Aid in reverse: how poor countries develop rich countries

This article was originally posted on The Guardian on 14 January 2017.

We have long been told a compelling story about the relationship between rich countries and poor countries. The story holds that the rich nations of the OECD give generously of their wealth to the poorer nations of the global south, to help them eradicate poverty and push them up the development ladder. Yes, during colonialism western powers may have enriched themselves by extracting resources and slave labour from their colonies – but that’s all in the past. These days, they give more than $125bn (£102bn) in aid each year – solid evidence of their benevolent goodwill.

This story is so widely propagated by the aid industry and the governments of the rich world that we have come to take it for granted. But it may not be as simple as it appears.

The US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics recently published some fascinating data. They tallied up all of the financial resources that get transferred between rich countries and poor countries each year: not just aid, foreign investment and trade flows (as previous studies have done) but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight (more of this later). As far as I am aware, it is the most comprehensive assessment of resource transfers ever undertaken.  What they discovered is that the flow of money from rich countries to poor countries pales in comparison to the flow that runs in the other direction.

In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn – that’s how much money has been drained out of the global south over the past few decades. To get a sense for the scale of this, $16.3tn is roughly the GDP of the United States

What this means is that the usual development narrative has it backwards. Aid is effectively flowing in reverse. Rich countries aren’t developing poor countries; poor countries are developing rich ones.

What do these large outflows consist of? Well, some of it is payments on debt. Developing countries have forked out over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London, on a scale that dwarfs the aid that they received during the same period. Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate back home. Think of all the profits that BP extracts from Nigeria’s oil reserves, for example, or that Anglo-American pulls out of South Africa’s gold mines.

But by far the biggest chunk of outflows has to do with unrecorded – and usually illicit – capital flight. GFI calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.

Most of these unrecorded outflows take place through the international trade system. Basically, 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. In 2012, developing countries lost $700bn through trade misinvoicing, which outstripped aid receipts that year by a factor of five.

Multinational companies also steal money from developing countries through “same-invoice faking”, 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.

GFI doesn’t include same-invoice faking in its headline figures because it is very difficult to detect, but they estimate that it amounts to another $700bn per year. And these figures only cover theft through trade in goods. If we add theft through trade in services to the mix, it brings total net resource outflows to about $3tn per year.

That’s 24 times more than the aid budget. In other words, for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.

Who is to blame for this disaster? Since illegal capital flight is such a big chunk of the problem, that’s a good place to start. Companies that lie on their trade invoices are clearly at fault; but why is it so easy for them to get away with it? In the past, customs officials could hold up transactions that looked dodgy, making it nearly impossible for anyone to cheat. But the World Trade Organisation claimed that this made trade inefficient, and since 1994 customs officials have been required to accept invoiced prices at face value except in very suspicious circumstances, making it difficult for them to seize illicit outflows.

Protest about tax havens in London in 2016, organised by charities Oxfam, ActionAid and Christian Aid.
Protest about tax havens in London in 2016, organised by charities Oxfam, ActionAid and Christian Aid. Photograph: Carl Court/Getty Images

Still, illegal capital flight wouldn’t be possible without the tax havens. And when it comes to tax havens, the culprits are not hard to identify: there are more than 60 in the world, and the vast majority of them are controlled by a handful of western countries. There are European tax havens such as Luxembourg and Belgium, and US tax havens like Delaware and Manhattan. But by far the biggest network of tax havens is centered around the City of London, which controls secrecy jurisdictions throughout the British Crown Dependencies and Overseas Territories.

In other words, some of the very countries that so love to tout their foreign aid contributions are the ones enabling mass theft from developing countries.

The aid narrative begins to seem a bit naïve when we take these reverse flows into account. It becomes clear that aid does little but mask the maldistribution of resources around the world. It makes the takers seem like givers, granting them a kind of moral high ground while preventing those of us who care about global poverty from understanding how the system really works.

Poor countries don’t need charity. They need justice. And justice is not difficult to deliver. We could write off the excess debts of poor countries, freeing them up to spend their money on development instead of interest payments on old loans; we could close down the secrecy jurisdictions, and slap penalties on bankers and accountants who facilitate illicit outflows; and we could impose a global minimum tax on corporate income to eliminate the incentive for corporations to secretly shift their money around the world.

We know how to fix the problem. But doing so would run up against the interests of powerful banks and corporations that extract significant material benefit from the existing system. The question is, do we have the courage?

This article was originally posted on Truthout on 06 June 2016.

CONNECTING THE DOTS THE P2P WAY: THE COMMONS AS THE RESPONSE TO THE STRUCTURAL CRISES OF THE GLOBAL SYSTEM

The Connecting the Dots series has convincingly shown a number of interconnected reasons why the global system is in crisis, and why there is no way out without a structural transformation of the dominant neoliberal system. In our contribution, we want to stress the key importance of what we call a “value regime,” or simply put, the rules that determine what society and the economy consider to be of value. We must first look at the underlying modes of production — i.e. how value is created and distributed — and then construct solutions must that help create these changes in societal values. The emerging answer for a new mode of value creation is the re-emergence of the Commons.

With the growing awareness of the vulnerability of the planet and its people in the face of the systemic crises created by late-stage capitalism, we need to ready the alternatives and begin creating the next system now. To do so, we need a full understanding of the current context and its characteristics. In our view, the dominant political economy has three fatal flaws.

Pseudo-Abundance

The first is the characteristic need for the capitalist system to engage in continuous capital accumulation and growth. We could call this pseudo-abundance, i.e. the fundamental article of faith, or unconscious assumption, that the natural world’s resources are infinite. Capitalism creates a systemic ecological crisis marked by the overuse and depletion of natural resources, endangering the balance of the environment (biodiversity extinction, climate change, etc).

Scarcity Engineering

The second characteristic of capitalism is that it requires scarce commodities that are subject to a tension between supply and demand. Scarcity engineering is what we call this continuous attempt to undo natural abundance where it occurs. Capitalism creates markets by the systemic re-engineering of potentially or naturally abundant resources into scarce resources. We see this happening with natural resources in thedevelopment of “terminator seeds” that undo the seeds’ natural regeneration process. Crucially, we also see this in the creation of artificial scarcity mechanisms for human culture and knowledge. “Intellectual property” is imposed in more and more areas, privatizing common knowledge in order to create artificial commodities and rents that create profits for a privileged “creator class.”

These first two characteristics are related and reinforce each other, as the problems created by pseudo-abundance are made quite difficult to solve due to the privatization of the very knowledge required to solve them. This makes solving major ecological problems dependent on the ability of this privatized knowledge to create profits. It has been shown that the patenting of technologies results in a systemic slowdown of technical and scientific innovation, while un-patenting technologies accelerates innovation. A good recent example of this “patent lag” effect is the extraordinary growth of 3D printing, once the technology lost its patents.

Perpetually Increasing Social Injustice

The third major characteristic is the increased inequality in the distribution of value, i.e. perpetually increasing social injustice.

As Thomas Piketty’s Capital in the Twenty-First Century shows us, the logic of capital is to concentrate more and more wealth into fewer hands through compound interest, rent seeking, purchasing legislation, etc. Our current set of rules are hardwired to increase inequality and injustice.

Enter the Commons

To what degree does the Commons and peer-to-peer production function as a potential solution for these three interrelated structural crises of capitalism?

Commons are resources that are owned and managed neither by private corporations nor by the state. Instead, they are governed by their user communities. As the late Elinor Ostrom has shown, Commons have managed and maintained a healthy resource base for extremely long periods. Both private capitalism and state-centric development have been detrimental for the environment and the maintenance and regeneration of natural resources.

Digital networks (such as the internet) have recently enabled a new type of Commons where the knowledge required for human action and value creation has been mutualized. This has led to global open design communities, which jointly create open knowledge pools (e.g. Wikipedia), free software (e.g. the Linux Operating System) or open designs to enable physical production (e.g. Arduino motherboards,WikiSpeed cars, WikiHouse housing projects, etc.).

Commons-based peer production emerges when technology enables the creation of open, contributory systems that create Commons. Unlike physical resources (which need to be managed tightly), these digital Commons can be open for use by all of humanity (on the condition of having network access of course).

In what way do the Commons and peer-to-peer dynamics represent a potential response to the three systemic crises we’ve described?

As a first approach, we offer the following theses:

1. Under capitalism, the design of products and services is led by the desire to retain market scarcity, and therefore, to create commodities. In this context, corporate-driven innovation is always characterized by planned obsolescence. The global open design communities engaging in peer production and mutualization of productive knowledge have no such perverse incentives. These communities design to ensure participation and are “naturally” inclined to design sustainable products and services. Of course, this is not to say that relying on peer production is entirely sufficient to obtain full sustainability. The point is that peer production does not structurally create the need for unsustainable production. tweet

2. Innovation under our current system actually depends on artificial scarcity and the intellectual property regime. The privatization and patenting of knowledge and technical solutions hampers the widespread distribution of necessary innovations. No such impediments exist in the open contributory systems of peer production communities, where innovation anywhere in the network is instantly available to the whole. tweet

3. Peer production, independent of the profit motive, invites and facilitates the creation of solidarity-based forms of economic entities. Being generative towards human communities, these entities are more likely based on socially just forms of value sharing. This condition, though, requires that the value generated by peer production communities is not captured by extractive economic entities. In fact, this is the central locus of political and social struggle when peer production emerges in the context of the dominance of an economic system based on value extraction from human communities and the environment. The self-organizing characteristics of peer production, however, also enables the creation of new economic forms that are generative, and which can therefore produce more justice in the economic system. tweet

The Revolution Is Already Happening

All over the planet, citizens are organizing to solve these three systemic crises. Their responses take three forms:

1. The sustainability and ecological/environmental movements, attempting to find solutions for the planet’s survival; tweet

2. The “Open,” “Commons” and “Sharing” movements, stressing the need for shareable knowledge and mutualized physical resources; tweet

3. The cooperative and solidarity economy, focusing on fairness. tweet

All three of these movements are vital, yet alone they are not sufficient for a global, systemic response to these crises.To be effective, they must combine elements from the “free” (open/shareable), “fair”(socially just) and “sustainable” movements.

The good news is that Commons-based peer production is the best way to bring these three necessary aspects together into one coherent system. However, for this to happen, the various movements need enabling tools and capacities. An example is the open source circular economy (encompassing open and sustainable approaches). Here, open and participatory logistical and accounting systems allow citizens, entrepreneurs and public officials to scale up their circular economy cooperation in otherwise impossible ways.

Similarly, open and platform cooperativism — the convergence of socially just forms of production with shareable knowledge — allows all contributing citizens to create fair, generative livelihoods around the shared resources they need and co-create.

The task may seem daunting, but history shows that value regimes do change; in fact, they’ve changed at least twice in the last thousand years in the European sphere.

Richard Moore, in his wonderful book The First European Revolution, describes how Europe moved from the post-Roman plunder economy to a feudal regime based on land ownership. Rapid development of a new economy came in the 15th century (after the crisis of feudalism), based on making and selling commodities. This would eventually become capitalism.

We’ve seen post-capitalist practices emerging since the late 20th century — for example, the 1983 invention of the universally available browser. Citizens have been empowered to create value through open contributory systems; these create universally available knowledge, which in turn can be used for material production. This new value regime is now emerging globally, and can be paired with an ethical, generative economy to create sustainable livelihoods for those who contribute to the common good. These are the dots that we must connect in order to help usher in the post-capitalist world.

  1. Nahido says:

    This is so true. I work for a (small) organization that engages in this kind of fake-invoice business practice to limit taxes in the lesser developed country where they do business. The businesses is able to not pay taxes in any jurisdiction due to off-shore banking. Yet they get all the benefits of the local government, police protection, paved roads, stability, etc. (all things needed for their business) but don’t have to pay into it.

    Its patently exploitative and technically completely legal.

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