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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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“Some viewers may find this content distressing” is how Oxfam GB caveats its new video on corporate tax “dodging.” But what I find most disturbing is how it oversells tax transparency as a panacea for domestic resource mobilisation in developing countries.
The video, which portrays companies that invest in developing countries as masked villains, and developing country actors as passive targets, is linked to a call-to-action for the UK government to mandate UK companies to publish country-by-country reports on their taxes. Oxfam argues that this mechanism would contribute to preventing multinational companies “dodging $100bn tax in poor countries,” an amount which could “cover the bill for essential healthcare that could prevent the needless deaths of eight million mothers, babies and children.”
Using alarming imagery and maternal and child mortality statistics in this way is an effective shock-tactic. If you disagree, you must be on the side of the scary-masked-men-who-turn-off-incubators. It is easy to lose sight of the question of whether the policy proposal itself is likely to be effective, and whether it addresses developing country tax priorities.
I am not convinced that public country-by-country reporting is a mechanism that can deliver what its promoters hope.
The ultimate goal of international cooperation on tax should be to enable and encourage governments to collect taxes using the rule of law, accountable to their own citizens. It is important that multinational corporations should be prevented from exploiting information asymmetries or mismatches in tax rules to wriggle out of paying taxes. But it is also important that taxpayers should have clear rules to follow, and that their rights should be respected.
As one of the actions agreed by the G20/OECD to address “base erosion and profit shifting” by MNCs countries are started to require that multinational companies include in their tax return a high-level breakdown of revenues, profits, employment, assets and taxes paid in each country where they do business. The idea is that these “country by country reports” (CBCRs) will provide a rapid risk assessment tool for tax authorities, to target their audit attention. These reports will be shared through exchange of information mechanisms from headquarters countries to other relevant jurisdictions, on condition that these tax authorities also safeguard taxpayer confidentiality and agree to use the data only for risk assessment, not to impose arbitrary tax bills.
Two arguments have been made for public CBCR; the first is to allow revenue authorities in developing countries to gain access to the information without having to go through the exchange of information mechanism, and the second is to allow the public to scrutinise the information.
On the first argument, it is not at all obvious that tax inspectors in developing countries should be excused from the obligation to maintain taxpayer confidentiality and levy taxes according to the rules. Nor have there been a flurry of calls from revenue authorities for this. For example, the African Tax Administrators Forum (ATAF) in their recent flagship report emphasises the importance of developing legal instruments, processes, and skilled staff needed for exchange of information. It does not call for publication of CBCRs to shortcut this process.
The second argument is that country-by-country reports should be open to public scrutiny. The Tax Justice Network argues “This would allow NGOs and journalists to expose[…] any major misalignment between the distribution of profit and the location of real economic activity.” Similarly, the European Commission thinks that public CBCR would incentivize companies to align more closely where they pay taxes with where profit-generating activities occur and facilitate an informed debate on tax policy. However, businesses may have legitimate concerns about commercial confidentiality, and there are fears that publishing country-by-country reports would lead to a cacophony of accusations, misunderstandings, and rebuttals, fuelling further public mistrust. Another concern is politicising tax administration. As ATAF highlights revenue authorities can face political interference, particularly in relation to the auditing of large taxpayers. Publishing CBCRs could increase this as a vulnerability.
How we weigh up these potential costs, risks, and benefits of enforcing public disclosure of this data depends in part on whether we believe the data contained in the CBCR can be effectively interpreted by people outside of the revenue agency (where there is access to much more information). British MP Caroline Flint has argued that “country-by-country reporting is a simple way to tackle a huge problem of avoidance.” But to date public analysis has tended to be naïve (or plain wrong). It is certainly worthwhile testing what public analysis of CBC reports is possible through collaborative exploration of data from the banking sector. It is also worthwhile keeping pressure on the UK and other developed country governments to ensure that the information exchange mechanism in practice is accessible for developing country revenue authorities. And multinational companies should be thinking seriously about how they can provide meaningful assurance that they are responsible tax payers.
But the fear about difficult-to-understand numbers being misinterpreted and exaggerated cannot simply be dismissed. Which brings us back to the Oxfam campaign, which links an estimate of $100 billion lost to tax avoidance with eight million deaths.
Is this meaningful? No.
Firstly, the comparison uses an ambiguity in the definition of “poor countries” to do a “bait and switch.” The estimates on cost of providing basic healthcare to reduce annual maternal and infant deaths by eight million is based on the WHO Global Investment Framework—in which 72 percent of spending is linked to low and lower middle income countries. However, the estimate of tax avoidance from UNCTAD is based on FDI stocks where only 15 percent of the total relates to low and lower middle income countries. Secondly only a portion of any additional tax revenue would in practice be spent on healthcare. The Lancet paper that Oxfam references says $1 in every $10 in additional taxes goes to healthcare.
If instead of putting the aggregate total numbers alongside each other we look at the UNCTAD/Lancet figures for an individual country the picture is quite different. For a poor country such as Malawi (FDI stock in 2012 $1.2 bn) the UNCTAD calculation comes up with an estimate of $21 million of tax—suggesting 13c of additional healthcare spending per person. In a middle-income country like India the figure comes out at 30c of additional healthcare spending, rather than the $5 of additional spending per person recommended by the WHO Framework.
Oli Pearce from Oxfam responded that “we do not assume or state that tackling tax dodging would see this healthcare funded or these deaths prevented.” I am reminded of the famous Brexit Bus slogan about £350m a week and funding the NHS, the numbers were put alongside each other just to catch our attention, not to be seen as a real statement of possibility.
Public political debate is increasingly played out through such polarised populism and broad brush claims. The video’s powerful emotive imagery could equally well have been whipped up by the ad agency for a client wanting to portray some other cast of scary masked figures: immigrants, the EU, the IMF, “White Monopoly Capital” or Obamacare “death panels,” take your pick.
Playing games with maternal and infant mortality figures, to inflate the perceived potential of a favoured policy proposal is not what I expect from Oxfam. The ability of organisations to enable people to evaluate and understand facts, have reasoned debates, and collectively learn and test ideas is more important to accountability than any single piece of data or reporting template. It is distressing that the team at Oxfam GB have put the hopes invested in the idea of public CBCR ahead of the organisation’s responsibility to inform the public.
Development Finance Institutions (DFIs) exist to promote development by investing in the poorest, least developed countries. They often route those investments via holding companies or private equity funds domiciled in tax havens. On the face of it, that seems absurd: tax havens are widely seen as a drain on development, depriving cash-strapped governments of billions of dollars in public revenue. Should the shareholders of DFIs demand a stop to this practice, as civil society urges?
In a new paper I argue that whilst widespread opposition to DFIs investing via tax havens is understandable, it is misguided. Banning the use of tax havens would do more harm than good. The argument rests on the answers to two questions: what do DFIs use tax havens for, and what are the alternatives to using them? The short answers are that tax havens are used to compensate for shortcomings in the legal systems of the countries that DFIs invest in, and that if DFIs stopped using tax havens, they would use onshore financial centres in rich countries instead. And that would not help developing countries one jot.
Why should DFIs continue to use tax havens?
To simplify matters, let’s say we care about two things: the amount of tax that developing countries raise from foreign investors and the quantity of investment in capital-scarce countries. We care because taxes pay for public services and investment creates better jobs and produces goods such as renewable energy.
Most of what we hear about tax havens has to do with multinational corporations shifting profits to low-tax jurisdictions. But in the context of where investors put their holding companies, what matters more are bilateral tax treaties. These are what determine whether investors pay a reduced rate on dividends or are exempt from capital gains tax, for example. Only a few tax havens have advantageous tax treaty networks, but established financial centres like London and Amsterdam have extensive networks. So as a rule, swapping a tax haven for an onshore financial centre would not help developing countries gather more tax.
A case in point is a recent accusation that a structure that CDC has invested in, via the fund manager Actis, has deprived the Ugandan government of £38m in capital gains tax by using holding companies based in Mauritius. As it happens, the UK also has a tax treaty with Uganda, so if Actis had put its holding companies in London, no capital gains taxes on the sale of equity would have been due in Uganda (and interest on the shareholder loans would have been taxed in London, not Uganda).
How about requiring DFIs to invest directly, without using holding companies or fund managers? Holding companies and funds should be “tax neutral” in the sense that their use does not result in investors paying more tax than they would when investing directly—this is why they will always be domiciled in specialist financial centres that allow for that (and meet legal and regulatory requirements). DFIs say they invest directly when they can, but that holding companies are sometimes useful for legal reasons and delegation to specialist fund managers works better when trying to invest in small businesses. The Ugandan power generator Umeme was once part of a multinational group, so some sort of cross-border holding company was inevitable. Less investment would reach developing countries if DFIs stopped using holding companies and delegating to funds.
Instead of avoiding tax havens, we need to reform tax treaty networks in favour of poor countries
At this point you may have two reactions: Why not regard London and Amsterdam as tax havens too? And how do we know the claims DFIs make, that the use of tax havens typically does not deprive developing countries of tax revenues but serves a useful purpose, are true?
The fact that problems with treaty networks and secrecy extend beyond stereotypical tax havens points towards the need for broader systemic reforms. Blacklisting a handful of islands is not the goal—raising standards however investments are structured, is. Multinational initiatives like the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Common Reporting Standard are addressing problems around secrecy, but the points of leakage in bilateral tax treaty networks have not yet been fully addressed. To widespread acclaim, the OECD has introduced something called the “multilateral instrument” (MLI) to simultaneously update multiple tax treaties, and has used it to address certain weaknesses that enable “treaty shopping.” To really fix the problems that lie beneath routing investments via third-party jurisdictions, we need a “development MLI” to focus on the needs of the poorest countries, including minimum tax rates on dividends, interest, and capital gains.
The lack of evidence around the tax impact of using offshore vehicles is a thorny problem. The question of whether poor countries are deprived of tax revenues cannot be answered without specifying a realistic alternative, and that requires more than data—it requires informed but subjective judgements. But if it is wrong to ask DFIs to stop using tax havens, it is right to ask them to do more to enable public scrutiny of those investments. DFIs must invest effort into defining the tax implications of the offshore structures they use, and make that information public.
Resource-rich countries face several challenges in converting their natural resource wealth into sustained prosperity:
How to strike the right fiscal balance between attracting investment and getting a fair deal for the country?
How to stop powerful political actors diverting the country’s wealth into illicit financial flows?
How to ensure that multinational companies are not able to run rings around revenue officials?
And how to spend natural resource revenues effectively?
There is a strong argument that these questions should be answered in public—through transparency of budgets and revenue data, contracts and fiscal models, and with scrutiny and open debate by parliamentarians, the public, civil society organisations, the private sector, experts and academics, and the media.
If transparency matters then so too does the way that figures get translated into public debates. Earlier this month the Lusaka Times published a claim that multinational mining companies were “robbing Zambia of an estimated $3billion annually through tax evasion and illicit financial flows.” The claim that Zambia is losing $2 or 3 billion to the mining industry and Swiss commodities traders has been in circulation for some time. The Lusaka Times article says the figure comes from a recent report by Zambia’s Financial Intelligence Centre, but this is not strictly true. The FIC report actually repeats a claim made by the Washington DC based-think tank Global Financial Integrity (GFI).
I have written about the Zambia Copper Billions before, in 2014 and 2015. I don’t think the figure is at all credible, and I am not the only one: Nathan Chishimba, president of the Zambia Chamber of Mines calls it “malicious nonsense,” and notes that $3 billion worth of copper is about 600,000 tonnes (equivalent to 80 percent of Zambia’s total copper production). This much additional copper would involve two “ghost” smelters secretly processing ore, and hundreds of trucks leaving the country unnoticed every day. Mooya Lumamba, director of Mines at the Ministry of Mines and Mineral Resources says the claim is “wholly untrue” and Ron Smit of the EU-funded Mineral Production Monitoring Support Project agrees, noting “no one ever offers any proof.”
This year GFI quietly withdrew the claim. But you had to be paying close attention to notice. On the second-to-last page of their regular Illict Flows Report they note:
“irreconcilable issues in the destination reporting of Zambia’s copper distort bilateral estimates of misinvoicing to such a degree that bilateral estimations of misinvoicing for these countries are of little practical use. To mitigate this destination reporting issue, we have decided to treat these countries as world reporters and apply the world aggregate method.”
Or, as the headline writers might have put it, “Zambia didn’t lose $9-billion over a decade after all.”
Similarly if you have to have been paying close attention to some fairly esoteric debates you might have noticed that Alex Cobham recognised the problems with the analysis behind the “doubling GDP” claim. But Christian Aid did not withdraw the related reports, and the distributors of the “Stealing Africa” film also saw no need to stop promoting the claim. Cobham and co-authors promised they would revise the analysis and the paper.
But then they didn’t.
A couple of other studies (a fact-finding mission by the International Bar Association Human Rights Initiative and a study by GFI and funded by the Government of Finland) set out to investigate illicit flows from Zambia in more depth. They could have usefully clarified the issues, but instead (presumably after finding that the huge outflows could not be confirmed) they decided that the best thing to do was to publish nothing at all.
So it is not surprising that people are still citing the large and assertively declared claims, and ignoring the quietly (or silently) made corrections. In fact, it is not even clear if the news that the $3 billion figure is no longer supported by GFI has made it around GFI’s office. They are still tweeting media stories from Zambia that feature it (but not those that question it), and when I suggested they could fact check the claim they responded, “You're saying we're responsible for this Lusaka Times article??” (Yes. It is based on a finding that GFI have strongly promoted, so I think there is some responsibility here.)
The problem of corruption, and associated illicit flows is very real. So too is the challenge of designing and administrating taxes for the extractives sector. In Zambia the Extractive Industry Transparency Initiative (ZEITI) works carefully to create a common fact base to support public debate and accountability. The Ministry of Mines and the Zambia Revenue Authority, with support from the donors such as the EU and Norway have been working to improve the governments’ monitoring of minerals production and the mineral value chain. Zambia has adopted a common system for companies to record mine production. This will ultimately enable customs inspectors to reconcile the quantities of minerals being exported with export permits and production data in real-time. Mooya Lumamba and Ron Smit say that some instances of inaccurate production statistics have been found through this work, although no estimates of the revenue implications have been made public yet. They say that they don’t think there is systematic misreporting throughout the industry.
According to Zambia’s most recent EITI report, export earnings by the mining sector were $5.46 billion in 2015, and tax receipts were 9 billion Kwacha (about $0.92 billion by my maths). Should this amount be more, and if so by how much?
I don’t know. But we can be sure that the answer is not going to be $3 billion. The careful work of the Zambia Revenue Authority, the Ministry of Mines, and the donor-supported projects should improve the ability of the government to collect mining revenues, and provide assurance that the right amount of tax is being paid. Inflated public expectations do not help, and may very well hinder the development of the strong and capable national institutions and informed debates that are needed for accountability.
Organisations that have allowed this myth to spread have not done any favours to the people of Zambia, and they have a responsibility to put it right.
Under the international regulatory framework for anti-money laundering and countering the financing of terrorism (AML/CFT), banks are assigned significant responsibilities for detecting and preventing illicit financial flows. These responsibilities include performing due diligence on their customers, monitoring accounts and transactions for suspicious activity, and reporting suspicious activities to the government.
The “de-risking” problem
In recent years, regulators have raised their expectations for what counts as adequate AML/CFT compliance. At the same time, they have cracked down on institutions that have fallen short. While arguably necessary, this more stringent enforcement has produced some unintended side effects. In particular, it has put pressure on banks’ ability and willingness to deliver certain types of services, notably correspondent banking services.
Correspondent banking—the provision of financial services by one bank (the correspondent bank) to another bank (the respondent bank)—is vulnerable to illicit finance abuse. A correspondent bank generally does not have a direct relationship with the respondent bank’s customers. Often, the only information it has access to is the originator and beneficiary information contained in the payments messages themselves. Therefore, it can be a challenge for the correspondent bank to properly assess the illicit finance risk that such transactions pose. While regulators have clarified that as a general rule, banks are not expected to know their customers’ customers (KYCC), many correspondent banks nonetheless find these types of risk difficult to manage in a cost-effective way. In addition, correspondent banking has traditionally been a high-volume, low-margin business.
However, there are two new technologies that may help to solve the problem: big data and machine learning.
Big data refers to datasets that are high volume, high velocity, and high variety. These datasets necessitate different hardware, software, and analytical solutions than do traditional data sets. Banks generate enormous volumes of data in a wide variety of formats. Big data systems can help banks to analyze these data in order to identify abuse while preserving relationships with trustworthy customers.
Big data systems can help compliance staff organize and make sense of large volumes of information. Banks’ compliance staff can utilize data from a wide variety of internal and external sources such as transactions metadata, open-source information (such as negative news stories), and government information (such as sanctions lists, arrest warrants, and so on). Traditionally, these data have been siloed and consequently hard to access. Big data systems can reduce the time compliance staff spend searching for and consolidating information. These systems are typically paired with advanced analytics engines, such as machine learning algorithms, which can help identify patterns and relationships in the data that might have otherwise gone undetected by human investigators.
Machine learning is a type of artificial intelligence which enables computers to learn without being explicitly programmed. There are two broad types of machine learning—supervised learning and unsupervised learning. With supervised learning, the machine learning algorithm analyzes a dataset in order to build a model that predicts a pre-defined output. For example, a supervised machine learning algorithm may be presented with transactions labeled “suspicious” and “not suspicious” and instructed to develop a model that best categorizes transactions as one or the other, based on the available data. With unsupervised learning, the machine learning algorithm explores the features of a dataset, looking for patterns and relationships without attempting to predict a pre-defined output.
Machine learning algorithms are already being used to tackle money laundering and the financing of terror. The application of machine learning to customer segmentation and transactions monitoring has the potential to greatly reduce both false negatives and false positives in identifying suspicious activities. Clustering, a type of unsupervised learning, can be used to develop much more sophisticated customer typologies than traditional methods. This can help banks to gain a better understanding of their customers’ financial behavior. In addition, classification algorithms, a type of supervised learning, can be used to identify suspicious transactions. These algorithms can be trained so that, over time, their accuracy improves. Recently, HSBC has partnered with Silicon Valley-based artificial intelligence firm Ayasdi to automate some of its compliance functions. Another American company, QuantaVerse, is helping several large international banks to fight money laundering and other financial crimes.
In early October, we will be discussing the scope of new technologies to address de-risking at RegTech 2017 in Brooklyn, NY. We will also be publishing a report, Technology Innovations to Address De-Risking, in which we will examine this topic in detail. While there have been many positive actions on the regulatory side, our view is that technologies that have emerged over the past few years present very real opportunities to solve the complex problem of de-risking.
When NATO forces entered Afghanistan following the attacks of September 11, 2001, much of the country’s infrastructure, as well as its public institutions and underlying social fabric, had been destroyed by more than two and a half decades of conflict. At the time, landmines were still killing an average of 40 Afghans a day.
Over the last 15 years, the international community, led by the United States, has invested massive resources in an attempt to transform Afghanistan into a more stable, modern, and prosperous country. While most of these resources were directed towards military support, a good chunk went to supporting economic development. In fact, Afghanistan has received more official development assistance than any other country since 2001, except for Iraq (See Figure 1).
Source: World Development Indicators, World Bank
Despite the often well-founded pessimism attached to the international effort in Afghanistan, the average Afghan, and particularly the average Afghan woman, is better off today than he or she was in 2001, according to the data. Consider the following advances made since that time:
Income per capita has more than doubled (though the country's per capita GDP of roughly $600 remains one of the lowest in the world).
Access to primary healthcare has increased from 9 to 82 percent of the population.
The percent of women attended by a skilled care provider at birth has risen from 14 to over 50 percent.
The number of Afghan children attending school has increased from less than 1 million to 9 million and the percent of students who are girls has increased from roughly 10 to 40 percent.
The country had its first democratic transfer of political power in 2014, with both men and women allowed to vote in the election.
These important gains are at risk, as the security situation in Afghanistan has deteriorated over the last several years following the drawdown of foreign troops. Today, the Taliban control 11 percent of the districts in the country and contest an additional 29 percent.* They have also ramped up the number of attacks in major cities. As a result, civilian casualties increased to 11,418 (3,498 deaths and 7,920 injuries) in 2016, the highest on record. At the same time, the country’s ability to provide social services is under strain due to the growing number of the internally displaced persons, which climbed to 1.4 million in 2016, and includes a large number of former refugees who have been repatriated from Europe, Iran, and Pakistan.
The recent announcement by the Trump administration that it would modestly increase the number of US troops operating in Afghanistan improves the chances of achieving stability. However, meeting this goal will also require the international community and the Afghan authorities to learn from past mistakes.
Two steps forward, one step back
Development in Afghanistan has been uneven and the rate of progress has generally tracked the evolution of the security situation. Starting from an extremely low base in 2002, the country achieved rapid progress early on, as technical advisors from USAID, DFID, the IMF, and World Bank helped the government rebuild key institutions essentially from scratch, and as donors implemented projects focused on providing basic health and education services.
During this time, the country enjoyed a brief respite from conflict. By the mid-2000s, however, the Taliban had begun to reassert itself in the south. The group’s resurgence was facilitated in part by the Bush administration’s decision to divert attention and resources to Iraq, and in part by the inability of the Afghan government to exert control and provide services in the provinces. In 2009, the United States and its allies responded to the growing insurgency by settling on a military strategy that relied on a surge in troops and aid aimed at dislodging the Taliban and winning the hearts and minds of rural Afghans.
The strategy temporarily supported growth and allowed the government to regain a tenuous hold on territory but did little to address some of the underlying problems in the country that continue to fester today, including widespread corruption and opium production. When the Obama administration announced a staggered troop withdrawal beginning in 2011, it soon became clear that many of the security and economics gains achieved were illusory.
Most of the improvements noted above were made in the period 2001-2010. But the current decade has been cruel to Afghanistan. In a 2016 poll conducted by the Asia Foundation, 66 percent of Afghans believed that the country was going in the wrong direction, the lowest level of optimism since 2004. The question now is whether the Afghan authorities and international community can arrest the country’s recent slide, stabilize security, and build on the progress made in earlier years. Addressing the long-standing problems that have prevented a lasting peace from taking hold will require changes in behavior on the part of both donors and the government.
These challenges include:
Reducing corruption. Afghanistan was ranked 169 out of 176 countries in Transparency International’s 2016 corruption perceptions index. The belief that public servants are corrupt has sapped popular support from the government and provided an opportunity for the Taliban. But the Afghan government does not hold all the blame. The international community pushed billions of dollars of aid into a country that lacked public sector capacity, a strong judiciary, and robust financial supervision—and then often failed to monitor where funds went. More strikingly, many actors in Afghanistan, including the US government, frequently paid off Afghan elites and power brokers to win their allegiance and gain information. The result was a country awash in dollars with little oversight about how they were spent.
Taming opium production. Afghanistan supplies roughly 90 percent of the world’s illicit opiates and the opium trade fuels both corruption and the insurgency. The UN Office on Drugs and Crime estimates that potential opium production increased by 43 percent in 2016, despite the more than $8 billion spent by the US government in counternarcotic programs in the country since 2002. Efforts at eradication have stalled in recent years, as the Taliban presence in poppy cultivating provinces has increased, and there is currently no credible strategy to deal with the problem that does not require improved security.
Reaching a political settlement. Both Afghan authorities and US officials now recognize that the terminating the war in Afghanistan will likely require some form of political settlement for two reasons: first, the United States does not have the appetite to wage a full campaign in the country again and second, even if it did, the Taliban has proven repeatedly its ability to bounce back. Indeed, US Secretary of State Tillerson has stated that the administration’s new strategy is to put enough military pressure on the Taliban to bring them to the negotiating table. Any political settlement would have to involve Pakistan, which continues to provide safe haven to insurgents.
Reducing aid dependence. Although clearly a secondary goal compared to enhancing security, the Afghan government must find a way to reduce its dependence on foreign aid. A recent World Bank report suggests that the country will not achieve fiscal sustainability—defined as occurring when domestic revenues cover operating expenditures—until well after 2030. Until then, the country will continue to rely on donors to cover most of the costs associated with security and development. Enhancing sustainability will require taking steps to both enhance growth and improve revenues, which start from a very low base of 10.5 percent of GDP.
A shot at stability
The international community’s inability to secure a lasting peace in Afghanistan after 15 years of engagement has naturally produced impatience in both Afghanistan and its partner countries. However, a full withdrawal of international assistance would leave the development gains made since 2001 at the mercy of the Taliban. The continued presence of US troops in Afghanistan preserves the possibility that the Afghan government can make inroads in governing—and that a fair political settlement, which pacifies the Taliban without giving them the power to roll back the freedom of women, for example, can be reached. In doing so, it can help to improve the outlook for one of the world’s poorest and most vulnerable populations.
*Focusing on territory gains alone overstates the Taliban’s advances. While the number of districts controlled by the Taliban has risen in recent years, a stalemate has set in more recently, and most of these districts are sparsely populated: 21.4 million Afghans live in districts controlled by the government, while only 3 million live in districts controlled by the Taliban.
How well do your country's policies make a positive difference for people in developing nations? That’s the question CGD seeks to answer each year in our Commitment to Development Index (CDI). It’s a ranking of 27 of the world’s richest nations based on seven policy areas: aid, finance, technology, environment, trade, security, and migration.
The team behind the CDI, deputy director of CGD Europe Ian Mitchell and policy analyst Anita Käppeli, join me this week on the CGD podcast to discuss why these rankings matter and how countries stack up.
In first place this year is Denmark, followed by Sweden, Finland, France, and Germany. Greece, Japan, and South Korea rank at the bottom—though South Korea actually ranks first on the technology component.
Among the countries in the middle are the UK, tying with the Netherlands for 7th place, and the US, all the way down at 23rd. In the future, how might these scores be impacted by the changing politics of the two nations?
“On Brexit, there’s real potential for this to affect the CDI score,” Mitchell tells me in the podcast. “The UK will take control of its own migration policy more fully and it will have its own trade policy and it will take control of agricultural policy form the EU. All of those things feature in the Commitment to Development Index.”
As for the the Trump Administration’s America-first approach, Mitchell says, “It’s surely in the interest of countries to see other countries developing to reduce the security risk, to make sure there’s lower risk of disease emerging . . . and the CDI is a framework for prioritizing action on that.”
Overall, Käppeli tells me, the CDI is a reminder to countries that “policy coherence is an issue; that they should not pursue policies in [only] one field—for instance, give a lot of aid, but then close the boarders for products from developing countries.”
“The CDI is holistic,” Mitchell adds, pointing out that the CDI’s focus on policy is “complementary” to the Sustainable Development Goals’ focus on outcomes: “If you think about how we’re going to achieve the SDGs, then looking at the CDI [is] a great way to do that.”
Today, we published this year’s Commitment to Development Index (CDI), which ranks 27 of the world’s richest countries in how well their policies help to spread global prosperity to the developing world.
We will be presenting the Index and our recommendations at the high-level period of the UN General Assembly (UNGA) later this month. As political leaders prepare to meet for UNGA, here are some key takeaways from our research that should help guide their policies and discussions.
1. Leadership on global development isn’t only for the richest!
The CDI analyzes the policies of 27 of the world’s richest countries in seven key areas: aid, finance, technology, environment, trade, security, and migration. The indicators adjust for size and economic prosperity—and the results demonstrate that country wealth does not determine the results. The wealthiest countries—represented by the G7—rank anywhere between fourth and twenty-sixth. Income per person averages half that of the United States in Visegrád countries (Czech Republic, Hungary, Poland, and the Slovak Republic), but all four now rank higher in their commitment to development. Portugal, who ranks sixth, performs well in most components despite being less prosperous than many of the CDI countries. Smart policy design is not a matter of prosperity only. Therefore, our first key message to all the leaders of the 27 CDI-countries:
Domestic economic challenges needn’t prevent leadership on smart policies to increase global prosperity.
2. Development is about much more than aid
The CDI draws attention to the fact that global development is about so much more than the amount or quality of foreign development assistance provided. Policymaking in various policy fields directly affect the lives of poor people around the globe.
For example, the design of our policies on technology or finance affect the prospect for people living in poorer countries. Both research and development policies and investment policies are mainly pursued for domestic goals. However, they have a lasting effect on developing countries. Smart intellectual property rights can enable knowledge sharing and technology transfer. Also, bilateral investment agreements with developing countries recognising specific public policy goals such as labour rights, environmental standards, or human rights can have an important effect on the prospect for development.
The commitment to implementing balanced and sustainable policies domestically also sends a strong signal about their importance globally and irrespective of countries borders. Money spent on foreign development assistance does not have the same lasting effect if countries don’t recognise the international impact of their actions in other policy areas. Therefore:
In our integrated world, your policies and decisions as a leader of a rich country have an important bearing on the lives of people in developing nations.
3. Even the bottom-ranked country has smart policies we all can learn from
Like the Sustainable Development Goals (SDGs), the CDI recognizes development has many angles. But while the SDGs cover all nations and their outcomes, the CDI concentrates on the richest countries and emphasizes how policies can make a huge difference to development globally. The fact that we limit our evaluation to high income countries means that policy recommendations are more tailored and relevant. Even the best-ranked countries have weaknesses where they can learn from their peers. Overall leader Denmark performs weaker on migration and could learn from the migration policy designs from countries as varied as Luxembourg, New Zealand, or neighbouring Sweden. Similarly, bottom-ranked South Korea could advise all other 26 CDI countries on how to build long-lasting support for research and development. Accordingly:
Use the CDI as a tool to learn from others and to inspire change through your own best-practice policies.
4. Some overall progress on the Environment component but stronger commitments are needed
Tragically, Hurricane Harvey has reminded the United States how vulnerable we all are when natural disasters hit. Further, people in South Asia were left suffering after massive flooding and devastation affected millions, while earlier this year we saw how the unprecedented drought in Africa affected the lives of millions facing malnutrition. These tragic events, sadly far from unique, remind us that we all need to do more to combat climate change.
This year’s CDI points out that progress has been made—CDI countries report progress in curbing new greenhouse gas emissions and the amount of Ozone-depleting substances has been cut significantly. However, many environmental challenges remain. We need to see an even bigger commitment to development from the CDI countries in the future, such as a complete support for the Paris Agreement and the willingness to tackle issues such as overfishing and deforestation. Thus, our final recommendation:
While progress has been made, many global challenges remain. We ask this generation of world leaders to strengthen and deepen their commitment to development.
These findings show that we and our governments can do so much more to spread prosperity to poorer countries. The CDI serves as a useful tool to identify which national policies still have potential to be designed in a more development friendly way. We hope world leaders use the opportunity of UNGA to discuss ways to make further progress in all policy fields, inspiring each other to achieve more on global development.
You might remember the UNCTAD report on trade misinvoicing published last year which alleged that the majority of gold exports leave South Africa unreported. If not, you will more than likely have heard the billion dollar estimates of illicit financial flows as a source of resources for financing the SDGs. It is increasingly clear that these calculations, based on gaps and mismatches in trade are not reliable.
The South African Chamber of Mines isn’t letting it lie
The strongest pushback on the UNCTAD report came from South Africa (where the study argued that gold exports are largely unreported) and it is still going on. Last week the South African Chamber of Mines published a final report by economics consultancy Eunomix, taking a careful look at the UNCTAD study. The Eunomix report confirms many of the problems with the calculations which have been raised previously, and also argues that these shortcomings effect other similar studies such as those carried out by Global Financial Integrity (GFI) and the UNECA/AU High Level Panel on Illicit Financial Flows.
The Eunomix analysis demonstrates that most of the gold discrepancy which UNCTAD interpreted as misinvoicing can be explained by South Africa recording gold exports as “money” while trade partners classified the same gold bars as “non-monetary.” The remaining (and much smaller) discrepancy in the data may be due to gold from other countries refined in South Africa and recorded as South African by trade partners. Similarly, with platinum, a large part of the discrepancy is explained by missing data in the UN database. The remaining difference may be due to Zimbabwean platinum refined in South Africa. Other cases in the report such as Zambia copper and Cote D’Ivoire cocoa highlight a more general problem with “mirror trade data” calculations, which is that ordinary non-illicit trade through bonded warehouses, transit hubs, or “merchanting” hubs (such as by Swiss trading houses) can be interpreted as equal and opposite pairs of illicit trade flows going into and out of developing countries.
Eunomix note that if there was customs and tax fraud on the scale that UNCTAD suggests in the South African metals sector, the money stashed offshore it would have shown up in the accounts of major stock-exchange listed companies (certainly market participants have not reacted as if they found the UNCTAD report credible).
Eunomix argue that the reliability of the UNCTAD findings matter, firstly for the South African government, secondly for the reputation of the mining industry, and thirdly for the credibility of UNCTAD itself. They say that accusations of extensive misinvoicing are contributing to lack of trust between stakeholders in the mining industry.
UNCTAD seems to be confident that they can continue to ignore the criticism and hope it will blow over. This confidence is perhaps based on safety in numbers; other high profile studies have also used similar calculations (for example, it is notable that the same countries and commodities that feature in the UNCTAD study also feature strongly in the calculations of the High Level Panel on IFFs from Africa, and in GFI’s calculation for Africa in its previous reports).
This is not the first-time serious scrutiny of such studies has been shrugged off. Back in 2009 DFID commissioned academics Clemens Fuest and Nadine Riedel to undertake a literature review looking at emerging methodologies for estimating tax evasion, avoidance, and tax expenditures in developing countries. Their report raised some of the methodological problems that have subsequently become clearer. GFI responded by calling on the UK government to withdraw the critical literature review, saying that the misinvoicing estimates were “unimpeachable” and “based on the most reliable data available analyzed in accordance with internationally recognized methods of economic analysis.”
GFI adjusts its calculations
More recently Global Financial Integrity (GFI) has begun to recognise some of the problems with its methodology (including acknowledging some issues that were raised by Fuest and Riedel). GFI notes in its most recent report that:
irreconcilable issues in the destination reporting of Zambia’s copper exports and South Africa’s gold exports distort bilateral estimates of misinvoicing to such a degree that bilateral estimations of misinvoicing for these countries are of little practical use.
They have therefore switched (for these two cases) from their main methodology of comparing trade records bilaterally to comparing countries’ own statistics with partners on an aggregate “world” basis. This eliminates the issue of ordinary trade being classed as capital flight based on destination mismatches. However, for most other countries the higher “bilateral” figure continues to be used, which will tend to generate both apparent illicit inflows and outflows from ordinary trade.
They have also introduced a new “low” estimate which addresses another problem: that of double counting in misinvoicing between pairs of developing countries. These two changes have the effect of reducing estimated misinvoicing in South Africa from an average of $21 billion a year to $7 billion a year (between 2004 and 2013), and in Zambia from $3 billion a year to $160 million a year (remember, these are not estimates of revenue loss).
Overall the estimated illicit flows due to misinvoicing from Africa falls from an average of $60 billion dollars a year to an average of $32 billion. There is significant downward reassessment from South Africa and Zambia (which went from a “bilateral” to “world” approach) and the significant upward reassessments of Sudan, Algeria, and Egypt (which went from “world” to “bilateral”).
GRI also discovered that large amounts gold exported from India to Switzerland which they had counted as “misinvoiced” were in fact recorded in official statistics. This realisation lead them to reduce the estimate for illicit flow from India via trade misinvoicing by 85 percent in the 2017 report, compared to the previous version.
All of this shows how sensitive the findings are to methodological choices, and to specific local knowledge not captured in the IMF DOTS database or UN COMTRADE.
It is good that GFI has taken some steps to revise its calculations, however these adjustments may pass many readers by amidst the footnotes and tables. A close reading of the latest report shows that GFI’s new estimates no longer support previous claims that have become received wisdom on this topic. For example, it is often said that because of illicit financial flows Africa is a “‘net creditor to the rest of the world” losing some 6 percent of its GDP, however GFI’s revised estimates now put illicit outflows at some 2 percent of GDP in Sub-Saharan Africa with apparent inflows somewhat higher. It has been said that illicit outflows are growing faster than international trade, but the new figures suggest misinvoicing is, if anything, falling compared to overall trade.
Figure 5. New estimates of misinvoicing as a percentage of trade (GFI, 2017)
Furthermore, several issues remain. For example, the calculations still fail to take into account the monetary/non-monetary gold issue for South Africa. GFI’s new low estimate of outflows through misinvoicing from South Africa gives an average of around $8.6 billion from 2005 to 2010. However, the data on gold exports from the South African Reserve Bank suggest that (non-illicit) exports of non-monetary gold exports might account for around $6 billion of this.
While the latest GFI report finally accepts that apparent illicit outflows cannot simply be ignored, it now adds apparent inflows and outflows together.
Don’t worry about the numbers?
It can be argued that we should not worry too much about the numbers. As Raymond Baker of GFI puts it:
What policies for curtailing IFFs would be changed based upon the most accurate of these numbers? None. The magnitude of the problem is severe at every level.
I would argue that relying on bad numbers undermines understanding, debases political debates, and erodes organisational integrity and is likely lead to ineffective action. The high profile estimates have been used to make a case that greater attention should be paid to the misinvoicing channel and less to crime and corruption, but this is not supported by the analysis. Disaggregated analysis of illicit flows and the factors that drive them in individual countries would be valuable, but these studies can run in to tensions if they are expected to find massive trade misinvoicing.
The paradox of all this is that these numbers have been valued most strongly as a communication tool for making the case for transparency mechanisms such as public registers of beneficial ownership and country by country reporting. The hope is that these will prove to be breakthrough solutions that enable informed and empowered citizens to hold governments and the powerful to account. But for this to work there needs to be a robust chain of links between raw data, real analysis, and sustained public and political engagement on complex issues. It is hard to reconcile this with the argument that we shouldn’t worry about the analysis.
The Chamber of Mines is calling on UNCTAD to acknowledge shortcomings of the analysis and withdraw the report. And it should. When you are in a hole its best to stop digging. But the trade misinvoicing figures more broadly, and the conclusions drawn from them, have become widely accepted through repetition. Many organisations have played a role in constructing this hole in the first place, and they have both a collective responsibility and interest in helping to repair it.