BOOK REVIEW
Follow the money Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market
System by Raymond Baker
Buy this book
Reviewed by Gary LaMoshi
Raymond
Baker was a freshly minted Harvard Business School graduate when he went to
Nigeria in 1961 to manage the country's oldest bakery. He admits to being
sucked into petty corruption in the public and private sectors as part of doing
business there over 15 years. That annoyed Baker, but it didn't affect him the
way an incident many years later did.
In Nigeria, Baker's family employed a nanny named Mary, whom they brought to
the US on two occasions, the last in the mid-1970s. In addition to childcare
duties, she took night classes to expand her skills and returned to Nigeria
"brimming with self-confidence". Baker made a point of seeing Mary every year
or two on his trips to Africa.
On a trip to Nigeria in the mid-1990s, Baker said Mary appeared to have aged 30
years in less than three. After initial pleasantries, "she fell to her knees on
the floor and begged me - with her hands gripping my ankles, her head touching
my feet and her tears flooding the carpet - begged me repeatedly to take her
only child back to America."
Nigeria at the time was ruled by Sani Abacha, a general who seized power in
1993. Abacha managed to steal as much as $1 billion a year during his five
years in office, before dying during an orgy with two other generals and three
prostitutes in 1998. Abacha's theft had worked its way through the system to
leave people such as Mary destitute, homeless, and worst of all, hopeless.
For Baker, that pitiful picture of Mary represents the tragedy of dirty money
and the threat that inequality poses to global capitalism. In Capitalism's
Achilles Heel, Baker presents a comprehensive program to stop the flow
of dirty money and to revitalize capitalist philosophy the way Scottish
political economist Adam Smith really intended it. Both tracks are more
controversial than you might expect.
Baker is at his best discussing dirty money and its movement through the
international banking system. He defines dirty money more broadly than most
governments (more on that below) - as money that is illegally earned, illegally
transferred or illegally utilized. Contrary to what you might believe, methods
for laundering money or moving illicit profits around the globe are very
simple. The three most common methods are falsifying prices of goods or
services, passing money through dummy entities and faking transactions. Baker
identifies a fourth category of special gimmicks, ranging from carrying cash in
suitcases to arranging transfers anonymously through banks or the hawala
private network (agents in different countries who trust each other and act as
brokers for people to send and receive money with a phone call) that helped
al-Qaeda fund the September 11 attacks in the United States.
Baker scoffs at the notion of "sophisticated" money-laundering, emphasizing
that none of these methods for moving dirty money is new or very complicated.
Mispricing is a common practice among multinational companies to move profits
to low-tax jurisdictions, as well as corrupt dictators like Abacha to siphon
off treasury funds to overseas accounts. For example, if a plane costs $1
million, Abacha had his offshore company sell it to Nigeria for $2 million.
Even a couple of pennies on a million barrels of oil a day can really mount up.
Baker estimates annual dirty money flows at $1-2 trillion, half of it from poor
countries flowing to rich ones.
Amazingly, Western banks still welcome dirty money and compete for the
business. The vaunted US crackdown on money-laundering after September 11 has
left wide loopholes. The US and other rich countries make it illegal to handle
proceeds of crimes committed within their borders but generally don't
criminalize funds from illegal activity in other countries. So funds from the
likes of Abacha, former Indonesian president Suharto, Mobutu (former president
of Zaire, now the Democratic Republic of the Congo) and Russian mobsters are
welcome in Western banks, no questions asked. When US banks get slapped for
money-laundering, it is usually because they broke US laws in their zeal to
accommodate these big customers. Baker's simplest, and most effective
suggestion, is for the US to broaden its definition of dirty money to his:
money that breaks laws in its origin, movement or use, without regard to where
the laws are broken.
According to Baker, illegal transfers lead directly to inequality, the second
threat to capitalism. Foreign aid from rich to poor countries totals $50
billion annually while $500 billion in dirty money flows from poor to rich.
Baker says this imbalance is the reason that poverty alleviation efforts over
the past 50 years have had so little impact. He also says these illegal fund
flows should be part of the consideration for debt relief on the $2.3 trillion
that poor and transitional countries owe to rich ones. He vilifies the World
Bank in particular for turning a blind eye to corruption, not just regarding
aid disbursements, but to the whole question of illegal outflows and the role
of Western bankers in encouraging them.
The global ratio of income between the top and bottom 20% is now 31 to 1. In
rich countries, the gap ranges from a multiple of 3.4 in Japan to 8.5 in the
US. Baker says the 31 to 1 gap is unacceptable and unsustainable in an
increasingly globalized and interdependent world. The rich, whether it's
rich-country bankers or poor-country corruption beneficiaries, can't expect the
poor to keep playing a game in which they fall increasingly behind.
Baker blames the tolerance and spread of this perverted form of capitalism on
English philosopher Jeremy Bentham's philosophy of utilitarianism, which he
claims has corrupted Adam Smith's view of free markets with an inherently moral
basis. Utilitarianism has come to mean maximizing advantages to society as a
whole, the greatest good for the greatest number, with the ends justifying the
means and no place for justice. Utilitarianism, according to Baker, has become
the unseen, unquestioned bedrock of modern global capitalism, and it's about
time we took a second look at that.
Here, Baker is confronting the dominant pillar of capitalism's post-Soviet
moment of triumph: free markets are the best answer. This principle drives
champions of globalization, asking only that the world be made safe for
Wal-Mart (see
Overhyped hypermarkets, July 17, 2004), to encourage tax
cuts for the wealthy as a means to economic growth. But rather than tackle it
directly, Baker chooses to joust in the arena of obscure philosophy. He could
use some of that courage he wishes to see from the World Bank, to face the
world as it is and offer real solutions.
When Baker sticks to his knitting and takes on the key issue of dirty money and
why it matters, he's masterful: witty, well informed and devastatingly on
target. After reading Capitalism's Achilles Heel, when someone mentions
dirty money, you won't just think of Columbia's Cali drug cartel or corrupt
dictators. You'll remember poor Mary driven to her knees, and how some
international banks helped put her there.
Capitalism's Achilles Heel by Raymond Baker, John Wiley & Sons,
Hoboken, New Jersey, 2005. ISBN: 0-471-64488-9. Price: US$27.95, 438 pages.
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Raymond
Baker was a freshly minted Harvard Business School graduate when he went to
Nigeria in 1961 to manage the country's oldest bakery. He admits to being
sucked into petty corruption in the public and private sectors as part of doing
business there over 15 years. That annoyed Baker, but it didn't affect him the
way an incident many years later did.
