Tuesday, March 24, 2009

UN commission of experts on financial crisis - recommendations

The high-level UN commission of experts on reforming the international monetary and financial system, chaired by the Nobel prize-winning economist Joseph Stiglitz, has now issued its preliminary recommendations. We are highly encouraged by what we see, and we note that recommendations we submitted to the Commission are substantially reflected in this draft.

Take this, for example, from point 40.

"The collapse in confidence in the financial system is widely recognized as central in the economic crisis; restoration of confidence will be central in the recovery. But it will be hard to restore confidence without changing the incentives and constraints facing the financial sector. It is imperative that the regulatory reforms be real and substantive, and go beyond the financial sector to address underlying problems in corporate governance and competition policy, and in
tax structures, giving preferential treatment to capital gains, that may provide incentives for excessive leverage."

This is just as we have been arguing (the italics are the UN's, not ours). Well said - and the rest of point 40 is worth reading too. Now look at the next section of the report:

"Well regulated economies have to be protected from competition from economies with inadequate or inappropriate regulatory systems. The problems of regulatory arbitrage and tax evasion are closely linked. Tax havens and financial centers in both developed and developing countries that fail to meet basic standards of transparency, information exchange and regulation should be given strong incentives to reform their practices, e.g. by restricting transactions between financial institutions in those jurisdictions and those in more highly regulated countries. Institutional arrangements for improving harmonisation and transparency should be strengthened, including the United Nations Committee of Experts on International Cooperation in Tax Matters as proposed in Paragraph 16 of the Doha Declaration. Also other international arrangements and conventions such as United Nations Convention against Corruption should also be strengthened."

We like it. Point 56 is also worth noting (this time, the italics are ours):

"Financial institutions have been allowed to grow to be too big to fail, imposing enormous risk on the global economy. And while there has been innovation, too much of the innovation was aimed at regulatory, tax, and accounting arbitrage, and too little at meeting the real needs of ordinary citizens. Too little was done to help developing countries and ordinary homeowners manage the risks which they face, with consequences that have been repeatedly apparent. Financial regulation must be designed so as to enhance meaningful innovation that improves risk management and capital allocation."

Point 67, looking at better global regulatory governance, notes that

"Movement towards this goal might be enhanced by taking steps to lay the groundwork for a Global Financial Regulatory Authority and a Global Competition Authority.

Interesting. A Global Tax Authority is something that has been suggested in the past, although nobody seems to be pushing this hard at the moment. And, referring to what the Financial Stability Forum and the Basel Committee have agreed (a College of Supervisors to coordinate supervision of major international banks,) the Stiglitz report makes clear that this is only seen as a temporary step:

"A potential, but partial, remedy to this difficulty is the proposal for a College of Supervisors to oversee systemically relevant global financial institutions. This could provide a basis for a more comprehensive Global Authority."

Then points 78 and 79 provide for an intriguing possiblity. First, point 78 provides the context:

The international community needs to explore a variety of mechanisms of innovative finance, including regular emissions of a new global reserves (SDRs), revenues generated from the auction of global natural resources (such as ocean fishing rights and pollution emission permits), and international taxes (such as a carbon tax, which would simultaneously help address problems of global warming, or a financial services tax, which would simultaneously help stabilize international financial markets."

And then point 79, adds this crucial set of ideas:

"The effective implementation of national systems of taxation form a crucial part of domestic development finance. Measures must be taken to preserve national autonomy in the selection of the sources and methods of government financing while ensuring that national differences do not create incentives to evade responsibility of contributors to the support of government policies. An efficient method of achieving this result would be the acceptance by all countries of an amendment of Article 26 of the United Nations Model Double Taxation Convention between Developed and Developing Countries to make the exchange of information automatic."

Here the UN is suggesting automatic exchange of information, just as we've been discussing. Fascinating. Times are changing.

There are some things we don't see in there. Proposals for a proper multilateral framework for tax cooperation, and reference to the proposed UN Code of Conduct on taxation are absent; these are just some of the ideas we'd have liked to see proposed here.

The report will be presented and discussed in an interactive thematic session on 25-27 March 2009 at the UN in New York. It would be interesting to conduct a gap analysis between this set of recommendations, and the final outcomes, to find out what has been cut out, and why. And, of course, who was responsible for cutting them out. Very little, we hope. But past experience has made us rather cynical.

(For those interested in looking at the issue of tax havens and the financial crisis in depth, look at this recent article by Nicola Liebert of TJN-Germany and Axel Troost of the German Bundestag; see also this special TJN web section dedicated to these issues. There is also now a German translation of our paper Ending the Offshore Secrecy system here.)


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