Financial Transparency Coalition

[youtube]http://www.youtube.com/view_play_list?p=81A5B656D49CBC7E[/youtube]

As Prepared for Delivery

I run the international development program at SAIS, at Johns Hopkins, and for the last several years I’ve been involved in governance issues because it does seem to me that the development community has finally woken up to the importance of good governance and institutions.  Obviously, the fight against corruption is a key part of this agenda.  I think there is a very broad consensus that has fallen into place over the last decade or so about just how detrimental corruption is in undermining the legitimacy of democratic institutions and in impeding growth.

If you bear with me I’m actually going to take a little bit of an historical detour because for the past couple of years I’ve been involved in writing a very long book on the origin of institutions, and among the institutions that I’ve been looking at is [the rise of] accountable government, political accountability, or what we call democracy today.  This will get back to the subject at hand, you’ll see.  I’ve spent a lot a time dealing with early modern Europe in the 16^th -17^th centuries. The rise of representative democracy in the West was very much related to the desire of absolute monarchs in this period to tax their populations and in many respects Parliament in England would not have become the body that it is today but for the fact that the early Stuarts wanted to tax British taxpayers in order to raise money for wars. That was the main driver of the government’s demand for revenues in this period.  And those of you who know the history of the 17^th century in Britain know that they actually fought a civil war, a long civil war, and after that was overn eventually ended up replacing their monarch with a pretender from the low countries in order to establish the principle of no taxation without representation, that there should not be any extraction of revenue without the consent of parliament,.  Our political system is a direct outgrowth of this victory and principle of political accountability.

Things were very different in France, in the France of Louis XIV and Louis XIII.  There was great weakness in France, because although you had an absolutist government, it could not tax the elites in French society for a whole variety of reasons. The wealthy aristocracy and the bourgeoisie managed to buy for themselves exemptions, and they got very good at hiding their income from the tax man. In fact, the French monarchy had to resort to the sale of offices. Henry IV actually auctioned off the post of finance minister to the highest bidder. He got something like 17 bids, sold it to the guy who gave him the most money, and then the finance minister went to town using that post for his own corrupt purposes.  Now this was very important because it had very negative effects on French political development.  For one thing, it completely undermined the solidarity of the elites in France to resist absolutist power because they were all bought off as individuals. Nobody wanted to harm the inherited privileges that they could hand down to their children that the French monarchy had given them.  And it was also very bad for the society because it meant that if you can’t tax the rich the burden of taxation was going to fall on ordinary people through excise taxes and through taxes on the peasantry. It was an extremely regressive form of taxation and the result was the French revolution, quite honestly.

Now the reason I have taken this digression is that I think that you can see a certain parallel between the old regime in France and the situation in many developing countries today.  — We can discuss the comparison to contemporary America: I think we’re not quite as bad as auctioning off the post of Treasury Secretary but we may get there one day. — But, in any event, it is certainly the case in many developing countries that you have a situation that is very parallel to the old regime in France in the sense that the government really does not have the legitimacy or the authority to tax its own society, and the kinds of taxes it has to raise therefore fall on the weakest members of those societies. For Latin America, as a whole, I believe that the total amount of income tax that is taken from individuals is only 7% of total tax revenues.  Now this is where GFI, it seems to me, comes in. If you think about the difference between the 17^th century and the current situation, in many respects the ability of elites and wealthy individuals and corporations to resist taxation is enormously greater today than it was back then.  Back then you would try to avoid the cadastral survey, you’d hide your gold in the family vault, but you physically couldn’t take your assets out of the country — most of your assets were your manor and your land and so forth.  But today obviously things are much more mobile and you have an entire global economic system that is institutionally set up to facilitate people moving money across borders.  And therefore all of the ills of the old regime in France, it seems to me, fall on those societies that are subject to this problem.  There can be no demand for democracy if all the rich people, if all the elites in the country, can manage to protect their own private fortunes, they have no reason to work with other people to resist the government, to demand democracy, to demand accountable government. There’s no demand for less corrupt government because everybody has taken care of themselves as an individual and it delegitimizes democracy.  Again, I point back to that very important link between a society’s ability to tax its own people and the demand for representative government because the two of those are absolutely bound together historically, and once you break that link you get very weak support for political accountability. So anything that can be done to reduce the ability of people to transfer assets and to avoid the sovereignty of the state, it seems to me, is very important.