8. The resource curse is BlackRock's benediction

It is not by chance that transnational companies exploiting natural resources in developing economies establish their domiciles in tax havens, nor is it by chance that BlackRock invests in these companies. 

The effect of tax havens on extractivism in the Global South has been described as an element of an economic situation known as the resource curse. 

The resource curse, although being relatively common, is a perplexing situation. It is the state of a country with abundant natural resources, oil-rich soil or forested land for example, but slow or stagnant economic growth compared to other countries with similar general conditions, but without abundant natural resources. 

The main cause of the resource curse, to put it bluntly, is greed. But greed doesn’t appear magically in the presence of forests or diamonds. An official report given to the Norwegian parliament explained how it works in 2009. 

When a natural resource is available in abundance, economic actors are given (roughly) two options regarding its exploitation. The first one is to follow the rules and respect environmental and fiscal laws. The other option is to do the opposite. When economic actors follow the rules, the yield is limited by environmental constraints and taxation, which amounts to the redistribution of a fraction of the profit in the form of public investments: roads, hospitals, schools, but also sewage or power lines. When economic actors don’t follow the rules, the yield is higher because there are fewer environmental limitations to the exploitation, and none or little of the profit is taxed and redistributed in public investment. In the case of a developing economy, entrepreneurs, politicians or military officers have little incentive to follow the rules because institutions are unable to enforce them. 

The result of the gap in fiscal income is that the government can’t sufficiently invest in infrastructure, health and education, which impacts the economic growth of the country. This is followed by a rupture of the fiscal contract between the general population and a corrupt elite, and eventually leads to a negative economic equilibrium where lawful actors are punished instead of being rewarded. 

The role of tax havens in this downward spiral is to provide incentive and legal tools to corrupt actors to break the rules and move the proceeds of extractivism out of reach of the taxman. The Norwegian report explains that the way out of the resource curse is to reinforce and improve public institutions, tax collection for a start. But tax havens are the result of the complacency of international institutions dominated by rich countries of the North, not a supposed laxism of governments in developing countries.

BlackRock didn’t invent tax havens, extractivism or greed. But it used every tool at its disposal to make its customers richer, and that means investing in companies that keep entire regions in a poverty trap which often leads to a debt trap. 

The environmental impact of tax haven financing in the exploitation of natural resources is hard to fathom. Trans-disciplinary research between finance, fiscal policy and climate change is just beginning. But it is absolutely certain that the Big Three asset managers, BlackRock, Vanguard and State Street, have an important role in the allocation of investments and the rules they follow. The one rule that asset managers follow and the main reason for them to route investments through tax havens is what they call fiduciary duty: profits above all else.

In a nutshell, tax havens help companies avoid accountability for environmental crimes. It was demonstrated to be the case for agribusiness in the Amazon, whose activities are frequently associated with human rights violations against indigenous communities, but also in the case of illegal fishing, which is causing the depletion of the ocean and the peril of marine ecosystems.

Abundant natural resources are often associated with tax haven financing. The OECD reported high levels of illicit financial flows in the trade of oil and gas, while Global Witness exposed how transnational mining companies in the Democratic Republic of Congo shift taxable profits to London and other tax havens.

Crucially, asset managers like BlackRock, with their systematization and centralisation of investment control, offer great opportunities for detection of corporate profit shifting and regulation of harmful investments. 

To understand the depth of the impact of tax havens on the environment, climate change and the livelihood of populations in the Global South, we need to unpack the coupling of debt and extractivism inside offshore finance.

One of the people who understand this problem the best is Léonce Ndikumana, who dedicated his career as an economist to studying the causes of capital flight in Sub-Saharan Africa, and demonstrated how capital flight in the region is a clear indicator of capital fleeing to tax havens.     

According to Ndikumana (and co-authors), the abundance of natural resources, most often minerals or fossil fuels, is a strong predictor of capital flight fueled by foreign direct investment in Sub-Saharan Africa. 

This agrees with the resource curse scenario that was discussed above, where tax havens act as a legal toolkit and cash safe for corrupt actors seeking to allocate the rent of extractivism to themselves.     

But the more surprising revelation in reading Ndikumana is that debt is also a predictor of capital flight. In fact, the  countries with recurrent high levels of external debt tend to suffer from higher levels of capital flight, with peaks following new loans from international creditors. What this means is troubling. A significant part of loans given to highly indebted Sub-Saharan countries flows out of the country shortly after the agreement of the loan, seemingly to tax havens.  

In the same vein, recent data from the Bank of International Settlement showed peaks of capital fleeing from developing economies to tax havens shortly before the signature of conditioned loans with the International Monetary Fund. More stringent conditions and more austerity for the population appear to be correlated with more capital flight prior to the agreement of the loan. This indicates a deliberate scheme by people with prior knowledge of the IMF loan to add to the debt burden of the general population while removing private funds from the country’s taxable base. 

The reason for this is that external debt shares an important characteristic with abundant natural resources. Both create a source of income for the government that is detached from public opinion. When a government finances itself with taxes on the whole population, politicians need to pay attention to what people will say about their spending, and taxpayers are more likely to pay attention to the government budget. But when a government collects most of its income from natural resources or external loans, they don’t feel the need to report much of their spending to the population, who is less likely to be concerned with where the money is going. 

These observations must be framed in the Sub-Saharan context and situations may differ widely between different regions of the Global South. However, it is possible to draw some general conclusions with regards to the Debt For Climate campaign for canceling debt in order to keep oil in the ground, preserve natural resources, and empower indigenous communities.  

This article is the eighth in a series: Sink logic: how BlackRock and tax havens worsen the climate and debt crisis