Thursday, February 2, 2012

oh, mexico!

The Council on Foreign Relations reports on a new study of the cash generated by the informal economy--and states that it amounts to $50 billion a year.

But here's the catch: the study only looks at what it calls "illegal capital flight or illicit financial flows" out of Mexico. It covers "all unrecorded private capital outflows that drive the accumulation of foreign assets by residents in contravention of applicable laws and the country’s regulatory framework." As the article notes, "the report finds that the vast majority (80 percent) of the money leaving Mexico does so through a method called “trade mispricing.” This is when a company either undervalues exports or overvalues imports, and agrees with its trading partner (for many this is the same entity or owner) to transfer the balance to a bank account abroad. Just as when a restaurant doing cash business fakes the number of customers it receives to avoid paying taxes, companies doctor their trade records to allow money to flow out of a country untaxed."

So this study only tracks the extent to which elite Mexicans evade the law and sneak their income out of the country.

But the street level economy is far larger than this. Mexico's GDP last year was more than $1 trillion, and the best estimate (from professor Friedrich Schneider) is that the country's shadow economy is equal to approximately 1/3 of that. So Mexico's System D is worth approximately $345 billion. That's some street trade!

[praise be John Conroy -- @informaleconomy -- for linking me to the article]

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