The Global Emerging Market in Transition: Articles, Forecasts, and Studies

We Forgive You

WE FORGIVE YOU A solution to poverty and unemployment in emerging market countries. The movement of foreign capital to emerging markets is usually as relentless as the eastward flow of the mighty, murky Danube. Capital seems inevitably attracted to the lower expense bases of developing countries, with their weaker regulatory regimes, tireless work forces, and six-day work weeks. And investment flows usually mean gradually rising levels of net wealth, health, and education for the target markets. Paradoxically, though, one category of emerging markets finds itself consistently capital-poor—and getting poorer. These are the emerging markets where corruption and xenophobia rule—such as Ukraine, Bulgaria, Romania, and Albania. Foreign investment rarely occurs here, and when it does, employment increases in the short term, but poverty and unemployment remain intractably high, and the country remains capital-poor. Successful domestic entrepreneurs , who would normally be inclined to invest locally, usually move their assets rapidly to banking havens abroad and are loath to return capital to the country for fear of punitive or unpredictable tax regimes . Bulgaria illustrates the paradox. Its population has, during the last nine years, declined more dramatically than that of any other nation on earth. In addition, the birth rate—7.7 live births per 1,000 people —is the lowest in the world. A country that once boasted a vast Black Sea tourism business now finds it harder to raise foreign capital than Egypt, Colombia, and Sri Lanka, according to a recently released ranking done by the World Bank. Based on my research as a Fulbright scholar, I concluded that Bulgarians have transferred some $7 billion in flight capital—or ‘‘fright capital’’—out of the country in the last 13 years. The story unfolds in the same way throughout the region. Albanians have taken a minimum of $3 billion out of Forbes Global (July 21, 2003). 164 the top emerging markets their country. The International Monetary Fund estimates that about $170 billion has left Russia out of domestic bank accounts. The West cannot afford to ignore the plague of protracted unemployment in these countries. First, these countries, which should be rich new export markets for multinationals, have become crippled bazaars of market failure and corruption. About two-thirds of Russia ’s 150 million people live on less than $2 per day. Ukrainians, Belarussians, Albanians, and Moldovans get by on about $2.25 per day. This is the reality unfolding not only in Eastern Europe, but also in parts of Asia and South America. More pernicious is the fastgrowing resentment of people in these countries toward the West (the U.S. primarily), driving them to support dictatorial, anti-freemarket regimes such as those of Venezuela’s Hugo Chavez and Belarus ’s Alexander Lukashenko. In North Africa, Indonesia, and the Philippines there appears to be a close link between economic disenfranchisement of the majority of the population and the increasing appeal of Islamic terror groups. There is an obvious link between a pervasive sense of economic hopelessness and whipped-up ethnic hatred, as evidenced in BosniaHerzegovina , the Philippines, and Indonesia, particularly among unemployed young men. Currently there is a dearth of foreign capital to reverse the fortunes of these emerging market countries. Today’s geopolitical climate , coupled with the anemic recovery in the U.S. and Western Europe, make it unlikely the solution will come from foreign investors . Even when the West emerges from its economic malaise, there is no reason to think that there will be enough foreign capital to mitigate the massive unemployment even in the poorer European regions, much less in Africa, Asia, and Latin America. Instead, these countries should move forward with a plan that would encourage people to return their capital and reinvest locally. A capital-amnesty program, a step further than a traditional tax-amnesty strategy, is the only realistic approach to strengthening these economies with the capital they need to reverse their own fortunes. Under such an amnesty program a government agrees not to launch any criminal probes into anyone who returns capital to the country. The taxpayer is exempt from late-payment penalties or fines for having sheltered income by moving cash out of the country. Funds returned to domestic bank accounts should be subject to tax at a we forgive you 165 nominal rate—in the range of 5 percent—to make up for the fact that these fortunes were made tax-free and to provide the government...