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Tax havens hinder sustainability

By Yu Yongding

On September 25, 2015, global leaders unanimously adopted the 2030 Agenda for Sustainable Development – a comprehensive global plan to build a more sustainable world. But more than five years later, progress on the Agenda’s 17 Sustainable Development Goals (SDGs) leaves much to be desired.

Countries struggling to meet the SDGs are most constrained by a lack of financial resources. Even before the pandemic, many poorer countries were showing signs of debt problems. And fighting health and economic crises at the same time makes mobilizing financial resources for sustainable development even more difficult.

$10 trillion in offshore havens

Of course, there are ways to mobilize money. Affected countries can increase domestic savings, seek foreign investment, and ask rich countries, international organizations, and multilateral development banks for development assistance. But this is never easy – especially in a world where illicit financial flows are easy.

In 2015, Gabriel Zucman estimated that at least $7.6 trillion of private funds were in tax havens, equivalent to eight percent of global household wealth. That sum had already risen by 25 percent in the previous five years, suggesting that it could be considerably higher today. In 2017, for example, the National Bureau of Economic Research reported that about ten percent of global GDP is held in offshore tax havens.

Illicit financial outflows not only impede the financial resources of poor countries but also undermine the willingness of donor countries to provide further development assistance. Governments have three major defenses against such flows:

Fight corruption more vigorously

The first is to reduce the amount of illicit money by fighting corruption. In doing so, such efforts must address not only direct criminal behavior – such as tax avoidance, bribery, and embezzlement of public assets – but also more subtle maneuvers, such as the exploitation of tax loopholes by multinational corporations. That such large corporations avoid taxes undermines countries’ ability to finance development at least as much as direct corruption – if not more so.

Control capital flight

The second line of defense is to carefully manage cross-border capital flows. If illegal money stays in its country of origin, this makes corruption less lucrative – and thus less appealing. But again, activities that are obviously illegal are only part of the problem. Even when capital flight occurs legally, it empties governments’ coffers and can even trigger financial or currency crises.

More consistent prosecution of illegal transfers

Finally, governments must aggressively pursue, recover, and bring back into the country illicit funds that have slipped past capital controls. The problem with this, however, is that the re-integration of such funds is very complicated, costly, and sometimes contentious because of mistrust between countries. So very little stolen money has been returned to its rightful owners. And although there have been some initiatives, programs, agreements, conventions, and treaties against illicit financial flows in recent years, they have proved to be far from sufficient.

But there is reason to hope that this will soon change. Last year, Volkan Bozkir, the president of the UN General Assembly, and Munir Akram, the president of the UN Economic and Social Council, hosted a high-level committee on International Financial Accountability, Transparency, and Integrity (FACTI) to achieve the 2030 Agenda.

FACTI report on strengthening the financial architecture

This panel has now published a comprehensive report containing 14 evidence-based recommendations to strengthen the global financial architecture in support of sustainable development. For example, it calls on all countries to create laws to make available as many legal means as possible to hold perpetrators of cross-border financial crimes accountable. In addition, governments should put in place robust and coordinated mechanisms to strengthen financial integrity.

The FACTI panel also advocates for much greater international cooperation, which could include the establishment of global tax norms and transparency standards through an “open and inclusive” legal instrument. And further, the experts recommend creating an impartial mechanism to resolve international tax disputes – as well as an inclusive global coordination mechanism at the UN Economic and Social Council to promote financial integrity on a systematic level.

Implementing the FACTI recommendations will not be easy. But the UN’s efforts to find solutions are undoubtedly a step in the right direction. If we now get the international community on board, we still have a chance to secure the resources needed to achieve the SDG.

Yu Yongding, former Chairman of the Chinese Society for World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.

Copyright: Project Syndicate, 2021.


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