Taxation and International Development: North-South Conflicts over Capital Flight and International Taxation Issues after WWII (1945-1970)

Why was no multilateral regulation against capital flight and international tax evasion implemented between 1945 and 1970?

Project Summary

This project aims to renew studies on capital flight and tax evasion of poor countries by going back to the origin of this issue, namely the post-war period. This research will try to understand why no multilateral regulation against capital flight and tax evasion was implemented between 1945 and 1970. On the basis of the historical archives of the main international organizations active in this domain (the United Nations, IMF, OECD), the research will retrace the debates that dealt with this issue and will analyze their decision-making process. Moreover, the project will quantify the extent of illicit financial flows and international tax evasion for the same period. Indeed, although a number of macroeconomic studies have dealt with capital flight from 1970-1980 onwards, no similar effort has been undertaken for the previous period yet.

This project will ultimately examine if the post-war period – that witnessed the emergence of development aid policies – was also the time when Western countries imposed their veto on the establishment of the conditions necessary for the proper functioning of the fiscal systems of poor countries and hence for the independent financing capacity of these states. This finding would contribute to critical thinking on the use of development aid mechanisms as tools promoting the financial dependence of the South to the North during the decolonisation period.

Academic Output

Working Paper

Capital Flight from Africa: New Estimates, 1950-1970

Given ongoing discussion in the literature concerning capital flight from developing countries to developed countries, this paper studies whether African countries had noticeable capital flight already in the post-WWII period, and if that was the case, how capital flight was related to taxation of the countries. Firstly, it presents new estimates of capital flight from 22 African countries for the period 1950-1970 using three measures; net errors and omissions in the balance of payment statistics, the “Hot Money” approach, and the trade misinvoicing approach. Then, using pooled OLS and panel fixed e↵ects model, it examines the relationship between the size of capital flight and government tax revenue, and conducts a case study for selected countries who show distinctive features in the development of capital flight during the sample period. Overall results indicate that capital flight did exist in Africa in the pre-1970 period, and higher taxation is significantly associated with larger capital flight, given colonial rule and external borrowing of the countries.

Executive Summary

The purpose of this research project was to study capital flight and international tax evasion between developed and developing countries during the 1945-1970 period. This period was selected as it has been neglected by existing research on the topic, which tends to focus almost exclusively on the post-1970 (and even post-1990) period. The project aimed to combine an analysis of international tax negotiations, based on archival sources, and the quantification of illicit capital flows in an effort to increase theoretical reflections on the basis of these empirical data. In conclusion, the project output working papers emphasize the shortcomings of both multilateral and bilateral approaches in the attempts to fight capital flight from developing to developed countries. These shortcomings are compounded by the resilience of the defence of tax havens in core industrialized capital exporting countries.

Research Team

Marc Flandreau
Coordinator
Graduate Institute Geneva

Matthieu Leimgruber
Co-Coordinator
University of Geneva

Christophe Farquet
Principal Member
University of Lausanne

Samuel Segura Cobos
Principal Member
Graduate Institute Geneva

Nicolas Delalande
Associated Member
Institut d’Etudes Politiques de Paris (Science Po)

Patricia Hongler
Associated Member
University of Lucerne

Ronen Palan
Associated Member
City University

José Sanchez Roman
Associated Member
Universidad Complutense de Madrid

Status

completed

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All countries

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Coordinator

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