World - Capital Outflows Aggravate Poverty

What are some examples of major global issues that are still unresolved today?

They are the environment and the effects of climate change, the arms race and resultant proliferation of nuclear weapons, the pressure on the earth’s resources in terms of food and water, and the challenges that societies face with respect to education and healthcare.

But, there is one very important issue that the public is not generally aware of. It has the effect of increasing poverty in developing countries and making it more difficult for them to invest in infrastructure, healthcare, and education. It is the outflow of capital from developing countries through corruption, business mispricing, and money laundering.

Developing countries need about 40 billion dollars to 50 billion dollars, annually, to meet their Millennium Development Goals (MDGs), the World Bank estimates. Yet, the loss of revenue from these countries through illicit financing channels, each year, amounts to about 850 billion dollars a year.

If businesses and multinationals paid their taxes in a more responsible manner and there was less trade and transfer mispricing, the improved tax collection from this source alone could amount to about 160 billion dollars a year. The funds, if available, could be used for increased investment in education, job creation, healthcare, a cleaner environment, access to water, and resources to fight infectious diseases.

But, action has been slow. Why?

The truth is that much of the money ends up in Western financial institutions and in tax havens and those institutions have more clout than the person on the street in a developing country. The long-term goals of developing countries should be to replace foreign aid dependency with tax self-reliance and to stem this outflow through illicit means by businesses and politicians.

If even 10pc of the annual capital outflow of about 850 billion dollars is retained in developing countries, it could have a dramatic impact on their future.

For every country receiving development assistance, a list of politically exposed persons (PEPs) is maintained by government agencies and the World Bank. Since this data is also known to financial institutions, they should be required to validate major deposits coming from overseas and to confirm that they are not coming from individuals that are on these PEP lists.

A strict tracking of all deposits by PEPs would also help, at least in part, to reduce the opportunities for funds to be stolen from developing countries by corrupt civil servants, political leaders, or businessmen and then deposited overseas. Some will still get through, but, at least, it will be tracked and monitored, thereby becoming a disincentive.

There are other areas to help stem capital outflows. These include reducing opportunities for corruption and receipt of illicit money in Western banks, understanding the role of trade mispricing by multinationals and encouraging more compliance, seeking more transparency in the banking system globally, instituting legal requirements for the better exchange of tax information among countries, stemming the use of tax havens by individuals and companies, and encouraging greater responsibility by accountants and lawyers who advise on these matters.

No doubt that everyone seeks a world in which developing countries can replace foreign aid dependency with tax self-reliance. In the long run, it is taxes, not aid allowances, that are the most sustainable sources of finance for developing countries. This is because foreign aid makes governments accountable to donors, while taxes make governments accountable to their citizens.

What is needed, then, is a fairer distribution of the fruits of globalisation. Capital flows, whether leaving a country or retained within, is an important fruit of globalisation. If the world can keep them in developing countries, where they belong and are needed most, it can reduce economic deprivation in those countries. Certainly, in the long run, that can do more for human rights than anything else.

BY KRISHEN MEHTA

Addis Fortune

Krishen Mehta is director of Asia Initiatives, a non-profit organisation devoted to microfinance and education in developing countries.

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