The Tax Haven at the Heart of the IMF

The financial police turn to crime: the tax haven at the heart of the IMF.

By Dr. Tristan Learoyd

Last week the Financial Times reported that “Only the IMF can solve the Eurozone Crisis” (1).

The IMF’s stated mission

According to its website, the mission of the International Monetary Fund (IMF) as part of the World Bank group is “to fight poverty with passion and professionalism for lasting results”. Upon its creation, it was envisaged that the fund would serve to oversee the global economic system. The IMF would be the financial police, if you like, keeping countries in good economic health for the benefit of its citizens.

The conditions of the IMF in the Euro debt crisis

Throughout the past forty years, the IMF has become synonymous with providing loans at a steep cost to sovereign nations, the cost being the fire-sale of essential public utilities, the axing of public services and fiscal constraint. Such conditions are present in recent IMF led Euro bailouts.

Greece

The IMF offered a three-year €30 billion bailout to Greece “in support of the authorities’ economic adjustment and transformation program”. The Greek government’s IMF enforced program included reforms to tax administration, the labour market, the Greek health service, and the management of public finances.

The IMF tells us that the measures will make the Greek economy more competitive, transparent, and efficient. The fiscal measures include the much publicised reduction in public sector wages and pensions.

Transparency is raised time and time again by the IMF in its reporting of Greece (2).

Ireland

Ireland’s bailout included the usual IMF rhetoric of transferring the water service provision from local authorities to a water utility (read: privatisation), plus a Bill to increase the retirement age, measures to cut legal and medical costs, and significant cuts in social welfare payments.

“Independent assessment” of the electricity and gas sectors was recommended, which when complete, the authorities are instructed to set targets for their possible privatisation (3). Accordingly, electric is to be partially privatised in Eire in 2012 (4). The debate over the timing of the introduction of water charges in the Republic of Ireland roars on and looks likely for 2014.

Such privatisations provide an initial lump sum to indebted governments but severely hampers their abilities to hit strict inflation targets in the long term, targets set by the IMF (who else). For example, in the UK water privatisation led to price increases of up to 50% within four years with yearly increases since.

Disastrous economic conditions affecting consumption such as increasing and broadening the scope of VAT and means tested pensions are also common pieces of IMF ‘advice’ (3). It’s clear that the IMF, in its scrutiny-of-nations role, applies ideologically selective conditions to its loans. Other than privatisation, the main stipulation for a nation receiving an IMF loan is “fiscal control”, with a strong emphasis on inflation targeting via its obsession with fanciful laissez faire market equilibrium.

Inflation targeting is ideologically preferred by the IMF to employment and growth targeting. However, such inflation targeting becomes a lot more difficult for an indebted nation due to the conditions that the IMF applies to its bailouts.

The problem with IMF monetary policy

The problem with monetary policy is that you have to have a rough idea of how much money is in circulation in an economy for it to work. You also have to have a rough idea of market supply and demand to determine inflation. These crude neoclassical approximations become further obfuscated in a global financial environment that allows the unregulated and highly secretive stashing of capital in secrecy jurisdictions and tax havens, through which up to half of the world’s trade on paper passes (5).

Originally the IMF had developed a highly dubious anti-corruption agenda that focused on “the opacity of the offshore bank system, with the exception of the restrictive programmes that concern money laundering” (6). However, the reality is that as early as 2003 World Bank group members were championing tax havens:

“That does not mean that tax incentives have no effect on foreign direct investment. It is no coincidence that in 1985–94 foreign direct investment grew more than fivefold in tax havens in the Caribbean and South Pacific” (7).

As the financial crisis started to grip the World Bank Group reverted to back to the realm of reason: “The World Bank has announced a new programme of asset recovery, to be undertaken jointly with the UN. There should be no safe haven for those who steal from the poor” (8,9). However, as the crisis played out the World Bank reverted to arguments of tax competition, and of regulatory competition, in an attempt to legitimise the use of tax havens and secrecy jurisdictions: “to some degree, this tax competition can facilitate better resource allocation” (10).

The Tax haven at the heart of the IMF

Despite the IMF and its partner’s fluctuation over policy on tax havens, it is one thing for the IMF to champion the type of poverty creating investment centres used by drug dealers – and another entirely to stash public money in them (11).

In 2010, there were calls for a department of the IMF, the International Finance Corporation (IFC), not to invest in companies operating out of tax havens (12). The IFC supposedly promotes “economic development in countries where private enterprises are encouraged to operate efficiently and grow. It helps the private sector in emerging markets.” In short, the IFC helps to get foreign multinational companies into developing countries (13). The IFC, as the private sector arm of the World Bank Group, shares the Group’s mission and among those statements is, of course, the eradication of poverty (13).

For an organisation that constantly refers to “transparency” and “eradicating poverty” in its reports, the IMF may want to answer questions over IFC’s Asset Management Company (AMC). It appears that the IFC isn’t just dealing with companies that ‘operate’ out of tax havens – but it has also created one. The AMC’s dubious purpose of “allowing foreign investors to help themselves to any company they might have in their sights, bearing little or no risk, courtesy of IFC-provided public money” [Aldo Caliari, Center of Concern], is fortunately – for the IMF – somewhat camouflaged by its chosen business address (14).

The AMC is a wholly owned private subsidiary of the IFC, and is headquartered in Delaware, United States. Delaware is the number one destination for financial secrecy, tax avoidance and tax evasion on the globe according to the Tax Justice Network’s financial secrecy index (15).

The AMC is a growing part of the IFC portfolio, it manages a $3 billion IFC ‘capitalisation fund’, a $200 million Africa Fund, and huge funds from public institutions: including $2 billion from the Japanese Bank for International Cooperation, and investments form the Africa Fund of the UK’s Department for International Development (DFID) and the European Investment Bank (EIB) (16).

It is a cruel and covert hypocrisy that the IMF calls for greater government transparency from European Governments when evidence suggests the IMF is stashing public money in tax havens where it can’t be traced. Furthermore, the IFC, which aims to reduce poverty in Africa, is sponsoring the kind of jurisdiction which is responsible for poverty through capital flight and money laundering out of Africa, through its own subsidiary’s activities (17).

In light of this evidence, perhaps the IMF isn’t the solution to the Eurozone crisis the Financial Times article suggested it was; perhaps it was a principle cause of the crisis: by permitting – and now partaking in – financial secrecy.

Bibliography:

Bretton Woods Project

Tax Research UK

References:

(1) The A LIst Blog: Only the IMF can save the Eurozone Crisis

(2) The IMF Greece FAQs

(3) The Irish Times: Front Page

(4) BBC Northern Ireland: Electricity Owner to be partially sold off

(5) The Guardian: Truth about Tax Havens

(6) SGIR Stockholm Conference Sept 2010: Tax Havens

(7) World Bank Group Public Policy for Private Sector Journal

(8) NY Times: World Bank and UN to help poor nations recover stolen assets