New Article: Financial Transparency Is The Antidote For Perpetual Poverty And Instability In The Developing World

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The developing world has long been plagued with poverty, political turmoil, and corruption. This vicious cycle has been extensively researched, combated, and discussed from many different angles, but nothing has been able to completely ‘solve’ it. While it is unrealistic to seek a blanket solution to the issues that keep countries perpetually poor and unstable, one must look at the wider spectrum of developmental issues and ask, “Why do they persist?” Oscar Abello brings to light one huge reason why they do: financial opacity.

“Let’s say I’m a South Africa-based factory owner and you’re a solar panel salesperson from New York City. I want some solar panels to make my factory more self-sufficient, and we agree I’ll pay you $1 million for them. But I ask you a favor: Could you invoice me for $1.2 million and then deposit the extra $200,000 that I just gave you into another company’s bank account in New York City. You’re eager to close a big sale, so we agree to the deal.

You might know false invoicing is illegal, you might not, but it’s very unlikely either of us gets caught anyway. What you don’t know is that I actually made most of that $1,200,000 from my side business, smuggling poached elephant ivory to China; the money I’m about to wire into your bank account comes from my Canary Islands bank account where I send all my business earnings to minimize tax obligations; and I’m going to use that $200,000 to purchase stolen art from a broker in midtown Manhattan so I can decorate my future retirement home in the Seychelles, where another company I control anonymously just purchased some beachfront property.”

Each year, roughly $1 trillion moves out of developing countries through a tangled network of anonymous shell companies, tax havens, and trade mispricing techniques like our invoice example, according to Global Financial Integrity (GFI), a Washington, D.C.-based research organization that studies these so-called illicit financial flows and their beneficiaries. That’s $10 in illicit financial outflows for every $1 of foreign aid flowing in.

In a world where total transparency existed, developing countries would stand to benefit significantly more from their exports and resources. Instead, many developing countries see their economies chronically underperform, because tremendous sums of money are leaving illicitly. Abello notes that one estimate finds that if Zambia’s mining industry sold copper at prices in line with global markets, its GDP would increase by 50%.

Read Oscar Abello’s full article here for a more in depth look at the importance of financial transparency in our global financial system.