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OP-ED: Why the rich are sending their money abroad

  • Published at 06:37 pm July 21st, 2020
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Illegal capital flight has one major reason

Historically, one of the most daunting challenges our economy has always faced is illicit capital flight. In the past decade, this problem has grown into a beast of its own with annual figures of capital flight getting uncomfortably close to one lakh crore taka. 

Now, the aspiring right wing and libertarian politicians of this country would have you believe that the number one reason behind so much money leaving our country is our high tax rates, but, reality couldn't be further from that ideology. There are a few reasons behind why I say that.
First of all, if you look at the list of countries where most rich Bangalis illegally siphon their money off to, you will see that most of these countries have a much higher marginal income tax rate than Bangladesh. If lower taxes were their primary motivation, then Bangladesh would've been a better option compared to these countries anyway.

Secondly, being as corrupt as it is, Bangladesh has always been a country where it is easy for the rich and well-connected to dodge and evade taxes. Most of these countries where the rich are parking and investing their wealth seem to have stricter and tighter regulations. 

If you are looking to save money on taxes, why would you ship your money and your wealth to those countries? 

Finally, as the billionaire owner of Seagram's, Edgar Bronfman once said: "To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable." This means that once you have successfully accumulated wealth beyond a certain threshold, a majority of your earnings won't come through income and work, but, through capital gains by the sheer virtue of wealth accumulation. 

In other words, rich people don't earn through income, they earn through capital gains by hoarding massive amounts of wealth for themselves. Yes, their money literally sits somewhere and makes babies. 

So, here is the reality, although Bangladesh does have a surcharge on wealth above Tk3 crore, it has no wealth tax and its capital gains tax rates are much lower than a lot of these countries rich people are siphoning their wealth off to. 

On top of this, some of these countries have up to 3% wealth tax. So, even in that regard, it makes no sense to ship off one's money and wealth to these countries.

So, now that we have thoroughly established that dodging taxes is not why the country is slowly being bled dry off almost all of its wealth (to the point it is inevitable that it is what will come back to completely destroy our economy by the end of this decade), the big question now becomes: Why are the rich really taking all their wealth out of this country and sending it elsewhere?

Well, the answer seems to be simpler than you think. Inflation. 

Bangladesh has some of the highest inflation rates amongst the stable economies of the world (ie, obviously excluding countries like Venezuela). The official rate of inflation is around 6% (which in and of itself is reason enough), however, if you look at the basket of goods and services we use to calculate CPI (consumer price index), you will quickly realize that this is nothing but an underestimation; the real inflation rate may be close to 9%. 

Here, lies the problem. Just to ensure that your wealth doesn't lose its value to inflation, you need to find investment opportunities with a consistent double digit return over the long term while simultaneously making sure that your investment is reasonably safe. 

If you ask any experienced investor worth his salt, that person will tell you that this is almost impossible to do. Not just in Bangladesh, but, anywhere in the world. 

No sane person who has earned hundreds of millions of dollars in his/her lifetime would be willing to sit there and watch his/her money become worthless simply because of unreasonably high inflation. 

So, they siphon their money off to countries with a much lower inflation rate. There, they make investments which give them a constant 3-5% annual return which is enough not only to beat inflation, but to make their wealth grow in real terms over time. 

Even after deducting capital gains tax and wealth tax, they are richer overall every year. This is the real reason behind Bangladesh's capital flight, lack of reasonable investment opportunities, not high tax rates. All these countries where the rich are sending their wealth to, have one thing in common: Very low inflation rate.

So, the question now becomes, what is the reason behind our high inflation rates and what can we do about it? 

Again, here, a lot of right-wing politicians and libertarians would have you believe that high inflation is an inevitable consequence of high GDP growth rate. Well, no. Not necessarily. 

One of the best examples of this is the Republic of Ireland. In 2018, their GDP growth rate was 8.3%, their inflation rate in the same year was 0.7% only. In the following year, their GDP growth rate was 5.5% and their inflation rate in the same year was 0.9% only. This year, their GDP growth rate is projected to be 6.3% and their inflation rate for the year 2020 is projected to be around 0.4% only. 

You see, the thing is, a fast growing economy only faces rampant inflation if most of that growth is fuelled by the demand side. This growth becomes even more dangerous when most of this demand is generated by the public sector funded by massively unsustainable amounts of public debt and foreign aid (which is exactly the case for Bangladesh).

Anyone who has ever studied elementary economics would know that if you increase demand without increasing supply first, it inevitably leads to an increase in price, ergo high inflation.

Our GDP growth was always mostly funded by public sector demand. Besides the garments industry, no significant effort was ever made to massively boost the supply side. Granted that the garments industry and foreign remittance industry plays a major role in our economy, still, they are nothing compared to the demand side's contribution to our economy. 

Our "economic miracle" may be impressive to some, but it is not productive. Contrary to our politicians, Ireland's politicians have focused on sustainable GDP growth, driven mostly by the supply side. They have focused more on productivity than on consumption.

To fix this problem, to lower the inflation rate, and to encourage the rich to invest in Bangladesh, we have to first aim for GDP growth that is driven by the supply side. 

We have to try to climb up in the ease of doing business rankings, we have to enable and encourage true creators and innovators, we have to give the educated people of this country enough incentive to stay in this country and contribute to our economy, we have to reduce corruption and abuse of power, and we have to massively overhaul our education system. 

We have to encourage and incentivize talented and qualified individuals to become school teachers and for that, the quality of jobs in the education sector first needs to rival the jobs available in the private sector. We need to encourage the best of us to become educators.

You can't pay teachers meagre salaries and expect a highly educated, highly productive populace. Finally, we have to design a productivity-oriented, creative curriculum, moving away from the current curriculum based on unreasonably high number of tests and rote memorization. 

But, alas, GDP growth rate has simply become a number we can flaunt in the media from time to time as a way of publicly patting ourselves on the back and as such, we don't care if the said growth is driven by the supply side or the demand side as long as we can flaunt the raw numbers and as long as we have long bridges, fancy metro rails and expensive nuclear power plants to show for it.

Shams Ishtiaque Rahman is a freelance contributor.

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