James K. Boyce and Léonce Ndikumana

This is part 1 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.

Understanding types of capital flight

Private capital stashed abroad by Africans is not a homogeneous pool of resources. Some of it is clean capital, licitly acquired and licitly transferred, but a substantial part is illicit by virtue of its mode of acquisition and/or transfer.

As can be seen in Table 1, African private wealth held abroad includes some capital that was honestly acquired in Africa and legally transferred abroad as capital outflows duly recorded in national statistics in the country of origin. This is clean capital. Some legally acquired capital is transferred abroad by clandestine means, however, circumventing regulations and reporting requirements on the cross-border movement of capital. The motivations for such transfers include tax evasion, as well as more legitimate concerns about the security of property rights or illegitimate taxation. We refer to this as smuggled capital, and it is one component of capital flight.

Table 1: Legal and Illegal Capital Held Abroad

Acquisition →
↓ Transfer
Legally acquired Illegally acquired
(stolen assets)
Legally transferred Clean capital Laundered capital
Illegally transferred
(capital flight)
Smuggled capital Dirty capital

 

Illegally acquired capital originates from corruption, theft, bribery, counterfeit, trafficking of illegal goods and services, and other illicit transactions. The perpetrators of these economic and financial crimes have two additional motives for moving their stolen assets out of the country: to conceal evidence of their crimes, and to hide the proceeds where they are less likely to be recovered by legal authorities, and more accessible should they find it prudent to move abroad themselves.

In some cases, stolen assets find their way into the country’s legal financial system, either by taking advantage of the laxity of controls or by corrupting the officials responsible for verifying the origins of the funds. This laundered capital may then exit the country using legal routes. Because outflows of laundered capital are recorded in the official statistics—despite the illicit origins of the funds—they not enter into measured capital flight.

Although domestic money laundering makes it easier to move funds out of and back into the country, it entails risks and transaction costs, and it exposes assets to the view of tax authorities. For these reasons, most illegally acquired capital that leaves the country of origin does so clandestinely. This is what we call dirty capital. The strong correlations between capital flight and external borrowing, and between capital flight and natural resource extraction, suggest that dirty capital constitutes a substantial fraction of total African capital flight.

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Sunita Narain

The Indian government must not use “equity” to block climate change negotiations. It must be proactive on equity and put forward a position on how to operationalise the sharing of the carbon budget—accounting for countries’ contribution to past emissions and allocating future space—in climate talks.

I wrote this last year when the UPA government was in power. I am repeating this as the NDA government prepares for the next conference of parties (CoP) to be held in December in Peru.

Equity is a pre-requisite for an effective agreement on climate change. In the early 1990s, as the negotiations began, Anil Agarwal, environmentalist and director of the Centre for Science and Environment, and I put forward the argument that since the atmosphere is a global common, we need equal entitlements to the space. We argued the only way countries would commit to reducing emissions—connected to economic growth—would be if there were limits for all, based on contribution to the creation of the problem.

The 1992 UN Framework Convention on Climate Change is built on this premise—the group of countries (Annex 1) responsible for creating the problem must create space for the rest to grow. But since the objective is to have a different growth pattern to avoid emissions of long-life carbon dioxide, developing countries would get money and technology.

The current situation is very different.

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Tomaso Ferrando, Guest Blogger

Tomaso Ferrando is a Ph.D. candidate in law, and currently a Visiting Fellow at the Institute for Global Law and Policy, Harvard Law School. This article is a condensed version of a chapter that appears in “Shifting Power: Critical perspectives on emerging economies,” published by the Transnational Institute (August 2014).

The BRICS countries’ relationships with other countries in the South are often said to be distinguishable from those of traditional Northern donors. In particular, it is often claimed that South-South development cooperation does not attach policy conditionalities, provides assistance based on a win-win paradigm, and places emphasis on how to ensure economic sustainability of the receiving country.[1] A closer look at the issue of investing in land abroad, and the use of investment agreements to secure those investments, suggests though that there is much less of a gulf between the practices of governments in North and South than we might like to think.

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Jeff Madrick

The title of this post, by regular Triple Crisis contributor Jeff Madrick, references the adage “It’s the economy, stupid!”—coined by leaders of Bill Clinton’s successful 1992 presidential campaign, as a reminder to emphasize economic issues. Madrick, however, argues that both major political parties in the United States are afflicted by bad economic ideas, especially simplistic “invisible-hand thinking.” These bad ideas, he argues, result in bad policy, including a view of government deficits as an unmitigated evil, a fixation with very low inflation rates, and a tolerance of excessive inequality.

How much do ideas in economics matter? I raise the issue because I just published a book called Seven Bad ideas: How Mainstream Economists Have Damaged America, and some commentators have doubted the potency of ideas themselves. At the heart of the damage I describe—stagnant wages, inequality, a dearth of public investment, a growing class culture, repeated financial crises—is an over-simplified faith in the invisible hand, which in mainstream thinking not only rules individual markets fairly but also the entire economy with no interference from government. Demand and supply will meet as prices shift to establish a balance between then two. The faith in such general equilibrium continues strong because partly it makes economics so much easier to do. It also conforms to the ideological turn in America against trust in government.

There is absolutely no proof that general equilibrium actually exists, however, which Jonathan Schlefer has taken pains to point out. I’d argue the Democrats got a whipping in the mid-term elections because of such faith in the invisible hand and related ideas—to put it simply, because of bad economic ideas. I will explain further.

Economists will always deny that they take the invisible hand that seriously. They acknowledge that for it to work as Adam Smith suggested requires many assumptions: a free flow of information, complete lack of monopoly power, a pure and simple mechanism to discover the right price. It is a metaphor for how markets could work, not how they do work.

But as I stress in the book, it is too alluring an idea. Kenneth Arrow, who understands its limitation better than anyone, called it one of the most important contributions in history of intellectual thought. James Tobin called it one of the greatest economic ideas of all time. But, as I say, this idea is so beautiful, it overpowers good sense.

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Gerald Epstein

Regular Triple Crisis contributor Gerald Epstein, of the University of Massachusetts and the Political Economy Research Institute, speaks with The Real News Network’s Sarmini Peries about the 2010 Dodd-Frank Wall Street Reform law. Prof. Epstein notes two key problems with the law’s final rules: While Dodd-Frank includes a provision to prevent banks from merging, it does nothing to reduce the size or complexity of banks that are “already too big, they’re already too complex, they’re already too hard to manage.” Meanwhile, the new law’s rules about banks holding onto risky securities, he suggests, is a “red herring,” since the real problem is that “too big to fail” banks expect to be bailed out in the event of a crisis.

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Martin Khor

Imagine our world getting more and more polluted, and little space left for the Earth to absorb more pollutants before all kinds of disasters take place.

And imagine that we have not yet found the solutions to really slow down the emissions or to prevent the catastrophe that lies ahead.

This look into our scary future was evident at the recent meeting in Copenhagen to finalise the last climate change report of the IPCC (inter-governmental panel on climate change).

The IPCC produces the most comprehensive reports on the state of climate change. Over a thousand scientists came together to produce three huge reports on science, adaptation and mitigation.

And then a synthesis report was finalised at the Copenhagen meeting, with hundreds of government representatives going over, debating and finally approving a “summary for policymakers” (SPM) together with the authors.

The synthesis report and its SPM make very interesting reading. You can find information on the damage that climate change has already caused, and the many more harms that lie ahead.

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Timothy A. Wise

What could the Transatlantic Trade and Investment Partnership (TTIP) do to help Europe recover from its current economic crisis? According to a new study by my colleague, Jeronim Capaldo, the US-EU free trade agreement could make just about everything even worse than it is now. (See the executive summary here and the full paper here.) Using a new UN economic model that avoids some of the false positives that come with assuming away things like unemployment, Capaldo shows that TTIP would likely cause trade among EU countries to decline, unemployment to increase, and labor’s share of national income to fall. European countries would also open themselves up to greater financial instability, rising asset bubbles, and possible contagion from fluctuations in U.S. financial markets. Capaldo’s model and study suggest what will happen if policy-makers fail to reverse the austerity-fed decline in the purchasing power of working people.

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What We’re Writing

Cornel Ban, Is There More Room to Negotiate with the IMF on Fiscal Policy?, Global Economic Governance Initiative (GEGI)

Sunita Narain, Making Sense of Green Building Rating, Down to Earth

Leonce Ndikumana, Better Global Governance for a Stronger Africa: A New Era, a New Strategy, Political Economy Research Institute (PERI)

Matias Vernengo, Some Thoughts on Currency Crises and Overshooting, Naked Keynesianism

What We’re Reading

Jeronim Capaldo, The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability, Global Development and Environment Institute (GDAE)

Rania Antonopoulos, Sofia Adam, Kijong Kim, Thomas Masterson, and Dimitri B. Papadimitriou, After Austerity: Measuring the Impact of a Job Guarantee Policy for Greece, Levy Economics Institute of Bard College

Prabhat Patnaik, Dilma Rousseff’s Victory, IDEAs

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Arthur MacEwan, Guest Blogger

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts-Boston and a columnist for Dollars & Sense magazine.

In many countries in the world—including most of the high-income countries and the most populous lower-income countries—the distribution of income has become more unequal. If we look at the income differences among countries, however, the situation has become more equal because per capita income has generally increased more rapidly in lower-income countries than in higher-income countries—but with important exceptions. And if we look at income distribution among all the people in the world—accounting for inequality both within and between countries—it seems that in recent decades the very high degree of inequality has remained about the same.

Distribution Within Countries

Take a look at Tables 1 and 2, which show the changes in the distribution of income within selected countries, several high-income and several low- or middle-income, over roughly the last two decades. The measure of income distribution used in these graphs is the ratio of the total income of the highest-income tenth of the population to the total income of the lowest-income tenth of the population.

Table 1: Inequality in Selected High-Income Countries, Mid-1990s and Recent Years: Ratio of Income of Highest Income 10% to Income of Lowest Income 10%*

Mid-1990* 2011
Canada 7.2 8.5
France 6.1 7.4
Germany 6 6.9
Italy 10.9 10.2
Norway 5.4 6.6
Spain 10.3 13.8
Sweden 4.1 6.3
United Kingdom 9.2 9.6
United States 12.5 16.5**

* For the U.K. the figure is for 1999; for Spain the figure is for 2004; for France the figure is for 1996. For all others the figures are for 1995.
** The U.S. figure is for 2012.
Source: OECD

The first thing that stands out in Table 1 is that the U.S. income distribution is substantially more unequal than those of any of the other countries. Also, the absolute increase by this measure of inequality is greatest in the United States. However, with the sole exception of Italy, all the countries in Table 1 experienced rising income inequality.

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Martin Khor

Smoking cigarettes is the number one preventable cause of death. Six million people die each year from tobacco use and this number will rise to eight million by 2030, most of them in developing countries.

Almost 200 countries signed the World Health Organisation’s Tobacco Control Convention and are obliged to take measures to curb tobacco use.

But the industry has hit back. A big tobacco company, Philip Morris, has taken Uruguay and Australia to tribunals under bilateral investment treaties, claiming billions of dollars in compensation for the two countries’ measures to have big warning signs and small or no brand logos on cigarette packets.

Under trade agreements like the Trans-Pacific Partnership Agreement (TPPA), companies can similarly sue governments, claiming loss of profits resulting from policy measures. At the World Trade Organisation, cases are also being taken against countries for their tobacco control measures.

Now for the good news. Many governments are fighting back against the Big Tobacco onslaught, with Malaysia taking a lead role on two important fronts: the Tobacco Control Convention and the TPPA.

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