 We'll go ahead and get started now with our afternoon program We've got a session now on governance inequality and growth domestic consequences of illicit financial flows The subtitle to this would be why do we care about illicit financial flows to talk about that? We have a lot of install from the Norwegian embassy Leonardo Baramacui from the State University of Rio de Janeiro and our Moderator for this session will be Roberto Fendt from the Centro Brazil de la Ració Internacionales And I will introduce Roberto and turn it back over to him So Roberto is the executive director of the Brazilian Center for International Relations acronym of SEBRI in Brazilian which is a prestigious think-tank here in Rio de Janeiro He has chaired the International Affairs Committee of the American Chamber of Commerce of Rio de Janeiro The Brazilian Association of Foreign Trade and the Trade Council of Federation of Commerce of the state of Sao Paulo He's also served as the superintendent of studies and research center foundation for foreign trade studies and professor of economics at the University of Sao Paulo and he is a Oh, and he also teaches at the Graduate School of Economics for FGV So without further ado, I will turn it over to him and for those of you who need caffeine or water We still have that in the back. So Roberto You hear me? Okay. I can't hear myself Well, our panel as was mentioned before will be on governance inequality and growth domestic consequences of illicit flows on my left This Olaf Lungstahl Is a consular for energy in oil at the Norwegian Royal Norwegian Embassy here in Brazil Mr. Lungstahl Works in Brasilia is a graduate of economics business and economic history from the University of Oslo The Norwegian the School of Economics and the London School of Economics On my right is Mr Leonardo Burlamacchi Who is current currently professor and research scholar At the state University of Rio de Janeiro works for the Brazilians He was formerly a senior program officer at the Ford Foundation and Very appropriately for these panel He was at that time in charge of reforming global financial governance initiative without much ado We'll get started Mr. Lungstahl We'll have the floor first and then I'll pass the floor to Leonardo Burlamacchi Thank you very much first Thank you to GFI and also to the co-hosters for for the invitation I must admit that there is some kind of a long-term relationship also between GFI and Norway and of course today I also Represent government of Norway as as I work for Norwegian Ministry of Foreign Affairs There has been a long Collaboration in this topic and I will come a bit back to it And I've had the pleasure of working with Raymond and other of his colleagues also in Africa I recently came to Brazil just been here three weeks after I've spending nine years in Africa including five years in Sambia Where I worked most intensively on the issue that was mentioned by Raymond earlier So I'll possibly come back to that also a little bit, but let me let me jump into the presentation see if I can See if I can I will My talk will hopefully be quite brief and I will try to focus to put I think Some of the overarching elements for the discussion out although to some extent I realized that many for many of you this will perhaps be a repetition and to some extent it was Mentioned in the first session today, but I think it's important to sort of To to put the context of the discussion also when we look at the domestic scene because so the first Slide there is basically I mean why are we talking about this? Why are we talking about IFF tax havens and development and I will go a little bit into actually although the topic is more to the developing economies also Dwelling in a little bit on the developed economies. Why also developed economies are concerned about this issue And it basically has to do with that there is a very clear Indication and now increasingly more and more empirical evidence as well from the developed economies That the issues and and basically the connection between secrecy jurisdictions tax havens and and illicit financial flows or capital flights and challenges of Development and inequality are are a very large and they are also linked to overall Development issues also in the western world we can discuss perhaps if it's time But I mean there's no doubt that there are close links also with financial crisis and And also ups and downs in the global economy and in in economies in different regions Link to this topic and it's interesting just to put on the table a few few data here That sort of puts why this is so important and I've taken Taking some data from Nicholas Jackson who has written a very influential book on this topic Looking into from the point of view of UK, but also at the global level the issue of tax havens So just to put it out there. I mean 50 percent of world trade today goes through tax havens So this is they are involved in in a very large part of them of the international transactions that goes on both in trade And in services 50% of all banking assets are held in offshore accounts 30% of all FDI go through offshore accounts and Raymond mentioned this link to to China But you can also say the same about India and actually most, you know, the biggest foreign investor in India Where does the money come from it comes from Mauritius for example? And the balance sheet again Raymond mentioned of small island countries is above 18 trillion US dollar or About one-third of world GDP. So this is not we're not talking about Marginal or part of the global economy or part of the capitalist system This is this is the heart of the whole system the way it has evolved and it is bigger and it has ever been I mean, even if we talk about early early 20th century that you had inequality and global economy that perhaps Was similar to what we are evolving towards now never before has it been With the relevant the relative importance as it has today So for Norway, why is Norway interested in this Norway is a major partner in many countries when it comes to development cooperation and We have also realized I think through different governments that we have had that it's important to think differently about financing Development and it's also this big paradox that is now brought up by GFI and by other authors before as well to some extent Paul Collier for example writing quite extensively on capital flight earlier on and we had the Monterey conference in Mexico and financing for Development and already really got engaged in this and supported GFI in the early phase still supports GFI And wrote actually a government white paper on it as well in 2009 that became quite influential on tax havens and development Where we brought up also some of the available information We also brought up a lot of policy proposals that have been implemented to some extent in Norway and also Supporting regional and global and national initiatives. I mentioned. I recently came from Tanzania in Tanzania We have actually a project also supported where we work with the central bank to look at illicit financial flows as well And we have also supported work that Raymond and GFI has been involved in with the high-level panel in Africa as well as well as the global task force and And work through OECD and work through World Bank and IMF and several other bodies as well so Why as I mentioned if you there were questions earlier this morning also about the developed economies What is sort of the engagement here? Why? What is the access to the realities for developed economies here? And we have as many of you probably have might have read or at least have heard about There is a recent work that has created a lot of discussion But this also has come on the back of a discussion that has emerged for the last 10 to 15 years at least if not more And it is that we see a trend throughout most of the Western world or developed economies of Rising inequality so the last two to three decades According to documentation by Thomas Piketty in his famous book capitalism in the 21st century you see an Inequality rising that is he is comparing it with the situation before the First World War But the basic argument for the Western world from his side is that it's linked to the sharing of the gains Between labor and capital that they are becoming more and more unequal There are other studies also by French think tanks showing similar things for Europe for example so there is increasing evidence and empirics backing up this situation and Of course, it's linked also to the global financial crisis and the eurozone crisis Which are still to some extent ongoing with many countries struggling with the after Aftermath and the problems that accumulated were basically what we have seen is that through these crisis now what has emerged is is Also a situation where you have actually ended up with a big big problem caused to large extent in the financial sectors and and Well to some extent by public investment as well But you have actually had the situation where you ended up after the crisis With a more unequal situation than before and who is left with the bill? Well, it's basically the government and also the the big part of the population so a lot of what is lost in the discussion often in Europe for example where I come from is that a lot of people think That it was mainly due to irresponsible fiscal policy in Europe that they got into this This big mess to some extent that is true But to a large extent it's not true actually because a big part of the crisis now and the big debt That has accumulated on the hands of the government is actually that they have bailed out Investments from the private sector that went wrong basically So if you look at the fiscal soundness of Ireland for example or even many Mediterranean countries before the crisis hit Many of them are running surpluses for numerous years right up to the crisis hit So so this issue of inequality like was mentioned before also that There was a lot of capital and I mentioned the numbers on the last on the slide before a lot of capital Obviously some is from the south to the north that is accumulated in tax havens but a big chunk of money also is money that is taken out of the western world into tax havens and Then is actually not even in the numbers like Raymond was alluding to this morning Everyone is astounded by the numbers that Thomas Piketty is putting out But actually he's not really including Full on the numbers that are are in the tax havens and when we look at how big those numbers are we realize that Surely they mean that the situation is even much worse than what he has described So he's big he broadly leaves untreated for example the offshore economy that has increased as I said to Unprecedented levels in the last few decades And he doesn't discuss either which is understandable that a lot a big part of that boost in the offshore economy Comes from a growing and large net transfer from the south to the north So that is also sort of an emerging discussion in Norway I think in many other countries I will come back a little bit to international initiatives Hopefully on this a G8 has their three T's now under the UK And and now soon to come German chairmanship. They're looking at trade transparency and tax And why is that? I mean it's also purely for Selfish reasons because it has to do with that They have a huge debt on the public hands or on the government hands and they have a fiscal deficit And a fiscal problem while at the same time there are big amounts of money lying Unutilized or or or not taxed or that is not contributing and could easily solve big parts of this problem So for the emerging economies which was I was supposed to talk more about And What are the issues? I will not go so much into sort of all the human rights aspects and all the Social aspects that maybe was expected. I should have done but it's from my point of view fairly obvious Although we can discuss and there was some criticism also from the person who comes after me now questioning whether really that funding would be available for development, but I think it's true in Many countries where you have large outflows and I can clearly say coming from Africa having worked nine years in Africa That this outflow is a major problem And I think in many of these countries. Why is it a major problem? Yes, because They have the basic argument for aid for example was the savings gap, you know the savings investment gap This is I mean all all the time development economics This is why we started doing development economics in the 50s and the 60s and the the rationale for aid as well And it's true. I mean the there is a huge gap in parts of Africa And they've been a lot of studies and estimates So there is a lost financing opportunity for development in some cases. It's much more Extreme in parts of Africa. It's much more extreme in relative terms And you have actually then profitable private and public investment That could have been happening part of it as Raymond was saying through that some would have been taxed Some would have been then private that could have been utilized in the country itself And we have looked at the numbers of course So these are not small numbers. We are talking about up to one one trillion US dollar per year so as mentioned as Raymond mentioned this exceeds net legal capital inflow to the developing world and many times ODA and We also have a situation as I mentioned where these numbers are getting worse So we have a situation where the gaps are increasing So the outflows compared to what was really the gap or what was needed to reach certain growth levels or to have money to fund Social investments and also productive investment from the government side. The gaps are in some cases increasing There was a reason to report by GFI on East Africa that showed clearly I think for many countries that these gaps are growing and there is a big underutilized potential here So the net effect here is one study. I work quite closely with a number of economists Under there something called the African Economic Research Consortium based in Nairobi It's an aggregation of African economists from all over Africa that are now currently working on Publishing a book on the illicit financial flows led by Leonce and the Kumana and James boys and also other professors of economics from Nigeria So one of the economists in that group has currently is going to publish an Article and this basically shows that the net effect of illicit financial flows on growth and poverty Has been estimated to To have it could have if that money would have been kept in the country's according to his calculations They also has developed a number of models linked to this could have been of such magnitude If you assume that the investment had a similar type of efficiency than other type of investment Spreads in the in the public and private sector. It could have had meant that sub-Saharan Africa could have reached MDG one namely the poverty goal within 2015 as a whole as most of you know Sub-Saharan Africa is not on track to reach that goal Some countries are making progress, but as a whole the region is lagging behind quite a lot So what about Brazil? Where is Brazil in this picture? I must be careful. I'm very new to Brazil So I will try to but I'm looking reading quite a lot these days I'll try to put up some thoughts here For Brazil I've come across some numbers for example by tax justice network from last year They have an estimation and that's a study that was done by James Henry former chief economist of McKinsey He had an estimate in a global study. He did that around 520 billion US dollar of assets Coming from Brazil or belonging to Brazil were in secrecy jurisdictions So that's quite an interesting number Brazil is that was mentioned the seventh highest cumulative IFF outflow among developing countries in the last decade And then you have the situation in the economy of course that many of you know much more about than me But increasing productivity challenges in the overall economy Company also by low levels of domestic savings and investments Brazil on average at least in the last decade has been Much lower than many other benchmark countries in the region and not to talk about Asia. I mean currently between 17 to 18 percent of GDP Several studies by the IMF by others as well have estimated what the level of investment would need to be at in order to Sustain growth at certain levels So this this is clearly an issue That is there that there is a lack of saving and a lack of investment Probably also for reasons then in the enabling framework and in the whole thing that we can get into discussing But there's no doubt that if you look at for example infrastructure There's a stock number there that was from a McKinsey report 2012 The infrastructure stock of Brazil was only 17 percent of GDP compared to benchmark countries around 50 to 75 Investment in infrastructure in 2013 only 1.5 percent of GDP. It's an interesting number. It's close to the number of Estimated illicit financial flows out of Brazil in the same year And then there are estimates from from university here of Rio also Looking at what would it take to really lift Brazil up to the level of infrastructure development that That you would expect considering its level of development They're talking about very very big numbers and many many times the current plans of the government and of course right now 2014 Brazil is in Officially in technical recession So and with decreasing levels of growth in the last few years and I mentioned already that estimated IFF was about the same as investment in infrastructure in 2012 And I think no one disagrees that level of infrastructure investment needs to be significantly higher So yes, the money is needed Of course, if it would go to the right place is a discussion of enabling framework and policies So outlook I'll try to wrap up and just leave a few things here that will be more discussed in the next session I guess, but if you look at the international picture What what is the outlook the risk is what I had commented and many have commented in the first session earlier this morning that The trend is upwards. So if you look at the risk scenario, I mean Currently the way things are going By all by all signs one would expect the numbers to increase So one would expect financial flows illicit once and listed to go up and Inequality also to go up. This is basically what Piketty says in his book as well He doesn't believe that it will stabilize or go down in the in the near future But what are some of the opportunities? There is a lot of international and more and more and increasingly and Agreement that this is a problem. It's not just an esoteric problem or a financial sort of side thing of the financial system It's a systemic problem that has to be dealt with in a different way than before So there are a lot of initiatives G8 G20 as well OECD is starting a lot of work on this and there's a lot of attention to political level IMF is starting a big big Research program on this as well UN and also some of the BRICS countries are doing very interesting things in practice including Brazil is doing very innovative things when it comes to the issue of transfer pricing and in terms of moving away from the traditional Approach within the OECD guidelines for example on arm lengths deal arm arm arm lengths practices to deal with the transfer pricing issue and Then there are other things that are under some of these initiatives automatic exchange of information Brazil has pushed for this extended country by country reporting and Global financial systems scrutiny. There is some emerging discussion on this Question is whether there is willingness to go far enough and to go structural that answer is probably no Because it's very political But could for example the BRICS as was mentioned this morning or other groups that are growing in importance Push this discussion somehow. I think there are like-minded countries in the Western world as well And many multilateral institutions are willing to look at this in a profoundly different way So I think needed I will say the same for Bastille I think what is needed is actually a new global and national approach to regulation and taxing of international business This is what is on the underlying the whole thing. We can try to patch part of the system Is it really going to make a difference? I don't know. I mean the numbers are not not promising and there are quite a few alternative thoughts and Ways of how to tax differently, but it would require of course an unprecedented perhaps Agreement at the global level between a lot of very strong interest and diverging interest to some extent as well So for Brazil Outlook, how is it the risks will increase in Brazil as well? No doubt I mean I talked about the needed investment in infrastructure and other parts of the economy Brazil in many ways is at the path fork in the road to some extent I mean many have talked about the middle-income trap You have gone to a certain extent with a certain model and approach They will have to be very large investments. No doubt if you're going to re-boost the growth So there will be a rapid increase in infrastructure investment Typically those have a high risk of corruption and a high risk of illicit flows as well This is the experience all over the world including in Norway where there are several big corruption cases going at the moment and Then pre-sale development you're talking hundreds of billions of dollars in investment this as well high risk area So I wouldn't really expect the risk to go down or the numbers to go down unless you are doing Something completely different or completely better than most other countries that have been in a similar situation Opportunity the good news is I believe in my very limited knowledge of Brazil is that there are some very innovative initiatives in Brazil and there is Also some political will to try to do things differently. So I mentioned the approach to transfer pricing and I think also there is new legislation coming some has arrived already and we will see now how this can be implemented and I think also what could be much needed is as well mentioned this morning to really use the Brick window and to work actively with with the coalition of strong enough partners to Influence really the new rules that are needed You need a new approach to in taxation of international business that I firmly believe and there is research going on I am on the research board research board of international center on tax and development There is they are doing new and innovative research. I believe in many partners and countries on some That could bring out some interesting findings. Thank you Stay seated. Well, I think this is a little bit more of a informal way of exchanging instead of just going to the podium And thanks for inviting me here. It's a great report and it's revealing I think a couple of interesting Sessions and a lot of interesting interventions. So I think we're going in a very very nice fact The title I gave to the notes that I wrote to myself just to have an idea where I could be starting from Title is Nuclear power and financial systems both have the capacity to blow up the world And I think he's into something when he says that okay Well, this should be very much in the front of the regulators in the central bankers nowadays So the growth of illicit capital flows as we could see from this report and for the past Reports that Raymond and his team put together very nice reports The the growth of illicit capital flows over the last I did three decades, but especially the last decade maybe And not only in Brazil all over the place I think this is one of the most telling manifestations of Something that I will call maybe sort of an audaciously a Structural change that globalized finance and globalized capitalism brought to us. I'm referring to financialization plus private interest driven Re-regulation people used to call this deregulation. I have a problem with that Word because I happen to believe that there is no such a thing as deregulation Deregulation completely regulation means anarchy means there are no rules. You can do whatever you want What we have is always re-regulation so the question is You regulate for the public interest or you let private interest write the rules that will be applied to them I think this is what exactly the sort of environment Institutional and legal environment that we're living through so financialization By financialization, I mean not only the growth in the size and in the profits of the financial system but More than that. I would say the industrialization of finance and the financialization of industry In the sense that finance now Doesn't really just loans Make loans for a few clients or even like a bunch of clients It packs their securities and they sell them all over the world. So that's industrialization of finance, right? and on the other side of the equation or the coin well Private corporate non-financial corporations all got financialized stocks buybacks and other things and the things that you Describe in terms of busy voicing in all all this refers to ways to avoid paying taxes and ways to increase their gains which Not necessarily or frequently has nothing to do with getting more productive Improving productivity. So that's what I mean when I talk about when I refer to those things. So the group of illicit capital flows and listed capital flows as well. I think illustrates the point In a sense that it falls in a very complex interaction Among domestic and international supervision and regulation tax authorities and tax rules, of course Financial regulators and tax shelters, which my colleague just mentioned and I will come back to this point in a moment So the obvious fact I will say I would say is that The reports as the report titles The title indicates they are and I will say a potential a potential hidden resource well Abundant again potential tax revenues in a world that that's starved for tax revenues that's a big point and Well those tax revenues could be doing what well, they could be doing a whole lot of things Raymond mentioned that they could be Funding helping to fund development are in the social programs poverty alleviation all the all those things combined There there's no lack of uses for them But maybe I think there is in they are insufficient that there is insufficient understanding in terms of what Add the bulk of the problem which I will Suggest it's a big regulatory flow Which gets us I think to the heart of all the financial system works And that was I think my point when I raised the question to Raymond in Earlier this morning so The obvious fact In terms of what adding to what I just said is that those flows they not only subtract From public interest related Uses, but they also add to purely speculative gambling activities and That's why I mentioned the potential the potential of a very negative type of multiplier If you'll multiply the operations you do with options and derivatives That's clearly not a good thing if the money stays but the financial Financial regulation in the place where or be it in Brazil be it in Russia be it whatever if you have crappy financial regulation that could be a big problem a lot of money that came to the US by the way and a During 2005 2004 2006 2007 he went there What for? for productive investments We know what happened with that money right it helped to inflate a Tremendous financial bubble so not necessarily liquidity equals investment productive investment or even a Responsible or sane consumption because again when we looked at the okay the housing boom and the way the housing boom was Managed this was consumption. Yes, but it was also it was also at the same time crazy in that net filled by Leverage and again, we were not well the US was in terrible shape shape in terms of managing that and the whole world Felt the blow So again the way the financial system works both domestically and Internationally speak It's I think at the heart of the problem in terms of this whole thing of illicit capital flows illicit capital flows and the way they link or do not link to develop but before trying to Close or wrap up offering some Comments, I won't say please I won't say I will Offer any answers to that but some comments before doing that Let me just take a small step back and get a little bit into the what I Think I will call the problem of the global, right? And this this also marks a lot of my trajectory at the Ford Foundation when I began there in 2006 it was I was running a portfolio called originally was called Global economic governance and then after the crisis it turned to be reforming global financial governance for the obvious reasons and And I was very much enthusiastic about the global the potential the potential and the Potentialities of some sort of global whatever global governance mechanisms go global governance Organizations go you name it What happened after I don't know six years at Ford I I stayed eight years, but maybe after Four or five I was already scratching my head in terms of okay What exactly is the potential of the global the global in terms of fixing the mess that were in the middle of? and By now I have to say I have much less faith in the global Then I used to have when I started there Some reasons I'm not obviously not gonna be Exhausting anything, but if we go and see the financial reforms and the financial The projects for financial reforms that are in place. So for example The Vickers report the Lee Cunning report the Vickers report basically UK Lee Cunning report is original But it's you right or what we have that's like the most has That's more meat into it. Not Frank not Frankville is us. It's not a global thing It's basically a US sort of regulatory reform, right? So we have an exception one exception there, which is the Stiglitz report the UN dash Stiglitz report of 2009 But this is the one that is less discussed and it's also what I think we have to say we have to I would agree with Someone if someone said well, but this thing is reported quite general. Yes. Yes. It is quite general But it's also truly global it addresses the problem from a global perspective, but still is just the beginning And it didn't fare well It it's not one of the most discussed thing. It's more or less. It passed It was discussed when he was released. I don't know maybe six months after nobody talked about that report anymore. So What's the reason? I'm not sure maybe because some of the ideas that are there are nice, but Tremendously difficult to implement even to begin to think about Implementation so they know very much the what's they don't very much. They don't know very much the house how to do So when we move from debates or proposals from the from from that to the facts I think it's fair to say we're six years after lemon right after lemon brothers I think it's it's it's fair to say that the situation we're in is far from encouraging I think the banking I think we know the banking system is more not less concentrated than it was Okay Global banks continue to do pretty much whatever they want They have a ton of money in which I was given to them free by the Fed And they are basically what really not doing anything not at Most of all they are not lending productively So is it it's sitting there or is being used is being used to to gamble Again, so that's not exactly exciting so and they don't need to lend to productive activities why because profits are booming anyway So the incentives to do that are simply not there again the way the financial system works counts a lot So if we look at who are the real The facto regulators nowadays Still are the credit rating agencies. They are the ones they mess up royally All the time, but they are still Doing the ratings and a lot of Corporations and even governments when they are Downgraded they have to sell some of the investments because the investors are not triple A or something like that And who who's on top of that credit rating agencies which were completely demoralized by the crisis itself So what exactly changes in that? So that's the landscape where illicit capital flows boom The last 10 years the last eight years the last four years So given that background the first question that I want to raise for discussion is the following well, is that Is it the case should should we be thinking that the case? Uh, is that not much can be done outside National borders meaning again the global dimension is not really very one that is very effective in terms of One is not able to manage whatever you think especially finance on a global scale And if this is correct if this is true So then the full question I think becomes The following what are the prospects for addressing this imbalance between global markets Global financial markets especially And the lack of a proper institutional framework to discipline them I think that question is still there not much was done in terms of resolving that there's not Not a very clear or or smart answer to that that one So if the global in itself is if if global governance is much more And especially again global financial governance is much more difficult To accomplish then some of us think it was Should we be concluding that financial globalization? After all is unmanageable. It cannot be managed And if so it should be reversed Less financial globalization should be something in the works because you can't have Global financial markets, which are completely unmanageable if you can't manage them If you don't have the institutional apparatus to deal with them So the logical response is okay. Then we have to reverse them Of that's something that I leave. It's a point that I leave for discussion. I'm sure that There will be people here that will not agree with me, but that's the point for discussion The second thing the secondly the question of and then I go let me Put together illicit and listed capital flows Both of them because Raymond you said oh, I don't I don't have a problem with the listed capital flows The ones that go and they are legal. I have why do I have this problem because I think that The impact that capital flows listed and illicit the impact that the destabilizing impact that they have in terms of domestic policy space in terms of the volatility of exchange rates and by Doing that the impact their impact on interest rates. This is a problem This is a real problem for development. Why because it creates a whole lot of uncertainties by Creating financial volatility and eventually financial fragility. That's minzki I'm really being minzki and here So it gets in a way of development the way I see it, but it's much less because This money represents a lack of savings. It doesn't It doesn't because there's no savings glut If you have credit You have investment You don't need to save first the household needs to save first in order to expand Banks can create money and especially Treasuries and central banks they do create money and after they do that Then they get the deposit. They don't need the deposits first to create the money afterwards So there's not a problem in that regard The question is financial volatility. So that I think is what for me is again the The cracks the The central point of the issue of the issue and the question that follows that is obviously how are global regulators Dealing with that and the response. I don't think it's thrilling, right? Let me jump to Just one episode that To give you a new illustration of that difficulty This was in jackson hole at the central bankers conference last year, right? Where we had this famous paper by ellen ray from the london business school And where she was saying well The basic takeaway that she had was The choice is the following One has to impose capital at jackson hole. So that was a really bold statement Either you have to impose capital control or you have to let the you have to let the federal reserve Run your economy, which is basically what you're doing And apparently this bold statement didn't cause any big storm among the u.s. Participators The then president, I don't know if he's still doing this to the president that then his lock heart was the the federal reserve the atlanta's federal reserve President he told the press very bluntly this We are there to set national policy for the betterment of the u.s. economy And do not have a lot of scope to go outside That set of considerations And the financial time summarized that episode with the title central bankers have have given up on fixing global finance Which I think it was appropriate because what he was saying was very good luck. Our problem is domestic even if As I think we know the federal reserve the closest thing that we have From a global central bank However, it's not a global central bank. It's the u.s. central bank and Its policies are domestically oriented. Otherwise, it'll be they will be even illegal So against this orientation The next question that I think I would like to suggest is how to build international cooperation On manage both listed and illicit capital flows If The most powerful central bank of all Has an explicitly domestically oriented Set of policies. How do you build international cooperation in a place like that? Uh Fourthly and then I'll go back to the fiscal shelters. This is I would say so much important than people People give them Well, it's it's it's one of the most crucial elements in this whole thing Why? well We all know and my colleague here all of just Underlined all this This combination this deadly combination of fiscal shelters off balance sheet operations And their combinations. There are the perfect vehicles for illicit capital flows as well as as well for the list. Okay Tax avoidance over leverage, etc But the really interesting question is this Why fiscal shelters are so Much used. Why do they exist? And the answer is simple Because they are legal They are perfectly legal So the question is this why fiscal shelters are legal Everybody uses them Why because they can there is no problem in using them again. They are legal So if one wants to get serious about anything in terms of global Regulation of capital flows, we have to have Capital controls as as one of the most important pieces of macroeconomic management on one hand And you have to close down fiscal shelters because they don't do any good for any of the things that we're thinking about They're just do harm for them. But again, they're legal and just before we think again Oh Caiman islands and there are other islands that they're all the Caimans and the jerseys They're linked to other islands Manhattan the uk, etc. And don't forget Delaware Okay, don't forget Delaware not Caiman not Jersey Delaware Just inside the u.s. Is a big fiscal shelter. Why on earth? This is legal So that's the kind of questions. So When we deal with illicit capital flows, don't get the first african african dictator that is there This is not a problem problem is in Delaware problem is in wall street. That's where the problem is So let's be clear about that and Just to wrap up and try to finish up, okay Uh When exactly Tax authorities Will begin to really cooperate with financial regulators Because they don't they don't cooperate And i'll give you a very brief example or i just meant i don't i don't i don't think i have time to do it But this the case of n ron is emblematic about that because n ron was reporting Record profit record profits because he was using the mark to market rule that was allowed to them by financial regulators on the other hand The irs the you american uh tax authorities were not taxing n ron at all Why because from their perspective n ron was not making any money There were there were no profits to be taxed But there were profits. They're showing up for financial regulators. They were not showing up They didn't exist. They were reporting potential future profits as existing profits The irs knew that financial regulations apparently didn't and they never talked to each other So this is a big problem when this is going to start happening because they don't talk Those agencies don't talk to each other and they should And lastly to close up really Regulatory capture that's again another big problem because regulators are Often not very well paid Sometimes they are not even well respected in the u.s. They weren't and the whole rigging post rigging and bushes, etc not respected And of course very easy to Get captured if you have I don't know all sorts of Perks and the next job and things like that not to mention Ideological capture, which means everywhere again in 2014 every single U.s. And uk whatever anglo-american universities are still teaching more or less the same things Same things the textbooks are the same. So Light touch regulation effective markets efficient markets, etc Remember who got the noble prize this year? Well shiller, which is against that and elgin fama the father of efficient markets Very much schizophrenic, but this is how the noble prize was distributed last year very much So what I think we're facing It's a very a truly unholy alliance in between ideas and Interests and the power of The financial industry I'm done. So What I would like to suggest and that's again a point for discussion Is that when we look at? Sort of the system that we have in place I would call it a system of governance by lobbying Lobbies are the one who exercise the who mobilize and exercise the governance If this is correct, I would say illicit capital flows are just the tip of a much bigger iceberg, which is the problem of after all Western style Democracy if representative democracy is there, but who really governs are the interests of the big corporations and the financial interest Can we really talk about true democracy? That's My final point and I thank you when I'm sorry that it went more more than I should thank you very much Thank you very much You know both of you made my my work tough because usually the moderator would be Taking notes of whatever it is agrees and would throw the these agreements on the on the Of the people who who made the statements, but I'm very sad to say that I agree with most of what said in this panel just beginning with Eduardo's presentation I fully agree that I I couldn't agree more With Eduardo on the difficulties of avoiding capture of regulators by the regulated I couldn't agree more with the Difficulty of having any multilateral agreement on anything You just look at the the trade Agreements we are on the verge of turning the world trade organization in the major and the huge dispute settlement Organization and that's all in the same applies to financial regulations and the regulation of capital flows Most central banks. I don't know of any any one central bank which has in its mission to help to fix problems of imbalance in the international market in the national financial market usually the The mission of a central bank Is to preserve the value of domestic money Which is another problem by the way the existence of several different monies in the boat some of them have an additional mission of Pursuing price stability with preservation of economic growth as the the federal reserve in the united states But none of them has any mission to take care of financial imbalances on a world scale So if such an institution doesn't exist, we shouldn't expect that these things would happen spontaneously I'm a bit dissatisfied with the the causes of of the the illicit flows Discussed here Because I guess it has a lot to do with the size of the tax burden That individuals and firms Have in their respective countries So Those tax heavens As Eduardo mentioned They they serve the purpose of channeling resources from heavily taxed countries to lower Taxid countries and then to really distribute the money back to Where the the return on investment given the institutional protection of investment Exists I have a doubt to a lot with your presentation I had the understanding That inequality in brazil Had been reduced dramatically especially during the the two firms of president lula and You correlated so to speak the The increase in illicit financial flows from brazil With the increase or understood it badly With the increase in inequality So I was puzzled but maybe understood it incorrectly And when on a world scale Inequality is also being reduced and it's being reduced dramatically because Of these incredible growth in china, which was one of the poorest Country number of people in the world and in india. So inequality is going down and On a world scale In brazil inequality is going down and the figures presented for illicit flows is not They're not going down. So I I would be tempted not to correlate The two but this is just a comment to provoke questions and more comments And I I would like to to uh to pass the word to the floor to To the audience to for the questions, please whoever wants to intervene Just give me the name And and to whom you would like to address The question, please the microphone Microphone it in a french, please First inequalities reducing is a kind of simpson paradox because Uh, you if you calculate at global level. Yes, it's reducing because the china is Growing but if you calculate in every place except from brazil inequality is growing so It's I would say that's a bit unfair from the point of view that People that are living this inequality that's reducing in a global level Um The idea that the bricks Will do something to change this. I think that I'm not sure if I I would say that it drowned it. It disappeared uh with ukraine or with the solution in with the crisis in Cyprus that Was the first time that the people that get the capital there their capital was destroyed Other situations the state intervened and saved the wealth But in cyprus they decided oh this wealth is not valid wealth It was a tax haven that was Wasn't heaven anymore I think that's the the idea the proposal that Russia Russia should be expelled of swifts And uh the Things that are happening like for example Argentina Banned by a court in new york from the financial markets and started to do swaps in u1 with china That's analyzed that's some kind of split happening and the the the idea that we can have A global solution a negotiated global solution It's not there anymore. So I believe that's some Taking the the point that all of put I I believe that's That's some kind of unsolvable split happening that this The this globalization financial globalization we're living they are It's about to dissolve by political problems. So I would like to see Perhaps if we go now we'll see this point the other thing in brazil we have an internal mastery So the thing is we have limits for the local levels of states to Make uh infrastructure investments and we don't have like china that has some Offsheets of balance structures That allow this kind of investment to be done a point that I saw Two times albert katal make here in brazil That's that's the the the huge difference because the We can't for example create an entity that would do the The fast train between ria and san paulo because we can't create enough balance public Entity anymore So that's the the thing we there are some more complicated things that the The late responsibility of fiscao and the other Or Kind of the the things that are in the agenda in brazil that make it quite difficult to do well, we have 10 more minutes. So what I'm planning to do is the following up I'll have two more questions if there are two more questions in the audience and then pass the The floor to both of the speakers for replies Any any more questions, please? I'm paulo vorobio Leonardo You've been quite pessimistic in a way in terms of your description of the impossibility of a global Global way of dealing with with finance and I think I made this point earlier that If we look at the post recession Regulatory Environment it's it changed very little In the margin in the margin there were some changes But in the beginning actually the the g20 was formed in a way to to Partially to to to do with this issue to To look at finance from a broader aspect But particularly your idea your idea of financialization Which means the financialization of industry the industrialization of finance I think it's it's I agree entirely but do you see do you see Any way where this conundrum could be moved From where we are one more question. Is that all? Well, maybe I should Yes floor first to all of you might address including my Yes, my my comments at the beginning and the and the Try to address the questions posed by the audience. Yes. Thank you very much Oh, I think it's uh, it's a very interesting discussion also taking a lot of notes on my My colleague here in this intervention. I fully agree and I think you summed it up well We seem to agree on a lot of the basic descriptions Uh I think I mean you the question you posed a bit I mean, is there anyone with the mandate to fix the global financial system imbalances and causes To some extent of course there are existing institutions that have have this as part of their mandate But have they been equipped to implement is another question perhaps the IMF for example Has to some extent some of these mandates. They had the ambition. I think under the former Head as well as under the current to try to move in that direction However, they don't have The means basically nor potentially The instrument the right instruments to really do it and it's unclear. I think whether Also, the big powers would want them to have that sort of leverage and and and those means But I do think they to some extent have it. I think in europe and in Parts of the western world. I mean another one is the bank of international settlements I mean they also to some extent have some of this mandate But again, they haven't been fully leveraged to do it. I think And this discussion goes on really in terms of whether one really wants And then the comment you made on causes of illicit financial flows. I mean, is it linked to We should be raising up the issue. Is it linked to that the tax burdens are too high In some other countries they are escaping from I think to some extent there It's it's an interesting discussion, but I think in many of the countries I have worked I was five years in sambia. I work mainly on the issue of mining and extractives the similar In tansania and I don't think necessarily there for example the issue was that The tax burden was overly high to be honest. I mean, it's much higher in many other comparable countries In fact, when I came they were at the global bottom when it came to effective tax rates on the mining But still they didn't collect practically anything in mining tax So it's it's a race to the bottom. Unfortunately a bit we are talking about here because of course If the alternative is zero rate then You know, I mean where where where is really? I mean, I think the crux of the matter here is that No one really wants and of course the shareholders want The company leadership to minimize their tax the tax expenses So as long as you have this as long as you are unable to put restrictions and to regulate differently Both at the global level and not to forget also at the national level because we haven't talked that much about it But it's actually possible also to do a lot of things at the national level some countries do much better Including my own country. Norway does very well in terms of taxing Petroleum and many countries actually in the case of petroleum managed to get a hold of a very large share of the revenue But the issue is more how it's used. I mean, Nigeria is an example where they don't manage But actually I've been looking and I'm doing currently a study as part of my phd work on this And there's a large difference between mining and petroleum So so the question here is a bit. Yeah, is the tax burden too high? Is that why they skip? It's a bit of a dangerous discussion I think also because if you can have zero, of course, obviously you would be pushed by your shareholders and your And your owners and your management to go as close to zero as possible as the big ones do Um And then on the inequality. Yeah, I mean you're right. I didn't I was a bit Unprecise and juggled the way I described these things. I wasn't implying in any way actually that In inequality in Brazil had gone up I think it's clear that it has gone up in Europe. It has gone up in us For several decades I think it's clear that yes at the global level because of China especially and a few other countries There is some sort of equalization happening But if you look within the countries There are huge challenges of inequality also in the ones that are very successful like china Uh, and still brazil. I mean even if the last decade you saw some progress and professor norah lustig and others have documented That this is not just brazil but parts of latin america Still the levels of inequality are very high um So, you know, uh, yes, I mean it's very good I think Concrete policies that led to this and a lot of effort from brazilian government and brazilian people to Historically then for almost the first time Reduce inequality Still there is a long way to go. So I think and that I mean coming again having worked in africa There are huge challenges linked to inequality and we know That it's not That it's not Any more some economists had argued earlier that this was part of the expected path and That you have to sort of settle with that inequality has to be high and somehow sometimes also it would be good for growth I think at least this discussion is over Now even the imf and others have now come out with reports saying that no there is empirical evidence showing Clearly that if you do invest in reducing inequality in efficient ways It's both good for development on the social side and good for your growth rates So you have this now for the western world and for developing countries so this was the point there and then on the On the discussion on the bricks and uh, yeah, I mean I I was just throwing out some ideas here I I I don't really know too much about it. I agree With with with my colleague who was saying that this is is really at the international level is very difficult how to how to deal with these issues And but I do I I I think I will go back to saying also that I do think Brazil and also other Developing economies can do a lot more at the domestic level Uh, and I think actually that this whole issue of the Financialization of industry and the derivative issue. It's actually not unsolvable at the national level I would actually insist that it can be dealt with To some extent not solved fully Let me give you one example from Africa and that is that in most countries in Africa and it might be the same here as well When you deal with the balance sheets or multinationals that do mining or petroleum activities Normally, for example derivative activities are allowed in the tax accounts Now, why do you allow it? I mean you open the playing field for speculation and for abuse You could simply do as was done in sambi at some point Although it was later reversed because the president died. There was a new government coming in and policies were reversed We simply put it out of the regular core mining tax Uh legislation and dealt with it separately What did that mean the mining companies were up in arms about this because for the first time they could not Write off huge fake losses that they did through derivative actions In their core balance sheet that was reported to the tax authorities in sambia What did it mean? It meant that suddenly they have huge surpluses that had to be they had to pay tax Supposedly they managed to negotiate the president died and then yeah It's a long story and I've written a paper about that as well that is available on the net but uh I think you can actually regulate for certain industries and for parts of the economy to avoid part of the issue With the derivative and other sorts of financialization of the economy So I agree. That's why you the issue of regulation You need to actually have tough regulation and to separate Between these different elements to not let it uh erode your tax base to such an extent It's possible to do that has been done in several countries. It's not impossible Thank you Okay, uh, let me get first to I think what is the The really biggest question which was raised by paulo, uh, which is well, I am quite pessimistic Do I think that uh, there is any solution at hand and my answer for that is well, not really why because it's not a technical problem in terms of Technicalities, I think I I mentioned some elements, which I'm not saying that is easy, but you can figure out For example, much less financial Globalization than what we have today. How do you do that? You use much more capital controls as a key tool on your macro financial management You close down fiscal shelters Or you impose tremendous restrictions on on them Uh, you get tax authorities to really interact on a daily basis and that that can be done today on with electronic platforms You can't do it domestically and internationally All those things Can't be done from a purely technical perspective. What is the problem political is a problem of political will The elites which would be the ones cable Of managing that managing not solving completely but managing that problem getting getting it to a much better I don't know plateau They are part of the problem. They're they're almost all involved With this so it's very complicated Uh This is a very complicated issue to Change the political will that would enable the technical solutions to happen. That's why I think that I I always scratch my head in thinking about that Not disagreeing with with with you that yes, some countries do much better than other countries. Yes Singapore for example is the The Best example that you can really do Much better in all those things one of the reasons being they are the best bureaucracy in the world And why is that among other things? They Are very well respected. They get a very nice salary They get tenure But on the other hand if they mess up they go to jail right away And they can do it. So yes, it's possible. They they have a truly Viberian Viberian kind of bureaucracy and that works But if you have the reverse Then It's very difficult because you you're already handicapped when when you begin with when you when you you build Your public infrastructure to deal with those problems You're already handicapped if you start by saying the state is part of the problem not of the solution You're already you're at the loss of the battle Just to get like two very quick observations your your Or that in terms of the the idea that illicit capital flows that you are not very Satisfied with the explanation for them, right? And I think that the explanation for them. It's really easy It's like why do you have illicit capital flows growing and growing and growing because they can Because all the conditions are there for them So would you rather if you if you're a corporation or a very wealthy individual, etc And you have the opportunity of paying And then I again, I don't think the tax burden is a big problem because if I can choose Am I going to pay 50 percent tax 10 percent tax or zero tax? I would say once Well zero tax if I know that I can do it I will pay zero tax So I will do it if it if it became so easy to do it Then It really does not depend on the tax burden in itself. It depends on the incentives and the easiness That you can do it if on the other hand you post a lot of fences And you control much more money and money out and you identify who is doing what Then it becomes more complicated, but that's not the world we're living and just like the One one One beat of a of an observation that I I can't resist Just mentioning because this appeared more than once already In the morning and now in terms for example of okay one of the The good things that If we're able to curtail elicit capital flows would be for example We would have a lot of money to invest in infrastructure. There is so so badly needed again We don't need it would be great to contain elicit capital flows But we don't have investment in infrastructure at least here in brazil because there's only one Institution that does it it's called the nds the Banco Nacional de Desenvolvimento Econômico and Private finance private financial institutions don't do it. Why they don't do it again because they can Because of their portfolio preferences short term portfolio preference They can make a ton of money not putting one dollar in infrastructure investment. Why would they? If they are able to profit immensely without doing it so again Regulations and incentives. I think this is the name of the game Thank you. I guess We are about time to finish the session. I would like to thank both speakers and the attention of the audience And now we make a break for the next section. Thank you very much. Thank you