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Efficient, resilient, and accountable governance systems are essential to successfully manage natural resources, provide public services, foster trade, attract private investment, and manage aid relationships. Corruption and secrecy are often at odds with such goals. Illicit financial flows, for example, undermine development and governance while secrecy in extractive industries can squander a nation’s wealth and weaken the social contract.
CGD’s work in this area focuses on contact transparency, tax evasion and avoidance, efforts to combat money laundering and terrorism financing, and the negative effects they can have on remittance flows and international security.
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India’s reform of household subsidies for the purchase of LPG cooking gas stands out for a several reasons. The paper provides a detailed picture of the reform through its various stages, including how the process was conceptualized, coordinated, and implemented. It analyzes how such a reform must be able to adapt to concerns as they arise and to new information, how digital technology was used and how it is possible to use a voluntary self-targeting “nudge” to defuse potential resistance to income-based targeting.
The Sustainable Development Goals (SDGs) include a target to “significantly reduce illicit financial flows (IFFs).” While there is no global consensus about what this means, working definitions point to funds that are “illegally earned, transferred, and/or utilized.” The term is thus generally seen as an umbrella for a wide variety of “dirty money” including funds associated with drug, arms, and human trafficking; wildlife and natural resource crime; state capture and illicit enrichment; the financing of terrorism; and the evasion of taxes and tariffs.
Counting the uncountable?
IFFs is a useful composite category insofar as it draws attention to the role of international financial channels in enabling, profiting, and providing a haven for the proceeds of various forms of crime and corruption. However, it is often used in precisely the opposite way: to downplay down these issues. Raymond Baker of Global Financial Integrity, in his 2005 book Capitalism’s Achilles’ Heel, famously argued that grand corruption is a relatively minor contributor to illicit financial flows, responsible for just for a few percent of the total, with proceeds of crime responsible around a quarter, and “commercial tax evasion” (from his studies of trade misinvoicing) contributing the largest portion. This statement has been frequently repeated. However, it is increasingly recognised that the numbers underlying it (based on gaps and mismatches in trade and balance of payments data) are just not reliable. Transactions interpreted as trade misinvoicing and therefore tax-motivated can also reflect the payment of bribes and kickbacks (i.e., corruption) as well as simple noise in the data.
The apparent availability of sets of regular, IFF figures (such as those published by Global Financial Integrity) seems to have been an important influencing factor in creating an expectation that staunching the flow of IFFs could contribute a massive boost to finance for development, and also that generating regular sets of global dollar measures is feasible. Thus the experts who set the SDG indicators optimistically established the indicator to be measured as “the total value of inward and outward illicit financial flows (in current United States dollars).”
The task of coming up with a methodology has been passed to the UN Office of Drugs and Crime (UNODC), together with the UN Conference on Trade and Development (UNCTAD). Last week the organisations brought together an expert group in Vienna to discuss initial proposals towards a global indicator framework.
Should legally compliant taxpayer behaviour be included in definitions of the “illicit”?
A key debate which remained unresolved in Vienna was whether the IFF concept should also cover controversies over corporate tax planning, even where taxpayers are acting within existing tax rules. While tax fraud and tax evasion would certainly be included within the catalogue of lawbreaking transactions, organisations associated with the Tax Justice Network have called for the IFFs definition to include operations by multinational corporations which are within the letter, but not the “spirit” of the law, or which are deemed “socially unacceptable.”
The idea of a separate letter and spirit of the law is problematic. It also seems like a stretch beyond what the SDG drafters intended. Target 16.4; which includes IFFs, brackets it with arms trafficking, the theft of public assets, and organised crime, suggesting that the drafters had in mind the idea of “dirty money” rather than base erosion and profit shifting.
While there are important questions about how to tax multinational corporations and the digital economy, bracketing legally compliant taxpayer behaviour into a single category with criminal and corrupt money flows seems like a singularly bad idea: a recipe not just for bureaucratic confusion and an arms race of big numbers and meaningless comparisons, but also for real world consequences of undermining progress towards clear and effective tax systems governed by the rule of law.
Misaligned expectations, misaligned measures
Alex Cobham, of the Tax Justice Network, and Petr Jansky developed and presented an initial proposal for estimating tax-related illicit financial flows, developed on behalf of UNCTAD. The proposal is to measure “misalignment” between the locations where corporate profits are declared and the locations where “economic activity of MNEs” takes place by using aggregated country-by-country reporting (CBCR) data submitted by large companies as part of new regulations focused on Base Erosion and Profit Shifting. Economic activity is proposed as the simple average of employee headcount and of final sales within each jurisdiction (this is something similar to Cobham and Jansky’s estimate of misalignment of US company profits, or Oxfam France’s “Opening the Vaults” analysis of country-by-country data published by EU banks).
The advantage of this number is that (like the original trade misinvoicing headline figures) it is easy to calculate from data which will be readily available. (The OECD plans to collect and publish aggregated data from country-by-country reports.) It is likely to produce a large number (which has come to be expected).
The disadvantage: it bears no relationship to tax evasion or avoidance. It compares profits with "real economic activity" using a metric that no tax system in the world currently uses. This is not tax avoidance, but avoidance of a unitary tax which does not exist. Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration describes CBCR data as the means for tax administrations to smell a rat, ”such as where, for example, you have all your profits in a zero-tax jurisdiction where you have no sales, no employees and no assets.” The proposed metric suggests that rats should be sniffed out wherever global corporations have operations that do not result in homogenous profit margins and labour productivity across diverse locations and business units.
If this ratio were adopted as a UN metric of “illicit financial flows,” it would likely lead to revenue authorities being put under political pressure to adjust taxpayer’s incomes accordingly—despite the fact that CBCR data was not intended to be used as a basis for such “formulary apportionment.” Furthermore, it would encourage a narrow focus on a single tax (and in many low-income countries, very small) set of taxpayers, rather than consideration of other taxes, tariffs, and fees which are often subject to cross-border tax evasion and fraud.
IFF indicators: Where to go from here?
The development of the IFF indicators is not a done-deal, but will be the start of a process that includes expert consultations, pilot studies, and testing which is envisaged to result in guidelines for national, regional, and global estimates. The methodological work on the indicator is expected to be completed by mid-2019.
Any definition or indicator on tax-related aspects of illicit financial flows should be recognisable to those working in tax compliance (both on the side of tax inspection and taxpayers). The discussions in Vienna (and proceeding them, in Geneva) were notable for the relative absence of engagement by tax practitioners. This was perhaps not on purpose, but rather a reflection that experts from revenue authorities and private practice—and those involved in research, teaching, and technical assistance on tax policy and administration—don’t view their work in terms of “illicit financial flows.” This means that those most likely to question the meaningfulness of a concept that brackets legally earned profits with the proceeds of crime are simply not there to make the case. Those from the private sector are perhaps least likely to engage in a process where it seems they have been cast as the villains from the outset.
The question of whether the desired dollar indicator is feasible and meaningful should not be taken as given. International laundering of the proceeds of crime and corruption is a very real phenomenon. But the ability to measure and track it year-on-year through application of a simple formula to readily available statistics is not. Actors engaged in illegal activity either do not want to be discovered, or are able to operate with such impunity that they do not fear discovery. The prospect of developing a standard methodology and asking national statistics agencies to produce reliable, regular, and standardised figures on the total value of such flows may simply be an overoptimistic quest.
Action on illicit financial flows does not depend on a global “big number.” Indeed, some of the other problems under SDG goal 16. 4—such of return of stolen assets and combatting organised crime—do not have an indicator. There is no SDG indicator on grand corruption. If the chimera of a single number was abandoned, there are other things that could be measured and better understood:
increasing seizure of proceeds related to corruption;
increase in the capacity of institutions that tackle wildlife poaching and natural resource crime;
increasing access to exchange of information agreements (including on country-by-country reporting and automatic exchange of banking information);
investigation of grand corruption cases;
number of countries that have eliminated the possibility of banking secrecy; and
effectiveness of reliable access to beneficial ownership information and of mutual legal assistance.
There is perhaps a fear that multinational tax avoidance will fall off the international development agenda altogether if it is not included in the SDGs under target 16.4. But this seems unlikely. There is already a commitment under Action 11 of the G20/OECD led BEPS programme to measure indicators of Base Erosion and Profit Shifting. And there is a better place for considering the tax affairs of multinational corporations in relation to the SDGs, rather than as an odd-one-out alongside arms trafficking, stolen assets and organised crime. That is under target 17.1: strengthening domestic resource mobilization.
Developing countries should consider international taxation challenges as part of their overall approach to setting tax policy and administration priorities. Rich countries should consider how their tax rules and treaties and the conduct of multinational corporations may either support or undermine tax collection in developing countries.
Strengthening the consistency of international tax rules and the administration of tax law so that it is neither weakly enforced, nor capricious and predatory, would be positive for citizens, businesses, and public budgets, and is good for both inward investors and host countries. Bundling questions about the evolution of international tax rules under a weakly specified but easily sensationalised category of “illicit financial flows” undermines trust, understanding, and the ability to have constructive conversations about how to do this.
A lot has been said and written about post-conflict Liberia’s broken civil service and capacity void, but—at the risk of sounding self-pitying—I believe that no ministry felt the impact as severely as the Ministry of Finance at the dawn of President Ellen Johnson Sirleaf’s first administration in January 2006.
There we were with the imperative of rapidly obtaining debt relief and quickly delivering tangible improvements in our country’s finances and living conditions—with little capacity and debilitating corruption. I had returned to lead a ministry with many ghost workers—people on the payroll in name but not in body—and post-retirement-age employees. A number of senior staff had, at best, a substandard high school education. Some otherwise capable people were appointees of Charles Taylor and the transitional governments whose capacity had previously been directed towards creative means of defrauding the state!
In need of quick fixes across the government, I think it’s fair to say that both our administration and our international partners were slow to fully embrace civil service reform and institution-building. The wealth of technical assistance under the Governance and Economic Management Assistance Program (GEMAP) and other programs certainly helped us move our reform efforts forward, but it built little sustained capacity. Progress was made in payroll clean-up and limited organizational restructurings here and there, but we were simply too focused on getting things done in those early years to tackle the difficult business of comprehensive civil service reform and institution-building.
At the Ministry of Finance, we repeatedly stated that these were critical long-term objectives, but we were inevitably constantly consumed with putting out fires. So to create some desperately needed fiscal space, we worked to remove ghosts and staff beyond retirement age from the payroll. As head of the first ministry to wrestle with the latter problem, I was smeared as the “heartless” minister who targeted aged staff who were terrified of facing irregular, measly pensions. To fill critical capacity holes, we pounced on the various donor and philanthropy-financed initiatives, including Transfer of Knowledge Through Expatriate Nationals (TOKTEN); expatriate advisors under GEMAP; an outstanding Mozambican advisor to the minister financed by the World Bank; the Senior Executive Service program; and the Scott Family Liberia Fellows Program and Harvard’s Kennedy School MPAID summer interns, both of which provided extremely bright and energetic young expatriate staff.
These last two programs would eventually inspire the development of the President’s Young Professionals Program, or PYPP, which continues to help strengthen Liberia’s civil service today. Through a transparent and meritocratic process, the PYPP recruits, trains, and places top university graduates throughout the government. Since its establishment in 2009, more than 120 fellows have been recruited into the Liberian civil service through the PYPP, including 19 in the Ministry of Finance and 7 in the Liberia Revenue Authority. More than 90 percent of these fellows remain in government today and the majority of those still serving have risen to positions of greater responsibility.
As Liberia begins its transition to a post-Sirleaf government, the PYPP will no doubt come to be appreciated as one of her noteworthy achievements. The incoming minister of finance will certainly find herself or himself with more capacity at the junior and middle ranks of the ministry than I did in 2006. I have high hopes that this inheritance will convince the new administration to fully own and safeguard the PYPP as an important component of an institution-building strategy for Liberia. As the PYPP model begins to expand to Ghana and Cote d’Ivoire under the banner of the Emerging Public Leaders (EPL) program, I expect that in time other ministers of finance will consider how this promising program can help address their particular capacity development needs.
Yet I can’t resist this opportunity to spell out the four reasons why PYPP and EPL-type programs could be especially suited to the evolving capacity needs of ministries of finance in constrained resource environments: attracting young talent; adaptability to digitalized public finance; cost-effectiveness; and building integrity.
With few graduate-level applicants and stiff competition for young talent from commercial banks and other private sector establishments, deliberate efforts to attract the brightest graduates from local universities into ministries of finance are necessary (assuming hiring into the civil service is not frozen). Career-building incentives in the form of opportunities for professional growth, mentorship, and performance management can be valued as attractive supplements to otherwise moderate financial compensation and increase retention.
The ongoing digitalization of public finance underscores the need for skilled staff that adapt comfortably and productively to a more technology-dependent revenue administration and public financial management system. Such staff are more likely to be young people, many of whom are “digital natives” more conversant with technology than current older civil servants.
PYPP and EPL-type programs can render young fellows highly cost-effective when compared to internationally recruited (junior) technical consultants. At an annual cost of $15,000 per fellow in Liberia, these programs can be more cost-effective than other models of technical support and capacity-building.
Last but not least, the meritocratic recruitment process and focus on integrity in PYPP and EPL training can help develop a cohort of young civil servants that contribute to the fight against corruption and increase the credibility of ministries of finance in that connection.
Civil service reform and institution-building will forever remain fraught with political pitfalls and resistance. So when low-cost innovations can help move them a few steps forward, ministers of finance in resource-constrained environments should eagerly embrace them.
 GEMAP was international partners’ response to the record of corruption and bad governance of the transitional government prior to President Sirleaf’s election. It placed financial controllers in key state-owned enterprises, a financial expert in the Central Bank of Liberia, financial experts in the cash management committee at the Ministry of Finance, and a budget adviser at the then-autonomous Bureau of the Budget. With a focus on controls and the co-signing authority given to these experts, GEMAP was very controversial but ultimately helpful (“a necessary intrusion” in the words of the president).
 See Gupta, Keen, Shah, and Verdier Digital Revolutions in Public Finance, International Monetary Fund, 2017.
History was made in Zimbabwe this week as Robert Mugabe finally agreed to resign the presidency after almost four decades in power. How the country will be governed by new leadership is still very much unknown—yet it is not too early for the international community to start considering how it can offer help to rebuild Zimbabwe’s economy for the benefit of its people.
“The question is, is this going to be just a junta with some kind of fig leaf,” asks Todd Moss, CGD senior fellow and longtime Zimbabwe watcher, in this edition of the CGD Podcast, “or is this a genuine transitional authority that is going to lead to something better, which the international community can get behind?”
In the end, Mugabe’s own party and his military turned on him and forced him from office, where decades of economic decline, political opposition and international condemnation could not. Zimbabwe is left in a parlous state—indebted and unstable. Yet Moss, who lived and worked in Zimbabwe for some time and also served as a Deputy Assistant Secretary of State under President George Bush, says there are specific things that donor governments, including the US, and international institutions, should be considering.
In the short term they include initial assistance in setting up free and fair elections, due next year, as well as reviewing Zimbabwe’s debt arrears and the sanctions against some regime members. In the long run, Moss says, Zimbabwe could benefit from the kind of truth and reconciliation process its neighbor South Africa undertook after apartheid. Moss outlines his ideas in a new blogpost entitled Seven Ways the International Community Can Help Zimbabwe through Tough Times.
Events are in tremendous flux in Zimbabwe after the non-coup committed by the military last week and the resignation of President Robert Mugabe on November 21. The immediate focus of negotiators has been on finding a peaceful exit for Mugabe and some kind of inclusive authority to get the country to elections.
Yet, it’s also not too early for the international community to start considering constructive steps to help the country get through the inevitable transition and back on a path to democracy and prosperity. Here are a few ways:
Technical support for a timely and credible election. After losing a referendum in 2000 and the presidential election in 2008, the ruling ZANU-PF has manipulated and distorted the electoral system to the point that it can no longer deliver a fair result. Elections have long been scheduled to be held by August 2018, but the country likely needs time to overhaul its flawed voting system and to align its laws with the 2013 constitution, if it hopes to have a truly free and fair poll. Objective technical support from the outside, including with the voter roll and data systems, could give opposition candidates confidence in the poll and boost the integrity of the outcome.
Set benchmarks for ending sanctions. The United States, Canada, Australia, and the EU all have sanctions in place on targeted individuals who are responsible for undermining democracy and the rule of law in Zimbabwe. The US Treasury currently lists 209 individuals and entities that are subject to US financial sanctions. Once Mugabe is out of power and a transition is genuinely underway, these programs should begin a review of the benchmarks for cancellation.
Debt restructuring. Zimbabwe owes more than $9 billion to international creditors, including more than $1 billion in arrears to the World Bank. Resolving the arrears overhang is a precondition for new lending—and any eventual economic recovery. A bailout plan presented by the authorities in Lima in 2015 was far too premature. But the plan nonetheless provided the skeleton for a roadmap. Clear and careful triggers for arrears clearance and eventual lending (rather than an embarrassing whitewash) could provide momentum for reforms in a manner that the US and other shareholders could get behind.
Private investment. While aid and debt relief will be necessary, the real investment that’s going to drive Zimbabwe’s revival of its farms and factories will come from private capital. Zimbabwe’s allies could help to facilitate diaspora investment back home and use agencies like OPIC and the CDC to catalyze and crowd in private investment. For the US, this is especially relevant in the electricity sector where Zimbabwe will need a major overhaul and the Power Africa tools are ready to contribute.
A land ownership audit. Agriculture is still the backbone of the economy, a source of employment, and the foundation of the banking sector. Land is a highly-charged political issue, but dealing with who-owns-what and issues of fairness and efficiency cannot be avoided if the country hopes to move forward. Some kind of external platform, perhaps hosted by the UN, could start that process with an objective accounting and audit of land ownership.
Support for a formal justice and healing process. Zimbabweans will eventually need some mechanism for dealing with past injustices and atrocities. This might be like South Africa’s Truth and Reconciliation Commission, which offered amnesty in exchange for open testimony, or some other arrangement suited to Zimbabwe’s circumstances.
Zimbabwe’s future is, as it should be, in the hand of its own people. But the country has friends around the world and cannot thrive isolated from the rest of the world. The international community has a crucial part to play in supporting Zimbabweans to recover from their national trauma and realize their own ambitions.
On the heels of President Trump’s trip to the Philippines, a bilateral foreign policy question looms. Next month, the Millennium Challenge Corporation’s board of directors will meet to select the set of countries that will be eligible for the agency’s large-scale grant programs. One of the decisions on the table will be whether to continue the partnership with the Philippines. The board needs to formally reselect the country this year for program development to proceed. The Philippines has been a long-term partner for MCC, having completed a threshold program (2006–2009) and a compact (2011–2016). In late 2014, MCC gave the Philippines the green light for the next step, selecting it to start developing a second compact. However, over the last year and a half, questions have emerged about whether the Philippines continues to meet MCC’s good governance criteria. In one month, MCC and its board will have to answer those lingering questions.
For background on MCC’s selection process, visit MCC’s official document or my short synopsis (see section “How the Selection Process Works,” p. 2-4).
The Philippines and the United States have long been strong allies. Close military and security cooperation, substantial trade and investment, and immigration have contributed to what both countries have typically viewed as an overwhelmingly favorable relationship. The inauguration of President Rodrigo Duterte in mid-2016, however, created something of a rift. At the outset of his tenure, Duterte engaged in inflammatory anti-American (and specifically anti-Obama) rhetoric, threatening to “break up with America.” This came largely in response to concerns voiced by President Obama and others over Duterte’s support for the extrajudicial killings of thousands of individuals suspected of involvement in illicit drug activity. When MCC’s board faced the decision last year of whether to give the Philippines the go-ahead to continue working toward a second compact, it deferred, opting to take a wait-and-see stance rather than a forward-leaning foreign policy decision. That decision, which could have been interpreted as either a stamp of approval or a punitive action with respect to a significant ally would have occurred just weeks before the new Trump administration was to take office.
Over the past year, anti-American rhetoric has waned as Presidents Trump and Duterte have forged a more friendly relationship. And Trump has been virtually silent on the human rights concerns expressed by the previous administration—even telling Duterte during an early phone call that he was doing an “unbelievable job on the drug problem.”
This sets up the MCC board for a tough call. Should good governance-focused MCC take a stand on the Philippines’ serious human rights concerns even though the White House has been ambivalent, at best, about the issue? How much will the answer to this question be informed by pressure to treat delicately an important geostrategic ally whose current leadership has responded to US criticism by threatening American interests and edging closer to China?
In making that decision, another important factor will come into play. The Philippines doesn’t pass MCC’s scorecard criteria this year, falling just short on the critical Control of Corruption indicator. In some ways, that may seem convenient. Pointing to a failing Control of Corruption indicator would theoretically give the board cover to pull back MCC’s engagement with the Philippines without having to (a) express concerns about other governance issues and (b) awkwardly put MCC, as opposed to the State Department, at the leading edge of that conversation.
As tempting as that rationale might be, it’s also wrong. The Philippines’ failing score does NOT mean that the country is suddenly much more corrupt. In fact, the change in score is slight and not even close to statistically significant. The simple fact is that the Philippines has always been near the middle of the pack on this indicator, fluctuating above and below the passing threshold (in its eight years as a lower-middle-income country, it’s passed the Control of Corruption indicator three times). Simply put, its measured corruption performance this year is not meaningfully different than the year it was selected.
As I’ve arguedmanytimes, MCC should not necessarily curtail a country’s compact development process just because it fails the Control of Corruption hurdle. For corruption to be a valid justification, MCC should be able to point to a concrete decline in actual policy—not just in score. MCC’s official guidance suggests this is the agency’s approach, as well, noting that the board should use its judgement—informed by its understanding of data limitations—to interpret what the scorecard says about policy performance. Unfortunately, the board’s interpretation of the data has sometimes been more rigid than the indicators’ imprecision allows. For instance, the board decided not to reselect Benin, Sierra Leone (FY2014), and Kosovo (FY2017) for compact eligibility when they narrowly failed the Control of Corruption indicator, even though MCC acknowledged (for the former two at least) there had been no deterioration in policy. Sierra Leone and Kosovo were relegated to MCC’s much smaller threshold program. Benin was reselected for compact eligibility the following year, but only after compact development was slowed by the earlier decision. Earlier this year, I was hopeful that MCC would formalize an approach to corruption that would—for decisions about whether to reselect countries to continue compact development—reduce the need for the board to trade off appearing to “play by the rules” (countries must pass the Control of Corruption hurdle) and the imperative to use data wisely. The current guidance isn’t explicit about this, leaving open the possibility that the board could use the Control of Corruption indicator as an “easy out.” I hope that’s not the route they’ll take.
I hope that instead, the board gives greater scrutiny to other aspects of the Philippines’ scorecard data. For eligibility for a second compact, MCC is clear that there is a higher “good governance” bar. The agency looks not just for a passing scorecard, but for improved performance during the course of the previous compact. In the past, I’ve highlighted why this can sometimes be an impractical criterion, but for the Philippines, there are some signals the board should heed. Notably, while the Philippines still easily passes the Civil Liberties indicator, Freedom House (the indicator’s source) gave the Philippines a “downward trend arrow” due to the extrajudicial killings associated with the war on drugs, as well as threats against civil society activists. The Philippines also fails the Rule of Law indicator (which covers events of 2016 and earlier). The decline is slight, and, given its longstanding middle-of-the-pack rank, it has failed this indicator before. But it will be useful for MCC and the board to understand what is behind the decline and how assessments have changed over the past year.
All this makes the Philippines the decision to watch at MCC’s upcoming December board meeting. In the balance are not only the fate of the Philippines’ compact, but also important questions of how the new board under the Trump administration interprets MCC’s good governance mandate and whether it will use data wisely.
As economic indicators deteriorate, the Tanzanian government has jailed an opposition leader for questioning the Bank of Tanzania's growth statistics. It's time for the World Bank and the IMF to speak up. If it's illegal to question a government's statistics, why should anyone trust them?
Last week Zitto Kabwe, an opposition member of Tanzania's parliament and former chair of the parliamentary accounts committee, posted on Facebook:
I am free, to report to police next week. Comrades, as you have been properly updated by the party, I was arrested by police at home around 6 in the morning. Charged with sedition at Chang'ombe police station based on the speech I gave at Mbagala. And charged with cybercrime and statistics offences based on the economic analysis I presented to the party central committee and later made public. Statistics act is being used for the first time since enacted. Let us test it in court.
One of the crimes Zitto allegedly committed was to question the GDP growth numbers published in the Bank of Tanzania's quarterly report. The central bank says the Tanzanian economy grew at an annual rate of 5.7 percent in the first quarter of 2017. Zitto argues that this is implausible given the Bank of Tanzania's own reports about the collapse of money supply growth since 2016, and calculates—with some bold assumptions we’ll revisit below—that the true GDP growth rate may be closer to 0.1 percent.
The government's interpretation of the 2015 statistics act turns skeptics into criminals—myself included
I asked Aidan Eyakuze, executive director of the Tanzanian civil society organization Twaweza, about this, and he noted that after the bill passed the National Bureau of Statistics clarified that the act "does not prohibit any agency or person from conducting their own research"—which Twaweza does frequently. Indeed, the final text of the act limits the criminal offense to anyone who "publishes or communicates official statistical information which may result in the distortion of facts" (p. 25, para. 5, emphasis added). That's good news, but that last phrase is a little vague.
Unfortunately, the charges against Zitto Kabwe show that the government interprets that phrase to prohibit not just lying about, but even merely disagreeing with the Bank of Tanzania's statistical findings.
If that's the bar for breaking the law, count me guilty. I've previously questioned official statistics quite openly, noting that for years the National Bureau of Statistics' official inflation rates appear to have been significantly underestimated. For that matter, note the massive, unexplained revisions to GDP growth figures from one quarter to the next in the Bank of Tanzania's own reports (see graphs below). Maybe the Bank of Tanzania is guilty too.
Any application of the law premised on the infallibility of official statistics in Tanzania is a recipe for selective, politically motivated enforcement, which we're now seeing.
Even if the official growth figures aren’t wrong, the opposition's main critique still applies
So what did Zitto actually say? And is he right? His main critique is that government policy is leading to a decline in investment and slower growth. His narrower technical claim is that the GDP data is wrong. That claim is based on something called the quantity theory of money. It stipulates that the growth rate of real GDP should be equal to the growth of the money supply minus the inflation rate.
y = m - p
He notes that this relationship used to hold for Tanzania, but recently broke down. The growth of the money supply collapsed in 2016, while inflation and growth were fairly steady. It literally doesn’t add up. So either the theory is wrong or the data is wrong.
Figures based off data from quarterly Bank of Tanzania Economic Bulletin
Personally, I would side with the data. The quantity theory of money is not an accounting identity. It assumes no change in the velocity of money, which need not be the case. So it seems a little hasty to assume growth has fallen that far, that quickly. But that’s not the end of the story.
I emailed Chris Adam, an economics professor at Oxford University who has worked extensively on Tanzania's macro economy, and asked for his reaction to Zitto’s Facebook post. He has “no reasons to believe [the growth figures] are way out of line,” he replied by email.
But the really big issue is what Zitto’s numbers do point to, namely the astonishing decline in domestic credit to the private sector (and the public sector), which in turn is reflected in the sharp slowdown in M3 growth… This is pretty worrying – the growth of real credit to the private sector from the banks has been essentially zero since about mid-2016… I remain concerned that this is a leading indicator on investment and that while growth has remained reasonably robust to date we may see the consequences a bit further down the line.
The central bank isn't independent if the government jails anyone who questions it
Imagine the scenario: next month the Bank of Tanzania announces something truly preposterous, like Chinese-style double-digit economic growth. Everyone would know it was a lie, and that the Bank was covering for the government. But under the current interpretation of the law, media wouldn’t be able to say anything. Opposition politicians wouldn’t be able to question the numbers. Outwardly, everything would look and sound… well, exactly like it does now.
There's no reason to believe the Bank of Tanzania or the IMF, who helps check the growth statistics—endorsed Zitto Kabwe's arrest. But at this point, their silence as critics are jailed feels awkwardly close to complicity.
The Bank of Tanzania as well as the World Bank country director and IMF resident representative should let it be known that official data is fallible—even if not necessarily wrong in this instance—and that they welcome free, open debate of all the Bank of Tanzania’s policies and publications. They will object that this is sullying themselves by getting involved in democratic politics. But that misses the point. Free and open debate is not only vital for Tanzania’s faltering democracy, it’s also indispensable for good macroeconomic governance. If it remains illegal to tell the emperor he has no clothes, we'll never really know if he's naked.
Graphs based on Bank of Tanzania quarterly reports, various months. I’m grateful to Mallika Snyder for research assistance with the data.
The US Department of the Interior announced last week that the United States would no longer seek to comply with the Extractive Industries Transparency Initiative (EITI), an international multi-stakeholder organization that aims to increase revenue transparency and accountability in natural resource extraction. The move—while disappointing—is not altogether unexpected. And sadly, it will put the United States further behind the curve when it comes to corporate transparency.
Why This Matters
EITI established a global standard for reporting financial flows in extractive sectors, a critical element of promoting good governance of oil, gas, and mineral resources—in what the OECD cites as the world’s most corrupt industry. While transparency alone is not enough, citizens and civil society can use published data to increase government accountability, protect revenues, and fight corruption. Given that natural resource wealth too often finances kleptocrats and wars rather than investment and development, this is surely a good thing.
The message from the Department of the Interior suggests that the US government “remains fully committed to institutionalizing the EITI principles of transparency and accountability,” but the decision to no longer implement EITI offers yet another instance of the United States walking away from an international commitment. And in doing so, the US government forfeits its ability to meaningfully champion extractive sector transparency at a time when evidence of EITI’s impact is growing.
In February, Congress used the Congressional Review Act to kill a proposed rule from the Securities and Exchange Commission—scheduled to take effect next fall—that would have required public companies that extract oil, natural gas, or minerals to disclose payments made to foreign governments or the US federal government. The proposed rule was a long-delayed attempt to implement Section 1504 of the Dodd-Frank Wall Street Reform Act—also known as the Cardin-Lugar Provision after its Senate champions.
According to a report from the Department of the Interior’s Office of Inspector General (OIG) published in May, the United States had managed to fulfill seven of the eight requirements for EITI compliance. But the remaining requirement—for the federal government to reconcile its revenue collection data with extractive payment data provided by companies—was proving difficult. The Section 1504 rule would have mandated disclosures from oil, gas, and mining companies. Without it, the Department was left to rely on voluntary disclosures of data—and most companies weren’t providing it. The OIG pointed out that the US government had been pursuing an alternative avenue to fulfilling this requirement, but would ultimately need approval from the EITI board. And if the United States underwent validation (a required assessment of its EITI performance) without such an agreement and was found short of full compliance, its status would be downgraded from “implementing country” to “supporting country.” With the United State slated for validation in April 2018, the clock was ticking.
A Growing Problem?
So why exit EITI now? It is possible the US government was concerned about losing face following a validation process that results in a downgrade, which it sought to avoid by preemptively adopting the “supporting country” moniker. Or perhaps the Department of the Interior simply ceded to pressure from extractive industry companies concerned about privacy and compliance costs.
In any case, the challenge of US EITI compliance was certain to grow. The Initiative is slated to phase in another major requirement in 2020—one on beneficial ownership. EITI countries will be required to report the identity of individuals who own or control extractive companies. The motive behind public disclosure of beneficial ownership is to prevent anonymity that could conceal transnational financial crimes, from terrorist financing and sanctions busting to money laundering and tax evasion. But there are obstacles to mandating beneficial ownership disclosure in the United States (as discussed here), which is complicated by the fact that state governments manage the registration of corporations.
EITI initially had the support of both US industry and government. The American Petroleum Institute, an industry group, is a partner organization of EITI, and contrasted EITI’s level playing field with the Section 1504 Dodd-Frank provision in a press release last year. But times have changed. EITI’s disclosure requirements are growing more stringent. The considerable majority of the Initiative’s implementing countries appear capable of keeping pace. But, sadly, that does not apply to the United States. In extractives transparency, America has long since lost the mantle of leadership. The announcement on EITI suggests that these days it can’t even keep up with the pack.