Econ-atrocity: Do The World's Poor Countries Finance the Rich Ones?
Source Emily Kawano
Date 08/01/18/13:40

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

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.

1. Isabel Ortiz (2007) Putting Financing for Development in
Perspective: The South Finances the North, IDEAS Network

2. World Economic Situation and Prospects, 2007- United Nation
Development Policy and Analysis Division

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.

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