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Dirty money and the role of offshore tax havens

Many in the global justice movement think that increasing aid to poor countries will be ineffective unless it’s accompanied by measures to tackle the causes of poverty, which include the problems of capital flight and tax evasion. In Capitalism’s Achilles Heel, Raymond Baker probably errs on the conservative side in his estimate that the flows of dirty money from poorer countries into offshore accounts managed by Western banks are currently $500 billion annually. Corruption, which attracted so much media attention in the run-up to the G8 Gleneagles summit, accounts for only 10 per cent of this total.

Some of this money might be round-tripping: going to an offshore company, before being re-invested in the country of origin under the guise of foreign direct investment, thus attracting tax breaks and subsidies for the ‘beneficial’ owners of the investing company, who may well live in the country being invested in. Most flight capital, however, leaves its country of origin permanently, much of it destined for the financial and property markets of the major Western economies. The current global aid budget of $78 billion is insignificant alongside these massive wealth transfers in the opposite direction. It’s anyone’s guess how much dirty money has accumulated offshore, but at least $5 trillion has been shifted out of poorer countries to the West since the mid-1970s.

The outflows of domestic financial resources and the wholesale tax evasion that goes hand in hand with capital flight have had a devastating impact on developing and transitional economies. Deprived of domestically based private investment and tax revenues to fund public services, many governments have been forced into dependence on foreign direct investment and expensively serviced external debt. Both impose strict conditions on recipient states.

Hooray Hen-Wees by John Christensen

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