Friday, October 26, 2012
China: $4 Trillion In Dirty Money Should Worry Us All
Raymond Baker/Huffington Post
Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System
By Raymond W. Baker
Global Financial Integrity's new report on illicit financial flows from China showed some of the worst numbers that we've ever estimated. Crime, corruption, and tax evasion cost the world's largest country and second-largest economy $3.79 trillion from 2000-2011. To make matters even darker, illicit capital flight is intensifying. In 2011 alone, China lost over $600 billion --more than any other single country lost over a ten year period when Global Financial Integrity estimated illicit financial flows from 2000-2009.
At first glance, these numbers are so big that it can be difficult to wrap your head around them. Even for a country the size of China, $3.79 trillion is a lot of money. What does this look like in the concrete example? A story in The New York Times this morning reported that close family members of Wen Jiabao, the outgoing Premier of China, have accumulated $2.7 billion in wealth--much of it housed offshore. His immediate family was awarded tremendous amounts of money in government contracts. This comes not long after The Wall Street Journal exposed that the wife of Bo Xilai, a rising star governor who was on the verge of being promoted to China's powerful Politburo, was responsible for the murder of a British citizen who helped her family smuggle as much as $1 billion to offshore tax havens and secrecy jurisdictions.
Illicit financial flows on a massive scale--as captured in the GFI study--are how these corrupt billionaires hoard their money. Global Financial Integrity's new report found that in 2010 alone, $213.7 billion of foreign direct investment flowing into China was officially reported to come from the British Virgin Islands--population 28,000. This is likely the result of round tripping--where Chinese elites launder money through secrecy jurisdictions and back into China in order to disguise its source--and is what you would expect wealthy Chinese elites to do if their wealth was earned illegally. However, massive amounts of money are indeed leaving China and not returning. Our report found that of the $2.83 trillion that flowed out of China since 2005, almost $600 billion wound up as deposits or liquid assets in tax havens.
This has tremendous implications for the Chinese economy. Our report found that illicit financial flows are increasingly driving inequality in China, and may reflect recent concerns about Chinese elites wishing to leave the country. At some point, something has to give. Crime, corruption, and tax evasion will threaten China's economy, and as a result, the global economy if this trend continues. In the words of our Lead Economist, Dev Kar, "[China's] social, political, and economic order is not sustainable in the long-run given such massive illicit outflows."
China has seen massive, world-changing, economic growth over the past three decades. However, corruption is undermining much of this growth. The infrastructure that China is building right now should drive growth, and therefore raise living standards for the Chinese people for a century to come. However, many of the brand new bridges, roads, and modern buildings in China have been plagued by shoddy quality and massive amounts of corruption. Our research suggests that much of this money is flowing out of China.
I spent most of my professional life as an entrepreneur in Nigeria, and lived there for 15 years. Despite massive oil wealth and a vibrant, young population, 45% of the population lives below the poverty line. Per-capita GDP has barely risen since I first set foot there in the 1960s. I know far too many people living worse off today than they did decades ago. This is not because the Nigerian economy lacks promise--it has huge oil exports, and the country is filled with good, ambitious, entrepreneurial people--but because crime, corruption, and tax evasion have torn the country apart.
When China is growing at close to 10% every year, China's median citizen sees their life improving despite endemic corruption and illicit outflows. However, there are serious questions for the political and social stability of China's economy if growth slows. Will the median citizen continue to tolerate obvious and tragic corruption on the scale that we are seeing when more modest growth is not improving their living standards? When we say that illicit flows drive inequality, it is because money moved illegally out of the economy hurts your average person. That money can't be spent on schools, infrastructure or basic services. To make matters worse, our prior research finds that illicit flows drive underground economies, resulting in more organized crime, smuggling, and other factors that undermine the Chinese economy.
A recent Pew poll suggests the average citizen may be getting restless. The study released last week found that roughly half of the Chinese public now see corruption and inequality as "very big problems" in their country, a significant spike from 2008 when the poll was last conducted.
Still, the world needs to do something about this. Potential political unrest in China affects us all. We make it far too easy for wealthy elites all over the world to stash their money in tax havens, including the United States. The world cannot afford to let China collapse into a pit of corruption and civil unrest. The result would be a disaster.