Guest Post: Coming To Terms With A Borderless World Economy

[10]

Everything was all so much easier when our conception of the world resembled the familiar image, above. The patchwork of brightly coloured areas indicated the spheres of political influence that are nation states. Borders could be patrolled and national laws enforced, it was a comforting delusion which primitive communications made feel real.

We all knew it looked more like this, but there was a physical reality and a political reality and there appeared to be no contradiction between the two. There was a clear demarcation between different legal jurisdictions, this was the political reality. But improved communications have blurred those state borders over time, and now, at least as far as financial regulation and intellectual property law are concerned, they have been all but erased.

This article is about the erosion of those state borders and its consequences and at the end of it the reader will be faced with a stark choice. I’m not going to come down on one side or the other, I’ll satisfy myself with just fairly presenting that choice but it is not one for which a compromise can easily found, there is no middle way, you will not be able to have your cake and eat it.

Wealth has become stateless, and as a consequence it is becoming increasingly less accountable to any state’s laws or tax codes. Over the last quarter century it has become increasing easier to transfer large sums of money, what is more, large financial institutions find it far easier today to relocate to a different legal and tax jurisdiction than at any previous time, because it is easier to re-establish the necessary business infrastructure, the cost of relocation has lessened.

Recognising this trend over the last quarter century, and being desirous of any slice of revenue they can get their hands on, governments around the world have competed with each other, to provide the ‘best business environment’ for those financial institutions. Let’s not delude ourselves about this, the ‘best business environment’ is the least regulation and the most advantageous tax breaks. And by competing with each other in this way, governments around the world created the regulatory environment which was, in part, responsible for the current financial crisis.

And then there are the ‘Tax Havens’. Tax Havens only exist because the regulatory conditions in other states allow them to. The diagram below is from ActionAid, of the FTSE 100 companies in the UK, all but two have subsidiaries in Tax Havens [ The term in this case is used loosely and is explained below]

“For its survey, ActionAid took a list used by the US Congress and added two further jurisdictions – the US state of Delaware and the Netherlands. Some consider countries to be tax havens if – like the Republic of Ireland and the Netherlands – the way they tax cross-border income allows companies to shift profits to genuine tax havens, Bermuda or the Cayman Islands, for example, where they avoid tax altogether.

Delaware doesn’t make company accounts public, and allows owners of companies to hide their identities.” BBC [13]

Now, let’s not be coy about this, there is only one reason why these companies have subsidiaries in those countries and that is the avoidance of tax.

And lets also be clear that if nothing is done then this trend towards stateless money will continue. The situation will continue to deteriorate and big money will increasingly dictate to state its laws. Some might argue that this is already happening and that the reason government is so dislocated from the electorate is because they are more interested in serving those big monied interests than they are the people who put them there.

But states are not entirely powerless, they have the right to deny any company access to their domestic market but with so many other states willing to welcome those businesses with open arms, there is little danger of that happening. Game theory should dictate that states should come to some accomodation on financial regulation and tax. A well known example is that of the ban on cigarette advertising, instead of cigarette manufacturers spending millions on advertising campaigns simply to retain their market share, the cessation of competition meant that market share was retained and a great deal of money saved by all.

But for any accomodation between states to have any power it must have a framework of agreed financial regulation and an international financial regulator with the teeth to punish, not only businesses which break the tighter regulation but also states which fail to stick to the agreed line.

Such an arrangement could only work if the USA and the EU were the primary signortaries and any other country which failed to sign up to this new financial regulation would be excluded from trading with the group of countries which had accepted it. Tax Havens would then face a choice of either conforming or being isolated. Intellectual property rights could also be part of this trading agreement, as too could flat business tax rates.

All this looks very ominous but that is the stark choice I said at the beginning I was going to present you with and I believe it is one that governments around the world will eventually be confronted with, though not before further financial turmoil forces their hand, and certainly not before the US Presidential elections in November.

Either you do nothing and a small group of people will run the borderless world by virtue of their wealth or you empower a different small group of people to police them.