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ActionAid’s report Hole in the Pocket estimates that the predicted fall in economic growth for developing countries is equivalent to a total loss of US$414 billion, resulting in a downturn that could force them to make further cuts in vital spending on education, health and rural development. The current crisis may also see rich countries reduce aid budgets in 2009 and 2010 to mitigate the fiscal costs of their financial bail-outs and economic stimulus packages.

Christian Aid’s report The Morning after the Night Before illustrates how international governments have ‘looked the other way’ as multinational corporations exploit inadequate global financial regulations and tax havens to the detriment of poor countries.

Large international businesses have minimized, avoided, or illegally evaded their obligation to pay tax in many of the countries in which they operate. In the developing world alone, tax evasion by multinational corporations currently amounts to US$160bn a year – enough to save the lives of 350,000 children under the age of five each year.

The rapid multilateral action taken by rich countries to rescue the financial sector proves that international cooperation is both possible and desirable. Reform of international and national financial regulation presents a unique opportunity to deal with the problems of banking secrecy, tax evasion and avoidance - factors which both helped to cause the crisis and could prevent developing countries from falling further into poverty. 

ActionAid International: Hole in the Pocket: Why Unpaid Taxes are the Missing Link in Development Finance

Reform global finances to help the poor, world leaders urged

27th November 08 -  ActionAid International

As world leaders and finance ministers meet this weekend to discuss funding for poorer countries, two leading development agencies are calling for major reforms of the global financial system to give the war on poverty new momentum.

Christian Aid and ActionAid are concerned that the present financial crisis will be used by rich countries as an excuse to renege on aid commitments to the developing world.

The crisis, they say, should instead be seen as a rare opportunity for root and branch reform of the financial system that would benefit both rich countries and poor countries alike. In particular, they want the Doha Financing for Development conference, which opens in Qatar on Saturday, to:

• Agree the need for new banking and accounting regulations to stop tax dodging by transnational corporations and other businesses. Such activities deprive the developing world of billions of dollars of badly needed revenue each year.
• Take steps towards ending the banking secrecy offered by tax havens.
• Require the upgrading of the UN Committee of Experts on International Co-Operation in Tax Matters into an intergovernmental body, which could progress the above and more.

The demands are contained in two reports launched by the organisations, The Morning After the Night Before: The Impact of the Financial Crisis on the Developing World, from Christian Aid, and Action Aid's Hole in the Pocket: Why Unpaid Taxes are the Missing Link in Development Finance.

Christian Aid has calculated that tax revenue lost to poorer countries annually through evasion amounts to US$160bn. If used according to current spending patterns, the money could save the lives of 350,000 children under the age of five each year.

ActionAid says the situation for developing countries is likely to deteriorate rapidly as the financial crisis bites ever deeper. It estimates that more than US$400 billion worth of growth could disappear by 2010.

"The turmoil now engulfing the world’s wealthier economies can be traced directly back to the same factors that have undermined the developing world for years, condemning poor countries to a cycle of poverty," said Christian Aid's policy manager Alex Cobham.

"In rich countries, lax banking and accounting regulations, and tax havens offering banking secrecy, led to a massive credit boom which has now ended in disaster. In poor countries, the same factors have for years enabled many transnational corporations and other businesses to minimise, avoid or even illegally evade altogether paying the tax revenues that the developing world so badly needs."

Anna Thomas Head of Economic and Social Development at ActionAid said: "For every pound that arrives in poor countries in aid, five pounds is removed illicitly out of the desire to evade tax.

"We work with people who have no schools for their children, no doctors and nurses when they are ill, and who don’t have enough to eat. The tax payable on capital illicitly removed would pay for services that we take for granted in the UK.

"Doha is a window of opportunity to allow poor countries to have a say in international tax regulation."

Both Christian Aid and ActionAid say upgrading the UN Committee of Experts on International Co-Operation in Tax Matters into an intergovernmental body would help end the secrecy tax havens offer.

The move is supported by more than 70 of the world's poorest countries, but the UK Government has lobbied against it. Some 30 of the world’s 70-plus tax havens are Commonwealth countries, Crown Dependencies or British Overseas Territories.

Further UK support for havens was apparent when it exempted its Overseas Territories and Crown Dependencies from the UN Convention against Corruption which it signed in 2006.This weekend’s Doha conference is to assess the progress made towards realising the 2002 Monterrey Consensus on Financing for Development, which signposted how public and private funds could be used to help poor countries.

The consensus was reached in 2002 in Monterrey, Mexico between more than 50 heads of state and 200 ministers of finance, foreign affairs development and trade, as well as heads of UN organisations, the IMF, the World Bank and World Trade Organisation.

Worrying indications have emerged from pre-Doha negotiations taking place in New York that rich countries may block progressive measures on tax to the extent that the conference actually weakens the consensus.

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