draining development.pdf - Khazar University

Policy and Research Implications of Illicit Flows 497to take an unusually strong stand for the inherent legitimacy of the government.Such issues also raise difficult problems for the legitimacy andsocioeconomic impact of suspicious activity reporting schemes if theseare used in such countries for tax recovery or other purposes. When doesextortion become the “recovery of stolen money”?Which countries have large IFFs?A striking feature of the final estimates is the dominance of China. Theestimated annual normalized IFF from China is US$238.5 billion (Karand Cartwright-Smith 2008). This is almost exactly equal to the total ofthe next nine countries with the largest flows. Indeed, China accountsfor about 25 percent of the global total. Note that there is evidence,referred to by Lorraine Eden in her chapter, that TPM is a particularlyimportant phenomenon for China. Only considering the 57 developingcountries in the study by Kar and Cartwright-Smith, the China estimatesrange from 58 percent of the gross unadjusted mispricing estimates to 83percent of the net unadjusted trade mispricing estimates for these countries,a major element of the illicit flows.The focal policy concern about IFFs at the national level has been lackof domestic investment; this is clearly not an issue in China. Over the last30 years, since its economy was released from command and control,China has experienced sustained domestic growth rates higher than therates achieved by any other nation over such a long period. Moreover,the well-being of China has not been adversely affected by a lack of capitalfor investment. Some of that investment has been subject to lowertaxation because it falsely appears as foreign direct investment, the resultof illicit transactions that allow domestic capital to move overseas ratherthan appear as domestic investment; Hong Kong SAR, China, seems tobe a particularly important location for faked capital movement. Thecomment here is not that the outflows have no consequence, but that themost dire one—the lack of investment—is absent.It is also striking that five of the next seven countries ranked by thesize of IFFs are countries of which the exports are dominated by oil(Saudi Arabia, Russia, Mexico, Kuwait, and República Bolivariana deVenezuela). Two of these nations (Saudi Arabia and Kuwait) are notdeveloping countries at all; they have high per capita GDP. 18 The otherthree are middle-income countries, with high levels of corruption and