Monday, June 01, 2009

Conclusions from EU / Latin America Caribbean Forum in Montevideo

Last month we blogged on the recent expert forum in Montevideo, Uruguay on the challenges of fiscal policy in response to the deepening crisis in the LAC (Latin American and Caribbean) region.

We now have a copy of the concluding messages from this forum, and draw your attention to the following issues which, amongst others, our Director John Christensen raised at the forum:

We consider that the present crisis also provides opportunities to promote structural reforms. Governments should not discard the objectives of strengthening the State. This implies improving the tax structure in order to make it more robust in times of crisis, strengthen its progressive nature and collect the means needed to fulfil public tasks, minimising non-compliance with taxation obigations (tax avoidance and evasion)

These are crucial issues. Despite some improvement in very recent years, the public finances of most LAC countries have been devastated by high external debt, colossal tax evasion, and a general shift towards indirect taxation. This undermining of public financing has been compounded by externally imposed strangleholds on public spending, typically led by the Washington-based IMF (International Monetary Fund), which has had a devastating impact on health and education programmes in the region. The IMF is under pressure to reform its fiscal policy framework, but as this op-ed by Joia Mukherjee and Brooke Baker in today's Boston Globe suggests, there is a long way to go:

While the IMF claims it is voluntarily loosening its fiscal stranglehold, a recent review of nine post-crisis loan agreements shows that the IMF continues to restrict government spending, mandating wage, employment, and general public-sector cuts.

The irony of this perverse approach to human development has never been clearer. Today, market-based, financial-sector strategies have failed so miserably that nothing but massive public spending can rescue even the wealthiest economies. The United States itself has used trillions of dollars of public monies to stimulate the economy and secure private institutions. Yet expansionary public spending will not be possible in poor countries if the IMF is given free reign to restrict public expenditures.

Getting back to the conclusions of the Montevideo forum, we also note the following:

International processes and institutions have to be strengthened in order to establish rules and improve the regulation of the global financial system.

Again this is crucial. The G20 leaders will be meeting again in the early Autumn, this time in New York with the US acting as hosts, and this must be seen as an opportunity to flesh out the detail of what was discussed in principle in London in April, including and especially what measures are to be taken to improve on financial market transparency and reduce the opportunities for using tax havens for tax and regulatory arbitrage. The G20 is dominated by OECD country interests, but LAC countries can and must use the moment in New York to push G20 leaders to take steps against tax havens, for example by pushing for multilateral and automatic tax information exchange processes, supporting international accounting standards for country-by-country reporting, and requiring full transparency of beneficial ownership of all legal entities.

One of the unpleasant paradoxes of the current crisis is that despite having stronger banking regulation than the US and UK, whence the banking turmoil originates, LAC countries are likely to suffer disproportionately from the global economic slowdown. This is partly due to volatility of earnings from commodity exports, falling levels of remittances from employment in North America, and also falling demand for goods and services. The public finance impact of the recession is likely to be dramatic. Every effort must be made to mitigate the harm this will cause, and tackling the huge incidence of tax evasion in the region must be number one priority.


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