Financial Transparency Coalition

Today Global Financial Integrity released yet another enlightening report.  This one, titled “Transnational Crime in the Developing World,” estimates the global illicit flow of goods, guns, people, and natural resources worldwide.  The paper puts the global figure, which both flows in and out of developing countries, at $650 billion, of which drugs account for $320 billion and counterfeiting accounts for $250 billion.  In a Foreword to the paper, Raymond Baker notes “netting the economic effects of criminally derived outflows and inflows is flawed reasoning because both sides of the equation produce adverse consequences for nations at risk.”  As a result the figures above represent the overall size of these criminal markets and not the money flowing out of developing countries as a result of these activities.

This reasoning is quite appropriate.  In fact, by only estimating the size of the criminal markets, I believe this paper dramatically understates the adverse economic impacts of these activities on developing countries.

The author, Jeremy Haken, does an excellent job of outlining the economic impacts of these markets, calling out their role in promoting poverty, inequality, state weakness, and in forestalling economic prosperity.  Each of the twelve sections, one for each type of criminal activity, are broken into an overview, the total value of illicit flows related to that activity, a section on profit distribution, and then a section which describes the impact of this activity on the developing world.  This is the appropriate way to discuss these data because the adverse impacts of these activities are not limited to the loss of capital or currency.  While $650 billion is a useful starting point, it does not begin to cover the economic losses due to some of these activities.

The drug trade takes up the overwhelmingly largest portion of these flows.  However the economic losses which result from the drug trade are not limited to the profits themselves.  As Haken notes many of the profits from the drug trade funnel into either the shadow economy or to the criminalization of the state. It should be noted that proceeds of drugs can flow into the legitimate economy, but the positive effects do not outweigh the negative ones.  The report also states that “simply increasing the amount of money in a country does not automatically benefit the economy of the country in question. Rather, these criminal flows can do immeasurable structural damage to developing economies by empowering forces which erode the capacity of the state.”  Haken’s analysis is an overview of a massive problem, so he does not have space to discuss other adverse impacts, but it’s important to remember the drug trade wrecks other havoc on the economy.

Other trades, which have much lower volumes, have even more understated results.  The most obvious examples include the illicit timber trade or the illicit wildlife trade, though all illicit trades include negative externalities. The international trade in illegally logged timber, for example, can strip developing country governments of much needed tax revenues, promote corruption and conflict, and undermine the rule of law, but it also has the added economic impact of robbing these nations of a useable and necessary resource.  It is estimated that 1.2 billion people depend on forests for wood, fuel, fodder and food.  Forests provide a vital global environmental good to the entire world as they serve as a carbon sink and absorb carbon from the air; this in turn is an important resource for the developing countries which hold them.

As Stephen O’Brien, the UK Undersecretary of State in the Department of International Development has noted:

In the world’s poorest countries, illegal logging fuels corruption and results in billions of pounds in lost revenue every year. For the hundreds of millions of people across the globe who depend on forests for their livelihood, curbing the scourge of illegal logging means vital sources of income remain protected.