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Outflows, Not Aid, Must Be Curtailed to Fight Poverty

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We learned some devastating news last month. A new study from Global Financial Integrity revealed that despite the onset of the global financial crisis in late 2008, the developing world still suffered nearly $1 trillion in illicit financial outflows in 2009, a number that is almost 10 times larger than the official development assistance they receive each year from Western economies like the United States, United Kingdom and Norway.

These outflows -- the proceeds of crime, corruption and tax evasion -- bleed developing economies of much-needed tax revenue, exacerbate income inequality, and fuel the underground economy. They undermine the rule of law, entrench corruption, and shrink developing nation economies at a time when they can least-afford it.

Of course, this juxtaposition of foreign aid and illicit outflows naturally raises the question: why should Western powers, which are currently struggling with their own economic problems, continue giving aid to developing economies if so much money is just going to flow back out illicitly? Are we wasting our money? Or worse, are we fueling the problem?

The simple answer is that research does not find any connection between foreign aid investments sent to a particular country and illicit money flowing out of that same economy. Aid money tends to be highly monitored, and it is generally directed toward poverty alleviation and improving social services -- efforts which, if anything, would likely curtail illicit outflows, which are driven in part by income inequality. Indeed, a prime example of this non-connection is China, which suffered illicit outflows of $291 billion in 2009 -- several times more than any other nation -- while only receiving about $1 billion in development assistance.

A more nuanced analysis of the issue reveals that, while officials in developing nations are not innocent in the matter, financial structures created and maintained by Western economic powers are the main factor facilitating the illicit flow of money out of the developing world.

A shadow financial system consisting of tax havens, secrecy jurisdictions and anonymous corporate vehicles makes it easy for corrupt dictators, terrorists, drug traffickers and tax evaders to quietly shepherd their funds out of the developing world and around the planet without notice.

The problem is endemic, with more than 60 tax havens scattered across the globe offering low to no taxes on profits booked in non-functioning entities. Nearly all of these jurisdictions, which include economic powers like the United States and United Kingdom, offer secrecy services enabling entities to form behind trustees and nominees such that no one, including law enforcement, can figure out who are the real owners.

As long as this tax haven secrecy exists, developing economies will continue to hemorrhage vast sums of money. Yet, just as developed Western economies created this opaque financial system, they can dismantle it.

The world's leading economic powers, like the G20, have the ability to introduce transparency measures banning the use of anonymous shell companies, requiring multinational corporations to account for their sales and profits in every jurisdiction in which they operate, and sharing tax information automatically between countries. Representing 85 percent of the world's economy, they carry the heft necessary to exert enough pressure on these secrecy jurisdictions to ensure that the world moves towards transparency and away from a system pillaging the pockets of the world's poorest people.

Certain Western countries have already taken the lead in bringing about much needed transparency on an international level. The 10 government members of the Task Force on Financial Integrity and Economic Development have placed the issue of tax haven secrecy and illicit financial flows on the global agenda. At the same time, Western aid for schools, hospitals, and farm programs has contributed to improving the lives of millions worldwide struggling with the devastations of war, famine, and extreme poverty.

Of course, the end goal is a world in which official development assistance is obsolete -- a world without poor countries and rich countries, a world that consists entirely of developed economies. Until that day, foreign aid remains an essential tool in the battle against poverty.