The Anatomy of Tax Evasion in Africa

Africa Confidential has a great piece analyzing leaked documents from PwC, the professional services firm, showing the various arrangements that enable multinational companies to evade taxes in Africa. You can read the whole piece here (gated).

  • One of the measures PwC advised multinationals to take was to create a wholly-owned Luxembourg-based subsidiary which would hold the rights to intellectual property used by the rest of the group. The rest of the group would then pay licensing fees to the Luxembourg-based subsidiary which, by agreement with the authorities, would be granted tax relief of up to 80%……
  • A second tax avoidance mechanism simply involved the companies becoming incorporated in Luxembourg. In 2010, Luxembourg concluded an agreement with several companies of the Socfin (Société financière) agribusiness group, which was founded during the reign of Belgian King Leopold II by the late Belgian businessman Adrien Hallet. The companies chose Luxembourg as their base and made an agreement under which their dividends were subject to a modest 15% withholding tax, a lower figure than those in force where their farms are located (20% in Congo-K and Indonesia, 18% in Côte d’Ivoire).
transfer-pricing

The art of hiding profits

Altogether, Socfin subsidiaries in Africa [in Sierra Leone, Nigeria, Liberia, Cote d’Ivoire, and Cameroon] and Indonesia produced 123,660t. of rubber and 380,770t. of palm oil in 2012. The combined turnover of its main African subsidiaries reached €271 mn. in 2013. The list also includes the 100%-owned Plantations Socfinaf Ghana Ltd. (PSG) and Socfin-Brabanta (Congo-Kinshasa). Socfin also holds 88% of Agripalma in São Tomé e Príncipe and 5% of Red Lands Roses (Kenya).

  • A third mechanism involves cross-border lending within a group of companies. Companies registered in Luxembourg are exempt from tax on income from interest.

According to the Thabo Mbeki High Level Panel report between 1980 and 2009 between 1.2tr and 1.4tr left Africa in illicit flows. These figures are most likely an understatement. Multinationals, like the ones highlighted by Africa Confidential, accounted for 60% of these flows.

Alex Cobhan, of the Tax Justice Network, has a neat summary of the various components of illicit financial flows (IFFs) and how to measure them. He also proposes measures that could help limit IFFs, including: (i) eliminating anonymous ownership of companies, trusts, and foundations; (ii) ensuring that all bilateral trade and investment flows occur between jurisdictions which exchange tax information on an automatic basis; and (iii) making all multinational corporations publish data about their economic activity and taxation on a country-by-country basis.

Alex Cobham blogs here.

More on debt, macroeconomic stability, and natural resources in Africa (Uganda Edition)

See earlier posts on this subject here and here. Below is a quote from FP on Uganda’s growing petroleum sector (see also the Global Witness report on Uganda’s secret oil contracts here):

Source: Global Witness

Uganda’s Projected Oil Production Curve. Source: Global Witness

The bulk of Ugandan government borrowing against future oil revenues has focused on grand infrastructure schemes built and funded by the Chinese. In 2014 alone, the government signed deals with China to build two hydropower dams worth $2.2 billion, a standard gauge railway that could cost up to $8 billion, and a $600 million fertilizer plant. Additional projects include a $2 billion oil field being developed by the state-owned China National Offshore Oil Corporation and a $350 million roadbetween Uganda’s capital, Kampala, and Entebbe International Airport. The possibility has even been raised that a Chinese bank may bail out Ugandan parliamentarians in danger of going to jail for failure to honor their debts.

And how efficiently is Uganda spending the [expensive] borrowed money?

Costs for the Ugandan section of the East African Standard Gauge Railway are especially out of control. The project had an initial price tag of $4.5 billion for the Ugandan side of the railway, compared to $3.8 billion for the Kenyan side. Estimated costs in Uganda subsequently shot up, first to $8 billion and then to a staggering $11 billion

So what will happen when China decides to deal with its public debt situation and the effects propagate to its many public companies involved in mega-projects in Africa?

To reiterate, let’s not declare mission accomplished in the war against the resource in Africa just yet.

The Long-Run Economic Impact of the Tse Tse Fly in Sub-Saharan Africa

The Tse Tse is estimated to have had substantial effects on precolonial Africa: a one standard deviation increase in the TSI [Tse Tse suitability index] is associated with a 23 percentage point decrease in the likelihood an African ethnic group had large domesticated animals, a nine percentage point decrease in intensive cultivation and a six percentage point reduction in plow use. A one standard deviation increase in the TSI is correlated with a 53 percent reduction in historical population density….

The TSI has a negative correlation with current economic outcomes as measured by satellite light density or the observed cattle distribution in Africa. The modern analysis is performed at the district level and is robust to including country fixed effects. The evidence suggests that the relationship between the TSI and satellite lights is driven by the Tse Tse’s effect on shaping historical institutions, particularly political centralization.

You can find the entire paper here.

HT Tyler Cowen.

Working With the Grain in Development

I finally got to reading Brian Levy’s Working With the Grain. It is easily the most underestimated development book of 2014, and should be read alongside William Easterly’s Tyranny of Experts (which it both complements and pushes back against). Like Easterly, Levy worked at the Bank and has insightful case studies and anecdotes from South Korea, to Ethiopia, to Bangladesh, among other countries. The book’s main thrust is that approaches to interventionist development policy ought to internalize the fact that:

… Successful reforms need to be aligned with a country’s political and institutional realities. For any specific reform, an incentive compatible approach begins by asking, who might be the critical mass of actors who both have standing and a stake in the proposed arrangements – and so are in a position to support and protect them in the face of opposition? [p. 142-3]

From a policy perspective, Levy tackles the relationship between governance, regime types, and development head on. How do you deal with the Biyas, Kagames or Zenawis of this world if you deeply care about [both] the material aspects of human welfare – roads, hospitals, schools, electricity, etc., [and] political freedoms and inclusive institutions?

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Levy’s answer is that development experts should work with the grain, focusing on incrementally solidifying past gains in specific agencies and issue areas, instead of engaging in epic battles against ill-defined and equally poorly understood “bad institutions” and evils like “corruption.” He aptly points out that you do not need the full set of the “good governance” bundle in order to continue chugging along on the path to economic prosperity.

In other words, we don’t have to put everything else on pause until we get the institutions right (or topple the bad guys). It is not an all or nothing game. His argument is persuasive (“good governance” has failed as a prescriptive remedy for underdevelopment), albeit at the cost of casting the immense toll of living under autocratic regimes as somewhat ineluctable on the road to economic prosperity. But at least he dares to challenge conventional approaches to governance reform that have at best failed, and at worst distracted governing elites from initiatives that could have worked to improve human welfare in developing countries.

As I read the book I wondered what Levy might think of the current state of development research. We are lucky to live in an age of increasing appreciation for evidence-based policy development, implementation, and evaluation. However, the resulting aura of “objectivity” in development research often leaves little room for politics, and its inefficiencies and contextual nuances. Sometimes the quest for generalizability makes us get too much into the weeds and forget that what is good for journal reviewers seldom passes the politicians’ (or other influential actors’) incentive compatibility test, rendering our findings useless from their perspective.

It is obvious, but worth reiterating, that the outcomes we can quantify, and therefore study, do not always overlap with the most pressing issues in development or policies that are politically feasible.

Perhaps this is a call for greater investment in public policy schools (not two-day capacity building workshops) in the developing world that will train experts to bridge the gap between academic development research and actual policy formulation and implementation (talking to policymakers makes your realize that this gap is wider than you think). Linking research findings to actual policy may sound easy, but you only need to see a “policy recommendations” section of a report written by those of us in the academy to know that it is not.

Development Experts and Their Biases

It is perhaps uncontroversial to suggest that World Bank staff have a different worldview from others. World Bank staff are highly educated and relatively wealthier than a large proportion of the world. However, it is interesting to note that while the goal of development is to end poverty, development professionals are not always good at predicting how poverty shapes mindsets. For example, although 42 percent of Bank staff predicted that most poor people in Nairobi, Kenya, would agree with the statement that “vaccines are risky because they can cause sterilization,” only 11 percent of the poor people sampled in Nairobi actually agreed with that statement. Overall, immunization coverage rates in Kenya are over 80 percent. There were also no significant differences in the responses of Bank staff in country offices and those in headquarters or in responses of staff working directly on poverty relative to staff working on other issues. This finding suggests the presence of a shared mental model, not tempered by direct exposure to poverty [emphasis added].

That is an excerpt from the World Development Report 2015, the section on the biases of development professionals.

One hopes that the problem highlighted by the last line is not crowded out of President Kim’s agenda at the Bank by the ongoing cost-cutting. And in case you were wondering, I don’t think flying coach and no breakfast will cut it since airports and the Mamba Points of this world are beyond the reach of most poor people. Speaking from experience, the development “expert” bubble is real, and enduring. We definitely need to do more to burst the bubble.

If field country offices are mere extensions of DC, then many development projects will continue to be variants of the proverbial solar cookers decried by Jim Ferguson in the Anti-Politics Machine. And everyone will continue to run around in circles.

A New TV Show About Aid and Development

Just saw this over at Africa is a Country:

Finally, a new TV show exists to highlight some of the absurdities of the international aid sector. The slyly named The Samaritans is a comedy about the perils – and pleasures – of the “NGO world”. Created by a Kenya-based production company, it chronicles the work of Aid for Aid – an NGO that, in the words of its creator, “does nothing”.

H/T D. Waweru

Who is the African child on the cover of William Easterly’s new book?

ImageUPDATE: A reader, C. Mwangi, just brought to my attention this quote from William Easterly’s 2009 review of Dambisa Moyo’s Dead Aid.

Moyo is onto something important but, as she says, seldom discussed openly. One of development’s dark secrets is its still-influential origins in the “poor people are children” view, a view with a deeply rooted and very long history. The “development” metaphor was itself is a biological one: poor people “develop” from childhood (poverty) into adulthood (prosperity). Some of the signs of this mindset are subtle but unmistakable. Just think of who was pictured in the last glossy “aid to Africa” brochure you saw? I am willing to bet it was African children. As David Rieff said in his classic book A Bed for the Night, “There are two groups of people who like to be photographed with children: dictators and aid officials.” And of course, you don’t let children manage their own affairs; the adults must do it for them.

The rest of the review, originally meant for publication in the LRB, is available here.

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They say don’t judge a book by its cover, but if it wasn’t for Bill Easterly’s reputation for sound thinking on matters to do with Development, I would not have pre-ordered his upcoming book The Tyranny of Experts.

Seriously, as a new year resolution can we all promise never to fall into the temptation to include anonymous African children (invariably looking poor and shabby with flies on their faces or carrying guns, among other things) on the cover of books on poverty and development?

PLEASE? It is no longer good form (and never has been), especially coming from people who ought to know better. Were the boy’s parents or guardians consulted? Do they even know that their kid is on the cover of Easterly’s book?

The book title suggests that Easterly cares about the forgotten rights of the poor, yet the use of the cover image violates an important right of the poor: the right against unfair objectification. There is research out there suggesting that African states face an FDI inflow penalty simply because they are African. Images like these on the cover of books do not help the cause to reverse this reality.

To be fair (as a commenter pointed out to me on twitter) it is the publishers who decide these things to drive sales. But authors still have a right (and in my view, a duty) to ensure that this sort of stuff doesn’t happen.

I feel bad calling out Easterly on this because he is one of the more nuanced and very sane development economists/practitioners out there (and there are certainly far much worse instances of this phenomenon out there); but the habit of using a whole region and its peoples as shorthand for poverty, underdevelopment and dysfunction has to stop. And it starts with each and every one of us.

More on direct cash transfers

As Chris Blattman put it, the Cashonistas are rejoicing. And with very good reason.

There is mounting evidence that giving money directly to poor people does a much better job of improving their welfare than traditional channels of institutional(ized) aid-giving. On a related note, this evidence lends credence to claims by proponents of oil-to-cash programs. Oil to cash enthusiasts advocate for direct payments to citizens of revenues from extractive sectors (and especially oil) so as to avoid what is commonly known as the resource curse (more on oil-to-cash here). I am not one to argue against evidence, so I am intrigued by the success of Give Directly, and look forward to further impact assessments to ascertain the stickiness of the observed welfare gains.

However, I agree with Brett Keller that we shouldn’t allow the present evidence to distract us from thinking about things like schools, hospitals, business-promoting state institutions, etc.

Despite the within-community evidence of positive effects of direct cash transfers, we shouldn’t forget that these communities do not exist in a vacuum but within political economies of various states. For instance, given what we know about ethnicity and attendant barriers against collective action, what would be the effect of giving all the money to the people and then requiring them to comply with tax regimes and other collective action endeavors?

Furthermore, giving poor people money is often based on an implicit premise that the poor ought to become entrepreneurs and lift themselves out of poverty (People respond to incentives, and we know what would happen if say we guaranteed them direct cash transfers in perpetuity. So the scheme only works if poor people can use the money to start businesses). But entrepreneurship is hard. Even for people with trust funds and super-charged business incubation resources. So is it really fair to require that the objectively most risk averse among us lift themselves out of poverty by starting businesses? Isn’t this the role of the middle and upper middle classes who can tolerate the risk? I am not saying that entrepreneurship is limited to particular classes (lots of people from humble backgrounds have created wildly successful businesses the world over). What I am saying is that as a matter of policy we shouldn’t unnecessarily burden the most vulnerable among us.

Also, to borrow from Huntington, we are well advised to keep in mind that even though economic success leads to stabilization, the process of development can be destabilizing. With this in mind, for most development initiatives to succeed, they need political cover (broadly defined as the ability to shape or influence government policy). Interventions to accelerate growth must never lose sight of this fact. Those who make and/or can influence policy matter a great deal.

This might sound very 20th century, but I think that the best anti-poverty measure out there is still mass job creation by BIG business (and agree with Chris Blattman here). It beats all the pro-poverty pro-poor interventions I can think of. So may be instead of raining cash on the poor it might be better to think of smart ways of jumpstarting the growth of SMEs in the developing world into mass employers. This is not a trickle down economics argument. It is an argument for the continued emphasis on macro reforms in the political economy to provide an enabling environment for mass job creation.

We can’t continue to insist that institutions matter but then turn around and do our best to device anti-poverty interventions that skirt the very same institutions that we insist are the fundamental cause of long-run growth.

Direct cash transfers might prove to be a key part of the shortcut to Denmark (and I hope the successes stick). But like with most shortcuts, the potential for disappointment is a little higher than most of us would like to admit.

Pockets of California amid sub-Saharan Africa?

Rant and rave alert. 

As an undergrad at Yale I took several classes in which professors, TAs and fellow students would casually say things that insinuated that all of Africa (read sub-Saharan Africa) was a cross between a hospice, a giant slum and a war zone. Let’s just say that it all made me a little bit uncomfortable, and sometimes forced me to over-compensate in discussions and with papers and homework. I was particularly disappointed in my professors for not knowing any better. It probably also played a big role in my choice to pursue a career as an academic in the social sciences. 

The quote below reminded me of those episodes:

Despite considerable economic growth and increasing self-confidence as a major global player, modern India is a disaster zone in which millions of lives are wrecked by hunger and by pitiable investment in health and education services. Pockets of California amid sub-Saharan Africa, sum up Sen and Drèze.

It’s one thing when an ignoramus who imagines Kenya to be a town in South Africa that does a mean giraffe barbecue says something nasty about an entire region and its people. But it’s quite another when it comes from a college professor or from people that you expect to know better. 

For instance, when we say California, are we talking Palo Alto or East Palo Alto? I must add here that because it is Sen (my beloved author of The Idea of Justice), may be he meant the “median Californian experience” vs the “median African experience” as opposed to simply comparing Palo Alto with Kibera. May be.

I admire Prof. Sen. Very much.  But I would like to register my disappointment over this offending line. The full article in the Guardian is actually quite illuminating regarding inequality in India. 

If you ever teach a class or write a book or newspaper article or give a talk, please know that it is not kosher to use the word Africa as short hand for everything that you imagine to be wrong with this world. Always remember that part of your audience might include real flesh and blood Africans. Spare us the awkwardness. Please. 

The decline of Economic History at MIT

What is the cost of not having economic history at MIT? It can be seen in Acemoglu and Robinson, Why Nations Fail (2012). This is a deservedly successful popular book, making a simple and strong point that the authors made originally at the professional level over a decade before (Acemoglu, Johnson and Robinson, 2001). They assert that countries can be “ruled by a narrow elite that have [sic] organized society for their own benefit at the expense of the vast mass of people” or can have “a revolution that transformed the politics and thus the economics of the nation … to expand their economic opportunities (Acemoglu and Robinson, 2012, pp. 3-4).”

The book is not however good economic history. It is an example of Whig history in which good policies make for progress and bad policies preclude it. Only transitions from bad to good are considered in this colorful but still monotonic story. The clear implication is that if countries can copy the policies of English-speaking countries, they will prosper. No consideration is given to Britain’s economic problems over the past half-century or of Australia’s relative decline for a century.

That is Peter Temin writing about the story of Economic History at MIT in the 20th century. For more click here (H/T Greg Mankiw).

Also, to be honest, one of the reasons I am into development (and the politics around it) is because of my fascination with economic history. I wish more development practitioners and theorists alike cared a little bit more about economic history. At the very least, looking at how things really actually worked out in the past serves to temper the urge to completely fall for the latest fad within the development industry.