Achieving TransparencyA Dialogue for Action

James S. Henry

Economic Transparency

2010 Annual Conference

Economic Transparency•What Is It? •Why Do We Care? •What Do We Need?

Summary

• Metrics drive policy• Go to the front (vs. “abstract empiricism”)• Tax evasion/money laundering: a huge global polluter

– Global “pirate banking” industry – Banks’ role in story is crucial: (debt-flight-debt-flight)– Vs. “havens,” “offshore industry,” endogenous “corruption”

• This is not 1986– Huge offshore private untaxed wealth stock– Need to be creative about bringing the money back

• “Offshore” moving “onshore”– “First World” now the heavily-indebted source of capital flight– “Third World private banking”

What’s “Economic Transparency?”Audience/ Customers

Eyes ofBeholder

Macro economists “True” measures, market values of gross national goods and services, adjusted for misreported activities

Financial regulators Timely accurate financial risk, fraud indicators

Tax authorities Timely “compliant” metrics, tax base, jurisdictional status

Investors Timely accurate metrics relevant to “true” market values

Law enforcement Size, growth of illicit activities; associated “money laundering”

“Publish what you pay”

Timely accurate measures of cross-border transactions with governments

Environmental analysts

Externality measures; “environmental CBC” reporting

… depends..”

Why do we care?

9(C)JSH 2008

Numbers drive policy.…(+…disclose new

worlds..)

If you cannot express it in numbers, your knowledge is of a meager and

unsatisfactory kind.

-- Lord Kelvin, 1889

“Just use the inter-ocular significance test. Look at the fuckin’ data.”

-- John Tukey, 1985

The Author• 1890 – GGF leaves Norway-> clarinetist in Minneapolis• 1966 - $1/hr making pizzas• 1973 - Sachs and Pinera • 1976 - “Calling in Big Bills” – demand for US currency• 1979 - Fed Res data, Castle Bank, Income Tax Compliance • 1986 - “Debt Hoax” - relation between debt and flight

• Sachs runs Bolivia; Pinera buys LAN Chile • 1996 - “Banqueros y Lavadolares” – first book on int’l tax havens

• Sachs & Co. ruins Russia; Pinera is a billionaire • 2003 - “Blood Bankers” - dirty debt book• 2005 - “Private Banking for the Poor”• 2006 – Film about Evo: “Cocalero”• 2008 – Oxfam GB cap flight estimates for G20• 2010 – Estimate of untaxed offshore wealth (Forbes, etc.)

– “Pirate Bankers” in works – $1/ hr pizzas; return to Norway

• Pinera is President of Chile; Sachs is a Deity

12(C)JSH 2009

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

2006

$100 Bills per Capita Other US Currency/Coin Per Capita Area 3 Area 40

10

20

30

40

50

60

70

80

90

$100 Bill Velocity Velocity - Other US Currency

“Unusual” Demand for US Currency -

Key Indicators, 1970-2007

Source: December data on currency outstanding from US Treasury Bulletin;$GNI estimates from World Bank-WDI(2008); JSH analysis

© JS Henry, 2008

GNI VelocityUS CurrencyPer Capita ($) Argentina’s

banking crisis

Early clues and leads….

Growing Haven Role -- US Foreign Bank Liabilities, 1978-2007

0%

20%

40%

60%

80%

100%

1978 1984 1989 1994 2000 2004 2007

Cayman/BVI Bahamas Channel Islands UK

Bermuda Neth Antilles Panama Switzerland

Luxembourg Hong Kong Singapore China (mainland)

Russia All Other Countries

Total = $4.721 Trillion, December 2007

Source: US Treasury TIC data (2005), author’s analysis

World Current Deficit Discrepancy -Key Components ($95 Billions)

-$225

-$150

-$75

$0

$75

$150

$225

1974 1978 1982 1986 1990 1994 1998 2002

World Trade Gap World Income Gap Total World CA Gap

Source: IMF(2005) data, author’s analysis

Early clues….

16(C)JSH 2008

Where Did The Money Go?

• First clues – offshore currency demand, growth of “inbound” US bank deposits via havens

• “Dubious debt” ***– Lousy projects (artificial economics) – Roundtrips (Philippines, Nicaragua, etc.)– Privatization fiascos (Mexico, Arg., Indonesia,etc.)

• Financing initial capital flight• Flight wealth: on-going tax evasion and money

laundering• Human capital flight

*** For examples, see The Blood Bankers (NY:Basic Books, 2005)

17(C)JSH 2009

More capital than ever before for developing countries…..(including poor ones, the subprime equivalent…)

18(C)JSH 2009

Disappointing Real Growth(1980 - 2005)

China India Poorest (UN) All Other Developing Countries

High Income

World

Countries (n) 1 1 49 105 54 210

% of Pop --1980-- 2005

22.1%

20.3%

14.4%

17.1%

8.1%

11.4%

33.0%

35.8%

22.5%

15.3%

100%

100%

% of Real Income ($95

PPP)

3.2%

13.6%

3.5%

6.3%

1.9%

1.9%

29.3%

24.5%

62%

54%

100%

100%

Real Income Per Capita

2005 ($95 PPP) $4,972 $2,752 $1,249 $5,123 $26,191 $7,428

1980-2005 RAAGR (%) 8.1% 3.8% .7% .8% 1.9% 1.6%

2005 Population (B) 1.3 1.1 .74 2.3 .98 6.43

© JSH 2008Source: World Bank data (2008), JSH analysis

(c) JSH, 2008 19

The Philippines Long-Term Development -

Real Per Capita Incomes, Five Asian Economies(1972 = 100)

0

1

2

3

4

5

6

7

1972 1976 1980 1984 1988 1992 1996 2000

Indonesia Japan Korea, Rep. Malaysia Philippines

Source: WB (WDI Data), 2003, author’s analysis © JS Henry, 2003

Underground roots of the globaldevelopment crisis

 •Roberto Benedicto $747.6 million•Marcos family members $726.5•Roberto Cuenca $676.9•Herminio Disini $258.4•Eduardo Cojuangco $201.2•Jobo Fernandez $180.0•“Kokoy” Romualdez $150.4•Manual Elizalde Jr. $104.1•Jose de Venecia $71.4•Lucio C. Tan $51.8•Placido Mapa Jr. $50.6•Ramon Cojuangco $30.9 •Ricardo Silverio $30.6•Juan Ponce Enrile $28.6•Vicente Chiudian $15.6•Roberto Villafuerte $15.2•Bienvenido Tantoco $6.0•Salvador Laurel $5.8•Other Marcos allies: $134.4

TOTAL: $3.58 billion

OTHER (not identifiable:) $3.4 billion

Insider Recipients - Philippine Central Bank loans ($mm outstanding, 1986)

Source: JS Henry, The Blood Bankers (2003)

Other Cases

• Citibank (LA)• UBS (world)• JP Morgan (Brazil)….• Chase (Venezuela, Iran)• Deutsche Bank (Iraq)• Chile privatization fiasco (BT)• Sandinista debt deal…• Haiti and West Africa (BNP)• Chief Justice Brazil’s S Ct. • Drinking with Lula• Goni’s gas tale• Carlos Andres’ offshore fund…• Noriega’s phone calls…• Stroessner’s phone calls• Nixon’s offshore accounts

Flight Capital Estimation Process -Russia Example

Debt Flows ($B)

Net Foreign

Investment ($B)

Total Sources

($B)

Reported CA

Deficit

Ch in Reserves

Total Observed

Uses($B)

Annual CFEstimate

($B current)

Annual CF Estimate ($B US 95)

1994 -5.8 0.4 -5.4 7.8 3.4 11.3 5.9 6.0

1995 2.1 1.5 3.5 7.0 -4.9 2.1 5.6 5.6

1996 7.1 3.7 10.8 10.8 6.1 16.9 27.7 27.2

1997 5.4 3.0 8.4 -0.1 -0.4 -0.5 7.9 7.6

1998 46.3 2.2 48.5 0.2 10.5 10.7 59.2 56.3

1999 0.7 0.8 1.5 24.6 -5.4 19.2 20.7 19.4

2000 -12.6 -0.4 -13.0 46.8 -18.9 27.9 14.9 13.7

2001 -3.3 0.7 -2.6 33.8 -12.0 21.8 19.1 17.1

2002 -5.6 2.6 -2.9 29.1 -12.8 16.3 13.4 11.9

2003 28.6 -1.4 27.3 35.8 -27.2 8.6 35.9 31.2

Total $62.8 $13.2 $76.0 $196.0 $-61.6 $134.4 $210.4 $195.9

Source: data from IMF/World Bank (2008), JSH analysis

(C)JSH 2010

Year $ Shift Tax Loss2000* $131 BN $44.5 BN2001* $156 BN $53.1 BN2002 $251 BN $85.2 BN2003 $143 BN $48.7 BN2004 $267 BN $90.9 BN2005 $252 BN $85.6 BN

Pak and Zdanowicz (2006): estimates based on authors’ special

Access to US Customs data on product values reported for imports and exports.

Estimated US Corporate Tax Losses Due to Trade Misinvoicing

Capital Flight Outflows From Key East Asian Countries, 1970-2007

(Real $2000 Billions)

Source: data from IMF/World Bank (2008): JSH analysis

$68.6

$87.9

$33.5

-$7.1

$10.7

$105.9

$104.5

$40.9

$1.6

$69.2

$149.6$99.3

-$20

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180Korea* Indonesia Malaysia Singapore Thailand Philippines

1970-92 1993-2007

** Insufficient data for Cambodia, Fiji, French Polynesia, Guam, Kiribati, DRK, Laos, Myanmar, PNG, Samoa, Solomon Islands, Tonga, Vanuatu, and Vietnam

SS$764.7,

EAST ASIA MAJORS

1970-2007

(c) JSH 2008

Revised 10-08

S =$218.2 =S $ 139.4 =S $106.2 S=$51.6

=S $ 62.0 =S $ 187.2

*1976-2007

Capital Flight Outflows from Latin America, 1970-2007

(Real Value of Cumulative Net Outflows by Period, $2000 Billions)

$3.5 $17.0 $4.1 $13.8 -$0.5 $8.2 $0.5 $0.3

$83.5

$105.8

$101.6

$82.9

$5.6 $14.5

$215.8

$58.3

$37.5

$115.4

$16.9 $12.7$3.8

$3.0

-$3.8-$4.0

$122.6

$83.2

-$3.3

$30.3$4.0 $2.5

$14.1$16.3

$4.7

-$11.5

$9.2 $6.9

-$30

$20

$70

$120

$170

$220

$270

$320

1970-76 1977-92 1993-2000 2001-2007

Source: data from World Bank/ IMF (1979-2008); JSH analysis

=S $298.4

=S $268.3

S=$226.5

=S $208.9

S=$ 40.4 =S $ 25.4 =S $ 21.5

=S $19.6 S = $ 26.9

**19 other Latin American and Caribbean countries

S S=$1231.1,

LAC REGION,

1970-2007

(c) JSH 2008

Revised 10-08

Huge debt- and oil-financed real flight flows by region…

Capital Flight Outflows From FSU, 1976-2007

($2000 Billions)

$92.1 $76.8

$132.6

$23.6

$443.0

$112.2

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Russia HungaryPoland

UkraineKazahkstan

Other FSU*

Source: data from IMF (2005), World Bank (2005); JSH analysis

Revised 10-08

© JSH 2008

S S=$911.6,

FSU COUNTRIES

1976-2007

-$50

$0

$50

$100

$150

$200

1982 1985 1988 1991 1994 1997 2000 2003 2006

Total China/HK/Macao CF Total Foreign Capital Sources

Source: World Bank/ IMF data (2008); JSH analysis

Annual Flight Flows** – All China(1982-2007, $2000 Billions)

** ”Sources and uses residual” CF measure for China Mainland, HK SAR, and Macao SAR. Includes “roundtripping” through offshore havens.

(c) JSH 2008

Revised 10-08

28(C)JSH 2008

Flight Capital Outflow as a % of National Income, by Source Country, 1970-2007

-8%

-3%

2%

7%

12%

17%

22%

1970 1975 1980 1985 1990 1995 2000 2005

Argentina Brazil Mexico Venezuela LA +CARIB TOTAL

Source: IMF/ World Bank data (2008); JSH analysis

(c) JSH 2008

Revised 10-08

Significant yearly “tax” on domestic savings…

External Debt Vs. Estimated Flight Wealth, By Key Country - ( 2007 $Billions)

-$500 -$400 -$300 -$200 -$100 $0 $100 $200 $300 $400 $500 $600

External Debt Flight Wealth

Source: data from IMF/World Bank (2008); JSH analysis

© JSH 2008

32(C)JSH 2008

Compare current $700 billion+ US bank bailout, 500 billion UK bailout, $135 billion (so far) AIG bailout, $200 billion Fannie/Freddie bailout, etc..

33(C)JSH 2008Source: World Bank (’05), IMF (’09), WDI (’06), OECD (’06); author’s analysis

* In addition to US participation in Paris Club debt relief

©JSH, 2008

** Excluding Russia

= $161 Billion = $149 Billion

= $310 Billion, 2005 NPV***

***Most likely expected value as of mid-2006

0%

20%

40%

60%

80%

% of all higher-skilled adults who emigrated to OECD

Highly-Skilled Labor Emigration Rates,Sub-Saharan Countries (2000)

Source: OECD(2005); Barro and Lee (2000); Cohen and Soto (2001), my analysis

**”Higher-skilled” includes post-secondary college and vocational training

35(C)JSH 2008

36(C)JSH 2008

37(C)JSH 2008

38(C)JSH 2008

39(C)JSH 2008

FINANCIAL SERVICES34%

REAL ESTATE38%

INSURANCE28%

THE US ”FINANCIAL-INDUSTRIAL COMPLEX" --TOTAL REAL SPENDING ON FEDERAL POLITCAL INFLUENCE*,

1990 - 2010(Cumulative $2010)

$2.292 B$1.930 B

$2.601 B

∑ =$6.823 Billion

Source: Opensecrets.org (2010) data, my analysis

(c) Submergingmarkets.com, 2010

* Total real cumulativespending on federal lobbyingand campaign contributions,by industry

** Asuming 220 workdays per year, which may be generous

That's $2973 per Congressman and Senator per day** -- for 20 years

40(C)JSH 2008

Bank

Empl

o...

Bank

Asset

s

Bank

Loan

s

Bank

Depos

its

Unins

ured

De...

Real E

stat

e ...

Home

Mor

tg...

Bad H

ome Mo.

..

Credi

t Der

iva.

..

9% 11% 11% 9% 11%7% 6% 4%

0%

39%45%

40% 42% 42%36%

47%

78%

88%Top 4 US Banks -

Market Share Indicators 1992-2010

19922010

Source: FDIC (2010) data, our analysis (c) JSH, Submerging Markets (2010)

¶ Just four banks - C, JPM, BAC, and WFC - now control ≥ 40 % of the US banking market, vs. < 10% in 1992

¶ They now control 47% of all US home morgages, 78% of bad mortgages, and 88% of CDOs

41(C)JSH 2008

$0

$100

$200

$300

$400

$500

$600

$700

$800

$468$389

$120

$515

$630

$43

$80

$37

$93

$82

$78

$39

$20

$33

$41

MARKET CAP - TOP 4 US BANKS, GOLDMAN SACHS, and MORGAN STANLEY

1999 - 2010 ($Billions)

MORGAN STANLEYGOLDMAN SACHS

Source: SEC filings (2010), my analysis (c) SubmergingMarkets (2010)

Dec1999

June2008

Mar2009

Dec 2009

May 2010

Foreign Ownership of US Long-Term Securities, 2007

Carib/LA Havens

European Havens

Asian Havens

ME Havens

China Intl Orgs

3W Non-Havens

First World Non-Havens

Bearer Bonds

Source: US Federal Reserve Bank of NY, my analysis

(100% = $9.136 trillion, June 2007)

43(C)JSH 2008

“What Goes Around…..”

– 1960s/70s• Rise of International banking, fueled by oil price spike, CA deficits, FW slow-down• 3W Debt Surge - unregulated, highly profitable, unproductive, and “insured” by FW taxpayers• 3W Debt-Flight cycle -- private wealt accumulated offshor,public debts at home• Rise of international private banking, global haven network

– 1980s• Third World Debt Crisis/ Stagnation• IMF/ World Bank “Structural Adjustment” failed to work quickly, sustain growth• Banks get Bailouts, Brady Plans; countries continue paying

– 1990s-2008 • Limited 3W Debt Relief, Continued Stagnation Outside BRIC• FSU provides more debt/flight fuel• More IMF/ World Bank “Structural Adjustment” failures• Banks Turn Attention Back to First World• Rubin Treasury institutions QI, check the box regs • Takeoff of domestic LLCs, asset protection trusts• BRIC Opts for Reserve Accumulation (vs. risk of more IMF fiasco) • Increased Deregulation, Globalization, Haven-eering • Ultra-deregulation: banks, securitization, hedge funds, insurance• Loose Fed, fiscal policy: balooning FW CA deficits• Huge reverse flows from BRIC to FW Countries• Accumulated Offshore Flight Capital also Fuels Rise of FW • IMF, World Bank are marginalized• Unregulated mortage lending boom -- unregulated, highly profitable, unproductive

– 2008-2010+: • FW mortgage/ housing market craters• FW Banking, Insurance, Hedge Funds, Pension Funds: massive exposure• BRIC exposure by way of MSBs, FW bonds• Huge Bailouts for Financial Institutions; limited ones for borrowers so far• IMF gets back in the game• Crisis spreads to weaker 3W, heavily indebted EU countries

Summary

• Metrics drive policy• Go to the front (vs. “abstract empiricism”)• Tax evasion/money laundering: a huge global polluter

– Global “pirate banking” industry – Banks’ role in story is crucial: (debt-flight-debt-flight)– Vs. “havens,” “offshore industry,” endogenous “corruption”

• This is not 1986– Huge offshore private untaxed wealth stock– Need to be creative about bringing the money back

• “Offshore” moving “onshore”– “First World” now the heavily-indebted source of capital flight– “Third World private banking”

46(C)JSH 2009

47(C)JSH 2008

(c) JSH 2008

Latin American majors’ flight consumed most of their trade/aid revenues

CONVENTIONAL ECONOMIC ASSUMPTION - “POOR COUNTRIES NEED FOREIGN CAPITAL(INCLUDING BANK LOANS)”

Low-income countries: lower net savings rates (after accounting for other social expenditures)

Capital Flight Outflows From Sub-Saharan Africa, 1970-2007

(Real $2000 Billions)

-$20

$0

$20

$40

$60

$80

$100

$120Nigeria South Africa Sudan Angola* Gabon Eq. Guinea*

1970-76 1977-92 1993-2007

Source: data from World Bank/ IMF (2008); JSH analysis

=S $ 104.3 =S $ 45.6 =S $22.6 =S $16.8 =S $ 21.6 =S $ 2.1

S S=$222.1,

SUB-SAHARAN AFRICA

1970-2007

(c) JSH 2008

Revised 10-08

“Apparent” Capital Flight From China, Hong Kong SAR and Macao SAR, 1982-2007

(Real $2000 Billions)

Source: World Bank/IMF data (2008); JSH analysis

$114.0

$0.0 $0.0$8.6

$549.9

$196.2

$0

$100

$200

$300

$400

$500

$600China (Mainland) Hong Kong SAR* Macao SAR

1982-1992 1993-2007

=S $663.9

=S $196.2 =S $8.6

*HK data: 1998-2007; **Macao data, 2002-2006

(c) JSH 2008

S S=$860.3,

CHINA

1982-2007

Revised 10-08

China’s apparent flight is exaggerated, due to round tripping…

54

1970s

• Rise of International banking, fueled by oil price spike, CA deficits, First World slow

• 3W Debt surge - unregulated, highly profitable, unproductive, and “insured” by FW taxpayers

• 3W Debt-Flight cycle -- private wealth accumulated public debts at home

• Drug money boom• 1970: CTRs• Rise of international private

banking, global haven network

• 1976 – “Calling in Big Bills”• 1978 – FR data:

Miami/Texas surpluses• 1979 – Senate testimony re

role of offshore cash demand, weird ME flows

(C)JSH 2008

Middle East Capital Flight, 1976-2007

($2000 Billions)

$148.2

$47.5

$27.1 $39.1$50.1

$23.1

$43.1

$87.5

$75.7

$46.8

$52.0

$0

$50

$100

$150

$200

$250

Kuwait Turkey Iran Israel Egypt Saudi Arabia

1976-92 1993-2007

Source: data from IMF (2005), World Bank (2005); JSH analysis

=S $ 223.9 =S $ 135.0 =S $ 93.1 =S $73.9 =S $62.2 =S $ 52.0

© JSH 2008

Cumulative Flight by Region(1977-2003, $95 Billions)

China

Russia

Other FSU

Other AsiaSSA

LA

Mid East**

$0

$500

$1,000

$1,500

$2,000

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Source: data from IMF (2005), World Bank (2005); JSH analysis**Excluding Kuwait and Saudi Arabia © JSH 2008

Global Flight Wealth - Key Countries, Including China

($2007 Billions)

Thai

Indon

Sing

Korea

Other Asia

Mex

Ven Arg

Poland

Ukraine

Other FSU

Turkey

NigeriaS.AfricaOther SSA

Other ME

Brazil

China/HK

Russia

Other LA

Malay

Phil

Hungary

Source: data from IMF/ World Bank (2008); JSH analysis

S= $ 6.209 Trillion

© JSH 2008

Global Flight Wealth, Vs. All Developing Country Debt**

(1975-2003)(Billions US $Current)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Capital Flight Wealth Gross Foreign Debt Foreign Debt Net of Reserves

Source: data from IMF (2005), World Bank (2005); JSH analysis

First crossover: 1989-90

**Including China

Flight Wealth “Surplus”

© JSH 2008