The taxman cometh: Are Vanuatu’s days as a tax haven numbered?
“Before sunset we sat in a circle to drink kava. My friend Tim passed around some smol kaekae (food) to wash away the taste. Gathered for a fundraiser to help a friend pay her daughter’s school fees, we chatted as group of about eight kids played nearby. Who belonged to which parent? Later, a plate of chicken legs and island cabbage followed – for everyone….”
Continues in Vanuatu Business Review, August 2016
What will Brexit mean for the least developed countries?
The United Kingdom vote in June 2016 to leave the European Union will have major implications for developing economies, according to a report from the Overseas Development Institute (ODI). Least developed countries (LDCs) will be particularly affected, mostly via reduced exports and lower aid values. Aid and trade preferences are two of the main international support measures (ISMs) available to LDCs.
Although LDCs will be impacted differently depending on how (and if) the UK leaves the EU, the effect will mostly be negative, via trade, financial markets and investment, aid, migration and remittances, and global collaboration. The ODI conservatively estimates that the 10% devaluation of the pound in the first week after Brexit, together with a downturn in the British economy, could cost LDCs $500 million in lost exports. In addition the devaluation will in effect reduce total British aid to all developing countries by $1.9 billion, with LDCs probably among the worst affected. “If the pound continues to fall, the effects could increase,” says the report. Around half of Britain’s £12.2 billion aid budget is allocable to LDCs. By mid-July the sterling/dollar exchange rate had fallen by 12%.
The UK accounts for around 5% of LDC exports, although export dependency varies significantly by country. LDCs that export a lot to the UK will be most affected, including Bangladesh, which sends 10% of exports to the UK, and Cambodia, which sends around 7% of its exports to the UK. The devaluation effect could even be compounded by increased protectionism or a deterioration in Europe and Britain’s trade relations with the rest of the world.
LDCs also rely heavily on the larger EU market, the single biggest in the world. If the EU is negatively impacted by Brexit, these countries will suffer and import less from the rest of the World. Bangladesh sends half of its exports – mostly garments – to Europe including the UK. Ethiopia, Malawi and Uganda send nearly a third of their exports to Europe. Tanzania, Sierra Leone and Rwanda export less to the EU but will still be affected.
Exports of selected LDCs to the UK, 2014
| Country | Exports to UK (million US$) |
Total exports (million US$) |
Exports to the UK as % of total |
| Tanzania | 46.6 | 5,704.6 | 0.8% |
| Rwanda | 5.5 | 653.3 | 0.9% |
| Zambia | 97.7 | 9,687.9 | 1.0% |
| Sierra Leone | 3.1 | 279.2 | 1.1% |
| Ethiopia | 62.3 | 5,666.8 | 1.1% |
| Uganda | 33.2 | 2,261.9 | 1.5% |
| Nepal | 20.5 | 900.8 | 2.3% |
| Malawi | 64.4 | 1,341.8 | 4.8% |
| Cambodia | 751.6 | 10,681.3 | 7.0% |
| Bangladesh | 2,306.4 | 23,313.7 | 9.9% |
Data source: UN Comtrade; NB. excludes re-exports. Data on Bangladesh is from ODI.
An additional channel for the Brexit effect is via investment – both portfolio and direct. Whilst the impact of a downturn in financial markets immediately after the vote appeared negative for developing countries and LDCs, the subsequent stock-market rebound suggests that the near-term fallout could be limited. Estimating the impact of further financial volatility is extremely difficult, and in any case LDCs tend not to be major recipients of portfolio flows. A greater long-term impact may be felt in the form of lower foreign direct investment (FDI). Zambia, according to the ODI report, is a particularly large LDC recipient of British FDI.
Another of the outcomes of the Brexit vote may be lower remittances, which will affect the countries most dependent on the UK such as Afghanistan, Angola, Cambodia, Haiti, Mali, Uganda and Somalia. Not only may Brexit lead to restrictions on immigration, but sterling remittances will be worth less following devaluation.
A final area of uncertainty for LDCs surrounds UK trade policy following the vote to leave Europe. The ODI, like a number of other commentators, envisages two main scenarios: either that Britain pursues a UK-EU customs union, or that the UK pursues an autonomous trade policy. The first scenario would be less disruptive, and in principle there need be no impact on trade preferences. The UK could continue to offer duty free access along the lines of Everything But Arms (EBA) initiative and under the same conditions as under current Economic Partnership Agreements (EPAs) between the EU and African, Caribbean and Pacific (ACP) countries.
An autonomous UK trade policy might present further problems. Some proponents of leaving the EU have suggested that Britain would reduce tariffs to either very low levels or to zero as part of a series of new trade deals with other countries. In this case the LDCs benefiting from the EBA initiative and the ACP-EPAs would lose their preferential margins. Preference-dependent LDCs may struggle to compete with more efficient or cheaper middle-income countries. This further underlines the need for LDCs to focus on building productive capacity and on generating greater efficiencies among exporters. LDCs also need to diversify and engage in economic transformation that makes them less dependent on European and UK aid, trade, remittances and investment.
Overall, the case of Brexit may only be the latest in a number of international economic shocks that LDCs are forced to confront as large economies experience slow growth and voters begin to question the benefits of economic internationalisation. Whilst ISMs are an important source of help for the LDCs, they depend on continued stability and prosperity in the biggest economies. Global political and economic events often have a much greater impact than aid and trade concessions granted by the international community.
Trade and productive capacity in Solomon Islands
Here’s the abstract for a working paper I just published on the Solomon Islands:
Economic growth, environmental sustainability and human development in the Solomon Islands have lagged much of the Pacific region since independence in 1978. Trade contributes insufficiently to development, partly because of the dominance of the logging industry but also due to the lack of emphasis on building productive capacities with a view to economic transformation toward higher productivity activities. Targeted soft industrial policies may help address these shortcomings, in the form of sectoral prioritisation; linkages policies; joint government-donor support to build appropriate infrastructure; and the development of human resources in specific areas. Government institutional capacity will only improve if policymakers are permitted true ownership over policies and if they are allowed to make mistakes.
Applying the Growth Identification and Facilitation Framework to Uganda
Here’s a blog I just wrote about work we commissioned with Justin Lin and Jiajun Xu of the Peking Center for New Structural Economics on the application of the Growth Identification and Facilitation Approach to Uganda, the first time it’s been done in a least developed country.
Hiatus
Please note i’ve stopped updating this site, hopefully temporarily, as i’ve started a new job. More soon — with luck (or not, depending on how you see these things).
Solomon Islands Trade Policy Framework
The trade policy framework myself and a colleague have been working on has been endorsed by the Solomon Islands government.
“The vision of the Trade Policy Framework is to: ‘Build the productive capacity of the Solomon Islands economy via sustainable trade and investment. The resulting creation of wealth and employment opportunities is aimed at promoting human development, reducing poverty and improving living standards for Solomon Islanders.'”
Radicalism in a time of austerity
Just a couple of quick thoughts on radicalism in the aftermath of the Greek elections. Paul Krugman rightly points out that Syriza’s policies aren’t radical. Syriza is proposing sensible things: rejigging its unfair debt obligations, investing and reflating the economy, just like in Germany after the second world war. These policies are what any sensible policymaker would do in response to years of failed austerity. It’s the eurocrats who are radical, proposing fiscal rectitude in a full-on depression.
The situation reminds me of Scotland’s Radical Independence Conference last year after the referendum. Several speakers pointed out that what the so-called radicals wanted was pretty mainstream. Calls for tax to go up a bit aren’t exactly Trotskyite. The top rate of income tax under Margaret Thatcher was 60%, higher than any Scottish party or campaign group is currently proposing. It isn’t ‘extreme’ to rid the country of weapons of mass destruction or to ask for a society which looks after the worst off.
One reading of this situation is that conservatives have succeeded in dragging the debate so far to the right that today’s firebrands are reduced to saying things that would have seemed middle-of-the-road two decades ago. Maybe that’s partly true.
But it’s also important to remember that radical doesn’t mean extreme or fanatical. It’s from the Latin radix, meaning root. There’s a sense in which radicalism is to do with stripping away the superficial and delving to the bottom of a problem. Today’s radicals are, like their forebears, addressing the roots of economic and social concerns. They’re not posturing, wild-eyed fanatics. In a sense, it’s a source of optimism that many people have reached the end of their patience and are being forced to see things as they really are, coalescing around the doable and showing up right-wingers and austerians as the fantasists.
Borrowing is almost free
Here’s further evidence to back up my earlier post, proving that Cameron is talking utter rubbish. As Richard Murphy says,
“If we had a debt crisis very clearly risk would have increased and so interest rates would have risen. But they haven’t. Interest rates have fallen, significantly, and not just to reflect inflation.
So first of all we have no gilt crisis.
Second, we have no affordability crisis.
And third, we have a lost opportunity to invest at rates lower than we have almost ever known, which lost opportunity is why we have an economic crisis.”
I thought i’d post a graph of benchmark gilt yields going back to 1984. It shows quite clearly that borrowing costs are at some of their lowest levels ever. There was no spike in yields during the crisis. Investors do not remotely think the government might default, nor do they think spending plans might be unsustainably high. More likely they expect years of stagnation or low growth.
It’s just ludicrous to suggest, as Cameron and Miliband do, that anything other than buttock-clenching austerity will be the “path to ruin”. Any future interest rate payments on debt issued now are profoundly not the main problem. If it wanted, the government would have plenty of wiggle-room within which to reinflate the economy.
The data is from the Bank of England’s series “annual average yield from British government securities, 10-year nominal par yield”.
The non-economics of Desperate Dave
David Cameron today again repeated the nonsense claim that anything other than swingeing cuts will cause “economic chaos”. In an indication of just how impoverished mainstream British political debate has become, he lambasted Labour’s plans to balance the budget but keep spending on infrastructure as if it were Zimbabwe-esque profligacy.
Yet far from lowering the deficit, the cuts are one reason why the economy has suffered its worst period of growth since the Great Depression in the 1930s. Balancing the budget is exactly the wrong medicine in a crisis. The coalition has sucked so much money out of the economy that demand and investment have collapsed, raising welfare payments and reducing tax revenues.
The mainstream media’s fixation with the last five-minute’s news means that they tend to focus on headline economic growth, which recently hit a quarterly rate of 0.7%. But the economy shrank so much after the crisis hit in 2008 that it was likely to rebound sooner or later. Because of population growth, it’s still smaller per head than before the crisis.
Here’s a graph Cameron doesn’t want you to see:
Data source: Office for National Statistics
Taking inflation into account economic output is now 7.3% smaller per head than at the start of the crisis in the first quarter of 2008. We’ve only now climbed back to the levels of about 2005. Of course averages don’t tell the whole story, and a small minority have become much wealthier whilst most people have suffered much more, but of the G7 group of rich countries Britain’s economy has performed second-worst, ahead of only Italy.
Alongside slowing global growth part of the reason for this economic catastrophe – the worst for 80 years – is that the government has extracted tens of billions of pounds from the economy. These sort of cuts are economically counterproductive during a recession.
The recent fall in unemployment to a still-unacceptable 6% has been the result of an increase in part-time, badly-paid and insecure work. People aren’t being paid enough to contribute to government coffers.
The fall in pay is a remarkable feature of the crisis. Again, accounting for inflation, the wages of a British worker have suffered their longest sustained fall since records began in 1862. The International Labour Organisation says that British pay has plunged more than even in Italy. In the five best performing countries shown in the following graph, wages have gone up.
Average real wage index for developed G20 countries, 2007-13
Because we’ve got less pay in our pockets, less money is spent than it otherwise might be, which in turn suppresses growth. Consumer expenditure collapsed during the crisis and is only just recovering. Business investment has shrunk to unprecedented levels as too few people can afford to buy companies’ products and services, and companies remain uncertain about the future. Productivity remains abysmal. I suspect that a fragile recovery based on the services sector and badly-paid jobs will peter out as the underlying economic conditions remain so bleak.
Instead of the debt falling due to government spending cuts, it’s forecast to keep going up until next year because the economy is doing worse than it otherwise would. In fact public debt isn’t particularly high by historical standards and it’s not the main problem, especially when borrowing costs are at such historic lows.
What the Tories fail to mention is that it was private debt which caused the crisis, not government debt. Private debt, mostly financial sector and corporate, grew to four-and-a-half times GDP, compared with public debt which is now 80.4% of GDP.
The deficit has ‘only’ halved as a proportion of GDP since the coalition took power, to £91.3 billion, despite Osborne’s promise to eliminate it by now. This failure is because of the cuts.
There’s more madness to come. Osborne said in his autumn statement that over the next five years he wants to shrink public spending to levels not seen since before the second world war. £60 billion will come from public service cuts. That’s nearly twice the defence budget or the equivalent of dualling Scotland’s A9 road from Perth to Inverness 143 times. Schools, health and foreign aid are ring-fenced, so some departments will be ransacked. This amounts to a full-scale attack on the state.
What we should be doing – and what Scotland could do given full economic powers – is reinflating the economy. Building infrastructure would encourage businesses to invest. Tackling the housing shortage would stimulate demand. We could develop a modern, strategic industrial policy which built a new, environmentally-sustainable economy based on Scotland’s advantages in sustainable energy. This investment would eventually pay for itself, particularly when borrowing is as cheap as it’s ever been.
Osborne and Cameron have taken us so far down the rabbit hole that we’ve confused up with down, good with bad. We should be rebuilding the economy rather than trashing it; looking after each other instead of accepting the cuts. All that rhetoric about hairshirts and tightening our belts is nonsense. We’re being punished when punishment isn’t the answer.
The Importance of Trade and Productive Capacity Post-2015: Lessons from the Pacific
Here’s an article I published this month with the Commonwealth on the importance of trade and productive capabilities in the sustainable development goals to be adopted next year. In addition to social and climate-related goals, the least developed countries must be helped to build their domestic economies.
This issue of Commonwealth Trade Hot Topics examines how the sustainable development goals (SDGs) that will be adopted in 2015 can better reflect the trade and development-related needs of least developed countries (LDCs) and small island states such as the Pacific island countries (PICs). It draws lessons from four Pacific Diagnostic Trade Integration Studies (DTISs) – a series of comprehensive trade analyses aimed at improving countries’ ability to access global markets and to benefit from trade. The paper argues that, in addition to market access, focus should be placed on behind-the-border measures including infrastructure, rules of origin, negotiating capacity, standards and targeting aid for trade.
Click here (pdf) to read the article.
Emergent Economics 