I am in Kampala this week, covering the People's Forum of the Commonwealth Heads of Government Meeting.
Amid the frenzy of deadlines and staff management and on-the-fly philosophical debates, I had a chance to sit down and interview Sony Kapoor. He's an activist on international debt cancellation and stemming capital flight. You can read the full interview here.
Tell me a little bit about your background...
I got into this whole thing with taxing the financial system, trying to leverage my knowledge of the financial system but from a development perspective.
I worked quite closely on this project called Innovative Source of Financing. France and Brazil and Chile and a number of other countries got together trying to say that this traditional aid business is not working and there is a need to transfer some of the wins of globalization to those who have been left behind. They had this commission working on making feasible proposals for taxes on global public “bads” such as pollution, the arms trade and financial volatility.
As a part of that I helped develop a feasible proposal of taxing financial transactions, taxing currency transactions and taxing airline ticket transactions. Of all of these, the airline ticket levy is now a reality. It was launched last year and is being used to finance HIV/AIDS treatment. The process continues; we are hoping more will come through.
Was it easier to engender political will to tax airline tickets than to tax the arms trade?
I think in terms of political will, taxing the arms trade would be a far better target. The impact [impact of the arms trade] is far worse. But there are certain logistical problems with that. First, by taxing the arms trade and using the benefits for development, would you not, in some way, be legitimizing it?
The second is, a lot of the arms trade, especially the part that is most harmful - small arms, unauthorized dealers in Africa - you don’t know where they are. It becomes really tricky to tax them. With airline tickets, the administrative mechanism is in place. The levy is just one to two euros or dollars per ticket. It was an easier target.
With taxes on currency trade, we are still battling the big banks, who have all the lobbying power.
It was 2003 that I was lecturing about this when someone from the Jubilee Global Debt Cancellation Network asked me to help them. Bilateral debt had been cancelled whereas IMF and World Bank debt had not. The IMF and the World Bank had stalled progress by saying that they did not have the resources, they could not afford to pay for the cancellation of debt or they would go bankrupt. I used my financial knowledge to prove conclusively that both the IMF and the World Bank had more than enough money to pay for the debt cancellation program. That helped break the logjam.
So I was, in a backroom-dealing kind of way, helping coordinate a large part of what went into the 2005 debt cancellation deal. It was OK. It was some progress. It was far from satisfactory but, hey, there is some more money on the ground.
And then I helped launch something called the Tax Justice Network because I was looking at this overall phenomenon of financial flows to and from developing countries. You look at World Bank, IMF figures and things look rosy. The aspect that is stressed is the aid going in, the investment going in. What is not stressed is the money that is going out in the form of debt repayment and profits from existing investments.
Even if you look at the official data presented by the World Bank and the IMF, there is more money going out of developing countries [than coming in]. Developing countries are having to accumulate reserves as an insurance against the kind of financial crisis that happened in 1997, 1998. It’s very expensive buying this insurance. The money is invested in US Treasury Bonds, which ends in the absurd position that Uganda and Brazil and India and China are lending money to the United States, the richest government in the world, at an interest rate that is [above] market rates.
The worst part is that the biggest channel of outflow, capital flight, leaks out of countries under the table. It doesn’t get captured by any data, so you don’t talk about it.
What is capital flight?
The way I refer to it is money that illicitly flows out of a country. It could be money that was mobilized illegally or that was transferred out in a way that broke the law, money that was not declared to the tax authority. It is money that leaves the country more or less permanently.
If you have an active reason to hide a transaction and money leaves the country, then it is considered capital flight.
We talk about African corruption but there is a supply side and a demand side. It’s a moot point whether Suharto is guilty [of gross embezzlement]. How about the Swiss banker who visited Asia in pinstripe respectability and said, “Sir, we will keep your money safe. And nobody will know about it and we will invest and we will return five percent every year for you.”
I am well-educated, I am well traveled, but still when I hear the word ‘corruption’ the image that comes into my head (and probably yours and everybody else’s) is someone who is yellow or brown asking for a bribe. What almost never comes to mind is these guys sitting in their posh offices in Swiss banks, in the UK, in tax havens, in New York. They are calling themselves wealth managers. They can help you “responsibly” manage your money, help you avoid taxes, take dirty money… The discussion is completely unbalanced.
Do you think more transparency is possible or will corruption and capital flight just go further underground?
There will always be some people who will have a reason to hide their stuff and will go to any length [to do so]. For the most part, having bank secrecy – these convoluted laws where you have shell companies and jurisdictions where the legal system is extensively designed for secrecy - it just makes the rewards so high and the potential risks so low that the extent of this flow is far higher than it would be in the absence of [financial transparency] legislation.
In a way the legal system in these countries has been hijacked.
There is a narrow view of corruption that it is something illegal, or public sector related. But it is really someone in a position of power being able to abuse their authority. That includes [political leaders] who have put into place a legal system which was written by KPMG to facilitate capital flight and tax evasion.
Does such a thing happen?
Yes it does. All the time.
The total estimates are that about 500 billion dollars leaves developing countries every year in capital flight, under the table. That is ten times the amount of aid going in.
It sounds like you have more of a concern about capital flight than about conditions on international loans or aid?
I am equally concerned about both. They are very strongly interrelated.
South Africa between 1994 and 2003 was losing 9.2 percent of its GDP every year as capital flight. It’s been getting half a percent of GDP as aid. Of every ten or 20 dollars you lose, maybe one dollar comes back as so-called charity. It has strings attached, which then restricts your policy space and makes you open your markets and reduced trade barriers, which has further implications…
Import tariffs in less developed countries are an important source of tax revenue because they are easy to administer. As part of aid conditions, Kenya among other countries was forced to reduce these tariffs to a very large degree. The domestic industry was subjected to international competition that it wasn't prepared for.
The Kenyan government suddenly lost 30 to 40 percent of their tax revenue. And that made them further dependent on aid and more susceptible to these aid conditions. All this whilst Kenya was losing five percent of its GDP to capital flight.
Every country that is rich, grew rich behind barriers. That includes China, Korea, India, and especially the United Kingdom and the United States. These were the two most protectionist countries in history. They seem to have forgotten that.
What role does the media have to play in terms of updating, reframing the aid dialog?
I think the media has a critical role to play. Whenever you talk about financing development, it’s “debt, aid, trade.” [But that is] such a small part of the equation that [the media coverage] sends this bad picture. It paints a very unflattering picture of recipient countries. [Debt and aid relationships] also indebt self-confidence. That’s part of the problem in Africa. If I were African, my confidence would be seriously dented [from the widespread perception that Africa can’t provide for itself].
The first thing that the media needs to do is put this capital flight issue at the top of the agenda so that people actually know what is going on. Most people don’t know about capital flight. The media need to put out there that there is between 500 billion to one trillion dollars in stolen wealth lying abroad.
African doesn’t need aid. Africa needs its wealth back.
It also needs domestic resource mobilization. Development is an internal process.
If you are a country that is resource-rich, you have enough resources. Norway managed to keep 90 percent of its oil revenues and grow rich. Africa is keeping 30 percent, at most. The rest is going abroad. So you need domestic resource mobilization and domestic resource retention.
Aid is the third thing you need, in the case of states that do not have a wealth of resources. I see a role for aid as a mechanism for global redistribution. At national levels, we have progressive tax systems. That’s how Canada and Norway and Sweden are redistributing national wealth. This is the role of a modern welfare state.
I strongly recognized the need for an international redistributive mechanism and these innovative source of financing, such as taxing those who have benefitted from globalization, such as the airline industry, the financial industry, shipping etcetera and redistributing that toward those who have been left behind or those who losing… that would be a good starting point for a new vision for the future. I see that as playing, at most a supportive role. Everything else has to come from within.
What needs to happen in order for your average Jane and Joe to support a paradigm shift?
At the domestic level, if you are rich and powerful, you don’t pay your fair share of tax. This happens in rich and poor countries. I’m a liberal at heart but still I see a very strong role for government, especially in poor countries. There is a minimum level of service that they need to provide: health and education and infrastructure. And that money has to come from tax revenue. There is natural resource wealth. Using the Norwegian example, 90 percent of the money from oil went to the government.
That needs to be supplemented with scrapping these tax holidays for attracting investment. They are counter-productive. You can have export promotion zones, but you need to supply them with a high level of skilled workers or something that is going to outlast the investment. The investor comes in, they enjoy the ten year tax holiday, and then they move on to Uganda, to Tanzania. In some cases [the EPZs are a form of] negative taxation. Not only is the government providing a tax holiday, it's building a road. It’s supplying electricity at discounted prices.
There is a clear need for everybody to have a more critical view of everything from aid to tax evasion.
Most people don’t like this concept of aid. People recognize Africa is rich. Given a little more information, a little more transparency and openness... I think there is a massive latent civil society outrage to be tapped into, to keep Africa’s wealth in Africa. On the debt issues, there is this whole new campaign on illegitimate debt. So, I am optimistic.
At an international level, there is some progress happening. I’ve just convinced the Norwegian government to start an international task force against capital flight. This is the first time that we are trying to put capital flight at the top of the development agenda, to look at who is actually financing who.
What you need to address this issue, are initiatives at the local and at the national level, and action at the international level.
I think there could be a good cross-constituency support.
There is hope.