India Shows Us the Curse of 'Black Money'

By Raymond Baker

India's opposition party leader L.K. Advani sparked a political conflagration with pre-election campaign remarks that India was losing tens of billions of dollars each year in illicit financial outflows, or "black money". He asserted that the National Democratic Alliance would vigorously pursue recovery of these lost assets if voted into power. With the rolling election now in progress, the issue of India's missing billions has grown progressively thornier, as both sides vie to take the moral high ground.

Whatever the outcome of the election, India's problem has broader implications both for the developing world and for efforts by the Group of 20 developed and developing nations to craft an effective post-crisis economic plan for the global financial system.

In his discussion of black money, Mr Advani cited our estimates of illicit capital flight, which suggest total illicit outflows from the developing world of $1,000bn (€766bn, £684bn) a year. India ranked fifth highest at $22bn-$27bn a year, coming in behind Russia ($32bn-$38bn), Mexico ($41bn-$46bn), Saudi Arabia ($54bn-$55bn) and China ($233bn-$289bn).

Mainland China's massive outflows were predominantly the result of trade mispricing - a common practice whereby multinational corporations manipulate figures on commerce and earnings to minimize tax liabilities. A popular means of tax evasion for companies, trade mispricing is the driving force behind most of the illicit capital exiting developing countries.