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Anglo-Disease Sidelights (1): UK = Tax Haven

by afew Fri Jun 22nd, 2007 at 11:01:51 AM EST

The Anglo Disease was introduced by Jérôme here and here, and defined (by allusion to the "Dutch Disease", but referring directly in the case of the US/UK to the financial services industry) as a situation in which an "industry with much higher returns... made investment in other sectors relatively unprofitable and eventually generated economic hardship". A recent (April 2007) working paper from the International Monetary Fund throws an interesting sidelight on the question - with a bang.

It's by Ahmed Zoromé and is entitled Concept of Offshore Financial Centers: In Search of an Operational Definition. As his title suggests, Zoromé works on the definition of Offshore Financial Centres (OFC), often called (perhaps mistakenly) tax havens.

In recent years, there has been an increasing recognition of the need to improve the understanding of the activities of offshore financial centers (OFCs) because these centers have captured a significant proportion of global financial flows. <...>

Notwithstanding this focus, there is no unanimity on what constitutes an OFC.

Zoromé examines the definitions proposed so far (by academics or by the IMF), and concludes:

All the definitions examined above tend to equate OFCs with a regulatory and taxation phenomenon and do not differentiate OFCs based on distinctive (preferably measurable) macroeconomic features they have developed as a result of the cross-border nature of their financial intermediation.

He offers this definition:

An OFC is a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy.

Zoromé both examines the reliability of the data - excluding insurance from financial services because of problems of incomplete data - and works through the formulae that might turn the general definition into better metrics than those previously used.. He separates a high-income group of countries from a low-to-middle group, and gives them different treatment with the same aim of calculating a ratio of financial services exports to GDP. He then uses the standard deviation as the threshold beyond which a country may be considered an OFC.

For the high-income group, we find (lo and behold!):

The United Kingdom makes the list of OFCs.

How significant is this? Well, it's one guy doing some statistics according to rules he thinks are solid. It's a working paper, so does not officially represent the views of the IMF (though it may form the basis of future IMF doctrine). Anyway, does it matter so very much if we call the UK a tax haven or Offshore Financial Centre? (Well, that one's a debatable question, imo...)

But - re the Anglo Disease - it does show that the ratio of financial service exports (that part of the financial services industry, outside insurance in this case, that caters for external clients) to overall GDP is relatively high - in a country whose GDP places it in the top bunch of the world's economies. The UK is the largest economy in Zoromé's list.

The second sidelight (next week) will come from another IMF working paper and some Bank of England reports.

I plan to write an introductory diary to the concept, trying to make it clearer to non economists.

but Real Life has way to intrude, lately...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Jun 22nd, 2007 at 11:24:05 AM EST
for an important datapoint in that respect.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Jun 22nd, 2007 at 11:24:27 AM EST
[ Parent ]
It's interesting to notice that, besides United Kingdom itself, most of the outstanding OFC appearing in this list are either British crown dependencies (Guernsey, Jersey, Isle of Man) or British overseas territories (Bermuda, Cayman Islands)...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Jun 22nd, 2007 at 11:55:18 AM EST

In praise of shopkeepers and sellers

But just as Britain led the world into industrialisation, so now Britain is leading it out. Today you can still find a few British engineers and scientists making jet engines and pharmaceuticals--and doing rather well at it. But many more are cooking up algorithms for hedge funds and investment banks--where in many cases they add more value. The economy has boomed these past 15 years, as manufacturing has been left behind and London has become the world's leading international financial centre. Britain's deficit in manufactured goods is hitting record highs. But so are the capital inflows.

And it's all Napoléon's fault, apparently...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Jun 22nd, 2007 at 06:39:33 PM EST
I hear it is the fault of the americans in that they let Russian collapse, and the money had to go somewhere, and it went to London, where the russians invested in property...and lo!  The value of my property has noticed.

Don't fight forces, use them R. Buckminster Fuller.
by rg (leopold dot lepster at google mail dot com) on Fri Jun 22nd, 2007 at 08:27:00 PM EST
[ Parent ]
 But many more are cooking up algorithms for hedge funds and investment banks--where in many cases they add more value.

Add more value?

Extract more value from the productive sector I'd say.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Jun 22nd, 2007 at 08:34:11 PM EST
[ Parent ]
and through the looking glass out of hamelin they followed the nonsensical tune, seeing that down was up, and 2+2=3.5, (when the man behind the curtain takes his slice).

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sat Jun 23rd, 2007 at 08:02:32 PM EST
[ Parent ]
Mandatory wikipedia links:

Of course many centers are both, in a small place even a low fee on bank registration is more than enough to cover government needs and so no tax.

On the mechanism at work, these places sell one commodity: obscurity. There are two non exclusive ways to reach it:

  • Legislate it (banking secrecy laws, eg Swiss)
  • Have the executive/judiciary branch not look at possible crimes

Let's not forget the second way is as efficient as the first and is used by the UK, as seen with Carousel VAT fraud:

Figures from Eurocanet, a European Commission sponsored project, released in September 2006, appear to show that the United Kingdom is the main victim of this fraud, having lost an estimated €12.6 billion during 2005-6, followed by Spain and Italy which each lost over €2 billion during this period.

UK loses the most because it doesn't monitor that its businesses follow the law in its simplest form. See the article for a detailed description of the scheme.

by Laurent GUERBY on Sun Jun 24th, 2007 at 03:24:21 AM EST

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