sixteen local government chairmen were sacked by the governor, exactly nineteen days after he assumed office. Before the sack, Justice Cornelius Akintayo of Ado Ekiti High Court held that the State Independent Electoral Commission (SIEC), which organized the election was not properly consti-

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between state governors and Local Council ­Chairmen, lack of economic/social development and basic services within local government areas and resultant increases in crime (such as earnings management and securities fraud). In most states, the state governor was also the leader of the ruling political party, and that eliminated all checks-and-balances and facilitated corruption. Politics became and remains politics-of-self-promotion instead of politics-ofissues. State governors and their cronies routinely appeared at private, government and political-party events wearing exactly the same types of clothing (often with the governor’s picture/image on their shirts or upper parts of the clothing). On an almost daily basis, governors’ cronies routinely placed many full-­page advertisements in each of the top eight daily newspapers with governors’ pictures congratulating the governor for some occasion (sometimes as many as ten full-page advertisements in one major daily newspaper on one day for one governor). One of the resulting adverse effects was and is that the Social Capital, opportunity-­to-­ express and recognition (that in developed and thriving economies, is allocated to business executives, scientists/innovators and entrepreneurs who generate tax revenues) was instead allocated to Nigerian state governors. Almost all Nigerian state governors (who served between 1999 and 2019) have never been able to collect more than 30% (thirty percent) of all taxes due (except Lagos state and Rivers states), and have never generated sufficient “internal” revenues with which to manage their states. Most Nigerian state tuted. He therefore dismissed their application. But a judgment by the Court of Appeal held that Justice Akintayo erred as what he ruled on was not the case before his court. It was held that the case before the court was the constitutionality of the sack carried out by the governor, or lack of it. The judgement held that the governor lacked the power to sack the local government chairmen that were elected. 7. Bayelsa State: In 2013, five local government chairmen were sacked from office by the connivance of the state governor and the state House of Assembly. The local government chairmen had only six months to end their tenure of office before they were booted out. It was alleged that the local government chairmen committed crime of gross misconduct coupled with failure to give account of their stewardship to the House of Assembly. . Anambra State: The state governor refused to hold local government election while 8 in office. The only local government election he held was the one held a few weeks before the end of his tenure. 9. Edo State: In late October 2012, the state House of Assembly connived with the governor to sack the eighteen local government executives of council transition committees….

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governments rely on monthly hand-outs from the federal government for more than 65% of their state’s revenues (except Lagos, Edo, Cross River, Delta, Rivers and Akwa Ibom states); and more recently, they have been issuing local bonds. It has been rumored that the state governors routinely controlled the state judiciary through the appointments of judges, by withholding cash budgeted for the state judiciary system and by controlling the allocation of security personnel to individual judges, courts and judiciary facilities. During 1999–2014, it was widely rumored that some state governors also controlled their state legislatures through gifts to legislators, awards of contracts to cronies/relatives of state legislators, appointments of legislators and their relatives/cronies to boards of state agencies and more. As of September 2014, the EFCC and other government agencies were investigating at least sixteen current and former state governors (who served between 1999 and 2014) for fraud, embezzlement and other misconduct. As of September 2006, the EFCC was investigating thirty-one of Nigeria’s thirty-six state governors for Corruption.41 See: Ogunseye (2013).42 On or around June 18, 2015, the EFCC arrested Ikedi Ohakim, the former governor of Imo State in connection with fraud and other misconduct. In October 2015, the EFCC arrested Mr. Akpabio, the former governor of Akwa Ibom State in connection with fraud and other misconduct. In June 2015, the government of Niger state filed a petition at the EFCC against Mr. Aliyu, the former Governor of Niger state. According to the Nigerian

41  See: BBC: “Nigeria governors in graft probe”. http://news.bbc.co.uk/2/hi/ africa/5387814.stm. 42  See: Ogunseye, T. (January 6, 2013). EFCC, ICPC Probe Twelve Governors for Massive Fraud. The Punch (Nigerian newspaper). http://www.punchng.com/news/efcc-icpc-­ probe-12-governors-for-massive-fraud/. This article stated in part:

No fewer than twelve governors are being investigated by the Economic and Financial Crimes Commission and the Independent Corrupt Practices Commission for massive fraud and misappropriation of public funds in their states, a Sunday Punch investigation has revealed. Our correspondent learnt that the discreet investigations commenced after the anti-graft agencies received several petitions against the twelve governors. While the EFCC is investigating eight governors, the ICPC is probing four. It was gathered that most of the petitions were received after the said governors had celebrated their first year in office.

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Labor Congress (NLC),43 as of June 2015, at least eighteen (out of thirty-six) state governments in Nigeria were technically bankrupt and were owing several months of staff salaries—the affected states were Abia, Akwa Ibom, Bauchi, Benue, Cross River, Ekiti, Imo, Jigawa, Kano, Katsina, Kogi, Ogun, Ondo, Osun, Oyo, Plateau, Rivers and Zamfara states. In June 2015, the Director-General (Mounir Gwarzo) of the Securities and Exchange Commission of Nigeria (SEC) stated that the level of indebtedness of these state governments was not reflected in the amount of infrastructural development that exist in each such insolvent states—which implied that government money had been stolen. The situation was the same as far back as 2003 during the Obasanjo administration when state governments were technically bankrupt and owed staff salaries because they had signed away their future statutory allocations to contractors whom they owed (these contractors were paid directly from the source of the state governments’ monthly cash allocations from the federal government). During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, most of the Franchisee Governors seemed to emphasize individuals’ stateof-origin in their hiring of political appointees and awards of contracts so that in most states, most or a significant percentage of commissioners, government appointees and contract-awardees were indigenes of the state. This pattern was detrimental to the principle of national unity (in hiring and awards of contracts), and was a contrast to past military state governments which were vastly more diverse (each state governor and some of his/her senior advisors were typically indigenes of different states in Nigeria).

43  See: “State Governments: Another Cycle of Non-Payment of Salaries to Begin Soon”. Thursday, April 9, 2020. https://www.proshareng.com/news/State%20and%20Local%20 G o v t s % 2 0 / S t a t e - G o v e r n m e n t s % 2 D % 2 D A n o t h e r- C y c l e - o f - N o n - P a y m e n t - o f Salaries-to-Begin-­Soon/50369. See: “Eighteen states bankrupt, can’t pay workers’ salaries”. Vanguard, June 15, 2015. http://www.vanguardngr.com/2015/06/18-states-bankrupt-cant-pay-workers-salaries/. See: “428 agencies can’t pay November salaries—Federal Government. …As Senate laments lopsidedness in budgetary allocation to MDAs … Urges FG to Employ the Youths”. By Henry Umoru. https://www.vanguardngr.com/2020/11/428-agencies-cant-pay-novembersalaries-fg/.

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18. Type 18: During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, funds budgeted for law enforcement and training were routinely misused or diverted. A May 11, 2015, report in Business Day (newspaper) stated that N1 billion (one billion Naira) that was budgeted to be spent by the Financial Reporting Council (FRC) on training for IFRS accounting standards (the IFRS Academy Fund) had been misused and depleted to about N800 billion. 19. Type 19: During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, the ruling political party (PDP) allocated federal political positions by “zoning” which meant that positions had to be allocated to individuals based on their state-of-origin in the six geopolitical regions in Nigeria. This ensured that in many instances, mediocre individuals were appointed to critical positions in the federal government, which resulted in inefficiency, poor leadership, low enforcement, fraud and crime. The PDP often extended this costly “zoning” philosophy to state government positions (including Governor positions) in most of the state governments that they controlled. The result has been increased corruption and cronyism; deep divisions among towns and groups within states; reinforcement of the “Franchisee Governor” model; bitterness and tribalism; bias in allocation of state government resources and so on. 20. Type 20: During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, senior officers of the CBN and NDIC routinely issued improper directives to banks, and the CBN and NDIC routinely quarreled about jurisdiction. As of August 2014, most of the senior officers of the CBN were being investigated by various Nigerian government agencies for various types of misconduct (and especially for possible embezzlement of the alleged missing US$20 billion that was not accounted for by various federal government agencies). 21. Type 21: The appointment of former employees and officers of the IMF and the World Bank to senior-level or ministerial-level positions in the Nigerian government (federal, state or local governments) is a major conflict of interest. These individuals typically have earned, or earn or are due to earn pension benefits from the World Bank or the IMF. The World Bank and IMF have provided loans and financial advice to the Nigerian government. Historically, such loans have often been granted with attached harmful “Positive

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Economic Sanctions”; the loans and advice have often been detrimental to Nigeria, including the Structural Adjustment programs of the 1980s and required devaluations of the Naira and other World Bank conditions, advice and requirements from the 1980s to the present day. 22. Type 22: During the Obasanjo, Yaradua and Jonathan administrations in Nigeria, government investigative or enforcement officers were physically threatened and/or harmed. For example, on September 14, 2010, the head of the Forensic Unit of the EFCC, Abdullahi Muazu, was assassinated in Kaduna, Nigeria. Muazu had been actively involved in the investigations and court trials of several CEOs and Managing Directors of banks44 in Nigeria. 3. Type 23: During the Obasanjo, Yaradua and Jonathan administra2 tions in Nigeria, it was often alleged that government officials routinely stole government assets. For example, in May 2015, sixteen senior officers of the CBN and some employees of banks were arrested and charged in Court by the EFCC for stealing N8 billion (eight billion Nairas) of damaged and condemned Naira currency notes which were supposed to have been physically destroyed. They allegedly replaced the stolen currency notes with newspapers that had been cut to the sizes of the currency notes and packed in boxes. 4. Type 24: It has been alleged that members of the Nigerian legisla2 ture have participated in, or knowingly facilitated corrupt practices. Researchers such as Otusanya et al. (2015) have documented the role and participation of the Nigerian legislature in corrupt practices. Also, members of the Nigerian Legislature effectively set their own salaries and allowances which is a conflict of interest. A significant portion of the annual budget of the Nigerian federal government is allocated toward expenses of the Nigerian federal legislature—which clearly is too expensive for Nigeria. According to Tables 6.1 and 6.2, the statutory allocation to the National Assembly exceeds that of twenty-one states (out of a total of thirtysix states) and is guaranteed, compared to the monthly allocation of state governments which is disbursed only if states meet pre-set performance conditions. 44  See: “Gunmen kill EFCC’s forensic team leader in Kaduna”. NEXT.  September 15, 2010. http://234next.com/csp/cms/sites/Next/News/5619080-147/gunmen_kill_ efccs_forensic_team_leader.csp.

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Table 6.1  Comparison of the Nigerian government’s statutory allocations to the Nigerian National Assembly with those made to twenty-one Nigerian state governments

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Table 6.2  Rankings of states’ liquidity

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25. Type 25: In December 2015, a news company reported that the Presidency and the DSS45 had stopped the payment of salaries of federal judges presumably in order to coerce the judges and that DSS agents were suspected to have bugged the cellphones of some federal judges. 26. Type 26: In June 2015, the Chief Judge of Nigeria publicly stated that there were corrupt judges on the bench in Nigeria and that the judiciary was working hard to eliminate such judges. In November 2015, the Chief Judge of Nigeria46 stated that the ­federal government didn’t have the political will to prosecute high-­ profile corruption cases. In 2016, the DSS raided the homes of Supreme Court judges and high court judges and found stashes of cash (both local and foreign currencies), and some of those judges were arrested and prosecuted. 27. Type 27: In 2015, Ngozi Okonjo-Iweala (the former Minister of Finance in both the Obasanjo and Jonathan regimes) became a Senior Advisor at Lazard Freres (a financial advisory company). However, during her tenure as Minister of Finance, Okonjo-Iweala awarded at least one advisory contract to Lazard Frères for which the Nigerian government paid that company at least US$2 million. 28. Type 28: In November 2015, Sambo Dasuki (former National Security Adviser in the Jonathan Administration), Bashir Yuguda (the former Minister of State for Finance in the Jonathan Administration), Attahiru Bafarawa (the former governor of Sokoto state in northwest Nigeria), and Raymond Dokpesi (a businessman and the Chairman of DAAR Communications) were arrested by the EFCC47 for questioning in connection with allegations of awards of fake contracts in the amount of at least

45  See: Presidency Halts Salaries to Federal Judges—DSS Begins Harassment, Bugging of Judges Phone lines. http://247ureports.com/presidency-halts-salaries-to-federaljudges-dss-begins-harassment-bugging-of-judges-phone-lines/. 46  See: No political will to prosecute high-profile corruption cases, says CJN. December 1, 2015. http://www.vanguardngr.com/2015/12/no-political-will-to-prosecute-high-profilecorruption-cases-says-cjn/. 47  See: “High-profile Arrests Over Nigerian ‘Fake’ Arms Deals”. http://news.yahoo.com/ high-profile-arrests-over-nigerian-fake-arms-deals-201738702.html.

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US$2 billion for the purported purchase of arms by the Nigerian Army for combat against the Boko Haram group in northern Nigeria. 29. Type 29: In November 2015, some of the DSS operatives (federal security agents) that were attached to Bukola Saraki48 (the federal Senate President) were arrested for robbery—they stole N310 million from a Bureau De Change in Abuja, Nigeria. 0. Type 30: Illegal transfers of monies by federal government agencies 3 to either other government officials or private entities/persons. In 2015, Okonjo-Iweala (the former Minister for Finance under the Jonathan administration) publicly admitted spending $2  billion from Nigeria’s Excess Crude Oil account based on directives of former President Jonathan. In November/December 2015, Okonjo-Iweala admitted to giving Sambo Dasuki (the former National Security Advisor to former President Jonathan) the sum of $322  million based on directives from former President Goodluck Jonathan. In 2015, Godwin Emefiele (the Central Bank Governor) publicly admitted that the Central Bank of Nigeria gave billions of Naira to Dasuki based on directives from President Jonathan (for use in purchasing arms and prosecuting the war against Boko Haram in Northern Nigeria). A significant portion of those funds were given to Dasuki in cash in violation of Nigeria’s then existing anti-money laundering statutes. In addition, all such transfers of monies to Dasuki were illegal because those funds were not approved or appropriated in any way by the National Assembly of Nigeria (the federal legislature). Similarly, the amounts of money that were approved by the Ministry of Finance and paid to oil/gas marketing companies as subsidies were more than twice the amount that the National Assembly had formally appropriated for such subsidies and thus constituted illegal transfers. Emefiele and Okonjo-Iweala knew or should have known that those transfers were illegal and they had the option to resign. 48  See: “N310 Million Robbery: Arrested DSS Agents Attached to Me—Saraki”. By Ismail Mudashir; December 9, 2015. http://www.dailytrust.com.ng/news/general/n310m-­ robbery-­arrested-dss-agents-attached-to-me%2D%2Dsaraki/123444.html. See: “BDC Robbery: Saraki Not Owner of N310m, Say Police”. December 10, 2015. This Day (Newspaper). http://www.thisdaylive.com/articles/bdc-robbery-saraki-not-owner-ofn310m-say-police/227614/.

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31. Type 31: Theft of funds—in January 2016, the federal Minister of Information, Alhaji Lai Mohammed, announced that between 2006 and 2013, 55 well-placed Nigerians stole N1.34 trillion and that using World Bank rates, 33.33% of those stolen funds would have been enough to provide 635.18 kilometers of roads, build 36 ultra-modern hospitals per state, build 183 schools, provide education for 3974 children from primary to tertiary level at 25.24 million per child, and build 20,062 units of two-bedroom houses.49 The federal minister said fifteen former governors stole N146.84 billion; four former federal ministers stole N7 billion; twelve former public servants both at federal and state levels stole more than N14  billion; eight other Nigerians in the banking sector stole N524 billion, while eleven businessmen stole N653 billion. Furthermore, ineffective supervision by the Nigerian SEC, the NSE, the NDIC and the CBN has resulted in a culture of brazen earnings management by banks in Nigeria. During every year since 2007, Nigerian banks were repeatedly fined by the CBN for violations of various statutes including BOFIA.  Most modern stock exchanges have corporate governance codes and ensure that listed firms comply with accounting rules. Thus, it’s surprising that both the London Stock Exchange and the Nigerian Stock Exchange did not sanction or de-list any of the non-compliant Nigerian banks, or even suspend their executive officers for habitual non-­compliance with IFRS accounting standards and banking regulations.

6.7   Federalism, Optimal Voting and Optimal Political Geoboundaries See Chap. 5 in this book, which introduces a model of demarcation of Governing-Units at the local and state government levels. To date, the debate about the effectiveness of foreign aid, sovereign default risk and associated corruption revolves around federalism50 and constitutional powers and most of the articles and books on the subject have not addressed the following issues: 49  See: “55 Nigerians stole N1.34trn in 8 years—FG”. http://www.vanguardngr. com/2016/01/602271/. 50  See: Shah (2014), Bernardi et al. (2013), Purfield (2004), Blanchard and Shleifer (2001), Weingast (February 2000), Bird and Ebel (n.d.), Bardhan and Mookherjee (2006), DíazCayeros (2006), Eaton (2004), Wibbels (2005), De Rugy (March 17, 2010) and Radin (2007).

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1. The constitutional power of state and local governments to negotiate and accept foreign aid, or to issue debt and securities. 2. The nature of fiscal federalism (as applied in the country) and the constitutionally defined economic relationship between the federal government on the one hand and the state or local governments on the other hand but with respect to only Foreign Aid and Foreign Investment. 3. The efficiency of government at the state, federal and local government levels, with regards to the uses of Foreign Aid. 4. The effectiveness of the formula for the allocation of “revenues” among the federal, state and local governments which can affects both the efficiency of foreign aid (traditional aid, FDI and FI) and sovereign default risk (e.g. in Nigeria, where the government derives more than 60% of its revenues from oil and gas). 5. The allocation of power over government spending to the executive and legislative branches of the central/federal government and same branches of the state governments. This refers not only to the budget process, but also to the actual allocation of contracts to specific persons/companies, and to the approval of infrastructure projects, and disbursement of federal funds for non-routine expenditures. 6. The degree of accountability of the executive branch of government to the legislative branch of government. 7. The power of federal government agencies to preempt or limit transactions or rule-making by state and local governments. 8. The constitutionally defined powers and Social Capital of federal government agencies that are in charge of monitoring and preventing corruption and theft (such as the EFCC in Nigeria) also affect the effectiveness of foreign aid. 9. The constitutionally defined Police Powers of the central/federal government. 10. The optimal geographical demarcation of states in a country. 11. The optimal allocation of non-cooperating communities to a state in a country remains a major question which has not been addressed in almost all democracies in the world. Tate (1990) analyzed the constitutionality of state governments’ attempts to regulate Foreign Investment. Persson (2002) analyzed the extent to which political institutions shape economic policies.

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Many countries have bi-cameral risk regulations wherein banking, credit/loan, insurance and securities laws exist at both the federal and state levels (such as in the United States, Mexico, Brazil, Australia and Canada) and sometimes even at the local government levels. In such countries, the enactment and enforcement of risk regulations and constitutional interpretation by government enforcement agencies heavily depend on the geographical demarcations of state government boundaries and local government boundaries. In most countries, the geographical demarcation of states and local government areas and boundaries for senatorial and lower-house elections are critical elements of sustainable growth because they often determine taxation, allocation of capital by banks, government spending, applicability of regulations (environmental, financial etc.), preemption of state/federal laws in litigation, applicability of state government constitutions (distinct for federal constitutions), facility location decisions of companies and government agencies, corporate spending, job creation, household spending, voting patterns and so on. In most developed and developing countries, there is no rational economic basis for the geographical demarcation of states and local government areas and boundaries for governorship, senatorial and lower-congress elections. Most of these geographical demarcations are very rigid and don’t respond to changes in populations, national/regional economies and the political preferences of indigenes.

6.8   Conclusion Until the dominant model of foreign aid (loans and grants to federal governments) is changed, and until the strong similarities among FDI, FI and foreign aid are fully understood, until there is a better understanding of the often symbiotic relationships among constitutions, foreign aid, sovereign debt policy and systemic risk, most criticisms of the effectiveness of foreign aid are premature at best. Even developed countries receive foreign aid in the form of FDI, FI and the in-migration of highly-skilled labor. Constitutions can have a significant effect on the effectiveness of foreign aid, sovereign debt policy and systemic risk.

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Index1

A Africa, 36, 318 ASEAN, 9 B Balkanization, 88 Behavioral Bias Indicators, 19–20 Behavioral expectations, 93, 95 Behavioral macroeconomics, 93, 95, 212n4 BlackRock Geopolitical Risk Indicator (BGRI), 84, 85, 91 Bond markets, 218, 219, 331, 332 Bonds, 4, 7, 9, 36, 112, 116n13, 141, 142, 213, 214, 266, 276, 317, 319, 324, 332–333, 336, 337, 340, 344, 345, 350, 361 Bubbles and crashes, 5

C CEE countries, 8, 88 China, 1, 5, 7–9, 17, 25, 36, 71, 72, 85–89, 100, 106, 110, 122, 150, 169–184, 317, 318, 327, 333, 347, 348 CIS countries, 5, 9, 88, 90 Commodities markets, 98, 120, 121 Competition, 15, 16, 85, 89, 137–188, 209n1, 233, 260, 263, 275n40 Complexity, 19, 23n18, 117n13, 146–149, 187, 262, 316 Complex systems, 4, 6, 19, 31, 92–97, 100, 146–149, 207–250, 262, 316 Constitutional economics, 4, 17–20, 32, 138, 207 Constitutional political economy (CPE), 2, 4, 12, 13, 15, 16, 19–26, 34, 88, 96, 112, 138, 187, 313–371

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. I. C. Nwogugu, Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume I, https://doi.org/10.1007/978-3-030-71415-4

383

384 

INDEX

Constitutions, 1, 2, 4, 5, 7, 17, 20, 24, 33–36, 34n28, 106, 108, 112, 114, 138, 257–302, 313, 314, 314n1, 316, 317, 327–369, 371 Contagion, 93–95, 97 Convergence, 17, 83 Corporate governance, 19, 94, 98–101, 273, 322, 326, 341n27, 345, 346, 348, 350, 351, 354, 369 Corporate Location Incentives, 207–250 Cross-Border Spillovers, 1, 12–16, 31, 83–122, 212–215, 260–261, 273, 317–319, 327 E Eastern Europe, 9, 10 Economic competition, 15, 137–197, 233, 260, 263 Economic crises, 12–16, 71, 72, 328n19 Economic forecasting, 32, 137 Economic modelling, 263, 263n20 Economic models, 5 Economic psychology, 1, 4, 5, 10, 17–19, 25–27, 31, 32, 92, 137–188, 207–250, 260–261, 267, 277, 322, 326 Economic sanctions, 4, 19, 72, 89–91, 98, 100, 102, 110 Emergence, 12–16, 20–26, 84–88, 92–111, 260–261, 263–286, 320–327 Emerging markets, 1, 9, 13, 15, 16, 86, 90, 93, 96–100, 102, 110, 141, 142, 144, 145, 170, 214, 215, 258, 260–261, 264, 266, 267, 274, 276, 279, 300,

317–319, 324, 325, 331, 334, 342n28, 345–348 Equal Protection Doctrine, 26, 179–181, 216, 220–222, 224, 231–233, 236–238, 291, 356 Europe, 4, 18, 36, 103–111, 169, 224–228, 249, 258, 318 F Federalism, 5, 10, 22, 22n16, 23n18, 111, 112, 141, 259, 286–302, 313, 318, 333–337, 347, 369–370 Financial Accelerator Theory, 25 Financial crises, 16, 68, 71, 101 Financial markets regulation, 330 Financial Stability Board (FSB), 107, 117n15, 118n18 First Amendment rights, 167, 168 Fiscal policy, 7, 94, 176 Foreign Aid, 9, 34–36, 35n30, 86, 96, 99, 102, 141, 144, 145, 213, 215, 258, 260–262, 265–268, 273, 276, 287, 288, 299, 313–371 Foreign Commerce Clause, 155–157, 169, 182–185, 237, 238 Foreign direct investment (FDI), 9, 34, 36, 96, 99, 100, 102, 141, 144, 145, 212, 214, 215, 258, 260, 261, 263, 265, 266, 273, 276, 287, 297, 299, 313–315, 317–319, 325, 332, 337, 340, 371 Foreign exchange reserves, 11 Foreign policy, 10, 85, 91, 214, 276, 325 Freedom-of-Speech Doctrine, 186, 187 Free Speech doctrine, 160

 INDEX 

G GARCH models, 95 Global digital economy, 1, 2, 4, 5, 10, 17–19 Global financial crisis, 1, 10, 18, 70, 83, 106, 111, 259, 344n31, 345 Global sustainable growth, 4, 92 Government-Size, 258, 261–272, 314, 334 Granger Causality, 93 G20/G30, 83–122 I India, 5, 6n2, 7, 9, 10, 13, 72, 85, 86, 88, 89, 106, 108, 109, 112, 117n15, 122, 170, 318, 321, 326, 340 Information content, 27, 158 Information gap, 34 International business, 98 International Monetary Fund (IMF), 36, 83–122, 117n15, 317, 363 International trade, 6, 9, 10, 85, 86, 88, 93, 99, 120, 121, 260, 261 International trade agreements, 266, 276 Interstate Commerce Doctrine (US Only), 240–242 J Japan, 6n2, 7–9, 13, 36, 72, 100, 117n15, 122, 184, 317, 318 L Labor, 1, 32, 33, 89, 120, 121, 147, 148, 215, 269, 271n39, 277, 278, 299, 320–322, 325, 326, 333, 371

385

Labor regulation, 148, 249, 263–272, 277–278, 321, 322, 326 Latin America, 36, 85, 103–111, 169, 318, 334 Learning, 111, 115n13, 153 M Macroeconomics, 6, 19, 20, 25, 89, 93, 95, 120, 144, 166, 272, 277, 343 Market volatility, 1, 5, 27, 93, 94, 98, 273, 274 Mechanism design, 10, 20–26, 149–150 Monetary policy, 7, 25, 32, 85, 94, 122, 137, 176 Multiple listing systems (MLS), 32, 137, 138, 140–164, 184, 187 Multiplier-effects, 93–95, 302 N Nationalist movement, 83, 103–111 Nigeria, 5, 8–10, 33, 34, 85, 87–90, 265, 267, 279, 287, 288, 297–301, 318, 335–337, 339, 340, 341n27, 341–342n28, 342, 345–352, 354, 355, 357, 358, 361–364, 367–370 Nonlinear, 97, 98, 260–261 Nonlinearity, 12–16, 84–88, 92–111, 262–286, 320–327 O Oligarch Government, 87 Optimal voting, 19, 257–302, 314, 369–370

386 

INDEX

P Panel data, 97 Panel Vector Autoregressive model (PVAR), 97 Peer effects, 97 Pension funds, 34, 36, 313–371 Political decisions, 86, 97 Political power, 83, 91 Political risk, 94, 95, 266, 276 Portfolio diversification, 96 Procedural Due Process Doctrine, 181–182, 228–231 R Real estate markets, 1, 5, 137–188, 207, 212 Real estate taxes, 32, 207–250 Real estate websites (REW), 32, 143, 148, 158, 166–169 Redistricting, 285, 287, 289, 291, 292 Regionalization, 88 Regulatory capture, 221n9, 247 Rent control, 32, 149, 152, 169–184, 187, 244 Right-of-association doctrine, 160–161 Right-to-contract doctrine, 161–162, 223–225, 238–250, 356 Risk management, 4, 5, 19, 112, 115–116n13, 323, 327 Risk-perception, 27, 95, 97, 99, 100, 102, 145, 260, 261, 289, 321, 323, 325, 327 Risk regulation, 2, 5, 22, 33, 34, 106, 111, 114, 114n13, 265, 267, 268, 286, 332, 371 Risk taking, 97, 99, 101, 102, 260, 263, 338, 339 Rule of Law, 88, 146–149, 262, 316 Russia, 8–10, 17, 32, 85, 86, 88, 89, 110, 114, 117n15, 184

S Separation of Powers Doctrine, 23 Shocks, 1, 9, 90, 91, 95, 98, 119–121, 264, 334 Sovereign, 1, 34, 34n28, 36, 85, 93, 94, 97, 122, 258, 265–268, 276, 287, 313–371 Sovereign debt policy, 34, 299, 313–371 Sovereign Wealth Funds, 34, 313–371 Standards-of-Review, 12 Stare decisis doctrine, 26–27 State action, 21, 23, 24, 153, 154, 156–157, 162–164, 175, 175n57, 180, 181n64, 182, 182n66, 183n67, 185, 220–223, 228, 231, 233, 236, 239, 243, 247, 248 Stock markets, 2, 16, 72, 93, 94, 98, 212, 218, 219, 331, 340 Substantial Control Theory, 153–154, 158, 161, 162, 164 Substantial Inducement Theory, 24, 154, 157, 157n17, 158, 160–164, 161n31, 162n35, 163n39, 175, 175n57, 181–183, 181n64, 182n66, 183n67, 185 Substantive Due Process Doctrine, 181–182, 228–231, 240–242, 291, 356 Substitution Theory, 24, 154, 157n17, 158, 160–164, 161n31, 162n35, 163n39, 175n57, 181n64, 182n66, 183n67 Sustainability, 4, 5, 11, 13, 15, 16, 19, 27, 32, 88, 89, 91, 141, 207, 263, 265, 274, 302 Sustainable growth, 4, 141, 207, 265 Systemic risk, 6, 20, 25–27, 32, 83, 86, 92, 97, 112, 114n13, 116n13, 118n18, 137, 138, 142, 149, 150, 170, 299, 313, 317, 327, 330–331, 334, 371

 INDEX 

T Tail risk, 97 Technology, 94, 115n13, 166, 218, 260, 261 Trade policy, 261 Transition economies, 4, 5, 17, 31, 83–122 Transmission channels, 96, 142, 327 2010–2020 Recommendations, 31, 32, 83, 84, 111–119 U Unilateral Sanctions, 88 United Kingdom (UK), 2, 6n2, 8, 13, 20, 32, 33, 87, 108, 112, 117n15, 147, 215, 318, 321, 326, 327, 344n31, 355

387

United States (USA), 1, 4–11, 6n2, 13, 32, 33, 85, 87, 103–111, 122, 142, 147, 152, 153, 155, 164, 178, 210, 215, 219, 224–228, 246, 247, 249, 265, 289–290, 321, 326, 338, 340, 358 US Dollar, 7–9, 92n2, 107, 367, 368 US Supreme Court, 23, 24, 26, 168, 171, 177, 178, 210, 235, 236, 245, 246, 289, 291 V Volatility, 1, 4, 5, 27, 35n30, 93–95, 98, 219, 273, 274, 315n3 Voting districts, 257–302, 314