Monday, June 14, 2010

First, Greece, now Portugal: the case of illicit flows

Following our recent Greece blogging, Global Financial Integrity now has a related article out about Portugal, in the Portugal News. It contains this:

"Research at Global Financial Integrity (GFI), a research and advocacy group in Washington DC, confirms that deteriorating economic conditions have been fueling massive illicit flows from Portugal over several years.

Flow of funds analysis, which looks at a country’s source of funds against its recorded use, show that Portugal lost a total of about US$138 billion through illicit transfers over a five-year period ending 2009. Apart from such balance of payments leakages, model estimates based on IMF’s Direction of Trade Statistics indicate that Portuguese traders also over-invoiced exports (probably to gain VAT refunds) and under-invoiced imports (to evade duties or VAT on imports).

The government lost significant revenues during this period as a result of the criminal falsification of customs declarations which shifted US$75 billion illicitly into the country. The IMF’s call to raise VAT revenues may lead to more evasion if the increase in VAT rates are not accompanied by customs reform and economy-wide improvements in governance.

Under the traditional method of analyzing capital flight, economists would net out illicit inflows from outflows and estimate that Portugal lost an estimated US$63 billion in illegal capital flight, even though the government could not have taxed the unrecorded inflows of capital. In contrast, by setting illicit inflows through trade mispricing to zero, the GFI method estimates that Portugal lost US$138 billion or an average of US$27.6 billion per year in that five-year period—a loss of much needed capital that can be linked directly to Portugal’s difficult financial situation.

Regardless of methodology, the Portuguese case illustrates the “revolving door effect” between debt and illicit outflows in that new loans merely financed illegal capital flight from the country. Such a loss of capital could only have acted to weaken the country’s capacity to meet upcoming financial obligations. However, there is a silver lining in the gathering cloud over Lisbon—measures to curtail illicit financial flows also strengthen the country’s capacity to service external obligations. The coincidence of policies does not mean that the policies would be easy to implement but rather that Portugal needs to make a clean break with the past in order to restore market confidence."

The point about traditional forms of measurement is a rather important one.


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