Nick Shaxson ■ Finance Curse in The Atlantic: how to mount an offshore coup
We recently hosted Brooke Harrington, an Associate Professor at the Copenhagen Business School, on our Taxcast, talking about her remarkable research on tax havens. She wrote an article in The Atlantic last October, entitled Inside the Secretive World of Tax-Avoidance Experts – which we’d urge you to read if you haven’t already – and now she’s followed it up with another equally powerful article, also in The Atlantic, entitled Why Tax Havens are Political and Economic Disasters. This article draws directly and explicitly from TJN’s work on The Finance Curse, spearheaded by TJN’s John Christensen and Nicholas Shaxson. In short, if your country is overdependent on financial services, it will suffer many of the same problems that are faced by countries overdependent on exporting minerals like oil, and for mostly similar reasons.
The Atlantic article is a useful summary of the phenomenon, not just pointing to our work but also exploring what may be one of the more surprising aspects of the Finance Curse: its effects on the smaller finance-dependence countries, otherwise known as tax havens. People have long pointed to high-income tax havens as evidence of the benefits of large financial sectors, but as we have long pointed out, the large share of the measured benefits tend to accrue to white, male expatriate, skilled or transient workers: locals tend to get only a bit of trickle-down from these folk, plus a bunch of harms. Harrington notes of Luxembourg, which has among the world’s highest measured per-capita income:
Podcast: African Arguments. TJN’s Nicholas Shaxson discusses the Finance Curse and Panama Papers
Luxembourg’s role as a leading tax haven has benefitted foreigners at the expense of locals, across the board. Over 60 percent of the country’s workforce is comprised of foreigners, who reap virtually all the benefits of the wealth generated by the Duchy. The society, as a result, is fracturing along expat-versus-local lines, both in economic and political terms.
As Zucman documents, inequality in the Grand Duchy has skyrocketed, with poverty doubling since 1980, and real wages for ordinary Luxembourgers stagnating for the past 20 years. Meanwhile, salaries for expat wealth managers have exploded, tripling housing prices in Luxembourg City. However, even this new wealth has not benefitted the local economy: Due to Luxembourg’s tax policies, public institutions such as the educational system are in “accelerated decline,” mainly to the detriment of locals.
And of course this is much more threatening than just this. Luxembourg, a founder member of the European Union, has enormous power to shape (or veto) European policies. As Harrington describes it, Luxembourg “has made itself the political arm of international finance, effectively giving those multinationals voting and veto privileges over European public policy.”
And it’s a similar story in the other example she gives, Panama:
Panama remains one of the most economically unequal states in the world: a so-called “Fourth World country,” signifying an extreme degree of material deprivation. More than one-third of its population lives in poverty . . . the benefits of Panama’s economy, including the offshore finance industry, have been tightly constrained to elites. This is particularly true of those tied to “little Manhattan”—the district of the capital city where financial firms are based. But across the board, in all areas of the economy, Panama’s growth primarily benefits foreigners.
And there’s plenty more evidence in the article. She also explores the ‘captured states’ phenomenon that we’ve long spoken about, with a wonderful quote concerning the international fraudster Allen Stanford:
“As the country’s former prime minister said of Stanford, “This man has a lien on our whole country.”
Which is reminiscent of what Jürgen Mossack, founder of the disgraced Panamanian Law Firm Mossack Fonseca, said about the tiny island of Niue, which was similarly captured: he told Agence France-Presse that it chose tiny Niue partly because it would face no competitors.
“If we had a jurisdiction that was small, and we had it from the beginning, we could offer people a stable environment, a stable price.”
Note those all-important words ‘we had it’. This was nothing less than a silent and successful coup d’état, mounted by the forces of offshore finance. The ‘stability’ he mentions is an insidious part of the Finance Curse: what it means is that the place is reassuringly stable for the offshore players, because the offshore sector has been ring-fenced against such pesky things as local democracy. And offshore, of course, is democracy’s nemesis, as TJN, Harrington, and many others have observed.
The Finance Curse is, of course, such a profound, multi-faced beast that one (excellent) article in The Atlantic can’t really capture anything more than a grainy headshot. Our Finance Curse page has more: outlining a much wider, richer range of reasons why the apparent benefits from hosting a large financial centre are smaller than one might suppose – and why the harms are greater than one might suppose.