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CapitalismsAchillesHeelMattiKohonen
Capitalism’s Achilles Heel
Book Review : Baker, Raymond (2005) Capitalism’s Achilles Heel, John Wiley & Sons, Inc., Hoboken, New Jersey.
by Matti Kohonen, Tax Justice Network and NIGD, London, November 2005
This book was already reviewed in a more personal manner by " TARGET=NEW>John Cristensen
The author is currently working at the Brookings Institute in Washington, and he’s been one of the key researchers into the secretive, illegal, fraudulent practices of every day capitalism. This book should be read carefully by everyone who thinks that the illegal workings of multinational companies are confined in terms of paying bribes to government officials and individuals in developing countries. In fact, in this book Baker challenges the whole text-book concepts of economics at such a striking way that it shouldn’t even leave anyone doubting whether capitalism is off the track globally.
The magnitude of dirty money, as he calls it, that is leaving developing countries annually is at $500 Bn annually, which he says is a conservative estimate, though already ten times official development aid at its average levels in the past 20 years. Baker has published this figure in the major newspapers of global finance, including the Financial Times in July 2004 and nobody to this date has challenged the magnitude of the problem or his methodology. The book cries for more work on the topic from the so called mainstream economists at the OECD, World Bank and the IMF, but none of them dare touch the topic, or attempt to shrug the problem with codes of conduct that have too many loopholes. This for Baker amounts to collusion with the perpetrators of the dirty money system at the highest level, where the World Bank hires bankers from the commercial banks such as J. P. Morgan. Baker’s analysis is mostly centred in the US political sphere, which is legitimate considering where he’s writing from, but an analysis of EU initiatives, including the withholding tax would have been fruitful. This would illustrate whether there is a different approach within the European Union, and above all the European Parliament.
The book starts from a more example based approach of naming and shaming the largest perpetrators from the Dummy corporations as described in the Dirty Money User Manual, the sleaziest dictators from Fujimori to Abacha and the money they looted, and the countries where the practices are the most common place ranging from Russia to China and declaring Nigeria as the champion of dirty money. This sensationalist style is gladly confined to only chapters 2 and 3.
The chapter 4 is among the most comprehensive theoretical analysis of the corruption of everyday capitalism that I’ve read so far. The chapter is titled Magnitudes and Misunderstandings, starting from the fact that nobody wants to talk about, or let alone estimate the magnitude of the problem. Simply the Washington Consensus kept quiet about the whole phenomenon due to conflicting interests, not lack of understanding. Some of the available data is collected from the banks and global consultancy firms themselves, for example, the Boston Consulting Group in its Global Wealth report in 2003, says that high net-worth individuals (rich people for short), who have more than $250,000 in listed securities or cash deposits, have between 10-70% assets held offshore. In the decreasing order, in the Middle East the figure is 70%, Latin America 50%, Europe 20-30%, North America and Japan 10%, where as Africa is not included in the report, but likely in a similar range to the Middle-East. Other studies get a trend at 30% across the globe, which means the rich are evading tax in a massive scale everywhere, but practically looting in the developing countries their national economies. One myth that Baker also dismisses is that that money eventually returns home, whether in Africa or in Russia that money stays where its placed, though a break down of offshore investment in Western economies is not offered, probably very hard to produce. My own feeling is that real estate is very high on the list.
Like other illegal phenomena transfer mispricing (or profit laundering as we in the Tax Justice Network call it) and other phenomena can only be estimated based on surveys and interview based data that look at the range percentage of mispricing, such as an average of 7 percent for Africa, and then multiply that across the board. This is due to non-existant reporting requirements by MNCs on this issue. This exemplifies that most phenomena can only be estimated, so the challenge Baker gives is to build better data on the phenomenon. What can be accounted are aspects that are counted for, such as assets. Banks even in the Caymans do declare most asset types they hold anonymously, and assets offshore make up for as much as $11 Trillion, of which $1 Trillion are located at the Cayman Islands alone. The chapter ends by stating that for the US, their policy is to not to impede the inflows of dirty money from abroad, as it would hurt their predominant position as a financial centre.
The following chapters are about inequalities, which he sees as the second Achilles Heel of capitalism today. His analysis is interesting, since he reviews most studies of inequalities, and trashes their methodology as taking averages of each country, and then putting countries on a scale. This methodology has a nationalistic bias, and much better is to compare quintiles across countries, so the top class is the top 20% in Luxembourg with per capita incomes of $92,000 per year, and the bottom class is the lowest 20% in Sierra Leone with $8 per year. Of course dollars buy more in Sierra Leone than in Luxemburg, but it shows how global disparities work if statistics are looked a bit more carefully, the scale of humanity from the richest to the poorest can only be displayed at its fullest, any country average is a lie, since it masks the inequalities inside countries, which in a place like brazil so wide that they literally, physically and monetarily live in different worlds. Then again compiling such statistics isn’t easy, as it would require much more careful household surveys than are currently done in developing countries. The point that Baker makes on inequality is a good one, in the end, as he says that most studies of inequality are just measuring it, not looking at the root causes of what cause it. The addition of human development, though enriching, if distracting from dirty money, is neither the best step forwards in his view.
Raymond Baker is a defender of the free market system, he doesn’t see that capitalism, if played by the rules, is a bad system. What I find amazing is that he does start his concept of capitalism from the idealised text-book system, which capitalism has never been anyway. In two chapters, however, Baker looks into the original philosophy that lead to the development of capitalism and how capitalism was decoupled from moral control as time passed on and as utilitarians won over the debates in economics. An analysis of utilitarianism as the key cause of the development of dirty money is a vital one, since it points down the sentiments on which bankers still make choices about the origins of money, on profit, not on moral origins. He suggests we go back to the moral philosophy of Adam Smith in Theory of Moral Sentiments, which he sees as a sufficient basis for the renewal of global capitalism. He also sees that more generally, the work started in the US by John Rawls is important, among with other rights based approaches to morals that Jeremy Bentham opposed so vehemently.
The rules he presents relate to increasing individual responsibilities of tax accountants, making it a criminal act (likely to lead to jail sentences) to sell tax shelters in developing countries, signing import and export invoices by both seller and recipient and filing them together at customs, having statements of not engaging into mispricing by the board of directors, which can be used in court. Such measures do not envisage new institutions to regulate the global economy, such as an International Tax Organisation at the UN ECOSOC, though Baker by no means should be against such a move. By focusing on individual responsibilities, the organisational and structural issues are left aside. Baker should more seriously consider forms of capital controls and have the clout to propose them as well and not only revert to the free market system for answers, backed up with individual responsibilities.
