*By Amit Basole
CPE Staff Economist
Global Charity*In the year 2000, the richest 10 per cent of the world's population held 85percent of its total income and wealth. The bottom half owned a mere 1percent. Such glaring global asymmetries have long justified redistributionof wealth from the "Global North" to the "Global South" in the form ofdevelopment aid and loans. So much so, that the stock image of a developingcountry that springs to mind (particularly in sub-Saharan Africa) is that ofa heavily indebted economy which continually borrows simply to repay its oldloans and receives food and other forms of aid to feed and clothe its "nakedand hungry masses." Persistent poverty is often blamed on inadequate aid,and rich countries are periodically exhorted to donate more generously. Thisform of global charity is visible to all. But there is another flow ofwealth across national borders, greater in magnitude and more clandestine.This is the flow from poor countries to the rich. Yes, the world's poorestcountries are today financing the richest. Far from being heavily indebted,many developing countries are net creditors vis-?-vis the rest of the world.How is this possible?*Who is financing whom?*Recent analysis of flows of income and wealth across national bordersreveals a startling and different story than that of global charity towardsthe South. Economists have found that more money flows out of developingcountries in the form of interest payments, profits of foreign corporations,and clandestine investments in financial markets of the rich countries thanflows into them as loans, aid, and foreign direct investment. According to a
recent United Nation's report, in 1995 the net inflow of money intodeveloping countries was $40 billion, but by 2006 this had reversed to a netoutflow of $657 billion! The global financial system is sucking wealth outof developing countries, making them poorer in the process. Sub-SaharanAfrica in particular is associated with highly indebted poor countries.Indeed, in 1996 the combined external debt of 25 countries of sub-SaharanAfrica, owed to rich countries and to institutions such as the IMF and theWorld Bank, stood at $178 billion?a large sum indeed. But even moresignificantly, the flow of wealth out of these same countries over 26 years(1970-1996) equaled more than $193 billion. To make matters worse, much ofthis wealth flowing out of poor countries ends up in the US economy, whichabsorbs two-thirds of world savings. The ecologically-damaging consumptionboom in the world's rich countries is financed by its poor countries whereconsumption is a matter of survival. The insanity of this situation puts aquestion mark on the entire logic of the international financial system.*How does this happen?*But wait a minute. We might wonder, aren't developing countries poor bydefinition? How then do they have resources to transfer to rich countries?We must remember here that although the majority of the population in adeveloping country is indeed poor, most countries have a small elite classthat owns a disproportionate share of its income and wealth. In other words,the poor are poor precisely because the rich are rich. Further, a governmentmay be highly indebted but what about its private citizens, in particularthe rich ones? Several African leaders have amassed personal fortunes evenas the governments they head have incurred large debts. At least in partthese extraordinary assets are held abroad in rich countries. The problem isthat while public debts are scrupulously recorded, many private assets are
just as scrupulously concealed. To take just one famous example, the Swissbank accounts of the family of General Sani Abacha, who ruled Nigeria forfive years, reportedly contain as much as $2 billion.This phenomenon is also known as "capital flight." There are several avenuesby which money flows from the poor countries to the rich. Repayment ofearlier debt and accumulation of foreign exchange reserves with CentralBanks in developing countries are two big ones. Since reserves often takethe form of US treasury bills, reserve accumulation essentially meanslending scarce capital to the US, a classic case of the poor lending to therich. But there is yet a third, more hidden, avenue as well. This is trademis-invoicing: under-reporting exports and over-reporting imports. Exportersin a country may understate the value of their export revenues, so that theycan retain abroad the difference between their true value and their declaredvalue, while importers may over-state the value of their imports to obtainextra foreign exchange, which can then be transferred abroad.*What can be done?*Should we simply chalk this up as a typical case of Third Worldmismanagement and corruption, a problem of "failed states," a lack ofdemocratic accountability and transparency? It is all that, but that is notthe whole story. Rich country governments and international lendinginstitutions are often complicit in maintaining corrupt rulers and intransferring their assets abroad. The Financial Times remarks in aneditorial on the freezing of General Abacha's bank accounts, "Financialinstitutions that knowingly channeled the funds have much to answer for,acting not so much as bankers but as bagmen, complicit in the corruptionthat has crippled Nigeria."If development aid is used to amass private fortunes while external
creditors look the other way, why should a developing country's poorcitizens be forced to pay the price of painful "reforms" such as cutbacks ingovernment spending on essential services, when most of that aid has notbenefited them at all in the first place? Rather citizens of developingcountries and their governments could tell their foreign creditors that olddebt will only be treated as legitimate if the creditors can provideevidence for how the money was used for genuine development goals. Thisshifts the burden of proof onto the lenders. Needless to say, such aproposal would be extremely unpopular with rich country governments as wellas with the IMF and the World Bank.In addition to "bottom-up" approaches to development, such as strengtheninggovernment accountability and democracy from below in developing countries,there is a role for us here in the developed world to play: we can do ourbit by raising awareness about capital flight and odious debt, and holdingour own governments accountable for who they lend or give aid to and howthat money is spent.
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