This video link was distributed to my work via a mass email- rather surprising given that it comes from the CATO institute, a rather openly economically conservative group. However, if it weren't for Tax Havens I may not have a job, so can't complain.
Beef with the Video: Tax Havens help Developing Countries
Just because capital flows towards low tax areas, which could help developing countries attract needed investment and economic activity, the presenter acts as if this is a direct link. I completely disagree with how causually this point is made. I remain unconvinced that capital/economic activity spurred by tax havens and the like have dramatic or effective enough spillovers to actually benefit the country's people. I am not saying this can and does not happen, but it is not direct. Here is where I become a softy for proactive governments, who I think, in order to reap the full benefit of increased foreign investment, need to be proactive about funnelling that activity into local infrastructure, public programs and making sure their is knowledge spillover into the local workforce and businesses.
Please feel free to disagree.
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3 comments:
Are you surprised to have received the video or are you surprised that it is from CATO? And, why exactly are you surprised?
I think CATO is more accurately described as a “classically liberal” think-tank. They might be offended by your “conservative” description.
In your beef, are you suggesting that an increase in private investment and capital accumulation is not a generator (or not a major generator) of growth (under any definition of "direct")? I think I can safely say that claim is disputed by ALL serious economic growth research. In fact, there is a strong emerging theme in growth literature showing that large-scale private capital investment in the formal sector is dramatically more effective at creating short-term growth than the type of economic activity nurtured by small loans to entrepreneurs or investment in infrastructure. The bottom line is that individuals in poor countries need a means to dramatically increase their marginal productivity; that is what large-scale capital accumulation enables. And, the resulting economic opportunity from capital accumulation, particularly foreign capital, presents the additional benefits of more stable and consistent income relative to, say, small business ownership. Of course, there are many local and institutional barriers beyond taxes that discourage investment in poor countries; efforts should also be made to lower those barriers.(To preempt an obvious response, I will note that I am putting aside the discussion of importance of human capital accumulation.)
Of course, your suggestion that infrastructure investment is an important component of growth is an obvious conclusion and is also supported by the literature. And, there is an argument for why some types of infrastructure are best treated as a public good to be provided by the state. However, it is just a hop, skip and jump to assuming ALL infrastructure needs to be provided by the state. This is a common growth-killing fallacy. First, government officials in poor countries and experts in development agencies are notoriously bad at identifying what infrastructure to prioritize. A lot of money has been wastefully buried (and/or diverted to cronies) by investing in infrastructure that has no economic value. Second, with a foundation of strong and predictable property rights law the private sector will provide a lot of necessary infrastructure and with much greater efficiency. Toll roads in Mexico and the history of private/public transportation in Santiago are two examples that come to mind.
Q: Who knows best what type of infrastructure would generate growth?
A: Holders of capital…they have the strongest incentives to get it right.
Q: How do you get holders of capital to signal what infrastructure is most valuable?
A: By encouraging them to invest their capital.
I concede.. well put. I know other people read this post and agreed as well, but people are hestiant to comment... why? Even if you agree, at least comment that you do.
Oh man. You give up to easy. Allow me to reconcile the original piece and my defense with your comment: capital accumulation is necessary, but insufficient for economic growth.
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