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From financial repression to external distress: The case of Venezuela

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The literature on external default has stressed the existence of the so-called debt-intolerance puzzle: developing nations tend to default at debt-to-GDP ratios well bellow those of developed countries. The underestimation or plain omission of domestic debt may account for a fraction of that puzzle. We calculate fiscal revenues coming from financial repression using different methodologies for the case of Venezuela, and look at their correspondence with comprehensive measures of capital flight. In particular, we add to the standard measure of capital flight the over-invoicing of imports, rife in periods of exchange controls. We find that financial repression accounts for public revenues similar to those of OECD economies, in spite of the latter having much higher domestic debt-to-GDP ratios. We also find that financial repression and capital flight is significantly higher in years of exchange controls and interest rate caps. We interpret this as significant evidence suggesting a link between domestic disequilibrium and a weakening of the net foreign asset position via capital flight.

Publicado en: Economía y finanzas
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From financial repression to external distress: The case of Venezuela

  1. 1. From  financial  repression  to  external  distress:   The  case  of  Venezuela       Carmen  Reinhart   Minos  A.  Zombanakis  Professor  of  the  Interna7onal  Financial  System   Harvard  Kennedy  School     NBER  Research  Associate       Miguel  Angel  Santos   Senior  Research  Fellow,  Center  for  Interna7onal  Development   Harvard  Kennedy  School     Adjoint  Professor,  Center  of  Finance   Ins7tuto  de  Estudios  Superiores  en  Administracion  (IESA)       miguel_santos@hks.harvard.edu   @miguelsantos12      
  2. 2. 2   The  idea  and  its  rela.on  to  the  literatrure   •  Debt-­‐intolerance  puzzle:  Developing  countries  tend  to  default  at  debt  to  GDP   ra.os  much  lower  than  developed  na.ons  (Reinhart  &  Rogoff,  2003,  2010)   •  The  forgoTen  history  of  domes7c  debt:  Underes.ma.on  or  plain  omission  of   domes.c  debt  may  account  for  a  frac.on  of  that  puzzle  (Reinhart  &  Rogoff,  2011)   •  An  overwhelming  majority  of  external  defaults  are  heralded  by  domes.c  debt   defaults:  Real  losses  forced  on  domes.c  bondholders  (Reinhart  &  Rogoff,  2010)   •  Domes.c  default  occurs  in  the  context  of  interest  rate  and  exchange  controls  that   force  real  losses  on  domes.c  bondholders  (Giovanini  &  de  Melo,  1991;  Reinhart  &   Sbrancia,  2013)   •  In  this  paper  we  explore  an  empirical  channel  connec.ng  financial  repression  with   external  distress,  via  a  broader  measure  of  capital  flight:   -­‐  Restricted  capital  flight  (as  presented  in  the  literature,  Diaz-­‐Alejandro  1984   and  Rodriguez,  M.  1987)   -­‐  Over-­‐invoice  of  imports  
  3. 3. 3   The  case  of  Venezuela   •  Venezuela  is  experiencing  a  prolonged  episode  of  harsh  price,  exchange  and  interest   rate  controls  (2003  –  nowadays)   •  Premiums  on  the  black  exchange  market  are  running  53%  -­‐  4,020%  (depending  on   the  official  exchange  rate  used)    
  4. 4. 4   Huge  exchange  rate  premiums…   0.00   50.00   100.00   150.00   200.00   250.00   300.00   Venezuela´s  Mul;ple  Exchange  Rates   Parallel  Market  Rate   Official  1   Official  2   SICAD  I   SICAD  II   SIMADI   4,020 %   53%  
  5. 5. 5   The  case  of  Venezuela   •  Venezuela  is  experiencing  a  prolonged  episode  of  harsh  price,  exchange  and  interest   rate  controls  (2003  –  nowadays)   •  Premiums  on  the  black  exchange  market  are  running  53%  -­‐  4,020%  (depending  on   the  official  exchange  rate  used)   •  Between  2006-­‐2013  Venezuela  accumulated  an  astounding  public  debt:   •  Foreign  debt  quadrupled,  from  US$  26.9  to  US$104.3  billion)   •  Domes.c  debt  doubled  in  real  terms:  1,058%  nominal  growth  (CAGR  42%),   par.ally  offset  by  528%  accumulated  infla.on  (CAGR  30%)   •  Financial  repression  has  been  rampant,  with  domes.c  infla.on  running  at  a  rate  five   .mes  higher  than  nominal  domes.c  interest  rates   •  Prac..oners  in  Wall  Street  (Rodriguez,  F.  2014)  have  stressed  that  ability  to  service   foreign  debt  is  strictly  related  to  the  availability  of  foreign  currency,  and  unrelated   to  the  prevalence  of  highly  nega.ve  real  interest  rates  in  the  domes.c  market    
  6. 6. 6   Debt to GDP ratios @ average official exchange rate 10,5%% 12,0%% 10,1%% 12,5%% 14,9%% 11,4%% 10,4%% 8,4%% 6,8%% 9,3%% 3,3%% 9,6%% 13,5%% 12,1%% 16,7%% 9,6%% 7,6%% 7,9%% 10,3%% 13,5%% 16,2%% 18,9%% 14,7%% 11,1%% 9,2%% 7,3%% 4,5%% 7,5%% 8,9%% 11,4%% 15,6%% 15,8%% 46,7% 59,5% 45,4% 53,3% 71,7% 77,4% 68,6% 76,5% 62,9% 65,5% 57,5% 64,2% 60,0% 54,6% 58,8% 43,0% 38,7% 37,6% 32,6% 34,6% 46,0% 53,5% 39,6% 32,3% 23,7% 24,1% 20,7% 28,0% 40,7% 42,3% 43,2% 39,8% 1982% 1983% 1984% 1985% 1986% 1987% 1988% 1989% 1990% 1991% 1992% 1993% 1994% 1995% 1996% 1997% 1998% 1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% Consolidated%Public%Debt% (%%of%GDP%at%average%official%market%rates)% Domes1c%Debt% Foreign%Debt% Total%Public%Debt%
  7. 7. 7   Debt to GDP ratios @ average parallel exchange rate (32,0) 10,5%% 12,0%% 10,1%% 12,5%% 14,9%% 11,4%% 10,4%% 8,4%% 6,8%% 9,3%% 3,3%% 9,6%% 13,5%% 12,1%% 16,7%% 9,6%% 7,6%% 7,9%% 10,3%% 13,5%% 16,2%% 18,9%% 14,7%% 11,1%% 9,2%% 7,3%% 4,5%% 7,5%% 8,9%% 11,4%% 15,6%% 15,8%% 46,7% 109,1% 79,0% 87,0% 117,6%114,9% 110,8% 76,9% 62,6% 64,7% 56,8% 63,8% 64,5% 72,6% 62,3% 43,0% 38,6% 37,5% 32,6% 34,6% 45,9% 71,2% 52,4% 38,2% 27,1% 42,5% 38,0% 65,2% 69,7% 73,3% 87,4% 154,3% 1982% 1983% 1984% 1985% 1986% 1987% 1988% 1989% 1990% 1991% 1992% 1993% 1994% 1995% 1996% 1997% 1998% 1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% Consolidated%Public%Debt% (%%of%GDP%at%average%parallel%market%rates)% Domes1c%Debt% Foreign%Debt% Total%Public%Debt%
  8. 8. 8   What  is  it  that  we  do?   •  Divide  the  period  1983-­‐2013  in  years  of  exchange  controls  and  years  of  free-­‐markets   •  Use  varia.ons  of  two  different  methodologies  (Giovanini  &  de  Melo,  1991;  Reinhart  &   Sbrancia,  2013)  to  es.mate  Venezuelan  fiscal  revenues  coming  from  financial   repression  and  test  if  they  are  higher  in  periods  of  exchange  controls   •  Decomposing  expected  infla.on  and  pure  (expected)  financial  repression   •  Using  yields  on  foreign  debt  to  calculate  ex  post  equilibrium  domes.c  debt  rates   •  Es.mate  capital  flight  using  the  tradi.onal  approach  (Diaz-­‐Alejandro,  1984)   •  Es.mate  over-­‐invoice  of  imports  using  an  innova.ve  methodolody,  that  capture   differences  between  imports  reported  by  Venezuelan  customs  and  Central  Bank´s   •  Test  whether  broad  capital  flight  (capital  flight  +  over-­‐invoice  of  imports)  tends  to  be   higher  in  years  of  exchange  controls  
  9. 9. 9   Estimating financial represion vía Reinhart-Sbrancia (2013) Breaking down “unorthodox” financial components Basic equation Unexpected inflation effect Pure financial repression effect Seigniorage 1 + !! ! = !!!!!! !!!! ! !,!the!ex'ante!real!return!on!domestic!debt! Transformed equation where
  10. 10. 10   We estimate expected inflation using an ARIMA (1,1,0) approach !20$ 0$ 20$ 40$ 60$ 80$ 100$ 120$ 140$ 1960$ 1961$ 1962$ 1963$ 1964$ 1965$ 1966$ 1967$ 1968$ 1969$ 1970$ 1971$ 1972$ 1973$ 1974$ 1975$ 1976$ 1977$ 1978$ 1979$ 1980$ 1981$ 1982$ 1983$ 1984$ 1985$ 1986$ 1987$ 1988$ 1989$ 1990$ 1991$ 1992$ 1993$ 1994$ 1995$ 1996$ 1997$ 1998$ 1999$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ Infla%on'and'ARIMA'Forecasted'Infla%on' CPI$Varia4on$ ARIMA$Expected$CPI$Varia4on$
  11. 11. 11   Yields on domestic debt instruments have been negative, liquidation years (inflation>yields) are more common in years of controls, but not unheard of in free-market years 11.6  11.4  11.5   28.1  29.5   84.5   40.7   34.2   31.4   38.1   60.8  59.9   99.9   50.0   35.8   23.6   16.2   12.5   22.4   31.1   19.2   14.3   16.9   22.6   32.4   28.6  27.8  27.6   19.9   56.1   13.0  13.2  12.6  12.1  13.5  14.9   17.3   20.1   27.1   31.7   41.0   54.7  53.4   49.1   25.4   47.9   31.1   21.0  22.1   38.5   32.2   15.6   12.9   7.8   9.6   14.5  12.8   15.5   17.5  16.8   1984   1985   1986   1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011   2012   2013   Average  Nominal  Domes;c  Bond  Yield  and  Infla;on     Infla.on   Average  Yield  on  Domes.c  Bonds  
  12. 12. 12   VEF$Million %$GDP VEF$Million %$GDP VEF$Million %$GDP 1984 3 0.70 3 0.63 1985 -2 30.44$ 0 30.04$ 12 2.60 1986 0 0.04 0 30.05$ 9 1.89 1987 10 1.41 13 1.80 21 3.07 1988 -7 30.83$ 12 1.39 27 3.07 1989 28 1.85 66 4.38 48 3.16 1990 -50 32.21$ 17 0.75 106 4.64 1991 37 1.22 39 1.30 205 6.75 1992 3 0.08 23 0.57 131 3.17 1993 22 0.40 38 0.69 146 2.67 1994 88 1.02 209 2.41 436 5.03 1995 -166 31.21$ 194 1.42 436 3.18 1996 644 2.19 1,141 3.88 1,239 4.21 1997 -1,660 33.96$ 32 0.08 1,888 4.50 1998 513 1.03 -318 30.64$ 1,504 3.01 1999 -67 30.11$ 19 0.03 1,902 3.20 2000 111 0.14 -1,699 32.13$ 1,566 1.97 2001 195 0.22 -1,584 31.78$ 1,332 1.50 2002 1,713 1.59 493 0.46 2,410 2.23 2003 -2 30.00$ 1,980 1.47 5,400 4.02 2004 -4,384 32.06$ -3,546 31.67$ 7,065 3.32 2005 1,188 0.39 -4,814 31.58$ 8,633 2.84 2006 1,943 0.49 959 0.24 25,067 6.36 2007 945 0.19 3,612 0.73 27,608 5.58 2008 1,093 0.16 7,281 1.07 35,119 5.18 2009 -3,270 30.46$ 6,517 0.92 32,561 4.60 2010 1,111 0.11 9,224 0.91 46,711 4.59 2011 388 0.03 16,874 1.24 76,315 5.62 2012 -11,864 30.72$ 10,258 0.63 124,277 7.58 2013 93,349 3.50 131,293 4.92 272,982 10.24 Average 0.16 0.81 4.19 Average'Repression/Control'Years 0.32 1.27 *** 4.34 * Average'Free4Market'Years -0.16 -0.07 3.36 Unanticipated$Inflation$ Effect Ex3ante$Financial$ Repression$Effect Seigniorage
  13. 13. 13   Estimating financial represion vía benchmarks with yields on foreign debt (use average YTM as opposed to coupons) @Official rate 11,9$ 15,0$ 10,7$ 21,3$ 16,0$ 9,8$ 9,6$ 16,0$ 14,4$ 13,3$ 14,7$ 13,1$ 8,9$ 7,7$ 7,1$ 6,6$ 9,1$ 21,6$ 14,1$ 13,9$ 13,7$ 9,4$ 13,8$ -0,6$$ 5,6$$ -0,3$$ -13,7$$ 30,3$$ -35,0$$ 27,3$$ 11,9$$ 33,7$$ 16,8$$ 13,7$$ -23,9$$ -0,0$$ 12,7$$ 3,2$$ 10,9$$ 7,8$$ 9,5$$ 14,5$$ -36,0$$ 2,1$$ 17,5$$ -18,3$$ 1991# 1992# 1993# 1994# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# Financial$Repression:$US$$Yields$on$Foreign$and$DomesCc$Debt$(@Official$Exchange)$ Average#US$#Yield#on#Foreign#Debt# Average#US$#Yield#on#DomesAc#Bonds#@Official#
  14. 14. 14   @Official rates: Repression/control years are higher, but due to small number of observations (Venezuelan debt startied floating 1991 onwards) difference is not significant VEF$Million %$GDP Merryl$Lynch$Ave$ Yield$(US$) Change$in$official$ price$of$dollar Equilibrium$Yield$ Domestic Equilibrium$Domestic$Yield$H$ Average$Government$Yield Financial$Repression 1991 11.88 20.83 35.19 15.13 33 1.09 1992 15.00 20.43 38.49 11.35 24 0.57 1993 10.71 32.04 46.18 14.52 48 0.88 1994 21.33 63.36 98.19 57.16 486 5.60 1995 15.98 18.78 37.76 H16.97$ H240$ H1.76$ 1996 9.83 135.99 159.18 105.80 3,476 11.81 1997 9.58 17.07 28.29 H20.80$ H930$ H2.22$ 1998 16.01 12.07 30.01 4.60 180 0.36 1999 14.38 10.62 26.52 H21.36$ H908$ H1.53$ 2000 13.31 12.26 27.20 H3.92$ H254$ H0.32$ 2001 14.71 6.43 22.09 1.06 107 0.12 2002 13.08 60.43 81.42 59.30 8,728 8.09 2003 8.89 38.56 50.88 12.37 2,648 1.97 2004 7.72 17.21 26.26 H5.89$ H1,665$ H0.78$ 2005 7.13 12.00 19.98 4.41 1,430 0.47 2006 6.57 1.81 8.50 H4.43$ H1,550$ H0.39$ 2007 9.14 0.00 9.14 1.33 481 0.10 2008 21.56 0.00 21.56 12.01 3,994 0.59 2009 14.13 0.00 14.13 H0.34$ H144$ H0.02$ 2010 13.88 76.28 100.75 87.91 63,073 6.20 2011 13.73 13.17 28.71 13.18 16,105 1.19 2012 9.38 0.00 9.38 H8.12$ H16,610$ H1.01$ 2013 13.76 42.99 62.66 45.90 155,102 5.82 Average 1.60 Average'Repression/Control'Years 2.13 Average'Free'Market'Years 0.78
  15. 15. 15   Estimating financial represion vía benchmarks with yields on foreign debt (use average YTM as opposed to coupons) @Parallel rate 11,9$ 15,0$ 10,7$ 21,3$ 16,0$ 9,8$ 9,6$ 16,0$ 14,4$ 13,3$ 14,7$ 13,1$ 8,9$ 7,7$ 7,1$ 6,6$ 9,1$ 21,6$ 14,1$ 13,9$ 13,7$ 9,4$ 13,8$ -0,6$$ 5,6$$ -0,3$$ -21,4$$ 0,6$$ -14,7$$ 38,1$$ 11,9$$ 33,7$$ 16,8$$ 13,7$$ -23,9$$ -33,8$$ 12,6$$ 22,2$$ 14,8$$ -36,4$$ 10,7$$ -15,7$$ -5,9$$ -2,3$$ -9,6$$ -63,3$$ 1991# 1992# 1993# 1994# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# Financial$Repression:$US$$Yields$on$Foreign$and$DomesCc$Debt$(@Parallel$Exchange)$ Average#US$#Yield#on#Foreign#Debt# Realized#US$#Yield#on#DomesCc#Bonds#@Parallel##
  16. 16. 16   @Parallel rates: revenues from financial repression are significantly higher (95%) in years of financial repression and controls VEF$Million %$GDP Merryl$Lynch$Ave$ Yield$(US$) Change$in$parallel$ price$of$dollar Equilibrium$Yield$ Domestic Equilibrium$Domestic$Yield$H$ Average$Government$Yield Financial$Repression 1991 11.88 20.83 35.19 15.13 33 1.09 1992 15.00 20.43 38.49 11.35 24 0.57 1993 10.71 32.04 46.18 14.52 48 0.88 1994 21.33 79.50 117.78 76.75 652 7.52 1995 15.98 53.78 78.35 23.62 335 2.45 1996 9.83 79.87 97.55 44.17 1,451 4.93 1997 9.58 7.97 18.31 H30.78$ H1,376$ H3.28$ 1998 16.01 12.07 30.01 4.60 180 0.36 1999 14.38 10.62 26.52 H21.36$ H908$ H1.53$ 2000 13.31 12.26 27.20 H3.92$ H254$ H0.32$ 2001 14.71 6.43 22.09 1.06 107 0.12 2002 13.08 60.43 81.42 59.30 8,728 8.09 2003 8.89 109.35 127.96 89.45 19,153 14.27 2004 7.72 17.38 26.44 H5.71$ H1,614$ H0.76$ 2005 7.13 H5.45$ 1.29 H14.28$ H4,634$ H1.52$ 2006 6.57 H1.59$ 4.87 H8.06$ H2,818$ H0.72$ 2007 9.14 69.51 85.01 77.20 27,878 5.64 2008 21.56 H1.07$ 20.26 10.71 3,561 0.53 2009 14.13 35.86 55.05 40.58 16,986 2.40 2010 13.88 19.96 36.61 23.77 17,057 1.68 2011 13.73 18.22 34.44 18.91 23,115 1.70 2012 9.38 29.96 42.15 24.66 50,472 3.08 2013 13.76 217.85 261.58 244.82 827,209 31.03 Average 3.40 Average'Repression/Control'Years 5.16$** Average'Free'Market'Years 0.66
  17. 17. 17   Summary  of  findings  on  financial  repression   •  Regardless  of  the  methodology,  government  revenues  coming  from  financial   repression  thrive  on  periods  of  interest-­‐rate  ceilings,  exchange  and  price  controls   (1.3%  -­‐  5.2%  of  GDP),  and  come  close  to  zero  when  none  of  these  restric.ons  prevail   •  Large  misalignments  across  these  indicators  on  a  year-­‐to-­‐year  basis  mirror  similar   disequilibria  across  domes.c  government  bond-­‐returns,  foreign  yields,  infla.on,  and   exchange  rate  movements   •  Since  es.mates  based  on  dollar-­‐yields  of  sovereign  bonds  are  consistently  higher,  one   could  infer  that  foreign  and  domes.c  debt  instruments  are  not  perfect  subs.tutes     -­‐  Domes.c  regula.ons  different  from  price,  exchange  and  interest  rate  controls,   seems  to  drive  domes.c  investors  to  hold  domes.c  debt  in  spite  of  its  yields   being  significantly  lower  in  dollars   -­‐  We  can  see  this  set  of  regula.ons  as  a  more  subtle  way  to  impose  financial   repression  
  18. 18. 18   Estimating capital flight (Diaz-Alejandro, 1984) ü  To  the  balance  of  interna.onal  reserves  at  the  beginning  of  the  year,  add   the  current  account  balance,  direct  investment,  pornolio  investment  and   other  (net)  varia.on  in  net  public  assets  (including  debt  service  payments),   and  subtract  the  ending  balance  of  interna.onal  reserves   ü  It  is  the  equivalent  of  calcula.ng  what  would  have  been  the  accumula;on   of  interna;onal  reserves  in  the  absence  of  changes  in  the  net   accumula;on  of  private  assets  abroad  and  errors  and  omissions   •  To  gauge  the  importance  of  capital  flight  we  es.mated  the  figure  as:   -­‐  %  of  GDP  at  the  official  exchange  rate   -­‐  %  of  GDP  at  the  parallel  exchange  rate   -­‐  Constant  US$  dollars   -­‐  %  of  exports  
  19. 19. 19   US$ Million % GDP - @ Official % GDP - @ Parallel Constant 2013 US$ Million % of Exports 1984 2,162 1985 1,028 1986 709 1987 )403, 1988 )1,205, 1989 2,768 1990 3,014 1991 2,450 1992 1,001 1993 )907, 1994 3,293 1995 3,386 1996 2,466 1997 5,757 1998 6,098 1999 4,083 2000 6,118 2001 9,403 2002 9,841 2003 3,783 2004 8,797 2005 11,738 2006 7,364 2007 17,948 2008 20,569 2009 23,505 2010 20,255 2011 19,261 2012 11,968 2013 8,612 Average Average'Repression/Control'Years Average'Free'Market'Years 3.5 1.7 1.6 )1.0, )2.7, 7.1 6.3 4.6 1.7 )1.5, 5.7 4.4 3.5 6.7 6.7 4.2 5.2 7.7 10.6 4.5 7.8 8.2 4.0 7.8 6.5 7.1 7.5 6.1 3.1 2.0 4.7 4.4 5.2 6.8 3.1 2.9 )1.6, )4.7, 7.2 6.3 4.6 1.7 )1.5, 6.2 6.2 3.8 6.7 6.7 4.2 5.2 7.7 10.6 6.8 11.8 10.4 5.0 16.3 13.5 20.1 14.5 12.2 8.1 11.4 7.1 8.0,* 5.2 4,950 13.6 2,263 7.2 1,532 8.3 )840, )3.9, )2,414, )12.0, 5,291 21.4 5,466 17.3 4,264 16.4 1,691 7.2 )1,488, )6.2, 5,266 20.4 5,267 17.7 3,728 10.4 8,507 24.3 8,869 34.7 5,783 19.6 8,381 18.2 12,685 35.3 12,967 36.7 4,893 13.9 11,019 22.2 14,217 21.1 8,698 11.2 20,369 25.6 22,801 21.6 25,366 40.8 21,536 30.8 19,890 20.8 12,148 12.3 8,612 9.7 8,723.9 17.2 9,729.6,* 15.7 6,712.5 20.3 Capital  Flight   ü Capital  flight  is  higher  in   periods  of  exchange   controls  when  calculated  as   a  %  of  GDP  at  the  parallel   market  rate,  or  in  constant   US$  2013   ü As  a  %  of  GDP  or  as  a  %  of   exports,  capital  flights   seems  to  be  higher  in  free   market  years,  but  the   difference  is  not  significant  
  20. 20. 20   Es.ma.ng  the  over-­‐invoice  of  imports   •  We  departed  from  tradi.onal  FOB-­‐CIF  mirror  trade  sta.s.cs  that  focus  on   over-­‐invoicing  “on  the  route”  to  es.ma.ng  over-­‐invoicing  within  Venezuela   •  We  contrast  Central  Bank  imports  (CIF),  with  the  sum  of  imports  registered   by  Venezuelan  customs  (UNcomtrade)   •  The  difference  was  subject  to  two  different  tests:   -­‐  Ver.cal:  Whether  import  over-­‐invoices  as  es.mated  in  this  way  is   higher  in  periods  of  exchange  controls  (high  black  market  premiums)   as  measured  by:   -­‐  %  of  GDP  at  the  official  exchange  rate   -­‐  %  of  GDP  at  the  parallel  exchange  rate   -­‐  Constant  US$  dollars   -­‐  %  of  exports   -­‐  %  of  imports   -­‐  Horizontal:  Whether  errors  registered  in  Venezuela  each  year  are   significant  within  the  distribu.on  of  that  error  worldwide  for  each  year  
  21. 21. 21   Current'US$'Million Overinvoicing*of*Imports % GDP - @ Official Overinvoicing*of*Imports % GDP - @ Parallel Overinvoicing*of*Imports Constant 2011 US$ Million % of Exports Overinvoicing*of*Imports % of Imports Overinvoicing*of*Imports 1984 *** 1,210 1985 *** 908 1986 *** 1,180 1987 *** 1,240 1988 *** 1,670 1989 *** 1,020 1990 ** 787 1991 - 1,210 1992 ** 1,520 1993 - 1,370 1994 *** 1,250 1995 *** 2,000 1996 *** 1,070 1997 * 1,610 1998 *** 1,740 1999 - 659 2000 - 1,770 2001 - 2,030 2002 - 1,380 2003 - 962 2004 - 2,170 2005 - 2,380 2006 *** 9,420 2007 *** 15,500 2008 - 3,550 2009 - 3,440 2010 *** 7,020 2011 *** 11,900 Average Average*Repression/Control*Years Average*Free*Market*Years 2.0 1.5 2.7 3.2 3.7 2.6 1.6 2.3 2.5 2.3 2.1 2.6 1.5 1.9 1.9 0.7 1.5 1.7 1.5 1.2 1.9 1.7 5.1 6.7 1.1 1.0 2.6 3.8 2.3 2.6'** 1.8 3.8 2.7 4.8 5.0 6.5 2.6 1.6 2.3 2.5 2.3 2.4 3.7 1.6 1.9 1.9 0.7 1.5 1.7 1.5 1.7 2.9 2.1 6.3 14.1 2.3 2.9 5.0 7.5 3.4 4.3'*** 1.8 2,629 7.6 1,936 6.4 2,469 13.8 2,502 11.9 3,240 16.6 1,888 7.9 1,382 4.5 2,039 8.1 2,487 10.9 2,176 9.4 1,936 7.8 3,012 10.5 1,566 4.5 2,304 6.8 2,451 9.9 904 3.2 2,348 5.3 2,652 7.6 1,761 5.2 1,205 3.5 2,632 5.5 2,791 4.3 10,775 14.4 17,034 22.1 3,811 3.7 3,595 6.0 7,228 10.7 11,900 12.8 3,666.1 8.6 4,563.8'** 9.4'* 2,050.4 7.1 16.7% 12.1% 15.0% 14.0% 13.8% 14.0% 11.6% 11.9% 12.0% 12.0% 14.7% 16.6% 10.8% 11.8% 11.5% 5.0% 10.5% 10.6% 10.3% 9.2% 12.7% 9.9% 28.0% 32.8% 6.9% 8.4% 18.2% 25.4% 13.8 15.5%'** 10.7 Over-­‐Invoice  of  Imports   Ver;cal  test   ü Over-­‐invoice  of  imports  as   es.mated  by  our  method   is  higher  in  years  of   exchange  controls  by  any   criteria:   -­‐ %  of  GDP  (Official):  95%   -­‐ %  of  GDP  (Parallel):  99%   -­‐ Constant  US$:  95%   -­‐ %  of  exports:  90%   -­‐ %  of  imports:  95%   ü There  seems  to  be  a   posi.ve  bias  in   Venezuelan  sta.s.cs,  but   controls  years  exhibit  an   excess  of  2.5  billion   constant  2011  US$  per   year  with  respect  to  free-­‐ market  years   ü Look  at  2007  and  2011!  
  22. 22. 22   Horizontal  test:  Measures  whether  the  error  registered  in  Venezuela   (Imports  BCV  /  Sum  of  Imports  at  customs)  is  significant  within  the  context   of  the  distribu.ons  of  errors  worldwide  that  year  -­‐  2007   01234 Density 1.00 1.20 1.40 1.60 imp_errord Source: WDI2014 and Comtrade database Distribution of import discrepancies: merchandise imports (WDI vs imp_comtrade) in 2007
  23. 23. 23   Horizontal  test:  Measures  whether  the  error  registered  in  Venezuela   (Imports  BCV  /  Sum  of  Imports  at  customs)  is  significant  within  the  context   of  the  distribu.ons  of  errors  worldwide  that  year  -­‐  2011   01234 Density 1.00 1.10 1.20 1.30 1.40 1.50 imp_errord Source: WDI2014 and Comtrade database Distribution of import discrepancies: merchandise imports (WDI vs imp_comtrade) in 2011
  24. 24. 24   On  the  over-­‐invoice  of  imports:  Horizontal  tests   •  Out  of  the  eighteen  years  where  Venezuela  had  exchange  rate  controls,  in   thirteen  (72%)  the  error  registered  was  significantly  higher  than  the  world´s   average,  in  all  cases  at  a  99%  confidence  level   •  Only  four  out  of  the  ten  (40%)  years  where  exchange  controls  did  not  prevail  the   Venezuelan  error  turned  significantly  higher  than  the  world´s  average   •  There  seems  to  be  a  posi.ve  bias  in  the  error  difference  in  Venezuela   •  The  fact  that  we  observe  the  expected  result  (errors  significantly  higher  in  years   of  controls,  no  discernible  difference  in  the  others)  in  68%  of  the  years;  and   within  Venezuela,  across  all  of  our  indicators,  the  over-­‐invoice  of  imports  resulted   significantly  higher  in  years  of  financial  repression,  seems  to  indicate  that  our   es.mator  was  able  to  pickup  some  of  the  differences  in  incen.ves  to  over-­‐invoice   imports  in  years  of  exchange  controls  
  25. 25. 25   Capital'Flight 'Over/Invoicing'of' Imports' US$$Million US$$Million US$$Million 1984 2,162 1,210 3,372 1985 1,028 908 1,936 1986 709 1,180 1,889 1987 3403$ 1,240 837 1988 31,205$ 1,670 465 1989 2,768 1,020 3,788 1990 3,014 787 3,801 1991 2,450 1,210 3,660 1992 1,001 1,520 2,521 1993 3907$ 1,370 463 1994 3,293 1,250 4,543 1995 3,386 2,000 5,386 1996 2,466 1,070 3,536 1997 5,757 1,610 7,367 1998 6,098 1,740 7,838 1999 4,083 659 4,742 2000 6,118 1,770 7,888 2001 9,403 2,030 11,433 2002 9,841 1,380 11,221 2003 3,783 962 4,745 2004 8,797 2,170 10,967 2005 11,738 2,380 14,118 2006 7,364 9,420 16,784 2007 17,948 15,500 33,448 2008 20,569 3,550 24,119 2009 23,505 3,440 26,945 2010 20,255 7,020 27,275 2011 19,261 11,900 31,161 Average Average'Repression/Control'Years Average'Free'Market'Years 'Broad'Capital'Flight' % GDP - @ Official 5.4 3.2 4.3 2.2 1.0 9.8 7.9 6.9 4.2 0.8 7.8 7.0 5.0 8.6 8.6 4.8 6.7 9.3 12.1 5.7 9.7 9.8 9.2 14.5 7.7 8.2 10.2 9.8 7.2 7.2 7.0 'Broad'Capital'Flight' % GDP - @ Parallel 10.6 5.8 7.7 3.4 1.8 9.8 7.9 6.9 4.2 0.8 8.6 9.9 5.4 8.6 8.6 4.8 6.7 9.3 12.1 8.6 14.7 12.5 11.3 30.4 15.8 23.0 19.5 19.7 10.3 12.2$** 7.0 'Broad'Capital'Flight' Constant 2011 US$ Million % of Exports 7,325.3 21.2 4,127.3 13.6 3,952.0 22.1 1,688.6 8.0 902.0 4.6 7,011.7 29.3 6,675.3 21.8 6,168.6 24.5 4,125.2 18.0 735.6 3.2 7,034.4 28.2 8,112.6 28.2 5,175.9 14.9 10,541.3 31.1 11,038.6 44.6 6,503.7 22.8 10,464.1 23.5 14,935.1 42.9 14,317.8 41.9 5,942.9 17.4 13,302.5 27.6 16,558.8 25.3 19,197.9 25.6 36,758.5 47.8 25,890.7 25.4 28,158.1 46.8 28,082.9 41.5 31,161.0 33.6 11,996.0 26.3 13,910.4$* 25.6 8,550.5 27.4 'Broad'Capital'Flight'
  26. 26. 26   Conclusions   •  Significant  evidence  sugges.ng  a  link  between  domes.c  disequilibria  and  a   weakening  of  external  accounts  via  capital  flight     •  Fiscal  revenues  coming  from  financial  repression  are  similar  in  size  to  others   reported  in  the  literature  for  countries  with  domes.c  debt-­‐to-­‐GDP  ra.os  six   .mes  larger     •  Large  infla.on  tax  derived  from  deficit  mone.za.on,  coupled  with  financial   repression,  has  spurred  a  significant  wave  of  capital  flight  in  spit  of  the  risks  and   penal.es  .picaly  embedded  in  exchange  control  enforcement  legisla.on     •  In  spite  of  high  transac.on  costs  and  large  penal.es  involved,  exchange  controls   have  proved  to  be  inefficient  in  putng  a  halt  to  capital  flight:  there  is  no   evidence  of  lower  capital  flight  in  years  of  controls,  and  by  some  of  our   indicators  it  is  even  higher     •  Domes.c  disequilibria  might  play  a  significant  role  in  external  distress  dynamics  

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