Today Global Financial Integrity published a report called “Tax Revenue Loss due to Trade Mispricing.” Trade mispricing is a practice that is neither widely nor well-understood by most of the development community. Yet according to GFI estimates, this mechanism moves about $400 billion a year out of developing countries (for a more detailed description, see my blog On Tea and Taxes).
The new paper finds that developing country governments lose about $100 billion a year in tax revenue to the practice of trade mispricing. This figure represents about 4.4% of the entire developing world’s government revenue.
Admittedly, the economics of the paper are simple and the models are not revolutionary, but the conclusions are based on sound assumptions and the dataset is unique. The paper takes Global Financial Integrity’s estimates for the trade mispricing component of the measure of illicit financial flows and applies country-specific corporate tax rates to estimate the approximate tax revenue lost by developing country governments due to this practice. There are empirical limitations to this rather broad approach, but those are enumerated in detail in the report.
Since the attempted bombing of Northwest flight 253 on Christmas day, there’s been a lot of chatter about Yemen. In case you don’t know, this is because the bomber was allegedly trained and equipped by an arm of al-Qaeda in Yemen. Joe Lieberman has called the country “tomorrow’s war” on terror and Stephen Colbert has noted the letters in Yemen, rearranged, spell “ENEMY.”
Yemen is a startling example of how illicit financial flows are not just an obstacle to development, but also pose a stark danger to national security worldwide.
Last night I attended a dinner honoring New York District Attorney Robert M. Morgenthau, who has served the borough of Manhattan for thirty-four years. At the age of 90, he is retiring, which, as he has noted, is “25 years past the normal age.” Last night’s event honoring Mr. Morgenthau’s career of public service was hosted by Global Financial Integrity and The American Interest.
As was made clear by the speeches of adoring Congressmen and Senators last night, Mr. Morgenthau has proven himself a dedicated public servant, in the truest sense of the word. Over his long tenure, Mr. Morgenthau has vigilantly pursued mobsters, murderers, and Wall Street executives, with no thought to his personal safety. And we all know how hard CEOs bite.
This week Transparency International (TI) released their corruption perceptions index, which measures the perceived level of public-sector corruption in 180 countries and territories around the world. TI notes that “the plundering of public resources feeds insecurity and impunity” and erodes “trust in the very institutions and nascent governments charged with ensuring survival and stability.”
We often think of corruption as “their” problem; “they” being the developing world and “us” being the rich. We see chronic poverty as a choice; an exploitation of resources by corrupt leaders and dictators who rob their countries blind. “Alas,” we say to ourselves, “that is certainly unfortunate, but we can’t help them if they aren’t willing to help themselves.”
Philosophers distinguish between two types of moral imperatives: negative and positive duty. Negative duty is the moral obligation not to cause harm, whereas positive duty is the moral responsibility to prevent harm. For example, you have a negative duty not to push another person in front of a speeding train. You might also have a positive duty to pull an injured man out from in front of a speeding train.
Most humanitarians talk about our positive duty to eradicate poverty. In the face of overwhelming inequalities of income, rampant disease, and widespread starvation, these people contend that we have a moral responsibility to help poor nations and people. Thomas Pogge, a philosopher from Yale, takes another take. He believes we have a negative duty to not make worldwide poverty worse. But he also believes this minimal moral obligation is not being fulfilled. Pogge argues rich countries are actively harming “many in the poor countries through the global economic order they impose.” For this reason, poverty is a human rights issue because, in Pogge’s view, someone “is a human rights violator when he or she actively harms others or contributes to harming them.”
Dear Martha,
I want to get this letter to you before the lawyers call, which will be any day now. You might ask yourself why you are even hearing from me. I know the last time we exchanged words was when you shouted at me in front of our divorce lawyers—something about the value of our (or what is now my) house. I won that ruling, of course. I hope you’ve finally learned that turning up the volume on your mouth is not as persuasive as solid reason. But dredging up old battles is not the point of this letter.
Martha, I want to put aside differences and be honest with you. It’s the least I can do. I have had a Swiss bank account with UBS for over ten years. I originally opened the account on the advice of a certain banker, Bradley Birkenfeld; perhaps you’ve seen his name in the news. Or maybe you haven’t. You’ve never bothered much with newspapers. Plus I’m sure you’re much too busy lately spending money from your generous divorce settlement to inconvenience yourself with CNN.
On Tuesday I attended an event hosted by the Cato Institute, a Libertarian think tank, called The Case for Tax Competition, Fiscal Sovereignty, and Financial Privacy. After attending, however, I think the following title would have been more suitable: Nonsensical–but Convenient!–Arguments in Support of Tax Havens. I had rather hoped to find the conference intellectually challenging. I was disappointed.
The theme of the conference was that tax competition is good for governments, for business, and for growth. From this assumption, the speakers concluded that tax havens must provide a net benefit to the world through tax competition, by pressuring larger countries into keeping rates low. Keeping with this, they argued tax havens are the world’s last restraint on power hungry, tax crazed developed-country governments. Apparently tax havens (and tax evasion) are the real checks on western democracies. And here I thought the checks on democracy should be the nation’s voters, not other countries. Silly me.
But it’s a moot point. The Task Force isn’t arguing that tax havens can’t have an income tax rate of 0%. They can all have tax rates of -50% for all we care. What these countries can’t do is accept foreigners’ money, hide it from the foreigners’ governments, and then cower behind their constitutions when those governments request banking information.
A couple months ago there was a piece in Foreign Policy called Think Again: Asia’s Rise. The article questioned the now almost conventional assumption that Asia will soon dominate the world’s political and economic stage. The author argued that although China, India, and the Asian Tigers have enjoyed huge growth in influence, Asia is unlikely to “take over the world” any time soon. The piece made the cover of the magazine, which featured a picture of the Statue of Liberty with a single word above her head: BAMBOOZLED.
Like the assumption that Asia will one day “dominate the world,” there is a prevalent notion that Asian secrecy jurisdictions will soon dominate offshore finance. The recently published 2009 Asia-Pacific Wealth Report refers to these countries’ favorable business conditions and regulations, which include “reliable legal systems, highly efficient governments, and well-regulated financial sectors.” The report also notes that “With the European Union stepping up its scrutiny of European tax havens, wealthy Europeans are increasingly looking at Singapore and Hong Kong as offshore investment centers.” Other proponents of this argument agree, citing America’s crackdown on UBS and the current financial crisis as engines propelling depositors to Asia.
I’m not convinced. I certainly wouldn’t argue the Asian centers aren’t gaining ground and they will certainly benefit from the changing dynamic in offshore finance. But when you look at the cold, hard numbers—it’s clear that Asia still isn’t even close to the likes of Cayman and Switzerland. And it will be a long while before they even get close.
GFI has been known to repeat (and then repeat again) that for every $1 of aid that enters the developing world through the front door, $10 escapes out the back in illicit financial flows (for my explanation of these flows and their the magnitude, see: 10 times ODA, but what is that in Apple Pies?). While many people grasp the enormity of this number, few seem to appreciate what this means or how these flows can affect development. Some people even go so far as to say, “Why should we care? That money wasn’t going to build a well or buy vaccines for children.”
The truth is: it does matter. And the macroeconomic reasons for “mattering” are going to be the topic of this blog (and a few others to come).
Reason 1: Illicit Financial Flows reduce the growth potential of developing countries by diverting domestic savings away from investment.
Let’s start at the beginning. Broadly speaking, income can be used either as consumption to buy goods and services (clothing, cars, going out to eat) or it can be saved (ideally in a bank and not under the mattress). Deposited savings are invested by banks, which produce “fixed capital,” like factories and machinery. The total (domestic + foreign) savings of a country must equal total investments, which makes savings vital to increasing fixed capital. In turn the accumulation of fixed capital plays an essential role in development. With more machinery comes more jobs, with more jobs comes more income, and with more income comes more consumption. This is economic growth.
I’ve never worn a pair of crampons. I’ve never wielded an ice axe. And I’ve definitely never been snow camping. However, my favorite climber, who scales mountains weekly, has given me a rather intimate knowledge of the—completely outrageous—sport of mountaineering. And if for that reason alone, I can say I am preeminently qualified to declare that mountaineering is exactly like international politics. Well, minus the whole “risking your life” part.
Mountaintops provide a convenient symbol for anything from achievement to power. So it doesn’t come as a surprise that the meeting of the world’s twenty most powerful leaders is called the G20 “summit.” Actually, the copycat nomenclature runs far deeper. For instance: the diplomats who lay the groundwork for the G20 leaders’ trip to the summit? They’re dubbed “Sherpa,” with a dash of self-aware irony, after the Nepalese guides who help mountaineers scale peaks in Nepal. And with what may be a move to thrash the symbol to death, the G20 Sherpa’s aides are called “yaks.”
This week, the Task Force on Financial Integrity and Economic Development had its yearly conference. The impressive list of speakers included Senator Carl Levin, Francis Fukuyama, Paul Collier, and Raymond Baker. The speakers covered a wide array of topics, revealing dozens of ways that illicit financial flows affect development. It was both eye-opening and brain-exhausting. That’s a technical term.
The Task Force conference also pushed me to a halting conclusion, revealing a glaring gap in the way I contextualize the Task Force’s work and my job, as well. I realized that I focus so much—too much—of my time thinking about sandy beaches, tax evading billionaires, and their effect on the developed world’s tax return. While this context certainly has a place in the discussion, the Task Force conference reminded me that I have forgotten our mission: to alleviate poverty through financial integrity.
This week I attended two conferences: one at the World Bank called “Understanding the dynamics of the flows of illicit funds from developing countries” and one hosted by the Task Force labeled “Increasing Transparency in Global Finance: a Development Imperative.” Ultimately these conferences conveyed a sense of massive variety in our topic, showing the many, many different varieties of illicit financial flows and their impact on development. But while these conferences were similar in mission, they were as fundamentally different as chalk and cheese.
The World Bank conference, in a typical Economist swagger, returned over and over to a discussion of data and the measurement of capital flight. These conversations often revolved around technical back and forths concerning methodology, data issues, and econometrics.
The Financial Task Force conference was a wholly different animal. This discussion also strived for a multifaceted understanding of the situation, but the underlying implications of each of the speakers called for action, instead of research. Both conferences have a valid place in the discussion on illicit financial flows and together they played to two of my own inherent qualities—my call for understanding and intellectual curiosity and my drive for solutions.
In Brazil, there is an agency known as “the Lion,” whose agents fly around the ...
May 23, 2012
The G8 have just released an ambitious and comprehensive asset recovery action plan as part ...
May 23, 2012
Wednesday's daily news updates from Global Financial Integrity
May 23, 2012
Officials in Switzerland have opened criminal proceedings against Libyan and Syrian citizens suspected of holding ...
May 22, 2012
Subscribe to the Task Force Blog RSS feed and get the latest blog posts!
The Task Force on Financial Integrity & Economic Development
1319 18th Street, NW Suite 200 Washington, DC 20036
Email: info@financialtaskforce.org
Telephone: +1 (202) 293-0740 | Fax: +1 (202) 293-1720
© 2009-2012 Task Force on Financial Integrity & Economic Development
Some rights reserved. 
Follow @Task_Force