Impact Interviews

In this profile interview by Robaiya Nusrat, Alex Cobham explains his choice to leave academia to try to better leverage his expertise on illicit financial flows, or ways in which forms of tax avoidance can hinder poverty alleviation and development efforts. Cobham left a research post at Oxford University to join UK-based Christian Aid, and he now serves as a research fellow at the London office of the US-based Center for Global Development. Details on CGD’s overall impact efforts are available at here

Q: Why did you decide to leave academia? What was it that you felt you couldn’t do as an academic researcher that you can do now?

Cobham: Well, I had been doing various research posts at the Queen Elizabeth House, the Department of International Development at the University of Oxford, since the beginning of 1999. During that time I was lucky enough to work with a professor who was especially then one of very few people who were seriously thinking of the role of tax havens and to some extent on the scale of the illicit financial flows and their impact on development. At the end of the 90s there was an OECD process looking at tax havens and it felt for a period that real policy change might be quite close. So one of the things we did in that period was to write a series of background papers for the UK Government’s white paper on globalization, which is one of the first major policy documents on that. It was quite explicit about the potential damage that tax havens can do. It felt like it was the right place in terms of being able to influence policy and persuade to that research agenda. Over the following few years, the OECD process more or less completely stalled, as a previous one 10 or so years earlier had done. It started to feel there was less and less policy attraction with research, so I suppose I got to the stage of thinking that I could sit in my office and write the perfect paper on tax havens and illicit financial flows in developing countries and nothing would happen. It simply wouldn’t matter.

Around about 2005, by that time I was working as junior teaching fellow at Oxford and doing more of my own research independently, mainly focusing on the importance of tax for development. Around about that time I met a very interesting economist called Charles Burgay who became the head of policy at Christian Aid — one of the big 5 development NGOs in UK. I think it was him more than anyone who saw the potential for the whole area of work to become the next big economic justice campaigning issue. I must say, the UK development NGOs, in terms of their scale but also on their commitment to campaigning on the policy issues, are probably the world leaders. So when eventually he and I talked about the possibility of my coming to work for Christian Aid and starting that campaign, it just felt like too good a chance to pass up. Christian Aid began the first really big development campaign on tax issues and illicit financial flows, closely followed by ActionAid, which meant you had 2 organizations among the big five. Over the course of 5 years or so, in combination of a lot of people, we were able to drive the issue up the agenda. The financial crisis was also turning up. As they say, “Every cloud has a silver lining.” The silver lining of the financial [crisis was that these] issues became impossible to escape even within the domestic context in a country like the UK, and making the development argument became that much easier, as people were more and more aware about the problems of tax evasion and tax avoidance for the UK and could very well understand how a country at the lower income level might face more extreme versions of those problems.

Q: Were there specific contributions you made in your work for Christian Aid, and now for the Center for Global Development (CGD), that wouldn’t have been possible at Oxford?

Cobham: I think it was more of the fact that the work that I started doing at Christian Aid was tied directly into the campaigning. To be fair, it is also possible for academics to achieve a lot of the same opportunities without leaving academia in the same way I did. But, I think, having those links and being involved in to some extent in those campaigning and understanding the policy potential was important. So, the first serious piece of work we did at Christian Aid was to drawn some existing estimates of illicit financial flows and calculate both the potential tax revenue impact across a range of developing countries, but then also use estimates of the elasticity with respect to tax revenues. To calculate the potential impacts in terms of child mortality – so that first report gained enormous amount of attention and media coverage, because in a sense it was more media focused than anything that I might have done at Oxford. Potentially 1000 children under 5 years of age die in a day needlessly because of this problem. I think that was the first time that it really brought home to people the human impact rather than just saying this is a technical problem in the financial sector. It crossed a line in awareness of people’s human development issue. I guess that’s the kind of thing you could certainly do from within academia, but then having that outlet to reach the kind of media and policy makers directly — I think you need to be thinking about the relationship with NGOs and with campaigning organizations.

Q: There is increasing emphasis on financial secrecy and international tax laws. Why is it of such importance now? Is this growing importance good news for the developing countries? How is the situation different for all those developing economies suffering from severe domestic corruption?

Cobham: First of all, you are absolutely right, this has taken a place on the international policy agenda, which reflects the importance of the issue, but which for a long time simply hasn’t been true. The fact that the UN High Level Panel on the post Millennium Development Goals (MDGs)- 2015 framework has explicitly recommended a target of reducing illicit financial flows and tax evasion is extremely good news for developing countries, but [also] actually more widely. Because this is one of those areas were people living in a country like the UK suffer in exactly the same way as people in countries of lower income levels. Not all the impacts are not to the same degree. Overall, however, nothing has actually changed yet. Really very little has been delivered. Now, the G8 held in the UK this year has finally got down to some of the real specifics. Again, they haven’t really delivered much, but it was really important and I think the line that has been crossed here is that you now have the international policy agendas focusing on the right specifics, the things that would really make a difference rather than just the ‘color of the flier’ rhetoric. Unfortunately in this area we tend to hear this after every 10 years or so, and then it goes away. This time it feels different simply because the areas where progress is needed are very well identified, and that’s things like having public registers of who owns companies and trusts and foundations. That’s not only important for fighting tax evasion but also money laundering and a whole set of or types of corruption. Again, we are also looking at the specifics around transparency in corporate reporting, which is crucial for reducing the scale of corporate tax avoidance, and also automatic information exchange between the type of financial centers sometimes called tax havens and developing countries.

Now coming to your final answer, on corruption within developing countries. There remains no question that this remain a problem in very many countries, but I think it’s wrong, and it’s increasingly being realized that it’s wrong to see that as a developing country problem. One of the things you see over the last 20 years is a growing recognition in international media of the problem of corruption. But unfortunately that’s being associated with a sense that corruption is a problem over there somewhere in developing countries, not a problem for major high income economies, and that’s actually very misleading. If you look at the corruption perception index, it very strongly reinforces that view, but these are the perceptions of a very narrow international elite, and I think it’s a growing concern about whether that index is playing a useful role. An alternative that gives you quite a different picture is the financial secrecy index, which actually ranks countries according to, in effect, how important they are in terms of tax havens. So, you often see countries which do extremely well on the corruption perception index, coming near the [top] of the financial secrecy index — and that’s countries like Switzerland and Singapore, who in some sense very well regulate it but actually are encouraging corruption of various sorts, including tax abuse in countries of lower income levels. We need to thinking about corruption in that way as it appears as having a train of events. This is not about one person in one place perhaps working for a government, asking for a bribe. This is a pattern of asking for a corporate behavior, a pattern of consistent international bribery. But it’s also about jurisdictions and the professionals, accounts and banks and others who facilitate and create structures to facilitate tax evasion, money laundering and whole range of types of corruption. I think, finally what we are seeing is the discussion around the post-2015 framework is a recognition of that, when we talk about corruption we will be talking about these global problems to which the solutions will be global rather than [this] very unhelpful and distorted view that corruption is a problem in developing countries and that they need to address by themselves somehow. I think again we have crossed a line on that.

Q: To what extent do illicit financial flows have impact on global poverty?

Cobham: Certainly income poverty in particular is overwhelmingly focused in developing countries, or concentrated. [It is] increasing in middle income rather than low income countries, and that tells you somewhat on the geography of poverty, that it is really about inequality within countries, not only about poor people living in poor countries. That in fact goes back to this global problem. One of the effects of the pervasive nature of illicit financial flows, not least tax evasion and tax avoidance, is that it becomes very difficult for countries at any income level, and particularly at lower income levels, to effectively tax income, profits and capital gains. If direct taxation is very heavily constrained in the developing countries by this problem of illicit flows, then almost inevitably you will end up with higher inequality than you would do otherwise. For example, if you look across Latin America, you see great many countries where the original market distribution of income is more or less as unequal as it is in the UK or in the US. The difference is that [especially] in the UK, fairly powerfully, you have a system of taxation and transfers that reduces that inequality quite significantly. Across Latin America, very often you simply don’t see that. Increasingly there are some efforts on the transfers but it’s still very little very effective direct taxation and that means people living in these countries are left with higher levels of inequality and of course with all the social, political and human development problems that come alongside that. We know that economic growth is more unsustainable in developing countries. We know that conflict is more likely. We know that child development outcomes are much worse, gender and inequality is higher and so are the health outcomes. Henceforth, there is global attention and global policy change to address things which individual development countries can’t address on their own.

Q: Can you cite some examples of poverty effects from illicit financial flows, and which parts of the world are most affected?

Cobham: That’s a major part of research agenda here at CGD, but we are not taking it forward in the sense of global development. In think the bulk of the research being done on the problems of illicit financial flows has not in fact been done by academics, and there is a clear gap and need for greater scholarly attention to these questions. The work that has been done has largely focused on generating the kind of big numbers, estimates of the total scale, which have been extremely valuable in driving these issues up the policy agenda. The shortcoming they have is this: they don’t easily allow a break down into detail of the type of development impact of the different type of illicit flows in different countries, or if you want to look at countries by income level or by region. So, that’s the kind of agenda we’ve got at CGD, to start trying to push forward not just the estimates of the dollar scale of illicit flows but specifics types of impacts, whether that’s on tax revenues, on governance and effective political representation, on inequality. It’s about being a bit more precise on what the priorities should really be, whether that’s individual developing country or for policy making at the global level.

It is important to stress that illicit financial flows are a global problem. There is not a single country that does not suffer, and to some extent the difference is the question of the type of illicit flows that a particular country has a problem with, and the scale. Let me give an example of the kind of problem that is perhaps most common in Sub-Saharan Africa, and this is the problem of illicit flows around the natural resource wealth of large number of countries. We had a bit of work few years ago looking at Zambia. Now, Zambia relies for its export-GDP largely on copper which it is mining. There are two major problems in the way Zambia benefits or fails to benefit from its copper resources. One is the ownership, and although this has improved somewhat in recent years, the ownership has historically been fairly well hidden. A great many of the copper mines have been owned by the British Virgin Islands, which is one of the most secretive jurisdictions. It’s long been thought that various numbers of different governments have in fact been behind them, and the treatment of these companies, or the extent that those nations have benefited rather than the owners have benefited, has been questioned. The other aspect is that the majority of Zambia’s trade, at least on paper has been with Switzerland. Now, Switzerland combines being a global hub of commodity trading. A Swiss company sells the copper it mines to a Swiss-registered company at prices greatly below the market value, which Switzerland subsequently declared on re-exporting copper itself. What comes out of it, when the Swiss company resells the same copper at a price far above the world price, taking the difference as profit in low-tax Switzerland, depriving Zambia of both export earnings and tax revenue. Zambia’s GDP would have nearly doubled from something like $14 billion to more than $25 billion, and that’s a country where about 80% of people were living on less than $2 a day. So, the potential of addressing the illicit financial flows in Zambia’s copper trade in terms of the impact they could have had enlisting the majority of the population to come out of their income poverty would have been enormous. This is why you have a Zambian government which is being much more focused [on this issue] and trying to ensure better national benefits.

[Consider also] a country at a higher income level, a country that is heavily dependent on natural resources, a bigger economy, like Brazil or Argentina. What you tend to see there, is that there is a lot of problem is around the corporate tax behavior, and you find two different things. One is that OECD guidelines on transfer pricing, which are supposed to guide effectively how a MNC behaves in order to ensure that its profit is declared in the place where the actual economic activity took place. But these guidelines simply don’t work very well, and they work especially badly for developing countries. One of the reasons can be that they are designed by the OECD member countries, and it’s not surprising, but unfortunately they continue to be the global standard, despite Brazil, India or China and a number of other countries actually trying to use quite different rules. They are pushing to change those rules internationally. So, Brazil takes a whole set of efforts and measures which OECD doesn’t condemn in order to try and restrict the extent to which it was losing tax to different MNCs. In Argentina, in the last few years you see quite a number of cases being taken against the MNCs, which is very rare in the UK, I don’t think anything like that have happened in the 4-5 years. But it’s a signal of the frustration that these relatively powerful developing countries government have in trying to get what they feel is fair amount of tax from the MNCs, with benefit from operating within their markets.

You can also talk about more extreme cases [like] extent of Nigerian wealth in the billions of dollars, taken by various, more or less dictatorial leaders and subsequently [sent to] those range of jurisdictions. In the case of Nigeria it has been particularly concentrated in the island of Jersey, one of the UK’s grand dependencies, and in Switzerland of course. A lot of countries or jurisdictions offer either bank accounts or company or sometimes both which people can control completely and anonymously. That anonymity has been shown systematically to encourage and to facilitate the type of abuses I had been talking about, from the theft of public assets, to tax evasion and tax avoidance and related forms of corruption and bribery.

Q: If the Southern part of the developing world is heavily affected from illicit flows be it a larger or smaller economy, are things much worse for smaller economies in the South of Asia?

Cobham: Well I couldn’t count it as small but we could think about Bangladesh, as having and facing a number of problems. Bangladesh is thought to have higher illicit financial outflows but also potentially a large number of inflows which are likely to be associated with undermining governance and the rule of law. So we shouldn’t think these are largely benevolent. So, in Bangladesh we see different types of flow. But, what is particularly worrying is around trade mis-pricing. It’s estimated that a great deal, and perhaps the majority, of exports from Bangladesh, often in the textiles, are mis-priced in such a way as to do one of two things: either to increase artificially subsidies that may arise for exporting, or to reduce the profit which is being declared within Bangladesh by artificially depressing the price declared, and having an additional fee for the exports being paid outside the country. A kind of classic example would be, textiles worth a $1000 have been depressed in terms of price or declared for exports as for $100 and that’s what comes to the company. But perhaps the company doesn’t declare any profit, so it doesn’t pay any corporate tax. The other $900 is paid into the bank account of the textile company owner, let’s say in Switzerland, which will never exchange and never provide that information to the tax authority in Bangladesh or other parts of the government.

It will be absolutely outside government’s ability to tax or explore whether there may be corruption, of course, since that $900 tends to be split with people who try to blind eye the customs, or the tax authority, or people in the government who otherwise wouldn’t help to turn the process around. That’s secrecy around who owns assets and income streams, the fact that information is not readily available to developing countries like Bangladesh, and it leads to all sorts of abuses which not only reduce the tax revenues that Bangladesh receives but also just domestically undermine the benefit of any economic activity taking place there and also of course undermine the rule of law. A sad additional fact on this is that when people in a country are aware that they are elites, whether there are individuals in power or large companies are not paying the tax as thought to, then people intending to pay tax are reduced — it’s like why should I pay tax when people with higher incomes are evading? Since we know choosing to pay tax is voluntary, it is really necessary to raise the citizen-state relationship to the social public right, and the way that develops over time to support effective political representation is very fundamental to the process of development.

Q: There is a growing importance of approaching economic sustainability on the other hand continuing emphasis on market liberalization. How do you think the UN’s High Level Panel (HLP) addressed these issues in their recommendations for Millennium Development Goal replacement efforts after 2015?

Cobham: I think the High Level Panel had a very difficult job to do in the way they were given the task. This has to be remembered that it is their first draft, where they are taking into account of the whole horizon of political, economic, environmental and social sustainability issues. In saying that, we should remember that their reports and their recommendations are only in the first draft. There’s a long way to go, and it needs a great deal of improvement. So I think what they tried to do is whatever they can, but it’s pretty clear from the report that it was difficult for them to interpret in a few places and that is also because they were under a lot of time pressure. One of the areas in which the integration is largely lacking or the area that the report lacks is, I would say, this area of illicit of financial flows and that of tax evasion and tax avoidance. So, I think yes you are right, from the view point of how companies can be set within rules of taxation in a market liberalized environment is something to be looked at. I mean the HLP have points that are committed to transparency and accountability, as well as to sustainability but the joint document probably lacks complete coherence on an economic approach to sustainability with emphases both on the multinationals’ roles and market liberalization.

In my opinion, ASAP will have to work more in the issue of illicit financial flows. In a sense that it is quite new in its working arena on illicit finance, but they can make an elaboration of their tasks and make a contribution in the post-MDG framework.

Q: There are many institutions working towards transparency and anti-corruption. What do you see that is different in the High Level Panel’s recommendations?

Cobham: Well I think it is — the recommendation of the panel is very much of a challenge. Their proposed target is to reduce the volume of illicit flows, which is an admirable aspiration, but that’s the problem of the target. To begin with, you don’t have proper estimates of the flows, but probably a wider challenge is the qualitative measure than the quantitative one. What are the right set of indicators and targets? Are those targets set achievable? And, whether those measures would give us the right set of policy decisions. The panel’s recommendation for a ‘data revolution’ is valuable to promote accountability, and the proposal for a target of reducing illicit financial flows is of course very important. The challenge is to populate what is currently just a placeholder for such a target with a meaningful target and a set of indicators that both reflect the range of the problem and will trigger the necessary, specific policy actions in countries at all income levels.

Q: There have been very public criticisms recently of big corporations such as Google and Starbucks, alleging tax avoidance. What sorts of specific solutions have been proposed, and would they be effective?

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strong>Cobham: The OECD Base Erosion and Profit Shifting initiative, supported by the G8 and G20 groups of countries, is intended to address the issue of large-scale multinational company tax avoidance. Ultimately, however, the proposals so far resemble a piecemeal approach to what is a systemic problem. Fundamentally, the OECD approach to taxing multinationals relies on treating each company within the group as a separate (profit-maximizing) entity – when of course any such maximization occurs at the level of the group as a whole, and profit-shifting between group companies can be driven by a desire to reduce overall tax payment. Until there is a broader shift to recognize the unit of taxation as the group of companies as a whole, and then to allocate the tax base between countries of operation on the basis of the real economic activity taking place in each tax authority – not least in lower-income countries – we will face an uphill struggle to obtain an appropriate amount of tax.

Q: ‘Global partnership’ is given a lot of emphasis by the High Level Panel. To what extent do you think it is a progressive measure and do you think global partnerships can be effective on illicit financial flows?

Cobham: The global partnership goal of the MDGs, MDG8, is widely seen as a failure – the only one with direct requirements for donor countries, and the only one with no effective accountability measures in place. The optimism about the HLP’s proposed goal 12 is that it does provide the space for verifiable contribution and accountability for all countries. And of course, illicit flows are a global problem, that no one country can deal with alone, so setting this issue in the context of global partnership is crucial. However, the current proposal is a long way short of the specific, verifiable target and indicators that will be needed to ensure serious progress.

Q: How do you see gender inequality, as highlighted by the High Level Panel, intersecting with issues around illicit financial flows?

Cobham: Arguably, the greatest contribution of the MDGs was to crystallize through MDG 3 the then growing but still fragile consensus that gender equality is a fundamental part of progress. The HLP proposal retains, and makes broader and more ambitious, the targets in this regard. Especially important also is the HLP recommendation that each marginalized group – not only in terms of gender but also by income, region, ethno-linguistic group, age and disability – must separately meet any target before that target can be considered to be met overall.

My main concern with the HLP recommendation is the decision to reject the findings of the global consultation in respect of a goal, or even a target, on economic inequality. While economic inequality can be more politically challenging to address than absolute poverty, there is very clear research that progress will be much weaker if economic inequality is not challenged; but also a growing consensus that the human effects of inequality are such that challenging it should be seen as important to development inherently, not only instrumentally.