by DEV KAR
The trade mispricing model compares a country’s recorded imports to what the world says it exported to that country; similarly, the country’s recorded exports are compared against world imports from that country. Import values are adjusted for the cost of freight and insurance before they are compared to exports. GFI’s estimates of trade mispricing are based on the gross excluding reversals (GER) method which tracks illicit outflows as a result of export under-invoicing and import over-invoicing.
Primary Findings
The report finds that Mexico lost a total of $872 billion in illicit financial flows (or illegal capital flight) over a 41-year period from 1970 to 2010. These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.
IFF Breakdowns:
- Total capital flight represents approximately 5.2 percent of Mexico’s GDP over the 41-year period ending in 2010; IIlicit flows peaked in 1995 at 12.7 percent of GDP.
- Average outflows increased sharply in each successive decade; They were $3 billion in the 1970s, $US10.4 billion in the 1980s, $US17.4 billion in the 1990s, and $49.6 billion in the decade ending 2009.
IFF Drivers: The growth of the underground economy and trade mispricing are found to be significant drivers of Mexico’s illicit financial flows. In fact, illicit flows and the underground economy are found to drive each other, creating a feedback loop. (12)
Analysis
There is a stable relationship between the volume of illicit outflows and the onset and aftermath of Mexico’s macroeconomic crises during the 41-year period. With reference to the six crises studied, illicit outflows increased in the crisis year compared to the two years preceding the crisis. (4)
Furthermore, illicit flows through trade mispricing rose sharply after NAFTA came into being. (47) The following chart shows this acceleration:
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