Chinese economy lost US$3.79T via crime, tax evasion and corruption from 2000-2011, finds advocacy group Global Financial Integrity; massive outflows seen as threat to country's social, political stability
October 26, 2012
– The Chinese economy hemorrhaged US$3.79 trillion in illicit financial outflows from 2000 through 2011, according to a new report [PDF] released today by Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. Amidst increased domestic concern over inequality and corruption, GFI’s study raises serious questions about the stability of the Chinese economy merely two weeks before the once-in-a-decade leadership transition.
“I’ve studied the proceeds of crime, corruption, and tax evasion for decades, and the magnitude of illicit money flowing out of China is astonishing,” said GFI Director Raymond Baker. “There’s no other developing or emerging economy that even comes close to suffering as much in illicit financial outflows.”
The research, conducted by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, found that the illegal outflows—the proceeds of crime, corruption, and tax evasion—were largely due to a trade-based money laundering technique known as ‘trade misinvoicing ,’ which accounted for US$3.2 trillion, or 86.2%, of the total outflow of illegal capital over the 11 years studied. The trade misinvoicing figures were provided exclusively to The Economist, and appear in the latest edition of the magazine which hits newsstands tomorrow.
Dr. Kar, a former senior economist at the IMF, and Ms. Freitas discovered a sharp increase in annual illicit financial outflows over the time-span, increasing from US$172.6 billion in 2000 to US$602.9 in 2011. As GFI’s past studies have observed, such massive outflows make China the largest victim of illicit financial outflows worldwide.
The report warns of the serious ramifications of such massive outflows, stating “if outflows continue to ratchet upwards, adverse repercussions on social and political stability cannot be ruled out.”
“The Chinese economy is a ticking time bomb,” said Dr. Kar. “The social, political, and economic order is not sustainable in the long-run given such massive illicit outflows.”
Illicit financial flows have been shown to exacerbate inequality and corruption, two of the biggest challenges facing China today. The authors write, “One of the adverse effects of illicit flows from China has been a worsening of the country’s income inequality as the rich get richer through tax evasion (which comprises by far the major portion of such outflows) and through using the world’s shadow financial system to shelter and multiply their illicit wealth.”
A recent Pew Global Attitudes Survey found roughly half of all Chinese view inequality and corruption to be “very big problems” in their country, a dramatic increase since 2008 when the poll was last conducted.
Moreover, such massive illicit outflows are linked to round-tripped FDI, the beneficial effects of which are doubtful. This is because round-tripped FDI typically do not generate much employment or transfer significant technical know-how that increases the economy’s productive capacity.
“Clearly, genuine recorded FDI into China is overstated to the extent that total foreign direct investment includes round-ripped funds coming from tax havens,” added Dr. Kar.
Further Key Findings
Other key findings from the report include: