Filling a sieve
How much water does it take to fill a sieve?
It’ll fill eventually, won’t it?
That, says Raymond W. Baker of the Global Financial Integrity Project, is why foreign aid fails — because even faster than it is poured into deserving countries, it pours out via illicit financial transactions.
Raymond W. Baker
As he put it in a recent speech:
I want to talk about two things this morning. One, the international structure that supports the flow of illicit money across borders, and two the harmful impact these illicit flows have on economic growth and poverty alleviation in poorer countries.
[Yes, patient reader, this comes back to housing. In the end, everything does J.]
Housing’s in here somewhere
For nearly a decade, Mr. Baker has been on a crusade against illicit capital flows, which he sees as a relatively new development — technology-driven — that is distorting the world:
Since the 1960s we have built and expanded a global structure to facilitate the movement of illicit money. A few elements of this structure were available before then, but the development of the structure accelerated in the 1960s for two reasons. First, it was the period of decolonization. From the late 1950s to the end of the 1960s, 48 countries gained their independence from European powers. Many political leaders and wealthy businesspeople wanted to take money out of these newly independent counties, a desire which was well serviced by western financial institutions. Second, corporations began to spread their flags across the planet. Certainly there were international companies before the 1960s, but typically an international oil or trading company had overseas branches in only 12 or 15 countries. The great thrust to expand all over the globe took off in the 1960s and has continued up to the present. Most of these corporations utilize tax evading techniques to relocate profits across borders at will. For these two reasons—decolonization and the spread of multinational corporations—the 1960s marked the point at which the expansion of the illicit financial structure took off in earnest.
There are a number of interrelated parts of the illicit financial structure.
Mr. Baker’s passion is evident, his analysis compelling, his estimates breathtaking — and appalling:
I estimate that something on the order of $1 trillion to $1.6 trillion of illicit money moves across borders annually. These estimates are conservative and are developed with some care in my book, Capitalism’s Achilles Heel, utilizing both top-down and bottom-up approaches. Other analysts think these estimates are considerably short of the real global totals.
Drug kingpins, criminal syndicate heads, and terrorist masterminds did not invent any new ways of moving their illicit proceeds. They merely utilized the mechanisms that we had created for the purpose of moving flight capital and tax-evading money.
In this, illicit capital flows use the same hijacking of an efficient network deployed by spammers — they ride along inside, stowaways on other people’s intangible infrastructure.
We’re all just taking advantage of the system
This $1 trillion or more a year of illicit money that flows across borders and the structure that facilitates its movement is not only the biggest loophole in the global economic system, it is also the most damaging economic condition hurting the poor in developing and transitional economies. It drains hard-currency reserves, heightens inflation, reduces tax collection, worsens income gaps, cancels investment, hurts competition, and undermines trade.
We’re trying to reach the needy
If Mr. Baker is right, money poured into the top (such as sovereign lending, which is the sole product allowed by the World Bank) can do only so much good as cannot be siphoned off by the corrupt.
“We can painlessly drain bank accounts …”
Of the $1 to $1.6 trillion of illicit money that I estimate crosses borders annually, I further estimate that half—$500 to $800 billion a year—comes out of developing and transitional economies. These are countries with the weakest legal and administrative structures, the largest drug and criminal gangs, and, far too often, political and economic elites who want to shift their money abroad.
Now, let’s go further and consider the impact of this estimated $500 to $800 billion of illegal money coming annually out of poor countries.
It eviscerates foreign aid. Through most of the 1990s and into the current decade, aid has been running about $50 to $80 billion a year from all sources. Consider the comparison: $50 to $80 billion of aid in; $500 to $800 billion of illicit money out. In other words, for every $1 that we have been generously handing out across the top of the table, we in the West have been taking back some $10 of illicit money under the table.
I’m only in it for the money
There is no way to make this formula work for anyone, poor or rich.
Think what would happen if $500 billion a year, or a reasonable part of it, stayed in the developing and transitional economies rather than coming illegally out. It would alter our shared world for the better, rich and poor alike.
While Mr. Baker’s passion and expertise are unquestionable, his analysis is not comprehensively embraced. This Amazon reviewer makes excellent points:
If you would believe Baker, the reason for much of this poverty is the corruption and shadow economy that plague much of Africa and
Is that really fatal?
Similarly, he insists that the rampant tax avoidance and tendency to stash money overseas and the like cause the corruption in Africa; could it not be that the corruption, arbitrary taxation and confiscation of goods account for the habit of avoiding exorbitant taxes and keeping one’s savings overseas? If
Even allowing the reviewer’s worthwhile points — particularly about the self-reinforcing vicious circle of corruption, avoidance, and policy apathy — they represent only a dial-back of emphasis, not a refutation of the fundamental thesis.
Seeking angels, we find devils
Illicit capital outflows, controlled by a country’s elite (political, plutocratic, aristocratic, or military), vastly dilute the impact of aid efforts. What can we do about it?
The solution isn’t to junk the technology. Reducing hijack risk by undermining a system’s utility for contributors is slow systemic suicide. No system was ever Harrison-Bergeron-ed into viability. As the solution to spam is better filters, so the ultimate solution to illicit capital flows will be traceability and a concomitant surrender of some shavings of privacy. But in the meantime, what can we do to ‘fix’ capital in target countries? What interventions are most resistant to illicit capital outflows?
Self-built housing, Nile valley,
Agronomists know that if you want to grow crops, you have to fix nutrients (like nitrogen) into the soil, because sand by itself is barren. In the same way, if we want to grow healthy honest open societies, where our aid adds value with minimal entropy, we need interventions that stick in place.
What asset sticks in place? What asset is immobile?
Housing.
Apartments, Mavoko,
It’s the asset that cannot flee. It can be ruined, but it cannot flee.
In the waltz between capital and property, property anchors capital. It’s the asset that cannot flee.
I’ve previously talked about homeownership as the hillside sod of society:
That’s the problem with classical slum clearance — it’s flash-flood funding. Pump in money, build some wonderful new structures (e.g. high-rise public housing, in France and elsewhere, which simply creates the slums inside). For a few years, the desert blooms — the neighborhood looks better. But the wealth extraction machine hums steadily along, all day every day, and like water poured through sand, out goes the wealth and the slum reverts.
We’re here for the rent
Just as a desert becomes green only if it can trap water, to make a community healthy one has to enable it to store wealth within itself. (As long as a slum can extract wealth, what goes out will rise instantly to equal what comes in.) Rule of law matters, otherwise portable wealth is simply stolen or extorted from residents. So does indigenous business and commerce.
Fruit and vegetable store in Kibera
Real estate is wealth made both visible and sessile. Homeownership is personal wealth anchored to a place. It may be even less mobile than we would like (Hernando de Soto’s ‘dead capital‘), but whatever else may be, owned homes represent wealth earned, accumulated, and planted. Homes are the visible manifestation of excess labor, which is why we instinctively equate an attractive home with success. Look at my owner, says the house, he could afford to work on me.
I have described homeownership as “the sod on civil society’s hillside,” and that’s why: homeowners invest their capital long-term, and in so doing they add wealth to a neighborhood, wealth that can internally circulate. This is part of why so many great American immigrant fortunes came through property ownership, because they were the first-mover entrepreneurs who helped changed what had been slums into neighborhoods, communities, and urban assets.
To homeownership’s other benefits — wealth-building, savings encouragement and reward, citizen motivation — we now add another, a geopolitical one: homeownership is capital that is hard to filch.
Co-operative built house, Mavoko,
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