In the period of imperialism and neoliberalism, foreign direct investment is sought after by governments, especially in developing countries like South Africa. This is because neoliberalism minimises the state’s involvement, and in such conditions nations rely ― to a dead end ― on the private investments for expansion of production, creation of jobs and the growth of the economy.
History, however, has proven that foreign direct investment, embodied through multinational corporations and transnational corporations, are mainly concerned with exporting capital, and finding natural resources to exploit and cheap labour in order to multiply their profits, rather than expanding production and creating jobs per se.
Nevertheless, developing countries operating under the paradigm of market fundamentalism and neoliberalism still premise their economic development on attracting foreign direct investment.
But to attract this investment, these governments must make conditions for maximisation of profit extremely ripe. These conditions include deregulation of the labour market, curtailing organisation of labour (trade unions), and relaxation of capital and exchange controls.
Unfortunately for the developing world, the much-celebrated foreign direct investments by bourgeois economists exploited the relaxation of capital and exchange controls in the 1990s to embark on capital flight and steal monies through illicit financial flows.
Illicit financial flows
Illicit financial flows are not a new phenomenon. They developed in tandem with the development of imperialism ― monopoly capitalism in which concentration of production fused with banks created conglomerates that exercised more power on their governments and led to exportation of capital (not goods).
In one of his majestic pieces, Imperialism, the Highest Stage of Capitalism, Vladimir Lenin described the tendency of imperialists towards illicit outflows in that ,“the holding system (conglomerates)… resort with impunity to all sorts of shady and dirty tricks to cheat the public, because formally the directors of the mother company are not legally responsible for the daughter company, which is supposed to be independent, and through the medium of which they can pull off anything.”
Though the development of imperialist capitalism was at its early stage, and there has been a development of regulations to try to monitor the activities of imperial conglomerates since 1916, the tendency of these conglomerates (multinationals and transnationals) to “cheat the public” continues today.
Multinational and transnational corporations have been exposed in isolated cases and sometimes in information leaks such as the Panama Papers, Paradise Papers and Pandora Papers for stealing money through trade misinvoicing, transfer pricing and base erosion and profit shifting into tax havens.
In value, illicit financial flows have cost South Africa a lot of money. In its report, Oxfam South Africa reported that between 2010 and 2014, the government potentially lost $7.4-billion annually (estimated between R51-billion in 2010 and R93-billion in 2015). The Alternative Information and Development Centre reports that export misinvoicing between 2000 and 2014 was estimated at $385.1-billion (more than R2-trillion). Global Financial Integrity estimated in 2017 that the value of illicit financial flows was 7% to 8% annually (between R200-billion and R400-billion).
Illicit flows, tax collection and government deficit
From the evidence provided by these international and national research groups, South Africa’s economy is losing gross domestic product while the government is losing in tax collections.
In a neoliberal fiscal framework where the government relies on self-imposed limits of collecting tax and borrowing before it can spend ― what Stephanie Kelton calls “TABS” – illicit financial flows are a great disadvantage to government expenditure.
Partly because of these financial losses in tax collection, the government embarked on an austerity programme. The Institute for Economic Justice reported in 2019 that government expenditure on public goods and services increased marginally by 1.8%. If we factor in the population growth rate of 1.6% and the average inflation rate of more than 5%, it shows that government expenditure in this period fell by a minimum of 4.8% in real terms.
From 2020 until 2024, the government plans to cut social grants by R36-billion, and R303.4-billion from the public sector wage bill. In the current Medium Term Budget Policy Statement the government indicated it would cut R2.1-billion from basic education, R16-billion from health and R3-billion from the police between 2021/22 and 2023/24.
In addition to tax losses, the government justifies its austerity by (mis)using the concept of budget deficit and the debt-to-GDP ratio. Despite economists who do not conform to the conventional wisdom of the neoliberal TABS model denouncing such a deficit as not “mattering” for countries with sovereign currency, our country still uses conventional neoliberal fiscal frameworks and thus wags debt-to-GDP as a factor.
In this fashion, illicit financial flows’ shrinking of GDP makes our debt-to-GDP ratio widen, giving neoliberal choppers a pretext to chop government expenditure on public goods and services in the name of containing debt and consolidating the fiscus.
Consequently, budget cuts on education, correctional services, healthcare and social development affect human rights. That is why 150,000 young people were denied student financial aid in 2021 even though the Constitution says that “everyone has a right to further education, which the state, through reasonable measures, must make progressively available and accessible”.
Furthermore, the majority of the working class rely on an understaffed and ill-equipped public healthcare system in which they constantly lose lives in cases where this could have been prevented. This is despite the fact that adequate healthcare is enshrined in the Constitution as a guaranteed right.
Similarly, the Constitution guarantees everyone adequate housing and yet thousands still live in housing not even suitable for animals.
These are consequences of austerity which in the neoliberal fiscal framework, in which the ANC government is so immersed, are partly contributed to by illicit financial flows perpetuated by multinational and transnational corporations.
Illicit financial flows and workers’ wages
In its pamphlet, Losing Out on the Lion’s Share: A Primer on IFFs, Tax Evasion and Wage Evasion in SA, the Alternative Information and Development Centre argues that a huge chunk of the monies for these multinationals and transnationals is taken off the table at wage negotiations through profit shifting.
In the platinum belt, it means an estimated $19-billion (about R133-billion) that was lost to trade mispricing between 2000 and 2014, was not factored in during wage talks in those years. This is despite the fact that rock drillers in the platinum mines were earning R4,500 on average.
In 2019, an Alternative Information and Development Centre investigation revealed that Lonmin was involved in profit shifting that culminated in the gross margin of R1.288-billion. This means the Marikana Massacre could have been averted because Lonmin could afford to pay the wages demanded by workers at the time.
In the 10 days between 19 and 30 October 2021, 14 mineworkers lost their lives while on duty. Such incidents – which have become prevalent as though it is still the old days of mining where elementary tools were used – are proof of the inadequate funding for and investment in the health and safety of workers.
Capitalism has no regard for human rights, which is why it extracted profits on the deaths of its workers. The two world wars and the imperialist-instigated wars in the Middle East, Africa, Asia and Latin America bear testament to this fact.
Ghanaian politician, political theorist, and revolutionary Kwame Nkrumah wrote in 1965 that “foreign capital is used for exploitation rather than for development”, and that “investment under neocolonialism increases the gap between the rich and poor countries”. This is because multinational and transnational corporations are focused on extraction of profit rather than development.
Trade unions, students and other working-class organisations must organise to resist imperialist theft in the form of illicit financial flows and capitalism as a whole. DM