Global Financial Integrity

 

Capital Outflows from Developing Countries

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Krishen Mehta

What Can Be Done about This Major Source of Poverty?

This article was originally published by Japan Spotlight Magazine.

What are some examples of major global issues that are still unresolved today? One can say that they are the environment and the effect 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 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, education, and other priorities. And that is the outflow of capital from developing countries through corruption, business mispricing, money laundering, and other means.

Outflow versus Inflow

The World Bank estimates that developing countries need about $40 billion to $50 billion annually to meet their Millenium Development Goals. Yet, the loss of revenue from these countries each year amounts to about $850 billion 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 a year. The funds, if available, could be used for increased investments in education, job creation, healthcare, a cleaner environment, access to water, and the resources to fight infectious diseases.

Significant research on this subject has been done by Raymond Baker and his team at the Global Financial Integrity (GFI) group in Washington, DC. The work is documented in the book “Capitalism’s Achilles Heel.” 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 of clout than the person on the street in a developing country. (Chart 1)

The long-term goal of developing countries should be to replace foreign aid dependency with tax self-reliance, and to stem the outflow through illicit means by businesses, politicians, and others. If even 10% of the annual capital outflow of about $850 billion is retained in developing countries, it could have a dramatic impact on their future. That is our goal, and the subject of this article.

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