Remarks
Jose W. Fernandez
Assistant Secretary, Bureau of Economic and Business Affairs
Washington, DC
June 5, 2012


Thank you for your warm welcome. I am pleased to be here today. Late last week I returned from a trip to Tunisia where the people and their new government are engaged in an unprecedented effort to build a vibrant democratic system and an economy that delivers for all the people. Their success, and that of other people across the region, is critical to achieving the promise of what’s been happening there. I wanted them to know the U.S. Government strongly supports their aspirations and is implementing a range of policies to help them transform their political and economic systems.

A critical element of what we were trying to do to improve political and economic governance is to strengthen transparency and the rule of law. And that means building effective tax systems, which is a focus of today’s conference. I understand you already had a session on tax effectiveness.

Let me pause here to admit that tax has not always been my strong suit. In law school, I barely scraped by to pass my tax law course. But I learned enough to know that I couldn’t do a deal without tax loans. I used to tell clients the smallest chunk of their bill is for tax advisors’ hours, but it’s probably well spent.

I am very happy to be here today. The OECD has and continues to serve in a crucial role in advancing the interests of business. What businesses need to succeed is a stable, predictable environment marked by rule of law, which is to say: the rules are known up-front, no particular business is favored over another by government; and property and contracts are evenly enforced. This is why one of the things we believe is businesses prosper where their governments are OECD members – the OECD’s Codes of Liberalization are a precondition for joining; the OECD, in my experience at least, gathers and promotes best practices based on empirical experience; and the OECD gives something in government we ought to adopt – regular, open report cards to mark progress.

I was at last year’s OECD Ministerial, where Secretary Clinton stressed that corruption and poorly functioning tax systems are major barriers to long-term sustainable growth. Poor tax systems rob states and citizens of the resources needed to fund critical public services.

So we are all here today not to discuss how much of our paychecks goes to paying Uncle Sam here in the United States, or whomever it is that you pay. This is an issue of the economic development of countries. It’s an issue of how invested a society is in the development of their own nation. One of the things the Secretary said is it’s hard to ask the American people to support you if you won’t pay your share. And indeed, it’s ultimately an issue of democracy, freedom, and self-determination.

The reality is every country, including the United States, is faced with a three-fold challenge: 1) strengthening good governance practices; 2) enhancing citizen confidence in democratic institutions; and 3) generating greater domestic revenues to finance social and economic development programs that promote economic growth and prosperity.

What I’ve been trying to do the last 15 months, we want countries to use their own resources.

I have spent a lot of time over the last 15 months working in particular with newly-elected governments in North Africa and the Middle East in these areas. We want to help developing countries mobilize their own resources to meet their development needs. Because when a country can fund its own development, it will also own its own development.

At the Department of State, we have two major programs in the Middle East and North Africa region that I want to highlight for you today: Domestic Finance for Development and the larger framework of the Deauville Partnership.

DF4D

Let’s start with what we in government, there’s always an acronym, call D4FD. D, numeral 4, F, D. General development assistance from the United States to countries around the world in the last few years has gone up. Still, there is a growing need for technical assistance to help countries in the region fund their own economic independence. With such economic independence, countries can break free of relying on external assistance and international aid.

But this isn’t just the U.S. pushing this. There is also a growing demand from developing countries to enhance their own fiscal management capabilities to ensure that public investments are made in an effective, equitable and transparent manner. As I stated at the outset, this is where the principles of democracy start to take root on a very basic but essential level: where people’s wealth is at stake. When we talk to people this is where the rubber hits the road.

At the State Department, Secretary Clinton believes that enhancing the ability of countries to mobilize their own internal resources is critical for sustainable economic development.

From these needs for partnership and self-determination, the initiative Domestic Finance for Development, or as we fondly call it, DF4D, was born.

DF4D revolves around three critical themes: 1) tax administration, which is just administering fiscal systems better, 2) fiscal transparency, and 3) anti-corruption. These three elements create a virtuous cycle. Countries need to collect taxes in order to develop. But they also need to show their citizens how those tax funds are being spent – they need to have that debate – and that it is to the benefit of each citizen to pay their share. This is the transparency piece. And finally, as part of the conversation about transparency, it is up to governments to demonstrate that hard-earned tax money won’t be siphoned off into the pockets of public servants, that they won’t be taken offshore. So we are working on all three legs of the stool.

At the State Department and USAID, we understand that the individual needs of each country in these areas are different, even if many of the themes are the same. That is why we are working with partners in El Salvador, Honduras – because Latin America is important – Kyrgyzstan, Tunisia – which is what took me there last week – and Zambia to tailor this three-legged stool to their specific situations.

Before I move on to discuss the G8 Deauville Partnership, I want to tell you about one of my favorite examples of the principles of DF4D at work, and I know one my colleagues is from Colombia. Many of you might know, because I think you’re all old enough to know, Medellin, Colombia used to be one of the most dangerous cities in the world and home to Pablo Escobar. Then the citizens of Medellin elected a new mayor, Sergio Fajardo. Mayor Fajardo, in a matter of a few years, turned the city into one of the best examples anywhere of economic development and innovative urban planning.

When asked how he did this, he was pretty straight forward. He said, “We did this through taxes. We improved the city’s ability to collect taxes so more people are paying their taxes. We improved transparency in the system and when businesses were convinced we weren’t stealing from them, and they knew we would use their money effectively, they paid. And businesses now support us because they see how much it can help them.” It’s that three-legged stool I’ve been talking about.

DF4D seeks to foster this kind of transformation in other countries, using a variety of diplomatic, policy, and technical interventions to foster good governance, transparency, and fair taxation.

Encouraging Better Governance and Fairer Tax Systems in the Region

DF4D is also working through the Deauville Partnership with Arab Countries in Transition. This includes G8 countries and regional partners, such as Turkey and the Gulf States, to support political and economic transition in Egypt, Tunisia, Jordan, Morocco and Libya. The Deauville Partnership, which began under the French G8 Presidency in 2011, last year, and seeks to help these countries get their economies back on track and support their democratic transitions. President Obama has committed to continuing the Deauville Partnership during our year as G8 President, and highlighted our cooperation with Arab countries in transition at the G8 Camp David Summit.

The Partnership’s open governance and participation agenda will focus on a variety of initiatives. These initiatives are designed to foster rule of law, enhance citizen confidence in democratic institutions, and combat impunity. Addressing these factors will be critical to helping these countries do what they have to do to attract investment, fostering local job creation, and fighting corruption. These factors, in turn, will serve to maximize economic growth.

The Deauville Partnership’s open governance action plan builds upon what President Obama was talking about in the G8 Summit. During the next 12 months of the U.S. G8 Presidency, we are partnering with Tunisia, Libya, Morocco, Jordan and Egypt in three areas:

First, we will foster civic participation in newly-democratic states. To meet local demands for greater transparency and civic participation, the Partnership is cooperating with the OECD to help transition countries achieve eligibility for membership in what is called the Open Government Partnership (OGP). OGP is a presidential initiative for transparency. Jordan joined the OGP this past year, and Tunisia expects to join next year. We are working with the other three transition countries to achieve their eligibility. As you know well, the OECD has good expertise in these issues and has been working closely with many countries in the region for several years. The Open Government Partnership (OGP) is a diverse coalition of governments and other stakeholders who have pledged to embrace open government principles. We think the Arab Spring is a wonderful opportunity to achieve this.

Second, we are working on a number of anti-corruption initiatives. These include pursuing the adoption or enhancement of systems for disclosure of assets of appropriate officials, whistleblower protection, and conflicts of interest. It also includes ensuring that practices and standards are consistent with international best practices, and that they are not just put on paper but applied in practice.

Finally, we are working to create a Financial Services Advisory Corps, or FSAC. This group will consist of volunteer experts from the public and private sectors who will provide technical assistance to countries in North Africa in transition in developing public financial management sectors that are strong, transparent and accessible.

This volunteer corps will train public servants in two areas: First, to better protect public finances from fraud and tax evasion; and second, to equip reforming countries to better generate and channel domestic revenues towards public investments that facilitate enabling business environments. This is the kind of infrastructure needed in all these countries to lower unemployment.

The United States commits to a financial contribution in the FSAC program. We will encourage Deauville partner countries, regional partners and other OECD-members to contribute and participate in this new program as well as public private partnerships.

Conclusion

In closing, I would like to reiterate that we are focused on good governance and fair tax systems in order to empower democratic transitions; cultivate more enabling business environments; and ensure economic independence in Developing countries.

I’m very happy to see that in North Africa there has been a wonderful reception. As I said at the outset, last week I was in Tunisia to discuss both DF4D and Deauville. The Tunisian government seeks to implement the principles of DF4D with the help of the Deauville Partnership and other experts from around the world. These partnerships are the first steps to turn the courage of a fruit vendor in Tunisia into economic reforms that will enable entrepreneurs to thrive, that create the kinds of objectives that will fulfill the Arab Spring.

The OECD is already helping enormously in this task, and I commend all of you for your efforts in Tunisia and elsewhere. Thank you Pascal, and for all of you – your tax work goes beyond client efforts and supports our political efforts and what we are doing at the State Department.

Thank you.

[This is a mobile copy of 2012 OECD International Tax Conference]