Description:
"Myanmar is the most porous economy we have studied in depth. Long isolation, trade restrictions,
and attempts to regulate currency exchange rates have combined to drive a substantial part of the
economy underground"...
Executive Summary:
"There have been few studies on capital flight and illicit financial flows to and from Myanmar, due to
waning public interest in the wake of insular domestic policies and Western economic sanctions.
This study finds that confinement, seclusion, and economic instability along with entrenched
governance deficits have characterized the country since independence. We show that insularity
and isolation have led to a declining trend in trade openness. Furthermore, we reveal that over the
period 1999-2013, Myanmar experienced much larger macroeconomic instability (as measured by
the variance in the rate of inflation, the current account to GDP ratio, and rates of economic growth)
relative to other developing countries, including those in Asia, five ASEAN countries (Indonesia,
Malaysia, the Philippines, Singapore, and Thailand), and other groupings.
Given the strong combination of macroeconomic, structural, and governance-related factors, we
estimate both flight capital and illicit trade flows to and from the country. Flight capital includes a
small portion of licit capital (that is not recorded due to statistical shortcomings), while illicit trade
flows only include capital that is illegal in nature. Over the period 1960-2013, inflows and outflows
of flight capital averaged 15.1 percent and 13.1 percent of GDP per annum in constant dollars,
respectively. Illicit trade inflows and outflows amounted to an average of 14.4 percent and 6.5
percent of GDP per annum, respectively. This scale of inflows and outflows is much larger in the
case of Myanmar than most other developing countries.
Flows of illicit trade capital in both directions are smaller than flight capital counterparts. Illicit
trade inflows totaled US$77.7 billion over 1960-2013, while total inward capital flows amounted
to US$82.8 billion. Similarly, illicit trade outflows totaled US$18.7 billion while outward flight
capital totaled US$35.9 billion over this period. Average illicit trade inflows were more than four
times average illicit trade outflows. Import under-invoicing, which dominated other types of trade
misinvoicing, drove most inflows.
A particular feature of capital flight and illicit trade flows to and from Myanmar is that inflows are
much larger than outflows. We show that this is in fact the case with other countries (such as
Afghanistan, Mexico, Russia, and Thailand) where drug trafficking is a significant issue. Myanmar?s
place as the world?s second largest producer of opium poppy places it easily within this group of
countries.
We present an analysis of how economic sanctions, by creating an excess demand for certain
items in domestic markets, can encourage technical smuggling as importers seek to meet the
excess demand. The few importers with the license to import the goods in question reap illegal
profits through import under-invoicing. The estimates of illicit trade flows provided in the paper
confirm that technical smuggling through import under-invoicing is by far the largest component of
inward capital flows or illicit trade inflows. We also find preliminary evidence of outward smuggling
viii Global Financial Integrity
of timber and other wood products into India and China and the over-invoicing of precious stones
to the latter. We cite other researchers who find perverse incentives arising from Myanmar?s trade
policies to explain deliberate trade misinvoicing.
Myanmar could have lost at least US$2.9 billion and as much as US$3.6 billion over the period in
potential tax revenues through i) uncollected import tariff revenue due to import under-invoicing and
ii) lower corporate profit tax captures due to export under-invoicing. To put it in perspective, this tax
loss due to illicit flows ranged from 122-172 percent of total health expenditures and 48-73 percent
of total education expenditures incurred during 1960-2013. The figures are just as startling for 2010-
2013: 129 percent of health expenditures and 42 percent of education expenditures.
The paper also tests the link between illicit flows and the underground economy using estimates
derived from the currency demand approach. The underground economy is a good proxy for the
state of overall governance of a country. We find a strong and significant link between illicit flows
and the underground economy, confirming that weak governance both drives and is driven by illicit
flows. Using a currency demand approach modified to reflect the predominant role of smuggling
and black markets in Myanmar?s economy, we find that the underground economy averaged around
55 percent of official GDP—one of the highest in the world. The World Bank has also found the
underground economy of Myanmar to be around 50 percent of official GDP.
The paper concludes with a series of policy recommendations for the Government of Myanmar.
GFI urges the Government to develop a priority list of areas for technical assistance to improve
the quality of its statistics. Data is a critical element of analysis and understanding the country?s
dynamics—for the government and for those outside the government. Anti-money laundering
legislation and enforcement should be brought up to Financial Action Task Force (FATF) and IMFdefined
standards. Trade misinvoicing should be curtailed with the implementation of a real-time
world market pricing risk analysis system for the Customs Department..."
Source/publisher:
Global Financial Integrity (GFI)
Date of Publication:
2015-09-09
Date of entry:
2015-10-01
Grouping:
- Individual Documents
Category:
Language:
English
Local URL:
Format:
pdf
Size:
1.68 MB