A Rogue Economist

Loretta Napoleoni is an expert in money laundering, organised crime and the global black economy. She was one of the first people to interview notorious Italian terror group, the Red Brigades, and is a senior partner of G Risk, a London-based risk agency.

As Chairwoman of the counter terrorism-financing group for the Club de Madrid, Napoleoni brought Heads of State from around the world together to create a new strategy for combating the financing of terror networks. Her book Terror Incorporated was an international bestseller, while her latest book, Rogue Economics, examines the international black economy and the aftershocks of globalisation.

We caught up with her while she was in town for the Sydney Writers’ Festival

newmatilda.com: Where did your research into money laundering and terrorism begin?

Loretta Napoleoni: I’ve been working on this topic for a very long time. I started by disaggregating money laundering takings from the percentage that is related to terrorism, and I became an expert on money laundering. What I do mostly is to track this money: where it’s coming from and where it’s going. I look at money laundering and terrorist financing mostly from the global point of view – I tend to give a global picture. Rogue Economics is very much a book about the consequences of globalisation – and the negative consequences of globalisation.

I was struck by your research on the growth of international sex slavery for Rogue Economics.

It’s quite shocking actually. There are a few people who have made the correlation between the growth of democracy and slavery, but nobody has put it in that context [of the rise of sex slavery]since the fall of the Berlin Wall.

In the book you say that "No-one controls the rogue economy". What did you mean by that?

What I say is that this is a process we’ve also seen in the past, in the history of human kind during the industrial revolution and the 1929 crisis, it is impossible to control the economy when the economy goes wild, in a time of great transformation. So we’ve got to a circumstance where we’ll have to accept it and wait for this process to run its course. This is why I say nobody controls rogue economics, because nobody can stop this process.

What we can we do, of course, is understand the process, to create strategies to protect ourselves from the consequences of this transformation while it is taking place.

You talk about post-World War II world economic structures such as the Bretton Woods agreement, and the breakdown of those structures in the 1970s. Do you believe there is enough regulation on the movement of global capital?

No. There is absolutely not enough regulation at the moment. The Bretton Woods model is neo-liberalism – a retreat of the State from the political arena in order to let the market basically take care of the economy. But also there is no regulation of it because the economy is moving so fast that politics really can’t control it. So even if we were not in a neo-liberal phase, we still would face endemic weakness of politics in the domain of economics because the economy is moving too fast.

Is there anything we can do to regulate the movements of global capital, given the increasing scale of the unregulated black economy?

If you mean "we" in terms of governments, I think there is something that governments can do for sure, which is cooperate more with each other. A lot of what is happening with money laundering for example is very much related to the loopholes which exist in the legislation moving from one country to another country. That can easily be fixed by introducing more homogenous legislation in every single country. But that is very difficult. It is difficult to homogenise politics, while of course the economy is totally globalised. But that is one strategy.

But apart from that, the regulation always comes too late. Look at the sub-prime mortgage crisis – the regulation should have been in place before [it happened], but who could have predicted that sub-prime lending was going to become this gigantic bubble which is about to burst and affect the entire world economy? Nobody could have predicted that 10 years ago, and yet it is happening.

But we seem to have speculative bubbles develop in rich economies, so to some degree we can predict that they will develop periodically?

Yes, but this is the first globalised bubble. I don’t think this is just a bubble, it has been created by structural problems, and the structural problem is the lack of regulation of derivatives. So the consequences of this crisis will be much more serious.

Yes because the size of the global derivatives market is absolutely enormous, isn’t it?

Well, nobody really knows how big. Nobody really knows how wide the sub-prime exposure is. That’s another big problem, and because we are in a global economy and banks all over the world had exposure to mortgage-backed securities which were linked to sub-prime, we really don’t know how big the bubble is. That’s another typical situation of rogue economics – the economy is running wild and you really can’t predict what will happen next.

Do you believe that capitalism itself is the problem – without taking a Marxist view, is it inevitable that capitalism will create these problems?

I don’t think it is necessarily a crisis of capitalism, it is just a transformation. I wouldn’t say this is happening because global capital is taking over the world. I think what is happening is because of globalisation – meaning, knocking down the Berlin Wall and kick-starting the process of globalisation which was still, at that time in 1989, very much circumscribed only to the so-called "free world". That process opened the gates for rogue economics to come back. It’s not that rogue economics is a consequence of global capitalism, just as the industrial revolution or [the Wall Street crash of]1929 [were not consequences of capitalism]– [but]it is going to be a crisis of capitalism [in so much as]capitalism is the only economic system in place in the world.

You also talk about how after the fall of the Berlin Wall billions of workers flooded onto the international labour market. You say that has forced down wages in the rest of the world.

Yes, the labour force has doubled in the space of a couple of years, because knocking down the Wall has given the opportunity to people from Eastern Europe, and then eventually the dismantling of Communism has given the opportunity for people from Asia, to access Western markets.

And let’s not forget that we have liberalised our markets and made it easier for people to come and work in our countries. These people are willing to work for less money than people in the West and this has suppressed the level of salaries.

But at the same time, salaries are depressed because of outsourcing and off-shoring, so people can take their activities to countries where labour costs are much lower, or people can outsource a part of their business to these countries. That has driven down salaries in the West so that today in real terms they are lower than they were in the 1970s or early 1980s.

And finally, there has been a distinct reduction in social wages – the benefits linked to wages.

Here in Australia, we view the rise of China as an economic force essentially as a very good thing. The vast majority of economic commentators in Australia view it as a positive for Australia, because we can export minerals and resources to China. What is your view on the rise of China as a global economic power?

Well my view is that it is positive. What I say is that in the long run, the end of rogue economics will only come by the creation of a new system where Chinese economics will merge with Islamic finance. This new system will bring rogue economics back under control and by doing that it will end this period of economic chaos, so I’m fairly positive about that. Now in order to reach that point we’ll have to go through a new phase of rogue economics which for the West will be particularly hard, because the new world will be a world where the epicentre will not be the West anymore, but will be China and the Middle East.

Do you think the West will become poorer than these centres? Is that inevitable?

No, I don’t think so necessarily – I can’t predict. I think in terms of economic growth, these countries will be the countries that will produce the largest parts of the world’s GDP, where today we’re still in the situation where the US produces 22 per cent of the world’s GDP. Now in terms of poverty it depends on how this wealth is going to be redistributed – if it is going to be redistributed equitably or not, and at this stage it’s too early to tell.

Yes, because in your book you deal with the issue of inequality, and the phenomenon where by a very small percentage of high income earners are capturing much of the wealth being created in our society.

What I say in the book is that since the fall of the Berlin Wall we’ve seen a redistribution of wealth in favour of the rich, and this is because the State has retreated from the economic arena, and the State really has not redistributed wealth. And the consequences are really quite shocking. Today the median income of countries like the US – the income sandwich between the rich and the poor – is actually lower in real terms than the median income of the 1970s. That doesn’t mean that there hasn’t been growth – there has been growth, but the largest share of economic growth has been taken by the small percentage of people who are rich, and today are the super-rich.