If you’ve been following the melodrama surrounding the Bank of Kabul unfold, you’ll already know that the situation has (somewhat) stabilized. If you haven’t, here’s what you missed. Last week panic struck when President Karzai approved the dismissal of the Bank’s CEO, Sherkhan Farnood, amid numerous allegations of large scale corruption. According to high-level reports, top executives of the bank had been lending millions of dollars to the political elite for purchases of high-end real estate in Dubai. In the face of United Arab Emirates’ alarming real estate bubble, these investments are looking frighteningly sour.
If this had occurred in the U.S. or another financially mature economy, depositors may regard such a scandal with disdain and perhaps a little unease. But U.S. citizens would not worry about losing their deposits, thanks in large part to the Federal Deposit Insurance Corporation, which insures deposits on all accounts in U.S. member banks, up to $250,000 (raised from $100,000 in the face of the financial crisis). Unfortunately banking in Afghanistan is not like banking in the U.S. Afghanistan’s banking system is young and fairly shallow. In fact, the country runs on a largely cash economy where only about 5 percent of citizens even hold bank accounts.
What if there is a way to directly fund development that doesn’t involve foreign aid or philanthropy? A recent article in the Christian Science Monitor, written by the finance ministers of France, Japan, and Belgium, proposes just this. The authors suggest using innovative financing—which uses small taxes on large financial transactions, like purchases of airline tickets—to mobilize resources for development initiatives.
Just how small can these taxes be? Recently, the Taskforce on Financial Transaction for Development reported that a levy of 5 cents on every $1,000 traded on the foreign exchange market could bring in more than $30 billion per year. The ministers hope these figures show international organizations, like the United Nations, could use innovative financing alongside traditional foreign aid to fund safe drinking water, food, treatment for pandemics, and education for children.
I admire the courage it must take to propose such funding techniques in an environment when even maintaining existing tax rates elicits heated reactions. But if we examine the economics behind this proposal, I think we’ll find it satisfies economic guidelines.
As I have noted, there is a popular argument among advocates of tax havens that these jurisdictions provide a positive influence on the world through so-called “tax competition.” Mostly these advocates toss this phrase into their arguments with the misguided hope that those hearing it will not think too long and hard about it, because at the end of the day, it doesn’t make much sense.
As far as I can tell, the most comprehensive definition of tax competition was put forward by Richard Teather, a tax specialist from the UK, in “The Benefits of Tax Competition.” Teather defines tax competition as “deliberate reductions in effective tax rates” to “attract foreign capital investment.” Teather argues European governments, fearful that they would be “sucked into a spiral of competitive tax reductions that would result in investment income being tax free,” have responded by “seeking either to force [tax havens] to raise taxes or to emasculate their tax-efficient status.”
I don’t have a problem with this argument. Foreign direct investment—that is when a citizen of one country makes a capital investment into a company in another—occurs through legal, generally transparent channels. In this case, a county’s tax-rate is an expense to the investor, just as brokers’ fees and labor are costs, too.
The Wyly Brothers (spelled w-y-l-y, though it might as well be spelled w-i-l-y), have broken their long silence.
A few weeks ago, I wrote about the recent suit brought against Samuel and Charles Wyly by the Securities and Exchange Commission. The SEC believes the brothers have reaped $550 million in undisclosed gains, and hid the money in a series of channels through the Isle of Man and the Cayman Islands, two of the world’s most infamous tax havens.
I theorized these men had a bad case of the egos. This is an especially dangerous trait when it’s coupled with a little intelligence and a lot of money.
As far as international tax cooperation goes, the OECD is the organization that holds the cards. Or at least it does when it comes to the standards by which countries exchange information for tax purposes. According to OECD guidelines, countries which have negotiated bilateral Tax Information Exchange Agreements (TIEAs) exchange of information for tax purposes on request when it is “foreseeably relevant.” The OECD also maintains a gray list of so-called “tax havens;” jurisdictions with a lack of transparency that have signed fewer than twelve TIEAs. The jurisdictions which reach that threshold are removed from the list.
The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal requires countries to cooperate to achieve environmentally sound management of hazardous waste and builds a framework for controlling cross-border movements of waste. According to Convention requirements “every company or broker wishing to export hazardous wastes to ask the Government of the exporting State to provide prior written notification” to authorities in the importing State. The importing country must then give written consent before the export can take place. In addition, each approved shipment must be accompanied by a “movement document” that details the contents and their disposal requirements.
But just as capital controls in developing countries that exist to prevent the outward leaks of funds have systematically fail to do so, the Basel Convention has failed as well. And leaked it has. Researchers estimate that of the 440 million tons of toxic waste generated every year worldwide, about 10 percent is disposed abroad. These wastes impose massive health, social, and economic costs on developing countries.
HP and its current and former executives are embroiled in allegations over sexual assault, tax fraud, bribery and kickback schemes. This raises philosophical questions of morality. Do corporations have a social responsibility beyond their legal requirements? And do they have a moral obligation to follow the law?
The Economist highlighted a paper yesterday, with the headline “shadow economies have grown since the financial crisis began.” The magazine noted that for the first time in a decade the world’s shadow economies are increasing as a percentage of GDP.
Mexico has a problem. I’m not referring to the criminal organizations seeking to topple the state or the growing numbers of violent deaths, kidnappings, and extortions. Though those problems are obstructing development in Mexico, they are not problems which the Mexican government cannot overcome. I’m referring to a shift in the Mexican age pyramid.
The debate over the American war in Afghanistan has reached something of a boiling point.
Why did an attractive Austrian Governor with a propensity for driving expensive cars and attending lavish parties have financial ties to an entrenched North African dictator known for terrorist sympathies? The history of these men nonetheless reveals a strikingly similar ideology and mirror experiences.
Around the time Haider found his feet as a leader in the FPÖ, Muammer al-Gaddafi ascended as dictator of Libya in a coup. Qaddafi based his new regime on a blend of Arab nationalism and a welfare state, which he called “Islamic socialism.” The dictator spent the next ten years refining his political views, dubbing Libya a “Jamahiriyyah” or “government through the masses” in 1977. The 1980s in Qaddafi’s Libya was marred by links to terrorism, which brought severe trade sanctions and diplomatic isolation. Escalation of military confrontations with the United States escalated to severe action by the superpower in April 1986 when a U.S. force of warplanes bombed several sites in Libya, killing or wounding several of Qaddafi’s children and narrowly missing Qaddafi himself.
A 2005 documentary called Enron: The Smartest Guys in the Room details Enron’s involvement in the California electricity scandal, the company’s collapse in 2001, and the criminal trials of the companies’ top executives. The movie also spends time exposing the personalities of Ken Lay, Jeffery Skilling, and the other Enron executives largely responsible for the scandals, and as the title suggests, the movie also delves into their egos.
But the truth is—and as much as we hate to admit it—they are smart guys. Maybe even some of the smartest.
The problem with being smart is that it tends to get to your head. And when you couple smarts and ego with skyrocketing wealth, a healthy dose of opportunity, and a dash of immorality; well, the result is Enron.