I had the pleasure of contributing to the Financial Times Growth Market Summit 2015 in New York today.
I was delighted to be able to share with an International group of Private Equity firms, Asset Managers and investors gathered in the heart of Wall Street, insights garnered from the “Jersey’s Value to Africa” report produced by Capital Economics.
When Jersey Finance commissioned Capital Economics to look at the contribution that the Island could make to African development, we asked it also to review the role of international financial centres in developing countries.
This fascinating report vindicates our expectation that asking these two big questions would be a worthwhile exercise: it says that Jersey could help provide the investment that Africa badly needs; and it demolishes headline-grabbing stories about the allegedly damaging role of IFCs in developing economies.
I suspect that a number of people still see Africa conforming to that well-rehearsed stereotype of a backward, even hopeless, continent destined always to disappoint. Whilst a view widely held, it is not one shared by us.
Capital Economics shows that while there are still many serious problems facing some African countries, it has been one of the world’s fastest growing regions for the last decade. Governance has improved and greater political stability has led to a series of peaceful transitions following democratic elections — all at a time when its lucrative natural resources industries have been buoyant. And there is potential for much more.
Africa is still a young continent, whose peoples will make up almost a quarter of the world’s population by 2040. Greater life expectancy is a challenge for African governments, but it is also a great opportunity: their fast-rising working-age populations will boost urbanisation and sustain economic growth. Capital Economics estimates that Africa’s economy could grow by 5 per cent a year to 2040.
Achieving such growth will require a surge in investment, however — $85 trillion by 2040, for infrastructure, machinery, buildings and homes. Some of that could come from domestic sources, though entrepreneurs and investors would need reassurance that they would be properly rewarded in a region where the rule of law is often weak.
Government investment could also help, but too many countries lack the ability to administer and collect taxes consistently and effectively. Foreign aid is too small, and often targeted at day-to-day needs. So foreign private investment must help fund the investment gap.
There are steps that African governments could take to make the continent more attractive to global investors — easing currency and capital controls, for example, and making it easier to do business. But the report also identified the role that Jersey could play in helping African economies attract investment funds. Currently, the Island provides a conduit for between 0.5 and 1.5 per cent of all foreign investment into the continent, below the 2.8 per cent of total foreign investment we provide globally.
I am sure — like the authors of the report — that we can do much more to plug Africa‘s investment gap. For example, our tax neutrality means we can pool investments from all over the world to finance projects in Africa efficiently and cost-effectively. Our robust legal framework and sound judiciary offer protection to investors who might be uncomfortable investing directly in African countries. Through our strong links with London, we have the access to capital markets needed by large companies in industries such as mining.
We can also encourage entrepreneurship, by providing a secure jurisdiction to protect the wealth generated by entrepreneurs. And through our dialogue with the African Tax Administration Forum, we hope to support capacity building and knowledge transfer particularly around governance structures and information exchange.
The report concludes with a robust rejoinder to non-governmental organisations who allege that IFCs shelter the proceeds of bribery, corruption and other illicit activity, and facilitate evasion of taxes in developing countries. Capital Economics convincingly demonstrates that lurid estimates of mega-billion sums siphoned off through centres such a Jersey do not bear detailed scrutiny, failing to understand international trade data and basing their estimates on unjustifiable assumptions.
The report also points out that for all the talk of secretive tax havens, the era of banking secrecy is over, as the OECD said in 2009 — and I am proud that Jersey has offered strong leadership on the issue. Indeed, most reputable IFCs have signed up for international agreements strengthening financial regulation, increasing transparency, tackling money laundering and freezing out the proceeds of foreign crimes.
As for accusations that the robust IFCs are complicit in tax evasion, the report is equally scathing and says that they often assume that any money held offshore must be illegitimate. Almost no multinational companies operating in Africa have vehicles registered in Jersey which could be used to siphon off tax from African treasuries. The ones that do are mainly in extractive industries which pay substantial taxes to host governments, with fewer opportunities to misprice exports whose value is clearly visible on the open markets where they are traded.
This report from a reputable, independent research firm makes a strong case for the value of Jersey to Africa which is already moving ahead on development indices. It establishes that the Island has the skills and abilities to make a significant impact in driving growth in the next regional powerhouse. And it proves conclusively that by expanding its role in Africa, Jersey will be part of the solution for the continent, not complicit in shady activities that undermine development.