Critics of the Indian government's liberation policies and globalisation watchword now have some more numbers to nail the government with. India lost $104 billion in illicit financial flows between 2000 and 2008, according to a groundbreaking report which used World Bank and IMF data to estimate the
quantity and patterns of illicit financial flows coming out of developing countries.
The figures are from Global Financial Integrity (GFI)'s Illicit Financial Flows from Developing Countries 2000–2009 report.
The only thing the Indian government can find solace in is the fact that India is not the worst of the lot – it is China, which lost $2,176 billion during the period. India does not figure in the top 10 (India, in fact, is placed 15th):
- China $2.18 trillion
- Russia $427 billion
- Mexico $416 billon
- Saudi Arabia $302 billion
- Malaysia $291 billion
- United Arab Emirates $276 billion
- Kuwait $242 billion
- Venezuela $157 billion
- Qatar $138 billion
- Nigeria $130 billion
The Indian government might also say that things have improved since the country was placed fifth in the 2008 report which looked at the period between 2000 and 2006. But, the report says, this doesn't mean much. It explains:
There are three main reasons why average illicit flows from India slipped in the country rankings and they have nothing to do with policies and conditions required for the curtailment of such outflows. For one, illicit outflows from several oil producers such as the United Arab Emirates, Kuwait, Venezuela, Qatar, Nigeria, Kazakhstan, and Indonesia (in that order) now outpace those from India. For another, there were substantial inflows of illicit capital into India (mostly through the balance of payments but also through trade mispricing) that were set to zero under the gross outflows method. As we have argued elsewhere, traditional economists commit a serious mistake when they net out unrecorded illicit inflows from outflows as if such inflows somehow benefit a country or can be used by a government for productive purposes. Finally, the United Arab Emirates and Qatar, which have the sixth and ninth highest average illicit outflows respectively, were excluded from the 2008 IFF Report because of lack of balance of payments and debt data. These two countries were included in this update after we were able to obtain the requisite macroeconomic data from published IMF country reports.
That's not all. The report Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008 had found that macroeconomic conditions as reflected in the budget deficits and inflation policy did not appear to drive such outflows of capital. However, this finding is subject to two limitations:
First, a more comprehensive measure of fiscal imbalances (including the deteriorating finances of the state and local governments) available for the entire sample period of that case study, 1948-2008, could have better captured the significance of fiscal deficits in driving illicit flows. Second, the wholesale price index (WPI) used as a measure of inflation in that study may not be reliable enough to capture the link between inflation and illicit outflows posited in the economic literature. The most important finding of the GFI study on India is that while economic reform can be largely credited for driving faster economic growth, large sections of the population could not benefit from the growth, and income distribution became more skewed. The resulting proliferation of high net worth individuals drove illicit flows in the absence of an improvement in public and corporate governance. Moreover, another by-product of reform namely, trade liberalization, spurred an expansion of the traded sector relative to GDP. The resulting trade openness provided more opportunities for related and unrelated parties to misprice trade and shift billions of dollars in illicit capital from the country.
This particular report was about corruption. The current one is more of ineptness and too much of secrecy. The GFI report, in fact, has a one-point solution to this: increasing transparency in the global financial system is critical to reducing the outflow of illicit money from developing countries.
That's something that critics of the Manmohan Singh government have been harping on for ages. The United Progressive Alliance (UPA) regime is anything but transparent.
Looking at things globally, illicit outflows increased from $1.06 trillion in 2006 to approximately $1.26 trillion in 2008, with average annual illicit outflows from developing countries averaging $725 billion to $810 billion, per year,over the 2000-2008 time period measured. Illicit flows increased in current dollar terms by 18.0 per cent per annum from $369.3 billion at the start of the decade to $1.26 trillion in 2008. When adjusted for inflation, the real growth of such outflows was 12.7 per cent. Real growth of illicit flows by regions over the nine years is as follows:
- Middle East and North Africa (MENA) 24.3 per cent,
- Developing Europe 23.1 per cent,
- Africa 21.9 per cent,
- Asia 7.85 per cent, and
- Western Hemisphere 5.18 per cent.
Asia accounted for 44.4 per cent of total illicit flows from the developing world followed by Middle East and North Africa (17.9 per cent), developing Europe (17.8 per cent), Western Hemisphere (15.4 per cent), and Africa (4.5 per cent).
The report points out some trends:
- Trade mispricing was found to account for an average of 54.7 percent of cumulative illicit flows from developing countries over the period 2000-2008 and is the major channel for the transfer of illicit capital from China.
- Bribery, theft, kickbacks, and tax evasion were the greatest conduit for the illicit financial flows from the major exporters of oil such as Kuwait, Nigeria, Qatar, Russia, Saudi Arabia, the United Arab Emirates, and Venezuela.
- Oil exporting countries, like Russia, the United Arab Emirates, Kuwait, and Nigeria, are becoming more important as sources of illicit capital.
- Mexico is the only oil exporter where trade mispricing was the preferred method of transferring illicit capital abroad.
- With half a trillion in illicit outflows in 2008 alone, Asia accounted for the largest portion of illicit financial flows from the developing world. Over the nine-year period examined, 89.3 percent, on average, of total illicit flows from Asia were transferred abroad through trade mispricing.
- Financial flows from Malaysia have more than tripled from $22.2 billion in 2000 to $68.2 billion in 2008. This growth rate, seen in few Asian countries, may be a result of significant governance issues affecting both public and private sectors.
- In real terms, illicit outflows through trade mispricing grew faster in the case of Africa (28.8 percent per annum) than anywhere else, possibly due to weaker customs monitoring and enforcement regimes.
- GFI projects that in 2009 illicit flows from developing countries will total $1.30 trillion. This represents a significant slowdown from the 18.0 percent rate of growth over the period 2000-2008. This projected slowdown of illicit financial outflows is mainly due to a decline in trade mispricing resulting from a slowdown in world trade in the wake of the global financial crisis.
If that doesn't sound bad enough, listen to what GFI has to say, "The illicit outflows measured in this report are approximately 10 times the amount of official development assistance (ODA) going into developing countries. The ratio of illicit financial flows coming out of developing countries compared to ODA is 10-1, meaning that for every $1 in economic development assistance which goes into a developing country, $10 is lost via these illicit outflows."
Whenever money leaks out, someone is always there to tap it. It is our right to know, who.
