– Crime, corruption and tax evasion cost the Mexican economy more US$872 billion between 1970 and 2010 according to a new report from Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. The illicit financial outflows, which averaged a massive 5.2% of GDP, grew significantly over the 41-year period studied from just US$1 billion in 1970 to US$68.5 billion in 2010.
“This is a devastatingly large amount of money for any developing country to lose,” said Raymond W. Baker, director of GFI. “This is $872 billion lost, which could have been used to develop the Mexican economy, to invest in education, to build roads, or to fight the drug cartels. The negative ramifications are huge for everyday Mexicans.”
The study, which was authored by Dr. Dev Kar, GFI lead economist, saw illicit outflows explode from an annual average of US$3.0 billion in the 1970s, to US$10.4 billion in the 1980s, to US$17.4 billion in the 1990s, and US$49.6 billion in the decade ending 2009.
Moreover, illicit outflows were found to drive the domestic underground economy and contribute to the deterioration of economic governance. Likewise, growth in the underground economy was also shown to drive illicit flows, creating “a snowballing effect where both the underground economy and illicit flows continue to grow at an increasing rate unless something or someone intervenes,” according to Dr. Kar, a former senior economist at the International Monetary Fund.
The report concluded that policymakers should focus on measures to curtail trade mispricing, a form of trade based money-laundering, which skyrocketed in the years after NAFTA came into effect and which was shown to account for 73.7% of total illicit financial outflows over the 41-year time period. The study recommends three policy measures to reduce trade mispricing:
Require the utilization of computer software to detect export and import prices that are clearly out of line with international norms; (49)
Require that the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing in an attempt to avoid duties or taxes has taken place and that the transaction is priced using the OECD arms-length principle; (51) and
Undertake additional measures to curb abusive transfer pricing. (51)
In addition to recommending policies to curtail trade mispricing, the report recommends four additional policy actions to reduce illegal capital flight from Mexico:
expand double tax avoidance agreements; (53)
require automatic cross-border exchange of tax information on personal and business accounts; (54)
maintain macroeconomic stability, which includes low budget deficits, low external debt levels, and low and stable inflation rates; (56)
improve overall governance in order to reduce the propensity to pay bribes and ki