Poor countries are losing $1 trillion a year to illicit capital flows – 7 times the volume of aid

December 16, 2013

     By Duncan Green     

I was surprised not to see more coverage of last week’s hard-hitting report from the Global Financial Integrity watchdog. Illicit Financial Flows fromGFI Developing Countries: 2002-2011 has a whole bunch of killer facts about the escalating haemorrhage of wealth from poor countries. Here are some highlights. My additions in square brackets/italics:

“We estimate that illicit financial outflows from the developing world totalled a staggering US$946.7 billion in 2011, with cumulative illicit financial outflows over the decade between 2002 and 2011 of US$5.9 trillion. [By way of comparison, total global aid in 2011 was $134bn (not mn as first printed -thanks to all of you who pointed this out) – 14% of illicit flows – and has fallen since, even as illicit flows keep booming. Want that as a soundbite? ‘For every dollar of aid, the South loses $7 in illicit outflows; developing countries are losing $2.6 bn a day/$108m per hour/$2m per minute/$30,000 per second’.]

This gives further evidence to the notion that illicit financial flows are the most devastating economic issue impacting the global South.  Large as these numbers are, perhaps the most distressing take-away from the study is just how fast illicit financial flows are growing. Adjusted for inflation, illicit financial flows out of developing countries increased by an average of more than 10 percent per year over the decade. Left unabated, one can only expect these numbers to continue an upward trend.

Heat map of illicit flows by country, % of GDP

Heat map of illicit flows by country, % of GDP

The pattern of illicit outflows, trend rate of growth, and impact in terms of GDP all vary significantly among the five regions. Asia accounts for 39.6 percent of total illicit outflows from developing countries, the largest share of illicit flows among the regions, and six of the top 15 exporters of illicit capital are Asian countries (China, Malaysia, India, Indonesia, Thailand, and the Philippines). Developing Europe (21.5 percent) and the Western Hemisphere (19.6 percent) contribute almost equally to total illicit outflows.

While outflows from Europe are mainly driven by Russia, those from the Western Hemisphere are driven by Mexico and Brazil.  The Middle East and North Africa (MENA) region accounts for 11.2 percent of total outflows on average. MENA’s share increased significantly from just 3 percent of total outflows in 2002, reaching a peak of 18.5 percent in 2009, before falling to 12 percent in 2011. In comparison,  Africa’s share increased from just 3.9 percent in 2002, reaching a peak of 11.1 percent just  before the Great Recession set in (2007), before declining to 7 percent in 2011, roughly on  par with its average of 7.7 percent over the decade.

The volume of total outflows as a share of developing countries’ GDP increased from 4.0 percent in 2002 to 4.6 percent in 2005. Since then, barring a few upticks, illicit outflows have generally been on a declining trend relative to GDP, and were 3.7 percent in 2011.  While Africa has the smallest nominal share of regional illicit outflows (7.7 percent) over the period studied, it has the highest average illicit outflows to GDP ratio (5.7 percent), suggesting that the loss of capital has an outsized impact on the continent. [Got that? The poorest continent has the biggest problem of illicit outflows]

capital flightThe MENA region registered the fastest trend rate of growth in illicit outflows over the period studied (31.5 percent per annum) followed by Africa (20.2 percent), developing Europe (13.6 percent), Asia (7.5 percent), and Latin America (3.1 percent). The sharply faster rate of growth in illicit outflows from the MENA region is probably related to the rise in oil prices.

Trade misinvoicing comprises the major portion of illicit flows (roughly 80 percent on average).  Balance of payments leakages fluctuate considerably and have generally trended upwards from just 14.2 percent of total outflows in 2002 to 19.4 percent in 2011.

[Statistical analysis shows that] An increase in corruption increases trade misinvoicing while capital account openness leads to greater export misinvoicing in both directions if openness is not accompanied by stronger governance. In fact, as the experience of developed countries shows, greater openness and liberalization in an environment of weak regulatory oversight can actually generate more illicit flows.’ [So by making it easier for people to shift $, liberalization risks making things worse not better, which fits with the rapid rise in volumes of illicit flows]

Maybe one reason for the lack of coverage is that the report is a bit, errm, boring. It fizzles out just when advocacy should have come in to follow up the number crunching, and the format is very old school, with none of the razamatazz required to get a buzz going – infographics, animations, short video presentations etc. But the content is excellent, so could someone out there give the data geeks a hand with the advocacy and comms next time?

December 16, 2013
Duncan Green