Developing countries lose $2 for every $1 gained, report says

http://www.theguardian.com/global-development/2014/dec/18/developing-countries-debt-eurodad-report

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The poorest countries have lost just over $2 for every $1 gained since 2008, with illicit financial flows, profits taken out by foreign companies, debt repayments and lending to rich countries responsible for most of the outflow.

A report, State of Finance for Developing Countries, published on Thursday by the European Network on Debt and Development (Eurodad), said lost resources – money that should have been invested but instead left the country – accounted for more than 10% of gross domestic product (GDP) for developing countries since the 2008 financial crash.

These countries are losing twice as much as they gain through aid, investment, charitable donations and remittances.

“Eurodad’s been saying for many years that more money flows out of developing countries than goes in, but the scale of it is incredibly shocking,” said Jesse Griffiths, director of Eurodad and the report’s author. “When you compare these lost resources to the size of the economies, it’s a huge proportion of their income that they’re losing.”

The largest losses were illicit financial flows, which accounted for $634bn in 2011. Griffiths said this encompassed illegal activities, but did not include aggressive tax avoidance, suggesting the real figure could be higher.

“There’s a huge amount that isn’t technically illegal but is hugely damaging. And we’ve seen all of that with the Lux leaks: how corporations can structure themselves in different ways to pay taxes in certain jurisdictions and not others,” he said, referring to revelations about Luxembourg’s tax deals for large corporations.

The report said taxes on multinationals had been “significantly reduced” through tax breaks and other incentives in developing countries.

“This ‘race to the bottom’ – where all countries compete to offer lower tax rates to attract multinationals – is facilitated by the difficulty developing countries face when trying to levy taxes in the first place,” it said.

Eurodad wants greater transparency, international cooperation and an end to tax evasion and aggressive tax avoidance. “We are pushing for the UN to set up a new body on international tax cooperation to try and make sure that governments can stop the wars that undermine everybody’s public services,” Griffiths said.

Profits repatriated by international investors accounted for $486bn in 2012. Griffiths said it was clear the majority of foreign investment and repatriated profits, particularly in the poorest countries, was driven by the extractive sector.

Foreign investment was still critical, especially for delivering new technologies and skills, but it needed to be better managed, he said.

“There is a narrative that these figures challenge which is that the private sector or private finance will … be the saviour of developing countries ... That investment is important but these figures show there are huge problems with the way the private sector and private finance operate,” he said.

“Unless developing countries can be allowed to have a much stronger way of directing investment where they need it, all the negative aspects risk significantly outweighing the positive,” he said.

Lending and debt repayments also led to lost resources. In 2012, developing countries lent $276bn to rich countries, mainly by buying safe assets such as US government bonds to boost their reserves. Developing countries also paid $188bn in interest on foreign debts.

“We’ve been supporting a proposal by Undesa [UN Department of Economic and Social Affairs] to annually issue special drawing rights [SDRs], which are a form of reserve asset that all countries receive,” Griffiths said, pointing out that in 2009, $250bn of SDRs were issued in response to the global financial crisis.

Griffiths said the UN general assembly had agreed to work towards the creation of a multilateral framework for sovereign debt restructuring. “By the end of next year … we could see the start of a proper international framework which could be fair, transparent and independent of creditors, and lead to rapid resolution of countries’ debts when they are in crisis,” he said.

“The problem is several developed countries are dragging their heels. So many European countries abstained or voted against. The US voted against this proposal. We need to get those countries on board.”

Developing countries have increased revenue collection, with government revenues accounting for close to 19% of GDP in 2011. In the poorest countries, however, this translates into tiny amounts per capita to spend.

“That is why we have such huge problems when we get things like Ebola,” Griffiths said, adding that aid was still vitally important to develop public services, and should not be diverted to boost the private sector’s involvement.

“If you engage in the aid discussions now, all the discussion, which the UK is a major leader on, is about how can we use aid to subsidise private investment, to leverage private finance,” he said. “It’s completely the wrong way round ... If you divert the aid to subsidise western companies to invest in developing countries, you lose a huge and important source of public finance.”