It is difficult to keep money at home in any small economy, not connected strongly with the global system or not a member of any free trade or economic bloc. Money flows from small economies to stable and bigger ones. Money or wealth needs safe homes which the advanced economies of the West and economies strongly connected with them, offer. Small and isolated economies like that of Bangladesh earns money but cannot keep it all at home. Many use the term 'capital flight' to describe outflows of money in illegal ways.
The Global Financial Integrity (GFI), an American financial intelligence agency, has let us know recently that Bangladesh is losing yearly nearly $ 7.0 billion in capital flight. The agency calls illicit flows of money among countries as dirty money against which tax is not paid and which is not accounted for at home properly. The amount of $7.0 billion is a huge amount of money for Bangladesh. By using this amount, the country could have constructed two Padma bridges. The amount is roughly half of what all the Bangladeshi nationals working abroad send home annually.
The agency also reported that a major outlet of the dirty money that flows abroad is trade mismatch. It means importers pay more to foreign sellers or at times bring in something like contraband items instead of what has been declared in the import bill vouchers. When exporters export, they receive less money through banking channels with the remaining amount kept with overseas importers, who, in their turn, put it in accounts on the advice of the former.
Another outlet of capital flights is the age-old hundi or hawala system which facilitates speedy payment at home in local currency against foreign exchange which remains abroad. In the hundi mechanism, foreign money never comes home. But against a pre-determined amount of foreign money, payment is made at home by using private channels. The transactions performed through hundi are never recorded though the transacted amount is huge. Yet another route of illegal transfer of money is legal transfer in foreign currencies by resident Bangladeshis for so-called investment abroad. If an inflated investment amount is shown in papers, no authority in Bangladesh can detect it accurately.
Wealthy people have many routes to take their money out of the country. For keeping it at home, the free will of the rich people is important. If they do not want to keep or invest money at home, the government can do little in this respect. Some policy changes, however, can encourage them to keep their money at home. The desired changes can be reduction in rich men's tax rates such as on their businesses' profit and the same on their personal incomes.
Money has a tendency to move to countries which offer incentives in terms of low taxes. The more preferred destinations are tax-haven countries and territories with no tax at all or very low tax. The receiving countries or territories do not question wherefrom the money is coming or whether it is coming legally or illegally. In some cases, many countries of the world directly and indirectly encourage the flow of the so-called illicit money to those countries.
Black or dirty money will not flow to Bangladesh, or so to say, to any country like ours but the reverse is true for us. Bangladesh's policymakers should see the reasons behind such outflows of money and should accordingly act to remove those factors. The high tax rate is one of the reasons. The other reason for illicit outflow from Bangladesh is that the rich people do not find enough investment options locally. Here in Bangladesh, gold, which is used as hedging instrument abroad, is not available for investment purpose. The policymakers should consider opening of gold market for investment.
Also, the commodity market can be the other option for investment by the rich people. But in Bangladesh, a formal commodity market, suitable to be invested in by the rich, is absent.
The policymakers should also see how to make Bangladesh a partner in a global trade bloc. Capital flight seldom takes place from any country which is a member of a big free trade bloc or free economic area. Bangladesh is an isolated country in the sense that it is not, until now, a member of any free trade area. Integrating the Bangladesh economy with those of the regional economies and beyond will assure Bangladesh's rich people that this country will remain stable in future and it has a better future than the countries where they are taking their wealth. Internally, an inclusive policy in all respects will help assure the rich people that Bangladesh will remain at peace with itself.
The writer is Professor of Economics, University of Dhaka.