An unintended effect of NAFTA, the informal economy's growth is about more than just drugs



A truck approached the U.S.-Mexico border crossing near Laredo / Reuters

Yesterday Global Financial Integrity released a new report, "Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy," which provides an in-depth look at flows of illicit money from Mexico. The study finds that nearly $1 trillion in illicit capital left Mexico from 1970-2010, averaging about $50 billion a year this past decade. Illicit outflows have increased over time - in 1970 only $3 billion of illicit money left the country per year - and experienced particularly large upswings during macroeconomic crises. These flows decreased by more than 50 percent as a share of exports, though this is largely because exports overall increased dramatically as Mexico transformed from a relatively closed to open economy.

The report's most interesting finding is that this illicit capital is not necessarily or mostly drug money. Instead it comes from Mexico's large underground economy. In these markets the goods being traded are not necessarily in and of themselves illegal. What's illegal is the under-the-table way that they are bought or sold. 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.