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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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With cuts to foreign aid on the horizon, the United States, now more than ever, needs to sharpen its tools to operate in a constrained budget environment. Key to this approach is a strong development finance institution that can leverage private investment to achieve development outcomes, as well as create opportunity for American companies abroad—all at less than no cost to the US taxpayer. At this event, Congressman Ted Yoho of Florida addresses the vital role the Overseas Private Investment Corporation plays in US development policy, and discusses how he came to support its mission. An expert panel discusses the conservative rationale behind OPIC, why its critics are wrong, and what can be done to strengthen the institution and leave it better prepared to address future development challenges.
The early days of this new administration are a critical time for bipartisan exchange among leaders of previous administrations. Please join CGD for a conversation with three former Treasury Under Secretaries for International Affairs who played central roles in the Bush II and Obama administrations’ formulation and execution of international economic policy. The panel will discuss the outlook for the global economy, international structural changes and challenges that have emerged since their time in office, the critical issues that will confront the next Under Secretary for International Affairs, and the nature of the job and lessons learned. We hope you can join us for this stellar panel, as we continue to build understanding of global economic challenges and how the United States, working with others, can best meet them.
With cuts to foreign aid on the horizon, the United States, now more than ever, needs to sharpen its tools to operate in a constrained budget environment. Key to this approach is a strong development finance institution that can leverage private investment to achieve development outcomes, as well as create opportunity for American companies abroad—all at less than no cost to the US taxpayer.
CGD Europe recently published a (UK) election manifesto on development with proposals across 19 areas. One area that raised comments and feedback was the proposals on tax. In particular, Alex Cobham of the Tax Justice Network noted the “striking absence of public country-by-country reporting” and argued that this makes “the CGD position less progressive than any major party.”
The set of proposals are not CGD positions, but it is true that public country-by-country reporting is not amongst them. I can’t speak for others who contributed ideas to the manifesto, but the reason I did not suggest public CBCR is this: I’m not convinced by it.
‘CBCR’: What is that?
As part of the G20/OECD-led Base Erosion and Profit Shifting (BEPS) Action Plan, governments have begun requiring that very large multinational companies (those with turnover in excess of €750m) have to submit an annual document showing revenues, profits, assets, employees, and taxes broken down for each jurisdiction where they do business. The idea is to provide a risk assessment tool to revenue authorities to help them to direct their audits. These documents will be shared bilaterally between tax authorities under conditions of confidentiality. The European Commission has gone further and proposes that companies should be required to publish several of the headline indicators (which would cover 6,000 companies with European operations). The Economic and Monetary Affairs Committee of the European Parliament has gone further than the Commission and says that the requirement should extend to cover smaller multinationals with a turnover of more than €40m (around 42,000 companies in Europe). The Financial Transparency Coalition of NGOs also calls for this approach. Labour’s Shadow Chancellor John McDonnell goes a step further and says that the full tax returns of large companies should be made public.
More data, more progress?
Equating progress with disclosure creates a danger of jumping onto a treadmill of perpetually asking for more data without checking if it is working to deliver the hoped for outcomes.
There is a good general case for government data to be ‘open’ (i.e., more comprehensive, timely, and accessible) But there is a difference between government-statistics type information and requirements for private entities to collate and publish data. For the first category 'open by default' makes sense. But for the second category, considerations of privacy, confidentiality, and cost matter.
Public country-by-country reporting: simple and profound?
Arguments for public country-by-country reporting tend to be broad and sweeping. The MP Caroline Flint says public country-by-country reporting would be “a simple yet profound way to tackle a huge problem of avoidance.” She argues that it would “help developing countries to help themselves” and that the lack of tax transparency is “one of the major stumbling blocks to their self-sufficiency.” However, this seems long on conviction and short on evidence. Her argument that “if developing countries got their fair share of tax, it would vastly outstrip what is currently available through aid” seems to reflect the often inflated perceptions of the scale of revenue at stake from taxing FDI more in poor countries. (Yes, estimates of the scale of revenues at stake from profit shifting are of the same order of magnitude as global aid flows. But no, if countries such as China, Brazil, or Mexico collected a fraction more tax, this would not be used to pay for public services in countries such as Ethiopia, Tanzania, and Bangladesh.)
The European Parliament Committee’s argument for rapidly and radically expanding public country-by-country reporting to some 40,000 companies is circular and incomprehensible:
Most countries use International Accounting Standards. Therefore, public CBCR will be a cost effective way to generate change in global corporate transparency for the benefit of our societies, including citizens, shareholders, tax authorities, investors, economists, and it will give them a means to hold governments and multinational companies to account.
The big question for public CBCR is whether publishing this data in this form will lead to better understanding and meaningful accountability. The risk is that if it doesn’t it will lead to confusion, undermining trust in tax systems which are largely dependent on voluntary compliance.
Transparency and accountability: try, learn, adapt
More general thinking about the case for transparency may be helpful.
Alan Hudson at Global Integrity in a really good post about the intrinsic and extrinsic case for transparency notes that relying on the argument that transparency must be good has led to a situation where the theory of change about the link between data and development remains unclear and under-examined. Hudson argues that unrealistic expectations make it harder to assess what works to inform more effective action. The point of transparency, he says, is that it enhances the ability of communities to try, learn, and, adapt their way towards better development outcomes, through a combination of evidence and politics.
I think it’s try-learn-adapt all the way down. We don't necessarily know what effective open governance (and associated data disclosures) look like, so that is part and parcel of the try-learn-adapt cycle of evidence and politics rather than a linear input to it.
There is a similar question about privacy and confidentiality to the one about openness—is it intrinsically good, or good because of what it enables? The extrinsic case for commercial confidentiality is that it enables entrepreneurs, companies, and investors to undertake their own try-learn-adapt cycles. A certain amount of confidentiality is necessary when making plans, and to protect expensive-to-obtain knowledge long enough to make it worth investing in, (and this is not just valuable to the investors, but because businesses grow by solving problems and meeting needs for consumers). However it is also the case that privacy and secrecy can be used to protect powerful vested interests against legitimate challenges; commercial confidentiality should not be an absolute.
Neither transparency nor privacy are unconditional principles or teams whose flags we need to fly. What is important is that institutions in society—commercial enterprises, investors, public organisations, academic and research institutions, NGOs, communities, and individuals—have the mix of information, privacy, and other enablers and incentives they need to learn and adapt and interact towards better outcomes.
Learning in practice
There is a well-worn path of trying, learning, and adapting around specific approaches to corporate disclosure which winds from pioneering leadership, to industry standard, to mandatory requirements. The idea is that you push and pull a few companies that are particularly vulnerable to reputational pressures, or that see an opportunity from taking early leadership, to recognise a business case for disclosure (on carbon emissions, human rights impacts, extractive industry payments to governments, marine stewardship, and so on). They develop and iterate tools for measurement, reporting, and assurance, which make it easier for others to follow. At the same time an ecology of data users develops; civil society, socially responsible investors, and regulators develop ways to analyse and use the disclosures, to rank and rate companies on their reporting, and eventually on their substantive performance. Both sets of actors learn and educate each other. Consumers, wider investors, and governments may begin to take notice. Companies start to work together, and with civil society organisations to codify expectations into voluntarystandards. If it works, the first movers call for other companies to adopt the mechanism, and may support calls for legislation in order to level the playing field. In some cases official guidance, public procurement requirements, or mandatory disclosure legislation follows. This change process results in a rising tide of data disclosures, which might perhaps change behaviour, through internal processes or external accountability or market responses. It is a messy, uncertain, and often conflicted process rather than a simple and profound one.
Proponents of country-by-country reporting have made an admirable effort at trying this pathway. The Fairtax Mark is a voluntary standard which hinges on country-by-country reporting. It was launched in 2014 with the backing of the MP Margaret Hodge (then chair of the Public Accounts Committee) and has been endorsed by organisations including Christian Aid. It had a plan to accredit and license roughly 350 companies over three years. However three years later it has only attracted one FTSE 100 company (which operates only in the UK and Ireland), and only one company that has substantial international operations (Lush Cosmetics). In total it has accredited around 25 enterprises, mainly composed of UK-based co-ops and SMEs. The Fairtax Mark set out to show that a convincing business case could be made for multinational companies to undertake country-by-country reporting. It tried, and what we have learnt is that few are so far convinced. The results of this experiment are an opportunity for learning and adaptation (and does not need to be obscured by jubilantly counting retail branches and offices).
As part of a movement, the Fairtax Mark did contribute to a wider recognition by companies that they needed to start to say something about their tax strategy. Around two thirds of FTSE 100 companies now publish something on their approach to tax beyond statutory accounts, and this has been made into a mandatory requirement.
There is a try-learn-adapt cycle to be run here between business, civil society, regulators, and investors, but it won’t work if it is approached as if the correct outcome and template for reporting are already known, and the role of civil society is simply to herd companies with carrots, sticks, and leaks towards the pre-established goal of public CBCR.
Extractives are different
One reason that general country-by-country reporting seems like an obvious solution is because there is a strong case in the extractive industries. But it is worth considering why the different situation of these sectors.
The extractive sector is different because natural resources are part of a countries’ national wealth. The social benefit they generate, and a companies ‘social license to operate’ comes largely through fiscal contributions, made up of taxes and royalties. Access to mineral resources is generally through public contracts, and there are large risks of mismanagement and corruption at every stage. At the same time companies are faced with making large sunk investments in often politically unstable locations which are then subject to ‘obsolescing bargain’ problem that the government (or subsequent governments) may go back on the deal.
The campaign for revenue and contracts disclosure in extractives was driven by the idea that public transparency that would help all parties. If citizens had access to information about natural resource revenues and contracts they could ask better questions about the deals being done on their behalf, and how the revenues are spent. For businesses, if the fiscal regime, contracts, and revenue streams are subject to public scrutiny and social approval this will increase long term certainty by reducing the risk of social unrest, unmanageable expectations, renegotiation and fiscal hikes or expropriation and nationalization.
It is not obvious what the right amount of tax should be just by looking at the value of minerals exported, but extractives projects can be modeled using information from contracts, and knowledge of oil and mining value chains. Questions about whether it is better to collect more tax early in a project’s life, or later once it is profitable, and about how the fiscal system deals with commodity price volatility can and should be debated in public. Furthermore extractives revenues are large enough, and the companies few enough that this kind of public scrutiny is feasible (although not easy).
So, for companies in the extractive industries there is a strong case for demonstrating that they are contributing the revenues that their host societies expects of them, and country-by-country reporting may provide a means to encourage tax certainty, which benefits both businesses and society.
This argument does not transfer simply to other sectors. For companies whose business models are not based on public concessions and standardized exchange-traded products the headline indicators might not translate into reasonable expectations in the same way (for example see the case of Inditex). The amount that ‘society expects’ (however vague) is often not the same as the amount the law requires, but instead falls back on intuitions such as linking the location of consumers with the tax that should be payable.
In other words, for companies in other sectors it is not clear that CBCR would enable them to demonstrate that they are paying ‘what society expects them to,’ and the resulting controversies could increase reputational risk and tax uncertainty and undermine trust and tax morale.
If not country-by-country reporting, then what?
The try-learn-adapt approach suggest that we focus on objectives. It is worth unpacking the hopes attached to CBCR:
Government: Better tax policy and tax policy making
Revenue authority: Better administrative performance, trust in the revenue agency
Individual Companies: Taking a responsible approach to tax practice and risks, contributing openly to public debates on tax
Each year, as ministers gather from all corners of the world for the World Bank/IMF Spring Meetings, Washington DC resounds with a cacophony of differing perspectives on future prospects, like a giant, multinational orchestra tuning up. Yet this time, in both public and private gatherings, with both developed and developing country dignitaries, as well as leading technocrats from the international financial institutions, one refrain kept recurring, defining the mood of the whole symphony. I would summarize it as 'The numbers are looking better, so why don't I feel good about them?' This was the most common explicit or implicit refrain I heard from a wide variety of policymakers. I see three factors behind it.
The numbers are indeed better but in many cases still not good enough.
For the advanced economies, the upgrading of the US growth projection for 2017 to a healthy 2.3 percent is a significant reason for optimism, with Europe and Japan also showing firmer recovery. (All numbers are from the IMF April World Economic Outlook.) For emerging markets, almost every region is forecast to do a little bit better in 2017 than it did last year but, except for Asia, still remains short of potential or what is needed to deal with high unemployment and stagnant living standards. Sub-Saharan Africa is coming off its worst growth performance in a decade to grow at a projected 2.6 percent which hardly keeps up with population growth. And Nigeria, South Africa, and Angola, the big anchor economies in the continent are struggling for different reasons (in his recent CGD Podcast, President Adesina of the African Development Bank explain how his institution at least can help tackle Africa’s worrying growth trend.)
Latin America's improved performance reflects to a large extent the ending of recession in Brazil, with storm clouds looming over the region's commodity exporters and the threat of protectionism affecting Mexico. For the Middle East, there is some improvement in the outlook for both oil importers and oil exporters (notwithstanding the lower headline growth numbers for the latter which reflect lower oil production even as the non-oil economy, which is what matters for jobs and economic activity, is picking up as fiscal drag eases because of firmer oil prices). But in both groups of Middle Eastern countries, the 2017 numbers fall short of what is needed, as do, more worryingly, the longer term protections for growth under current policy frameworks.
To be fair, in every region there are some countries that are doing much better and whose prospects look good but it is hard for them to realize their full potential when their neighbors aren't making progress.
It's really only in Asia that growth rates around 6 percent provide a strong basis for optimism, even allowing for the well-known risks that come from China's rebalancing and growing political tensions in a number of regional hotspots. By contrast to the pallor of the World Bank/IMF Spring Meetings, at the Asian Development Bank Meetings in Yokohama last week, I was struck by the difference in the substance and atmospherics of the conversations. The talk there was about how to cope with the challenges that come from sustained of high growth: inclusivity, urbanization, inequality, environmental sustainability, and a doubling of infrastructure that needs over $1.5 trillion of financing per year.
These better numbers are subject to a variety of downside risks.
The most obvious of these is the risk of protectionist policies by the US and others. Attempts to downplay the significance of the absence of the usual statement on resisting protectionism in the recent G20 ministerial communique were only half convincing. A second risk is whether financial—especially equity—markets are being too complacent in pricing risk. I was struck by comments to this effect both in some of the public seminars and—more forcefully—in private meetings.
Populism is a real and present danger.
Finally, there was a generalized sense that the liberal, open, cooperative economic model, for which the World Bank, IMF and many of the policymakers at the meetings have been advocates, is under serious threat from the backlash against the downside effects of globalization and technology, exploited by populist political forces (the meetings took place before the first round of voting in France). The more thoughtful participants recognized that fixing this will require more than tinkering at the margins of current policies (a bit more money on worker retraining and some action on 'fair' trade). They also saw that technology induced changes yet to come will impact the nature and organization of work in ways that will pose deep and difficult challenges for most rich countries, challenges which their institutional political systems are not yet equipped to bear.
Overall I would characterize the mood of the Meetings as a sigh of relief at the breathing space provided by somewhat improved economic performance in the year ahead but a recognition that if we don't address some short term risks and fundamental challenges, the light at the end of the tunnel could well be the proverbial freight train.
In this paper, I examine the effects of power sharing on vulnerability to adverse shocks in a multiethnic setting. Combining a unique dataset on the allocation of ministerial posts across ethnicities with the spatial distribution of Ebola, I provide evidence that ethnic representation mitigated the transmission of Ebola in Guinea and Sierra Leone. The findings suggest that one percentage point increase in proportional cabinet shares reduced Ebola transmission by five percent, as reflected in the total number of confirmed cases.
Kate Raworth's new book Doughnut Economics discusses "seven key ways to fundamentally rethink economics and transform the economy into one that works for all." Raworth will present her ideas from Doughnut Economics, to be followed by discussion and debate with the audience. Kate Raworth is a senior research associate at Oxford and senior associate at the Cambridge Institute for Sustainability Leadership.
This annual report marks two milestones in 2016: CGD’s 15th anniversary and, at the end of the year, its first leadership transition, with founding president Nancy Birdsall being succeeded by Masood Ahmed. In this first era, the Center has established itself as an influential voice in international development policy, with a unique model of nonpartisan policy innovation.