Financial Transparency Coalition

I once heard that “Finance is the art of passing money from hand to hand until it disappears.”  The truth of this little phrase has buzzed in my mind over and over as I pass my days researching billions of disappearing dollars.

And what, pray tell, do I mean by “disappearing dollars?”  I’m talking about illicit financial flows (IFFs), which in 2006 were somewhere between $850 billion and $1 trillion dollars.  IFFs are bundles of money that are sneaked out of low-income countries illegally (and usually wind up in the developed world).  This is not limited to money laundering, drugs, and crime.  IFFs include wealth sent out to avoid irritations like taxes or to skirt pesky capital controls, which are the systems that developing countries use to keep their economies from bleeding money.  Actually that’s not a bad analogy.  You can think of capital controls like bandages on a patient who has been mauled by a bear, which makes IFFs a lot like…another bear in the hospital room, nibbling on the bandages the doctor has just replaced.

One trillion dollars is hard to visualize, so to help people relate we often compare IFFs to official development assistance** (ODA).  Namely, capital flight from the developing world is ten times bigger than all foreign aid.  This means that for every $1 of aid that enters the developing world through the front door, $10 escapes out the back.

This comparison got me thinking about other ways to relate the massive volume of IFFs.  Which reminded me of CNN and apple pies.  (Yes, you did read that correctly.)  CNN, while covering the $700 billion financial bailout in 2008, tried to relate this vast amount to the ordinary tax payer.  They told us, much to my amusement and chagrin, that the bailout would be the equivalent of buying 2,000 McDonald’s apple pies for every American.

So what are $850 billion to $1 trillion IFFs in apple pies?  About 2,200 to 2,800 pies per American.

You might say, “But wait! $1 trillion is a lot to Americans, ‘cause there are only 300 million of us, but there are over 5.5 billion people in the developing world!”  And you’d be right, except for one little detail.  The total income of all those people—those 5.5 billion people—is about the same as America’s yearly income.  We earn about $13 trillion/year.  They earn $14 trillion***.   So when their economies collectively lose $1 trillion a year, it’s comparable to the U.S. economy losing $1 trillion per year.  I can just picture CNN’s hysterical reaction to that.

Here are some other ways to think about it:

• $1 trillion was a little less than half of the entire developing worlds’ government revenue in 2007 ($2.5 trillion), which means that for every $2.50 those governments earned, $1 crept out of their countries.
• $1 trillion was about 8% of the entire developing worlds’ income or $181 (159 apple pies) per person.  This is particularly significant given the fact that the average annual income of the developing world is only $2,366 per year (about 2,075 apple pies per year).
• $181 per person is more than the developing world’s total health spending per person ($114 per person)
• $1 trillion is 500 times what the World Bank will spend on emergency food aid in the next two years
• If the $1 trillion had been taxed, it would have generated an additional $144.5-$170 billion in government revenue for the developing world, in 2006 alone (assumes an average 17% tax rate).

Needless to say, with or without the apple pie comparison, this is a pretty big problem.  But it’s not an unsolvable one.  Much of the illicit financial flows escape through trade mispricing (approximately $400 billion in 2006), which could be mitigated if we required parties conducting an internationl transaction to sign a statement in the commercial invoice certifying that no trade mispricing had taken place.   This would help to make those “invisible dollars” a little more visible and maybe keep some of those apple pies where they belong.

notes:

* Developing countries includes (basically) African countries, Latin American countries, Middle Eastern countries, Asian countries (except Japan and South Korea) and Eastern European countries

** ODA is aid to developing countries by both governments and international organizations like the UN & IMF.

*** For accuracy’s sake, though, don’t forget that $1 in the United States is not quite the same as $1 in the developing world.  $1 will get you more than a piece of apple pie in Africa.

All of the figures above can be found in the World Bank’s data and research page.  Developing countries are classified as “low and middle income” countries.