draining development.pdf - Khazar University

Tax Havens and Illicit Flows 339This chapter sets out the key questions on this important researchagenda that has now become an urgent one also for policy. There arethree main areas requiring further analysis: the definition of tax havens,the broad development impact of tax havens, and the specific impact onparticular developing countries in different regions and at variousincome levels. An additional issue that should be addressed urgently isthe lack of data to examine these questions.The chapter addresses these questions in turn. We begin by consideringthree related, but distinct concepts—tax havens, offshore financialcenters, and secrecy jurisdictions—and the various definitions that havebeen offered for each. The lack of clarity in definitions has been a significantbarrier to greater understanding, and it emerges from our discussionthat the fundamental feature of these concepts relates not to theprovision of low(er) tax rates, nor to the provision of financial servicesto nonresidents, but to the secrecy associated with each provision. Thefinancial secrecy index (FSI) is therefore identified as a potentially valuabletool for further research.We then briefly survey the literature on the development impact ofsecrecy jurisdictions. This serves to highlight two main points. First, thekey damage appears to stem from the functions attributed to secrecyjurisdictions, rather than to the functions of the alternatively definedentities discussed. Second, the literature identifies a range of powerfularguments about the impacts, but does little to differentiate amongdeveloping countries and tends to treat the experience of these countriesas homogenous. Greater evidence of direct causality is also required.The next section takes the first steps toward providing a more differentiatedanalysis of development links. By considering a range of bilateralflows and stocks in trade and finance, we identify the key areas inwhich different types of developing countries are most exposed to thedamage that relationships with secrecy jurisdictions can engender. Theclaim sometimes made that developing countries are less at risk thanricher economies finds no support in terms of the recorded scale ofdeveloping-country exposure. In addition, important differences inexposure emerge among developing countries in different regions and atdifferent income levels.This chapter does not set out to prove causal links between the exposureto secrecy jurisdictions and damage to development. It does, how-