Breaking the vicious circles of illicit financial flows, conflict and insecurity

Cobham, A. 2016. Breaking the vicious circles of illicit financial flows, conflict and insecurity. GREAT Insights Magazine, Volume 5, Issue 1. February 2016. Republished with permission of the European Centre for Development Policy Management (ECDPM). 

Illicit financial flows (IFF) not only thrive on conflict and insecurity but exacerbate both, by undermining the financial and political prospects for effective states to deliver and support development progress. Policies to meet the Sustainable Development Goals’ target of curtailing IFF will also promote peace and security. 


In 2014, the Tana High-Level Forum on Security in Africa took as its theme the impact on peace and security of illicit financial flows (IFF). Leading figures from across the region, including a range of current and former heads of state, discussed the nature and scale of illicit flows and the policy options available.

The subsequent report of the High Level Panel on Illicit Financial Flows out of Africa, chaired by Thabo Mbeki, cited the Tana Forum background study (Cobham, 2014) and reiterated its analysis of the linkages with security; and so it was no surprise that the IFF target in the Sustainable Development Goals (SDGs) appeared under Goal 16: ‘Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels’:

16.4 By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime…

The linkages between IFF and insecurity are not necessarily well understood, however. Assessing how the two issues interact can help to identify the range of policy responses that will support powerful progress.


Illicit financial flows


There is no single, agreed definition of IFF. The Oxford dictionary definition of ‘illicit’ is: “forbidden by law, rules or custom.” The first three words alone would define ‘illegal’, and this highlights an important feature of any definition: illicit financial flows are not necessarily illegal. Flows forbidden by “rules or custom” may encompass those which are socially and/or morally unacceptable, and not necessarily legally so. Multinational tax avoidance (as opposed to illegal tax evasion) might come under this category.

This particular example also shows why a legalistic approach may introduce an unhelpful bias. Commercial tax evasion affecting a low-income country where the tax and authorities have limited administrative capacity is much less likely either to be uncovered or successfully challenged in a court of law, than would be the same exact behaviour in a high-income country with the same laws but with relatively empowered authorities. A strictly legal definition of IFF is therefore likely to result in systematically – and wrongly – understating the scale of the problem in lower-income, lower-capacity states. For this reason above all, a narrow, legalistic definition of IFF should be rejected.

Figure 1: Main IFF types by nature of capital and transaction

GREAT_Insights_Vol5_iss1_Cobham_Fig1

The central feature of IFF – and incidentally a major reason their measurement is so difficult – is that they are deliberately hidden: financial secrecy is key, in order to obscure either the illicit origin of capital or the illicit nature of transactions undertaken (or both). As illustrated in Figure 1, four main types of behaviour are captured: 1) market/regulatory abuse (e.g. using anonymous companies to conceal political conflicts of interest, or breaches of antitrust law); 2) tax abuse; 3) abuse of power, including the theft of state funds and assets; and 4) laundering of the proceeds of crime. Figure 1 also highlights that there is a broader distinction between ‘legal capital IFF’ (tax abuse and market abuse, types 1 and 2) and ‘illegal capital IFF’ (the abuse of power and laundering of criminal proceeds, types 3 and 4).


Security and state ‘fragility’


There is growing agreement that the concept of fragile states – as a binary division against all other, ‘non-fragile’ states – is an unhelpful one for analysis. Instead, it is more useful to think of all states as occupying some position on a spectrum of (risk of) fragility. As the High Level Panel on Fragile States (2014) put it:

Fragility comes about where [pressures such as those stemming from inequality and social exclusion, or from new resource rents and resource scarcity] become too great for countries to manage within the political and institutional process, creating a risk that conflict spills over into violence – whether interstate or civil war, ethnic or tribal conflict, widespread criminality or violence within the family. Countries that lack robust institutions, diversified economies and inclusive political systems are the most vulnerable. In the most acute cases, violence has the effect both of magnifying the underlying pressures and eroding the institutions needed to manage them, creating a fragility trap from which it is very difficult to escape.

The risk of fragility is then closely related to a state’s ability to provide citizens with ‘negative’ security (to prevent personal, community, political and environmental insecurity) and with ‘positive’ security (to provide the conditions for economic, food and health security and progress). These two forms of security exhibit potentially mutually reinforcing relationships with particular types of IFF.


Two vicious circles


Figure 2 shows a vicious circle linking illegal capital IFF and problems of negative security. Where IFF derive from abuse of power – say, for example, the extreme behaviour of a kleptocratic leader – the cycle follows almost tautologically. The nature of the IFF itself undermines state legitimacy and both the capacity and interest to provide security, or indeed to act to curtail IFF.

When the rise in IFF reflects laundering of the proceeds of crime, it is the underlying crimes where the linkages are likely to emerge. Most dramatically, Cockayne (2011) finds that drug and human trafficking has led to little less than the criminalisation of governance itself in West Africa and the Sahel. He identifies two hubs that grew strongly after Caribbean counter-narcotics efforts in the 1990s pushed the trade elsewhere: one around Gambia, Guinea and Guinea-Bissau, and the other around Benin, Ghana and Togo. In addition, Cockayne highlights important services provided in other states – namely money laundering in Senegal, and transit in Mali, Mauritania and Niger. The growing involvement of the state in criminal activity (including IFF), and the growing power of criminality over the state, make the vicious circle somewhat inevitable again.

Figure 2: The vicious cycle of negative security and illegal capital IFF

GREAT_Insights_Vol5_iss1_Cobham_Fig2

Much of the problems of conflict and negative security arise in countries characterised by low levels of institutionalisation of authority, a heavy reliance on patronage politics and an accordingly high level of allocation of state rents to unproductive activities (patronage, to maintain the political machine). For a rent-seeking patronage order to function, it must resist or evade the pressures to institutionalise state finance – through, for example, an incentive structure in which senior officials have a personal interest in financial opacity and the misuse of public funds, and fiscal policy is subordinated to the ‘political budget’ (the state allocation for patronage purposes). Major sources of funds such as natural resource companies may be rewarded through the opportunities to evade tax with impunity, and may maximise net profits through bribery.

In turn this kind of state structure creates structural incentives for violence. Kleptocracy will tend to require violence to protect the position of privilege; those outside may resort to force to extort rents from those in power, or to challenge for the prize of (illegitimate) power itself.

All four IFF types shown in Figure 1 are likely to result in reductions in both state funds and institutional strength – that is, they undermine governance as well as domestic resource mobilisation. While little research has sought to quantify the governance impact, and some attention has been given to the theft of state assets, a growing body of literature seeks to assess the financial scale of flows and the revenue losses associated with particular elements. Consistently, the scale of IFF and of revenue losses from corporate profit-shifting and from individual evasion through undeclared offshore assets is greater in lower-income countries; and often material in respect of countries’ GDP. Indicative estimates of the resulting impacts on basic human development outcomes such as child mortality suggest these too are powerful indeed – potentially bringing African achievement of the Millennium Development Goal target forward from an estimated 2029 to 2016, for example (O’Hare et al., 2014).

Figure 3: The vicious cycle of positive security and legal capital IFF

GREAT_Insights_Vol5_iss1_Cobham_Fig3

Figure 3 illustrates the vicious circle that can arise between these largely legal capital IFF, and problems of positive security. Bluntly, revenues are undermined where they are most needed; and further institutional damage follows from the weakening of the state-citizen relationship that is built on effective taxation.


IFF and security: Policy implications


At the Tana Forum in 2014, President Salva Kiir of South Sudan told how the ‘vultures’ had circled the new state even before it came into existence, building relationships with soldiers and others, so that when the moment came they were poised to create a web of contracts that channelled away oil revenues into anonymity – without delivering on the contracts:

When peace was signed, the vultures that were hovering over Sudan landed. We have learned in our cultures that when you see vultures hovering around, there must be a dead animal – or something is going to die… They knew there would be a vacuum of administration there… That [oil] money was disappearing day by day to where you cannot trace it.

The central feature of IFF is that they are hidden, typically by the financial secrecy provided by other jurisdictions. The secrecy in question relates primarily to the provision of vehicles for anonymous ownership such as shell companies; to the refusal to provide information on foreigners’ assets and income streams to their countries of tax residence; and to the type of corporate opacity that obscures the worst excesses of multinationals’ profit-shifting. As shown by the Tax Justice Network ranking of tax havens, the Financial Secrecy Index, this includes many of the leading economies – not least the USA, ranked third.

States can protect themselves to a degree, by ensuring greater transparency of public contracts for example, and public country-by-country reporting by multinationals; and by engaging fully in the multilateral process for automatic exchange of tax information. But while other states insist on selling secrecy, major obstacles will remain.

Success in the Sustainable Development Goals target of curtailing illicit financial flows would contribute to reducing risks of state fragility across the board – and to achieving many human development targets too. But such progress depends on international progress against financial secrecy. A significant step would be the adoption of indicators for target 16.4 that will ensure individual states are held accountable for the secrecy they provide globally – and the IFF they stimulate as a result.

The following indicators (Cobham, 2015) draw from the agreed policy positions in the Sustainable Development Goals and the Financing for Development declaration from Addis, July 2015:

  • For each country and jurisdiction, on what proportion of foreign-owned assets and to the states of what proportion of the world’s population, are they providing tax information bilaterally to others?
  • For each country and jurisdiction, from which countries and jurisdictions are they receiving tax information bilaterally?
  • For each country and jurisdiction receiving information, what proportion and volume of revealed assets were already declared by the taxpayer, and what resolution has reached each year in respect of the remainder?
  • For each country and jurisdiction, for multinationals making up what proportion of the declared multinational tax base is country-by-country reporting publicly available?

The harder it is for vultures to hide, the fewer may be the unnecessary deaths suffered.

Figure 4: Overview of IFF and security linkages

tana overview fig

 


References


Cobham, A., 2014, ‘The impact of illicit financial flows on peace and security in Africa’, Tana High-Level Forum on Security in Africa Discussion Paper.

Cobham, A., 2015, ‘Uncounted: Power, inequalities and the post-2015 data revolution’, Development 57:3/4, pp.320-337.

Cockayne, J., 2011, ‘Transnational threats: The criminalization of West Africa and the Sahel’, Center on Global Counterterrorism Cooperation Policy Brief (December).

High Level Panel on Fragile States, 2014, Ending Conflict & Building Peace in Africa: A call to action, African Development Bank: Tunis.

High Level Panel on Illicit Financial Flows out of Africa, 2015, final report.

O’Hare, B., I. Makuta, N. Bar-Zeev, L. Chiwaula & A. Cobham, 2014, ‘The effect of illicit financial flows on time to reach the fourth Millennium Development Goal in Sub-Saharan Africa: a quantitative analysis’, Journal of the Royal Society of Medicine 107(4), pp.148-156.

 

Uncounted: Power, inequalities and the post-2015 data revolution

Data: Facts and statistics collected together for reference or analysis

Revolution: A forcible overthrow of a government or social order, in favour of a new system

– Oxford English Dictionary

Just published: a special double issue of the journal Development on African inequalities, including my (open access) guest editorial setting out the thesis of ‘Uncounted’ – how power and inequality are intimately related to who and what go uncounted, from tax evasion in the 1% to the systematic exclusion of women and girls, from the corrupting influence of illicit financial flows to the marginalisation of people living with learning disabilities…

Guest Editorial: Uncounted: Power, inequalities and the post-2015 data revolution

Development (2014) 57(3–4), 320–337. doi:10.1057/dev.2015.28

People and groups go uncounted for reasons of power: those without power are further marginalized by their exclusion from statistics, while elites and criminals resist the counting of their incomes and wealth. As a result, the pattern of counting can both reflect and exacerbate existing inequalities. The global framework set by the Sustainable Development Goals will be more ambitious, in terms of both the counting and the challenging of inequalities, than anything that has gone before. This article explores the likely obstacles, and the unaddressed weaknesses in the agreed framework, and suggests a number of measures to strengthen the eventual challenge to inequalities, including by the promotion of tax justice measures.

Keywords: inequality; data; household surveys; SDGs; tax; uncounted

 

While the whole edition just came out, it is technically the 2014 volume. The majority of the papers are drawn from the Pan-African Conference on Tackling Inequalities in the Context of Structural Transformation held in Accra that year, and include some cracking contributions – not least important papers on gender inequality, sustainability and disabilities, as well as broader pieces on the economics and politics of inequality. Check out the full table of contents.

Power in the darkness, uncounted

Measuring illicit flows in the SDGs

Today (Tuesday 15 December) is the last day of the consultation on ‘grey’ indicators for the Sustainable Development Goals – that is, the ones where there remains a substantial degree of uncertainty about the final choice of indicator. To the surprise of literally no one, this includes 16.4: the illicit financial flows (IFF) indicator.

At the bottom of this post is my submission, which makes two main proposals for the way forward. Short version: we need a time-limited process to (i) improve data and (ii) build greater methodological consensus; and we need to include from the outset measures of exposure to financial secrecy which proxy for IFF risk.

The consultation

The full list of green and grey indicators is worth a look, as much as anything as a snapshot of where there’s more and less consensus on what the new development agenda will, and should, mean in practice. The late-October meeting of the Inter-Agency Expert Group (IAEG-SDGs) produced a plethora of documents showing the range of positions.

As an aside, I particularly liked the IAEG stakeholder group‘s demand for a proper inequality measure in 10.1:

The omission of any indicator to measure inequality between countries is glaring. We propose an indicator based on either the Gini coefficient or Palma ratio between countries which will not require additional data from states, but will provide a crucial guide to the effectiveness of the entire agenda. In general, inequality is not limited to income and therefore Gini and Palma must be measured within countries. Of the proposals to measure inequality, we support 10.1.1 comparison of the top 10% and bottom 40% and further breakdown wherever possible.

On illicit financial flows, this was the sensible and promising position of the UN Chief Statisticians:

Target 16.4. As commented by many countries, the indicator on illicit financial flows, while highly relevant, lacks an agreed standard methodology. Statistical programmes in international organizations stand ready to support the IAEG to initiate a process for developing such a methodology and support the gradual implementation of the indicator in future monitoring.

This engagement of international organisations is exactly what has been lacking in this area, and what organisations producing estimates such as our colleagues at Global Financial Integrity, have long called for: “don’t complain about our methodology, do better”.

Below is my quick submission. (The consultation phase only runs 9-15 December, and I only heard yesterday – clearly need to spend more time on UNSTAT.org…) Any comments very welcome.

Two proposals: Illicit flows in the SDGs

At present, there is great consensus on a target in the SDGs to reduce illicit financial flows, but a lack of consensus on an appropriate methodology and data sources by which to estimate them (and hence to ensure progress). There are important implications for the SDG indicator, set out below. To summarise:

  • A fully resourced, time-limited process is needed to bring together existing expertise in order to establish priorities for additional data, and a higher degree of consensus on methodology, so that by 2017 at the latest consistent IFF estimates (in current US$) will be available; and
  • Recognising that even the best such estimates will inevitably have a substantial degree of uncertainty, and are likely also to lack the granularity necessary to support national policy decisions, additional indicators should be adopted immediately which proxy for the risk of IFF and provide that granularity – specifically, by measuring the financial secrecy that countries are exposed to in their bilateral economic and financial relationships.

Illicit flows are, by definition, hidden. As such, most approaches rely on estimation on the basis of anomalies in existing data (including on trade, capital accounts, international assets and liabilities, and of the location of real activity and taxable profits of multinational corporations). Almost inevitably then, any estimate is likely to reflect data weaknesses as well as anomalies that result from illicit flows – so that one necessary response is to address the extent and quality of available economic and financial data, especially on bilateral stocks and flows.

In addition, there is no consensus on appropriate methodologies – despite leading work by many civil society organisations, and growing attention from academic researchers. In part, this reflects the failure of international organisations to engage in research here – a failure which should be rectified with some urgency, as part of the second necessary response which is to mobilise a sustained research effort with the aim of reaching greater consensus on high quality methodologies to estimate illicit financial flows.

Since the SDG indicators are needed almost immediately, the efforts to improve data and methodologies should be resourced in a strictly time-limited process, ideally under the auspices of a leading international organisation but recognising that the expertise resides with civil society (primarily among members of the Financial Transparency Coalition) and in academia, so that the process must be fully inclusive.

The results of this process are unlikely to be available before 2017. In addition, it must be recognised that the eventual estimates of illicit financial flows (IFF) will not be free of uncertainty. Moreover, individual IFF types (e.g. tax evasion or money-laundering) do not map onto individual channels (e.g. trade mispricing or non-declaration of offshore assets), so that overall IFF estimates – however good – will not immediately support granular policy responses.

The SDG indicators should therefore include, starting immediately, a set of measures of risk. Since IFF are defined by being hidden, measures of financial secrecy therefore provide the appropriate proxies. The stronger a countries’ trade or investment relationship with secrecy jurisdictions (‘tax havens’), the greater the risk of hidden, illicit components. For example, there is more risk in trading commodities with Switzerland than with Germany; and less risk in accepting direct investment from France than from Luxembourg.

The Tax Justice Network publishes the major ranking of secrecy jurisdictions, the Financial Secrecy Index (FSI) every two years. This combines measures of financial scale with 15 key indicators of secrecy, in a range of areas relevant across the horizon of IFFs. The African Union/Economic Commission for Africa High Level Panel on Illicit Flows out of Africa, chaired by H.E. Thabo Mbeki, published pioneering work using the FSI to establish indicators of vulnerability for each African country, separately for trade, investment and banking relationships.

In addition, each country and jurisdiction should be asked to publish the following information annually, in order to track consistently the contribution of each to financial secrecy affecting others:

  1. the proportion and absolute volume of domestically-established legal persons and arrangements (companies, trusts and foundations) for which beneficial ownership information is not publicly available;
  2. the proportion and absolute volume of cross-border trade and investment relationships with other jurisdictions for which there is no bilateral, automatic exchange of tax information; and
  3. the proportion and absolute volume of domestically-headquartered multinational companies that do not report publicly on a country-by-country basis.

These indicators map to three proposed IFF targets which are estimated to have very high benefit-cost ratios.

By prioritising the suggestions made here, the SDG process can make a great contribution to both the analysis and the curtailment of IFFs.

mbeki vulnerability

Time for a gendered data revolution

Too many of the big numbers on gender inequality count the cost for GDP – rather than the costs imposed on women. Daphne Jayasinghe, Women’s Rights Policy Adviser at ActionAid UK, calls time. 

Counting gender inequality – which big numbers?

It seems that when it comes to measuring the scale of women’s economic inequality, big numbers really count. Last month the McKinsey Global Institute published its finding that labour market gender inequality represents a $12 tn loss in global GDP. The IMF, the World Economic Forum, the OECD and others have described the “double dividends” of increasing numbers of women in the labour market thereby increasing GDP growth rates .

This analysis makes a striking, headline grabbing argument but what is the purpose? In spite of 1 in 3 women suffering violence and a gender pay gap as high as 30% in some countries, it seems that world leaders and decision makers need more convincing on the value of gender equality.

The fashion therefore is to promote women’s rights in relation to financial returns to the economy. To highlight the growth potential for economies of more women in the labour market, regardless of the exploitative or dangerous conditions they may be working in.

This analysis neglects the fact that neoliberal growth models rely on underpaid women workers as well as a workforce that is fed, clothed and brought up by the invisible cadre of unpaid women carers. Gender inequalities in the home and work place are by no means an inconvenience to global capitalism, they are a precondition for its success.

Counting the costs to women

ActionAid took steps to attach a big number to this debate which challenges this contradiction and measures losses to women themselves. We estimate that women globally could be USD$17 trillion better off each year if their pay and access to jobs were equal to that of men (USD$9 trillion in developing countris). We argue that women’s cheap labour and unpaid work is effectively subsidising the economy by this staggering amount – a result of gender discrimination and women’s economic inequality.

AAid gender gap2

An analysis of this problem that makes a growth potential argument for gender equality neglects the role that economic policies can play in exacerbating inequalities.  An assessment of the benefits of economic justice to women themselves and the economic drivers of inequality is vital.

Analysis of the legal gender barriers to the economy exist in the World Bank’s Women, business and the law project. In contrast, an understanding of the underlying but more pervasive social norms governing gender inequality is constrained by data shortages. For example, less than half of all countries measure unpaid care using time-use surveys.

Talkin bout a revolution

The Sustainable Development Goals agreed last month present an opportunity to improve gender data particularly since addressing discriminatory social norms and institutions has become a new development priority and features strongly across the goal on gender (SDG5) targets. Investments in countries’ capacity to gather data and attention to strong indicators to track the progress of achieving goals are imperative.

Such a gendered data revolution may help move the debate on women’s economic empowerment along from assessing what women could do for the economy towards what they are already doing – often with little recognition or reward.

Ask not what women could do for the economy – ask what they are already doing. 

 

Inquest closed: Connor Sparrowhawk – #JusticeforLB

The inquest of Connor Sparrowhawk (LB) has closed, with a unanimous jury finding: Connor’s death, as a result of drowning following a seizure in the bath while in a Southern Health treatment and assessment unit, was contributed to by neglect.

Much more will be heard of the specific failings on the unit, and in particular of the management of Southern Health. So this is far from the end of the road. But it is an important step towards #JusticeforLB – the extraordinary grassroots campaign that has grown up around Connor’s family, Sara and Richard, GeorgeJulian and many others.

The consistent and persistent uncounting of people living with learning disabilities is a part of, and a reflection of, one of the greatest systemic injustices internationally.

But those statistics, and more often their absence, don’t transmit the full picture. A few of the specifics of Southern Health’s approach, as revealed at the inquest, are worth drawing out.

These are in addition to the documented failures to gather information about Connor, including from his family – such as the history of his epilepsy – and to ensure appropriate training for staff around important aspects of their job – such as epilepsy. [This was a highly costly, specialist unit for people with learning disabilities. One in five people with learning disabilities have epilepsy. One. In five.]      

Withholding information

Repeatedly over the course of events, Southern Health ‘found’ new information that should have been provided to Connor’s family previously. Including sending new information unexpectedly, by courier, in the week before the inquest. This, more than two years after Connor’s death, and after numerous internal and independent reviews.

At best, the implication is a quite exceptional incompetence in the treatment of vital information about people in their care. 

In addition, it was only during the inquest that it came to light that a patient had died on the same unit in 2006 – after, almost unbelievably, an epileptic seizure in the bath.

Connor’s family, between their own professional expertise and the network of support, including a largely pro bono legal team led by a QC, have probably got as close to making the inquest a ‘fair fight’ as anyone ever does. One wonders what happened in the 2006 case. Which leads us to…

Adversarial approach

The UK government’s attempts to deny legal aid to bereaved families – which have been found in breach of human rights law – rest on the idea that such processes are not adversarial.

Connor’s inquest demonstrated beyond any possible doubt the falsity of such a claim. Not only was Southern Health (aggressively) represented, and from the public purse, so too were multiple members of the unit’s then staff, each individually.

The full timeline of @LBinquest is hugely revealing, but the arguments over what directions the coroner could give the jury were especially so. Southern Health’s legal team sought a set of directions to make it less likely the jury could return a verdict on neglect – including by arguing for a dictionary rather than a legal definition, which is an interesting court approach to say the least. The family’s QC, Paul Bowen, told the coroner:

Not adversarial? What happens when the family don’t have a QC to respond?

The last word – for now

In September, the United Nations made the commitment to the Sustainable Development Goals (SDGs), which provide a set of targets for human progress for 2016-2030, and importantly apply to every country of the world.

The SDGs include a requirement to disaggregate main progress indicators according to a range of salient inequalities – including those related to disability. Given that the UK’s prime minister co-chaired the high level panel that first made that proposal, let’s hope that the UK will lead the way by finally delivering on the recommendations of the government’s own inquiry on the need for much better data in relation to people living with learning disabilities. And then the rest…

Over to Connor’s family (and please read the full inquest response from JusticeforLB):

Two years and 7 months ago, our gentle, quirky, hilarious and beyond loved son (brother, grandson, nephew, cousin) was admitted to a short term assessment and treatment unit, STATT, run by Southern Health NHS Foundation Trust. Connor, also known as Laughing Boy or LB, loved buses, Eddie Stobart, watching the Mighty Boosh, lying in the sunshine and eating cake. He was 18 years old.

The care Connor received in the STATT unit was of an unacceptable standard. The introduction of new medication led to increasing seizure activity on the unit, a fact denied by the consultant psychiatrist for reasons only known to her. Connor was allowed to bathe unsupervised and drowned, 107 days later.

Connor’s death was fully preventable. Over the past two weeks we have heard some harrowing accounts of the care provided to Connor. We have also heard some heartfelt apologies and some staff taking responsibility for their actions for which we are grateful. During the inquest, eight legal teams (seven of whom we understand are publicly funded) have examined what happened in minute detail. We have had to fundraise for our legal representation.

Since Connor’s death, Southern Health NHS Foundation Trust have consistently tried to duck responsibility, focusing more on their reputation than the intense pain and distress they caused (and continue to cause us). It has been a long and tortuous battle to get this far and even during the inquest, the Trust continued to disclose new information, including the death of another patient in the same bath in 2006. Families should not have to fight for justice and accountability from the NHS.

We would like to thank everyone who has supported the campaign for JusticeforLB, and hope that the spotlight that has been shone onto the careless and inhumane treatment of learning disabled people leads to actual (and not just relentlessly talked about) change. It is too late for our beautiful boy but the treatment of learning disabled people more widely should be a matter of national concern.

Addis #FFD: An intergovernmental tax body?

global tax body - OxfamA major obstacle to early agreement on the text for the upcoming Financing for Development conference in Addis is the fate of the mooted intergovernmental tax body.

Could this work? Is it a good idea? And regardless of the answers to those questions, what will actually happen? This post explores the three main possibilities, and the likely outcome for Addis.

1. OECD retains leadership

The OECD has long had the leadership on international tax issues, despite being representative of only a fraction of the world’s countries, or population. This, and the relative wealth and power of its member states, has allowed it to build a leading position in terms of technical capacity. Now, to be fair, the OECD has tried quite hard to include developing countries in the latest Base Erosion and Profit Shifting initiative, for which it received the mandate from the G20 group (including major non-OECD countries).

But ultimately, major aspects of the BEPS Action Plan have come down to political negotiation – and of course OECD members have the most power, so developing country voices have barely been heard at the sharp end of these negotiations.

The most likely outcome of all is that the OECD retains leadership, at least over the medium term, even though BEPS comes to be seen largely as a failure. But this is hardly a good outcome.

2. A challenge from the IMF?

That leaves two main alternatives. One is the IMF, where there has been clear frustration at the OECD being handed the leadership on tax since the financial crisis. The IMF rightly claims to be much closer to a globally representative membership; and to have a tax expertise that’s much more focused on national policymaking in developing countries.

But there are two big issues. If anything, there is a greater sense with the IMF than the OECD of domination by a few major economies, the US in particular. And while the IMF’s Fiscal Affairs Dept includes respected researchers, the organisation’s policy recommendations at country level have consistently failed to reflect even their own research evidence. So it’s hard to see strong support emerging for the IMF to lead here, even though there’s a growing sense that BEPS has already failed to deliver on its promise.

3. An intergovernmental tax body

The other alternative is the type of intergovernmental body that many developing country governments, along with national and international NGOs, are now calling for. This short briefing, put together by a range of TJN partners, sets out ten reasons an intergovernmental body is a good idea.

The short, short version is this: it could be a significant step towards a coherent global system, compared to the complexity of current arrangements which are clearly failing everyone – and especially developing countries who are outside the main power grouping of the OECD.

While this should sit at the UN, in order to provide a broad representation and political accountability, it’s unlikely to be simply an extension of the current UN tax committee – which has about one and a half full time staff as a secretariat, and is a technical body rather than a political one. The pressure for an intergovernmental body will only be worth it if the resulting body has at least equivalent resources to the OECD’s current tax work (which is significantly wider than BEPS); ideally, scaled up from OECD to global level.

{Aside: the most recent OECD accounts seem to be for 2013, before BEPS got fully underway, and I can’t work out what share of the €600m+ budget went on tax and related areas. Any info on this most welcome.}

Realpolitik?

The argument some make to defend the status quo, that the US would pay no heed to such a body, is not an unreasonable one, and it confronts the fundamental politics here.

The US is able to exert power over important decisions at the OECD, and hence the OECD (largely) retains US support, and its own role.  (Although it’s worth noting that there is a significant lobbying attempt underway by US multinationals to obtain Republican support for rejection of the entire BEPS outcome, and more besides.)

A genuinely intergovernmental body might be more representative but powerless, because it would be starved of resources like the UN tax committee; or it might become powerful only if the US and a few other major powers are able to dominate it, in which case it might not offer much of an improvement from the OECD.

Realer politik

But think about where we are today. The latest IMF research suggests developing countries lose revenues of more than $200 billion a year to multinationals’ profit-shifting, and OECD countries around $500 billion a year. That means developing countries lose about three times as much as a share of GDP. So it’s increasingly clear that international tax rules don’t work for OECD countries, and even less so for developing countries.

How long can a few major powers prevent other countries from adopting more effective alternatives to the OECD rules? The greater the resistance to change in intergovernmental settings, the more likely we are to see substantive splits, with increasing numbers of countries giving up on the OECD rules in practice, regardless of rhetorical commitment.

As I noted in a discussion of the politics of country-by-country reporting for multinational companies, the successful lobbying by US multinationals in particular might turn out to be a pyrrhic victory: the strangling at birth of that measure, in terms of value for developing countries at least, may actually lead to more pressure for effective transparency, and potentially greater compliance costs for multinationals too.

In this case, successful resistance to a genuinely representative intergovernmental tax body might simply accelerate the loss of credibility of the OECD and its rules, leading to greater fragmentation.

And the answer is…

The most likely outcome in Addis is, of course, a fudge: agreement to a body, probably based on the UN tax committee, which has some greater political power via ECOSOC but remains so strapped for resources that it is never able to challenge the OECD or IMF.

The OECD will hold on for a while, the IMF will spin its wheels (and produce useful research), and the constrained UN body will offer just a little space – and no more – for other approaches like formulary apportionment.

But this is not a stable equilibrium, given the multiple and near-universally acknowledged flaws in international tax rules. If that’s where we end up after Addis, increasing fragmentation of national approaches seems inevitable. And perhaps it is anyway.

Financing for Development: Tax revenues and health outcomes

From the Tax Justice Research Bulletin 1(6).

One of the striking differences between the Millennium Development Goals set in 2000, and the post-2015 Sustainable Development Goals, is the latter’s emphasis on domestic resource mobilisation – set against the aid-centricity of the former. While this is welcome (primarily because of the enhanced potential for domestic “ownership” of priorities, and the ensuing political benefits), it does raise a question.

Figure 1A new paper published in leading health journal, The Lancet, tackles this question. Reeves, Gourtsoyannis, Basu, McCoy, McKee and Stuckler construct a panel of revenue, expenditure and health data for 89 low- and middle-income countries, from 1995-2011, and use it to explore the relevance of different sources of financing.

They reach two main findings. First, as you’d expect, they uncover a fairly strong association between tax revenues and health spending (Figure 1 – click to enlarge): more tax revenue per capita… more public health spending per capita.

Reeves et al Lancet 2015 fig2In a simple model, an additional $100 of GDP per capita is associated with $1.86 of extra health spending; while an additional $100 of tax revenue per capita is associated with $9.86 of health spending. There is also (Figure 2) support for impact on health outcomes.

Second, the authors find that the association hinges on direct tax in particular. They find that $100 of direct tax revenue per capita is associated with $16 of public health spending; whereas consumption and other taxes appear to have a small negative association. Most strikingly (Figure 3) there is an association between consumption taxes (but not direct taxes) and mortality outcomes.

What should we make of these results? (Does VAT kill children?) The authors are cautious about the limitations of World Bank tax data, and about direct causal interpretations of the results. But perhaps still more caution is needed.

Reeves et al Lancet 2015 fig3

Broadly speaking, we expect direct taxes (on income, profits and capital gains) to be more progressive than taxes on consumption – since households with lower incomes inevitably consume more of their income. In addition, there is some evidence to suggest that direct taxes are the most powerful in driving governance improvements associated with greater reliance on tax revenues rather than say natural resources or aid – on which, see Mick Moore’s really useful, critical survey in this ebook. So if direct taxes are a progressive tool associated with better governance, should we expect also to see better public spending outcomes?

Perhaps, and maybe even probably; but let’s be careful. Correlation and causation again. If governments are more or less interested in progressive taxation, and more or less interested in universal service provision, we’d expect those to line up so that governments favouring progressive tax will generally also deliver more broad-based improvements in (e.g.) health. But that’s not the same as saying that if all governments increased direct taxes (by diktat, or from changes in international norms, or – say – improvements in the transparency of multinationals), that they would also all focus more on health improvements.

We know that there are strong correlations between GDP per capita and tax/GDP. We know, too, that this holds most strongly for direct taxes. In addition, the sample period covers what is probably the peak of the “tax consensus” which inter alia encouraged consumption taxes above all others, and the relative neglect of direct taxes. In general, such advice was most powerfully passed into policy in those countries with least capacity and least political space to resist.

By and large, then, we’d expect to see that countries with the lowest per capita incomes and the weakest states exhibit not only low public health spending and poor outcomes, but also low tax revenues and relatively high reliance on consumption tax rather than direct tax — without there necessarily being any link from tax choices to spending outcomes…

This paper is a thought-provoking contribution, but due both to data weaknesses and to the difficulties of establishing causality, it can’t be more than suggestive. The challenge for further research is to address, as far as possible, these two issues. We can’t show that specific tax policies necessarily deliver different spending policies or outcomes (these are separate policy choices); but we may be able to demonstrate the associations more strongly, not least by allowing more effectively for the causal roles of per capita GDP and state capacity, and/or by focusing on specific moments of policy change to understand the effects.

Should tax targets for post-2015 be rejected?

In a strident blog at the International Centre for Tax and Development, Mick Moore, Nora Lustig, Richard Bird, Nancy Birdsall, Odd-Helge Fjeldstad, Richard Manning and Wilson Prichard have called for the rejection of post-2015 tax targets. (Full disclosure – I work with the ICTD, including on the Government Revenue Dataset.)

Seven leading thinkers on development and tax can’t be wrong – can they?

The case against

The  Zero Draft of the Outcome Document suggests that “… Countries with government revenue below 20 per cent of GDP agree to progressively increase tax revenues, with the aim of halving the gap towards 20 per cent by 2025.…”

It would be a great mistake to encourage quantitative tax targeting of any kind.  It would be like reintroducing the kind of production targets that did so much damage in the former Soviet Union.

This position rests on three arguments:

First, it is already a significant problem in developing countries that most tax agencies are already subject to a single performance measure: the extent to which they achieve the cash targets for revenue raising set by ministries of finance…

Second, increasing revenue collection will likely in some countries lead to an increase in poverty… It is not uncommon that the net effect of all governments taxing and spending is to leave the poor worse off…

The third objection is that, in many cases, the figures used to assess performance in relation to these targets may be almost meaningless.

Background

I’ve posted on this before, in response to a request on what would be the best post-2015 tax targets (taking for granted that there would be some kind of a tax target).

The limitations of the tax/GDP ratio should give us pause, and so it is useful to consider alternative denominators in particular – not least the tax/total revenues ratio, which is associated with improvements in governance. This was the conclusion:

[F]or all its issues, the tax/GDP ratio is probably worth sticking with; while the tax/total revenues ratio is an important complement.

tax ratio comparison table

But maybe I should have been more cautious about having any target at all…

A useful intervention

There is a legitimate debate about whether there are too many goals and targets in the proposed SDGs (not to be confused with the pretty feeble argument sometimes heard that we should ‘stick with the Millennium Development Goals (MDGs)’, and ignore difficult things like inequality).

There has been a tendency to think that any important issue needs a target – and it may not be true.

Not all important issues have a clear consensus on the right value to target. Even a pure ‘bad’ like infant mortality may more usefully have a positive, rather than a zero target. So it’s possible that tax – reflecting the complexities of state-citizen relations as well as economic structure – simply doesn’t lend itself to a target.

But: the individual elements of the critique seem overstated, so it becomes hard to support the authors’ stark conclusions.

To recap, they argue that a tax target is a bad idea because

  1. it’s a blunt tool that risks the wrong prioritisation;
  2. tax may be bad for poverty, so more of it may be worse; and
  3. we measure both components of the proposed tax/GDP target too badly.

Criticism 1. Too blunt?

The first criticism is that the tax/GDP target is too blunt. Tax authorities can already face too much pressure around a single measure (cash collections). Might tax authorities be put under such pressure to reach a tax/GDP target that they undermined broader progress on e.g. taxpayer trust, revenue diversification or stability?

Diversifying the performance criteria for tax collectors is vital. Some developing countries are making progress. Any kind of international blessing for archaic practices would be a mistake – and perverse in terms of the Sustainable Development Goals.

This is clearly a legitimate concern. But it’s hard to feel comfortable with it being used to draw such a stark, final conclusion as that there should be no target at all.

The whole SDG process requires finding the best individual targets to reflect political priority in important areas. Almost by definition, these cannot reflect the perfect, broader dynamics in any of those areas. And this is not their role.

Would a tax/GDP target really be ‘archaic’, and ‘perverse’?

As the authors note, there is currently excess pressure on cash collection targets. Could one international target (among many) overtake this existing domestic political pressure? If it did, would a tax/GDP target (for which there is some evidence of association with development) be worse than a cash collection pressure (for which there is none)?

And what if the target was instead on tax/total revenue – which tends to support accountability over time? Or what if we included additional targets (as I suggested), or nested indicators, that reflected some of the other aspects?

Criticism 2. Bad for poverty?

This criticism rests on Nora Lustig’s important findings from the valuable Commitment to Equity (CEQ) project, namely that some countries’ tax and transfer systems leave people living in poverty worse off.

This is clearly of great importance. If more tax led to more poverty, a (positive) tax target would be obscene.

But I don’t think the authors of this post hold that view – in fact, quite the reverse. As Mick wrote earlier this year: “The developmental benefits of governments taxing citizens, even for modest sums, are often disregarded.”

And nor does the evidence support a broad pattern of taxation worsening poverty.

The problem that the blog authors highlight is that “the number of poor people who are made poorer through the taxing and spending activities of governments exceeds the number who actually benefit”, in Armenia, Bolivia, Brazil, El Salvador, Ethiopia and Guatemala.

I couldn’t see the claim stated as such in the CEQ paper linked, so it’s a little hard to be sure. But what it does show is the pattern of net receivers and net payers in figure 6:

CEQ fig6 net payersNow where the $2.50 absolute poverty line falls above the blue/red changeover in the cases mentioned, it implies that some of the people below that line are absolute losers from the tax and expenditure system. (Directly only – the analysis doesn’t look at broader benefits of taxation, such as improved long-term government accountability, which may be of particular benefit to those living in poverty, as opposed to elite insiders.)

The CEQ analysis also finds that expenditures in developing countries are broadly progressive, and becoming more so. What we can tell from figure 6 is that in all cases  examined, the poorest appear to do best (that is, net receivers are always at lower income levels than net payers). Where there are high levels of absolute poverty, some systems are insufficiently progressive to ensure that the better-off of those living below the poverty line are also net winners.

From this, the blog authors conclude:

The big risk in setting tax targets is that governments will then strive to reach them – and in the process impoverish poor people even further.

Clearly, there is risk that governments raise (more) tax without making it (more) progressive. But is this really ‘the big risk’?

Consider draft SDG target 10.1:

by 2030 progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average

Indicators under discussion for this include pre- and post-tax and transfer income shares of the top 10% and bottom 40% (yay Palma).

It seems unlikely that a tax/GDP target would take precedent over 10.1, such that regressive taxation is pursued in order to hit the tax target. And on balance, you’d expect the progressive of taxes and transfers to improve (or at least, not to deteriorate) with a rising tax/GDP ratio.

So again, I think the authors raise an important point to think about, but then draw such a stark conclusion that it’s hard to support.

Criticism 3. Too badly measured

The third criticism made is that GDP in particular is too badly measured, and tax too open to manipulation, for tax/GDP to provide a decent basis for target. (Per my earlier piece, the denominator is also not in policymakers’ control.)

The authors note the extent of GDP mismeasurement, and what I hope is a uniquely egregious example of tax timing manipulation, as well as the instability associated with e.g. resource revenue volatility.

Accounting and reporting games are already being played around tax collection targets. If the international community were to popularise the idea that an improved ratio of tax collection to GDP is intrinsically a good thing, we can expect more such games.

This seems to be the strongest, and also the least over-stated, criticism.

Here’s the thing though: substitute other words for ‘tax collection’ in the quote, and it still makes sense.

The measurement of a great many aspects of the MDGs – never mind the SDGs – is open to manipulation. Tying this to public accountability for performance is, yes, likely to result in more manipulation (see e.g. the contrasting measures of educational enrolment in Kenya; or consider how the much-celebrated dollar-a-day poverty target was successively re-engineered to allow increases of hundreds of millions of people in the target numbers living in extreme poverty).

In addition, there are a great many proposed SDG targets for which data is – currently – not good enough. I hope there is also a general consensus that this time, the targets should be chosen on merit and the measurement then addressed; rather than allowing the existence of data to dictate what targets are set, as with the MDGs.

So the criticism is fair, but it doesn’t follow that this is a reason not to have a target. (If it were such a reason, the entire SDGs project – and the MDGs before them – would be open to question…)

Long story short(ish)

The intervention from the seven authors of the ICTD blog raises a set of important questions, and these merit further attention in the design of a post-2015 tax target. As they suggest, tax should almost certainly be better and more diversely measured, as well as more progressive.

What the intervention does not, however, provide, is substantial support for the conclusion that introducing a tax target would be a mistake.

Like the MDGs, the SDG targets will not be universally pursued – never mind achieved. What they will do, if successful, is establish important norms that will in turn drive broad progress.

There’s no question that the MDG model was seriously flawed in its reliance on aid as the implicit source of finance. Flawed, because aid could only ever have formed a small part of the solution; and flawed because of the politics (note that progress only really got going in sub-Saharan Africa, for example, with the mid-2000s adoption of MDG targets into national planning processes – where they began to exert substantial influence on budget decisions).

We can, and should, design better tax targets. But domestic taxation must be central to Financing for Development in post-2015.

Dropping tax targets completely would be, by far, the bigger mistake.

Uncounted: has the post-2015 data revolution failed already?

This was originally posted at the Development Leadership Program. I’m grateful to Cheryl Stonehouse for patient(!) editing.

Counting matters. As the Stiglitz-Sen-Fitoussi report puts it:

What we measure affects what we do; and if our measurements are flawed, decisions may be distorted…. [I]f metrics of performance are flawed, so too may be inferences we draw.

The UN Secretary General was told two years ago by the 2012–13 High Level Panel of Eminent Persons on the Post-2015 Development Agenda that any follow-up to the Millennium Development Goals (MDGs) had to include adata revolution.

In common with the UN global thematic consultation on inequality earlier in 2013, the High Level Panel recognised that challenging inequalities and better data collection are inextricably linked – because better data make it clear which goals are and are not being met, and because with better data we can all demand answers and action.

So the data revolution can only be about changing the balance of power. Yet much of the current discussion emphasises purely technical reforms instead.

I use the term ‘Uncounted’ to describe a politically motivated failure to count that reflects power. It ignores people and groups at the bottom of distributions whose ‘uncounting’ adds another level to their marginalisation. It ignores people at the top whose uncounting hands them even greater power.

Kenya enrolment series - justin-amandaWhy do we fail to count well at the bottom? This figure shows three different series for primary school enrolment in Kenya. One comes from the Kenyan National Bureau of Statistics (KNBS); one from the Demographic and Household Surveys (DHS); and one from the Ministry of Education (MOE). MOE data come directly from schools and are used as the basis for funding decisions.

Now, MOE trends tell you that progress is rapid and unsustained, while surveys look static. Which do you believe? If your children are in Kenyan state education, how well counted do you feel?

Not that survey data are perfect either. Six groups are systematically excluded from most household survey and census returns. Excluded by design are the homeless, those in institutions and nomadic populations. Ignored by undersampling are those living in fragile, disjointed households, in areas facing security risks and in informal settlements. These groups, thought to amount to around 250 million uncounted people – roughly 3.5% of today’s global population – obviously contain a disproportionate share of the world’s poorest people. They are being systematically failed even in the ‘best’ counting approaches we have.

It’s no coincidence that people in poverty are excluded. Nor is it because of technical problems that Sudan’s government in Khartoum suppresses publication of data on regional development outcomes. Or that the deaths of those living with disabilities in the UK go uncounted.

As for counting at the top, it’s equally no coincidence that high-income households are undersampled in surveys. Or that even when tax data are used to adjust the picture, major wealth – $8 trillion? $32 trillion? – remains uncounted. Or that the OECD, charged with measuring the ‘misalignment’globally between the profits of multinational companies and the actual location of their economic activity, has so far been unable to lay its hands on the necessary data.

UK wealth inequalityOur choice of measure is also important – and also political. Take a look at this chart which shows how two measures, the Gini coefficient and the Palma ratio, come up with radically different answers to the same question about income distribution. Has UK wealth inequality been flat across the crisis? Or did it fall sharply, then immediately rebound even more dramatically?

The Gini coefficient embodies such strong normative views (pp. 129–144) that it doesn’t capture well changes in the top 10%, or in the bottom 40% where most poverty lies. It is very encouraging (to me!) that instead the Palma ratio has featured in recent drafts of the post-2015 indicators.

The Palma – which expresses the ratio of income shares of the top 10% to the bottom 40% – also embodies a normative view, but it’s absolutely explicit about it. The chart of UK wealth distribution across the financial crisis shows why the Gini gave rise to so many congratulatory headlines about stable inequality, and why they’re wrong.

What might an actual ‘data revolution’ look like? If there’s no recognition of the political nature of the problem, then we’d be fooling ourselves to expect any great change: the same people and the same things will continue to go uncounted.

What’s noticeable in the discussion so far is that there has been a great deal more attention paid to the uncounted at the bottom than at the top. There’s been precious little mention of Piketty’s proposal for a global wealth register, for instance, or of specific measures that would eliminate anonymous company ownership, require states to exchange tax information with each other (think SwissLeaks), or multinational companies to publish country-by-country reporting (think LuxLeaks). Yet if we don’t start counting things that make elites uncomfortable, then we’re not doing it right.

Data reforms are, broadly, welcome; but a revolution remains far off.  People and things go uncounted largely for political, not technical reasons.

That’s why a data revolution is so badly needed. And revolutions aren’t technical: they’re political.

Inequality in post-2015 – indicator update

Slightly belatedly: the March draft of the post-2015 Sustainable Development Goals (SDGs), to be finalised in September, has a decent set of income inequality indicators:

Goal 10. Reduce inequality within and among countries

Target 10.1 by 2030 progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average

Draft indicators

64. [Indicator on inequality at the top end of income distribution: GNI share of richest 10% or Palma Ratio]

65. Percentage of households with incomes below 50% of median income (“relative poverty”)

10.1 Gini coefficient.

The obvious objection is that indicator 10.1 has nothing to do with target 10.1 (and is not great in all sorts of other ways). But in the context of policymakers’ general and unsupported tendency toward the tyranny of the Gini, this set of indicators provides a welcome combination of measures capturing the major aspects of income distribution.

It’s not a million miles from last year’s cracking SDG inequality proposal from the New Economics Foundation:

The Palma ratio – a measure of the proportion of gross national income (GNI) accrued the top 10% versus the bottom 40% – scored highest among the experts we surveyed, providing an easy to understand and statistically robust measure of income inequality. If adopted, this should be supplemented with at least two other indicators. We suggest:

1. A measure of the distributional gains to growth, such as the change in real median income, and

2. A measure of wealth concentration, such as the share of wealth going to the top 1%.