Global Financial Integrity

 

How Dirty Money Binds the Poor

SHARE
Jennifer Nordin
Raymond Baker

This article was originally published in the Financial Times.

The World Bank in its 2005 World Development Report issued last month calls for governments to promote a “better investment climate” in the developing world and implores the international community to remove trade barriers and offer more aid. “A good investment climate”, it declares, “plays a central role in growth and poverty reduction.” All nice words, but the bank overlooks the shadowy underside of the global economy that conspires to keep poor countries in their place.

For more than 50 years, the World Bank has committed billions of dollars and the brain power of some of the brightest economists to fighting poverty, and yet outright success has been elusive. Even among World Bank staffers, there is a sense that something is missing that might explain the mystery of why so much development aid has done so little good.

James Wolfensohn was the first bank president to ask the question: could illegal financial practices be partly responsible? At his urging, the World Bank took up for the first time the issues of corruption, fraud and accountability, with some success. The bank now ranks countries based on corruption indicators and keeps a list of unscrupulous contractors barred from World Bank projects. Corruption is now an important factor in lending, a welcome change after years of denial.

Unfortunately, the crooked and the corrupt in poor countries have had a long head start. The World Bank and the International Monetary Fund helped to underwrite decades of deceit by lending billions of dollars to some of the most corrupt regimes on the planet. Between 1970 and 2002, for example, the World Bank and the IMF disbursed Dollars 232bn to Indonesia, Dollars 94bn to the Philippines, Dollars 28bn to Nigeria and Dollars 10bn to Congo/Zaire. Compare this with Transparency International’s tallies of theft at the highest levels: up to Dollars 35bn by Suharto, Dollars 10bn by Ferdinand Marcos, Dollars 5bn by Sani Abacha and Dollars 5bn by Mobutu Sese Seko.

The World Bank’s narrow focus on corruption ignores the much larger problem of cross-border dirty money. In the broadest sense, it is money that is illegally earned, illegally used or illegally transferred, and has three main facets: criminal proceeds from drug trafficking and racketeering; commercial proceeds from transfer pricing and shady business transactions, often hidden in tax havens; and corrupt proceeds from greedy government officials. Western businesses and banks have facilitated and sheltered this dirty money for years. Of the total, the corrupt portion is actually the smallest, representing less than 10 per cent.

The missing piece of the development puzzle is the impact of this illegal capital flight on global poverty. About Dollars 50bn (Pounds 28bn) in aid flows to developing and transitional economies from richer nations each year. At the same time, roughly Dollars 500bn in dirty money – in all its forms – flows in the opposite direction out of poorer countries. Aid inflows are swamped by a torrent of illicit outflows. For every Dollars 1 the west distributes in assistance across the top of the table, we take back some Dollars 10 in illegal proceeds under the table.

The consequences of these illicit outflows on the developing world are massive. They deepen poverty, foster crime, facilitate terrorism and void trade and investment. They also dampen economic development, support large-scale tax evasion and generate economic instability. Indeed, the illicit flow negates the World Bank’s very mission and best intentions.

Consider what that Dollars 500bn would do if it stayed in poor countries. It would make a large dent in the most pressing human needs of our time: universal childhood vaccination, more classrooms and teachers, clean water systems and basic medical care for millions of people – and there would be billions of dollars remaining for investment and growth.

Certainly, the dirty money problem is far larger than one multilateral institution. However, as the world’s leading organisation charged with easing the burdens of poverty, it is in the World Bank’s interest to expose one of the most damaging economic conditions facing the poor. Here, leadership is crucial to getting a firm grasp on the amount of dirty money flowing out of developing and transitional economies, its effect on these countries and its effect on development aid programmes. Any problem that can be identified and measured is a step closer to being solved.

Focusing solely on corruption, while neglecting other forms of illegal capital flight, is a formula for failure. The World Bank must put all these illicit flows on its agenda before development aid can reach its potential. A full, unflinching look at how dirty money sustains worldwide poverty would pay very rich dividends.

Raymond Baker is a senior fellow at the Center for International Policy in Washington, DC, and is author of the forthcoming book Capitalism’s Achilles’ Heel; Jennifer Nordin was director of economic studies at the Center for International Policy

This article was originally published in the Financial Times.