Financial Transparency Coalition

Today Global Financial Integrity released a much-needed update report called “Illicit Financial Flows from Developing Countries: 2000—2009.”   The paper notes “illicit outflows increased from $1.06 trillion in 2006 to approximately $1.26 trillion in 2008,” with annual illicit outflows from developing countries averaging $725 billion per year between 2000 and 2008.  As I’ve noted, that’s over 3,000 McDonald’s apple pies for every American man, woman, and child.

Outflows from China alone account for a significant chunk of that $725 billion, actually about a third, or $266 billion.  Together the top ten countries (China, Russia, Mexico, Saudi Arabia, Malaysia, UAE, Kuwait, Venezuela, Qatar and Nigeria) average about $546 billion between 2000 and 2008, or about 75% of the total.  These estimates, however, may understate the total.  Significant data problems prevent the authors from gathering accurate estimates from the entire developing world. For example, Afghanistan, Iraq, and several African are omitted from one portion of the estimate.  We have good reason to believe such countries also experience significant illicit outflows.

The numbers in this report are big (particularly when you sum up annual totals in a headline).  As such they rightfully command big attention.  I’m glad to see GFI shining a light on the problem and I hope these numbers continue to grab interest and spark debate.  This is valuable research that is currently filling a vacuum amongst academics and policy makers.  But as GFI continues its work and analysis on a worldwide basis, I would be interested to see GFI explore these issues in greater depth worldwide.  To that end, I have three questions.

1. What are the drivers of illicit financial flows?

GFI recently released another wonkish, yet informative, report on the drivers and dynamics of illicit financial flows from India.  While it would be utterly infeasible to implement the depth of analysis Dr. Kar applied to India on the scope of the entire world, it would nonetheless be interesting and enlightening to read a report that attempts to explain the drivers of illicit flows on a worldwide basis.  Of course, illicit financial flows manifest themselves differently on a case-by-case basis, but such a report may nonetheless prove useful as the study of IFFs progresses, particularly as more countries realize the problem and search for solutions.

2. How does the picture of IFFs look in the context of capital controls worldwide?

Capital controls are restrictions on exchanges of domestic currency and they are one of the two major forms of regulations illicit financial flows seek to circumvent (the other is corporate taxes).  They exist in many contexts and to various degrees, but they do not exist uniformly across all developing countries.  As sound and detailed data exist on the types and manifestations of capital controls worldwide, I would be interested to see an analysis that explored IFFs on a country-by-country basis in light of each nation’s prevailing exchange rate regime.

3. What are the implications of IFFs for monetary and fiscal policy?

GFI and the Task Force have often repeated their recommendations to curtail illicit financial flows.  Their suggestions are useful and would be effective.  While it is clear these numbers are big, there does not exist a thorough, clear analysis of their implications for the economics of developing countries.  Of course the impact of IFFs on domestic economies is going to vary widely, depending on the monetary and fiscal conditions of each nation, so it may be infeasible to conduct such a study on the entire cross-section of developing countries included in this report.  Nonetheless, a study of perhaps the top ten or top twenty might serve as a useful point of guidance for those interested in this topic.

GFI, Dev Kar, and Karly Curcio have produced a useful and relevant analysis that I hope will be cited and used by reporters and policy makers worldwide.  I am grateful GFI continues to authorize excellent research, which, as I have noted before, does not always conform to the “herd mentality.”  It is this kind of thinking that is required to change an unacceptable status quo.