Archive for category: Economy

Information and stories about economy.

Global Public Good: International Trade Regime

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In the interest of ending poverty, much attention has been focused on trade. Trade is supposed to make everyone better off and allow people to utilize their comparative advantage, selling goods to others and buying better goods for cheaper. What this abstraction looks like in real life is a messy bundle of tariffs, quotas, free trade zones and heaps of rules and regulations. This begs the question, how is an international trade regime a public good and what should it really look like?

Borrowing a page from game theory will help us answer this question. Imagine the government of country A imposing barriers to trade on country B. Country A may do this for a number of reasons, including pressure from their domestic private sector. Their action will impose costs on exporters and manufacturers in country B, which country A has little reason to take into account. Their decision to under-value the cost of their trade barriers takes the form of an externality and results in an inefficient international trade regime.

Therefore a case can be made for an international institution aimed at easing the flow of trade between countries to make everyone better off. This would be achieved by lowering tariff barriers, increasing the predictability of tariff rates, which give exporters a clearer view of how their products can compete in the international market, and providing a platform for member countries to discuss trade-related issues and negotiate agreements. Making trade easier would make people better off.

Being a member of this institution would offer network externalities, where one user can make the good more valuable for others, whose benefits would grow with the number of members, making it desirable to have all countries participate in the trade regime.

The most prominent figure in international trade is the World Trade Organization (WTO), which is responsible for correcting the externalities and making the benefits of trade available to all.

The level of trade has dramatically increased since the introduction of the WTO, but problems have arisen as well.

The way that many of these agreements have played out have not necessarily benefited the poorest countries. One reason is that “institutional adjustments related to trade are costly.” Member nations must be compliant with WTO rules and regulations, and because these regulations are generally the norm for developed countries, the costs of implementation are borne by the countries that are less able to afford them.

For example, the United Nations uses an estimate of $150 million for a typical developing country to meet requirements in just three of several WTO agreements, “customs valuation, health and phytosanitary measures and intellectual property rights.” $150 million can be equivalent to an entire year’s development budget for some of the least developed countries. Meeting the WTO requirements implies reforming the tax structure and social safety nets to comply with the rules for intellectual property, health measures and subsidies, among others.

Should developing nations opt out of the WTO, foregoing the expensive compliance costs but also the benefits of belonging to a market-opening, trade-facilitating institution? Before answering, a look at how the WTO can fix these problems is in order.

First, a broader evaluation of the fairness of the trade regime is required. Three aspects, identified by the United Nations Industrial Development Organization, include neutrality, the net benefit for all and the maximin rule. These aspects translate to ensuring that “each country should be at least as well off with the trade regime as without it”, all members need to see a benefit from the regime and developing countries need to experience increasing benefits from the system. Retooling the WTO according to these fairness aspects would benefit developing nations and boost the effectiveness of the international trade regime overall.

In addition, financial and technical support to help developing countries meet the exacting WTO requirements is needed. The WTO has recognized its failure and is dedicating more energy to building capacity and helping developing nations meet these requirements with little cost. Recently, Germany donated a little more than $1 million dollars to a fund dedicated to this purpose.

With a number of global trade deals on the table, including the massive Trans-Pacific Partnership and Transatlantic Trade Investment Partnership, a deeper look into the workings of the international trade regime and what efforts can be levied to make it work better can have a large effect on global poverty rates.

– John Wachter

Sources: Dartmouth University, United Nations Industrial Development Organization, World Trade Organization 1, World Trade Organization 2
Photo: Georgetown Law

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What Iceland Can Teach Us about Financial Recovery

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During the financial crisis seven years ago, while many countries were struggling to stay afloat, Iceland was already at the bottom of the sea. A tiny country with a population of only 320,000, Iceland experienced near-total bank failure in the span of three days and a 95% decrease in stock. While monetary policies in the United States and Europe let large amounts of cash flow into the economy, Iceland let enormous amounts of dollars flow through. When the Icelandic krona crashed in 2008, the country’s three biggest banks had amassed wealth more than 10 times the country’s Gross Domestic Product (GDP). As a result of this “loose money” policy, 85% of the economy tanked. The lack of cash flow regulation in the economy led to its downfall and hindered the rebuilding process.

Iceland’s attempts at becoming an international banking powerhouse also factored into its demise. With very high interest rates, international investors could borrow dollars at 5%, exchange them for krona, and buy Icelandic stock at 9% interest. They would profit off the difference in interest rates. Without any governmental controls on the flow of money, all cash could have exited the country, further depressing the economy. However, with help from the International Monetary Fund, the Icelandic government began to impose strict capital controls, barring krona from leaving the country or residents from buying foreign currency or international stock. In the years immediately following the crash, the government raised taxes and provided debt relief to mortgage holders, but not to social services.

It also did something most developed countries have failed to do: jail bankers.

International hedge funds purchased claims for pennies at the height of the crash. Once financial recovery started, their assets grew, giving them a large share of power over the financial system. Due to continued cash control policy, this control affected the lives of Iceland’s residents as well. Residents were especially limited in the amount of foreign cash they could spend, which became a problem when traveling abroad or investing in international stock. “You have a feeling that there’s a system watching you and telling you what you can do with your money,” noted Gudmundur Kristjansson, a fisherman.

However, cash flow restriction and the devaluation that resulted posed some benefits for the economy as well. Exports became cheaper and imports more expensive, allowing residents to produce more goods rather than depend on foreign manufacturers. Devaluation caused wages to fall, so unemployment did not reach the soaring heights it did in Europe. Tourism increased as more people began to travel to Iceland for its cheap prices and its currency independence from less developed European countries.

However, the bars that once held Iceland in restricted success must soon be lifted. “We are enjoying the longest sustainable growth period in recent history,” commented Minister of Finance Bjarni Benediktsson, but cited lacking international investment and competing foreign companies as reasons for lifting the restrictions that helped foster the country’s success for so many years. “[Such controls] are not a sustainable situation for an economy,” said Prime Minister David Gunnlaugsson.

Today, unemployment in Iceland is at 4%, GDP is expected to grow by 4.1% in 2015, and tourism is a flourishing industry. Despite the uncertain future of the country’s economy, it is certainly faring better than other European countries that suffered under the crash. For Greece, whose citizens voted against a deal with creditors and potentially face a future of exiting the Eurozone and financial security, tight monetary restrictions would not be a likely solution. It has a population of 11 million to Iceland’s 320,000, and a GDP 16 times that of the tiny island. When Iceland was preventing its people from spending money, Greece was throwing it around in all directions. Yet Iceland serves as an example of how unorthodox financial practices—controlling the cash flow, granting influence to international hedge funds—can unfreeze a nation and help it rebuild. Restoring a country to financial security is a process of understanding its government, citizens and industries. For Greece and other struggling countries, it will be a struggle, but not a failure.

– Jenny Wheeler

Sources: IMF, New York Times
Photo: The Automatic Earth

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The Missing Global Middle Class

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Although one billion people have risen out of extreme poverty in the past 15 years, concerns still remain. Amid the success in this impressive reduction, there are new concerns over how those who have risen up out of extreme poverty are transitioning into a working middle class.

A new study from the Pew Research Center found that, despite slight growth in the population living on between $10-20 per day (middle income), the growth was largely concentrated in specific regions of the world. These hot spots of growth include China, Eastern Europe and South America. In areas where extreme poverty is extremely concentrated, such as in India, Southeast Asia, Africa and Central America, growth was minimal. Furthermore, there are still large inequalities in wealth distribution, as demonstrated in the areas that have the majority of middle and upper income populations—North America and Europe.

The study also notes that even in these specific areas of improved prosperity, the improvements in their standards of living and qualities of life did not improve as much as may have been expected. Another reason for small middle class growth, despite larger reductions in extreme poverty, is the volatility of climate change. Of the many factors that push people back into poverty, climate change is increasingly understood as the true threat, as changing weather brings its effects to light.

The lack of growth in the middle class has huge implications on individual countries and globally. The middle class was predicted to have grown, which would have increased national economic and political participation and boosted health outcomes.

Many experts associate the development of the middle class with a certain advantageous social structure that benefits the country as a whole. The middle class is generally able to focus less on strictly surviving, which enables them to make certain choices about the kind of lives they want to live, and to demand rights to make those choices, which leads to, all around, more developed nations.

Still, over 70% of the world’s population lives in poor to low-income levels, and progress still needs to be made. The disparities seen, despite progress, are calls to action. One of the biggest public health and developmental challenges we face today is that of inequality and inequity. Seeing such discrepancies on a global level is further proof that this is a problem that needs global attention.

The report brings attention to the fact that, although poverty reduction has been successful in some cases, on a more global and long-term level, changes need to be made. There need to be more effective strategies aimed at not only helping people come out of poverty, but also helping people stay out of poverty. We now know that the effects that we had hoped to see as a result of poverty reduction have many intermittent steps and barriers that also need to be addressed in order to see the kind of results that were predicted. The benefits of a growing middle class are achievable and progress in poverty reduction is the first step, but until the other barriers that new global middle class members face are also addressed, people, their nations, and the world will not see the maximum benefits.

– Emma Dowd

Sources: BBC, Pew Global
Photo: Deccan Chronicle

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The Fall of Chinese Stock Markets and the Impact on Poor

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The recent collapse of the Chinese stock markets has been tumultuous. Millions of Chinese middle-class citizens were caught up in the fervor; many of the stock-buyers have been Chinese without high school diplomas. Many observers in the west had feared that the meteoric growth of the stock markets in China was unsustainable. In 2014, the Shanghai Composite Index rose 21 percent in one month alone — a warning sign to many that this type of growth could not continue forever.

Since the beginning of the falling stock prices, at least 3.2 trillion dollars in value has vanished. The bubble was seemingly inflated — in part with government encouragement — with lax policies put in place to encourage further investment in stocks. Many people began to pour savings and accrue debt in order to pump more money in the over-valued stock prices. The government’s role in encouraging the bubble has now led to a loss of face for Chinese leadership and policy makers.

The ramifications of the Chinese stock market collapse could be widespread. A large fraction of the investments made were done not by large businesses or businessmen, but by middle class urbanites and even rural villagers. Much like the housing bubble in 2008, a tremendous loss in assets for middle and lower class Chinese could be hugely detrimental to the country. In light of the fact that the Chinese economy has been attempting to transition into a more consumer-based economy and the slowdown in growth in recent quarters, this financial crisis could be a major setback in China’s economic ambitions for the future.

The loss of value for stocks owned by every-day Chinese citizens means that demand would suffer and begin the cycle into lower economic health and greater uncertainty about the future of the markets. In general, an economic downturn is bad for everyone, from the most impoverished, to the well off. The poor in China will almost certainly suffer more, should the economy take a turn for the worst.

The Chinese Government has taken strong steps towards avoiding a complete collapse in stock prices. Pouring money into the teetering markets, the government is attempting to push back against the tide of sellers and avoid what many consider to be inevitable. Forty percent of stocks have stopped trading in an effort to stop the bleeding prices, but many argue that this is will do little. Market corrections will occur regardless — the bubble has already popped.

The secret is out — the majority of these unsustainably growing stocks belong to companies who are simply not worth even close to the price tag. Many of these Chinese companies have suffered huge blows to their reputation and legitimacy. Stopping trading is more likely than not, a desperate measure to allow for some leeway and time to think. The market is no longer in a psychological craze, and all the freezes will do is delay the inevitable market corrections.

The real question now is, how much value will be lost and how much will this hurt the middle and lower classes in China?

– Martin Yim

Sources: New Yorker, Bloomberg 1, Bloomberg 2
Photo: Gbtimes

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Gentrification in Rio de Janeiro

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Many believe that gentrification is a purely American and European phenomenon in which large numbers of college graduates move to cheap, urban areas and open yoga studios, green markets and “hipster” coffee shops. However, gentrification is not only a global occurrence but also an established urban renewal and regeneration strategy in all corners of the world.

The Oxford Dictionaries define “gentrification” as the “renovation or improvement (of a house or district) so that it conforms to middle-class tastes.” Middle-class tastes in American cities like Portland, Seattle or New York City usually relate to the rise of what sociologists term the “creative class”—a group of young people entering the workforce concerned with personal expression and technological advances more than monetary progress. Professor and urban studies theorist Richard Florida found that one-third of Americans belong in the creative class.

“I define the Creative Class to include people in science and engineering, architecture and design, education, arts, music and entertainment whose economic function is to create new ideas, new technology, and new creative content,” said Florida.

Although developing countries have not necessarily experienced as significant a rise of a distinct creative class, middle-class residents of the community as well as significant tourist populations have completely redesigned global cities. Specifically, some poor shantytowns—favelas—in Rio de Janeiro, Brazil have experienced a complete upheaval of population and culture to cater to new, wealthier residents.

“Pacification programs” that officials applied in the past fifteen years, especially those immediately before Rio’s hosting of the 2014 World Cup and leading up to the 2016 Olympics, have done as much harm as good.

Favela residents report that areas that were once slums, full of rampant drug gangs, violence and poverty, are now safe places to live, policed by a permanent security presence. Increased security in favelas has attracted a population with a sense for business and entrepreneurship, which keeps the economic interests growing.

Foreigners have recently entered the housing market in favelas in Rio and are buying property more frequently than locals. As tourists no longer have to pay taxes to drug gangs, many foreign and native residents advertised their property for temporary stay on the Airbnb website during the World Cup and Olympics.

As the value and popularity of the city increases with new construction and business opportunities, property prices have risen dramatically. Houses that cost $2,500 in 2006 cost $75,000 in 2014. As a result, whole socioeconomic groups no longer have the ability to live in the favelas that they once called home. Current residents are also struggling with rent increases and displacement, and are being forced to move to more dangerous favelas.

Ebilene Rodriguez Periera, a 54-year-old resident of a favela in Vidigal, an area in Rio, said that the new hotels and restaurants are being built for foreigners, “not for us.” Veronica Mora, another resident of a favela in Santa Marta, detailed community resistance against rent increases, demolitions and evictions.

“For years, the authorities did nothing when it was so dangerous to live here. Now that the area is finally safe, they want us to move out,” said Mora.

American researcher and former resident of Santa Marta, Charles Heck, finds that pacification programs—essentially government-sponsored gentrification programs—have changed urbanization and urban regeneration policies. Many new urbanization policies now deny current residents basic trash, water and electrical services in what some urban theorist experts call an attempt to force residents out. Gentrification in Rio de Janeiro has resulted in Rio’s strategic plan to provide for a 5% reduction in favelas from 2013 to 2016.

“Post-UPP, urbanization has focused primarily on land titles and new businesses rather than health, sanitation, education and other infrastructure,” said Heck.

The U.N. has critiqued Rio’s implementation of gentrification policies in the past, as an organized governmental effort to include residents of favelas in urban plans is essential to a thriving city. Inclusion of large social and socioeconomic groups encourages citizen participation and increases the viability of solutions to social justice issues in Portland and Rio de Janeiro alike.

– Paulina Menichiello

Sources: Business Insider, NPR, Oxford Dictionary, The Guardian
Photo: Flickr

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How Coca-Cola Is Helping Deliver Medicines

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Coca-Cola products reach every corner of the world while essential medicines do not. ColaLife, a UK charity, noticed this and decided to make a change. ColaLife uses Coca-Cola to open up the private sector supply chain to deliver affordable and effective medicines.

ColaLife produced the Kit Yamoyo, an anti-diarrhea kit. Diarrheal diseases cause life-threatening dehydration, which is the second leading cause of death in children under the age of 5 in developing nations. Each year, it takes the lives of 760,000 children, even though it’s curable.

The problem is that these children do not have access to the cure, which is what ColaLife sought to solve. The Kit Yamoyo contains Oral Rehydration Salts (ORS), soap, and zinc, which act as a cure. The package itself acts as a measuring device for water needed to mix up the ORS and zinc, and can also be used as a storage device as well as a cup.

The Kit Yamoyo has a v-shaped cup to easily fit into the Coca-Cola delivery crates. As a compact, low-cost product, the Kit Yamoyo piggybacks Coca-Cola’s supply chain to reach remote areas. It is a symbiotic relationship: Coca-Cola products continue to reach and get sold in remote areas, while the consumers gain access to more medicines than ever before.

The kits themselves are sold with Coca-Cola products. As the kits make their way out to the remote areas, the demand for them becomes greater. It’s a positive situation for everyone involved: Coca-Cola products are sold, the retailer makes a profit, and the consumer gets the medicine they need to help their children.

With enough funding, the Kit Yamoyo will have a big impact. It will widen vaccine coverage in remote areas and reduce death rates caused by dehydration and malnutrition. It will also encourage an increased investment in training and help health workers reduce child mortality rates. ColaLife has proven that the supply chain is just as important as the medicine itself.

– Hannah Resnick

Sources: ColaLife, University of Delaware, WHO, Zambia Daily Mail
Photo: Just Giving

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China’s War on Poverty

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The rhetorical phrase “War on Poverty” is commonly used to describe programs and policies aimed at reducing or eliminating poverty. It has been used in the context of United States politics but is now also being applied by the media to Chinese efforts to reduce poverty, especially in rural areas. China has experienced a meteoric rise to economic prominence in a few decades, yet much of the country lies in the past, still experiencing economic hardship without the benefits of the recent successes. What is China doing to fight poverty?

Hundreds of millions of people have been salvaged from poverty since China’s rise to prominence, however, in 2012, China’s GDP per capita was less than other developing countries, including Iraq and Colombia. Part of this statistic lies with the fact that the Chinese economy has to sustain a huge number of people, but another reason for this surprising statistic is that economic growth in China has benefited some more than others. Specifically, those in urban areas have tended to gain more from recent economic advances than those in rural China.

In the past, the millions lifted out of poverty in China were a result in part of strong economic growth. Additionally, less people are working in agriculture and moving into other businesses and improving human capital systems. Anti-poverty actions by the government also played a role but perhaps have not been enough.

In the 1990s, China changed its definition of poverty to a level that was about two-thirds of the international standard, artificially lowering its poverty statistics. However, China has also thrown billions of dollars at the problem in the form of subsidized loans, grants and programs such as “Food For Work,” which aimed to stimulate the economic situation of the poor while at the same time improving infrastructure for water systems and roads.

Whether poverty reduction government programs like Food For Work were strong factors behind China’s first burst of poverty reduction between the 1970s and the late 1990s is hard to determine. Some believe that China’s staggering growth in those decades was the biggest driver for poverty reduction. If that is the case, then a slowdown in the Chinese economy (still at 7% growth approximately) could hurt the reduction in poverty unless new government programs can pick up the slack.

As previously mentioned, many of the poor in China have already benefited from economic growth, but many more are still impoverished. In the past month, President Xi Jinping reaffirmed the government’s responsibility to fight poverty in rural areas while at a conference about China’s 13th Five-Year Plan. A rash of suicides among children in a rural area of China and the death of five homeless children in 2012 (carbon monoxide poisoning from lighting a fire in a trash container where they were taking shelter) has caused hard questions to be asked and for government officials to talk about action. Recognition of the continuing problem by the Chinese government is a positive sign. The additional fact that the Chinese economy is becoming more dependent on a consumer class sheds light on the need for the Chinese economy to pull more out of poverty and into the consumption class. China’s war on poverty — the incentive to work towards ending poverty — is apparent, from both a public relations standpoint and an economic one.

– Martin Yim

Sources: Reuters, The Diplomat, Journal of Chinese Economic and Business Studies, IMF, Asia Society
Photo: Yibada

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How Tourism Can Revamp a Country’s Image

TourismMillions of people travel around the world every day, whether for work, vacation, personal leisure or to visit family and friends. In less than a day, you can fly to any corner of the world you please; you can go to sleep on a flight leaving from the U.S. and wake up in Europe or Asia. Advancements in international travel have shrunk the world, making once inaccessible regions open to tourists from all over the globe.

The travel and visitation to other countries, known as tourism, not only allows for personal exploration and adventure, but it also serves as a key factor in maintaining international relations and the international economy. Here are some reasons why tourism can help redefine a country’s image:

1. Tourism campaigns can change the way foreigners perceive a country.

A prime example of this phenomenon is seen in South Africa. In South Africa’s history filled with racially-based conflict and identity challenges, the detrimental period of apartheid has become one of the nation’s most well-known historical markers. The government, largely through the tourism sector, has successfully managed to secure its newfound democratic identity as an interracially knit community of diverse peoples which is equally supportive of all races and ethnicities. Through various video and advertising campaigns, the country created a new label for itself: the rainbow nation. Since then, South Africa’s tourism sector has seen widespread growth, and the country’s efforts to unite its ethnically and culturally diverse population has led to a revamping of the entire economic sector, largely caused by tourism.

2. Tourism boosts the economy.

Tourism is widely used as a tool to ignite economic and internal progress. According to the U.S. Travel Association, the tourism industry generates over two point one trillion dollars in economic output every year. This type of large-scale spending is often the sole savior for countries buried in debt. Additionally, 15 million jobs are supported by travel expenditures (includes eight million directly in the travel industry and seven million in other industries). Think about the wide variety of employment opportunities here: airlines, tour guides, travel consultants, and many more.

3. Tourism creates domestic and foreign appreciation of culture and heritage.

When you visit another country, you gain a sense of appreciation for that country’s existing culture and heritage. Many travelers use tourism solely for this purpose: to learn and appreciate the diverse ways in which other people live their lives. This appreciation, however, goes both ways. When a country creates tourism campaigns and celebrates its own national pride and beauty in order to convince foreigners to visit, this also fosters a sense of citizens’ pride and national identity.

4. Tourism can help a country re-populate.

Tourism Excellence, a business created to help the tourism industry prosper, said, “In many areas tourism has helped to slow or halt the drift to cities, by not only making the local area and its employment opportunities more attractive to young people, but by attracting ‘sea changers and ‘tree changers’ from major population centers.” Increasing an area’s population can transform a place from being a small town to a highly-populated, desirable location to live, which has unending benefits for a country’s image.

All of these points further clarify the importance of the tourism industry to a country. Travel and tourism remain essential components of a country’s economic, cultural, and social success.

– Hanna Darroll

Sources: Tourism Excellence, U.S. Travel Association
Photo: Karibu

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5 Things I Learned about Poverty in Peru

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An avid world traveler, there is nothing I love more than exploring new places and experiencing cultures that are vastly different from my own. On my latest adventure, I spent two weeks roaming around the South American country of Peru. Although best known for its well-preserved Inca ruins and lovable llama population, I learned that there are many dimensions of Peru that the average tourist does not see. The spirit of the Peruvian people struck me at many moments during my visit, but here I offer up five things that I learned during my travels that I find particularly revealing.

1. Rural poverty is rampant

Although government statistics report that only a third of the Peruvian population lives below the national poverty line, about 8 million people still qualify as poor. As I traveled from town to town in buses and taxis, time and time again I was forced to think about how much better the average living conditions of Americans are in comparison. Poverty in Peru is deepest among indigenous people living in remote rural areas. In fact, the national rural poverty rate is over 50 percent, with 20 percent of people in the Andean region considered extremely poor. This was evident in the villages in the mountains I passed through; they looked almost abandoned, with people living in huts, little modern technology and often no electricity.

2. Everything is cheap

For American tourists, this is not a bad thing. Currently, one Peruvian Nuevo Sol is equivalent to approximately $3.15 (USD), making purchasing hotels and food throughout Peru a breeze for thrifty college students like myself. Although I enjoyed the benefit of this exchange rate, it reflects a sad truth about the Peruvian economy. The average GDP per capita is $5,000 (USD), a sum that the majority of Americans can barely imagine earning in a month or two in order to make ends meet.

3. People are desperate

Every time I would visit a notable tourist site, I was swarmed by locals selling knock-off goods, badly reproduced “Peruvian artifacts” and women dressed in traditional garb with llamas, trying to charge money to take a photo with them. It seemed all fun and games at first, but the more I thought about it the more I realized that these were the actions of desperate people. Clearly these individuals are in need, as they are making a mockery of their own culture in order to make a couple sols – usually just a dollar or less.

4. Despite their poverty, the people are helpful

You might expect an impoverished population to lie and steal in order to make ends meet – this is the stereotype that many Americans adopt when visiting foreign countries. I, however, kept an open mind when I arrived in Peru, and I was more than pleasantly surprised by the conduct of the people I encountered. I did not feel like I was lied to or cheated at any time on my trip. On the contrary, everyone I encountered was extremely willing to help me. From the customs official who gave me restaurant suggestions to the cab driver who pulled over several times to ask locals on the street where my hostel was located, to the woman selling rice who told me to move my cell phone from my pocket to a safer place, I was met with incredible kindness.

5. More than helpful, the people are happy 

Although the poverty in Peru was evident in many of the towns that I visited, also evident was the spirit of the Peruvian people. At no time during my trip did it seem that individuals in the towns were unhappy with their situation. Children played soccer, elders sat on the porches and watched the world go by, and those giving my friend and me tours for reasonable sums were passionate about the landscapes of their country. This was perhaps the most inspiring for me, for even without wealth the people of Peru are able to live fulfilling lives and be generous and welcoming to those around them, even foreigners. It is these kinds of people that are worthy of help, and it is important to remember that people in poverty are not much different from you and me.

– Katharine Pickle

Sources: Rural Poverty Portal, CIA
Photo: Pulsa Merica

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Closing Tax Loopholes to Fund Development

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“Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations’ civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance.”

This is the guiding principle and raison d’être for the recently formed Independent Commission for the Reform of International Corporate Taxation, thankfully referred to as ICRICT. ICRICT had its first meeting in March of this year after being established by a coalition of civil society groups including Oxfam, Christian Aid and the Council of Global Unions. Their aim, which is evident in their name, is to reform the global tax structure to put an end to tax loopholes and dodging.

Tax dodging, or tax evasion, occurs in a myriad of different ways, some quasi-legal and some entirely criminal. One of these, known as the separate entity concept, treats subsidiaries of multinationals as legally independent and allows the corporation to effectively shift profits away from high tax countries to regions with low or no taxes. This simultaneously reduces their tax burden and steals government revenue.

Complicated and arcane, international tax law does not spark much interest. However, it has massive implications for poverty rates and economic development around the world.

The reasons why are simple. Expounding on the guiding principle of ICRICT, the resources that are undermined by tax dodging would allow governments to invest more in public goods, specifically healthcare and infrastructure. A lack of quality education, public utilities and other government goods work against the poor and are an underlying reason why people remain in poverty.

The numbers are staggering. Africa, which received slightly less than $56 billion in official development assistance in 2013, loses more than $60 billion a year in “illicit financial outflows.” Another report estimates that for every dollar Africa receives in international aid, two dollars are lost due to tax evasion. A report by IMF researchers estimates that tax avoidance costs developing nations $213 billion a year. Globally, governments are robbed of over $3 trillion every year.

It is uplifting to realize that the window of opportunity for reform is ajar. The recent inception of ICRICT was preceded by America’s Foreign Account Tax Compliance Act, the OECD’s creation of a Common Reporting Standards and their Convention on Mutual Administrative Assistance in Tax Matters. These efforts are bringing attention and solutions to the problem.

As the window opens, the first sight on the horizon is the Third International Conference on Financing for Development, which is to take place in just over a month in Addis Ababa. The conference will make critical decisions on how the Sustainable Development Goals will be financed. Clamping down on tax dodging would uncover a huge source of funding.

In the ever-evolving arms race between regulators and thieves, the dedication and perseverance of international governing bodies and those that advise them may have tipped the balance in favor of the regulators. If successful, these anti-tax avoidance measures will harness and utilize billions of dollars for poverty reduction measures.

– John Wachter

Sources: Wall Street Journal, The Guardian 1, The Guardian 2, The Economist, ICRICT, United Nations
Photo: Flickr