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Taking on the outlaw economy

November 12, 2005|Moises Naim

EVERY NIGHT, Fortuna Garcia sings a lullaby to her daughter Carmen as the 6-year-old goes to sleep in her grandmother's house in Cochabamba, Bolivia. Fortuna lives in Gaithersburg, Md., and has not seen Carmen since she left Bolivia three years ago. But every night, using a prepaid calling card, she can sing Carmen to sleep for less than a dollar.

And every month, Fortuna sends about $300 to her mother, who takes care of Carmen. Fortuna's remittances have helped refurbish her mother's home and paid for the operation that saved the life of her sick niece.

Fortuna is one of the 500,000 foreigners who enter the United States illegally each year -- a number that has not declined from its pre-9/11 levels despite efforts to fortify the U.S. borders. Because she is an illegal immigrant, Fortuna does not have a bank account in the United States and therefore relies on an encomendero -- a fellow Bolivian who, for a fee, hand-delivers the money she and her neighbors in her expatriate community regularly send home. These informal, ethnically based channels that are used to move money internationally are common to many immigrant groups. Among Middle East and South Asian immigrants, the system is called hawala. Among Chinese, it is known as chop.

Though a heads of state meeting in a summit in Argentina last week failed to reach any agreement on how to promote free trade in the Americas and integrate the hemisphere, illicit traffickers -- of people, money, drugs, weapons or counterfeit goods -- are doing a fine job of connecting the south with the north, and changing both in the process. Free trade may not be booming in the Americas. But illicit trade sure is.

Fortuna and other Latin Americans living abroad sent almost $46 billion to their home countries last year, more than all multinational corporations combined and far more than all the foreign aid doled out by the U.S., the World Bank and the International Monetary Fund.

The capital flow already amounts to 10% of Latin America's GDP, and it is growing by up to 10% per year. Some of the transfers are from legal migrants through legal channels, but a significant portion is earned and sent illicitly.

Narcotics, not remittances, are still by far the main illegal activity in Latin America and a major source of foreign exchange. According to the U.N., drug sales overseas far exceed the $75 billion in agricultural products that the region exports every year. For many Latin American countries, drugs are not just the main and most lucrative export but also an important source of political power and, tragically, a lethal driver of violence and social upheaval.

Brazil, for example, is no longer a transit route for drugs moving from the Andes to Europe but an important market in its own right. Along the U.S.-Mexican border, rival trafficking gangs are waging an all-out war among themselves and against the government. In Bolivia, the cocaine cartels have entered into complex alliances with politicized indigenous groups poised to gain control of the country.

Recently, senior Venezuelan military officers were accused by the U.S. government of drug trafficking -- a charge that President Hugo Chavez immediately dismissed as another attempt by the Bush administration to destabilize his regime. Yet there is no doubt that Venezuela, with its porous borders, its money-laundering financial system and politically influential criminal networks, has become a major facilitator of the region's drug industry.

Half of all the economic activity in Latin America takes place in the informal sector. Many of these jobs are precarious, which workers often prefer to traditional jobs because, in the informal sector, they earn more and are more independent. Indeed, just 2% of all formal companies in Latin America qualify as "large" -- and even those that are large in Latin America are quite small by international standards. In contrast, the region's illicit economy nurtures all kinds of significant, highly globalized and efficient business networks that can deliver people or drugs from the most remote locations in the Andes or the Amazonian jungle to Miami or Amsterdam in a matter of days, if not hours.

The illicit economy thrives in plain sight, connecting the hemisphere in powerful and often criminal ways. From this perspective, the furious debates in last week's summit, which pitted the anti-free trade Latin American presidents against President Bush and those other Latin American leaders who see free-trade agreements as the hope for a better future, seemed sadly to miss the point. Free-trade agreements are struck among governments, and largely benefit formal companies. Trade and investment flows are already driving the Latin American economies. Too bad so many of them are illicit.

MOISeS NAiM, the editor of Foreign Policy magazine, has just published "Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy" (Doubleday).

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