ECONOMIC AND FINANCIAL

Vaidehi Rathod

YMCA 2020 Southeastern High School Model United Nations YMCA Southeastern High School Model UN

Dear Delegates,

On behalf of the conference staff, it is our utmost honor to welcome you to SHSMUN 2020! We are excited to share what we’ve been working on for the past several months, and can’t wait to see you in November. The conference has seen several improvements: we have added two committees We have also made changes to the structure of our conference and committees to best create a safe and sanitary and a new staff position. environment.

One thing, however, hasn’t changed, and never will: our dedication to putting on a conference unmatched by any in the region. Our longest SHSMUN tradition has been taking pride in our staff and delegates’ commitment to research, hard work, and introspective and focused debate while at the conference. As such, we hope that the topic guides that we have prepared will introduce you to many intriguing and relevant international problems facing the world today, and will inspire you to delve into your research with the same enthusiasm we have been so privileged to witness at past conferences.

Remember, the research and writing process of position papers and resolutions is not only rewarding, but has innumerable benefits. Coming in with an educated perspective will not only allow you to be a better and more informed delegate, but will hopefully allow you to realize that the positions of other countries can work in conjunction with your own. In any committee, delegates will have to compromise and work for the betterment of the international community. To be able to do this and do it well is a vital skill for the increasingly interconnected and complex world we live in today.

With all this in mind, please do not hesitate to contact your chair or any other conference staff with questions relating to your topics, committee, or the conference in general. Your chair’s contact information can be found in their chair letter or on our website. We wish you the best of luck in your work, and cannot wait to see all of your efforts pay off at the conference this November!

Sincerely,

Sasha Hitachi Yoonie Yang Sophie Peirano Emily Stoddard Secretary General Director General GenCo President Under Secretary General [email protected] [email protected] [email protected] [email protected] ​ ​ ​ ​

P.S. Keep up with the latest SHSMUN news and updates by following @tnshsmun on Instagram, Snapchat, and Twitter!

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Parliamentary Cheat Sheets Sheet 1: Overview of Common Points and Motions Motion or May Requires Pro-Con May Be Vote Point Interrupt Second? Debate? Amended? Required Speaker?

Point of Order Y N N/A N Chair’s Discretion

Right of Reply Y N N/A N Chair’s Discretion

Suspend the N Y N/A Y Simple Meeting Majority Limit / Extend N Y 1/1 Y Simple Debate Majority

Limit N Y 1/1 Y Simple Speaker’s Majority Time Introduce N Y 1/1 N Simple Amendment Majority Amend the N Y 1/1 N Simple Agenda Majority Caucus (ALL) N Y 1/1 Y Simple Majority Divide the N Y 1/1 N Simple Question Majority Roll Call Vote N Y 1/1 N Simple Majority Take from the N Y 2/2 N Simple Table Majority Introduce N Y 2/2 N Simple Resolution Majority Enter Voting N Y 2/2 N 2/3rds Procedures Majority Table N Y 2/2 N 2/3rds Majority Suspend the N Y 2/2 Y 2/3rds Rules Majority

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Sheet 2: The Parliamentary Procedure Basics

Remember! 1. Any time you speak, you must begin by saying your name and country. ​ ​ ​ ​ 2. Before you ask questions to a delegate, you must say, “Does the delegate yield to a ​ possible series of questions?” and if they yield, you may then ask up to three questions. ​ ​ Speakers’ List: add yourself if you wish to speak on the topic. If you are on the docket, you are ​ automatically added. When on the Speakers’ List, you may yield your time one of three ways: ● To the chair: Chair absorbs the rest of your time ​ ● To questions: Other delegates may ask you up to three questions ​ ● To another delegate: Another delegate may speak for the rest of your time ​ Caucuses: ● Moderated caucus: a way to hear from multiple delegates for short periods of time; ​ set a total speakers time, an individual delegate speaking time, and a topic ● Roll Call Caucus: The Co-Chair will take roll, and every delegate will be given thirty ​ seconds to speak on their position. ● Unmoderated caucus: unregulated time to work on super-resolutions; stay on task. ​ Points: ● Point of Order*: Used if a delegate incorrectly uses parliamentary procedure ​ ● Point of Inquiry: Used to ask questions about parliamentary procedure or clarify ​ what is going on; also used to ask for other delegates to speak louder, for boys to ask to remove their coats, to ask to change temperature of the room ● Right of Reply*: If another delegate directly slanders your country, you can use this ​ to refute their claims and defend your nation *You may interrupt a speaker to make these points ​ Introductions: ● Amendments: In order to change or add anything to a resolution already introduced, ​ you must send it to the dais and then move to introduce it. ● Friendly amendments: The author(s) of the resolution(s) favor it and it is ​ immediately added to the resolution ● Unfriendly amendments: The author(s) of the resolution(s) do not favor it, and ​ it is put to a vote in committee ● Resolutions: 25% of the committee must be signatories, then send it to the dais and ​ move to introduce it. Ways to Vote (Resolutions and Amendments) ● Simple Placard Vote: Delegates raise their placard to cast their vote (default) ​ ● Roll Call Vote: The Co-Chair will take roll and each country will say their response; ​ “rights” may be claimed during this vote.

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Table of Contents:

Letter from the Chair………………………………………………………………....……..…6

History of the Economic and Financial Committee…………………………...... …...…7

Topic A: Evaluating the Economic Effects of Global Labor Arbitrage…...... …8

Introduction……………………………………………...………….………………….....…...8

Background…………………………………………....…………..………………..…..…..…9 Current Situation………………………………………………..……………………....……12

Committee Directive and Jurisdiction………………………..……………………...... ……15

Questions to Consider……………………………………...……………………………...…16

Suggested Sources………………………………………...……………………………….....16

Topic B: Assessing the Role of Central Banks During Recessions……………………….....18

Introduction……………………………………………....………………………....…..……18

Background…………………………………………………………………………..………19

Current Situation……………………………………………………………………...... ……23

Committee Directive and Jurisdiction……………………………………………...... ……...26

Questions to Consider………………….……………………………………………...……...27 Suggested Sources……………………….……………………………………………...... …28

Topic C: Addressing Transnational Corporate Tax Evasion...... 29 Introduction………………………………………………………………………....…..……29

Background………………………………………………………………………....…..……30

Current Situation………………………………………………………………...... …………32

Committee Directive and Jurisdiction………………………………………….....…….……36

Questions to Consider……………………………………………….………….……………37

Suggested Sources…………………………………………………….………...... …………37

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Chair Letter

Dear Delegates, My name is Vaidehi Rathod, and I am very honored to serve as your 2020 SHSMUN Economic and Financial Committee (EcoFun) chair. I have lived in Chattanooga for almost my whole life and am so thankful that this beautiful city started SHSMUN. In my entire highschool career as a SHSMUN delegate, I have been in EcoFin and it is the only committee that I have ever truly loved, after all the world couldn’t run without money. EcoFin has always been a fun adventure for me during and even after committee and I hope I can make it as enjoyable for you all this year. In addition to SHSMUN I also enjoy dancing, playing piano, cooking, and of course bingeing Netflix. As far as the best Netflix shows Gossip Girl, New Girl, and Lucifer are my all time favorites. When choosing topics for EcoFin I focused on finding relevant material. I wanted my topics to be about issues that delegates may have seen on the news or are somewhat familiar with. I also strived to find topics that were broad enough to include as many nations as possible, yet still narrow enough to allow for efficient debate. Offshoring, central banks during recessions, and corporate tax evasion will all lead to what I believe will be fun, lively, and intuitive debate. SHSMUN is all about the delegates and what YOU make of it. EcoFin has always been the fun, laid back committee that still manages to get work done, which is why it earned the nickname EcoFun. My role during committee will simply be to facilitate your debate, where debate goes is up to you delegates. If you only leave reading this with one thing it should be to know your country’s position inside and out! Knowing your country’s position will lead to more interesting, and sometimes heated, debate. . I know that it won’t be an easy task but I know that each and everyone of you are capable of doing it. I’m sure my predecessors have given the same advice and I would not be repeating it if it wasn’t crucial to an exciting SHSMUN experience. The conference may only be three days long but I can guarantee that it will be memorable. Also remember, do not be afraid to speak up in committee! Even if it is just to make a simple motion raise your placard! The mock debate is the best time to speak up especially for first time delegates since you will be speaking from your own perspective. Believe me the more you participate the more fun you'll have. I cannot wait to meet each and everyone of you amazing delegates and please feel free to contact me via email if you have any questions.

Sincerely, Vaidehi Rathod 2020 Economic and Financial Chair [email protected]

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Committee History

The Economic and Financial Committee (EcoFin) is the Second Committee of the United Nations General Assembly, and was established in 1945, concerning itself with the economic issues of the global community, including, but not limited to, debt sustainability and international financial problems. Its solutions involve the propagation of international growth and continuing to regulate and expand the reaches of international trade and commerce. The Economic and Financial Affairs Committee also works in tandem with the Economic and Social Council of the United Nations (ECOSOC) to help finance the development of nations and their infrastructures, as well as coexisting with the International Monetary Fund and World Bank to aid certain member states. Progressing through its seventy-fourth session, the Second Committee continues to prioritize economic growth and development worldwide, including addressing questions of macroeconomics, interdependence, and global partnerships. Furthermore, the Economic and Financial Committee has tasked itself with the newly designed Sustainable Development Goals, which include the end of poverty, promotion of economic growth, and ensuring sustainable production. The committee has also taken a priority in the economic sovereignty of member states, ensuring the freedom of trade and means of production within and among member states. With this, the Second Committee has strived to hear a variety of voices on economic issues, by introducing economic experts and world leaders for their perspectives. In doing this, the Second Committee aims to resolve the economic issues of the global economy by employing its power as a force of the United Nations and the impact of member states coming together.

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Topic A: Evaluating the Economic Effects of Global Labor Arbitrage ​

“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.” - Lee Kuan Yew Introduction Arbitrage is the action of buying and selling currency, commodities, or other assets in different markets in order to take advantage of price differences between those markets and capitalize on the imbalance.1 Global labor arbitrage, also known as offshoring or outsourcing, occurs when a company moves certain jobs to other countries where the cost of labor and business is lower than in their own country.2 Offshoring has become an extremely popular business tactic around the world over the past few decades. As businesses strive to keep operating and manufacturing costs as low as possible, they turn to offshoring. Corporations move operation and manufacturing facilities to different countries and regions for the sole purpose of paying the lowest price possible for labor. There is also another aspect to offshoring in which people immigrate to more prosperous countries in search of higher skilled and higher paying jobs; in turn, the supply of labor in relation to capital usually increases, which then decreases wages.3 Countries that have these offshoring agreements for labor and manufacturing usually reduce, if not entirely remove, trade barriers such as tariffs.4 Tariffs are taxes imposed on imports and are also a type of protectionist trade barrier.5 These taxes are paid by domestic consumers, and can raise the relative price of imported products.6 One of the main results of tariff removal is that consumers pay a lower price on domestic products, making them more affordable.7 Another benefit of offshoring is that it adds foreign value to exports. Foreign value is the value added by resources that were imported to produce the final services or goods to be exported.8 There are both benefits and limitations to offshoring, which can vary upon a country’s economy. While offshoring directly displaces domestic workers, it can increase the potential for better and more access to foreign markets and lower production costs, allowing domestic firms and businesses to expand production and increase efficiency.9 This expansion can help create

1 James Chen, “Arbitrage”, Investopedia, February 1, 2020, accessed February 2, 2020, https://www.investopedia.com/terms/a/arbitrage.asp 2 Prateek Agarwal, “Global Labor Arbitrage”, Intelligenteconomist, April 12, 2019, accessed February 2, 2020, ​ ​ https://www.intelligenteconomist.com/global-labor-arbitrage/ 3 Ibid. 4 Ibid. 5 Brent Radcliffe, “The Basics of Tariffs and Trade Barriers”, Investopedia, November 21, 2019, accessed on ​ February 24, 2020, https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp ​ 6 Ibid. 7 Ibid. 8 “WTO "Trade in Value-Added and Global Value Chains" profiles Explanatory Notes”, wto.org, 2018, accessed February 3, 2020, https://www.wto.org/english/res_e/statis_e/miwi_e/Explanatory_Notes_e.pdf ​ 9 Gianmarco Ottaviano, “Offshoring and the migration of jobs”, wol.iza.org, 2019, accessed on February 3, 2020, ​ ​ https://wol.iza.org/articles/offshoring-and-migration-of-jobs/long

8 YMCA Southeastern High School Model UN new domestic jobs that are usually different than the current jobs in that country. New jobs can often be higher skilled jobs compared to the existing domestic jobs. For example, a domestic job which is simply manufacturing shoes in a factory by hand could be replaced by a job that would be to oversee automation, or machines, that are manufacturing that same shoe. Ultimately, they give an opportunity for the domestic labor market to grow and develop.10 The Economic and Financial committee will discuss the positive and negative consequences of global labor arbitrage and work together to find solutions that will benefit the majority of nations.

Background Over fifty years ago, goods were made in the same region where they were consumed; this began to change in the late 1970s. Western businesses began sending away expensive jobs to third world countries with adequately skilled workers in order to save on labor costs.11 By the 1980s, this trend had become an important economic move for many large-scale corporations and it became known as offshoring. In 2004, around the time of the Eurozone Recession, four out of ten European companies had offshored labor.12 Many of the companies sending jobs abroad believed their home countries benefited from this action by being provided with lower prices on goods and more competitiveness in the global market.13 As such, the movement of jobs at this time was one directional: wealthy countries from the West were sending jobs to poorer countries in the East.14 However, offshoring does affect more than labor cost, it further impacts hiring decisions. For example, when hiring employees, a company will most often hire an employee with less experience and expertise over a more experienced worker simply because of the location of the first employee.15 For example, in recent years, Ford Motor Company offshored their IT enterprise and entire call center to India. Not every Ford employee in India may be able to speak fluent English, but by offshoring to India, Ford was able to give their clients 24/7 customer support.16 Companies have always been looking for ways to increase profits, and offshoring gave them a new opportunity to do just that by opening a door to cheaper and sometimes better labor.

10 Ibid. 11 “The story so far: Offshoring has brought huge economic benefits, but at a heavy political price”, The ​ ​ Economist, January 17, 2013, accessed on February 6, 2020, https://www.economist.com/special-report/2013/01/17/the-story-so-far 12 Karl P. Sauvant, “Service Offshoring Takes Off In Europe”, unctad.org, June 14, 2004, accessed on february 6, ​ ​ ​ 2020, https://unctad.org/en/pages/PressReleaseArchive.aspx?ReferenceDocId=4865 ​ 13 Ibid 14 Ibid. 15 Chris Niccolls, “Labor Arbitrage and the Cost Differentials of Outsourcing: Labor Cost Differentials to Consider ​ When Outsourcing and Offshoring”, The Balance, December 21, 2018, accessed on February 6, 2020, https://www.thebalance.com/how-companies-benefit-from-labor-arbitrage-2552891 16 “5 Biggest US Companies That Offshore to India”, 31West, 2019, accessed on March 29, 2020, https://www.31west.net/blog/5-biggest-us-companies-offshore-india/

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Offshoring is primarily employed by private companies in capitalist economies. In countries where the entire economy is controlled by the government, each offshoring contract must be approved by the government of the country of origin. For example, if a private company in the United Kingdom, a capitalist country, wants to offshore jobs to another company in Sri Lanka, then the UK company does not need government permission. However, the Sri Lankan company would need permission for this deal because it is a socialist country.17 Many governments that have capitalist economies, however, have protested that taking away domestic jobs has had a negative impact on the economy. Other governments see offshoring as a way to build relationships with other countries and to gain more labor and money.18 Offshoring is a form of arbitrage, but it is different from other forms of arbitrage. When it comes to products, for example, a company could buy a thousand tons of wheat from either North America or South America and ultimately receive a very similar product. However, when it comes to the arbitrage of people, the outcome isn’t the same. For instance, there could be an IT team in the UK where each member of that team has his or her own strengths and weaknesses. But, if the jobs for that team get moved to India, the team changes and there are now different people with different strengths and weaknesses. Both teams will do the job, but each team is unique; often, the products from both teams will not be comparable.19 At first, offshoring was simply a way to cut labor costs, but it has developed into a method of finding workers with certain specialized skills, such as math, science, or English.20 Another “benefit” of offshoring that companies can get, particularly for developed countries with higher labor and environmental regulations, is the ability to escape through loopholes and require workers to work in conditions that would have been illegal in their home country.21 For example, in France a maximum work week is 35 hours, and any hours beyond are counted towards overtime or can be compensated by taking extra days off.22 In India, however, the maximum hours allowed per week is 48 hours per week and up to 9 hours per day.23 The

17 Rosemary Carlson, “Differences Between Capitalism and Socialism”, The Balance, January 5, 2020, accessed on February 26, 2020, https://www.thebalancesmb.com/the-characteristics-of-capitalism-and-socialism-393509 ​ 18 Ben W. Heinman Jr., “Why We Can All Stop Worrying About Offshoring and Outsourcing”, The Atlantic, March ​ ​ ​ ​ 26, 2013, accessed on February 8, 2020, https://www.theatlantic.com/business/archive/2013/03/why-we-can-all-stop-worrying-about-offshoring-and-outsour cing/274388/ 19 Ibid. 20 The Week Staff, “Where America’s Jobs Went”, The Week, March 18, 2011, accessed on February 8, 2020, https://theweek.com/articles/486362/where-americas-jobs-went 21 Ibid. 22 “Ten things to know about labour and employment law in France”, Norton Rose Fulbright, March 2017, accessed ​ on February 27, 2020, https://www.nortonrosefulbright.com/en/knowledge/publications/f1d8c939/ten-things-to-know-about-labour-and-em ployment-law-in-france 23 Roli Srivastava, “India passes 'historic' minimum wage law amid activist worries”, Thomson Reuters Foundation, ​ ​ August 2, 2019, https://news.trust.org/item/20190802170845-5q2uq/ ​

10 YMCA Southeastern High School Model UN difference between the working week of France and India may not seem large, but the minimum wage in France is 10.03 Euros (11.02 USD) per hour, and in India, the minimum wage is about ​ 24 176 Indian rupees (3.00 USD). Companies​ will most likely make a higher profit in India than in France from the same amount of work. ​Furthermore, labor costs are no longer the sole factor that ​ businesses consider when turning to offshoring. Other factors include insurance costs, equipment costs, and labor laws. In many developing nations, businesses are not even required to insure their workers. In these countries, companies are able to save more money since they do not need to spend anything on insurance for each employee. There are also more lenient labor laws, which allow for more work to be done in a shorter amount of time.25 While these lax regulations are beneficial for developed countries that are sending their jobs to these other countries, it is actually very harmful to the host country’s economy. In many countries where regulation of labor laws and the laws themselves are inadequate, studies have shown that enforcement of these laws often leads to higher unemployment, especially in lower skilled jobs.26 An example of this correlation can be seen in a study done in 2012 in Brazil. This study found that a rise in labor in municipalities, or cities, in Brazil led to a rise in business inspections. The more inspections that were performed, the more businesses followed proper labor regulations; however, enforcement caused higher rates of unemployment.27 Another benefit of offshoring is the foreign value added into markets. For example, from 2001 to 2013, the foreign added value to exports increased from $50 billion to over $700 billion in China.28 China also received many imports of raw materials from Southeast Asian countries, such as Cambodia, Thailand, and Vietnam, which contributed to an increase in the overall exports into China and the foreign value added to Chinese exports.29 Many of the manufacturing jobs from these countries, however, are outsourced to China. When this happens, China benefits while these developing economies lose jobs, creating a disadvantage for everyday workers. Large-scale companies may be making more profits, but the overall population is losing more than it is gaining.30 This was the case in 2018 when Sanofi, a pharmaceutical company based in

24 “French minimum wage and average salary in France”, Expatica, February 12, 2020, accessed on February 27, 2020, https://www.expatica.com/fr/employment/employment-law/french-minimum-wage-and-average-salary-in-france-98 2310/ 25 Chris Niccolls, “Labor Arbitrage and the Cost Differentials of Outsourcing: Labor Cost Differentials to Consider When Outsourcing and Offshoring”, The Balance, December 21, 2018, accessed on February 6, 2020, https://www.thebalance.com/how-companies-benefit-from-labor-arbitrage-2552891 26 Lucas Ronconi, “Enforcement of labor regulations in developing countries”, IZA World of Labor, accessed on February 28, 2020, https://wol.iza.org/articles/enforcement-of-labor-regulations-in-developing-countries/long ​ 27 Ibid. 28 Ibid. 29 Robert C. Feenstra, “Statistics to Measure Offshoring and its Impact”, imf.org, October 1, 2016. Accessed ​ ​ February 3, 2020, https://www.imf.org/external/np/seminars/eng/2016/statsforum/pdf/Feenstra_paper.pdf ​ 30 Ibid.

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France, laid off 670 employees.31 These employees were dismissed due to their jobs being offshored out of France. Sanofi was looking to reduce positions in IT, human resources, and finance.32 There are many other cases, similar to the Sanofi one, all over the world. Offshoring can be very beneficial for some parties, while, at the same time, being very detrimental for others.

Current Situation In the early 2010s, the global economy started to change. The original reason why offshoring became so popular was because it allowed companies to manufacture goods and services at a lower cost. Cheaper labor, however, became the same reason that started to lower the desire to offshore. Wage costs started to go up in popular offshoring countries such as China and India. The numbers grew consistently from ten to twenty percent almost each year in the past decade. At the time, manufacturing costs in the US and Europe were nearly the same as a decade before.33 While there is still a gap in labor costs from the US and Europe to China, that gap is smaller than it used to be, and it is often off-put by transportation costs.34 A global CEO survey done in 2013 ranked countries on a scale from 1 to 10 on their manufacturing competitiveness.35 10 was high and meant very competitive, and 1 was low and meant not as competitive.36 Brazil, Taiwan, and South Korea all ranked above 7.5 at 7.89, 7.57, and 7.63 respectively.37 There are still some Asian countries whose labor costs are still cheap, such as Indonesia, the Philippines, and Vietnam. However, the problem with these other countries in terms of offshoring is that they do not have anywhere near the number of supply chains, efficiency, or scale as a country such as China.38 Mexico, though, is more competitive than these other Asian countries and has infrastructure similar to China in terms of efficiency and supply chains. The average minimum wage in China is around $6.50 USD an hour compared to the minimum wage

31 Alex Keown, “Sanofi to Cut 670 Jobs in France by 2020”, BioSpace, December 6, 2018, accessed on March 30, 2020, https://www.biospace.com/article/sanofi-to-cut-670-jobs-in-france-by-2020/ ​ 32 Ibid. 33 Tazmin Booth, “Here, there and everywhere”, the economist, January 19, 2013, accessed on February 6, 2020, ​ ​ ​ https://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are -rethinking-their-offshoring 34 Ibid. 35 Mike Arnold, “Enhancing Manufacturing competitiveness in South Africa”, Deloitte, 2013, accessed on March 30, 2020, https://www2.deloitte.com/content/dam/Deloitte/dk/Documents/manufacturing/manufacturing-competitiveness-Sout h-africa.pdf 36 Ibid. ​ 37 Ibid. 38 Tazmin Booth, “Here, there and everywhere”, the economist, January 19, 2013, accessed on February 6, 2020, ​ ​ https://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are -rethinking-their-offshoring

12 YMCA Southeastern High School Model UN in Mexico, which is $4.82 USD an hour.39 Mexico also has 14 free trade agreements with over 50 countries.40 Free trade agreements are valuable because they make a country more attractive to other countries looking to offshore. The reason being that companies can take advantage of these free trade agreements. For example, a country like Afghanistan that doesn’t have a free trade agreement with the United States could offshore business to Mexico, which does have a free trade agreement with the United States known as the North American Free Trade Agreement (NAFTA), established in 1994. By manufacturing in Mexico, Afghanistan can take advantage of NAFTA and export products from Mexico to the United States and Canada with limited tariffs. In developed nations, such as the US and European countries, offshoring is a positive thing for companies because they are able to get cheaper labor. Unfortunately, offshoring leads to more competition in the job market, which can lead to higher unemployment rates for citizens. Often, factors such as flexibility in employment and acceptance of a lower wage are the defining factors differentiating employment.41 However, sometimes, qualifications are the defining factor for employment, with the equal possibility of both immigrants and native citizens prevailing in that category. One common misconception people have when they think about offshoring and outsourcing is that only the United States and China are involved; however, in the first quarter of 2017, Europe, Asia, and the Middle East’s contribution to the offshoring market was 35%, with 22.07% of that coming from the UK.42 At the same time, the Asia Pacific’s contributions were 23%, which had risen from 16% in the previous year.43 In most developed countries, such as the US, the UK, France, Germany, and Australia, half of all low skilled jobs are at risk of being offshored to a developing country where labor is cheaper and regulations are looser.44 While this is beneficial for companies, since they are able to get cheaper and sometimes more efficient labor, it can be harmful to low income workers who generally do not have a very advanced skill set. These workers are at the highest risk of losing their jobs.45 There are also special skilled jobs for areas where that skill is abundant. To further elaborate, if country A has a lot of tech

39 “Low Cost Country Manufacturing: China Or Mexico?”, tetakawi, January 15, 2020, accessed on February 28, ​ 2020, https://insights.tetakawi.com/low-cost-manufacturing-china-or-mexico ​ 40 Ibid. ​ 41 Peter Skurkiss, “Global labor arbitrage: What is it, and why does it matter?”, americanthinker.com, February 14, ​ ​ 2018, accessed on February 8, 2020, https://www.americanthinker.com/blog/2018/02/global_labor_arbitrage_what_is_it_and_why_does_it_matter.html 42 Sjoerd Krosse, “The Ultimate List of Outsourcing Statistics”, Microsourcing, February 28, 2019, accessed on ​ February 28, 2020, https://www.microsourcing.com/learn/blog/the-ultimate-list-of-outsourcing-statistics/ ​ 43 Ibid 44 Vivi Octaviani,”Outsourced and offshored: An Australian worker's story”, Independent Australia, March 29, ​ ​ 2017, accessed on February 26, 2020, https://independentaustralia.net/life/life-display/outsourced-and-offshored-an-australian-workers-story,10156 45 Andrew Soergel, “Study: 1 in 4 U.S. Jobs At Risk of Offshoring”, usnews.com, July 17, 2017, accessed on ​ ​ February 8, 2020, https://www.usnews.com/news/economy/articles/2017-07-17/study-1-in-4-us-jobs-at-risk-of-offshoring

13 YMCA Southeastern High School Model UN manufacturing jobs and country B has a lot of people who are skilled in manufacturing tech parts and products, then it is beneficial to both countries for country A to offshore its tech manufacturing jobs to country B. In real life, this is one of the main reasons why a great deal of IT jobs are offshored to India. There is an abundant amount of people who are extremely skillful in math and technology who might not be as skilled in other areas. This type of offshoring is good for these developing economies, specifically because many people are able to take advantage of their limited skill sets. One effect of offshoring is that many countries will usually create new trade agreements with the countries where they are sending labor, meaning that there are lower tariffs, if any; these agreements are very beneficial to developing countries’ economies. These agreements can also create lower import and export prices. Lower import and export prices is one of the reasons that Mexico has been growing in popularity as a country to offshore manufacturing to. As mentioned before, Mexico is a part of NAFTA, and when countries manufacture goods in Mexico, they can take advantage of this agreement to export goods into the United States and Canada with lower tariffs. As the economies of countries popular for offshoring start to grow, their wage rates also start to increase. This increase is starting to force companies and labor firms to look elsewhere for lower priced labor, such as Latin American and MENA (Middle East and North Africa) region countries with developing economies.46 Mexico is one of these countries, and it has been a popular country to offshore labor in since 2014. In Mexico, however, there are other reasons that attract foreign labor markets. One incentive is the cost of labor, which is 20% cheaper in Mexico than in any other North American country.47 The United States and Canada being located very close to Mexico is another beneficial incentive as well as Mexico’s involvement in NAFTA. Manufacturing goods in Mexico allows foreign countries to take advantage of NAFTA for themselves.48 Foreign countries can manufacture then export their goods from Mexico into Canada and the US with lower tariffs, if any at all. As the economy and purchasing power of countries in Latin America continues to grow, it is becoming a more and more popular spot for developed economies to offshore their jobs to.49 Another misconception of offshoring is that developing countries only receive work from outside. This is not true, as countries like China and India are not only receiving jobs, but are also sending them over to other Asian countries. One such case in 2019 dealt with China wanting

46 Célestin Monga, “The Mechanics of Job Creation Seizing the New Dividends of Globalization”, worldbank.org, ​ October, 2013, accessed on February 8, 2020, https://openknowledge.worldbank.org/bitstream/handle/10986/16877/WPS6661.pdf?sequence=1 47 “Mexico, Latin America Poised For Offshoring”, tetakawi.com, March 20, 2014, accessed on February 8, 2020, ​ https://insights.tetakawi.com/mexico-latin-america-poised-for-offshoring 48 Ibid. 49 Ibid.

14 YMCA Southeastern High School Model UN to offshore garment manufacturing jobs to Cambodia.50 Cambodia has relatively high labor costs in comparison to other countries, and workers in the garment industry are known to have gone on multiple strikes for higher wages, fewer hours, and better working conditions in the past.51 The cost of labor in Cambodia, or minimum wage, is $190 USD per month compared to Myanmar, Bangladesh, and Taiwan at $3.53, $94.48, and $0.19 per month respectively.52 Many Cambodian workers are in unions, and they have also questioned their rights as workers in the past.53 Cambodia is, however, an ally of China, specifically Beijing, and China has financially aided Cambodia. Another issue that came up was that, at the time, Cambodia's garment export trade agreements with the EU and the US were at risk.54 This risk impacted the agreement Cambodia had with China, because China had positive relations with the US and the EU. If Cambodia’s trade agreements were broken, then it would affect China negatively. Without Cambodia’s trade agreements with the US and the EU, China would have to pay more money in tariffs on exports. There are many aspects that go into determining where a country should offshore its labor to. Countries must comply with all current trade agreements and regulations and must be mindful of international relations. In addition, businesses looking to offshore labor must consider how the country has handled offshore work in the past and if they have the resources to take on more labor offshored to them. Global labor arbitrage has many benefits, but also has many consequences. It is up to each individual nation to compromise with other nations in order to reap as many benefits and as few consequences as possible from offshoring.

Committee Directive and Jurisdiction The Economic and Financial Committee will convene to discuss global labor arbitrage and its effects on the world economy. During debate, delegates should discuss major issues such as the impact of offshoring on low income communities, trade agreements between states, and any and all government involvement in offshoring. The committee should also address how to reap the most from offshoring for economic development and growth in the global economy as a whole. Delegates must also consider how offshoring affects their countries specifically and whether it is currently more harmful than helpful or vice-versa. The committee must also address both the current benefits and consequences of global labor arbitrage. Delegates should also keep in mind any free trade agreements that exist between nations and how they affect labor arbitrage

50 Bradley J Murg, “Is Beijing hitting out at offshoring in Cambodia?”, Asia Times, July 5, 2019, accessed on ​ ​ ​ ​ ​ February 8, 2020, https://www.asiatimes.com/2019/07/opinion/is-beijing-hitting-out-at-offshoring-in-cambodia/ ​ 51 Ibid. 52 “Minimum Wages Asia,”, Trading Economics, 2020, accessed on July 8, 2020, https://tradingeconomics.com/country-list/minimum-wages?continent=asia 53 Bradley J Murg, “Is Beijing hitting out at offshoring in Cambodia?”, Asia Times, July 5, 2019, accessed on ​ ​ ​ ​ ​ February 8, 2020, https://www.asiatimes.com/2019/07/opinion/is-beijing-hitting-out-at-offshoring-in-cambodia/ ​ 54 Ibid. ​

15 YMCA Southeastern High School Model UN in those nations. Delegates should strive to create a solution that will help the world economy and not just the economies of a few countries. Delegates must also consider the role of the government when it comes to offshoring and must create solutions that do not interfere with state sovereignty. Delegates must keep in mind the jurisdiction of ECOFIN, which only goes as far as the economic effects of offshoring. Delegates must be mindful not to step into the International Labour Organization’s (ILO) jurisdiction when discussing the cost of labor. When drafting resolutions, delegates must remember that ECOFIN cannot infringe on national sovereignty nor create binding legislation; rather, it can only set up programs and suggested regulations.

Questions To Consider 1. To what extent does your country participate in global labor arbitrage? a. Does it participate more in offshoring or receiving labor? 2. Does your country have any current agreements with other nations for the free movement of goods and labor? a. If so, how have these trade or labor agreements impacted offshoring in your country, if at all? 3. What impact, if any, has offshoring had on low income families and residents in your country? a. Has offshoring effectively created more jobs for these lower skilled workers? b. Has offshoring caused these workers to lose their jobs? 4. How much has your country’s government interfered with offshoring in the past? a. Has it openly supported offshoring? b. If not, have they had no interference at all or attempted to limit it? c. How has your country’s governmental opinion of offshoring impacted the impact of offshoring on your country’s economy?

Suggested Sources 1. Arbitrage | Investopedia https://www.investopedia.com/terms/a/arbitrage.asp 2. Global Labor Arbitrage | Intelligent Economist https://www.intelligenteconomist.com/global-labor-arbitrage/ 3. Here, There, and Everywhere | The Economist https://www.economist.com/news/special-report/21569572-after-decades-sending-work-a cross-world-companies-are-rethinking-their-offshoring 4. Differences Between Capitalism and Socialism | The Balance https://www.thebalancesmb.com/the-characteristics-of-capitalism-and-socialism-393509

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5. The story so far: Offshoring has brought huge economic benefits, but at a heavy political ​ ​ price | The Economist https://www.economist.com/special-report/2013/01/17/the-story-so-far 6. The Basics of Tariffs and Trade Barriers | Investopedia https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

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Topic B: Assessing the Role of Central Banks During Recessions

“Inflation is a monetary phenomenon. It is made by or stopped by the central bank.” - Milton Friedman Introduction Recessions and financial crises can be devastating to economic growth and development. In almost all cases, recessions result in heightened rates of unemployment, reduced stock prices, and a lower GDP growth rate. There are many different organizations working to battle recessions, but several of the most important entities are central banks. Central banks play a key role in recessions before and after they begin. A central bank is defined as “an independent national authority that conducts monetary policy, regulates banks, and provides financial services ​ ​ ​ ​ including economic research.55 Central banks are responsible for controlling and manipulating a nation’s money supply by issuing currency and setting interest rates on loans and bonds.”56 The main goals of any central bank are to stabilize the nation’s currency, keep unemployment low, and prevent inflation.57 While central banks are, in most nations, free from political influence in their daily activities, their privileges are established and protected by law.58 By being free from political influence central banks can make policy changes, such as interest rate cuts, without prior government approval. Also, keeping central banks free of political influence means keeping them from being controlled by political candidates during campaigns. Privileges include making policy changes as the banks see fit without having to go through the government. Most central banks are governed by a board, which consists of representatives from member banks.59 A member bank is any bank in affiliation with the central bank of its nation.60 Any bank can apply to become a member bank by filling out an application, fulfilling certain requirements, and going through a waiting period, but the process may vary between countries.61 Central banks around the world have different benefits that come with being a member bank. In the United States for example, member banks of the Federal Reserve are required to purchase Federal Reserve stocks. These stocks cannot be sold, traded, or pledged as collateral for loans, but every year, member

55 Kimberly Amadeo, “Central Banks, Their Functions and Role: Meet the People Who Control the World's Money”, ​ ​ The Balance, March 4, 2020, accessed on March 27, 2020, https://www.thebalance.com/what-is-a-central-bank-definition-function-and-role-3305827 56 Troy Segal, “Central Bank”, Investopedia, March 26, 2020, accessed on April 9, 2020, https://www.investopedia.com/terms/c/centralbank.asp 57 Ibid. 58 Ibid. (1) ​ 59 Ibid. ​ 60 Will Kenton, “Non-Member Banks Defined”, Investopedia, March 5 2018, accessed on April 9, 2020, https://www.investopedia.com/terms/n/non-member-banks.asp 61 Ibid. ​

18 YMCA Southeastern High School Model UN banks receive a six percent annual dividend on their Federal Reserve Bank stock.62 Dividends are payments made from the company to the stockholder, and under these circumstances, they help member banks make more money annually. Central banks have several tools at their disposal to prevent recessions and respond if they occur. Two main tools are quantitative easing (QE) and interest rate cut policies. Quantitative easing involves a central bank buying assets, usually government bonds, with money it has printed or created electronically.63 The bank then uses this money to buy bonds from investors such as banks or pension funds, which increases the overall amount of disposable funds in the financial system.64 Doing so pumps liquidity, or cash, into the economy and makes more money available. Making more money available encourages financial institutions to lend and invest more in businesses and individuals.65 This higher availability of money can also lower interest rates across the economy.66 The Economic and Financial committee must convene to analyze the different aspects of quantitative easing and other tools used by banks during recessions. The committee will study this relationship between central banks and recessions in order to better understand possible solutions.

Background In modern times, some of the most prominent central banks are the Bank of Japan, the Federal Reserve, the Swiss National Bank, and the European Central Bank (ECB).67 Modern central banks have four main goals: economic stability, preventing recession, economic growth, and controlling inflation, which are achieved through a variety of policies. The policies, once again, are quantitative easing and rate cuts. While quantitative easing can be tremendously helpful to institutions with bonds, this tool is almost useless to businesses without bonds to issue. For businesses like this, another tool comes into play: bailout packages. Bailout packages are not offered by central banks but by the government and the International Monetary Fund (IMF), and take the form of direct or third party loans to industries. During recessions, many central banks will distribute their own funds to purchase numerous bonds. By buying bonds from institutions, central banks are giving these institutions more liquid money that is easier to use in the economy, enabling them to keep their businesses afloat during recessions.

62 “What is the advantage of putting your money in a Fed member bank versus a bank that is a nonmember? How do you know which banks are Fed members?”, Federal Reserve Bank of San Francisco, October 2003, accessed on May 23, 2020, https://www.frbsf.org/education/publications/doctor-econ/2003/october/member-nonmember-banks/ ​ 63 “What is quantitative easing?”, BBC News, August 4, 2016, accessed on May 6, 2020, https://www.bbc.com/news/business-15198789 64 Ibid. ​ 65 Ibid. ​ 66 Ibid. ​ 67 “Top 95 Largest Central Bank Rankings by Total Assets”, SWFI, 2020, accessed on May 7, 2020, ​ https://www.swfinstitute.org/fund-rankings/central-bank

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Once the recession has mostly ended and businesses are back to doing well, businesses will buy back their bonds from the bank. Companies get their bonds back and the banks receive liquid money to refill their reserves. The other main way central banks try to stabilize their economies before and during recessions are with rate cuts. Interest rate cuts are most often related to inflation. Lower rates increase inflation, and higher rates lower inflation.68 When central banks want people to spend less, they increase interest rates and do the opposite when they want people to spend more.69 This tool allows banks to control the economy, making it easier for them to stabilize it during recessions.70 A stable economy, in most countries, has an inflation rate around the target rate of 2%.71 Central banks also affect economic growth by controlling liquidity, which is the ease or security with which an asset can be converted into cash without affecting its market price in the financial system.72 There is a term in economics, the liquidity effect, that describes how monetary policy changes affect interest rates, income, and inflation.73 For the discussion of how liquidity affects economic growth, the focus is on interest rates and inflation. Low or tight liquidity, when cash is all tied up in non-liquid assets, happens when interest rates are high which makes it more expensive to take out loans.74 High liquidity, when there is readily available cash, happens when interest rates are lower which makes it cheaper to borrow from banks. Low liquidity slows economic growth because it causes less lending and borrowing, and high liquidity boosts economic growth because it encourages more lending and borrowing.75 Although bailout packages are not issued from central banks, they work in tandem with central banks by helping businesses and institutions that lack their own bonds. A bailout package is usually a large sum of money in a package that can take the form of a loan, cash, bonds, or stock purchases.76 These packages are essentially some form of a loan which must be paid back. For example, South Korea received a bailout package of about $78 billion from the

68 Markus Demary, “When Low Interest Rates Cause Low Inflation”, Intereconomics Rewview of European Economic Policy, 2015, accessed on May 23, 2020, https://www.intereconomics.eu/contents/year/2015/number/6/article/when-low-interest-rates-cause-low-inflation.ht ml 69 Ibid. ​ 70 Ibid. ​ 71 Kristie Engemann, “The Fed’s Inflation Target: Why 2 Percent?”, Federal Reserve Bank of St. Louis, January 16, 2019, accessed on May 23, 2020, https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent ​ 72 James Chen, “Liquidity”, Investopedia, March 19, 2020, accessed on March 27, 2020, ​ https://www.investopedia.com/terms/l/liquidity.asp 73 Victoria Duff, “Liquidity Effect in Economics”, Small Business, 2019, accessed on May 23, 2020, https://smallbusiness.chron.com/liquidity-effect-economics-5212.html 74 “Chapter 8: The liquidity effect”, Oxford, 2015, accessed on May 23, 2020, http://users.ox.ac.uk/~exet2581/msc/ec924liquid.pdf 75 “Top 95 Largest Central Bank Rankings by Total Assets”, SWFI, 2020, accessed on May 7, 2020, ​ https://www.swfinstitute.org/fund-rankings/central-bank 76 Ibid.

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IMF in December of 1997 to help rebuild their economy after the Asian Crisis.77 Brazil had three bailouts in November 1998, August 2001, and August 2002 during which the packages contained $56.7 billion, $16.3 billion, and $36.7 billion respectively.78 The first bailout was needed due to the panic that erupted between Latin investors during the financial crises in Asia and Russia at the time.79 The second bailout was given as Brazil started losing economic stability due to its currency being devalued by 20% which started to rapidly increase national debt.80 The third bailout was during the elections in 2002, and then in 2008 when Brazil’s stock market fell even further. There is limited public information about the exact effects of bailout packages on nations’ economies, but it is clear that bailout packages do not solve all economic problems in a nation. Recessions are mainly caused by high interest rates, reduced consumer confidence, and reduced wages. When interest rates increase too rapidly, prices also increase rapidly, causing consumers to lower their spending. Lower consumer spending can slow down the economy and eventually lead to a recession. Reduced consumer confidence and reduced wages affect the economy alongside high interest rates. When people’s income is lowered they tend to spend less and save more, defined as reduced consumer confidence. Some effects of recessions include a slump in the stock market, an increase in unemployment, and increases in national debt. Perhaps the most famous modern example of a recession is the 2007-2009 economic depression, when the financial crisis in the United States went global. The 2007-2008 global recession started as a subprime lending crisis in the United States. The crisis spread to western Europe and the rest of the world when the interbank, a global network for trading currency, froze completely.81 Inflation around the world increased, key businesses failed, consumer wealth declined by the trillions, and the global market contracted as sources of liquidity dried up. Unanimously, central banks of multiple countries soon coordinated action to provide financial institutions with liquidity support soon after the interbank had frozen. 82 During the financial crisis, the Eurosystem provided banks with as much liquidity support as possible to banks through quantitative easing. The usage of quantitative easing inadvertently caused a reduction in banks’ incentives to attract market financing and weakened the disciplinary effect of market forces, meaning banks were less motivated to take a stand in the global market and expand by attracting foreign investors.83 Overall, banks no longer had any

77 Ibid. ​ 78 Ibid. ​ 79 Ibid. 80 Ibid. 81 Manoj Singh, “The 2007-08 Financial Crisis in Review”, Investopedia, May 9, 2019, accessed on April 4, 2020, https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp 82 Ibid. 83 “DNBulletin: Time to revisit crisis liquidity support”, DeNetherlandscheBank, July 17, 2018, accessed on May 7, 2020, https://www.dnb.nl/en/news/news-and-archive/DNBulletin2018/dnb377768.jsp ​

21 YMCA Southeastern High School Model UN incentives to keep their balance sheets in order, necessitating further intervention by central banks.84 In order to combat the crisis as quickly as possible, central banks introduced rate cuts, which are policy changes, along with the IMF and governments’ bailout packages. Central banks in Canada, Sweden, China, Switzerland, England, and the European Central Bank resorted to interest rate cuts to aid the global economy. In 2009, Sweden cut its rates below zero, becoming the first country at the time to implement negative rates. Riksbank, Sweden’s central bank, cut its deposit rate to -0.25%.85 A deposit rate is the amount of money paid out in interest by a bank or financial institution on cash deposits. Banks pay deposit rates on savings and other investment accounts.86 Under the negative interest rate policy, the central bank collects interest from financial institutions that hold on to excess cash, any amount beyond the regulated limit.87 By penalizing financial institutions for holding on to extra cash, central banks encourage these institutions to boost lending to businesses and consumers.88 This policy keeps money flowing throughout the economy and keeps inflation at bay. Sweden has still kept their negative interest rate policy years after the 2008 crisis.89 All of these central banks cut rates to encourage more spending and borrowing in order to stimulate economic growth. The more money that people are spending, the more money there is circulating in the economy. Rate cuts are aimed at easing these nation’s economies out of recessions. In addition to rate cuts, most state governments presented their own versions of a bailout package, which is financial support given to a failing company or economy possibly on the verge of bankruptcy.90 Argentina and Ukraine were two of the most affected countries from the 2007-2008 financial crisis. Argentina's form of a bailout package included nationalizing nearly $30 billion in private pensions to mainly protect those that had retired from falling bond and stock prices.91 Ukraine’s bailout package was a loan from the IMF for $16.4 billion, of which $4.5 billion was disbursed immediately.92 The intention of this loan was to stabilize the country’s

84 Ibid. 85 Zubin Jelveh, “Sweden Cuts An Interest Rate Below Zero”, The New Republic, July 2, 2009, accessed on May 7, ​ 2020, https://newrepublic.com/article/50642/sweden-cuts-interest-rate-below-zero ​ 86 “Deposit Rate”, Financial Advisory, accessed on May 7, 2020, https://www.financialadvisory.com/dictionary/term/deposit-rate/ 87 “Explainer: How does negative interest rates policy work?”, Reuters, September 13, 2019, accessed on May 7, ​ 2020, https://www.reuters.com/article/us-ecb-policy-rates-explainer/explainer-how-does-negative-interest-rates-policy-wor k-idUSKCN1VY1D2 88 Ibid 89 Ibid ​ 90 Ibid. ​ 91 Alexei Barrionuevo, “Argentina Nationalizes $30 Billion in Private Pensions”, New York Times, October 21, 2008, accessed on April 11, 2020, https://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html ​ 92 Krishna Guha, “IMF approves $16.4bn Ukraine loan”, Financial Times, November 5, 2008, accessed on April 11, ​ 2020, https://www.ft.com/content/64a72c4c-ab9b-11dd-b9e1-000077b07658 ​

22 YMCA Southeastern High School Model UN banking system and alleviate the impact of a collapse in the price of steel which was one of the country’s largest exports.93 Ukraine’s original plan for the package was to bailout seven of its ailing banks.94 Two of those banks, however, did not accept the money because it meant they had to give up 75% of their shares which they did not want to do.95 This bailout seemed to not have majorly aided Ukraine in view of the fact that Ukraine and the IMF agreed on another bailout loan for $15 billion in 2010.96 During the 2007-2008 financial crisis, central banks were able to help their economies get back into shape with rate cuts, policy changes, and quantitative easing. There have been many recessions in history, both global or regional, and there will only be more in the future. Central banks are constantly working to keep the economy stable and doing everything they can to prevent recessions.

Current Situation Central banks have always been able to help their countries repair after financial crises and recessions in the past. To prepare for potential impending recessions, there are several popular policies central banks around the world have adopted. These policy changes were around rate cuts and quantitative easing. For example, last year many Latin American countries, such as Brazil, Mexico, and Argentina, were still experiencing the aftermath of the 2008 financial crisis and have not yet been able to fully recover from it. To combat this, central banks in many countries, including Brazil and Mexico, cut their rates at the end of July into August in 2019. Mexico drastically cut rates while Brazil cut rates at a much slower pace.97 However, Argentina's benchmark interest rate remained the world's highest at 58% even after it had dropped about 15 interest points since May 2019. The central bank kept a strict monetary policy to prevent a currency rout preceding the October 2019 presidential election.98 A currency rout is when a nation’s currency is dangerously devalued.99 The central banks in Brazil and Mexico cut their

93 Ibid. 94 Pavel Korduban, “The Ukrainian Government Launches Bailout Plan for Banks”, The Jamestown Foundation, June 17, 2009, accessed on May 7, 2020, https://jamestown.org/program/the-ukrainian-government-launches-bailout-plan-for-banks/ 95 Ibid. 96 “Factbox: Ukraine's history with IMF bailouts”, Reuters, February 25, 2014, accessed on May 7, 2020, ​ https://www.reuters.com/article/us-ukraine-crisis-imf/factbox-ukraines-history-with-imf-bailouts-idUSBREA1O1D T20140225 97 David Biller and Mario Sergio Lima, “Latin America Central Banks Poised to Join Global Rate Cut Party”, Bloomberg, July 24, 2019, accessed on April 4, 2020, https://www.bloomberg.com/news/articles/2019-07-24/latin-america-central-banks-poised-to-join-global-rate-cut-pa rty 98 Ibid. ​ 99 Paul Wallace, “Zimbabwe’s Currency Rout Makes Argentina’s Seem Like a Blip”, Bloomberg, September 17, 2019, accessed on may 23, 2020,

23 YMCA Southeastern High School Model UN interest rates with the goal of encouraging consumer spending and borrowing. While it is not clear whether these rate cuts have stimulated the economic growth hoped for by the central banks, the countries have slowly continued to cut interest rates down even more. The main goal is to increase spending by making prices cheaper, but this actually increases inflation at the same time. Many times these rate cuts can backfire and reduce spending even more. In short these rate cuts actually did not help the economies during the recessions as much as they had planned to. Mexico even cut its key lending rate for the first time since 2014.100 The key rate is the interest rate at which banks can borrow when they fall short of their required reserves.101 All of these nations cut rates as much as possible without completely hurting their economies. The rate cuts were how the central banks strived to keep the economies as balanced as they could be while still trying to slowly lower inflation. The week of August 5, 2019, the central banks in India, Thailand, and New Zealand both cut rates more than expected. India’s rates went from 5.40% to 5.07%, Thailand’s rates went from 1.50% to 1.25%, and New Zealand’s rates went from 1.0% down to 0.5%.102 India made this rate cut as an effort to stimulate economic growth.103 Many countries underwent these rate cuts to keep their currency cheap while dealing with inflation and historically low interest rates. 104 Cheaper currencies allow a country to export more goods and services while making imports more expensive, which helps to bolster up domestic prices.105 New Zealand was expected to cut its official cash rates, or interest rates on loans, by 50 to 100 basis points in order to keep up with its employment and inflation objectives.106 Basis points, bps, or bits are a unit of measurement in finance used to describe percentage change.107 One basis point is equivalent to 0.01%.108 The ​

https://www.bloomberg.com/news/articles/2019-09-17/zimbabwe-s-currency-rout-makes-argentina-s-seem-like-a-m ere-blip 100 Jeanna Smialek and Karl Russell, “As Recession Concerns Mount, Dozens of Central Banks Are Cutting Rates”, New York Times, August 15, 2019, accessed on April 6, 2020, https://www.nytimes.com/2019/08/15/business/economy/central-bank-rate-cuts.html 101 “What is the Central Bank policy rate?”, IMF, 2019, accessed on May 7, 2020, ​ http://datahelp.imf.org/knowledgebase/articles/484375-what-is-the-central-bank-policy-rate 102 Ibid. 103 “India central bank cuts rates by 35 basis points to speed up growth”, CNBC, August 7, 2019, accessed on April 12, 2020, https://www.cnbc.com/2019/08/07/india-central-bank-cuts-rates-by-35-basis-points-to-try-to-speed-up-growth.html 104 Ibid. (61) ​ 105 Ibid. 106 “New Zealand’s central bank stuns markets with a bigger-than-expected rate cut”, CNBC, August 6, 2019, accessed on April 20, 2020, https://www.cnbc.com/2019/08/07/new-zealands-central-bank-rbnz-cuts-cash-rate-by-50bps.html 107 Chad Langager, “Basis Point (BPS)”, Investopedia, February 7, 2020, accessed on April 20, 2020, ​ https://www.investopedia.com/ask/answers/what-basis-point-bps/ 108 Ibid.

24 YMCA Southeastern High School Model UN amount New Zealand cut was very shocking to markets because it was much larger than the expected 10 basis point cut, as the original rate was 1.50%.109 Similarly, Russia also faced higher inflation and an economic downturn in 2019 when Russia’s central bank, the Bank of Russia, made five consecutive interest rate cuts, leaving the end of the year key rate at 6.25%.110 A key rate is the key lending rate used by the central bank to regulate the availability, cost, and use of money and credit within the nation.111 Russia’s economic growth had slowed a few years before 2019 and has only continued to do so.112 Russia, however, was not the only nation with financial issues at the beginning of 2019. On January 4, 2019, the People’s Bank of China cut the required amount of cash banks must hold by one percentage point, which freed up about $218 billion for its economy.113 When a central bank cuts the minimum amount of liquid cash banks are allowed to hold, banks are encouraged to lend and invest more, which allows more cash to circulate in the economy. During this time, the Chinese economy was suffering from lower rates of factory output and weaker consumer confidence while in the middle of a trade war with the United States.114 After the cash cut, businesses and factories were able to take out more loans at lower interest rates to help keep their businesses running. The People’s Bank of China also established other rate cuts throughout the year such as the reserve requirement ratio in order to allow more leeway in lending.115 Even after all of the nation’s efforts, China has not yet fully recovered from the previous economic crisis, which is concerning. Most central banks today have policy rates, also known as key rates. For example, the Reserve Bank of India currently has a policy rate of 4.65% .116 As of March of 2020 the Reserve Bank of New Zealand has a policy rate of a mere 0.25%.117 An issue that has been coming up in the past years is central bank independence (CBI), and although it has nothing to do with recessions directly, it can affect the policy changes banks can make. There are many cases for and against CBI. One main concern about CBI is that politicians may ease up monetary policy

109 Ibid. (66) ​ 110 “Russia's Central Bank Cuts Key Rate to 6.25%”, The Moscow Times, December 13, 2019, accessed on April 20, 2020, https://www.themoscowtimes.com/2019/12/13/russias-central-bank-cuts-key-rate-a68625 ​ 111 “What is the Central Bank policy rate?”, IMF, 2019, accessed on May 7, 2020, ​ http://datahelp.imf.org/knowledgebase/articles/484375-what-is-the-central-bank-policy-rate 112 “Russia's Central Bank Cuts Key Rate to 6.25%”, The Moscow Times, December 13, 2019, accessed on April ​ 20, 2020, https://www.themoscowtimes.com/2019/12/13/russias-central-bank-cuts-key-rate-a68625 ​ 113 Alexandra Stevenson, “China Pours $218 Billion Into the Economy as Growth Slows”, New York Times, January 4, 2019, accessed on April 20, 2020, https://www.nytimes.com/2019/01/04/business/china-economy-central-bank.html 114 Ibid. 115 Ibid. 116 Reserve Bank of India, 2020, accessed on May 7, 2020, https://www.rbi.org.in/ ​ ​ 117 “New Zealand Interest Rate”, Trading Economics, 2020, accessed on May 7, 2020, ​ https://tradingeconomics.com/new-zealand/interest-rate

25 YMCA Southeastern High School Model UN before an election to help their campaigns.118 If this were to happen then rates would depend on elections instead of the economy.119 However, a very important benefit of CBI is that it delivers better inflation outcomes without compromising economic growth.120 Most central banks in democratic nations are as independent from the government as they can be. Even nations that may not be fully democratic still have central banks with CBI.121 Central bank independence is important because greater freedom has been shown to lower inflation rates.122 Central banks can allow this reduction in inflation without negatively impacting growth and employment goals.123 While there is no direct evidence of CBI leading to slower rates of inflation, many studies have shown some correlation between the two.124 CBI can also be seen as a set of restrictions on the government’s influence on the management of monetary policy by the central bank.125 Most nations in the world have been facing some form of economic depression or recession since 2019 and even years earlier. Many nations were not able to fully recover into a full economic growth state by 2020. Key rates remain negative in many European and Asian countries, such as Sweden and Japan, leaving less room to cut rates. Many major central banks have also failed to hit their 2 percent inflation targets in these past few years, heightening the risk that prices will slip dangerously low come the next downturn. The COVID-19 outbreak during the first quarter of 2020 also hasn’t just taken a toll on the Chinese economy, but on the world’s economy as a whole. While a full global recession may not happen, the virus has caused a great deal of economic destruction to many economies across the globe.

Committee Directive and Jurisdiction The Economic and Financial Committee will convene to discuss the role of central banks in economic recessions and financial crises. Delegates should guide nations into better economic stability in the aftermath of a recession while considering how central banks compare and contrast across multiple nations. In addition, delegates should also examine whether all nations truly have a central bank that is fully free from government influence or not. Delegates should

118 Martin Essex, “Central Bank Independence: The Cases For and Against”, Daily FX, September 19, 2019, accessed on May 7, 2020, https://www.dailyfx.com/forex/fundamental/article/special_report/2019/09/19/Central-Bank-Independence-The-Cas es-For-and-Against.html 119 Ibid ​ 120 Ibid 121 Behrooz Gharleghi, “Central bank independence and economic growth”, DOC Research Institute, March 4, 2019, ​ accessed on March 27, 2020, https://doc-research.org/2019/03/central-bank-independence-economic-growth/ ​ 122 Ibid. 123 Charles Arthur, “Money and Banking Vol. 2”, Saylor Dot Org, August 29, 2016, accessed on April 9, 2020, ​ https://saylordotorg.github.io/text_money-and-banking-v2.0/index.html 124 “Central Bank Independence and Inflation”, Federal Reserve Bank of St. Louis, 2009, accessed on May 23, 2020, https://www.stlouisfed.org/annual-report/2009/central-bank-independence-and-inflation 125 Charles Arthur, “Money and Banking Vol. 2”, Saylor Dot Org, August 29, 2016, accessed on April 9, 2020, https://saylordotorg.github.io/text_money-and-banking-v2.0/index.html

26 YMCA Southeastern High School Model UN observe central banks that have been able to help their nations’ economies recover the most after disastrous financial crises and consider how solutions could be implemented in other countries while respecting national sovereignty. Delegates should also analyze the importance of CBI and what policies such as rate cuts, QE, and bailout packages are most effective at preventing a recession and responding to one. The Second Committee oversees the financial and economic development aspects of nations. ECOFIN’s main goal is to encourage economic growth and development within developed and developing economies. The committee can only make suggestions about policy changes and whether more CBI is needed or not. Delegates must keep in mind that ECOFIN cannot infringe on national sovereignty, and therefore, cannot force any nation to do anything. During debate the delegates must be mindful of ECOFIN’s jurisdiction and must be careful of discussing issues under another committee’s jurisdiction. For example, if delegates are discussing how central banks have responded during the COVID-19 crisis, then they must be mindful not to fall into the World Health Organization’s (WHO) jurisdiction.

Questions To Consider 1. How strong is your country’s central bank in regards to how quickly it is able to restabilize the economy after a recession or financial crisis? a. Is your central bank publicly free from governmental influence? b. To what extent does your country’s central bank work in tandem with your country’s government? 2. What have been some actions your nation’s central bank has taken to help growth during recessions in the past? a. Were these actions successful or did they hurt the economy even more? How so? 3. Is your country’s economy in a recession currently? a. What was the cause of the crisis? b. How long has it lasted? c. To what extent has your country’s central bank worked to combat the current recession, if at all? 4. Has your central bank issued any rate cuts recently? a. If so, on what? b. Have they been beneficial to your country’s economy? Why or why not? 5. How does your nation’s central bank utilize quantitative easing? a. Is it used before recessions and after? b. Is it used during recessions?

27 YMCA Southeastern High School Model UN

Suggested Sources 1. Central Bank | Investopedia https://www.investopedia.com/terms/c/centralbank.asp 2. Bonds | Investor.gov https://www.investor.gov/introduction-investing/investing-basics/investment-products/bo nds-or-fixed-income-products/bonds 3. Top 94 Largest Central Bank Rankings by Total Assets | SWFI https://www.swfinstitute.org/fund-rankings/central-bank 4. The Financial Crisis of 2008: A Review of Notable Books | UVA Darden https://blogs.darden.virginia.edu/brunerblog/2018/12/the-financial-crisis-of-2008-a-revie w-of-notable-books/ 5. Chart: The Downward Spiral in Interest Rates | Visual Capitalist https://www.visualcapitalist.com/chart-the-downward-spiral-in-interest-rates/ 6. How Will Coronavirus Affect the Global Economy | World Economic Forum https://www.weforum.org/agenda/2020/04/imf-economy-coronavirus-covid-19-recession/

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Topic C: Addressing Transnational Corporate Tax Evasion

“Our international banking system allows banks to accept funds gained from tax evasion and other crimes and thereby facilitates and encourages embezzlement by public officials, especially in developing countries, as well as tax evasion and tax avoidance by multinational corporations.” - German Philosopher and Director of the Global Justice Program, Thomas Pogge Introduction Tax evasion is defined as the illegal nonpayment or underpayment of taxes, referring to both individuals and corporations. Thus, transnational corporate tax evasion occurs when transnational corporations take certain measures in order to avoid paying their taxes in full or even at all. Companies often choose developing countries for manufacturing not only because labor is cheaper, but also because many of these countries have looser tax regulations. Although multinational corporations are often confused with transnational corporations, they work differently. Transnational corporations do not have one centralized management system, but they still operate in countries outside of their home country.126 These corporations usually have multiple management offices that each manage a number of companies; usually by continent. Multinational corporations have facilities and assets in multiple countries outside of their home country, and they have one centralized office where global management is coordinated.127 A transnational company will have multiple operational units in different countries responsible for various tasks.128 Many of these corporations do not recognize any country as a home or base nation.129 For example, Nestle is a transnational company headquartered in Switzerland, but it operates in over 115 countries worldwide.130 As of 2009, there were 159 Nestle factories in Europe alone, but Nestle is mostly managed separately by continent.131 Companies, such as Nestle, often face public criticism when they avoid higher tax rates.132 Public criticism on the topic of tax avoidance has also been called “tax shaming”. When

126 “Difference Between Multinational and Transnational”, Difference Between, 2020, accessed on May 20, 2020, http://www.differencebetween.net/business/difference-between-multinational-and-transnational/ 127 Ibid. 128 “Domestic, Transnational, or Multinational Business?”, North Eastern University D’Amore-McKim School of Business, 2019, accessed on May 20, 2020, https://onlinebusiness.northeastern.edu/blog/domestic-transnational-or-multinational-business/ 129 Ibid. 130 “Nestlé-Switzerland”, IUF, 2009, accesed on May 20, 2020, ​ http://www.iuf.org/sites/cms.iuf.org/files/NESTLE%20.pdf 131 Ibid. 132 “Domestic, Transnational, or Multinational Business?”, North Eastern University D’Amore-McKim School of ​ Business, 2019, accessed on May 20, 2020, https://onlinebusiness.northeastern.edu/blog/domestic-transnational-or-multinational-business/

29 YMCA Southeastern High School Model UN a company is tax shamed people will often boycott that company or brand and that company will receive bad publicity, which can negatively affect sales.133 Corporate tax evasion is possible because of tax havens, shell companies, and divergent tax policies. Transnational companies can more easily evade taxes since they often do business in countries in which the tax rates are relatively low, if there are any at all. Corporations strive to avoid paying taxes solely to have more revenue and profit for themselves, which has shown to be detrimental to nations’ economies. Tax evasion strongly affects economic growth and development negatively. Evading taxes can help companies accumulate more resources and profits, but it also reduces the amount of public services that can be supplied by the government. 134 This reduction is an indirect effect; fewer paid taxes leads to a lower amount of government revenue, which leads to tighter budgets. In short, corporate tax evasion increases capital accumulation, implying more economic growth, but it also decreases tax revenue for public services and goods, resulting in a lower economic growth rate.135 The Economic and Financial Committee will convene to discuss and evaluate the consequences of transnational corporate tax evasion.

Background The topic of taxation is a centuries old debate still happening today. International committees, such as the League of Nations and the International Chamber of Commerce, have been addressing the phenomenon of double taxation since the 1910s.136 Double taxation is the taxation of the same income twice.137 An example of this concept in relation to corporations is with dividends.138 A dividend is a distribution of a company's earnings given to its shareholders. 139 When companies earn profits, they must pay income taxes at the corporate level. Parts of those profits are eventually distributed to shareholders in the form of dividends.140 Then, those dividends are taxed as a personal income for each of the shareholders.141 Through this process,

133 Vanessa Bardford, “Google, Amazon, Starbucks: The rise of 'tax shaming'”, BBC News, May 21, 2013, accessed on June 28, 2020, https://www.bbc.com/news/magazine-20560359 ​ 134 R. Cerqueti, R. Coppier, “Economic growth, corruption and tax evasion”, Core, December 2009, accessed on May 21, 2020, https://core.ac.uk/download/pdf/6393384.pdf ​ 135 Ibid. 136 Matti Ylönen, “Back from oblivion? The rise and fall of the early initiatives against corporate tax avoidance from the 1960s to the 1980s”, UNCTAD, 2016, accessed on May 21, 2020, https://unctad.org/en/PublicationChapters/diaeia2016d2a2_en.pdf 137 “What is Double Taxation?”, My Accounting Course, 2020, accessed on May 21, 2020, https://www.myaccountingcourse.com/accounting-dictionary/double-taxation 138 Ibid. 139 James Chen, “Dividend Definition”, Investopedia, May 14, 2020, accessed on June 6, 2020, https://www.investopedia.com/terms/d/dividend.asp 140 “What is Double Taxation?”, My Accounting Course, 2020, accessed on May 21, 2020, https://www.myaccountingcourse.com/accounting-dictionary/double-taxation 141 Ibid.

30 YMCA Southeastern High School Model UN the company’s profits have essentially been taxed twice. As soon as the discussion of double taxation had, at most, partially addressed the issue of under taxation rose in prominence.142 Under taxation is when an individual or business is taxed at a lower rate than they should be.143 Under taxation is a problem because it allows individuals and companies to legally pay a lower tax rate than they should be paying. The act of under taxation causes the government to also lose necessary revenue. These two issues have caused problems for governments in the past, in terms of funding public services, and continue to be prominent in the present. In the 1974 Global Economic Report (GEP), the World Bank mentioned corporate tax evasion specifically and how it was becoming easier and easier for corporations to evade their taxes.144 The report stated that with the development of better communications technologies, corporations were able to pursue transnational strategies, such as the use of tax havens and shell companies, which were used to maximize profit of the company as a whole opposed to individuals.145 When corporations evade taxes, they usually don’t split tax money evenly among their employees. The owners and CEOs of these corporations usually keep the company’s tax money for themselves while none of the company’s employees get a cut. These strategies for profit maximization worked well because policies were varied across nations in the tax fields.146 These discrepancies allowed transnational corporations to render their own nation’s policies ineffective.147 The boom in communication technologies marked the beginning of corporations storing their assets and incomes in nations outside of their own in order to benefit from the difference in tax policies.148 As more and more businesses switch to online platforms, they are able to escape taxes. When a corporation earns income from online sales, there is no fully accurate way to determine how that income should be taxed. With the era of online shopping, companies are able to sell in one country, yet get taxed in another since the company has no actual location. By having no actual location companies can, in some cases, choose which country they would like to be based in; therefore, they are taxed by that nation’s policies.149 The digital economy has long been affecting tax evasion and continues to do so today.

142 Matti Ylönen, “Back from oblivion? The rise and fall of the early initiatives against corporate tax avoidance from ​ the 1960s to the 1980s”, UNCTAD, 2016, accessed on May 21, 2020, https://unctad.org/en/PublicationChapters/diaeia2016d2a2_en.pdf 143 “Why Warren Buffet is right, the rich are undertaxed.”, WHYY PBS, August 19, 2011, accessed on May 21, ​ 2020, https://whyy.org/articles/why-warren-buffet-is-right-the-rich-are-undertaxed/ ​ 144 “Global Economic Prospects Slow Growth, Policy Challenges”, The World Bank, 2020, accessed on May 21, 2020, https://www.worldbank.org/en/publication/global-economic-prospects ​ 145 Matti Ylönen, “Back from oblivion? The rise and fall of the early initiatives against corporate tax avoidance from ​ the 1960s to the 1980s”, UNCTAD, 2016, accessed on May 21, 2020, https://unctad.org/en/PublicationChapters/diaeia2016d2a2_en.pdf 146 Ibid. 147 Ibid. 148 Ibid. 149 Scott Hodge, “Taxing the Digital Economy”, Tax Foundation, June 3, 2020, accessed on June 29, 2020, ​ https://taxfoundation.org/taxing-the-digital-economy/

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Current Situation Tax avoidance by corporations is successfully accomplished by the usage of low-tax countries with preferential policies.150 Taxing corporations has always been an issue regarding what and where they should actually be taxed.151 “What” refers to which assets and incomes qualify as taxable, and “where” refers to which country the corporation should be taxed in. The problem has increased since wealth is no longer strictly tied to tangible assets, such as factories and intellectual property rights, which are patents or licenses that generate cash flow through royalty fee payments.152 Additionally, transnational corporations that are active in two or more countries beg the question of which country has the right to tax the corporation’s profits.153 Transnational corporations make the taxation process even more complicated, since they have separate companies for manufacturing, marketing, distribution, and other operations. Most of these corporations do not have a centralized global management system or headquarters based in one nation. Corporations take advantage of scattered operations to evade taxes by using loopholes, such as tax havens and shell companies. One way transnational corporations avoid taxes is by storing profits in a tax haven, which is a sovereignty that allows companies and individuals to store profits in order to evade taxes. There is no standard definition of what a tax haven is; however, all tax havens do, for the most part, meet three criteria. First, the region the haven is in has low or no tax rates at all for certain assets, including intellectual property rights, bonds, and shares, which are often only granted to foreign residents.154 Second, they have a low level of regulation regarding legal entities such as companies, foundations, or trusts. Tax havens are an additional element that adds to the problem that globalization creates for taxation. Globalization is when companies start expanding into foreign countries. While evasion through the use of tax havens is illegal if companies merely deposit funds into a foreign bank account, most transnational corporations have been able to find loopholes that allow them to evade taxes legally, such as owning a manufacturing plant or sales center in a country with a low tax rate. One does not need any initial capital to set up a legal entity, but they can hide the real ownership of that entity or they do not face strong due diligence

150 FRIEDRICH-EBERT-STIFTUNG, “Tax haven and the Taxation of Transnational Corporations”, Global Policy ​ Forum, June 21, 2013, accessed on May 21, 2020, https://www.globalpolicy.org/component/content/article/216-global-taxes/52426-tax-havens-and-the-taxation-of-tra nsnational-corporations.html 151 Ibid. 152 Ibid. ​ 153 Ibid. ​ 154 FRIEDRICH-EBERT-STIFTUNG, “Tax haven and the Taxation of Transnational Corporations”, Global Policy ​ Forum, June 21, 2013, accessed on May 21, 2020, https://www.globalpolicy.org/component/content/article/216-global-taxes/52426-tax-havens-and-the-taxation-of-tra nsnational-corporations.html

32 YMCA Southeastern High School Model UN requirements.155 Due diligence is the research and analysis of a company or organization that must be done in preparation for a business transaction, such as a corporate merger.156 For example, under Japanese law, due diligence legally requires information regarding company organization, shares and shareholders, and governmental licenses and permits.157 Thirdly, a tax haven must guarantee strong secrecy, which could come from secret bank accounts, a lack of public registration of entities, or no cooperation with foreign tax authorities. All information stays strictly confidential.158 In 2019, the top three tax havens were the British Virgin Islands, Bermuda, and the Cayman Islands.159 A company set up in the British Virgin Islands doesn’t have to pay any income taxes on capital gains, and there are no sales taxes.160 Bermuda and the Cayman Islands also have similar tax policies making these destinations particularly attractive for transnational corporations. Another way transnational corporations evade taxes is through the use of shell companies. A shell company is a business that is created to hold funds and manage another entity’s financial transactions.161 These corporations do not have any employees, are not traded on exchanges, and do not make money or provide any customers with any goods or services. The only standard business practice of these companies is keeping track of assets that they hold, which usually isn’t a lot of money.162 A shell company used for illegal business is commonly referred to as a phantom firm, and the ultimate owner of the business who controls the company is called the beneficial owner.163 These shell companies can be made in any region or nation in the world.164 Corporations utilize tax havens by setting up shell companies within them. Many desirable shell companies locations are in Africa, including Seychelles and Mauritius.165 The

155 Ibid. ​ 156 “Due Diligence”, Merriam-Webster, 2020, accessed on May 23, 2020, https://www.merriam-webster.com/dictionary/due%20diligence 157 Nagashima Ohno & Tsunematsu, “Due diligence, information and disclosure in M&A transactions in Japan”, Lexology, January 23, 2018, accessed on May 23, 2020, https://www.lexology.com/library/detail.aspx?g=2c0ca1bf-a2e7-4a95-a432-5cb0f825be73 158 FRIEDRICH-EBERT-STIFTUNG, “Tax haven and the Taxation of Transnational Corporations”, Global Policy ​ Forum, June 21, 2013, accessed on May 21, 2020, https://www.globalpolicy.org/component/content/article/216-global-taxes/52426-tax-havens-and-the-taxation-of-tra nsnational-corporations.html 159 “Channel Islands 'among worst tax havens' worldwide”, BBC News, May 29, 2019, accessed on May 23, 2020, https://www.bbc.com/news/world-europe-jersey-48354081 160 “International Offshore Jurisdiction Review: British Virgin Islands (BVI) as an Tax Reduction Center”, Offshore Protection, 2020, accessed on May 23, 2020, https://www.offshore-protection.com/bvi-british-virgin-islands-tax-havens 161 Amanda Dixon, “What Is a Shell Company?”, SmartAsset, June 6, 2018, accessed on May 23, 2020, https://smartasset.com/investing/what-is-a-shell-company 162 Ibid. ​ 163 Ibid. 164 Ibid. ​ 165 Katie Warren, “The top 15 tax havens around the world”, Business Insider, November 19, 2019, https://www.businessinsider.com/tax-havens-for-millionaires-around-the-world-2019-11

33 YMCA Southeastern High School Model UN corporate tax rate in Seychelles is 0% and 15% in Mauritius.166 Even though Mauritius has a corporate tax rate of 15%, that rate only applies to residents and only on Mauritius sourced income.167 Therefore, non-residents from outside of Mauritius who set up shell companies there and move their profits into those companies are not required by law to pay any taxes on that profit. Developing nations are not the only top shell company locations; a study done in 2012 actually showed that the United States is one of the easiest places to create a phantom firm, second to Kenya.168 While there are many legal uses for shell companies, they are often used by corporations, and even individuals, to evade taxes. Anonymous shell companies can open bank accounts and wire money just like any other company without any scrutiny from law enforcement or the public.169 In the past few years, transnational corporate tax evasion has become very large scale. There have been multiple tax evasion scandals over the past few years involving both individuals and companies. The most substantial tax evasion scandal of the past decade is the Panama Papers. The Panama Papers, released on April 3, 2016, are 11.5 million leaked documents that exposed a network of over 214,000 tax havens, including people and entities from about 200 different nations.170 These confidential documents were property of the Panama based law firm Mossack Fonseca.171 The papers were encrypted, and it took a team a year to decrypt the files before they were revealed to the public.172 Many people and corporations are still facing the consequences of the Panama Papers today. The Panama Papers exposed corporations and individuals from every continent. Most corporations and individuals have had to pay millions of dollars in fees, and many of the tax violators have also had to spend time in jail. Some of these individuals are still in jail, while some of the companies that were caught are still suffering from major losses that they had to pay back to their respective governments. In 2019, three years after the papers had been released, much action had already been taken. Twenty-three countries were able to recover about $1.2 billion USD of tax money, many corrupt governmental leaders involved in the scandal have either resigned or been prosecuted, and there are ongoing

166 “Business Tax”, Seychelles Revenue Commission Republic of Seychelles, 2020, accessed on May 23, 2020, https://www.src.gov.sc/pages/businesstax/businesstax.aspx 167 “Mauritius Corporate - Taxes on corporate income”, Worldwide Tax Summaries, January 14, 2020, accessed on May 23, 2020, https://taxsummaries.pwc.com/mauritius/corporate/taxes-on-corporate-income ​ 168 Michael Findley, “Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies”, Centre for Governance and Public Policy Griffith University, May 2014, accessed on May 23, 2020, https://secureservercdn.net/45.40.149.159/34n.8bd.myftpupload.com/wp-content/uploads/2014/05/Global-Shell-Ga mes-2012.pdf 169 “Anonymous Companies”, Global Financial Integrity, 2012, accessed on May 23, 2020, ​ https://gfintegrity.org/issue/anonymous-companies/ 170 “Panama Papers Q&A: What is the scandal about?”, BBC News, April 6, 2016, accessed on May 24, 2020, https://www.bbc.com/news/world-35954224 171 Ibid. ​ 172 Ibid. ​

34 YMCA Southeastern High School Model UN investigations in about eighty-three countries.173 These investigations regard officials, corporations, and politicians that may have been involved in the scandal.174 The law firm that started the whole tax evasion scandal, Mossack Fonseca, has also been shut down.175 The Panama Papers were important not only because they exposed hundreds of individuals and corporations of tax evasion, but also because they have prompted international debates regarding tax policy reforms.176 Many organizations are working to end transnational corporate tax evasion, including the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN). The OECD has specifically been addressing Base Erosion and Profit Shifting (BEPS).177 “Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to ‘shift’ profits from higher-tax jurisdictions to lower-tax jurisdictions, thus ‘eroding’ the ‘tax-base’ of the higher-tax jurisdictions.” Countries lose around $100-$240 million USD per year in revenue as a result of BEPS practices.178 Over 135 countries and jurisdictions are working towards “the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.”179 BEPS affects businesses, citizens, and governments negatively.180 Governments lose the funds that are acquired through taxes and are needed for public services, such as education and health care.181 Citizens end up having to pay higher bills or even taxes in order to cover up for the tax revenue lost by corporate tax evasion, or they have to live on without those public services.182 Businesses that are purely domestic, and must pay their taxes in whole or pay even higher taxes, suffer due to transnational corporations that offshore their funds to avoid taxes.183 They struggle to compete with these larger companies and sometimes lose more money than they earn.184 In 2015, the OECD joined together with G20 countries and stakeholders and created a package of 15 actions and possible solutions to address the problem of BEPS.185 The G20 is a global forum for the

173 “THREE YEARS AFTER THE PANAMA PAPERS: PROGRESS ON HORIZON”, Transparency International the Global Coalition Against Corruption, April 4, 2019, accessed on May 24, 2020, https://www.transparency.org/en/news/three-years-after-the-panama-papers-progress-on-horizon# 174 Ibid. ​ 175 Ibid. ​ 176 Ibid. ​ 177 “What is BEPS?”, OECD, 2020, accessed on May 24, 2020, https://www.oecd.org/tax/beps/about/ ​ 178 Ibid. ​ 179 Ibid. ​ 180 “Ending offshore profit shifting”, OECD, 2020, accessed on May 24, 2020, https://www.oecd.org/about/impact/combatinginternationaltaxavoidance.htm 181 Ibid. 182 Ibid. ​ 183 Ibid. ​ 184 Ibid. ​ 185 Riyadh, “G20 Leaders Summit 2020”, IISD, 2020, accessed on May 24, 2020, ​ https://sdg.iisd.org/events/g20-leaders-summit-2020/

35 YMCA Southeastern High School Model UN governments and central bank governors made up of 19 countries and the European Union.186 There are many key actions and goals of this group, including stopping the inappropriate transfer of profits between transnationals’ subsidiaries in different countries, like shell companies.187 Another goal is to help countries collect VAT, or value added tax, more effectively.188 A value-added tax (VAT) is a tax that is placed on a product at each stage of manufacturing and until the final sale of the product. These are just a few of the group’s goals. The United Nations has taken some direct efforts aiming to combat transnational corporate tax evasion. In 2016, the Economic and Social Council (ECOSOC) agreed on a proposal for a United Nations Code of Conduct on Cooperation in Combating International Tax Evasion. This Code supports the automatic exchange of information for tax purposes as the way forward but recognizes that it is vital for developing countries to exchange information, even if they are not ready for automatic exchange.189 The Automatic Exchange of Information (AEOI) is an online space where taxpayer information is reported and exchanged without it being requested.190 ECOSOC also discussed corporate tax evasion during their 10th and 11th meetings in the 2019 session.191 The council discussed many aspects of the problem, including how the digital era has encouraged corporate tax evasion and the OECD’s efforts.192 It was concluded that a solution to this issue would require better communication between the federal and city governments and that corruption is a main issue that hinders the implementation of new tax policies. The council also concluded that the topic must be further discussed.193 Transnational corporate tax evasion is both a broad and narrow issue that affects developing and developed economies in different ways.

Committee Directive and Jurisdiction The Economic and Financial committee will convene to discuss the issue of transnational corporate tax evasion. ECOFIN must highlight the main issues regarding transnational corporate tax evasion and find possible solutions to combat these issues. Delegates should address how the digital economy comes into play and whether it helps or hinders corporations’ efforts on evading taxes. The committee must discuss how corporations implement transnational strategies such as

186 Ibid. ​ 187 Ibid. ​ 188 Ibid. ​ 189 “International efforts to combat tax avoidance and evasion”, United Nations, 2020, accessed on May 24, 2020, https://developmentfinance.un.org/international-efforts-combat-tax-avoidance-and-evasion 190 “Automatic Exchange of Information”, OECD, 2020, accessed on June 29, 2020, ​ https://www.oecd.org/tax/exchange-of-tax-information/automaticexchange.htm 191 “Corporate Tax Reform Must Focus on Developing Countries’ Needs, Combating Inequality, Speakers Tell Special Meeting of Economic and Social Council”, United Nations, April 29, 2019, accessed May 24, 2020, https://www.un.org/press/en/2019/ecosoc6978.doc.htm 192 Ibid. 193 Ibid ​

36 YMCA Southeastern High School Model UN the use of tax havens and shell companies into their everyday business. ECOFIN must keep in mind how corruption may affect a nation’s tax policies. Delegates should address tax havens and shell companies and what multiple nations can do to remove them. Delegates should keep in mind existing organizations and regulations in place to combat tax evasion and focus on transnational corporate tax evasion as opposed to individual tax evasion. Delegates should stray away from discussing tax evasion as a crime, as the criminal aspect of tax evasion is in the jurisdiction of the United Nations Office on Drug and Crime (UNODC). This committee has the jurisdiction to discuss and act upon the economic problems and concerns that arise as a result of tax evasion. ECOFIN does not have the right or jurisdiction to force any nation to implement any policies or resolutions and may only suggest that nations adopt proposed regulations and policies.

Questions to Consider 1. What are your nation’s tax policies and regulations? a. What is the income tax rate? b. What entities are responsible for paying taxes? c. Must corporations only pay taxes on income sourced within your nation or on all income? 2. Is your nation considered a tax haven? a. Are there any shell companies in your nation? b. How easy is it to open up a shell company in your nation? 3. Are there any notable transnational corporations that operate in your country? a. If so, do they pay tax in your country? b. Has your country taken any initiatives, such as policy changes or stronger regulations on corporate business earnings, to combat transnational tax evasion in the past? 4. Does your country have any tax policies specific to the digital economy? a. Are there any businesses that are fully online? b. To what extent are partially online businesses taxed? 5. What may be possible reasons or issues that make the implementation of tax policies difficult? a. Is there corruption in your nation? b. In your nation, do the 1% possess most of the country’s wealth?

Suggested Sources 1. Corporate Tax Reform Must Focus on Developing Countries’ Needs, Combating Inequality, Speakers Tell Special Meeting of Economic and Social Council | United Nations

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https://www.un.org/press/en/2019/ecosoc6978.doc.htm 2. Domestic, Transnational, or Multinational Business | North Eastern University D’Amore-McKim School of Business https://onlinebusiness.northeastern.edu/blog/domestic-transnational-or-multinational-busi ness/ 3. Anonymous Companies | Global Financial Integrity https://gfintegrity.org/issue/anonymous-companies/ 4. What is a Shell Company? | SmartAsset https://smartasset.com/investing/what-is-a-shell-company 5. Tax haven and the Taxation of Transnational Corporations | Global Policy Forum https://www.globalpolicy.org/component/content/article/216-global-taxes/52426-tax-hav e ns-and-the-taxatio n-of-transnational-corporations.html 6. What is BEPS? | OECD https://www.oecd.org/tax/beps/about/

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