Poverty ain’t what it used to be, nor for that matter where it used to be either. As the nature and location of poverty continues to change, the illicit financial flows agenda becomes all the more important for development.
Historically, the vast majority of people living on less than a dollar a day (or $1.25, where the World Bank’s line is now drawn) did so in low-income countries (LICs); that is, in countries with per capita gross national incomes less than $1005. So: income-poor people lived in income-poor countries. Simples. And true: twenty years ago, 93% of those in this extreme poverty lived in LICs.
‘Give a man a fish’, goes the old saying, ‘and he’ll eat for a day. Teach him how to fish and he’ll eat forever.’
In its time, this was a progressive message, arguing for sustainable development approaches over simple aid-giving, but it now sounds rather dated. Worse than the apparent gender bias is the underlying assumption that development solutions involve ‘us’ teaching ‘them’ how to avoid being poor.
The thrust of Christian Aid’s work on financial integrity, and that of the Task Force and its other members, is quite different. Our work, not least in generating estimates of the scale of developing country losses due to a lack of financial transparency, has been motivated by a desire to see developing countries and their citizens engage directly in order to challenge abuses – and in doing so, to pursue improvements in governance alongside growth in the revenues available for public expenditure to support health, education and wider development outcomes. These estimates – not least those of Global Financial Integrity – have, over the last five years, become increasingly influential. Just last week, US Secretary of State Hilary Clinton cited estimates of illicit outflows from developing countries in excess of $1 trillion a year.
It’s an interesting moment of flux for Task Force issues, especially if you’re sitting in London. On the one hand, you can see a key piece of UK legislation on financial integrity at serious risk; on the other hand, you can see the potential for a powerful step forward at the European level. Both are still in the balance, so if you’ve got any political pull at all – now’s the time to choose.
The nature of both discussions points to a broader point, however, which is this: national- or regional-level responses to financial integrity issues will always risk a competitive dynamic, in which legislators seek to gain short-term economic advantages by undercutting their rivals with successively weaker integrity measures. This risks a competition to the bottom, instead of a progressive raising of standards that could come through multilateral measures that create a level playing field through mandatory minimum for issues such as corporate transparency.
In the UK, the much-delayed implementation of last year’s Bribery Act is now close – but the same discussions with business that have held up implementation have also resulted in a ‘guidance note’ that appears to limit the scope and power of the Act from what was widely understood when the legislation was passed with strong cross-party support at the end of the last Parliament.
OK, it seems a bit premature to be thinking about Mexico’s G20 before we’re anywhere near November 2011 and Paris. But there are good reasons to start thinking about 2012 – and good reasons to think that it could be the first G20 that puts financial integrity and the combating of illicit flows right up front and centre.
There are important measures that can be pursued in 2011, and pressure must be maintained on President Sarkozy to deliver concrete actions to back his administration’s strong words on the damage done by secrecy in tax havens. With luck, however, the French G20 will be the last whose agenda is largely driven by the global financial crisis – and this creates the opportunity for Mexico to run the first G20 with a clear focus on long term development, and the necessary structural and systemic changes.
What could a Mexican G20 agenda look like? Well, we can get some ideas if we consider a range of evidence on the problems that face the country itself, on policy directions it has pursued and on its approach to G20 summits thus far.
Last month, Global Financial Integrity published new estimates showing the scale of illicit flows that Mexico faces – specifically, that the country lost around $460 billion between 2000 and 2008. This number is made all the more dramatic when you think that it does not take into account illegal, cash-only transactions or smuggling-related activities.
While the headlines are full of information that governments did not intend to release, European ministers of finance including UK Chancellor George Osborne last week agreed to a draft directive outlining a powerful new basis for the automatic exchange of tax information between jurisdictions – a directive which, if it does what it says on the tin, would be a dramatic step towards the end for European tax havens.
This Tuesday 7 December there was a meeting in Brussels of the Economic and Financial Affairs council (EcoFin, effectively Europe’s council of finance ministers). The press release (still provisional) shows an agenda that covered everything from the Irish bailout to climate finance, but importantly included the following: “political agreement on a draft directive aimed at strengthening administrative cooperation in the field of direct taxation so as to enable the member states to better combat tax fraud. [The Council] will adopt the directive without further discussion at a forthcoming Council meeting, after finalisation of the text.”
The significance of this agreement should not be understated. The additional press release devoted specifically to this item contains further detail. The draft directive will “overhaul… directive 77/799/EEC, on which administrative cooperation in the field of taxation has been based since 1977.” And how! According to the Ecofin press release, the changes represent nothing less than a fundamental rethink of the approach to information exchange.
The biggest sport in the world is football. Soccer, that is. Unfortunately, it also offers a paradigmatic example of the poisonous effects of a lack of financial integrity.
There are a great many people with a stake in the outcomes of football – for example, the World Cup held in South Africa earlier this year has verified viewing figures of 715 million women, men and children (around one in ten of the world’s population), having been broadcast in 214 countries. The sport’s world governing body FIFA estimate there were 26 billion World Cup match viewings – enough for each person on the planet to have seen three games and more.
Because of the interest of so many people, there is also a great deal of money in the game. This first World Cup to be held in Africa has been the most profitable of all time – for FIFA. The governing body made around $3.4 billion, tax free. South Africa, in contrast, incurred costs of around five times that. As the Tax Justice Network reported, the South Africa Revenue Service explained why their own revenues were never likely to cover these costs: “The concessions we had to give to FIFA are simply too overwhelming and demanding for us to have material monetary benefits.”
The Task Force on Financial Integrity and Economic Development has a problem. There are two common reactions when people hear about it. The first is ‘Snappy title.’ The second is ‘Financial integrity? What’s that?’
Now, it’s true that the title is on the long side, but this shouldn’t in itself be a problem – if the name gives people an immediate understanding of what we do, and why it matters. And to be fair, the focus of the Task Force is – well, exactly what it says on the label. Each of the five recommendations we pursue aims to contribute to a globalisation with greater financial integrity, to support a more just and inclusive pattern of economic development.
No, it’s the second reaction people have which is the problem. ‘Financial integrity? What’s that?’ It’s a problem for the Task Force if people aren’t clear what we do; but it’s a much bigger problem if we’re not able to communicate clearly the nature and importance of the goal of financial integrity. And if people don’t immediately understand what is meant by ‘financial integrity’, it’s probably unlikely that they’re going all out to support it…
More than that, a lack of clarity will undermine progress even where there is support. The coordinating committee of the Task Force, for example, includes Transparency International (TI) and the Tax Justice Network (TJN). TI blazed a trail in focusing international attention on weaknesses of financial integrity among public officeholders in developing countries, through their high-profile Corruption Perceptions Index. More recently, TJN (in partnership with Christian Aid) have published their Financial Secrecy Index which highlights a lack of integrity in the ‘tax haven’ behaviour of jurisdictions large and small, rich and poor.
Markets do not work well when they are not transparent, and nowhere is that more true than in financial markets. If I sell you a banana, I care about the wider market for bananas – whether, for example, the crop has failed in the Dominican Republic, so that I should be raising my prices. I care about you, however, only insofar as you have the money to give me in exchange now. But if I sell you a loan, I care about your creditworthiness and your financial prospects, because I need to know that you will
pay me back, or rather I need to price according to the chance that you won’t – so information matters in a whole new way.
It was for formalising the implications of the latter that Joseph Stiglitz won his economics Nobel in 2001 – his Prize Lecture was entitled ‘Information and the change in the paradigm of economics’. Among a range of other papers with various co-authors, it is the model of ‘credit rationing’ that he and Andrew Weiss published in 1981 that provided a powerful new direction for understanding how financial markets can be driven by information asymmetries.
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