Until the financial crisis of 2008, tax havens were seen as exotic places, Caribbean islands or Alpine financial fortresses patronized by celebrities, gangsters and wealthy aristocrats.
Since then six issues have become clear, which make us reflect:
a) the phenomenon is much bigger and more central to the global economy than anyone could imagine;
b) the laundering of money from global drug trafficking is favoured – a business equal to the value of global oil trade, which rescued many of the big global banks from bankruptcy in the 2008 financial crisis;
c) the funding of terrorism is developed – a “low cost” war with a very high strategic effect;
d) it distorts the international financial mechanism by changing the data and costs of operations, thus making them unpredictable;
e) the amount of money available in tax havens makes mass corruption possible, which is now endemic in both developing and developed countries;
f) the biggest tax havens are not where we thought they were.
According to recent estimates, tax havens collectively cost governments 500-600 billion U.S. dollars a year in tax revenue lost, through legal and other means. Low-income economies account for about 200 billion U.S. dollars of that lost revenue: a higher GDP share than advanced economies and more than the 150 billion U.S. dollars they receive each year in foreign development aid. American Fortune companies alone held approximately 2.6 trillion U.S. dollars offshore in 2017, although a small portion was repatriated following the U.S. tax reforms in 2018.
Companies are not the only beneficiaries. Individuals have hidden 8.7 trillion EU dollars in tax havens, according to 2017 estimates by Gabriel Zucman, an economist of Berkeley’s University of California. The more accurate and complete 2016 estimates by the economist, James S. Henry, point to a surprising total of up to 36 trillion US dollars.
Moreover, since the main users of tax havens are large financial institutions and other multinationals, the system damages small and medium-sized enterprises, by increasing monopolisation.
Powerful governments, too, have an interest: most of the main tax havens are located in countries with advanced economies or in their territories. The Tax Justice Network’s Corporate Tax Haven Index ranks – among the top three – British Virgin Islands, Bermuda and the Cayman Islands, all UK overseas territories. The Financial Secrecy Index identifies Switzerland, the United States and the Cayman Islands as the top three jurisdictions for private wealth.
With a view to better understanding why rich jurisdictions are at the top of the list, let us try to think about how many very wealthy Africans hide secret assets in Geneva or London, as well as how many rich Swiss or British people would instead bring assets to some African capital cities. Offshore capital tends to flow from poor to rich countries, thus causing more damage than the populations that international mafia groups make converge in Europe.
The offshore system is also growing: it has contributed to a drastic fall in average corporate tax rates by half, down from 49% in 1985 to 24% in 2019. For U.S. multinationals, corporate profits moving to tax havens increased from around 5% to 10% of gross profits in the 1990s to around 25-30% in 2019.
The principles of the international system of corporate taxation were established by the League of Nations (1920-1946) almost a century ago. Therefore, until about ten years ago, there were few political curbs on the expansion of tax havens. After the aforementioned 2008 crisis, however, governments have been under pressure: 1) to bridge large budget deficits; 2) to appease voters who were furious about bank bailouts funded by taxpayers’ money and 3) about the increase in inequalities and in the ability of multinationals and the rich people to evade taxes.
The Panama Papers and the Luxembourg Leaks have shown the use of tax havens for often harmful purposes and have increased pressure to do something about it. The OECD has launched two major projects.
One is the Common Reporting Standard(CRS), a regime for the automatic exchange of financial information across borders to help tax authorities to track the taxpayers’ offshore assets.
The CRS, however, has many loopholes. For example, it enables people with the right passport to apply for residence in a tax haven rather than in the country where they live.
Nevertheless, the CRS has brought some results. In July 2019 the OECD estimated that 90 countries had shared information on 47 million accounts worth 4.9 trillion euros; bank deposits in tax havens had been reduced by 20-25% and voluntary disclosure prior to implementation had generated 95 billion euros in additional tax revenue for the OECD and G20 Member States, which include the major emerging market economies.
The other initiative is the Base Erosion and Profit Shifting (BEPS) project, targeted to multinationals. It is the OECD effort to “realign taxation with economic substance” without breaking the long-standing international consensus in support of the free competition principle. Although BEPS has improved transparency for multinationals, it has ultimately been seen as a failure by the OECD, especially for the digitalised economy.
In January 2019 the dam started to crack. The OECD recognised the need for “solutions going beyond the free competition principle”. In March 2019, Christine Lagarde, the then IMF Managing Director, defined the control method as “obsolete” and “particularly harmful to low-income countries”.
She called for a “fundamental rethinking”, shifting to approaches based on income allocation formulas. In May 2019, the OECD published a road map proposing reforms based on two pillars: (i) determining where taxes should be paid and on what basis, and what part of profits should be taxed on that basis; (ii) convincing multinationals to pay a minimum level of taxes.
Professor Reuven Avi-Yonah, of the University of Michigan’s Law Faculty, said that the plan was “extraordinarily radical” and would be “almost inconceivable” even five years ago.
But a radical change is feasible. The Tax Justice Network now sees that its four key demands – initially dismissed as utopian – are gaining global support: automatic exchange of financial information across borders; public records of the actual ownership of financial assets; country-by-country reporting, and a single tax with a distribution formula.
Corporate taxation, however, is only the beginning: we should consider the forces that make the offshore system work. Switzerland is a case in point. Politicians in Germany, in the United States and in other countries have clashed with Switzerland over banking secrecy, with little success. In 2008, after discovering that Swiss bankers had helped U.S. clients to evade taxes, the Department of Justice adopted a different strategy: it targeted not the country, but its bankers and banks.
For the first time Switzerland has made important concessions on banking secrecy. It is understood that any effective international response must include strong sanctions against those who facilitate private business, including accountants and lawyers, especially when they favour criminal activities such as tax evasion.
Financial flows in search of secrecy or fleeing corporate taxation increase inequalities and vulnerability to crises and cause unquantifiable political damage. Meanwhile this capital shrouded by banking secrecy infiltrates Western political systems and destabilises them as poverty and unemployment increase. While financial capital flows from the poorest countries to the tax havens of the rich world, it follows the aforementioned migration of job seekers, not needed by the already saturated markets of destination.
The financial network of tax laundering operations favours the choice of unfair operations without any moral evaluation of the means to be used to enhance capital.
There will be those who cry out for freedom of trade, but suffice to point out to them the list of money laundering companies operating in tax havens.
The greater the scale of financial transactions, the less their freedom and autonomy must be. This will be the next big international issue to be solved with less talk and more deeds.
Blue Economy and its potential in Pakistan
Blue economy refers to the sustainable use and management of ocean and coastal resources for economic growth, improved livelihoods, and the preservation of the marine environment. It encompasses a wide range of economic sectors, including fisheries, aquaculture, tourism, shipping, renewable energy, and biotechnology, among others.
The concept of blue economy recognizes that the ocean and its resources can contribute significantly to the global economy and the well-being of coastal communities. However, it also acknowledges the need to ensure that these resources are used in a sustainable and responsible manner, considering the fragility of the marine ecosystem and its crucial role in supporting life on Earth.
The blue economy concept has gained prominence in recent years, with several countries and international organizations promoting policies and initiatives to harness the economic potential of the ocean while preserving its health and biodiversity.
Pakistan has a long coastline of approximately 1,046 kilometers, which presents immense potential for blue economy development. The country’s coastal areas are rich in marine resources, including fish, shrimp, crab, lobsters, and other seafood, which can be exploited sustainably for economic growth and job creation.
Pakistan’s fisheries sector is one of the main contributors to the country’s economy, providing livelihoods to millions of people. The sector can be further developed by introducing modern fishing techniques, improving the quality of seafood, and promoting export-oriented fisheries.
Pakistan also has significant potential for the development of mariculture, which involves the cultivation of marine organisms such as seaweed, shellfish, and finfish. The country’s warm waters and favorable climatic conditions provide ideal conditions for mariculture, which can help diversify the economy and reduce pressure on wild fish stocks.
In addition, Pakistan’s coastal areas are rich in mineral resources, including oil and gas, which can be extracted sustainably to contribute to the country’s energy needs and economic growth.
Furthermore, Pakistan has significant potential for developing the tourism sector along its coastal areas, including beaches, historical sites, and marine parks. This can attract both domestic and international tourists, creating job opportunities and generating revenue.
Moreover, Pakistan has great potential for developing its blue economy, and it is important to ensure that this is done in a sustainable and responsible manner to protect the marine environment and ensure long-term benefits for the country’s economy and people.
There are several ways to ensure the sustainable development of the blue economy in Pakistan. Here are some key steps that can be taken:
Implement and enforce regulations: Pakistan should adopt and enforce strong laws and regulations to ensure sustainable use of marine resources, protect the marine environment, and promote responsible business practices. This can include measures such as catch limits, gear restrictions, and protected areas.
Strengthen research and monitoring: Adequate research and monitoring of marine ecosystems are crucial for effective management and conservation. Pakistan should invest in scientific research and monitoring programs to better understand the marine ecosystem and the impacts of human activities.
Promote sustainable fisheries practices: Pakistan should promote sustainable fishing practices, such as using selective fishing gear, reducing bycatch, and implementing closed seasons and areas, to ensure that fish stocks are not depleted and the ecosystem is protected.
Encourage responsible tourism: The tourism sector can have both positive and negative impacts on the marine environment. Pakistan should promote responsible tourism practices, such as limiting tourist activities in sensitive areas, reducing waste and pollution, and educating tourists about sustainable behavior.
Support innovation and technology: Innovative technologies can help reduce the impact of human activities on the marine environment and improve resource management. Pakistan should invest in research and development of new technologies, such as offshore aquaculture, renewable energy, and waste management systems.
Foster public-private partnerships: Public-private partnerships can play a critical role in developing sustainable blue economy practices. Pakistan should encourage collaboration between government, businesses, and civil society to promote sustainable practices and ensure that economic development is balanced with environmental protection.
Overall, ensuring the sustainable development of the blue economy in Pakistan will require a collaborative effort from all stakeholders, including government, businesses, civil society, and local communities. By taking a holistic approach and prioritizing sustainable practices, Pakistan can unlock the economic potential of its marine resources while safeguarding the health and well-being of its people and the environment.
China-Russia summit: What economic goals ahead?
The visit of Chinese President Xi Jinping to Russia to meet Russian President Vladimir Putin is likely to feature a wide range of issues for discussion, with bilateral economic cooperation being one of the most critical areas that will need an in-depth analysis and an ambitious action plan.
As stated by the Chinese president in his article titled “Forging Ahead to Open a New Chapter of China-Russia Friendship, Cooperation and Common Development,” published in the Russian media on March 20, both countries “need to raise both the quality and quantity of investment and economic cooperation and step up policy coordination to create favorable conditions for the high-quality development of our investment cooperation.”
The track-record of intensifying the China-Russia economic cooperation in 2022 will need to be assessed with due consideration with regard to both the achievements as well as those areas where there remains substantial scope for boosting bilateral ties.
On the bright side, there is the record-high trade turnover between China and Russia posted in 2022. A figure of around $190 billion in trade turnover comes close to the newly established $200 billion target for bilateral trade set for 2024. With annual growth in trade turnover reaching 34.3 percent in 2022, the momentum appears strong for the $200 billion target to be reached well ahead of schedule.
China’s optimization of COVID-19 measures and the liberalization of transportation regulations (including with respect to direct flights between China and Russia) will likely boost bilateral trade further, including in the services sector (most notably in the tourist segment).
On the other hand, figures on investment from China to Russia, most importantly long-term foreign direct investment (FDI) flows, show a significantly more moderate growth pace compared to the above-mentioned trade growth figures. The FDI data published by the Eurasian Development Bank suggests that the stock of FDI from China to Russia grew by 27.4 percent from 2016 to mid-2022, implying an annual average growth rate of a little over 3 percent. According to the forecasts coming from the Eurasian Development Bank, growth in FDI inflows from China into Russia is likely to continue, albeit still at a moderate pace.
Against the backdrop of these trends in trade and investment, the use of national currencies will very likely be another point of discussion at the China-Russia talks. Last year saw a substantial rise in the use of the rouble and the Chinese yuan in bilateral trade transactions. In the course of 2022, the share of the rouble and the yuan in Russia’s export operations increased from 12 percent and 0.5 percent to 34 percent and 16 percent, respectively; the share of the U.S. dollar and the Euro declined to less than 50 percent by end-2022.
As regards Russia’s imports the share of the yuan increased from 4 percent to 23 percent, while that of the Russian rouble declined from 29 percent to 27 percent, the share of the U.S. dollar and the Euro declined from 65 percent to 46 percent.
In spite of the impressive scale of de-dollarization in bilateral trade, there is still ample scope to further increase the use of national currencies. This should be made possible by greater use of national and regional payment systems – not only on a bilateral basis, but also in the broader framework of BRICS via the introduction of the long-awaited BRICS Pay system.
Another possible venue to de-dollarization that may be discussed at the summit may be the launching of a new BRICS reserve currency – a project that Putin unveiled in mid-2022. The future of this new currency dubbed R5 (all five currencies of BRICS countries start with a letter “R”) to a significant degree will depend of the readiness of both China and Russia to pursue a coordinated approach to launching such an undertaking that may prove to be critical not only for the BRICS proper, but for the broader realm of the developing world.
To forge ahead with greater de-dollarization, it is critical to ensure greater coordination in international economic organizations. This is particularly important for the advancement of the global role of such groupings as BRICS that have taken on a rising prominence on the international arena, particularly after the successful BRICS chairmanship of China in 2022. Both countries play a crucial role in making BRICS a dynamic, open and inclusive platform, with one of the near-term issues being that of BRICS expansion and the possibility of the inclusion of new large emerging markets into the BRICS core.
In the end, the meeting between the leaders of China and Russia will present an opportunity to build on the strong momentum in boosting bilateral economic cooperation. Apart from the rising prominence of Global South, there is the resurgence of economic concerns in the West – against the backdrop of rising fragilities in the financial sector in the U.S. and Europe, boosting bilateral economic ties between China and Russia may be seen as lowering the susceptibility to the rising frequency of crisis waves emanating from developed economies.
Author’s note: First published at CGTN
Is the Western Moral Triumph still possible? Of Jeffrey Sachs and Edges of Globalization
“It feels like I imagine 1912 to feel” stated US Columbia Professor Jeffrey Sachs during an extraordinary zoom conference on the 8th of March. The discussion about the current geopolitical state with Geneva participants, concepted and hosted by professor Anis H. Bajrektarevic, was held on an emblematic day, the International Women’s Day, celebrating female achievements in social, cultural and political fields. As Professor Sachs reminded, to remember this occasion is of the highly importance to maintain human rights at the core of our engagements in a froth and difficult geopolitical situation.
Jeffrey David Sachs, born November 5, 1954 is a US economist, academic, public policy analyst, and former director of the Columbia’s Earth Institute, where he holds the title of university professor. He is known for his work on sustainable development, economic development, and the fight to end poverty.
Currently, Sachs is Director of the Centre for Sustainable Development at Columbia University and President of the UN SD Solutions Network. He is an SDG Advocate for UN Sec-General Antonio Guterres on the Sustainable Development Goals (SDGs), a set of 17 global goals adopted at a UN summit meeting in September 2015. Previously, from 2001 to 2018, Sachs served as Special Advisor to the UN Secretary General, and held the same position under the previous UN Secretary-General Ban Ki-moon and prior to 2016 a similar advisory position related to the earlier Millennium Development Goals (MDGs), eight internationally sanctioned objectives to reduce extreme poverty, hunger and disease by 2015. In connection with the MDGs, he had first been appointed special adviser to the UN Secretary-General in 2002 during the term of Kofi Annan.
Sachs is co-founder and chief strategist of Millennium Promise Alliance, a nonprofit organization dedicated to ending extreme poverty and hunger. From 2002 to 2006, he was director of the UN Millennium Projects network on MDGs. He is co-editor of the World Happiness Report (co-authored with Helliwell and Layard). In 2010, he became a commissioner for the Broadband Commission for Sustainable Development (developmental effects of broadband in international policy).
For the past three decades, Sachs extensively advised numerous governments in Europe, MENA, and Afro-Asia. He has written number of books and received several awards. He has been criticized for his views on economics, the origin of Covid-19, war in Ukraine and decoupling from China.
During his mesmerizing talk and exchange with the participants, professor Sachs evoked the biased diametrically opposed media information conveyed by the West and Russia, reinforcing the dangerous and froth environment of an escalating and unpredictable war. The honorable guest spoke about the conflict’s real debuts, “33 years ago at the cold war’s sundown under Gorbachev’s leadership and the promise by the US and Germany that NATO would not expand east, as well as the rise of the US as the ultimate superpower”. Giving the admiring audience anecdotes of his career, Jeffrey Sachs explained how the conflict is wrongly portrayed aiming for an Orwellian amnesia, and how things could have been handled strategically differently and with more honesty and empathy, ending in a dissimilar outcome. His principal host, prof. Anis asked him: “Jeff, is the moral triumph of the (political) west still possible?”
He lankly criticized the change of US policy towards China since 2015, labeling the country as an enemy as its economy rose, creating a dangerous environment that leaves no place for diplomacy. Professor shared his worries towards the tensions and the fear of an escalating hot war that could easily lead to a nuclear conflict. To Professor Sachs the aggressive US’ hegemonic policy towards China is senseless and dangerous and weakening diplomacy. “All China wants is to be respected and all America wants is to be told how smart they are”- he stated. He insisted on the fact that we need an open new world where there is no US or Europe leading but a world of acknowledgement, history, justice, appreciation and hope.
Throughout the discussions, the esteemed Professor criticized the lack of communication between Biden and Putin and the huge irresponsibility that he places mostly on the US side. He insisted on the importance of communicating in diplomacy as well as with each other in day to day lives. Further on, distinguished guest engaged audience in a constructive critic of the western positions in contemporary world of slobalisation and attempts of decoupling from the Sino world through the accelerated spiral of violent rhetoric’s and wargames. Finally, he made a reference on the recent hearing at the UN Security Council related to the so-called North Stream issue.
The inspiring yet easy-going talk evolved in a friendly exchange of questions and remarks between Professor Sachs and the participants. Content intensive, inspiring reflective and farsighted, yet amicable and family-like atmosphere with a direct, personal access to the notable guest deeply impressed all. As the event came to an end, with the univocal wish of organizing global teaching, a global seminar to educate people and especially young people on important topics (including human rights and liberties), Professor Anis Bajrektarevic closed the meeting by inviting Professor Sachs to make time on his very busy agenda to visit Geneva soon to continue the discussion, proposition that was kindly welcomed and agreed to.
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