The Good Governance 8 and a debate on tax havens

April 7, 2009

     By Duncan Green     

One of the G20 Voice bloggers at the London Summit last week was a rather distinguished-looking, silver haired Chilean who turned out to be Daniel Kaufman. He used to work at the World Bank, where he was one of the 46 employees who blew the whistle on Paul Wolfowitz in a letter to Wolfowitz and the bank’s board that argued that the then World Bank President’s decision to arrange a promotion and pay raise for his companion undermined the credibility of the institution:

‘We are deeply concerned by the impact of the current leadership crisis on the bank’s credibility and authority…. Our own governance standards must be upheld and enforced impartially and without exception,’ the letter said, ‘even when they touch the highest levels of this institution.’

Kaufman outlasted Wolfowitz, but has now moved on to the of Brookings Institution and his blog, the Kaufman Governance Post. Here’s an example of his work: Daniel picks a ‘Good Governance Group of 8’, (ggg-8) made up of Botswana, Chile, Mauritius, Uruguay, New Zealand, Norway, Singapore and Switzerland, and contrasts them with both the G20 and the G8. He finds not only that the ggg-8 beats the G8 and G20 on a government effectiveness, rule of law and corruption, but that the gap is widening.

Kaufman got into a fascinating debate with fellow G20 Voice blogger Richard Murphy, a chartered accountant turned tax campaigner who runs the tax research blog (these two were not representative of the highly diverse G20 Voice crowd, don’t worry!). Murphy argues passionately that the secrecy surrounding tax havens was one of the contributory factors in the crisis, allowing financial bubbles to expand beyond the jurisdiction of the authorities. Kaufman is sceptical, worrying that tax havens have become a convenient scapegoat, when the real problem is regulating the financial sector in New York and London. The Economist and Martin Wolf in the Financial Times have made similar arguments. What I took away from their exchange though was that, whatever the argument over causality, if we are to regulate finance at home, we have to sort out tax havens at the same time, or else financial institutions will merely flee offshore. So toughening up the G20 decisions on ‘uncooperative jurisdictions’ has to be part of the solution, but is no substitute for re-regulating finance at home.

I have all sorts of problems with Daniel’s focus on governance – the indicators used, such as the World Bank’s Country Policy and Institutional Assessment (CPIA) present themselves as objective, but often have an inbuilt bias towards deregulation – for example, the CPIA gives countries higher marks for having low trade tariffs, ignoring the role of temporary tariff protection in the development of countries such as South Korea and Taiwan. The governance debate too often ignores issues of power and politics (my favourite definition of governance is ‘government with the politics taken out’), but there’s no questioning Kaufman’s sincerity or courage.