http://www.asiasentinel.com/index.php?option=com_content&task=view&id=5065&Itemid=422
Illegal Capital Flight Handicaps Asian Economies
Written by Philip Bowring
Friday, 21 December 2012
The only way to travel
But report by Global Financial Integrity may be misstating the case
The recent report by Global Financial Integrity, a US-based group aimed
at improving governance, contains some mind-boggling data about the prevalence
of illicit money transfers costing developing countries hundreds of billions of
dollars.
The bottom line, the report says, is that over the past 10 years these
countries have lost a total of US$5.8 trillion. Of this, Asia has accounted for
nearly half, with China leading the field by a long way and Malaysia,
Philippines, Indonesia and India all appearing in the top ten list of losers,
who together account for 75 percent of the global total.
However, although the numbers are useful indicators of the extent of
evasion of currency regulations and taxes, they can be criticized as greatly
over-stating national as opposed to purely government revenue losses.
The figures comprise two principal components. Primarily they are the sum
of discrepancies between export and import data of the countries concerned with
the comparable data of their trading partners. Thus export values are
understated in order to accumulate funds offshore and import values are
overstated for the same reason, the differences between declared and actual
value accumulating in offshore accounts. These account for some percentage of
the total. Second are what the report terms "Hot Money Flows," essentially the
difference between recorded transactions and balance of payments data.
The report details different ways of calculating these two ingredients
but even the lowest one shows, for example, an illicit global outflow of at
least US$738 billion in 2010 alone while the largest calculation puts it at
US$1.19 trillion.
However, the report is essentially a compilation and analysis of data
that doesn't attempt to show actual trade and other transactions or explain the
motives. Thus China apparently lost US$420 billion in 2010 alone and a total of
$2.7 trillion over the past decade – almost 50 percent of the global total.
Although superficially horrifying, it actually looks odd given that over
this period China's foreign exchange reserves have risen at a pace that
suggests massive financial capital inflows, not outflows, as its reserves grew
far faster than its trade and investment account data would suggest. In other
word China could have been a net winner, not the world's major loser from
illicit transactions.
This circle can in fact probably be squared by reference to Hong Kong
through which a still large (but diminishing) trade is conducted. It has long
been well know that under-invoicing of trade through Hong Kong has been on a
massive scale mainly aimed at taking advantage of the territory's lower tax
rate. Similarly Hong Kong's apparent huge capital inflow reflects not actual
investment but round-tripping by mainland enterprises, again primarily for tax
reasons.
The net impact is a loss of revenue by Beijing but no loss to the nation
as a whole. While it may be technically illegal the under or over-invoicing
game is played by almost all multinationals – not least brand names like
Google, Apple and Starbucks which divert most of their profits in developed as
well as developing countries into tax havens where they have located patents.
That is a serious global problem but the GFI report muddies the issue by
making it one of the developing countries always being the losers. In the case
of China there is of course large illicit capital outflow, into real estate in
the US, Australia etc, Swiss and Singapore bank accounts, often ill-gotten
gains laundered through Macau gambling tables. But clearly there must have also
been large informal inflows. These may now have dried up and been partly
reversed but they were clearly on a huge scale when speculation on yuan
revaluation was at its height.
That said, the data for Malaysia and the Philippines should be especially
worrisome as these suggest that massive outflows are a cause of the very weak
levels of private investment in the both countries. The Malaysian case is
already quite well known. For a decade the current account surplus has been
running at a massive 10 percent or more of GDP but foreign exchange reserves
have only partially reflected this. Some large scale capital outflow is
well-known – not least foreign investments by government and quasi-government
entities such as Petronas and Malayan Banking.
Private capital outflow by the disadvantaged non-bumiputras has long been
a feature of Malaysia but the GFI report suggests that the number is even
greater than hitherto assumed. Its puts the average unrecorded outflows at
US$28 billion a year for the past decade and US$64 billion in 2010 alone.
Perhaps more surprisingly given the nature of Malaysian's exports it says that
trade invoicing accounts for two thirds of the total. Much of that is probably
through Singapore, which provides the same tax minimization service for
Malaysia and Indonesia that Hong Kong does for mainland China.
The Philippines case is perhaps the most worrying given the abysmal level
of investment, public and private and the government's struggle to raise
revenues. According to the GFI there has been an annual outflow averaging US$13
billion over the past decade, which roughly matches the total inward
remittances from OFWs and other overseas Filipinos. While some of the exported
money may come back suitably laundered of tax liability, much clearly does not.
It is hardly a secret in the Philippines that the much of the nation's export
of minerals – especially gold and nickel ore to China – goes under-recorded, or
not recorded at all thanks to the weakness of its customs administration and
the connivance of local officials with mining companies, often with close links
to the Chinese importers.
But it is a wake-up call for the nation, not just the government to see
so much of the hard-earned inward remittances going into the relatively small
number of pockets of the well-placed businessmen and officials to buy luxury
condominiums in California. Even if the gross losses given by GFI need to be
cut in half to reflect the loss to the nation, rather than to government
revenues, they are huge relative to the country's foreign trade. They also
provide funding for another of the nation's woes – inward smuggling of goods
which likewise undermines local industries, limits tax revenues and is both
symptom and cause of the Philippines governance failings.
All in all the GFI report appears to exaggerate the overall losses to
developing countries by using gross rather than net figures. Its lack of
context also undermines its usefulness. Nonetheless it is a stark reminder that
compliance with currency and tax laws are key parts of the good governance
needed for sustained and well-distributed development.
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