Ogreba S.V.

Taras Shevchenko National University of Kyiv

Methodical aspects of the statistical assessment of capital flight

The processes of international capital flight have extended in the modern conditions of functioning of financial system of developing countries. The main reasons of this are political and economic instability of the countries, the high level of tax burden, distrust to the national financial systems and criminalization of the economies. So the effective statistical assessment of the sizes of the capital flight is one of the important steps for elimination of these reasons and liquidation of the negative consequences of capital flight all over the world.

Statistical assessment of the sizes of capital flight is based on following methods: the Dooley method, Hot Money method, Trade Misinvoicing method, and Residual Method. The common feature of these methods is usage of the Balance of Payment as the framework for calculations.

The Dooley method is a widespread instrument of the quantitative assessment of the sizes of capital flight developed by the expert of the International Monetary Fund (IMF) M. Dooley. By the definition of M. Dooley capital flight is the attempt of the fund’s placement outside the control of the national authorities. This definition includes the illegal fund’s transfer abroad and so excludes the legal types of the capital outflow. The calculations by this method consider the “errors and omissions” of the Balance of Payment and difference between data of the international statistics that deals with changes in the residual amount of the external debt and debt repayments. These calculations provide the size of general capital outflow. Then all flows on which income payments are registered should be excluded from the size of capital outflow. As there is no accurate and full information about interrelations between capital outflow and the amount of income payments, special values that characterize the size of the external assets which can provides fixed by statistics level of income on these assets are introduced. The average interest rate established on the world market is used for these computations. The size of capital flight is calculated as the difference between general capital outflow and the calculated size of the external assets. The practical application of this approach is very difficult because of low quality of the cross-border flow’s statistics. Also the special values used in the Dooley method are based on the world average indicators, so this methodic is effective for calculations of the world average sizes of capital flight and gives a significant deviation in the calculations of the sizes of capital flight of the specific country. [3]

Another approach to the statistical assessment of the capital flight is Hot Money method developed by J. Cuddington. In the 1980-s he proposed the conception of the “hot money” according to which capital flight was considered as outflow of the short-term capital caused by the short-term changes on the financial markets. These method estimates the size of capital flight as the sum of long-term capital outflow and errors and omissions of the country’s Balance of Payment. Omissions and errors are considered because this indicator helps to adjust the size of capital flight on the amount of unregistered fund’s outflow. [3] According to the IMF’s recommendations exceeding of the errors and omissions in the Balance of Payment over the value of the normal statistical error shows the increase of hidden flow of the resources. [4] The main disadvantage of this approach is disregard of long-term forms of the capital flight such as the direct investments in the offshore countries, fictitious portfolio investments, etc.

Trade Misinvoicing method estimates export underinvoicinig and import overinvoicing which can hide capital flight. According to this method differences in statistics of the reporting country and its trading partners can help to identify it by means of putting imports as reported by the country and imports as reported by the world (exports by the country) on a comparable basis. Also both are adjusted from a CIF (cost, insurance, freight) basis to a FOB (free-on-board) basis. This implies that reported imports, normally expressed on a CIF basis, are adjusted downward by a country-specific CIF/FOB ratio so that exports and imports can be compared on a consistent FOB basis. So

Export misinvoicing = (Xw / CIFFOB factor) - Xc;

Import misinvoicing = (Mc / CIFFOB factor) - Mw;

where

Xw - Imports from that country as reported by the world CIF;

Xc - Exports as reported by the country FOB;

Mc - Imports as reported by the country CIF;

Mw - Exports to that country as reported by the world FOB;

CIFFOB factor - CIF to FOB ratio.

Imports are adjusted downward by a country-specific CIF/FOB ratio, so a positive sign signifies capital flight (overinvoicing of imports or underinvoicing of exports) and a negative sign signifies reverse capital flight (underinvoicing of imports and overinvoicing of exports). Since both export underinvoicing and import overinvoicing add to capital flight, the two should be added for the net effect of trade misinvoicing on capital flight. This method also has some disadvantages. First of them is difficulties in obtaining of the statistical information from different countries. And the second is caused by the fact that differences in trade statistics can be due not only to capital flight, but also tax evasion, inconsistent reporting methods and bad reporting. [1]

According to Residual method developed by S. Erbe capital flight consider as all types of private financial assets outflow. This method involves comparing of the sources of capital inflow (net increase in the external debt, net increase in the foreign investments) and usage of these funds (the deficit of the current balance, changes in the foreign reserves) on the year basis. So the basic equation is

dED + dFI = DBP + dFR,

where

d - change,

ED - the amount of the external debt;

DBP - the deficit of the Balance of Payment;

FR - the amount of the foreign reserves.

When the equation becomes the inequality and the left side exceeds the right side, capital flight takes place and it can be expressed as

CF = dED + dFI - DBP - dFR,

where CF is capital flight.

Residual method is actively used by the experts of the World Bank, but application of this method is very doubtful outside the group of the developing countries-debtors. [3]

So we have considered the most wide spread methods in the world practice of the statistical assessment of capital flight. All of them have advantages and disadvantages. But in general we came to the conclusion that existing estimation tools had non-systemic nature. So in the case of the improvement of the methodological base of the statistical assessment of capital flight we propose the new system of the quantitative evaluation of this phenomenon. This methodic is also based on the analysis of the Balance of Payment, so its items are used for capital flight’s estimation.

Several definitions and structural components of the phenomenon being studied should be presented for implementation of the new methodic.

General capital outflow - all types of the transferring funds from the national economy for recapitalization in foreign countries. [5] This term includes both legal and illegal capital outflows. Legal capital outflow (capital export) implies recapitalization of the national funds in foreign economies by direct investments, portfolio investments and other investments excluding uncollectible revenue from exports of goods and services, payments for imports that were not delivered, and payments for fictitious transactions with securities. Illegal capital outflow is carefully hidden from official authorities monitoring and illegal funds transferring to the foreign countries. This category can be divided into three structural components: fixed, hidden and unfixed capital outflows. Fixed illegal capital outflow is funds transferring from the national economy with violation of the national law and can be assessed by the amount of the uncollectible revenue from exports of goods and services, payments for imports that were not delivered, and payments for fictitious transactions with securities. Hidden illegal capital outflow implies partial return of investment income to the country that has exported the capital. Unfixed illegal capital outflow is connected with transferring funds by smuggling. And at least capital flight can be divided into two types: possible capital flight and real capital flight. Real capital flight includes the whole amount of the illegal capital outflow and possible capital flight is considered as direct investments in the offshore countries and trade credits and advances extended to foreign partners. The sum of possible and real capital flights is general capital flight. The methodic of the estimation of the capital outflow and capital flight are presented in the table 1.

Table 1

The methodic of the estimation of capital outflow

№	The type of the capital outflow	The way of quantifying
1	Legal capital outflow	Direct investments + portfolio investments + other investments - uncollectible revenue from exports of goods and services, payments for imports that were not delivered, and payments for fictitious transactions with securities.
2	Fixed illegal capital outflow	Uncollectible revenue from exports of goods and services, payments for imports that were not delivered, and payments for fictitious transactions with securities.
3	Hidden illegal capital outflow	Quantitative evaluation requires the special observations, methods and in-depth examination of the statistical data
4	Unfixed illegal capital outflow	Errors and omissions in the Balance of Payment which exceed the normal statistical error
5	General illegal capital outflow	2 + 3 + 4
6	General capital outflow	1 + 2 + 3 + 4
7	Possible capital flight	Direct investments in the offshore countries + trade credits and advances extended to foreign partners
8	Real capital flight	5
9	General capital flight	7 + 8

Source: Composed by the author

Thus there are four main methods of the statistical assessment of capital flight sizes that are widely used in the world practice. They are the Dooley method, Hot Money method, Trade Misinvoicing method and Residual method. Development of these approaches is the attempts to create universal methodic with simple calculations that can be applied for the most countries all over the world. And these methods perform their functions comparing the approximate tendencies across the countries and calculating the average values of capital outflow. But unfortunately such approach is insufficient for adequate and accurate assessment of the sizes of capital flight in specific country. The proposed methodic is based on the systematic approach and analyze not only the size of capital flight overall but each of its structural components separately. So this methodic can be applied as for evaluation of the capital flight in the specific country as for average value calculations and for international comparison.

References:

1. Claessens S., Naude D. Recent Estimates of Capital Flight. - the World Bank. - 1993. - 34 p.

2. Khodaei H. The Calculation of Capital Flight and its Effect on Macroeconomic Variables in Iran // Journal of Basic and Applied Scientific Research. - TextRoad Publication. - 2012. - p.9365-9369.

3. Корнилов М., Лобачев С. Как оценить объем бегства капитала из России // Экономический вестник Ростовского государственного университета. - 2008. - т.6. - №1. - с.78-86.

4. Косарев А. Макроэкономическая оценка текущих тенденций бегства капитала из России // Экономический журнал ВШЭ. - 2002. -№4. - с.474-481.

5. Купрещенко Н. Незаконная утечка капитала из России, его масштабы и основные схемы вывоза // Аудит и финансовый анализ. - 2008. - №1. - с. 1-12.