INDIANS' MYTHICAL TRILLIONS 2

Continuation of the previous column - published in the Calcutta Telegraph of 21 April 2009. Unsurprisingly, it caused indignant outbursts from black money paranoiacs; this was my response. ADVANI’S FAUX PAS

Nothing succeeds like outrage. Lal Krishna Advani’s claim that resident Indians had deposits between $0.5 and $1.4 trillion in Swiss banks has caused great excitement. Thanks to his eminence, my refutation of his claim in The Telegraph of April 7 has caused much outrage amongst his supporters. It has also drawn support from quarters I would have been happy to be dissociated with. Some other quarters have used it in their own support; I can hardly protest against that. The prime minister referred to my article when talking to women journalists. The prime minister-in-waiting considers himself macho. The Hindutwit leadership is overwhelmingly male. And all the hateful references I have invited were from men. So men may be more in need of illumination on this subject. But if the prime minister-in-waiting is right about the prime minister of the moment, then maybe the latter has greater appeal for women. That this issue of black dollars may have a sexual dimension to it had never occurred to me. There is a school of thought which thinks that I wrote what I did out of “compulsion” — which presumably means that I am a paid hack of the Congress. I have nothing to do with the Congress, and have never had. It is true that Manmohan Singh took me as his advisor when he became finance minister following the balance of payments crisis of 1993. That had nothing to do with my political views; to me at least it was a complete surprise. I believe it had something to do with my writings before that time, which contained solutions to the economic problems the country was facing — alternative solutions to the socialist ones that had been tried out and failed. I served Manmohan Singh for two years. But once I found that he was unable or unwilling to liberalize the economy any further, I resigned. Since he became prime minister, I have not met him or approached him, and he has not rewarded me in any way. What I wrote came from my convictions, not from any compulsion. As far as the personal disharmony between Manmohan Singh and L.K. Advani is concerned, I am entirely neutral — and I deplore the language of both. I also have nothing to do with Jairam Ramesh’s attack on Advani, which I find rather intemperate and irresolute. On the one hand, he says that the “entire edifice of [Advani’s] numbers” is a hoax; on the other he says there is no dispute that “we must try and get this money back”. Bringing back a hoax is a feat only politicians can perform. Those who are not politicians and are seriously interested in the issue should read the report of the Global Financial Integrity Project on the subject (Illicit Financial Flows from Developing Countries: 2002-2006), which is readily available. It reviews earlier estimates of illicit money flows, which were made in one of five ways, and makes its own. The first method takes illicit flows to be equal to net errors and omissions in official developing-country balance-of-payments statistics. They may be real errors and omissions, and not illicit money flows. To “filter” such real errors, the GFIP reduces the estimates in two ways: to be illicit, capital outflows, errors and omissions should have been negative for three years or more out of the five years 2002-2006; second, they should exceed 10 per cent of exports. The second is the Dooley method, which adds to errors and omissions an estimate of the change in a country’s external debt investments that do not generate income in the balance of payments. The GFIP does not use this method, so I shall ignore its shortcomings. The third is the World Bank residual method. If statistics are accurate, the sum of a country’s current account deficit and the rise in its foreign exchange reserves must be equal to the sum of its capital inflows including debt and equity. If the former exceeds the latter — if a country’s external liabilities increase more than is explained by the payments deficit and rise in reserves — the World Bank takes it to be an illicit outflow. This method underestimates the outflow because it excludes figures derived by the fourth method. The fourth, trade mispricing method, is the difference between the value of exports officially recorded by the exporting country and the value of imports from that country recorded by the importing country if the latter exceeds the former; plus the difference between the value of imports recorded by a country and the value of exports to that country recorded by the exporting country if the latter exceeds the former. The difficulty with this method is that the two values may differ for reasons other than illicit flows — for example, costs of insurance and freight. Trade mispricing is common, and is generally undertaken to avoid import and export duties or earn subsidies. In countries whose official exchange rates undervalue black market rates, mispricing is a common way of taking foreign exchange out of official channels and selling it in black markets. This method does not give estimates to the liking of researchers into illicit money flows: it generally has the wrong sign: it shows developing countries importing illicit money. So they conveniently ignore the figures with wrong signs, and take only those with right signs to be the right estimates of illicit flows. The fifth, international price profiling method, concentrates on commodities where the import or export price officially recorded by a country differs from the international market price by more than a certain percentage — say, 25 per cent. It can be applied only to commodities which have international markets and are not too heterogeneous. It is thus a conservative variant of the mispricing method, and gives lower estimates. Raymond Baker, Dev Kar and Devon Cartwright-Smith, who made the Global Financial Integrity estimates, are strong believers in illicit flows and enthusiasts for the various ways of estimating them. They find that their estimates of illicit flows from India made by three methods have the wrong sign — that is, they show illicit money to be flooding India. Only the trade mispricing method shows an illicit capital outflow — of $22 billion a year in 2002-2006. That is 3.5 per cent of India’s gross domestic product at current prices, 14.5 per cent of international trade in goods, and 9.3 per cent of international trade in goods and services. These are significant figures, but nowhere close to the billions and trillions that Hindutwits dream of. That is why the Hindutwit believers have studiously ignored the GFIP estimates. And so should all who share their paranoia. But however passionately they hold their beliefs, there is no way these figures — theirs or the GFIP’s — can be connected to real Indian smugglers and misinvoicers. So my challenge to Advani is still valid: he will not be able to bring back his vaunted billions in 30 years, let alone three months. Those who find my scepticism unwelcome can continue to think unkind thoughts. Or alternatively, let them turn to making estimates of black money à la Kar and Cartwright-Smith. They may find none of it, but they will make lucrative careers as economists.