Raymond Baker is a businessman, scholar, and founder of Global Financial Integrity in Washington, DC, which focuses on issues surrounding harmful economic practices. He serves on the High Level Panel on Illicit Financial Flows from Africa and is a co-founder of the DC Forum, which advocates for financial transparency and accountability to strengthen democracy and capitalism. He is a graduate of Harvard Business School and the Georgia Institute of Technology.
Below, Raymond shares 5 key insights from his new book, Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy—And the Way to Renew Our Broken System. Listen to the audio version—read by Raymond himself—in the Next Big Idea App.
1. The motivations underpinning capitalism have changed.
Over the last half century, something utterly fundamental has happened within the democratic capitalist system. The original pillars of democracy have not fundamentally changed since their formation in the late 1700s. Popular vote, rule of law, representative legislatures, and protection of minority rights still guide our democratic aspirations. However, the original pillars of capitalism are now radically altered.
These pillars, also conceived in the late 1700s, were formulated around making profits, spreading wealth, and generating public goods. But, across recent decades, capitalism has taken on the ulterior motive of masking income, disguising income in the trillions of dollars annually and wealth in the tens of trillions of dollars cumulatively. Secrecy has become as important as profitability. Generating, moving, and sheltering money in ways that are beyond the oversight and control of the organs of democracy, that is beyond the control of legislators and regulators, is a recent phenomenon in capitalist operations.
2. This new motivation is powered by an overarching financial secrecy system.
We have created a financial secrecy system that now facilitates perhaps half of global economic operations. What is this system? There are several main components.
First are tax havens and secrecy jurisdictions, where lawyers and accountants can handle your affairs without identifying you. No one outside this circle can see what is going on. A second component is disguised corporations. In these entities, no record is kept of who owns the businesses. Tens of millions of disguised corporations have been set up across the world. The United States has created more than any other country. A third component is anonymous trust accounts. These let you conduct business without anyone knowing with whom they are doing business. Fake foundations are a fourth component of this structure. You can create a charitable foundation, donate your money to it, and then designate yourself as the beneficiary of the charity of your foundation. In this way, you can escape taxes and accountability at every step of the way. A fifth component is a broad range of specialized money laundering techniques that are used to handle particular types of financial transactions. Finally, governments intentionally leave holes in the laws of their countries that enable money to move through this financial secrecy system and end up in our economies.
“I have never known a multinational, multibillion dollar, multiproduct corporation that did not use falsified trades to shift money across borders in unseen ways.”
Sitting in the middle of this financial secrecy system is the practice of falsified trade. This is trade conducted with invoice prices differing from real values. I have never known a multinational, multibillion dollar, multiproduct corporation that did not use falsified trades to shift money across borders in unseen ways. This has become completely normalized in international business. The U.S. is the biggest user of this financial secrecy system—it is the biggest recipient of dirty money flowing from around the world and finally finding a home in our own economy.
3. Financial secrecy worsens crime and corruption.
Just as corporations and banks use these financial secrecy structures to move and hide money, so too do criminals, corrupt government officials, and terrorist financiers. Here is a key point: many people think that we in the richer western countries are the innocent victims of the terrible practices of drug dealers, human traffickers, money launderers, and kleptocrats. That is not correct. We, in the richer countries, have created and expanded the modern financial secrecy system. Not a single element of this system has been thought up by the people we like to blame. This system and the harms it causes are not something that is done to us; it is something that is done by us.
The reality of this system and its operations means that we cannot effectively fight against drugs, human trafficking, counterfeiting, illegal logging, fishing and mining, the organ trade, illegal arms trafficking, and more. We can’t succeed fighting against the bad guys when we make it so easy to move and shelter the money generated by the bad guys. We are failing in the fight against these ills because we provide the system that enables them to move and shelter their profits.
4. Secrecy drives economic inequality.
Among all these financial ills, the greatest impact of the financial secrecy system is on inequality—economic inequality. This is, without question, a huge problem in the 21st century. When I received my MBA in 1960, the ratio of executive salaries and workers’ wages in the United States was 20 to one. Today this ratio is more than 350 to one. Today we live in a world where the richest one percent have as much wealth as the remaining 99 percent. Much of this soaring inequality has been enabled by the financial secrecy system. This system is designed to help the rich make, move, and hide their money through mechanisms which are simply not available to or even visible to the middle class and the poor.
“The angst that exists in the middle class in America, and indeed in many other countries, has factual roots.”
Let’s take that figure of 20 to one in 1960, the ratio of top pay and average wages. Had that ratio been maintained through to today, the middle class would be better off by $50 trillion dollars! Research has shown that millions of Americans believe that they will not be as well off as their parents. This is deeply disheartening. The angst that exists in the middle class in America, and indeed in many other countries, has factual roots, realities that contribute in a major way to political discontent.
5. Democratic capitalism is at risk.
Severe imbalance now characterizes the way democracy and capitalism are functioning. For decades, even centuries, we’ve taken it for granted that one supports the other. These two systems should be working in sync to spread liberty and prosperity. Democracy is expected to offer equal political rights to its citizens. Capitalism should offer fair economic opportunities to its participants.
Instead, these two guiding tenets are becoming decoupled. The capitalist side of the equation is running out of control, eroding the social contract, facilitating crime and corruption, evading obligations, maximizing income and wealth inequalities, and thus jeopardizing democracy.
The onus for these outcomes lies primarily on underperforming capitalism rather than on a collection of other societal problems. Rebalancing capitalism and democracy is certainly one of the most difficult and important challenges facing the world in the 21st century. This is a critical issue around which much of the fate of political economy will turn. As currently practiced, our two prevailing doctrines—democracy and capitalism—are not working well together and will not get us through the 21st century.
“We are dealing with a systemic and existential threat to shared economic and political progress in the 21st century.”
Can anything be done? Most certainly yes. We need to instill transparency and accountability much more firmly into capitalism. We need to devote discussions to measures available to strengthen transparency and accountability. Not a single aspect of these steps that can be taken will be easy, as it is technically difficult. But all are entirely a matter of political will.
In closing, democratic capitalism is the best invention within political economy yet devised. But it is being damaged, if not destroyed, by ill motivations and ill dealings within one of its components, capitalism. We are dealing with a systemic and existential threat to shared economic and political progress in the 21st century. Change must come if the hinge of political economy is to pivot toward strengthening both equality and justice. The stakes could not be higher.
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