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As at countless events on sub-Saharan Africa’s economy over the past two weeks, discussions at Harvard University’s March 23-24 9th annual “Africa Development Conference”—where I delivered a keynote address—were animated by the signing of the Continental Free Trade Area (CFTA) agreement by 44 sub-Saharan African countries two days before. The theme at this year’s annual conference (organized by African students attending five Harvard graduate schools) was entitled “Our Time, Our Vision: Wielding Africa’s Potential for Sustainable Growth.” The vision came from the ambitious African Union “Agenda 2063,” the long-term regional development strategy adopted in early 2014.
Once again I was thrilled to be surrounded by hundreds of young, bright, optimistic African students—from Harvard and other New England universities—undoubtedly on their way to becoming the continent’s next generation of leaders. My first exposure to the group and the keynote address I made at their 2013 event left enough of an impression to make me pounce on their second invitation: I knew it would be an excellent opportunity to gauge the pulse of young Africans’ thinking on economic issues while sharing my (older more sobering) perspective. And indeed, coming as they did after loftier “we can do” presentations by other panelists, the messages I conveyed focused on four immediate challenges for the region while stressing the need to address debt vulnerabilities, increase domestic revenues, and foster diversification.
My first message concerned the foremost challenge of returning the region to a path of durable growth following the decline in per capita incomes in 2016 and the tepid 2017 upturn. The need for continued adjustment and reform was most urgent in oil exporters. But to safeguard debt sustainability, fiscal consolidation should be initiated in robustly growing countries as well.
I then moved to the challenge emanating from the region’s increased interconnectedness in recent years, a welcome development that the CFTA seeks to take further. I stressed the need for the three largest economies—Nigeria, South Africa, and Angola—to pursue more growth-friendly policies with the view to releasing positive rather than negative spillovers from greater interconnectedness and expanded trade.
The region’s high level of income and gender inequality was the third immediate challenge requiring action on several fronts but made difficult by politics and vested interests. Ownership at the highest political level was therefore essential to reduce such inequality and unleash the boost this could give to growth.
I then pointed to “bitter politics” and their adverse impact on economic policy leadership as the fourth challenge. Institution building was required to counter them but—as populist pressures in the United States and other advanced countries have shown—even strong institutions could find themselves on shaky ground. Safeguarding them required enduring and broad-based political engagement.
Recalling some of the underpinnings of the “Africa Rising” narrative, I qualified these messages with the observation that they did not necessarily imply doom and gloom. But the region had to better prepare itself to seize potential new opportunities in the global economy and successfully reap the “demographic dividend.”
In addition to policymakers’ responsibilities in moving this agenda forward I commented on the need for agility on the part of the region’s partners in responding to its evolving needs. I also stressed the need for China’s voice to be more strongly heard on the issue of continued policy adjustment in sub-Saharan African oil exporters—given its role as the largest creditor in several countries where debt is now unsustainable. And, not surprisingly, my final message concerning the region’s partners was the importance of advocating against growing protectionist and inward-looking policies in advanced countries.
Rather than the dart-throwing questions I had anticipated, these messages were well-received by a number of insightful comments and questions. Following my speech, the high energy level and “can do” perspective prevailed despite some soul-searching about why many sub-Saharan African politicians and policymakers continued blaming external factors but seldom their own timidity in tackling the many obstacles head-on. It all underscored the great value-added derived from listening to younger Africans on the road to Agenda 2063 and the CFTA that they will inhabit.
On March 24, 2018, Antoinette Sayeh gave the afternoon keynote speech at Harvard University’s 9th Annual African Development Conference. She highlighted four immediate economic challenges facing sub-Saharan Africa, what they mean for the long-term, and the need for action to address them.
The Sustainable Development Goals (SDGs) include a target to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime” (Target 16.4). However, there is no globally agreed upon definition for “illicit financial flows” (IFFs). My new CGD paper looks at why there is so much disagreement and confusion over this term.
Sandwiched between gun running, stolen assets, and organised crime in the Global Goals, it is clear that the core idea of illicit financial flows is concerned with “dirty money” that crosses international borders—one common formulation is money that is “illegally earned, transferred, and/or utilized.” This includes the proceeds of crime and corruption: illegal trade, embezzlement, bribes and kick-backs, terrorist finance, and misreported transactions that evade tariffs or taxes. In countries with foreign exchange controls, movements of money dodging currency controls would also fall under the definition. The idea of illicit financial flows is important because it highlights that crime and corruption are not just the problem of the country where they happen, but of the countries that allow their financial systems, goods trade or real estate markets to be used as getaway vehicles for ill-gotten loot.
Figure 1. Core concept of illicit financial flows
All of this seems relatively clear (although difficult to measure—such financial flows are obscured and hidden by design). However a case has also been made, for example, by coalitions such as the Global Alliance for Tax Justice and the Global Financial Transparency Coalition that illicit financial flows should be defined more broadly in relation to breaking some line of moral acceptability.
In practice this argument does not aim to draw up a list of morally acceptable and unacceptable things that people could do with their money (which would of course be impossible), but is focused on a particular issue; that “tax avoidance” should be included within the IFFs definition. This would bracket legally compliant taxpayer behaviour into a single category with criminal and corrupt money flows.
I argue that this broad approach is not coherent, and undermines the rule of law.
Grey areas on tax planning and tax evasion: not really so grey
One argument for taking the broad approach, which is often seen as compelling is the idea that there is a large “grey zone” reflecting an absence of clear defining lines between legal tax planning and tax evasion. Transfer pricing and trade misinvoicing are often highlighted as representing this overlapping practice. This is usually illustrated with big estimates, such as that trade misinvoicing drains $800 billion (USD) annually from developing countries, or that it is responsible for $50 billion of illicit flows from Africa.
While there are of course real legal uncertainties and enforcement failures, it is becoming clear that these issues are not well represented by adding up gaps and mismatches in trade data, which often do not reflect misinvoicing at all. Even more fundamentally it is a mischaracterisation to interpret “misinvoicing” as an example of the same kind of thing as legitimate questions over transfer pricing. On the one hand is customs fraud and smuggling, which is a channel for illicit financial flows, and on the other there are ordinary questions over determining acceptable “arms-length” prices for subsidiaries of a multinational corporations to charge between themselves.
For example, a report by Olivier Longchamp and Nathalie Perrot of the Swiss NGO Public Eye provides a good outline of how commodity price manipulation can be used as a means to enable illicit (i.e., illegal) financial flows. They map out several different arrangements between trading companies, “politically exposed persons,” and state-owned enterprises to transfer bribes and kickbacks by misreporting the value of commodity trades (the diagram below is only the simplest of a series).
It is sometimes argued that excluding legal tax planning or resulting “misalignment” from the definition of illicit financial flows means excluding multinational corporations from the scope. However, this is not true, instead it draws the line between corporations acting lawfully and acting in ways that break the law or that abet crime and corruption.
The Swiss Eye report highlights cases such as abuse of the Iraq Oil for Food program involving Glenclore, Vitol making payments to individuals close to the President of Congo-Brazzaville, Glencore (again) over-billing ore from Kazakhstan and paying commissions to a close advisor of the president, and Alcoa’s involvement in trade price manipulation in order to make side payments to a minister in Bahrein. Other cases such as Siemens historic bribe paying and Operation Car Wash in Brazil (involving many companies including Petrobras and Odebrecht) are also well known.
Another recent report The Plunder Route to Panama by the African Investigative Publishing Collective highlights how international financial centres (including London) become the end point for resources plundered through corrupt deals involving politicians and well-connected people. The South African Centre for Investigative Journalism amaBhungane has tirelessly investigated the use of manipulated contracts and misreported payments to deliver kickbacks and embezzle funds from public enterprises in South Africa. In the UK, Lord Peter Hain called for the government to seek a criminal investigation into whether HSBC and Standard Chartered banks facilitated the illicit transfers from South Africa.
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 there is a better place for considering the tax affairs of multinational corporations in the global goals. That is under target 17.1: strengthening domestic resource mobilization. Rich countries should consider how their tax rules and treaties, the development of international tax norms, and the conduct of multinational corporations may support or undermine tax collection in developing countries.
Strengthening the consistency of international tax rules and the administration of tax law so that they are 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 everything under a weakly specified and easily sensationalised category of “illicit financial flows” undermines trust, understanding, and the ability to have constructive conversations about how to do this.
Illicit financial flows (IFFs) connected with corruption, crime, and tax evasion are an issue of increasing concern. However, there is not yet a clear consensus on how to define illicit financial flows, and even less on how to measure them.
The Center for Global Development and Oxfam are hosting a discussion on the Politics of Pro-Worker Reforms with author Alice Evans. Alice will present her paper on the drivers of pro-worker reforms in Vietnam, including how rich countries can use the tools of trade and aid to support workers’ rights, social activism, and decent pay. Specifically, she examines the relative roles of the Better Work program and US demands for labor reform during negotiation of the Trans-Pacific Partnership in encouraging Vietnamese labor market reforms. The paper can be found here, and a blog summary here.
Prior research on foreign investment and supply chains in emerging markets has focused almost exclusively on the creation of international networks in manufacturing and assembly. This paper extends that research, looking beyond manufacturing into supply chain creation in horticulture in developing countries.
Expectations were low for the eleventh World Trade Organization (WTO) ministerial meeting in Buenos Aires, and on most accounts it still managed to under-deliver. The two previous ministerial meetings in Bali and Nairobi produced limited but important multilateral agreements to promote trade facilitation and eliminate beggar-thy-neighbor agricultural export subsidies. But this time around, US and Indian negotiators refused to compromise in service of achieving a consensus agreement in any area. Roughly three quarters of WTO members endorsed a precedent-setting, albeit hortatory, declaration on women and trade; the United States and India did not. And there were statements from varying groups of “like-minded” countries to pursue work in areas that could eventually lead to “plurilateral” agreements. Still, it is not clear these efforts are any more likely to overcome the sharp differences that have prevented compromise among the broader membership. And if they do, they could end up marginalizing smaller, less powerful developing countries.
The Obstinate Actors and a Leadership Vacuum
President Trump made clear his preference for bilateral trade when he withdrew from the 12-country Trans-Pacific Partnership (TPP) shortly after taking office. US trade negotiators reflected the skepticism toward multilateralism in the run up to Buenos Aires when they blocked agreement on a draft ministerial declaration that would have “reaffirmed the centrality of the multilateral trading system and the development dimension of the organisation’s work.” Meanwhile, there is India, which has repeatedly threatened to block WTO agreements (including the Trade Facilitation Agreement) unless WTO members conceded to its demands on public stockholding for food security. In Buenos Aires, India continued to hold things up over the stockholding issue, but the country’s negotiators also refused to accept disciplines on fishery subsidies—even subsidies contributing to “illegal, unreported, and unregulated” fishing. Unsustainable fishery subsidies had been one of the areas receiving extensive attention in the lead up to the ministerial, and where hopes had been highest for reaching agreement.
In the end, it was a relief to many that the United States did not actively seek to dismantle the WTO—as some had feared. But giving up its traditional leadership role could lead to a similar result, only more slowly. The European Union, under Trade Commissioner Cecilia Malstrom, tried to fill the void, but it got little help. China, which I had hoped would back its recent free trade rhetoric with action, mostly stayed on the sidelines. And India remains unwilling to pay any domestic political price to preserve a multilateral, rules-based trading system.
Does Eroding Multilateralism Matter?
So does it matter if plurilateral negotiations among self-selected groups of like-minded countries replace consensus-based, multilateral trade agreements? There are two models for plurilateral agreements at the WTO. In one, a “critical mass” of countries accounting for the vast majority of trade agree, for example, to reduce tariffs on certain products. Under the WTO’s “most-favored nation” nondiscrimination principle, all members benefit from the tariff cuts negotiated. This was the approach taken under the Information Technology Agreement. In the other model, only those willing to sign onto the agreement reap the benefits. This was the approach taken in the plurilateral Government Procurement Agreement, where only signatories get improved access to one another’s markets. In the latter case, smaller developing countries could feel compelled to join agreements to remain competitive—with respect to e-commerce, for example—but without having had any leverage to influence the negotiations.
In Buenos Aires, there were no plurilateral agreements, but there were ministerial statements endorsed by varying groups of 70-80 members pledging cooperation on investment facilitation for development, exploratory work on future negotiations on trade-related e-commerce rules, and an informal work program on micro, small, and medium-sized enterprises (all of the ministerial documents are available here). US negotiators endorsed only the statement on e-commerce while India signed on to none.
Even in an area that would seem ripe for consensus, divisions emerged with key members. Led by Canada, Iceland, and Sierra Leone, 118 of the 160+ WTO members signed a declaration calling for efforts to increase trade opportunities for women. While not legally binding, the declaration’s endorsers committed to improving data collection and information sharing around women in trade. But even that promise was apparently too much for the United States and India, which along with Saudi Arabia, South Africa, and Venezuela, and others, declined to endorse the declaration.
Plurilateral agreements on an issue-by-issue basis among coalitions of the willing may be the only way forward. But how meaningful can such agreements be if key countries are missing? And none of this bodes well for smaller developing countries that will have little or no voice.