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IFCs play key role in boosting growth in developing countries

Tuesday 13 July 2010 - by Andrew Hickley

In an extract from his latest research paper, Professor Jason Sharman of the Centre for Governance and Public Policy at Griffith University in Australia explodes the myth that international financial centres are the primary problem in attracting and hosting illicit funds from the developing world

International Financial Centres can increase foreign and domestic investment in developing countries which helps to alleviate poverty.

An example of this can be seen by the most successful poverty reduction effort in history - that of China. Since 1978, millions have been lifted out of poverty, with openness to foreign direct investment regarded as a key driver for Chinese growth during this period. FDI is between three and ten times more effective than foreign aid in boosting growth, with the World Bank declaring that "foreign direct investment remains one of the most important tools in the fight against poverty".

However, there have been suggestions in the past that IFCs have a negative impact upon developing countries. Largely, these themes centre around IFCs having no benefit to developing countries, and at worst actually impoverishing already poor countries.

The first of these negative views argues that IFCs are havens for illicit wealth plundered from developing countries. The view that IFCs are the primary problem in attracting and hosting illicit funds from the developing world is deeply misleading. Large powerful G20/OECD states are the main problem in facilitating corruption and other crimes in the developing world. In fact, the World Bank and the International Monetary Fund have identified corruption as the single biggest obstacle to economic development. Furthermore, the World Bank has found that US corporate vehicles are the most likely to be used in laundering the proceeds of corruption from the developing world.

Unsurprisingly, these same powerful states have a strong incentive to overlook this evidence and shift the blame to small, weaker players outside the most important international clubs.



Criticisms regarding issues such as round-tripping and tax avoidance have also arisen, though these are often without credit. The simple stolen assets haven and round-tripping argument of Chinese linkages with IFCs are both incompatible with available evidence.


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