Today’s post is from Brenda Killen, Head of OECD’s Global Partnerships and Policy Division and Donata Garrassi from the International Dialogue on Peacebuilding and Statebuilding
Is peacekeeping a cost-effective way of spending aid money, as UK Prime Minister David Cameron implied last week in remarks quoted by the BBC?
In 2010, some forty countries in situations of fragility received around $50 billion in Official Development Assistance (ODA), as aid is formally known. This represents 38% of total ODA according to OECD figures. Global peacekeeping has cost an estimated $8 billion a year over the past few years.
These are significant sums, especially when governments are seeking ways to reduce their deficits. But compare them with the costs of military operations. Between 2009 and 2010, for example, US Department of Defense spending alone for Afghanistan grew from $4.4 billion to $6.7 billion a month. According to US government data, the cumulative total for the War on Terror and the Iraq and Afghanistan wars since 9/11 is $1.283 trillion, of which about $1.2 trillion went to the Department of Defense with only $67 billion, or 5%, going to State/USAID.
ODA covers a broad range of activities from humanitarian interventions to stabilization, peacebuilding and statebuilding. (although peacekeeping is funded by a blend of ODA and non-ODA funds). Why is it better to use ODA as opposed to defence budgets for these initiatives? Because with ODA, taxpayers have a clearer idea of where and how their money is being spent. ODA is an accountable and transparent way to deliver development assistance, even if it is not the only one. ODA funding to fragile states is reported regularly by donors, providing taxpayers in these countries and governments and people in recipient countries with as clear as possible a picture of how much money comes in, from where, what it is used for, and how effectively it is provided. Military aid, on the contrary, and enforcement aspects of peacekeeping, are not reportable as ODA. It is difficult to know how much is spent, how, and on whom, let alone to assess the impact on national governments and populations.
The main issue is about the best way to support countries during the difficult transition out of conflict and fragility. It’s also about preventing conflict flaring up again, by addressing the root causes of conflict, and promoting the growth and development that make conflict less likely in the future.
These are huge tasks. The human development record in fragile states is not good. Not one conflict-affected fragile state has achieved any of the Millennium Development Goals., and the share of world poor living in fragile states is expected to exceed 50% by 2015. What do these trends suggest? Tackling fragility and instability requires a long-term development strategy. A military solution (even one that drags on for years) will not solve the underlying problems. An army may manage to provide stability, but it is not designed to address the inequalities, sense of injustice and frustrations that lead to conflict in the first place.
Lasting peace needs more than peacekeepers. It needs economic development to provide jobs, education, health care and other services. It needs the political involvement of the whole population, especially those with grievances, to promote social justice and to seek solutions other than violence. It needs well-functioning government and institutions. Building a lasting peace may take decades, so it needs long-term commitment from national and international actors to develop the local capacities and potential that will eventually make aid irrelevant.
This is not a military strategy or timescale. Un-glamorous development departments and personnel have the skills needed to implement cross-governmental approaches, use pooled funds wisely, and work in the multidisciplinary teams best suited to conflict-affected and fragile states. But vital as their contribution may be, it is secondary. Ultimately, transitioning out of conflict and ensuring long-lasting peace depend on the country itself, not foreign aid, whether civilian or military. So maybe we should start by asking conflict-affected and fragile countries for which we are designing strategies, re-allocating funds, and planning operations, what would work best.
Findus, whose horse lasagne is now world famous, has a section on their French website called “Agri Confiance®”, promising “confidence from the pitchfork to the fork!” They explain how Agri Confiance® ensures the total traceability of your food by perfectly identifying all the different stages of production, from the plot of land through to the final transformation. That final transformation of horse into cow must be a trade secret because they don’t mention it.
The whole affair raises the question of whether the food industry can be trusted. Given the number of laws and regulations governing it and the number of scandals that keep on happening anyway, “no” seems the obvious answer. It’s only natural therefore that governments try to impose standards on what we eat and drink, and have traditionally done so. Roman legislation on consumer protection, for example, was just as elaborate as some of today’s laws, but the world’s first comprehensive modern food law was the UK’s 1860 Act “Preventing the Adulteration of Food and Drink.”
If you’ve read TC Boyle’s Water Music, set a few decades earlier, you probably remember “Chichikov’s Choice”, a caviar Ned Rise makes from frog spawn and shoe polish. It sounds far-fetched, but the report of the parliamentary Committee set up to examine the need for the 1860 Act shows that food (in towns at least) wasn’t better in the good old days. The list of additives includes plaster of Paris and copper sulphate in bread, sawdust in chicory, and sulphuric acid in gin. The Committee members were given the chance to try a popular “gunpowder tea” sold in the poor quarters of London. As the report says, “the Committee did not venture to taste it, but they were assured its flavour was very peculiar”. That would be the silkworm dung added to make the tea look stronger.
The parliamentary debates leading up to the Act sound almost identical to today’s discussions for and against government intervention. John Roebuck, member for Sheffield, claimed that if the “Bill were carried into effect it would create such confusion in London that no shopkeeper would pass a quiet life.” According to John Wise, Member for Stafford, the Committee had established that adulteration was practised wherever it was possible, adding that “Nor have the poor the same power to protect themselves … as their richer neighbours; they are necessarily limited to such means of purchase as are afforded by the immediate locality in which they reside…”. Speaking in a parliamentary debate on 12 February, London MP Diane Abbott said “… there are families in communities such as mine who eat an awful lot of cheap, processed food. They deserve absolute assurances about its quality.”
So what has changed? Multinational retailers and food manufacturers now dominate the industry. They put enormous pressure on suppliers to cut costs and nothing is wasted. At the start of the 20th century, Upton Sinclair summed up the meat industry’s approach by saying “They use everything about the hog except the squeal.” His 1906 novel The Jungle contains sickening descriptions of the Chicago meatpacking industry and actually helped to get the Meat Inspection Act and the Pure Food and Drug Act passed that same year.
The food industry opposed that legislation, as it opposes many attempts to impose any form of regulation other than self monitoring. Speaking at an OECD Food Chain Network meeting last October, Professor Tim Lang from the Centre for Food Policy, City University, London said that “In spite of the growing evidence since 2000, the mainstream agenda for the food system remains anchored in reducing government involvement; changing consumer behaviour through ‘nudges’ and information availability and continuing to deliver internal supply chain efficiencies. Essentially this agenda says the food system is fine.”
Obviously it’s not. That said, legislation can sometimes have unintended negative consequences. Last year, the EU banned “desinewed” meat in low cost meals. This includes MRM (mechanically recovered meat) obtained by blasting bones with high-pressure hoses after cutting away what you and I would probably think of as meat. With pink slime (as it’s also known) unavailable, the industry looked for equally cheap alternatives, often from suppliers or even countries they hadn’t used before.
That brings us to the second major feature of the modern food industry: the global supply chain, or what a recent OECD study describes as “growing fragmentation of production across more economies”. Dozens of different companies and intermediaries may be involved in supplying “meat” to the final processor. The latest scandal shows that nobody is really sure that all their partners can be trusted, with everybody claiming they were duped by somebody else.
Walmart’s disclaimer is charmingly frank about this, warning the customer not even to trust them: “While we strive to obtain accurate product information, we cannot guarantee or ensure the accuracy, completeness or timeliness of any product information.” Their UK subsidiary ASDA tries to be more reassuring: “…because products are regularly improved, the product information, ingredients, nutritional guides and dietary or allergy advice may occasionally change.” (We’ve upgraded your beef burger from a boring old cow to something more classy).
By the way, one of the intermediaries selling meat to the French food processors is Draap, owned by a trust registered in our old friend the British Virgin Islands. According to The Guardian, Draap’s sole director is an anonymous Cyprus-based corporate services company called Guardstand, who also owned a share in a business called Ilex Ventures. US prosecutors allege that “merchant of death” Viktor Bout gave Ilex funds to purchase aircraft to fly arms and ammunition around Africa’s trouble spots in breach of embargos.
A couple of weeks ago, Rod Kramer and Todd Pittinsky wrote on the Insights blog that “Political and business leaders often bemoan the “fragility” of trust – so hard to earn and so easy to lose, they whine. But that’s exactly the way it should be.” The horse meat scandal proves their point. The violent reaction of many consumers is due to the fact that they have suddenly discovered a disgusting truth. In A Winter’s Tale, Shakespeare compares this feeling of betrayal to discovering that you’ve drunk from a cup that had a spider in it. If you never find out about the “abhorr’d ingredient”, you won’t be bothered, but if you do…
There may be in the cup
A spider steep’d, and one may drink; depart,
And yet partake no venom (for his knowledge
Is not infected), but if one present
Th’ abhorr’d ingredient to his eye, make known
How he hath drunk, he cracks his gorge, his sides,
With violent hefts. I have drunk, and seen the spider.
Does money make us happy? Phrased a little more subtly, this question has been bugging economists for years. For much of the 20th century, most of them would probably have replied yes. But in the 1970s, doubts began to show, in part because of the work of the American economist Richard Easterlin.
The “Easterlin paradox” appeared to show that as economies developed there was very little change in “self-reported (or “subjective”) well-being” – in other words, even though countries were getting richer, people didn’t seem to be getting happier. Significantly, the appearance of Easterlin’s work in the 1970s coincided with a period of rising environmental concern. Not only did the social benefits of growth come to be questioned but so too did the cost to the planet.
In the years since, all this has fed into an argument that pursuing economic growth – as measured in rising GDP – is not enough in itself. It needs to be balanced against other issues, such as access to health and education, inequality, environmental sustainability and people’s own judgement of the quality of their lives.
If you want an example of how these ideas have now entered the mainstream, look no further than the latest edition of the OECD’s Going for Growth, released today in Moscow. Since it began in 2005, the OECD project has sought to identify ways to promote growth in leading economies, focusing on areas such as employment policies, education and regulation. But as well as offering policy recommendations, this year’s report examines their wider implications – these policies may be good for growth, but are they also good for society and the environment?
These issues are reflected in another OECD project – the Better Life Index. The BLI reflects a shift in thinking on well-being and progress, based on the notion that while economic growth is necessary for development, it’s not sufficient. Accept that, and you also have to accept that, to establish the state of a society, you need to do more than just measure its GDP (which simply represents the total of the goods and services a country produces).
But what should you measure? Here’s where things get complicated. Over the past 20 years or so, several indices have emerged aimed at measuring the progress of societies, nationally and internationally, encompassing a range of measures, such as levels of health, education, inequality, personal happiness, safety, and so on. Are such indices useful? Debate rages. Advocates say they present a balanced, nuanced picture; critics say they’re too subjective, and depend too much on what researchers decide is important and not important. By contrast, they argue, at least GDP is a hard, objective number.
Those critics may feel buoyed by what looks to be a bit of an academic backlash to Easterlin’s work: “The fact is, the richer you are, the happier you are,” crowed one critic; “Can We Kill The Easterlin Paradox Now Please: It’s Wrong,” added another. Such rejoicing may be premature: There’s a lot of honest difference of opinion among academics over how best to research this area, which is generating a great deal of diverse work. As of now, the consensus seems to be that, once a society reaches a certain level of development, more money doesn’t add up to much more happiness.
Still, it is interesting to see how – for all its flaws – many of us can’t help but link GDP (and related numbers like GNP and GNI) to wider issues. Indeed, we may have reasonable grounds for doing so: As the German researchers Jan Delhey and Christian Kroll reported last year, “for an economic indicator never intended to assess national well-being, the GDP is surprisingly successful in predicting a population’s subjective well-being.”
But, interestingly, the two researchers did find an indicator they liked even more: “One measure actually does a better job: the OECD’s Better Life Index which is particularly effective when it comes to predicting subjective well-being in the richest OECD countries.”
The new OECD report on Addressing base erosion and profit shifting (BEPS) doesn’t sound like the kind of thing anybody would read for fun, but I guarantee that if you do read it, you’ll want to tell your friends (and enemies) about what you discover in its 80 or so densely written pages. Especially if you pay taxes. For instance, according to the IMF, in 2010 Barbados, Bermuda and the British Virgin Islands received more foreign direct investment (FDI) than Germany (5.11% of global FDI for the islands versus 4.77% for Germany) or Japan (3.76%). During that same year, these three small “jurisdictions” also made more foreign investments (4.54% combined) than Germany (4.28%).
So what is BEPS? “Erosion” refers to the erosion of national tax bases. “Profit shifting” is one way this happens. Companies use a number of schemes to shift profits across borders to take advantage of tax rates that are lower than in the country where they made the profit. Some multinationals end up paying as little as 5% in corporate taxes when smaller businesses are paying up to 30%. It’s all perfectly legal, and exploits the fact that tax systems are still essentially nation-based and were designed for the “old” economy in which, for example, profits from intellectual property were relatively unimportant. But even in the old economy, firms took steps to ensure that international taxation didn’t harm them. Many domestic and international rules to address double taxation of individuals and companies originated from principles developed by the League of Nations in the 1920s.
One of the most common mechanisms for exploiting flaws in the international tax system is a hybrid mismatch arrangement. As we explained in this post, the basic idea behind hybrids is to have the same money or transaction treated differently by different countries to avoid paying tax. For example, declaring the same transaction as either debt or equity depending on the tax rules of the various countries involved. Hybrids often feature dual residence, companies that are residents of two countries for tax purposes. Take Amazon for instance. Officially, they may only have a delivery service in many of the countries where they sell things. In Europe, the main business is based in Luxembourg, and the billions of euros in sales income generated elsewhere is not taxed in those countries.
The passages in the report about Luxembourg are well worth quoting. The Grand Duchy (population half a million) features in a discussion on so-called Special Purpose Entities (SPEs): “entities with no or few employees, little or no physical presence in the host economy and whose assets and liabilities represent investments in or from other countries and whose core business consists of group financing or holding activities”. Total inward stock investments into Luxembourg for 2011 were equal to $2,129 billion, with $1,987 billion being made through SPEs. Outward stock investments from Luxembourg were equal to $2,140 billion with about $1,945 billion USD being made through SPEs.
When I read the report, I thought that was a typo and checked the original data in the OECD Investment Database. But no, plucky little Luxembourg really did attract over $2 trillion in 2011. Luxembourg’s Benelux partner the Netherlands did even better. Total inward stock investments for 2011 were $3,207 billion, with $2,625 billion channelled through SPE. Outward stock investments from the Netherlands were equal to $4,002 billion with about $3,023 through SPEs.
Along with hybrid mismatches and SPEs, another favourite is transfer pricing (explained in more detail here). Around 60% of world trade actually takes place within multinational enterprises, for example the headquarters in the US paying a subsidiary in India to carry out research or manufacture components. This payment is a transfer price. Transfer prices are used to calculate how profits should be allocated among the different parts of the company in different countries, and are used to decide how much tax the MNE pays and to which tax administration.
There is no simple method for calculating a transfer price, so the final value is the result of a negotiation between the company and the tax authority. Ideally, this would be based on equal access to information, a shared objective and a “zero sum game” where an exemption in one jurisdiction is offset by tax in another. It’s not. International business consultancies have more people working on transfer pricing than any national tax authority. Prem Sikka of Essex Business School, co-author of a paper on The Dark Side of Transfer Pricing, claims that “Ernst & Young alone employs over 900 professionals to sell transfer pricing schemes. The US tax authorities employ about 500 full-time inspectors to pursue transfer pricing issues and Kenya can only afford between three and five tax investigators for the whole country.”
BEPS raises a number of questions concerning fairness and equity, including the fact that “if other taxpayers (including ordinary individuals) think that multinational corporations can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers – upon which modern tax administration depends.” There are wider economic risks too, for example employment, innovation and productivity could suffer if post-tax profit becomes the main criterion for investment.
So what should be done about BEPS? From the above, you’ll have understood that national solutions aren’t going to work. The report was commissioned by the G20 and the OECD will draw up an Action Plan, developed in co-operation with governments and the business community, to quantify the corporate taxes lost and provide concrete timelines and methodologies for solutions to reinforce the integrity of the global tax system.
If you’ve any experience of how these international efforts work, your reaction may be that there will now be years of discussion followed by a vague declaration that something must be done. So here’s a nice surprise for you: “It is proposed that an initial comprehensive action plan be developed within the next six months so that the Committee on Fiscal Affairs can agree it at its next meeting in June 2013. Such an action plan should (i) identify actions needed to address BEPS; (ii) set deadlines to implement these actions; and (iii) identify the resources needed and the methodology to implement these actions.”
By the way, did you know that one of the Virgin Islands was the inspiration for Stevenson’s Treasure Island? You couldn’t make it up.
UPDATE July 19 2013 The Action Plan against BEPS
On a visit to Scotland in 1435, Aeneas Sylvius, the future Pope Pius II, saw many marvellous things, but as he wrote in his journal, the most astonishing was how “the poor, who almost in a state of nakedness begged at the church door, depart with joy in their faces on receiving stones as alms!” Like most Europeans at the time, the pre-Pope didn’t know what coal was, but once he heard the explanation, he saw that the monks were doing a good deed by helping the poor to heat their hovels.
These days, he may have been astonished to learn that often it’s the other way round. German taxpayers for instance gave 2 billion euros to coal producers in 2011. Poland’s coal producers got 7 billion euros over 1999-2011. These are just a couple of examples of the 550 measures that support fossil-fuel production or use in the OECD’s 34 member countries. These measures had an overall value of $55 to $90 billion a year in 2005-2011 according to a new OECD report, Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013.
Despite the many benefits for the environment and public finances of reforming fossil-fuel subsidies, lack of information regarding the amount and type of support measures in place makes it difficult to design and apply policy efficiently. Usually, lack of data is associated with developing counties, but in this case the culprits include OECD members. The International Energy Agency (IEA) has been producing data on fossil-fuel consumer subsidies in emerging and developing countries for several years using an estimation approach known as the “price-gap” method. This measures the extent to which a policy keeps domestic fuel prices below an international reference price. According to the IEA’s 2012 World Energy Outlook, fossil fuel subsidies amounted to $523 billion in 2011, up almost 30% on 2010 and six times more than subsidies to renewables.
However, the IEA approach does not capture support to producers and tax concessions to producers and consumers. The new report does, and you can download the data for each country or consult a country overview here.
Lack of data isn’t the only difficulty facing reform. There is a problem of political economy you’ll find in many other cases too. Those who stand to lose from the reform may be significantly worse off and feel the impact immediately. Benefits on the other hand may be more long term and not amount to much when spread over the whole population. Moreover, those seeking to block reform are often better informed and better organised than the reformers.
That said, there are a number of examples of successful reform. The figure of 2 billion euros to the German coal industry actually represents a significant drop from the 5 billion the industry got in 1999. Much of the money Poland is now paying is associated with historical liabilities, and since 2011 the country has to follow EU regulations that only authorise state aid for the purpose of closing mines, treating damage to miners’ health, and addressing environmental problems from past mining.
The OECD report cites a number of other examples of successful reforms, and identifies a number of common characteristics of programmes that work. First, improve the availability and transparency of support data. Apart from informing the debate, this helps to identify where support is helpful and where it’s not. (The report itself insists that it “does not analyse the impact of specific measures or pass judgement on which ones might be usefully kept in place, and which ones a country might wish to consider for possible reform or removal.)
Second, some people are going to suffer from subsidy removal, so provide them with financial if needed.
Third, where possible, integrate the subsidy reforms into a package that includes broader structural reforms.
And finally: “Ensuring credibility of the government’s commitment to compensate vulnerable groups and, more generally, to use the freed public funds in a beneficial way.” So announcing that you’re cutting pensioners’ heating allowance to help pay bankers’ bonuses may not rally the support you need.
Taxing Energy Use: A Graphical Analysis provides the first systematic statistics of effective tax rates – on a comparable basis – for each OECD country, together with “maps” that illustrate graphically the wide variations in tax rates per unit of energy or per tonne of CO2 emissions.
“Joint report by IEA, OPEC, OECD and World Bank on fossil-fuel and other energy subsidies: An update of the G20 Pittsburgh and Toronto Commitments” prepared for the G20 Meeting of Finance Ministers and Central Bank Governors (Paris, 14-15 October 2011) and the G20 Summit (Cannes, 3-4 November 2011)
We take it for granted, but the fact that so many school leavers routinely go on to study in university is a relatively recent development. Back in 1900, it’s estimated that there were just half a million students in higher education around the world. By 2010, Unesco estimates the figure stood at around 177 million.
Few countries did more to pioneer the expansion of higher education than the United States, and today its finest colleges and universities have a global reputation. Among OECD countries, only three – Canada, Israel and Japan – can boast a higher proportion of graduates among their total adult populations than the U.S.
But dig a little deeper, and you’ll spot an interesting trend: among younger adults (25-to-34 years old), the U.S. slips to just 14th place among OECD countries for the proportion of graduates in that age group. Also worth noting: there’s very little difference – just a single percentage point – between graduation rates of the total population (41%) and the younger age group (42%).
The implication is clear. In most OECD countries, younger people tend to be better educated than older ones, but in the U.S., as the BBC reported, that’s less and less the case. “It’s something of great significance because much of today’s economic power of the United States rests on a very high degree of adult skills – and that is now at risk,” commented the OECD’s Andreas Schleicher.
So why does the U.S.’s long love affair with higher education seem to be running out of steam? In a word, money. Tuition and fees for a four-year degree at a public university are now at least 3½ times higher than they were 30 years ago. Over the same period, the strong growth in income that American middle class families enjoyed in the post-war era slowed markedly. The result, in part, has been a rise in student debt, which is now reckoned to top a trillion dollars. As one academic wrote in The Atlantic, “Even for the academically inclined, the value of college in this economic climate is increasingly subject to question.”
Is college still worth it? The answer for most people is yes. On average, university graduates in OECD countries earn 55% more than non-graduates, and the figure for the U.S. is over 80%. So, university still pays, but communicating that message can be difficult. Seeing a neighbour or a cousin struggling with student debt is likely to register much more strongly with a prospective student than a statistical average.
Other social and cultural influences may also be at work. As The New York Times reported, the stories of billionaire college dropouts like Steve Jobs and Mark Zuckerberg seem to have struck a chord. “It’s inspiring that [Jobs’] dropping out basically had no effect, positive or negative, on the work and company and values he could create,” said Benjamin Goering, who quit college early to work for an Internet start-up.
But the 22-year-old also said something that may point to a changing attitude among his generation towards higher education: “Education isn’t a four-year program. It’s a mind-set.” The idea that there might be viable alternatives to trotting off to university for three or four years seems to be gaining ground, and that may be due in part to the growth in MOOCs – Massive Open Online Courses, or, as Forbes described them, “free online college courses, designed by academic rock stars and ‘attended’ by hundreds of thousands of students from around the world”.
Like much that happens online, MOOCs may be the victims of “irrational exuberance”. While many have enrollment figures that justify “massive,” that’s not always true of their completion rates. Nevertheless, their growth is impressive. One operator, Coursera www.coursera.org, now has 2.4 million students on its books, according to Thomas Friedman, and is drawing students from all over the world, including from developing countries.
And that, perhaps, is what’s most interesting about this phenomenon. At a time when full time education may be slipping beyond the grasp of some students in wealthy countries, while remaining stubbornly out of reach in poorer countries, MOOCs may offer an alternative and, argue some, a glimpse into where higher education goes next.