The Honorable Zhivargo Laing, the Minister of Economic Development, at a recent seminar spoke of globalization and trade liberalization. He stated that in this world the Government, among other things, must "detect international trends" and "identify international allies to help build local prosperity." He urged his listeners to keep their "hands to the plough and not look back."

But…the present financial crisis demands such a looking back. Any appraisal suggests strongly that in 2000 the FNM had trouble with the above "musts" in its battle with the OECD…a battle that paralyzed the country's vibrant financial community. In addition, it is clear that economic think tanks played a critical role in the battle.

Buildup

After World War II the United States deliberately promoted an open worldwide trading system. However, the process greatly accelerated after the fall of the Berlin wall in 1989 thanks to the end of Cold War politics and to "microchips, satellites, fiber optics and the Internet." The spectacular decline in telecommunication costs wove the world tighter and produced spectacular economic growth. With it came social protest and financial crises.

But governments differ greatly in their political/social policies…and some tax individual wealth to the point of expropriation. The governmental bureaucracies of high tax countries as France, Germany and Sweden were threatened by the new technology that made the evasion of excessive taxation easier. The outward flow, or loss, of their tax base caused these countries to spearhead the movement to stop "unfair tax competition".

The Bahamas was one of those countries that benefited most from "globalization" and also one most exposed to the campaign against unfair tax competition.

Attack

The tax battle began over a decade ago within the Organisation for Economic Cooperation and Development (the "OECD", a Paris-based organisation of 29 countries). Separately the United States conducted its war against illegal drugs by pursuing perpetrators and their financial gains in foreign countries. Landmark events were the OECD publication "Harmful Tax Competition: An Emerging Global Issue" in 1998 and the U.S./Bahamian "Mutual Legal Assistance Treaty" of 1992.

But nothing seemed to happen. The United States and the U.K. benefited greatly from international capital flows and were, in fact, big money launderers themselves…at least according to the U.S. State Department's "1999 International Narcotics Control Strategy Report." The OECD was largely a toothless tiger and the Bahamas successfully frustrated all actions initiated by the U.S. under the Treaty.

The critical point was the summer of 2000.

· The G-7, the seven most powerful nations in the world, said they would support sanctions against tax havens.
· Mr. Larry Summers, the new Democratic Secretary of Treasury, against the interests of the country as a whole, "endorsed added regulatory burdens on financial institutions in low-tax countries" and others in the administration supported "discriminatory treatment against offshore institutions."
· The French Government argued that the IMF should "oversee capital flows into these centers" and the Prime Minister wanted to outlaw "all financial transactions with low-tax regimes."

Then it is reported that the U. S. Government "held the gun" to the head of the Bahamian Government. Just before yearend the Bahamas passed all the regulations and financial controls specified by the OECD.


Counter attack

Two conservative think tanks, The Center for Freedom and Prosperity and the Heritage Foundation, developed the counter attack. They produced a steady flood of material and campaigned tirelessly in Washington throughout 2000.

Daniel J. Mitchell on September 18, 2000 produced the definitive study, "An OECD Proposal to Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy". It was a 33-page work with 287 footnotes. He personally handed hard copies to Bahamian Government officials during a visit to the Bahamas just before Christmas 2000. At that time he indicated that the Republican Administration of George W. Bush would not support the Clinton/Summers initiatives.

The FNM did not detect the counter attack nor did it identify a Republican administration in Washington as a potential ally. And this was a shame because both the U. S. and the European Union in 2001 reversed their positions.

Next battle

The FNM must now extricate the country from what can only be described as a legal, constitutional and regulatory nightmare. No doubt…Mr. Laing…it will need allies to do it effectively.