Wednesday, April 21, 2010

Former Malaysian PM identifies role of tax havens in financial crisis

Former Malaysian Prime Minister, Dr Mahathir Mohamad, who, for all his faults, is widely credited with directing Malaysia's modernisation programme from 1981 to 2003, has published an analysis of the financial crisis in which he examines how laissez-faire economics degraded financial market prudence and created markets for financial products that served no useful purpose. And he also notes how lax regulation in offshore tax havens contributed to causing the crisis:

46. The investments by the hedge funds and their leveraging (borrowings) are mysterious. It seems that they need not report to the Government on their activities. Besides, by operating from offshore tax-free havens, they needed to submit reports to no one. Investors in hedge funds were thus able to make huge profits.

Famously, during the late-1990s South East Asian financial crisis Dr Mahathir chose to ignore the IMF's policy prescriptions for Thailand, Indonesia and other neighbouring countries and, heretically, imposed capital controls to protect the Ringitt. Subsequent events proved that the disasters that the mainstream economists predicted did not materialise. As Paul Krugman put it:

"When the controls were put on, many Western analysts predicted disaster: a collapse of the economy, hyperinflation, rampant black markets. It didn't happen."

Mahatir is correct in pin-pointing how tax havens act as the Achilles' heel of globalised financial markets. And his concluding remarks provide very little comfort for western politicians and the cheerleaders of laissez-faire economics:

64. Attempts by the Governments to bail out the financial institutions and companies have not really succeeded. If the economy was doing well then the banks and companies bailed out by the Government would be able to make some recovery. But it would take time because they would have to do prudent business and such business would be slow in giving a return. They can only recover quickly if they were allowed the abuses they had indulged in before. But obviously they shouldn't although there are some who believe they should be allowed to. As for the companies, the general contraction of the purchasing power of the people must reduce sales of their products and therefore their profits. Even if they recover they would not be as financially healthy as before.

65. The recent talk of recovery is therefore not based on reality. Actually it is to justify not doing anything with systems which in the past had been so lucrative. It would take another worldwide crisis before the west would consider dismantling their banking, monetary and financial systems.

66. The leaders of the West are still in a state of denial. What is more likely is that they are aware of how the financial market operations have brought about the crisis but are unwilling to do away with them because they have made so many of their investors rich and have contributed much to per capita and GDP growth in their countries.

67. And so we may see the crisis continue, albeit de-emphasised so as to sustain the financial market.

68. The real solution would be a return to real business i.e. the production of goods and services. But then the developed countries of the West would have to accept being somewhat poorer than the good old days.

The full article is here. To the IMF's credit - albeit decades too late for many countries - it has now, timidly, endorsed capital controls. Once the obvious becomes blindingly obvious, even the blind start to see. Occasionally.


Blogger Physiocrat said...

Yes but what is preventing his country from suffering a property-based boom-bust?

3:08 pm  
Anonymous Eric said...

Okay I'm a bit late to this post but I have to let off a rant about Dr. M's hypocrisy here ... "Westerners" did this, "Westerners" did that ... remind me again who was in charge of Malaysia when the parliament passed the Labuan Offshore Business Activity Tax Act of 1990? And kept rather quiet to their treaty partners who had signed with them agreements for the "avoidance of double taxation AND PREVENTION OF FISCAL EVASION" that there was now a new piece of Malaysian territory to which the Income Tax Act 1967 did not apply? Which meant that, for example, Newbridge Capital did not pay a single cent of capital gains tax to any government on its sale of Korea First Bank, after purchasing it at a firesale price ... precisely during the crisis of 1997 for which Mahathir takes so much credit at averting in his own country?

1:02 am  

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