The paper develops a balance of payments-consistent procedure for estimating unreported flows. Using data between 1990 and 2007, total unreported flows of ten selected Asian countries is estimated at 80% of their 2007 combined GDP. The paper also examines the empirical relationship between the volume of reported and unreported flows. Unreported flows increase with increase in reported flows and economic growth as well as weaknesses in the governance of reported flows and accumulated unreported flows. In contrast, financial depth and governance of the real sector decrease unreported flows. Altogether, the results indicate that unbalanced financial and real sector development facilitates the exit of large amounts of cross-border flows and domestic resources. The paper argues that the situation can be reversed through a judicious application of capital flow and trade flow management techniques and development and improvement in capacity, including governance, to internalize resources and convert them into desired outcomes.

June 18, 2010.