Thursday, January 13, 2011

Why has offshore been so overlooked, for so long

There are many answers to the question in the headline. One is outlined in a recent blog by Ann Hollingshead on the blog site of the Task Force on Financial Integrity. It examines the question of what is traditionally referred to as capital flight, but which we prefer to talk about in terms of illicit flows (because that lets us talk about financial inflows, and tax havens, rather than just focusing on the victim countries suffering the outflows.)

It looks at why Global Financial Integrity's eye-watering numbers ($850-1,000 billion in annual illicit flows out of developing countries) are bigger than traditional estimates. And the reason they are bigger is quite simple:
"When it comes to the study of illicit financial flows (IFFs), this example could not be clearer. In traditional models, economists net illicit inflows from illicit outflows, resulting in a lower “net” estimate of capital flight. This is a skewed picture because illicit outflows, because they are illegal by definition, are not supplementing the domestic economy in the same way an illicit outflow is detracting from it. For example, if you were an economic advisor in Colombia, would you tell President Juan Manuel Santos that the money flowing into his country as a result of the drug trade is offsetting the negative effect of the money flowing out? No. If anything the two numbers should be added.
Good example to illustrate the point. And now, re a wider failing:
Economists often get caught up with the status quo or as we call it the “established literature.” Because all of the previous models of capital flight have netted outflows from inflows, economists who follow will continue the tradition. This kind of herd mentality is damaging to economics and damaging to international development as it drastically understates the damage to developing countries as a result of IFFs. Thankfully, we can look to organizations like Global Financial Integrity who are bucking the trend and are following reason instead of the crowd.
Quite so.


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