Capital Flight’s Elusive Estimate Integrity
The Washington-based illicit flow watchdog group Global Financial Integrity adjusted and criticized World Bank methodology to reach higher calculations for developing country exit through 2010, with China dominating the pack but MENA numbers growing fastest in a precursor to ensuing political and economic revolts. The new approach attempts to eliminate legitimate capital outflow for commercial purposes from the total, but still encounters the difficulty of tracking movements from origins with opaque sovereign wealth funds. Hot money transmission of both types increased over 2009 which was the height of the global credit crisis. The loss ranges from $850 billion to $1.2 trillion for all regions, implying a 15 percent annual jump over the decade. False trade invoicing is the overwhelmingly preferred channel, with only 20-30 percent resulting from other balance of payments leakage. Asia accounts for 60 percent of the figure, mainly from China and India. The Western Hemisphere is next at 15 percent, followed by the Middle East at 10 percent, and emerging Europe and Africa are roughly equal with 7 percent. Yearly outflows spiked 25 percent from Gulf oil producers, with Sub-Sahara Africa almost matching the pace. Russia is an exception to the traditional manipulation of import/export billing as unrecorded transactions continue to drive the phenomenon, which the central bank puts for 2012 around $80 billion.
Banks and companies have also tapped the Eurobond market for half that sum, even as corporate governance scores remain low and ratings agencies warn about the 30 percent rise in consumer lending. At the opposite extreme is Chinese under and over-invoicing for 90 percent of activity, as export growth was subdued during the communist party leadership switch and the island standoff with Japan further hampers cross-border trade. The capital account tipped into quarterly deficit as residents moved offshore both to park funds and seek better returns than in the flat Shanghai stock exchange despite bargain valuations. Cumulative illegal flight from 2001-10 was $2.8 trillion, five times runner-up Mexico’s at $475 billion fueled by drug cartel money. This year in contrast foreign portfolio investment is at a record, with allocation to government bonds at almost $40 billion as equities are up 25 cent on the MSCI index. PRI President Pena Nieto again pledged energy and tax reform at his inauguration along with near-term elimination of the budget deficit.
Malaysia is third at $285 billion with ethnic unease combining with commodities riches, and the pattern may be repeated as the ruling National Front may resort to religious and populist devices to avoid addition erosion of its parliamentary majority in imminent elections. India and Nigeria are tied at about $125 billion, and their respective stock markets are ahead 20 percent and 40 percent into December. The Singh government in its final stretch has moved to slash state control in the retail and other sectors which may aid the problem, while Nigeria’s new $1 billion sovereign wealth pool intends to break with past flighty behavior toward petroleum proceeds.
