Wednesday, May 20, 2009

Collateral damage: Latin America and the financial crisis

Letter from Montevideo
John Christensen, 20th May 2009

This week Uruguay hosts a timely and fascinating regional forum aimed at sharing views on how Latin American governments should adapt their fiscal policies in this time of crisis. Jointly supported by the Economic Commission for Latin America and the Caribbean (ECLAC) and the German Agency for Technical Cooperation (GTZ) the forum has brought together top economists and policy makers.

As recently as mid-year 2008 there were those who argued that the countries of the South had succeeded in 'de-coupling' themselves from the financial crisis in the USA and Europe. The traumatic events of Autumn 2008 put paid to such notions. Despite successes in strengthening their public finances, restructuring and lowering debt burdens, and regulating their banking systems in ways that put the USA and UK to shame, many countries in the region are seeing tax revenues plummet as commodity exports fall, remittances from the USA shrink, and inwards investment flows dry up. The spectre of rising unemployment haunts the region.

Whilst governments in the North have taken measures to stimulate growth, for example, by cutting taxes and pumping new money into the banking system, there is less room for manouevre in the South, partly because of the high public debt levels and also because of the existing high level of dependence on mineral royalties and indirect tax revenues. Public revenues, already relatively low compared to OECD countries, are likely to fall. After almost a decade of rising revenues, will governments react by cutting back on some of the more progressive programmes for long-term poverty alleviation, for example programmes to support secondary education for children from low income households? Or are there other possibilities for protecting public expenditure programmes without incurring unsustainable debt levels?

Tax systems in the Latin American region are too frequently regressive in their overall impact. In many countries pre-tax market income inequality is actually lower than post-tax disposable income inequality. Too many government transfer payments schemes benefit the upper middle classes: people with pensions, those in tertiary education, and the big energy users. This situation is compounded by very low collection rates for direct taxes on property, personal income and corporate profits. Unnecessary and harmful tax exemptions secured by politically powerful elites play a part in this under-collection, but most people seem to agree that tax evasion has been endemic throughout the region for decades and lies at the root of public financing problems in most countries.

In this respect, the current crisis offers room for political manouevre that would have been previously unthinkable. Progressive governments throughout the region should push for regional and multilateral tax information exchange based on the European Union's automatic exchange principle. They should also be pushing for enhanced corporate accounting transparency to combat transfer mispricing and other tax evasion techniques. TJN's accounting standard for country-by-country reporting is designed for this purpose. And, given that much of the region's tax evasion problems stem from tax havens in the Caribbean area (not to mention that Uruguay narrowly avoided inclusion on the OECD's blacklist published last month) now is the moment for regional leaders to push G-20 president Gordon Brown to take strong action to tidy up the British tax havens in the Caribbean and support their transition to non-tax haven economies.

Tackling endemic under-collection of direct taxes offers Latin American governments the opportunity they need to protect their public finances and sustain their anti-poverty programmes. The depth of the current crisis provides political space to take action against the entrenched interests that have blocked reform in the past. Latin American leaders should send a clear message to the G-20 leaders that they want rapid progress towards multilateral information exchange and tough action against havens that don't cooperate. This was the basis of my comments to the Forum yesterday afternoon, the message was well received.


Blogger Physiocrat said...

Another part of the world that could do with land value taxation.

3:20 pm  
Blogger Jennifer Pierno said...

Thank-you for this article. I have a sickening feeling that the poorest of the poor are going to suffer the most from the financial chaos of 2009. Please keep speaking up for them.

11:47 pm  

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