TABLE OF CONTENTS
The Price of Offshore Revisited
1. INTRODUCTION/ SUMMARY AND KEY FINDINGS 2. WHERE IS OFFSHORE, ANYWAY?
3. THE GLOBAL HAVEN INDUSTRY
4. OLD ESTIMATES
5. NEW ESTIMATES
6. TRADE MISPRICING AN ASIDE
7 . IMPLICATIONS
1. INTRODUCTION/ SUMMARY
The definition of victory for this paper is to review and improve upon existing estimates of the size, growth and distribution of untaxed private wealth protected and serviced by the global offshore industry.
This is necessarily an exercise in night vision. The subterranean system that we are trying to measure is the economic equivalent of an astrophysical black hole.
Like those black holes, this one is virtually invisible and can be somewhat perilous to observers who venture too close. So, like astronomers, researchers on this topic have necessarily used indirect methods to do their estimates, conducting their measurements from a respectful distance. This indirect approach is painstaking, and has many inherent limitations, as well see.
Unlike in the field of astrophysics, however, the invisibility here is fundamentally man-‐ made. Private sector secrecy and the official government policies that protect it have placed most of the data that we need directly off limits even though it is, in principle, readily available.
In many ways, the crucial policy question is what are the costs and benefits of all this secrecy?
Another key theme that emerges from this paper is that there is an urgent need for tax justice advocates and their allies in governments and in the public, especially in source countries where the wealth is coming from, to press the relevant authorities for this information.
The very existence of the global offshore industry, and the tax-‐free status of the enormous sums invested by their wealthy clients, is predicated on secrecy: that is what this industry really supplies as it competes for, conceals, and manages private capital from all over the planet, from any and all sources, no questions asked.
We are up against one of societys most well-‐entrenched interest groups. After all, theres no interest group more rich and powerful than the rich and powerful, who are the ultimate subjects of our research.
The first step, however, are the estimates. The way is hard, the work is tedious, the data mining is as mind-‐numbing as any day below surface at the coal face, and the estimates are subject to maddening, irreducible uncertainties.
Nevertheless, as usual, some things may be said.The definition of victory for this paper is to review and improve upon existing estimates of the size, growth and distribution of untaxed private wealth protected and serviced by the global offshore industry.
This is necessarily an exercise in night vision. The subterranean system that we are trying to measure is the economic equivalent of an astrophysical black hole.
Like those black holes, this one is virtually invisible and can be somewhat perilous to observers who venture too close. So, like astronomers, researchers on this topic have necessarily used indirect methods to do their estimates, conducting their measurements from a respectful distance. This indirect approach is painstaking, and has many inherent limitations, as well see.
Unlike in the field of astrophysics, however, the invisibility here is fundamentally man-‐ made. Private sector secrecy and the official government policies that protect it have placed most of the data that we need directly off limits even though it is, in principle, readily available.
In many ways, the crucial policy question is what are the costs and benefits of all this secrecy?
Another key theme that emerges from this paper is that there is an urgent need for tax justice advocates and their allies in governments and in the public, especially in source countries where the wealth is coming from, to press the relevant authorities for this information.
The very existence of the global offshore industry, and the tax-‐free status of the enormous sums invested by their wealthy clients, is predicated on secrecy: that is what this industry really supplies as it competes for, conceals, and manages private capital from all over the planet, from any and all sources, no questions asked.
We are up against one of societys most well-‐entrenched interest groups. After all, theres no interest group more rich and powerful than the rich and powerful, who are the ultimate subjects of our research.
The first step, however, are the estimates. The way is hard, the work is tedious, the data mining is as mind-‐numbing as any day below surface at the coal face, and the estimates are subject to maddening, irreducible uncertainties.
New Estimates. As discussed below, previous estimates of the size and growth of the
offshore industry to date have relied on rough judgments and rules of thumb or, at best,
on one or two very simple estimation methods.
We triangulated on our estimates from the vantage point of several different methods. The aim is not pseudo-‐precision, much less really big numbers, but to identify a plausible base case for this otherwise-‐well hidden sector of the global economy.
A More Open Process. Another objective is to keep a sharp eye out for the puzzles surfaced by this data analysis, of which there are many. A key problem with previous estimates is sensationalism. That is to be expected, given the subject matter, and the fact that estimation is still dominated by relatively closed communities of consulting firms, government agencies, or NGOs.
An important aim of this project is to establish a more open, transparent, collaborative model for doing such research so that the data sources, estimation methods, and core assumptions are all exposed to the sunlight of peer review, and ultimately to public scrutiny.
Estimation Methods. As discussed below in more detail, this paper employs four key estimation approaches: (1) a sources-‐and-‐uses model for country-‐by-‐country unrecorded capital flows; (2) an accumulated offshore wealth model; (3) an offshore investor portfolio model; and (4) direct estimates of offshore assets at the worlds top 50 global private banks.
To compile its estimates, the paper uses latest available data from the World Bank and IMF, the UN, central banks, and national accounts to explicitly model capital flows for each member of a subgroup of 139 key source countries that publish such data.
The paper goes further, supplementing these models with other evidence, including (1) data on so-‐called transfer mispricing, (2) data on the cross-‐border demand for liquid mattress money like reserve currency and gold, part of which may move through offshore markets; and (3) a review of market research by leading consulting firms on the size of the offshore private banking market. (See Section 5, below, for more details.)
We believe that the resulting estimates of unrecorded capital flows and accumulated offshore wealth are the most rigorous and comprehensive ever produced.1 In the spirit of open research, we hereby issue an open challenge to the IMF and the World Bank to all comers, in fact to see if they can come up with better estimates.
Copyright by James S. Henry
We triangulated on our estimates from the vantage point of several different methods. The aim is not pseudo-‐precision, much less really big numbers, but to identify a plausible base case for this otherwise-‐well hidden sector of the global economy.
A More Open Process. Another objective is to keep a sharp eye out for the puzzles surfaced by this data analysis, of which there are many. A key problem with previous estimates is sensationalism. That is to be expected, given the subject matter, and the fact that estimation is still dominated by relatively closed communities of consulting firms, government agencies, or NGOs.
An important aim of this project is to establish a more open, transparent, collaborative model for doing such research so that the data sources, estimation methods, and core assumptions are all exposed to the sunlight of peer review, and ultimately to public scrutiny.
Estimation Methods. As discussed below in more detail, this paper employs four key estimation approaches: (1) a sources-‐and-‐uses model for country-‐by-‐country unrecorded capital flows; (2) an accumulated offshore wealth model; (3) an offshore investor portfolio model; and (4) direct estimates of offshore assets at the worlds top 50 global private banks.
To compile its estimates, the paper uses latest available data from the World Bank and IMF, the UN, central banks, and national accounts to explicitly model capital flows for each member of a subgroup of 139 key source countries that publish such data.
The paper goes further, supplementing these models with other evidence, including (1) data on so-‐called transfer mispricing, (2) data on the cross-‐border demand for liquid mattress money like reserve currency and gold, part of which may move through offshore markets; and (3) a review of market research by leading consulting firms on the size of the offshore private banking market. (See Section 5, below, for more details.)
We believe that the resulting estimates of unrecorded capital flows and accumulated offshore wealth are the most rigorous and comprehensive ever produced.1 In the spirit of open research, we hereby issue an open challenge to the IMF and the World Bank to all comers, in fact to see if they can come up with better estimates.
Overall Size
A significant fraction of global private financial wealth -‐-‐ by our estimates, at least $21 to $32 trillion as of 2010 -‐-‐ has been invested virtually tax-‐free through the worlds still-‐ expanding black hole of more than 80 offshore secrecy jurisdictions. We believe this range to be conservative, for reasons discussed below.
Remember: this is just financial wealth. A big share of the real estate, yachts, racehorses, gold bricks -‐-‐ and many other things that count as non-‐financial wealth -‐-‐ are also owned via offshore structures where it is impossible to identify the owners. These are outside the scope of this report.
On this scale, this offshore economy is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and most importantly to have very significant negative impacts on the domestic tax bases of key source countries (that is, countries that have seen net unrecorded private capital outflows over time2.)
2. Our 139-‐country focus group: who are the real debtors?
We have focused on a subgroup of 139 mainly low-‐middle income source countries3 for which the World Bank and IMF have sufficient external debt data.
Our estimates for this group underscore how misleading it is to regard countries as debtors only by looking at one side of their balance sheets.
Since the 1970s, with eager (and often aggressive and illegal) assistance from the
international private banking industry, it appears that private elites in this sub-‐group of
139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in
2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonizing structural adjustment and low
growth, and holding fire sales of public assets.A significant fraction of global private financial wealth -‐-‐ by our estimates, at least $21 to $32 trillion as of 2010 -‐-‐ has been invested virtually tax-‐free through the worlds still-‐ expanding black hole of more than 80 offshore secrecy jurisdictions. We believe this range to be conservative, for reasons discussed below.
Remember: this is just financial wealth. A big share of the real estate, yachts, racehorses, gold bricks -‐-‐ and many other things that count as non-‐financial wealth -‐-‐ are also owned via offshore structures where it is impossible to identify the owners. These are outside the scope of this report.
On this scale, this offshore economy is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and most importantly to have very significant negative impacts on the domestic tax bases of key source countries (that is, countries that have seen net unrecorded private capital outflows over time2.)
2. Our 139-‐country focus group: who are the real debtors?
We have focused on a subgroup of 139 mainly low-‐middle income source countries3 for which the World Bank and IMF have sufficient external debt data.
Our estimates for this group underscore how misleading it is to regard countries as debtors only by looking at one side of their balance sheets.
These same source countries had aggregate gross external debt of $4.08 trillion in 2010.
However, once we subtract these countries foreign reserves, most of which are
invested in First World securities, their aggregate net external debts were minus $2.8
trillion in 2010. (This dramatic picture has been increasing steadily since 1998, the year
when the external debts minus foreign reserves was at its peak for these 139 countries,
at +$1.43 trillion.4)
So in total, by way of the offshore system, these supposedly indebted source countries including all key developing countries are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-‐2010.
The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.
As a U.S. Federal Reserve official observed back in the 1980s: The real problem is not that these countries don't have any assets. The problem is, they're all in Miami (and, he might have added, New York, London, Geneva, Zurich, Luxembourg, Singapore, and Hong Kong)
These private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.5
Today, local elites continue to vote with their financial feet while their public sectors borrow heavily abroad but it is First World countries that are doing most of the borrowing. It is these frequently heavily indebted source countries and their elites that have become their financiers.
In terms of tackling poverty, it is hard to imagine a more pressing global issue to
address. (more...)So in total, by way of the offshore system, these supposedly indebted source countries including all key developing countries are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-‐2010.
The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.
As a U.S. Federal Reserve official observed back in the 1980s: The real problem is not that these countries don't have any assets. The problem is, they're all in Miami (and, he might have added, New York, London, Geneva, Zurich, Luxembourg, Singapore, and Hong Kong)
These private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.5
Today, local elites continue to vote with their financial feet while their public sectors borrow heavily abroad but it is First World countries that are doing most of the borrowing. It is these frequently heavily indebted source countries and their elites that have become their financiers.
Copyright by James S. Henry
James S. Henry is a leading economist, attorney and investigative journalist who has written extensively about global issues.
Mr. Henry served as Chief Economist, McKinsey & Co (NY) and VP Strategy, IBM/Lotus (Cambridge). As founder of The Sag Harbor Group, his clients have included such leading organizations as ABB, Allen & Co., Ashoka, AT&T/Bell Labs, ATKearney, Calvert Fund, Cemex, ChinaTrust, Scotland Yard/FBI Task Force on Caribbean Havens, IBM/Lotus, Intel, Oxfam GB, South Africa Telecom, the Rockefeller Foundation, the Swedish Power Board, TransAlta, and Volvo.
Read the complete Henry's report on pdf
