Capitalism's Achilles Heel
March 2, 2006
Raymond Baker, Guest Scholar at the Brookings Institution and Senior Fellow at the Center for International Policy, presented his new book Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System at a STAGE-hosted seminar. Baker, a graduate of Harvard Business School and longtime international businessman, argued that the capitalist system was threatened by the lopsided distribution of income between the top 20% of the world's population (who control 70-90% of global income) and the bottom percentiles. Directly contributing to this economic disparity was "dirty money," defined as capital whose origin, movement, or use violates the law, and of which there are three kinds: corrupt (bribes), criminal (drugs, racketeering, etc.), and commercial (tax evading).
Baker traced the global infrastructure for moving dirty money (including the world's 70 tax havens, its 1 to 3 million disguised corporations, fake foundations, flee clauses, shell banks, and anonymous trusts) as a Western development of the 1960s to handle the flight capital of the fleeing political and economic elite of newly independent former colonies and as a by-product of the great proliferation of international corporations in that era. In the 1980s and 1990s, syndicated crime inherited the system and was joined in more recently by international terrorist networks.
Falsified pricing, noted Baker, was the most oft used tool for shifting funds. Difficult to trace, it involves verbal or informal agreements between businesspeople to enrich themselves quietly by invoicing sales at higher prices, hiding overloads. In doing so, export and import values are misstated, and capital flows go unrecorded, leading to ineffective tax collection, as well inaccurate GDP figures and other important economic indicators.
Unfortunately, current U.S. law and policy is ineffective in fighting the movement of dirty money. The scope of the laws against money laundering is so narrow, targeting money from drugs, terror, and governmental corruption, that funds raised overseas through non-bank fraud, racketeering, stock and bond swindles, counterfeiting and counterfeit goods, slave trading, alien smuggling, trafficking in women, etc. all can legally enter the United States. Baker argues that it is folly to fight such a narrow subset of illicit funds, while welcoming with open arms and few questions dirty money raised through all other means. He noted even bin Laden recognized in a 2001 tape that "these are the very flaws in the Western financial system that are becoming a noose for it."
The greatest victims of dirty money are the world's poor, as Baker characterized the basic purpose of the illicit money structure as being the movement of money from the poorest 20% of the world's population to its richest 20%. In total, $1 trillion per year in illicit funds flows across international borders each year, while the Tax Justice Network estimates that $11 trillion dollars, roughly the equivalent of U.S. GDP, is stashed in tax havens around the world. Baker estimates that $500 billion per year flows out of developing countries, "eviscerat[ing] foreign aid," which averages globally only $50 billion per year.
But dirty money threatens the West as well, as it increases border crime, finances terrorism ($300 million to al Qaeda in the 1990s), arms dictators such as embargo-era Saddam Hussein, contributes to weapons proliferation by funding networks such as A.Q. Khan's, and contributes to state failures.
Ted Moran, Karl F. Landegger Professor of International Business Diplomacy, and Director, Landegger Program in International Business Diplomacy at Georgetown University, provided comments on Baker's book and presentation. He promised the audience some bad news, some good news, and a quandary. The bad news was that his own research had uncovered Western and Japanese multinational corporations engaging extensively and shamelessly in new dishonest practices that do not technically violate the Foreign Corrupt Practices Act or the OECD Convention to Combat Bribery, suggesting the entire G8 anti-corporate corruption regime may be a sham.
There is hope, however, in the fight against transfer pricing, as he pointed to Costa Rica, which has instituted effective policies in which the burden of proof for proving the legality of transactions lies with the business, and the government investigators are themselves policed.
He disagreed with Baker on the role of inequality and development, instead citing a recent IIE study he participated in that traced a correlation between increasing levels of trade and investment and gains in economic growth. Pointing to the example of India and China, he furthered that higher levels of growth reduce absolute (the lowest levels) of poverty. The quandary lay in the fact that along as poverty drops inequality can jump. The tycoons captaining this investment might see their net worth skyrocket from $200 million to $600 million, while the country's poorest might increase see an increase from $2 per day to $6 per day. While on the surface this imbalance appears reprehensibly unfair, Moran argued that that seemingly modest increase to $4 or $6 a day affects the live of the poorest in profound ways.
Moran appreciated many sections of the book, including Baker's treatment of Jeremy Bentham. However, he recommended a veritable bibliography of other resources on Baker's subject, ranging from the website of the Extractive Industries Transparency Initiative to the policy work of his own study group at the Center for Global Development, should the audience wish to sample the larger, more in-depth policy debate on dirty money.
Baker explained that his role in this debate was to publicize it and raise the political will to tackle the issue. He hoped to make people "face the question of how much of our money in the U.S. we want to have originated in human trafficking."
Drafted by Alton Buland, Program Assistant, Program on Science, Technology, America, and the Global Economy
Capitalism's Achilles Heel