Transcript N Meisel_Economic and Political Impacts of the International Tax

The International Tax and Financial
Architecture and its impact on
Economic and Political Development
in Africa
Nicolas Meisel ([email protected])
2 April 2014
Mo Ibrahim Governance School on
Governance for Development in Africa
Outline
• Introduction: provide a few analytical tools to
understand key mechanisms and insertion of SSA in
FG.
• Framework: Capitalism and financial globalisation
(FG)
• Assessing the impact of FG on economic and
political development: theory & evidence
• Concerning features of FG: tax competition, capital
flight and tax havens
• Conclusion: Way forward
• Bibliography
• Discussion
2
Capitalism & Financial Globalisation (1)
• Capitalism is based on market economy but came
much later and is more than market economy
• Market economy paradigm = exchange among
equals. Price signals  S=D. Markets self regulating
in competitive equil. Engines of growth=Division of
labour ; economies of scale ; technological
progress. Main policy recommendation: separate
econonomic sphere from politics.
• Capitalism = force of accumulation. Because money
= power & No limit to desire of power, capitalism is
not self regulating. Not converging to any ideal
model. Inequality is its essence (social well-being
not an obj). Separation of econ and pol impossible
 objective = effective regulation.
3
Capitalism & Financial Globalisation (2)
• Development trajectory determined by interaction
between organisations (firms, states, etc) and institutions
(formal = rules of the econ & pol game; informal =
representations & beliefs) at all scales.
• Capitalist growth is global in its logic of accumulation AND
enshrined in local structures. Possible to have acceleration
in one part of the world AND deceleration in another
• A historical process fed by its own contradictions
(expansion, crises, innovation…).
• Instability is the rule, stability the exception.
• Finance = central mediation of capitalist history, must
resort to it to borrow, invest, employ labour, expand K;
dominant financial centres capture value (power shifting
between Venice, Antwerp, Amsterdam, London, New York,
Hong Kong…). Financial markets = money making money.
Pb: greed has no bound. Self regulation cannot exist.
4
Capitalism & Financial Globalisation (3)
• 1944: Bretton Woods monetary system. Obj = stability.
Fixed parities +USD-gold convertibility. Finance under state
controls in segmented national financial systems. Control
of key prices= wages (w), goods, interest rates (i), x-rates.
• 1960s: increasing tensions due to end of reconstruction +
accumulation of USD outside US
• 1971: Start of FG with the exit of BW by Nixon (end of
dollar-Gold convertibility)  floating exchange rates & full
K mobility
• 1970s: recycling of petro-dollars overlending to 1st & 3rd
world (public and private loans). Race between p, w & i in
Western World  stagflation.
• 1980: Dramatic rise in US i to curb p and definitely transfer
power from borrowers to lenders  Debt crisis 
structural adjustment plans: macro ‘stabilisation’ ;
liberalisation of K account; and privatisation of public util.5
Rationale & theoretical benefits of FG
• Standard justification for FG: if free to circulate, K
flows from S-rich-low-growth to S-poor-high-growth
countries.
• LICs need foreign K to grow because S-constrained
(same fundamental justification since the 1950s!)
• Financial opening will
– Raise S, reduce financing costs (better risk allocation and
increased liquidity reduces cost of K)
– Develop domestic financial market (entry of foreign
banks, increased competition, better credit allocation)
– Smooth output and consumption volatility
– Introduce market discipline in all macro policies: spur
fiscal discipline, monetary policy, and institutional reforms
– Attract FDI (intl markets confidence & business climate)
6
– Raise domestic investment and growth
Evidence (1): Saving and investment rates have actually
declined with financial integration in SSA (source: WDI)
Gross S and I in LA (% of GDP)
Gross S and I in SSA (% of GDP)
35
35
30
30
25
25
20
20
15
10
1960
Epargne brute
Investissement
1970
1980
1990
2000
Epargne brute
Investissement
15
10
1960
1970
1980
1990
2000
7
But not in ASIA
Gross S and I in South Asia (%
Gross S and I in East Asia (% of
of GDP)
GDP)
35
30
45
Epargne brute
Investissement
40
35
25
30
25
20
20
15
Epargne brute
Investissement
15
10
1960
1970
1980
1990
2000
10
1960
1970
1980
1990
2000 8
Evidence (2): No relationship between
growth and FG
Rodrik and Subramanian (2009) find no correlation between long-run
growth and intensity of cross-border capital flows, neither in level …
9
… nor in growth
Confirming (Prasad et alii, 2007 ; Gourinchas and Jeanne, 2007) : Countries that
have grown most rapidly are those that rely less, not more, on foreign K!
« For any given level of I, the more that is financed by domestic savings, the
10
greater the long-run growth » Rodrik (2009)
Evidence (3): doubts on benefits of FG
• Facilitated external borrowing may actually relax, not
increase, macro discipline and fiscal constraint for longer
periods than possible otherwise; ↑ future adjustment costs
• Y, C and income volatility ↑ with FG (Kose et al, 2007)
• Insufficient absorption capacity  Risk of overborrowing
through domestic financial institutions  Poor I perf +
Speculative asset bubbles → priv & public debt → boost C
 inflation + CA deficit  ↑ risk of K flow reversal (sudden
stops) and financial crises (Mex 1994, Thai 1997, Arg 2001)
• Classic answer: “inappropriate regulatory, prudential,
supervisory structures”
• Pb: endless list; unfeasible; not strategic : ignores trade-offs
& resource constraints (other reforms may be more urgent) ;
historically unjustified (post-45 Europe, Korea, China). 11
Real risks with capital inflows (2)
• Appreciation of the real exchange rate
(overvaluation) hampering diversification in
tradables
• Increase of real x-rate  loss of profitability and
competitiveness of tradable goods sector which
is the key sector to foster endogenous growth 
Disincentive to invest in non traditional tradable
sectors  I demand for tradables diminishes and
productive capital accumulation actually recedes
12
Net private flows (loans,
FDI, portfolio) and
overvaluation 1970-2004.
Source: Rodrik (2009)
Undervaluation of the real
exchange rate and growth
(panel of 5-year averages
1980-84 & 2000-04)
13
Decomposition of growth into‘within sectors’and structural
change between sectors, 1990-2005
SSA: Growth-reducing structural change - Constrast with Asia
-30-
0.05
Asia
0.04
0.03
Latin America
Africa
0.02
High-income
0.01
structural
within
0
-0.01
-0.02
Figure 8
2005
• Economic development requires
systematic reallocation of
factors of production from lowproductivity, low skill &
technology, decreasing returns
sectors to higher-productivity,
increasing returns sectors.
-
Disindustrialisation in SSA: Manufacturing Value Added (% du GDP)
Source: McMillan and Rodrik (2011). Regional averages are unweighted averages for countries for
which data are available.
1980
PMA
12,7
(Figure 9). The sector with the largest relative loss in employment over
PMA africains
12,1
1990-2005 is manufacturing, which also happens to be the largest sector among those with
PMA asiatiques
14,2
above-average productivity. Most of this reduction in manufacturing employment took place
Autres PED
21,1
To observe a particularly egregious case of growth-reducing structural change, turn to
during the 1990s, under the Argentine experiment with hyper-openness. Even though the decline
1990
11,0
10,7
11,8
22,1
2000
9,8
7,4
12,7
23,0
2009
9,5
6,6
14,4
24,8
14
FG hampering industrialisation:
trickle down effects
• Impact on cost of capital: Atrophy of tradable
sectors may worsen current account deficits and
trigger a lasting dependence on foreign K to cover
them, hence reinforcing perceived vulnerabilities
and increasing cost of K.
• Impact on labour and demand for democracy:
Historically industrialisation has promoted wage
earners, formalisation and taxation of labour
incomes, & contributed to develop welfare state
• If desindustrialisation slows down middle class
formation, it may well suppress an essential
historical constituency behind the D for democracy
15
Conclusion on impact of FG
• Increased instability
• Overliquidity, esp. since
2000s (see graphe)
• Boost in consumption ;
• Appreciation of real x-rate
even in countries with large
CA deficits! contrary to
Mundell Fleming std model
• Reduction of domestic I in
tradables (decreasing
returns on domestic I)
 Impact on growth = O
 Sounds familiar?
Variation of real exchange
rate horizontally and
current account vertically
for 30 emerging countries
(2003-2007). Source: WEO,
IBS.
16
Net Capital Flows towards 30 emerging
Countries (USD 2010)
Source : Institute of international finance (2010)
17
Explanation: LICs suffer more from investment
constraints than from saving constraints
• If an economy suffers from a lack of I demand, financial
opening is not likely to impact domestic I positively
because I is not responding to market conditions
(decreasing function of r)
• Low demand for domestic I in tradables may be due to:
– Low social return of K bec. human K, skills, infras and
social welfare limited by inadequate gov capacities
– Poor I appropriability due to weak institutions (eg
property rights) or enforcement capacities of the state
• Tradable sectors suffer the most from weak institutions
& learning externalities (implicit tax, on top of x-rate
appreciation)
 Putting the emphasis on I rather than on S as a main
constraint entails completely different prescription =
invest in public infras, public goods and public services18
Harmful feature of FG: Tax competition
• Tax rebates ; 5-year holiday... schemes encouraged
by WB (DB) to attract FDI
• Esp & ironically recommended “because you do not
provide investors with key public infras” so they
won’t come unless offered tax breaks
• Individual ad hoc treatments that increase fiscal
policy complexity (IMF opposition)
• Race to the bottom in corporate income tax (no
limit to the process)
• Pb: Not part of integrated fiscal, employment, skill
devt, and industrial strategy.
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Harmful feature of FG: Capital flight (1)
• FG reduces returns on domestic I in tradables but ↑
incentives for K flight (returns on foreign I ↑)
– Certain skills imported with FG = fin., legal, fiscal and
private banking.
– Much easier to send money abroad than invest in risky
industrial venture for export markets.
– Much safer to protect assets abroad from predation,
taxation, expropriation, competitors, etc.
– NB: origin of funds may be licit or illicit : proceeds from
privatisations; kickbacks on gov loans; procurement
contracts; transfers from public accounts…
– Csq: tax evasion by elites (reduced fiscal space) and
20
inequality
Stock of capital flight by country, 2008
21
Harmful feature of FG: Capital flight (2)
• KF figures by Ndikumana & Boyce 2011 > Henry 2012
• KF = BoP residual (K inflows – uses) + trade misinvoicing
(underinvoice X– overinvoice M) + unrecorded remittances.
• 2010: accumulated stock (39 African countries) since 1970 =
$1700bn >> Debt = 280bn. Collier (2001): 40% of Africa’s
private wealth is held abroad.
• Nigeria, Algeria, Morocco, Egypt, Angola, Cote d’Ivoire…
• Csq: Africa net creditor to the rest of the world
• However important difference: public L but private A!
• Negative impact of K flight on domestic I
• Negative impact on growth = -2.4% (average) ; -0,8 (median)
• On tax = 1700bn*3%=51bn (earnings per year)*30% (marginal
income tax rate) = 15Bn per year of lost revenues
22
Harmful feature of FG: Capital flight (3)
• KF from SSA = equal to the sub-continent’s total GDP
• Equal to 10 years of Africa’s infrastructure investment needs
• Equal to the wealth of Africa’s 100,000 “High Net Worth
Individuals”
• Direct impact on inequality: rich do not pay tax ; real
distribution of income and even more of wealth far more
skewed than current inequality stats (underestimation of Gini)
as very rich underreported in both HH surveys & tax accounts
• Indirect impact on inequality and democracy : rich do not
contribute to public infrastructure provision ; do not create
local demand ; do not push for better institutions.
• Elites’ incentives disconnected from ordinary citizens: do not
have to account for their deeds and can increase their wealth
independently of their people’s fate.
23
Harmful feature of FG: Capital flight (4)
• 60% of KF due to debt = debt fueled KF ; and debt fuels KF as
well = KF and external overborrowing = twin problems
• Zaire: ‘(…) In this office [the Presidency], no distinction is
made between state expenditures and personal needs. (…)
Impossibility of control of frauds means that there is not any –
I repeat any – chance on the horizon that the numerous
creditors of Zaire will recoup their funds.’ E. Blumenthal
(1982), Zaire: Report on its international financial credibility.
• FT, 12 May 1997: Senior banker quoted: ‘How Mobutu built
up his $4bn fortune: Zaire Dictator plundered IMF loans’
• Mobutu: the first African president received by Bush Sr
• WB loans to Nigeria 1984-94 = $4.6bn
• Responsibility of lenders  “Odious debt” by odious gvt
• Today: KF accelerating ; China’s 2004-2010 $14bn Resource
backed non transparent loans + IMF optimistic projections
24
Public foreign borrowing now conditional to IMF
Debt sustainability analysis
IMF stress tests of debt sustainability in poor indebted
countries recognizing lenders’ responsibility to prevent new
crises  green, yellow, red.
Limits: only external public D, missing donors; IMF position
Growth hypotheses are a key parameter of debt dynamics :
dt = bpt + dt-1 (1+i)/(1+g) ; and easy to control
Annual average growth rate of GDP (historical, source WEO) and DSA hyp.
SENEGAL
1986-2006
3,2
1994-2006
3,9
2000-2006
4,0
MADAGASCAR
1986-2006
2,3
1996-2006
3,3
2001-2006
2,1
2007-2012
5,5
2013-2027
5,0
2007-2027
7,0
25
Harmful dimension of FG: Tax havens
• Off-shore secrecy jurisdictions
• About 80 such places
• With between USD 20 and 30.000 bn of
accumulated assets from developing countries
under management (thus with hyp of 3% of return=
600-1000 Bn incomes)
• Hyp = 30% Marginal income tax  180-300Bn
annual lost tax revenue
• 50% of banks cross border deposit and credit
operations ; 1/3 of FDI
• Organised and controlled by 50 largest banks
26
The Way Forward:
Democracy and capitalism
• Main effective governance scale until today = national.
Largely ineffective in front of today’s global challenges
• « As long as the world economy remains politically divided
among different sovereign and regulatory authorities,
global finance is condemned to suffer from deformations
far worse than those of domestic finance » (Rodrik).
• Incompatibility triangle: democ – econ integration
(globalisation) - sovereign nation-states
• Global financial capitalism requires global regulation to
protect itself from its excesses. Regulatory institutions
need to be protected from market mechanisms. Politics
must rule finance.
 New forms of governance required and emerging: multiscale, from national to global, to help democracy survive 27
References
• P. Gourinchas & O. Jeanne (2007), Capital Flows to Developing
Countries: The Allocation Puzzle, NBER Working Paper.
• E. Prasad, R. Rajan, A. Subramanian (2007), Foreign Capital and
Economic Growth, Brookings papers on economic activity
• A. Kose, E. Prasad, M. Terrones (2007), Growth and Volatility in an
Era of Globalisation, IMF Staff Papers
• D. Rodrik & A. Subramanian (2009), Why did Financial Globalisation
Disappoint, IMF Staff Papers
• J. Henry (2012), The Price of Offshore Revisited, Tax Justice Network
• L. Ndikumana & J. Boyce (2011), Africa’s Odious Debts: How foreign
loans and capital flight bled a continent
• N. Shaxson (2011), Treasure Islands: Tax havens and the men who
stole the world
• R. Baker (2005), Capitalism’s Achille’s Heel: Dirty Money and How to
Renew the Free Market System
• T. Piketty (2014), Capital in the 21st Century
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