dimanche 1 mai 2011

Summary:The impact of Switzerland's money laundering law on capital flows through abnormal pricing in international trade

This research investigates the effect of money laundering law implemented by Switzerland government on the movement of money from Switzerland to the US. The authors deem that individuals use the international trade as a substitute technique to launder their money by overpricing the imports and under pricing the exports because this technique could be undetectable by the authorities who enact legislation that focuses only on financial institutions. Given that, the authors look into the abnormal pricing in imports and exports and compare the volatility and amounts of capital outflows via trade between the pre-implemented law date and its aftermath. They choose the period 1995-2000 in which there were three dates of money laundering implementation law:
- 10 October 1997: the official date of the federal act.
- 16 March 1998: the Swiss Federal Government decided the MLA (Money laundering act).
- 1 April 1998: the MLA became officially effective.
In fact, the shift of capital from one country to another may be down to many reasons:
- Income tax avoidance: individuals may minimizes/avoid the income tax payment by shifting taxable income from the country in which they earn money to another.
- Capital flight: people may move their money out due to the bad financial and/or political circumstances existed in their country.
- And/or Money laundering is referred as the illegal capital flight or all form of illegal movement of capital in or out of the country as well as the income tax evasion.
Therefore, assuming that the movement of capital is sensitive to the money laundering and not other fundamental/financial reasons has to be proved.
2- Data
Trade data base:
The authors used trade data on monthly basis from the US Merchandise trade data from 1995 to 2000. This data contains information at the transaction level of imports and exports. They took only the transactions that exceed $2500 for exports and $1250 for imports, with the quantity and the item, and all foreign records are converted to US dollar.
At the end, there is a matrix containing each individual transaction of the US export and US import of a particular commodity from or to a specific country. The resulting matrix contain 5 millions cells, within each, the median price, the upper quartile price and the lower quartile price are calculated.
Macroeconomic variables:
These variables are extracted from IMF (international monetary funds) and IFS (international financial statistics) extended from 1995 to 2000.
3- Methodology
The interquartile range price (upper and low quartile interval) is used as a benchmark to determine the abnormal pricing of import/export transaction. In fact, prices outside this interquartile range are considered abnormal. Every import and export transaction between Switzerland and the USA for every month from 1995 to 2000 was analyzed. For each of the months studied the dollar value of capital moved from Switzerland to the USA was determined through over-valued Swiss imports from the USA and under-valued Swiss exports to the USA. The monthly capital outflows were calculated based on interquartile price ranges determined from all USA–Switzerland transactions. Also, the percentage of monthly capital flows were determined by dividing Switzerland’s capital outflows by USA–Switzerland trade. An empirical test was used to gauge the significance impact of the laundering laws of Switzerland on the magnitude of capital flows from Switzerland to US.
For the macroeconomic variables are used to measure the capital flight through trade. This will help to understand the response of capital outflows to the release of the new money laundering law in Switzerland. To do so, the authors adopt two portfolio models:
-Pastor Jr (1990) model:
It assumes that capital flight occurs when individuals transfer their domestic assets abroad once the domestic market become unfavorable. According to him, capital flight can be determined through three major financial variables such as: change in inflation rate, financial incentive for capital flight which calculated by the difference between the US Treasury bill rate and the local deposit rate and finally the degree of overvaluation (measured as the average real exchange rate for the current year relative to an equilibrium value)
-Cuddington (1987) model:
Cuddington model determine the capital flight through the domestic interest rate, foreign interest rate and the domestic inflation rate.
In addition to these variables, the authors added a dummy variable which take the value of 1 for the passage of any money laundering law (noted above).
The results of the trade analysis are contained in Table 2 and Figs. 1 and 2 (See pp 222-223). Table 2 presents the amount and the percentage of Switzerland's capital flows. Figure 1 and 2 show that both the amount and the volatility of capital outflows via trade increased after the implementation of the MLA. This proves that movers of capital used the international trade to launder their money from Switzerland to US.
To outperform this observation, two portfolio models were tested, in which the capital flight is determined by some financial variables and one other dummy variable related to the passage of the laundering law.
Results show that the dummy variable is the only significant determinant of capital flight. For the Pastor model, the Dummy variable is more significant especially for the dates of the passage of MLA. The other variables, incentives for capital flight, change in inflation and the degree of overvaluation are not statically significant and so they don't determine the capital flight of the Switzerland to US.
The second model of Cuddington displays similar results, but not as strong as Pastor's results.
To conclude, the author's results show that the laundering law of Switzerland has a significant impact on capital flights.
5- Sum up
This paper analyzes the impact of the money laundering law of Switzerland on the capital flows via trade. The authors show that abnormal pricing of import and export increased after the passage and enactment of the MLA.
Indeed, pricing transfer to avoid income taxes payment, capital flight or the money laundering can be accomplished through the abnormal pricing of import/export transactions. The abnormal pricing of trade transaction is detected when export/import pricing is out of the interquartile range prices of the global price matrix of trade transactions.
To outperform this observation, the authors analyzed empirically the effect of the money laundering law using two portfolio models in which the capital flight is explained by some financial variables and a dummy variable added for the laundering law passage. Their results show that the capital flight is significantly determined by the dummy variable.
Conclusively, there is a significant impact of the laundering law on capital flights, which is accomplished by abnormal pricing in international trade according to the author analysis.

dimanche 24 avril 2011

Review: Frederic Mishkin, The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich

While Globalization has been hardly reproached on deepening the disruptions in the financial system such as the case of financial contagion of several crises, Frederic Mishkin explains conversely how it can help to lift poor countries out of poverty if it goes along the lines of his next great globalization vision. He argues that Globalization and economic growth are associated as a result of causality. In fact, countries who have taken advantages of globalization by increasing their financial openness either by developing their trade sector or by motivating the foreign capital flows have witnessed spectacular economic growth. He put forward some historical examples of nations were considered in the past half century as the poorest in the world with low incomes, minimal engagements in international trade of good and services and with subordinate movement of capitals yet become one of the prosperous and richest nations though they increased their economic involvement in the world market. In India and China Globalization has led more than 1bn people out of extreme poverty.
Nevertheless, Mishkin thinks that the right implementation of globalization requires a sound financial system. According to him, the financial system is the key driving force for the Globalization and therefore for the development. He deems that financial system can and should be shaped to the benefit of all, especially the disadvantaged nations most in need of growth and prosperity. In this vein, he draws arguments to caution that wrong institutional policies and governmental mismanagement have impeded the financial globalization of most developing countries. He investigates therefore the financial crises in Mexico, South Korea and Argentina and he elucidates in detail their circumstances, how the authorities reacted to it and how well they have been able to work it out. He believes in fact that these financial crises are relatively "homegrown" and the external links are just "accelerators".
He uses cautiously these arguments to demonstrate how better policies can help them to open up their economies properly to catch up with developed countries. He explains indeed the conditions required for the better functioning of the financial system: effective property rights, efficient legal system, strong financial supervision and regulation which include indeed transparency, banking regulation, accounting practices, corporate governance and so on.
Mishkin if ever think to update this edition, he would discuss the latest global financial crisis, although it stems from a developed state, it might be a concrete example to judge the next great globalization: How well regulated has been the financial system during the late crisis? How well implemented the financial globalization? Whom to blame, the financial system and/or the Globalization?
What Mishkin tells in this book is not exactly new, but he touched an important yet confusing topic. To conclude, this book could be summarized in the few final words: "the next great globalization is financial". But as long as there are countries who believe that wealth can be created without any of the necessary requirements listed in Mishkin's book, it should remain compulsory reading for everyone.

Deceiving what happened today

My beloved horse is called” batteur”, the most quit horse in the stable, a little a bit aged, but so so sensitive. I discovered that great sensitivity since my first meeting with him, his immediate strange escape when I fell down akin to other few novice trainees, the poor, it was like he felt guilty.
So Excited and in my highest spirits, I was carrying around the square slowly, I was trying as much as I can to avoid his gallops, I am not yet used to otherwise I turn into an out of control body.
The trainer was cautiously watching me out, alerted, shouting blames triple in a while, but supporting once in a while. Unexpectedly as usual, the director of the club came to check out the course. He saw me from afar, but his looks were wicked, I swear I felt it. Then he called my trainer.
My trainer left me alone, hell, I felt unconfident. I was anxious...No body watching me..
A quarter-hour, this rude colonel took with my trainer and left. The latter finally appeared, I saw him coming I breathed a sigh of relief...He came back but vexed?! What happened I asked. He said disgracefully that his boss doesn’t like my scarf! And I should uproot it to attend the riding course.
I was shocked, I started telling him off with four heads and four voices, how come he hell dares it! In such current circumstances? How come he has no fear but proud to say it? Certainly I can’t find only two explanations:
Either he is a stupid extremist, unconsciously and without vision , he gives irrational orders... Or, he needs to leave his work but he is unable yet enforced to stay, so he is so intelligent using this way, to topple him out? And then to leave him in peace??

lundi 11 avril 2011

What I have seen to date

What I have seen to date, ambivalent stories and ambivalent people, I am becoming ambivalent too…face the gray propagandas…fog around and dust on eyes.
What I have seen to date, heroic people of me, incredibly were unified, strappingly were unanimous to topple the so hated benalist regime. I won’t say Benali, because if he has succeed to seed his grimy power alongside his oppressed policies which has reached the epidemic level, that he didn’t it alone, a big clan and big heads of lobbies have lend the bighearted hand. I didn’t expect that so fast he will be collapsed. It warms the hearts but this event devastates me from time to time because I knew if something good or bad goes so fast, that means something out of the blue is waiting.
More impressed, the revolutions started to be contagious, all over the Arab world. Riots started to rise one after another, enthusiastic words you hear: who’s next? Any dictator there? Any corruption exists there? Let’s dismiss it.
I will not take much talking about our revolution, everybody knows, what we don’t know, its fruits…
Results are still blurred…
Yet, The gloomy face of revolution, what I have seen to date, and please do not reveal what I am coming to say to anyone, my people are no longer unanimous, my people have been split into small pieces, shutttt..it seems that again we started a new puzzle, New issues…I can see bodies playing the batman, others looking for abusing from liberty as much as they can, it seems the last chance that will not last…so we hell do as much as we hell can…we do abuse. Yes, it is easy and funny and the best time ever.
The journalists, stars sparkling with juicy readings…
The employees, poor victims with unsatisfactory payroll, more impatient than jobless…
Democrats, VIP with pitiful islamiphoby... indirect insights of exclusions…wasn’t opted by their dictator formers?
Businessman, flourishing benali days, oops!
In brief, all are vigilant, vigilant sometimes to take advantage wherever there is a piece of bread.