!!!!!!!!!!!!! International!Political!Economy!Exam!2012!!BSc.!International!Business!and!Politics!!!!!!!

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1 InternationalPoliticalEconomyExam2012 BSc.InternationalBusinessandPolitics

2 TableofContent Introduction.3 Graspingtheconcept...4 ThejuridicalBifurcationoftheState 5 Forbetterorforworse. 7 FinalRemarks.9 2

3 Introduction The offshore world is no matter what ones opinion is to it, a large part of the modern global economy. As capital has become hypermobile and globalization has put its mark, offshore economies have despite economic crises continued to prosper. It is an ethically loaded question for people, as it is seems as circumventing of one s duty as a citizen to deposit one s funds in an offshore institution. Taxhavens and their juridicial bifurcations have led to various conflicts between developed states, as the country s own interests are at stake. What seems to be an easy puzzle to solve, turns out to be highly complicated. This paper will define the concept of the offshore world, seeking to understand and thereby argue whether it can be eradicated or not. And whether this a desired matter for the developed states. The paper will start off by defining the offshore world using Ronen Palan s definition of the offshore world. His understanding of the offshore world along with concepts from Robert Murphy, will be the foundation when discussing the offshore world. The second section will look at the jurisdictional bifurcation of the state, using Susan Stranges competitive game approach as well as her view upon structural power. I will highlight whether the global governance has changed seen in the light of whether offshore financing can be understood as an example of markets taking over the state and whether there has been a loss of sovereignty for the state. Lastly I will argue why we as citizens of the western developed world should use energy on being concerned about the offshore world. 3

4 Graspingtheconcept When trying to grasp a concept as fluffy as the offshore world one must look at the various dimensions behind it because of the lack of a proper definition along with the numerous interpretations of it. Words such as tax havens, sovereignty and secrecy are often the first thing that strikes ones mind. What is the offshore world and what/how is the structure of it? Who do they affect, and who are the actors. Is it states, markets, institutions or people? Are we talking about rich Russian Oligarchs who are involved in money laundering? Or is it normal people such as your neighbor who has a bank account registered in Jersey? There is an ongoing debate within the world of IPE on how to define the offshore world. Should it be referred to as the offshore world, tax haven, offshore financial center or the secrecy world? Or should it be referred to as something completely different? Some claim it depends on whom you are talking to along with what their agenda is (Murphy 2009) seeing that actors such as the OECD, the EU and the UN Tax Committee with focus on tax evasions call it tax havens, while the IMF and the Financial Action Task Force place a greater focus on calling it Offshore Financial Centres (OFCs) The offshore world can be looked upon in many ways as an example of this, Palans assertion of what offshore refers to is not to a geographical location but rather a set of juridical realms marked by more or less withdrawal of regulation and taxation on the part of a growing number of states (Palan 2003). To reach the abovementioned definition Palan considers all transactions that take place within these offshore economies to take place in specifically designed juridical enclaves distinguished from their onshore counterparts by the removal of some or all state regulation. To be able to fully understand the thought behind his definition of offshore, the term onshore has been brought before us because when having an offshore logically there must be a counterpart, i.e. onshore. Therefore when distinguishing between offshore and onshore activities, we have a separation of territories with different regulations where offshore activities have the characteristic of providing favorable regulations for foreigners by low degrees of taxation and regulation (Palan 2003). Offshore activities all take place in specially designed territories (whether it is Export Processing Zones, EPZs, or tax havens) almost similar to the onshore activities, however here some state regulations have been removed. 4

5 Onshore is then the actual physical territory where the jurisdictions legal regulations are to be followed, while offshore is on the other part of the fence where the jurisdictions favorable legal regulations apply. Thus by having an offshore world or in other words, for an offshore world to exist, we see a juridical bifurcation within the state. TheJuridicalBifurcationoftheState Taking a further look at the juridical bifurcation of the state, the basic state and sovereignty relationship should be considered when looking at why offshore economies exist. To understand this, we must look at the basic notion of why offshore economies exist. Off shore economies exist because people try to evade regulations and taxations from the state. Yet as both Palan (Palan 2003) and Murphy (Murphy 2009) agree on, the language and lack of clear definitions and interpretations can easily confuse us when discussing state and sovereignty. The heart of the offshore world is jurisdictions yet not all of them are fully sovereign as some are dependencies of nation states such as Isle of Man while others are protectorates e.g. the British Virgin island (Murphy 2009) though they all share the same common denominator namely the exclusive right to write law - law that can be considered valid even outside of the areas. The archetypal of the offshore world is tax havens, which often make use of as little regulation as possible along with extremely liberal tax regimes. Secrecy is one of the keywords here. One charecteristica is the lack of transparency where you enjoy secrecy of owenership along with having the possibility of picking someone you know to be the owner (nominee owner) enabling you to have several accounts, transferring money between them, the lack of a public registry of shareholders is also one of the characteristics such as e.g. Bermuade where you in one building have over a thousand companies registred (Duncan Wigan, Lecture 11). According to Adam Starchild tax havens are countries that have enacted tax legislation especially designed to attract the formation of branches and subsidiaries of parent companies based in heavily-taxed industrial nations (Palan 2003). However with Starchild definition we once again encounter the problem that not all tax heavens are countries, such as Switzerland. However the basic idea is that tax havens undermine the rules in which the people buying the services/using the services of the tax haven really live combined with enormous secrecy measures. 5

6 This is what makes offshore economies and tax havens so interesting, also because the system which tax havens is trying to avoid is actually the system supporting its existence. This will be covered later on in the paper when discussing why the offshore world is so hard to eradicate. All in all, the juridical bifurcation of the state is what differs the offshore states from being what one might think at first; as being a liberal nation state with the focus on maximizing economic wealth. However, should offshore financing be understood as an example of markets taking over the state? Looking back at why tax havens were created, tax heavens came to be created because of an accelerated liberalization of capital account and financial innovation whereby states (markets) saw a possibility to attract business by lowering taxes. The lowering of taxes is seen not only between states in the attempt of attracting foreigners, also within countries such as in the case of Switzerland where they have experienced intra-cantonal competition which has led to immense lowering of taxes on individuals (personal tax) and corporate tax. This follows the neoliberal idea that capital can move about freely, so when capital began to be liberalized and global economic inequality and instability began to kick in, tax havens (and a kind of outbidding of tax regulatios) were constructed. The neoliberal view posits how markets always will distribute resources in a better way than the government, thereby increasing the well being of humans to a greater extent than the government. As mentioned in Palan, Murphy and Chavagneuxs Tax Haven Susan Strange said : states are now engaged increasingly in a different competitive game: they are competing for world market shares as the surest means to greater wealth and greater economic security (Strange 1988, Palan). This is also very much related to Strange s approach to structural power, the idea that the ability to shape your own rules in a particular area, are the ones were power resides. (O Brien p. 38). And power, is exactly what it is about when talking about the offshore world. Strange s approach can help us in this. Some states find it hard to finance their activities and therefore seeks to other solutions such as offshore financing, however we also see how taxhavens favour MNCs and thereby slowly letting the markets dominate the power relation between states and markets. 6

7 In OFCs such as London and New York, with big banks like USB and HSBC along with big MNCs like Starbucks and Google, we observe how there s a new way to which actors interact, a shift in the global governance. But does a shift towards market mean loss of sovereignty for the state? Or has the state just adopted a new position as sovereign? In an attempt of explaining how the political economy of the offshore world best should be understood, one should look at the relationship between state and sovereignty and the development thereof to understand the different approaches of offshore tax havens. If taking Jean Bodins thinking of unrestricted sovereignty of states into consideration, the notion that From a constructivist point of view, offshore economies can be considered as radical redrawing of sovereignty (Palan 2003). This can be seen as a point where the sovereign right to write law is considered a basic notion of international order. Palan illustrates this with bringing up sovereignty as a commercial asset. One of these is the commodification of fx human rights such as selling passports or citizenships for money. When examining how the power structures and global governance has changed, we come closer to answering the question of why the offshore world is so difficult to eradicate. The question is, if the western developed world really wants to eradicate it, and if so, are we actually trying our hardest to do so? And why should we be concerned about it? Forbetterorforworse One of the main issues in the offshore world is of course tax havens. One of many reasons for why it is so hard to eradicate the offshore world is because of the underlying perception of sovereignty and taxation, as taxation makes up one of the founding pillars of what it entail to be a soverign state nowadays. Taxation has always been considered the sovereign states prerogative. Taxation is also a point of sovereignty that states will not willingly give up. Another point is, that even though most tax havens are dependencies or protectorates of a state or oversea territories such as e.g. Turks and Cairo being a British overseas territory, the main country rarely uses their power when e.g. corruption is detected. In Turks and Cairo s case, the British government suspended the self-government of Turks and Cairo on that basis. But there is a fine balance between when states want to intervene with OFCs and tax havens, and when not. 7

8 One might wonder why we should use energy on being concerned about the offshore world, about tax havens? Why do not we not just turn the blind side instead of using immense amounts of work on it? Contrary to Hobbes state of nature where everyone fights for himself or herself, we live in a world today where we do not accept illicit activities to take place right before our eyes. (Some countries that struggle with corruption and dysfunction states Russia as an example hereof might allow money from crime to pass right before their eyes). The money that travels through tax havens are very well likely to be proceeds from terrorists, cash from corruption or money that is being whitewashed to avoid paying taxes in the homecountry. These funds have been estimated to be between USD 1 trillion and USD 1.6 trillion, a year. Out of these amounts an estimate of that of % of them are connected to violation of taxes. (Baker 2007). Therefore, there is a good economic incentive to eradicate these secrecy rules. When having established the economic incentives for dealing with the offshore world, the shift in global governance can be looked upon. One can observe how the G7 countries (UK, USA, DE, JP, CAN, FRA, IT) and OECD states have lost their dominance over the global economic governance, one of the reasons being how they don t include China and India. The strong and dominant developing countries as China and India are the ones leading the game now. (Sharman 2012) The power that the G7 and OECD countries no longer enjoy, one of them being the ability of the G7 to hold access to their market (Sharman 2012), is just one of the important factors that ensured their status in the world economy. Once tax havens primary customers were within the OECD countries, the core countries, as they were the only consumers of financial services however as there are so many emerging economies from non-core countries who now are interested in buying financial services from tax havens, tax havens are not dependent on the OECD countries to be able to survive. Basically, this means that the OECD countries are placed in a weaker position in terms of controlling the tax havens and trying to eradicate or at least lessen their influence, as the tax havens market their services to non-oecd countries (Sherman 2012). But do the OECD countries and the other core states really want to eradicate tax havens and OFCs? 8

9 Throughout history, it seems as if the core industrial countries have had an equivocal attitude towards them. In an 1996 article in the Economist, it was stated how the British government tolerates the offshore financial industry on the assumption that it brings more money into Britain by channeling more expatriate and foreign wealth into London than is taxen out by people working tax dodges. Is it possible that there are some positive attributes in tax havens if you look beyond tax degradation? Does e.g. the facilitation of registering businesses contribute to something good, i.e. a greater return on investment? Can it increase productivity in countries with high levels of taxation? According to Desay, Foley and Hines (2006) if profits from a country with high level of taxation, is placed in a tax haven, thereupon the return on investment in the high tax country leading to making them more attractive for future investment. FinalRemarks Since the liberalization of capital, the offshore world has continued to prosper living through economic recession, wars and other turbulent affairs. The concept of the offshore world is one that is hard to define, as most thinkers on the subject seem to struggle to come to consensus. By using Palans definition of what the offshore world is, one can see how harmful and how many trillions of dollars that flow through these offshore economies on a daily basis. This once again stresses the fact that the offshore economies and tax havens should be demolished. 9

10 Bibliography O'Brien,Robert,andWilliams,Mark.(2010,)GlobalPoliticalEconomy: EvolutionandDynamics3rdedition,HoundmillsandNewYork:Palgrave Macmillan. Palan,Ronen(2003)TheOffshoreWorld,Ithaca:CornellUniversityPress.Chap 1,pp.17S62. Strange,Susan(1994)StatesandMarkets.London:Continuum. Sharman,Jason(2012):CanariesintheCoalMine:TaxHavens,theDeclineof thewestandtheriseoftherest,newpoliticaleconomy Palan,R.(1998).TryingtoHaveYourCakeandEatingIt:HowandWhythe StateSystemHasCreatedOffshore.InternationalStudiesQuarterly,42:625S 644 Palan,R.,Murphy,R.,Chavagneux,C.(2010):TaxHavens:HowGlobalization ReallyWorks,CornellUniversityPress.P.142S160 10