The Single Fact That Shows How the Global Financial System Fails Developing Countries

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

This will make you angry. After six months crunching all the best data from international institutions, here’s what we found: for every dollar developing countries have earned since 2008, they have lost $2.07. In fact, lost resources have averaged over 10% of their Gross Domestic Product (GDP).

We’re not talking about all flows of money out of developing countries, just the lost resources: money that should have been invested to support their development, but instead was drained out. Twice as much is leaking—or rather flooding—out than the combined inflows of aid, investment, charitable donations and migrant remittances.

Losses vs. Inflows

The graphic above shows the proportionate losses of resources compared to one dollar of inflows. The figures are in U.S. cents, and are based on the average inflows and losses between 2008 and 2011. The four main lost resources shown in the graphic point to the problems, but also the solutions. Read the rest of this entry »

A Global Compact Against Capital Flight and Safe Havens

James K. Boyce and Léonce Ndikumana

This is the final post of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Capital flight from Africa is not just a national problem. Nor is it only a continental problem. It is a global problem, and as such it requires a global solution. Institutional reforms at the national level are critically needed to discourage capital flight and tax evasion, but these will not be fully effective unless supported by international efforts to tackle corporate sector corruption, banking secrecy, and other dodgy business practices in the global trading and financial systems.

Strategies at the national level

While African countries have undertaken a number of efforts to combat corruption, money laundering, tax evasion, and illicit financial flows, the scope of these efforts and their degree of effectiveness remain uneven. Even where relevant agencies have been established, they often face serious financial, technical, and human capacity constraints. Moreover, efforts often are spread too thinly across a multitude of agencies, with little systematic coordination and few synergies among them.

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Misunderstanding South Africa’s Foreign Economic Relations and Worker Productivity

Patrick Bond

South Africa’s class struggle generated two gold medals for performance in 2014. In February, PricewaterhouseCoopers identified the Johannesburg bourgeoisie as, according to The Times, “the world leader in money-laundering, bribery and corruption, procurement fraud, asset misappropriation, and cybercrime,” with 77% of all internal fraud committed by senior and middle management. (This may help explain SA’s 2013 rating as, according to the International Monetary Fund, the third most profitable country for corporations among major economies.)

Then in September, for the third year in a row, the World Economic Forum’s Global Competitiveness Report ranked the South African proletariat as the world’s most militant out of 144 countries surveyed. The intensity of South Africa’s class struggle is reflected in the war of ideas just as much as in the strike wave that commenced in 2012.

South Africa’s leading corporate-funded strategic think-tank is the Centre for Development and Enterprise (CDE). Last week’s input to CDE by Harvard Center for International Development director Ricardo Hausmann—“Raising South Africa’s ‘speed limit’”—makes two central claims about, first, the current account and, second, the allegedly high cost and low productivity of labour.

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What We’re Writing

Sara Hsu, “Property Slowdown Makes China’s Shadow Banking Even More Dangerous” (Nikkei Asian Review).

China’s shadow banking sector is morphing, as a slowdown in the economy leads to a decline in financial activity, especially in the real estate sector.

Major channels for nonbank financing have slowed, while new ways of conducting such business have appeared. After being more exposed to scrutiny in the past year or so, shadow banking has again become less visible, while maintaining its risky characteristics. Read more »

C.P. Chandrasekhar and Jayati Ghosh, “Debt in Asian Vulnerability” (Business Line).

Leonce Ndikumana, “Better Global Governance for a Stronger Africa: A New Era, A New Strategy” (Political Economy Research Institute, University of Massachusetts-Amherst).

What We’re Reading

Heidi Garrett-Peltier, “The Job Opportunity Cost of War” (Cost of War, Watson Institute for International Studies, Brown University).

David Kotz, The Rise and Fall of Neoliberal Capitalism (Harvard University Press).

Prabhat Patnaik, “The Gathering Clouds of Recession” (People’s Democracy).

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Martin Khor

It’s that time of year again when the United Nations gathers 192 countries and thousands of people to discuss actions to tackle climate change.

This year’s climate conference is in Lima, the capital of Peru. The country is home to 51 indigenous peoples who comprise 45% of the population of 30 million.

At the time of the Spanish invasion around 1500, the Incas were dominant in the Andes, and they had a sophisticated civilisation with cities, temples and buildings in the mountains that are a marvel admired by legions of visitors, epitomised by the famed ancient city of Machu Picchu.

Unfortunately, many of the indigenous people died after the Spanish conquest due to diseases brought in by the invaders, and to battles and ill treatment at the hands of the conquerors.

Peru is also famous for being the centre of origin of the potato. It was here that the local communities, thousands of years ago, learnt to grow that crop which today is the staple food in large parts of the world.

It is thus fitting, geography-wise, that Peru is hosting the 2014 conference.

The first week of this two-week affair has already passed and it exposed the difficulties in finding solutions to possibly the biggest threat to humanity’s survival.

Read the rest of this entry »

William Gumede, Guest Blogger

William Gumede is associate professor, School of Governance, University of the Witwatersrand (Johannesburg), and chairperson of the Democracy Works Foundation. His most recent book is South Africa in BRICS: Salvation or Ruination (Tafelberg).

This article is based on a longer paper, “South Africa and the BRICS alliance,” from Shifting Power: Critical Perspectives on Emerging Economies (Transnational Institute).

One of the key drivers of African growth in the past decade has been the seemingly unlimited appetite for African commodities in fast-growing emerging markets—mainly in BRICS countries such as China and India.

According to South Africa’s Standard Bank, BRICS countries’ trade with African countries jumped 70% in the past five years: In 2013, China’s share of this trade was 61%; India’s, 21%; Brazil’s, 8%; South Africa’s, 7%; and Russia’s, 3%. In 2013, BRICS members’ trade with Africa stood at $350 billion.

Meanwhile, according to South Africa’s Industrial Development Corporation, in 2012 Africa (excluding South Africa) was the source of 15% of overall BRICS imports, or $420 billion out of $2.8 trillion. In 2013, South Africa’s trade with Africa stood at $25 billion—mostly in manufactured goods.

The big question, however, is to what extent the emergence of these new economies has benefited Africa? In the case of South Africa, which is both a member of BRICS and also an African country, what has engagement with BRICS meant for its economy, society and its relationships with its African neighbours?

What do BRICS offer Africa?

The primary advantage BRICS countries offer African countries is their provision of new markets and sources of development finance at a time when finance sources in the EU and North America struggle with the aftermath of the global financial and Eurozone crises.

There is also evidence that BRICS have used their new economic power to push for a “rebalancing” of global political, economic and trade systems away from their northern bias. The launch in July 2014 by the BRICS of a New Development Bank and a contingency reserve fund to help members who face sudden capital flight is one such measure. The potential of new sources of finance has already made many multilateral agencies bring on board African and other developing country interests—previously mostly ignored.

As BRICS countries prise open policy space for independent development policies appropriate to their own countries, this may help African and other developing countries do the same. Many—using BRICS as alternative trade partners as a bargaining chip—are already able to get better terms from industrial and former colonial powers.

However, some African countries, civil society groups, and analysts argue that these new opportunities ultimately end up reinforcing Africa’s low-quality growth model—enriching African elites rather than the masses, undermining Africa’s own agricultural and manufacturing sectors, leading to vanity infrastructure projects for African elites, and undermining attempts to foster democracy.

They have a point: Africa’s rich are getting richer, and the poor are—at best—marginally better off, with the vast majority remaining poor or becoming poorer. Africa’s share of global poverty rose from 21% in 1999, to 29% in 2008, and, according to the World Bank, by 2030 will represent the vast majority of the world’s poor.

South Africa: A BRICS Member Punching Above Its Weight

South Africa is in many ways an anomaly in the BRICS, but has secured its position in part because it is seen as a bridgehead to Africa. Also, its influential private sector and global financial institutions—such as the Johannesburg Stock Exchange—allow it to punch above its weight.

Its involvement in BRICS, though, is the subject of much internal debate. Some argue that South Africa should use the BRICS alliance to secure new markets for the country’s products, for new investors in South Africa, and to speed up engagement with BRICS countries as an alternative to Western investors and governments. Meanwhile, others oppose the BRICS strategy. “If we let [China and India] enter Africa on their own …. We may find it is not only our minerals that are dominated by foreigners, but also our infrastructure,” says Malusi Gigaba, the Home Affairs minister.

Sections of the South African business community strongly support the current BRICS strategy, as do black business interests, but South Africa’s trade unions have been strongly critical.

South Africa and BRICS: Opportunities

The BRICS partnership offers key allies for South Africa in lobbying for the restructuring of the global trade, economic, and political landscape, and the potential for the transfer of new ideas on social development, sustainable technologies, and institutional innovation. It also offers participating countries the space to resolve disputes, be they trade-related, political, or diplomatic.

South Africa’s new-look BRICS strategy also gives it the chance to secure new markets for its products and new investors at a time when its largest market, Europe, is undergoing economic difficulties. South Africa’s share of trade with BRICS countries in 2012 stood at 18%, up from 10% in 2005 against declines in trade with its traditional markets of Japan, the European Union, and the United States.

South Africa and BRICS: Challenges

At the same time, BRICS may erode South Africa’s domestic economy, because many products from BRICS countries directly compete with its own. Other BRICS countries are already exporting manufactured goods to Africa, including the inputs to Africa’s infrastructure programmes such as railways (supposedly SA’s strategic advantage)—hurting the very manufacturing sectors identified as key to job creation.

While South Africa’s manufacturing sector is coming out of a deep crisis, the manufacturing sectors of most of its BRICS partners are buoyant. Many South African manufacturers say that while products from BRICS enter South African markets relatively easily, high tariff barriers make it difficult for South African products to enter BRICS markets.

Added to these problems, there is a real danger that the Chinese yuan will replace the rand in Africa, enabling China not only to reduce the currency risks inherent in many unstable African currencies, but also to circumvent non-tariff barriers in Africa.

Africa needs to negotiate better with BRICS partners

The formation of the BRICS grouping offers a potential economic windfall to Africa, but unless African countries engage more shrewdly with these new emerging powers, they may also undermine the continent’s long-term prosperity. Looking to the future, African countries may have the opportunity to negotiate better development aid terms from BRICS countries. However, to benefit from the rise of BRICS, African countries will have to make structural changes: they must be more pro-active, clearly identify their priorities, and be more hard-nosed in their negotiations.

Africa needs better economic policies to benefit from BRICS

Ultimately, Africa needs better economic policies that “[achieve] the policy objectives of development and poverty reduction.” Merely seeking to increase investment and growth without seeking to channel the investment strategically and in the right arenas is short-sighted and doomed to failure.

The bulk of Africa’s economy is in the informal sector, but this sector is rarely included by government or civil society in development planning. Instead African states allow cheap, highly subsidised Chinese products to flood their markets. This means the potential for businesses in African countries’ indigenous informal sectors to grow into medium- and then larger-sized enterprises is lost.

In most African countries, agriculture remains the largest sector where people eke out a living informally. African countries should support people to at least produce food for themselves and carry out basic “light” manufacturing of food products without having to import these. However, currently African countries end up doing the opposite, allowing emerging economies, such as China and South Korea, to buy land to produce agricultural goods for export back to these countries, doing nothing to protect food security and often dispossessing people in the process.

Currently, it appears that new investments in Africa—such as those from China, India, and Brazil—are targeted less at the needs of Africans and more at seeking to export goods. African roads and ports developed or built by China, for example, are often constructed to make it easy for China to export or import products to or from Africa, rather than integrated into the infrastructure of the host African country.

African countries should pro-actively decide where and how development should take place, and then partner foreign investment with these home-grown, targeted development initiatives.

Africa must diversify growth and add value to its exports

If Africa wants to achieve a higher-quality, more equitable growth, countries must add value to raw materials and diversify into manufacturing and services. This will create more jobs for Africans, and result in more equitable and sustainable growth for African economies.

Africa has been prevented from doing this by industrial nations that have erected high trade barriers to such products coming from Africa. Yet BRICS nations have similar high tariffs for Africa’s manufactured goods. While African products and services may be uncompetitive in industrial-country markets, for a range of reasons, African countries can trade these products with each other and should be supported to do so.

Conclusion

Unfortunately, at the moment, BRICS engagement with Africa is replicating Africa’s low-quality growth model, exacerbating inequality, and undermining democracy on the continent. Only ecologically and economically sustainable development, inclusive growth, and quality democracies have the chance to turn this around. One of the crucial ingredients for achieving this will be a robust African civil society. To play such a developmental role, African civil society will have to become more innovative, relevant, and engaged.

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James K. Boyce and Léonce Ndikumana

This is part 4 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Illicitly acquired wealth that has been transferred abroad can be recovered and repatriated via the legal process known as “stolen asset recovery.” In the period from 1995 to 2010, approximately $5 billion was recovered and repatriated in this manner worldwide. Although this is a modest amount compared to the total magnitude of capital flight and illicit wealth, the sums involved are by no means inconsequential for the authorities who have successfully recovered stolen assets. For example, Switzerland has repatriated to Nigeria $700 million of assets held in Swiss bank accounts by former military ruler Sani Abacha and his family.

The importance of stolen asset recovery efforts go beyond the amounts successfully recovered. These efforts can have a demonstration effect, acting as a deterrent against future capital flight. They may encourage voluntary repatriation of some flight capital, and even payment of attendant tax penalties, if this alternative comes to be seen as preferable to the outright seizure and forfeiture of the entire amount of assets in question. Similarly, the “naming and shaming” that accompanies asset recovery can have a deterrent effect on banks and other institutions that collaborate in the illicit transfer and sequestration of stolen funds.

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When 21 Countries Opposed World Bank Plans for an Investor-State Dispute Institution

Robin Broad

Fifty years ago this fall, at the 1964 World Bank annual meeting in Tokyo, 21 developing-country governments voted “no” on the convention to set up a new part of the World Bank Group where foreign corporations could sue governments and bypass domestic courts. It was to be called the International Centre for Settlement of Investment Disputes (ICSID). The 21 included all of the 19 Latin American countries attending as well as the Philippines and Iraq.[1]

The historic vote was dubbed El No de Tokyo, or the Tokyo No.[2] It could well be the largest collective vote against a World Bank initiative ever. And perhaps the one time that all Latin American representatives voted “no.”

So I write in part to toast that Tokyo No on its fiftieth anniversary. But I also write because it is time to recognize that the 1964 “no” vote has been vindicated by history.

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Patrick Bond

An impression is forming that the South African government is hostile to global business thanks to its recent cancellation of a few bilateral investment treaties (BITs). With the World Trade Organisation (WTO) stagnating, BITs have protected foreign firms from expropriation or other politically related financial harm.

Boston University political economist Kevin Gallagher, for example, argued last week that along with Ecuador, South Africa “leads by example” when it comes to fighting transnational corporate (TNC) domination of the BITs’ arbitration panels, where weak states’ sovereignty is usually lost.

But look a bit more closely at how demands for protection of TNC profits are made and won in South Africa, using class analysis. At stake is whether state sovereignty can be maintained against an international arbitration regime that typically favours the TNCs.

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James K. Boyce and Léonce Ndikumana

This is part 3 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.

Curbing trade misinvoicing and transfer pricing

A substantial amount of capital flight from African countries occurs through the underinvoicing of exports and the overinvoicing of imports (Ndikumana et al., 2014). When a firm understates the price and/or quantity of exports on invoices submitted to the African authorities, it can retain abroad the difference between the true value and the declared value, rather than surrendering the full amount of its foreign exchange earnings to the central bank in return for local currency. When a firm overstates the true value of its imports, it can obtain extra foreign exchange to send abroad, and again retain the difference in foreign accounts.

Strategies to curb trade misinvoicing must include interventions on both sides of trade transactions; that is, both in Africa and in trading partner countries. African governments need to strengthen trade regulation and exchange control mechanisms to better track international trade. The governments of Africa’s trading partners need to cooperate in enforcing transparency in international trade and combating corporate sector corruption. The automatic sharing of invoice data submitted to trading partners’ customs authorities would make it possible to identify discrepancies in the prices and quantities recorded on both sides of trade transactions. In addition, the African trader who files a falsified invoice often has a cooperating partner overseas who may corroborate inaccurate information and remit the hidden funds to designated accounts. Africa’s trading partners can assist the continent by establishing and enforcing regulations and laws that make such complicity costly.

Transfer pricing poses a different set of challenges, since it cannot be detected by the comparisons of invoices submitted to the customs authorities of the originating and receiving countries. Instead, the same fictive price is recorded at both ends of the transaction, so as to relocate profits to low-tax or no-tax jurisdictions, thereby lowering the firm’s overall global payments of taxes.

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