A Contrarian View on the Panama Papers

As the International Consortium of Investigative Journalists proceeds to reveal the closely held and protected world of shell companies produced by the Panamanian based law firm Mossack-Fonseca, a flood of opinion columns, expert analysis and direct coverage in Panama has taken over every media in in the world.
To the chagrin of all those who would like to develop a policy response to the dilemma, attention has — up till now — been focused on describing the disease; but little time has been devoted to addressing its causes.

Depending on whether you are a journalist or a law enforcement officer, the Panama Papers reveal either a collusion between the powerful who place themselves above the law or a well-designed plot to circumvent tax legislation throughout the world.

No one however has shed light on the roots of the obvious malformation of the international corporate world and the world financial system.

In order to fully dissect the problem one needs to move away from ideology and adjectives to search for the origins of corporate and individual behavior that is creating severe imbalances in today’s seamless web of economic relations among nations.

Should the international community fail to fully understand the roots of the syndrome, it will slowly erode the carefully crafted and slowly matured international legal framework aimed at fighting organized crime and corruption — the Scylla and Charybdis of global times.

Further, failure to tackle the origins of the shell company model prevailing amongst the top 1% of the world population will gradually erode the greatest human creation: democracy.
First we need to face the fact that the world is made of nation states and that they are not equal in size, economic weight or foundational institutions.

It is like living on a community where high end buildings, mansions, apartment buildings; houses and shacks coexist.

Shacks are vulnerable to destruction be it by weather or human activity. Left unsupported and without oversight, shacks can turn into breeding grounds for disease, drugs and crime.

Small nations with limited resources end up becoming prey to stronger non-state organizations like organized crime or economic players able to expand their resource basket.

Given that the rise of the Welfare State in Europe spread across the world, the view that citizens have the right to receive all public services at the lowest possible cost, these states end up delegitimized as third world governments fail to deliver these rights to their citizenry.

As their governments lose legitimacy, institutional decay sets in and the doors open to a takeover by transnational organizations that need a base to operate.

Local managers are extremely well compensated and the need arises to find a safe haven for their newly found riches.

Needless to say, shell companies are such safe haven.

Lest a worldwide movement to shore up shacks is undertaken, strong transnational actors of all kinds will find in them an exceptional operating base.

Then there are the countries built to resist the world economy.

These were created to act as extraction platforms for imperial powers. Accordingly, their institutional framework was designed to prevent political equality and to deny economic participation except to the elites.

These parts of the international puzzle are under severe stress from globalization, as trade has fostered the growth of middle classes and these have, through education, developed a worldwide network of like-minded people who are both democracy believers and economic creators.

Accordingly, governments are increasingly hard pressed to protect their cocoon of inequality cum controlled participation.

Policies swing between populism and market friendliness with swings happening when a development crisis erupts.

On every swing, savings suffer either because they are seized by the state or liquefied by its economic policies.

Upper middle classes in these societies seek savings protection by taking their money abroad and hiding it in shell companies.

Lest an effort is made to create an economic friendly institutional base founded on the principle of rule of law, the growing upper middle classes of these countries will continue to be fans of shell companies thereby nurturing corruption while denying their own societies the tax and banking resources to better develop human capital.

Then we arrive at the mansions. These are roughly represented by the first tier of the OECD countries.

Here the problem lies in the different levels of their gardens. As landscapes are irrigated, the height differential pushes water to the lowest levels. Lower levels are what we could dub as tax friendly countries. These are those that have lower tax rates, particularly corporate.

In their flight to lower taxation levels, corporations and individuals resort to shell companies. Lest there is tax harmonization among world leading economies, shell companies will continue to have their day.

In conclusion, the rise of globalization has made coexistence among disparate institutional structures and economic development difficult.

Imbalances tend to be filled with “task oriented structures” like shell companies.

The virtue of the Panama Papers is that it has exposed with blinding brilliance the world imbalances that foster the proliferation of shell companies that allow those who exploit imbalances to hide away 8% of the world GDP from tax authorities while simultaneously providing a safeguard to those that derive their income from illicit activities. 


Published by Latin American Herald Tribune


April 11th, 2016