The study traces the evolution of illicit financial flows from Mexico over the 41-year period 1970-2010. While such outflows have increased throughout the four decades, the pace picked up in the post- compared with the pre-NAFTA period. Furthermore, in spite of the somewhat erratic nature of the outflows over time, there is a discernable pattern to these outflows in the years leading up to the macroeconomic crises and their aftermath. We develop a dynamic simulation model that examines the interactions between fiscal developments, monetary expansion, and the generation of inflation on the one hand and on the interactions between the underground economy and illicit financial flows on the other. The underground economy is first estimated using the currency demand approach and then its evolution is traced in terms of model-specific endogenous and exogenous variables. The results of model simulations show that unstable macroeconomic developments, weaknesses in overall governance (as captured by a growing underground economy) and structural factors like trade openness together drove illicit flows from Mexico in a complex process. The drivers and dynamics of the model help us to formulate a set of recommendations to curtail the cross-border transmission of illicit capital.
- Capital flight,
- illicit financial flows,
- trade mispricing
Available at: http://works.bepress.com/dev_kar/5/