Mining Revenues Undermined

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Aug 9 2023 (IPS) - The primary commodity price boom early this century has often been attributed to a commodity ‘super-cycle’, i.e., a price upsurge greater than what might be expected in ‘normal’ booms. This was largely due to some minerals as most agricultural commodity price increases were more modest.

This minerals boom improved many developing country growth records, not least in Africa. With growing pressures to act urgently in response to accelerating global warming, mitigation efforts have been stepped up, promising energy transitions to reduce greenhouse gas emissions.

These require major shifts from fossil fuel combustion to renewable energy and complementary (e.g., transport) technologies. This energy transition requires more of specific minerals like lithium, copper and cobalt. This increased demand for minerals offers resource-rich economies more opportunities for greater domestic resource mobilization for development.

The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) and the African Tax Administration Forum (ATAF) report, The Future of Resource Taxation: 10 policy ideas to mobilize mining revenues, reviews major problems faced by African and other governments trying to greatly increase revenue from mining.

Great expectations, little taxation

Colonial and neo-colonial mining arrangements have rarely delivered the revenue needed by post-colonial governments. Weak governance, overly generous tax incentives, poor fiscal policies, bad contracts, as well as tax avoidance and evasion have all eroded mineral revenues for developing countries.

Resource-rich countries have been rethinking how to benefit more from mining in the face of the Covid-19 pandemic, worsening developing country debt crises, and increasingly uncertain government revenues and expenditures.

Mining royalties and taxation have remained largely unchanged for decades, while corporate income tax is hard to collect, vulnerable to profit shifting and often minimized with the aid of tax professionals and corrupt officials.

Improving taxation

Taxing transnational corporations has long posed major challenges. Poor laws and enforcement as well as limited funding and staff mean most developing countries are poorly equipped to apply complex international tax norms, such as the ‘arm’s-length principle’ and ‘double taxation treaties’.

Developing nations are especially vulnerable to tax base erosion and profit shifting (BEPS). International Monetary Fund staff estimate African countries have lost annual mining revenue up to $730 million annually due to BEPS.

Many developing countries identified ‘transfer pricing’ as the greatest challenge to taxing mining. The problem has been made worse by mining tax regimes and investment agreements favouring investors, especially from abroad.

Such agreements often contain fiscal incentives making mining revenue collection difficult. Worse, many governments believe generous tax incentives are necessary to attract mining investment. But these typically undermine effective tax administration, causing significant revenue losses.

Also, policy conditionalities typically ‘lock in’ poorly designed fiscal conditions and mining contracts, often required or recommended by the IMF or World Bank. These tend to benefit investors, potentially resulting in costly disputes for host governments.

Generating substantial government revenue from artisanal and small-scale mining (ASM) is difficult. As ASM induces more local spending, rather than extraction or export taxes, indirect taxes and wealth taxes are probably better for such incomes.

Governments of resource-rich developing countries require finance and reliable personnel for successful implementation, to ensure accountability and curb corruption. Sufficient financial and technical assistance can greatly improve mining revenue collection, ensuring companies pay all royalties and taxes due.

Effective implementation needs to be well supported by international agreements and organizations, development partners, and civil society. Tax incentives undermining government policy objectives and legal systems should be avoided.

Taxing better not easy

More access to information and expertise can greatly improve mining tax administration. Information, particularly from other jurisdictions, is critical for tax administrations to better collect taxes due. Sadly, progress has been painfully slow in many developing countries.

Instruments designed to improve information exchange include bilateral investment and tax treaties, tax information exchange agreements, the Organization for Economic Co-operation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters, and the ATAF Multilateral Agreement on Assistance in Tax Matters.

Mining revenue collection needs to be able to verify the quantity and quality of mineral reserves and extracts. Key challenges include enhancing tax audit capacity and getting up-to-date knowledge of mining, including implications of changes in mining techniques.

Better inter-agency cooperation is often necessary for better regulation and to avoid an incoherent, fragmented approach. Many mining revenue BEPS problems are due to capacity constraints, e.g., whether governments can effectively verify the costs of goods and services and mineral prices.

Many transactions also require tax auditors to have detailed knowledge of the mining value chain. Many aspects of mining operations allow inflating actual costs to evade taxes. Valuing intangibles, such as intellectual property, is also difficult. Many countries also lack regulations to tax the sale of offshore indirect mining assets, often losing much revenue as a consequence.

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Mining Revenues Undermined

Government Health Financing for All, Not Insurance

By Jomo Kwame Sundaram and Nazihah Noor

KUALA LUMPUR and BERN, Aug 2 2023 (IPS) - To achieve universal health coverage, people need public healthcare systems providing fair access to decent health care. This should be an entitlement for all, regardless of means, requiring adequate, appropriate and sustainable financing over the long term.

Appropriate arrangements can help ensure a financially sustainable, effective and equitable healthcare system. However, insurance-based systems – both private and social – not only incur unnecessary costs, but also undermine ensuring health for all.

Private health insurance

Voluntary private health insurance (PHI) is not an acceptable option for both equity and efficiency reasons. Those with lower health risks are less likely to buy insurance. Paying the same rate will be seen as benefiting those deemed greater risks, especially the less healthy, often also those less well off.

Hence, PHI premiums are often ‘risk-rated’. This means those considered greater risks – e.g., the elderly or those with pre-existing conditions – face higher premiums. As these are often un-affordable, many cannot afford coverage.

This is clearly neither cost-effective nor equitable, but also socially risky, especially with communicable diseases. This typically means poorer health outcomes compared to spending. Also, various insurance premium rate arrangements have different distributional consequences.

‘Fee-for-service’ reimbursement encourages unnecessary investigations and over-treatment. This escalates costs, raising premiums, without correspondingly improving health. But limiting such ‘abuse’ requires monitoring, always costly.

Unsurprisingly, many PHI companies use costly ‘managed healthcare’ services to try to limit rising costs due to such abuses. Thus, Americans spend much more on health than others, but with surprisingly modest, unequal and hardly cost-effective health outcomes.

With PHI, much public expenditure is needed to cover the poor and others who cannot afford the premiums, often also deemed to be at greater risk. Hence, achieving ‘health-for-all’ in such circumstances would require costly public subsidization of PHI.

Social health insurance

Unlike typically ‘voluntary’ PHI, social health insurance (SHI) is usually mandatory for entire national populations. Although often espoused with the best of intentions, SHI is invariably costlier due to its limitations and problems.

SHI incurs additional costs of health insurance administration to enrol, collect premiums, ascertain eligibility and benefits, make payments and minimize abuses. Revenue financed universal coverage need not incur such costs.

Compared to PHI, SHI seems like a step forward for countries with weak or non-existent public healthcare arrangements. But like PHI, SHI encourages over-treatment and cost escalation, as well as costly bureaucratic insurance administration.

Instead of such abuses inherent to insurance systems, a revenue financed health systems would incentivize prioritizing the health and wellbeing of those it is responsible for, thus emphasizing preventive health.

Such a health system contrasts with insurance systems’ emphasis on minimizing costs for the often unnecessary medical services it incentivizes, instead of improving the population’s health and wellbeing.

Government subsidies for health insurance, private or social, would inevitably go to the transnational giants which dominate health insurance internationally.

Financing SHI complications

Hence, SHI involves much more per capita health spending, raising it by 3-4%! But despite being much more costly than revenue-financed systems, there is no evidence health outcomes are improved by switching to SHI from government funding.

Germany’s SHI has been more cost-effective than the US with its PHI. But it is less cost effective than most other economies with revenue-financed healthcare. Nevertheless, healthcare financing consultants, continue to recommend versions of SHI, although it is clearly not cost-effective, appropriate, efficient or equitable.

SHI schemes remain in some rich countries for specific historical reasons, e.g., Germany’s evolved from its long history of union-provided health insurance. But more recently, even these economies rely increasingly on supplementary revenue financing. But again, such hybrid financing does not improve cost-effectiveness.

As SHI typically involves imposing a flat payroll tax, it discourages employers from providing proper employment contracts to staff. SHI is estimated to have reduced formal employment by 8-10% worldwide, and total employment in rich countries by 5-6%!

It is also difficult and costly to collect SHI premiums from the self-employed, or from casual, temporary and informal workers not on regular payrolls. Also, most working people in developing countries are not in formal employment, with far fewer unionized.

SHI schemes are always difficult to introduce as they would reduce take-home incomes. In most developing countries, most families cannot afford such pay-cuts. Hence, government revenue would still be needed to cover the uncovered to achieve health for all.

Many SHI proposals also recommend earmarking revenue from new ‘health’ taxes collected. Such earmarking creates likely conflicts of interest reminiscent of justifications for ‘sin taxes’ on addictive narcotics, smoking, alcohol consumption and gambling.

Will governments perpetuate unhealthy practices and behaviours to secure more tax revenue? Is there an optimum level of smoking or sugar consumption to be allowed, even encouraged, to get such earmarked funding?

Revenue financing

International evidence shows progressive revenue-funded public health financing to be much more equitable, cost-effective and beneficial than SHI. Hence, moving from revenue-financing to SHI would be a step backwards in terms of both equity and efficiency, or cost-effectiveness.

The late World Bank economist Adam Wagstaff and others have long advocated tax- or revenue-financed health provisioning due to the significant additional costs of managing health insurance systems, both private and social.

Revenue-financed public healthcare financing avoids the many insurance administration expenses incurred by both PHI and SHI. There will be no more need for such costly payments for unnecessary medical tests, procedures and treatments, and bureaucratic processes to manage insurance procedures and curb abuses, e.g., those associated with ‘moral hazard’.

Better financing and reorganization of preventive health efforts are needed. Public health programmes requiring mass participation, e.g., breast or cervical cancer screening, generally have much better outcomes with revenue-financing compared to SHI.

Better results can be achieved by improving tax-funded healthcare. More resources need to be deployed to improve preventive and primary healthcare. Strengthening public health services must include improving staff service conditions, morale and retention rates.

There is nothing inherently wrong with revenue-financed healthcare. Underfunding is largely due to political choices and fiscal constraints. These are typically due to externally imposed political limits.

Instead of dogmatically insisting on SHI, as is typical of health financing consultants, revenue financing of public healthcare should be reformed, strengthened and improved by: * increasing and improving budget allocations. * eliminating waste and corruption with competitive bidding, etc. * increasing government revenue with fairer taxation, including wealth, ‘windfall’ and deterrent ‘sin’ taxes, e.g., of tobacco and sugar consumption.

https://www.ipsnews.net/2023/08/government-health-financing-not-insurance/

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Exchange Rate Movement Due to Interest Rates, Speculation, Not Fundamentals

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jul 26 2023 (IPS) - Currency values and foreign exchange rates change for many reasons, largely following market perceptions, regardless of fundamentals. Market speculation has worsened volatility, instability and fragility in most economies, especially of small, open, developing countries.

US Fed pushing up interest rates

For no analytical rhyme or reason, US Federal Reserve Bank (Fed) chairman Jerome Powell insists on raising interest rates until inflation is brought under 2% yearly. Obliged to follow the US Fed, most central banks have raised interest rates, especially since early 2022.

The US dollar or greenback’s strengthening has been largely due to aggressive Fed interest rate hikes. Undoubtedly, inflation has been rising, especially since last year. But there are different types of inflation, with different implications, which should be differentiated by nature and cause.

Typically, inflationary episodes are due to either demand pull or supply push. With rentier behaviour better recognized, there is now more attention to asset price and profit-driven inflation, e.g., ‘sellers inflation’ due to price-fixing in monopolistic and oligopolistic conditions.

Recent international price increases are widely seen as due to new Cold War measures since Obama, Trump presidency initiatives, COVID-19 pandemic responses, as well as Ukraine War economic sanctions.

These are all supply-side constraints, rather than demand-side or other causes of inflation.

The Fed chair’s pretext for raising interest rates is to get inflation down to 2%. But bringing inflation under 2% – the fetishized, but nonetheless arbitrary Fed and almost universal central bank inflation target – only reduces demand, without addressing supply-side inflation.

But there is no analytical – theoretical or empirical – justification for this completely arbitrary 2% inflation limit fetish. Thus, raising interest rates to address supply-side inflation is akin to prescribing and taking the wrong medicine for an ailment.

Fed driving world to stagnation

Thus, raising interest rates to suppress demand cannot be expected to address such supply-side driven inflation. Instead, tighter credit is likely to further depress economic growth and employment, worsening living conditions.

Increasing interest rates is expected to reduce expenditure for consumption or investment. Thus, raising the costs of funds is supposed to reduce demand as well as ensuing price increases.

Earlier research – e.g., by then World Bank chief economist Michael Bruno, with William Easterly, and by Stan Fischer and Rudiger Dornbusch of the Massachusetts Institute of Technology – found even low double-digit inflation to be growth-enhancing.

The Milton Friedman-inspired notion of a ‘non-accelerating inflation rate of unemployment’ (NAIRU) also implies Fed interest rate hikes inappropriate and unnecessarily contractionary when inflation is not accelerating. US consumer price increases have decelerated since mid-2022, meaning inflation has not been accelerating for over a year.

At least two conservative monetary economists with Nobel laureates have reminded the world how such Fed interventions triggered US contractions, abruptly ending economic recoveries. Although not discussed by them, the same Fed interventions also triggered international recessions.

Friedman showed how the Fed ended the US recovery from 1937 at the start of Franklin Delano Roosevelt’s second presidential term. Recent US Fed chair Ben Bernanke and his colleagues also showed how similar Fed policies caused stagflation after the 1970s’ oil price hikes.

De-dollarization?

However, the US dollar has not been strengthening much in recent months. The greenback has been slipping since mid-2023 despite continuing Fed interest rate hikes a full year after consumer price increases stopped accelerating in mid-2022.

Many blame recent greenback depreciation on ‘de-dollarization’, ironically accelerated by US sanctions against its rivals. Such illegal sanctions have disrupted financial payments, investment flows, dispute settlement mechanisms and other longstanding economic processes and arrangements authorized by the World Trade Organization, International Monetary Fund and UN charters.

Even the ‘rule of law’ – long favouring the US, other rich countries and transnational corporate interests – has been ‘suspended’ for ‘reasons of state’ due to economic warfare which continues to escalate. Unilateral asset and technology expropriation has been justified as necessary to ‘de-risk’ for ‘national security’ and other such considerations.

Horns of currency dilemma

For many monetary authorities, the choice is between a weak currency and higher interest rates. With growing financialization over recent decades, big finance has become much more influential, typically demanding higher interest income and stronger currencies.

Central bank independence – from the political executive and legislative processes – has enabled financial lobbies to influence policymaking even more. For example, Malaysia’s household debt share of national output rose from 47% in 2000 to over four-fifths before the COVID-19 pandemic, and 81% in 2022.

There is little reason to believe recent exchange rates have been due to ‘economic fundamentals’. Currencies of countries with persistent trade and current account deficits have strengthened, while others with sustained surpluses have declined. Instead, relative interest rate changes recently appear to explain more.

Thus, both the Japanese yen and Chinese renminbi depreciated by at least six per cent against the US dollar, at least before its recent tumble. By contrast, British pound sterling has appreciated against the greenback despite the dismal state of its real economy.

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Exchange Rate Movements Due to Interest Rates, Speculation, Not Fundamentals