After having seen the relationship between in Black money and crime in the last article, we shall now try to understacnd in lay man’s terms how the Indian Black economy is related to the economies of US and Europe. The repercussions of eradicating Indian black economy are enormous not only on the crime prevalent in the nation but also on the economies of US and Europe. Eradicating the Indian Black economy may eventually lead to a complete collapse of American and European economies. And the consequences of this collapse will not be restricted to only economic sphere, but will pervade linguistic, social, political and intellectual aspects of people’s lives through out the world.
As usual we shall begin with our friendly conversation.
You: So what’s the deal ? How is Indian black economy related to the economies of the Europe and US ?
Me: Before answering that question, let’s discuss first how is black money actually stored.
You: Umm, hmm..
Me: Suppose that Kalmadi bought 5 centralized air-conditioning systems for the CommonWealth Games at a price of Rs 1 crore each, while the air-conditioning systems cost only Rs 10 lakh in the market. That means the government is paying Rs 90 lakhs extra on each AC. For the 5 Air-conditioners, the government has been fooled into paying Rs 450 lakh more than what is required. Also, suppose that the AC vendor and Kalmadi have colluded to share the profits equally. As per the collusion deal, Rs 225 lakh go into filling the pockets of Kalmadi and the remaining Rs 225 lakh fill the pockets of the AC vendor. The steps in this process are as follows.
- Kalmadi authorizes the payment of Rs 5 crore for the 5 ACs.
- The government, which is organizing the common-wealth games, receives 5 ACs from the vendor and transfers Rs 5 crore from the government’s bank accounts to the vendor’s bank accounts. This Rs 5 crore is white money as it is a bank account transfer and is traceable. This transaction is also reflected in the country’s (white) GDP.
- Once the vendor received Rs 5 crore in his bank account, he sends a briefcase full of Rs 1000 notes to Kalmadi with total amount of Rs 225 lakhs i.e. Rs 2.25 crores.
- The money which was paid by the tax-payers for proudly organizing the CommonWealth Games that symbolize India’s slavery, has safely landed in the pockets of a politician (Kalmadi) and a capitalist (the AC vendor).
That we are such big fools that we proudly organize the commonwealth games and grandly acknowledge that England’s queen once looted us and made us poor, is a different topic. Here we shall not digress into that. Here, let’s talk only of what Kalmadi does with the Rs 2.25 crore he received.
You: He will definitely not put them in a bank. So what does he do ?
Me: Because the money is in the form of Rs 1000 notes, he can safely store it in his house in a small vault. And because he belongs to the ruling party, he can be sure that there will not be a CBI raid on his house. In fact, whenever the CBI or Income Tax department raid someone’s house and recover crores of ill-gotten wealth, the wealth is invariably in the form of high denomination notes. But there..
You: Hmm, as I contemplate more and more, I realize more and more the advantages of banning high denomination notes. It was my mistake to not support Baba Ramdev while he fasted last year with this demand. In fact, I used to mock at him for this demand. My bad!
Me: That’s fine. Let’s discuss further, what Kalmadi might do with the illegally earned money.
You: Simple, he will store the money in his house and spend it gradually, to satisfy his desires for sense pleasures. You explained last time we met that these desires for sense pleasures is called काम in Sanskrit. I remember.
Me: Think again about what he will do with the money. The overall loss to the government exchequer from the CommonWealth Scam was not 450 lakhs but 76,000 crore. The example we discussed was only for explanation. The amount of money swindled away in national level scams is huge, in fact, so huge that the politicians, the bureaucrats and the capitalists involved, can’t possibly store the black wealth in their homes even if the loot is in the form of Rs 1000 notes. For example, how can someone store Rs 2000 crores in his house, even with the help of the notes of Rs 500 and Rs 1000 ?!!
You: So, if not in their homes, then where do they store it ? Wait a minute! I know where. They store it in Swiss banks to conceal the ill-gotton wealth from the Indian Income Tax department.
Me: Yes, you are right. But, do you know, why only swiss banks ? Why not store the loot in, say, Bangladeshi banks ??
You: Lolz, a Bangladeshi Bank!! he he he !!
Me: Grrr. Don’t laugh. It is a genuine question. You have no right to laugh if you can’t answer it.
You: Umm…..ummm…ummm. Ok, don’t know! Tell.
Me: Because Switzerland is a Tax Haven and Bangladesh is not. Actually, the corrupt elite ruling our country and economy, stores the money not only in the Swiss banks but in any country which is a tax haven. This is how Investopedia defines a Tax Haven.
A Tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. Individuals and businesses that do not reside a tax haven can take advantage of these countries’ tax regimes to avoid paying taxes in their home countries. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its tax policies.
That means, if Switzerland is a Tax Haven, then Kalmadi can easily deposit his loot in a Swiss bank and the Tax laws of Switzerland are such that they make it difficult for the Indian authorities to extract the information about the Swiss bank accounts of Indian nationals. In a nutshell, tax havens are the place the doctor ordered to store the loot.
As you might have realized, Switzerland in not the only tax haven in the world. Though there is no objective criterion to determine which country is a tax haven and which is not, but most economists consider the countries of Europe and US to be tax havens.
You: I always used to wonder why the Swiss banks are so cool to talk about and so popular for storing Black money. And now it turns out that they are not the only ones. But now you have put me in a quandary. The last time we met, you explained that banning high denomination notes will almost eliminate the Indian Black economy. I am wondering how will the money stored in foreign banks get added to government exchequer by banning high denomination notes ? And if the money is not added to the government exchequer, then it is still black because the government does not know about it.
Me: Good question. The corrupt people store the Black money earned from illegal activities at two places.
- In their own houses or at some other clandestine location inside India. This money is in the form of Rs 500 and Rs 1000 notes.
- In the foreign bank accounts in Tax Havens outside India.
That means the money supply of the Indian Black economy is divided into two compartments. The black money that lies physically inside India and the black money that lies physically outside India.
Banning high denomination notes will not get back the money swindled away to foreign banks. All it will do is convert the black money stored in India into white by adding it to the government exchequer and preventing future loot thus putting a break on increasing the size of Indian Black economy. But the money that has already been swindled away to foreign banks will have to be recovered by methods other than banning high denomination notes.
Assume that the total amount of money in India’s Black economy is, say, Rs 100. This is obviously only for the purpose of explanation. Out of this Rs 100, if Rs 30 is inside India and Rs 70 outside India, then banning high denomination notes will add only Rs 30 to the government exchequer. The remaining Rs 70 will not be affected.
You: So what are those methods for getting back the remaining Rs 70 ?
Me: Well, I am not very sure about that. Baba Ramdev suggests some methods but I do not have much knowledge about them, so not sure about their effectiveness. But let’s understand how is all this related to the economies of Europe and US. For discussion purposes, let’s take the example of US.
You: Ok. Go on…
Me: So what do you think happens to that Rs 70 ? Does it stay idle there in foreign banks ?
You: Hmm. Definitely not. The banks will loan that money to their customers.
Me: Absolutely! And who are the customers ? The customers are the US government and American entrepreneurs! That money which belongs to India is loaned out by American banks to US government to fund its military and scientific research. The research ultimately is utilized in increasing the military power of US. The US government invests that money which belongs to India, to build Universities and educate its people and inculcate a scientific and entrepreneurial temper in them. The American entrepreneurs use that money to invest and open up new businesses, thus decreasing unemployment in US. With high employment, rises the average income of Americans which in turn reduces the poverty in US. The US government uses that money to build water and sanitation infrastructure to provide pure water to every house and provide high quality public health care. In fact…
You: Wait! You are taking it too far. What you are effectively saying is that US is rich because of our money ??
Me: Well! Not exactly. Let’s not talk about US alone, rather let’s see the big picture. What I am trying to say is that the so-called developed countries have become developed by using the wealth of the so-called developing countries. So the countries of North America and Europe have developed on the wealth of the countries of Asia and Africa. The problem of Black money is not a copyright of India alone. It is a problem of all the developing countries.
You: What you are telling may be true. But do you have evidences to lend more credibility to this ??
Me: Sure. First notice that the size of the Black economy of a country depends on the level of corruption prevalent in that country. Greater the corruption, greater the size of Black economy. The source of black money is corruption and its beneficiaries are corrupt people, criminals and terrorists. In the example of Kalmadi that we just discussed, Kalmadi had effectively added Rs 225 lakhs to India’s black money supply by indulging in corruption. Now I will lend credibility to the assertion that The developed countries have become developed by using the wealth of the developing countries.
For this we will compare 4 statistical parameters for different countries. Those statistical parameters are Literacy Rate (as a measure of education standards), Life-expectancy, Infant Mortality Rate (as measures of health-care standards) and Corruption Perception Index (as a measure of corruption level). Here is a webpage that allows one to moniter all the 4 parameters for every country. Just go through it and convince yourself that the countries of North America and Europe have high literacy rates, high life-expectancy, low infant mortality rates and high corruption perception index, while the countries of Africa and Asia have low literacy rates, low life-expectancy, high infant mortality rates and low corruption perception index. (This is not a universal law but only an empirical observation that is valid for most countries.)
You: Hmmm! Let me see. (Takes some time to examine the data.) Yes, that is not completely true but true for most countries. The exceptions are Russia, Iran, Saudi Arabia and a few others.
Me: Yes. Note that the exceptions you have shown are all oil-producing countries. This suggests that in spite of prevalent corruption, people have access to education and health care because of high incomes generated from the oil industry.
You: Oh! Did not realize that. Nice observation. Your assertion that education and health-care standards of a nation are related to corruption makes more sense now.
Me: Yes! And now that you have observed this trend, what does it mean ? It means that the countries of North America and Europe have good educational infrastructure (because of high literacy rates), good health care (because of high life-expectancy and low infant mortality rates) and low corruption (because of high corruption perception index). On the other hand, the countries of Asia and Africa (minus the oil producing cuontries) have bad educational infrastructure, bad health-care services and high corruption. This observation is also consistent with common sense. Obviously, greater the corruption in a country is, lesser will be the quality of education and health-care in that country. That is because providing good education and health-care requires investment either by the entrepreneurs or the government or both. And the investment requires money. If corruption is high in a country, the money in that country will be utilized in fueling illegal activities and fulfilling the desires for sense pleasures (काम) of a select few at the expense of public investment.
You: Agreed. But that does not prove your assertion that the developed countries have developed on the wealth of developing countries.
Me: I know. Here is the missing link. This page provides the list of countries by their external debt. Arrange the table in descending order of external debt per capita and you will observe a pattern.
You: Ok. (Takes time to examine the table.)..
Me: So what do you observe ? (Still taking time)…
You: Yes, the developed countries have much much more external debt per capita than the developing countries. What does that mean ?? And before that, what exactly is external debt ?
Me: Yes! Most investments require taking loans and loans need to be repaid as debt. If you take a loan from a creditor, you owe a debt to the creditor. Debt = Principle + Interest. External Debt of a country is that debt which the people and the government of that country owe to foreigners. Since US has a huge external debt, that means the entrepreneurs and the government of the US owe huge debt to foreigners. In fact, all the developed countries owe huge debt to the foreigners while the developing countries owe very little to the foreigners. We also know that corruption is intense in developing countries while it is minute in developed countries.
Couple the following facts together.
(1) Developing countries have intense corruption, hence a huge amount of their money is swindled away to tax havens.
(2) Developed countries, which are tax havens, have high external debt.
(3) Developed Countries have little corruption, so the size of their black economy is small and hence little of their money is swindled away to other countries.
This suggests that the corruption in developing countries has generated huge amount of black money which is swindled away to the developed countries because they are Tax Havens! And this swindled black money appears as huge external debt of developed countries! This phenomenon is also responsible for the fact that the developing countries are still developing and have bad education and health care standards and low quality technology while the developed countries are already developed and have high education and health care standards and advanced technology. High external debt of developed countries means that developed countries have taken large loans from the developing countries while low external debt of developing countries means that developing countries have taken only some loans from the developed countries. Overall, developed countries owe money to developing countries. But why would the developing countries give loans to developed countries when the developing countries are in dire need of loans to invest in education and health in their own country ? Why will someone give loan to others when he himself requires money ??
You: I think I got the answer! The common people of the developing countries do not want to loan their wealth to foreigners but the corrupt politicians, corrupt bureaucrats, and greedy capitalists have looted common people with the help of high denomination notes and then stored this wealth in foreign banks to save their asses from the income tax department. And these foreign banks loaned the money. The money which should have been used for investment in developing countries was put into foreign banks by the corrupt people. This caused a severe shortage of money in the developing countries making them poor and underdeveloped because of lack of investment. Right ??
Me: Absolutely! So the loans which the developed countries have taken from developing countries do not appear on official accounts of developing countries because those loans were given out of untraceable (black) money, while the loans that the developing countries have taken from developed countries appear on official accounts of IMF and other international economic organizations because that is white money!
You: So, how will ending Indian Black economy put breaks on American and European economies ?
Me: Suppose the Indian government is able to catch hold of all the Indians who have stored black money in foreign accounts and get access to their accounts, then it can withdraw all this money into government exchequer. This would suddenly cause a severe shortage of funds in those tax havens/developed countries where Indians have stored their black money. That’s because according to the data provided by the Swiss banks, India has more black money than rest of the world combined. Due to this shortage of funds in the developed countries, there will be a sharp rise in interest rates, in turn, preventing the debtors from borrowing more money to repay their existing debts, causing their credit risk to increase. The debtors are not only unable to repay there existing debts but the increased interest rates will ensure that the debt rises rapidly in future. This will prompt potential creditors to not loan their savings to these countries since they defaulted on their existing debts. And with no funds at the disposal of entrepreneurs and the government in these tax haven countries, all the developmental projects will come to a halt. Also, other Asian and African countries may get inspired by India’s example to take back their black money from US and Europe, leading to a comprehensive shortage of loans in these so-called advanced economies. Since loans are the lubricant of economic investments, the advanced economies of US and Europe will suddenly run short of investment to sustain economic growth and their GDPs will decline rapidly. The companies whose investment projects had been half way through when they halted, would go bankrupt because they had already invested their loans in the projects that yielded no returns simply because the projects remained incomplete. Such companies would liquidate and go bankrupt seriously raising unemployment and poverty in these developed countries to the levels of medieval Europe!
You: Makes sense. What you are telling looks plausible. Mann, you are a genius!
Me: No! Not me. Baba Ramdev is a genius. He has been shouting all this at the top of his voice since atleast 2009. The media and politicians have ignored him till 4th June 2011, when ultimately he built so much pressure in Ramlila maidan that they could no longer ignore him. But now the media and politicians have changed their tactics. Instead of completely ignoring him, they now project him in bad light trying to defame him.
You: Do you mean that there is a nexus between media and politicians against Baba Ramdev ?
Me: I do not know. But one thing is very clear. Both the politicians and the media do not wish Baba Ramdev to succeed, hence the politicians call him an RSS agent or thug while the media tries to project him as a greedy businessman trying to fool gullible people in the name of religion. While it is understandable why the politicians try to defame him, it goes beyond my brain to understand why the media also tries to defame him. Probably, the media houses which are nothing but profit-minded businesses stand to lose something if India’s black economy is eradicated. I am confident that the media houses earn a substantial part of their income through paid news industry which runs on black money. If Baba Ramdev succeeded in banning high denomination notes, that could considerably reduce the incomes of the media companies. Moreover, if Baba Ramdev succeeds, that would give a fatal blow to the capitalists of US and Europe who are today the most affluent people in the world. Eradicating Black economy will kill their major source of funds. Hence, it would not be naive to assume that the MNCs would try their best to ensure that Baba Ramdev does not succeed and the media might only be acting as a tool in the hands of the MNCs.
You: Hmmm. By the way, I have a doubt. Are the Americans not aware of their huge external debt and are they not taking any steps to solve this problem ?
Me: Well, the Americans are very much aware of this weakness of theirs and the huge external debt is a strong political issue in American politics. In fact, one of the motivations for the ongoing Occupy protests in America is the inherent instability in the debt-based capitalist model of development which has lead to the huge debts of capitalist nations ! Baba Ramdev has been explaining the problem of huge American external debt from an Indian perspective. From our perspective, America’s external debt is our black money. Here is an animation that explains the problem of huge external debt from an American perspective and shows how the Americans see this problem.
In any case, ending India’s black economy will have huge impact on social, linguistic, political and intellectual aspects of people’s lives throughout the world. I need to go now, but I will explain in detail the next time we meet about the all-pervasive repercussions of the end of India’s black economy. Bye.
You: Wait. Before going, answer this question. The root cause of this problem seems to be that there is heavy corruption in developing countries while little corruption in developed countries. Why is it like that. I mean, why should corruption be high in one country and less in others ??
Me: Well, that again requires a lot of explaining. I will explain that the next time we meet. Till then you contemplate on this question. Bye for now.
You: Thanks yaar. You are very insightful. Byeee.
PS: Though I used the words corrupt politicians, corrupt bureaucrats, and greedy capitalists, I do not mean that all the politicians, bureaucrats and capitalists are like that.