Pandora Papers and the economic impact of high-level corruption
Welcoming the release of the Pandora Papers, Prime Minister Imran Khan stated that it once again exposed “the ill-gotten wealth of elites, accumulated through tax evasion & corruption & laundered out to financial ‘havens’… ”. He also highlighted that the UN Secretary General’s panel on International Financial Accountability, Transparency and Integrity (FACTI) estimates that as much as $7 trillion of stolen assets are parked in largely offshore tax havens. The Papers include names of politicians in high office as well as retired military officials, businessmen and media owners.
While owning offshore companies or bank accounts per se does not automatically imply culpability, it is incumbent on all the named, especially those holding senior governmental positions, to provide evidence of transparent money trails and of the declaration of such assets with the tax authorities in Pakistan. In a move that lives up to his crusade against corruption, Prime Minister Imran Khan set up a high-level cell under the Inspection Commission to investigate the matter with the objective of holding “everyone involved in the Pandora leaks accountable” and promised to make the investigation public. It would also be consistent with the PM’s earlier stance that those implicated in the leaks should not be in positions that can in any manner influence the investigation while it is being carried out.
Beyond the immediate fallout of the Pandora Papers, which at present appears to be limited, the leaks once again raise the question of the economic impact of high-level corruption, not only in its flagrant manifestation of bribery, but also in the more insidious facilitation of rent-seeking activities, which in turn creates inefficiencies, fuels waste of resources and undermines the integrity of the public expenditure process.
While owning offshore companies or bank accounts per se does not automatically imply culpability, it is incumbent on all the named, especially those holding senior governmental positions, to provide evidence of transparent money trails and of the declaration of such assets with the tax authorities in Pakistan.
Some academicians and proponents of entrepreneurial speed have argued that corruption “greases the wheels” of the economy by overcoming red tape in developing countries where the combination of excessive regulation and institutional weaknesses makes decision making convoluted and time-consuming. It is also argued that Pakistan’s anti-corruption campaign is ineffective and used more as an instrument of political victimization than toward improving overall governance. While there is some validity in questioning the effectiveness and motives of the anti-corruption efforts, the ‘greasing the wheels’ reasoning, in toto, does not stand up to scrutiny.
In China it has been argued that corruption — euphemistically also called access money — has helped speed up economic growth. However, the renowned political scientist, Yuen Yuen Ang, who has extensively examined the matter, states in a recent article that corruption “spurred government officials to promote construction and investment aggressively, regardless of whether it was sustainable. Luxury properties that enriched colluding state and business elites have mushroomed across the country, while affordable housing remains in short supply…”. More ominously she points out that “Corruption, inequality and financial meltdowns can trigger social unrest and erode the legitimacy of the Chinese Communist Party...”.
The recent case of Chinese real estate developer Evergrande, potentially defaulting on $300 billion worth of liabilities accumulated for the mushrooming of real estate projects supports Professor Ang’s contention. The prospect of such a massive default could dampen the lending appetite of Chinese banks and also economic growth prospects. This latest failure is one of many in a long list of examples across countries that illustrates the corrosive impact of corruption on economic growth, equality and the quality of a country’s governance and institutional environment.
Similarly, in Pakistan the elite, comprising among others, civil and military bureaucracy, industrialists, real-estate developers, and media groups, have wielded considerable political influence and control over economic policy. They have not only through flagrant abuse of power or grants of extravagant state largesse, but also through shaping taxation and public expenditure policies adversely affected long-term economic growth.
Corruption has distorted incentives and market forces, and acted as a tax on business that has raised production costs and reduced the profitability of investments. Even more perversely it has dissuaded international investors from considering Pakistan as an investment destination, thereby suppressing the inflow of foreign direct investment (FDI) into the country. On the basis of a survey of 390 senior executives in 14 countries, a PricewaterhouseCoopers study reported that 45 percent of respondents refused to enter markets where corruption risks were perceived to be high.
Corruption’s corrosive influence on the overall governance and business environment as well as the extraction of resources into offshore accounts such as those disclosed in Pandora Papers has undermined Pakistan’s growth prospects and poverty alleviation efforts. It has denuded already scarce resources available for investment in health and education, thereby limiting human capital development and enhancement of its productive capabilities. It is therefore indisputable that all forms of corrupt practices, both direct and indirect, must be eliminated. While some of that will require structural change and take time, in the near-term international enforcement mechanisms must be mobilized to shut down avenues that facilitate illicit financial flows.
- Javed Hassan is Chairman Economic Advisory Group (EAG). He’s an investment banker by training and has worked in senior executive positions both in the profit and non-profit sector internationally.