Global corporate tax as a means of averting the ‘Great Divergence’

While the global economy is gradually recovering from the pandemic, the fortunes of the rich world and the developing countries are diverging. The World Bank projects that in 2021-23 emerging economies (excluding China) will grow annually by 0.8% less than advanced economies, while in 2010-19 they grew, on average, 0.7% faster than advanced economies. Poor countries will grow by 1.9% less than the rich countries. The pre-pandemic trend of convergence among developing and advanced economies is about to be undone.

The Great Divergence, as the two-speed recovery from the pandemic has been dubbed, reflects the vulnerability of many developing countries that lack the fiscal space to effectively support their economies. They also face a shortage of vaccines, which exacerbates the growth deficit. It is estimated that 85% of the vaccines have been channeled to high-income and upper-middle-income countries, while only 0.3% have been made available to poor countries. The number of people in deep poverty (those who live on less than $1.90 per day) rose by 124 million in 2020, compared to a baseline with no pandemic, while another 39 million are expected to fall into poverty in 2021 as a result of the two-speed recovery.

So far rich countries have not done much for the poorest countries. Most notable was the suspension by the G20 of debt repayments to official creditors of 73 vulnerable economies, which was extended until the end of 2021. However, the relief is only temporary, as these countries need to repay debt worth about $600 billion by 2025.

The G7 summit last month, at the initiative of the USA, launched a massive infrastructure investment plan in middle- and lower-income developing countries (Build Back Better World – B3W). Key objectives are to mitigate climate change, promote health, foster the digital economy and improve gender equality. However, the plan is vague as to the financial resources to be mobilized, and whether they will be additional to official development assistance. It seems to rely more on the private sector as a catalyst of development financing. As it stands, it looks more like a move, with multilateral backing, in the US geopolitical confrontation with China.

China’s geopolitical influence in the developing world has grown since the launch of the Belt and Road Initiative (BRI) in 2013. The program aims to transform the economic geography of the planet’s largest landmass, from Southeast Asia to the fringes of Europe, through a modern “silk road” with integrated land and sea connections. The cost of the program could reach $1.3 trillion by 2027, although estimates remain ambiguous. Investments are made by Chinese state-owned enterprises or financed, mostly on commercial terms, by state-owned Chinese banks.

The 70 countries participating in BRI will benefit from an estimated 10% increase in trade and a 3.4% gain in GDP. But there are also risks related to debt sustainability of fragile economies in the region, the environment, and the lack of investment transparency. The benefits are also substantial for China: State-owned enterprises channel surplus production capacity abroad, new export markets are created, the international role of the renminbi is strengthened, and at the same time China gains more geopolitical clout.

The geopolitical rivalry between the G7 and China is unlikely to help the poorest developing countries. Poor countries need a steady flow of low-cost financial resources, but also debt relief. Instead of fighting for geopolitical influence over the developing world, the G7 and China should focus on innovative and generous solutions. The US proposal, endorsed by the G7, to introduce a minimum global tax of 15% on multinational companies, to curb tax competition, could offer such a solution. The advanced economies, which are home to most multinationals, will get the lion’s share of the additional revenue generated by the tax. Instead of using this revenue domestically, an alternative would be to use it as a means of enhancing financial support to poor countries.

The Organization for Economic Cooperation and Development estimates the additional revenue from the global minimum tax on multinationals at $60-100 billion annually. On the other hand, the OECD countries’ development assistance amounted to $161 billion in 2020. It represented only 1% of the various domestic stimulus packages and support measures deployed by advanced economies to cushion the crisis of the pandemic. Adding on the extra revenue from the global corporate tax would boost development assistance by about 50%. More generous financial support could fund badly needed infrastructure, but also reforms to restore growth and improve the resilience of the poorest countries. It could mitigate the risk of a widening rift between rich countries and the developing world in the wake of the pandemic.

Aristomene Varoudakis is a former professor of economics at the University of Strasbourg, and a former official of the World Bank and the OECD. This article was first published at Kathimerini’s Money Review: https://www.moneyreview.gr/opinion/37313/i-megali-apoklisi-kai-i-geopolitiki/