Mexico's economy lost a staggering $872 billion dollars over a 40-year period to tax evasion, corruption and crime that included drug, arms and human trafficking, according to a new study by Global Financial Integrity.
Trade-related schemes by domestic and transnational companies also contributed to the illicit capital flight between 1970 and 2010, said the report based on GFI's study titled "Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy."
"This is a devastatingly large amount of money for any developing country to lose," said Raymond W. Baker, director of of Global Financial Integrity (GFI) and expert on corruption, money laundering, growth and foreign policy issues.
GFI is a program of the Center for International Policy, a think tank in Washington, D.C., which conducts research and promotes policies and safeguards to end the cross-border flow of illegal money.
"The negative ramifications are huge for everyday Mexicans," Baker added. "This money that's gone could have been used to develop the Mexican economy, invest in education, build roads or fight the drug cartels."
Dev Kar, the GFI's principal economist, said the amount of illegal money that left the country grew from an annual average of $3 billion in the 1970s to $17.4 billion in the 1990s and to $49.6 billion in the decade that ended in 2009.
"Moreover, illicit outflows (of money) were found to drive Mexico's underground economy, which includes, among other
things, drug smuggling, arms trafficking and human trafficking," the GFI report said.
The report said that illegal capital flight contributes to deteriorating governability, while the corruption involved in illegal capital flight often includes bribery and kickbacks by wealthy Mexican citizens.
Also, an estimated 70 percent of people in Mexico, such as street vendors, are involved in the underground economy to some extent, which robs the country out of badly needed tax revenues.
GFI considers money to be illicit if the source, use or movement of the funds is illegal, and its flow estimates are based on cross-border transfers of illicit money. The study for its report does not include money laundering within the country or cash transactions that are used in illegal activities.
The GFI report said that trade-based money laundering practices, such as trade mispricing, contributed to nearly 74 percent of illicit money outflows, a practice that skyrocketed after the North American Free Trade Agreement went into effect in 1994.
According to the Tax Justice Network in Washington, D.C., trade mispricing does enormous economic damage to countries, and can occur within a multinational company, as in the case of transfer mispricing, or in secret deals between unrelated domestic and or foreign-owned companies.
In a separate study, Simon Pak, president of the Trade Research Institute and a professor at Penn State University, examined highly overpriced or underpriced traded goods, and determined that suspicious pricing probably occurs for money-laundering or capital flight purposes.
The GFI report said that the top three destinations for illicit money from Mexico are the United States, Europe, and tax havens in the Caribbean.
The report also shows how Mexico's peak capital flights corresponded to the country's major economic crises, including the 1994 peso crisis and the 2007 global recession. During these economic shocks, money flew out of Mexico, which worsened the short and long-term effects on its citizens.
For example, the illicit money that left the country during the 1994 peso crisis amounted to 3.8 percent of Mexico's gross domestic product, compared to an average 1.3 percent of GDP from 1992 to 1993. During the global economic slowdown of 2007, Mexico's illicit capital flows were 8.8 percent of GDP, compared to an average 5.5 percent of GDP from 2005 to 2006.
Despite the pummeling to Mexico's economy from illicit capital flows, the University of Texas at El Paso Border Region Modeling Project says the outlook for the country's economy in 2013 is a good one.
"In 2013, GDP and private consumption are expected to grow by 3.5 percent and 3.6 percent, respectively," according to the UTEP project's latest Mexico Consensus Economic Forecast.
"A pattern of strong growth in investment is expected to continue, with this variable increasing by 6.1 percent. Moderate trade growth is also predicted to continue, with imports increasing by 7.1 percent and exports by 6.6 percent," the UTEP forecast report said.
GFI executives presented a copy of its report to Mexican and U.S. officials, with recommendations on ways to reduce illicit capital flight. Among other things, GFI recommended requiring software that detects export and import prices that are out of line with international norms, and expanding international agreements to avoid double taxation,
GFI also recommended requiring automatic cross-border exchange of tax information on personal and business accounts, an arrangement that Mexico already has with Canada but not with the United States.
"Mexico, since the 1970s, has asked for a similar arrangement with the U.S. government, but it hasn't happened," Baker said. "The response from the U.S. over the years has been that it's too complicated to put into place."
Illicit money flows
Top countries with the highest cumulative illicit financial outflows between 2000 and 2009:
-- China: $2.74 trillion
-- Mexico: $504 billion
-- Russia: $501 billon
-- Saudi Arabia: $380 billion
-- Malaysia: $350 billion
Source: Global Financial Integrity
Most Popular Stories
- SEO Traffic Lab Celebrate Wins at Digital Marketing Event 'Internet World 2013' in London
- Social Media Initiatives Should Follow Customers' Lead
- Apple CEO: Offshore Units Not a 'Tax Gimmick'
- U.S. Senate Accuses Apple of Large-scale Tax Avoidance
- UTEP Water Recycling Project Wins Venture Titles
- Marketo Makes a Mint in IPO: Stock Shoots Up More than 50 Percent
- Bieber Booed at Billboard Awards
- Crude Oil Up, Gasoline Down
- Austin Startup Compare Metrics Raises $3.5 Million for Expansion
- Why So Many Top 'Car Guys' Are Actually Women