Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to crime, corruption, and tax evasion. This amount is more than these countries receive in foreign direct investment and foreign aid combined.
This week, a new report was released that highlights the latest data available on this “hot” money. Assembled by Global Financial Integrity, a research and advisory organization based in Washington, DC, the report details illicit financial flows of money from developing countries using the latest information available, which is up until the end of 2013.
The cumulative amount of this “hot money” coming out of developing countries totaled just over $7.8 trillion between 2004 and 2013. On an annual basis, it breached the $1 trillion mark each of the last three years of data available, which is good for a growth rate of 6.5% rate annually.
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Illicit flows tend to take stronger root in countries experiencing non-inclusive growth. Not only do illicit flows exacerbate income inequality, they also undermine a nation’s fiscal capacity, the degree to which the government can credibly enact revenue, expenditure, and monetary policies to achieve socially desirable outcomes. As a result, nations find it more difficult to stem, if not reverse, the vicious cycle of illicit financial flows and inequality.
Illicit flows also represent a major drain on the resources of African countries. Global Financial Integrity carried out a joint study with the African Development Bank and found that Africa was a net creditor to the world to the tune of up to $1.4 trillion over the period from 1980 through 2009, with the most conservative estimate of the capital loss being around $600 billion. Thus, despite the inflow of international aid into every region of Sub-Saharan Africa, outflows of illicit capital continue to result in a net loss of resources that overwhelms any salutary economic effects of recorded capital inflows.