[Marxism] Econ-atrocity: Do The World's Poor Countries Finance the Rich Ones?

["Ian Seda" <isedairi@xxxxxxxxxxxxxxx>]

 *Do The World's Poor Countries Finance the Rich Ones?*

By Amit Basole

CPE Staff Economist

January 16, 2008



*Global Charity*

In the year 2000, the richest 10 per cent of the world's population held 85
percent of its total income and wealth. The bottom half owned a mere 1
percent. Such glaring global asymmetries have long justified redistribution
of wealth from the "Global North" to the "Global South" in the form of
development aid and loans. So much so, that the stock image of a developing
country that springs to mind (particularly in sub-Saharan Africa) is that of
a heavily indebted economy which continually borrows simply to repay its old
loans and receives food and other forms of aid to feed and clothe its "naked
and hungry masses." Persistent poverty is often blamed on inadequate aid,
and rich countries are periodically exhorted to donate more generously. This
form of global charity is visible to all. But there is another flow of
wealth across national borders, greater in magnitude and more clandestine.
This is the flow from poor countries to the rich. Yes, the world's poorest
countries are today financing the richest. Far from being heavily indebted,
many developing countries are net creditors vis-à-vis the rest of the world.
How is this possible?



*Who is financing whom?*

Recent analysis of flows of income and wealth across national borders
reveals a startling and different story than that of global charity towards
the South. Economists have found that more money flows out of developing
countries in the form of interest payments, profits of foreign corporations,
and clandestine investments in financial markets of the rich countries than
flows into them as loans, aid, and foreign direct investment. According to a
recent United Nation's report, in 1995 the net inflow of money into
developing countries was $40 billion, but by 2006 this had reversed to a net
outflow of $657 billion! The global financial system is sucking wealth out
of developing countries, making them poorer in the process. Sub-Saharan
Africa in particular is associated with highly indebted poor countries.
Indeed, in 1996 the combined external debt of 25 countries of sub-Saharan
Africa, owed to rich countries and to institutions such as the IMF and the
World Bank, stood at $178 billion—a large sum indeed. But even more
significantly, the flow of wealth out of these same countries over 26 years
(1970-1996) equaled more than $193 billion. To make matters worse, much of
this wealth flowing out of poor countries ends up in the US economy, which
absorbs two-thirds of world savings. The ecologically-damaging consumption
boom in the world's rich countries is financed by its poor countries where
consumption is a matter of survival. The insanity of this situation puts a
question 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 by
definition? How then do they have resources to transfer to rich countries?
We must remember here that although the majority of the population in a
developing country is indeed poor, most countries have a small elite class
that owns a disproportionate share of its income and wealth. In other words,
the poor are poor precisely because the rich are rich. Further, a government
may be highly indebted but what about its private citizens, in particular
the rich ones? Several African leaders have amassed personal fortunes even
as the governments they head have incurred large debts. At least in part
these extraordinary assets are held abroad in rich countries. The problem is
that while public debts are scrupulously recorded, many private assets are
just as scrupulously concealed. To take just one famous example, the Swiss
bank accounts of the family of General Sani Abacha, who ruled Nigeria for
five years, reportedly contain as much as $2 billion.



This phenomenon is also known as "capital flight." There are several avenues
by which money flows from the poor countries to the rich. Repayment of
earlier debt and accumulation of foreign exchange reserves with Central
Banks in developing countries are two big ones. Since reserves often take
the form of US treasury bills, reserve accumulation essentially means
lending scarce capital to the US, a classic case of the poor lending to the
rich. But there is yet a third, more hidden, avenue as well. This is trade
mis-invoicing: under-reporting exports and over-reporting imports. Exporters
in a country may understate the value of their export revenues, so that they
can retain abroad the difference between their true value and their declared
value, while importers may over-state the value of their imports to obtain
extra foreign exchange, which can then be transferred abroad.



*What can be done?*

Should we simply chalk this up as a typical case of Third World
mismanagement and corruption, a problem of "failed states," a lack of
democratic accountability and transparency? It is all that, but that is not
the whole story. Rich country governments and international lending
institutions are often complicit in maintaining corrupt rulers and in
transferring their assets abroad. The Financial Times remarks in an
editorial on the freezing of General Abacha's bank accounts, "Financial
institutions that knowingly channeled the funds have much to answer for,
acting not so much as bankers but as bagmen, complicit in the corruption
that 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 poor
citizens be forced to pay the price of painful "reforms" such as cutbacks in
government spending on essential services, when most of that aid has not
benefited them at all in the first place? Rather citizens of developing
countries and their governments could tell their foreign creditors that old
debt will only be treated as legitimate if the creditors can provide
evidence for how the money was used for genuine development goals. This
shifts the burden of proof onto the lenders. Needless to say, such a
proposal would be extremely unpopular with rich country governments as well
as with the IMF and the World Bank.



In addition to "bottom-up" approaches to development, such as strengthening
government accountability and democracy from below in developing countries,
there is a role for us here in the developed world to play: we can do our
bit by raising awareness about capital flight and odious debt, and holding
our own governments accountable for who they lend or give aid to and how
that money is spent.



*Sources:*

1. Isabel Ortiz (2007) Putting Financing for Development in Perspective: The
South Finances the North, IDEAS Network (
http://www.ideaswebsite.org/news/nov2007/Putting_Financing.pdf)

2. World Economic Situation and Prospects, 2007- United Nation Development
Policy and Analysis Division (http://www.un.org/esa/policy/wess/wesp.html)

3. James Boyce and Leone Ndikumana (2000) Is Africa a Net Creditor? New
Estimates of Capital Flight from Severely Indebted Sub-Saharan African
Countries, 1970-1996. (
http://www.umass.edu/economics/publications/econ2000_01.pdf)





-- 
Ian J. Seda-Irizarry
Department of Economics
818 Thompson Hall
University of Massachusetts-Amherst
Phone: (413)-687-3889
________________________________________________
YOU MUST clip all extraneous text before replying to a message.
Send list submissions to: Marxism@xxxxxxxxxxxxxxxxxxx
Set your options at: http://lists.econ.utah.edu/mailman/listinfo/marxism