While reading El País the other day, I came across a bold claim regarding capital flight: Venezuelans had $405.8 billion hidden abroad without any specifics. Honestly, I was incredulous, surprised; I’d never seen such figures. Since the article didn’t detail the methodology used, the timeframe, or the data sources, I decided to dig a little deeper and found the original source: James S. Henry from the Tax Justice Network. Before explaining Mr. Henry’s methodology, let me present the chart from which El País derived its claim.
(1) a “sources and uses” model for country-by-country unrecorded capital flows; (2) a “wealth accumulated abroad” model; (3) a “portfolio of extraterritorial investors” model; and (4) direct estimates of extraterritorial assets in the 50 largest private global banks.
I called Henry to ask about his numbers. The conversation started with the assertion that offshore is basically a black hole and that there are no direct figures. I think we can all agree on that. The dataset comes from: 1) the Bank for International Settlements (BIS), which produces a series on “cross-border loans from BIS-reporting banks,” as well as another on “cross-border loans from BIS banks to non-bank entities”; among other sources, private bankers’ interviews and reports from “non-banks” on managed and unmanaged assets; 2) asset management reports from the 50 largest banks in the world; and 3) sources and uses, a method used since the 1970s that estimates foreign debt—external debt with foreign direct investments and portfolio investments (sources)—and contrasts it with deficits in current and trade accounts and reserves (uses), which should, theoretically, cancel each other out.
In reality, however, they do not. Henry states that there is a large difference and thus estimates of capital flight.
I’m not an economist and don’t claim to be an expert in the field. However, I can only agree with Henry that the issue of capital flight and extraterritorial wealth is, at best, a conservative estimate. This is primarily because the data is unreliable. The World Bank, the IMF, and the BIS (the three sources used by Henry) can only report what their members inform them. That, in my opinion, has an obvious disadvantage. In Venezuela’s case, for instance, the unaudited figures from institutions controlled by the Chavistas do not reflect reality. In fact, there were recent reports in the blogosphere about the last time Venezuela met the IMF’s financial assessment requirements: September 13, 2004, undefined. As Fausta accurately expressed: “The Venezuelan government has not allowed the verification of its own numbers for almost a decade.”
I’ll provide another notorious and famous example: poverty decreased in Venezuela by 11% overnight after Hugo Chávez called the president of the National Institute of Statistics (INE) to order a revision of the reported figures.
When we add reports from banks that—for obvious fiscal reasons—underreport managed wealth and client-owned assets, we arrive at a picture that barely resembles reality.
Despite its amount, the estimate of $405.8 billion for the period 1970-2010 could easily be too low. It’s just over $10 billion per year. This period includes two episodes in Venezuela of extraordinary oil revenues (the 1970s and 2000s). Considering that the Foreign Currency Control Institute (CADIVI) granted $20 billion to ghost companies in 2012 alone, we can see the size of the fiscal hole corruption can create in a single institution in one year. Multiply that by an expanding, largely unregulated state apparatus, undefined over 40 years, and $405.8 billion becomes, in fact, a very conservative estimate. The combined GDP of Venezuela, just since 1999, is nearly $3 trillion…