Debt and Financial Outflows

In 1980, the US Federal Reserve hiked interest rates toward 20%. This triggered a crisis across the global South, as external debts – which are often denominated in US dollars – became unpayable. The core states leveraged this crisis to impose structural adjustment programs (SAPs) on global South countries, effectively forcing governments to adopt neoliberal economic policies, including privatization, market deregulation and cuts to social programmes. SAPs included rules that constrained national monetary sovereignty, and constrained fiscal and industrial policy. This limited governments’ ability to issue public finance and build national industries, making them more dependent on foreign creditors. The result is that today much of the global South holds very high levels of external debt. 

This creates several problems. The first is that large creditors have the power to dictate economic policy, including further neoliberal reforms. Governments that are dependent on foreign finance are often forced to capitulate in order to maintain access to capital. The second is that external debt must be paid in foreign currency. Debtors are therefore obliged to mobilize production around exports to countries that hold or issue that currency, diverting productive capacity away from national needs.

Interest payments on external debt ultimately represent a net transfer of goods from debtor countries to creditor countries. Today, these transfers are worth over $300 billion per year (and sum to $7.7 trillion over the period 1970-2023). And because Southern prices are compressed relative to Northern prices, the underlying flow of real goods is much larger than the monetary value suggest. These are resources that could be used to provide healthcare, education and housing to meet local needs, but instead are diverted to enrich foreign banks.

Interest payments are not the only financially-mediated outflows from the global South. Southern economies also suffer losses due to profit repatriation by multinational companies. These firms make profits from production in the South, using Southern labour and resources, and then transfer the profits back to the countries where they are headquartered, or to third countries, rather than reinvesting profits back into the national economy, where it could contribute to achieving national development and production for local needs. 

This map shows the scale of cumulative losses and gains for countries from 2005 to 2023.  Most of the core economies are net-beneficiaries of profit repatriation flows, whereas most peripheral countries suffer substantial net-losses. 

This graph shows the global North’s gains each year due to profit repatriation. The line for “net profit inflows” indicates profits generated on production carried out in the global South which are siphoned into Northern banks. This currently amounts to nearly $400 billion per year, and a total of $6.7 trillion since 2005. 

The menu button switches to Southern losses.  The South’s recorded net outflows are lower than the North’s net inflows because for many global South countries outflow data does not exist.  The data for Northern net inflows therefore gives a more complete picture of the scale of net South-North transfers. 

Research shows that high-income countries enjoy an ‘exorbitant privilege’ in the world economy, as they can borrow from abroad at lower rates of return than they receive on their own investments in other countries. This is especially true for the United States, but it also applies to the United Kingdom, Japan, and, since the 2000s, the European Union.

This graph shows how much money has been gained or lost by different world regions as a result of asymmetries between their borrowing costs and the rate of return on their investments. The core economies have gained $15 trillion USD over this period, which has been financed by the rest of the world.

Scholars point out that rich countries enjoy this ‘exorbitant privilege’ because they issue international reserve currencies. This allows them to pull in the savings of the periphery by issuing low-yield bonds and other low-return assets denominated in their currency. Core states and corporations can then invest these inflows into more profitable ventures, pocketing the difference as a net gain.

This net flow from periphery to core not only boosts the income of the core, but also directly gives the core more power over production in the world economy – more power to determine what to produce and for whose benefit. Meanwhile, the periphery is forced to finance this capital transfer with a trade surplus or with more debt.

Global South countries also suffer large illicit outflows, primarily due to corporate tax evasion. One common strategy is that corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions, a practice known as “trade misinvoicing”. Usually the goal is to evade taxes, but sometimes this practice is used to launder money or circumvent capital controls. Multinational companies also steal money from developing countries through “abusive transfer pricing”, shifting profits illegally between their own subsidiaries by mutually faking trade invoices on both sides. For example, a subsidiary in Nigeria might dodge local taxes by shifting money to a related subsidiary in the British Virgin Islands, where the tax rate is effectively zero and where stolen funds can’t be traced.

In its 2015 report, Global Financial Integrity (GFI) indicated that, together with capital flight through “hot money outflows”, total outflows from developing countries amounted to an average of $2.2 trillion per year, over the 2010-2013 period.¹ For most countries, these outflows outstripped their aid receipts many times over. Nigeria lost $11 for every dollar of aid it received during this period, while India lost $80. The rollover function on the map shows data for each country. These outflows deny global South countries a crucial source of tax revenue, but also a crucial source of investment that could be used for development.

Measuring illicit flows is not straightforward and GFI’s methods have changed over the years. The drop-down menu allows users to select results from GFI’s various reports from 2015 to 2019, for comparison.

This graph shows total illicit outflows from developing countries over the period 2004 to 2013, according to GFI’s 2015 report. This includes outflows due to trade misinvoicing in goods, estimates for trade misinvoicing in services, estimates for abusive tranfer pricing, and hot money outflows. At the end of this period, losses totalled nearly $2.5 trillion. The drop-down menu allows users to see results from other reports.

These outflows can be stopped by introducing customs rules to prevent trade misinvoicing, by requiring corporations to pay taxes in the jurisdiction where production occurs, and by imposing a universal minimum corporate tax rate globally.² 

Notes

Suggested citation: Hickel, J., Sullivan, D., & Zoomkawala, H. (2025). “Debt and financial outflows”, Global Inequality Project. Accessed at: https://globalinequality.org/debt-and-financial-outflows

1. This is based on GFI’s 2015 report, “Illicit outflows from developing countries: 2004-2013”, focusing on the years 2010-2013, after the global financial crisis. This report indicates misinvoicing figures for traded goods. In other material, GFI estimates that misinvoicing in services is equivalent to another 25%, and indicates that illicit outflows through abusive transfer pricing are likely similar in scale to misinvoicing (see GFI’s 2016 report, “Financial flows and tax havens: combining to limit the lives of billions of people”). In the map they have been summed as “trade-related outflows”. 

2. Pogge & Mehta (2016).