Amer­ica in the way of global growth

Financial Mirror (Cyprus) - - FRONT PAGE -

The Third In­ter­na­tional Con­fer­ence on Fi­nanc­ing for De­vel­op­ment re­cently con­vened in Ethiopia’s cap­i­tal, Ad­dis Ababa. The con­fer­ence came at a time when de­vel­op­ing coun­tries and emerg­ing mar­kets have demon­strated their abil­ity to ab­sorb huge amounts of money pro­duc­tively. In­deed, the tasks that these coun­tries are un­der­tak­ing – in­vest­ing in in­fra­struc­ture (roads, elec­tric­ity, ports, and much else), build­ing cities that will one day be home to bil­lions, and mov­ing to­ward a green econ­omy – are truly enor­mous.

At the same time, there is no short­age of money wait­ing to be put to pro­duc­tive use. Just a few years ago, Ben Ber­nanke, then the chair­man of the US Fed­eral Re­serve Board, talked about a global sav­ings glut. And yet in­vest­ment projects with high so­cial re­turns were be­ing starved of funds. That re­mains true to­day.

The prob­lem, then as now, is that the world’s fi­nan­cial mar­kets, meant to in­ter­me­di­ate ef­fi­ciently be­tween sav­ings and in­vest­ment op­por­tu­ni­ties, in­stead mis­al­lo­cate cap­i­tal and cre­ate risk.

There is another irony. Most of the in­vest­ment projects that the emerg­ing world needs are long term, as are much of the avail­able sav­ings – the tril­lions in re­tire­ment ac­counts, pen­sion funds, and sov­er­eign wealth funds. But our in­creas­ingly short­sighted fi­nan­cial mar­kets stand be­tween the two.

Much has changed in the 13 years since the first In­ter­na­tional Con­fer­ence on Fi­nanc­ing for De­vel­op­ment was held in Mon­ter­rey, Mexico, in 2002. Back then, the G-7 dom­i­nated global eco­nomic pol­i­cy­mak­ing; to­day, China is the world’s largest econ­omy (in pur­chas­ing-pow­er­par­ity terms), with sav­ings some 50% larger than that of the US. In 2002, Western fi­nan­cial in­sti­tu­tions were thought to be wizards at man­ag­ing risk and al­lo­cat­ing cap­i­tal; to­day, we see that they are wizards at mar­ket ma­nip­u­la­tion and other de­cep­tive prac­tices.

Gone are the calls for the de­vel­oped coun­tries to live up to their com­mit­ment to give at least 0.7% of their GNI in de­vel­op­ment aid. A few north­ern Euro­pean coun­tries – Den­mark, Lux­em­bourg, Nor­way, Swe­den and, most sur­pris­ingly, the United King­dom – in the midst of its self-in­flicted aus­ter­ity – ful­filled their pledges in 2014. But the United States (which gave 0.19% of GNI in 2014) lags far, far be­hind.

To­day, de­vel­op­ing coun­tries and emerg­ing mar­kets say to the US and oth­ers: If you will not live up to your prom­ises, at least get out of the way and let us cre­ate an in­ter­na­tional ar­chi­tec­ture for a global econ­omy that works for the poor, too. Not sur­pris­ingly, the ex­ist­ing hege­mons, led by the US, are do­ing what­ever they can to thwart such ef­forts. When China pro­posed the Asian In­fra­struc­ture In­vest­ment Bank to help re­cy­cle some of the sur­feit of global sav­ings to where fi­nanc­ing is badly needed, the US sought to tor­pedo the ef­fort. Pres­i­dent Barack Obama’s ad­min­is­tra­tion suf­fered a sting­ing (and highly em­bar­rass­ing) de­feat.

The US is also block­ing the world’s path to­ward an in­ter­na­tional rule of law for debt and fi­nance. If bond mar­kets, for ex­am­ple, are to work well, an or­derly way of re­solv­ing cases of sov­er­eign in­sol­vency must be found. But to­day, there is no such way. Ukraine, Greece, and Ar­gentina are all ex­am­ples of the fail­ure of ex­ist­ing in­ter­na­tional ar­range­ments. The vast ma­jor­ity of coun­tries have called for the cre­ation of a frame­work for sov­er­eign-debt restruc­tur­ing. re­mains the ma­jor ob­sta­cle.

Pri­vate in­vest­ment is im­por­tant, too. But the new in­vest­ment pro­vi­sions em­bed­ded in the trade agree­ments that the Obama ad­min­is­tra­tion is ne­go­ti­at­ing across both oceans im­ply that ac­com­pa­ny­ing any such for­eign di­rect in­vest­ment comes a marked re­duc­tion in gov­ern­ments’ abil­i­ties to reg­u­late the en­vi­ron­ment, health, work­ing con­di­tions, and even the econ­omy.

The US stance con­cern­ing the most dis­puted part of the Ad­dis Ababa con­fer­ence was par­tic­u­larly dis­ap­point­ing. As de­vel­op­ing coun­tries and emerg­ing mar­kets open them­selves to multi­na­tion­als, it be­comes in­creas­ingly im­por­tant that they can tax these be­he­moths on the prof­its gen­er­ated by the busi­ness that oc­curs within their borders. Ap­ple, Google, and Gen­eral Elec­tric have demon­strated a ge­nius for avoid­ing taxes that ex­ceeds what they em­ployed in cre­at­ing in­no­va­tive prod­ucts.

All coun­tries – both de­vel­oped and de­vel­op­ing – have been los­ing bil­lions of dol­lars in tax rev­enues.

Last year, the In­ter­na­tional Con­sor­tium of In­ves­tiga­tive Jour­nal­ists re­leased in­for­ma­tion about Lux­em­bourg’s tax rul­ings that ex­posed the scale of tax avoid­ance and eva­sion. While a rich coun­try like the US ar­guably can af­ford the be­hav­ior de­scribed in the so-called Lux­em­bourg Leaks, the poor can­not.

I was a mem­ber of an in­ter­na­tional com­mis­sion, the In­de­pen­dent Com­mis­sion for the Re­form of In­ter­na­tional Cor­po­rate Tax­a­tion, ex­am­in­ing ways to re­form the cur­rent tax sys­tem. In a re­port pre­sented to the In­ter­na­tional Con­fer­ence on Fi­nanc­ing for De­vel­op­ment, we unan­i­mously agreed that the cur­rent sys­tem is bro­ken, and that mi­nor tweaks will not fix it. We pro­posed an al­ter­na­tive – sim­i­lar to the way cor­po­ra­tions are taxed within the US, with prof­its al­lo­cated to each state on the ba­sis of the

The US eco­nomic borders.

The US and other ad­vanced coun­tries have been push­ing for much smaller changes, to be rec­om­mended by the OECD, the ad­vanced coun­tries’ club. In other words, the coun­tries from which the po­lit­i­cally pow­er­ful tax evaders and avoiders come are sup­posed to de­sign a sys­tem to re­duce tax eva­sion. Our Com­mis­sion ex­plains why the OECD re­forms were at best tweaks in a fun­da­men­tally flawed sys­tem and were sim­ply in­ad­e­quate.

De­vel­op­ing coun­tries and emerg­ing mar­kets, led by In­dia, ar­gued that the proper fo­rum for dis­cussing such global is­sues was an al­ready es­tab­lished group within the United Na­tions, the Com­mit­tee of Ex­perts on In­ter­na­tional Co­op­er­a­tion in Tax Mat­ters, whose sta­tus and fund­ing needed to be el­e­vated. The US strongly op­posed: it wanted to keep things the same as in the past, with global gov­er­nance by and for the ad­vanced coun­tries.

New geopo­lit­i­cal re­al­i­ties de­mand new forms of global gov­er­nance, with a greater voice for de­vel­op­ing and emerg­ing coun­tries. The US pre­vailed in Ad­dis, but it also showed it­self to be on the wrong side of history.





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