draining development.pdf - Khazar University

Introduction and Overview: The Dynamics of Illicit Flows 3Following this introduction, the book has five parts: I. The PoliticalEconomy of Illicit Flows; II. Illegal Markets; III. To What Extent Do CorporationsFacilitate Illicit Flows?; IV. Policy Interventions; and V. Conclusionsand the Path Forward.The Short History of Illicit Financial Flow EstimatesRaymond Baker’s Capitalism’s Achilles Heel: Dirty Money and How toRenew the Free-Market System, published in 2005, gave shape to thetopic. Baker reported on the results of 550 interviews he had conductedwith senior business executives around the world in the early 1990s toestimate the extent of illicit flows involving corporate mechanisms,mostly in transactions between unrelated parties. He examined governmentand academic reports on other sources of the flows, such as illegalmarkets, and, accompanied by explicit statements on the reasons for hisjudgments, offered assessments of the amounts that might be flowinginternationally out of developing countries as a consequence. A summaryof his quantitative findings is provided in table 1.1.Baker estimates that over 60 percent of total illicit flows arise fromlegal commercial activities, and most of the remainder from criminalactivity. The former leave the developing world through three channels:the mispricing of goods traded between independent parties, the distortionof transfer prices charged on goods traded within a multinationalfirm, and fraudulent transactions.Baker provides minimal detail about the derivation of these figures.Thus, there is no information on the methods used to convert theTable 1.1. Crossborder Flows of Global Dirty MoneyUS$, billionsGlobalFrom developing or transitional countriesTypeHigh Low High LowCriminal 549 331 238 169Corrupt 50 30 40 20Commercial 1,000 700 500 350Total 1,599 1,061 778 539Source: Baker 2005.