Tax Justice: Putting Global Inequality on the Agenda

Tax Justice Putting Global Inequality on the Agenda

Edited by

MATTI KOHONEN and

FRANCINE MESTRUM

PLUTO PRESS

www.plutobooks.com

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First published 2009 by Pluto Press 345 Archway Road, London N6 5AA www.plutobooks.com Copyright © Matti Kohonen and Francine Mestrum 2009 The right of the individual contributors to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN ISBN

978 0 7453 2862 1 978 0 7453 2861 4

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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental standards of the country of origin. The paper may contain up to 70% post consumer waste. 10

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Designed and produced for Pluto Press by Chase Publishing Services Ltd, Fortescue, Sidmouth, EX10 9QG, England Typeset from disk by Stanford DTP Services, Northampton Printed and bound in the European Union by CPI Antony Rowe, Chippenham and Eastbourne

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CONTENTS

List of figures and tables Acronyms and abbreviations Preface: the Tax Justice Network Introduction Matti Kohonen and Francine Mestrum

vii ix xiii 1

PART I: VISUALISING THE PROBLEMS

1 Why we have to fight global income inequality Francine Mestrum 2 Rationale for World Public Finance: Mapping the tools for social change Matti Kohonen

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PART II: MISSING PUBLIC REVENUES

3 The global financial system and enduring poverty Peter Wahl

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4 Dealing with debt Katarina Sehm-Patomäki

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5 Taxing transnational corporations John Christensen

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6 The fiscal impact of trade liberalisation Aldo Caliari

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7 Global taxes for public finances in the South Jacques Cossart

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8 Breaking the vicious circle: Grand corruption in Kenya Alvin Mosioma and Bob Awuor

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PART III: BETTER PUBLIC EXPENDITURES

9 The myth of development aid Lou Keune

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10 Public finance for global public goods Dries Lesage

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Postscript Matti Kohonen and Francine Mestrum

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Notes on contributors Index

226 228

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LIST OF FIGURES AND TABLES

Figures 2.1 Public finance in developing countries, annual losses through four main leakages 9.1 World income distribution by percentiles of the population, 2000 9.2 The living planet index, 1970–2003 9.3 Humanity’s ecological footprint, 1961–2003 9.4 Terms of trade indices: all developing countries 9.5 Terms of trade - gains (+) or losses (–): all developing countries 9.6 Long-term debt: all developing countries 9.7 Disbursements of loans, debt service, long-term debts: all developing countries 9.8 Foreign direct investment (net), investment income: all developing countries

48 191 192 193 195 196 197 198 200

Tables 2.1 Sources of commercial dirty money flows 5.1 How one euro’s worth of bananas purchased in Europe is traded on paper for profit-shifting purposes 9.1 Terms of trade: gains and losses (US$ millions, current values, 1980–2006) 9.2 Terms of trade gains and losses: official development aid (US$ millions, current values, 1980–2005) 9.3 Disbursements of loans, debt service (in million dollars, current values, long-term debts) 9.4 Foreign direct investment, net: investment income (in million dollars, current values, 1980–2005)

55 110 196 197 199 199

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LIST OF FIGURES AND TABLES

Box 5.1 The case for country-by-country reporting by transnational countries

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ACRONYMS AND ABBREVIATIONS

ACECA AML ATTAC

BIS CbC CCMF CDM CEO CSR CTT DAC EC ECB ECK EDB EITI EPZ EU FATF FDI FTAA FTAM FTAP GATS GATT GDP GEF GEO Gha

Anti-Corruption and Economic Crimes Act Anti-Money Laundering initiative Association for the Taxation of Financial Transactions for the Aid of Citizens Bank for International Settlements Country-by-Country Climate Change Mitigating Facility Clean Development Mechanism Chief Executive Officer Corporate Social Responsibility Currency Transaction Tax Development Assistance Committee European Commission European Central Bank Electoral Commission of Kenya European Development Bank Extractive Industries Transparency Initiative Export Processing Zone European Union Financial Action Task Force Foreign Direct Investment Free Trade Agreement of the Americas Fair Transparent Arbitration Mechanism Fair Transparent Debt Arbitration Process General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Product Global Environment Facility Global Environment Organisation Global Hectares ix

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ACRONYMS AND ABBREVIATIONS

GJM GPG HIPC HNWI IASB IBASD ICC IDPF IFI IFRS ILO IMF ISEW KAAB KACC KANU KYC LDC LDP LIC LPR MAI MDG MNC NAK NAMA NARC NATO NGO ODA ODM OECD OFC OTC PEF

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Global Justice Movement Global Public Goods Highly Indebted Poor Country High Net Worth Individual International Accounting Standards Board International Board of Arbitration for Sovereign Debt International Criminal Court International Drug Purchase Facility International Financial Institution International Financial Reporting Standard International Labour Organisation International Monetary Fund Index of Sustainable Economic Welfare Kenya Anti-Corruption Advisory Board Kenya Anti-Corruption Commission Kenya African National Union Know Your Client Least Developed Countries Liberal Democratic Party Low Income Country Living Planet Report Multilateral Agreement on Investment Millennium Development Goals Multinational Corporation National Alliance of Kenya Non-Agricultural Market Access National Rainbow Coalition North Atlantic Treaty Organisation Non-Governmental Organisation Official Development Aid Orange Democratic Movement Organisation for Economic Cooperation and Development Offshore Centre Over-The-Counter Private Equity Funds

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ACRONYMS AND ABBREVIATIONS

POEA PPP PRGF PRSP PWYP REITS SDRM SEZ SID SIV TI TIM TJN TKK TNC TRIM TRIP UK UN UNCITRAL UNCTAD UNDP UNEP UNICEF US VAT WWF WTO WWR

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Public Office Ethics Act Purchase Power Parity Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Publish What You Pay Real Estate Investment Fund Sovereign Debt Reduction Mechanism Special Economic Zone Society for International Development Structured Investment Vehicle Transparency International Trade Integration Mechanism Tax Justice Network Toa Kitu Kidogo Transnational Corporation Trade Related Investment Measures Trade Related Intellectual Property United Kingdom United Nations United Nations Commission on International Trade Law United Nations Conference on Trade and Development United Nations Development Programme United Nations Environment Programme United Nations Children’s (Emergency) Fund United States Value Added Tax World Wildlife Fund World Trade Organisation World Wealth Report

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PREFACE INTRODUCING THE TAX JUSTICE NETWORK: ‘ONLY THE LITTLE PEOPLE PAY TAXES’

Large corporations and wealthy individuals are increasingly avoiding their obligation to contribute to society through taxation. With the aid of governments, they are shifting the tax burden further onto ordinary citizens and smaller businesses. Governments claim that revenues are too low to achieve social justice through decent public goods and services; privatisation and cuts in social expenditure are presented as the only solutions. Instead, we argue for tax justice: to restore the ability to tax the wealthy beneficiaries of globalisation. Tax avoidance now occurs on a massive global scale. Assets held offshore, beyond the reach of effective taxation, are already estimated to equal one-third of total global assets. Around half of all world trade appears to pass through tax haven jurisdictions, as corporations shift profits to where they can avoid tax. Networks of banks, lawyers and accountants create complex and secret financial structures, reducing transparency and enabling tax evasion. Claims of corporate social responsibility are undermined when low corporate tax payments are exposed. Such behaviour is economically inefficient, socially destructive, and profoundly unethical. Developing countries are estimated to lose revenues greater than annual aid flows. An increased return of just half a per cent on global assets held offshore could yield sufficient revenue to finance the UN Development Goals for 2015, halving global poverty. Instead, such development is under threat from the huge tax breaks offered to attract large corporations, and from the vast outflow of funds from developing countries to tax havens. xiii

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These trends threaten democracy and development. A process of tax competition at the global level undermines the social contract previously set within the national arena, as states compete to offer tax exemptions to capital. Tax havens grow more numerous, the world’s richest financial centres get even richer, taxes paid by large corporations fall, and ordinary citizens bear the cost. The Tax Justice Network is part of a growing global civil society, which through its many facets is challenging the status quo of globalisation, while arguing for a more transparent, democratic and equitable world society and economy. The TJN was founded as an international NGO coalition after the 2002 European Social Forum in Florence, and 2003 World Social Forum in the Brazilian city of Porto Alegre. Continuing to work with a wide range of civil society groups our network also includes academics, accountants, development organisations, faith groups, financial professionals, lawyers, public-interest groups and trade unions. The network has also grown into a global campaign. Tax Justice for Africa was founded during the Nairobi forum in 2007, and there is an increasing number of regional and national coalitions including Tax Justice USA, the Nordic Tax Justice Network, TJN Netherlands and TJN Canada. We call upon all concerned to join in meeting these challenges, by building global and national campaigns for tax justice.

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INTRODUCTION Matti Kohonen and Francine Mestrum

At a time when climate change, an economic recession caused by financial turmoil and a serious food crisis are threatening the planet and humankind, questions arise about the ways in which our world is being managed. It is in these times of turmoil that we find it timely to put forward a vision for changing some of the underlying assumptions concerning the global economic architecture. We call this architecture World Public Finance as it intends to regulate the world economy. It is based on public support in order to gain democratic legitimacy and to raise domestic and global financial resources to promote development. The current financial turmoil is largely caused by the lack of regulation and transparency in world markets that has masked the risks inherent in irresponsible lending and investment practices in recent decades. It is the myth of the self-regulating markets – better described as self-speculating markets – that has led politicians, think-tanks and even regulators to consider that markets somehow are able to take care of the risks that build up. The current economic crisis started in July 2007 with a credit crunch after it was evident that irresponsible lending practices in the US housing market had been largely hidden. In August 2007 it was revealed that for many years credit-rating agencies had failed to recognise the nature of the risks that had been packaged into mortgage-backed securities. By September 2007 it also became clear that rating agencies had subsequently failed to act fast enough to advise the investor community when the scale of these risks became apparent in 2006. Importantly, the majority of the securitised instruments at the heart of the sub-prime mortgage market crisis had been created in either the Cayman 1

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Islands or the British Channel Island of Jersey, both of which have promoted themselves on the basis of soft-touch regulation combined with rigorous secrecy and non-existent capital gains or corporate taxes. It is also in these offshore jurisdictions where de facto regulation of the world economy takes place today, in the absence of the global regulation that we are calling for. For instance, there are currently some 9000 hedge funds, of which 75 per cent are registered offshore. They manage an estimated $US 2 trillion worth of assets, which, for instance, gives them the clout to account for some 30 per cent of US stockmarket trading. Most of them are set up as limited partnerships of a small pool of private or institutional investors, so that they would be subject to regulations that concern mutual investment funds, including minimal capital requirements on investments, reporting their investment decisions and curbing high-risk trading. The European Union, the United States and other major market regulators should take a lead in removing the veil of secrecy from hedge funds, and other offshore investment funds, trusts and other hidden assets that include the private equity funds and real estate investment funds that also largely make use of offshore secrecy spaces. These assets not only threaten the integrity of the global economy, but have led to tax evasion on an unprecedented scale and global reach. There are various ways of increasing regulation, starting from reporting standards for hedge funds by applying a licence-based system to mandating reporting standards on clearing houses where many derivatives, foreign exchange and over-thecounter trades are settled. Furthermore, financial transparency and detailed reporting standards are the main objective of a future regulatory overhaul so that regulators, central banks, credit-rating agencies and investors alike can assess better the risks associated with capital flows to prevent economic turmoil and social crisis. Well-enforced automatic information exchange treaties between tax authorities in the future will spell the end of banking secrecy. What has

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happened since the credit crunch is that hedge funds and other high-risk investors have moved to speculate increasingly on commodities markets, pushing up prices of agricultural goods in particular in anticipation of food shortages from changing food consumption patterns, and substituting oil with biofuels in the West owing to the effects of the Third Oil Shock that struck as petroleum prices climbed over the $100 a barrel mark on 2 January 2008. In this climate of economic turmoil and a food crisis, the G7/8 leaders are locked in their short-term vision of pleading with the petroleum producing countries for increased production, while what they should really agree upon are global measures including minimum tax levels on all petroleum products and other nonrenewable sources of energy, and global taxes on carbon emissions to finance for a shift towards a post-oil-dependent world. The enormous profits of the leading energy companies from the oil price boom will not encourage them to hold the long-term view on shifting beyond oil. It is not their role to do primary research in any case, as shareholders want returns on a quicker basis and find renewable energy research too risky. This is why a minimal amount of the profits of leading oil companies goes into renewable energy research and development, and we shouldn’t expect the proportions to rise in the near future. Besides, like all companies in extractive industries, they are poorly equipped to innovate other than in furthering refining and exploration techniques. While some oil companies may talk up their green credentials, none of their projections would estimate decreasing oil consumption in the near term, as renewable energy is only a complement and not a substitute in their calculations. Social innovation plays a key role as markets and companies do not innovate on their own. Public mobilisations and consumer boycotts also play their role, along with opinion leaders. It is actually largely a consequence of reactions to the Second Oil Shock in 1979 and a public vote to close down nuclear power production in 1988 – after the Chernobyl nuclear disaster – that Denmark today manages to cover 25 per cent of its energy consumption with

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wind power. Public subsidies paved the way with research and development, certification, testing and standardisation to build an industry with exports over $7 billion in 2007. Germany is the world’s leading photovoltaic power producer with 46 per cent of world production, while not exactly being endowed with the most sunlight in the planet. In particular, the southern German city of Freiburg has started a solar renaissance, where successful protests against nuclear power created a stimulus for alternative energy in the 1970s, and subsequently municipal building regulations and state subsidies were met with grassroots enthusiasm. Freiburg has the world’s only solar-powered football stadium, and new buildings are mandated to be equipped with photovoltaic cells. Meanwhile France responded in the 1980s with increased nuclear power capacity, as its public opinion was less hostile to nuclear energy owing to the research being carried out domestically. Today 35 per cent of France’s total energy requirements is covered by nuclear energy. France and Denmark consequently have the least emissions per kilowatt in Europe. We demand that governments make bold commitments in the field of renewable energies as a response to the Third Oil Shock. The food crisis, which has been aggravated by speculative commodity futures trading, will not be simply solved through aid, but by bolstering public financing in developing countries in order to increase agricultural productivity, recuperate land from desertification arising from overgrazing and global warming, bring back agricultural development officers to rural areas across Africa and Asia who have been laid off in government spending cuts mandated by the IMF (International Monetary Fund), and build sustainable water and waste management infrastructures for improved agricultural yields and better hygiene. The food crisis will also trigger demands for an increased role for the state in maintaining food security through emergency food storage (bumper stocking) – which can also be bought and sold to soften market volatility – and agricultural land management strategies for any bumper crops being made available in reasonable time frames as emergency stocks run out.

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A RATIONALE FOR PUBLIC FINANCE-LED DEVELOPMENT

Civil society movements have been sharing experiences across the world and learning from the mistakes of various governments and international agencies who, far from giving early warnings or attempting to avert crises, have done little but watch as financial turmoil, increasing inequalities and an ecological disaster have been building up. We are therefore proposing that the current crisis should serve as a turning point where we break from our past habits and look towards political alternatives for the future. The role of global civil society has been precisely this for the past two decades: to visualise the practical and political solutions in order to create a new system of global governance. Since the 1990s poverty reduction of individual people has been the priority of development cooperation. Despite these efforts, the number of poor people is hardly diminishing. According to the ILO (International Labour Organisation), almost half of the world’s labour force earns less than $2 a day. At the other end of the spectrum, about 100,000 people have more than $30 million of financial assets, and their accumulated wealth grew by 16.8 per cent compared to 2006. The two sides of the coin are related, since the highest income-earners have often placed their assets offshore and thus refuse to pay the taxes that would allow launching social welfare programmes and public services for those on the flip side of global inequalities. To tackle poverty, at the UN (United Nations) Conference on the Financing for Development in Monterrey, in March 2002, the rich countries were urged to make concrete efforts towards a spending target of 0.7 per cent of GNP (gross national product) as development aid. These promises have been repeated and strengthened at every G7/8 meeting, though with little tangible results. In 2006 the official development aid of the DAC (Development Assistance Committee) members was 0.31 per cent of their GDP. Therefore we find that strengthening public finances holds greater hope than development aid for curbing poverty and

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inequality and in meeting the Millennium Development Goals (MDG) by 2015, a rendezvous that is likely to be missed for many of the poorest people in the world, especially in a world of higher food and energy prices. Efforts should be focused on nation-building and democratisation so that governments can take the lead in effectively taxing economic flows and provide for public goods. We live in a truly paradoxical world. Never before has there been so much wealth, and never before has poverty been so manifest and unacceptable. And yet, both phenomena are part of one single reality. We live in a global society that promotes world trade but turns a blind eye to redistribution. While we have charters and declarations for promoting global citizenship, we refuse to give citizens an opportunity to make a decent living. The editors of this book believe this world is unsustainable as it now stands. They have launched the World Public Finance initiative as a concept that brings the various proposed alternatives together in a wider architecture. What distinguishes this design from many others is that it does not come from the drawing board of a famous architect (or an economist), being a social and technical construction of the efforts made by global civil society during the past two decades, encapsulating both the creativity and the sense of urgency. It does not present an ideal, nor a blueprint. It is not a piece of modernist architecture; instead, it presents a living design that is shaped by the dialogical processes and ongoing social struggles that create conditions for imagining new forms of social solidarity and interaction. Indeed, this architecture is a beginning rather than an end, the start of a process rather than its end point. These proposals also demonstrate the renewed efforts of civil society concerning economic issues. Civil society has moved beyond identity politics to constructive politics, where various identities are no longer lying in their own cultural spheres, but are part of the dialogical process of shaping a new global polity where diverse identities can interact.

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THE CONVERGENCE OF SOCIAL MOVEMENTS IN TACKLING PUBLIC FINANCES

World Public Finance brings together different strands of social movements.

The aid agenda While development was understood in the 1960s and 1970s as consisting broadly of a state-driven process of demand-stimulated growth, this agenda was completely abandoned as we moved towards the 1980s, and poverty reduction of individual people became the new priority of development cooperation towards the 1990s. This change of agenda was caused both by the crisis of public finances in the debt crisis and a shrinking policy space in development owing to structural adjustment plans and trade liberalisation. After the end of the Cold War, the UN organised a series of international conferences on questions of the environment, population, human rights, women, social development, etc. All conferences ended with beautiful action plans, which were further elaborated at the UN Millennium Summit in 2000 into the Millennium Declaration, yielding eight Millennium Development Goals as the synthesis of the various conferences. Unfortunately, there was no money to implement them, and the Monterrey Conference of 2002 was an attempt to tackle the challenge. Civil society repeatedly pointed to the fact that the rich countries had not lived up to their promise of giving development aid up to 0.7 per cent of their GDP. More and more criticism was also heard on the quality of the aid, which is tied to suppliers from the donor country. This means it never reaches the developing countries, but is paid directly to companies in the industrialised countries. Besides, too much of the aid is phantom aid that goes to pay for expensive consultants, who write their reports on what poor countries are supposed to do, what rich countries have done and why it has or has not worked. Recent increases in aid have either been due to post-war ‘reconstruction’ efforts in Iraq, Afghanistan

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and elsewhere, led by politically connected construction companies, or through one-off debt relief disbursements. The Paris Declaration of 2005 is meant to enhance the effectiveness of aid and has the potential of harmonising the aid practices of several donors. But two major problems remain: aid is still donor-driven, and despite the new principles introduced by the World Bank (ownership and participation), old practices continue to be applied. The second problem is precisely that the relevance of aid money is reduced by the huge financial losses of poor countries that are described in this book. We therefore need to take an urgent look beyond the aid itself, in terms of a number of current movements. Aid at best is a catalyst for ongoing processes of state-building and democratisation, but like any catalyst it can only work on sociopolitical reactions already in motion – not ignite them nor extinguish them.

Global debt The first movement we have to look at is the debt movement. Debt is best analysed as a political issue between the rich North and the poor South, and this has also framed ongoing discussions. The people of the countries previously led by dictators active on the borrowing front do not see themselves as responsible for repaying these loans since they never benefited from them in the first place. These dictators, ranging from Baby Doc Duvalier and Somoza to Suharto, used the loans for consumption or for the military, rather than for investment. During the political arm-twisting of the Cold War, little attention was paid to these problems, though creditors were well aware of the way their money was being used. It was not until the debt crisis of the 1980s that academic interest was sparked. Stiglitz developed new thinking on asymmetrical information, problems of moral hazard and adverse selection in lending activities in particular, while Krugman introduced debtforgiveness and suggested that forgiveness should be applied alongside financing. This research brought to light a critical analysis of the lending policies of the World Bank and the IMF.

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A political response to the debt crisis also came in the 1980s. While it was initially seen as a case of shortage of liquid means, the Brady Plan of 1989 was the first initiative approving debt cancellation instead of the previously adopted debt restructurings. Some groups started to compare international lending to national lending and examined the possibility of the borrowing party declaring itself bankrupt and thus unable to repay its loans. The final factor contributing importantly to the understanding and development of the discussions on debt was the highly visible, vast and persistent civil society mobilisations. This phenomenon of public uprising with a particular focus on debt made the debt issue a front-runner on the agenda of civil society mobilisations. These mobilisations grew from the end of the 1980s onwards, culminating in the G7/8 shadow meeting in Birmingham in May 1998, and visibly repeated in Gleneagles at the G7/8 meeting in 2005. Reportedly, the Jubilee 2000 campaign of the 1990s for cancelling Third World debt attracted as many as 24 million signatures. Susan George was the first to spell out that the debt problem is not simply a problem for the poor borrowing countries, but rather an international problem. In her book the Debt Boomerang she predicted that the debt problem could also have consequences for the North. Among other things, she mentions deforestation, drug trafficking and immigration. In order to mend North–South relations and create a basis for healthier relations, it was proposed to set up a North–South truth commission. The promise of a reconciliation process is attractive because of its potential as a trust-builder between nations and regions. It would allow for understanding the dynamics of the debt problem mainly in its historical and political sense, rather than as an issue of macroeconomic stability.

The end of development In practice, however, the debt crisis gave rise to structural adjustment programmes. They were the follow-up of stabilisation programmes imposed by the World Bank and the IMF and had

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caused enormous social consequences. Budget deficits had to disappear, inflation was to be reduced, borders had to be opened for goods and capital, public enterprises had to be privatised, and labour markets deregulated. In order to service the debt, growth had to be export-driven. This programme, later called Washington Consensus, is still running, and until now the World Bank and the IMF continue to impose conditionalities with their lending. Unicef was the first international organisation to condemn the heavy social costs paid by populations, mainly women and children, for this ostensibly economic but actually political overhaul. In 1990 the World Bank introduced its poverty reduction programmes, which were formally adopted as the development cooperation priority at the UN Social Summit in 1995. Four years later, the IMF replaced its Structural Adjustment Facility with a Poverty Reduction and Growth Facility. However, the content of its programmes did not change. The Washington Consensus was now said to have poverty reduction as its primary aim, through growth, free trade and deregulation. The Washington Consensus in fact totally abandoned the economic and social development theories that had been proposed at the UN in the 1960s and 1970s, and also adopted by many newly independent countries. The focus shifted from countries to people, and states were no longer supposed to play an intervening economic role. Industrialisation and economic diversification had to be the consequence of market rules. Social security was said to be contrary to poverty reduction. Everything that hindered markets from functioning was detrimental to the poor, according to the World Bank. In fact, what the poverty reduction agenda did was give a human face to the neoliberal Washington Consensus. It ignored social and economic rights, labour and labour laws, and forgot about the central issue of income poverty.

Global trade While the debt crisis was ultimately created by the ill-advised lending policies of the IFIs (International Financial Institutions) that emerged in the post-war era, in some sense the opposite

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holds for the current trade regime. The lack of an international agreement to create lasting institutions in the post-war era meant that trade for a long time remained a special area of diplomacy, governed by shifting foreign policy priorities rather than shared objectives. The links between trade and foreign policy have always remained a point of conflict, and it can be argued that trade is the post-colonial instrument of rich countries. The first phase of trade liberalisation through the GATT (General Agreement on Tariffs and Trade) was gradually built up through seven different trade rounds, until the Tokyo Round in 1973. There were unprecedented reductions in tariffs, which created a trade regime whereby the tariff barriers between the three trading blocs of Europe, North America and Japan were substantially reduced. As the trade liberalisation agenda had reached many of its goals, the focus of free trade lobbyists was directed to new issues. The enlarged topics it dealt with included investments, intellectual property agreements, reduction of tariffs in services and agriculture, and elimination of non-tariff barriers, which essentially meant doing away with domestic rules and regulations that were said to hamper the access of foreign goods to new markets. On the one hand, the elimination of non-tariff barriers meant that democratic decisions were restricted to serving international trade imperatives. On the other, adjustments to foreign rules were very expensive if developing countries wished to keep market access in the North. As the GATT became the WTO (World Trade Organisation) with the end of the Uruguay Round in 1995, trade, so it seemed, began to govern an increasing part of life itself. Now faced with different criticisms concerning the preservation of indigenous knowledge being patented abroad, the term bio-piracy emerged and indigenous peoples claimed their right to their own livelihoods. What finally sparked the organisation of mass rallies of global civil society against the trade regime was a leaked document in 1997 on Multilateral Agreement on Investment (MAI). Negotiations were under way at the OECD (Organisation for Economic Cooperation and Development) and were meant to

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protect investors’ rights. This agreement was seen as eroding national sovereignty, as it had rules on labour law, clauses on foreign ownership in key industries, and regulations concerning the production of goods according to national standards. Trade activists and other social movements who opposed neoliberal globalisation all came together at the time of the Seattle Ministerial Meeting of the WTO in November 1999. What followed was the emergence of a Global Justice Movement (GJM), which aimed to halt the seemingly inevitable march of ever more imbalanced trade relations between the North and the South. If the GJM, largely through its ability to shape a nascent global identity, claimed notoriety following the events, its participants were also quickly dismissed in the mainstream press at the time as anti-globalisation activists, or as disillusioned youth wearing Nike trainers while protesting against Starbucks. While the MAI was buried, the same topics surfaced in the General Agreement on Trade in Services (GATS) within the WTO, as it envisaged further trade liberalisation in services. The problem is with the definition of services, which can range from local libraries to labour-hire companies and financial services. An antiGATS campaign was started in 2002, as it seemed unacceptable to allow the WTO to decide when a public service is seen as a market-based activity and when not. In the meantime, the trade agenda had evolved towards the Doha Development Round. It was through this linkage of trade to development, and the simultaneous Monterrey Financing for Development process, that trade also was linked to public finance, as it was said to allow for growth and public revenues. If trade was to be an engine for growth, it should be looked at in the framework of increased macroeconomic benefits to the developing countries in signing up to new trade agreements, or in negotiating concessions for foreign investors. The fair-trade movement, which benefits an estimated 1.5 million producers and workers organised in co-operatives and unions in 58 developing countries, had sales of $3.6 billion in 2007 – with an astonishing growth of 47 per cent from 2006 owing to strong growth in North America in particular. It represents a producer-

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focused vision of a global trade regime where support is given to increase their producers’ welfare with stable contracts, social development plans, quality produce and higher yields. Similarly governments should certainly judge foreign investors on their real contributions to social development.

Global taxes Globalisation has created new transnational spaces where economic actions take place without much regulation, taxation or surveillance. These spaces were only becoming evident when lowering tariffs made it possible to rely on imports for large parts of consumption, and above all when financial deregulation opened up the floodgates to the movements of capital and the world of offshore finance. Before trade and investment liberalisation, the potential tax base of global taxes would have been small. The idea of global taxes is often accredited to James Tobin, a Nobel laureate in economics, who proposed a small levy on currency transactions as far back as 1978 to put ‘sand in the wheels’ of foreign exchange markets by taxing them at a very low rate (he proposed 1 per cent, but later revised it down to 0.1 per cent). Exchange rate fluctuations, in his view, were detrimental to the real economy of trade and finance, a trend he had been closely following since Richard Nixon ended the dollar’s convertibility to gold in 1971. Tobin’s proposal was flagged up every time a major financial crisis occurred, but it was never taken seriously until the Asian financial crisis hit in 1997. A herding mentality of currency traders was evident as they started selling currencies, hoping to exhaust central bank reserves. When the currencies hit rock bottom, they bought back the assets and securities at a much lower value, giving them a hefty margin. An editorial in the December 1997 issue of Le Monde Diplomatique called for ‘Disarming the Markets’ by mobilising civil society. In June 1998 ATTAC (the Association for the Taxation of Financial Transactions for the Aid to Citizens) was founded in order to campaign for the CTT (Currency Transaction

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Tax) and other initiatives to regulate global markets, roll back the neoliberal economic consensus, and build alternatives. For the agenda of global taxes to succeed it needed much wider arguments than those around the CTT. The first objective was either to control markets with a double-tier taxation model or to collect revenues for financing global public goods. The agenda, however, needed to be broadened in order to attract more support. It was linked to the efforts concerning Financing for Development, and more taxes were planned. Indeed, the CTT itself was soon based on the foundations of welfare economics, as currency crises were analysed as harmful activities, following the thinking of the eminent welfare economist Arthur Pigou. Ever since the negotiations on the Kyoto Protocol, carbon taxes have become a part of everyday life in some rich countries. Sweden was the first to implement a national carbon tax back in 1991, prior to the Rio Earth Summit. Finland, the Netherlands and Norway soon followed, and some municipalities in the US and Canada have also implemented local carbon taxes. The EU considered an EU-wide carbon tax in 2005 prior to the emissions trading scheme. Many economists think a carbon tax is the most efficient solution to combating carbon-induced climatic change. At the Monterrey Financing for Development Conference in 2002 there were difficult negotiations concerning innovative sources of development finance, a topic introduced by the French and Brazilian delegations in calling for global taxes to fund the MDGs. While no agreement was reached, largely because of opposition from the US, Japan and some developing nations (fearing it would divert existing aid flows), the idea sparked the formation of the Leading Group on Innovative Financing Mechanisms. It has been headed by the French, Brazilian, Chilean and Spanish governments from 2003 and has been joined by 44 nations, with Norway and South Korea taking an active role. In 2003 the Leading Group prepared a wide-ranging proposal for up to ten international taxes concerning ecologically harmful activities, profits of multinational corporations, financial assets and transactions and Internet traffic. The total sum of the taxes proposed amounted annually to $956 billion, or nearly 20

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times the additional financial resources envisaged for achieving the MDGs. Subsequent progress on implementing these taxes has, however, been relatively slow. An air ticket levy, the smallest of the proposed taxes, has been piloted since 2006 by 12 countries. It has contributed some $250 million in funds allocated for the International Drug Purchase Facility (IDPF), which was branded as UNITAID, a term that could be translated in all languages. Other international taxes, however, have been much harder to implement as they face stronger resistance from business, and because of the prospects of tax competition. Though the group enjoys the support of a further one hundred countries, many of them would not be willing to implement the taxes at this stage. Global taxes seem to be an idea whose time has come, while politicians are turning a blind eye to the problems faced by our planet and global society.

Tax justice Tax justice issues have surfaced in public opinion since the deregulation of financial markets and political measures for investment liberalisation changed the face of global finance in the late 1970s. Financial deregulation created the offshore phenomenon, where small jurisdictions found an easy way to enrich themselves by setting up banking secrecy laws and abolishing taxes on business and capital to attract mobile assets. There are currently about $11.5 trillion in private assets held offshore. It was for fear of overseas drug barons and other barbarians at the gates taking over the US financial system that the Financial Action Task Force (FATF) was created by the G7/8 leaders in 1989 to establish and operate a global anti-money-laundering programme. The majority of secrecy jurisdictions have enacted a plethora of new laws and regulations, but the essential features of offshore secrecy remain unchallenged, particularly the nondisclosure of beneficial interest in offshore companies, trusts, foundations, etc.

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However, FATF was a precedent in the international framework, and this made it possible to begin to tackle dirty money flows. Its 40 recommendations could go a long way in stopping illicit flows. In particular recommendation number five says that Know Your Client (KYC) checks should be made on all deposits, a rule that is not being commonly followed in tracking down the myriad offshore and otherwise secretive arrangements to hide beneficial ownership. Raymond Baker, having looked into the Anti-Money-Laundering regime, noted that the efforts have a failure rate of 99.9 per cent, as seized money-laundering assets amount only to $250 million, while estimates of dirty money flows into the US (even the official ones) put the figure at $250 billion. This rate of failure should certainly have provoked an overhaul of the AML regime, but instead it led to the conclusion that the harm in the US from crimes committed abroad was relatively low. Campaigners have highlighted that capital flight and corruption, where money often ends up in US or other Western banks, are indeed seriously hampering development efforts and halting the wave of democratisation in Africa and parts of Asia. Several scandals involving politically important persons in France and Britain, linked to the Elf-Aquitaine, British Aerospace and Clearstream affairs, demonstrate how corrupt money is being shipped out of developing countries with the help of Western intermediaries. By the late 1990s, the corrosive effects of harmful tax practices had become widely recognised. In its 1998 report on harmful tax competition the OECD identified five potential areas of harm, ranging from undermining the integrity and fairness of tax structures to an undesired shift of part of the tax burden to less mobile tax bases, such as labour, property and consumption. A decade has passed since the publication of that report, but despite increasing evidence of failing public services and mounting inequality in the richer as well as the poorer countries, tax evasion and avoidance continue unabated. Another OECD initiative included listing non-cooperating jurisdictions, though from an initial list of about 20 tax havens, it now only has

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three left: Liechtenstein, Monaco and Andorra. The subsequent OECD Global Forum initiative to create a level playing field between offshore financial centres moves forward at a painfully slow pace. Similar lack of momentum is evident in other international institutions. The United Nations Tax Committee, created in 2003 to encourage international cooperation in tax matters after initial fanfare by the Secretary-General’s office, has now entirely disappeared from public scrutiny and largely focuses on minutiae rather than the bigger picture. Equally hopeless is the Financial Stability Forum, created to prevent a repeat of the financial market instability that swept through South-east Asia, Russia and Latin America in the 1990s. It has abandoned its blacklist of offshore financial centres and is totally incapable of assessing the risks that have built up in offshore securities and derivatives. Civil society has played a crucial role in shedding light on the issues that are too easily forgotten within the intergovernmental agencies. What extractive industries campaigns, anti-corruption probes, tax justice initiatives and financial crime scandals have demonstrated is that the offshore world of secretive tax havens is the key culprit of the erosion of integrity in global financial markets. Tax competition is also aggravated by these low-tax jurisdictions and the practices that they legitimise in creating special economic zones (SEZ) and flags of convenience that in a similar fashion are ring-fenced jurisdictions that serve to dumb down social and environmental regulation. By focusing on developing countries we can once again highlight the losses of both tax evasion and tax competition, either through illicit means or negotiated concessions. This is why the Leading Group has recently been very interested in reducing corruption and has placed a focus on offshore jurisdictions as key facilitators of global corruption. The proposals that the Leading Group has recently presented for further revenue mobilisation will include tackling capital flight, trade misinvoicing and transfer mispricing.

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THE STRUCTURE OF THE BOOK

This book is primarily about the alternatives presented to the current global economic and financial order. It only very briefly discusses how the global financial system came about, since this has already been covered in previous publications about the structural injustices of the global economy. We wish here to move essentially a step forward, first by demonstrating the issues and the reactions that have been sparked by global civil society concerning the global economy, and secondly by analysing, in a rather provocative but constructive manner, the various proposals that have been put forward. The huge inequities cannot be eliminated by national public finances alone nor by relying on the private sector or global financial markets. This globalised world should not be just a playing field of stockbrokers and private equity funds. Instead we must map out a global public that could set out rules and conventions for the new spheres that globalisation has opened up. It will obviously require far more than the handful of ideas proposed in this book. Most of all, it will require some form of global governance. This book is divided into three parts. The first part is an overview of the role of public finances in contemporary world society; the second part considers the various leakages and erosions of public finances and proposes new mechanisms and initiatives to recapture them within a framework of deepening international cooperation; and finally, the third part maps out some of the proposals that build upon the expenditure side of public finances in considering both the old problems of development cooperation and the new challenges of global public goods. In Chapter 1 Francine Mestrum begins by making a case for reassessing the ways in which we consider inequalities in global society. If we wish to rise above both nationalistic biases and the limited notion of absolute poverty, we should look at the ways in which income and wealth inequalities have increased and continue to do so. Whereas poverty reduction can be legitimised by ethical rules, the fight against income inequality necessarily falls back on

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political arguments, which we are proposing are crucial in the development debate as well. In Chapter 2 Matti Kohonen maps out a vision for world public finances by combining the four key erosions that developing countries face: debt servicing, lost tax through dirty money flows, the lost national tax base and a missing global tax base. He then goes on to suggest that to capture the revenue potential in a globalised world we need to create a new global social contract, which would spell out the rights and responsibilities of all actors when acting beyond national spaces. Moving on to Part II, Chapter 3 by Peter Wahl looks at the systemic failures of the financial system and the structural inequalities that it produces. He describes the historic transformation of financial markets in a neoliberal era and gives insights into the role of new key players in the highly dangerous and volatile financial world. In Chapter 4 Katarina Sehm-Patomäki discusses the debt problem and urges us to reconsider the issue as a political rather than an economic question. Existing debt cancellation plans have also been mostly led by political motives, such as post-war reconstruction, or a sense of shared responsibility, as recognised by the Norwegian government when it cancelled some of its outstanding debts in 2005. The solutions to the debt crises must involve lasting institutional frameworks such as international debt tribunals and sovereign debt bankruptcy laws, or else we will face yet another debt crisis. Taking as his theme in Chapter 5 concerning taxing transnational corporations, John Christensen inquires into the accounting and incentive structures of some of the largest corporations. He asks how such entities that operate globally could be brought under a framework of fair taxation. He proposes to implement countryby-country accounting rules, requiring TNCs (transnational corporations) to submit global unitary accounts and work further to press for international tax cooperation. Expanding on the previous chapter, in Chapter 6 Aldo Caliari considers the entire trade and investment liberalisation regime by analysing how various international or bilateral agreements have

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eroded both the policy and tax base of many developing countries. The current export-driven growth model has been promoted aggressively in developing countries, encouraging them to give tax holidays and set up export-processing zones to attract mobile capital. More coherence between trade regimes and promoting sound public finances is called for. In Chapter 7 Jacques Cossart reflects on the impact of global taxes on cross-border economic activities such as financial transactions, profits of TNCs and CO2 emissions as a way of collecting revenues for financing necessary global public goods. He provides both theoretical and practical support to the arguments for setting up treaties on global taxes, suggesting that such taxes will work best within a UN framework, while collection would be based on existing national institutions. Finally, in the last chapter of this part, Chapter 8, Alvin Mosioma and Bob Awuor review the political crisis in Kenya after the failed elections in December 2007. After analysing a system of governance that created Grand Corruption, the authors analyse the ways in which corruption needs to be seen as a North–South issue, where solutions must be found for solving the supply side of corruption in the West, as much as for entrenched political institutions that support corruption in Africa. Part III explores both current and proposed models of expenditure for world public finances. In Chapter 9 Lou Keune examines the myth of development cooperation by focusing on the disparities between inflows and outflows of all economic values (not just taxes) between Northern and Southern countries. He finds that the South is largely contributing to the North, and such flows question the premise of development cooperation as a means of helping the poor. In Chapter 10, which aims to map out a future framework for the provision of global public goods, Dries Lesage points out that an emerging consensus is building up around the concept of GPGs. Using this as a progressive platform, he notes that it has the potential for redistributing global incomes and guaranteeing basic social rights in a globalised world.

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THE BEGINNING OF A RESEARCH PROJECT

This book is only the beginning of a research project that will take many years to be completed. Its purpose is to start a global debate in order to promote the concept and the crucial idea of global redistributional justice. The now fashionable ideas of global ethics, corporate social responsibility and good governance cannot hide the systemic failures, the unsustainability of the growing inequalities and their consequences for global stability and the survival of humankind. It should be clear by now that development needs to consist of more than poverty reduction. It needs to combine economic, social and political changes that provide for broader democratic rights, and it has to reorganise production so as to meet ecological sustainability requirements. Furthermore, in the midst of a global food crisis, food sovereignty has to be reinstated as a fundamental right of all countries and regions. Not being naïve cosmopolitans, we believe in the importance of strong and effective nation-states that can protect their sovereignty and their populations. Neither do we believe in an unstoppable course of history, or of the human spirit; rather, the struggles here and now are what shape our consciousness and provide opportunities for change. We are also convinced of the need for better global governance, democratically organised and monitored.

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Part I Visualising the Problems

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1 WHY WE HAVE TO FIGHT GLOBAL INCOME INEQUALITY Francine Mestrum

There should exist among the citizens neither extreme poverty nor excessive wealth, for both are productive of great evil. (Plato) A society can be Pareto optimal and still be perfectly disgusting. (A.K. Sen)1

Since the international organisations put poverty on the political agenda in the 1990s, little has been heard about inequality. This is quite amazing, since it was the income gap between rich and poor countries that gave rise to the development project after the Second World War. The first UN resolutions on development do not mention poverty, but they do refer to the huge inequalities between developed and underdeveloped countries. With the new poverty agenda of the World Bank and the human development programme of the UNDP (United Nations Development Programme), both introduced in 1990, people, if not individuals, clearly have become the objects of development. There certainly are good reasons to welcome this shift, since development without benefits for people would be rather meaningless. But one also has to recognise the perfect convergence of this shift with the emergence of a neoliberal agenda that tried to weaken states and deprive them of their economic role. If countries are neither the objects nor the driving forces of development but only have to create an enabling environment and care for the extremely poor, 25

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there clearly is a new development agenda and there are good reasons to analyse all its consequences. One of these consequences is the semantic change in the concept of social development. Poverty is defined in absolute and not in relative terms. The PRSPs (Poverty Reduction Strategy Papers) promoted by the World Bank and the IMF as well as the MDGs of the UN perfectly fit into the liberal agenda. Redistribution is no longer mentioned, while inequalities concern all matters of social life and rarely incomes, and equality of opportunity is the most ambitious objective. There is a global consensus, even with NGOs (non-governmental organisations), to give priority to poverty reduction. Yet, there are no convincing arguments to explain why poverty is more important than income inequality. As I will explain below, there are reasons to believe that inequality is more threatening than poverty and can be considered to be a more urgent global problem. LEFT AND RIGHT CONVERGING

I can see three reasons to explain the success of this liberal shift. The first is the now dominant (neo)liberal ideology. As an article in The Economist in 20012 put it very well, only ‘unjustified’ inequalities have to be acted upon. The 1990s is said to have been the most exuberant period of wealth creation in human history and inequality is said to have risen. A dynamic economy needs inequality, but acting for the truly poor is ‘a much worthier goal than merely narrowing inequalities’. In any case, the rich ‘have their share of troubles’, but what gives them pleasure is philanthropy. Lifting people out of poverty is good for society, as is having profitable companies. ‘Squeezing the rich too much is in nobody’s interest.’ There is nothing new in this reasoning. According to Hayek, distributive justice is the road to serfdom;3 it necessarily leads to the destruction of the rule of law that is coterminous with equal rules for all. Inequality is more readily borne if it is determined by impersonal (market) forces than when it is a result of (political) design. The poor can be helped with a minimum of food, shelter and clothing, sufficient to preserve

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health and the capacity to work. Every step beyond this destroys freedom. ‘A universal potlatch would make a civilized world impossible,’ stated Milton Friedman.4 Poverty reduction, then, is desirable, inequality reduction is not. The second reason relates to the impatience of development organisations, and especially NGOs. They have always been focusing on poor people, much more than the official development cooperation agencies. And despite considerable economic growth from 1960 to 1980, they have seen little progress for poor people, although all social indicators significantly improved during that period.5 The poverty agenda of the World Bank and of the UN were welcomed and interpreted as a truly important and holistic shift in development thinking. A third reason is to be found in the emerging globalisation and the leftwing protests against it. Many social movements with a critical attitude towards globalisation consider the rising poverty as the final evidence of the negative impact of globalisation. However, although the disastrous social consequences of the structural adjustment programmes of the World Bank and the IMF can clearly be seen, the first critical assessments of them never mentioned a rise in poverty,6 simply because sufficient and reliable poverty statistics did not exist. Since 1990, the World Bank has made a significant effort to make worldwide poverty statistics, and even if serious doubts have arisen concerning their reliability,7 there is no alternative evidence of rising poverty. Social movements may be right in denouncing the negative consequences of globalisation on people, but there are reasons to believe that workers and civil servants are the main victims, not the already extremely poor rural population. The main victims of globalisation could be the middle classes instead of the poor. From that perspective, globalisation does produce relative poverty, although it does not worsen the situation of the extremely poor. This could explain the improving poverty statistics of the World Bank. According to recent statistics, extreme poverty fell from 40.14 per cent of the population in developing countries in 1981 to 18.09 per cent in 2004.8

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Whatever the reasons for the shift from inequality and (re)distribution to absolute and extreme poverty, it should be clear that two totally different agendas are concerned. On the one hand we have the development agenda of the 1960s and 1970s as designed by the UN and its new majority of poor countries. Development was supposed to enhance economic growth and social progress; it was a collective project for the modernisation and emancipation of countries and societies. On the other hand, the poverty agenda of the 1990s aims to help extremely poor people and especially women gain access to education and health services, in order to boost their productive capacities. Economic development is left to market forces and free trade is supposed to boost economic growth. (In)equality and (re)distribution are no longer on the agenda. THE EMERGENCE OF ETHICS

By focusing on poverty and poor people, the (neo)liberal agenda made itself acceptable and gave itself a human face. One of the problems in criticising the social agenda of neoliberalism is that the welfare state, which was developed slowly from the end of the nineteenth century onwards, never had a solid theoretical basis. The most convincing thinkers to defend re-distributional welfare were J.M. Keynes and T.H. Marshall. But social security was mainly a political decision in the light of moral indignation for workers’ conditions, the need for a productive workforce and the threat of emerging communism. Amazingly, the theoretical basis for the poverty agenda is not only given by (neo)liberal philosophers like Hayek, but also by well-intentioned philosophers and economists who have been trying to improve the ethical basis of the current system.9 Unfortunately, Rawls’s and Sen’s ethical approaches have in common the limits to equality that are inherent in their theoretical thinking. Equality may be a desirable primary good or a necessary element of individual freedom, but it will only be realised as far as markets allow it to be realised. And markets are not impersonal phenomena but the result of powerful human

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agency. Consequently, there is a serious risk that they will never go beyond a minimal level of poverty reduction. They cannot solve the political problem. As for Van Parijs’s basic income, it does not eliminate the possibility of growing inequalities. Today, new theoretical approaches are being developed as global ethics. They mainly and rightly point to the necessity of organising some kind of social protection at the global level, but have difficulties in going beyond the poverty reduction policies. These can indeed be ethically founded, whereas truly antiinequality policies will always be the result of political decisions. The fight against poverty is an ethical imperative, according to the UN. And the members of the G7/8, meeting in Gleneagles or Heiligendamm, fully agree. It should not surprise us that faced with a significant accumulation of wealth of the 1990s, they are the first to defend an ethical globalisation. These ethics perfectly fit with their discourse on the end of ideologies, the efforts to depoliticise social relationships and to dismantle social rights. THE (RE)EMERGENCE OF AN EQUALITY AGENDA

It would be wrong to state that inequality has completely disappeared from the current political discourse. In Latin America, the world’s most unequal continent, even when poverty is declining, inequality can be rising. The concept has always played an important role in development thinking, and even recent World Bank documents on Latin America recognise its major role in producing poverty.10 In recent years, a number of researchers and international organisations have again looked at inequality, even if they do not always link political conclusions to their findings. The first and major organisation that has to be mentioned is the UNDP. Since it started publishing its Human Development Reports in 1990, it has provided yearly statistics on the growing inequality at the world level. In 1992 it published the now famous glass of champagne showing how the richest 20 per cent of the world’s population possess 82.7 per cent of global income, while the poorest 20 per cent have to share 1.5 per cent.

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The world’s richest 1 per cent of people receive as much income as the poorest 57 per cent. The richest 10 per cent of the US population has an income equal to that of the poorest 43 per cent of the world. Put differently, the income of the richest 25 million Americans is equal to that of almost 2 billion people.11

However, despite these shocking statistics, the UNDP never offers political proposals to reduce these income inequalities. It seems as if the examples were just mentioned to encourage all political actors to engage in more solid human development efforts. It is one of several points where the UNDP is found to be slightly schizophrenic.12 Statistics are indeed very important. If poverty came on the political agenda before the World Bank had some more or less reliable empirical evidence on it, it seems as if the publication of data on inequality is one of the reasons why it may make a political comeback. Just as is the case with poverty, there are many different ways to measure inequality, and they are not ideologically neutral. Many researchers have looked at the possible links between globalisation and inequality but come to divergent conclusions. Some find a growing level of inequality among or within countries.13 Others are more cautious,14 or state that inequality may have declined worldwide, but that when leaving China and India out of the analysis inequality is clearly rising.15 These diverging conclusions are in fact inevitable because there are too few reliable data to measure income inequality, because different measurements are possible and different methods can be used.16 The lack of data is even worse than in the case of poverty measurements, where 67 countries lack any data and 93 countries lack trend data on the $US 1 a day poverty line.17 The main differences, however, come from the ideological stance the authors are taking, reinforcing the different values about what constitutes a just distribution of the gains from globalisation.18 A first difference concerns the distinction between two very different concepts of inequality, one of which depends solely on proportionate differences in incomes while the other depends on

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absolute differences. Critics of globalisation will use mainly the second kind of inequality, in order to point to the income gap between rich and poor. When the incomes of the poor and the rich double in size the relative income gap remains the same. However, the absolute income gap then rises sharply, because the income gain is greater for the high-income household. Absolute and relative inequality are two different concepts. The preference for one over another reflects an implicit value judgment. A second difference relates to whether one can focus solely on how the average gains from growth vary with income. Defenders of globalisation tend to focus on aggregates, while opponents will emphasise the losers among the poor. Growth tends to reduce absolute poverty on average, but that does not imply that growth is always good for the poor. If one person loses and another one gains, the impact will not be seen in the statistics, unless one specifically wants to analyse this kind of churning. The third difference concerns the inequality between countries and the question whether one should weight countries equally or people equally. This is the issue of interpersonal versus intercountry inequality. Critics of globalisation point to the fact that income disparity has been rising over time. The average income of the richest country in the world was about ten times that of the poorest around the end of the nineteenth century. Today it is sixty times higher. This is correct if one treats each country as one, which means that countries and not people should get equal weight in assessing the fairness of distribution. This is the between-country component of total interpersonal inequality. Another possibility is to look at the within-country inequality. If instead of weighting countries equally one uses population weights then the tendency for rising inequality between countries vanishes. Inequality is even found to be the lowest it has been in half a century. When one looks at the high growth rates of China and India, the two most populous countries in the world, one clearly sees the importance of these differences. One of the major researchers on inequality, Branco Milanovic, works with three different concepts of inequality.19 The first is unweighted international inequality. This uses income or GDP

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(gross domestic product) per capita and disregards population. This type of inequality has clearly been rising over past decades. Milanovic makes a distinction between four groups of countries: the rich ones; contenders, ready to catch up and join the rich club; Third World countries; and Fourth World countries. From the 19 non-Western countries that belonged to the rich club in 1960, only four remained there in 2000. Four new non-Western countries joined the club of the rich, and the group of contenders almost disappeared. Out of the original 22 contenders in 1960, 20 were either in the Third or in the Fourth World group in 2000. The group of Fourth World countries increased from 25 in 1960 to 71 in 2000. This leads Milanovic to conclude that there has been an Africanisation of poverty and a westernisation of wealth. His second concept is population-weighted international inequality, where one assumes that everyone in a country receives the same income but the number of representative individuals from each country reflects its population size. This assumes that within-country distribution is perfectly equal. Measured in such a way, inequality has decreased in the past twenty years, though it has increased if one takes out India and China. The third concept treats, in principle, everyone the same, disregarding individuals’ nationality. This is no longer an international measurement of inequality but a global one, which goes beyond methodological nationalism. Here we see a sharp increase in inequality between 1988 and 1993. The poorest 5 per cent have lost almost 25 per cent of their real income, while the top quintile has gained 12 per cent. Most of this increase can be explained by the rise of between-country inequality: 50,000 rich people receive as much as 2.7 billion poor people; and 75 per cent of the world population lives with less than the world mean income of $3526 in PPP (purchase power parity) terms. Measuring inequality with the third concept, Milanovic notes that only 17.4 per cent of the world population is middle class and that they receive only 6.5 per cent of the world 1998 income. Milanovic concludes that ‘people are poor because they live in poor countries’.20

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WHY SHOULD INEQUALITY BE BACK ON THE AGENDA?

In preparing its second major Poverty Report of 2000, the World Bank published various articles on the new poverty data, on its new social protection policy and also one of the reasons why inequality was making a slow comeback. Equity and efficiency are not separable phenomena, the authors noted, because markets are never perfect. Even if inequality does not change much over time, the task is to find combinations of instruments that will deliver both growth and equity. The world seems to be converging towards two clubs: a rich one and a poor one. Policy matters, and a country’s evolution can be altered by intervention. Ravallion was the first to show that inequality can be an impediment for pro-poor growth and that in countries with high inequality it is perfectly possible that growth has no impact at all on poor people.21 These findings are confirmed in other articles and formally integrated in the World Bank’s thinking. ‘High levels of inequality and deprivation can be harmful to efficiency and growth, ’ states the World Development Report of 2003.22 In 2006, the World Bank’s World Development Report was dedicated to equity.23 ‘Equity and equality overlap quite extensively,’ stated one of the outlines of the report, and both concepts were used without ever making a clear distinction. If this focus on equity is a major achievement for the World Bank, it should also be noted that the final report exclusively focuses on equity24 and ignores equality. The policy aim is not equality of outcomes. Outcomes matter, but mainly for their influence on absolute deprivation and their role in shaping opportunities. Individual incentives should not be blunted by income redistribution schemes, because that could lead to less growth. ‘The history of the twentieth century is littered with examples of ill-designed policies pursued in the name of equity that seriously harmed […] growth processes… A balance must be sought…’25 The report constitutes a real shift in World Bank thinking by mentioning social protection as opportunity-enhancing, as including minimum wages, human rights and core labour standards, even taxes, though all these elements are said to imply serious trade-offs. In

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fact, the report does not concern income inequality but merely inequality of opportunity, and it does not give statistics on income inequality. Moreover, this seemingly positive shift at the World Bank is contradicted by another series of its reports that classifies countries positively when they have little or no labour market regulations, and gives them a negative score when labour markets are regulated.26 SOME OTHER GOOD REASONS TO FIGHT INEQUALITY

The reasons mentioned by the World Bank why inequality is back on the agenda are rather limited though not unimportant. Its 2006 report shows that the Bank is not really convinced of the usefulness of analysing income inequality. In fact, its reasoning on the links with the poverty-reducing potential of growth could lead to a kind of optimal inequality: small enough not to hinder poverty reduction, large enough not to hinder growth. There are other reasons for tackling inequality. The first reason is moral indignation, not only faced with the magnitude of inequality, but also faced with the profound feeling of injustice many people have. Milanovic gives the example of a room full of people where one person gets $20,000 and all others between 25 and 75 cents.27 Everybody’s welfare improves, yet most people will not accept this unfair distribution. The income people receive is not only a means whereby to acquire more goods and services, it is also a tangible recognition of how society values them. Equality is a fundamental value in each society, and that is why the point of inequality becomes relevant when so much attention is focused on globalisation. The inequality between Africa and Europe is not relevant as long as there is no human interaction between them, but once there is, inequality becomes very important. This argument becomes significant when newspapers and television have daily stories on the huge wealth accumulation of CEOs and report mass lay-offs in companies making profits. According to the Merrill Lynch World Wealth Report, there are now 9.5 million people worldwide with more than one million

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dollars in financial assets (HNWI or high net worth individuals), an increase of 8.3 per cent compared to 2005. One per cent of them own more than $30 million in financial assets. The accumulated HNWI-wealth went from $16,600 billion in 1996 to $37,200 billion in 2006, an increase of 8 per cent per year and much higher than the rate of economic growth.28 According to the ILO (International Labour Organisation), 1.39 billion people or 50 per cent of the total labour force and 58.7 per cent of the labour force in developing countries earned less than $2 a day in 2003. Some 550 million people or 23.3 per cent of the labour force of developing countries earn less than $1 a day. Half of the world’s workers are thus working poor.29 Less than 10 per cent of the population in the poorest countries has adequate social security protection. In December 2006, 4000 financial workers in the City of London each received a bonus of 1.5 million euros. A second reason again is linked to globalisation and the paradoxical need of borders linked to growing inequalities. If one believes in the desirability of one world community in which not only goods and capital but also people can move freely, inequality is clearly a major problem. The gap between rich and poor countries, as well as the lack of opportunity in large parts of the world, makes people migrate in search of better prospects. It is not the extremely poor people who leave their country, but mainly the middle classes with professional skills that are needed in rich countries. However, rich countries lack the social basis for mass migration, welfare states are under severe pressure, and so-called illegal migrants are often exploited on the labour market or die on the Mediterranean beaches or at the Southern electronic border of the United States. There clearly is no free movement of people, and today’s migration is a kind of survival strategy, with borders raised in order to prevent mass migration. In turn, this is one of the reasons why right wing populist and often racist or xenophobic political forces gain momentum in most rich countries and threaten democracy. Huge inequalities, then, make borders necessary and hinder the free movement of people. In other words, huge inequalities are not compatible with globalisation or with democracy.

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A third reason is linked to political instability. Since 2002 and the RIO+10 UN conference on sustainable development, the World Bank has spoken of ‘social sustainability’. Social matters are part of a government’s portfolio and are to be managed in the same way as environmental matters. Problems arise when these assets are at risk and can lead to ‘social stress – and at the extreme, social conflict’.30 Contrary to the Club of Rome’s statement of 1971 calling for limits to growth in order to preserve the environment, the World Bank calls for poverty reduction and environmental protection in order to preserve the growth process and avoid conflicts. However, there is no evidence at all that extremely poor people are a root cause of political instability or terrorism. Extremely poor people, living on less than $1 a day in a market economy, have to use all their time and energy in trying to survive. By contrast, middle classes threatened by impoverishment, young graduates with no employment possibilities, professionals frustrated by unmet promises of development, all faced with the constant Western good-news-shows of globalisation, may have reasons to resist and revolt. Growing inequalities can only worsen this situation. The most urgent task, then, should not be to reduce poverty – however necessary that is – but to reduce inequalities. If one wants to promote global political stability, the best war on terror is not war on poverty as the former World Bank president, James Wolfensohn, declared, but a war against inequality. A fourth reason is also political. Social and economic rights came into being in order to give meaning to political citizenship. Citizenship is based on equality. Throughout the latter part of the nineteenth and the first half of the twentieth century, a growing consciousness of the importance of equality and of the equal value of all human beings led to the creation or the promise of welfare states. Equally, the development project that came into being after the Second World War was explicitly aimed at closing the gap between poor and rich countries. However, the current growing inequalities undermine the political citizenship of individuals. In poor countries, it is not too difficult to buy the votes of poor people, just as it is not difficult to buy the votes of poor countries in international assemblies. Economic differences imply asymmetric

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power relations and the domination of some over others. At the UN, poor countries are often obliged to follow the vote of the rich countries, in order to maintain their development assistance. The World Bank and the IMF can impose their economic conditions of privatisation and deregulation because they hold the key to development financing. The UN Charter speaks of the ‘sovereign equality’ of countries, but geopolitics and inequality inevitably point in another direction. A fifth reason is linked to the debt of rich countries towards poor countries. Recent history can be said to have favoured the rich world and impoverished the poor world. There is now a lot of evidence that structural adjustment policies clearly had huge negative social consequences for poor countries. The costs of the economic crisis that started in the 1970s have largely been transferred to the poor countries, in the form of debt servicing, falling commodity prices, rising imports from the rich world and capital flight. Between 1998 and 2003, net transfers from poor to rich countries were $51 to $132 billion per year. Poor countries had $1460 billion in deposits in banks of the North, whereas they had $700 billion in debt for these same banks.31 Apart from this social debt, rich countries have an enormous ecological debt caused by the way they are exploiting natural resources, their responsibility for the diminishing of biodiversity, their CO2 emissions that reduce the development possibilities of poor countries, as well as their production of dangerous or polluting chemical, toxic or nuclear arms and waste. Measuring this ecological debt is a complex and controversial exercise, but over a period from 1950 to 2000 a country like India would have accumulated a carbon credit of more than 500 billion euros, and one like Congo between 27 and 38 billion euros.32 Finally, there are good reasons to mention a historical debt, owing to centuries of colonisation and the slave trade, which robbed poor countries of their best natural and human resources. Again, measuring this debt is necessarily a controversial issue, but taking into account the transfer of tens of millions of black people from Africa to the Americas, the amount cannot be a minor one.

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This fifth reason calls for some reflections on responsibility. If the debt question clearly is the consequence of a historical process, do current generations bear any responsibility for it, and do they have to service this debt? It is difficult to give a positive answer to this, since no one can inherit their ancestors’ sins. But as Thomas Pogge rightly asks, then, why ‘can they inherit the fruits of those sins, the huge economic superiority prevailing at the end of the colonial period?’33 The inequality built up in the colonial period made for a very unequal start into the post-colonial era. These inequalities are mirrored in the very asymmetric power relations of organisations like the World Bank and the IMF, where 24 African countries have less than 1.5 per cent and China less than 4 per cent of the voting power, whereas the United States, with less than a quarter of China’s population, has more than 15 per cent. In other words, inequality tends to reproduce itself. HOW TO FIGHT INCOME INEQUALITY?

If there are good reasons to fight inequality, does it mean we have to aim for full income equality? While some people will answer that question affirmatively, it is widely believed that some degree of inequality is perfectly acceptable because of different talents, the impossibility of perfectly equal opportunities and the divergent reactions to the incentives of inequality. But what degree of inequality is acceptable or unacceptable cannot be answered at a theoretical level. It is a highly political question that can only be answered in a broad democratic debate. Few people will dare to state that inequality should be unlimited or that those who are wealthy should not share with those who have nothing. If inequality is to be limited, in what way should it be done? By and large, there are two possibilities. First, inequality can be reduced by giving poor people some possibility to rise to the income level of middle-class or wealthy people. This already goes beyond the current UN MDGs or the PRSPs of the World Bank, which only concern extreme poverty. But this very attractive solution is not possible from an ecological point of view. The human environmental impact is already superior

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to the regenerational capacity of the planet with an overshoot of 20 per cent. The ecological footprint of the US is, per capita, more than ten times as high as in India. A massive rise of incomes and Western-style consumption would be the kiss of death to the sustainability of the planet, though new technologies can mitigate some of the consequences. On the other hand, inequality can be reduced by curbing the incomes of the wealthy. This implies a redistribution of income and/or wealth in order to reduce poverty and inequality. Traditional methods to realise this are philanthropy and charity, income taxes, wealth taxes and social security. Philanthropy seems to be the preferred method of today’s rich. The ten largest foundations in the United States and Europe had more than $150 billion in assets in 2005.34 Warren Buffett and Bill Gates, two of the world’s richest men, have joined hands and have now given over $60 billion. In the US, private giving far outpaces government aid and climbed to over $70 billion in 2004. Giving clearly makes rich people happy. It not only offers them tax benefits, it also is evidence of their social usefulness. Moreover, it ensures unlimited power. There is no democratic control on how and where foundations spend their money, whereas official development aid is scrutinised to the last penny and has to prove its effectiveness. A wealth tax is on the other extreme of rich people’s preferences. Only a few countries have a real property tax, though possibilities for tax evasion are numerous. A progressive income tax is the best redistributive method, though it is becoming less and less popular in giving way to indirect taxes or flat tax rates that are paid in a disproportionate way by lower-income families. Taxes allow governments to provide for public goods, like public services that give equal access to all to social services (education, health, environment and so on). They also have a role in the defence of democracy. Apart from the old maxim no taxation without representation (and vice versa), taxes allow governments to have more legitimacy, as citizens can exert pressure for efficient spending and governments can be made accountable. Taxation can

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become an important element in the pursuit of good governance and democratisation. Social security has a dual function: to protect people against the arbitrariness of the market place and to organise solidarity. It is an insurance mechanism and an instrument for guaranteeing incomes. In that way, it plays an important role in the redistribution of incomes even if benefits are totally derived from labour incomes instead of capital. Before the neoliberal era, the World Bank promoted social security as an important factor in the modernisation of societies, by replacing communitarian or tribal solidarities by state-organised solidarities, or, to use the Durkheimian terminology, by replacing mechanic by organic solidarity. In the relationship between rich and poor countries, taxes and social security are not applicable as yet. Here development aid could play a redistributive role, but the volume of ODA (official development aid) is too limited to have any serious impact. Moreover, a large share of aid never leaves the donor country or organisation, but is spent on overheads, staff or acquisitions in the North. WORLD PUBLIC FINANCES

If poverty reduction remains the major priority of the international community, it should be clear that this should not be limited to extreme and absolute poverty. Even if all extreme poverty could be eradicated – way beyond the Millennium Development Goals – we would not live in a more just world if, at the same time, inequality is growing. People do not revolt because they are poor, but because they experience injustice, because their dignity is oppressed, because they are marginalised and feel excluded from the moral unity of humankind. Even fighting absolute poverty requires that inequality is tackled. Asset and income inequality are a major impediment to poverty reduction. Growth is clearly not enough and threatens to be uneven and worsen inequality. Countries with the lowest poverty rates are also the countries with the lowest inequality.

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The MDGs will probably not be met, in line with inequality trends.35 Whatever way one looks at the problem of poverty and inequality, it seems obvious that redistribution should be back on the agenda, and that is why the concept of World Public Finance is so important. It can only happen on economic and political grounds. Globalisation could be the first historical process that gives a real and meaningful content to the concept of global community and of one universal humankind. In order for globalisation to benefit everyone, inequality should be tackled with redistributional justice, with global taxes and global social protection, beyond poverty reduction. Poverty is not an individual problem, but a problem of the whole of society; it points to a biased distribution of incomes, and that is the level at which it has to be tackled. Distributional justice requires public finances and global distributional justice requires global public finances, since finances can no longer be looked at from the exclusive vantage point of national states. Moreover, neoliberal globalisation has already seriously eroded the fiscal capacities of national states. Tax evasion and tax havens will have to be fought, while global taxes will have to create a solid basis for redistribution at the global level. This redistribution can take the place of development aid, a very arbitrary and inefficient way of financing poor countries. The new thinking on development assistance with budget support is a step in the right direction but it is still too closely linked with hard conditionality. With an efficient monitoring system on the arms trade and on capital flight, with more transparency on capital movements and consciousness of the necessary sustainability of the global system and human interdependency, this is perfectly possible. The concept of World Public Finance has a very high potential to reorient the development debate. It allows for thinking on the provision of global public goods such as the global environment, public services, water and redistributive justice itself. The concept avoids the pitfalls of too narrow a vision on development and global taxes. What has too often been forgotten in the past decade is that development does need an important capital input. Aid

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can be multilateralised and become a global system of income redistribution and of solidarity. Like poverty, inequality cannot be exclusively looked at from the vantage point of the poor. Both are social and societal problems that concern all of us. Poverty and inequality, at the individual and at the country level, cannot be dissociated from wealth – they are like breathing in and breathing out, both part of one single system that produces both wealth and poverty. NOTES 1. Both quoted in UNDP, Human Development Report 2005, New York: United Nations, 2005, pp. 51, 53. 2 ‘Does Inequality Matter?’, The Economist, 16–22 June 2001, pp. 11–22. 3. F.A. Hayek, The Road to Serfdom, 2nd edn, London: Routledge & Kegan Paul, 1976 [1944]. 4. M. Friedman, Capitalism and Freedom, Chicago and London: University of Chicago Press, 1962. 5. PNUD, Rapport mondial sur le développement humain 1990, Paris: Economica, 1990, p. 19. 6. G.A. Cornia et al., (eds), Adjustment with a Human Face. Protecting the Vulnerable and Promoting Growth (A study by Unicef), New York: Oxford University Press, 1987. 7. S.G. Reddy, and T. Pogge, How Not to Count the Poor, 2002, www.socialanalysis.org. The authors conclude that the World Bank underestimates the number of the poor. On the contrary, X. Sala-i-Martin, The World Distribution of Income (Estimated from Individual Country Distributions), Working Paper 8933, Cambridge, MA, 2002, thinks that the World Bank overestimates the number of the poor. 8. S. Chen and M. Ravallion, Absolute Poverty Measures for the Developing World, 1981–2004, World Bank Policy Paper 4211, April 2007. The authors add that this decline is mainly related to China and India. In Africa, poverty fell between 1981 and 2004 from 42.26 to 41.10 per cent; in numbers, poverty rose from 167.53 to 298.3 million people. However, a recent study on purchase power parities values reveals that China’s and India’s economies have been overevaluated by 40 and 25 per cent respectively. This could mean these countries have 300 to 400 million more extremely poor individuals than the World Bank has estimated.

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9. J. Rawls, A Theory of Justice, Cambridge, MA: Harvard University Press, 1971; A.K. Sen, Inequality Re-examined, Oxford: Clarendon Press, 1992; P. Van Parijs, Qu’est-ce qu’une société juste? Introduction à la pratique de la philosophie politique, Paris: Seuil, 1991. 10. D. De Ferranti et al., Inequality in Latin America. Breaking with History? Washington, DC: World Bank, 2004. 11. UNDP, Human Development Report 2002, New York: United Nations, 2002, p. 19, Box 1.1, ‘Global inequality – grotesque levels, ambiguous trends’. 12. For other examples, see F. Mestrum, Mondialisation et pauvreté: De l’utilité de la pauvreté dans le nouvel ordre mondial, Paris: L’Harmattan, 2002, chapter 5. 13. D. Dollar and A. Kraay, Growth is Good for the Poor, Development Research Group, World Bank, 2000; S. Chen and M. Ravallion, How Did the World’s Poor Fare in the 1990s?, Development Research Group, World Bank, 2000; M. Rama, Globalization, Inequality and Labor Market Policies, Development Research Group, World Bank, 2001; K. O’Rourke, Globalization and Inequality: Historical Trends, Trinity College Dublin, CEPR and NBER, 2001; A. Maddison, The World Economy: A Millennial Perspective, Development Centres Studies, Paris: OECD, 2001; G.A. Cornia, Inequality, Growth and Poverty in an Era of Liberalization and Globalization, UNU–WIDER Studies in Development Economics, Oxford: Oxford University Press, 2004; Ha-Joon Chang and I. Grabel, Reclaiming Development, London: Zed Books, 2004; R.H. Wade, Globalisation, Poverty and Income Distribution: Does the Liberal Argument Hold?, conference document ‘Towards a New Political Economy of Development’, Political Economy Research Centre, University of Sheffield, July 2002. 14. P. Lindert, and J. Williamson, Globalization and Inequality: A Long History, World Bank Annual Conference on Development Economics – Europa, Barcelona 2001; World Bank, World Development Report 2000/2001. Attacking Poverty, Washington, DC: World Bank, 2001; R. Kohl, ‘Introduction’, in R. Kohl (ed.), Mondialisation, pauvreté et inégalité, Paris: OCDE, 2003. 15. X. Sala-i-Martin, The World Distribution of Income. Falling Poverty and … Convergence, Priod, October 2005, http://www.columbia. edu/~xs23/papers/pdfs/World_Income_Distribution_QJE.pdf; United Nations, World Social Situation: The Inequality Predicament, New York: United Nations, 2005. 16. Three major methods are being used: the Lorenz curve, the Theil indicator or the Gini index. This last measurement is the most frequent, with values between 0 for perfect equality and 1 for perfect

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17. 18. 19. 20. 21. 22. 23. 24.

25. 26. 27.

28. 29. 30. 31.

32. 33.

34. 35.

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inequality. Another possibility is to look at the ratios of richer to poorer. UNDP, Human Development Report 2005, New York: United Nations, 2005, p. 336. M. Ravallion, Competing Concepts of Inequality in the Globalisation Debate, World Bank Policy Research Paper 3243, March 2004. B. Milanovic, Worlds Apart. Measuring International and Global Inequality, Woodstock: Princeton University Press, 2005. B. Milanovic and S. Yitzhaki, Does the World have a Middle Class?, World Bank, n.d. M. Ravallion, Growth, Inequality and Poverty: Looking beyond Averages, Development Research Group, World Bank, n.d. World Bank, World Development Report 2003, Washington, DC: World Bank, 2003, p. 53. World Bank, World Development Report 2006. Equity and Development, Washington, DC: World Bank, 2005. The UN gives the following definitions: equity is when equals are treated equally to arrive at an equitable outcome; an equal outcome can be arrived at when unequal interventions are required in unequal situations. Report on the World Social Situation 2001, New York: United Nations, p. 3. World Development Report 2006, p. 3. World Bank, Doing Business 2008, Washington, DC: World Bank, 2008. B. Milanovic, Why We All Do Care about Inequality (But are Loath to Admit it), World Bank, Development Research Group, October 2003. CapGemini/Merrill Lynch, World Wealth Report 2007, n.p., 2007. ILO, World Employment Report 2004–2005, Geneva: ILO, 2005. World Development Report 2003, p. 14. E. Toussaint,‘Enjeux politiques de l’action de la BIRD et du FMI envers le tiers-monde‘, Thèse de doctorat en sciences politiques, Université de Liège et Université de Paris 8, 2004. ‘Ecologische Schuld: het onderzoek’, Zacht geritsel, VODO, n.d. T. Pogge, The First Millennium Development Goal: A Cause for Celebration?, http://Etikk.no/GlobalJustice/oslo_Global_Justice_ mainlecture.doc . ‘The New Powers in Giving’, The Economist, 1 July 2006, p. 65. G.A. Cornia, ‘Poverty and Inequality in the Era of Liberalization and Globalization’, in H. van Ginkel et al., (eds), Human Development and the Environment: Challenges for the United Nations in the New Millennium, Tokyo: United Nations University Press, 2002.

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2 RATIONALE FOR WORLD PUBLIC FINANCE: MAPPING THE TOOLS FOR SOCIAL CHANGE Matti Kohonen

A vision for World Public Finance is taking shape in order to assemble different conceptualisations, proposals and identities that tackle current global economic and social injustices. The key innovation is that by focusing on public finance we can bring together many separate campaigns and investigate their common linkages. Public finance is the key not only to state sovereignty and all public good provision in all societies, it is also crucial to our efforts to bring forth an age of universal economic and social rights. Indeed, paying taxes is good for you and the rest of society. It is possibly the greatest paradox of our times that while there has never been so much wealth in the world, the number of persons living in poverty is increasing. The current generation is also the first that can realistically conceive a world without poverty. However, rather than making it a technical argument, it is much more important to believe in political alternatives, and continue pursuing them in an active manner. The construction of the World Social Forum with attached regional, national and thematic forums demonstrates this vitality of social and political alternatives continuously under construction. This book among others is a contribution to the vitality of the proposals that are emerging from what can be called the largest social movement in history, which after the 45

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anti-war protests on February 2003 became to be known as the second superpower.1 The solutions to poverty and inequality are unlikely to be found within the existing system of international political and economic relations. The annual amount of illicit flows of dirty money from developing and transitional economies, mostly flowing to tax havens and Western banks, adds up to $780 billion, of which potential tax revenues could represent $270 billion. Adding to this the amount of debt servicing, $540 billion, and the shrinking domestic and the missing international tax bases – $310 and $230 billion respectively – we realise why developing countries have increasing difficulties in finding the complex accounting and legal arrangements of the global economy fit for the purpose of revenue mobilisation. Development aid is no substitute for domestic resources, and part of the way in which we need to reconceptualise the world is in understanding that developing nations are not at all as poor as they seem in international comparisons, based on GDP or other indexes that measure their wealth after leakages have taken place. Many developing countries are simply not able to capture within their tax nets the existing economic activities that take place in their countries or pass through their territories. The big fish in particular swim in deeper seas beyond the tax nets of all tax authorities by diving deep into the offshore world, beyond the proper application of the arm’s-length pricing rules governing international taxation.2 We propose that to end poverty and inequality we need to imagine a new age of world public finance. In this vision, the objective of international cooperation and solidarity is no longer based on charity and development aid. It is moving to a post-aid era, where solidarity levies and global taxes provide tangible and accountable contributions towards meeting global social policy goals. The further problem with development aid is that it is rarely accountable to the people that it is supposed to help, but rather to the terms of reference decided between the donors and the recipients. In some ways development aid erodes democratic accountability, as public officials in Southern countries are busy

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making sure they account for the used aid money to Northern counterparts instead of their own citizens. International oversight mechanisms, such as peer-review mechanisms as used today in Africa between governments, could be developed to increase the accountability of public finances rather than relying on bilateral – or donor club – levels. The way in which the concept is constructed corresponds to mapping out the domain of diverse social movements, NGOs, faith groups and other civil society actors that have highlighted the extent of different types of leakages of public finance. Every political movement, be it the debt movement or the fair trade movement, is fundamentally based on the experiential and dialogical views on the role of civil society movements in the world arena. By bringing these movements momentarily together in this book, the authors are not only revealing old and forging new links between the civil society actors, but are also equally making an intervention in the debates that concern nation-building, development and democratisation. It is these topics on which this book wishes to establish a dialogue with the existing set of intergovernmental organisations, by demonstrating workable and feasible alternatives to the current forms of global governance. More practically speaking, if we bring together various campaigns that in different ways aim to bolster developing country public finances, we can analyse how much each campaign could, if successfully realised, contribute towards the public finances of the developing countries in question. Once we answer that question, we can consider the strategies and efforts currently committed to these areas of campaigning and ask if we can construct a more encompassing strategy based on a broader vision of democratisation and nation-building via the strengthening of public finances. For instance, too much effort goes to campaigning for increased aid, which, if successful, would increase – at best, and subject to conditionalities – the developing country public finances by an estimated $50 to $100 billion per year. More results could be achieved by these same actors were they to make demands for changing the accounting rules for transnational corporations,

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which would make it more difficult for them to evade taxes in particular in the global South, with an estimated annual loss of at least $200 billion. Such strategic choices can be considered once a holistic view is taken towards the issues of development, democratisation and the North–South solidarity within this proposed framework. VISUALISING EROSIONS IN THE GLOBAL SOUTH

Public finance in developing countries alone suffers from various erosions that are inherent to the current institutions that govern the world economy. There are no intergovernmental institutions to tackle these leakages; they are simply seen as an inherent part of the current process of globalisation. The four main leakages are: debt servicing, a missing global tax base, the lost national tax base, and tax lost through dirty money. The total estimated losses in developing countries alone amount to $1350 billion per year.

17%

debt servicing $540 bn

40%

lost national tax base £310 bn lost tax due to dirty money flows $270 bn

20%

missing global tax base $230 bn 23%

Figure 2.1 Public finance in developing countries, annual losses through four main leakages

Debt servicing costs developing countries a very significant part of their annual budgetary expenditure, as the developing country debt burden in 2007 stood at $2851 billion.3 While the recent debt cancellations reduced the amount by $40 billion, the

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burden still remains heavy for many developing countries. An annual amount of approximately $540 billion was paid in debt servicing from all developing countries combined in 2006.4 As a consequence, the most heavily indebted countries need to run large primary budget surpluses – beyond balancing the budget – of 4.86 per cent of GDP in 2005 in Brazil,5 while the figure in Turkey in 2008 was of 5.5 per cent.6 Such surpluses are unheard of in OECD countries where only Belgium – with a peak of debt per GDP ratio of 138 per cent in 19937 – has run over 4 per cent surpluses over the past ten years.8 We can ask several questions regarding the developing country debt as, for instance, why today’s generations should carry the debt of their past military rulers who borrowed money for purposes of personal enrichment and their grip on power. What were the political reasons behind giving these vast amounts of money to the corrupt leaders during the Cold War? It is for this reason that we consider debt servicing as a leakage for developing countries, as it consists of paying back a largely illegitimate debt. The $540 billion represented here considers the totality of the Third World Debt as illegitimate, and before a Fair Transparent Debt Arbitration Process (FTAP) is in place, it will be difficult to reduce the perceived illegitimacy of this entire debt. The common question that is asked by the international financial institutions is simply about knowing whether the debt is sustainable, that is, will these countries be able to carry the burden? However, sustainability is often linked to the ability to keep paying the interest and roll over the debt – and raise taxes often on the poor to do so – rather than looking at wider social policy objectives. Obviously, the more ambitious the objectives are, the more public money is needed. To take an example, the estimated $74 billion that Brazil pays annually to service its debt could pay five times the expenses of the bolsa familia scheme, a direct income transfer system to low-income families. Debt servicing therefore is seriously stalling the plans of many developing countries to create wider social assistance programmes, which are the best manner to foster a sense of citizenship and break powerful networks of personal patronage.

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The missing global tax base arises from the unregulated (and thus also untaxed) nature of global trade flows that are not contained within the jurisdiction of any single national state. We are facing here a double paradox. Not only is there an increasing amount of economic activities of a cross-border nature but there are also severely harmful effects from these untaxed activities. For the past decade, civil society movements have argued in favour of taxing financial transactions, in particular currency transactions. Since 1977 these have increased over 200-fold from a daily volume of $18.3 billion to a current $3.2 trillion in 2007.9 Similarly an ever-increasing amount of world trade takes place within different affiliates of multinational corporations, who find ways to evade taxes through various methods of creative accounting. These global flows should legitimately be taxed as they are currently escaping the jurisdictional capacities of any single national state. The second paradox concerns harmful activities of various types that currently go untaxed as they enter the realm of world trade. While taxes make up 29 to 90 per cent of the price of oil for domestic consumers in developed countries, there are no taxes on maritime fuel or kerosene used in air transport, apart from a relatively small value-added tax. Taxing environmentally and socially harmful activities is legitimate, as is the taxation of air pollution, the global arms trade, production and keeping stocks of nuclear waste, and other similar harmful activities. The estimated potential of global taxation, according to Jacques Cossart in this volume, is $1175 billion, which follows closely the estimates made in the Landau Report10 in 2004, which found the revenue potential of global taxes at $956 billion. Looking at the sub-categories of the proposed global taxes, we estimate the proportions for developing countries to correspond to about 6 per cent of the foreign exchange market,11 about 4 per cent of the total value of share trading,12 and not more than 1 per cent of assets,13 while less than 1 per cent of the profits of TNCs are from TNCs domiciled in developing countries.14 In terms of CO2 gas emissions in 2004 the developing countries contributed to 41 per cent of global emissions,15 while recent

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estimates put the Chinese annual emissions growth rate at 11 per cent, having in 2006 surpassed the USA as the largest single polluter.16 Therefore, we can estimate that by the end of 2008 developing countries will contribute about 46 per cent of global CO2 emissions. However, in terms of other environmental flows, developing countries have built only 5 per cent of the world production of nuclear energy17 and they represent 30 per cent of all air transport.18 Adding these figures together, we arrive at developing countries levying $110 billion worth of global taxes, a mere 9 per cent of the total. Under different conditions however, global taxes could represent significant revenue mobilisation in developing countries. Firstly, the way in which we account for global flows cannot be solely based on the – often offshore – domicile of the parent company that through clever use of double-taxation treaties repatriate profits without paying much tax on them anywhere. Instead, taxes on TNCs should be based on more objective criteria, evaluating where value is being created. The profits of TNCs should be accounted for using a unitary accounting method19 which by requiring country-by-country accounts and listing all foreign subsidiaries – including offshore trusts – allows determining how much tax is due in each separate territory. Giving both revenues and employment equal weight, we could argue that a much larger share of the profits of TNCs are actually generated in the global South than what is currently accounted for in company accounts. This may be up to one-fifth, but the lack of data on TNC revenues in the South makes it hard to give any accurate estimates. Adjusting to this amendment, developing countries would be able to levy some $229 billion in global taxes, or 19 per cent of the total. Secondly, developing countries could levy much higher global taxes on key flows. They could, for instance, tax CO2 emissions, air traffic and maritime fuel at a much higher rate. Taxation rates may be more efficient at higher rates in the South, as collecting taxes from certain more complex flows requires costly monitoring and technological innovations. However, taxing financial transactions at a higher rate is an efficient and simple

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way of collecting extra revenues, as the Brazilian case shows where the tax on financial transactions collected some $20 billion annually between 1993 and 2007 (when the tax lost in a vote in the Brazilian Congress).20 Finally, global transfers are at the heart of the proposals for global taxes, as the revenues that are gathered are designed to finance global public goods, as argued by Dries Lesage in this volume. Since the needs for public goods are most urgent in the global South, clearly most of the money should be spent there. This, however, requires that the countries who collect the money agree to hand it over either to the UN, or directly to developing countries as bilateral aid. In the light of the many unfulfilled promises of overseas development aid, we cannot just assume that this will happen without significant arm-twisting. Lost national tax base is a label that denotes the ways in which national states have signed off their rights to tax certain areas of potential fiscal revenue. Agreements are made either with single companies that ask for tax holidays, while negotiating foreign direct investment deals, or by intergovernmental agencies such as the WTO and the IMF when they ask developing countries to lower their trade taxes, or customs levies. None of these areas are easy to account for, but some partial figures do exist. The impact of the informal economy is accounted at $250 billion, of which $110 billion could be captured by the national tax authorities taking into consideration both the capacity of taxpayers and the cost of collection.21 The informal economy has for a long time been discussed as a significant burden in many developing countries, as it not only includes street vendors and village markets, but also many big economic units that work entirely outside the fiscal net of the national state. In Bangladesh, for example, less than 1 per cent of the population pays taxes, and less than 0.4 per cent of the population pays 40 per cent of the tax revenue.22 Certainly those who do pay taxes are in a minority, and many of the richest entrepreneurs and companies fail to meet their tax obligations. Another point of comparison is that in the whole of Sub-Saharan Africa, the tax per GDP ratio stood at 15.7 per cent,23 in comparison to the 2007 average of

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OECD countries of about 40 per cent. Capturing larger parts of the economy under the tax net is clearly necessary. The favourable tax treatment given to export processing zones (EPZ) and special economic zones (SEZ) around the world highlights another type of erosion of the domestic tax base. By signing off long-standing agreements not to tax certain walled-off territories within the national state, the state is certainly writing off a substantial part of its tax revenues. There are surprisingly few cost-benefit analyses of tax holidays, or any tax cuts for that matter. When such calculations are made, we find that the estimated costs are so huge that we can legitimately ask whether this money would not be better spent in the form of public finances. Using figures from the Indian Finance Ministry, the OECD reported that India would lose annually an average of $6 billion in forgone tax revenues from corporate taxes, customs and excise duties and other indirect taxes as a result of its SEZ policy.24 Previous estimates concerning the effects of tax competition combined with capital flight amount to lost revenues worth $50 billion globally.25 While updating it would be a significant undertaking, a figure of $100 billion is tentatively adopted here to denote the lost revenues through tax competition in industry and services. Within the topic of tax competition, it is quite clear that extractive industries present a special case of lost public finances owing to the common practices of low royalties and tax holidays – a specific form of tax competition – to attract investors. Investors are exempted for periods up to 50 years from paying corporate taxes, income taxes on key personnel, import taxes on mining equipment, and at times even utility payments on utilised water and electricity. There is no reason to give tax holidays for investments in extractive industries, as they are inherently location specific and will depend largely on current and projected market prices for the minerals rather than incentives. Royalties are paid per tonne of extracted mineral to compensate for the fact that once a mineral is extracted it is no longer available for future consumption. It is also a very simple tax, and extremely hard to evade, which argues strongly for its continued relevance.

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If we look at the gaps in government revenues from total earnings in some key commodities, the governments in Ghana and Tanzania received 6.4 per cent and 8 per cent of gold revenues respectively; Zambia only got 0.7 per cent of its copper revenues, whereas Bolivia received 27 per cent of its oil and natural gas revenues.26 There is an enormous gap between the 27 per cent that Bolivia gets and 0.7 per cent in Zambia. Though copper and gas are different products, both have experienced significant price increases during the recent boom in commodity prices. Meanwhile, the world’s leading oil exporter, Saudi Arabia, gained oil revenues of $194 billion in 2007 as a consequence of the record oil prices and increasing oil production in the Kingdom.27 If oil revenues in the Middle East are any guide to the potential of extractive industries worldwide, it could be estimated that developing countries could gain another $100 billion from higher taxes and royalties on extractive industries. Dirty money is money that is illegally earned, illegally transferred or illegally utilized.28 It is different from capital flight as a measure, as it encompasses flows that do not show on official balance of payments, or customs reports as traceable flows. Instead measuring dirty money includes top-down estimates as well. Dirty money constitutes the largest outflow in developing countries, annually up to $778 billion in high-end estimates.29 Lost tax revenues through dirty money flows would represent the amount of corporate taxes levied in these countries, which are taken to represent 35 per cent in developing countries on average, giving a sum of $271 billion. Using a similar methodology the lost tax revenues through dirty money flows have been estimated at $53 billion for the US Treasury (with a tax rate of 34 per cent),30 and $486 million to the Russian Treasury as a result of mispricing in the US–Russia trade alone (with a tax rate of 25 per cent).31 There are no comparative figures of the total estimate for developing countries, though the effects of mispricing and fake transactions on public finances have alone been estimated at $160 billion.32 It would be feasible to tackle the $500 billion element of commercial dirty money with immediate measures, and meanwhile

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it would also likely reduce government corruption and criminal components of dirty money flows – the remaining $278 billion – that consist of proceeds of drug trafficking and sale of counterfeit goods, bribery, stolen assets, racketeering, terrorist finance, etc. – through enhancing the rule of law. Table 2.1 Sources of commercial dirty money flows33 Transactions

Mispricing Fake transactions Abusive transfer pricing Total

High estimate (billions of dollars) 150 200 150 500

Low estimate (billions of dollars) 100 150 100 350

The three different categories of dirty money that result from commercial transactions (see Table 2.1) need to be examined in more detail to give a more complete account of how the international dimension of the global economic regime is being distorted for purposes of tax evasion, capital flight and organised crime. Essentially, the common denominator between all elements of dirty money is the use of secrecy jurisdictions to hide the identity of the money. Mispricing and misinvoicing are the most frequently used mechanisms. This means that trade transactions, real estate or property sales, securities deals, and other aspects of trade take place between two separate parties who by overstating or understating the value of the goods, shift profits abroad, escaping taxes and regulations domestically. They may also misinvoice the actual goods and pay the real value difference offshore. Alternatively, importers ask for an order to be over-invoiced to get hold of foreign exchange, a necessary hurdle in countries where governments ration foreign currency reserves.34 For instance, in US–Ghana trade in 2005, diamonds were exported to the US for $35.15 (world median price at $1361.76), drums were sold for $1.75 (median at $51.91), and mahogany wood at $38.82 (median at $958.26); examples of overpricing

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imports to Ghana from the US included generators for internal combustion engines for $60,000 (world median at $63.03), and electric hand saws at $26,640 (median world price at $152.77).35 The contributions of mispricing to tax evasion and capital flight may be truly enormous, with one estimate that 60 per cent of trade transactions into or out of Africa are mispriced by an average exceeding 11 per cent, resulting in a dirty money outflow of 7 per cent of African trade, totalling $10 to 11 billion annually.36 In one instance it was found that the largest logging company in the Democratic Republic of Congo intended to underinvoice by up to 35% their trade, actually making losses in their African subsidiaries, while booking all profits in the Swiss group accounts.37 The second mechanism involves misidentifying trade transactions between two entities. A fake transaction involves a complete scam taking place, with no goods or services ever traded, but billing it means making either a loss or a profit – where appropriate for tax or regulatory reasons – and shifting profits offshore to an affiliated company. It is estimated that such transfers, though less frequent than mispricing ‘may now concern more money than mispricing which tags along with legal trade’.38 So the difference between fake transactions and mispricing is that while the former never takes place, the latter is attached to actual trade of goods and services. Transfer pricing denotes trade between two subsidiaries of the same company that under arm’s-length principles are supposed to charge prices equivalent to an open market price, which would exist between two unrelated corporate entities. However, in many cases, this principle is not followed, and transactions are mispriced in order to allow MNCs to move money illicitly, mostly to evade taxes by booking profits in low-tax jurisdictions. PATHWAYS TOWARDS A GLOBAL POLITICAL PROJECT

This visualisation is an exercise that I believe has never been conducted before, as it attempts to draw together into a single picture the various ways in which developing countries currently

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lose much needed resources for eradicating poverty and reducing inequalities. Data concerning these flows even in the most approximate sense have only emerged through civil society and independent research efforts, as governments are largely blind to these magnitudes. Therefore, rather than seeing this as a statistical exercise – since judged in these terms it remains patchy given the very nature of methodological nationalism in compiling just about all statistics about global flows – it needs to be seen as an inherently constructive intellectual task. Through assembling these flows we find a surprising picture emerging of our contemporary world, one in which the South is very rich indeed, and plugging the leakages of lost revenues alone – without increased aid or lower subsidies to Northern farmers – would go far in eradicating poverty and reducing inequality. Indeed, the solutions for recovering the lost public finances as outlined above are not available within the current global economic architecture. What the various contributors to this book are asking for are structural changes to the ways in which global financial markets function in contemporary world society, which entails a paradigmatic shift in how we relate to citizens of other states as equals, and stop thinking of politics as contained in national-state containers. The main challenge is to carry forward such a broad agenda of reconfiguring world public finances. Doing so means essentially reinventing the state in the globalised world through a deeper international cooperation as outlined in the chapters of this book. The notion of absolute sovereignty of each national state is outdated. It only leads to globalised actors such as the multinational corporations and high net-worth individuals taking advantage of the discrepancies between the often outdated legal regimes, special jurisdictions and misconceived incentives to evade the control of all states, enabling the globalised actors to establish themselves largely outside any democratic control. What this calls for is a new global social contract, as the social contract has only so far been drawn on the national level, leaving out the legal rights and crucially the responsibilities of activities in the global sphere.

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The global social contract, in my view, will be based on two pillars, the first being that the contract is essentially a legal framework between national states with the view of protecting the rights and spelling out the responsibilities of all actors in a globalised world. This would mean that a citizen is still primarily answerable to the national state or states of which she is a citizen or resident, while the national states would have binding agreements that spell out forms of international cooperation that correspond to the new challenges of activities that cross national boundaries. The treaties that are proposed to levy global taxes, create a framework of country-by-country reporting and engage in debt arbitration all function via existing national institutions, while spelling out their extended competences vis-à-vis crossborder activities. The second pillar concerns the creation of a global public through the formation of social movements, political associations, social enterprises, inclusive forms of media and communication and other networks on the global level. The creation of a framework of international law rests on its popular support and legitimacy. The growth of the Global Justice Movement, spontaneous international reactions to current events, the large anti-war demonstrations at the eve of the US-led invasion of Iraq, and globally networked media and communications outlets – that no longer reflect the views of any single national polity – are examples of the vibrant nature of the emergent global polity, and also its unpredictable elements. What we are lacking, however, are formal political associations – let alone parties – on the global level. This type of international framework would also build upon the existing national identity of a citizen, and extend it to include global rights and responsibilities that should in my view be included in constitutional amendments to national constitutional frameworks. There are already elements of such constitutional amendments, for instance, in Belgium, whereby human rights crimes committed anywhere in the world are crimes under Belgian law. Other countries should follow suit, and move beyond human rights clauses towards social and economic rights that would provide a legal basis for further international cooperation. This

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would not, however, amount to creating a world government with supra-national executive, juridical and legislative powers. The current challenge will be to extend the existing national institutions to capture cross-border activities. The solution is not a new form of cosmopolitanism, as this presupposes a Eurocentric concept of the political actor as a public man (yes, he still too often is a man) acting in a disinterested manner in a public sphere. When we bring our attachments and identities to the political arena, they cannot be disguised – and legitimised – under expertise or competence alone, as attachments shape how we view the world and the types of concerns we express. Accountants, for instance, make remarkably poor experts in determining international accounting standards, while offshore lawyers should not be considered competent for a UN expert committee concerning international taxation. But often, those who feel they have the most to lose from global governance also tend to populate the round tables where efforts to tackle global issues are raised. Indeed, we do not only live in a world of strangers,39 and we need to be more realistic, considering the implications and potentials of the pluralistic forms of identity that we bring to the political and economic arenas. This mapping out of a global social contract is the challenge of our times, as these proposals are not only necessary for tackling the urgent issues facing humanity, but also for ending the infighting between states in the economic domain that is creating significant tensions that can escalate to actual or proxy wars. Recent events concerning Russian tax exiles in the UK – no fewer than 20 of them facing extradition requests – and the use of international espionage by German secret services into secretive Liechtenstein accounts worth $100 billion – finding over 1000 high-profile Germans indeed hiding money there – demonstrate how discrepancies between rules concerning taxes and public finances are fuelling diplomatic tensions. Some states have openly declared the rules of other states as essentially void, as the case of Switzerland demonstrates where tax crimes committed abroad are not considered as predicate crimes for money laundering. The US displays an equally poor respect for foreign laws, since

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bank robbery, bankruptcy fraud, custom crimes, counterfeit and forgery, fraud and false statements, mail theft, prohibited nuclear materials transactions, racketeering, securities fraud and trafficking in stolen property are activities that are only listed as ‘specified unlawful activities’ when committed inside the US and not abroad. Profits of foreign crime do not seem to raise concern in the US money-laundering legislation.40 The current tax wars fuel economic nationalism that can easily spill over into outright xenophobia. Indeed, world public finances are the best chance to guarantee world peace. CONCLUSION

As we visualise the leakages of public finance, we can also sketch a more qualitative assessment of what we mean by globalisation. The trouble in conceptualising globalisation is that it is often identified as an external phenomenon rather than a set of political choices. In the era of 24-hour financial markets, an information revolution and ever cheaper means of transportation, we are told that technological change is driving social change, that the offshore world is an inevitable extension of electronic markets and virtual monies, that transnational corporations are just the logical extension of integrated world trade. Both claims, of course, are untrue: TNCs dominate because of their extensive practices of transfer pricing that allow them to pay much less tax than purely domestic businesses, and offshore finance is not the logical abstraction of money; it just corresponds to the current discrepancy we have in granting national sovereignty – in its absolute form – to small island jurisdictions where indirect levies on company registrations, and handling fees from assets worth hundreds of billions can sustain decent living standards and social welfare provisions for some 30,000 to 100,000 residents that tax havens normally contain. The error that both Giddens41 and Castells42 make in discussing globalisation is that this new epoch that they call high modernity or network society means that we live in an age where we are powerless when facing the effects of integrated, real-time,

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electronic, converging, leveraged and liquid markets that are portrayed as occurring as naturally as seismic activity, volcanic eruptions, hurricanes and occasional tsunamis. At best we are told that we are able to subvert such flows – as the subcomandante Marcos in Mexico subverted the internet for his rise to fame – but that we cannot change their underlying nature. Instead, the picture of globalisation that is presented here is a qualitative one, where the key tools to understand the global economy and society are not technological gadgets and fancy terminology from high finance. Rather, the key tools include concepts such as the very real juridical discrepancies, abusive use of sovereign offshore territories by wealthy individuals and large corporations, and the actual rules agreed in poverty reduction strategy papers to liberalise foreign investors from the shackles of constraining rules such as paying taxes and royalties on extracted minerals. The conceptual tools that we propose to be developed, demonstrated and further disseminated include key concepts to understand the qualitative aspects of globalisation as the proliferation of the use of offshore interfaces, the inequalities created by abusive use of transfer pricing, the continuing relevance of the term of odious debt in international commercial law, and the role of illicit capital flight in enduring poverty. This qualitative picture can be used to juxtapose the quantitative picture of numbers and exponential graphs of capitalisation in stock markets, the exponential volumes of foreign exchange markets or the astronomical growth of world trade. Indeed the hyper-globalists43 – calling globalisation inevitable – and the sceptics44 – saying it is not really taking place, or that it is nothing new as the late nineteenth century was more global – are both wrong as they base their analysis largely by taking figures and statistics at face value. None of those numbers, such as those reported in the UNCTAD (United Nations Conference on Trade and Development) World Investment Reports, give a detailed picture why in 2006 there were 78,000 multinational enterprises, with 778,000 foreign affiliates, while still in the 1990s there were

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37,000 TNCs with 170,000 foreign affiliates. In contrast, we can also say that the volume of dirty money flows represents between 2 to 5 per cent of global GDP,45 which would mean that about 8 to 20 per cent of world trade is unrelated to actual flows of goods and services (world trade in 2006 being at $12 trillion,46 while global GDP was at $48 trillion, both measured in current dollars).47 In the light of this contrast, one begs the question what lies behind such phenomenal growth in trade and investment. Further qualitative assessments suggest that investment vehicles are being put together for the purpose of concealing data from housing market regulators and credit rating agencies, and the whole raison d’être of TNCs points towards tax evasion. We should really wonder whether the global economy really is just a technological externality, or rather a more familiar social milieu where diverse actors are using new tools and spaces to gain advantage over other actors. We do not live in a ‘runaway world’48 of anything else than of our own making; indeed, how could the world run away from us – where would it go? Globalisation and the associated offshore phenomenon, debt crisis, trade and investment liberalisation and capital flight are the combined result of a political consensus, including past and current mistakes in designing a global society. It is by reversing such a political consensus that we can map the path out of the current impasse. NOTES 1. ‘Threats and Responses: News Analysis; The New Power on the Streets’, New York Times, 17 February 2003: ‘the huge anti-war demonstrations around the world this weekend are reminders that there may still be two superpowers on the planet: the United States and world public opinion’. This written by Patrick E. Tyler two days after the largest ever anti-war demonstrations took place in 800 cities across the world on 15 February 2003. 2. J. Neighbour, ‘Transfer Pricing: Keeping it at Arm’s Length’, OECD Observer, January 2002. 3. World Bank, 2007, Global Development Finance Online Data Bank.

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4. E. Toussaint, The Differences between the 1982 and 2007–2008 Crisis, Liège: CADTM, 12 January 2008, http://www.cadtm.org/ spip.php?article3040. 5. Fórum Brasileiro de Orçamento (2005) Superávit primário, FBO discussion paper, São Paulo: FBO, http://www.forumfbo.org.br/ media/SuperavitPrimario.pdf. 6. S. Bryant and A.B. Meric, ‘Turkey to Loosen 2008 Budget to Boost Spending on Dams, Roads’, New York: Bloomberg, 30 April 2008. 7. Belgian Debt Agency, 2006 Review, 2007 Outlook, Brussels: Belgian Treasury, 2007. 8. H. Tobias, ‘Estimating the Effect of Parliamentary Elections on Primary Budget Deficits in OECD Countries’, Economics Bulletin, Vol. 8, No. 8, 2007, pp. 1–5. 9. BIS, Triennial Central Bank Survey, Foreign Exchange and Derivatives Market Activity in 2007, Basel: BIS, 2007a. 10. Landau, La Documentation française, 2004, http://www. cttcampaigns.info/documents/fr/landau_en. 11. Triennial Central Bank Survey, 2007. 12. WFE, Annual Report and Statistics, Paris: World Federation of Exchanges, 2006. 13. BIS, Locational Banking Statistics, Basel: BIS, 2007b. 14. CNN, Fortune 500, New York: CNN, 2008, http://money.cnn.com/ magazines/fortune/fortune500/2008/index.html. 15. M.R. Raupach, et al., ‘Global and Regional Drivers of Accelerating CO2 Emissions’, PNAS, Vol. 104, No. 24, 2007, pp. 10288–93. 16. M. Inman, ‘China CO2 Emissions Growing Faster than Anticipated’, National Geographic News, Washington, DC, 18 March 2008. 17. WNA, World Nuclear Power Reactors 2006–2008 and Uranium Requirements, London: World Nuclear Association, 2008. 18. WDM, The Economic and Social Benefits of Air Transport, Air Transport Action Group, Geneva, September 2005. 19. R. Murphy, A Code of Conduct for Taxation, Basildon: AABA, 2007. 20. PriceWaterhouseCoopers, ‘Brazil: The Contribution on Financial Activities (CPMF) Expired on the 31 December 2007’, International Tax Review, 2008. 21. A. Cobham, Tax Evasion, Tax Avoidance and Development Finance, Working Paper 129, Queen Elizabeth House, University of Oxford, 2005. 22. T. Sarker and Y. Kitamura, Technical Assistance in Fiscal Policy and Tax Administration in Developing Countries: The State of Nature in Bangladesh, Tokyo: Keio University, 2006.

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23. Commission for Africa, Our Common Interest: Report of the Commission for Africa, London: Commission for Africa, 2005. 24. OECD, India’s Trade Integration, Realising its Potential, Paris: OECD Working Party on the Trade Committee, 2007, p. 54. 25. Oxfam, Tax Havens: Releasing the Hidden Billions for Poverty Eradication, Oxford: Oxfam, 2000. 26 Christian Aid, A Rich Seam: Who Benefits from Rising Commodity Prices?, London, Christian Aid, 2007. 27. EIA, OPEC Revenues Fact Sheet: OPEC Oil Exports Revenues, Washington, DC: Energy Information Administration, 2002. 28. R. Baker, ‘Dirty Money and its Global Effects’, International Policy Report, Washington, DC: Centre for International Policy, 2003. 29. R. Baker, Capitalism’s Achilles Heel: Dirty Money and How to Reform the Free Market System, Hoboken, NJ: John Wiley & Sons, 2005. 30. S.J. Pak and J. Zdanowicz, US Trade with the World: An Estimate of 2001 Lost U.S. Federal Income Tax Revenues due to Over-Invoiced Imports and Under-Invoiced Exports, US Senate Study, Washington, DC, US Senate, 21 October 2002. 31. M.E. de Boyrie, S.J. Pak and J. Zdanowicz, ‘Estimating the Magnitude of Capital Flight due to Abnormal pricing in International Trade: the USA–Russia Case’, Accounting Forum, Vol. 29, No. 3, 2005, pp. 249–70. 32. Christian Aid, Death and Taxes: The True Toll of Tax Dodging, London: Christian Aid, 2008, p. 2. 33. Baker, Capitalism’s Achilles Heel, p. 172. 34. Christian Aid, Haemorrhaging Money: A Christian Aid Briefing on the Problem of Illicit Capital Flight, London: Christian Aid, 2007. 35. S.J. Pak, ‘Estimates of Capital Movements from African Countries to the United States through Trade Mispricing’, paper given at the ‘Tax Workshop’, University of Essex, Colchester, 7 July, 2006. 36. Baker, Capitalism’s Achilles Heel, p. 170. 37. Greenpeace International, Conning the Congo, Amsterdam: Greenpeace International, 2008. 38. Baker, ‘Dirty Money’. 39. K. Appiah, Ethics in a World of Strangers, London: Penguin, 2007. 40. Baker, Capitalism’s Achilles Heel, pp. 187–8. 41. A. Giddens, The Consequences of Modernity, Cambridge: Polity, 1990. 42. M. Castells, The Rise of the Network Society, Cambridge: Blackwell Publishers, 1996.

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43. K. Ohmae, The End of the Nation State: The Rise of Regional Economies, London: HarperCollins, 1995. 44. P. Hirst, and G. Thompson, Globalization in Question: The International Economy and the Possibilities of Governance, Cambridge: Polity, 1996. 45. M. Camdessus, Money Laundering: The Importance of Counter Measures, Plenary Meeting of the Financial Action Task Force on Money Laundering, Paris, 10 February 1998: ‘the estimates of the present scale of money laundering transactions are almost beyond imagination – 2 to 5 per cent of global GDP would probably be a consensus range’. These remarks were made while Camdessus was the Managing Director of the IMF. http://www.imf.org/external/np/ speeches/1998/021098.htm. 46. WTO, International Trade Statistics 2007, Geneva: World Trade Organisation, 2007. 47. World Bank, WDI and GDF Online: Key Development Data & Statistics, Washington, DC: World Bank, 2008. 48. A. Giddens, Runaway World: How Globalisation is Shaping Our Lives, London: Profile, 1999.

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Part II Missing Public Revenues

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3 THE GLOBAL FINANCIAL SYSTEM AND ENDURING POVERTY Peter Wahl

‘The number of people suffering starvation did not diminish but instead rose from 840 million in 1996 to 854 million in 2005.’ ‘The financial assets of HNWI (High Net Worth Individuals) amount to $33.3 trillion, which is an increase of 8.5 per cent.’’ These two interesting pieces of information were reported simultaneously in the media in spring 2006. The first one is taken from the ten-year balance of the UN World Food Summit that took place in Rome in 1996. The agreed goal of the summit was to reduce by half the number of chronically undernourished people on earth by 2015. The second comes from the WWR 2006 (World Wealth Report), which is published annually by Merrill Lynch and CapGemini. HNWIs are not untiring activists mobilised for a highly ethical, valuable cause. They are people with liquid capital assets worth one million dollars and upwards (that is, without means of production, property/real estate and luxury goods). The increase of these assets from 2004 to 2005 amounted to $2.6 trillion. In ten years the HNWIs were able to double their fortune from $16.6 trillion to 33.3 trillion. The number of HNWIs also doubled in this period. There were 8.7 million HNWIs worldwide in 2005. In order to grasp the dimensions: during the same period (1995– 2005) the accumulated development aid of the OECD member states amounted to $688 billion, according to the OECD. That is barely 4 per cent of capital gains made by HNWIs. It is also interesting that the strongest increase of HNWIs was registered 69

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in Africa, where their number increased by 11.5 per cent from 2004 to 2005. In second place came the Middle East (9.8 per cent). Regarding the growth of capital assets, Africa was second with 14.5 per cent. In absolute numbers, this is an increase of $51.5 billion. About 87,000 Africans – somewhat less than 0.01 per cent of the total population – are the beneficiaries of this kind of growth. By comparison: in 2005 Africa received $24.7 billion for development aid, less than half the capital gains of HNWIs. The World Wealth Report predicted a further increase in African capital assets by 5.2 per cent by 2010. Nevertheless, at the same time, the World Bank predicts an increase of the number of people living in extreme poverty in Africa: ‘In 2030 more than three quarters of the population of Sub-Saharan Africa will belong to the poorest of the world.’ In 2006 the figure was 53 per cent.1 The enormous growth of capital assets worldwide, and also in Africa, can be attributed largely to the skilful use of opportunities provided by international financial markets. At the stock exchange in Johannesburg, for example, the rate of return for globally registered indices amounted to 43 per cent in 2005. Exceptionally profitable were private equity funds, also known by the derogatory metaphor locusts. ‘The returns of private equity funds rose world-wide from 42 billion Dollars in 2004 to 174 billion Dollars in 2005, an increase of 314%.’2 New players in the form of institutional investors, innovative financial products such as derivatives, offshore centres and tax havens, arbitrage and speculation made it possible to accumulate more financial resources than ever before in the history of mankind. Globalised financial markets have become a money-making machine for those who have access to them and know how to use them. FINANCIAL MARKET-CENTRED GLOBALISATION: A HISTORICAL TRANSFORMATION

Originally, financial markets had three main functions: – to organise international payment (foreign exchange market)

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– to finance investments (money and capital market) – to enable securities trading – shares and government loans (stock market). Thus, financial markets historically had a subordinate and instrumental role with respect to the real economy (production and trade). The three sub-segments of the financial market were separated from each other to a large extent. In addition, up to the 1970s, financial markets were mainly national markets, and thus concentrated on the respective national economy. International business simply consisted of the transactions for external trade and foreign investments. Until the 1970s, international financial markets were politically regulated by the Bretton Woods system. At its core were fixed exchange rates among the world’s major currencies and capital controls. The US dollar was the anchor and lead currency. The system ensured a relatively stable framework for the world economy, as well as considerable growth in the post-war decades. After the system was discontinued, in 1973, the world economy experienced a radical change with far-reaching consequences. The fixed exchange rates were replaced by a free-floating exchange rate regime; that is, the currency’s value was allowed to fluctuate according to supply and demand on the foreign exchange markets. Also, controls on capital movements were abolished to a large extent. Capital became the most mobile of all factors of production. In combination with technological progress (digitisation, communication), it is possible nowadays to transfer billions of dollars to any financial centre on the globe with a mouse click. Capital thereby has a comparative advantage over any other factor of production – and it uses it extensively. National financial markets were no longer confined to their national economy, but could act internationally and/or globally. For this reason, the range and variety of the business grew by various degrees. The relationship between the real economy and the financial system was turned around and led to the dominance of financial markets over the rest of the economy. This change was the trigger, and still is the centre and engine of the present wave

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of globalisation, which also could be called a qualitatively new stage in the history of capitalism. It is more than just a shift in the economy. It is a new model or mode of accumulation – driven and dominated by the financial sector – which affects the whole of society: the economy, social structure, politics and culture. In the following sections, the basic structures and dynamics of the new system will be sketched. THE EMERGENCE OF NEW AND HIGHLY PROFITABLE SOURCES OF INCOME RETURN

Together with the development of transnational financial markets, completely new and higher than average sources of income return were opened up. Through arbitrage3 and speculation, trade with foreign currency became an independent source of income return; until then this was only a subordinate service for trade and investments. The abolishment of capital controls made arbitrage possible, a practice of using differences in interest rates and speculation in all kinds of securities. Keynes had called such a financial system a ‘global casino’. Another fundamentally new process is securitisation. While bank credits were previously basically bilateral transactions between creditors and debtors, they are now transformed into securities, which are traded further on the market. This means that they are bought and sold at will. Thus, the credit risk is distributed to other market participants. A recent example is the conversion of the sub-prime mortgage credits in the US to tradable securities. In the classic relationship between bank and borrower, the market appears as a third factor. This upheaval has particular consequences for company funding because large companies, above all, no longer finance themselves through banks but through financial markets. As each fluctuation of the exchange rate or other prices opens up chances for speculative business, this opportunity is frequently used. Permanent purchases and sales are the consequence. The turnover rate of capital increases dramatically. That leads to

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daily foreign exchange transactions at a value of more than $3 trillion. Today the general nature of business is short term, with fast income returns. More than 80 per cent of investments in financial markets last at most seven days. This leads to increased instability and sensitivity in the market. At the same time new financial products have been developed, namely derivatives. Originally, derivatives were insurance instruments for a transaction in the real economy; however, in the meantime, derivatives have become a tool for all kinds of transactions, for example, regarding market trends (from foreign exchange rates to shares, and highly aggregated indicators like the Dow Jones or DAX), or having to do with derivatives of derivatives. Only 20 per cent of trade is subject to supervision, that is, when trade is done on the stock market. The remaining 80 per cent is outside the stock market (over the counter, OTC) and completely uncontrolled. Opacity and a dramatic lack of transparency make the trade of derivatives a high-risk factor within financial markets. Potential profits in this kind of system are higher than one can normally obtain in the real economy – approximately double the normal profit – and usually they can be realised in a much shorter time frame.4 This leads to participants with liquid capital assets investing preferentially into the new financial market instruments that promise significantly more profit than the real economy. The consequence is a structural weakness in investment, and accordingly negative consequences for growth and employment.5 The subordinate status of financial markets in relation to the real economy has been reversed by this new system. Financial markets have become not only an independent source of accumulation, but a superior one. A new, financial market-centred economic system has developed and has replaced the model of the so-called Rhenanian capitalism connected with the welfare state, full employment and a certain prosperity even for those traditionally excluded. A typical example is the recent case of the German plant of Nokia, a Finnish producer of mobile phones. Although the firm made profits of $4 billion in 2007, the German plant is in process

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of closing down and the production relocated to Eastern Europe. In addition, Nokia received public subsidies for job creation in Germany, which the government is currently trying to get back. The company will receive subsidies from the EU for investing in the new member states. NEW KEY PLAYERS – INSTITUTIONAL INVESTORS

The dynamics of the financial markets have also generated new players of central importance: institutional investors. These include banks, pension funds, insurance companies, investment funds, private equity funds and real estate or property funds. These players act as capital-collecting funds, which they use in combination with their own capital funds to invest tremendously high amounts in financial transactions. In contrast to the individual investor, they have enormous assets as well as a professional apparatus for the management of their investments. Recent results of institutional innovation are hedge funds, private equity funds and REITS (Real Estate Investment Funds). While banks, insurances and pension funds still conduct their traditional core business and thus produce an economic value for the real economy, this is not the case with hedge funds, private equity funds and REITS, which operate exclusively to amass fortunes for the shareholder. This means that the only practical value this industry produces is the enhancement of value as such. The fact that a business is making a fair profit is no longer sufficient. What counts is the greatest possible rate of return. International competition ensures that this thinking is becoming the norm all over the world. These new funds and business models exclusively represent the shareholder. Holding shares is professionalised and becomes a highly sophisticated activity. This means that for the increase of income return, all suitable options are sought and used – in a highly institutionalised form and more systematically than ever before. Institutional investors are transferring this shareholder focus to the real economy.6 But in the real economy such returns are only

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possible with a corresponding reduction in costs. These always include cutting wages, reducing social security benefits, extending working time without compensatory wage increases and reducing and/or phasing out of social security systems. Other targets such as growth, improvement of competitiveness, innovation and an increase in productivity fade into the background. In the meantime, competition puts pressure on businesses that are not yet controlled by institutional investors. They too must reduce costs in order to stay competitive. The behaviour of management is influenced by incentives, such as the disbursement of a large part of the salary bill in the form of warrants and ‘golden parachutes’ in case of a collapse of the company. At the same time, hedge funds and private equity funds are an important factor of instability, because they operate with leverage, that is, they use a multiple of their own capital as credit for speculation. Hedge funds are growing fast in assets, activities and numbers – worldwide there were 9000 in 2006. According to estimates from McKinsey, the assets under management grew between 1990 and the second quarter of 2007 by 1381 per cent. The assets in 2007 amounted at $1.7 trillion. McKinsey also estimates that the leverage is three to four times the assets under management. In some individual cases the ratio for leverage is even higher. For instance, the Carlyle Capital Fund, which collapsed early in 2008,7 conducted transactions for $22 billion with only $670 million of its own assets. This is a leverage of 1:32.8 Hedge funds played an important role in the financial crisis of 2007 and 2008. They have bought and traded a lot of the socalled collateral debt obligations, derivatives that in 2007 proved to be rotten assets. Even the IMF admits, in its Global Financial Stability Report, that hedge funds are one of the main institutions responsible for the crisis: There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions – banks, monoline insurers, governmentsponsored entities, hedge funds – and the associated risks of a disorderly unwinding.9

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This is not the end of the story. As the traditional business opportunities for these highly speculative institutions are shrinking as a result of the crash, they have turned to speculation on commodities and food. There are several reasons why these prices are increasing, and speculation is one additional factor. UNCTAD senior economist Rainer Flassbeck says: Speculation increased visibly last summer. This raises concerns for us, because speculators withdrew from the American mortgage market. The speculators seek new investment opportunities, where they can rather easily make profits.10 POLITICAL BACKING FOR ECONOMIC TRANSFORMATION

The private sector is only one part of the transformation process. It was and still is promoted on the political and governmental level through liberalisation, deregulation, privatisation, tax policies, international agreements and the policies of multilateral organisations. Governments and ruling politicians are by no means helpless victims of the change. Of particular importance on the governmental level are OFCs (offshore centres) and tax havens. These are territories where otherwise relevant economic, financial and tax legislation does not apply or is reduced. Many are jurisdictions dependent on larger states – for instance, Jersey, Bermuda and Netherland Antilles – which were created by a simple administrative act. Others are international legal entities, although many of them represent socalled operetta states such as Liechtenstein or Monaco. The largest OFC, however, is the City of London, followed by Switzerland. OFCs are not marginal. According to estimates of the Tax Justice Network, the assets held in OFCs are $11.5 trillion.11 OFCs allow those operating within them to be exempted from the control of financial institutions, to avoid taxes more or less legally, and to launder money for criminal and dubious business. By extracting tax revenues from national economies and promoting capital flight by the elites, OFCs are especially harmful, particularly with regard to development. In addition, they represent a risk for the

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stability of the financial system. In early 2008, tax evasion by hundreds of German, French and other CEOs and rich individuals to Liechtenstein was revealed. One of the main culprits was the CEO of Deutsche Post, a company which, after its privatisation in the 1990s, had become one of the biggest TNCs (transnational corporations) for postal services worldwide. Ironically, in the middle of the scandal, the IMF published its country report on Anti-Money Laundering and Combating the Financing of Terrorism in which the Fund says: The authorities have made significant progress since that time in moving towards compliance with the FATF Recommendations, as noted in the AML/ CFT assessment conducted by the IMF in 2002 as part of the Offshore Financial Center assessment program and as evidenced by the subsequent major legislative amendments and institutional restructuring.12

It is not surprising that under these conditions the Prince of 30,000 citizens and 60,000 foreign firms in Liechtenstein was seen to be aggressively defending his country as a sovereign washingmachine for dirty money. A further component of the transformation are multilateral financial institutions, such as the IMF, World Bank, WTO (through the financial service agreement in the context of GATS), BIS (Bank for International Settlements), EDB (European Development Bank), as well as other regional development banks, and the major central banks including the Federal Reserve Bank in the USA and the European Central Bank (ECB). In particular, the IMF, World Bank and WTO play a prominent role in the liberalisation and deregulation of the financial sector. They paved the way for the alignment of developing country economies to financial markets by forcing indebted countries to implement structural adjustment in order to gain access to public and private capital. Further, rating agencies, representing a kind of privatisation of supervision, have also had pro-cyclical effects (herding behaviour) in the past. They were not able to play a preventive role in any of the large financial crashes of the past. As the recent financial crash shows, rating agencies are part of the problem, not the solution.

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The list continues at the national level with most governments pursuing a policy of meeting the interests of financial markets. The hegemony of the neoliberal discourse, the lobbying power of the financial industry, and real constraints created by the transnationalisation of the economy and international competition, have together resulted in a situation in which national policies follow the interests of financial markets to a considerable degree. The effects of transformation processes on financial markets can be classified in three main sectors, which will now be considered: – stability risks – social polarisation and increasing poverty, and – erosion of democracy. STABILITY RISKS

After the end of the Bretton Woods system, volatility and systemic instability have increased considerably, as well as financial crises and crashes. Crucial moments of instability are connected with the volatility of exchange rates, short-term orientation, high-risk funds, offshore centres, derivatives, the pro-cyclical behaviour/herd behaviour of the financial market participants, and international contagion in the case of crises. The vulnerable national economies of developing countries and emerging markets are the ones that are hit hardest. The crises in the financial sector of these countries spread to their real economy. As a result of the Asian financial crisis, for example, masses of medium-size and smaller enterprises in the crisis-ridden countries were forced to file for bankruptcy. Consumer demand collapsed, resulting in mass unemployment, wage cuts and impoverishment. After the crash of 2001 over half the population of Argentina was forced below the poverty line. In addition to the countries in which the crash occurred, others were also sucked in indirectly. Laos, for example, was hit by the crisis in Thailand because 80 per cent of its foreign trade is with Thailand.

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But even if there is no crisis on the horizon and financial markets are functioning properly, volatility and hectic activity on the markets entail permanent economic stress and costs for developing countries. The fluctuation of the exchange rate accounts for the fact that their revenues in foreign trade and their debt service levels are constantly changing. The present depreciation of the dollar, for instance, means that their export prices are increasing and their competitiveness on the world market is affected. On the positive side, however, their debt service and the oil bill – for oil importers – are lowered. Taking all these factors into account, this nevertheless leads to an uncertain and incalculable economic environment. As development needs a stable and predictable economic environment, external shocks produce harmful effects. Companies can protect themselves against these uncertainties to a certain degree by taking out insurance against the exchange rate risk (hedging, not to be confused with hedge funds). This, however, comes with a cost, which varies depending on the currency in which one trades. And because currency fluctuations in developing countries are usually higher than those with hard currencies, their risks in foreign trade increase disproportionately in price. Another method of controlling exchange rate fluctuations is to accumulate currency reserves in order to stabilise one’s own currency. This procedure, however, has the disadvantage of being expensive because of a constant outflow of funds, which can easily be higher than development aid. A further disadvantage of this method is that it absorbs enormous amounts of funds, which thus are not available for development and the fight against poverty and inequality. There is also the risk that the currencies in which countries hold reserves experience devaluation, which leads to corresponding losses. High reserves also cause pressure to increase interest rates. This form of protection against the risk of exchange rate fluctuations is thus to a considerable degree inefficient and becomes an obstacle to development in the long run. Nevertheless, many

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developing countries and emerging markets have accumulated huge currency reserves in the last ten or so years. The financial crash of 2007 and 2008 clearly shows that the present financial system is deeply flawed. This time, however, and contrary to 1997, there are no excuses. When emerging markets were hit by a financial crisis, weak institutions, poor supervision, crony capitalism, etc. were blamed. This time, however, the crisis broke out in the centre, in the most advanced and sophisticated financial system of the world. SOCIAL POLARISATION AND INCREASING POVERTY

Through the aspect of distribution policies, the new system leads to social polarisation. This means that the growth of income and the accumulation of assets are extraordinarily dynamic in the upper and top level, while they decrease and finally devolve into stagnation or decline. This applies equally to industrial as well as developing countries. The cake grows, and the slice for the strong and rich becomes bigger and bigger and that of the others smaller and smaller. The bottom-up effects of redistribution not only occur through earned and unearned income. Tax policies usually make their contribution to social polarisation as well. In order to increase the attractiveness of a given country as a financial centre, financial investors are offered tax preferences and other privileges. The financial markets further use their political influence to decrease direct taxes – income, business and property tax – and to increase indirect taxes. As a consequence, total tax revenue decreases gradually, while the burden on the lower classes rises and tax justice erodes more and more. In addition, the dynamics of financial markets have problematic effects on social security systems. Market liberalisation and deregulation result in the fact that insurance and pension funds of the industrialised countries put pressure on emerging markets and developing countries, in order to sell health and old-age insurance to the middle classes there. Thus they undermine the establishment of security systems based on solidarity and redis-

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tribution that would favour weak and vulnerable sectors. The systems of solidarity developed in Europe in the second half of the nineteenth century were a civilising advancement that made it possible for the subaltern classes to experience a certain security from the ups and downs of life, for the first time in the history of mankind. They were, however, based on a social alliance with the middle class, which financed the top-down component of the solidarity systems. Against the backdrop of an export push by the insurance industry, middle classes of the South will not show any inclination to help set up solidarity systems in their own countries. EROSION OF DEMOCRACY

Money is not only an economic factor. Having large sums at one’s disposal can also be an instrument of power for the acquisition of political influence. A political economy of financial markets therefore has to consider its non-economic effects. Aristotle once said: ‘The point at which democracy and oligarchy differ is poverty and wealth.’ This applies also in terms of parliamentary democracy. Hence, article 28 of the Universal Declaration of Human Rights of 1948 states: ‘Everyone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realized.’ The central problem is that the transnationalisation of economies leads to transnational areas that prevent individual nation-states from exercising their regulatory power. Parliamentary democracy, however, is both historically and structurally inseparable from the territoriality principle of the nation-state. National territory and its citizens are the basis of democracy, whereas transnational areas are not subject to democratic control. Democracy beyond the nation-state does not exist so far. The influence on governments by financial markets and transnational companies, whose decisions can affect the fate of millions of people, leads to the erosion of democracy. Many political decisions are enforced by the factual constraints caused by investment decisions and competition

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between different geographical locations. Governments are taken hostage by financial markets. ALTERNATIVES

Today, even the mainstream financial community speaks out for some changes and for systemic stability. There are many proposals, but they will always be controversial in situations like these. Their scope and their direction will depend on the interests that shape them. If bankers now call for state intervention because the markets have failed, they mean socialising the losses, while continuing to keep the profits in private pockets. And if fund managers talk about financial stability, they mean stability of their ‘alpha returns’ and bonuses. The failure of the dominant model has never been so manifest. As the current system is widely discredited, a historic window of opportunity for substantial changes is opening. However, the question cannot be how to make the casino safer for the gamblers. What is needed is a paradigmatic change in favour of stability, equality and human development. The basic rationale of a new financial order must be to stop the dominance of finance over the real economy. This does not mean going back to the old Bretton Woods system, but it does mean the necessity to develop a global financial architecture that is adapted to the requirements of the twenty-first century. We need systemic changes, that is, changes that cover the whole system and not only some highly visible selected elements of it. The crisis is not the result of some unfortunate circumstances, nor can it be reduced to the failure of supervision, rating agencies and the misbehaviour of banks and hedge funds. This chapter has uncovered the systemic nature of the failure. BUILDING BLOCKS FOR A NEW FINANCIAL ARCHITECTURE

The complexity of the present financial system makes it impossible to resolve the problems with one instrument; there is no Archimedean point. Thus a whole box of instruments will be

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necessary. Furthermore, we have to distinguish between short-, mid- and long-term measures, and the different range, scope and targets of the proposals.

The speculator pays principle The proliferation of liquidity into the distressed markets is unavoidable in order to prevent a complete collapse of the system. A reliable financial system is a public good. However, this comes at a price. Both for reasons of fairness and for maintaining market discipline, that is, to prevent a moral hazard, it is necessary for those who have benefited from the system in the past to pay the bill. Therefore, the speculator pays principle has to be strictly observed. Each country affected by the crisis should set up a special emergency fund for the purpose of providing liquidity, for buffering the consequences on the real economy, and feeding an emergency fund for the poor countries suffering from the crisis. The funds should be replenished with a one-off extra duty on all private capital income above $50,000 and with a forced loan to all banks and other institutional investors as a reinsurance for institutions threatened by bankruptcy. Ten per cent of the raised money could go to a LIC (Low Income Country) Emergency Fund under the auspices of the UNDP.

Transparency and disclosure Transparency is a precondition for efficient supervision and regulation. Therefore all market participants should be obliged to disclose all data and information that supervising bodies may require. Any capital flows from and to institutions and countries that refuse to lift the banking secrecy on request of the supervising institution of another country should be pressurised through extra duties – and an embargo in certain cases. Off-balance deals, which play an important role in the present crisis, should be immediately forbidden.

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Capital controls and capital requirements All countries should be allowed and encouraged to use national capital controls if they deem it necessary in order to prevent contagion. The capital requirements for banks have to be upgraded.

Prevention of food and oil speculation by speculative funds Each government should prevent access by hedge funds and other highly speculative actors to commodities and food stock exchange. This can easily be done by registering all traders. Funds that violate the rules should be closed down and their assets transferred to the LIC emergency fund mentioned above.

Countering the downturn in growth and employment Strong public investment programmes should be implemented in the social infrastructure and environment in each country threatened by the crisis, in order to counter the downturn in growth and employment. This can be financed according to the speculator pays principle.

Solutions for mid- and long- term stability problems A new Bretton Woods agreement should be prepared, under the auspices of a democratised UN.

Stabilising exchange rates Free-floating exchange rates are at the root of many problems of the financial system. They create risks and hence costs for trade, and they open the way for speculation and lead to a volatile and unstable system. Therefore, the stabilisation of exchange rates should be envisaged, to be followed in the long run by their replacement by fixed rates or by the merger of currencies according to the example of the euro.

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In the meantime, a two-tiered currency transaction tax (CTT) as proposed in the early 1990s by the former IMF advisor P.B. Spahn13 can be introduced. The tax is linked to a variable exchange rate corridor. As long as the real exchange rate remains inside the limits of the corridor, the tax is low. As soon as the limits are passed, the second tax rate, which is of a prohibitive size, comes into force, thus bringing the exchange rate back into the corridor. Technically, the tax is unilaterally feasible. As recent studies show, the probability of circumvention is lower than for most other taxes. The CTT is multifunctional. Besides stabilising exchange rates and limiting speculation, its revenues would be an important source to fund global public goods, in particular for the environment and development.

Regulating derivatives As long as there are risks for the real global economy, such as the exchange rate volatility, derivatives can play a positive role if they serve as an insurance against these risks. For that purpose, they should be traded on the stock exchange, standardised and authorised by a regulatory body. However, trade outside a regulated framework – OTC – should be banned.

Who needs hedge funds? Who needs hedge funds and what is their benefit for the economy? The G8 meeting in Germany in 2007 asked for more transparency on hedge funds. The answer was that these funds have a useful function because they take risks that others are not ready to take. In fact, these risks are the risks of speculation. There is no benefit for the economy. Nobody needs hedge funds except rich individuals and institutional investors looking for high-risk maximum profit. In terms of the practices of leverage, the risk is transferred to the banks. This is why they should not exist at all. Declaring hedge funds to be instruments of risk prevention is like giving a pyromaniac the responsibility of fire prevention.

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Therefore, hedge funds have to be supervised and be submitted to the same capital and other requirements as banks.

Neutralising offshore centres Who needs offshore banking centres and tax havens? Only rich individuals, institutional speculators, the Mafia, terrorists, arms traders and other criminal forces who want to launder money. From a macroeconomic perspective there is no reasonable economic argument in favour of maintaining the economic status of such territories – not to mention the moral and political criteria. Offshoring constitutes per se a stability risk. Therefore, the present offshore centres should be completely closed down.

Special contribution of the EU The Lisbon Treaty of 2007 is shaped according to neoliberal beliefs. Its article 56 forbids any restrictions on capital movements and thus sets the perfect conditions for the overwhelming hold of finance on society. It should be deleted. Furthermore, it is necessary to change the status of the ECB. Its monetary policy follows neoclassical dogmas. The lesson from the crisis should be learnt: asset price inflation is as important as consumer price inflation. Growth and employment have to be added to the mandate of the ECB, with the same importance as price stability.

Overcoming the dynamics of inequality in the finance system As long as profits and rewards for bankers are much higher than can be realised in the real economy, there is an incentive for speculation and excessive risk-taking. Therefore, the incentives for excessive profit-making have to be removed, for individuals as well as for institutions. A key instrument is progressive income tax. The trend towards regressive taxation – reduction

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of corporate and wealth taxes, shift towards indirect taxes, etc. – has to be reversed.

Regulating private equity funds Private equity funds can improve efficiency in the real economy and provide venture capital if they are regulated properly. At present, however, they serve mainly as a conveyor belt for the transfer of the logic of financial markets to the real economy. Capital requirements have to be improved. Leverage has to be limited to a sustainable level. Reforms in corporate governance such as multiple voting rights for long-term shareholding are necessary. Trade unions, consumers and other stakeholders must be given mandatory participation in corporate decision-making.

Breaking the dominance of financial markets over real economy The basic orientation for a real change has to aim at breaking the dominance of the financial markets over the real economy. Many of the measures proposed above would contribute to a reorientation of economic activities, such as the CTT, capital controls, regulating exchange rates, progressive income taxes, etc. In order to close many remaining loopholes, a further suitable instrument could be the taxation of all kinds of capital transfers in order to reduce the hypertrophy and power of the financial sector. Incentives for banks are needed to (re)engage in company financing. Another measure could be the strengthening of the public and cooperative sectors in the financial industry.

Making financial markets work for human development When this chapter was being written, the food crisis in several developing countries was on the front pages of newspapers worldwide. Obviously, something is rotten in global state affairs. There is so much more money in the world than ever before in human history. Nevertheless, the number of hungry people is

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increasing. All studies on the implementation of the very modest MDGs state that they will not be met. However, compared to the $33 trillion of liquid capital assets of the HNWIs, the financial means required to reduce extreme poverty by half amount to peanuts. A solidarity tax of only 0.7 per cent on the capital assets of the HNWIs would generate $231 billion. This is more than double the present official development aid. A small tax on the trade in the major currencies, of the order of 0.01 per cent, would generate sums that development policies have never received. In 2009 we can celebrate the 39th anniversary of the non-compliance with the 0.7 per cent target. After such a long period of continuous failure it is time the raise the question: Why? It is time to give up false modesty. The target of reducing poverty by half is too modest. Poverty must and can be eradicated totally. Therefore inequality must be tackled. There is more than enough money. It is time to turn attention on the systemic questions of the global financial system. Think big – there is the big money out there, and it only has to be distributed better. This question has to come on top of the international agenda, because one cannot talk about poverty and be silent on wealth. NOTES 1. World Bank, Global Economic Prospects: Managing the Next Wave of Globalization, Washington, DC: World Bank, 2006, p. 79. 2. Merrill Lynch/CapGemini, World Wealth Report 2006, n.p., 2006, p. 14. 3. Arbitrage is the utilisation of known exchange rate differences. If, for example, the exchange rate between euro and dollar is different at the closing of the market in the European time zone and at the opening of Wall Street, the difference is used to make a profit. At the same time these deals produce the adjustment of the different exchange rates. 4. The front-runners of the industry, such as Deutsche Bank, now have a return on equity of 25 per cent. Such a margin allows them to double the capital employed in three years. 5. From the ecological viewpoint this may appear positive at first sight. But sustainable development at the expense of employees and

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7. 8. 9. 10. 11. 12.

13.

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the precarious and vulnerable social sectors of society would be a contradiction in itself. A recent example is German Telekom, where the hedge fund Blackstone enforced wage cuts against strong opposition by the trade union and despite the profits the company was making. Spiegel, online, 13 March 2008. Frankfurter Allgemeine Zeitung, 14 March 2008. IMF, Global Financial Stability Report, Washington, DC: IMF, 2008, p. ix. Interview in Frankfurter Rundschau, 24 April 2008. http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore.pdf Liechtenstein: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism, March 2008. IMF Country Report No. 08/87, Washington, DC: IMF, 2008. P.B. Spahn, Zur Durchführbarkeit einer Devisentransaktionssteuer, Gutachten im Auftrag des Bundesministeriums für Wirtschaftliche Zusammenarbeit und Entwicklung, Bonn, 2002.

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4 DEALING WITH DEBT Katarina Sehm-Patomäki

Recent emphasis on fighting poverty as a top priority among aid donors has led to an increasing level of debt relief, peaking in 2006. Yet, civil society remains unhappy with the amounts, the schedules and the processes. Moreover, debtors replace their debts to the IMF with loans from new sovereign lenders and by issuing bonds. Despite the changing shape of debt, the debt burdens remain. Debtors’ and creditors’ views on how the debts were accumulated differ, as do their views on the responsibility for repaying debts. Even more contrasting views are seen in the discourse of the International Financial Institutions versus that within civil society. Perhaps the most conspicuous difference is the following: while creditors maintain that the debt problem is an economic issue, civil society stresses the problem as a political matter. Loans are, of course, one of the tools a government can use to overcome low conjunctures, or when making larger longterm investments. Indebtedness in itself does not automatically constitute a problem. Rather, problems arise from situations of over-indebtedness, or situations where debts cannot be repaid according to the schedule. Accumulating debts easily lead poor countries into debt spirals that are difficult to exit. Debt repayments consume social investments, and in reaction, civil society keeps calling for changes in the global economic structures, which they say favour the rich nations. At the same time, they also call for the revisiting of loans made to poor countries under suspicious circumstances. People’s perceptions follow the direction of the 90

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tide of research reports linking growing debts to the economic and social problems of indebted countries. From different perspectives, discussions emerge ranging from debt relief to the rights of the indebted. There seems to be substantial disagreement regarding the measures to be taken, and few attempts at gluing these together. In this contribution, I join with those who propose that arbitrating international debt provides an umbrella framework for dealing with debt while promoting the rule of law internationally. At the same time, the mechanism would address and assess economic sustainability, odious debt, and the questions of accountability of lenders’ and borrowers’ performance in the past. Naturally, the introduction of mechanisms solving perceived injustices in the past must be accompanied by arrangements that promote fairness, justice and sound economics in the future. Dealing with debt must also be accompanied by transformations and reforms regarding fair mechanisms of trade, the implementation of international taxation – especially targeted at the financial markets and protecting the environment – along with other measures altering the structures of the world economy. FOUR CONSIDERATIONS REGARDING DEBT RELIEF

Debt relief initiatives so far have come with four main sets of considerations, which are yet to be dealt with in designing new debt-handling mechanisms. Firstly, debt relief is granted only following the implementation of certain policy measures required by the creditors (so-called conditionality). Joseph Hanlon describes HIPC policy as conditional on poor countries jumping through a number of hoops relating to macroeconomic stability and openness of the economy having the World Bank approved Poverty Reduction Strategy Papers […] it is basically a charitable exercise in which the debt of the ‘deserving poor’ is reduced but not totally cancelled.1

From a democratic point of view, external involvement in national political decision-making is problematic. It endangers the national

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democratisation process where voters have elected their political decision makers. External interests do not necessarily equal nationally developed democratic preferences. The second set of problems has to do with the idea that large sums are injected to creditors in compensation for lost credits (such as the case of Iraq in 2004, proposals by the G7/8 and the proposal of selling IMF gold reserves). Most of the credits owed by indebted poor countries have small prospects of ever being repaid. If the IFIs were handed large sums in compensation for loans – that they will never get paid back anyway – it is possible that they would use this money to do what their terms of agreement binds them to do: to use money for new loans in the future.2 There are no new straws in the wind signalling that new loans would be made in ways different from the previous ones, which are presently being disputed. An overall decrease in the debt burden would actually allow the IFIs to collect better from a debtor, when part of its burden is lifted. Consequently, and as a third point, new loans could be accompanied with yet tighter conditionalities.3 Stated differently, ultimately, debt relief can serve as a political tool to reformulate conditionalities now tied to a loan. Hanlon explains how loans are rolled over or replaced by new loans in ways that attempt to wash away the original taint of odiousness.4 Finally, debt relief does not at any point allow questioning the accuracy and accountability of the policies practised by the international financial institutions (IFIs),5 which is something civil society argues strongly for. In short, lending policies as such should be revisited since future lending is an important policy instrument. DISCUSSING THE DEBT PROBLEM AS A POLITICAL ISSUE

Since the 1970s, civil society has been calling for the cancellation of debts. The debt problem appeared on the political agenda in 1982, with the default of Mexico. Since the late 1990s the debt problem has been on the agenda of the annual G7/8 meetings. A quarter of a century after the crisis, despite numerous debt

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relief programmes, the same debt administration system still remains. During the same period, the actual debt burden of poor countries has grown nearly threefold, with the total debt of poor countries amounting to around $2851 billion.6 The interest paid to IFIs, private and public creditors is many times what was owed in 1985. While the accumulated actual amounts paid to creditors exceed the debts, the debt stock has also risen. This fact reveals that the debt problem cannot be seen as a purely economic problem any more. The view is supported by the record of politically motivated cancellations of debt. Furthermore, it is clear that this unfair problem can contribute to the widespread poverty and inequality, threatening world peace. Based on these observations, civil society organisations and movements consider the debt problem of the indebted and poor countries to be above all a political problem. There is a need for a new relationship between the richer and the poorer countries because the present condition is thoroughly unhealthy. In describing the role of the UN in the twenty-first century, the then UN Secretary-General Kofi Annan suggested a ‘debt arbitration process to balance the interests of creditors and sovereign debtors and introduce greater discipline into their relations’.7 Appointing an independent entity to decide over wrongs and rights resembles the initiative of setting up a North-South truth commission. Forsberg and Teivainen8 looked specifically into the history and functions of truth commissions and conclude their research by saying, ‘debt arbitration could indeed constitute themes under which truth-commission-like consideration on forgiveness and reconciliation could play a role’.9 Yet, they point out that given the current relations of power it is not surprising that some of the radical social movements express doubts about the proposal of arbitrating the debt of poor countries. Indeed, the initiatives with political motivations – in contrast to economic ones – have ultimately materialised into decreased debt burdens. A range of successful examples, with regard to actual reduction of debt, would include the case of Germany in 1953. As the Versailles Treaty following the First World War had led

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to the rise of Hitler, any repetition of such a scenario was seen as undesirable. Secondly, in 1969, Suharto’s new Indonesian regime received a debt reduction very similar to the German one – the debts of both countries were halved. Thirdly, in 1980, Polish debts were reduced in the hope of suffocating socialism. Fourthly, in 1991, the debt of Egypt was reduced following its support in the first Iraq war. The most recent example is Iraq after the inauguration of the new regime in 2004. The fact that the initiatives to date are creditor-controlled is incompatible with the principles of the rule of law. These principles mean equal possibilities of participation and influence by all parties while presuming that there are no asymmetric dependency relations between countries or groups of countries. As Herman points out, the present arrangements are actually less unbalanced than the case of private corporate bankruptcy proceedings, where creditors hold almost all power over the disposition of the bankruptcy enterprise.10 But here, the distinction between the public and the private constitutes the principle of excluding business from political decision-making – and the principle of not treating political decision-making as a business. This is the central theme of my argument. International debt is a political matter, which should be discussed in terms of equal participation by those concerned in the action. Rule of law is a prerequisite for democracy. One definition of democracy is that political power is authorised and controlled by the people over whom it is exercised, in such a way that it gives these persons roughly equal political influence.11 The application of the rule of law would in effect give a franchise to the debtors. One of the few proposals by debtors was the plan for a Club of Debtors, initiated by Cuba in 1982. This plan fell through owing to the launch of a new negotiation process shortly thereafter, flashing a false hope of forthcoming positive changes.12 The debtors are not helped by the articles of the Paris Club – the group of sovereign creditors to which a country must go to negotiate debt rescheduling – explicitly denying borrowing countries the right to negotiate in groups.13

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DEBT ARBITRATION AS A MEANS TO INTRODUCE INTERNATIONAL RULE OF LAW

The rule of law stands for the principle that no one is above the law. In this light, the fact that debt relief programmes have been named and framed by the creditors alone becomes interesting.14 As spelled out, these programmes are not unproblematic for the debtors. Increasingly, debt relief is grouped under development aid as part of the development policies of donors. For instance, Action Aid estimates that 42 per cent of French development aid in 2003 was made up of debt relief.15 But lifting the debt burdens is not simply a question of charity. In addition to reasons of pity, creditors may also implement debt relief against a more selfish background aimed at preventing a meltdown of the financial markets to protect the creditors’ own interests. Hanlon turns these self-interests inside out by stating that the burden of responsibility for illegitimate loans lies on the lenders, not on the borrowers.16 He puts forward the case that debt cancellation is dependent on prior action of the lender, not on the present conditions or actions of the borrower17. To sharpen the argument, out of the total sum of debts of poor countries, nearly a third – more than $735 billion – can be attributed to dictators in 23 different countries.18 This echoes the claims by especially Southern civil society organisations and movements, who have called not only for cancellation of debts but also for compensation from the North.19 In addition, international lending, which lacks mechanisms of international law, can be compared to laws on lending in a national and corporate context, and to corruption. International lending can be compared with national lending in which the borrowing party can declare itself bankrupt and thus unable to repay its loans. Arbitration of international debts entails the attractive feature of placing the creditor and debtor in equal positions. No fair – or national – judicial system allows the same parties to act as prosecutor, defender and judge. Entering the discussion on international lending from the point of view of odious debt, Hanlon explains that law around domestic lending has developed rapidly in the twentieth century in the direction of significantly increasing

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the responsibility of the lender to act in good faith.20 Hanlon concludes with an example from the UK where the Consumer Credit Act 1974 ‘reverses the normal burden of proof: if a debtor alleges that a credit bargain is extortionate, the burden of proof lies on the creditor to prove that the bargain is not extortionate’. Other analogies have been drawn to corporate lending policies. Here Hanlon21 refers to Kremer and Jayachandran22 and points out that a corporation is not liable for contracts entered into by its senior officers without proper authority. Hanlon parallels the lack of liability of corporations to that of dictators taking loans without proper consent of the people or their representatives. In addition to comparing international lending to national lending and business law, Khalfan adds the aspect of treaty law and international treaty law on corruption, specifically the UN Convention against Corruption.23 The UN Convention provides a basis for the principle that governments and those parties that engage in corruption are engaging in unlawful behaviour, and therefore cannot benefit from such conduct. Civilised insolvency laws are applicable to practically all debtors except poor countries; therefore, indebted poor countries should demand a neutral institution assuring fair solutions.24 Given the impartiality of national courts, whether located in a creditor or a debtor country, they cannot be guaranteed the establishment of a neutral court of arbitration to allow absolutely fair and equitable international bankruptcy proceedings, devoid of overreaching, however subtle. Countering the suspicion that arbitration would jeopardise future lending, Raffer has looked into examples of successful situations similar to debt arbitration that have taken place since 1945; the London Accord with Germany and the Indonesian solution of 1969 emerge.25 Raffer concludes that the German experience suggests that debt arbitration will not necessarily disrupt international lending to the country involved. However, not everyone feels comfortable with debt arbitration, despite its promises of rule of law, largely because it is seen as a function of declaring oneself – the country in question – bankrupt, or insolvent. Insolvency is perceived as humiliating. Agosta and Ugarteche say that corporations go bankrupt, not countries,

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for ‘a state is not a company doing business, but something quite different: a sovereign entity for the purpose of remaining in existence’.26 Organisations that do not speak highly of debt arbitration – Jubilee South, for instance – tend to speak for debt cancellation, full stop. Proponents of debt arbitration processes/ mechanisms counter the demands for immediate debt cancellation by saying that cancellation must happen as a result of some form of process and by some kind of mechanism. Raffer strengthens the argument by pointing out that demanding the cancellation of unpayable debts entails requesting an independent entity to be empowered to make the decision.27 At present, of course, there is no such responsible independent entity at the global level – public entities within the United States, for instance, are responsible to the state. Nor is there a comparable global legal system or enforcement mechanism. Herman points out that, strictly speaking, international bankruptcy is an inapplicable model.28 He concludes on a more optimistic note by asking whether arrangements that share some of its features would improve the present process for solving debt crisis. ABOUT ODIOUS DEBT

There are certain debts that are perceived as being odious, illegitimate, corrupt, criminal or illegal. With the exception of odious debts, there is no universal definition of these concepts,29 and consequently the application of the concepts has been confusing and at times contradictory. Odious debt, on the other hand, is a legal precedent (dating back over a century when the US captured Cuba from Spain), which became law in 1923 and could allow for the cancellation of such debts by international agreement. In 1927, the international law specialist Alexander Sack defined odious debts as debts incurred by dictatorial regimes for their own benefit (absence of consent) and against the interest of the population of a state (absence of benefit), without its consent and in full awareness of the creditor (credit awareness).30 Adams’s important revival of the concept of odious debt, partly consisting of Sack’s French text translated into English, launched a stream

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of papers, which today seems to have turned into a flood, first by civil society but now also by academics and most recently a reactionary paper by the World Bank.31 Ultimately, with the exception of the World Bank paper, the contributions conclude that odious debt constitutes a doctrine in international law. But following from here, there seem to be considerable differences regarding the practical application of the concept. The recent trend of countries reimbursing the IMF ahead of schedule has led to a transformation of debts. External multilateral sovereign debts are being turned into bonds and the lenders are private or new sovereign actors. If the old debt is replaced by a new debt, does it matter if the original debt might have been odious? According to Hanlon, loans are rolled over or replaced in ways that attempt to wash away the original taint of odiousness. He notes that this trick makes it complicated to distinguish legitimate loans from illegitimate ones. Khalfan calls this question a grey area, but concludes tentatively that the debt would remain odious and the initial creditor could be sued for the loss.32 ARBITRATING INTERNATIONAL DEBT

As another parallel path to the discussion on the consequences of debt, the liabilities of the situation, debt relief and odious debt, some – mainly economists – point out that Adam Smith in his Wealth of Nations proposed a fair and open bankruptcy as the least dishonourable solution to sovereign debtors and the least hurtful alternative for creditors. In the 1980s, a few proposals started comparing the principles of corporate insolvency to that of indebted countries.33 At first, the principle for these emerging discussions was Chapter 11 of Title 11 of the United States Bankruptcy Code, a code that permits reorganisation for any business under the bankruptcy laws of the US. But while private corporate assets can be seized, governmental assets cannot. The enforcing of judgment is difficult in a context of sovereign debt. In addition, the Chapter 11 approach failed to address the questions of sovereignty, and therefore this business approach is not applicable to sovereign

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countries. At this point, Raffer proposed the internationalisation of the principles of Chapter 9 of the same code and title.34 Chapter 9 is a procedure for solving the insolvency of a governing body, a so-called municipality, without violating or undermining its governmental power. It takes into account the protection of governmental powers for the debtor, protects those affected by debts and is thus applicable to sovereigns. In addition, it gives the debtors – the affected taxpayers as well as employees of the municipality – the right to be heard and to defend their interests. Raffer adds that Chapter 9 combines a general framework with the flexibility necessary to deal fairly with individual debtors. In practice, when a municipality files a petition this translates into an automatic stay of enforcement of claims against the debtor. This means that the indebted government would be given a period of grace to elaborate a plan with its creditors and its people while benefiting from protection. Most famously, in 1994, Chapter 9 was used by Orange County, California, to adjust its debts. Raffer states that an international adaptation of the basic principles of Chapter 9 would require only minor changes, the exception being the replacement of a national court with a neutral court of arbitration.35 This was also the kind of neutral body of arbitration that was established by the London Accord, which reduced Germany’s debt burden in 1953. This is because no national court can be considered impartial. In Raffer’s model, and as is usual practice in international law, each side nominates the same number of persons, who, in turn, elect one further member to achieve an uneven number. One of the arbitrators is elected as chairperson by a simple majority, or, if the debtor and creditors should wish so, by a qualified majority. As the outcome of the process, the creditors are to receive what can be reasonably expected from the debtors under given circumstances. The living standards of the indebted municipality’s population are protected. The jurisdiction of the court depends on the city’s volition, beyond which it cannot be extended. An international Chapter 9 would return the debt service obligations again in line with the capacity to pay, which demonstrates the appropriateness for sovereign debtors. It could be implemented quickly, first

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as an ad hoc, cheap and immediate mechanism in the name of both economic efficiency and the protection of human dignity. It would also be fair to all concerned, avoiding unnecessary costs on debtors or the international community. A central feature of the model is that in addition to the protection of sovereignty, governmental powers and public interest, all creditors should be subject to arbitration, and all creditors should be considered equal. The inclusion of all parties is important because a large proportion of debts are public debts, or credits by the IFIs. IFIs or the other international institutions cannot be considered unbiased or neutral as they are controlled by majorities of creditor states, and are creditors in their own right. All claims have to be verified loan-by-loan at the beginning, as is routinely done in any domestic insolvency. On the one hand, this also means that multilateral institutions cannot be considered neutral in terms of serving as arbiters in the process. On the other hand, by putting the credits for IFIs up for arbitration, this procedure would also entail that the past lending policies of the IFIs would be politicised. The policies of the IFIs would thus be held accountable. This is, in fact, the objective of the many public civil society debt tribunals held since the late 1990s. Acknowledging the political difficulties in convincing the World Bank and the IMF to take part in an arbitration process, one way forward could be to link it with alternative forms of financing for poor countries. In an indirect way, this is currently materialising with the transformation of debts and the new lenders on the international markets. Commenting on this model, three other proposals of debt arbitration have emerged. These are a Fair Transparent Debt Arbitration Process (FTAP) as drawn up by Erlassjahr,36 an International Board of Arbitration for Sovereign Debt (IBASD), by Alberto Acosta and Oscar Ugarteche, most recently in 2006, and the Sovereign Debt Reduction Mechanism (SDRM) conceptualised by Anne Krueger of the IMF.37 In order to avoid the use of the sensitive term ‘insolvency’ when discussing arbitration, civil society organisations prefer FTAP. Apart from the heading, this proposal differs little from Raffer’s proposal regarding international Chapter 9. Erlassjahr proposes that once the debts,

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or a majority of the debts, of the poor countries are arbitrated, the FTAP process could be transformed into a Fair Transparent Debt Arbitration Mechanism (FTAM). It could be set up on a permanent basis, for instance, within the UN system. One alternative could be with the UNCITRAL, the UN Commission on International Trade Law. In view of the power play within the UN system, Erlassjahr concludes – siding with Raffer – that it would, however, not be advisable to launch the process from within the UN, thus echoing the concerns of Forsberg and Teivainen regarding a North–South truth commission. When comparing the code proposed by Acosta and Ugarteche to the model by Raffer, it seems that the differences are minor, apart from the disagreement on whether a country can officially declare itself insolvent. Acosta and Ugarteche speak for the IBASD as part of a new financial code. Referring to the code, Raffer brings in the component of time as a factor that risks slowing down the process.38 Raffer summarises that the SDRM, as drawn up by the IMF, builds partially on arbitration by the IMF, which exempts multilateral institutions and is evasive to Paris Club members.39 The fundamental principle in a Chapter 9 arrangement of including all creditors as equals would thus not be fulfilled. In addition, even if all creditors were brought in under some equal heading, the situation whereby a creditor – the IMF – would arbitrate in its own case sounds odd indeed. THE FRAMEWORK FOR DEALING WITH DEBT

The discussions on odious debt, the bankruptcy proposals, economic sustainability and debt relief programmes have sprung from different corners. Lawyers talk to lawyers and economists to economists, and in this debate, the political scientists have yet to get mobilised. In fact, the precise relationship between the proposals for restructuring sovereign debt and for creating a workable odious debt doctrine remains unclear or unexplored in most contributions. Howse concludes that odious debt could be raised either in multilateral negotiations or in the context of arbitration or domestic litigation.40 However, he warns of a situation where multiple forums of diverse debt contracts involve

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the same debtor state. This may lead to inconsistent decisions. Rather, he proposes a single special transitional tribunal for this purpose. Based on her analyses of the sovereign debt workouts in Argentina and Iraq, Gelpern concludes that these cases suggest that alternative tools to shield countries from creditor lawsuits and reduce sovereign debts have helped pre-empt the emergence of new law in the areas of sovereign bankruptcy and Odious Debt. The fact that public and private creditors seem to prefer the existing tools weighs heavily against the new norms.41

Rasmussen combines these viewpoints into three groups, with the first supporting generous and responsive debt-relief for distressed countries in need.42 If this were the case, chances are that not many other tools would be needed. The second group consists of those who separate odious debt from the debt relief context in which it is usually found. They say that odious debt is not linked to financial distress. The third group identified by Rasmussen concerns the link between economic sustainability and odious debt by connecting it to the nature of the debt. Is the debt accumulated because of investments or private consumption? As shown, sovereign debt restructuring according to an international edition of the basic concepts of Chapter 9 provides a viable solution to the puzzle. The model would merely replicate what states agree is fair on national levels. Central to the argumentation of this chapter is that many proposals regarding debt reduction could be accommodated under the umbrella of an international version of Chapter 9 – be that under the FTAP heading or some other treaty. The institutional form would erase the risk of multiple forums submitting inconsistent decisions. The model could be implemented as an orderly framework to determine what part of the debt could or should actually be paid by insolvent debtors. The people affected would be heard, and the sovereignty of their country respected. All creditors would be treated equally. Picking up on matters emerging from the discussion above, this arbiter’s job description could include the assessment, and consequent repudiation, of odious debts. It would further involve determining the economic sustainability

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of the debtor (a disputed and vague concept), and drafting a repayment plan together with the nationals. Abiding by the rule of law allows for the rights of the debtors to be heard. The creditors’ claims would be adjusted according to the debtor’s ability to service its debt stock. As regards odious debts and the proposals for an arbitration panel or tribunal, once a debt is ruled odious it should not be paid. This could, for instance, be the case for loans deliberately made to dictators – although perhaps rolled over many times since. In addition, a successful process could be beneficial to North–South relations. CONCLUSION

The obstacles for launching a debt arbitration process are political, not legal or economic. More precisely, and hardly surprisingly, the creditors are the main obstacle. It is difficult to tempt creditors to come on board and commit themselves to an outcome that may not be in their favour. However, extending the time frame for implementing an orderly debt management mechanism only decreases the probabilities of reimbursement and the amounts repaid. Intuitively, this may sound uneconomical, but economists are trained to prefer stable and predictable environments. A promise of reimbursement tomorrow is preferable to action today spinning too many simultaneous factors out of the economists’ control. In the meantime, at least, it would be desirable for the new loans to include a clause that the loans are subject to international arbitration upon signing new credit agreements. The fact that borrowing countries reimburse their debts to the IMF has meant three things: firstly, countries have transformed their public external debts into private and internal debts. Secondly, a number of new lenders in the shape of emerging economies have entered the scene; China is often mentioned in this context. The new loans issued by these new lenders may come at higher interest rates, but also with fewer or no conditionalities. Thirdly, fewer dependency strings between debtors and the IMF may open doors for new financial initiatives, potentially Southern ones. The future role of the IMF seems to be up for debate. This debate opens

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up other questions on the future of international lending. How should international lending be organised? Will fewer dependency strings between debtors and the IMF actually open doors for new international financial initiatives? Will international loans be arbitrated? And if so, according to what principles? In order to gain legitimacy and be economically efficient, any future arrangements must be set up according to democratic mechanisms as regards participation and decision-making, relying on democratic principles and abiding by the rule of law. It is equally clear that arbitrating international debt is only one of the several transformations required for launching a process of democratisation of the world economy. No doubt, there are chapters yet to be written on this subject. NOTES 1. J. Hanlon, ‘“Illegitimate” Loans: Lenders, not Borrowers, are Responsible’, Third World Quarterly, Vol. 27, No. 2, 2006, pp. 211–26, at p. 223. 2. K. Raffer and H.W.Singer, The Economic North–South Divide: Six Decades of Unequal Development, Cheltenham: E. Edgar, 2004, pp. 185–6. 3. A. Acosta and O. Ugarteche, ‘Global Economic Issues and the International Board of Arbitration for Sovereign Debt (IBASD)’, unpublished manuscript, 2006, p. 7. 4. Hanlon, ‘“Illegitimate” Loans’, p. 221. 5. See more on the financial accountability of the international financial institutions in K. Raffer, ‘International Financial Institutions and Financial Accountability’, Ethics and International Affairs, Vol. 18, No. 2, 2004, pp. 61–76; also J. Stiglitz, Globalisation and its Discontents, London: Allen Lane, 2002. 6. World Bank, Global Development Finance 2007, online data bank. 7. K. Annan, We, the Peoples: The Role of the United Nations in the 21st Century, New York: United Nations, 2000, p. 38. 8. T. Forsberg and T. Teivainen, Past Injustice in World Politics – Prospects of Truth Commission-Like Global Institutions, Crisis Management Initiative, Office of President Ahtisaari, Helsinki, 2004. 9. Ibid., p. 28.

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10. B. Herman, ‘The Players and the Game of Sovereign Debt’, in B. Christian et al., (eds), Dealing Fairly with Developing Country Debt, Carnegie Council, Malden, MA and Oxford: Blackwell Publishing, 2008, p. 35. 11. T. Pogge,‘Achieving Democracy’, in Christian et al., Dealing Fairly, p. 249. 12. G.C. Hernandez Pedraza, ‘La dette externe du tiers Monde: nouvelles initiatives ou vieilles recettes?’, in Raisons et déraisons de la dette, Le Point de vue du Sud, Alternatives Sud, Vol. IX, No. 3, Louvainla-Neuve: L’Harmattan, 2002, p. 32. 13. N. Hertz, I.O.U. The Debt Threat and Why We Must Defuse It, London: Fourth Estate, 2004, p. 40. 14. Given the focus of this chapter, I have left out of the discussion numerous other creditor-led initiatives to reduce debt. 15. Action Aid, Real Aid: An Agenda for Making Aid Work, London: Action Aid, 2005, p. 28. 16. Hanlon, ‘“Illegitimate” Loans’. 17. Ibid., p. 212. 18. For a breakdown of these countries/dictators, see ibid., p.217. 19. The Norwegian decision (Foreign Ministry of Norway 2006) to cancel its debts to five countries revived an interest in the role and responsibility of lenders. 20. Hanlon, ‘“Illegitimate” Loans’, pp. 214–15. 21. Ibid., pp. 217–18. 22. M. Kremer and S. Jayachandran, ‘Odious Debt’, Finance and Development, Vol. 39, No. 2, June 2002. 23. A. Khalfan et al., Advancing the Odious Debt Doctrine, CIDSL Working Paper, Montreal, 2006, p. 2. 24. K. Raffer, Solving Sovereign Debt Overhang, Studien von Zeitfragen, 36. Jahrgang Internetausgabe 2002, http://www.jahrbuch2002. studien-von-zeitfragen.net/Weltfinanz/Raffer_1/raffer_11.htm, and K. Raffer, To Stay or Not to Stay – A Short Note on Differing Versions of the SDRM, 31 January 2003, available at http://www. jubilee2000uk.org/latest/raffer310103.htm. 25. K. Raffer, ‘Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face’, World Development, Vol. 18, No. 2, 1990, pp. 301–11. 26. Acosta and Ugarteche, ‘Global Economic Issues’, pp. 3–4. 27. Raffer, Solving Sovereign Debt Overhang, p. 21. 28. Herman, ‘The Players and the Game’, p. 35. 29. For attempts, see Hanlon, ‘“Illegitimate” Loans’; K. Raffer, ‘Odious, Illegitimate, Illegal or Legal Debts – What Difference does it Make for International Chapter 9 Debt Arbitration?’, Law and Contemporary

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30.

31. 32. 33.

34. 35.

36.

37.

38. 39.

40. 41.

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Problems, Vol. 70, No. 4, Autumn 2004, pp. 221–47; EURODAD, World Bank Paper on Odious Debt: Dismissive and Limited, 13 March 2008, p. 2. A. Sack, Les effets des transformations des Etats sur leurs Dettes publiques et autres obligations financières, Recueil Sirey, 1927, available at: http://www.odiousdebts.org/odiousdebts/pulications/ dettes_publiqyes.html. P. Adams, Odious Debt: Loose Lending, Corruption, and the Third World’s Environmental Legacy, London: Earthscan, 1991. Hanlon, ‘“Illegitimate” Loans’, p. 2. For an overview of these proposals, earlier ones and ideas related to other initiatives, see K. Rogoff and J. Zettelmeyer, Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001, IMF Staff Papers, Vol. 49, No. 3, IMF, 2002. Raffer, ‘Applying Chapter 9’. One established method for solving legal disputes is arbitration. The Greeks and the Romans are known to have applied arbitration to settle disputes. Today, international arbitration is common in commercial law. In the context of this chapter, lifting the principle of arbitration to an international level also takes it out of the rules of any particular jurisdiction. Erlassjahr, A Fair and Transparent Arbitration Process for Indebted Southern Countries, 2001, available at: www.erlassjahr.de/content/ languages/englisch/dokumente/ftap_englisch_rz.pdf. A. Krueger, ‘New Approaches to Sovereign Debt Restructuring: An Update on Our Thinking’, speech at the conference on Sovereign Debt Workouts: Hopes and Hazards, Institute for International Economics, Washington, DC, 1 April 2002, http://www.iie.com/ publications/papers/paper.cfm?ResearchID=454. Raffer, ‘Odious, Illegitimate, Illegal or Legal Debts’. Raffer, To Stay or Not to Stay, p. 2 and K. Raffer, ‘The IMF’s SDRM – Simply Disastrous Rescheduling Management?’, in C. Jochnick et al., Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis, Oxford: Oxford University Press, 2006, pp. 246–66. R. Howse, The Concept of Odious Debt in Public International Law, Geneva: UNCTAD, 2007. A. Gelpern, ‘What Iraq and Argentina Might Learn from Each Other?’, Chicago Journal of International Law, Vol. 6, No. 1, Summer 2005, p. 393. R. Rasmussen, ‘Sovereign Debt Restructuring, Odious Debt and The Politics of Debt Relief’, Law and Contemporary Problems, Vol. 70, No. 4, Autumn 2004, pp. 249–61.

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5 TAXING TRANSNATIONAL CORPORATIONS John Christensen

The past half-century has seen a massive shift of economic and political power from the state to companies. Transnational corporations (TNCs) bestride the globalised markets, wielding huge powers at national and international levels. The largest hundred corporations control 20 per cent of global foreign direct investment, and approximately 60 per cent of world trade occurs between subsidiaries of TNCs. Their ability to use opaque and complex structures for funnelling investment and trade flows provides TNCs with enormous scope for monopolising markets, operating pricing cartels, and engaging in aggressive tax planning. They routinely finance politicians and political parties, thinktanks, academic research posts and the media in order to promote their special interests. They also pressurise elected governments, frequently using threats to disinvest entirely from a country, in order to obtain business-friendly incentives, meaning tax cuts and lesser regulation. Democratic processes appear impotent in the face of these dominant powers. Off-shore financial centres, located in secrecy jurisdictions – also known as tax havens – dotted across most time zones, have played a key role in enhancing corporate power. The focus within boardrooms has shifted from product innovation to financial engineering and novel tax planning – a euphemism for aggressive tax avoidance. Battalions of accountants, lawyers and bankers devise complex structures to exploit loopholes in domestic tax legislations, while advancing the idea that tax 107

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avoidance is crucial to promoting corporate efficiency. The outcome has been the creation of a business culture in which distributions to society through tax payments are regarded as a corporate cost, to be minimised, and tax avoidance is seen as a major profit centre. Any company that chooses to act in an ethical way by paying taxes on profits when and where they are due is seen as inefficient and therefore ripe for takeover by a private equity buyer – almost certainly controlled through an offshore financial centre. The impact of corporate tax avoidance on developed countries is immense. For example, the UK is estimated to lose 16 billion euros each year to corporate tax avoidance, enough to pay for a 20 per cent hike in pensions for the elderly. But the situation is even worse for poorer countries, which are more vulnerable to aggressive tax planning by TNCs. Poorer countries are also more vulnerable to pressure from TNCs to provide fiscal concessions, very often in the form of tax holidays, lower tax rates, even direct and indirect subsidies. These concessions continue to be provided despite empirically based evidence that questions the usefulness of offering tax breaks to attract foreign direct investment.1 It remains overwhelmingly the case that TNCs continue to rank the quality of physical infrastructure, labour productivity and dynamics of the domestic market more highly than tax breaks when taking their investment decisions, but such is the bargaining power of the companies that governments of poorer countries are too easily forced into granting fiscal concessions that they would not otherwise wish to concede on.2 The British non-governmental organisation Oxfam has estimated that the use of secrecy jurisdictions by TNCs contributes to revenue losses for poorer countries exceeding 35 billion euros annually: The 35 billion euros loss is equivalent to six times the estimated annual costs of achieving universal primary education, and almost three times the cost of universal primary health coverage. Of course, ending the diversion of resources from governments into corporate profit margins and offshore bank accounts provides no guarantee that the funds released

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will be used for poverty reduction purposes. This depends on governments developing effective poverty reduction strategies. But allowing current practices to continue will undermine the successful implementation of such strategies.3

This chapter explores the way in which corporations have exploited the gaps between national tax and regulatory regimes to create elaborate and secretive structures for both tax avoidance and avoiding disclosure of key information, including the identity of beneficial ownership. This chapter also identifies the role of financial intermediaries, who earn huge fee income from creating elaborate tax planning strategies, many of which stray across the avoidance/evasion boundary into illegality. And it explores some of the options for tackling this apparently intractable problem, including a simple proposal for changing accounting reporting standards, which, by itself, would yield more revenue for poorer countries than the combined aid programmes of all the countries of the global North. THE GREAT BANANA TRADE SCAM

Located in the cold and windy English Channel, Jersey, the author’s home island, is not ideally placed for growing and exporting a highly perishable tropical fruit. It does, however, host a major offshore financial centre, and it is in this capacity that Jersey plays its part in international banana trading. Not that banana reefers from Latin America or the Caribbean pass anywhere near the island’s port at Saint Helier. Bananas typically travel direct from the producer countries to the ripening warehouses in consumer countries: but on paper, bananas loaded in Ecuador, the Windward Islands, and other production centres in Latin America, follow a complex journey, which zig-zags to and fro across the Atlantic, stopping at half a dozen offshore financial centres en route, before being invoiced to the end-users in consuming countries – see Table 5.1.

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Table 5.1 How one euro’s worth of bananas purchased in Europe is traded on paper for profit-shifting purposes Invoice 1 Producer country

Bananas exported at 13 cents. Labour and other production inputs account for 12 cents. Approximately 1 cent of taxable profits booked in producer country Invoice 2 Cayman 8 cents fee charge for use of purchasing Islands network Invoice 3 Luxembourg 8 cents charged for use of company financial services Invoice 4 Ireland 4 cents charged for use of brand Invoice 5 Isle of Man 4 cents charged for use of insurance services Invoice 6 Jersey 6 cents charged for management services Invoice 7 Bermuda 17 cents charged for use of distribution network Invoice 8 Consumer Bananas imported at 60 cents and invoiced country to retailers at minimal margin or even at a loss. The retailer adds a margin of 39–40 cents. Approximately 1 cent of taxable profits booked in consumer country.

Source: F. Lawrence and I. Griffiths, ‘Revealed: How Multinational Companies Avoid The Taxman’, The Guardian, 6 November 2007.

Bananas rank alongside cereals, sugar, coffee and cocoa as among the largest traded agricultural produce by value. By volume, the majority of bananas produced globally are consumed in the producing countries, but bananas have become a staple fruit for most households in Europe and North America, and the market value of traded bananas exceeds 50 billion euros annually. World trade in bananas is dominated by a small number of vertically integrated companies, which control every stage of the production, transport, ripening and wholesale distribution processes. The big three banana corporations – Chiquita, Dole and Del Monte – have combined sales exceeding 35 billion euros a year, accounting for around two-thirds of world banana trade, with Irish-based Fyffes and the Ecuadorian company Noboa controlling the majority of the remainder.4

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Analysis of the financial records of the big three companies, all of which are headquartered in the United States, shows that the use of elaborate profit-shifting mechanisms have enabled Chiquita, Dole and Del Monte to bring their effective tax rate down to as low as 8 per cent, despite the fact that the nominal tax rate in the US is 35 per cent. How do they achieve such low tax payments? The key to their tax minimisation strategies lies with the process of bundling different costs – very often relating to treasury operations and intellectual property rights such as patents, copyrights and similar intangible assets – into offshore entities that can be used to load costs on to the subsidiary companies based in producer countries, and shift profits into low- or no-tax jurisdictions. Thus, in the case of bananas, transport services, financial services, marketing services, use of brands, logos and management services, are all bundled separately and charged from different offshore financial centres at high rates. Inflated rates can be sustained because the big three dominate global trade in bananas and can therefore act as price-setters. Since 2005 the big three banana traders have been under investigation by the European Commission for allegedly operating a price-fixing cartel, but such investigations encounter major problems when trying to calculate the cost of intangible assets and in-house services. The end goal of these tax-planning strategies is to minimise the invoiced price from the exporting country – thereby reducing taxable profits arising at the production end of the value chain – while also ensuring that the import price charged in the consuming country, is set as high as possible – thereby reducing taxable profits arising at the consumption end of the value chain. Data for the big three banana traders show that for each euro spent on bananas by consumers in Europe, only one cent of taxable profit is reported in the producer countries, and only one cent of taxable profit is reported in consumer countries.5 In theory, the scope for using transfer pricing mechanisms for profit-shifting is limited because TNCs are required to apply an arm’s-length price to sales between their different divisions, effectively treating these divisions as though they operate independently on a wholly commercial basis. The arm’s-length

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price is therefore supposed to equate more or less to the world market price. In practice, however, many intra-group transactions relate to either products or services that are specific to the company, meaning there is no world market price to use as a benchmark. TNCs have developed complex models to allocate costs between their different divisions, but the process is open to abuse. Transfer mispricing is especially prevalent when TNCs hold dominant market positions and can operate as price-setters, as is the case with the banana traders, which have a long track record of confrontation with tax authorities in the US and in Latin American producer countries. TO PAY OR NOT TO PAY

The banana trade illustrates how companies can manage their tax affairs to minimise their tax payments, but the banana industry is not exceptional in this respect. All TNCs engage in tax planning, and most adopt an aggressive stance in their planning by inserting artificial transactions for profit-shifting purposes. Typically these artificial transactions are routed through subsidiaries incorporated in secrecy jurisdictions offering minimal or zero corporate tax rates. These secrecy spaces enable them to avoid disclosure of transaction details to a wide variety of stakeholders, including the public, regulatory authorities, tax authorities, competitors and even shareholders. In practice, TNCs use secrecy jurisdictions very extensively. Over half of all world trade is transacted on paper via the offshore financial centres located in these jurisdictions,6 despite the fact that these jurisdictions account for a mere 3 per cent of global GDP. This extraordinary statistic is explained by the fact that the majority – approximately 60 per cent – of all cross-border trade consists of transactions between subsidiaries of the same group of companies, almost all of which is routed through a secrecy jurisdiction for tax planning purposes. This introduces micro and macro inefficiencies into the production processes. At the micro level, TNCs are forced into elaborate transfer pricing exercises

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that bear little resemblance to the way they actually operate. According to the group tax controller of a major transnational: Commercially, transfer pricing makes no sense. It forces us to spend a lot of time doing things that are pointless from a business point of view. We have to waste time trying to price unfinished goods being sold from one plant to another … Businesses want to organise as if there were a single global or regional product market. Instead, tax is determining how they organise themselves.7

At the macro level, however, the ability of TNCs to engage in aggressive tax avoidance undermines market efficiency by introducing fiscal distortions into trade and investment flows. This situation is exacerbated by the ability of corporations to exert political power to extract favourable fiscal treatment. This creates an uneven playing field, allowing TNCs an unfair advantage over nationally based businesses, which in most instances means favouring businesses from major industrialised countries over their competitors in the South. It is in this context that it can be argued that tax competition, which exerts no pressure on companies to improve production efficiency and therefore yields no benefits to consumers, negates the theory of comparative advantage that underlies trade theory. It is also fictional to refer to terms of trade as a proxy for the actual gains of a country from world trade, as these terms do not take into account the elaborate transfer pricing schemes that most transnational corporations operate. Furthermore, the willingness of some company directors to engage in aggressive tax planning threatens the viability of competing companies that want to adopt an ethical position on paying taxes, while also harming democratic processes and public respect for the rule of law. The ease with which TNCs can exploit the loopholes in the double taxation treaties that regulate the international taxation environment means that they are effectively able to decide whether, where and on what basis they are prepared to pay taxes. They are able to exercise considerable discretion over where they will incorporate, frequently using intermediate holding companies based in a low-tax jurisdiction to collect dividend income from

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group subsidiary companies, and subsequently loaning the huge cash reserves they accumulate offshore to parent companies located in a major international financial centre like London, Hong Kong or New York. The majority of publicly quoted companies want to be located in the countries hosting international financial centres. They are therefore likely to pay some tax in these countries. But they are much less likely to pay tax in poorer, less politically powerful countries, especially since these countries often lack the capacity needed by their tax authorities to unravel sophisticated transfer pricing strategies. This lack of capacity is the most likely explanation for the fact that to date no African country has been able to successfully challenge a transnational on its transfer pricing arrangements, even though abusive mispricing schemes are rife in most sectors throughout that continent. Even in developed countries, the majority of company directors consider it unlikely that they will be challenged in their transfer pricing strategies. THE LITMUS TEST OF CORPORATE RESPONSIBILITY

Paying taxes is the ultimate test of corporate responsibility. Only those companies that choose to pay taxes in the countries where they are due, and in the time frame when they become due, can lay any claim to acting as responsible corporate citizens. Curiously, however, the majority of companies and their public relations advisers do not regard tax as a relevant indicator of corporate responsibility. Quite the opposite: at a business symposium organised by global accounting firm KPMG, business leaders concluded that ‘tax avoidance does not damage corporate reputations and may even enhance them’.8 How did the business world arrive at such an extraordinary position, where it posits its own interests in diametric opposition to those of the societies that host them? And how can claims to corporate responsibility, frequently based on minor donations to local schools or sports facilities, be reconciled with aggressive tax planning that denies national governments the resources they need to fund the public services they were elected to provide?

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Accounting firms enjoy a privileged status in most countries, but they, along with law firms and banks, have played a lead role in shaping and promoting tax avoidance schemes to their clients. A variety of reasons are offered to justify tax avoidance, and great play is made of the fact that tax avoidance is legal and therefore not comparable to tax evasion, which by definition is not legal. The most frequently heard justification for tax avoidance is that directors have a duty to their shareholders to maximise profits by cutting costs wherever possible: Tax is a cost of doing business so, naturally, a good manager will try to manage this cost and the risks associated with it. This is an essential part of good corporate governance.9

This argument might appear persuasive at first glance, but the language needs careful unbundling to understand its underlying politics. Firstly, a tax on profits is not a business cost but a distribution to society. This much is clear from how tax is reported on the profit and loss account alongside distribution to shareholders. In economic terms, costs relate specifically to the expenses incurred in producing a good or service: the term should therefore not be confused with how pre-tax profits are distributed. Secondly, the use of the word ‘risk’ is revealing. What risks arise from tax other than those involving a legal challenge to an avoidance or evasion strategy? Thirdly, directors committed to business integrity might prefer an ethically based approach in which ‘the tax-planning industry is encouraged to establish codes of conduct to provide a socially responsible, rather than merely legal, dimension to the tax advice that is offered to transnational corporations’.10 Finally, there is no requirement under company law – anywhere in the world – for company directors to avoid tax, especially when this involves actions that might infringe national laws, and hiding these actions from the scrutiny of shareholders and national authorities. In some cases, especially when tax avoidance schemes are successfully challenged by tax authorities, or major frauds are uncovered, company directors profess to not even understand the decisions for which they have been responsible:

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A culture of ‘don’t tell me, so I won’t know’ infests the banking and financial services industry. Board directors of many companies claim not to know what tax planning is done on their behalf, and profess innocence when their elaborate offshore structures are exposed as fraudulent. In the case of Enron, for example, which used several hundred special-purpose vehicles based in the Cayman Islands to conceal its loss-making assets, CEO Ken Lay and senior executive Jeff Shilling have both claimed that they knew nothing about the financial structures put in place by chief finance officer Andrew Fastow. They explain their positions by stating that these structures were approved by lawyers, bankers and accountants. Claims such as these are typically pure humbug. The tax director of one very major multinational company confirmed to me in February 2006 how much pressure boards place on their tax departments to stretch tax avoidance to the limits.11

As illustration of the subversive nature of the organised tax avoidance industry, a recent US Senate inquiry revealed internal communications from the accounting transnational firm KPMG, which contained a warning from one senior tax adviser that, were the company to comply with the legal requirements of the Internal Revenue Service relating to the registration of tax shelters, the company would place itself at a competitive disadvantage and would ‘not be able to compete in the tax advantaged products market’. KPMG went ahead undeterred: ‘knowingly, purposefully and wilfully violating the federal tax shelter law’.12 During its inquiries the Senate Committee discovered that KPMG had devised over 500 active tax products, just four of which cost the US Treasury $85 billion annually in lost tax revenues, whilst KPMG booked $180 million in fees. Speaking after the conclusion of the Senate Committee’s inquiries, senior ranking Democrat Senator Carl Levin said that: ‘our investigations revealed a culture of deception inside KPMG’s tax practice’. There is clearly a need for a major shift of attitude towards tax within the corporate world. Directors committed to genuine corporate responsibility should treat tax not as a cost to be minimised, but as a normal distribution from profits in favour of the countries and communities that supported the wealth-creation in the first place. This shift in attitude needs also to take account

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of the potential for reputational damage arising from shifting public expectations. Civil society’s growing interest in the developmental impact of tax avoidance – exemplified by the rapid growth of the Tax Justice Network – is accompanied by a mounting requirement that company directors act ethically and are seen to be acting ethically. In the case of tax payments this will require a behavioural shift in the direction of treating tax as a litmus test of commitment to corporate responsibility: What is becoming increasingly apparent is that a purely technical approach to tax planning is unlikely to protect companies from charges of irresponsibility and associated reputational damage. The distinction between a financial and legalistic approach to tax and an accountabilitydriven, economic approach is critical. Instead of focusing exclusively on an absolute boundary between illegal and legal approaches to tax, companies should focus on understanding what is considered to be responsible and irresponsible.

Company directors are coming under mounting pressure to be more open about the processes for which they are responsible. Part of this pressure arises from civil society discontent: according to polling agency MORI only one in five people would agree with the statement that ‘directors of large companies can be trusted to tell the truth’.13 Investors are also increasingly concerned that materially important information is not being made available in an appropriate fashion. The financial crisis triggered by liquidity problems arising from sub-prime lending in the US has revealed systemic flaws in financial markets, severely damaging public trust and confidence in banks and regulatory authorities. The crisis can be traced to a variety of causes: lack of analysis of loan credit books was compounded by inadequate investigation by creditrating agencies; the growth of trade in opaque securitised financial packages enabled unknown risks to be sold on to relatively unsophisticated buyers; and the increased use of off-balance sheet vehicles – widely known as structured investment vehicles or SIVs – also played a part in ensuring that crucial information was withheld from investors.14 The problem was exacerbated by

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poor audit practices that fail to establish how risks are spread in structured products. The speed and depth of contagion across the principal financial markets during second-half 2007 has undermined the credibility of the risk-modelling techniques adopted by financial regulators under Basle II standards. In the words of Financial Times columnist Martin Wolf, the failure even to recognise that risks were present ‘has dealt a huge blow to the credibility of the Anglo-Saxon model of transactions orientated financial capitalism’. Lack of transparency lay at the heart of this crisis of the financial system. Even the most sophisticated financial market participants have acknowledged that they lacked vital information necessary for evaluating risks embedded in routinely traded instruments. This lack of information is widely ascribed to the use of financial tools, including securitised products, which reduce market transparency and encourage traders to engage in a lucrative but harmful game of pass-the-parcel of hidden commercial risks. In the majority of cases, the various scandals, corporate failures and instances of corrupt practices have shared a common denominator: the use of offshore entities located in secrecy jurisdictions to avoid disclosure of key information. ACCOUNTING TRANSPARENCY: THE CASE FOR COUNTRY-BY-COUNTRY REPORTING

The current crisis of confidence in corporate integrity can in large part be ascribed to the lack of available information about what companies do and how they do it. Companies are widely perceived to be using their very considerable political power to promote regulatory degradation and push for tax cuts and special fiscal treatment. According to one commentator: These are all issues about which companies do not like to talk. They are also issues which have large impacts on corporate stakeholders and for which a reasonable degree of transparency is possible. Tax is an issue because, especially for globalised businesses, there is a mismatch between what

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countries, being geographically bound, can control and what companies, having international power, can do.15

Making corporate accounts more transparent would radically redress this mismatch of power between state and boardroom. And an international financial reporting standard for country-bycountry could achieve this in a remarkably cost-effective fashion. International financial reporting standards provide the framework for the accounting rules employed by companies located in the European Union. Despite the rather grand-sounding title, they do not originate from an intergovernmental body: they are created by the International Accounting Standards Board (IASB), a London-based company registered in the US secrecy jurisdiction of Delaware. The IASB is largely funded by the Big Four accounting firms,16 plus a variety of TNCs. Few people have heard of the IASB, let alone taken part in its processes, but despite the lack of any democratic accountability, the Board is responsible for issuing financial reporting standards that are almost automatically adopted as law by the European Commission. Under current accounting rules, TNCs are able to consolidate all their accounts for a particular region into a single set of accounts showing the overall regional profits and losses, but without disclosing any relevant details about what has happened at country level. For example, many upstream oil and gas exploration and production companies will create an operational division – or segment – covering Europe, the Middle East and Africa, and will issue accounts for that geographic segment. This consolidation process wipes out any reference to cross-border trade between the group’s subsidiaries and effectively prevents national tax authorities from understanding how costs have been allocated within the group. In some cases it is not even possible to establish whether a link exists between a subsidiary and its parent company because ownership is hidden behind an offshore company and the group accounts do not disclose all subsidiaries. These accounting rules are a recipe for corrupt practices. Disappointingly, despite pressures for increased transparency and corporate accountability, the IASB proposes to further

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dilute reporting standards in ways that will significantly reduce both transparency and accountability. The IASB’s International Financial Reporting Standard 8, approved by the European Parliament in November 2007, is closely modelled on an equivalent standard currently used in the US. IFRS-8 weakens the already inadequate standard by allowing company directors discretion to determine the geographical segment on which they want to report, or to dispense with using geographic segments entirely. IFRS-8 also requires that companies report on only three-quarters of their activities in each segment, leaving the residual activities unreported. To make matters worse, the new standard allows the companies to employ different standards for the preparation of these accounts from those used to calculate the rest of their accounts, meaning that the figures do not need to tally from one set of accounts to the next. Not surprisingly, many members of the European Parliament felt unhappy about this dilution of reporting standards. At the time of the vote in November 2007, members of the parliamentary Economic and Monetary Affairs Committee expressed deep concern about both the processes used by the IASB when consulting with stakeholders, and also the lack of democratic accountability on the part of the IASB. The Parliament therefore accepted IFRS-8 subject to review after a fixed time period, but also recommended that the IASB prepare a new IFRS for company accounting on a country-by-country basis for companies operating in the extractive sectors, that is, upstream oil and gas, mining and forestry. This recommendation originates from a proposal by two civil society organisations, Publish What You Pay (PWYP) and the Tax Justice Network (TJN). PWYP has its focus on extractive businesses, especially those operating in developing countries, while TJN has a broader, non-sectorally specific focus, and therefore campaigns for a country-by-country reporting standard for all sectors. It is hard to exaggerate the potential gains to developing countries from the adoption of country-by-country by TNC. Almost at a stroke, and without any additional cost to the companies, information currently bundled up into segmental accounts would be available to national tax authorities. They would be able to

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track flows and determine how profits are being shifted between countries. Transfer pricing strategies would be revealed. The identity of subsidiaries would be made apparent. The use of tax havens for profit-shifting would also be disclosed. Other benefits would also flow from enhanced accounting transparency – see Box 5.1. Firstly, the opportunity for corrupt practices including bribery, market-rigging, tax evasion and making illicit political donations would be reduced. Secondly, it would become easier for investors, credit-rating agencies and other stakeholders to understand what companies are doing in different jurisdictions – including secrecy jurisdictions – and to identify potential risks. Thirdly, this increased transparency could strengthen relations between companies and the communities they operate in, as national and local tax authorities would be able to determine what profits are being made by the constituent parts of the group and therefore what the tax liabilities are at country-to-country level. Such confidence cannot be gained solely through token gestures undertaken as part of a corporate public relations exercise. Box 5.1 The case for country-by-country reporting by transnational companies Richard Murphy FCA What country-by-country reporting entails The Publish What You Pay (PWYP) coalition and the Tax Justice Network (TJN) are leading the campaign for country-by-country (CbC) reporting by multinational corporations (TNCs). The reporting PWYP and TJN are calling for would require every TNC to declare: 1. In which countries it operates; 2. What it is called in that location; 3. What its financial performance is in every country in which it operates, including: • its sales, both third party and with other group companies • purchases, split in the same way

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• labour costs and employee numbers • financing costs split between those paid to third parties and to other group members • its pre-tax profit 4.

How much it pays in tax and other ways to the government of the country in which it is operating as a consequence.

Our proposal requires this information for all territories – without exception – in which a TNC operates. Anything less will not do or transactions might be lost to view. This does not require each country to agree as the requirement would be imposed by an International Financial Reporting Standard (IFRS). How country-by-country reporting would benefit stakeholders 1. Corporate social responsibility (CSR) matters. CSR is about the relationship between a company and its host community. But this does require that the host community knows the company is there. CbC reporting provides that information. 2. Accountability matters. A company cannot be accountable unless it can be identified. This means that the names a TNC uses locally must be on public record. Too often they are not. CbC reporting names local subsidiaries. 3. Trade matters. Sixty per cent of world trade is intragroup trade. In other words, it takes place across national boundaries but between companies under common ownership or control. Existing TNC accounts completely eliminate all of this trade from public view. CbC shows it all. This is vital if trade relationships are to be understood, and made fair. 4. People matter. TNC accounts include statements on the number of employees a company has and their aggregate remuneration. CbC would require this statement for every country in which a TNC operates. This would provide invaluable information on labour conditions worldwide. 5. Tax matters. TNCs have more opportunity than any other group to plan their tax affairs. They can seek to shift their profits from state to state to find the lowest overall bill. CbC discloses the profits that companies record in each country in which they operate and the taxes that they pay on them. This means they can be held accountable for what they do and don’t pay. It is estimated that if this problem were tackled enough tax could be collected to pay for the Millennium Development Goals. 6. Corruption matters. The extractive industries are dominated by TNCs. The Extractive Industries Transparency Initiative

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(EITI) seeks to hold those companies to account for the tax payments they make, and the governments that receive those payments to account for what they do with them. Many TNCs resist disclosure of information on what they pay because of competitive pressure, contractual obligations and local political opposition. CbC would overcome these objections, significantly enhancing transparency in this sector, and help cut corruption. Development matters. The developing countries of the world are poor. Aid helps alleviate this problem but creates a dependency, harms the democratic accountability of developing country governments because they are not accountable to their electorates for what they spend, and aid can itself directly contribute to corruption. Local declaration of economic activity by TNCs with the resulting accountability for taxes paid could break this cycle and help create fully independent, accountable governments capable of raising their own taxation revenues. Governance matters. Many of the major corporate scandals of recent times have involved extensive use of offshore subsidiary companies. These are becomingly increasingly common throughout the TNC world, but it is recognised that the problem of managing them creates severe governance issues for TNCs. This results in increased risk for shareholders and others who need to understand the risk inherent in a TNC’s activity. Where you are matters. Some countries are politically unstable. If a company trades there shareholders should know. Some countries are politically unacceptable. If a TNC trades there civil society wants to know. Some countries are subject to sanction. Trading there is illegal. Where you are matters. CbC holds a company to account for where it is. Transparency matters. In many countries a corporation does not have to put its accounts on public record. That means that what a TNC does in that country is not a matter of public record. That matters. What TNCs do has enormous implications for the well-being of the world. CbC overcomes this problem. It puts all TNC activity on the record.

If you want to know more. The best next step is to read http://www.taxresearch.org. uk/Documents/IAS14Final.pdf; alternatively please see http:// taxjustice.blogspot.com/2008/04/country-by-country-reportingbriefing.html for the latest updates.

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An international country-by-country financial reporting standard is a necessary prerequisite towards creating a global framework for taxing TNCs on a unitary basis. Unitary taxation is widely known, especially in North America where it is the basis for allocating profits at state level. There are various ways in which unitary taxation can function, most involving a formula approach based upon three factors: sales to third parties, expenditure on labour, and actual capital employed within the territory. This formulaic apportionment process allows the global profits on a TNC to be allocated for taxation purposes to the locations where the added value was genuinely created. Unitary taxation of TNCs does not in any way imply a shift towards a global taxation regime as tax collection would be on a national basis, but it would reduce the potential for tax avoidance and evasion, while still allowing national governments the discretion to set their own tax rates and allowances. A proposal for an international tax organisation has been called for in order to regulate this new global unitary taxation framework.17 GLOBALISATION, TAX AVOIDANCE AND THE CHALLENGE TO GOOD GOVERNANCE

Delivering a keynote speech to an OECD conference of world tax experts in Cape Town in January 2008, South African finance minister Trevor Manuel called on developed countries to address the harmful consequences of tax avoidance by powerful companies operating in poorer countries: ‘It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country.’ Even the more sophisticated developing countries are severely impacted by tax evasion. The South African Revenue Service, for example, estimates that the tax gap in that country ranges up to 30 billion rand, approximately 45 per cent of total government revenues, largely owing to evasion by rich individuals and avoidance by companies.18 In 2005, the Kenyan Revenue Authority revealed it was owed a staggering 900 million euros in unpaid

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taxes, much of which, according to KRA Commissioner-General Michael Waweru, was unrecoverable. This represented about one half of the total government revenues for Kenya, which is struggling to service external debts exceeding 4 billion euros.19 Tax evasion on this scale threatens the viability of democratic states, not least because of the additional demands placed upon the revenue services. This threat to good governance should not be underestimated: a primary aim of democratic representation involves the bargaining process between citizens and elected representatives over taxing and spending. Most people are familiar with the complaints of eighteenth-century American colonists about taxation without representation, but the link between paying taxes in order to earn the right to representation is equally important. Concerns about the special tax privileges of non-domiciled residents in the UK are at least partly a reflection of the fact that the non-doms have representation without taxation, and TNCs are increasingly seen as being able to exert huge political influence without paying taxes in the countries where they create their profits. Another area of concern, particularly in countries with a high dependency on revenue earnings from mineral exports, is the ability of rulers in such countries to rely on the rents from natural resources, which allows them to sideline the views and aspirations of their citizens. A similar argument applies to poor countries that rely on external aid programmes for budget support: in the majority of such cases the donor agencies, whether multilateral or bilateral, have imposed conditions that force governments to override the wishes of their citizens. The implications for good governance of this break between rulers and ruled are dramatic: In general, the governments of many contemporary developing countries have access to very large non-tax revenues that have few historical parallels: free them from dependence on local taxpayers; especially in the case of large natural resource rents, tend to have a range of rather toxic effects on their polities; and most directly relevant here, obviate the need for revenue bargaining with the generality of potential taxpayers.20

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Taxpayers who feel that their interests are being represented are more likely to engage with the political processes, at the very least by voting, and they will be more willing to pay their taxes. They will be less willing, however, if the tax system is seen to be subject to major and systematic abuse, arising either from tax evasion and avoidance, or from the introduction of regressive measures imposed on governments by external pressures, for instance, the VAT (value added tax) regimes introduced in many developing countries by the IMF. SHAPING A NEW AGENDA

Attempts to put tax avoidance and the various problems associated with secrecy jurisdictions on to the developmental agenda are hampered by the lack of political will to tackle a scandal that has been allowed to fester for decades. Progress has also been hindered by the lack of interest on the part of civil society. The latter is particularly astonishing in view of the scale of capital flight and tax evasion, but major NGOs have been scared away from the issue: partly because tax avoidance and evasion are seen as complex and hard to research, but also because increasing aid, rather than strengthening the mechanisms of self-reliance and democracy, has dominated the development agenda for decades. This situation is now changing. There is increased interest in exploring a post-aid agenda, focused on identifying new sources of finance for development and making better use of the domestic resources of poorer countries. The need to focus on mobilising domestic resources was agreed as the principal priority of the opening chapter of the International Conference on Financing for Development at Monterrey, Mexico, in 2002, and was subsequently confirmed as a priority at the Global High Level Dialogue in New York (2005) and the outcome report of the UN World Summit in 2005. Inevitably this will involve taking a long, hard look at the part that TNCs play in depriving these countries of much-needed tax revenues. Similarly, civil society in Europe, and increasingly in North America, are asking searching questions

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about corporate tax avoidance in their own countries, and about the activities of financial intermediaries who profit handsomely from promoting these avoidance schemes. Despite the fact that many of its practitioners hold professional status, the culture of the tax planning industry is widely subversive of democratic norms. The prevailing spirit of disdain for public interest is perfectly captured in the following quote given to a national newspaper in the UK: ‘Rules are rules, but rules are meant to be broken … No matter what legislation is in place, the accountants and lawyers will find a way around it.’21 No matter how you attempt to spin this statement, it is clearly intended to convey the message that some classes of society are beyond compliance with social norms. Incredibly, none of the professional institutions of lawyers of accountants promote ethical codes of conduct on the marketing of tax avoidance structures and the use of secrecy jurisdictions by their members. Practitioners in the tax planning industry generally hold the view that tax avoidance is normal activity and therefore acceptable. Speaking on BBC Radio 4, Mike Warburton from London-based accountants Grant Thornton said: ‘tax avoidance is often referred to as the second oldest profession in the world, it has been going on for years’.22 Which is true, and the same applies to bribery and payment of kickbacks, though no one would argue that these activities are ethical or should be encouraged by firms of financial professionals. Critics of tax avoidance argue that the genesis of this culture of non-compliance with democratic norms lies with judicial rulings that have opened space for increasingly aggressive tax planning. The most frequently cited ruling in this respect is the 1936 ‘Duke of Westminster ruling’, which established the principle that ‘every man is entitled to arrange his affairs so that the tax attaching under the appropriate act is less than it otherwise would be’. This principle has been adopted by judiciaries around the world, and is heavily defended by the tax planning industry. The Tax Justice Network seeks to replace this principle with a general anti-avoidance principle that would test the underlying motives of commercial transactions to see whether they are primarily driven by economic factors or by the intention to avoid a tax

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liability. If the transaction is deemed to be primarily driven by a tax avoidance motive, any tax benefits claimed should be denied. A general anti-avoidance principle, accompanied by purposive legislation that states the intention of legislatures when passing tax laws, would yield a significant shift away from the tax avoidance culture that has captured the accounting and legal professions and company boardrooms throughout the world. THE COMING STRUGGLE

Corporate tax avoidance harms the revenue systems of the modern state and undermines the ability of the state to provide the services required by its citizens. The directors of TNCs, while enjoying privileged legal status, increasingly see themselves as detached from the societies that host them and reject ‘any of the obligations that citizenship in a normal polity implies’.23 They are almost always assisted in their anti-social tax avoidance schemes by a pinstripe infrastructure of professional bankers, lawyers and accountants, with an accompanying offshore infrastructure of secrecy jurisdictions with quasi-independent polities, judiciaries and regulatory authorities. By virtue of their privileged social and economic positions, these elites should take the lead in promoting ethical corporate behaviour, but the widespread use of aggressive tax avoidance techniques demonstrates the disconnect between their actions and words. This disconnect is likely to come under increasing challenge in years to come as civil society begins to look more closely at how corporate tax avoidance impacts on poorer countries, denying them the necessary public finances that they require to provide for public goods and realise their social and economic potentials The Tax Justice Network has identified a wide range of measures that could effectively tackle these problems at their root,24 but without significant pressure from grassroots campaigning activities there is little likelihood that the political classes can find sufficient will to take the necessary measures. The stage is therefore being set for one of the epic struggles of the twenty-first century.

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NOTES 1. McKinsey and Company, The McKinsey Quarterly, No. 1, 2004. 2. A. Mold, ‘A Proposal for Unitary Taxes on the Profits of Transnational Corporations’, CEPAL Review 82, April 2004, pp. 39–55. 3. Oxfam GB, Tax Havens: Releasing the Hidden Billions for Poverty Eradication, 2000. 4. http://www.newint.org/issue317/facts.htm. 5. I. Griffiths and F. Lawrence, ‘Bananas to UK via the Channel Islands? It pays for tax reasons’, The Guardian, 6 November 2007, pp. 6–7. 6. J. Christensen and M. Hampton, ‘All Good Things Come to an End’, The World Today, Vol. 55, No. 8/9, 1999, pp. 14–17. 7. P. Gillett of the ICI Group, quoted in ‘Gimme Shelter’, The Economist, 27 January 2000. 8. Accountancy Age, 3 August 2006. 9. P.J. Henehan, senior tax partner of Ernst & Young, Irish Times, 7 May 2004. 10. D. Kennedy-Glans and B. Schulz, Corporate Integrity: A Toolkit for Managing Beyond Compliance, Mississauga, Ontario: John Wiley & Sons, 2005. 11. J. Christensen, ‘The Secret World of Offshore Banking’, in S. Hiatt, A Game As Old As Empire, San Francisco: Berrett-Koehler, 2007. 12. US Senate Permanent Committee on Investigations, The Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals, Washington, DC, US Senate, 2003, p. 13. 13. MORI, British Attitudes to the Euro, Company Directors and Working Life, London: Ipsos MORI, 2003. 14. S. Picciotto and D. Spencer, ‘The Same Rules Must Apply to All’, International Financial Law Review, February 2008. 15. A. Henriques, Corporate Truth: The Limits to Transparency, London: Earthscan, 2007. 16. Deliottes, Ernst & Young, KPMG and PriceWaterhouseCoopers. 17. Vito Tanzi’s work on the International Tax Organization. 18. http://www.moneyweb.co.za/economy/tax/153684.htm. 19. P. Guindja and J. Christensen, ‘The Africa Question: Where Do All the Profits Go?’, Tax Justice Focus, Vol. 1, No. 1, Spring 2005. 20. M. Moore, ‘Between Coercion and Contract”, in D. Bräutigam et al., Taxation and State-Building in Developing Countries, Cambridge: Cambridge University Press, 2008. 21. Guy Smith, tax adviser at Moore Stephens, quoted in The Guardian, 18 March 2004.

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22. BBC Radio 4, Today programme, Friday, 1 February 2008; http:// www.bbc.co.uk/radio4/today/listenagain/ . 23. R. Reich, The Work of Nations, New York: Vintage, 1992. 24. See Closing the Floodgates, 2007, available as a free download from www.taxjustice.net.

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6 THE FISCAL IMPACT OF TRADE LIBERALISATION Aldo Caliari

Structural adjustment programmes, which became prevalent in most of the developing world from the early 1980s, were based on an export-led growth paradigm that went hand in hand with the downsizing of the state and, correlatively, its finances. But this model predicated, at the same time, fiscal austerity, that is, states should spend within their means. This philosophy lingered on as structural adjustment policies were crystallised in a growing number of trade and investment agreements. However, developing countries typically rely on trade-related tariffs and taxes to finance an average of 30 per cent of their budgets. As these sources of revenue became a target in processes of trade and investment liberalisation in countries that have limited capacity to collect the same revenue from other taxes, contradictions began to emerge. Just as it seemed the export-led growth was heading towards solidification, the contradiction between such policies and the objectives of fiscal soundness became more marked. Concurrently, it is becoming clearer that without a strong fiscal support for infrastructure needed to trade, which needs to be fuelled by predictable sources of fiscal revenue, there is no chance of success in an increasingly globally competitive environment. The Monterrey Consensus of 2002, with its call to achieve ‘coherence and consistency of the international monetary, financial and trading system’ establishes a purposive guideline to follow 131

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in the elaboration of policies in both areas of this relationship: trade and fiscal. Looking at it closely, important consequences for the design of policies in the trade and the financial areas can be drawn from this integral vision. The idea of this analysis, however, is more than a mere academic endeavour. The purpose is to evaluate whether what is being developed in terms of trade policy will have a positive impact in the area of finances, and vice versa. This chapter focuses specifically on fiscal policy, for example, what type of fiscal policies should be defined to better support trade for development, what type of unilateral and bilateral trade policies should be prompted in order to improve fiscal revenue, etc. This is an exercise of wide consequences. THE ASPECT OF INCOME

In the context of the neoliberal model, which predicates the long-term gains of trade and investment liberalisation through growth of GDP, there is no question that, even if there are some negative fiscal impacts in the short term, liberalisation will eventually compensate them and, ultimately, lead to fiscal revenue derived from growth of economic activity that serves as a base for taxation. A number of free trade agreement negotiations tend to be driven by the assumption that the financial consequences of liberalisation of trade and investment will be a greater income through greater exports and the attraction of FDI (foreign direct investment). This type of analysis is at the basis of recommendations to borrow for public finance adjustments that may become necessary when trade is liberalised. In order to implement this adjustment, which is deemed temporary, the IMF launched an instrument, the Trade Integration Mechanism (TIM). Originally, this mechanism did not contemplate the loss of fiscal income, at least not explicitly, as one of the situations where it would be applicable. In a recent reformulation of the mechanism, made in the framework of the discussion on Aid for Trade, this situation was explicitly added. The TIM would, thus, be a policy for countries to be

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able to borrow from an existing facility, or augment an already outstanding loan, with the purpose of financing fiscal revenue lost through trade liberalisation. However, except for some facilities such as the PRGF (Poverty Reduction and Growth Facility), the Fund facilities are not concessional. This means that a rate similar, or very close, to the market rate must be paid on the borrowed funds. Therefore the proposal is, basically, to increase debt in order to repair what is considered to be a temporary adjustment of the balance of payments. This only makes sense if it is true that liberalisation leads to increased growth, hence enabling repayment. A similar reasoning applies to all proposals that promote public borrowing in order to finance trade losses. For reasons of space, this chapter does not intend to deal in depth with the issue of whether trade and investment liberalisation do or do not lead to growth. Suffice to say that this assertion is, until today, of uncertain truth value. Some other factors to growth can be mentioned to demonstrate the point, such as good public services and infrastructure and an educated workforce, which all require long-term public finance investments. Several studies have shown that there is no systematic relationship between the average tariff and non-tariff barriers of a country and its economic growth.1 Similarly, the evidence does not support the assertion that increased FDI leads to increased growth.2 And the very link between investment liberalisation and increased FDI – or increased investment altogether – is not exempt from challenges. This chapter will illustrate a series of the most immediate, shortterm impacts. Some of them are rather well-established, even among those who predicate the benefits of trade liberalisation. THE CLASSIC SITUATION: TRADE IN GOODS

The negative fiscal impacts of liberalisation of trade in goods have received renewed attention in recent years, and the developing countries have complained that the pressure to liberalise puts them in the dilemma of either breaching trade commitments or fuelling unsustainable fiscal deficits.

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A paradigmatic case was brought by Argentina before the WTO in the late 1990s, to be allowed to impose a tax that it considered necessary under the conditions of its agreement with the IMF. It is important to bear in mind that, for developing countries, trade-related taxes are an important source of income that normally diminishes when they liberalise.3 Although there are large differences between countries several estimates report that income from trade taxes represents an average one-third of total tax revenue in developing countries.4 While those holding a benign view on trade liberalisation argue the losses are rather small, a research team has found that tariff losses for developing countries could outweigh the benefits by a factor of four. Moreover, these losses are not reported in the discussions of trade gains because the modelling exercises assume that fiscal balances of governments are fixed, that is, that tariff income losses will be compensated by other taxes.5 These same researchers quote UNCTAD, which has shown that tariff losses alone related to NAMA (NonAgricultural Market Access) – the industrial goods agreement being negotiated in the WTO Doha Round – could reach the amount of $63.4 billion. But both absolute figures and ratios of trade taxes to total tax revenue are only of limited value in assessing the real impact of revenue losses. Absolute figures are useful to get a sense of how much is at stake compared to, for instance, Aid for Trade promises. With Aid for Trade promises at $4 billion, if only fiscal losses from trade liberalisation are so high, thinking of Aid for Trade may not be a wise route for developing country governments. But the figures do not give a sense of the impact unless put in the context of the GDP of each country suffering the losses. Even the percentage figures may not convey an accurate sense of the impact. For example, a less-than-10 per cent ratio may make the impact appear small, but there are countries in which this percentage of income is more than the government spends in health, education and other social priorities.6 Against this backdrop, trade liberalisation advocates also argue that government revenue losses should not be an obstacle to liberalise as such losses can be recovered by resorting to

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other taxes. For instance, this has been the IMF position.7 In particular, the IMF recommends the replacement of the income by establishing value added and sales taxes. But the proposed substitution raises questions of feasibility and equity. In terms of feasibility, the capacity of low-income countries to recover income losses is limited. Implementing other taxes, such as value added taxes, demands increased administrative capacity that many countries do not have.8 A report published in 2002, looking at a sample of 84 countries between 1970 and 1998, concluded that low- and middle-income countries had experienced lower fiscal income as a result of a fall in trade-related tariffs and income, with structural characteristics justifying this reduction.9 More recently, IMF researchers have similarly found practical problems in developing country efforts to recover the income lost from trade-related taxes. In their study, these researchers, reviewing a sample of information of 125 countries concluded that middleincome countries had been able to recover between 35 and 55 cents per dollar of income from lost trade income, whereas lowest income countries had recovered basically nothing.10 Nonetheless, far from rethinking its advice on trade liberalisation, the general line taken by the IMF has been to recommend more emphasis in integrating regressive or otherwise non-business-related tax reforms as measures accompanying trade reforms. The equity dimension stems from the fact that, when the move from trade to consumption taxes is feasible, it tends to have negative distributional implications.11 In their study on indirect tax reform in developing countries, Stiglitz and Emran state that the general consensus on the virtues of replacing trade taxes income with taxes on internal consumption does not take into account the structure of developing countries.12 The larger the sector of the informal economy, the larger the welfare costs of such a policy as this will increase inter-sector distortions between the formal and informal sectors. It is worth noting the distributional implications of shifting from one type of taxes to the other is not limited to developing countries with large informal sectors, as the OECD countries have also experienced the same regressive trends.13

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One important factor as regards trade agreements and often neglected in the methodology for assessing its fiscal impacts is that, unlike the mere reductions in tariffs, which can be overturned, tariff limits fixed in an agreement cannot be reversed. Should the country need to raise extra revenue this option will be foreclosed. So, while there may be a case for tariff reductions, it is important to consider that once these tariff reductions are bound in an agreement, should fiscal losses materialise the resort to traderelated taxes will be closed. TRIMS

In the WTO context, countries have also adopted the Agreement on Trade Related Investment Measures (TRIMS), which calls for a halt in two performance requirements: local content requirements and trade-balancing requirements. Local content requirements are measures requiring foreign investors to source a certain portion of the inputs used in their production locally. Trade-balancing requirements are measures requiring foreign investors to generate a certain amount of foreign exchange in excess of the foreign exchange they use in imports into the country for their production process. The prohibition to implement such measures carries fiscal consequences. Indeed, transfer pricing, a practice associated with the growing internationalisation of cross-border transfers of goods, services, know-how, technology and intellectual property between parent and affiliated companies, has direct effects on the fiscal income of recipient and source countries.14 While there is a Framework Agreements on Transfer Pricing whose purpose is to promote reasonable fiscal income for all countries involved, this is far from being the most common case. The measures banned by the TRIMS agreement of the WTO, local sourcing and foreign exchange balancing requirements, are paramount among the measures that could reduce the revenue damage caused by transfer pricing.15 Local sourcing requirements ensure that, to the extent that inputs are not imported, taxes cannot be evaded via artificially inflated reported costs on imports.

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Trade-balancing requirements ensure that, to the extent that an excess of foreign exchange needs to be generated over the foreign exchange spent on imports, there are limits to how much earnings or costs of imports can be underreported by the foreign investors in order to pay lower taxes. TRADE IN SERVICES

But it is in another area usually affected by trade agreements, the liberalisation of trade in services, where the greatest problems in preventing transfer pricing are observed. The complexity of services transactions, the relative novelty and innovation they present and the difficulty of valuing and pricing the different components may be an insurmountable difficulty for the controlling public agencies. These components often include leasing arrangements and transfers of intellectual property generating a substantial share of the revenue in industries such as pharmaceutical, software and financial services. This is the case even in the most advanced countries.16 Therefore, it is even more of a problem in developing countries, given their difficulties to regulate such activities. In a survey UNCTAD revealed that 41 per cent of developing countries did not in any way address services in their regulations, administrative guidelines and requirements on transfer pricing. INVESTMENT LIBERALISATION

The phenomenon of taxation of multinationals is the subject of another full chapter (chapter 5) so the focus of this section will only be on assessing elements of investment liberalisation and agreements that are closely interlinked with the fiscal impacts of trade liberalisation. Indeed, it is to ‘take advantage of trade liberalisation’ that countries are encouraged to promote the creation of EPZs (export processing zones), that is, special areas where foreign companies enjoy a number of incentives, including fiscal and financial advantages, but others too, as in some cases regulations on environmental and worker protection may also not be applicable.

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EPZs and the number of countries hosting them have grown at an impressive rate. There were only ten host countries in 1970, while there were 116 in 2002.17 At the end of 2002, China alone was reported as employing the impressive number of over 30 million people in over 2000 such areas including ‘special economic zones, economic and technological development zones, EPZs and border zones’. In India, a law was passed in February 2006 granting large tax benefits to companies setting up in so-denominated special economic zones. Only a few months later, more than 150 SEZs had been approved, with 200 more applications in the pipeline, leading the Indian Finance Ministry and Central Bank to express concern about the loss of revenue they would represent, estimated at nearly $20 billion by 2010.18 In addition, upon the argument that trade liberalisation brings better results if supported by a climate that favours foreign investment, the latest wave of free trade agreements tends to involve extensive chapters on investment, which has contributed to blurring the distinctions between free trade and investment treaties. The lowering of trade barriers, alongside investment barriers, is what makes the competition for foreign investment heavily based on the provision of incentives rather than on other non-incentive factors. A number of studies have pointed out that the inevitable result of freer movement of capital is a greater difficulty in taxing capital and a consequent increase in the weight of taxes on wages and consumption.19 These trends are not unique to developing countries and have also been found in OECD countries,20 but in the former is where they show themselves with greater intensity because the difficulties and flaws of the control infrastructure on mobile capital are obviously greater. Evidence shows a proliferation of the frequency of use and increase in the value of investment incentives.21 This trend also relates to the generalised lowering of restrictions on investment, which in addition is increasingly codified in international legal rules. This impacts on incentives because it both makes the competition for investment depend on factors other than the accessibility of the respective country – incentives being one of

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such factors – and widens the FDI market connecting global with state and local markets.22 From a fiscal perspective, incentives also contribute to the erosion of public finances.23 These costs are augmented by the difficulties of administering such schemes in an effective manner, especially in developing countries, which represent added costs in administration and allocation of government resources, especially significant for developing country governments. In this regard, it is immaterial whether incentives are provided in the form of tax breaks or as financial subsidies. For instance, incentives may take the form of subsidised land prices or grants to buy land, lower-than-ordinary prices for access to infrastructure facilities or energy, subsidised credit, etc. Some speak of incentives, thus, as ‘tax expenditures’. This concept introduces the idea that the reduction or selective elimination of taxes has a fiscal cost, just as if it were an expense, one that is seldom estimated and, if it is, only in a very approximate manner. Several issues, thus, emerge. First, are incentives effective in their direct objective of attracting foreign investment? A study by McKinsey Global Institute found that direct incentives to FDI did not have a major impact on FDI flows. The incentives, on the contrary, came ‘with significant costs, including a negative impact on productivity and ‘race-to-the-bottom’ dynamics.24 In fact, the importance of market-related determinants in investor decisions, such as the size of the market, GDP, GDP per capita and GDP growth rates, are backed by a review of empirical literature. On this basis, an analyst has contested the view that traditional determinants of FDI are losing relevance compared with nontraditional determinants such as, for instance, the ‘cost differences between locations’. He finds that Traditional market-related determinants are still dominant factors shaping the distribution of FDI. If at all, the bias of foreign direct investors in favor of large host countries has become stronger rather than weaker.25

Second, are incentives necessary to attract the investment that does come in? For instance, for domestic market-seeking or resource-seeking FDI, incentives are harder to justify, because

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the country has greater bargaining power vis-à-vis investors than when the investment is only seeking the efficiency factor of a low-cost location.26 In general terms, it is important to determine if the investment would have come to the country without the incentive.27 Otherwise, as stated by Clark, the tax relief is providing an unnecessary ‘windfall gain’ to investors.28 The determination of the impacts of host country incentives at the margin is not an easy one. Third, assuming investment comes in, are there benefits emanating from it and do these outweigh the costs of the incentive? If the market failure is a factor hindering competitiveness, it is very likely the investor may simply move somewhere else once the incentive ends, if factors for poor competitiveness are still there.29 Sometimes, it may pay off to direct the financing to resolving the market failure that hinders the attractiveness to foreign investors in the first place. Other analysts argue that it is not easy for a government to determine when and in which sectors incentives will lead to spillovers and transference of knowledge, skills, etc. to the local economy that might make it beneficial. Failing an adequate assessment of these projected benefits, the cost to the country will probably exceed what it gains in return.30 For example, some estimates put the cost-per-job of incentives in the automobile sector at $100,000.31 An estimate of costs per induced job across the EU places such cost at $7000 to $15,000 per year, every year.32 Fourth, assuming the benefits of the incentives outweigh their cost, could higher benefits or benefits with a better distributional impact have been obtained for the same costs? There is some evidence in support of the hypothesis that incentives tend to compete with, rather than augment, the use of public resources to increase local productivity-enhancing human capital formation and the supply of modern infrastructure.33 Human capital and modern infrastructure are also important considerations for attracting foreign investors, and may have also more beneficial side-effects for the local population than, say, a tax holiday. In these cases it is worth asking whether different patterns for using the same public resources may have been warranted. This

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question is also applicable in the light of the distortionary effects of incentives, which tend to discriminate against smaller firms, local firms and firms in sectors or types of activity that are not targeted.34 A different expenditure pattern may, in this case, be a more equitable way to achieve the same benefits. The distributional impact can become a particularly acute consideration in cases where the forgone revenue represents lowincome consumers subsidising utility prices for the investment project. In Argentina in the 1990s, fiscal neutrality provisions in contracts with privatised utility providers required that lower fiscal pressure on such providers be passed on to consumers in the form of lower tariffs. But when the government reduced taxes for the companies, it neglected monitoring compliance. The ‘fiscal sacrifice’, thus, represented a de facto incentive for the companies that was directly at the expense of low-income consumers.35 In South Africa, recent reports point to pressure on the government to maintain access to energy at current prices, even at the expense of charges on low-income consumers. It is worth noting that the World Bank and the IMF also encourage lower tax levels in their packages of recommendations to improve the investment climate – sometimes also referred to as the business environment – and in that way attract FDI and promote exports. The hypothesis seems to be that a lower tax level on export gains is a precondition to increase exports, without which the necessary investment for production and exports might not take place. At the same time, export-oriented FDI would go up. From a perspective of growth and capital accumulation it is worth asking, of course, to what extent is it beneficial to increase exports whose revenue cannot be appropriated domestically. An example of the evaluation of investment climate by the World Bank is its Annual Doing Business report, published since 2004, which includes a ranking of economies based on ‘the ease of doing business’. Governments get desperate to climb up those rankings because they reason that the higher up they are in the ranking, the more foreign investment is going to seek the country.

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It has been observed that the rankings do have an impact in making countries introduce reforms. Regarding the fiscal theme, taxation is one of the criteria taken into account in preparing the Doing Business report, and one of the three elements that are considered within this item is that the lower taxation on companies is, the higher in the ranking the country will be. Like the other indicators, this applies to all countries in a one-size-fitsall fashion, no matter what is the revenue profile – or efficiency of public revenue use – in each case, which makes the indicator completely indefensible. It is important to explain the role of agencies such as the World Bank and IMF because it shows that the liberalisation of investment does not only come from treaties, but also from conditions imposed and the pressure that emerges from rankings created by external actors that generate a perception that more investment can be lured by applying certain policies – not a result that is endorsed by the available evidence, either. As a final point to address under the impacts of investment liberalisation treaties, reference needs to be made to the investor-state clauses. It has become common practice in investment agreements to include clauses that empower an investor in any of the parties to the treaty to sue one of the parties when there are breaches of treaty provisions before an ad hoc or existing arbitration tribunal. There is extensive documentation of the damaging effects of such clauses, which enable international bodies with little accountability and transparency, at the behest of large and resourceful companies, to second-guess areas that arguably fall within the domestic policy and regulatory sphere of the state. But little attention is paid to the extent to which one of these areas, domestic taxation, could be subject to challenge. Pursuant to such provisions, domestic tax disputes could reach unsuspected dimensions. This would be the case when laws, regulations or other tax measures are claimed to amount to indirect expropriation or a breach of fair and equitable treatment obligations, rising to the level of investment disputes where otherwise they would be dealt with in domestic tax courts.36

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THE ASPECT OF EXPENSES

In assessing the public finance impacts of liberalisation it is not enough to look at the income aspect, but it is also necessary to consider expenditures. Trade liberalisation does lead to increased public expenses. The demands of a growing regulatory and institutional burden as a result of trade agreements has been mentioned as a source of expenses that adds to the shattered budgets of low-income countries engaged in liberalisation. A widely cited review of the impact of new rules on developing countries puts the costs of compliance in just three areas: customs valuation, TRIPS (trade related intellectual property), and sanitary and phytosanitary measures, around $150 million per country.37 In eight countries covered by this study this was larger than the entire annual development budget. This estimate not only does not include all rules. It also does not include all costs a government needs to incur in order to modernise systems of production and infrastructure in order to respond to the demands of more intense competition. The taking of huge ‘competitiveness loans’ that accompanies the signing of trade agreements in countries such as Costa Rica, Colombia and Peru, shows the impact of such infrastructure on public coffers. Even if, as the theory says, trade liberalisation works, it brings dislocations and adjustments as entire sectors go out of business and jobs need to be absorbed elsewhere. In this sense, trade liberalisation generates the need for skills education, training and retraining of the labour force that makes this flexibility possible, and public sector resources are committed in this endeavour.38 The cost of provision of basic services by the state in the face of the dislocation of employment conditions created by trade liberalisation, the inequalities of coverage brought by services liberalisation or the adoption of patent protection, is relatively less studied, but can be considerable, as researchers from UNDP have brought to notice.39 For instance, the state must absorb the burden of dislocation of employment conditions created by trade liberalisation. Even in the best scenario where workers may be ‘in

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transition’ to new jobs, the outcome will be the need for increased resources in all forms of safety nets (housing, schooling, nutrition, etc.). Greater demand of publicly provided goods will also be required by growing geographical and sectoral mobility under conditions of reduced trade protection. With the liberalisation of trade in services, state resources are also compromised by the need to absorb the gap services liberalisation opens in the access to essential services for a sector of the population, with inequalities of coverage, as well as the provision to entire sectors that are priced out of coverage owing to rate increases. At the same time, because of the same liberalisation process, the state no longer has the taxing and cross-subsidising capacity that it possessed when it was in charge of the general provision. The section on income (above) has addressed the impact of investment liberalisation in promoting growing competition on the basis of incentives. While the focus there was on incentives that take the form of forgone income, it made reference to the fact that incentives often take the form of an expenditure. The line between an income-based or an expenditure-based incentive is admittedly a blurred one, especially when it comes to their implementation. For instance, the same subsidy for infrastructure use could be in the form of a grant for the company to partially offset utility payments – a direct expenditure – or in the form of a tax deduction for such payments to be invoked by the company – forgone revenue – or a combination of both. This is another reason why the unifying concept of ‘tax expenditure’ may be useful. The issues developed in the previous section with regard to tax incentives are largely applicable to financial incentives – involving a direct disbursement of public funds to the investor. A specific feature of financial incentives is that rich countries are more able to rely on them than poor ones. This adds an additional distortionary drawback to those that could be expected in fiscal concessions. The section on income referred also to investment treaty clauses allowing investor-state lawsuits. Financial compensation and punitive awards against states for exercise of public authority to

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regulate represent another potential cost to which public coffers become exposed through investment treaties. Finally, within this category of expenses, it is important to mention government procurement. In the WTO, government procurement has a ‘plurilateral’ agreement. That is, governments may not opt into the agreement as part of their single undertaking. But procurement of services is a part of the GATS (General Agreement on Trade in Services) that is scheduled for negotiation at a future stage. Demands by developed countries have consistently tried to start negotiations on a ‘Transparency of government procurement’ agreement which, according to certain analysts, is part of a two-step strategy to ultimately open access to markets on government procurement.40 Government procurement is also one of the proposed chapters of the FTAA (Free Trade Agreement of the Americas) and is a segment of the model FTA pursued by the US in its bilateral negotiations. At a unilateral level, reform of government procurement is frequently recommended by the World Bank and the IMF as a condition for financial assistance packages. Under the heading of transparency of government procurement, it is not unusual to have these institutions also recommend liberalisation disciplines – for instance, national treatment. The implementation of national treatment rules in the field of government procurement seeks to discipline government purchases and prevent the government from assigning quotas to direct part or all of its expense to local companies. It is true that some positive fiscal consequences may emerge, as greater competition may bring down prices of goods and services supplied to the government. But it is also important to take into account that contracting foreign providers represents a drain on public resources of funds that could be transferred inside the national economy, being, in this case, also subject to further taxation, as part of the profit of other actors of the national economy. In a more indirect way, the demand effects of purchasing more nationally produced goods and services, by stimulating the local economy, have positive repercussions in the overall levels of taxation that would be lost if provision were under control of foreign companies.

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CONCLUSION

This chapter has reviewed the impacts of a number of trade and investment policies and rules contained in agreements on the income and expenditure aspects of public finances. In the light of such impacts, the chapter offered guidance to governments to review, with deeper insight, the rules of trade – within or outside agreements – that are in their interest to implement, having very especially in mind the impacts on public finances. This is not a frequently undertaken exercise, particularly as it requires a high level of coordination among ministries with different portfolios, but it is surely one of wide consequence, and whose results will more than justify the efforts. There is certainly a critique of export-led growth and fiscal austerity policies on bases other than their internal logic – for instance, their impact on workers’ rights, the environment, or even growth effectiveness itself. But while the model offered a solid internal logic the challenging voices in the debate were hard to hear. The emerging internal contradictions have, thus, played a critical role in helping trigger calls for a full re-examination of the model and its eventual unravelling. In seeking the answers to these contradictions there is hope, and already there are signs that a space for the construction of an economic paradigm that is more consistent with the tenor of those voices is emerging. NOTES 1. K. Malhotra, ‘Trade, Growth, Poverty Reduction and Human Development: Some Linkages and Policy Implications’, paper prepared for the XVIII G-24 Technical Group Meeting, Geneva, March 2004. 2. W. Milberg, ‘Foreign Direct Investment and Development: Balancing Costs and Benefits’, in International Monetary and Financial Issues for the 1990s, Vol. XI, Geneva: UNCTAD, 1999; UNCTAD, Trade and Development Report, Geneva: UNCTAD, 2003, p. 76. 3. WTO, Liberalising Trade and Safeguarding Public Revenues, Communication from the IMF, WT/TF/COH/16, February 2003; T. Wise and K. Gallagher, Doha Round and Developing Countries:

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4.

5. 6. 7. 8. 9.

10. 11. 12.

13.

14. 15.

16. 17. 18.

19.

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Will the Doha Deal do More Harm than Good?, RIS Policy Brief, No. 22, April 2006. J. Stiglitz and A. Charlton, The Doha Round of Trade Negotiations: An Agenda to Promote Development and Facilitate Adjustment, Task Force on Trade Initiative for Policy Dialogue, New York, 2005; Economic Commission for Africa, Unlocking Africa’s Trade Potential, Economic Report on Africa, 2004; I. Grunberg, ‘Double Jeopardy: Globalisation, Liberalisation and the Fiscal Squeeze’, World Development, Vol. 26, No. 4, 1998, pp. 591–605; WTO, Liberalising Trade. Wise and Gallagher, Doha Round, p. 3. South Centre, Revenue Implications of WTO NAMA Tariff Reduction, South Centre Analytical Note, December 2004. WTO, Liberalising Trade. Economic Commission for Africa, Unlocking Africa’s Trade Potential; Stiglitz and Charlton, The Doha Round, p. 32. B. Khattry and J. Mohan Rao, ‘Fiscal Faux Pas? An Analysis of the Revenue Implications of Trade Liberalisation’, World Development, Vol. 30, No. 8, 2002, pp. 1431–44. T. Baunsgaard and M. Keen, Tax Revenue and (or?) Trade Liberalisation, Washington, DC, 2004 (version of 20 September). Economic Commission for Africa, Unlocking Africa’s Trade Potential. J. Stiglitz and S. Emran, ‘On Selective Indirect Tax Reform in Developing Countries’, Journal of Public Economics, Vol. 29, 2005, pp. 599–623. L. Krüger, ‘Negative Impacts of Increased Competition for Investment’, in P. Lanzet and M. Metzger (eds), Foreign Direct Investment: Not the Cure-All for Poverty, 2005. UNCTAD, Transfer Pricing, series on issues in international investment agreements, Geneva: United Nations, 1999, p. 3. M. Mashayekhi and M. Gibbs, ‘Lessons from the Uruguay Round Negotiations on Investment’, Journal of World Trade, Vol. 33, No. 6, 1999, pp. 1–26. ‘Financial Services Companies Face Tax Crackdown’, Financial Times, 3 August 2005. Krüger, ‘Negative Impacts’. ‘India Warned on Tax Breaks for Industry’, Financial Times, 2 September 2006; ‘Left Demands Put India’s SEZs in Doubt’, Financial Times, 20 October 2006. IDB, Integration and Trade in the Americas: Fiscal Impact of Trade Liberalisation in the Americas, Periodic Note, Washington, DC, January 2004, p. 7; Grunberg, ‘Double Jeopardy’, p. 595.

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20. IDB, Integration and Trade, p. 7. 21. UNCTAD, Trade and Development Report, p. 124; WWF, FDI and the Environment, p. 73. 22. UNCTAD, World Investment Report, Geneva: UNCTAD, 2003, p. 123; A. Markussen and K. Nesse, ‘Institutional and Political Determinants of Incentive Competition: Reassessing Causes, Outcomes, Remedies’, in A. Markussen (ed.), Reining in the Competition for Capital: International Perspectives, Kalamazoo: W.E. Upjohn Institute for Employment Research, 2006; S. Clark, Corporate Tax Incentives for Direct Foreign Investments, OECD Tax Policy Study, No. 3, 2000, pp. 7–8. 23. J. Morisset et al., Using Tax Incentives to Compete for Foreign Investment: Are they Worth the Costs?, Occasional Paper No. 15, Foreign Investment Advisory Service, Washington, DC, 2001, p. 94. 24. McKinsey Global Institute, New Horizons: Multinational Companies Investment in Developing Economies, 2003, p. 25. 25. P. Nunnenkamp, Determinants of FDI in Developing Countries: Has Globalisation Changed the Rules of the Game?, Kiel Working Paper No. 1122, Kiel Institute for World Economics, July 2002, p. 35. 26. UNCTAD, World Investment Report, 2003, p. 125; WWF, FDI and the Environment, p. 74. 27. Morisset et al., Using the Incentives, p. 92. 28. Clark, Corporate Tax Incentives, p. 7. 29. UNCTAD, World Investment Report, 2003, p. 125. 30. Morisset et al., Using the Incentives, p. 94; M. Blomstrom, The Economics of International Investment Incentives, Paris: OECD, 2002, p. 176. 31. C. Oman, Policy Competition for Foreign Direct Investment: A Study of Competition Among Governments to Attract FDI, Paris: OECD, 1999, p. 4. 32. P. Fisher, ‘The Fiscal Consequences of Competition for Capital’, prepared for the Conference ‘Reining in the Competition for Capital’, Hubert M Humphrey Institute of Public Affairs, University of Minnesota, 2004, p. 2. 33. Oman, Policy Competition, p. 5. 34. Ibid., p. 4. 35. D. Aspiazu et al., Crónica de una sumisión anunciada: las renegociaciones con las privatizadas bajo la administración Duhalde, Buenos Aires: Siglo Veintiuno Editoras, 2003, pp. 36–8. 36. A. Rodriguez, International Arbitration Claims against Domestic Tax Measures Deemed Expropriatory or Unfair and Inequitable,

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37.

38. 39.

40.

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Occasional Paper-SITI-11, Institute for the Integration of Latin America and the Caribbean, January 2006, p. 17. J. Finger and P. Schuler, ‘Implementation of Uruguay Round Commitments: The Development Challenge’, The World Economy, Vol. 23, No. 4, 2000, pp. 511–25. Grunberg, ‘Double Jeopardy’, p. 597. A. Heuty, notes from presentation at ‘The Budget Woes of Developing Countries: Can They Afford More Trade Liberalisation? ’, panel discussion organised by Heinrich Böll Foundation and the Center of Concern, Washington DC, April 2004. M. Khor, The WTO, the Post-Doha Agenda and the Future of the Trade System: A Development Perspective, Third World Network, Malaysia, May 2002.

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7 GLOBAL TAXES FOR PUBLIC FINANCES IN THE SOUTH Jacques Cossart

The measures proposed in this chapter should not be taken separately from other proposals discussed in this book. They are part of an integrated approach. Moreover, some issues that are tackled in this chapter are also present in other chapters. This should not be interpreted as redundancy, but as a reflection of a multifaceted reality. We will try to show why global taxes are necessary, and that technically they are perfectly feasible. All that is required is political will. What is needed is a momentous change in the way taxes are imposed on global flows of goods, services and harmful substances. It is a debate in which citizens must have a say. At stake is the future of the global society at large. In this context, it is essential that the standards and rules for such global taxation be decided in the framework of the United Nations, and that statistics on its implementation be gathered. The levying of taxes must be done nationally by competent authorities. Global taxes are the only possibility to guarantee the indispensable financing of global public goods, which need urgent attention. We could then work towards achieving the Millennium Development Goals and beyond, because we know many of the goals will not be met. Given its insufficient and uncertain nature, development aid would in this manner both be supplemented and ultimately replaced in international relations. 150

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WHY DO WE NEED GLOBAL TAXES?

Globalisation and tax competition Existing national tax systems in the developed nations were constructed at a time when territories and borders upon which taxes were levied coincided with national territories and borders. These tax boundaries actually existed centuries ago in medieval times, before modern national states did. Because of these borders, national states have long been favoured by sovereign, autonomous powers in deciding on monetary and tax matters. Current neoliberal globalisation has profoundly changed the framework for tax policies. Today, border controls have been abolished, trade tariffs have been lowered and factors of production are moving all over the world. National tax authorities have lost their autonomy and are now interdependent, both home and abroad, in settling tax matters with regard to the citizens and companies residing within their territories. Taxes do indeed have an enormous impact on financial and trade flows. Countries in the South in particular may think they can benefit from tax competition with neighbouring countries, for instance, hoping for an influx of capital and financial assets as a result of rising taxes and levies in nearby countries. It is a sign of our times that many countries, both North and South, justify changes in their tax laws by referring to external conditions. This tax competition takes place in times when public finances are overstretched. The under-provision of public goods has dramatic consequences to citizens. We can imagine two possible strategies, and both of them can be framed within the famous ‘prisoner’s dilemma’.1 Countries can refrain from international tax cooperation and go for tax competition and dumping practices. They can lower their taxes and try to attract foreign investments from transnational corporations. This means that their tax revenues will gradually decrease as other national states also enter into the tax-bidding process. Alternatively, countries can cooperate and work towards tax harmonisation or international tax cooperation in order to maintain a homogeneous level of taxes. This tax cooperation

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can either be based on a harmonisation of national tax policies or on the creation of common global taxes. Unfortunately, the reality of our neoliberal world offers only few possibilities for cooperation. Even the European Union, with a thousand and one reasons to organise itself as a relevant fiscal area, does not do so. In theory, in either case, whether countries harmonise their taxes or introduce global taxes, the result is similar, given an identical tax basis and an identical tax rate. The ‘free rider’2 practice is thus eliminated. The example of the EU shows that it is very difficult to put into place cooperative tax policies in the context of integrating markets. Only value added tax is harmonised to a certain degree as parts of it are directly paid to finance the EU budget.3 However, even VAT rates vary between 3 and 25 per cent, and businesses find ways of locating in the lower VAT areas such as Luxembourg, or operate from tax havens that are outside the EU common VAT regime but form a free-trade area with the EU, in particular the Channel Islands of Jersey and Guernsey. One of the reasons that tax competition seems so obvious is that TNCs optimise their international tax strategies by encouraging governments to opt for it. This phenomenon is particularly clear in the case of foreign direct investments, when companies ask for subsidies from central and regional governments when locating their manufacturing operations or service centres. While governments may consider such subsidies as a continuation of a social market economy practice, most companies today will relocate immediately as subsidies run out. This happened, for example, in the case of the Nokia factory in the German city of Bochum, where the closing down of a manufacturing plant was announced as subsidies from the regional state government ran out.4 Nokia relocated to Romania, where it announced that labour costs were one-fifth of what they were in Germany. Instead of assuming that companies will remain committed to their workers in a social market economy scenario, we should end all practices of granting either tax holidays or outright subsidies to companies. These rules should be first decided at the EU level for

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the better functioning of the common market, and furthermore be compatible with international tax cooperation agreements. Companies are contributing an ever smaller share of the overall tax income of states, a trend that is evident not only in developing countries but also in OECD member states. In the UK, it has been calculated that between 1990 and 2003, while personal income tax collection increased by 124 per cent, corporate tax payments only increased by 36 per cent, representing a mere 2.8 per cent of GDP.5 These trends are worrying especially as during the same time, the gaps in the fiscal revenues are increasingly being filled by both an increasing income tax burden on ordinary citizens and by regressive taxes such as VAT, which disproportionately hit lower-income persons who spend a higher amount of their disposable income on consumer goods.

Taxation and factor mobility States have no problems in taxing factors of production when these factors are not mobile and there is no elasticity of the tax base related to the tax rate. However, when national borders disappear in the context of market liberalisation policies, production factors start to move. This happens first with capital, whose owners are transnational industries, banks and international investors. Thanks to this mobility – whether it is legal or not – capital owners can optimise their tax strategy and go to the countries and regions where taxes are lower. This does not necessarily mean a geographical delocalisation. It can also mean the use of perfectly legal financial instruments or establishments. More and more, large companies can avoid paying national taxes altogether on their profits. And states have witnessed the erosion of their tax revenues. Companies have many instruments at their disposal to avoid taxation. The most drastic measures include using tax shelters, which include placing, for instance, all intellectual property rights offshore. Many pharmaceutical companies have done so.6 Another instrument, not an alternative to the first one, is to use complicated bookkeeping engineering. The most widespread technique in this

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field is fictitious transfer pricing between the parent company and its subsidiaries. There have been many examples of this technique in the past decade, for instance Volvo Cars (which since 1999 is owned by Ford Motor Company). It was caught by the Swedish tax authorities in January 2007 for mispricing its car exports to countries with high import taxes, including Finland, Taiwan, Thailand and Singapore. As a result, Volvo was fined $31 million.7

Globalisation and tax inequalities Neoliberal globalisation has increased tax inequalities between different types of owners of production factors, as a function of their mobility. On the one hand, there are farmers and wage earners, owners of land and labour that represent almost all of humanity, expressed in numbers of individuals. Most workers cannot move freely because of obvious obstacles, like cultural and linguistic borders and immigration laws. The consequence is that they suffer from the heaviest tax burden and have no means of avoiding it. This is particularly true for VAT, which, in France, for instance, represents almost half of the state’s tax revenues. Higherincome households pay only one-third of the part of income that is paid by lower-income households on VAT. Higher-income households, at the top of the pyramid of global incomes, are very mobile and the elasticity of their tax basis is very high. It means they can move in order to avoid taxation. Neoliberal globalisation has introduced a new gap between wage earners with, on one side, those who can move in order to reap the benefits of tax and wage differences, and on the other the huge majority of those who cannot move. Existing statistical data show very clearly how the tax basis is eroding and how this links with the mobility of production factors. The gap between tax rates on labour and on capital has constantly grown since the beginning of the process of neoliberal globalisation. In the countries of the EU, capital taxes have been diminishing, from a nominal 50 per cent in 1980 to 35 per cent in 1994 and 25 per cent in 2005. Labour taxes, and especially VAT,

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have increased in order to maintain states’ tax revenues. Fighting these inequalities will imply a serious rebalancing act. Those who can be called ‘capital owners’, to use a generic term, do exist, and they are the subject of various analyses published every year. In the eleventh edition of the World Wealth Report, it is stated that there are only 95,000 Ultra-HNWIs in the world, or 10 per cent of the total number of HNWIs. But these 95,000 hold one-third of the $37,000 billion held by HNWIs. UNDP and the International Centre on Poverty published a report stating that 10 per cent of the richest people in the world own 85 per cent of global assets, whereas 50 per cent of the poorest people in the world own less than 1 per cent.

Global taxes, global public goods and the common good of humanity One fundamental reason to think about global taxes is the idea that globalisation has created new needs, and that satisfying these needs requires a new international taxation instrument, just as former needs did. In reference to the common good of humanity, a new concept has been introduced: global public goods (GPGs). These represent global needs that cannot be produced by the market because of two major characteristics: everyone must have access to them – the principle of non-exclusion; and their consumption must be possible without the goods being depleted – the principle of non-rivalry. The goal of balanced development of the planet cannot be met if public goods, such as health, education and security, are not globally defined and financed using public resources gathered from global taxes. In this context, one needs only to consider our environment and particularly our climate: although these are subject to increasing debate, very little efficient action is taken. The existing Kyoto treaties have not led to necessary environmental taxation initiatives, nor are they globally binding, as some of the major polluters have opted out. Currently, GPGs are insufficiently available. Global financial instability, pandemics, financial crime, insufficient access to knowledge and information, and environmental degradation are

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among the consequences of this shortage. As a result and owing to neoliberal globalisation, our planet lacks stability, equality and health. There are many factors that explain this shortage. First, costs and profits tend to be assessed within a limited timeframe. However, GPGs must be considered in the long term. Policies against financial instability and the deterioration of biodiversity imply high costs and uncertain far-off financial profits, contrary to the financial profits currently made from the activities contributing to these crises. Governments and capital owners in particular are not accustomed to consider long-term profit scenarios. Second, the current shortage is also a consequence of the geographic dimension of GPGs. States’ budgetary and tax policies are defined within a national context whereas profits from GPGs are to be shared with other countries. There will never be enough public resources to meet the needs for public goods in developing countries, unless we have global taxes that get rid of the free rider phenomenon. WHAT KINDS OF INTERNATIONAL TAXATION?

International taxation should fulfil three major criteria, which can also be used to judge the efficiency of any proposed international taxation initiatives: the reduction of various negative social and economic externalities; the redistribution of incomes; and the production of international revenues in order to finance GPGs. Different kinds of international financial contribution models must be put in place through an efficient and equitable international tax system. These points were analysed in the Landau Report.8 Based on these criteria, the three types of taxation that are discussed in this chapter concern the agents who benefit most from neoliberal globalisation without contributing their share towards collective goods. The other taxes concern harmful activities or public ‘culprits’, who seriously damage the environment.

Financial taxation In our global economy, there are several easily identifiable flows. These flows create revenues for those who command them. It is

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perfectly reasonable that they be collectively taxed. Some of these flows are particularly dangerous for global economic stability, and a tax system that discourages these activities would thus help maintain social order and indirectly reduce the strain on the environment.

Taxation of speculative financial transactions There is considerable talk all over the world about a currency transaction tax and it is not necessary to go into detail here. It is discussed in books published by WEED,9 New Rules for Global Finance, and many others.10 Let us just point out that speculative international transactions are a real scourge of financial globalisation with considerable economic and social costs, especially in Southern countries, as we have witnessed in the past decade with the South-east Asian (1997), the Brazilian (1999), the Argentinian (2000), the Russian (2001) and some twenty other financial crises. One of the objectives of taxation is to raise revenues. A stock exchange tax on the exchange of securities, amounting to about 0.01 per cent and levied in all financial locations, would generate important tax revenues. A tax on all financial transactions existed in Brazil between 1993 and 2007. The rate of taxation was 0.38 per cent and it helped to raise some US$30 billion per year.11 In terms of incidence, it targeted both institutional investors and wealthy individuals, who both most benefit from the effects of globalisation and find it easiest to escape their tax liabilities. Whatever practical difficulties may exist in implementing a tax on financial transactions, and whatever possible mechanisms arise for avoiding it, it is still difficult to understand why such tax has not yet been proposed. In Sweden and the UK there are stamp duties applied to stock market transactions, but similar stamp duties do not apply to currency transactions. The EU should lead the way in applying a financial transaction tax, honouring its principles of social rights and equal treatment of all citizens, as it is now the poor who disproportionately pay the EU budget

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through the common VAT regime. It is obvious that taxation has an inevitable moral component.

A unitary surtax on profits The objective in this proposal is to restore the state’s capacity to levy corporate taxes on profits. In allowing the free movement of capital, states have given corporations the power to exert pressure that can only be avoided if a global unitary tax is introduced. It has become the current practice of corporations to threaten delocalisation or investment in another country unless they obtain tax holidays or a lower corporate tax regime. This is in fact a type of blackmail, which has led to a tax war between states to give more and more tax breaks that unavoidably erode tax revenues. In the US, corporate tax represented a mere 6.7 per cent in 2002, compared to 27 per cent in 1965.12 The OECD average was 9.3 per cent in 2002 for corporate tax and 32 per cent for VAT. The principle and modalities of a unitary tax are simple: wherever a company is established, it would pay a unitary rate on its profits. In that way, tax wars would be eliminated, as would tax evasion and fraud. Revenues would potentially be very high. According to the OECD, the profits of transnational corporations of G7 countries in 2004 represented 14 per cent of the GDP of these countries, a sum of almost $4000 billion; back in 1980, it represented much less, a mere 10 per cent. The stock exchange value of the world’s top ten financial entities was $41,000 billion in 2006.13 Even if the stock exchange value is not of the same nature as the gross global product, it is worthwhile to remember that it had more or less the same value that year.

A property tax Property is an asset and not a flow. But it is difficult to understand why asset holders would not equally contribute to the restoration and maintenance of the planet, according to the wealth they have accumulated. In the same way, they would contribute to the – partial – satisfaction of the basic needs of the planet’s poorest

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people. On the basis of 2006 data it seems realistic to estimate the financial assets of HNWIs at $10,000 billion, which is also relatively close to the amount of assets held offshore by wealthy individuals, calculated at $11,500 billion.14 A very modest average tax rate of only 1 per cent would yield $100 billion, an amount almost equal to total official development aid – even if aid figures are very controversial and overestimated. It is difficult to see why the world’s citizens would not agree to demand such a modest contribution, compared to the considerable wealth that asset holders cannot have created ex nihilo. The levying of this tax would, however, require the compliance of offshore financial centres and tax havens. The offshore centres would either need to sign up to tax cooperation treaties, and become an integral part of the global governance framework, or alternatively there could be punitive entry and exit taxes for capital going in and out of them. The most drastic measure would be to cut off banks and other financial institutions in non-complying tax havens from the global financial system.15

Ecological taxes With this type of taxation, the clear goal is to limit the negative impacts of activities that threaten the planet’s future. This is becoming more and more crucial. Environmental deterioration cannot be stopped without public rules because markets only worsen it. Very selective international taxes would have a strong regulatory effect if the modalities and rates were carefully defined. Of course, taxes are not the only instrument that would prevent the world from destroying itself. They would have to be part of a whole series of measures with incentives, prohibitions and sanctions. The objective of this book is precisely to propose a coherent set of measures. The three types of taxes listed in this section are not the only ones, but they are the most urgent. The public revenues they would generate can be used to prepare a budget for a Global Environment Organisation (GEO), as part, of course, of the United Nations. The mandate of the GEO would be to promote a vast global programme reducing energy

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consumption and hugely improving energy efficiency. It would also set and monitor binding global rules for the preservation of natural habitats, biodiversity and other global ecological commons. Finally, funds should be made available for research on alternative, renewable and non-polluting energy, waste recycling and non-polluting, energy-friendly modes of production.

A tax on carbon emissions There is no need here to explain the numerous and serious negative impacts of carbon-derived productive activities, stemming, for example, from CO2.16 It is absolutely necessary to introduce a tax that, along with strict, binding rules, would stimulate producers to reduce their emissions and make them pay for the costs that until now have been borne very unfairly by wider society. This model could be called ‘cap and tax’, instead of the currently used concept of ‘cap and trade’, where rights are given for carbon emissions. Instead, all emissions, including those under the cap thresholds, should be taxed. The tax rates would have to be carefully defined in order to genuinely stimulate emission reductions. The numbers that are proposed in the Appendix to this chapter should only be seen as indicative. They are in the lower margins of such a possible tax, since some proposals estimate yearly revenue of $500 billion.

An air ticket levy The fact that air transportation has become a sector of economic importance, or that the financial profitability of airlines is rather weak does not change anything about the particular relevance of a tax on kerosene consumption. Is it reasonable to consider taxing CO2 emissions without taxing air transportation? The economy must change according to human needs instead of humans changing according to economic needs. Of course, there are questions about the tax rates. But it is no coincidence that this international tax was the first one to be introduced by France, followed by many other countries, in order to pay for the fight

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against HIV/AIDS. The popularity of this tax demonstrates the viability of global taxes. A first analysis makes clear that the $3.76 per tonne of consumed kerosene is a perfectly reasonable rate of taxation as proposed in the Appendix. This tax should be seen in the context of harmful consumption taxes, and all harmful activities should certainly be taxed. The fact that the round trip to Miami for a European traveller causes an equivalent amount of CO2 emissions as a full year using an individual’s own car demonstrates the degree of the problem. Similar arguments could also be used to tax maritime fuel, because maritime transport competes on an unequal footing with rail and road transport with regards to the taxes on fuel consumption.

A tax on highly radioactive nuclear waste In addition to a heavy tax designed to reduce CO2 emissions, a tax on nuclear waste should also be introduced. Leaving aside the question whether nuclear energy is desirable or not, producers should clearly be encouraged to reduce flows and stocks of highly radioactive waste, such as plutonium and other by-products of nuclear fission. This issue is discussed in an excellent document on the French nuclear industry by Charpin, Dessus and Pellat.17 It is important to note that energy taxes should not be limited to carbon taxes alone. It does not matter whether plutonium or minor actinides from nuclear fuel are considered as energy resources or hazardous waste products. In the framework of current technology, they are stocked in such a way that they cannot be used again. As long as they cannot be utilised economically, and are not considered as a secure energy source, they are a harmful substance whose impact must be reduced. In the case of plutonium, this impact is linked to its long-lasting radioactivity and to the risk of it being used for nuclear proliferation. From these perspectives, it becomes reasonable and logical to tax nuclear by-products. The easiest and least controversial way to do so would be to take the production of plutonium and minor actinides as the tax

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basis. France has had some experience that could help assess such a tax. The country has shown that it is prepared to pay approximately $150 million per tonne to reduce its production of plutonium and minor actinides by 20 per cent. If more reduction were desired, costs could rise up to $300 million per tonne. It is reasonable, then, to consider a tax of about $200 million per tonne. If the amount of plutonium and minor actinides produced annually in the whole world is about 60 tonnes, a tax on these products would generate around $12 billion per year. Another question is whether to tax waste stocks. The material can be considered as having negative impacts and meriting taxation as a means to reduce the future pile-up of stocks. Whether they stem from civil or military use, their harmfulness remains the same and the tax should be calculated on the same basis. A yearly tax could be calculated on the basis of about 10 per cent of the stocks. MEASURES AGAINST TAX HAVENS AND BANK SECRECY

Taxes can only be equitable if their calculation and their payment can be monitored. This basic principle is constantly being violated by the existence of tax havens and bank secrecy. In the case of tax havens, the solution is simple: eliminate them. All other proposals are totally naïve or utterly ineffective. As for banking secrecy, a remedy against the tax evasions it allows would be relatively easy to put in place. If banks claim they must preserve the confidential character of their customer’s transactions, that is acceptable. But then banks should also be willing to declare the totality of the transactions concerned, without naming their clients, and pay taxes on them. If they refuse, it would be easy to introduce a flat rate. MECHANISMS FOR COLLECTING AND REDISTRIBUTING GLOBAL TAXES

National collection of global taxes Global taxes do not imply the introduction of a global revenue authority, as the existing national revenue authorities are fully

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capable of collecting taxes on global flows. It would be inefficient to invent new structures for collection, as the net benefit of a tax for public finances is measured by subtracting the cost of collection from the revenues collected. In the case of most proposed global taxes, the cost of collection is astonishingly low as available statistics already exist on most of the activities that are proposed to be taxed. The most efficient way is to apply taxes immediately at the point of the taxed activity, rather than calculating the costs at the end of the year. It is both more accurate and discourages harmful consumption more transparently to those who make decisions concerning the activities in question. In the case of financial transactions, air travel and large-scale CO2 emissions, the taxes can be applied on the spot. The profits of transnational corporations and assets of wealthy individuals would be better taxed at the end of the year as the annual accounts and tax returns are filed. Having heard the arguments as a member of the Landau Commission for the establishment of a global organisation18 charged with collection of global taxes, it is my view, this proposal would prove to be both an inefficient and an undemocratic solution to the question. While we already have competent national revenue authorities, and a legitimate international framework in the form of the UN, it would not make sense to reinvent global governance for the purpose of establishing a framework for global taxation. If a new body were to be established outside UN authority, what democratic legitimacy would it have?

An international framework for providing global public goods While collection is best done at the national level, we do need a binding international framework to commit the funds collected from global taxes for GPGs. Paying taxes should not be a matter of goodwill, nor should taxes be voluntary. Taxes are what we pay to live in a civilised society guaranteed by a rule of law. The agreement that binds national governments to global taxes and GPGs should be just as clear as is the social contract that binds

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citizens to their states as taxpayers. Without a global rule of law, we can forget having a global civilisation worth mentioning. The international treaties governing the relationship between global taxes and the provision of public goods must be established under a UN framework. This is the best framework since the UN has more legitimacy than the World Bank. There is a tendency in international diplomacy to allow the World Bank to administer specific funds aimed at the purchase of medicines against malaria, tuberculosis and HIV/AIDS. But the Bank’s undemocratic governance structures based on the size of the contributions and the choice of its president – always a US citizen, while the IMF always has a European national as its executive director – cannot allow these organisations to be given the role of administering the proceeds of global taxes. Global taxes must be decided by the UN General Assembly, just as this body decided on the Millennium Development Goals in 2000. We know that these goals will not be met in the majority of developing countries. The member states of the UN should draw the responsible conclusions and decide upon the recommendations of the Landau Report and further work carried out by the Leading Group on Innovative Finance Mechanisms to collect the necessary funds to achieve the MDGs and go even further. The extent of the global taxes proposed in the Landau Report allows for providing global public goods much beyond the MDGs. Indeed, it would entail the beginning of an environmental and social renaissance.

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Appendix

Indicative assessment of some global taxes (in billion dollars)

Type of tax

Hypothesis

Tax on speculative transactions Tax on stock exchange transactions Tax on the profits of transnational companies Asset tax

Rate: 0.1%; reduction of tax basis with 50% 0.01 %

Carbon emission tax Tax on plutonium and minor acnitides Tax on air transport

TOTAL

165

Tax rate of 15%, $4000 billion Flat rate of 1% applied to $10,000 billion $20 per tonne carbon content Tax of $240 million per produced tonne Tax of 1% on price of ticket or freight Tax of $3.65 per tonne of kerosene

Yearly result (billions of dollars) 125 100 600 100 140 15 2 75 1175

NOTES 1. Two men are in prison, but which one is guilty? In 1950 two researchers of game theory, Melvin Dresher and Merrill Flood, explained their dilemma as follows: if you accuse your colleague of a crime and if he does not accuse you, you will be set free and he will have to stay in prison for ten years; if you accuse him and he accuses you, you will both have to stay in prison for five years. If you do not accuse him and he does not accuse you, you will both have to stay in prison for six months. There is an opportunity to cooperate but the prisoners do not use it. They prefer to accuse one another and attempt escaping prison themselves. Thus they both will have to stay in prison for five years, whereas they could have avoided the longer sentence by cooperating. John Forbes Nash, Nobel Prize winner on game theory, shows that the ‘equilibrium’ is not Pareto optimal and the satisfaction of one does not diminish the satisfaction of the other. 2. A ‘free rider’ is someone using public transport without paying anything and without getting caught. 3. EU Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

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4. http://www.spiegel.de/international/germany/0,1518,529218,00. html. 5. http://www.guardian.co.uk/society/2003/nov/17/10. 6. http://www.accountancyage.com/accountancyage/news/2163995/ gsk-settles-biggest-tax-dispute. 7 http://www.grantthornton.com/staticfiles/GTCom/files/services/ TaxServices/Transfer%20Pricing%20Update/Transfer%20Pricing %20Update%202-26-07.htm. 8. Landau Commission on Innovative Development Funding, 2004; English edition: http://www.cttcampaigns.info/documents/fr/landau_ en. 9. B. Jetin and L. Denys, Ready for Implementation, November 2005, http://www2.weed-online.org/uploads/CTT_Ready_for_Implementation.pdf. 10. M. Huq, I. Kaul and I. Grunberg (eds), The Tobin Tax: Coping with Financial Volatility, Oxford: Oxford University Press, 1996; H. Patomäki, Democratising Globalisation: The Leverage of the Tobin Tax, New York: Zed Books, 2001; J. Weaver, R. Dodd and J. Baker (eds), Debating the Tobin Tax, Washington, DC: New Rules for Global Finance, 2003. 11. International Tax Review: http://www.internationaltaxreview.com/ ?Page=9&PUBID=210&ISS=24419&SID=699746. 12. OECD, 2005, http://gesd.free.fr/ochifff5.pdf. 13. AMF, according to data of the World Exchange Federation: http:// amf-france.org/documents/general/7822_1.pdf. 14. TJN, The Price of Offshore. http://www.taxjustice.net/cms/upload/ pdf/Price_of_Offshore.pdf. 15. This is what the Bush administration threatened unless Switzerland and the Cayman Islands hand over data concerning terrorist organisations following the acts of terrorism in the USA in September 2001. Unsurprisingly, these tax havens cooperated with the US administration (R. Baker, Capitalism’s Achilles Heel: Dirty Money Flows and How to Renew the Free-Market System, Hoboken, NJ: John Wiley & Sons, 2005.) 16. IPPC, 2007: the yearly carbon production was estimated at 6.4 billion tonnes in 1990 and an average of 7.2 billion tonnes in 2000–05. In the pre-industrial era, there were approximately 280 ppm of CO2 in the air; there were 379 in 2005. They increased by 1.9 per year between 1995 and 2005 and by 1.4 per cent between 1960 and 2005. 17. Etude économique prospective de la filière électrique nucléaire française, La Documentation française, 2000. 18. H. Patomäki and L. Denys, Draft Treaty on Global Currency Transaction Tax, Helsinki: NIGD, 2002, http://www.nigd.org/ctt.

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8 BREAKING THE VICIOUS CIRCLE: GRAND CORRUPTION IN KENYA Alvin Mosioma and Bob Awuor

If I knew this will be the outcome I will never have voted. What was the use of lining up for hours in order to vote only to end up in a refugee camp a week later? This is the last time I will vote! A caller to a Nairobi based FM radio station commenting on the post-election violence

On 27 December 2007 Kenyans lined up in voting stations to vote in a general election. The National Rainbow Coalition (NARC) party that had come to power in 2002 with many promises had turned into a great disappointment and many saw this as an opportunity for change. The little that the Kibaki government achieved, including the introduction of free primary education and an economic growth rate of around 6 per cent was overshadowed by its negative performance in other areas, including a promised war against corruption, enacting of a new constitution, creation of jobs for the millions of unemployed youth and the problem of ethnicity-based favouritism in favour of the President’s tribe and cronies. The enthusiasm in Kenya to bring about change can be seen in the high numbers of voters who registered (82 per cent of eligible voters) and the impressive voter turnout (over 75 per cent on average). The voting itself was largely peaceful and orderly. However, problems started emerging with reports of serious irregularities in the counting of the presidential votes, which pitted the incumbent Mwai Kibaki (running on a Party of National Unity ticket) against the main challenger Raila Odinga 167

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(of the Orange Democratic Movement (ODM) party) in a hotly contested race that saw the latter gain parliamentary dominance and an overwhelming win in local councils in seven out of Kenya’s eight provinces. Spontaneous mass protests broke out nationally following an unexplained delay by the Electoral Commission of Kenya (ECK) in announcing the winner. This strengthened the impression, particularly among ODM supporters, that Kibaki was scheming to ignore the voters’ will and manoeuvre himself back to power. When the ECK eventually declared Kibaki the winner on 31 December 2007, the country was immediately plunged into a state of chaos, with violent demonstrations erupting nationwide. The situation was not helped by excessive police brutality in an attempt to quell demonstrations, particularly in opposition strongholds. Instead of receiving a convincing result from the polls, Kenyans found themselves trapped in the worst violence of the postIndependence era with over 1000 lives lost, many people maimed and an estimated 300,000 people internally displaced. Property worth billions of Kenyan shillings was also destroyed. With the country descending into anarchy and fast becoming ungovernable, the two opponents finally agreed to meet and discuss a powersharing deal, albeit under intense pressure from prominent Kenyans such as Olympic athletes, the Kenya Law Society, the civil society movement, eminent African personalities such as Archbishop Desmond Tutu, a team of retired African presidents and the wider international community. A mediation team comprising eminent persons led by the former United Nations Secretary-General Kofi Annan was set up under the auspices of the African Union to broker a negotiated political settlement and restore peace in the country. This panel spent over a month trying to find a solution to the crisis. It took several weeks until by 28 February 2008 an agreement on the critical issues of power-sharing was reached. The brokered deal would see the creation of a power-sharing grand coalition that would change the constitution to create the position of a prime minister with executive powers for the head of the largest party in parliament. This post was designated for Mr Odinga. The agreement also

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stipulated a 50–50 sharing of ministerial cabinet positions based on the parliamentary strengths of each side. The Kenya parliament has since legislated two bills to reflect the agreement. A new 42member Grand Coalition cabinet was eventually agreed upon and sworn into office on 17 April 2008, ushering in citizens’ hopes for greater peace, political stability and co-existence. As Kenya moves beyond its deepest political crisis towards finding a lasting solution, many are asking themselves in the words of the Nigerian Nobel laureate, Chinua Achebe: ‘What we need to do is to look back and try to find out where we went wrong, where the rain began to beat us.’1 How could a country that has long been lauded as exemplifying political stability and transition to democracy in Africa so suddenly slip down the road of overnight governance failure that is otherwise so familiar elsewhere in Africa? Or could it be true, as an acclaimed Ghanaian author proclaimed long ago, that the beautiful ones are not yet born?2 But this could then mean that the prospect of democracy and justice is really not for the current generation of Africans. The masses who took to the streets demonstrating across Kenya clearly disagree in their emphatic demand for just, democratic and accountable governance in the here and now. In trying to understand the root cause of the crisis, many analysts have been quick to point at selected single issues (including the flawed elections; historic injustices in the distribution of land resources in the post-Independence era and tribalism) to explain away the post-election violence. However, seeing the problem through such restricted lenses risks missing the whole picture as it amounts to an oversimplification of a problem that no doubt resulted from a multiplicity of underlying factors, leading the frustrated citizenry to resort to direct action arising from years of accumulated anger. It must be emphasised that the flawed Kenyan elections were not by themselves the cause, but served as a catalyst to spark a problem that is symptomatic of underlying, deeper, socioeconomic and political problems that successive regimes since Independence have failed to solve. Failure to address the endemic political corruption that has permeated the Kenyan society and poor

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governance by the political elite as well as endemic inequalities underlie the country’s post-election violence. INDEPENDENCE: STARTING OFF ON THE WRONG FOOTING

Kenya, like many post-colonial African states, inherited a political governance system that was, in many respects, alien – at least to the extent that these systems were modelled on those of the departing colonial masters. From the outset, the political elite faced the challenge of unifying a country that needed a delicate balancing of competing interests among diverse ethnic groups and regions. The British colonial policy of indirect rule, which tried to incorporate inclusion of traditional institutions but largely limited this to maintaining public order and reinforcing the extraction of raw materials to the metropolis, contributed towards eroding the legitimacy and acceptance of these institutions among the people. Achieving national independence in December 1963 proved to be a mixed blessing for Kenya. Jomo Kenyatta became the first prime minister and a year later appointed himself president. This proved to be the beginning of the long impasse. Kenya had started life as a parliamentary democracy but soon morphed into an autocracy ruled by the whims of an imperial presidency. Though it moved formally from colonial rule, Kenya’s policies essentially remained the same colonial laws and policies that had been used for nearly 70 years to subjugate the Kenyan populace. Control of the state became a vehicle for cronyism, selfaggrandisement and wealth accumulation by and for the very few, a situation whereby state sovereignty became a commodity like any other, used by those who owned it to buy and sell land, laws and labour, reinforced by the state’s monopoly of violence. This situation is not unique to Kenya. Many African states are experiencing the same, from customs officers in the Chad Basin,3 to poisoned wells in Atlantic Africa4 and flags of convenience and offshore company registers in Liberia.5 The patron–client relationship – especially between the president, his cabinet and the

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rest of society – sowed the earliest seeds of Kenya’s contemporary problem of Grand Corruption. The result is a nexus of power around the politically connected rich men. ‘Politics will lead to personal enrichment just as it is expected that wealth will have a direct influence on political matters. Rich men are powerful, powerful men are rich.’6 Rampant abuse of state power by the ruling elite saw the emergence of a political dictatorship characterised by the criminalisation of political dissent, emasculation of open political debate, regular detention without trial and even politically motivated assassinations of those deemed to threaten the interests of the ruling elite. Above all, Kenya became a country in which those controlling state power perpetuated cronyism, economic dominance by the political class and outright bad governance with the attendant loss of political transparency, fiscal accountability and the requisite responsiveness to the needs of the citizenry in the management of the country’s public affairs.7 Such a state can be called a patrimonial one. Suffice it to say that a patrimonial administration is one in which the public/ private boundary, central to the concept of modern administration is to say the least unstable, and in many cases barely exists at all.8

To institutionalise the economic dominance of the ruling class in the late 1960s a commission was appointed by presidential decree (The Ndegwa Commission) allowing state employees to engage in business, often with the government as the client.9 This move proved to be disastrous as it saw senior civil servants and other public employees resort to exploiting their connections with the state to acquire wealth through unscrupulous methods. At the very apex of state power, the president, his immediate family, close relatives, political friends and business associates plundered unlimited amounts of public resources, including acreages of land held in trust by the government. By the time President Kenyatta died in 1978, corruption had become so endemic and virtually ingrained in the Kenyan moral and political values that it was a way of life.

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The personal interests of political leaders had become inseparable from public interest.10 Needless to say, those below them emulated their ways and soon state-perpetuated corruption was so much a part of the national psyche that even a junior clerk or office messenger in the public service expected tea, also known as a TKK (Toa Kitu Kidogo or ‘give me something small’) as a precondition for undertaking the most perfunctory of tasks within the public service. THE NEAYO ERA – FOLLOWING IN THE WRONG FOOTSTEPS

On ascending the presidency upon Jomo Kenyatta’s death on 22 August 22 1978, Daniel Arap Moi, the second head of state, vowed to ‘follow the footsteps’ of his predecessor. This was an astounding declaration as President Moi had inherited a fundamentally corrupt political system in which all the institutions of democratic governance had long been subverted to serve the personal interests of those holding executive political power. President Moi moved with speed and enthusiasm to perfect this system, destroying any real or imagined alternative centres of power. Privatisation of state sovereignty had come full circle. Growing discontent was aptly demonstrated by the emergence of dissident opposition voices that demanded a more open, accountable and democratic political order – and an attempted military coup d’état by a section of the Kenya Air Force. However, Moi moved swiftly to contain these nascent opposition voices, and amended the constitution to render Kenya a de jure one-party state. These iron-fisted manoeuvres were followed by additional amendments to the country’s constitution in 1987 that further entrenched Moi’s dictatorship by removing the security of tenure of certain public officials, giving Moi sweeping powers to hire and fire judges and civil servants. During Moi’s 24-year rule, the country witnessed its worst political and economic decline. This looting of state resources peaked in the run-up to the first general elections under a multi-party system. The scale of the ensuing plunder of public resources was astonishing.11 The picture of rampant looting of

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state resources is also highlighted by a leaked report prepared by the London-based investigation agency, Kroll and Associates, which had been commissioned by the new post-Moi government headed by President Mwai Kibaki in 2003 to trace Kenya’s looted resources. The report revealed a web of shell companies, secret trusts and front men allegedly used by well-connected individuals in the Moi administration to funnel funds amounting to hundreds of millions of pounds into nearly 30 countries, including a number of tax havens. 12 As the Kroll report demonstrates, and further leaked or publicised studies reveal, capital flight became a systematic way of impoverishing the state: Over a seven year period, nearly one third of all government revenues in Kenya were lost in shady deals, embezzlement, unauthorized spending and lax revenue collection, according to a study of the findings of Kenya’s controllers and auditor general’s report from 1990 to 1997.13

Under Moi’s watch, the plunder of the nation’s resources was carried out with impunity and could almost be conceived as the official state policy. There was a steep downward spiral in living standards as the economy floundered, with double-digit inflation rates, escalating unemployment and rising poverty in the country. By the time Moi left office in 2002 the economy was in tatters and the average Kenyan poorer than two decades earlier, with more than 60 per cent of the population living in abject poverty. TRANSITION TO DEMOCRACY: THE ABORTED LIBERATION

Kenya’s transition to a semblance of democracy can be traced back to 1991 when, under intense domestic and international pressure, Moi’s ruling Kenya African National Union (KANU) regime finally conceded a constitutional amendment that paved the way to a multi-party democracy. Under intense domestic and international pressure that forced a number of structural changes, the KANU regime under Moi was facing its toughest challenge, and expended vast amounts of public resources to buy patronage in the ensuing electoral campaigns.

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However, a hopelessly fragmented opposition movement lost the 1992 and 1997 elections to Moi. Needless to say, the ten-year period from 1992 to 2002 witnessed no improvements in the country’s governance despite the reintroduction of plural politics in Kenya. Kenya’s 2002 general elections were historic not only to the extent that this was, effectively, the very first time in the country’s political history that Kenyans were to have their say on the country’s leadership,14 as Moi was constitutionally barred from running for another term in office. This time round the opposition parties managed to form a united front under the umbrella of NARC, which brought together disenfranchised ruling party members as the Liberal Democratic Party of Kenya (LDP) led by Raila Odinga, and an alliance of several opposition parties, as the National Alliance of Kenya (NAK) led by then parliamentary opposition leader Mwai Kibaki. This alliance easily beat KANU’s front runner and Moi’s chosen heir-apparent, Uhuru Kenyatta, with an overwhelming national electoral mandate. Many saw this as a true and final liberation after two failed attempts in 1992 and 1997. NARC came to power under a strong anti-corruption banner. It pledged to deliver on a number of promises including a new constitution, jobs and a fight against corruption and ethnicity. To underscore the new government’s commitment to tackle corruption, President Mwai Kibaki stated during his inaugural speech in December 2002 that: We want every Kenyan who is trustworthy and patriotic to decide that we will fight corruption in all ways and that we will have no sympathy for anyone who will loot public property … corruption will cease to be a way of life in Kenya and I call upon all those members of my government and public officers accustomed to corruption to know and clearly understand that there will be no sacred cows in my government.

To show his seriousness in tackling corruption Kibaki appointed John Githongo, a former director of the Kenyan chapter of Transparency International, to head a newly created government ethics office. Indeed, in the first year the NARC government

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moved to put in place a number of anti-corruption laws including the Anti-Corruption and Economic Crimes Act, 2003 (ACECA), alongside the Public Office (Code Of Conduct) Ethics Act 2003 (POEA). ACECA also led to the establishment of the Kenya AntiCorruption Commission (KACC) and the Kenya Anti-Corruption Advisory Board (KAAB). Citizens approved this strong expression of commitment to fight corruption. People demonstrated their disdain for corruption, and many cases were reported in which passengers in public service vehicles teamed up to confront policemen spotted demanding bribes from bus drivers. The euphoria, however, was short-lived. Within his second year in office questions started arising regarding President Kibaki’s true commitment to fighting corruption as scandals surfaced involving the NARC leadership. NEW RULES – SAME OLD GAME

The evolution from one-party totalitarian state to multi-party democracy failed to address the main issues that to date still provide a fertile environment in which corruption thrives unabated. Through its centralised political and economic structures, the system restricts access to economic resources and other opportunities to those closest to the Big Man, Grosse Légume or the Connection Man, as politically connected business men were known in popular parlance across Africa. This new form of political patronage that has characterised the Kenyan political landscape in the multi-party democratic era has led to the creation of a thick web of domestic and global corruption networks involving banks in offshore financial centres, foreign connections for falsifying official documents and trade transactions, overseas Mafia operatives and other hired mercenaries, through whom the wanton plunder of public resources at the expense of the citizenry continues unabated. Beyond their role as legislators, leaders – as patrons – elected politicians are expected to be providers of development, ranging from expectations to sponsor costly public infrastructure initiatives

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in their constituencies to supporting a plethora of constituents’ personal needs, such as paying for school fees and medical bills. These expectations create a strong impulse and incentive in elected political leaders to accumulate wealth so as to ensure their continuity in power in a country where voter bribery is a well-trodden route to electoral success: ‘he who bribes the most secures the votes’, so goes the saying in Kenya. CORRUPTION AXIS – FRIEND AND FOE

The struggle to consolidate democratic gains is often hampered by powerful corrupt forces that see the widening of democratic space as a threat to their wealth and influence. The fight against corruption requires therefore more than just lip service: it requires a leadership with integrity, determination and the political will and commitment to eradicate the scourge. It also requires strong, independent and well-resourced public institutions with the requisite capacity to undertake their work at various levels, including tax collection and inspection, criminal investigation and prosecution, administration of justice, and also recovery of stolen assets both domestically and abroad. In view of the systemic nature of corruption in Kenya the country has yet to manage a clear break from the past. Many formerly highranking ruling party (KANU) politicians and officials had turned their jackets before the polls until noticing that they were on the losing end. Upon NARC ascending to power, a large number of these were appointed to the new cabinet with powerful ministerial positions despite being named in previous scandals. DEFINING CORRUPTION IN KENYA – FTOM TKK TO GRAND CORRUPTION

The now-defunct Kenya Anti-Corruption Commission defined corruption as: The abuse of power for personal advantage or advantage of another person or group. It can be found in every sphere of life and includes bribery, theft,

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embezzlement, fraud and evasion of payment of government revenue and taxes.

In addition, John Githongo characterises corruption under three heads: Petty Corruption, Grand Corruption and Looting.15 Focusing on the first two of the concepts, we find that the image of corruption in Kenya, both in the public eye, popular parlance and the press has changed from petty to grand corruption. Outright looting involving unconcealed theft, as exemplified by the likes of Mobutu Sese Seko’s rule in Congo/Zaire and Sani Abacha’s rule in Nigeria, is less prevalent today though grand corruption is not any less a perilous affair or serious offence. Petty corruption is infamously known in Kenya as Toa Kitu Kidogo (TKK), a Swahili phrase meaning ‘give me something small’. This form of corruption involves paying undefined fees in return for a public service that is normally available free of charge. Such a fee is paid as an inducement to provide the service, and is payable over and above any prescribed service charges where levied. This form of corruption has become so engrained in the Kenyan society that is has gained acceptability as part of the cost that must be borne. The Kenya chapter of Transparency International (TI) does release an annual report indicating the level of corruption in different public service institutions, and ranking the most affected public services. It is to be noted that TI has consistently ranked the Office of the President as the most corrupt institution. The second form of corruption is referred to as grand corruption. This mainly involves relatively senior government officials or private sector operatives closely involved with the politically powerful. Schemes hatched in grand corruption cases usually involve huge amounts of money from state coffers being paid for services never rendered. Such large-scale scams are accomplished not by one individual but a network involving high-level politicians, state bureaucrats, business people, and a number of both African and foreign intermediaries including lawyers, accountants and wellrespected banks. Because of the huge amounts of money involved

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in grand corruption cases their adverse impact on the economy is often significant and long-lasting. Public debates on grand corruption in Kenya, as elsewhere in many developing countries, have tended to focus on the demand side of the vice, involving corruption takers. Unfortunately, this means that the actions taken by the givers and intermediaries never quite attract the attention they deserve if the problem of corruption is to be eradicated. As the Kenyan case illustrates, many grand corruption cases have often involved not just local actors but also global networks of reputable banks, transnational corporations and individuals from the global North who acts as the perpetrators’ agents. The global anti-corruption campaign organisation, the Tax Justice Network, has kicked off the debate on the geography of corruption by arguing that the global fight against corruption can only be won if as much focus is put on the supply side of corruption as on the demand side. John Christensen states: There is clearly an urgent need for reassessment of what constitutes corruption; how it is perpetrated; and by whom. It is impossible to disagree with those who, whilst deploring domestic corruption involving bribe-taking and kickbacks on contracts, are puzzled by the way in which the corruption debate has focused on the bribe-taking by public officials whilst largely ignoring the role of private companies in offering bribes and kickbacks, and the equally important role of the pinstripe infrastructure which encourages, facilitates and profits from handling the proceeds of criminal activity, including tax evasion.16

The significance played by the offshore interface in perpetuating grand corruption is slowly gaining recognition among leading anti-corruption organisations like Transparency International. In a press release accompanying the 2006 Corruption Perceptions Index results, TI commented: Corrupt intermediaries link givers and takers, creating an atmosphere of mutual trust and reciprocity; they attempt to provide a legal appearance to corrupt transactions, producing legally enforceable contracts; and they help to ensure that scapegoats are blamed in case of detection.17

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This acknowledgement should, however, go a step further and include the role of those who supply such services, which includes supplying secrecy, through offshore shell companies, offshore trusts and similar subterfuges, all of which stimulate the demand side of corruption by offering concealment. A TALE OF TWO SCAMS

Goldenberg – The gold that never was The Goldenberg scandal is perhaps the most-discussed scandal in recent Kenyan history and has preoccupied both the international and national media for over 15 years. At the heart of it is a compensation scheme that was designed in 1991 to promote the export of gold and diamonds, although Kenya has negligible amounts of either. The official motive was to gain hard currency for the central bank by giving an incentive for export companies to repatriate profits in foreign currency in the Kenya Central Bank. The company at the heart of the scandal, Goldenberg International, was able to earn 35 per cent compensation for fake transactions of mineral exports that didn’t exist. The resulting Goldenberg scandal is alleged to have its origins in the then ruling party KANU’s desperate need to buy political loyalty and finance its badly needed electoral win in the 1992 multi-party general elections. The scandal itself is said to have led to a siphoning out of 100 billion Kenya shillings ($1.6 billion) from state coffers, becoming synonymous with the highest level of corruption of the Moi regime. Powerful politicians in President Moi’s government have been accused of complicity in the Goldenberg scandal. The International Monetary Fund and the World Bank suspended $500 million in aid to Kenya in 1997 on the basis that the government was not doing enough to end corruption in the country, citing the Goldenberg scandal as an example. The Goldenberg scandal has become a ghost that simply will not go away. It has been the focus of the country’s longest judicial commission of inquiry and is said to have cost the taxpayer an

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average of 15 million Kenya shillings per month since 2002. Further attempts by the Law Society of Kenya to privately prosecute those involved were thwarted by the Attorney-General who terminated all court cases related to the scam. To date no single person, from the long list of those named to have directly profited from the scandal, has been punished. The Kibaki regime abandoned the war against corruption, pointedly joining forces with the main perpetrators of the scam, thereby rendering it unlikely that any serious steps will ever be taken to bring to book those involved. Former President Moi has since become one of Kibaki’s strongest political supporters, openly campaigning for the former’s re-election during the justconcluded general elections.

Anglo Leasing or Anglo-fleecing The Anglo Leasing scandal, which broke out in early 2004 and still remains unsolved at the time of writing, seriously dented the credibility of the Kibaki government, which had come to power on an anti-corruption platform. The scandal involved the awarding of 18 security-related procurement contracts to fictitious offshore companies, registered in Guernsey, thereby committing the government to pay for goods that were either non-existent or over-priced. These procurement contracts were grouped around a small company in Northern England called Anglo Leasing & Finance, which subsequently was owned by a Guernsey trust. The groundwork for this scandal had seemingly been laid by the outgoing Moi regime by Moi’s networks of high-level corruption, and executed by the incoming Kibaki government. John Githongo, the then government anti-corruption chief, named four senior government ministers as directly involved in the scandal. They included the then vice-president, finance minister, internal security minister, and the then justice and constitutional affairs minister. After unfruitful attempts to get the president to act on this matter and stop further payments, Githongo was forced to flee the country for fear for his life – after receiving numerous threats.

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In a dossier released to the media the anti-corruption chief outlined how politically well-connected individuals and foreignregistered businesses siphoned off billions of shillings. While the cost of the scandal to the public treasury is not known, contracts worth $608 million are mentioned in the Githongo Report.18 Although three government ministers resigned over the scam (all but one were later cleared of wrongdoing and reinstated), investigations seem to be heading nowhere with hardly any prospect of any of the named perpetrators being charged in court. The case remains a mystery. While new information surfaces from time to time, we may never know the extent of this scam. Mars Group, a Kenyan anti-corruption agency, has leaked Investec Trust documents indicating that billions of shillings were laundered through bank accounts in Jersey, Guernsey, Southampton (UK) and Zurich (Switzerland) and distributed to unknown recipients. FOLLOW THE MONEY – CAPITAL FLIGHT FROM AFRICA

Researches have shown that the largest share of the money stolen through corruption finds its way to the North, mostly in tax havens in Europe and elsewhere. The African Union believes that $148 billion leaves the continent annually because of corruption.19 Corruption as described above involves mainly political connections and dealings with the ruling elite. However, even more substantial than this is the extent of commercial corruption, which involves mispricing goods (as in the Anglo Leasing scandal) and issuing fake transactions (the Goldenberg case). While these two cases were linked to financing political campaigns and siphoning money for political elites, business elites fare equally bad when it comes to integrity. In another scandal the Charterhouse Bank was closed by the Central Bank of Kenya in 2006 after it was revealed that Charterhouse had deliberately flouted know-your-client rules and assisted its client, Nakumatt (a supermarket chain), to evade tax and launder money. The loss of revenue to the Kenyan government

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is estimated as $240 million.20 Similar schemes involving transfer mispricing (under- or over-pricing intergroup trade of TNCs) have accelerated significantly. A study of import and export transactions between Africa and the US found that between 1996 and 2005 net capital outflows to the US grew from $1.9 billion to $4.9 billion through the use of low-priced exports and highpriced imports.21 The profits that are thus shifted abroad are then booked in tax havens that have a zero corporate tax rate for repatriated profits. In most cases the ultimate goal of corruption, both political and commercial, is to shift capital out of the country. Capital flight denotes the measurable and visible aspects of international monetary flows. According to recent estimates, the stock of capital flight out of 40 Sub-Saharan African countries between 1970 and 2004 was at $607 billion (including imputed interest earnings), exceeding the debt stock of these countries by a multiple of 2.9.22 It is in this way that we can say that Africa is a net creditor, as more money flows out illegally than is being paid to service the debt. DASHED HOPES

The dust from Kenya’s 2007 general elections is yet to settle. As Kofi Annan, whose mediation efforts managed to pull the country from ruin, pointed out: We must tackle the fundamental issues underlying the disturbances – like equitable distribution of resources – or else we will be back here again after three or four years.

Economic inequality has enabled corruption to thrive, which in turn leads to further inequality. The deep-rooted corruption culture has enabled some groups to enrich themselves, at the expense of the rest of society, thus exacerbating the inequality in the distribution of incomes and wealth. A 2004 study on inequality in Kenya conducted by the Society for International Development (SID) revealed that the top 10 per cent of households control 42 per cent of the income while the

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bottom 10 per cent control less that 1 per cent of the nation’s resources. The regional imbalance was also clear, showing the difference in life expectancy at a staggering 19 years between Kenya’s Central and Nyanza Provinces, to the disadvantage of the latter.23 The political crisis that faced the country after the elections has its root cause in the uneven distribution of national resources and the ever widening gap between the rich and the poor. It is noteworthy that successful regimes have failed to address this problem. Instead, the regimes have opportunistically exploited the people’s desperation, to divide them along ethnic lines and ensure unquestioning support. CONCLUSION

The domestic measures that require the most urgent attention certainly will involve giving Kenyans a constitution they deserve, one which protects the integrity of the democratic process, ensures the separation of powers and ends the sale of sovereignty which have allowed political leaders to engage in business during their political tenure. A public officer should not own a business with any potential conflicting interests. The Kenyan Anti-Corruption Commission needs to resume its work, and be allowed independence, much like the Scorpions in the South African Revenue Services. The resolution of grand corruption, however, will rest equally on the international dimension. Unless we disarm the political and the business elites of the most sophisticated tools of corruption, such as the use of Guernsey offshore trusts and Swiss bank accounts, the scrupulous global corruption networks will remain in place. Furthermore, asset recovery should become a part of concentrated international efforts, either at the International Criminal Court in The Hague, or/and by enhancing the existing conventions against corruption in the UN. This can be done by criminalising the provision of corrupt services in offshore jurisdictions. Such changes will only come through concentrated political pressure, and further international solidarity.

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NOTES 1. C. Achebe, Morning Yet on Creation Day, London: Heinemann, 1975, pp. 44–5. 2. A. Kwei Armah, The Beautiful Ones are Not Yet Born, London: Heinemann, 1968. 3. J. Roitman, ‘Productivity in the Margins: The Reconstitution of State Power in the Chad Basin’, in Anthropology in the Margins of the State, School of American Research Advanced Seminar Series, ed. V. Das and D. Poole, Santa Fe and Oxford: James Currey Publishers, 2004. 4. N. Shaxson, Poisoned Wells: The Dirty Politics of African Oil, New York and Basingstoke: Palgrave, 2007. 5. R. Palan, The Offshore World: Sovereign Markets, Virtual Places, And Nomad Millionaires, Ithaca, NY: Cornell University Press, 2003. 6. P. Chabal and J.-P. Daloz, Africa Works: The Political Instrumentalization of Disorder, Bloomington, IN: International African Institute in association with James Currey and Indiana University Press, 1999. 7. S.K. Akiwaga, ‘Towards a National Movement for Democratic Change in Kenya’, in L. Murungu Mute, W. Kioko and S.K. Akivaga (eds), Building an Open Society: The Politics of Transition in Kenya, Nairobi: Claripress, 2002, p. 14. 8. R. Theobald, ‘So What Really is the Problem about Corruption?’, Third World Quarterly, Vol. 20, No. 3, June 1999, p. 492. 9. B. Karuri, ‘Wrong Policies Blamed for Graft in Government’, The East African Standard, 6 September 2004, http://www.eastandard. net/archives/september/mon06092004/business/bsnew06090404. htm. 10. K. Kibwana, S. Wanjala and O. Owiti, The Anatomy of Corruption in Kenya, Nairobi: Claripress, 1996, p. 125. 11. X. Rice, ‘The Looting of Kenya’, The Guardian, 31 August 2007, World News, Top Stories, Page 1, http://www.guardian.co.uk/ world/2007/aug/31/kenya.topstories3. 12. See http://wikileaks.org/leak/KTM_report.pdf. 13. R. Herbert (ed.), ‘Portrait of Graft in the Moi Era’, e-Africa – The Electronic Journal of Governance and Innovation, Vol. 2, February 2004, p. 9. 14. President Kenyatta assumed leadership of the country at Independence without participating in a competitive electoral process. Upon his death in office in 1978, Moi became his successor without first having to go through a competitive electoral process to elect a president.

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15.

16. 17.

18.

19.

20. 21.

22.

23.

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There were no competitive presidential elections throughout Kenya’s single-party era, making 1992 the first time that Kenyan presidential elections had been competitively contested. But even then, as in the 1997 elections, Moi used his incumbency to his unfair advantage over his competitors to retain office. J. Githongo, ‘Fighting Corruption: An Institutional Approach’, paper presented at the Institute of Certified Public Secretaries of Kenya (ICPSK), Discussion Forum on Corruption. Nairobi, 22 February 2001. J. Christensen, Mirror, Mirror on the Wall, Who’s the Most Corrupt of All?, Nairobi: World Social Forum, 2008. Transparency International, Corruption Perceptions Index 2006 Press Conference, Berlin: Transparency International, accessed at: http://www.transparency.org/news_room/in_focus/2006/cpi_2006_ _1#pr. J. Githongo, Githongo Report on Graft in the Government of Kenya, 22 November 2005, available at: http://news.bbc.co.uk/1/shared/ bsp/hi/pdfs/09_02_06_kenya_report.pdf. UK Africa All Party Parliamentary Group, The Other Side of the Coin: The UK and Corruption in Africa, London: Houses of Parliament of the United Kingdom, 2006, p. 14. T. Mogusu, ‘Charterhouse Distances itself from Money-laundering Claim’, The Standard (Kenya), 24 June 2006. S.J. Pak, ‘Estimates of Capital Movements from African Countries to the United States through Trade Mispricing’, paper given at a tax research workshop at University of Essex, Colchester, 7 July 2006. L. Ndikumana and J.K. Boyce, New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options, Political Economy Research Institute Working Paper Series, No. 166, Amherst: University of Massachusetts Press, April 2008. Society for International Development, Pulling Apart: Facts and Figures on Inequality in Kenya, Nairobi: SID Eastern Africa Regional Office, 2004, p. vii.

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Part III Better Public Expenditures

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9 THE MYTH OF DEVELOPMENT AID Lou Keune

In the 1960s Harry Magdoff told us to compare the amount of development aid with the transfers of value from the South to the North: debt servicing, repatriation of profits and losses owing to the deteriorating terms of trade of the so-called developing countries.1 Since then this issue has drawn my attention. On several occasions I have tried to strengthen Magdoff’s argument by making calculations of some real-value flows. The latest were published in 2005.2 Magdoff focused on flows of money, including those related to trade relations. In this chapter I have added another category, inspired by the discussions about the severe and worldwide ecological deterioration. The North is responsible for major environmental damage, though its consequences are felt first and foremost by the peoples of the South. Therefore this can be considered an issue of South–North transfers. The great majority of these transfers only have the character of use value as they are not paid for with money. With reference to one of the fields of ecological deterioration, the exploitation of the biological capacity of the Earth, I have included the most recent data of overshoot. And for the sake of the argument I give a very rough indication of the money value of that overshoot. DEVELOPMENT COOPERATION: SUCCESS OR FAILURE?

This chapter discusses one of the myths about development cooperation: ‘The North is helping the South.’ Is it really true that the North is helping the South? There are several reasons why it is 189

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important to find an answer to this question. The most important of them is that since the start of development cooperation in 1948 with the famous Point Four of Harry Truman, the results of that endeavour are not very positive. Of course, living conditions have improved enormously in Third World countries. Life expectancy has risen and illiteracy has fallen. But for what reason? Thanks to the assistance of the North or thanks to the initiatives of the people and institutions in those countries? Success has many parents! At the same time one has to recognise that despite the many programmes and projects, at least two major problems dominate the picture. One has to do with poverty. About 40 per cent of the world population has to live with an income lower than $2 per person per day.3 That is a situation of which nobody can be proud. Of course, the argument given by the World Bank and the IMF is well known: the share of the very poor in the total world population is falling, and more and more very poor people are being lifted out of poverty. However, these findings have to be put into perspective. First, ‘one dollar a day’ refers to the purchasing power in New York, let’s say enough to buy a newspaper.4 So, in US dollars it is much less in most developing economies.5 Secondly, what does it really mean when a person’s income rises from $1.8 to 2.1? The very poor continue to be very poor. The third aspect is that of the growing inequality. More and more reports, including the 2007 IMF World Economic Outlook, indicate that at the global level and in most individual countries income inequality has risen. The 2005 Human Development Report illustrates this inequality with the ‘champagne glass economy’ graphic in Fig. 9.1.6 This growing inequality fosters among the poor an awareness of poverty. It stimulates, on the one hand, positive aspirations to better conditions of living, and at the same time, in case of enduring poverty, the negative expectations about the immediate and mid-term well-being. This leads to the well-known growing gap between aspirations and expectations. Fourthly, modern times make higher demands on people. Survival includes nowadays a broader basket of goods and

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Richest

Poorest Per capita income

Figure 9.1 World income distribution by percentiles of the population, 2000. (Source: Y. Dikhanov, Trends in Global Income Distribution, 1970−2015.)

services, for example, telecommunications, health services, formal education, sewage systems, etc. So, an income of one dollar a day per person in 2006 is in real terms much less then one dollar in 1950, even in conditions of a comparable purchasing power. Fifthly, how are incomes calculated? The figures about income as presented by the World Bank, the IMF, UNDP or UNCTAD are based on household expenditure surveys, or on the commonly used calculations of gross domestic product – GDP. However, research by a great number of economists including Daly,7 Goudzwaard and De Lange8 and Hueting,9 has demonstrated that these indicators do not correctly reflect the levels of welfare. Something is missing here! Many social and environmental costs and also some outputs as the products of unpaid labour – like private household work – are not included. But these deteriorations and outputs do affect life severely. To give but one example: Brent Bleys has calculated that when a more appropriate method

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is used, like ISEW (Index of Sustainable Economic Welfare), the national income of the Netherlands fell by around 60 per cent in 2004.10 What would be the results of applying the ISEW in cases of developing economies that suffer far more from ecological deterioration? There is also a question concerning the survival of nature. Resulting from the worldwide discussions about climate change, peoples and governments are becoming more conscious about the ecocide that is threatening mankind and nature. Calculations made by UNEP (United Nations Environment Programme) and the WWF (World Wildlife Fund) demonstrate that the biological diversity has been going down since the 1970s by approximately 30 per cent. This is illustrated in Fig. 9.2, the Living Planet Index.11 1.8

Index (1970 = 1.0)

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

1960

1970

1980

1990

2000 03

Figure 9.2 The living planet index, 1970−2003.

With regard to the ecological footprint the WWF speaks of an overshoot of the biocapacity by about 25 per cent in 2003, see Fig. 9.3: Humanity’s Ecological Footprint.12 It is well known that the daily life of the poor is more affected by ecological degradations than the life of the rich or the middle classes.13 So it is rather problematic to speak about the success of development cooperation. To explain the failures many elements can be put forward. One can concentrate on internal conditions

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1.8 Number of planet Earths

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

1960

Figure 9.3

1970

1980

1990

2000 03

Humanity’s ecological footprint, 1961−2003.

of developing economies such as bad government or traditional value systems. Other explanations are sought in the quality of the development aid, for example, the domination of Western culture, the decisive influence of the basic self-interests of donating countries, or the lack of continuity. Recently more attention has been given to the negative consequences of free trade.14 In the following section it will show that the flow of values from the South to the North, or the reversed development aid, is underestimated. REVERSED DEVELOPMENT AID

Is the North really giving aid to the developing economies? When one looks at reports and statistics submitted by institutions such as the World Bank, the OECD, UNDP, the EU and others, there is a huge and rather convincing stream of data underlying the thesis that the South is receiving aid. Moreover, the concept of development cooperation includes not only ODA and the funds submitted by the numerous NGOs, but also the transfer of funds by private enterprises in the form of loans and investments. These transfers are real and there are reasons to say that the North is giving a hand. But generally, these reports do not include data on what the developing countries really receive, nor do they say anything on

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the magnitude of the possible reversed streams. I have made some calculations of the reversed development aid. As in the case of Magdoff I have concentrated on the flows of monetised values, or what with reference to Magdoff’s companion Paul Sweezy15 could be called the priced exchange values and financial capital. But another approach is possible. The following analysis is limited to three examples of monetised flows: trade, loans and foreign private investments. There are of course more examples of monetary flows between the North and the South, for instance tax, evasion to tax havens,16 or remittances by migrant workers. Another category has to do with use values as attached to real human and natural resources. Generally speaking, the transfer (or withdrawal) of use values from the South to the North does not receive much attention. But since the fast-growing number of reports and other publications about ecological exhaustion, the damage caused in developing economies by (northern) overproduction and overconsumption is getting more attention. Therefore some observations on this subject will be presented. Most data are presented for the period 1980–2006.17 Groupings of developing economies and other concepts are used as defined by UNCTAD.18

Terms of trade The meaning of the term ‘development cooperation’ broadened during the second half of the last century. Originally it referred to development aid and the cooperation between national and international actors involved in designing and implementing development programmes. Especially during the 1960s and 1970s, a lot of attention was paid to various bottom-up strategies such as self-help programmes, primary education, community development, the cooperative movement, intermediate technology and land reform. From the first UNCTAD Assembly in 1964 more attention was paid to world trade, in particular to the contribution it could make to the development of countries in the South. ‘Trade, not aid’ became the motto. It reflected the new governing model, that of ‘export-led economic growth’. Actually this is still the

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dominating model, including the assumption that free world trade is the best tool for economic growth. Nevertheless, more and more people doubt the rightness of this way of thinking as each day many examples are illustrating that this form of internationalisation can have destructive consequences. Within the debate about the role of international trade attention has been given to the deteriorating terms of trade of developing countries. 19 The criticism includes the argument that such deterioration implied a growing imbalance in the interchange of use values: the South has to export, in relative terms, more and more use values so as to be able to import use values from the North. According to UNCTAD,20 the terms of trade of all developing countries have gone down slowly during the years 1980–2006, although during the last three of these years one can observe some improvement: see Fig. 9.4. 140% 2000 = 100%

120% 100% 80% 60% 40% 20% 0% 1980–2006

Figure 9.4 Terms of trade indices: all developing countries.

As said, the deterioration of the terms of trade is slow. Nevertheless it is of great importance because of the fast growth of world trade, including the international trade of developing economies. It is possible to calculate the implications of this evolution by comparing the actual monetary value21 of the actual exports and imports22 with the original values supposing the relative prices of that trade would not have changed. Figure 9.5 shows the results based on data from UNCTAD: from 1982 onwards we see a negative balance, which is overwhelmingly

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US $ millions; current values

caused by the falling export prices. That negative balance grows to enormous proportions at the end of the 1990s. 600000 400000 200000 0 –200000 –400000 –600000 –800000 1980–2006 Difference

Exports

Imports

Figure 9.5 Terms of trade − gains (+) or losses (-): all developing countries.

This figure presents the data at a high level of aggregation, that of all countries that are labelled by UNCTAD as developing economies. In Table 9.1 the results are summarised for the whole period and differentiated for the total of developing economies and for three sub-groupings: major exporters of manufactured goods, major oil exporters, and the least developed countries. Table 9.1 Terms of trade: gains and losses (US$ millions, current values, 1980–2006) All developing Major exporters Major Least economies of manufactured exporters of developed goods petroleum countries Exports Imports Difference

–4.632.615 –496.662 –5.129.276

–4.707.532 2.097.072 –2.610.460

–1.169.849 –1.552.620 –2.722.469

–435.059 166.580 –268.479

All the groups of developing countries have a negative balance of effects of the change in terms of trade.

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Comparing these results23 with the flow of ODA we get the results shown in Table 9.2. This table makes clear that the losses caused by the deteriorating terms of trade are enormous when compared with the ODA in the same period. Only in the least developed countries can a slightly positive balance be observed. Table 9.2 Terms of trade gains and losses: official development aid (US$ millions, current values, 1980–2005) All Major exporters Major Least developing of manufactured exporters of developed economies goods petroleum countries Terms of trade –4.898.546 gains and losses ODA 1.528.050

–1.957.425

–2.895.955 –260.016

242.306

188.422

386.387

Debt

US $ millions; current values

As shown in Fig. 9.6, total external debt of developing countries is still growing.24 1400000 1200000 1000000 800000 600000 400000 200000 0 1980–2003

Figure 9.6

Long-term debt: all developing countries.

Nevertheless, as Fig. 9.7 shows, during most years the total of debt service25 of developing countries exceeded the disbursements of new loans.26 This means that these countries are financing the received loans themselves, and even more than that.

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US $ millions; current values

400000 200000 0 –200000 –400000 1980–2004 Difference

Disbursments

Debt Service

Figure 9.7 Disbursements of loans, debt service, long-term debts: all developing countries.

As can be seen in Table 9.3, this overshoot occurs at almost all levels of aggregating developing economies. The exceptions are the non-major exporters of petroleum or of manufactured goods, among them the LDCs (Least Developed Countries). But LDCs do themselves finance the major part of the loans they receive. So, the question that arises is: who is giving aid to whom?

Foreign direct investment Foreign private capital and especially foreign direct investment is more and more considered as having a significant importance for the development of poor countries. It is linked to the possibilities of international business to modernise the economies of the South, to offer credit, create employment and increase the proceeds of foreign currency. Thus the term ‘development cooperation’ came to include not only world trade but also investments and loans by international business, as well as traditional developmental aid. So, the next category of financial flow to be considered concerns foreign direct investments in developing countries. These are related to profits draining from those same countries, the ‘investment income’. Figure 9.8 presents the data for the same period.27 Again with regard to these categories one can speak of a negative balance. Taking the period as a whole, developing countries are losing more in investment income than they receive in foreign direct investments. Only the major exporters of oil or manufactured goods present a slightly positive balance: see Table 9.4.

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502.821 –683.528 –180.706

1980–2004 Major exporters of petroleum 1.026.362 –982.550 43.812

Non-major exporters of manufactured goods or petroleum

1.670.656 –1.908.231 –237.575

325.831 –497.909 –172.078

720.766 –743.826 –23.060

Foreign direct investment, net Investment income Difference

1.842.056 –1.958.899 –116.843

All developing economies

88.642 –56.528 32.114

1.268.482 –1.123.327 145.154

127.790 –107.931 19.858

445.785 –727.642 –281.857

39.264 –95.625 –56.360

Major exporters Major exporters Non-major exporters Least of manufactured of petroleum of manufactured goods developed goods or petroleum countries

Foreign direct investment, net; investment income (in million dollars, current values, 1980–2005)

Disbursements 2.717.252 Debt service –3.150.536 Difference –433.284

Table 9.4

2.094.972 –2.391.896 –296.923

Major exporters of manufactured goods

1990–2004 All developing Major exporters of Major exporters Non-major exporters of Least developed economies manufactured goods of petroleum manufactured goods or petroleum countries

3.624.156 –4.058.544 –434.388

All developing economies

Disbursements of loans, debt service (in million dollars, current values, long-term debts)

Disbursements Debt service Difference

Table 9.3

US $ millions; current values

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200000 0 –200000

1980–2005 Difference

Foreign direct investment-net

Investment Income

Figure 9.8 Foreign direct investment (net), investment income: all developing countries. OVERSHOOT OF BIOCAPACITY

As shown by the graphics of the WWF, mankind is using the resources of the Earth in such a way that the reproduction of natural resources is lagging behind. According to the LPR 2006 (Living Planet Report), the overshoot amounts to about 25 per cent of the biocapacity. The footprint of the total world population was in 2003 14.1 billion gha.28 Based on estimates of the conditions of sustainability, only 11.2 billion gha was permitted. So, the overshoot amounts to 2.9 billion gha.29 That is an enormous amount. Who is responsible for that overshoot? The LPR gives very clear data, showing that the great majority of developing countries, including the most populous like China, India, Indonesia, Pakistan and Nigeria do have an ecological footprint per capita below the level of sustainability: 1,78 gha. And all the countries known as high-income countries – including some developing countries like the Arab oil states – and also many of the middle-income countries – including developing countries like Brazil and Venezuela – show an ecological footprint above or far above the level of 1.78 gha. What should be taken into account is that a high ecological footprint in countries like the Netherlands or the US does not mean that those populations use only natural resources from within the boundaries of those states. All resources used are listed, including those coming from developing countries. And yet the people living in these countries are affected by the withdrawal of resources

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by the overshooting countries. The conclusion is that there is a massive flow of natural values from the South to the North. How does this relate to the flow of official development aid? Is a comparison possible? We know the total sum of ODA in 2003: $56 billion.30 But we don’t know the monetary value of the ecological overshoot. Just for the sake of the argument, let’s find a price of a hectare. For instance, the price of a hectare of agricultural soil near Timisoara, Romania. Why not? That price is 1300 euros,31 or $1950. It means the monetary value of the ecological overshoot is $5.655 billion or one hundred times the value of ODA. Of course, this way of calculating does not merit the Nobel Prize. But it helps to illustrate the argument: the withdrawal of natural resources from the South to the North through the system of ecological footprints is of greater value than ODA and all other monetary transfers from the rich to the poor. CONCLUSION

Since President Harry Truman, much has been said and done about development cooperation. Great words and many billions of dollars, euros and yen have been spent in order to reduce the severe poverty of billions of people. During those same 60 years, many positive results have been obtained in fields of health, education and infrastructures. Yet, problems of poverty and ecocide have grown dramatically. Who is to praise or to blame? What we can say is that the evolution of the international economic relations between the North and the South have led to huge flows of reversed development aid. Reversed, because intensified worldwide relationships in the fields of trade, loans and private direct investment have led to transfers from the South to the North and these transfers are much greater than all transfers from the North to the South. Moreover, the transfers of use values like nature32 have a combined value that is incomparably larger than all development aid and it is caused mainly by overconsumption in the North. There is a fundamental misunderstanding about what is really going on within the South–North relationships. Instead of being

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givers we in the North are takers from the South. We should start to recognise our real position in this globalised world. NOTES 1. H. Magdoff, The Age of Imperialism – The Economics of U.S. Foreign Policy, New York/London: Monthly Review Press, 1969, chapter 4. 2. L. Keune, ‘Development Cooperation: A Hindrance for SelfSustainable Development’, Tailoring Biotechnologies, Vol. 1, No. 2, Winter 2006. 3. UNDP, Human Development Report 2007/2008, New York: UNDP, 2007, p. 25. 4. ‘Living on $1 a day does not mean being able to afford what $1 would buy when converted into local currency, but the equivalent of what $1 would buy in the United States: a newspaper, a local bus ride, a bag of rice.’ UNDP, Human Development Report 2003, New York: UNDP, 2003, p. 41. 5. According to D. Woodward and A. Simms, Growth Isn’t Working: The Uneven Distribution of Benefits and Costs from Economic Growth, London: New Economics Foundation, 2005, p. 1; $1 a day in New York is equal to $0.20 to 0.70 in most developing countries. 6. UNDP, Human Development Report 2005, New York: UNDP, 2003, p. 37. 7. H.E. Daly, Uneconomic Growth: in Theory, in Fact, in History, and in Relation to Globalization, 1999. 8. B. Goudzwaard and H. de Lange, Beyond Poverty and Affluence: Toward an Economy of Care, Geneva: Eerdmans Grand Rapids/ WCC, 1995. 9. R. Hueting, New Scarcity and Economic Growth, Amsterdam: North-Holland, 1980. 10. B. Bleys, A Simplified Index of Sustainable Economic Welfare for the Netherlands, 1971–2004, Brussels, Vrije Universiteit Brussels, March 2007, p. 22. The ISEW includes losses, such as non-paid ecological and health damage, and productions, for example, non-paid private household work (feeding, cleaning, nurturing, etc.). 11. WWF, Living Planet Report 2006, Geneva: WWF, 2006, Figure 1. 12. Ibid., Figure 2. 13. See, for example, UNDP, Human Development Report 1994, New York: Oxford University Press, 1994, chapter 1, and UNDP, Human Development Report 2007/2008. 14. For example, Christian Aid, The Economics of Failure: The Real Cost of ‘Free’ Trade, London: Christian Aid, 2005, p. 2.

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15. P. Sweezy, The Theory of Capitalist Development: Principles of Marxian Political Economy, New York: Monthly Review Press, 1968. 16. Including tax evasions to countries like the Netherlands. See: F. Weyzig and M. van Dijk, Tax Haven and Development Partner – Incoherence in Dutch Government Policies?, Amsterdam: SOMO, June 2007. 17. Depending on the availability of data. 18. UNCTAD, Handbook of Statistics, Geneva: UNCTAD, 2007. 19. See, for example, UNCTAD, Trade and Development Report 2005, Geneva, UNCTAD, 2005, chapter III. 20. UNCTAD, Handbook, 2007, Table 4.2. 21. See the value indices in ibid., Table 4.2. 22. Ibid., Table 1.1. 23. 2006 figures are not included. 24. UNCTAD, 2005, Table 6.6, including public and private longterm debt. According to the World Bank, total debt of developing countries amounted in 2005 to $2.742 billion, of which 78 per cent was long-term debt. See: Global Development Finance 2007, The Globalization of Corporate Finance in Developing Countries. II, Summary and Country Tables, Washington, DC: World Bank, 2007, Table 2, p. xxxv. 25. Long-term debt service payments are the sum of principal repayments and interest payments in the year specified. 26. UNCTAD, Handbook of Statistics, Geneva: UNCTAD, 2006, Table 7.7. Data derived from balances of payments of developing economies. 27. See UNCTAD Handbook, 2007, Tables 7.1 and 7.2. These data, derived from balances of payments of developing countries, do not refer to all developing countries as data are missing for some countries. As far as foreign investments are concerned, only direct investments are included. 28. Global hectares (gha): hectares with world-average biological productivity, WWF, Living Planet Report 2006, p. 38. 29. Ibid., p. 14. 30. UNCTAD Handbook, 2007, Table 7.6. 31. http://www.speurders.nl/zakenentransacties/veeteelt/34218809/ roemeni. 32. The transfer of human use values in the form of migration has not been included. It could be interesting to recalculate the figures presented by A. Gorz in his article, ‘Immigrant Labor’, New Left Review, Vol. 61, 1970, pp. 28–31.

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10 PUBLIC FINANCE FOR GLOBAL PUBLIC GOODS Dries Lesage

Since the end of the 1990s the term global public goods (GBG) showed up as a new paradigm to deal with global issues. Apart from academic work, the term appears more and more in official documents of certain governments and international organisations.1 But the concept has not yet been generally accepted. It still meets major obstacles. In this chapter I will argue that the controversial concept provides considerable value-added for progressive global governance. It entails a number of far-reaching political–philosophical consequences, including for public finance. This way, it gives a concept as world public finance more sense. The first section critically evaluates the concept of GPG and situates it within global governance discourse and thinking. Subsequently, its relevance for world public finance is discussed, through the lens of global environmental goods. This contribution is written from the perspective of expenditures, not revenues. Of course, both dimensions cannot always be completely separated. For discussions on international tax policy and global taxes refer to other chapters in this volume. THE RELEVANCE OF A NEW CONCEPT

What are global public goods? GBG are goods that can be consumed by the entire world community and in principle also by future generations, in a 204

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non-rival and non-exclusive way. Non-rival means that the consumption by one does not endanger the consumption by others. Non-exclusive implies that nobody can be excluded from consumption.2 Examples are international law, financial stability or peace, analogous to roads, police or the justice system in a national context. A typical category is the global commons, that is global environmental goods like the ozone layer, biodiversity or a stable climate. Private goods are rival and exclusive. In reality most goods should be set on a continuum between public and private. If users have to pay partly for public transportation, it is not completely non-exclusive anymore. With regard to the natural fish stock, consumption always implies some rivalry. In some cases, the problem is not consumption of the good as such, but damage to it through economic activities. An example is greenhouse gas emissions leading to climate change. Such issues can be tackled by assigning maximum polluting rights that can be traded (‘cap and trade’), which ideally goes along with natural regeneration of the threatened global commons. The place on the continuum between public and private mostly depends upon societal choices, made through political struggle. Goods such as drinking water or knowledge can be made public or private to various extents. There is no fixed list of GPGs. According to the conventional definition of GPGs, the public character relates to the consumption side. Theoretically, private actors can produce or finance public goods. Examples are volunteer work to the benefit of the entire society, or cultural initiatives sponsored by the private sector. In many cases, however, the private sector has no interest in providing goods that cannot be made sufficiently exclusive, unless the private sector is paid for it as subcontractor of the public authorities. In most cases it is the government that produces or finances public goods.

The significance of GPGs in today’s international diplomacy The concept of GPGs or ‘international public goods’ has already existed for a long time in political science literature. The hegemonic

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stability theory contends that the hegemonic superpower, partly for the sake of its self-interest, provides a number of GPGs such as a liberal trade regime and a reserve currency.3 The breakthrough of the concept GPG as a universal policy project is from a much more recent date, more precisely the end of the 1990s. The epicentre of this movement is without doubt the UNDP, which published in 1999 a seminal book on GPG.4 Under the aegis of this group, a broad range of studies has appeared since. UNDP also coordinates the gpgNet, an internet forum for debate on all aspects of GPG.5 International organisations such as the UN, the EU and the World Bank regularly refer to the concept in their documents. The EU undertook serious efforts to have it officially adopted in the conclusions of the 2002 UN Conference on Financing for Development in Monterrey and the 2002 UN World Summit on Sustainable Development in Johannesburg. These proposals were rejected by the US, Japan and the G77, among others. These states did not want to subscribe to a concept of which the political consequences are hard to predict. In addition, the G77 was concerned about a possible diversion of aid flows towards less direct priorities.6 Because of this deadlock, UNDP, the French and Swedish governments started up the International Task Force on Global Public Goods in 2003 to keep the concept alive. In 2006 the Task Force issued a meritorious final report.7 The Task Force received the support of the European Commission and a number of EU member states. Partly as a result of this process countries like Germany and the UK started to integrate the concept into their development assistance policy.8 In the meantime the concept also gained ground among social movements and progressive political parties.

Weaknesses of the mainstream GPG discourse Notwithstanding the undisputedly historical merit of its advocates to have put it high on the international agenda, until now the concept has only engendered limited enthusiasm. Currently, concepts such as sustainable development, good governance, corporate social responsibility or the Millennium Development

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Goals do mobilise more among political, business and NGO circles. Maybe the GPG concept is too abstract and academic. Classically taught economists can use it, but for others it does not unleash much emotion or political energy. Another criticism is that the concept is rather vague – and therefore quite elastic – and hard to operationalise.9 But is it a disadvantage? In my opinion, more problematic is the marked mainstream nature of the conventional GPG discourse – that is, coming from UNDP and the Task Force. In a discourse-analytical study Coussy points out that the conventional GPG discourse to a large extent makes use of the same language and concepts as neoclassical economics, the liberal mainstream approach in economic science, although actors such as UNDP and the French government are known for their critical posture vis-à-vis neoliberalism and the Washington Consensus. Most texts are characterised by an economic, technocratic, a-ideological and even a-political language. Ideological controversy, let alone confrontation, is systematically avoided. This can be seen as a discursive tactic to smuggle alternative views into the dominant ideological framework through the language of the hegemonic elite. Indeed, the GPG project entails some consequences in the direction of more interventionist governments, more regulation and possibly more taxes and redistribution – ideas that are heavily contested by hegemonic elites these days. Yet, this move has not been an obvious success. The attachment to the neoclassical idiom can help to make the concept acceptable within particular powerful circles, but it will not mobilise the public opinion, nor is it a counter-hegemonic discourse, which would be most welcome. Nevertheless, the concept still has a very interesting potential. THE POTENTIAL OF THE GPG CONCEPT

The end of national sovereignty The concept entails a number of highly interesting political– philosophical consequences that deserve more attention. Highlighting these could cause some tension with neoliberally

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inspired governments and institutions, as well as isolationist forces, but here it is argued that an open and explicit debate along these cleavages could render the GPG concept more relevant and mobilising. First, the concept suggests the existence of a world community. A world community supposes mutual dependence, which is hard to escape in a context of globalisation. A powerful image is that of Spaceship Earth. The world population is locked up in a closed sphere, in which the scarce and/or fragile global commons are managed in a good or bad way. Apart from this tangible and inescapable interdependence, the GPG project requires that the idea of world community is mentally lived up to in several social realms. It is an element of mental and social construction, and of political struggle, to which the GPG concept makes a contribution. So it is hoped that the world community will not only embrace the global commons, but for example also a powerful human rights regime as a genuine global public good, based upon mutual dependence and solidarity. A second, more implicit consequence is the existence of fundamental individual rights. GPGs are there for all people. The fundamental individual rights follow automatically from the fact that someone is a human being. In line with the notion of ‘World Society’, put forward by some English School theorists,10 the rights of individuals take precedence over the rights of states. In the notion ‘International Society’ the rights of sovereign states are predominant. Between both logics, for instance, in the case of human rights violations in a domestic setting, there are tensions, but the GPG concept clearly chooses a position. This leads us to a third consequence, the existence of a global responsibility to guarantee GPGs. Who bears that responsibility? The most logical answer is all citizens of the world, all with their fair share of the responsibility. In other words, the world community has to assume final responsibility and is accountable for that. In practice, states are the principal instruments to realise GPGs. They possess the monopoly of violence and taxation, and are as such the most powerful political actors. Because of a number of insurmountable obstacles, a ‘world state’ is not thinkable in the foreseeable future. Moreover, states claim responsibility over

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a specific territory and a broad range of policy realms, so that from a democratic viewpoint they bear the largest responsibility and are the most accountable. The GPG concept and the ensuing global responsibility affect state sovereignty in a double way. First, states are obliged to contribute a fair share to GPGs on and from their own territory. Secondly, when a state fails to do so, the other states are supposed to intervene on behalf of the world community. In the real world these principles are only carried through to a limited extent. In 2005 the UN approved the principle of ‘responsibility to protect’. It implies for the world community the duty to intervene in case of genocide, war crimes, ethnic cleansing and crimes against humanity, also when these take place within a purely domestic context.11 The ICC (International Criminal Court) applies a procedure through which a citizen of a state that has not ratified the ICC statute can be pursued by the ICC, also for crimes and/or victims in a state that has not ratified the ICC statute; one important condition is approval by the UN Security Council.12 For the rest states enjoy ample freedom. For a lot of GPGs, such as climate stability, there are no strong commitments. For others, international treaties or agreements are not accompanied by powerful enforcement mechanisms. On their own territories states can undermine GPGs in an undisturbed way. They are even able to unilaterally jeopardise GPGs for other states (for instance, climate, biodiversity and financial stability). In limited cases states can feel hindered by possible loss of reputation or retaliation measures, apart from legal provisions. But both legally and politically a quite extreme interpretation of national sovereignty remains the norm in world politics. In its turn, the GPG logic here presented can be called quite extreme. It would mean that if the US does not do enough to reduce greenhouse gas emissions, Malaysia allowed a number of animal and plant species to go extinct, or China violates particular human rights, the rest of the world has the duty, even in the absence of treaties ratified by the concerned countries, to intervene and de facto set aside sovereignty, for example, by means of tough economic sanctions. In the ecological sphere a question is

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whether the concept of global commons should not be extended. On Spaceship Earth natural resources are limited. Is it appropriate, then, that scarce and geographically very concentrated commodities such as petrol and natural gas are the property of particular states or firms? The non-intervention and sovereignty principles that lasted for centuries would be significantly downgraded. Such a revolution in international politics would not be without risks, and would cause a lot of international tensions. The new principle could also be used to legitimate less ethically driven interventions. For that reason, it is not probable that in the foreseeable future the GPG principle will be applied, but a political project could consist of efforts to integrate part of this radical thinking into international political practices. The ways global governance and GPGs are realised are the object of political struggle. But is the possibility of a less favourable outcome of this struggle from one’s specific viewpoint a reason to distrust the concept as such? For this reason an isolationist or sovereignist undercurrent with both rightist and leftist variants in many countries in the North and South is opposed to no matter what supranational dynamic, because no global governance is better than bad global governance, the latter being a risk never to be excluded. But this approach underestimates the nature, size, complexity and urgency of the global problems, which cannot be tackled without close global cooperation based upon the idea of world community. Some international tension as a result of mounting pressure on the non-intervention principle is an unavoidable side effect. To summarise: the GPG concept conceals a revolutionary rethinking of international politics and global governance. Because this point is so sensitive, it is hardly made explicit in mainstream GPG literature. But my hypothesis is that making this explicit would give the GPG concept more mobilising power. ‘GLOBAL COMPASSIONATE CONSERVATISM’ VERSUS ‘GLOBAL WELFARE STATE’

The mobilising power of the GPG concept will be reinforced by presenting it as one of the cornerstones of a broader, coherent

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vision of global governance. GPGs, world community, fundamental individual rights and global responsibility evoke a salient parallel with common conceptions of the national state. In a national state the national government – with its three powers – delivers a number of national public goods. Within the national borders there is a national political community bearing responsibility for fundamental individual rights. In democratic states the national government is accountable for the latter. A typical function of a national government is to keep oversight. This implies that it detects and resolves gaps with regard to public goods – that is, final responsibility – and maintains coherence between different policy domains. A model of global governance could be based upon the same principles, as Coolsaet and Arnould proposed in their report on global governance on behalf of the Belgian Royal Institute for International Relations. The aim is not a ‘world government’, but a global governance architecture that by and large assumes the same functions as a government, that is guarantees a series of democratically established GPGs.13 This also presupposes final responsibility and surveillance of coherence. Because of coherence, but also legitimacy considerations, it is recommendable that the multilateral UN system is the linchpin of this global governance model. We can refer to it as the ‘Global Welfare State model’, as it comprises a relatively broad and ambitious range of GPGs, corresponding to the goals of an advanced welfare state – law and order, extensive public infrastructure, accessible and highquality education and healthcare, poverty alleviation, ecological sustainability, but also full employment and the necessary redistribution for social cohesion. In this model global institutions and regimes provide an enabling framework and intervene where states fail. Both for effectiveness as legitimacy it is important that the subsidiarity principle is applied. The macro-regional, national and local levels bear their just part of the responsibility. Macro-regions become more and more important as enabling and supporting frameworks. The states remain the central actors, as most important entities within multilateral institutions and regimes, and as the principal public authority of citizens.

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Democratic states represent their citizens in a universal manner, and therefore have the privilege to carry further the monopoly of violence and taxation – and public finance – on to the global level through an intergovernmental method. Because of the pivotal role of states, an important function of multilateral institutions is to support national capacity-building, so that states themselves are able to conduct a substantive and coherent policy on their own territory for national and global public goods, rather than that global institutions themselves develop a multitude of concrete projects on the ground – which from time to time goes along with a loss of coherence. The current model of global governance hardly corresponds to the model sketched above. This is not the place to make an overall analysis of today’s global governance.14 The essence is that nowadays there is no supranational arrangement that keeps oversight and assumes final responsibility. Because of unilateralist and isolationist tendencies the UN is not allowed to fully take up this task. Meanwhile, national states are still failing to do what is necessary for GPGs. They are either weakened too much – because of civil war, corruption, devastating neoliberal adjustment, international competitive pressure upon regulation and taxation – or they have chosen not to intervene intensively in society and in the economy, at the expense of GPGs. The potential central role of the multilateral UN system, which could never flourish during the Cold War era, is also eroded by the more prominent role of institutions such as the IMF, the World Bank and the WTO, which formally or actually do not depend on the UN decision-making bodies, as well as geographically selective institutions such as the G8, OECD and NATO (North Atlantic Treaty Organisation) that more and more claim global responsibilities. Note that the World Bank through its projects and advisory work deploys a lot of activity in realms such as the environment, health and taxation, in a way that downgrades the UN. Western-dominated organisations like the G8, IMF, World Bank and OECD are the core of new network institutions such as the Financial Stability Forum and the International Tax Dialogue.

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At the same time non-state actors become more and more important in global governance. As such, this is not incompatible with the Global Welfare State model, provided that their activities fit into contours democratically established by governments within the multilateral UN system. This is not always the case. A spectacular phenomenon of the last 15 years is the boom and proliferation of global public policy networks, that is, horizontal partnerships of governments, international organisations, multinational corporations, NGOs, academia and other actors that try to assume various global governance functions. Some of these networks are integrated within the UN system, others are not. Although this method carries with it important advantages, such as flexibility and the potential capacity of non-state actors, a number of negative effects are associated with it. The literature mentions weak accountability, arbitrary composition, unwarranted biases from members and donors following from their specific perspectives or interests, uncertain financing, duplication of work and gaps.15 For the latter two problems the networks are not to blame. But there is a lack of political coordination at other levels. Against the backdrop of our Global Welfare State model, global public policy networks as such can hardly be presented as the hopeful alternative for multilateralism in crisis, notwithstanding the valuable complementary role they can play. Yet, this is the tone of some apologetic literature.16 In fact, the private sector assumes a rather important role in the financing of global policy. Transnational corporations and philanthropists such as Ted Turner, Bill and Melinda Gates and Warren Buffett have become vital sponsors of the UN and global public policy networks, for instance, in the health sector. The logic of the Global Welfare State would give higher priority to an appropriate corporate taxation on multinational corporations – revenues – in order to carry through some mandatory redistribution and to finance GPGs out of the public budget – expenditures. We can refer to the current model, somewhat provocatively, as Global Compassionate Conservatism, because of the choice for a rather weak global arrangement that hardly assumes final responsibility, relatively passive national governments in respect of GPGs,

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a poor counterbalance against the dominance of powerful actors (Western governments, Western-dominated institutions, powerful private actors), and the large trust in the private sector and the worldwide self-reliance of individuals, of which many have no other possibility to fulfil their basic needs. The dichotomy between Global Welfare State and Global Compassionate Conservatism may be a useful tool to inform and structure discussions on global governance. The insights that subsequently follow might in turn work in politicising and empowering. The concept of GPG as a cornerstone of the Global Welfare State has a key role within this struggle. The Global Welfare State is potentially an appealing and mobilising project because of the obvious parallel with the social and democratic project of the national welfare state, in a world characterised by chaos and a multitude of crises calling for radical and urgent action.

The bridge between realism and idealism From a different angle, put forward by mainstream GPG advocates, the GPG concept can work in a mobilising way as well. The point is that GPGs, which require efforts and expenses of – rich – countries both domestically and abroad, serve the national interests, and are not to be considered as a matter of altruism. For example, the final report of the International Task Force is entitled Meeting Global Challenges: International Cooperation in the National Interest.17 GPGs are not aid. This claim is made against the backdrop of intensifying globalisation as a higher form of complex interdependence. Advocates hope this way to be more able to overcome societal resistance to overseas efforts for the sake of financial stability, anti-terrorism, nature conservation or HIV/ AIDS prevention. If a very broad definition of GPG is applied – also representing development in the South as a GPG (what is not done in mainstream literature) – the entire official development assistance comes into the sphere of GPGs. This approach makes a bridge between realism – the influential view representing states as rational and egoist actors in an anarchical international system

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and legitimising corresponding behaviour – and idealism – the view that values (should) matter in international politics. PUBLIC FINANCE AND GLOBAL ENVIRONMENTAL GOODS

The framework for North–South solidarity highly underdeveloped The budgetary challenge for global environmental goods is very difficult to calculate, given the enormity and complexity of the issue in a dynamic context full of scientific uncertainty. There are not many studies providing such data. In a recent study for the International Task Force on Global Public Goods R. Clémençon states that the necessary expenditures to tackle climate change are extremely hard to calculate, and there is absolutely no consensus.18 It is clear that it will be a colossal amount of money. UNDP estimates that the transition towards a low-carbon economy in developing countries in the post-2012 period will cost $25–50 billion annually.19 With regard to biodiversity, a more manageable issue, Clémençon cites a study of Balmford et al. that estimates the resource need for an idealised global system of protected areas to be $45 billion annually, while the current expense is about $6 billion of which $5 billion is spent in industrialised countries.20 Topics such as the protection of the ozone layer and the fight against persistent organic pollutants require much smaller amounts (not more than $200 million a year).21 Here we confine ourselves to a structuring of the discussion. To start with, public finance is only one tool among many to provide environmental goods. Obligations and prohibitions in relation to production and consumption processes, regulatory tax measures and mandatory caps for use of environmental goods – that is, a cap on greenhouse gas emissions – are as important instruments. Such measures often have financial complications too, but shift costs and investments to private actors. Think of firms investing in energy-saving technology to avoid caps or environmental taxes; legislation that only allows energy-saving electronic machines on the market; legislation that forces proprietors of buildings to

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invest in isolation; legislation that forces energy companies to invest in renewable energy; the Clean Development Mechanism of the Kyoto Protocol that gives companies the possibility to invest in climate-friendly projects in the South in exchange for emission rights. Through environmental taxes, governments can even raise money. In other areas there is a role for the expenditure side of the budget. It would be wrong to think that financing global environmental goods predominantly requires a global budgetary policy, for example, with global taxes and a global framework for expenditures. The discussion should not be limited to this dimension, which will be addressed here first. It is true that because of their particular responsibility, the rich countries will have to make considerable expenditures abroad. Because of efficiency reasons and to better organise the participation of the South in decision-making some sort of multilateral framework is recommendable. Two typical multilateral frameworks already organise North–South solidarity in function of environmental goods: the Global Environment Facility (GEF) and the Clean Development Mechanism (CDM) under the Kyoto Protocol. The GEF was established in 1991 and finances projects in relation to biodiversity, climate change, international waters, land degradation, the ozone layer and persistent organic pollutants. Until now $7.4 billion have been spent. An extra $28 billion have been found in the form of co-financing. For the period 2006–10 donor countries have pledged $3.13 billion. Several international institutions such as the World Bank (which houses the GEF), UNEP, UNDP and regional development banks are closely involved with the implementation of projects. NGOs also participate.22 Unequal international power relations are anchored in the decision-making procedures. Normally, the main bodies, the Assembly and Council, decide by consensus, but in case of a vote a double majority applies: 60 per cent of the member states (the one state-one vote principle) and 60 per cent of the contributions (privileging the donors).23 Under the CDM industrialised countries can partly meet their Kyoto obligations by supporting climatefriendly projects in developing countries. Both governments and

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companies can invest in CDM projects.24 In 2006 $5.2 billion were invested under the CDM scheme.25 This method, just like the trade in emission rights between industrialised countries, is controversial, because it does not reduce greenhouse gas emissions. The principle of ‘cap and trade’ can be very effective, provided that the cap is not set too high, but corresponds with the ecological carrying capacity of the Earth. This is not the case for the Kyoto caps, which expire in 2012 anyway. In its 2007/08 Human Development Report devoted to climate change, UNDP confirms that the multilateral framework for assisting developing countries – including emerging economies such as China – in their transition to low-carbon economies is heavily underdeveloped and underfinanced. It proposes an integrated Climate Change Mitigation Facility (CCMF) to accelerate and streamline the process in the post-2012 era, away from the currently existing fragmented work and dialogue forums such as the Asia-Pacific Partnership on Clean Development and the G8’s Plan of Action for Climate Change, Clean Energy and Sustainable Development.26

Thinking and speaking differently about the budget Global environmental goods depend for most part on the efforts – including expenditures – which states make on their own territories. Domestically, a revolution in the direction of much less material and energy intensity of production and consumption is urgent. A crucial area is mobility. The world needs a transport revolution based upon massive public investment in public transport. Budgets for this will have to be multiplied, rather sooner than later. At the same time, an energy revolution is morally inevitable. This will also imply large-scale public subsidies to generalise energysaving technology and renewable energy sources. How else can the climate and energy crises be reversed in time? For social reasons, in a context of considerable income inequality the state will have to subsidise a broad range of environment-friendly products and activities, as these are in many cases more expensive. In several realms the state should enhance its research spending. Finally, much more money is needed to protect biodiversity and nature.

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Part of this policy will consist of compensating proprietors who will no longer be able to use the land for ecologically harmful economic activities. In mainstream GPG literature the required public expenditure is often underestimated. It is rightly stressed that a lot of work can be done without extra money, and that the modest amounts demanded for GPGs will provide a much higher return in the form of avoided costs in the future.27 With this tone the GPG discourse is compatible with the economic-liberal hegemony. But the reality is that financing GPGs will also require a profound rethinking of current public finance (discourse), rehabilitating a considerable taxes/GDP ratio. However, the opposite direction of reducing the tax burden has gained currency and is well embedded because of neoliberalism, which becomes very problematic, not to say immoral, in light of the financing needs for GPGs and many other societal needs that should be met in a civilised – world – society. Such dogmas are simply incompatible with GPGs. The required expenditure will have to be met by public revenues. The issue becomes even more complicated if we problematise further GDP growth, as we should do from an ecological perspective. All political and economic elites in the world plead for continuous GDP growth both in the North and South. This simply means that within some decades the economy of the developed world will have doubled. While this living standard cannot be denied to the developing world – it has to be generalised worldwide! This plan lacks sense, as it goes far beyond the ecological carrying capacity of this planet. It is impossible to combine massive economic growth with as spectacular a decrease in energy and material intensity. Even if this tour de force were technically possible, it would require interventionist policies that are not reasonably conceivable. But escaping from the growth logic will again require a radical rethinking of our economy and necessitate a much more prominent role for national and international redistributive policies. Our societies are not ready for this, but should be prepared for it. This counter-hegemonic point is, for example, also missing in the much-cited Stern Review,28 which appealingly stated that paying 1 per cent of GDP annually during coming years

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to reform consumption and production processes will avoid a 20 per cent of GDP cost as a result of climate change in the future.29 In other words, the GPG concept requires another discourse and another tone concerning taxation and budget policy. Too much optimism and superficiality in this respect is merely postponing the necessary adjustment to the detriment of those who suffer from GPG under-provision.

The GPG paradigm may imply a different budgetary policy UNDP and others have stressed that GPGs are not the same as classical development assistance aid. The entire world community can enjoy GPGs, including donors. Therefore, in their budgets, governments should make a distinction between expenditure as development aid and expenditure for GPGs. Concretely, investments against climate change or for HIV/AIDS prevention in the South should be charged to the account of the budgets of the environment and health ministry respectively. Some countries, such as Canada, already apply a two-track budgeting system.30 The basic philosophy of GPG advocates is that governments do not disguise as aid expenditures that – partly – serve their own interests, in order to reach more easily the famous norm of 0.7 per cent of GDP. But today much GPG expenditure is booked as aid. An example is clean development mechanisms (CDM) investments. However, within OECD–DAC, in compliance with the 2001 Marrakesh agreement on climate policy, an agreement was reached in 2004 to subtract from the total investment amount the amount of emission rights industrialised countries obtain through CDM investments. Official development assistance is supposed to be a net transfer to the South. As already mentioned, it can be disputed whether there is a clear distinction to be made between GPG and aid. I think that in an interdependent world, prosperity in the South can be considered as a GPG in its own right. Nevertheless, the GPG concept meets some suspicion in the South. There is a fear that the GPG paradigm can cause a diversion of resources away from concrete development aid. The

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GPG concept, in its narrow definition, is believed to bring just more topics to the agenda with a budget that will not spectacularly increase, to the advantage of Northern priorities and at the expense of classical development goals. The GPG concept can also erode Southern policy ownership.31 Only a much larger solidarity and generosity, and a more pro-input-democracy attitude in international and multilateral decision-making on the part of the North, could reduce the rivalry between GPG and development aid, and diminish distrust.

Distribution issues related to the financing of global environmental goods Expenditure for global environmental goods cannot be seen in isolation from revenues and the distribution of the financial burden. It would be totally against the GPG logic if financial responsibility depends on the location where the investment is made. Afforestation for the sake of climate stability has not automatically to be financed by the concerned national jurisdiction. Two other factors should determine each state’s fair financial responsibility: (1) who is most responsible for the under-provision of the GPG (‘the polluter pays’)?, and (2) who has the largest financial capacity (solidarity)? A trade-off between these criteria is also applied in national settings. In the ecological realm it is obvious that given these criteria the rich countries will have to bear the lion’s share of the costs. It is mostly their historical and current production and consumption that has put the Earth’s carrying capacity under severe stress, so that a legitimate catching-up by the South has become ecologically extremely problematic. This implies concretely that, apart from the investments and contraction in terms of environmental pressure that will have to be done in the North, the industrialised world will have to pay very substantially for technology transfer and capacity-building in the South, including in emerging countries such as China and India. In their convergence process up to higher living standards, the developing countries should do what they can to develop in an ecologically sustainable way, but are not able and morally not obliged to bear all the costs that the ecological trajectory entails.

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CONCLUSION

The main purpose of this chapter has been to show that the GPG concept does provide value-added for progressive global governance. However, this is conditional upon the willingness, not to say the courage, to think through its political–philosophical consequences, its function as cornerstone of an ambitious and comprehensive global governance project – here referred to as Global Welfare State – and its far-reaching budgetary consequences. Nowadays, what we can call mainstream GPG discourse, which has already delivered many useful insights, does not fully elaborate on these aspects. Making them more explicit could render the concept more controversial, but possibly also be more politicising, empowering and mobilising. NOTES 1. For an overview, see: http://www.sdnp.undp.org/gpgn/policy.php. 2. I. Kaul et al., Providing Global Public Goods: Managing Globalization, New York: Oxford University Press, 2003, pp. 21–2. 3. See C. Kindleberger, The World in Depression 1929–1939, Berkeley: University of California Press, 1973. 4. I. Kaul et al., Global Public Goods. International Cooperation in the 21st Century, New York: Oxford University Press, 1999. 5. http://www.sdnp.undp.org/gpgn. 6. M. Carbone, ‘Supporting or Resisting Global Public Goods? The Policy Dimension of a Contested Concept’, Global Governance, Vol. 13, No. 2, 2007, pp. 179–99. 7. International Task Force on Global Public Goods, Stockholm, 2006. 8. Carbone, ‘Supporting or Resisting Global Public Goods?’ 9. J. Coussy, ‘The Adventures of a Concept: Is Neo-classical Theory Suitable for Defining Global Public Goods? ’, Review of International Political Economy, Vol. 12, No. 1, 2005, pp. 177–94. 10. See, for example, R. Jackson and G. Sørensen, Introduction to International Relations: Theories and Approaches, Oxford: Oxford University Press, 2003, pp. 139–74. 11. Resolution adopted by the General Assembly of the UN, A/RES/60/1. 12. Rome Statute of the International Criminal Court. 13. R. Coolsaet and V. Arnould, Global Governance: The Next Frontier, Brussels: Royal Institute for International Relations, 2004.

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14. See, for example, S. Forman and D. Segaar, ‘New Coalitions for Global Governance: The Changing Dynamics of Multilateralism’, Global Governance, Vo. 12, No. 2, 2006, pp. 205–25; J.A. Scholte, Globalization and Governance: From Statism to Polycentrism, CGSR, Working Paper No. 130/04, University of Warwick, 2004. 15. See, for example, J. Martens, Multistakeholder Partnerships – Future Models of Multilateralism?, Dialogue on Globalization – Occasional Papers No. 29, Friedrich Ebert Stiftung, Berlin, January 2007. 16. See, for example, W. Reinicke, ‘The Other Worldwide Web: Global Public Policy Networks’, Foreign Policy, Vol. 117, 1999, pp. 44–58; J.-F. Rischard, ‘Global Issues Networks: Desperate Times Need Innovative Measures’, The Washington Quarterly, Vol. 26, No. 1, 2003, pp. 17–34. 17. International Task Force on Global Public Goods, Meeting Global Challenges: International Cooperation in the National Interest, 2006. 18. R. Clémençon, Resource Needs and Availability for Protecting Global Environmental Public Goods, in International Task Force on Global Public Goods, Expert Series 2, Stockholm, 2006, pp. 75–103. 19. UNDP, Human Development Report 2007/2008, New York: United Nations, 2007, pp. 153–4. 20. A. Balmford et al., ‘Economic Reasons for Conserving Wild Nature’, Science, Vol. 297, No. 5583, 2002, pp. 950–3. 21. Clémençon, Resource Needs and Availability. 22. http://www.gefweb.org. 23. See ‘Instrument for the Establishment of the Restructured Global Environment Facility’, http://www.gefweb.org. 24. http://cdm.unfccc.int. 25. UNDP, Human Development Report 2007/2008, p. 154. 26. Ibid. 27. See, for example, the ‘Questions & Answers’ note in the book by Kaul et al., Providing Global Public Goods, http://www. globalpublicgoods.org. 28. N. Stern, Stern Review on the Economics of Climate Change, London: UK Government Economic Service, 2006. 29. For a critique from the viewpoint of ‘ecological economics’, see C.L. Spash, ‘The Economics of Climate Change Impacts à la Stern: Novel and Nuanced or Rhetorically Restricted?’, Ecological Economics, Vol. 63, 2007, pp. 706–13. 30. International Task Force on Global Public Goods, 2006, p.105 31. Carbone, ‘Supporting or Resisting?’

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POSTSCRIPT Matti Kohonen and Francine Mestrum

As we were editing this book during the autumn of 2008 the global financial markets went ever deeper into a crisis and dragged the real economy with it into turmoil, leaving savers potentially without access to their life-long savings, endangering their pensions, leaving businesses dry of credit and home-owners caught with unpayable mortgage commitments. Following the turmoil, General Motors decided to shut down production at two of its Brazilian factories that were producing cars for the export markets showing the risks associated with the export-led growth model of giving incentives to foreign direct investments. At a time of crisis, it is public finances (tax payments and state lending backed by future taxes) that bails out the banks, keeps the economy running and credit flowing. The events following the collapse of Bear Sterns, the US investment bank, on 14 March, the effective nationalisation of US state-backed mortgage lenders Fannie Mae and Freddie Mac (first bail-out 12 July, second 6 September) all demonstrate the extent of false belief in the markets that were never asked to account for what was actually being sold and how profits were made – especially in the case of hedge funds. The second blow came with the demise of the investment banking sector as Lehman Brothers went bankrupt on 13 September, while on the same day Merrill Lynch – who produce the annual World Wealth Reports that we have drawn upon in this book – was bought by Bank of America. Next, on 16 September, the US insurance giant AIG was rescued by the government, and on 3 October Washington Mutual was taken over by the Federal Deposit Insurance Group. Banks thought too big to fail were dragging the rest of the economy into chaos. The greatest suspense came as the US Congress went to vote on a $700-billion bail-out package – the biggest in history – which would place bad loans from many more banks into state custody. The bill was rejected in the first vote on 29 September, but was passed in the second and amended vote on 3 October following scenes of panic among both politicians and traders. The vote effectively ended the era of laissez-faire capitalism, and reinstated the state supervision and ownership of the banking sector. 223

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When defending the proposed bail-out George W. Bush, in a White House press conference on 20 September, contemplated his confusion of presiding over the largest nationalisation package in US history: ‘I know – look, I’m sure there are some of my friends out there saying “I thought this guy was a market guy – what happened to him?”’ Future solutions will have to be discussed here and now. Both citizens and politicians alike, in the North and South, are demanding alternatives to the current ‘non-system’ of global finance. It relies on offshore financial centres for the most common transactions (currency trading and derivatives), has built itself on secrecy, where assets are hidden from the public prosecutors, regulators, tax collectors and investors alike. Now is the time to rethink the Bretton Woods institutions and establish a new global financial regulatory framework overhauling the World Bank and the IMF. The lack of judgement from the IMF concerning financial transparency is bad enough to warrant the laying off its entire staff, a fate which befell the 26,000 employees of Lehman Brothers who were given their final notice on the 13 September. In its place we should establish a Global Financial Authority, which would establish an international rule of law in the global economy and ensure financial stability. Its mandate would be to issue directives to regulate against systemic risk, provide reliable statistics and initiate a process of Fair Transparent Debt Arbitration (FTAP). We urgently need country-by-country reporting standards, where every transnational corporation (TNC) has to file accounts per country and jurisdiction where they operate, including the declaration of beneficial ownership of subsidiaries. We must end the current practice of TNCs paying taxes when and where they please, and more often than not evading them all together. Furthermore, automatic information exchange treaties (IETs) are needed so tax authorities can access the information regarding the tax liabilities of the cross-border trade. Once transparency is in place, governance must follow. An International Tax Organisation (ITO) should become the place where tax cooperation should be decided upon as currently 60 per cent of world trade takes place within TNCs – therefore regulating the majority of world trade that doesn’t fall under the jurisdiction of the World Trade Organisation. After the bail-out by the US Congress we should understand that the market alone will never solve the climate crisis, and we need global regulation in the form of global taxes. These would have both a regulatory and a revenue generating role, raising both revenues and ensuring social and environmental investment. For this purpose, we need to establish the Global Environmental Organisation (GEO) within the UN to regulate the post-Kyoto climate agreements to stop global warming and provide for other Global Public Goods. Furthermore, labour should get its fair

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225

share of income distribution, since now this is all too biased in favour of capital. Decent work, decent wages and decent social protection are perfectly possible and should be introduced as soon as possible. Social and ecological justice go hand in hand. Global taxes can help to create global social justice. Last but not least, we need to strengthen and democratise the UN. The process will start by the establishment of the permanent UN Tax Committee, which will oversee the establishment of the International Tax Organisation, making the UN a major player in regulating the world economy. Ensuring this happens will require the reform of the Security Council, by doubling the number of permanent members. By making global taxation a UN matter we are giving the UN the clout it needs to act as the arbiter of international conflicts, be they of a military or commercial nature. These proposals are not exhaustive, nor are they sufficient for establishing an equitable world. They are part of a wider road-map towards more effective global governance which is an ongoing process involving political will and citizen’s pressure. Ending poverty and inequality will require a fundamental rethinking of a global social contract.

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NOTES ON CONTRIBUTORS

Bob Awuor is Director of African Community Development Foundation, a London-based non-governmental organisation. He focuses on urban and regional development planning, and African Diaspora issues in the United Kingdom, and has organised a series of events bringing African civil society participation to the Millennium Development Goals. He holds a Master’s degree in Development from the Institute of Commonwealth Studies in London. Aldo Caliari is Director, Rethinking Bretton Woods Project at the Centre of Concern in Washington, DC. He holds both a Master of International Policy and Practice from the George Washington University, and a Master in International Legal Studies from the Washington College of Law. His research interests include global economic governance, debt and international financial architecture. He has recently focused on advocacy and coalition-building around the Financing for Development (Monterrey) process. John Christensen, a development economist, is Director of the International Secretariat of the Tax Justice Network. He was economic adviser to the Government of Jersey (a British tax haven) for 11 years. He was one of the founder members of the Tax Justice Network, a Fellow of the Royal Society for Arts, Manufactures and Commerce, and an external research fellow at Kent University. Jacques Cossart, a development economist; worked for the French Development Agency and for the World Bank Group, as well as for the private (oil) sector; secretary-general of the scientific council of Attac France. Member of the working party advising the French President on innovative international taxes (Landau Commission). Lou Keune, Master in economics and PhD in social sciences, is an associated researcher at Tilburg University, The Netherlands. Research interests are development issues, neoliberalism, reversed development aid, economic growth, alternative economics, tourism, community development, action research and development education. Matti Kohonen, PhD in sociology, discussing social enterprises in Ghana. Other research interests include fair-trade enterprises, the information 226

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society and global democratisation. Founding member of the Tax Justice Network, and currently works as part of the International Secretariat of the Tax Justice Network for programmes in developing countries. Dries Lesage, PhD in political sciences, is a researcher and teacher with the Global Governance Research Group at the Department of Political Science, Ghent University, Belgium. Research interests include the evolving global governance architecture in a context of globalisation and deepening multipolarity, as well as international tax justice. Francine Mestrum, PhD in social sciences, is a professor at the University of Ghent, Belgium. Research interests include social development, globalisation, gender and global civil society. Author of several books on global poverty, inequality and international financial institutions. Alvin Mosioma is Co-ordinator of Tax Justice Network for Africa, where his work includes the organisation of Kenya Tax Forums, and tax awareness and research workshops across Africa. He holds an MSc degree from the Johannes Gutenberg University in Germany, and has worked previously with SEATINI, a Nairobi-based trade justice campaign. Katarina Sehm-Patomäki has edited and written more than 30 publications on democracy and globalisation, most recently on the idea of global political parties. At present, she is doing research on international debt arbitration with the dual affiliation of the RMIT University in Melbourne, Australia, and the University of Helsinki in Finland. Peter Wahl, Master in social sciences and Roman languages in Mainz, Aix en Provence and Frankfurt/M, is Executive Director of Weltwirtschaft, Ökologie & Entwicklung – WEED (World Economy, Ecology & Development). Co-founder of Attac Germany, and member of the national coordinating committee from 2000 to 2007. Author of several books on North–South relations and financial markets.

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INDEX Compiled by Matti Kohonen

aid, agenda, 7–8; bilateral, 52; dependency, 123; development, 5, 41, 46, 59, 150, 189, 201; difference to global public goods, 214, 219; donor-driven, 8; donors, 90; expenditure, 219; flows, 206; for trade, 132, 134; harmonisation, 8; increases in, 7; increasing, 47, 126; phantom, 7; post-aid agenda, 8, 46, 126; programme, 109, 125; official development aid (ODA), 39–40, 52, 88, 159, 197; quality of, 7, 193; debt relief as a form of, 95; reversed, 193–4; suspension of, 179 accounting, unitary rules, 19, 51 Achebe, Chinua, 169 Acosta, Alberto, 96, 100, 101 actor, non-state, 213 afforestation, 220 Afghanistan, 7 Africa, 16, 34, 47, 119, 169; Atlantic, 170; growth of capital assets, 70; Sub-Saharan, 52, 70, 182; trade in, 56 African Union, 168 agenda, civil society, 9; development, 28, 126; distribution, 28, 41; equality, 29–30; global tax, 14; inequality, 33–34; international, 88, 206; neoliberal, 25–6, 132; political,

30, 92; poverty 10, 25–8; trade liberalisation, 11–12 air ticket levy, 15, 160 Andorra, 17 Anglo-Leasing, 180–1 Annan, Kofi, 93, 168, 182 anti-globalisation activists, 12 anti-money laundering, program, 15, regime, 16 Argentina, 78, 102, 134, 141 Aristotle, 81 Asia, 4, 16; South-East, 17, 157; financial crisis, 13, 78 assets, 50; accumulation, 80; capital, 70, 88; corporate, 98; financial, 5, 14, 36, 69, 151; foundations, 39; global, 155; hidden, 2; High Net Worth Individual (HNWI), 35, 69, 88; intangible, 111; liquid capital, 69, 73; loss-making, 116; mobile, 15; offshore, 5, 78, 159; private, 15; property, 158; recovery, 183; rotten, 75; seized, 16; stolen, 55, 176; tax, 165; under management, 75 ATTAC, 13 Baker, Raymond, 16 bananas, 109–11 Bangladesh, 52 Bank of International Settlements (BIS), 77; Financial Stability Forum (FSF), 17

228

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INDEX

bankruptcy, 60, 78; debt, 19; international, 96; sovereign, 100–2; private corporate, 94 Belgium, 49, 58 biocapacity, overshoot of, 192, 200–1 Bermuda, 76, 110 Bolivia, 54 Brazil, 49, 52; bolsa familia, 49; ecological footprint, 200 British Aerospace, 16 Buffet, Warren, 39, 213 budget, challenge, 215; balancing, 49; deficit, 10; development, 143; expenditure side, 216; policy, 219, primary surplus, 49; revenue side, 131; support, 41, 125 cap and tax, 160 cap and trade, 160, 205, 217 capital, comparative advantage 71; controls, 71, 84; flight, 16–17, 173, 181–2; human, 140; mobile, 20; movement of, 13, 158; outflow, 182; owner, 153, 155–6 capitalism, crony, 80; financial, 118; history of, 72; Rhenanian, 73 carbon credit, 37 Castells, Manuel, 60 Cayman Islands, 1–2, 110, 116 central bank, 2, 13 City of London, 76, 114; bonuses, 35 civil society, 17, 90, 92; actors, 47; debt-tribunal, 100; global, 5–6, 11, 18; interest in tax avoidance, 117, 126; mobilisation, 9; movements, 5, 47, 50; organisation, 100, 120;

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229

pressure, 117; research efforts, 57, 95; Southern, 95 charity, 39, 46, 95 Chad Basin, 170 Chernobyl, 3 China, 30–2, 103 Chiquita, 110–11 Clearstream, 16 climate change, 1, 192, 205, 215–17 Club, Debtors, 94; donor, 47; Paris, 94, 101; poor, 33; rich, 32; Rome, 36 Cold War, 7, 8, 49, 212 colonisation, 37 compassionate conservatism, global, 213–14 conditionalities, 10, 41, 47, 91–2, 103 Congo, Democratic Republic of, 56 community, financial, 82; host, 122; international, 41, 100, 168; investor, 1; one world, 35; world 204, 208–9 conservatism, global compassionate 213–14 country, African, 114; being geographically bound, 119; consumer, 109–11; contender, 31; debtor, 96; developing, 11–12, 17, 47, 77, 80, 108, 124, 135; dominating, 193; donor, 7, 40; exporters of manufactured goods, 196–9; exporting, 111; Fourth World, 31; industrialised, 80; less developed, 196–9; less politically powerful, 114; lowincome, 83, 135; middle-income, 135; OECD, 53, 135; oil-exporting, 196–9; petroleum-exporting 3; poor,

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36, 108; producer, 110; rich, 31, 35; sovereign, 102; sovereign and equal, 37; Third World, 31, 190 corporation, citizens, 118; integrity, 118; responsibility, 114, 116; social responsibility, 206–7 corruption, 16, 95, 121–3, 171, 181–2; commercial, 181; definition of, 176–7; demandside versus the supply-side of, 178; global, 17, 183; government, 55; Grand, 20, 171, 177–8; high-level, 180; intermediaries, 177–8; networks, 175; pinstripe infrastructure, 128, 178; petty, 177; political, 169; stateperpetuated, 172; war against, 167, 174, 180 cosmopolitanism, 59, naïve, 21 credit, bank, 72; carbon, 37; crunch, 1, 3; rating agencies, 2, 62, 117, 121; sub-prime mortgage, 72, 117 creditor, 8, 72, 90, 93–103 currency, hard, 179; hard vs. developing country, 79; foreign, 179, 198; merger, 84; reserve, 206; reserves, 79–80 Currency Transaction Tax (CTT), 13–14, 50, 157; two-tier, 85 debt, accumulation, 102; arbitration, 58, 95, 98–100; boomerang, 9; burden, 48, 90; cancellation, 9, 48; cancellation as reparations, 95; crisis, 10, 62; ecological, 37; external, 103; global, 8; internal, 103; international, 91; management, 103; movement, 8; odious, 61,

Kohonen 03 index Sec1:230

91, 97-98; past military rulers, 49; per GDP ratio, 49; political matter, 92; private, 103; problem, 9, 19, 90, 92–4; public, 103; question, 38; relief, 8, 91–2, 95; repayments, 90; restructuring, 9; service, 10, 37, 48, 79, 99; social, 37; sovereign, 98, 101; spiral, 90; stock, 103, 182; Third World, 9, 49 debt reduction, Egypt, 94; Germany, 93–4; Indonesia, 94; Iraq, 94 debt relief, counted as development aid, 95; political tool, 92 debtor, 72, 90, 92, 95–6, 99, 102–4 Del Monte, 110–11 Denmark, 4 democratisation, 6, 47, 104; national, 192 derivatives, 2, 73, 75; regulation of, 85 Deutche Post, 77 development, agenda, 26–8, 126; balanced, 159; cooperation, 10, 18, 20, 189–193, 198; demand-stimulated, 7; economic, 28; end of, 9; financing, 14, 37, 126; human, 25, 30, 82, 87; impact of tax on, 76, 117; project, 25, 36; public finance driven, 5, 7; social 13, 26; sustainable, 36, 206 Dole, 110–11 double taxation treaty, 51 Duvalier, Baby Doc, 8 ecology, carrying capacity, 217–18; deterioration,

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INDEX

189,191; disaster, 5; footprint, 39, 192; sustainability, 21, 220 economy, champagne-glass, 190; informal, 52, 135; local, 145; low-carbon, 215; relationship between real and financial, 71, 73–5, 83, 87; transnationalisation, 81 The Economist, magazine, 26, Efl-Aquitaine, 16 emissions, carbon dioxide, 3, 20, 37, 50, 160–1; global, 50; greenhouse gas, 205, 215; growth rate, 51 Enron, 116 European Central Bank (ECB), 77; changing statute of, 86 European Commission (EC), 111, 119, 206 European Parliament, 120 European Union, 2, 14, 119, 140, 152, 206; Lisbon Treaty (2007), 86 ethics, global, 29 era, neoliberal, 40; post-2012, 215, 217; post-aid, 46; postwar, 10, 71, 36 ethnicity, 167, 174 exchange rate, fixed, 71, 84; freely-floating, 71, 84; freelyfluctuating, 72, 79; high volatility of, 78; stabilisation of, 84–5; variable corridor, 85 Export Processing Zones (EPZ), 53, 137–8 extractive industry, 17, 53–4, 120; Transparency Initiative (EITI), 122–3 Fair Transparent Debt Arbitration Process (FTAP), 100–2

Kohonen 03 index Sec1:231

231

finance, intermediaries, 109; terrorist, 55 financial crisis, 13, 113; Argentina, 157; Asian, 13, 78, 157; Brazil, 157; Thailand, 78 financial service industry, 115 financial system, global, 18, 69; systemic failures of, 19 Financial Times, 118 fiscal, advantages, 137; area, 152; austerity, 131; concessions, 108; consequences, 136; deficit, 133–4; distortions, 113; eroding capacities, 41; impacts, 132–5; incentives, 137; neutrality, 141; policy, 132; revenue, 131–3, 153; sacrifice, 141; support, 131; treatment, 113, 118 flow, dirty money, 48, 62; environmental taxation, 40; global, 50, 51, 57, 150; goods and services, 62; illicit, 46; investment, 113; monetised, 194; South-North resources, 201; subverting, 61; tracking, 121; trade, 107, 113, 151; values, 193 Flyffes, 110 food crisis, 1, 4, 87 Ford Motor Company, 154 foreign direct investment (FDI), 107-08, 132–3, 139, 198–200; export-orientated, 141; incentives towards, 52, 139–40, 152; market-seeking, 139; resource-seeking, 139 Forsberg, Tuomas, 93, 101 free rider, problem of, 152, 156 free trade, assumptions of, 132; blurring boundaries with investment treaties, 138; consequences of, 193;

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lobbyists, 11; with tax havens, 152 Free trade Area of the Americas (FTAA), 145 Freiburg, 4 Friedman, Milton, 27 France, 4, 16; Landau Report, 164 fund, emergency, 83; environmental management, hedge, 2, 74–5, 85–6; 160; manager, 82; medicine purchase, 164; mutual investment, 2; pension, 80; private equity, 2, 70, 74–5, 87, 108; public investment, 84 Fussbach, Reiner, 76 G77, 206 G7/8, 8, 29, 92; Birmingham shadow meeting (1998), 9; Gleneagles meeting, 9; leaders, 3, 15 Gates, Bill and Melinda, 39, 213 General Agreement on Tariffs and Trade (GATT), 11; Tokyo Round (1973), 11; George, Susan, 9 Ghana, 54 Giddens, Anthony, 60 Githongo, John, 174, 177, 180 global commons, 205, 208 global environmental goods, biodiversity, 205; budgetary challenge, 215; ozone layer, 205; stable climate, 205 global hectars (gha), 200–1 Global Justice Movement (GJM), 12, 58 global North, 109 global public good, antiterrorism, 214; biodiversity, 209; climate, 209; concept,

Kohonen 03 index Sec1:232

219; development of the global South, 214; financial stability, 209, 211–14; law, 205, 211; nature conservation, 214; paradigm of, 219; peace, 211 global social contract, 57–9 global South, 48, 51 global tax base, missing, 50 global warming, 4 globalisation, 13, 18, 27; critics of, 31; historical process, 41; hyper, 62; intensifying, 214; neoliberal, 12, 41; qualitative picture, 60–2 Goldenberg Scandal, 179–80 governance, 123; bad, 193, 210; global, 5, 18, 47, 163, 204; good, 206, 210 Grant Thornton, law firm, 127 greatest paradox, 45 growth, downturn, 84; exportled, 131, 146, 194; logic, 218; pro-poor, 33 Guernsey, Channel Island of, 152, 180 Hanlon, Joseph, 91–2, 95, 98 Hayek, Friedrich, 26, 28 hedge funds, 2,3, 74–6, 84–5; regulation of, 85 herding behaviour, 77–8 Herman, Barry, 94, 96–7 HIV/AIDS, 161, 164, 214, 219 Hong Kong, 114 Index of Sustainable Economic Welfare (ISEW), 192 India, 30–2, 53, Special Economic Zones (SEZ), 138 inequality, 6, 18, 25, 57; absolute, 31; concepts of, 30–3; dynamics in the finance system, 86; economic, 182;

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INDEX

global, 5; global income, 25; growing, 36, 190; income, 18, 26, 35, 190, 217; interpersonal vs. inter-country, 31; measure, 29–30; opportunity, 34; population weighted, 32; relative, 31; war against, 36; wealth, 18 information exchange treaties, automatic, 2 injustice, 34; experience of, 40; historic, 169; social, 45; structural, 18; solutions to, 46, 91 International Accounting Standards Board (IASB), lack of accountability, 119; International Financial Reporting Standards (IFRS), 120–1; international debt tribunal, 19 International Drug Purchase Facility (IDPF), 15 International Financial Institutions (IFIs), 10, 92, 100 International Labour Organisation (ILO), 5, 35 International Monetary Fund, (IMF), 4, 8–10, 52, 90, 126; Anti Money-Laundering (AML) initiative, 77; Financial Action Task Force (FATF), 15–16, 77; Financial Stability Forum (FSF), 211; gold reserves, 92; Heavily Indebted Poor Country Programme (HIPC), 91; Poverty Reduction Strategy Paper (PRSP), 26, 131; Poverty Reduction and Growth Facility (PRGF), 10; related to dependency between debtors, 103; role of, 103; Structural Adjustment Policy

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233

(SAP), 9, 27, 131–2; Sovereign Debt Reduction Mechanism (SDRM), 100–1; Trade Integration Mechanism (TIM), 132; voting powers, 38; World Economic Outlook (WEO), 190 International Tax Organisation (ITO), proposal for, 124 investor, 2; attracting, 53; community, 1; financial, 83; foreign, 12–13, 61, 136–7, 140–2; institutional, 2, 74–5, 157; rights, 12; speculative, 76; withholding information from, 117 Iraq, 7, 102; US-led invasion of, 58; debt cancellation, 94 Ireland, 110 Isle of Man, 110 Japan, 206 Jersey, Channel Island of, 2, 76, 109–10, 152, 181 Jubilee 2000, 9 Jubilee South, 97 jurisdiction, court, 99; dependent on larger states, 76; low-tax, 17, 56, 111, 113; national, 220; non-cooperative 16; offshore, 2, 17; ring-fenced, 17; secrecy, 15, 55, 107, 112, 121, 126–8; small-island, 15, 60; special, 57 Kenya, Anti-Corruption Commission (KACE), 183; Electoral Commission of (ECK), 168; Revenue Authority (KRA), 124 Kenyatta, Jomo, 170–2 Keynes, John Maynard, 28, 72 Kibaki, Mwai, 167, 174–5

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Know Your Client (KYC) rules, 16, 181 KPMG, 114, 116 Krueger, Anne, 101 Krugman, Paul, 8 Kyoto Protocol, 14, 155, 216; Clean Development Mechanism (CDM), 216, 219 Latin America, 17, 29, 109–10 law, anti-corruption, 175; banking secrecy, 15; bankruptcy, 96–8; Belgium human rights, 58; corporate vs. country, 98; financial reporting, 119; immigration, 154; insolvency, 96; international, 58, 61, 101; international Chapter 11, 99; labour, 12; rule of, 26, 55, 103, 94–7, 113, 162–3; sovereign bankruptcy, 98–9; tax shelter, 116 Le Monde Diplomatique, December 1997 edition, 13 Leading Group on Innovative Sources of Development Finances, 14, 17 leakage, 18, 46–9; plugging, 57; visualising, 60 levy, air ticket, 51, 160, currency transaction, 13 liberalisation, trade, 11–12, 19, 131–5, 137–8, 143; investment, 19, 131–3, 137, 142, market, 153 Liberia, 170 Liechtenstein, 17, 59, 76–7 looting, 177 Luxembourg, 110 Magdoff, Harry, 189, 194 Marshall, Thomas Humphrey, 28

Kohonen 03 index Sec1:234

market, commodities, 3; deregulation, 80; emerging, 80; financial, 60, 71–3, 87, 95, 118; failure, 140; forces of, 28; Foreign Exchange, 13, 50, 71; housing, 62; labour, 10, 34; liberalisation, 80; liquid, 61; monopolising, 107; real-time, 61; rules, 10; self-regulating, 1; self-speculating, 1; stock, 73; tax advantaged products, 116; three main functions, 70–2; transparency, 118; village, 52; world, 1, 112 Merril Lynch, World Wealth Report (WWR), 34, 69 methodological nationalism, 57 Mexico, 92 middle-class, 27, 36, 38 Middle East, 54, 70 Milanovic, Branco 31–2, 34 misinvoicing, 55 mispricing, 55 Moi, Daniel Arap, 172–3, 180 Monaco, 17, 76 money, dirty, 16, 46, 54–6, 62; identity of, 55; laundering, 15, 59–60, 76, 181 Naboa, 116 New York, 114 Nike, 12 Nixon, Richard, 13 Netherlands Antilles, Dutch Overseas Territory of, 76 Nokia, telecommunications company, 73, 152 North-South, flow of value, 183, 193; issue, 20; relation, 9, 103; solidarity, 48, 216; truthcommission, 9, 93, 101

21/10/08 17:23:52

INDEX

nuclear, arms, 37; disaster, 3; energy, 51; material, 60; power, 3–4; waste, 50, 161–2 Odinga, Raila, 167, 174–5 offshore, accumulation, 113; arrangements, 16; assets, 5, 15; bank, 108; banking centres, 86; companies, 15, 119, 180; derivatives, 17; domicile, 51; entity, 111, 118; fictitious companies, 180; financial centres, 17, 77–8, 107–8, 175; foundations, 15; interface, 61, 178; jurisdiction, 2, 17; lawyer, 59; phenomenon, 15, 62; policy, 80; profit shifting, 56; property rights, 153; regulation, 2; securities, 17; secrecy, 2, 15, shell companies, 179; stability risk 86; subsidiaries, 123; territory, 61; trust, 15, 51, 179; world, 13, 17, 46, 60 Oil Shock, Second, 3; Third, 3 Organisation for Economic Cooperation and Development (OECD), 16, 69; Development Assistance Committee (DAC), 5, 219; Global Forum, 17 over-indebtedness, 90 overpricing, 56 Pareto Optimal, 25 philanthropy, 26, 213 Pigou, Arthur, 14 plunder, 172 Pogge, Thomas, 38 political crisis, 182 poverty, 5, 190; absolute, 18, 31; Africanisation, 32; agenda, 26–27; enduring, 57, 190; eradication, 40, 57; extreme,

Kohonen 03 index Sec1:235

235

25, 38, 70; fight against, 29, 79, 90; increasing, 78, 80–1, 173; line, 30, 78; reduction, 7, 10, 21, 26–9, 40, 61, 109; relative, 27; rising, 27; statistics of, 27; world without, 45 power, photovoltaic, 4; nuclear, 3–4 principle, polluter pays, 220; solidarity, 220; speculator pays, 83, 84 prisoner’s dilemma, 151 public man, 59; service, 12, 114; sphere, 59 public goods, 6, 58; global, 14, 20, 85, 150, 155–6, 163, 204–5; national versus international, 205–6; provision of, 163; reliable financial system, 85; underprovision, 151 public finance, 12, 47, 133, 212; lost, 58; national, 18; strengthening, 5 public policy, global networks, 213 public resources, 140; equitable distribution of, 182–3; plunder, 175 Publish What You Pay (PWYP), 120 private equity fund, 18, 71, 74, 87, 108; leverage, 75 procurement, 144–5 profit-shifting, 121 protest, anti-war, 46; left-wing, 27 Raffer, Kunibert, 96, 99–101 Rasmussen, Robert, 102 Ravallion, Martin, 33 Real Estate Investment Funds (REITs), 2, 74

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236

TAX JUSTICE

redistribution, 6, 21, 26, 211; income, 33, 40, 156; wealth, 39 reconstruction, post-war, 7 regulation, 1, 12, 83, 212; defacto, 2; deregulation, 13, 76–7, 107; environmental, 137; escaping, 55; financial, 118; labour market, 34; regime, 169; soft-touch, 2 reporting standards, 2, 109; accounting, 109; diluting, 120; financial, 119–20; country-bycountry, 19, 51, 58, 118–24 risk, accumulation of, 80; assessment, 17; credit, 72; exchange rate, 79; evaluation of, 118; modelling technique, 118; packaging, 1; speculative, 85; stability, 78–80, 86; transferral to banks, 85 royalties, extractive industries, 53 Russia, 17; Treasury, 54 Sack, Alexander, 97 Samosa, Anastasia, 8 Saudi-Arabia, 54 second superpower, 46 secrecy, banking, 2, 15, 83, 162; jurisdictions, 15, 55, 107–8, 117, 126; offshore, 15; space, 2, 112; supply of, 179; trust, 173; veil of, 2 securitisation, 72, 117 shell companies, 173, 179 social, alternatives, 45; cost, 10, 157, 191; crisis, 2, 36; contract, 19, 57–8, 163; consequences, 27, 37; enterprise, 58; innovation, 3; investment, 91; movement, 7, 12, 27, 45, 47, 93, 206; policy, 49; polarisation, 80–1, 84;

Kohonen 03 index Sec1:236

protection, 31–3; responsibility, 122; security, 10, 28, 40, 75; solidarity, 6; struggle, 6; welfare, 5, 60 sovereignty, national, 12, 209 Spahn, Paul Bernard, 85 Special Economic Zones (SEZ), 17; policy, 53 sub-prime mortgage, 1, 72, 117 subsidiary, African, 56; company, 111, 123; foreign, 51; local, 122; offshore, 51; of TNC, 107 subsidy, credit, 139; public, 4, 142, 154, 217; European Union, 74 Suharto, 8 Starbucks, 12 state, intervention, 82; national, 52, 210; national container, 57; operetta, 76; patrimonial, 171; post-colonial, 170; sovereign, 172, 208; totalitarian, 175; welfare, 28 Stiglitz, Joseph, 8 Sweeney, Paul, 194 system, Bretton Woods, 71, 78, 82, 84; solidarity, 81; UN, 101, 211–13 Switzerland, 59, 76 Tanzania, 54 tax, abolishing 15; advice, 115; air pollution, 50; arm’s length rule, 111–12; arms trade, 50; authorities, 46, 52, 119–20, 163; avoidance, 16, 107–8, 114–15, 124–5; breaks, 108; capital gains, 2; carbon dioxide, 50, 160, 165; competition, 53, 113, 151; controller, 113; cooperation, 17, 151; corporate, 2, 53, 153; cut, 53, 107, 118; director,

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INDEX

116; ecological, 158; energy, 161; evasion, 16, 77, 125–6, 136; exile, 59; financial transaction, 157; flat, 39; global, 3, 13, 20, 48, 150–2, 162–9; harmful competition, 16; harmful practices, 16; haven, 16, 76, 107, 162, 181, 201; holiday, 20, 52, 108, 140, 152; income, 39, 53, 87, 153; inequality, 154; kerosene, 50; legislation, 107; liability, 121, 128; maritime fuel, 50, 161; minimisation, 111; net, 46; non-domicile rule, 125; nuclear waste, 45, 161; payments, 117; planning, 107; planning industry, 116–17, 126–7; product, 116; reform, 135; regime, 109; rise, 49; shelter, 116, 153; solidarity, 88; stock exchange, 157, 165; strategy, 153; system, 125; trade, 52, 135; unitary basis, 124, 158; unitary surtax, 158; valueadded, 50, 126, 135, 152–4 tax base, 13, 48, 124; global, 19, 48, 50; lost national, 52; mobile, 16; national, 19, 48, 52; potential, 13 tax burden, 16, 80, 153–4; increasing, 153; reduction of, 218 Tax Justice Network (TJN), 76, 117, 120, 122–3, 127–8, 178 tax rate, effective, 111; flat, 39, 54; gap between labour and capital, 154 Teivainen, Teivo, 93, 101 Toa Kitu Kidogo (TKK), 170 Tobin, James, 13 Turkey, 49 transfer mispricing, 17, 112, 182

Kohonen 03 index Sec1:237

237

transfer pricing, 111–13, 136–7; abusive, 55; arrangement, 114; fictious, 154; North-South, 189, 201; South-North, 201 Transnational Corporations (TNC), 51, 77, 107–8, 111–16, 121–3, 182, 213; domicile, 50; profits of, 14, 158, 165; raison d’être, 62 transparency, 83; financial, 2, 41; lack of, 73, 118, 142; political, 171 Transparency International (TI), 174, 177, 178, transactions, artificial, 112; complexity of, 37; crossborder, 112; fake, 55, 179, 181; financial, 157; false, 175; speculative, 157, 165; trade, 175; underlying motives, 127 trade, activists, 12; African, 56; agenda, 12; agreement, 12, 135; arms, 41, 86; balancing requirements, 137; banana, 109–12; barriers, 138; crossborder, 119; fair-trade, 12–13, 47; free area, 152; foreign, 79; free-trade, 10, 28, 132; global trade, 10, 13–15; international, 14, 46, 195; international imperatives, 11; intra-group, 122; liberalisation, 11, 19, 131–2, 143; links between foreign policy, 11; misinvoicing, 17; over-the-counter (OTC), 73; phenomenal growth of, 62; policy, 132; post-colonial instrument 11; protection, 144; regime, 11–13, 20; slave, 37; tariffs, 131, 151; terms of, 113, 189, 194–6; theory, 113; unregulated, 50; US-Africa, 182; US-Ghana, 55; US-Russia, 54

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238

TAX JUSTICE

Truman, Harry, 190, 201 Turner, Ted, 213 Ugarteche, Oscar, 96, 100, 101 underpricing, 56 Unicef, 10 United Kingdom, 108, 153; Consumer Credit Act (1974), 96; corporate tax avoidance, 108; Duke of Westminster ruling, 127; Inland Revenue, 116; non-domestic residents, 125; tax exiles, 59 United Nations, 7, 10, 52, 150; Convention Against Corruption (COC), 96, 183; International Declaration of Human Rights, 81; United Nations Environmental Programme (UNEP), 192; General Assembly, 164; Global Environmental Organisation (GEO) proposal of, 159; Millennium Development Goals (MDG) 6, 7, 15, 41, 88, 122, 150, 164, 206–7; Monterrey Process on Financing for Development process (FfD), 5, 13, 125, 131; Rio Earth Summit (1991), 14; Rio+10 Summit, 36; Social Summit (1995), 10, 14; Tax Committee, 17; World Food Summit (2006), 69 United Nations Conference on Trade and Development (UNCTAD), 76, 134, 139, 194; definition of the terms of trade, 195; World Investment Report (WIR), 61 United Nations Development Programme (UNDP), 25, 30, 155; Climate Change

Kohonen 03 index Sec1:238

Mitigation Facility (CCMF), 212; Global Public Goods Net (gpgNet), 206; Human Development Reports (HDR), 29, 190, 217 United States (US), 38, 39, 50, 206; bankruptcy code Chapter 9, 99; bankruptcy code Chapter 11, 98–9; corporate taxation, 150; Delaware, state of, 119; Federal Reserve Bank (Fed), 77; financial crimes committed abroad, 16; financial system, 15; headquarters of TNCs, 111; housing market, 1; money laundering legislation, 60; poor respect of foreign laws, 59–60; Senate, 115; Treasury, 54 value, chain, 111; creation of, 51; difficulty of measuring, 137; economic, 20; market, 110; stock exchange, 50, 158; traditional system, 193; transfers of, 189; use, 195, 201 Van Parijs, Philippe, 29 vehicle, off-balance sheet, 117; special purpose, 116; structured investment, 62, 117 Versailles Treaty, 93–4 Volvo Car Company, 154 Washington Consensus, 10; neoliberal, 10, 207 Western, banks, 16, 46; cultural domination, 193; domination, 192, 212–14; governments, 214; intermediaries, 16 wealth, High Net Worth Individual, 35, 57, 69; Westernisation, 32

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INDEX

welfare state, 28, 35, 73; global model, 211–14, 221 Wolfenson, James, 36 World Bank, 8, 9–10, 25, 34, 190 Global Environment Facility (GEF), 216; Poverty Reports, 33; voting rights, 38; World Development Report (WDR), 33 World Public Finance, 1, 6, 19, 40–1, 45–6, 57 World Social Forum, 45 World Trade Organisation (WTO), 11–12, 52, 212; Doha Development Round (2006 ongoing), 12, 134; General Agreement on Trade in Services (GATS), 12, 77, 145;

Kohonen 03 index Sec1:239

239

Multilateral Agreement on Investment (MAI), 11, 12; Seattle Ministerial Meeting (1999), 12; Trade Related Intellectual Property Rights (TRIPS), 143; Trade Related Investment Measures (TRIMS), 136; Uruguay Round (1995), 11 Wolf, Martin, 118 World Wildlife Fund (WWF), Living Planet Index (LPI), 192, 200 xenophobia, 35, 60 Zambia, 54 Zurich, 181

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