Corruption transition

The Hindu : Business / Economy : Corruption transition

• 'A Journey from a Corruption Port to a Tax Haven' – a paper by
• Shafik Hebous and Vilen Lipatov, Faculty of Economics and Business Administration in the Goethe University Frankfurt
• speaks of sketching a model according to which tax havens attract corporate income generated in corrupted countries.
• In our framework, tax havens have two opposite effects on welfare
• First, tax havens' services have a positive effect on welfare through encouraging investment by firms fearing expropriation and bribes in corrupt countries. Second, by supporting corruption and the concealment of officials' bribes, tax havens discourage the provision of public goods and hence have also a negative effect on welfare,
• Based on firm-level data on outbound FDI, they find empirical support for one hypothesis implied by their model – that firms' investment in highly corrupt countries is associated with a high probability of having affiliates in tax havens.
• Hence, a policy recommendation in the paper is that eliminating tax havens' operations must be considered from a global perspective.
• The authors add that a dynamic approach may reveal further welfare effects of shutting down tax havens by modelling the transition from a corrupt country to a non-corrupt country.
• "While a tax haven can support investment (and corruption) in corrupt countries in view of their weak institutional setup, eradicating corruption can substantially enhance foreign direct investment.