Customer Reviews

Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System

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Terrorism, drug and human trafficking, environmental degredation, income inequality, poverty, political repression...no matter what your angle or area of concern in international affairs, there is money behind every challenge facing civilization. Dictators need resources to pay off their political power bases pases and support their lavish lifestyles; terrorists need resources to acquire weapons and stealthily transfer wealth to aid allies across borders; criminals, such as poachers, drug smugglers and human traffickers need some way to stash their ill-gotten proceeds; wealthy corporations and individuals have to hide their money somewhere to avoid paying taxes and skewing the economic system further in their favor. No matter what problem you're looking at, money needs to go in, and money needs to come out, and somebody has to hide it.

Raymond Baker is under no illusions. He's no pie-in-the-sky socialist still refusing to accept that capitalism has enriched and people everywhere it has been introduced. At the same time, he's not slavishly devoted to the ideology that says open markets are the cure for all ills, that the best the solution for every problem is simply to let the market "do its thing." He recognizes that the key to having a safe, fair and free capitalist system is to re-establish fair play and the rule of law necessary to maintain a truly free market.

This ground-breaking foray into capitalism's dark underbelly is grounded in Baker's rich use of economics, philosophy, practicality, personal experience and careful research. Incorporating case studies, economic research, the proceeds of international criminal investigations and his own experience and an international businessman, Raymond Baker shows how dirty money is at the center of so many of the world's problems--not just a peripheral side-effect of the spread of wealth--and why it is so important to ge this worsening problem under control.

Quite simply a must-read for anyone trying to better understand international affairs!

Raymond W. Baker has written a provocative and thoroughly readable book on one of the darker, less-examined, sides of globalization's financial and commerical dimensions. The author brings formidable intellectual assets to this undertaking. A well travelled and savvy international businessman, Baker demonstrates an enviable grasp of business and, more technically, accounting principles, and how they are frequently corrupted for short term financial gain. Indeed, with the obvious exception of George Soros, today's dominant writers on globalization are almost uniformly drawn from the academic and journalistic worlds. Nothing wrong with that, to be sure. But as Baker's pain stakingly researched case studies of financial and business criminality illustrate, direct, hands on expertise in this realm cannot help but make a stronger case for combatting those practices. The other compelling virtue of "Capitalism's Achilles Heel," in my view, derives from the sweep of the authors key indictment of the present international legal regime: the weakness, if not conscious laxity, of industrial country effort in combatting these practices. This book is not a comfortable read. For those who are tired of the current lamentable state of affairs, it is an absolutely necessary one.

John Starrels

This book distorts the corruption problem in developing countries by lumping it in with tax evasion. Little is said about government officials helping themselves to the public treasury in Asia, Africa, Latin America, the Middle East and Eastern Europe. The book only touches that issue to blame Western banks for accepting their deposits. Yet U.S. banks are subject to harsh penalties for accepting ill-gotten funds. Criminal as well as civil penalties are imposed on bankers who don't get the point, which means imprisonment and/or fines from personal assets. I hoped this book would propose practical solutions for improving this enforcement. Instead, it effuses on fear and greed, pointing the finger only where the market for anti-capitalism literature can bear. (I have no affiliation with banks, just grasping for solutions.)

For example, the author equates transfer pricing with tax evasion. Since every product is made in more than one country these days, there is always room for discussion about where income was earned and thus where income tax is owed. Developing countries often have tax rates in excess of 70%. Their officials frequently do not expect these rates to be paid-they use them to extort bribes with impunity. In countries where prices are negotiable, people are not shocked when government fees and regulations are negotiable. While this impoverishes the public treasury, local managers adapt (albeit stifled). U.S. managers cannot play this game because they are scrutinized under the Foreign Corrupt Practices Act. They cannot circumvent 70% tax rates by paying bribes, so they use transfer pricing to create some sort of system integrity in an environment of overwhelming litigation risk.

Valuable and well-written sections of the book relate to traditional forms of "dirty money"-criminal and terrorist proceeds. The author has a very worthwhile goal--to staunch the flow of dirty money by unifying efforts to fight all its various forms. My only disappointment was the pursuit of this goal by "rounding up the usual suspects."

Anyone interested in helping poor people in poor countries, or the state of global finance, or issues of justice will find this book required reading. Well researched, with a light, reader-friendly touch. You will soon learn how foreign aid is insignificant compared to the "hot" money that flees developing countries depriving them of their own resources for development. An activist myself, I am enthusiastic about the recommendations he poses.

I greatly enjoyed this piece!

First, to address some of the book's lower reviews, I think if you are looking at this piece from the lens of someone interested in the micro-issues of Africa or other nations, or if you are someone who is more solutions-oriented in a micro sense, this book could be disappointing.

However, if you are looking for a cogent macro-argument, this book is top notch. Baker does a very convincing job of connecting the way that Capitalism, when applied to states that lack effective regulatory systems (i.e. both legal infrastructure as well as actual capital regulatory structure) can result in rampant graft. He then connects this issue to a variety of social issues. The reason this is particularly important from a theoretical perspective is because the prevailing notion in society is that Capitalism solves everything. In fact, when poorly executed, it actually inspires graft and can lead to the transfer of value out of a nation, using a variety of means. This has a tremendously negative effect on a nation, the causal of which is the Capitalism that was implemented to "help".

While one critic has suggested that the book speaks too much in generalities, I would mention that his commentary is actually quite the opposite. Relative to notions that poverty is the problem, he turns the argument upside down and demonstrates how poverty is the result. He also sets forth both a solution (the need for comprehensive international regulation from the top down), versus coming up with fringe and marginal changes that are questionably effective (i.e. pouring more money into the poverty issue). I think the critic comes from the fact that Baker does not see a "simple" solution. Instead he frames the solution in ALL it's complexity. This requires the reader recognize that many existing measures are moving in the opposite direction of the solution.

He clearly shows, through examples of Korea and Africa, how addressing the money laundering/lack of regulation of money flows, could have played a positive role in changing social conditions. This is actually completely opposite the common discussion of economists who are more interested in ideas of equilibrium, without consideration for graft and power getting mixed into the equation of how equilibrium plays out.

He ends in defense of capitalism. I would have preferred he end with some of the modified capitalism theories that are out there. However, I suspect he feared that people would think him a socialist if he didn't not explicitly come out in favor of capitalism.

A great book full of examples, that I will be using for some of my academic work. Fantastic job!!

I found this to be one of the few books able to produce a cogent and specific critique of the problems of globalization, one that wasn't just leftist jargon at high decibels. The author acutely demonstrates the catch in current economic logic put on autopilot, and warns us that the principles we espouse have consequences, then astonishingly changes gear to the issues of economic philosophy, starting with Adam Smith and Jeremy Bentham. That we tend to espouse Bentham's utilitarianism and ascribe that to Smith, who wasn't the man we think he was, is an ingeniously apt characterization of the current global snafu over development.

Working in the financial sector in emerging markets, this was a fascinating shot across the bows. It should be required reading for anyone potentially involved in the effects of flight capital. This relates not to illegal movements but also to the legal (but immoral?) movement of money from poor countries to rich country priavte bank accounts.
The machanisms by which poor countries remain poor, while benefitting banks in rich countries makes for worriesome reading. Highly recommended.

After graduating from Harvard's Business School in the 60s, Raymond Baker spent some time in Africa, and is clearly unhappy with the continent's progress, or perhaps more accurately, lack of progress since then.

If you would believe Baker, the reason for much of this poverty is the corruption and shadow economy that plague much of Africa and South America, and he does indeed describe some of the manifestations of this plague, such as the Abachas. All the same, I was disappointed by this book, because I feel that it only superficially addresses these problems. South Korea was once a rather backward country with a rather opaque business world, and yet it has made leaps and strides towards becoming an industrialized country, while other countries in the same position went backwards. Ireland went from being a badly backward country most known for its exports of emigrants to a booming country whose economy was growing at 6% per annum without organizing UN conferences on tax evasion, as Baker thinks Africa ought do. Update: when the Irish government corruptly bailed out domestic and foreign banks who had made very lucrative but risky and foolish loans under pressure from foreign governments this was not in Ireland's interests. Old habits die hard. Unfortunately, Baker doesn't touch on possible explanations for the fact that some countries were able to overcome their "Achilles Heel" while others stagnated.

Similarly, he insists that the rampant tax avoidance and tendency to stash money overseas and the like cause the corruption in Africa; could it not be that the corruption, arbitrary taxation and confiscation of goods account for the habits of avoiding exorbitant taxes and keeping one's savings overseas? If Italy is any guide, Baker is confusing cause and effect of the problems he describes. How did Dubai, once much poorer than Africa, not fifty years ago a fiefdom in which hardly anyone could read and write, in which slavery was legal, endowed with little oil become such a prosperous emirate, its present difficulties, which are nothing compared to its former poverty, notwithstanding? (Even today, Dubai is much richer than it was 50 years ago, when it was poorer than most of Africa.) Not by whining about corruption and the like, but by establishing a pro-business business environment and letting the market work its magic. Unfortunately Baker neglects this Cinderella story that doesn't support the thesis of his book. Singapore, with its similar, and more enduring, history, goes unmentioned. This isn't to say that Baker doesn't identify some very real problems, but rather that the cures he has to offer may actually be worse than the disease. I feel that this book ought to be read with much caution.

This is a fascinating and deeply researched book by a businessman with experience across the world. Baker sums up, "Dirty money causes disaster for millions and deprivation for billions. No other economic condition generates so much harm for so many people. A system that continues to support such massive illegal flows, sustaining poverty, and contributing to historically high levels of global inequality, requires fundamental rethinking."

Multinational firms steal an estimated $500 billion a year from the peoples of Asia, Africa and Latin America. This can only happen with the connivance of the West's banks, which process the illicit gains.

Baker writes, "Intracompany trade across borders represents about 50 to 60 percent of all cross-border trade. I have never known a multinational, multibillion-dollar, multiproduct corporation that did not use fictitious transfer pricing in some part of its business to shift money between some of its entities."

Half of all international trade and investment passes through the world's 63 tax havens, including the Isle of Man, the Channel Isles, the Cayman Islands, Bermuda, the Bahamas, Cyprus, Malta, Gibraltar, Singapore and Hong Kong. Nearly half are members of the Commonwealth. They host about three million dummy corporations (500,000 in the Caribbean alone), holding possibly $11 trillion.

Foreign aid to Asia, Africa and Latin America is $50 billion a year, just a tenth of the amount plundered. These countries owe $1.5 trillion: the World Bank/IMF's Heavily Indebted Poor Countries' Initiative forgives only $50 billion of this, 3%.

How does the system `support such massive illegal flows'? For centuries the British ruling class, then the US ruling class too, have used the law to maximise capital's freedom. Lord Chief Justice Mansfield said in 1775, "No country ever takes notice of the revenue laws of another." So no capitalist state enforces the tax rules of another, opening the way to tax evasion.

Later, in 1929, the ruling in the case Egyptian Delta Land and Investment Co., Ltd. v Todd established the principle - for the entire British Empire - that companies could incorporate in Britain but avoid paying British tax. This allowed tax havens to sprout across the Commonwealth. Britain itself became a tax haven. As a French parliamentary committee reported in 2001, "Great Britain does not cooperate with European countries and offers a totally unacceptable haven for criminal funds."

Baker shows how the US state used English law as precedent: "Holes [were] intentionally left in anti-money laundering laws." These laws allow US banks to trade in the money generated by most kinds of crimes committed in other countries - prostitution, people smuggling and slave trading, for example.

Even after 9/11, the American Bankers' Association lobbied against tighter controls on bank accounts to curb terrorists' funds. So it is no surprise that 99.9% of anti-laundering efforts fail.

Liberal structures - the free movements of capital, goods and labour - suit capital best. By the same process, they aid crime and corruption. The freer capital is, the more lawless the host society will be. Free movement of capital also destroys national sovereignty and democratic accountability.

Baker shows how all capitalism's leading institutions are complicit in crime, but what does he say we should do about it? He urges us to press capitalism to put justice before profit. He writes, "There is no suggestion here that businesses should not be maximizing profits, operating efficiently, and competing. The point is much simpler: Capitalism should not place these aims ahead of justice in its institutions and transactions. Justice must be a prior condition."

Where is the evidence that capitalism could do this? It is idealist nonsense, sheer wishful thinking. As Lenin pointed out long ago, if capitalism could put justice before profit, it would not be capitalism.

Illegal money flows are not an unfortunate off-shoot of capitalism: they are integral to capitalism. Baker gives us enough evidence to convict capitalism as an unreformable, exploitative system, inevitably breeding crime and corruption.

Baker shows us how "maximizing profit" is a failed philosophy. Only by including Justice in our dealings with one another can we expect to create a decent, life-giving society. The one we have, he points out, is not working.

The day after finishing "Capitalism's Achilles Heel" I noticed a news item regarding the new cancer drug, "Avastin". The drug maker plans to charge $100,000 per year; citing the "inherent value of life-sustaining therapies". They said further that the health economics hold up "and therefore we don't see any reason for touching them".

A perfect example of Baker's revelation that "maximizing profit" is the operative principle in today's business dealings.

Dear reader, you need this book !