The World Can Stop Capital Flight Now

By Jomo Kwame Sundaram: Capital flight is widespread, with resource-rich countries more vulnerable. ‘Mis-invoicing’ exports and embezzling export earnings of state-owned mineral companies have been central to such wealth appropriation. Capital flight is enabled, not only by national conditions, but also by transnational facilitators. Internationally, capital flight is aided by institutions and professional enablers such as bankers, lawyers, accountants and consultants. Capital should flow to investments yielding the most returns. But economic theory suggests making more depends on appropriating what economists call ‘rents’. These rents may be secured by many means, legal or otherwise. Developing countries – especially resource-rich economies – are generally more susceptible to abuse. Wealth buys power and influence, enabling further accumulation. Thus, in the real world, natural resource endowments become a curse – not a blessing.

Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization.

Since the 1990s, the IMF’s sixth Article of Association – authorizing national capital controls – has been ‘flexibly reinterpreted’ by management and staff. Instead of protecting national economies, they have eased transborder capital flows – and flight. To add insult to injury, advocates falsely claim that more capital will thus flow into, rather than out of developing countries. After all, conventional economic theory insists capital flows from ‘capital-rich’ to ‘capital-poor’ countries. The reality of capital flowing ‘upstream’ – to rich countries – underscores how mainstream economic textbooks mislead. Clearly, the real world is very different from the one that such economists believe should exist. Unsurprisingly, the wealthy – especially the ‘crooked’ – want to keep their assets abroad – beyond the reach of national authorities, and rivals. As such wealth has often been acquired illicitly, owners want to protect themselves from investigation, prosecution and expropriation.

Illustration by Irshad Salim

Capital flight is enabled by transnational financial networks with considerable influence. These involve global banks and financial institutions, auditors and accounting firms, tax lawyers and consulting firms for hire. Along with corporate executives and government officials, they facilitate capital flight, sharing in the spoils. With both states and markets at their disposal, transnational financial networks successfully overcome national constraints. Prerogatives of national sovereignty are also abused to obscure their transactions and operations from surveillance.

Capital flight is enabled, even incentivized by national environments allowing the wealthy to surreptitiously sneak financial assets offshore. Instead of helping developing countries protect their meager assets, international financial institutions have facilitated, even worsened the haemorrhage. Elites influence the law and its enforcement, typically by employing enabling professionals and friendly legislators. After all, laws and governments are neither impartial nor efficient, constantly reshaped by influence, often connected to wealth. Hence, some illicit activities and wealth may be unlawful while others may not be…

More here.