Debt and Illicit Financial Flows
Debt is often leveraged by international capital to control economic policy in global South countries, and to impose claims on Southern labour and resources.
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 $300 billion per year. And because Southern prices are compressed relative to Northern prices, the underlying flow of real goods is much larger than the monetary value would 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 outflow from South to North. Global South countries also suffer large illicit outflows, primarily in the form of 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 invoice prices 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.
Data from Global Financial Integrity indicates that, together with “hot money outflows”, total outflows from their list of “developing countries” (as represented in this map) 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 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 and references
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. GFI reports misinvoicing figures for traded goods, indicating that figures for services are estimated to be similar in scale, while abusive transfer pricing figures are estimated to be equivalent to 25% of the misinvoicing figure for traded goods. In this map they have been summed as “trade-related outflows”.
2. Pogge, T., & Mehta, K. (Eds.). (2016). Global Tax Fairness. Oxford University Press.