JOIN US In the developed world, theft and death are not inter-related, unlike in the developing world.
My first encounter with the ‘shadow’ financial system was half a century ago in Nigeria. Fresh out of Harvard Business School, I was starry-eyed with hope that the free-market economy would help this newly independent country thrive. Instead, in only a matter of months, I became witness to a system of financial manipulations so incredible that I still have trouble believing it is real.
By ‘shadow financial system’ I am referring to an arrangement as insidious as a pyramid scheme, but much more sophisticated: an unofficial, international financial system functioning in parallel with the honest one I learned about in school. Its purpose is to allow local and foreign ‘elites’ to amass great wealth by tapping into a series of opaque inter-linking deals and system of loopholes, always at the expense of the poor. Today, this system is more abusive than ever and now hurts even the middle-classes of the developed world.
Tax havens are the linchpin of the shadow financial system. When I first came across the phenomena 50 years ago, the term could be applied to a handful of exotic locations like Lichtenstein and Curacao. Since then the demand for the services they provide -essentially different variations on how to hide a person’s identity and source of wealth- has grown to such an extent that at last count there were over 60 tax havens around the globe.
Tax havens
Today Americans are no longer obliged to go offshore to have their money be ‘offshore.’ After the great wave of financial deregulation of the 1990s, several US states turned themselves into tax havens. Another pillar of the shadow financial system is trade mispricing.
Corporations are not alone in stealing from the developing world. The Arab Spring shed light on the wealth Ben Ali, Mubarak and Gaddafi managed to syphon out of the countries they ruled. Although it’s easy to pin the blame for capital flight on local corruption, the reality is that without the shadow financial system (created and sheltered by international corporations and governments), none of these kleptocrats would have been able to stash their country’s wealth in private Swiss, UK, Austrian and US bank accounts.
In the developed world theft and death are not normally inter-related, in the developing world they often are. Economists Leonce Ndikumana and James Boyce calculate that the effect on public health of capital flight out of Africa is so great that it is responsible for an additional 75,000 infant deaths annually. They present the example of the main hospital in Congo-Brazzaville, which is so poor that patients have to pay bystanders to carry them up and down stairs.
Despite the suffering it causes in the developing world, the US and Europe have long paid little attention to this system and its consequences, likely because it did not appear to cause them any harm and might even have appeared to be good business. Starting sometime in the 1990s this changed.
Enhanced with elaborate new devices such as ‘derivatives,’ ‘collateralised debt obligations,’ and ‘interest rate swaps’ the shadow financial system took off in the west. Although it is not directly responsible for the current financial crisis, the system exacerbates it by providing the means for businesses and individuals to avoid paying tax and hide ill-gotten gains, thus bleeding desperate governments of much needed revenue. This has led to the groundswell of anger we are seeing with the ‘Occupy’ movements across the developed world.
Angry citizens might not be able to define exactly what has gone wrong with the economy, but to paraphrase the famous US Supreme Court decision on pornography: “they know (corruption) when they see it”.
A report published in early November by Citizens for Tax Justice found that among America’s 280 largest corporations 78 of them paid no federal corporate taxes or even negative tax rates for at least one year since 2008. The situation might be even more dire in parts of Europe. As the Euro struggles to survive, recent calculations by a European Union task force suggest that as much as 60 billion Euros have escaped to Swiss banks this year –much of it in unpaid taxes.
One lesson I learned in business school remains as true today as ever and that is that capitalism and a free-market depend on justice to flourish. For this reason we must rid ourselves of the injustice of the shadow financial system, which grossly favours the rich at the expense of the poor. The mechanisms it runs on may appear rather complex (which is natural as they were built with opacity in mind) yet the solution is rather simple: transparency.
Transparency in all financial transactions both local and international; transparency in public records; transparency and multiple oversight mechanisms to review financial structures; transparency to ensure that trade is conducted without disadvantaging weaker nations. A system that counts on shadows to survive will not survive once there is light.