South African billionaire Mark Shuttleworth has recently won an important case against the South African Reserve Bank in the Supreme Court of Appeal. The SCA ordered the Central Bank to repay Shuttleworth around £14m, which was levied to allow him to move £235m worth of his assets to the Isle of Man, a tax-efficient British Crown Dependency in 2001.
South Africa has strict capital control rules, which maintains the amount of capital available to local borrowers, but Shuttleworth has stridently contended for the past few years that SA’s exchange controls are “unconstitutional”, “out-of-date”, inhibit growth and competitiveness, and make money for South Africa’s banks.
His victory has been lauded in the business press and by wealthy South Africans, and Shuttleworth has been congratulated for taking on the government. However, this is an incomplete view of the long-term effects of capital outflows as well as of capital controls in general. It also ignores the fact that Shuttleworth’s assets are domiciled in a tax haven.
Nicholas Shaxson of the Tax Justice Network and author of Treasure Islands: Tax Havens and the Men who Stole the World also takes this view. Says Shaxson: “˜…it’s essential to view this from an economic perspective. From this perspective it is thoroughly poisonous. A billionaire has gone to the courts to extract wealth from a poor country…None of this will do anything to improve Shuttleworth’s productivity or entrepreneurial spirit. It will harm South Africa’s education system, its hospitals, its roads, and by extension its economic prospects. It’s a sordid affair, from top to bottom.’
Last year, the G8 group of countries agreed that action was needed on the flow of capital from developing countries to other (tax-efficient) jurisdictions in particular; an amount that is is estimated to be about US$10trn. Ronen Palan, an academic, warns that “the net flow of capital from the developing to the developed world does not see it transferred or invested there, but rather the financial resources from developing countries joins a large pool of capital registered in offshore locations.”
As for those who make the argument that exchange controls are inhibitors to growth and development, that is not always the case, and even the IMF has begun to acknowledge that capital controls are not always a bad thing. Nor do capital controls necessarily damage long-term financial integrity by encouraging rent-seeking and corruption, a view supported by the economist Dani Rodrik. Capital controls can also cushion economies from the vagaries of a globalised financial system.
Economic growth and development therefore needs to be looked at symmetrically and equitably with a long time horizon. There is obviously a tension between signalling that a country is open for trade and investment while at the same time insulating their economies against opportunistic speculators. For example, South Africa’s carefully monitored exchange control regime meant the country was relatively insulated from the global financial crisis, but its currency is notoriously volatile because it is one of the most popular in the global carry trade.
The approach to capital controls needs to be carefully considered. In fact, South Africa has actually recently relaxed some of its capital control mechanisms in view of this balancing act.
The Shuttleworth case is important as it serves as a reminder to hold the G8 accountable for its declaration to African developing countries in particular. South Africa, one of the wealthiest countries in Africa, should demonstrate long-term thinking on capital flows and their relationship to economic development and foreign investment. Improved revenue collection will facilitate an environment which is conducive to infrastructure development, political stability, social investment and global competitiveness.
Opponents of South Africa’s exchange control regime argue that, twenty years into democracy, it is no longer necessary, but Ben Fine and Patrick Bond have both contended that capital flight out of South Africa is actually worse now than it was under apartheid.
Says Fine: “It is surely time for the government to address the issue of capital flight; both in terms of the expatriation of wealth as well as lost revenue through tax evasion by the super rich and that liberalisation of these controls need to be viewed sceptically.”
One particularly problematic issue in this regard is the financial interests of the company Shanduka Group, founded by the deputy president of South Africa, Cyril Ramaphosa, in relation to the alleged transfer of $160m from Lonmin PLC to a company based in the tax haven Bermuda. This is particularly poignant if considered that Lonmin owns the Marikana mine at which 36 miners were shot and killed during a wage dispute – a stark example of the outcomes of South Africa’s rampant inequality.
South Africans, who live in the most unequal society in the world by income, would do well to question the merit of Shuttleworth’s cause. While rich South Africans bemoan the inconvenience of moving large sums out of the country, all South Africans, both rich and poor alike, are short-changed by such short-termism.
The long-term effects of capital flight, illicit outflows and the over-financialisation of economies remains an urgent issue on the global agenda. The effects damage not only developing economies, and African ones in particular, but also undermine the universal tax base of developed jurisdictions. The G8 should be held to account to make good on its promise to tackle these issues.