Sources and Authority —
Developing Countries
IFCs Facilitate Investment in Developing Countries
“Some [developing countries] will only attract inward investment if the total tax on the profits made is reasonably low. They are better off with the investment and the consequent employment than they would be with higher effective tax rates and less inward investment… The abolition of low-tax jurisdictions could also directly disadvantage developing countries. Such countries are sometime unable to offer strong corporate law and governance regimes until they have developed. Businesses can obtain the corporate law and governance that they require, without losing the benefit of tax or other incentives, by operating through low-tax jurisdictions. If low-tax jurisdictions were abolished, developing countries would not attract as much investment as they do now.”
Read more from Richard Baron, “Low-tax Jurisdictions”, Institute of Directors, July 2009
Developing Countries Proximate to IFCs are Advantaged
“A recent study by Blanco and Rogers (2009) draws similar conclusions from its analysis of the effects of foreign direct investment in IFCs on foreign direct investment in low income countries in the same regions. Using country-level data on aggregate foreign investment flows from 1990-2006, this study reports that investment in developing countries is positively associated with proximity to the nearest IFC and to the level of foreign investment in the nearest IFC.”
Read more from James R. Hines Jr., “International Financial Centres and the World Economy”, September 2009
Economic Freedom, Not Foreign Aid Reduces Poverty
“Asia’s success in nearly eradicating extreme poverty lies in sharp contrast to the experience of sub-Saharan Africa (see figure 1). The contrast is heightened by the fact that in 1970, poverty rates in Africa and Asia were roughly the same. Tragically, as poverty in Asia fell, it increased nearly 40 percent in Africa, from 35.1 percent in 1970 to 48.8 percent in 2000. Thus while half a billion people (487 million) were lifted out of poverty in Asia, an additional 200 million Africans fell into poverty over the past three decades.”
“According to Easterly, it is economic freedom, not foreign aid, that contributes to the prosperity needed to reduce poverty around the world. In other words, reforms introduced by Asian nations to increase freedom to trade and compete in markets, enforce private contracts, and protect personal property have played a pivotal role in lifting those nations out of poverty.”
Read more from Sylvia LeRoy and Amela Karabegovic, “Economic Growth Has Halved World Poverty”, Fraser Forum, November 2006
IFCs are Essential Conduits to Investment in Developing Countries
“Frustrated by the limitations of simply offering aid, western governments in recent years have turned to private equity funds to support economic growth in poor countries. These funds are largely based in tax havens, such as Mauritius.”
“The impact of DFIs should not be underestimated. European Development Finance Institutions (EDFI) is a Brussels-based representative organisation for the sector, counting 16 members. Jan Rixen, EDFI’s general manager, says that new commitments by members in 2008 totalled €5.2bn, spread across 941 projects in poor countries.”
“Rixen admits that DFIs’ use of tax havens is “very, very common” but says this is simply to avoid double taxation”, first on profits made in host countries, and second on the gains from those investments. DFI-owned companies in poorer countries do pay taxes on their profits, he emphasises.”
“But according to Rixen, without tax havens, many investors would pull out.”
Read more from Stephen Gardner, “Developing – Poverty-relief’s profit problem”, Ethical Corp, 1 September 2009
[“Several studies claim that tax havens cause an important part of the tax gap in the developing world. However, rigorous empirical analysis demonstrating this is scarce.”]
Read more from Clemens Fuest and Nadine Riedel, “Tax Evasion, Tax Avoidance and Tax Expenditures in Developing Countries: A Review of the Literature”, Oxford University Centre for Business Taxation, 19 June 2009
Corruption: Should we be looking to OECD Countries?
“With respect to developing states, the available evidence suggests that domestic factors far outweigh international in raising sufficient government revenue for public goods and development.[1] In terms of hosting the proceeds of corruption, the available evidence, which is far from complete, tends to implicate developed countries in general rather than IFCs in particular. Reports by the joint World Bank/United Nations Stolen Assets Recovery initiative but especially the NGO Global Witness[2] suggest that if IFCs were to disappear tomorrow, the continued existence of OECD financial centres would provide ample facilities for the proceeds of corruption.[3]
Read more from Jason Sharman, “International Financial Centres: Status of the Debate, Challenges, and Ways Forward, Commonwealth Secretariat, September 2009
[1] Deborah Brautigam, Odd-Helge Fjeldstad and Mick Moore, Taxation and State-Building in Developing Countries, Cambridge University Press, 2008
[2] UNODC/World Bank, Stolen Assets Recovery (StAR) Initiative Report, November 2007; Global Witness, Undue Diligence: How Banks do Business with Corrupt Regimes, 2009.
[3] See especially Global Witness, Undue Diligence, 2009, chapters 3, 4, 5, 6, 7 and 8.