flickr / linz_ellinas

Although most people don’t know this, the tailspin that Greece’s economy is in now did not begin in 2008, but rather in 2001, when it joined the euro. Although that statement doesn’t necessarily imply causality. The problem was there, but festering. When the financial crisis did get going, it didn’t so much create Greece’s problems, as it revealed them. At the beginning of 2010,Greece found itself on a precipice of financial ruin, driven by years of excess spending and borrowing and insufficient revenue.

To prevent the country from defaulting on its debt, in May of 2010 the International Monetary Fund and the European Union promised to provide Greece with a €110 billion rescue package. But in the terms of this agreement, Greece was to meet certain deficit goals: including reducing the budget deficit to 7.6% of GDP.

To meet this challenging goal, Greece has implemented a series of austerity measures, including spending cuts in the public sector, mainly in the form of pay cuts, pension cuts, and privatization, and also increases in taxes, whether they are indirect, like those levied on alcohol and tobacco, or the VAT. Every step of the way, Greek citizens have greeted these prospects with protests, which have sometimes turned violent. And despite the government’s efforts, the response from the international community has largely been “not enough.” In January, Moody’s and Standard’s and Poor downgraded Greece’s debt to junk status.

Though there are several key variables which play into this shortfall, one major component is Greece’s rampant tax evasion. According to Athens-based EFT Eurobank, Greece has one of the poorest rates of tax collection in Europe; more than 33 percent of workers list themselves “self-employed” and remit just 4 percent of revenue. There are anecdotes of Greeks paying “tips” to tax officials in exchange for a reduction in their owed taxes. And a recent estimate by Elena Panaritis, an economics expert for Prime Minister George Papandreou, shows that more than 30% of income taxes inGreece go uncollected. In fact,Greece’s revenue from taxes is 32.6 percent of GDP one of the lowest in the EU.

But Greece recognizes this problem, even at the upper levels of government. Finance Minister George Papaconstantinou has repeatedly asserted the Greek government plans to tackle tax evasion as part of its deficit reducing approach. As a part of this effort, the Greek government has seized 555 yachts and raised $4.7 billion in fines for tax evasion. This might seem like a big number, and to some extent it is, but it’s still just a fraction of the $56 billion Greece officials estimate are owed in uncollected taxes, going back decades.

Greece must continue on its current course to achieve stability. Let’s hope the government—and its taxpayers—are able to pull through.

Image License: This photo has Some Rights Reserved by linz_ellinas

Source: Treasure Islands Blog

On p28 of the UK edition of Treasure Islands, I write:

Almost no official estimates of the damage exist. The Brussels-based non-governmental organisation Eurodad has a book called Global Development Finance: Illicit flows Report 2009 which seeks to lay out, over a hundred pages, every comprehensive official estimate of global illicit international financial flows.

Every page is blank.

It’s a gimmick, but an important and telling gimmick. (Take a look at the picture: if you’re interested, the book’s cover looks like this). Now, for something I wrote yesterday on the TJN blog:

A startling quote from James K. Galbraith:

“[what] you cannot get – not at a meeting sponsored by the International Monetary Fund, not from the participants at the Institute for New Economic Thinking – is any serious discussion of contract law and fraud. I’ve tried, repeatedly. No one will deny, in response to the question, the role that fraud played in the financial debacle. How could they? But they won’t discuss it either.”

He explores why, looking at this in a Keynesian framework. It goes a long way towards explaining why economists have paid so little attention to tax havens.

And he has some frightening things to say, along the way:

“The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable.“

or

“we are at the end of the illusion of a market place in the financial sphere.”

and

“what we’re dealing with here and what we need to recognize is not an interruption to a long process of economic growth, a recession or some shock to aggregate demand. It is an incurable disease at the heart of the system.”

Strong stuff. He has some policy prescriptions, and rounds it off with these stirring words:

“I will not pretend, as Keynes did, that nothing stands in the way but a few old gentlemen in frock coats who require only to be bowled over like nine pins and might enjoy it if they were.

We should take on this challenge simply as a matter of conscience. We are not contestants for power. It is for us a matter of professional responsibility and civic duty.

My friend Bill Black, who has some experience in this area, likes to say, in the words of William of Orange, that it is not necessary to hope in order to persevere.”

Quite so.

Back to fraud and illicit flows. It seems, we aren’t much further on in our quest for illicit financial flows. I mean the World Bank, for instance, are grudgingly admitting that they need to reference Raymond Baker’s seminal work on illicit financial flows running at $1-1.6 trillion per year, although they still seem to shy away from his latest estimates, which are much scarier. One of Baker’s purposes in producing these figures was to spur august bodies like the World Bank to study this stuff. It hasn’t even tried. Galbraith’s words about the unwillingness to study fraud can be applied equally to the study of illicit financial flows.

Even so, the conclusion that can be drawn from the World Bank’s cited figures, that repatriated stolen assets amount to (at most) just 1/1500th of total lost to developing countries, is nevertheless useful.

Reposted from the Treasure Islands Blog

International Monetary Fund/Flickr*

Co-Authored by Maria José Romero and Rachel Sharpe

A new report by Eurodad and Action Aid

Tax policy has been at the heart of policy advice from the International Financial Institutions (IFIs) to developing countries for the last twenty years. Tax reforms became an increasingly important part of the structural adjustment programmes promoted by the World Bank and the IMF in developing countries from the late 1980’s.

This paper reviews existing literature on the IFIs approach to tax policy reform during the last decade. NGO and academic research suggest that the IFIs have used technical assistance and policy advice to encourage developing countries to reform their tax systems according to a consistent template of interlinked policy prescriptions.

This set of policy reforms has been called a ‘consensus’ on tax policy which has been referred to by numerous authors. However, there seems to be a recent move in the right direction. A new IMF paper responds to many of the criticisms made of the tax consensus, such as ‘one size fits all,’ and the lack of attention to the equity impacts of reform advice.

The first section of this report examines the policy reforms promoted by the IMF in particular and what has been said about the tax consensus. The second section examines the different mechanisms through which the IMF and the World Bank have influence over developing country governments and the tax policies that they set.

Download the full report here: http://www.eurodad.org/whatsnew/reports.aspx?id=4564
For more information on ActionAid, visit http://www.actionaid.org.uk/

Image License: Some Rights Reserved by The International Monetary Fund

Davide Oliva/Flickr*

Massive capital flight from the weaker Eurozone economies, not envisaged before the creation of the Eurozone, are putting further pressure on the union

One of the main problems underlying the current crisis in the Eurozone is that the conditions set out in the Maastricht Treaty which lay the economic foundation of the zone are not congruent with the criteria needed to form an optimum currency area.  The criteria under the Maastricht Treaty namely are (i) a rate of inflation no more than 1.5 percentage points higher than the average of three EU members with the lowest inflation rates (ii) a ratio of the annual government deficit to GDP not to exceed 3% at the end of the preceding fiscal year or at least required to reach a level close to 3% with exceptional and temporary excesses granted for exceptional cases (iii) a ratio of gross government debt to GDP not to exceed 60% at the end of the preceding fiscal year (iv) that the member should have joined the exchange rate mechanism under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period and (v) that the long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

As Robert Mundell, the famous economist, spelt out, the conditions for an optimum currency area to be viable are that (i) the group of countries should not be hit by shocks that are too asymmetric in that one country should not be substantially worse off while others are booming (ii) there is a high degree of labor and/or wage flexibility within the group of countries and (iii) there is coordinated fiscal policy ensuring that capital is transferred from countries that are doing well to countries that are doing poorly.  Members of the Eurozone do not meet most of these criteria.

First, shocks to the Eurozone are asymmetric in that the weaker countries in the periphery such as Greece, Ireland, Portugal, and Spain are hit by slow growth, low labor productivity, and lack of competitiveness whereas the  German, and to a lesser extent, the French economies have relatively much higher labor productivity and are much more competitive.  While this is the common explanation that has been repeated ad neusum in the popular media, the fact is that neither Mundell nor other economists since his seminal work was published saw that there is another shock to the system quite apart from the ones they pointed out.

Illicit financial flows—or illegal capital flight that are unrecorded and triggered by endemic corruption, can be compounded by legal capital flight—the sort of private capital that exits the country due mainly to a loss of confidence in economic conditions or policies. Research at Global Financial Integrity shows that in the years leading up to the financial crisis, there was massive capital flight from Portugal, Ireland, Greece, and Spain.  The flight of capital involved both licit and illicit funds. This hemorrhaging of capital occurred even as Germany and France continued to attract large foreign capital inflows.  But the loss of capital from the weaker members put an upward pressure on long-term interest rates in the Eurozone, higher than the rates which would have prevailed in the absence of such outflows. Moreover, illicit outflows also had an adverse impact on government revenues in the weaker members leading to ever wider fiscal deficits in those countries.  The Mundellian paradigm for an optimum currency area did not foresee the potential instability of a union with the weaker members losing massive capital through legal and illegal capital flight even as stronger members attract large capital inflows.

Second, quite apart from asymmetric shocks, practical rather than legal restrictions on labor mobility within Eurozone countries created tensions and reduced the cohesiveness of the monetary union. So while on paper the Eurozone members did away with the work and visa restrictions that hampered labor mobility, in reality labor has never been very mobile between them—for example, it is extremely difficult for Greek workers to join the labor market in Germany or France due to language and skill-set barriers.  Third, wages are quite sticky due to labor unions and laws so that lagging competitiveness in the weaker economies cannot be easily corrected.

Finally, there is no coordination in fiscal policy among member states of the Eurozone.

A strict control on monetary policy over the Eurozone members is not sufficient to ensure stability of the union. Because monetary control can be circumvented by foreign borrowing (i.e., foreign loans can substitute for an expansion of domestic currency), it would be necessary to complement the monetary union with centralized fiscal policy to control foreign borrowing.

Is the turmoil in Greece a harbinger of the Euro’s demise?  It looks as if in spite of massive bailouts from the IMF and the EU, Greece would not be able to stave off a debt restructuring (a euphemism for debt default) for much longer.  Going by the debt dynamics with Greek debt to GDP ratio at 150 percent and the ever higher rates that investors in Greek bonds are demanding, I expect a wholesale restructuring of Greek debt within one, at most two years. It’s a very somber scenario because contagion effects, in a financially globalized world, would mean that banks in major European countries which hold toxic Greek assets, can fail. There is a distinct possibility that the majority of Greeks may decide that they cannot live with the severe austerity being imposed on them by the IMF and the EU and would rather drop out of the Eurozone in favor of their own currency.  In that case, other countries like Ireland, Spain, and Portugal which are also battling huge debts and years of slow growth, high unemployment, and painful fiscal retrenchment may follow Greece to free themselves of the tethers of a monetary union. But the fact is countries that decide to opt out of the Eurozone for their own currency would not necessarily avert years of austerity—an expected (and immediate) fall in the value of their currencies will also spell painful cuts in wages until domestic goods are able to compete in world markets and resulting trade and budgets deficits are effectively narrowed.

* Image License: Some rights reserved by Davide “Dodo” Oliva

A new report from the IMF (hat tip: Markus Henn) tallies surprisingly closely, at least in part, with what members of the Task Force have been saying for some time. Take this, for example, on the role of secrecy jurisdictions (the IMF prefers the term Offshore Financial Centers, or OFCs:)

Before the 2008–09 economic crisis, many banks and hedge funds used OFCs for off-balance-sheet activities such as the so-called special purpose vehicles or structured investment vehicles. These vehicles were typically funded in onshore financial markets and purchased onshore assets.

Indeed. Off-balance-sheet finance isn’t the same as offshore finance – but as I mention in Treasure Islands, and as the IMF agrees, there’s a massive overlap. (They both involve escaping the social contract.) Now here’s something else, in the same vein:

Commercial operations may establish an insurance company in an OFC to manage risk and minimize taxes, or onshore insurance companies may establish an offshore company to reinsure certain risks and reduce the onshore company’s reserve and capital requirements.

That’s called getting around the rules. To “reduce the onshore company’s reserve and capital requirements.” As I remarked recently on the shadow insurance system, these rules, for all their flaws, are put in place for good reason – to protect society at large. Tax havens help firms get around these rules – at great cost to society.   The IMF says exactly this – albeit in its usual overly polite, stilted language:

OFCs are cost competitive, because they frequently operate under relatively weaker regulatory and supervisory financial standards—standards that are set by the host jurisdictions. This lax operational environment translates into lower administrative and operating costs but may not be fully consistent with international best practices.

Just as I explain in Treasure Islands. Anyone who thinks tax havens had nothing to do with the financial crisis is gravely mistaken. And don’t just take this as evidence – look at this trove.

Does the headline to this blog over-egg the IMF’s views? It calls its article “Bankers on the Beach” and provides the photo to accompany it, reinforcing the old myth that tax havens are palm-fringed islands. The IMF has been something of a tax haven apologist for years, and it says several more supportive things about tax havens elsewhere in the article. But read what the IMF says, above. I don’t think my headline is unfair.

There’s a table showing how big OFCs have become – over US$ 5 trillion in (each of) assets and liabilities – but I would respond by saying that the IMF, along with other organisations like the Bank for International Settlements, takes a politically convenient view of what a tax haven is – they pretend it’s mostly small islands like Cayman, whereas in fact the biggest ones are nations like the UK, the US, Luxembourg, Switzerland, Ireland and so on – big OECD economies.

I like the fact that the IMF mentions another key theme of Treasure Islands: alongside a picture of Cayman’s disproportionate share (73%!) of Caribbean offshore activity, it says

“the largest OFCs are located in nonsovereign territories—in particular, the Cayman Islands, a British overseas territory.”

Indeed – for those who keep saying that Cayman and its peers have the right to set their own sovereign tax policies – well, even the IMF knows that they are ‘nonsovereign.” (Britain – are you listening?)

Towards the end of the document, the IMF reverts to its traditional Love-The-Havens approach by wheeling out a discredited bit of research by James Hines, who claims that having a tax haven near your country boosts growth and foreign investment. Recently, my colleagues John Christensen and Richard Murphy heard that Hines was speaking at a meeting of the Policy Exchange in London, puffing the havens’ case. Christensen takes up the story:

“Richard and I sat in opposite corners of the room. It was a turkey shoot. We put it to him [Hines] that his paper hadn’t taken into account the gigantic issue of round-tripping. [That is, that much of that investment is not real foreign investment, but the result of locals going offshore, dressing up in tax haven secrecy, coming back pretending to be foreigners, and harvesting all the tax breaks and other privileges accorded to foreigners.] The effect of this will show up in figures on inequality and income distribution. Headline growth rates, which is what these studies use, simply won’t capture it. His paper doesn’t stand up the claim about growth.

We put these points to Hines, and he looked like a startled rabbit. There was a long pause – it was all quite theatrical – and he said he just  didn’t know.

The IMF also asserts, without presenting any evidence, that tax havens and the ‘tax competition’ between jurisdictions that they lead, make for more efficient resource allocation in global markets:

“To some degree, this tax competition can facilitate better resource allocation.”

So here’s a challenge to the IMF. Tax havens are not just about tax competition, but about regulatory competition, competition to provide the best secrecy, and so on. How exactly does that ‘competition’ work? How does the secrecy world, or these regulatory problems it mentions here, or the ensuing inequalities, play into this ‘more efficient resource allocation?’

IMF: I would love to hear from you on this.

End Note: s a nice picture, for aspiring policy wonks, of which body has responsibility for which bit of the offshore financial architecture:

He was talking about what the IMF is doing to help developing countries on this issue.

He lists a strong commitment by many countries  to strengthen their revenue systems, through both administrative reforms and improved tax policies. And he refers to good governance and avoiding exemptions and preferences plus the need for political will to drive through tough policy changes to build and support firm, even-handed enforcement.  These, he says, are the issues of concern for developing countries.

But he makes no mention at all of:

• transfer pricing abuse
• tax havens
• country-by-country reporting to ensure developing countries can get the information they need on multinational corporations’ activities
• information exchange
• tax avoidance by multinationals in developing countries
• political corruption.

Is he on another planet form all in the development community?

Almost everyone I know thinks the matters I list are  the real issues for developing countries face when it comes to tax.

But as ever the Washington Consensus ignores them.

Now, why is that? Ignorance, or a wilful blind eye?

You decide.

This post was originally published on the Tax Research UK blog.

Stephen Jaffe/IMF

Extreme turbulence and black clouds were the order of the day as I flew through a storm into Washington, DC. Ironic, then, that I was on my way to the institution tasked with picking up the pieces of the financial crisis and managing these turbulent economic times.

But the International Monetary Fund (IMF) itself has not escaped from the crisis unchanged. The new ‘fund’ seems less driven by economic orthodoxy at the expense of other perspectives and more open to criticism – to a point.

So as more than 160 delegates, from government ministers to academics and diplomats met to discuss the challenge of ‘domestic resource mobilisation’ in developing countries (raising taxes, to you and me), there was a spirit of learning and cooperation in the air. Good news, given that the IMF has just launched two massive topical trust funds designed to raise money to strengthen IMF technical advice on tax policy and administration, and taxation of natural resources.

It is probably foolish to underestimate the power that IMF economists have over the tax policies of many countries across the world – and not just developing countries (see Ireland for details).  The power dynamic was not lost on me. Sitting beside delegations from developing countries, I could hear whispered conversations and criticisms throughout, but when they were asked for their perspectives, many were silent.

NGOs have, in the past, been critical of the fund for pushing a ‘one size fits all’ policy onto developing countries. In the 90s, the Fund seemed bent on pushing a reduction in trade tariffs and corporate taxes and increasing VAT regardless of the situation or needs of the country. But in the new IMF, senior staff recognize the need to avoid a one size fits all policy, in favor of considering country characteristics like history, geography, legislative legacies and so on.

The new (and welcome) trend of tax and state-building, was a strong theme throughout the conference with credence given to the crucial role of civil society in making tax systems work. Countries like Bangladesh and Uganda have been leading the way – holding tax festivals which encourage people to declare their income, giving elites a reward for paying tax (invitations to state functions and the like), all in an effort to change the tax culture.

There was a consensus that tax incentives are a bad thing and should be eliminated. One delegate described them as the junk food of tax policy – everyone knows it’s unhealthy, but they are still offered. County after country testified to the fact that un-transparent and disgressionary incentives had undermined their tax bases, the public trust in the system and the amount on cash available for essential services. In particular fund officials were calling for all incentives to be declared publicly.

Tax equity was a strong theme, with the fund suggesting that personal income taxes had largely failed to deliver in developing countries, while VAT had been perhaps too successful leading to a “VAT curse” where other kinds of taxes were neglected. Is VAT regressive? The fund parted company with some civil society delegates, arguing that, compared to trade tariffs, it isn’t. If you offer VAT exemptions to make it more progressive, they argue it can backfire, with the majority of that money going to the rich who consume more. The Inter American Development Bank suggested that any regressive effects can be addressed spending the money on cash transfers. But this can only work when the state bureaucracy is strong enough to make sure this money gets to the poorest.

When it came to the issue of technical advice and actually implementing what the fund considers good practice, it was fascinating to hear the very basic challenges of implementing IT systems effectively, human resource issues, and basic information sharing.

It was this practical dynamic which I picked up on in my comments to the fund. To understand the unintended consequences of advice, the fund needs to understand the internal dynamics in a tax system and indeed, in a country. As long as the fund seeks to solve problems by flying in for two weeks, offering advice, and flying out again, it is hard to see this situation changing dramatically. And if citizens don’t know what the IMF is saying to countries, it is hardly consistent with the strong sentiments expressed regarding the need for citizens to engage in public debate regarding tax policy – though here perhaps the onus lies on governments themselves to disclose their tax strategies to citizens.

When it came to discussion the IMF’s input into the G20 there was a clear sentiment that the international community needs to distinguish between the good things they can and are doing to help on one hand, and on the other, the ways in which policies and international regulations undermine the ability of countries to raise revenue. For the first part, the G20 countries can lead the way in being transparent about their own tax incentives, offering technical assistance to developing countries and by helping deal with ‘free zones’. For the latter, ensuring corporate responsibility in tax planning and country-by-country reporting were top of the list.

Economics is the art of reading tea leaves while taking refuge behind numbers. This truth appears to be increasingly fashionable in the West as the ‘global’ financial crisis transpires to be a western financial and economic crisis. A recent IMF paper entitled “What Caused the Global Financial Crisis – Evidence on the Drivers of Financial Imbalances 1999 – 2007” is a welcome contribution to the tea leaf reading jamboree.

It has been argued that low interest rates in the US were perhaps the most important root cause for the ensuing financial frenzy. This IMF paper does not deny this theory, but allows for the possibility that the causal relationship needs to be addressed from a different angle: capital inflows have contributed in some countries towards depressing the long term interest rate, leading to a reduction in the spread between long and short term bank lending rates. This is something first year undergraduates learn: capital inflows lead to lower interest rates, because the supply of money increases drives down the price of money.

But how did this translate into financial crisis? On page 9 we read:

“A compression of the spread between long and short rates that is brought on by capital inflows at the individual country level affects the incentives of financial institutions to lever up.”

In other words: if a bank cannot make enough bucks from the difference between what it receives as interest on lending operations minus the interest it pays depositors on their bank accounts, there would be incentives to scale up its operations, or leverage. How do they do this? They borrow money on their own account from other banks and investors and start gambling with this money on the financial markets. Remember, CDOs, CDS, etc.?

Now the IMF confirms this is precisely what has happened (OK, it is more complex than this, weak supervision and regulation amplified the mess):

“[…] differences across countries in current account balances and the net capital flows associated with these differences had a statistically strong effect on financial sector imbalances. […] a current account deficit and the corresponding net capital inflow increases banking sector leverage. These effects are also economically sizable.” (page 17).

To spell it out more clearly, the IMF adds:

“We find that a lower spread is associated with greater leverage. Since a compression of spreads at the local level is driven in part by capital inflows (Appendix I), the empirical evidence on the effect of the spread between long term and short term rates on banking sector leverage confirms and complements the evidence on the effect of capital flows on banking sector leverage. In particular, it documents an important mechanism through which capital inflows will have led to an increase in leverage.” (ibid.).

Observers of financial crises in recent decades will hardly be surprised to learn that portfolio flows were particularly associated with financial turmoil. Mexico 1995, Argentina 2001/2002, and the Asian financial crises 1997/1998 all bear witness to the devastating role of volatile portfolio inflows. Sometimes, it seems we need to learn the hard way. The IMF writes:

“We find that, controlling for the net flow, both the size of other investments and of portfolio investments have a statistically significant effect on the build-up of financial imbalances, while the size of foreign direct investment does not. These results are plausible since some share of both other investments and portfolio investments would be expected to contribute to the funding of the domestic banking system, through foreign interbank loans and debt securities respectively. We find, finally, that controlling for the composition of gross flows does not alter the baseline result of a negative effect on the net flow, as measured by the current account. This is not surprising since, as we document in Appendix I, the net flow is a key determinant of long-term interest rates, which in turn can have an independent effect on banking system leverage.”

So far, so good. But now the tea leaves start to get interesting. The balance-of-payment related question about a chicken or egg has to be addressed: is the current account deficit driving capital inflows, or are capital inflows driving a current account deficit? Unfortunately, the IMF does not address this question in the paper. Is this omission because it would have led inevitably to the insight that huge fiscal incentives for capital inflows may have actually been the key reason for the persistent current account deficits of the US, if not the UK?

As we argue in our AIE-briefing paper, the exemption of foreign bank deposits from taxation is a key determinant of global portfolio investment flows. Now, as readers of this blog will know, the US is the world’s pre-eminent tax haven, not least through its qualified intermediary programme that guarantees non-residents anonymity and tax exemption for their investments in US-government debt. It is the biggest capital-sucking machine ever devised. This policy, copied by much of Europe, wreaks havoc on countries in the global South. But now we know it also wreaks havoc on western/northern economies.

There is hope: some brave folks in the US are currently seeking to end this abuse by calling for routine reporting of non-resident deposits. From the point of view of rectifying harmful capital flows, this would be an important step in the right direction.

Originally published on the Tax Justice Network blog…

Download the report, or read more about it at iff-update.gfintegrity.org.

Courtesy of the Presidential Committee for the G20 Summit

The recommendations of the Financial Stability Board on the “too big to fail” institutions are yet to be seen, and they should be submitted to the upcoming Seoul summit of G20 heads of state in November. If they fail to include significant enhancement in risk disclosure to clients and investors, they will probably have missed what is most urgently needed to prevent future crises. The multilateral financial institutions also have to mainstream transparency requirements in their dealings with governments or private entities. The recently reformed IMF safety nets, whether flexible or precautionary credit lines, have to be managed in a way that will bring about concrete changes in the framework put in place to fight corruption and the misuse of funds locally.

Generally speaking, increased capital outflows have to be accompanied by swift regulation. “Money fast, regulation slow” cannot be the underlying principle of the G20 action plan. More lending from the IMF and other institutions, more leveraging of private capital, more flexibility, increased front-loading, borrowing on a precautionary basis, all those measures increase money flows, but at least in the G20 public recommendations, we find no additional anti corruption commitments from borrowers or private lenders.

To the contrary, if the G20 has been fast recommending increased lending facilities, new regulation seems to be envisaged in an increasingly cautious manner. According to the G20 Finance Ministers’ meeting last June, prudential regulation is “to be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012”. What will happen if we face a new crisis before end 2012? Who will explain to the populations that the leaders’ major concern was to re-inject cash in an ill-functioning engine, without repairing the engine itself? Abuse of money has dried up money flows, money flows have to be eased but with new regulations which have to bring about a paradigm shift, from short term profit to long term growth.

Lastly, the G20 seems to be empowered, or to have empowered itself, with global governance, but it is not a global government. Global governance at the G20 level is fine; implementation by local, national governments is better. The Financial Stability Board has to report on national and regional implementation of financial regulation at the 22-23 October meeting of the Finance Ministers and Central Bank Governors. So far the G20 communiqués have been extremely vague on domestic implementation, mentioning only that “initiatives are underway in a number of jurisdictions”. Regulation on sound compensation, hedge funds, credit rating agencies, derivative trading, will be as strong as its weakest domestic link. Same is true of the abuse of bank secrecy. As long as big powers or financial centres, within or outside the G20 boundaries, allow investors to undertake quick, risky and opaque deals, the entire global system will be at risk. Each important financial crisis, from 1929 to 2008 through the Enron failure in 2001, has been followed by calls for greater clarity or, as we say now, transparency. Subsequent recovery has then caused collective amnesia, but in our globalized world with globalized challenges, collective amnesia is an illness we can hardly afford.