The winds of change do not seem to be blowing in the direction of international development aid. After more than 60 years, there is an increasing debate surrounding the international aid system and scrutiny regarding its ability to transform the lives of people in developing countries. This debate is joined by a growing number of voices from the Global South that speak of the need to “decolonise” it. Regardless of these debates, there seems to be a strong consensus on the need to move forward and define policies that go beyond international aid to support developing countries. Among all such policies—international trade rules, migration and security policies, etc.—, two of them deserve special attention: international taxation and the treatment and management of public debt. Following the devastating economic onslaught of COVID-19, an appropriate approach in both areas would allow developing countries to have more resources at their disposal and face a faster and, above all, more inclusive recovery with stronger safeguards.
A debt that already haunted developing countries before the pandemic
Before the outbreak of COVID-19, the situation was already worrying: public debt levels in developing countries had been worsening for years, their financing costs were becoming increasingly expensive and the percentage of countries vulnerable to a debt crisis was already high and rising. By the end of 2019, just three months before the global pandemic was declared, half of all low-income countries were reaching a point where they could no longer meet their debt payments [1]1 — International Monetary Fund (2020) The evolution of public debt vulnerabilities in lower income economies. IMF policy Paper No. 20/003, February 10, 2020 [Available online]. .
Another notable factor is that the origin of these debts had been shifting, with debts owed to private creditors becoming increasingly important, as opposed to traditional countries and international financial institutions. In addition to private financial institutions of all kinds—from investment funds to well-known global banks—other non-traditional lending states, such as China, had also been providing access to large sums of money to developing countries for years. This new reality was jeopardising—and undermining the effectiveness and legitimacy of—the (imperfect) mechanisms and spaces for concerted action to resolve possible problems that might arise on this issue, such as the Paris Club. While in 2008, 15 per cent of African countries’ external debt was contracted with the member countries of this Club, in 2017 it accounted for barely 7 per cent [2]2 — Coulibaly, B. S., Gandhi, S., Senbet, L. W. (2019) Is sub-Saharan Africa facing another systemic sovereign debt crisi? Brookings Policy Brief, April 2019 [Available online]. .
Before COVID-19, the situation was already worrying in terms of public debt, financing and vulnerability to a debt crisis
Between 2010 and 2019, debt service (the payment to be made by a country that has acquired one or more debts for a particular period) as a percentage of the least developed countries’ own income rose from 7.4% to 20.7% on average. In other words, in 2019, these countries were spending one out of every five euros of their public revenue (apart from official development aid) on debt repayments, limiting the financing of other public policies such as health or education [3]3 — Development Initiatives (2020) Reversing the trends that leave LDCs behind: How ODA can be targeted to the needs of people living in greatest poverty post-pandemic. Development Initiatives Report, September 2021 [Available online]. .
And COVID-19 came along
Although the relative health impact has so far been minor, developing countries have been particularly hard hit by the economic crisis resulting from the COVID-19 pandemic [4]4 — The evolution of the number of confirmed cases can be followed on the Our World in Data, Total confirmed COVID-19 cases [Available online].
. According to recent World Bank estimates, the number of people living in poverty (living on less than $1.90 a day) soared in 2020, increasing by 77 million to 732 million people worldwide. For the first time, after 20 years of a sustained reduction in extreme poverty, this trend is reversing. To get an idea of the magnitude of this impact, it is as if the populations of two entire countries such as Thailand and Paraguay are now living in a situation of extreme poverty and vulnerability [5]5 — Gerszon Mahler, D., Yonzan, N., Lakner, C., Castaneda Aguilar, R.A., Wu, H. (2021) Updated estimates of the impact of COVID-19 on global poverty: Turning the corner on the pandemic in 2021? in World Bank (2021) DataBlog June 24, 2021 [Available online].
. Global hunger also increased dramatically. The UN estimates that approximately 10% of the world’s population, up to 811 million people, were malnourished by the end of 2020, an increase of 161 million individuals [6]6 — FAO, IFAD, UNICEF, WFP and WHO (2021) The State of Food Security and Nutrition in the World 2021.
Transforming food systems for food security, improved nutrition and affordable healthy diets for all. Roma: FAO [Available online].
. As of today, hunger caused by the combination of COVID-19, conflict situations and the climate crisis could be killing more people in the world than the virus itself [7]7 — Oxfam Intermon (2021) The hunger virus multiplies: deadly recipe of conflict, covid-19 and climate accelerate world Hunger. Oxfam Media Briefing, 9 July 2021 [Available online].
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In stark contrast to what is happening in more advanced countries, where economic recovery appears to be well underway, the least developed countries will need, on average, at least three more years to recover the GDP per capita levels they had seen in 2019 [8]8 — UNCTAD estimates from the International Monetary Fund’s World Economic Outlook (April 2021) [Available online]. . The hoarding of vaccines and the greater room for manoeuvre for monetary and fiscal policies to cushion the impact and stimulate the economy are crucial elements in explaining the different recovery speeds from this crisis, in which developing countries are lagging.
Beyond the devastating impact on poverty and hunger, COVID-19 has precipitated a fiscal crisis in many of these countries. The fall in GDP (slowdown in trade, capital outflows and loss of investment), and the necessary increase in public spending to deal with the health, social and economic emergency, have further escalated public debt levels that in many cases were already at worrying levels. Put simply, it’s just one thing on top of another. According to EURODAD, between 2010 and 2020 public debt in developing countries rose from 40.2% to 62.3% of GDP. Of this increase, more than a third (8.3 percentage points or about $1.9 trillion) occurred in 2020 [9]9 — Munevar, D. (2021) A debt pandemic: dynamics and implications of the debt crisi of 2020. EURODAD Briefing Paper, March 2021 [Available online]. . Public debt increased in 108 developing countries, with the most significant increases observed in those countries with the highest levels of debt prior to the pandemic [10]10 — Íbidem. .
Organisations such as the International Monetary Fund and the World Bank have recently pointed out the fragility of an international financial system that could barely withstand a wave of countries defaulting
These levels of indebtedness may seem small compared to those of rich countries, which increased their debt levels dramatically to cope with the global financial crisis (for example, Spain’s debt exceeds 120% of GDP). This is even the case if we compare them with the levels of the developing countries that benefited from the various international debt relief initiatives that were deployed at the beginning of the century. However, it should be remembered that sovereign debt crises do not only arise because of the relative levels of indebtedness; other elements must also be taken into account, such as the cost of financing, the capacity of countries to generate domestic resources through taxation in order to pay off the debt and even the timetable of returns. Organisations such as the International Monetary Fund and the World Bank have recently pointed out the fragility of an international financial system that could barely withstand a wave of countries defaulting on their debt repayments, thus jeopardising global economic recovery after the pandemic [11]11 — International Monetary Fund (2020) Reform of the International Debt Architecture is Urgently Needed. IMF Blog [Available online]. World Bank (2020) The Global Economic Outlook During the COVID-19 Pandemic: A Changed World [Available online]. .
A rapid response, but as usual, an insufficient one
Unlike during the 2008 financial crisis, the international response to this situation has been much more responsive. However, as was the case then, the proposed measures are not sufficient, and amount to a ‘kick forward’, ignoring a problem that is becoming structural as it grows bigger and bigger. Indeed, despite the international response, in 2020 developing countries surrendered nearly $194 billion in debt repayments. At least 58 countries paid back more than they received [12]12 — Munevar, D. (2021) A debt pandemic: dynamics and implications of the debt crisi of 2020. EURODAD Briefing Paper, March 2021 [Available online]. .
Following the initiative of the World Bank and the International Monetary Fund, the G20 countries agreed in May 2020 (just two months after the declaration of the global pandemic) to implement the Debt Service Suspension Initiative (DSSI), allowing some 73 low- and lower-middle-income countries to stop paying their bilateral debts to other governments until the end of 2021 [13]13 — More information on this initiative is available online. . In principle, this measure should have allowed these countries to allocate resources to the most affected sectors, but it has hardly brought any meaningful relief. This initiative has made it possible to suspend the payment of $5.3 billion, 1.4 per cent of what they ultimately paid to their international creditors (some $372 billion) [14]14 — Fresnillo, I. (2020) Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket? EURODAD report, 14 October 2020 [Available online]. . It is also worth remembering that the Debt Service Suspension Initiative does not imply any cancellation, but rather a postponement of debt repayment.
Beyond 2021, the response of the G20 and the other countries that make up the Paris Club and the IMF has been the creation of another initiative known as the Common Framework for Debt Treatment Beyond DSSI in November 2020 [15]15 — More information on this initiative is available online. . This is again a step in a new direction as it includes countries such as China (and others such as India, Turkey and Saudi Arabia), hitherto outsiders to any concerted process of sovereign debt renegotiation, despite handling more and more of these countries’ debt.
However, the Common Framework for debt treatment has proved insufficient for two main reasons. Firstly, middle-income states are not eligible for this mechanism, even though many of these countries are among the most affected. Secondly, private creditors have been left out of this initiative. Debtor countries that sign up to the programme must also bring their private creditors to the table and, as we know from previous experiences (such as that of Argentina), these types of creditors are hardly keen on forgiving debts. In other words, their profit and loss account is far in excess of their health needs.
The solution to the debt crisis lies in the establishment of a permanent multilateral framework that recognises common and binding principles for both debtor and creditor countries
If we add to these shortcomings the lack of clarity as to whether this is indeed a mechanism for debt cancellation or a project that merely restructures debt by delaying repayment dates, we can better understand the scepticism of developing countries to embrace this initiative. Faced with uncertain benefits and a reputational cost in the markets that is too high, these countries do not have a positive perception of the proposal.
The solution to the debt crisis that threatens the future of developing countries lies in the establishment of a permanent, UN-sponsored and more transparent multilateral framework that recognises common and binding principles for both debtor countries and creditor countries and institutions. The latter must also assume part of the risk of their operations. Furthermore, any analysis of debt sustainability, and thus of the measures to be taken, must consider its impact in terms of human rights.
An outdated international corporate tax system
To this difficult debt situation must be added another closely related issue. This is the persistent inability of developing countries’ governments to increase their tax revenues. Unlike rich countries, high economic informality and weak tax collection agencies, coupled with low social acceptance, constrain the ability of developing countries to raise tax revenues. Moreover, these same weaknesses are responsible for the greater dependence of tax collection on corporate profits. Of the total revenue raised in 2018, corporate income tax accounted for 16% and 19% in Latin American and African countries, respectively, while for OECD countries it accounted for 10% [16]16 — OECD (2019) “Corporate tax remains a key revenue source, despite falling rates worldwide” [Available online]. .
However, this source of revenue is severely constrained by an outdated and ill-adapted international tax system, which makes it easier for multinational companies to avoid (and minimise) their tax obligations. Various estimates suggest that the amount of tax revenue lost globally is as high as $600 billion. In the case of low-income countries, this amount exceeds $200 billion (1.3% of their GDP) [17]17 — Crivelli, E., De Mooij, R.A., Keen, M. (2015) Base Erosion, Profit Shifting and Developing Countries, IMF Working Paper 15/118, International Monetary Fund: Washington, DC. . Beyond the resources lost to offshore tax havens, the current rules that determine where these large corporations must pay their taxes penalise the poorest countries. Currently, multinationals are taxed in the countries where they are headquartered, which tend to be wealthy countries. The Tax Justice Network estimates that if companies paid taxes in the countries where their businesses and employees are based, lower-income countries would collect up to 5% more, while rich countries would lose just 1% [18]18 — Garcia-Bernardo, J., Janský, P. (2021) Profit Shifting of Multinational Corporations Worldwide, ICTD Working Paper 119, March 2021 [Available online]. .
Thirsty for resources, the governments of the rich G20 countries—which have also seen their tax bills increase—resumed negotiations to finalise a long-awaited and urgent reform that lays the groundwork for how to tax the international profits of large corporations in an increasingly digitalised economy. Pending ratification by the end of October this year, this agreement aims to specify how much and where large multinational companies must pay their taxes, determining for the first time a global minimum that they must contribute.
The new tax model proposed by the G20 would for the first time set a global minimum tax rate for multinationals, thus curbing the predatory practices of tax havens and harmful tax competition
In short, the new tax model proposed by the G20 would for the first time set a global minimum tax rate for multinationals, thus curbing the predatory practices of tax havens and harmful tax competition. However, the design of the agreement will reproduce the same inequalities between rich countries—where the headquarters of large corporations are located—and developing countries, providing very little additional resources for the least advanced economies.
Due to years of political impassivity, the bill for these tax abuses by big business has ultimately been paid by the citizens. Social indignation has been growing as it has become public knowledge that large corporations are multiplying their profits (even during the pandemic) while at the same time obscenely reducing the taxes they pay on them. Indeed, these political decisions have affected the ability of many countries to deal with the COVID-19 pandemic.
An unambitious and unfair reform proposal
Despite being trumpeted as the ultimate long-term solution to these problems in the international tax system, the G20 agreement, as it stands, is a perverse gamble for developing countries, as it places them in a false dilemma: support an agreement that is unfair to them or give free rein to the most unconscionable tax avoidance.
The agreement reached is unfair and unambitious for two reasons. The first has to do with the proposed minimum effective rate ‘of 15%’. This is a far cry from the 21% that President Biden wants to apply in the United States, and below the 25% recommended by economists such as Joseph Stiglitz and Thomas Piketty [19]19 — Stiglitz, J.E. (2021) The Global Tax Devil Is in the Details, Project Syndicate 6 July 2021 [Available online]. . In essence, it is a concession that only brings us closer to the levels of well-known tax havens such as Ireland and Singapore. It is better than nothing, no doubt, but the bar is set so low that it is unlikely to achieve the expected effect of putting an end to tax competition. It will surely put a strain on the most aggressive tax havens, but it will be to the benefit of the richest countries. It is a measure designed to be enforceable by the country of the parent company. Therefore, according to some estimates, two thirds of the additional revenue will go to G7 and EU countries, while the poorest countries will get barely 3% of the total, despite representing 36% of the world’s population [20]20 — Oxfam Intermon (2021) “OECD Inclusive Framework agrees two-pronged tax reform and 15 percent global minimum tax: Oxfam reaction” [Available online]. . We are merely perpetuating decades of injustice in the international tax system, while certain European countries continue to behave as tax termites in the global system [21]21 — Oxfam Intermon (2020) “EU tax haven blacklist review, Oxfam analysis and background” [Available online]. .
The second problem relates to the agreed way of distributing taxes on the global profits of large companies that, despite making large profits, have no presence for tax purposes. The idea is to redistribute part of these global profits to the other countries in which the company has a presence. However, the thresholds are so high that it will only affect around 100 companies, those with a turnover of more than €20 billion and a profitability of more than 10%. So few companies meet these thresholds that even digital behemoths such as Amazon could be left out. Moreover, the countries in which the multinationals are actually making their sales and profits will only share a minimal part of the global profits, which is less than 5% [22]22 — The details of the agreement are available online. .
There are also problematic details that have yet to be finalised, for it is well known that the devil is in the details. It appears that the financial sector, for example, will be left out of the agreement, no doubt due to pressure from Britain and others. Their exclusion will mean cutting overall tax revenues by half [23]23 — Devereux, M., Simmler, M. (2021) Who Will Pay Amount A? EconPol Policy Briefs 36 2021 July Vol. 5 [Available online]. .
The agreement reached is unfair and unambitious: the proposed minimum effective rate of 15% is a far cry from the 21% that Biden wants to apply in the United States, and below the 25% recommended by economists such as Joseph Stiglitz and Thomas Piketty
The agreement is not yet signed, but if we are serious about creating a truly level fiscal playing field that will curb the excesses of big business and generate substantial additional revenue for all, especially for developing countries, the current details of the agreement must be changed.
Among the most important of these, is that we must consider a higher minimum rate of 25%. This is the only way to ensure that there is no return to the crazed competition between countries to attract investment, much of which is phantom investment, at the cost of many millions of lost dollars. On the other hand, we must guarantee that the benefits are shared in a balanced way with developing countries and that large companies, which have profited from the digitalisation of the economy, cannot escape this agreement.
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References
1 —International Monetary Fund (2020) The evolution of public debt vulnerabilities in lower income economies. IMF policy Paper No. 20/003, February 10, 2020 [Available online].
2 —Coulibaly, B. S., Gandhi, S., Senbet, L. W. (2019) Is sub-Saharan Africa facing another systemic sovereign debt crisi? Brookings Policy Brief, April 2019 [Available online].
3 —Development Initiatives (2020) Reversing the trends that leave LDCs behind: How ODA can be targeted to the needs of people living in greatest poverty post-pandemic. Development Initiatives Report, September 2021 [Available online].
4 —The evolution of the number of confirmed cases can be followed on the Our World in Data, Total confirmed COVID-19 cases [Available online].
5 —Gerszon Mahler, D., Yonzan, N., Lakner, C., Castaneda Aguilar, R.A., Wu, H. (2021) Updated estimates of the impact of COVID-19 on global poverty: Turning the corner on the pandemic in 2021? in World Bank (2021) DataBlog June 24, 2021 [Available online].
6 —FAO, IFAD, UNICEF, WFP and WHO (2021) The State of Food Security and Nutrition in the World 2021.
Transforming food systems for food security, improved nutrition and affordable healthy diets for all. Roma: FAO [Available online].7 —Oxfam Intermon (2021) The hunger virus multiplies: deadly recipe of conflict, covid-19 and climate accelerate world Hunger. Oxfam Media Briefing, 9 July 2021 [Available online].
8 —UNCTAD estimates from the International Monetary Fund’s World Economic Outlook (April 2021) [Available online].
9 —Munevar, D. (2021) A debt pandemic: dynamics and implications of the debt crisi of 2020. EURODAD Briefing Paper, March 2021 [Available online].
10 —Íbidem.
11 —- International Monetary Fund (2020) Reform of the International Debt Architecture is Urgently Needed. IMF Blog [Available online].
- World Bank (2020) The Global Economic Outlook During the COVID-19 Pandemic: A Changed World [Available online].
12 —Munevar, D. (2021) A debt pandemic: dynamics and implications of the debt crisi of 2020. EURODAD Briefing Paper, March 2021 [Available online].
13 —More information on this initiative is available online.
14 —Fresnillo, I. (2020) Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket? EURODAD report, 14 October 2020 [Available online].
15 —More information on this initiative is available online.
16 —OECD (2019) “Corporate tax remains a key revenue source, despite falling rates worldwide” [Available online].
17 —Crivelli, E., De Mooij, R.A., Keen, M. (2015) Base Erosion, Profit Shifting and Developing Countries, IMF Working Paper 15/118, International Monetary Fund: Washington, DC.
18 —Garcia-Bernardo, J., Janský, P. (2021) Profit Shifting of Multinational Corporations Worldwide, ICTD Working Paper 119, March 2021 [Available online].
19 —Stiglitz, J.E. (2021) The Global Tax Devil Is in the Details, Project Syndicate 6 July 2021 [Available online].
20 —Oxfam Intermon (2021) “OECD Inclusive Framework agrees two-pronged tax reform and 15 percent global minimum tax: Oxfam reaction” [Available online].
21 —Oxfam Intermon (2020) “EU tax haven blacklist review, Oxfam analysis and background” [Available online].
22 —The details of the agreement are available online.
23 —Devereux, M., Simmler, M. (2021) Who Will Pay Amount A? EconPol Policy Briefs 36 2021 July Vol. 5 [Available online].
Íñigo Macías Aymar
Íñigo Macías Aymar is currently Research Coordinator at Oxfam Intermón. He has previously worked as a researcher and policy officer in different public and private, national and international organisations on different issues related to development, inequality and international cooperation. He has published and participated in seminars and conferences on the impact of inequality on development, both in the pre-distributive and redistributive areas, as well as on the policy coherence in cooperation. Recently, he has also worked on different proposals for tax reform in Spain. He holds a Master's degree in Development Studies from the London School of Economics and a degree in Economics and Business Administration from Pompeu Fabra University. As a lecturer, he collaborates with different universities such as the Autonomous University of Barcelona, the University of Barcelona and the Barcelona Institute of International Studies (IBEI).
