Street vendors in Africa reflect the income inequality that pervades the continent, much of it due to corruption. Credit: Jeffrey Moyo/IPS

By Jeffrey Moyo
HARARE, Feb 21 2015 (IPS)

Reports this year of illicit moneys from African countries stashed in a Swiss bank – indicating that corruption lies behind much of the income inequality that affects the continent – have grabbed international news headlines.

Secret bank accounts in the HSBC’s Swiss private banking arm unearthed this year by the International Consortium of Investigative Journalists (ICIJ) were said to hold over 100 billion dollars, some of which came from Africa, including some of the poorest nations on the continent.

When these funds leave the region, they deny the very nations that need them most.

For example, at least 57 clients of the Swiss HSBC bank associated with Uganda were reported to be worth at least 159 million dollars. The World Bank has estimated that Uganda loses more than 174.5 million dollars in corruption annually.“Income inequality begins with our political leaders and corrupt wealthy business people who, more often than not, illicitly own the resources of the [African] continent” – Claris Madhuku, Platform for Youth Development, Zimbabwe

It is not a crime for Africans to have a Swiss bank account. But questions are now being raised by local tax offices as to whether the proper taxes were paid on the stashed amounts.

In South Africa, the head of the Revenue Service, Vlok Symington, said his office was analysing the information. “Early indications are that some of these account holders may have utilised their HSBC accounts to evade local and/or international tax obligations,” Symington was reported as saying by the South Africa Sunday Times.

“Income inequality begins with our political leaders and corrupt wealthy business people who, more often than not, illicitly own the resources of the continent,” Claris Madhuku, director of the Platform for Youth Development, a democracy lobby group in Zimbabwe, told IPS.

Diamonds, for example, which have made many traders wealthy, are often mined by the poorest of the poor, treated almost as slaves in war-torn African countries, despite the Kimberley Process Certification Scheme, which was established in 2003 to prevent the flow of these diamonds.

“It’s a case of greed and corruption,” thundered Zimbabwean independent political analyst, Ernst Mudzengi. “Africa has parasitic politicians who are primarily concerned with self-centred political power and economic gain as ordinary Africans remain at the periphery in poverty,” Mudzengi told IPS.

Development experts here attribute income inequalities to the continent’s lax anti-corruptions laws.

“African countries do not have sound anti-corruption laws and politicians and the rich amass too much power exceeding even the powers of the police here, leaving them with the liberty to accumulate wealth overnight by whatever means without being questioned,” Nadege Kabuga, an independent development expert in Kigali, Rwanda’s capital, told IPS

“It’s shocking how huge banks such as HSBC have created a system for enormously profiteering at the expense of impoverished ordinary people, worse by assisting numerous millionaires from Africa in particular to evade tax payment, disadvantaging the already poor,” Zenzele Manzini, an independent economist based in Mbabane, the capital of Swaziland, told IPS .

“Very often, government directors, ministers and their secretaries are the ones globetrotting on government businesses, awarding themselves huge allowances and the lower government workers remain stuck at the periphery with no extra benefits besides the meagre salaries they get monthly,” a top Zimbabwean government official in the Ministry of Labour, told IPS on the condition of anonymity, afraid of victimisation.

Writing for Financial Transparency Coalition, a global alliance of civil society organisations and governments working to address inequalities in the financial system, Koen Roovers, the coalition’s European Union (EU) Lead Advocate, asked the deeper question: “How do we prevent this in the first place?”

To catch fraud sooner rather than later, capacity in developing countries must be increased, Roovers said. “The scale of the challenge is significant: the UK-based charity Christian Aid has estimated that sub-Saharan Africa would need around 650,000 more tax officials to reach the world average.”

Rich states have promised help to poor countries to build the capacity they need, but these commitments have yet to be honoured.

Researchers at the U.S.-based Global Financial Integrity, a non-profit organisation working to curtail illicit financial flows, said developing nations have lost almost one trillion dollars through illicit channels.

Without clearly defined measures to curb income inequalities, economists say the African continent may be headed for the worst levels of poverty set to hit even harder at the already poor.

“Africa may keep facing perpetual poverty amid rising income inequalities because governments here have no institutions and expertise to identify and halt money laundering by corrupt wealthy individuals and politicians evading tax,” Zimbabwean independent economist, Kingston Nyakurukwa, told IPS.

According to Roovers, “criminals and their enablers are creative, so the only way to prevent future scandals is to shed light on what criminals and tax dodgers are trying to hide. This is why online registers of assets for all legal persons and arrangements are necessary and should be publicly available.

“If we turn a blind eye to these loopholes,” he added, “economic development for all will continue to be undermined by illicit actors looking to exploit them.”

Edited by Lisa Vives/Phil Harris    

July 2014 floods in Russia but authorities turning blind eye to climate change. Credit: takemake.ru

By Mikhail Matveev
MOSCOW, Aug 30 2014 (IPS)

The recent call from Russian Prime Minister Dmitry Medvedev for “tightening belts” has convinced even optimists that something is deeply wrong with the Russian economy.

No doubt the planned tax increases (introduction of a sales tax and increases in VAT and income tax) will inflict severe damage on most businesses and their employees, if last year’s example of what happened when taxes were raised for individual entrepreneurs is anything to go by – 650,000 of them were forced to close their businesses.

Nevertheless, it looks like some lucky people are not only going to escape the “belt-tightening” but are also about to receive some dream tax vacations and the lucky few are not farmers, nor are they in technological, educational, scientific or professional fields – it is the Russian and international oil giants involved in oil and gas projects in the Arctic and in Eastern Siberia that stand to gain.

“In October [2013], Vladimir Putin signed a bill under which oil extraction at sea deposits will be exempt from severance tax. Moreover, VAT will not need to be paid for the sales, transportation and utilisation of the oil extracted from the sea shelf,” noted Russian newspaper Rossiiskie Nedra.“It looks like some lucky people are not only going to escape the ‘belt-tightening’ but are also about to receive some dream tax vacations and the lucky few are not farmers, nor are they in technological, educational, scientific or professional fields – it is the Russian and international oil giants involved in oil and gas projects in the Arctic and in Eastern Siberia that stand to gain”

Some continental oil projects were alsoblessedby the “Tsar’s generosity”: “For four Russian deposits with hard-to-recover oils [shale oil, etc.] – Bazhenovskaya [in Western Siberia] and Abalakskaya in Eastern Siberia, Khadumskaya in the Caucasus, and Domanikovaya in the Ural region – severance taxes do not need to be paid. Other deposits had their severance tax rates reduced by 20-80%.”

In fact, the line of thinking adopted by Russian officials responsible for tax policy is very simple. Faced with the predicament of an economy dependent on oil and gas (half of the state budget comes from oil and gas revenue, while two-thirds of exports come from the fossil fuel industry), they decided to act as usual – by stimulating more drilling and charging the rest of the economy with the additional tax burden.

There have been many warnings from well-known economists about the “resource curse” [the paradox that countries and regions with an abundance of natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources] – and its potential consequences for the countries affected: from having weak industries and agriculture to being prone to dictatorships and corruption.

For a long time, however, economists have been keen on separating the economic and social impacts of fossil fuel dependency from the environmental and climate-related problems. But now, these problems are closely interconnected, and Russia might be the first to feel the strength of their combination in the near future.

Medvedev may not have read much about the “resource curse” but he should at least be familiar with the official position of the UN Framework Convention on Climate Change (UNFCC), whose Executive Secretary Christiana Figueres has said that three-quarters of known fossil fuel reserves need to stay in the ground in order to avoid the worst possible climate scenario.

One should at least expect this amount of knowledge from Russia as a member of the UN Security Council and it will be interesting to note whether the Russian delegation attending the UN Climate Summit in New York on September 23 will be ready to explain why, instead of limiting fossil fuel extraction, the whole country’s economic and tax policy is now aimed at encouraging as much drilling as possible.

However, it is not just the United Nations that has been warning against the burning of fossil fuels due to the related high climate risks. In 2005, Russia’s own meteorology service Roshydromet issued its prognosis of climate change and the consequences for Russia, stating that the rate of climate change in Russia is two times faster than the world’s average.

Roshydromet predicted a rapid increase in both the frequency and strength of extreme climate events – including floods, hurricanes, droughts, and wildfires. The number of such events has almost doubled during the last 15 years, and represent not only an economic threat but also a real threat to humans’ lives and their well-being,

Consider this summary of climate disasters in Russia during an ordinary July week (not including any of the large natural disasters such as the floods in Altai, Khabarovsk, and Krymsk, or the forest fires around Moscow in 2010):

“Following the weather incidents in the Sverdlovsk and Chelyabinsk District where snow fell last weekend, a natural anomaly occurred in Novosibirsk, resulting in human casualties … Two three-year-old twin sisters died after a tree fell on them during a strong wind storm in the town of Berdsk, Novosibirsk District.”

“The flood in Yakutia lasted a week and resulted in the submersion of Ozhulun village in Churapchinsky district last Saturday. Due to the rise of the Tatta River, 57 house went under.”

“Flooding in Tuapse [on the coast of the Black Sea] occurred on July 8, 2014 … [and] has left 236 citizens homeless.”

Cars swept away in July 2014 floods in Russia. Credit: takeme.ru

Is it not worrisome that so many climate disasters have to occur before Russian officials start to realise that climatologists are not lying? Or perhaps they are simply not inclined to take the climatologists’ warnings seriously.

Another significant problem could arise for Russia if oil consumers start taking U.N. climate warnings seriously – and there is evidence that this is happening.

The European Union (still the main consumer of Russian oil and gas) has announced an ambitious “20/20/20 programme” – increasing shares from renewables to 20 percent, improving energy efficiency by 20 percent, and decreasing carbon emissions by 20 percent. The United States has decided to decrease carbon emissions from power plants by 30 percent. These are only first steps – but even these steps can help decrease fossil fuel consumption.

Fossil fuel use has only very slowly been increasing in the United States and decreasing in Europe in the last five years. On the other hand, demand for oil has continued to rise in China and Southeast Asia, and it is perhaps this – rather than the recent “sanctions” against Russia over Ukraine – that inspired President Vladimir Putin’s recent “turn to the East”.

But there are serious doubts that Asia’s greed for oil will continue into the future. China recently admitted that it will soon be taking measures to limit carbon emissions – for the first time in its history. China has already turned to green energy andled the rest of the worldin renewable energy investment in 2013.

Will other Asian countries follow suit? Perhaps – because they certainly have a very strong incentive. According to Erin McCarthy writing in the Wall Street Journal, South and Southeast Asia’s losses due to global warming may be huge, and its GDP may be reduced by 6 percent by 2060, despite the measures taken to curb its emissions.

What does this mean for Russia?

Well, if the oil-consuming countries meet their carbon emission targets, we can expect a 10-20 percent decrease in oil demand in the next ten years, maybe more. Any decrease in demand usually induces a decrease in price – but not always proportionally. Sometimes, especially if the market is overheated, even a small decrease in demand can trigger a drastic falls in price. Economists call such a situation a “bursting bubble”.

Today, the situation in the oil (and, in general, fossil fuel) market is often called a “carbon bubble”. Because of high oil prices, investors are motivated to make investments in oil drilling in the hopes of earning a stable and long-term income.

But once the world starts taking climate issues seriously and realises that most of the oil needs to be left in the ground, oil assets will fall in value. Investors will try to withdraw their money from the fossil fuel sector, and, facing a crisis, oil companies will be forced to decrease both production and prices.

If the “carbon bubble” bursts, Russia will be left with sustainable businesses (that are being choked by the nation’s own tax politics) and with a perfect network of shelf platforms, oil rigs, and pipelines (which will be completely unprofitable and useless). Thus, by making fossil fuels the core of its economy, Russia is taking twice the number of risks.

First, it risks ruining the climate, and second, it risks ruining its own economy. It looks like Russia will lose at any rate: if the leading energy consumers are unable to decrease their oil consumption, the climate will be ruined everywhere, including Russia. If they manage to decrease their dependence on fossil fuel, the Russian economy will be ruined.

This certainly is not looking pleasant, especially if we add in the high probability of a major disaster like the Gulf of Mexico Oil spill happening in the Arctic, as well as countless minor leaks possibly occurring along the Russian pipelines.

But maybe Russia just has no other alternative to an economy dependent on fossil fuels?

In that case, perhaps it is worth mentioning a recent article by Russian financier Andrei Movchan in the Russian Forbes magazine. Movchan convincingly shows that the Achilles’ heel of the modern Russian economy is its extremely underdeveloped small and medium-sized businesses. And it looks like the current tax plans would literally exterminate them.

If Russia were able to reverse this tax policy and make small businesses play as big of a role in the economy as they do in the United States or Europe, there could be economic growth comparable to the growth expected from oil and gas – without all the frightful side effects of an economy driven by fossil fuels.

Sounds like a dream, but the first step to making it a reality can be simple: get rid of big oil lobbying in the government and try to reform the taxation system to suit the interests of Russian citizens instead of the interests of the big oil corporations.

(Edited by Phil Harris)

* Mikhail Matveev is 350.org Communications Coordinator for Eastern Europe, Caucasus, Central Asia and Russia

One of the aims of the tax reform is to finance an overhaul of Chile’s education system, the chief demand of mass street demonstrations. Credit: Claudio Esparza/IPS

By Marianela Jarroud
SANTIAGO, Apr 24 2014 (IPS)

Chilean President Michelle Bachelet’s proposed tax reform is seen as the cornerstone of her ambitious social programme and a sign of a new shift in fiscal policy towards redistribution of income.

But it has critics on the right, who say it goes too far, and on the left, who say it leaves legal loopholes and regressive taxes intact.

The bill, expected to pass easily through Congress, where the governing centre-left coalition has a majority, would boost tax revenue by 8.2 billion dollars a year.

The new revenue will go towards financing an overhaul of the education system, to guarantee universal tuition-free public education at all levels, improvements to healthcare and other social coverage, and paying off the deficit inherited from the previous administration.

That total is equivalent to three percentage points of GDP in this country of 17 million, where the economy grew 4.1 percent in 2013, down from an average of 5.8 percent over the previous three years. Taxes account for 80 percent of state revenue in Chile.

Socialist President Bachelet, who was sworn in on Mar. 11 for her second term – she previously governed from 2006 to 2010 – says the reform will enable Chile to become a “cohesive, democratic and just society,” because it will help the country “to move forward in equality, improving income distribution” under the premise that those who earn more, pay more.

For economist Gonzalo Durán of the Fundación Sol, a labour think tank, “this is the first time in 30 years that the tax system’s philosophy is undergoing a change in Chile; in the past, the implicit view was that taxes were stolen by the state from those who had the most.”

Durán told IPS that the reform “explicitly proposes that the role of taxes is to redistribute income”.

Under the reform, 2.5 percentage points of GDP will come from modifications of the tax structure, especially as a result of the elimination of the Fondo de Utilidades Tributarias (FUT), a corporate tax break created in 1984 by the dictatorship of late General Augusto Pinochet (1973-1990).

The remaining half a percentage point will come from measures against tax evasion, estimated at 46 percent in income tax alone. The reform will also eliminate different legal loopholes used to reduce payment of taxes.

The FUT is a widely criticised loophole that enables companies to defer income tax payments on profits that are reinvested, with the stated aim of promoting corporate savings and reinvestment.

But “the mechanism is a major source of tax evasion,” Durán said.

In the last 30 years, nearly 270 billion dollars in potential taxes were lost to the state coffers as a result of the FUT, he said.

The FUT will be eliminated in 2018, when businesspersons and shareholders start to pay taxes on all earnings, whether or not they are withdrawn.

“The tax base will be changed from profits withdrawn to profits earned,” Durán said.

The bill is an essential part of Bachelet’s government programme, which she unveiled on Mar. 31. It includes more than 30 changes to the current tax system. Among the most significant is the gradual increase in the corporate tax rate from 20 to 25 percent.

But it also has significant gaps, the economist said.

For example, it won’t do away with another mechanism, the “integrated tax”, which basically means the tax paid by companies is discounted from what the owners would have to pay when they earn profits.

Nor will the bill modify the taxes paid by mining companies, which will continue to pay the current royalties, based on earnings rather than sales.

Furthermore, the bill does not introduce changes in the value added tax (VAT) – the biggest source of tax revenue in Chile, accounting for 48.6 percent of fiscal revenue, followed by income tax, which represents 39.5 percent.

The tax on consumption taxes everyone at the same rate and gives commercial activity the same treatment as basic services and rights like education and healthcare.

The reform has its critics – mainly from the right.

The loudest opposition has come from the extreme-right Independent Democratic Union opposition party, whose offensive has included a fear-mongering pamphlet with warnings about the bill’s supposed negative effects on the middle class.

The Instituto Libertad (Freedom Institute), with ties to the right-wing National Renewal Party, launched a campaign against the tax reform, criticising, among other things, the increase in VAT on alcohol, soft drinks, and new homes.

María Teresa Arellano, a 37-year-old secretary, believes the reform will hurt her. “My only pleasure is drinking a cup of wine on the weekend, and now I’ll have to pay more for that,” she told IPS.

But Ana María Pineida, 57, said the reform is focused on a higher good: “I know my grandson will have free education thanks to the changes.”

For years, students have been holding street protests demanding tuition-free higher education, which is available in most of Latin America but not in Chile.

Independent lawmaker Giorgio Jackson, one of the members of Congress representing students, argued that people need to understand the essence of the reform, which in his view “is designed to correct longstanding problems.”

“The aim is to overcome the barrier of a state with little capacity to raise the funds needed to offer guaranteed, high-quality social coverage,” he told IPS.

Durán said the changes will benefit Chileans by providing tuition-free quality education, since two of the three percentage points of GDP that should be brought in will go exclusively towards that goal.

After that, progress can be made towards better distribution of income, he said.

Two out of three households in Chile live on less than 1,200 dollars a month, and half of all workers earn less than 500 dollars a month, while the 4,500 richest families in the country have average monthly incomes of over 40,000 dollars.

A study co-authored by Michel Jorratt, an adviser to Bachelet on tax issues, says the wealthiest one percent of the population has 15 to 33 percent of all income, but pays tax rates of only nine to 17 percent.

The benefits of tuition-free education will be seen in the long-term, but “taking 8.2 billion dollars from the richest people in the country, for the state, is an important contribution towards redistribution,” Durán said.

Political scientist Francisca Quiroga said the fears being spread by the right are unfounded. “This is not a radical overhaul of the tax system, it’s not revolutionary. It will be applied gradually,” she told IPS.

Latin America has regressive tax systems, “and several international institutions have stated that one of the challenges facing the region is to introduce tax reforms” to make the systems more fair, she said.

“This is a reform that Chile needs, and that continues to maintain beneficial conditions for business, such as the integrated system,” she said.

To head off criticism, Bachelet has sent her ministers around the country to explain the reform and outline its social benefits.

The bill, introduced on Apr. 1, is expected to be approved in mid-2014.