Illicit financial flows and the Global South: A review of methods and evidence

Abstract

Illicit financial flows (IFFs) constitute a major challenge for development in the Global South, as domestic resource mobilization is imperative for providing crucial public services. While several methods offer to measure the extent of IFFs, each has its benefits and drawbacks. Critically, methods based on the balance of payments identity may capture licit as well as illicit flows, and a method based on macroeconomic trade discrepancies suffers from doubtful assumptions. The most convincing estimate to date demonstrates that individuals hold financial assets worth around ten per cent of global GDP in tax havens. Evidence further indicates that countries in the Global South are more exposed to individuals and multinational enterprises illicitly transferring money out of the country. Further research is warranted on profit shifting out of countries in the Global South and the effectiveness of anti-IFF policies in countries outside Europe and the United States.

Does illicit financial flows crowd‐out domestic investment? Evidence from Sub‐Saharan Africa economic regions

“…This lends support to the postulation of the accelerator investment theory that an increase in the current/ previous output level (GDP) will accelerate the investment level by a certain magnitude. It also corroborates the findings of Baddeley (2003) and Ogunjimi (2019), which revealed that economic growth improves a country's or region's investment profile. Specifically, the magnitudes of increase in investment level as a result of an increase in economic (GDP) growth by 1% are 0.22%, 0.26%, 0.18% and 0.08% in CEMAC, EAC, ECOWAS and SADC, respectively.…”

“…Following the postulation of the accelerator theory, which shows that change in output is a major determinant of the current investment level, this study incorporates changes in output (represented by real GDP growth rate) into the investment model. Evidence revealed that economic growth leads to an improved investment position (Baddeley, 2003;Ogunjimi, 2019Ogunjimi, , 2020aOgunjimi, , 2020b. Thus, the coefficient of economic growth (GDP growth rate) is expected to have a positive sign.…”

Trade misinvoicing and domestic resource mobilization in Nigeria

“…The result showed that illicit financial outflows and informal sector size adversely affect domestic savings in the sampled countries, suggesting the need for African countries to make concerted efforts at formalizing the informal sector to reduce the incidence of illicit financial outflows and raise domestic savings. Brandt (2020) also argued that illicit financial flows reduce domestic resource mobilization and stifle development in the Global South, making it difficult for the government of the region to fulfil its constitutional mandates. Further, evidence showed that multinational companies operating in countries in the Global South have a high tendency of engaging in illicit financial outflow to their parent companies.…”

“…However, while there are overwhelming pieces of empirical evidence on the macroeconomic effects of foreign capital inflows to Nigeria (Ogunjimi and Amune, 2019; Ehigiamusoe and Lean, 2019; Aminu and Ogunjimi, 2019; Anetor, 2020), little is known about the macroeconomic effect of capital outflows, the other side of the balance sheet, in Nigeria, particularly with respect to domestic resource mobilization. While there are few studies on the effects of trade misinvoicing on domestic resource mobilization in the Arab region (Muslim et al , 2021), four mineral-rich African countries (UNECA, 2017), developing countries (Brandt, 2020; Lépissier et al , 2021) and West African Economic and Monetary Union (WAEMU) member states (Thiao, 2021), empirical studies on the subject matter are rare for Nigeria. Cross-country studies often conceal country-specific characteristics and generalize policy recommendations, which might not be effective in all the sampled countries given the differences in their economic structures.…”

Illicit financial flows and country-by-country reporting in extractive industries

“…A recent book (Cobham and Janský 2020) and paper ) compare different data sources and methods to estimate tax avoidance, and find that CBCR data are currently the most suitable data source for estimating the scale of illicit financial flows by MNCs. These data have been used in studies which have advanced the debate on tax avoidance and illicit financial flows (Brandt 2020;Collin 2020;Johannesen and Pirttilä 2016). This section evaluates the extent to which the different CBCR standards can be used to estimate tax avoidance in ways that will improve macro statistics.…”