Illicit Activity and Money Laundering from an Economic Growth Perspective : A Model and an Application to Colombia
This paper contributes to the economic analysis of illicit activities and money laundering. First, it presents a theoretical model of long-run growth that explicitly considers illicit workers, activities, and income, alongside a licit private secto...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/02/25975794/illicit-activity-money-laundering-economic-growth-perspective-model-application-colombia http://hdl.handle.net/10986/23917 |
| Summary: | This paper contributes to the economic
analysis of illicit activities and money laundering. First,
it presents a theoretical model of long-run growth that
explicitly considers illicit workers, activities, and
income, alongside a licit private sector and a functioning
government. Second, it generates estimates of the size of
illicit income and provides simulated and econometric
estimates of the volume of laundered assets in the Colombian
economy. In the model, the licit sector operates in a
perfectly competitive environment and produces a licit good
through a standard neoclassical production function. The
illicit sector operates in an imperfectly competitive
environment and is composed of two different activities: The
first activity produces an illicit good that nonetheless is
valuable in the market (for example illicit drugs); the
second does not add value to the economy but only
redistributes wealth (for example robbery, kidnapping, and
fraud). The paper provides a series of comparative statics
exercises to assess the effects of changes in government
efficiency, licit sector productivity, and illicit drug
prices. From the model, the analysis derives a set of
estimable macroeconometric equations to measure the size of
laundered assets in the Colombian economy in the period 1985
to 2013. The paper assembles a data set whose key components
are estimates of illicit income from drug trafficking and
common crime. Illicit incomes increased drastically until
2001, reaching a peak of nearly 12 percent of gross domestic
product and then decreasing to less than 2 percent by 2013.
The decline overlaps not only in a period of high economic
growth, but also after the implementation of Plan Colombia.
The data set is used to estimate the volume of laundered
assets in the economy by applying the Kalman filter for the
estimation of unobserved dynamic variables onto the derived
macroeconometric equations from the model. The findings show
that the volume of laundered assets increased from about 8
percent of gross domestic product in the mid-1980s to a peak
of 14 percent by 2002, and declined to 8 percent in 2013. |
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