The Divide

by Jason Hickel

  This means that investors can effectively conduct moment-by-moment referendums on decisions made by voters or governments around the world, bestowing their favour on countries that facilitate profit maximisation while punishing those that prioritise other concerns, like decent wages or a healthy environment, by pulling their capital. And when investors decide to punish, it hurts – for poor countries that rely on foreign investment just to stay afloat, quick outflows of capital can be devastating. In this sense, investors operate as a kind of virtual senate. Sitting in their high-rise offices in places like London, New York, Frankfurt and Hong Kong, they are the ones who ultimately decide on economic policy in countries around the world. Voters dare not cross them.

  Of course, it can be difficult for investors to keep track of what’s going on in terms of economic policy in all the countries around the world. The Wall Street Journal and the Financial Times can only cover business news in so many countries. Fortunately for investors, they have another option. The World Bank publishes a handy pamphlet known as the Doing Business report – a controversial document that ranks the world’s countries every year based on the ‘ease of doing business’ in them. For the most part, the fewer regulations a country has, the higher they score. Investors and CEOs use the rankings to decide where to move their money or headquarter their businesses for maximum profit. There’s even an iPhone app that jet-setting capitalists can use to redirect their investments on the fly. A new minimum wage law was just passed in Haiti? Better move your sweatshop to Cambodia! Higher taxes on the rich in South Africa? Time to sell your stocks and invest in Ireland instead! By providing a panopticon of knowledge about regulatory policies all over the world, the Doing Business rankings give investors an incredible amount of power. Countries are forced to respond by cutting regulations to make themselves more attractive to the barons of global capital. A special online ‘reform simulator’ shows how each country can improve their ranking by, say, slashing corporate taxes or legalising land grabs. The Doing Business report has become the World Bank’s most influential publication, and drove more than 500 substantive policy changes around the world between 2003 and 2013.

  The Doing Business rankings are based on ten different indicators, most of which rest on a bizarre black-and-white morality: regulation is bad, deregulation is good. Take the ‘employing workers’ indicator, for example. According to this measure, countries are scored down for having laws that require minimum wages, paid vacation and overtime rates. They also get docked for requiring employers to pay severance packages to retrenched workers. According to Doing Business, all of this counts as ‘red tape’ that needs to be abolished.

  When critics pointed out that this stance runs against the basic labour rights enshrined in the UN’s International Labour Organization conventions, the World Bank backed down and removed the indicator from the ranking system. But many equally troubling indicators are still in use. The ‘paying taxes’ indicator punishes countries for having corporate income taxes, property taxes, dividend taxes and even the financial transaction taxes that are so vital to preventing another financial crisis. They are also punished for requiring employers to pay taxes for services like roads and waste collection; apparently Doing Business doesn’t stop to ask how states would provide these services without taxes, or how companies could perform in their absence.

  Then there’s the ‘getting credit’ indicator. It sounds fair enough – businesses need access to credit, after all – but the name is misleading. It’s not really about how easy it is to get credit, but about how easy it is for lenders to recover debts. If countries have bankruptcy laws that, say, protect students who default on their loans, they get punished in the rankings. Countries are rewarded when they make it easier to seize the assets of debtors, even though this removes risk from lenders and can lead to dangerously inflated debt markets. There is also the ‘protecting investors’ indicator, which pushes towards stronger ‘shareholder value’ laws. These laws prevent companies from doing anything that might compromise short-term profits, such as paying higher wages or giving back to the community. And the ‘registering property’ indicator pressures countries to cut regulations on buying land, adding fuel to the wildfire of corporate land grabs currently spreading across the developing world.

  The disturbing thing about these indicators is that they have no sense of balance. They don’t just want lower minimum wages, they encourage countries to abolish minimum wages entirely; they don’t require more modest taxation, they press for zero taxation; they don’t ask for more streamlined trade, they want to cut out all tariffs; they don’t demand fewer regulations on land, they want total freedom of purchase. Countries are rewarded for pushing to these extremes. There is no recognition that some regulations might actually be important to a fair society, or indeed for a stable economy. But the Doing Business indicators are not actually against regulations as such; they are only against regulations that don’t directly promote corporate interests. Regulations that protect creditors and investors – and empower them to grab land and avoid taxes – are considered good.

  The Doing Business rankings reduce economic policy to the shallow metrics of private gain. According to this flagship initiative of the World Bank – which is supposedly devoted to creating a world without poverty – nothing matters aside from corporate profit. The well-being of the people, the health of the land, the fairness of the society – none of these count in the brave new world of free trade. Countries are compelled to ignore the interests of their own citizens in the global competition to bolster corporate power. And here’s what may be the most disturbing element of all: the rankings not only inform investors’ decisions, they also determine the flow of development aid, as some aid agencies give preferential support to countries that make progress in the rankings. Forget measures of health, happiness and democracy. Forget gains in wages and employment. In the end, what counts most is the ‘ease of doing business’.

  If you’re curious enough to look into the methodology behind the Doing Business rankings, you’ll find that it’s not very robust at all. An official review of the report, ordered by World Bank President Jim Kim and completed in June 2013, raised a list of concerns, including that the methodology has not been peer reviewed. Indeed, it appears to be based largely on the papers of two economists, Simeon Djankov and Andrei Shleifer, both of whom are well-known neoliberal ideologues. Why should we heed the pronouncements of these men? And who gave the World Bank the power to rank countries according to the narrow criteria of ‘doing business’? An increasing number of civil-society groups are raising these questions, and the official review even recommends abandoning the use of aggregate rankings within the report altogether.

  The rise of the virtual senate represents an important innovation in the history of neoliberalism. In the past, neoliberalism was imposed around the world by external powers. But the virtual senate enjoys the power to get countries to impose neoliberalism on themselves, simply by controlling the flow of capital. If a country wants to secure the capital they need for development – or even for survival – they have to kowtow to the wishes of the virtual senate: cut wages, cut taxes, slash regulations. Before the gods of foreign investment, the world is hostage.

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  People commonly think of neoliberalism as an ideology that promotes totally free markets, where the state retreats from the scene and abandons all interventionist policies. But if we step back a bit, it becomes clear that the extension of neoliberalism has entailed powerful new forms of state intervention. The creation of a global ‘free market’ required not only violent coups and dictatorships backed by Western governments, but also the invention of a totalising global bureaucracy – the World Bank, the IMF, the WTO and bilateral free-trade agreements – with reams of new laws, backed up by the military power of the United States. In other words, an unprecedented expansion of state power was necessary to force countries around the world to liberalise their markets against their will. As the global South has
known ever since the Opium Wars in 1842, when British gunboats invaded China in order to knock down China’s trade barriers, free trade has never actually been about freedom. On the contrary, as we have seen, free trade has a tendency to gradually undermine national sovereignty and electoral democracy.

  What would the world look like if this dimension of free trade was taken to its logical conclusion? We don’t have to use our imaginations to guess. All we have to do is take a look at the miniature free-trade utopias – called ‘free-trade zones’ – that already exist around the world. Most free-trade zones are bounded by barbed-wire fences and walls, and are often patrolled by private security forces. In many cases, elected politicians and national law-enforcement agencies are not allowed to pass through their gates. Within these enclaves, normal laws – labour laws, safety standards, customs duties, taxes and even the basic constitutional rights of citizens – do not apply. These are zones of exception where capital can operate almost unhindered by any form of regulation. The concept took off in the late 1990s, and today there are more than 4,300 such zones in nearly 150 countries. The rationale behind these schemes is that they attract much-needed foreign investment and provide much-needed employment. But the investment is notoriously fleeting, rarely improves anything beyond the borders of the zone, and the near-zero tax rates yield little benefit to the public. As for the jobs that such zones provide: unions are often illegal, wages tend to be lower than the national minimum (as low as 10 cents an hour), workers are commonly expected to put in fourteen-hour days, and they can usually be sacked without compensation.

  Free-trade zones are only enclaves, of course. But they offer us a rather horrifying glimpse of what the world might become if the logic of free trade is extended unchecked.

  Seven

  Plunder in the 21st Century

  Coups, structural adjustment, free trade and investor dispute tribunals are all ways that rich countries and powerful corporations have sought to secure their economic interests on the world stage. In a broad sense, each of these tactics has emerged to more or less replace – or at least overshadow – the ones that came before. But it’s not quite that clean-cut.

  Coups, for example, still remain a live tactic into the 21st century – especially in Latin America. In 2002, the United States tacitly supported a coup attempt against the democratically elected government of Hugo Chávez in Venezuela, and in 2004 helped topple Haiti’s progressive president Jean-Bertrand Aristide. In 2009, the elected leader of Honduras, Manuel Zelaya, was deposed in a military coup that was countenanced by the US State Department. There have also been more overt interventions. The US-led invasion of Iraq in 2003 was largely about securing access to oil and defence contracts, as well as preventing Iraq from selling oil in euros instead of dollars. As for the NATO air strikes on Libya in 2011, diplomatic cables released through WikiLeaks reveal that it had to do in part with France’s concerns about Libya’s attempts to create a Pan-African currency as an alternative to the French-controlled CFA franc. Assassinations are still in the playbook, too. Honduran indigenous activist Berta Cáceres was assassinated in 2016 by US-trained forces, to end her resistance to a dam across the Río Gualcarque.

  Third World debt is also re-emerging as a major concern. Because of the collapse in commodity prices following the global financial crisis, global South countries have watched their export revenues plummet – along with their ability to repay their debts. As a result, external debt payments shot up from 6.1 per cent of government revenue in 2013 to 10.8 per cent in 2016. Structural adjustment programmes are still widely used by the World Bank and the IMF to secure debt repayment, in the form of the new Poverty Reduction Strategy Papers. And sometimes creditors take even more extreme steps: when Puerto Rico came to the brink of bankruptcy in 2016, the US Congress responded by assuming executive control over domestic policy decisions through a piece of legislation known as PROMESA, which many denounced as a form of colonisation. And new free-trade agreements are still being negotiated – with investor dispute tribunals intact – as in the Trans-Pacific Partnership.

  These old strategies by which powerful actors seek to secure their interests in the global economy still persist. But when it comes to thinking about the relationship between rich and poor countries today, there are three new and much more pressing issues at stake.

  The Tax Evaders

  If you ever try to suggest that poor countries are poor because they have been disadvantaged by an imbalanced global economy, someone is almost certain to respond by pointing the finger at corruption instead. Poor countries are poor because they are run by corrupt leaders and officials, the argument goes. Corrupt officials make it impossible for businesses to work – and what is more, they steal the resources and wealth that rightly belong to the public, taking food out of the mouths of the hungry. It’s no wonder they’re poor.

  It’s not surprising that this argument crops up with such frequency. When Transparency International publishes their highly celebrated Corruption Perceptions Index (CPI) each year, the issue of corruption comes rushing into public consciousness. Development organisations use the opportunity of this annual event to point to corruption as a key driver of underdevelopment in the global South. Until we put an end to corruption and improve governance practices in poor countries, they say, development will never get off the ground. Indeed, this view is supported at the very highest levels. In 2003, the United Nations held the first Convention against Corruption, which asserted that, while corruption exists in all countries, this ‘evil phenomenon’ is ‘most destructive’ in the global South, where it is a ‘key element in economic underperformance and a major obstacle to poverty alleviation and development’.

  It makes good, intuitive sense. After all, the corruption map put out by Transparency International paints a compelling picture. The map depicts most of the global South smeared in the stigmatising red that indicates high levels of corruption. By contrast, rich Western countries, including the United States and the United Kingdom, are painted in happy yellow, suggesting very little corruption at all. This Manichean view fits nicely with our already existing assumptions: cliché images of dictators in Africa, bribery in India and generally unscrupulous bureaucrats and public officials pretty much anywhere outside the Western world. If poor countries are riddled with corruption while rich countries are corruption-free, it seems logical to conclude that corruption is a major driver of poverty. For anyone that isn’t aware of the history of colonialism, unequal treaties, structural adjustment and trade rules, this seems as good an explanation as any.

  But let’s leave aside the structural drivers of global poverty and inequality, and look at the question of corruption on its own terms. There is certainly no denying that corruption is a problem. According to the World Bank, corruption in the forms of bribery and theft by government officials, the main target of the UN Convention, costs developing countries between $20 billion and $40 billion each year. That’s a lot of money – and this figure is certainly large enough to warrant our attention as an obstacle to development. But if we broaden our view a little bit and put this figure into perspective, a very different story emerges. As it turns out, this kind of corruption is an extremely small proportion – only about 3 per cent – of the total illicit flows that leak out of the developing world each year. By contrast, the Washington-based Global Financial Integrity (GFI) calculates that up to 65 per cent of total illicit outflows have to do with corruption of a very different sort: commercial tax evasion. And when we look at commercial tax evasion, the neat corruption narrative that Transparency International tells begins to fall apart.

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  ‘Illicit outflow’ is just a fancy name for any illegal movement of money from one country to another. It could be a corrupt official siphoning public funds into a secrecy jurisdiction, or it could be a multinational corporation shifting their money offshore in order to avoid paying taxes. There are lots of reasons that people spirit money across borders. According to GFI, each year up
to $1.1 trillion flows illegally out of developing countries and into foreign banks and tax havens. This is an almost unimaginable sum – more than the total amount of foreign direct investment that developing countries receive each year ($858 billion in 2013), and eleven times the amount of official aid they receive ($99.3 billion in 2013). And these outflows have been increasing at a rapid pace over the past decade, growing at about 6.5 per cent per year. Between 2004 and 2013, developing countries lost a total of $7.8 trillion to illicit outflows. It’s an enormous problem.

  How does this happen? These illicit outflows work through two main channels: hot money and trade misinvoicing.

  Hot money is a term used to describe the rapid movement of capital from one country to another in order to speculate on interest-rate and exchange-rate differences. For example, if the United States looks likely to raise its interest rates, someone with investments in Nigeria might rapidly move their money to the US in the hope of making a quick profit. These rapid, speculative movements of capital are only possible because of the financial deregulation that has been promoted across the developing world over the past few decades by the World Bank, the IMF and free-trade agreements, and they can lead to serious market instability – particularly in small economies. But they also provide an avenue for moving money illegally across borders. In 2013, hot money accounted for 19.4 per cent of total illicit outflows from developing countries, or $211 billion.