KUALA LUMPUR, Malaysia, April 26 (IPS) – Curbing capital outflows from developing countries is long overdue. New sanctions against Russian oligarchs show that this can be done with the necessary political will. Recent research also shows how to prevent capital flight more effectively.
Flight is inherently triggered, not only by national conditions, but also by transnational operators. Internationally, flying is supported by professional organizations and facilitators such as bankers, lawyers, accountants and consultants.
Capital should flow into the investments that provide the most return. But economic theory suggests that earning more depends on appropriating what economists call ‘rent’. These rents can be secured in a variety of ways, legally or otherwise.
Developing countries – especially resource-rich economies – are often more vulnerable to abuse. Wealth buys power and influence, facilitating further accumulation. So, in the real world, natural resource endowment becomes a curse – not a blessing.
Since the 1990s, the IMF’s Sixth Article of Association – which mandates control of national capital – has been ‘flexibly reinterpreted’ by management and staff. Instead of protecting national economies, they eased cross-border capital flows – and flight.
To add insult to injury, proponents falsely claim that there will be more capital flowing in than out of developing countries. After all, conventional economic theory asserts capital flows from ‘capital-rich’ countries to ‘capital-poor’ countries.
The fact that capital flows ‘upstream’ – to rich countries – highlights how misleading mainstream economics textbooks are. Obviously, the real world is very different from the world that economists believe should exist.
Illegal cash flow activation
It is not surprising that the wealthy – especially the ‘crooked’ – want to keep their wealth abroad – out of reach of national governments and rivals. Since such wealth is often obtained illegally, owners want to protect themselves from investigation, prosecution, and seizure.
Flying activity is enabled by cross-border financial networks with considerable influence. These activities involve global banks and financial institutions, auditors and accounting firms, tax attorneys and rental consulting firms. Together with corporate executives and government officials, they facilitate capital flight, sharing the spoils.
With both states and discretionary markets in use, cross-border financial networks have successfully bypassed national restrictions. Sovereignty privileges are also abused to obscure their transactions and activities from surveillance.
Flight activity is inherently enabled, even encouraged by the national environment that allows the surreptitious to move financial assets abroad. Instead of helping developing countries protect their meager assets, international financial institutions have facilitated or even exacerbated the bleeding.
Elites influence the law and its enforcement, often by employing competent experts and friendly legislators. After all, laws and governments are neither fair nor effective, frequently reshaped by influence, often associated with wealth. As a result, some illicit activities and wealth may be illegal while others may not.
National jurisdictions were changed to ease cross-border flows. Rules, norms and practices have been changed to conceal transfers of assets from national and international authorities, laws and regulations. Therefore, natural resources give special incentives to capital.
Such flows can be even three times more illegal – in terms of redemption methods, concealment from tax authorities, and cross-border transfers. But not all illegally transferred flying capital is illegally recovered. In contrast, illegally obtained wealth – which is ‘washed’ before legally moving abroad – is not considered capital withdrawal.
Some flights involve legally acquired assets being illegally transferred abroad. These can be reported as trade-related payments on the current account – not related to capital account transfers. As a result, they can bypass, or even contravene, foreign exchange and capital control regulations.
They try to evade detection, prosecution, litigation, fines, fees and taxes by various revenue management agencies. Illegal foreign exchange flows that are secretly transferred abroad and not credited to official national accounts may not be considered illegal.
Consequently, the volume and importance of inherent flight estimates tend to be underestimated. Easier capital mobility from most developing economies, which have become more open over the past four decades to economic liberalization, is often required by fundamental adjustment programs. structure.
Why stop the capital flight?
Transnational corruption – across national borders – undermines the governance and mobilization of national resources needed to promote effective investment. But many capital account advocates justify capital flight by blaming governments that are accused of being predatory or incompetent.
The features of the international financial system that allow capital escape often also facilitate tax evasion and tax evasion by the wealthy. Thus, capital flight doubles down on domestic resource mobilization by washing away both investable and government resources.
Cross-order capital flows avoid or minimize taxes payable, while hiding the identity and wealth of beneficiaries in secret offshore tax havens. Government finances are also directly affected when external loans, or state-owned enterprises and natural resources are embezzled.
Worse still, government or public debt is often misused to directly finance capital flight. Meanwhile, capital flown illegally abroad is not taxed. This reduces the tax burden for the middle class and domestic businesses that cannot surreptitiously move their assets abroad, or to avoid revenue regulators.
Many developing countries continue to experience significant resource outflows, largely due to illicit capital flight. On the capital flight from Africa: The Takers and the Enablers – edited by Leonce Ndikumana and James Boyce – studied this blight in sub-Saharan Africa. The world has much to learn from their forensic analysis.
The estimated volume of bleeding from African countries since 1970 is US$2 trillion! Of this, nearly 30% has been lost in the 21st century. Plus interest, accumulated assets abroad were US$2.4 trillion in 2018 – more than three times Europe’s external debt. Fly!
The West’s piecemeal approach to sanctions targeting individuals is recognized as costly, time consuming and ineffective. Instead, the editors suggest a comprehensive, pre-emptive effort to disrupt the transnational networks that facilitate illicit financial flows. This should start with closing the loopholes of the financial system.
IPS UN Office
Follow @IPSNewsUNBureau
Follow IPS News UN Office on Instagram
© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service
