Violence & Capital Flight II

Violent election year
Generates enough fear,
Speeding clandestine capital flight
If level of significance is right.

In another embarrassing report,Global Financial Integrity (GFI) revealed worrying accounts of illicit financial flow from Bangladesh between 2009 and 2015 with an average flow of $ 8.8 billion. The mismatches between declared value of goods on the invoices and true value of goods were reported to be $5.2 billion in 2008, $6.9 billion in 2010,$8.8 billion in 2011,$7.65 billion in 2012,$9.35 billion in 2013 and $11.92 billion in 2015 ¹.Data for subsequent years were conspicuously absent as Bangladesh government did not provide the trade data to UN,as claimed by GFI.

Last year in March 07, I wrote this piece in a bid to find the link between political violence and capital flight. Sharing it again:

Global Financial Integrity has recently brought out its another report on illicit financial flow. Unlike previous reports, this time it underscores trade invoicing took place between 2008 and 2017. Illicit Financial Flow was broad and covered many areas. This report concentrates on trade mismatches. However, I did not get the relevant data for Bangladesh up to 2018. Much of the recent data were not available.

The 2015 report was complete and I found it handy back then. Immediately after the 2015 report , I tried to find out any possible link between political violence and illicit financial flow. Was there a correlation between the two? There was a little bit of correlation.

I still hinged on that 2015 data and looked on whether election years have any differential effect on illicit financial flow. For the political violence data, I relied on Odhikar, an NGO works on human rights issues. And from 2015 report I gleaned the data on illicit financial flow.

The regression function I constructed looked like this:

lnIFF_i = a₁ + bPolViol_i + a₂D_i

where lnIFF_i= log natural of illicit financial flow, PolViol_i= victims of political violence, D_i= 1 when the years are election years; prior and after years fall here. = 0 when the years are normal years.

Here a₂, coefficient of dummy variable, captures the differential effect of election years.

Since the data is time series in nature, I checked for autocorrelation. Durbin Watson statistic prior to natural log transformation reported 1.40 for 10 observations and 1 explanatory variable.

Then I carried out the semilogarithmic regression. At 5% level of significance, the model did not turn out to be significant. F= 3.339, p=0.095 (for degrees of freedom 2 and 7) . However it is significant at 10% level of significance. The intercept, a₁=8.273, appeared to be significant (t=44.79, p=0.000000721). The slope coefficient of political violence, b=0.000013, turned out to be insignificant (t=1.099, p= 0.308). The coefficient for dummy variable, a₂=0.4210 was found to be insignificant (t= 2.116, p=0.0720). However, it was significant at 10% level of significance.

Stat analysis did not find any evidence of differential effect of election years on illicit financial flow. What is interesting is that if the level of significance is raised at 10% level of significance then there is evidence that election years have some kind of differential effect on illicit financial flow. However, slope coefficient of political violence is still insignificant.

Let's interpret the result. At 10% level of significance, mean illicit financial flow of election years was higher than non-election years by 50.97%. As election years were more violent, as reflected in the political violence stat, more people laundered clandestine money abroad.

Based on higher level of significance , there is statistical evidence that violent election years accelerated the process of illicit financial flow. Clearly panic has its own economics. Sowing panic has intended /unintended consequences. However, finding conspiracy theory is not my goal. But my endeavor to see effect of violent election years on clandestine capital flight was not a failure².

Notes And References:

1 “Bangladesh Lost $50 billion To Trade-related Illicit Financial Flows In Six Years: Report”,bdnews24.com,December 17,2021 Link here

2 “Violence And Capital Flight “,Rezaul Hoque,https://hoquestake.blogspot.com,March 07,2021 Link here

Decoding Our External Sector

 This week I tried to take a deeper look into the composition of our import expenditure and export earnings.Import always dominates over export in our external trade. I am more interested in what constitutes the import and export items. In addition I tried to find link between illicit financial flow and our external sector.

I delved into the sententious stat given in the appendices of Bangladesh Bank annual report. I leafed through several annual reports starting from 2013-2014. I was befuddled when I had found that data were not easily tractable in subsequent reports. Data of many of the import items lack coherence in subsequent reports. For instance, I checked the data for food, edible oil, textiles, capital machinery and other import items for Fy2011, FY 2012 and FY 2013. To my dismay, I found that what was  reported in the annual report of 2013-2014 was different from subsequent annual reports. If this is the case for immediate past year, then the data maybe provisional or revised, as often indicated by Bangladesh Bank. But for the report of 2013-14 this is not the case. And I remind you I am talking about here about three consecutive fiscal years: 2011,2012 and 2013. For the above mentioned items in 2013-14 report ,reported data are not identical in subsequent annual reports. By the way, data in the annual reports for 2014-15, 2015-16 and 2017-18 are similar.  I got the PDF format of the reports from Bangladesh Bank website.

While decoding our investment for an earlier post, I also faced ordeal in gleaning information. To my horror I noticed that proposed investment figure in Tk  published on Bangladesh Investment Authority website was deliberately swollen. Someone tempered the figure by putting an extra zero at the end of the figure. Luckily I had checked the data with the one reported in Bangladesh Economic Survey. I also endured similar problems while I collected data  from Police websites. I think webmasters and persons responsible for running the government websites should be more scrupulous.

Now get back to the import data. To obviate the troubles in analysis, I depended on the most recent annual report and for data on earlier fiscal years (i.e.FY2008, FY 2009) I trusted the annual report for 2013-14.

Our import is composed of many items. Among them food grains, edible oil, POL,chemicals, fertilizer, plastic, raw cotton, yarn, textiles, iron & steel, capital machinery and other items constitute the biggest part of  import spending. Others( other items) alone turns out to be the the biggest contributor to import spending, followed by textiles, capital machinery, iron and steel, POL and raw cotton. For instance, provisional estimates of 2018 shows that we spent $6.8 billions on textiles, $5.46 billion on capital machinery, $4.83 billion on iron,$3.65 billion on POL, $3.25 billion on raw cotton and $ 15.88 billion on other items.And our import spending on textiles, capital machinery, iron and steel , yarn and raw cotton has been increasing for many years. Many of these items are used as ingredients of manufactured goods and used in setting factories or implementing development and investment projects.

On the other hand , decomposition of our export items reveals that woven garments, knitwear, home textile , footwear and jute goods fetch more foreign currency for our economy. For instance in 2018, woven garments brought $15.43, knitwear, fetched $15.19, home textile earned $878.68 million , footwear accounted for $809.69 million and jute goods brought $869.87 million. Woven garments, knitwear and footwear registered consistent growth over the years. It is highly compatible with our growing external sector. Projection made by Bangladesh Bank shows that both export and import will continue to grow in the coming years.

(Data Source: Bangladesh Bank , GFI)

Global Financial Integrity in its report on illicit financial flows claimed that between 2004 and 2013, a total of $55 billion was laundered abroad from Bangladesh. In January this year, in its new report GIF claimed that in 2014 $9 billion was drained out of Bangladesh. Moreover, in 2015 at least $5.9 billion was laundered abroad. Now many of the illicit transactions had taken place through trade misinvoicing, as reported by GFI. In export bill, export earnings are reported less than the true amount. In import bill, import spending is reported more than what it actually is. In addition, fake documents are created to do import and export by trading nothing or trading goods that value less or more than the true reported goods.

So the more our external sector grows, the more our hard earned currency launders abroad. According to GFI, gross trade misinvoicing in the period between 2004-2013 was $92.02 billion, of which $49.13 billion was trade misinvoicing outflows and $42.89 billion was trade misinvoicing inflows that means Bangladesh also witnessed illicit inflows of capital in the above mentioned period. If we break trade misinvoicing  outflows further, we will see over invoicing of import bills accounts for $18.21 billion of the total outflows and under invoicing of export bills accounts for $30.92 billion of the total outflows. To be more precise, in the given period we loss on average $1.8 billion due to over invoicing import bills and $3 billion due to under invoicing export bills every year. In light of this  we can say export sector is more responsible for illicit financial outflows than the import sector.

This thing is happening when we are having a current account deficit. We need to export more, import less and get more remittances in order to improve the current account situation. Government put forward lots of cash incentive packages to increase remittances and augment the export. Many economists opposed the move and pressed for depreciation of Tk. To them, it will augment the export, remittances and at the same time it will restraint the import.

Just bring  the illicit financial flow into play. In this case any initiative to boost export has a caveat: chances of illegal capital flight have also gone up as per our earlier discussions. But the idea of depreciation of Taka instead of cash incentive appears to be reasonable here. By slowing down import for some period it will curb the clandestine capital flight associated with over invoicing of import bill. At the same time it will increase the risk of capital outflow through under invoicing of export bill. If the former outweighs the latter then we can say that this depreciation measure will be boon for the external sector. Another note of caution is that slow import  will also stall the clandestine capital inflow through under invoicing of import bill, which was $42.9 in the given period. So curbing the money laundering and improvement of current account deficit put our policy makers in quandary.

Money laundering has been taking place for a long period of time. In a corrupt country these bad practices are deeply rooted in our society.We would  stem the trade misinvoicing if we were able to device the means. Since we do not have that mechanism, depreciation of Taka appears to be an acceptable solution right now to improve the current account situation.

La Semaine Dernière A Mes Yeux

(25 janvier --- 1 février)

Selon un reportage, le gouvernement du Népal a divulgué son enquête sur l'accident d'un vol de US Bangla Airlines.L'enquête a mis l'accent sur la condition psychologique de pilote pendant le vol. L'autorité bangladaise a accusé le gouvernement népalais pour ne pas avoir mis l'accent sur la faute de contrôle de Traffic aérien de l'aéroport de Kathmandu.

Selon un reportage, Global Financial Integrity s'est dit que Tk 500 milliards ont été blanchi depuis Bangladesh en 2015.

Selon un reportage, Transparency International dans la nouvelle indice de corruption a classé Bangladesh 149 parmi 180 pays. La position de Bangladesh a été baissée par 5 pas dans une année. Cela indique corruption amplifie dans le pays. Le chef de l'agence de l'anti-corruption a demandé des données sur l'enquête de TI.
Selon un reportage, un ancien banquier a escroqué Tk 186 milliards et s'est enfui à l'étranger. Il menait service financier clandestin depuis longtemps. L'escroquerie a laissé ses clients en difficulté financière.