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``Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System,'' by Raymond W. Baker ($27.95, Wiley, 438 pages)
Adam Smith has to be whirling in his grave because of what dirty money dealing is doing to capitalism, says the author of ``Capitalism's Achilles Heel'' in his illuminating and disturbing new book.
"Adam Smith today would be appalled to see that the pursuit of fraudulent transactions and illegal profits has become utterly routine, unencumbered by the moral safeguards he envisioned, generated by people lacking the traits of character he knew were necessary for effective conduct of the free market system," Brookings Institution guest scholar Raymond W. Baker writes.
The author, who spent more than 40 years in international business and is a senior fellow at the Center for International Policy, imagines that if Smith were to return today he would be "heartbroken" to find that distortion of his economic thesis has simultaneously generated great wealth and huge economic gaps that have stranded three times more people in poverty as there were living in the world when he wrote ``The Wealth of Nations.''
"If he 1/8Smith3/8 chose to remark on the invisible hand, he would identify it now with international pickpockets lifting the purses of the poor for deposit into the far-flung accounts of the rich," Baker writes.
The businessman-turned-scholar advances the view that the transfer of dirty money all over the planet is one of the primary causes of world poverty and global instability and is undermining capitalism's underlying ideals.
Baker breaks dirty money down into three components - corrupt, criminal and commercial.
When he speaks of corruption he is referring primarily to the conduct of public officials. Notable examples are the leaders of Nigeria, Indonesia and Pakistan. Of Nigeria in particular, Baker writes:
"Ladies and gentlemen, we have a winner. In the global corruption sweepstakes the grand prize goes to - and let's have a loud cheer for - NIGERIA - the most corrupt country in the world!!"
He backs up that assertion with hard evidence about the financial wheeling and dealing of Nigerian leaders, officials, criminals and businesspeople. Then he thoroughly documents how Indonesia is running a close second. No. 3 is Pakistan.
"Arguably the most dangerous nation on Earth, Pakistan is a bubbling cauldron of corruption and crime where grasping politicians, greedy generals, drug smugglers, and terrorists intermix in a volatile web, made more threatening by a nuclear bazaar operated as a national sideline," Baker writes.
Early in the book, Baker offers "The Dirty-Money User Manual," in which he explains the basic ways of laundering money, avoiding taxes, extracting and paying kickbacks and bribes, as well as some complicated and unique variations. All the dirty-money schemes fall into four basic categories - falsifying prices, passing money through dummy entities, faking transactions and using specialized devices, he says.
He points out that any corrupt national leader, CEO, run-of-the-mill tax evader or terrorist group can find office buildings in the United States and Europe full of bankers, lawyers and accountants to help him skirt the laws regulating the flow of money and goods.
Baker paints a disturbing picture of developing countries being deprived of the resources they need to build infrastructure, provide schools and health care and feed their people because the rich and powerful are siphoning off huge percentages of the public wealth and sending it abroad to places with lax financial regulations.
It is a picture that would, indeed, make Adam Smith weep. He believed that capitalism would spread the wealth to all sectors of all societies. Of course, Smith's version of capitalism, as Baker points out, was based upon a presumption of honesty and compassion for others.
Baker makes it clear that the survival of freedom is inextricably linked to the survival of capitalism. He makes a case for curbing the abuses of dirty money to curb poverty, reduce crime and defeat terrorism.
This might be one of the most important books of recent years. Readers should tell their representatives in Congress about it.
(c) 2005, Fort Worth Star-Telegram. Distributed by Knight Ridder/Tribune News Service.