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Article
Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy
Global Financial Integrity (2012)
  • Dev Kar, Global Financial Integrity
Abstract

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.

Keywords
  • Capital flight,
  • illicit financial flows,
  • Mexico,
  • NAFTA,
  • trade mispricing
Publication Date
January, 2012
Publisher Statement
Global Financial Integrity Wishes to Thank The Ford Foundation for Supporting this Project. Dev Kar, formerly a Senior Economist at the International Monetary Fund (IMF), is Lead Economist at Global Financial Integrity (GFI) at the Center for International Policy (CIP). The author would like to thank Sarah Freitas, Economist at GFI, for running the models in E-Views and in STATA and for contributing the box articles. She also provided guidance on data sources and collection to Daniel Robinson, a staff intern at GFI. Thanks are also due to Raymond Baker, Tom Cardamone, Heather Lowe, Lauren Pickett and other staff at GFI and CIP for helpful comments and to Krishen Mehta, a member of GFI’s Board, for helpful comments on the policy section. Any errors that remain are the author’s responsibility.
Citation Information
Dev Kar. "Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy" Global Financial Integrity (2012)
Available at: http://works.bepress.com/dev_kar/5/