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.

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
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
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
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
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
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
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
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
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
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
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
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
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
@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
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
@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
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
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
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
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
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
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
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
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
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
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