The transfer of capital by richThird World individuals into foreign banks and real estate is the great unspoken issue of Third World debt. Recent studies indicate a cash flow of astounding proportions. The rich countries benefit from increased investments. The poor countries are bled white and cannot pay their debts.

IT goes out in false-bottomed sultcases or in electronic transfers from banks that cater to 'high-net-worth individuals'. It takes elaborate forms&emdash;from under-invoicing exports to setting up corporations in Liberla. Its destinations range from banks in Zurich, Miami, or the Caymon Islands to co-op apartments in New York and condos in San Diego. It is flight capital, the great unspoken issue in discussions of Third World debt.

The toppling of Ferdinand Marcos and Baby Doc Duvaller has focused attention on the wealth these oligarchs stashed abroad&emdash;sapping local economies, draining central bank reserves and forcing nations close to or over the brink of debt moratoriums.

A Mexico city newspaper a few years ago published a list of 575 names of Mexican nationals, each of whom has at least US $1 million in deposits with foreign banks. The exposure of these - Sacadolares' &emdash; people who take out dollars caused an uproar as it coincided with Mexico pleading for US$15 billlon of new foreign loans to avert insolvency.

The African state of Zatre is the prime example of how the cascade of capital outflow can become the key element in debt peonage. For almost 10 years the country has stumbled from one debt crisis to the next. The government has seldom been able to service Its foreign debt, which stood at around US$4.2 billion at the end of, 1982. And yet, according to the German publication, Die Ziet, the fabulous wealth of Zaire's longtlme strongman, Mobutu Seko and his clan amounts to between US$4 and $6 billlon, invested in Swiss accounts and foreign real estate.

Zaire may be the most blatant example of the haemorrhage capital that poured out of many nations in the boom years of sovereign lending&emdash;but It certainiy Is not the most significant. Exposure of privately-owned foreign assets on a grand scale has often been linked to corrupt and authoritarian regimes. But corruption and the flow of hot money pales before the mass of flight capital motivated simply be 'diversification' of portfolios into dollars, Iong de rigueur for the well -heeled Latin Americans.

Debt and capital flight

More than half the money borrowed by Mexico, Venezuela and Argentina during the last decade has effectively flowed right back out the door, often the same year or even month it nowed in. Compiling informatlon from several sources, David Felix, Professor of Economlcs at Washlngton University, concluded that wealthy Latin Americans have salted away at least US$ 180 bllllon outside thetr continent. That amounts to just under half the region's current foreign debt.

The ratios of Argentina and Venezuela are even higher. During 1979-84, according to World Bank estimates, Argentina's capital night was 60% of gross capital Inflow. Venezuelans, buoyed by hlgh oil revenues, managed to expatriate some US$27 bllllon, or more than 117% of their US$22.9 billion in new foreign borrowing.

None of the LDC (Less Developed Countries) debtors of other regions come close to the high Latin American ratios of foreign assets to debt. Nevertheless, the dilemma of debt coupled with flight capital is not just limited to that region or a couple of Afilcan kleptocracies.

A study conducted in late 1985 by the prestigious Institute fur Wirtschofts-forsching- Hamburg (HWWA), revealed that substantial out flows of capital were also recorded in other heavily-indebted countries. Basing its calculations on several sources, the study concludes, 'They confirm that the major debtors Mexico, Venezuela, Argentina, Nigeria, Indonesia and Egypt are among the countries with the highest flight of capital.'

Clearly, the Third World's capital exodus and Its staggering foreign debt are locked in some kind of symbiotic embrace&emdash;with the two feeding each other like some financial perpetual motion machine. What then Is the nature of this embrace?

'In economic terms,' argues Morgan Guaranty economist, Arturo Porze conski, 'the governments have been saddled with the bulk of the foreign hard-currency debts, while the private sector holds most of the hard-currency assets. With the added twist of capital flight, the tension between the two sectors is further aggravated, generating an enormous redistribution of wealth from public to private hands.

The political impact of this wealth transfer was observed by a worried Federal Reserve official. He was concerned that the growing middle class in many developlng countries could become disenchanted with 'the role of capitalism... especially as the Income dlstribution becomes very distorted'&emdash; with the wealthy protecting their assets off-shore, while the majority bears the brunt of austerity measures at home.

The fuel that perpetuates this 'financial motion machine' is provided by the global banking system which, wittingly or unwittingly, continues to finance a cash outflow, undermining repayments on the debt mountain left behind. It is estimated that at least half of Cltibank's International Private Banking (IPD) assets of over US$26 billlon probably belong to the 'Big Four'&emdash; Brazil, Mexico, Argentina and Venezuela &emdash; of about US$10.3 bllllon.

Hence, even allowing for loans to the rest of Latin America, Citibank, one of the most aggressive private bankers', probably comes close to owing more money to Latin Americans than it is owed.

So while Latin America continues to have high ratios of foreign assets to debts, wages and budgets are slashed. UNICEF estimates that up to 150 million Latin Americans now live in 'absolute poverty'&emdash;and capltal fiight goes on. Nor Is there any discussion or recapturing these assets to reduce foreign debts.

A possible solution is 'coercive mobilisation a strategy to mobilise privately-owned foreign assets for debt servicing. The term 'War Economy' is currently in vogue as a metaphor among Latin American politicians trying to rally support for the wage and budget cuts. They need to remember that both Britain and France resorted to coercive mobilisation during both world wars. Their nationals were compelled to register all foreign securities with the treasury, which liquidated them as needed, paying the owners in local currency bonds.

On the other side of the fence, the governments and banks in industrialised nations must weigh their own role in attracting and harbouring a vast outpouring of capital from LDC debtors. Should tension bred by austerity bubble over, the major banks that inadvertentiy helped finance the capital exodus couid find themselves bargaining with a new set of governments far less willing to pick up a tab run up by discredited elites.

Source: Third World Resurgence, No 4, Dec 1990, pp18-19.

Back...