@JulieAnneGenter tax havens underwrite The Great Escape from extreme poverty in developing countries

Tax havens and offshore financial centres are vital to the economic development of poor countries. There are plenty of countries, poor countries, where the ability to move funds offshore is fundamental to successful investment. That is missed in the reporting of the Panama Papers:

Consider the big names that have shown up so far on the list. With the notable exception of Iceland, these are not countries I would describe as “capitalist”: Russia, Pakistan, Iraq, Ukraine, Egypt.  They’re countries where kleptocratic government officials amass money not through commerce, but through quasi-legal extortion, or siphoning off the till. This is an activity that has gone on long before capitalism, and probably before there was money.

Tax havens and offshore financial centres offer a way in which entrepreneurs can make an honest investment, secure a return and put it aside safely from the reach of the minister’s cousin who wants to muscle in once the business succeeded.

A major problem in poor countries is short time horizons for investment. Entrepreneurs must make their money quickly.

Many years ago there is a survey of entrepreneurs in Russia and Poland. It was in the early 1990s. Each was asked whether an investment project that doubled their money in two years was worth the risk. The Russian entrepreneurs mostly said no, the Polish entrepreneur said yes.

So insecure are the returns from investment in Russia at that time that the phenomenal returns were required before an investment was made. They would only invest if they could double the money in two years.

Many years ago, Mancur Olson wrote an insightful book about prosperity and dictatorships. He introduced the concept of rights intensive production.

As countries become more and more developed, investment horizons lengthen and depends more and more upon the enforcement of contract and property rights in a tolerably honest way.

Instead of being the first entrepreneur to introduce the most basic technologies and profit handsomely, entrepreneurs are introducing a product upgrade or new product that is a minor improvement on current offerings. Such investments will take time to pay off.

In many developing countries, China as an example, property rights are insecure. One way to secure your investment is to take the proceeds offshore to a tax haven. If everything goes wrong, at least you got some nest egg overseas.

As many developing countries have corrupt politicians and dishonest courts, the way to secure gains from honest investments is to move some of the profits offshore. That is why tax havens are essential to poor countries growing richer.

One of the sources of Hong Kong prosperity was investors would deal with a Hong Kong-based company with the requisite political and economic links to China. They could enforce their contracts in China against their Hong Kong assets because the contract was based in Hong Kong under British law.

If the local legal system is inadequate, entrepreneurs well look overseas for mechanisms to force contracts and secure their returns on investments against confiscation.

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