The Growing Illegal Economy

Alec Hogg / MoneyWeb

ALEC HOGG: In this special podcast, from the World Economic Forum (WEF) in Davos studio - we speak with Moisés Naím who is with the Carnegie Endowment for International Peace now Moisés, but cabinet minister in the past, editor as well - your passion though seems to be since I've known you for some years, the illegal economy and it was interesting to note that in the Global Risk Report of the World Economic Forum, for the first time, it really got due recognition.

MOISÉS NAÍM: Thank you - it's always a pleasure chatting with you, and yes - the illegal economy, the criminal trans-national networks that are becoming more important than ever, continue to be a centre of attention - not just mine, but its growing because there is growing evidence that they are mutating, they are growing and they're becoming a larger threat than they used to be.

ALEC HOGG: For people who don't understand, this almost parallel business operation that goes on, how big is illegal economy - the people who work outside of taxes and outside of the laws?

MOISÉS NAÍM: It's huge and first we need some definitions and what do we mean because crime and black markets - smuggling has always existed and is part of the human experience. So the question is, is there anything new under the sun or is it just more of the same. And I have argued that there is plenty that is new, that the combination of changes in the world, from the internet, ease of communications, to more open borders, to political changes, to the nature of power in the 21st century, to all - a panoply of changes that we're seeing is also transforming and amplifying these illicit trades. What we're talking about - the world knows that there is a huge trade in drugs, the world knows that there's a huge trade in human beings - some forced, some voluntarily - illegal immigrants, that there is a huge network of people trading in weapons of all kinds, that the likes of Pakistani gentleman called Aku Kan was the father of Pakistan's nuclear programme - developed an international market for nuclear technology, designs and knowhow that helped Iran and North Korea to develop an atomic bomb, that there is an illicit trade in counterfeit - you can buy fake bags, but also fake medicines that instead of curing, kill you, that there is money laundering around the world and illegal logging and all sorts of things. So all the numbers of these things are estimates in some cases, better than others, but all we know is that this is large, it is growing and there are no governments - with very few exceptions - that can claim that they have made substantial progress in containing the growth of these illegal trades.

ALEC HOGG: What's happened since the financial crisis of 2008?

MOISÉS NAÍM: Several things - the first and most important is that remembering that these illegal trades are essentially and foremost, businesses. These are people driven by greed and they are very innovative business people. They identify the opportunities of globalisation better and sooner than others. They know how to use the tools of globalisation from their container transport and cargo to the internet, to prepaid cell phones and satellite telephones to very advanced weapons that can be transported around the world. These are very good business people who know how to exploit the opportunities in the markets created by globalisation. Being business people, they quickly identify the fact that the global financial crisis weakened a lot of legal companies. A lot of legal companies found themselves in dire straits, they were short of cash, they were short of clients and easy prey to companies that were full of cash and very strong, and as we know the illegal trades are cash based and they did not have the proceeds in derivatives and other financial instruments that then became toxic and useless. They had it in hard cash, so a lot of these trans-national illegal networks started buying some of the important companies...

ALEC HOGG: To legitimise themselves?

MOISÉS NAÍM: To legitimise and doing what business people do - business people diversify. The first rule of business is that whenever you have some accumulation of cash, you diversify - you don't want to have all your activities concentrated in one business, in one industry, in one activity, especially if that activity is illegal and dangerous. So we have seen wide diversification and entry into the legal economy. There is one of the cables in WikiLeaks that we know about - thanks to WikiLeaks in which the Economic Council in Ukraine alerts the US government back in Washington, that one of the biggest oligarchs in the country - very wealthy person - who was connected to one of the largest kingpins mafia leaders in Russia, together they were buying a bank in Ukraine that had been weakened by the financial crisis. So these anecdotes, these vignettes illustrate how quickly they act, how much money they have, how international they are, and they know how to seize opportunities and diversify and become in fact, one of the owners of the largest banks in the country.

ALEC HOGG: I was mentioning off air that a first book a new recruit gets to Moneyweb, a young journalist gets, is your book "Illicit". It has been around for some years, it's a brilliant exposé and yet there are still many people who perhaps don't deny the existence of an illegal economy, but just turn a blind eye to it.

MOISÉS NAÍM: What I wrote in the book "Illicit" generated a conversation that is not unlike the one we had about climate change. About 10 years ago, climate change was a curiosity, it was highly controversial - some people believed that it was happening and that global warming - something had to be done about it because it was becoming an important world transforming threat and others said it was nothing. It was and it was not happening, it was old, more of the save - we always had cycles of changes in weather patterns, so it was very controversial. All of a sudden in the last few years, climate change and global warming is no longer as controversial as it used to be. There is a variety of initiatives, both at a local, national governments and at the multi-lateral systems meeting in Cancun and all this that are taking it seriously and assuming that indeed there is human-induced climate change that is creating global warming, and acting on it. That happened for a variety of reasons. It helped that Al Gore had a book "The Inconvenient Truth" - he got the Nobel Prize and an Oscar award for the movie. But far more important that the visibility that the likes of Al Gore gave to the issue of climate change was that we had better instruments and better data, so it was no longer a debate on opinions and preferences and ideology. It was a debate about data and the data and better instruments revealed that in fact there was climate change going on.

ALEC HOGG: But how do you get that data on your illegal economy...

MOISÉS NAÍM: So connected to the illegal economy is the same thing. We need to have better instruments, we need to have better data and we need to have the world recognise and understand the size scope and consequences of the activities of these illegal networks.

ALEC HOGG: At this World Economic Forum 2011 there has been a lot of talk about Africa's emergence and how there is going to be investment into African countries from all over the world for all the reasons that we know. But if you start looking at it from an illegal economy perspective, from a crime lords' perspective, a fragile state, a state that doesn't have the regulations of a developed country, must be much easier to enter as well.

MOISÉS NAÍM: Yes, frail states are states where people in charge of enforcing the laws are easy to capture, convert, take over, and are very attractive - this is nirvana...

ALEC HOGG: Captured through corruption?

MOISÉS NAÍM: Captured through corruption and what we're seeing, and this is not an African trend - we're seeing it around the world. It's not just a criminalisation of some politicians who are just bought by the gangs and the criminals, for bribes and other incentives. What we're seeing is governments taking over the criminals - not to stamp them out, but to take over what is very large, lucrative business. So we can see government leaders in several countries that have been caught leading these criminal organisations and we have seen a lot of high government officials that instead of fighting crime have become criminals or leading criminal organisations.

ALEC HOGG: In South Africa the head of police, Jackie Selebi was convicted of corruption. He was also the head of Interpol at the time and I suppose, that's a parallel with what you've just mentioned.

MOISÉS NAÍM: Jackie Selebi and what happened to him is an example, but we have seen other examples in Peru, we have seen it in Mexico, we had seen it in Colombia. President Juan Manuel Santos was here in Davos and was telling the story that in Colombia which is one of the success stories - he was able before being president, he was the minister of defence in charge of dealing with a group called the FARC - a gorilla group funded by narco traffickers and so he went after several of the kingpins, only to discover that the kingpins had been buying and controlling his generals. Only after he got rid of eight generals, one after the other - because he would appoint a major general as a crime fighter only to discover through counter-intelligence that the general was in the pockets of the drug cartels. So after eight of those, he finally got one that was incorruptible. Again we're talking about people at the highest levels of governments. The same is happening Thailand. We have evidence that in Burma, and in Myanmar that the junta, the military junta is ruling that nation for a long time, has strong leaks with the narco traffickers. We know that North Korea is essentially a criminal state that benefits the elites around power at the top, benefit for all sorts of exports of drugs and counterfeit money and all sorts of illegal trade. What I am saying is that yes, smuggling and black markets have always existed - never in such a global scope, never as much as having penetrated the state. So this is no longer very often about drugs and who smokes what, this is more about who has taken over which government.

ALEC HOGG: Given your global picture, and given that South Africa is an emerging and young democracy that's trying, or certainly the politicians say they're trying, to address these issues of corruption, not to become a criminal state. If you were consulting to the government, what advice could you give?

MOISÉS NAÍM: The first advice is to convey the urgency and importance of this problem to the population. Unless the population at around dinner tables - you all have conversations about what it means to have a government, a local government or a ministry or the governor of the country penetrated by criminals or what it all means for your lifestyles, for the future of your children and how businesses... unless society is not behind this, there is very little that governments can do. So this is first and foremost creating awareness in society of the importance of fighting this and not - the peaceful co-existence with crime is very tempting until you discover that the criminals have taken over. Closing an eye and saying it has always existed, is just because these are fights between the gangs and drug users and drug criminals and let's go on with our lives and be... what I said - a peaceful co-existence with crime is a very dangerous addition.

ALEC HOGG: From a broader perspective in the world, is the war being won, or lost?

MOISÉS NAÍM: At this point, it's being lost. There are very few governments, probably with the exception of Colombia and a few others where a government can claim that some of these markets are now smaller, in fact in most cases a lot of these markets today are larger than ever.

ALEC HOGG: Just to close off with, in the Global Risk Report that the World Economic Forum put together, in the fine print it says that many states in the world, where more than half the economy is illegal - in other words, only half of the businesses are paying taxes. Is that exaggerating...?

MOISÉS NAÍM: No this is a rough estimate. One of the problems that we have again, and this goes back to my suggestion that we need better research, better size, better tools to measure - is that it is not the same - not all illegal money has the same consequences. It is not the same in terms of threats to the future when a business is trying to avoid or evade some taxes as when a major narco trafficker is using the money to buy the minister of defence of a country. Both are crimes, both are morally intolerable, both should4 not be accepted. But if you ask which of the two should we go after first, given that we have scarce resources and we need to be selective, there is no doubt that we need to be careful not to try to stop every illegal activity because then we're going to stop nothing, because they are everywhere. So selectivity and understanding which of these illegal trades we should go after is very important. It will not take a lot of debate to discuss - if you have scare resources what do you want to go after - after the people that are copying Harry Potter books illegally and selling them without owning the rights, which is a crime, or the people that are trading small children for sexual exploitation around the world.

ALEC HOGG: Moisés Naím it's been a privilege...