• 14:07
  • Tuesday ,19 November 2019

Globalization financialization and South-North capital-wealth flow

by Al Ahram



Tuesday ,19 November 2019

Globalization financialization and South-North capital-wealth flow

 As the saying goes “the World is a small village”, but how is that village shaped by the hyper-globalization of the wild-untamed neoliberalism? In today s globalized economy, the polarization between the rich and the poor intensifies, not only between the North and South countries, but also within each country.

This polarization is driven by wealth and capital flows from South to North, at rates are faster than those experienced during the old days of outright colonialism. For sure, for the countries of the North, the process of capital and wealth flows has become much more sophisticated, more deceptive and less costly than mobilizing the colonial armies that may provoke military confrontations among themselves, and provoke the nationalist sentiments among the peoples in the South. 
Our small village has reached this level of unbalanced and unequal "globalization" after four decades of economic policies and legislations that cemented the neoliberal philosophy.
This reality has been established as many developing countries have been subjugated to the terms and conditions of the IMF, World Bank, and WTO obligations as well as the obligations of bilateral investment and trade agreements (an agreement between a single developing country and the 28 member countries of the European Union is also called "bilateral").
One of the most influential conditionalities of the IMF and World Bank that shaped today s globalization is the law of central banks, specifically the establishment of the fully open capital account in developing countries. This simply means that there are no regulations to control international capital movement, especially out of the country. Remaining restrictions on capital mobility are often eliminated by bilateral investment and trade agreements between countries of the powerful North and the weak South.
Laws have also been enacted to encourage the so-called “financialization”, which promotes rent seeking, monopoly, speculation on everything and transformation of everything with benefit to humanity (even if it is non-tradable good such as real estate) into a monetary value that surges with speculation.
Thus, with excessive financialization and open capital accounts, the flow of wealth and capital from the South to the North has become faster and easier. Nonetheless, while capital is encouraged to freely flow South-North, all restrictions are put in place to prevent the flow of people in the same direction; to the extent that some of the South countries are pushed to guard the borders of the North.
Last September, the UN released its annual Trade and Development Report, entitled "Financing a Global Green New Deal ". According to the report, the uncontrolled private capital flows can lead to the transfer of resources and wealth from developing to developed countries.
Increased financial integration, in a globalized environment, has exposed developing countries to global financial turbulence. In response, central banks in many developing countries are forced to accumulate foreign-exchange reserves by short-term borrowing of foreign currencies in large quantities at high interest rates.
This of course leads to capital outflow from the developing countries, at least equals to the value of interest paid on borrowed funds. Recent analysis by the United Nations Conference on Trade and Development (UNCTAD) indicates that in 16 developing countries, over the period 2000–2018, this resource transfer amounted to roughly $440 billion a year, or 2.2 per cent of the GDP of these countries (almost double the size of the Egyptian economy). 
Another channel through which capital flows South-North is the tax-motivated illicit financial flows of multinational enterprises (MNEs). These enterprises attempt to maximize their profits globally while avoiding paying taxes in the countries where they generate profits by considering the affiliates of MNEs in different countries as independent entities and treat taxable transactions between these entities as unrelated and independent. UNCTAD estimates that the MNEs illicit financial flows deprive developing countries of up to $200 billion annually in fiscal revenue.
The digital economy is another source of South-North capital flow. International internet companies usually do not have a physical or legal presence in the countries of the South, and do not pay tax to developing countries on the increasing number and values of digitalized transactions in the South.
These companies deal with transactions in hundreds of billions of dollars, may sell a product of a developing country to a consumer from the same country and take a significant commission on each transaction (Egypt domestic tourism is an example). This naturally leads to the outflow of money out of the South without even paying any tax on the profits of the digital company to the governments of producers and consumers in the developing world.
To address these problems; it is proposed to move towards a unified international tax regime that recognizes that the profits of the MNEs are generated collectively in a group of countries. The revenue from these taxes could be distributed among the countries where the profits are generated.
The current international standards and norms of corporate taxes should also be reviewed to determine the jurisdiction that has the right to tax; the treatment of cross-border transactions between the entities of an MNE; and the measurement of value creation when intangible assets and data accumulation and acquisition is the source of value. Tax equity in the digital economy needs to apply a new concept that does not necessarily depends on the material presence of sales or commercial transactions.
If the World is serious in its efforts to achieve the sustainable development goals, control over capital mobility should be considered as an essential economic policy instrument. Such control should be put in place at both senders and recipients of capital, rather than firmer controls at just one end. Furthermore, provisions on “open capital account” should not be part of regional and bilateral trade and investment agreements, or at least these agreements should include some mechanisms to allow countries the right to manage capital flows in times of crises.
UNCTAD estimates South-North capital flows from the aforementioned sources at about $680 billion per year (slightly less than three times the size of the Egyptian economy). Instead of leaking to the North; these funds could finance the Global Green New Deal as well as efforts for achieving the Sustainable Development Goals in the South.