01 Dec 2005


The Deleterious Effects of Dirty Money

by Lewis I. Rice

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In his new book, Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System (John Wiley & Sons, 2005), Raymond W. Baker (MBA ’60) chronicles the widespread illegal flow of money around the world through schemes like fictitious pricing, dummy corporations, and fake transactions. The practice bolsters international crime and terrorism and contributes to global inequality and poverty, he writes. A guest scholar at the Brookings Institution and a senior fellow at the Center for International Policy, Baker spoke from his office in Washington, D.C., soon before traveling to Cambridge for his 45th HBS reunion.

How has dirty money contributed to world poverty?

My estimate is that some $500 billion a year has moved out of developing and transitional economies. I’m not talking about legal outflows, which remain on the books of the entity that is sending the money abroad. It’s the illegal outflows that disappear from the books that go into tax havens and secrecy jurisdictions and then into American and European coffers. That’s a huge amount of money draining out of developing and transitional economies.

What should lawmakers do to address this problem?

They should close the difference between money laundering that arises domestically and that which arrives here from abroad. If it’s an offense in the United States, that same kind of money coming from abroad should also be barred as a specified unlawful activity.

You say it would benefit the rich to reduce inequality? How so?

Inequality drains capitalism of its robustness, of its opportunity to spread prosperity. It’s not a matter of reducing the take of the rich to redistribute it to the poor. It’s a matter of making the pie grow greater for all. That is accomplished with a distribution that is not so skewed as to leave basically half the world out of any ability to purchase the normal products of the free-market system. The system is enhanced when more people are brought into that process.

In the book, you celebrate your father’s integrity as a businessman, but is it realistic to expect other people to follow his example?

Why not? You can do business all around the world abiding by the laws of other countries. It’s when we want to maximize the profit on every single transaction that we get into difficulties. Is making the maximum profit worth it by breaking the law when you can make a reasonable profit by abiding by the law?

Are you hopeful that things will get better?

Part of the reason I’m optimistic is that the illegalities I write about can be curtailed merely with the application of political will. It is not technically difficult to do. If we decide we want it to happen, it will happen.

— Lewis I. Rice

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