THE MISSING WEALTH OF NATIONS: ARE EUROPE AND
THE U.S. NET DEBTORS OR NET CREDITORS?*
Gabriel Zucman

I. Introduction
There are two puzzles in international investment statistics.
The first is a set of statistical anomalies. At the global level,liabilities tend to exceed assets: the world as a whole is a net
debtor (Lane and Milesi-Ferretti 2007). Similarly, the global balance of payments shows that more investment income is paid
than received each year. Since the problem was identified in
the 1970s, the International Monetary Fund (IMF) has commissioned a number of reports to investigate its causes, and national
statistical agencies have put considerable resources into improving their data. Yet despite a great deal of progress, large anomalies remain; many European securities, in particular, have noidentifiable owner (Milesi-Ferretti, Strobbe, and Tamirisa 2010).
The second puzzle is a theoretical challenge. Since the latter
half of the 1990s, capital has been flowing from poor to rich
* I am very grateful to my advisor, Thomas Piketty, for his continuous support and guidance. I thank the editor (Robert Barro), five anonymous referees,
Jean-Edouard Colliard, Mihir Desai, Nicolas Frémeaux, Lucie Gadenne, PierreOlivier Gourinchas, Philip Lane, Gian Maria Milesi-Ferretti, Richard Sylla,
Daniel Waldenström, Edward Wolff, and participants at numerous seminars.
Paul Farello, Christopher Gohrband, Steve Landefeld, and Robert Yuskavage
from the Bureau of Economic Analysis also provided helpful comments. Part ofthis article was drafted while I was visiting New York University; I am grateful to
Jess Benhabib, who made this visit possible.
! The Author(s) 2013. Published by Oxford University Press, on behalf of President andFellows of Harvard College. All rights reserved. For Permissions, please email: journals.permissions@oup.com
The Quarterly Journal of Economics (2013), 1321–1364. doi:10.1093/qje/qjt012.
Advance Access publication on April 9, 2013.

1321

Downloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013This article shows that official statistics substantially underestimate thenet foreign asset positions of rich countries because they fail to capture most of
the assets held by households in offshore tax havens. Drawing on a unique
Swiss data set and exploiting systematic anomalies in countries’ portfolio
investment positions, I find that around 8% of the global financial wealth ofhouseholds is held in tax havens, three-quarters of which goes unrecorded. On
the basis of plausible assumptions, accounting for unrecorded assets turns the
eurozone, officially the world’s second largest net debtor, into a net creditor. It
also reduces the U.S. net debt significantly. The results shed new light on
global imbalances and challenge the widespread view that after a decade ofpoor-to-rich capital flows, external assets are now in poor countries and debts
in rich countries. I provide concrete proposals to improve international statistics. JEL Codes: F32, H26, H87.

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QUARTERLY JOURNAL OF ECONOMICS

1. See Dooley, Folkerts-Landau, and Garber (2003), Bernanke (2005), Dollar
and Kraay (2006), Engel and Rogers (2006), Caballero, Farhi, and Gourinchas(2008), Mendoza, Rios-Rull, and Quadrini (2009), Carroll and Jeanne (2009), Ma
and Haiwen (2009), Obstfeld, Shambaugh, and Taylor (2010), Aguiar and Amador(2011), Song, Storesletten, and Zilibotti (2011), and Alfaro, Kalemli-Ozcan, andVolosovych (2011) among others.

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countries. As a result, the rich world now appears to be a sizablenet debtor in the official data, dragged down by the United Statesand Europe. Although the literature has put forward possible
explanations for the U.S. net debt and the rise in China’s
assets,1 the negative net positions of Europe and the overallrich world remain largely unexplained. Despite this, many observers have grown accustomed to the view that external assets are
now in poor countries and debts in rich countries. In the publicdebate, the view that ‘‘China owns the world’’ has become particularly popular. Should it be correct, the implications for policy
making and open-economy modeling would be far-reaching.
My article challenges this view. The negative net foreign
asset position of the rich world, I argue, is an illusion caused by
tax havens. International statistics fail to capture most of theassets held by households through tax havens: they overlook
the portfolios of equities, bonds, and mutual fund shares thathouseholds own via banks in Switzerland and other countries
with strict bank secrecy rules. This coverage gap explains manyof the long-standing anomalies in global data. My computations
find that around 8% of households’ financial wealth is held
through tax havens, three-quarters of which goes unrecorded.
This stock of unrecorded assets is double the recorded net debt
of the rich world (Figure I). Because a body of evidence suggeststhat most of the wealth in tax havens belongs to residents of richcountries, accounting for it turns the rich world into a net creditor. Despite a decade of global imbalances, therefore, external
wealth is still probably in rich countries overall: China does not
own the world yet. Back in the 1980s–1990s the rich world had alarge positive net position; over the past decade it has eaten someof its claims away, but today poor countries are still repaying
their debts to advanced economies.
These findings have direct implications for core issues ininternational macroeconomics. On the basis of plausible assumptions, accounting for the wealth in tax havens turns the eurozone,
officially the world’s second largest net debtor, into a net creditor.
It also improves the U.S. net position. Now the net foreign asset

1323

THE MISSING WEALTH OF NATIONS

8%

My estimate of households' unrecorded
assets held in tax havens

6%
4%

Japan

2%
0%
Europe

-2%
-4%
-6%
-8%
1985

Rich world(Japan + Europe + U.S.A)
U.S.A

1990

1995

2000

2005

FIGURE I
Recorded Net Assets of the Rich World and Estimated Unrecorded Assets Heldin Tax Havens
The figure charts the value of unrecorded household assets in tax havens
along with the officially recorded net foreign asset positions of Japan,
the United States, and Europe. All series are scaled by world GDP. In 2008,
by my estimate, unrecorded household assets amounted to 7.3% of world GDP.
Total household financial assets stood at 120% of world GDP (Davies
et al. 2011) so unrecorded household assets amounted to 6% of total household
financial assets. Europe includes the 16 members of the eurozone at the end of
2010, five additional European countries (the United Kingdom, Norway,
Sweden, Denmark, and Switzerland), and three non-European countries(Australia, New Zealand, and Canada). Source: Online Appendix Tables A3
and A27.

position is a key state variable in dynamic macroeconomic
models. Accurate net positions are essential to assess the meritsof the different views put forward on the causes of global imbalances, and they are important to monitor financial stability. A
large body of literature has questioned the sustainability of
global imbalances.2 If, indeed, the net positions of Europe andthe United States are higher than in the official statistics, therequired international adjustment is smaller than commonly
2. See Obstfeld and Rogoff (2005), Blanchard, Giavazzi, and Sa (2005),
Gourinchas and Rey (2007a), the papers in Clarida (2007), Hausmann andSturzenegger (2007), Curcuru, Dvorak, and Warnock (2008), and Blanchard andMilesi-Ferretti (2009) among others.

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Net foreign asset positions / world GDP

10%

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QUARTERLY JOURNAL OF ECONOMICS

3. The two exceptions are Roine and Waldenström (2009) who use anomalies in
Sweden’s balance of payments to approximate capital flight, and Dell, Piketty, andSaez (2007) who use Swiss tax data to put an upper bound on the amount of capitalincome earned in Switzerland by nonresident taxpayers. Tax data, however, are notan appropriate source in this case, because the bulk of income earned by foreigners
in Switzerland does not have to be declared to Swiss tax authorities.

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thought. Domestic imbalances and public finance issues may be
more serious today for rich countries than global imbalances: richcountries taken as a whole are richer than we think, but some of
their wealthiest residents hide part of their assets in tax havens,which contributes to making governments poor. So far, tax
havens have been ignored by the literature that studies the evolution of top income shares around the world (Atkinson, Piketty,
and Saez 2011).3 My findings, therefore, also have implications
for this strand of research: my macro-based estimate of the funds
held through tax havens could be used as a first step to include
these funds into micro-based studies of income and wealthdistributions.
The article proceeds as follows. Section II begins with a brief
primer on the activities that take place in tax havens and thestatistical issues involved. Section III analyzes a previously
unused official data set from the Swiss National Bank. A considerable amount of wealth is held unrecorded in Swiss accounts;
contrary to popular belief, this wealth mostly belongs to residents
of rich countries. Section IV then presents a novel method toestimate the personal wealth in all the world’s tax havens,using anomalies in the aggregate portfolio stock data of countries(the key source here is Lane and Milesi-Ferretti 2007). My
method is indirect and relies on data with known imperfections,
so it is subject to some margin of error. Section V presents consistency and robustness checks, based on bilateral and flow datafrom the IMF, suggesting that the order of magnitude I find isreliable. The many data sets used in this article all paint the same
picture: households own a large amount of mutual fund sharesthrough unrecorded accounts in tax havens. In Section VI, I propose scenarios about how including the unrecorded assets in thestatistics would affect published international investment positions. I discuss the implications for global imbalances and theuncertainties that remain. The conclusion provides concrete proposals to improve the official data. There are numerous intricacies in the financial activities of tax havens and the international

THE MISSING WEALTH OF NATIONS

1325

statistics. The most important ones are discussed in the article;
others are detailed in a comprehensive Online Appendix.

II. Tax Havens and Their Implications for International
Statistics

4. On the asset side of official IIPs, statisticians isolate a fourth category,reserve assets, which includes the portfolio securities and other assets held bycentral banks. In this article, ‘‘securities’’ always includes the fraction of reserve
assets invested in securities.
5. See data gathered by the IMF for its Coordinated Direct Investment Survey.
In 2011 for instance, 30% of India’s inward direct investments came from
Mauritius; 25% of Brazil’s came from The Netherlands; 60% of China’s camefrom Hong Kong and the British Virgin Islands.
6. See for instance IMF (2000).

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First, let’s look at the basic concepts that will be usedthroughout the article. A country’s foreign assets and liabilities
are recorded in its international investment position (IIP). The
IIP is the stock equivalent of the financial account of the balanceof payments: the IIP shows the stock of existing cross-borderinvestments at the end of each year, while the balance of payments shows the yearly flow of new investments. There are threebroad categories of cross-border claims: direct investments (holdings of over 10%), portfolio securities (equities and bonds that do
not qualify as direct investment), and other assets (mainly loans
and deposits).4 At the end of 2008, as shown by Table I, securities
were the largest category: they accounted for $40 trillion out of$90 trillion.
Tax havens host numerous financial activities. About 40% of
the world’s foreign direct investments are routed through tax
havens such as the British Virgin Islands.5 Many investment
funds and financial vehicles are incorporated offshore. Luxembourg is the second largest mutual fund center in the world
after the United States; a great deal of the world’s money
market funds are incorporated in Ireland; and most hedge
funds are in the Cayman Islands. Multinational corporations routinely use tax havens for treasury operations and group insurance. Some of these activities have legitimate roles and aresatisfactorily covered in the statistics.6 My article focuses on
one specific tax haven activity: personal wealth management or‘‘private banking.’’ This activity is present in many but not all tax
havens. Leaders include countries with strict bank secrecy rules,

1326

QUARTERLY JOURNAL OF ECONOMICSTABLE I
SECURITIES FORM THE BULK OF CROSS-BORDER WEALTH

Securities
Bonds
Equities (including mutual fund shares)
Foreign direct investment
Other (loans, deposits, etc.)
Total cross-border wealth

Trillions ofcurrent US$% of world
GDP

40.1
26.4
13.7
17.7
32.0
89.9

65
43
22
29
52
146

such as Switzerland, the Cayman Islands, the Bahamas, Hong
Kong, Singapore, and Jersey. Banks incorporated in these countries—which are often subsidiaries of large global banks—attract
foreign individuals and provide them with investment advice andservices. In the IIPs of countries, the personal wealth management activities of tax havens do not affect direct investment data,slightly affect ‘‘other assets,’’ but cause large, systematic errors
for portfolio securities.
II.A. How Cross-Border Securities Should Be Recordedin Principle
To see what errors occur in portfolio data, denote Aij theamount of securities issued by country j, owned by residents ofcountry i 6¼ j. To measure Aij, the data-collection system of eachcountry i covers some agents directly and others indirectly (IMF
2002). Financial corporations, such as banks, investment funds,
and insurance companies, are direct reporters. They provide dataon their own holdings (the securities on their balance sheets) andon their clients’ holdings (the securities that are off their balance
sheets, but which they can observe). Governments and nonfinancial corporations above a certain size threshold are also direct
reporters. By contrast, households are indirectly covered, forpractical reasons. Their holdings are reported by financial companies. Trusts, personal wealth–holding companies, and othersmall nonfinancial corporations are indirectly covered as well,

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Notes. World GDP (2008) = US$61.4 trillion. Values are as of end of 2008. Securities include all‘‘portfolio investments’’ and the fraction of ‘‘reserve assets’’ invested in equities and bonds. In international
investment statistics, all mutual fund shares are classified as equities (irrespective of whether the funds
invest in equities or bonds). Derivatives are excluded because they are not measured yet in all leading
economies. Source. IMF Balance of Payments Statistics and the updated and extended version of theExternal Wealth of Nations database constructed by Lane and Milesi-Ferretti (2007).

1327

THE MISSING WEALTH OF NATIONS

offshore

To fix ideas, consider a portfolio of U.S. (j) equities held by ahousehold living in France (i). This portfolio can either be
entrusted to a French bank—in which case we will say that it isheld onshore—or to an offshore bank, say, in Switzerland (k).
Offshore banks provide investment advice and services justlike onshore banks do. But they also provide opportunities toevade personal income taxes. In most nonhaven countries,
onshore banks automatically report the investment income
earned by their clients to tax authorities. Such third-party reporting makes tax evasion impossible. By contrast, in tax havens withstrict bank secrecy rules, banks do not generally report information. Taxes can be collected only if taxpayers self-declare theirincome.
International investment statistics work on the basis of theresidence principle (IMF 1993). The residence principle statesthat a security issued by the United States and held by aFrench resident through a Swiss bank must be recorded as an
asset for France on the United States and a liability for theUnited States vis-à-vis France. The location of the custodian isirrelevant.
II.B. Offshore Portfolios: A Blind Spot in Securities Statistics
In practice, offshore custodian banks cause a blind spot in
portfolio assets data. When French households entrust U.S. securities to Swiss banks, these assets a~ kij cannot be captured by surveying French custodians. They go completely unrecorded in the

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and I include them in the household sector. We can therefore
write Aij as the sum of the foreign securities owned by directly
covered agents (aij) and households (a~ ij ).
All types of investors entrust their securities to domestic or toforeign banks for custody. Through to the 1960s, all securities
existed in the form of paper certificates that were deposited insafe places such as bank vaults. Keeping their clients’ certificatessafe was the custodians’ job. Today, paper has been replacedby electronic records, but investors still use custodian banks asbookkeepers and for other services. Let’s denote the custodian’scountry of residence with a superscript letter:
X
X
X
Aij ¼
Akij ¼ðakij þ a~ kij Þ ¼ ½aiij þ a~ iij  þðakij þ a~ kij Þ:|ﬄﬄﬄﬄﬄ
ﬄ{zﬄﬄﬄﬄﬄ
ﬄ
}
k
k
k6¼i
onshore|ﬄﬄﬄﬄﬄﬄﬄﬄ{zﬄﬄﬄﬄﬄﬄﬄﬄ}

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QUARTERLY JOURNAL OF ECONOMICS

III. Offshore Wealth in Switzerland
Since 1998, the Swiss National Bank (SNB) has publishedthe value of the offshore portfolios in Swiss banks. A monthly
survey of Swiss-domiciled custodians covers 95% of these holdings. The SNB conducts a full survey yearly. Portfolios are broken
7. As Section IV.A will show, transfers of funds to tax havens are not wellrecorded, so that it is not possible to capture offshore portfolios by cumulatingbanking flows. That is why errors in portfolio positions translate into errors forthe full IIP.

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French IIP.7 This blind spot is well known among statisticians:
Bertaut, Griever, and Tryon (2006, A67) discuss it in the context
of the U.S. data reporting system, the European Central Bank(ECB 2002, 8) in the context of the eurozone’s.
Household offshore portfolios do not appear on the IIPs of
tax havens either. To compile Switzerland’s external accounts,
the Swiss National Bank asks domestic banks to report on the
securities they hold in custody. Swiss bankers observe that theyhold U.S. securities belonging to French residents. These securities are neither assets nor liabilities for Switzerland, so in keeping with the residence principle, they are excluded from
Switzerland’s position.
Household offshore portfolios, however, do appear in theliabilities of countries’ IIPs. U.S. securities held by French
savers are duly recorded as liabilities for the United States
whether they are held in France or in Switzerland. Most of the
securities issued by the United States are ultimately kept by the
U.S. central securities depository, the final bookkeeper wheresettlements take place. This centralization makes it relatively
easy to estimate the amount of U.S. equities and bonds held byforeigners. (The country allocation of liabilities, however, are distorted: U.S. securities held by French savers through Switzerland
are wrongly attributed to Switzerland, because seeing throughthe Swiss banks is not possible.)
The failure to record the offshore portfolios of households
plagues countries’ international data. An obvious solution
would be to ask each tax haven k to provide information about
the portfolios held by foreign individuals through their banks, thea~ kij ðk 6¼ iÞ. No haven, however, discloses this information. No
haven, except Switzerland.

THE MISSING WEALTH OF NATIONS

1329

down by asset class and currency. The SNB also provides evidence as to who owns Swiss accounts. I am not aware of any
other publication that uses this unique set of data to investigate
the wealth held offshore. The outsized role that Switzerland playsin the offshore wealth management industry means that this one
data source can do a lot to fill in the gaps in countries’ portfolio
assets data. This section analyzes what we learn from the Swisscase, before attempting to compute the amount of wealth held in
tax havens globally.

The first striking result, reported in the first column ofTable II, is the huge amount of offshore wealth in Swiss banks.
At the end of 2008—when global stock markets were low—foreigners held through Switzerland portfolios of foreign (i.e., nonSwiss) securities worth s ¼ $1.5 trillion.8 Once you add bankdeposits (more on these later), the total offshore wealth inSwiss banks comes to more than $2 trillion—as much as
China’s foreign exchange reserves.
For comparison, the second column of Table II shows thevalue of the assets belonging to Swiss residents in Swiss banks.
They are much smaller. In 2008, only one-third of all the foreign
securities in the Swiss banks vaults belonged to Swiss savers—
two-thirds belonged to foreigners. This pattern epitomizes what
offshore financial centers do: Swiss banks essentially help foreigners invest out of Switzerland, the banks acting only as conduits.9 In 2004 there was a survey of the custodial holdings in
French banks. In sharp contrast to the Swiss case, almost all theforeign securities in French banks belong to French investors(Gest and Dajean 2005).
8. In the foregoing accounting framework, s (where  stands for offshore, andP P
s for Switzerland) is equal to i6¼s j6¼s ðasij þ a~ sij Þ. Ideally we would like to exclude
from the offshore portfolios s the portfolios of foreign securities that belong to
P P
foreign direct reporters ( i6¼s j6¼s asij ), and we would like to include the portfolios
Pof Swiss securities that belong to foreign households ( i6¼s a~ sis ). As discussed later,
in all likelihood both are relatively small, so that s is a good proxy for the amount ofwealth held in Switzerland that goes completely unrecorded in other countries’
P P
positions, i6¼s j a~ sij .
9. One common misconception is that having a Swiss account means having
Swiss francs or Swiss assets. In general, this is not the case.

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III.A. The Level and Composition of the Offshore Fortunes
in Switzerland

1330

QUARTERLY JOURNAL OF ECONOMICSTABLE IILARGE PORTFOLIOS OF SECURITIES ARE HELD IN SWISS BANKS BY FOREIGNERS

Foreign securities
Bonds
Equities(of which: mutual fund shares)
Fiduciary bank deposits
Total

Belonging toforeigners

Belonging to
Swiss residents

1,545
540
1,005
767
478
2,022

810
484
326
196
45
855

The second interesting result relates to the composition of
the offshore portfolios in Swiss banks. Mutual fund sharesaccount for one-half, bonds for one-third, and equities for the
rest. The SNB does not provide statistics on the type of mutual
funds that foreigners own (do they invest in bond funds? equity
funds?). But we do know that out of the 8,000 funds registered for
distribution in Switzerland, about 4,600 are incorporated in
Luxembourg and 1,200 in Ireland.10 The data, therefore, reveal
a clear pattern, summarized by Figure II. On their Swissaccounts, foreigners do own some U.S. equities, but they mostly
own Luxembourg and Irish fund shares (the funds, in turn, invest
all around the world).
Investing in a Luxembourg fund through a Swiss accountmakes perfect sense for a French tax evader: Luxembourg
does not withhold taxes on cross-border payments, so the tax
evader receives the full dividend paid by the fund on his or her
account, and French personal income tax can be evaded, because
there is no automatic exchange of information between Swissbanks and the French tax authority. Conversely, a French
person has to go through each step of the France–Switzerland–
Luxembourg circuit to evade taxes. Investing in a Luxembourg
fund through a French bank does not save on taxes. Investing
10. See http://www.swissfunddata.ch. Most hedge funds are not registered, andhence are not covered by these statistics. Section V.A will specifically address theimportant case of hedge funds.

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Notes. Values are in billions of current U.S. dollars, as of end 2008. Source. Securities: Swiss National
Bank’s Monthly Statistical Bulletin (http://www.snb.ch/en/iabout/stat/statpub/statmon/stats/statmon),series D51, D51a, D51, D51b, D52, and D52b and Banks in Switzerland (http://www.snb.ch/en/iabout/stat/
statpub/bchpub/stats/bankench), series 38a, 38b, 38c. Fiduciary deposits: Monthly Statistical Bulletin,series D4, D41a, D42a, and Banks in Switzerland series 36, 37, 38.

1331

THE MISSING WEALTH OF NATIONS

Luxembourg mutual funds
Irish mutual funds

Residents ofFrance, Italy,
Germany, U.S.,

French equities
U.S. bonds
Etc.

FIGURE II
Through Their Swiss Accounts, Foreigners Mostly Invest in Mutual Funds
This figure presents the typical pattern of investments revealed by the
Swiss National Bank’s statistics. These statistics show that at the end of
2008, foreigners owned about US$2 trillion in Swiss banks in the form ofbank deposits and portfolio investments. A large fraction of these assets were
invested in mutual funds. Most of the mutual funds sold by Swiss banks totheir clients are incorporated in Luxembourg and Ireland.

in a Swiss mutual fund through a Swiss bank is also useless,because capital income paid by Swiss corporations is subject toa 35% advance tax withheld at source by Switzerland. The
advance tax can only be refunded when taxpayers self-declareincome in their home country. The tax does not apply to income
credited to Swiss accounts but paid by foreign corporations, suchas Luxembourg funds. This fact explains why the vast majority ofthe mutual funds distributed in Switzerland are incorporated
abroad.
In all likelihood, the foreign securities held in Switzerland byforeigners belong to households. It makes little sense for foreignbanks, insurance companies, or investment funds to entrust their
non-Swiss holdings to Swiss custodians: doing so does not secure
any tax or regulatory advantage. There is no evidence that Swissbanks provide significant custody services for foreign corporations. There is, by contrast, considerable evidence from newspaper investigations, industry reports, and high-profile tax scandals
that they offer extensive wealth management services to foreign

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Switzerland

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QUARTERLY JOURNAL OF ECONOMICS

III.B. Who Owns Swiss Bank Accounts?
The last contribution made by the Swiss data is to provide
unique evidence as to the likely owners of unrecorded fortunes intax havens. Since 1976, the SNB has published a full country
breakdown of the owners of fiduciary deposits.
Country breakdowns are puzzling at first glance. As
Figure III shows, the SNB records a large and growing fractionof Swiss fiduciary deposits as belonging to tax havens, most notably Panama, Liechtenstein, and the British Virgin Islands. What
happens? The SNB records such holdings because it does not see
through sham corporations used by households. If a French saver
opens an account in the name of a shell company incorporated
in Panama, the SNB assigns the funds to Panama. Using shamcorporations as nominal owners of Swiss accounts has a long
tradition, dating back to at least the end of World War II

11. Note that the SNB provides a breakdown of s by owner sector (private
customers, commercial customers, and institutional investors). But this breakdown is misleading: the SNB does not see through intermediate wealth-holding
structures used by individuals with a Swiss account. The SNB counts the securities
of a French individual who uses a sham Panamanian holding company as belonging
to the foreign ‘‘institutional investors’’ sector. This is a first-order issue: few individuals have an account in Switzerland with their own personal address; most
Swiss bank clients use intermediate wealth-holding structures (see Section III.B).

Downloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013individuals. s is thus a good proxy for household offshore portfolios in Swiss banks.11
The foregoing discussion has centered on portfolio wealth.
In tax havens, however, households can hold not only securities
but also bank deposits. Swiss banks provide a unique kind of
deposit owned by households only, in the form of what are
known as fiduciary deposits. Fiduciary deposits cannot be used
as a medium of exchange: they are useless for corporations.
Swiss banks invest the funds placed in fiduciary deposits inforeign money markets on behalf of their clients. Legally
speaking, all interest is considered to be paid by foreigners to
the depositors, with the Swiss banks acting merely as ‘‘fiduciaries.’’ Thus, fiduciary deposits are not subject to the 35% Swissadvance tax. As shown by Table II, in 2008 fiduciary deposits
accounted for one-quarter of the total amount of offshore wealthin Swiss banks.

1333

70%
Tax Havens
EuropeMiddle East
Latin and South America
Asia
AfricaNorth America

60%
50%
40%
30%
20%
10%
0%
1976

1980

1984

1988

1992

1996

2000

2004

2008

FIGURE III
Most Swiss Accounts Probably Belong to Europeans
This figure shows which countries’ residents own Swiss fiduciary bankdeposits, as reported by the Swiss National Bank (SNB). The SNB does
not see through the sham corporations with addresses in such places as
Panama or the British Virgin Islands used by European, U.S., and other richcountries’ households as nominal owners of their accounts. This explains
the high share of deposits assigned to tax havens. Source: Online Appendix
Table A25.

(Schaufelbuehl 2009). Once you understand the purposes thatsham corporations serve, it becomes clear that most fiduciary
deposits assigned to tax havens by the SNB belong to residents
of rich countries, in particular to Europeans.
A sham corporation adds a layer of secrecy between theowner of a Swiss account and his holdings, making it harder for
tax authorities to investigate cases of tax evasion. When tax evaders combine numerous sham corporations in multiple tax
havens, foreign authorities have practically no way to find out
who is the beneficial owner of a Swiss account. Sham corporations
are less useful to residents of countries where there is no income
tax or where tax administrations have no resources to investigate
offshore tax evasion. Sham corporations also help Europeans
evade taxes. The European Union has adopted the Savings
Directive in a move to curb tax evasion: since 2005, Swiss andother offshore banks must withhold a tax on interest earned by

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% of total foreign-owned Swiss bank deposits

THE MISSING WEALTH OF NATIONS1334

QUARTERLY JOURNAL OF ECONOMICS

12. In July 2011, the tax rate was set at 35%. Tax havens keep one-quarter of
the tax revenue and transfer the remaining three-quarters to the European
country where the account owner is resident. This withholding tax allows tax
havens to avoid automatic exchange of bank information, the EU standard.
13. See Johannesen (2010) for an analysis of the reaction of Swiss bank deposits
to the directive.
14. See http://www.irs.gov/uac/Offshore-Tax-Avoidance-and-IRS-ComplianceEfforts.

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European Union residents.12 But the directive only applies toaccounts opened by European households in their own name;sham corporations are a straightforward way of eschewing it.
Figure III shows that there is a clear negative correlation
between the share of fiduciary deposits held by Europeans andthe share of fiduciary deposits assigned to tax havens. European
depositors have shifted their deposits to sham corporations overtime. They reacted particularly strongly to the introduction of the
Savings Directive in July 2005: between December 2004 andDecember 2005, Europe’s share of Swiss fiduciary deposits
declined by 10 percentage points while tax havens gained 8 percentage points.13 Zaki (2010, 54) documents how Swiss bankers
created sham corporations on a large scale during the summer of2005 to help their European clients circumvent the directive.
The U.S. Internal Revenue Service (IRS) provides additional
evidence that rich countries’ residents use sham corporations
extensively. In 2009, the IRS released case studies of tax evasion
by U.S. residents in a big Swiss bank.14 In almost all cases, U.S.
tax evaders owned their accounts through sham entities incorporated in Panama, the British Virgin Islands, and Hong Kong.
Many of them had transferred their accounts to shell companies
in the 1990s or 2000s. In many IRS cases, the sums involved
are huge, attaining $100 million for a single family in a single
bank.
Let’s assume that in 2004, before the EU Savings Directive, if
a country owned 10% of the fiduciary deposits not assigned to tax
havens, it also owned 10% of the deposits assigned to tax havens.
Let’s also assume that Gulf countries do not use sham corporations, which is plausible because they have no capital income tax.
Then the rich world owned 62% of Swiss fiduciary deposits in2004 (see Online Appendix Table A26). Contrary to popularbelief, there is no indication that African dictators or rich Asianinvestors own the bulk of Swiss accounts.

THE MISSING WEALTH OF NATIONS

1335

IV. An Estimate of the Global Offshore Wealth

IV.A. Using Anomalies in Countries’ Portfolio Securities Data
The method exploits the anomalies that the personal wealthmanagement activities of tax havens cause in the portfolio data of
countries. Take the typical investment revealed by the Swiss
data: French residents who own Luxembourg fund sharesthrough their Swiss accounts. (In turn, the Luxembourg funds
invest in U.S. bonds, German equities, and so on, but forget
about the investments made by the funds: they are irrelevant
for the argument.) These fund shares should be recorded as
portfolio assets for France and liabilities for Luxembourg.16 In
practice, France has no way to record assets. Luxembourg statisticians duly record portfolio liabilities—they are aware that foreigners own shares of domestic funds.17 Switzerland rightly
15. The testimony of a former Cayman banker can be read in U.S. Senate (2001).
Many of the large global banks have subsidiaries with private wealth management
activities in Hong Kong, the Cayman Islands, and so on. Based on interviews with
offshore wealth managers, the Boston Consulting Group (2009) estimates thatabout a third of the global offshore wealth is in Switzerland; 20% in Jersey,
Guernsey, and Ireland; 20% in the Caribbean and the United States; 15% in
Luxembourg; 10% in Singapore and Hong Kong.
16. In international investment statistics, mutual funds are treated as regular
corporations, they are never made transparent. All mutual fund shares are classified as a type of portfolio equities (even the shares issued by mutual funds that only
invest in bonds). This statistical convention can be seen as bizarre, but it is uniformly applied across the world. To clarify matters, I keep the word equity for
regular portfolio equities and distinguish equities from fund shares.
17. Note that the investments made by Luxembourg funds are also duly
recorded: U.S. equities purchased by the funds will be recorded as portfolio assets
for Luxembourg and liabilities for the United States. Furthermore, imagine thatthe funds in Luxembourg are in fact affiliates of German financial companies. In topof everything else, Luxembourg will record a direct investment liability and

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Switzerland is not the only tax haven that offers wealth management services to foreign individuals. Just like in Switzerland,banks incorporated in the Bahamas, Singapore, and other havens
with strict bank secrecy rules attract foreign individuals and provide them with similar private banking services—securities custody and investment advice.15 The goal of this section is topresent a novel method to estimate the amount of wealth heldby individuals through all the world’s tax havens. The method is
independent from the official Swiss statistics, which will enable
us to check its results against the Swiss data.

1336

QUARTERLY JOURNAL OF ECONOMICSCOROLLARY OF ANOMALY 1. For the countries j in which holders ofoffshore accounts invest, debtor-reported portfolioPliabilities
Lj will be greater than creditor-derived liabilities i A^ ij .
Tax havens also cause anomalies in flow data. First, statisticians usually compute dividends and interest income by applying
representative yields to stock positions, because observed positions are considered more reliable than flows.18 If some securities
are missing from the stocks, then Anomaly 2 follows.
ANOMALY 2. More cross-border dividends and interest will be paid
than received globally.
In addition, offshore banks do not only provide custody but
also brokerage services: they buy and sell securities on behalf of
their clients. Take a U.S. individual who purchases U.K. equities
from her account in the Bahamas. In principle, Bahamian statisticians will notice that the buyer is not a resident of the Bahamas,
so in keeping with the residence principle they will not record any

Germany an asset. The value of the direct investment will be the residual net worthof the funds (e.g., the value of the funds’ offices), which is very small compared to thefunds’ gross portfolio assets and liabilities. Any error here does not affect theargument.
18. See for instance BEA (2011, 42) in the case of the United States.

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records nothing on its balance sheet. Portfolio liabilities arebound to exceed assets globally.
The same argument applies when you replace France by any
country i whose households use tax havens (say, the UnitedStates), Switzerland by any tax haven k that hosts personal
wealth management activities (say, the Bahamas), and Luxembourg by any country j that attracts investments or where a lot of
mutual funds are incorporated (say, the United Kingdom).
Denote Lj the portfolio liabilities of country j, Aij the true assetsof country i on country j, and A^ ij statisticians’ estimates. Becauseof the personal wealth management activities of tax havens, there
will be a fundamental anomaly in the portfolio stock data of
countries.
P
ANOMALY 1.PMore
j Lj thanP ^ cross-border portfolio liabilities
assets j i Aij will be recorded at the global level.

THE MISSING WEALTH OF NATIONS

1337

equity purchase.19 The United Kingdom, by contrast, will duly
record a sale.
ANOMALY 3. When offshore account holders are net purchasers of
securities, more securities are sold than purchased globally.
(More securities are purchased than sold when offshoreaccount holders are net sellers.)

ANOMALY 4. In individual countries’ statistics, some transfers offunds to tax havens cause net errors and omissions and flowstock discrepancies.
But tax evaders can also carry banknotes, gold, and diamonds overseas. Such transfers will go fully unrecorded in U.S.
international accounts, and thus will not cause any anomalies.
Funds legally earned are unlikely to be massively transferred
this way, but funds illegally earned may well be.
We can use Anomaly 1 to compute the value of the assets
globally held unrecorded by households in all the world’s
19. A practical reason they will indeed not record a purchase is that transaction
data are increasingly inferred from variations in observed positions—and statisticians do establish positions in keeping with the residence principle, as the Swissdata exemplify.
20. In the financial account of the balance of payments, credits denote a reduction in assets or an increase in liabilities, whereas debits denote an increase in
assets or a reduction in liabilities.

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Transfers of funds to tax havens can also cause anomalies.
Take a U.S. saver who wires funds to the Bahamas. Following the
double-entry bookkeeping system used in balance of payments
accounting, such a transfer must be recorded twice in the
United States: both as an other investment credit (funds flowfrom a U.S. bank to a Bahamian bank) and an other investment
debit (a U.S. person purchases a foreign asset, namely, aBahamian bank deposit).20 In practice, a credit will be recorded
but a debit will not, thus causing negative net errors and omissions in the United States (see Online Appendix D.4.2 for a
detailed analysis).
U.S. savers can also purchase securities from their onshoreaccounts and then entrust them to offshore banks for custody. In
this case, U.S. portfolio investment flow data will be accurate but
the positions will not: there will be negative other changes in thestatistics that reconcile flows and stocks as per the identity
Stocks = Flows + Valuation + OtherChange.

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QUARTERLY JOURNAL OF ECONOMICS

21. The authors then go on by describing the problem in which I am preciselyinterested in this article: ‘‘However, for smaller U.S. investors, directly purchasing
foreign securities abroad without using the services of a large, U.S.-resident institution is increasingly easy. Such acquisitions will not be captured in the U.S.
recording system but will most likely be recorded as liabilities by the counterparty
country’s measurement system. Because all countries face this problem, crossborder assets are probably undercounted worldwide.’’Downloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013

havens provided we make two assumptions. On the asset side, weneed to assume that the securities held by direct reporters (suchas financial corporations and governments) and those held
onshore by households are well measured globally (H1). Second,
the global amount of recorded portfolio liabilities must be accurate (H2). Under these assumptions, the global gap between identifiable portfolio liabilities and assets captures the value of theportfolios held by households through all tax havens. In this article, my estimate of the unrecorded wealth in all tax havens isequal to the difference between globally identifiable portfolio
liabilities and assets.
At first glance, this estimation method might seem trivial
and crude. It is neither. It requires quite a lot of data, some ofwhich have become available only recently and are assembled
here for the first time. More important, although assumptions(H1) and (H2) are not fully verified in practice, they are reasonable starting points and the results are robust to relaxing them.
Leaving aside household offshore wealth, portfolio positions
are indeed considered quite reliable. Securities markets arehighly centralized. Most countries have a long-standing traditionof monitoring custodians, and custodians observe all the securities held onshore. There is usually no valuation issue: tradedstocks and bonds have readily available market prices. That iswhy, in a reference article, Bertaut, Griever, and Tryon (2006,
A67) write that ‘‘In general, the data on U.S. liabilities are considered to be reasonably comprehensive [my assumption H2 in
the U.S. case], as debt instruments tend to be issued by andbought or sold through large institutions that can be fairly readily
identified and included in the data reporting network. U.S. foreign assets held by or through large U.S. institutions should also
be well recorded [H1].’’21
The relatively good quality of portfolio stock data extends toother leading countries. In response to a number of reports (IMF
1987, 1992), the IMF launched a program in the 1990s to harmonize collection methods and spread best practices across theTHE MISSING WEALTH OF NATIONS

1339

world (IMF 2002). Since 2008, in all leading economies portfolio
asset data have been based on security-by-security surveys.
These surveys collect information at the level of individual securities, allowing for extensive cross-checking and error spotting.
Some issues do remain. As we will see, they are minor for thearticle’s results. What they simply mean is that my method tocompute the wealth in all the world’s havens can only give anorder of magnitude—not an exact figure as in the Swiss case.

To compute the value of the global offshore portfolio using
Anomaly 1, we need aggregate portfolio securities asset and liability figures for all countries. The key source is the August 2009
updated and extended version of the External Wealth of Nations
data set constructed by Lane and Milesi-Ferretti (2007), which
covers 178 economies. In the database, portfolio position data
come from published IIPs or in minor cases are derived by cumulating flows and adjusting for valuation effects.22
There are three data challenges here: the External Wealth of
Nations does not include data for all the world’s territories; I want
to include the securities held by central banks (which are classified as ‘‘reserves’’) in my portfolio assets total; and there areuncertainties on the holdings of Middle Eastern oil exporters.
To address these challenges, many studies exist to rely on, drawing on independent sources. By construction, my figures are inline with these studies, which makes me confident in their accuracy. When uncertainties remain, they can be quantified and they
are small compared to my estimate of the global offshore wealth.
First, filling in the coverage gaps in the External Wealth of
Nations database does not pose major difficulties. The only significant country not covered is the Cayman Islands, a large financial center where about 10,000 hedge funds are incorporated.23
But the Cayman Islands’ Monetary Authority has been publishing data on the holdings of Cayman hedge funds since 2006.
Based on this information, I reckon that the Cayman Islands
22. Starting in 2001, the portfolio data for almost all the largest economies andfinancial centers come from published IIPs. That is why I only use post-2001 data inthis research.
23. For the other countries not covered, see Online Appendix Sections B.3
and B.4.

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IV.B. Data on Countries’ Aggregate Portfolio Securities

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QUARTERLY JOURNAL OF ECONOMICS

24. Although there remains some uncertainty on the holdings of Cayman hedge
funds, this does not affect my estimate of household offshore wealth, because I use
the same method to compute the Cayman Islands’ assets as to compute its liabilities. If my assets estimate is $200 billion too small, then my liabilities estimate isalso $200 billion too small, leaving the global assets–liabilities gap unchanged. See
Sections A.2 and B.3.1 of the Online Appendix for more details on the Cayman
Islands.
25. The two key sources here are the IMF Special Data Dissemination Standard
and an IMF survey of securities held as reserve assets, called SEFER.

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had about $1.25 trillion in portfolio assets at the end of 2008, of
which about $700 billion were U.S. equities and bonds.24
Second, most countries disclose to the IMF what fractions of
their reserves are held in the form of bank deposits versus bonds
and other securities.25 Notable exceptions include China andTaiwan. On average, central banks invest 75% of their assets insecurities and 25% in bank deposits; I assume that the same holds
true for those countries that do not provide data. However,
Wooldridge (2006) suggests that the share of securities is probably higher in China, so I assume a 85% securities share for
China. There is a $100–$200 billion uncertainty on China’s portfolio and a $30 billion uncertainty on Taiwan’s (see Online
Appendix Sections A.4 [China] and A.6.2 [Taiwan and othernon-SEFER reporters]). This is negligible compared to my estimate of the global offshore wealth ($4,500 billion in 2008).
Last, little public information exists about oil exporters’ holdings. In principle, one could use counterpart country data—suchas the Treasury survey of U.S. portfolio liabilities—to capture oil
exporters’ assets. But oil exporters sometimes invest abroad
through offshore banks; the U.S. securities they hold throughSwiss banks will wrongly be attributed by the United States to
Switzerland.
To estimate oil exporters’ onshore assets, I start with theirholdings of U.S. securities as recorded in the Treasury liabilities
survey. I then make assumptions regarding the share of U.S.
securities in their portfolio. The many studies recently publishedon the subject share two conclusions: the U.S. share is high, and it
has declined in the 2000s. The assumption for 2001 of a 70% shareof U.S. assets and a regular decline of 2 percentage points per
year fits the available estimates best. To simplify matters, I do not
try to specifically estimate the value of oil exporters’ offshore
assets; I include these in my globally unrecorded offshore
wealth total. Although some uncertainties remain, available

THE MISSING WEALTH OF NATIONS

1341

studies, official sources, and Swiss statistics suggest that oil
exporters account for about 10% of my estimated total offshore
wealth . (Section A.5 of the Online Appendix provides a thorough discussion of oil exporters)
IV.C. The Global Portfolio Assets–Liabilities Gap

26. This figure comes from the work of Davies et al. (2011) who provide the firstcomprehensive estimate of the level and distribution of world wealth in 2000 basedon an exhaustive exploitation of available national balance sheets. A report by
Credit Suisse (2010) builds on the methodology developed by Davies et al. (2011)
to provide yearly estimates for the 2000–2010 period, and finds $74 trillion for 2008.

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Exploiting the global database, Figure IV reveals a firststriking result: each year, less securities assetsPthan liabilities
are identifiable worldwide.
P In 2008, liabilities i Li equal $40
trillion, whereas assetsP i A^ i reach$35.5 trillion only. There isP
a $4.5 trillion gap  ¼ i Li  i A^ i . (Note that selecting 2008 as
the benchmark year tends to understate the absolute size of
unrecorded claims given the collapse in world equity prices
after the Lehman Brothers bankruptcy). Each year, more than
10% of all cross-border equities and bonds have unknown owners.
Figures V and VI plot the discrepancy for equities (including fundshares) and bonds separately. Twenty percent of all cross-border
equities and fund shares have no identifiable owners; bonds areless affected.
Table III compares the portfolios that have no readily identifiable owners globally () with the offshore portfolios in Swissbanks (s) as of the end of 2008. Both look strikingly the same,
although they rely on fully independent data. In each case, equities including fund shares account for two thirds, bonds for one
third. (As we will see, most of the globally missing equities are
actually mutual fund shares, just like most of the equities held
through Swiss offshore accounts.) This fact suggests that the
global portfolio assets–liabilities gap does reflect the assets heldby households through tax havens. One third of the global missing wealth ( = $4,490 billion) can be traced back to Switzerland(s = $1,545 billion), a finding consistent with industry reports
estimating that about a third of the world’s offshore wealth is in
Switzerland (e.g., Boston Consulting Group 2009).
At end 2008, the global net financial wealth of households—
households’ bank deposits, equities, bonds, and insurance contracts, net of debts—was about $74 trillion.26 By my estimate,

1342

QUARTERLY JOURNAL OF ECONOMICS

60,0006,000

Total Liabilities (left-hand scale)

5,000

Discrepancy (right-hand scale)

40,0004,000

30,0003,000

20,0002,000

10,0001,000

0Billions of current U.S. dollars

50,00002001 2002 2003 2004 2005 2006 2007 2008
FIGURE IV

Each Year, Less Securities Assets Are Recorded Than Liabilities
This figure charts the securities assets and liabilities identifiable worldwide. Securities include all equities and bonds classified as portfolio investments or reserves. The totals cover 237 countries and territories along withinternational organizations. Source: Online Appendix Table A3.

individuals held unrecorded portfolios worth  = $4.5 trillion in
tax havens—that is, about 6% of their net financial wealth.
In tax havens households own not only portfolio securities
but also bank deposits. Contrary to what happens for portfolios,
offshore deposits do not go completely unrecorded in the international statistics. The major financial centers tell the Bank forInternational Settlements (BIS) how much deposits foreigners
have placed in their banks. In principle, French statisticians
can use the BIS data to estimate the value of French residents’offshore bank deposits, which will then be recorded in France’s
IIP as ‘‘other assets.’’ The IMF has been advocating the use of the
BIS data by national agencies since the 1990s. Not all countries
do so, however, and the BIS does not separate out corporate fromhousehold deposits.
To give a rough estimate of the global amount of household
offshore wealth, I assume in the first column of Table III that 25%of it takes the form of deposits and 75% of securities, as is the case

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Billions of current U.S. dollars

Total Assets (left-hand scale)1343

THE MISSING WEALTH OF NATIONS

25,0005,000
Total Assets (left-hand scale)

15,0003,000

10,000

2,000

5,000

1,000

0

Billions of current U.S. dollars

4,000Discrepancy (right-hand scale)02001 2002 2003 2004 2005 2006 2007 2008
FIGURE V

Each Year, Less Equity Assets Are Recorded Than Liabilities
This figure charts the equity assets and liabilities identifiable worldwide.
Equities include all equities classified as portfolio investments or reserves.
The totals cover 237 countries and territories along with international organizations. Source: Online Appendix Table A3.

in Switzerland. In 2008, global offshore wealth then amounts to$4.5 trillion (securities) plus $1.4 trillion (deposits). The resulting$5.9 trillion total represents 8% of household financial wealth. Of
this 8%, at most 2% (deposits) are recorded as assets in countries’
IIPs.27
Although this article is the first in the academic literature
to estimate the personal wealth held in tax havens, a number ofstudies have provided estimates before. The most detailed

27. Deposits are only partially recorded, because not all statisticians use the
BIS data as inputs to their IIPs. More important, the BIS data underestimate theoffshore deposits of rich countries’ households, because they do not see throughthe intermediate wealth-holding structures that the owners of offshore accounts
use. The Swiss bank deposits held by French savers through sham Panamanian
corporations are assigned to Panama in the BIS data. This is a first-order concern(see Section III.B).

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Billions of current U.S. dollars

Total Liabilities (left-hand scale)

20,0001344

QUARTERLY JOURNAL OF ECONOMICS

30,0002,000
Total Assets (left-hand scale)

Discrepancy (right-hand scale)

20,00015,0001,000

10,000Billions of current U.S. dollars

Total Liabilities (left-hand scale)

5,000

0

0
2001 2002 2003 2004 2005 2006 2007 2008
FIGURE VI

Each Year, Less Bond Assets Are Recorded Than Liabilities
This figure charts the bond assets and liabilities identifiable worldwide.
Bonds include all debt securities classified as portfolio investments or reserves.
The totals cover 237 countries and territories along with international organizations. Source: Online Appendix Table A3.

industry report puts the amount of household offshore wealth at$6.7 trillion in 2008 (Boston Consulting Group 2009, 31). Cap
Gemini and Merrill Lynch (2002, 11) put it at $8.5 trillion in
2002. The Tax Justice Network (2005) has a $11.5 trillion figurefor 2005 and Palan, Murphy, and Chavagneux (2010, 5) writethat ‘‘the global rich held in 2007 approximately $12 trillion of
their wealth in tax havens.’’ My estimate, $5.9 trillion in 2008, istherefore at the low end of the scale. Note that I focus on financial
wealth only, whereas households can also use tax havens forworks of art and real estate.28

28. Whether these elements can explain the difference between my estimate
and previous studies is a question that I leave for future research. Cross-border realestate, in particular, is an important asset class for households. I also disregard thewealth of individuals who live in tax havens.

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Billions of current U.S. dollars

25,000THE MISSING WEALTH OF NATIONS

1345

TABLE IIIESTIMATED OFFSHORE WEALTH, WORLD AND SWITZERLAND

Offshore securities
Bonds
Equities(Of which: mutual fund shares)
Offshore bank deposits
Total offshore financial wealthWorld

Switzerland

4,490
37%
63%
48%
1,388
5,878

1,545
35%
65%
50%
478
2,022

V. Consistency and Robustness Checks
My method to estimate the personal wealth globally held offshore is indirect, and as such subject to a margin of error. Futurestatistical improvements will make it possible to refine my estimate. In the meantime, this section provides evidence that theorder of magnitude I find is correct, robust to relaxing the key
estimation assumptions, and consistent with independent flow
data.
V.A. Using Bilateral Assets Data to Decompose theAssets–Liabilities Gap
A basic objection to my estimation procedure is that the
global portfolio assets–liabilities gap may reflect data deficiencies
unrelated to tax havens. How can we be reasonably sure that it
mostly reflects household offshore portfolios? Because of one key
reason: the wealth does not vanish randomly, but following a
specific pattern that closely mirrors what the independent
Swiss data show.
To make this point, I use bilateral portfolio assets data to
decompose the global portfolio assets–liabilities gap  and investigate its source. The main data source is the CoordinatedPortfolio Investment Survey (CPIS), conducted under the auspices of the IMF on a yearly basis since 2001. I use the 2008
wave of the survey, which presents the bilateral portfolio holdings A^ ij of 74 countries on 238 debtors. The CPIS is rounded out

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Notes. Global household financial wealth = 73,625. Values are in billions of current U.S. dollars, as ofend 2008. Global household financial wealth includes bank deposits, portfolios of securities, insurance
contracts of households net of households’ debt. Offshore financial wealth includes the bank deposits andportfolios of securities held by households in tax havens. It excludes real estate and other real assets heldin tax havens. Source. Offshore financial wealth: Online Appendix Tables A3, A23, and A24. Global
household financial wealth: Credit Suisse (2010).

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29. As shown by Portes and Rey (2005) and Lane and Milesi-Ferretti (2008), thegravity model fits cross-border portfolio flow and stock data well. Because I apply
the gravity model to less than 5% of global assets, any error introduced by the model
has negligible consequences.

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In its early years, the CPIS had important shortcomings.
Initially, only seven of the countries surveyed by the IMF conducted the security-by-security surveys required to accurately
measure bilateral portfolio holdings. The majority of the entries
in the CPIS were estimated by participating countries on thebasis of ad hoc methods. Over the years, progress was made. In
2008, most leading economies conducted security-by-security surveys, including the United States, the entire eurozone, andJapan. For these countries, the geographical allocation of assets
is likely to be very accurate (see, for instance, Bertaut, Griever,and Tryon 2006, A63 in the case of the United States). Some
problems still remain. The United States, for instance, does not
currently count short positions as negative assets, so reported
figures are slightly too high. There are some valuation issues:
when partial repayment of a debt security is possible, as is thecase for asset-backed securities, some custodians keep track of
the original principal, others only of what is remaining. But as
Section V.B. shows, these shortcomings cannot affect the main
conclusions I draw from the analysis of the CPIS data.
To analyze the source of the global gap  we need bilateral
portfolio assets data for all countries. I have therefore filled in the
coverage gaps in the CPIS. This is not problematic, because the
CPIS has a very good coverage rate: it captures 86% of all crossborder securities in 2008 (see Online Appendix Table A1). All theleading industrial countries and the large financial centers participate—although the Cayman Islands only reports on its banks’
portfolio holdings, disregarding its large hedge fund industry. To
reach a 98%–99% coverage rate, we only need to add data on four
nonreporters: China, Middle Eastern oil exporters, Taiwan, andthe Cayman Islands hedge funds. We have reasonably good information about the investments these nonreporters make: we knowthat they invest in the United States a lot. To allocate some of the
non-U.S. investments of CPIS nonreporters, I employ a gravity
model of portfolio holdings.29 The Online Appendix extensively

1347

THE MISSING WEALTH OF NATIONS

discusses the raw sources and methods used to fill in the gaps in
the CPIS.
Figure VII decomposes the 2008 global portfolio assets-liabilities gap  using the extended CPIS data. Each dot is equal to thedifference between the portfolio liabilities reported by a countryj (Lj) and the sum of the assets on j identifiable worldwide
P( A^ ij ). By construction, the dots sum to $4,490 billion, theiglobal portfolio gap . For 90% of the world’s countries, debtorP ^reported and creditor-derived liabilities match (Lj ¼
Aij ). Butii$1.1 trillion in equity assets on Luxembourg were identifiableworldwide: about $900 billion of Luxembourg mutual fundshares had no known owner.31 Overall, claims on funds incorporated in Luxembourg, Ireland, and the Caymans account for 48%
of the globally missing wealth .
The missing wealth thus follows a clear pattern that mirrors
what the Swiss data showed. We learned in Section III that foreigners own a great deal of Luxembourg and Irish fund sharesthrough their Swiss accounts (Figure II). We now observe thatmany of such fund shares have no identifiable owners globally(Figure VII). Banks all over the world, and not only in
Switzerland, sell Luxembourg and Irish fund shares to their customers—simply because a considerable fraction of the world’s
mutual funds are incorporated in these two countries that do
not withhold taxes on cross-border payments.32 The specific
30. These discrepancies have previously been documented by Lane and MilesiFerretti (2007) and the ECB (2009) in the case of Luxembourg and Ireland, andsuggested by Lane and Milesi-Ferretti (2011) in the case of the Cayman Islands, but
my article is the first to provide a consistent explanation for them. Section D.4.6 of
the Online Appendix discusses the preliminary steps taken by the ECB to address
the issue. Statistical agencies cannot do much until all tax havens disclose who
owns the offshore portfolios in their banks (see Section VII).
31. Almost 100% of the equity liabilities of Luxembourg, Ireland, and the
Cayman are fund shares.
32. One exception is that not many foreign funds are sold on the U.S. territory,
because of restrictions put by the Investment Company Act of 1940. Statistics
gathered by the European Fund and Asset Management Association (EFAMA)
show that Luxembourg and Ireland are the two leaders for the incorporation ofmutual funds in Europe. At the global level, Luxembourg comes second to the

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for the three financial centers that host large mutual fund industries—Luxembourg, the Cayman Islands, and Ireland—there is ahuge discrepancy.30 For instance, Luxembourg had aroundP ^
Lj = $2 trillion in equity liabilities at end 2008. Yet only
Aij =

1348
1000

QUARTERLY JOURNAL OF ECONOMICS

Luxembourg

Billions of current U.S. dollars
200
400
600
800

Cayman Islands

IrelandFranceSwitzerland

0

Guernsey

.1

.2

.3

.4

.5

.6

.7

.8

.9

1

FIGURE VII
Many Mutual Fund Shares Have no Readily Identifiable Owners in the Official
Statistics
Each dot represents a country j and is equal to the difference between
the securities liabilities reported in 2008 by j (Lj) and the sum of the
securities
assets on j held by 236 countries i and international organizationsP( i A^ ij ). The securities issued by Luxembourg, the Cayman Islands, andIreland are mostly mutual fund shares. Source: Online Appendix Tables A13
and A14.

pattern of anomalies in Figure VII can thus readily be explainedby the fact that households own fund shares through unrecorded
accounts in Switzerland, Singapore, and the Bahamas. It
cannot satisfactorily be explained by other known issues withthe data—including with the 2008 CPIS—nor by my imputations
for non–CPIS participating countries. There is admittedly someuncertainty on the holdings of China, oil exporters, and Taiwan,

United States. But the United States withholds taxes on payments made bydomestic funds to foreigners, which explains why in tax havens individuals own
Luxembourg rather than U.S. fund shares.

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Netherlands
Japan
Italy
United States

THE MISSING WEALTH OF NATIONS

1349

33. It makes little sense for central banks or sovereign funds to invest in mutual
funds (except in hedge funds and private equity funds) because they already pay
wealth managers to design suitable investment strategies. The largest sovereign
wealth fund, Norway’s, discloses its portfolio on a security-by-security basis: it has
virtually no assets on Luxembourg, Ireland, and the Cayman Islands.
34. A Foreign Account Tax Compliance Act passed in 2010 seeks to strengthen
information reporting. For more information on the taxation of hedge fund investors, see Sheppard (2008). I have no data on what fraction of offshore income goes
undeclared in tax returns globally. In the United States, the IRS estimates that
personal income tax evasion through offshore accounts and hedge funds might cost
up to $70 billion annually (Gravelle 2009).
35. Along these lines, Section C.2. of the Online Appendix reckons that at least
15% of U.S. cross-border portfolio equity liabilities have no identifiable ultimate
owner.

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but no indication that these countries massively invest in
Luxembourg and Irish funds.33
The large amount of missing claims on the Caymans can also
be explained by the use of tax havens by individuals, although themechanism is slightly different. Most of the funds incorporated in
the Caymans are hedge and private equity funds. Shares of suchfunds are usually directly purchased by investors rather thandistributed by Swiss and other banks. Because shares of hedge
funds are not entrusted to custodian banks, it is hard for U.S.
statisticians to measure U.S. claims on Caymans funds. At theend of 2008, the United States recorded less than $100 billion in
equity assets on the Cayman while funds incorporated there had
more than $ 1 trillion in foreign equity liabilities (see Departmentof the Treasury, Federal Reserve Bank of New York, and Board ofGovernors of the Federal Reserve System 2009, table 30, 68). In
all likelihood a large amount of U.S. claims went unrecorded. For
U.S. savers, directly investing in Caymans hedge funds offers
roughly the same potential tax evasion opportunities as holding
Luxembourg fund shares through Swiss accounts. When filling
tax returns, taxpayers can choose to report income, because there
is no automatic exchange of information between Cayman funds
and the IRS.34
Why should we care that a considerable amount of
Luxembourg, Irish, and Cayman fund shares have no identifiable
owners? Because the funds in turn invest in U.S. equities andother securities. Because we do not know who owns a large fraction of the world’s mutual funds, we cannot know who ultimately
owns a large fraction of U.S. equities.35

1350

QUARTERLY JOURNAL OF ECONOMICS

The missing claims on France, Japan, and other rich countries in Figure VII can be attributed to the fact that through theiroffshore accounts savers directly invest in French equities,
Japanese bonds, and other securities issued by rich countries.36
Again this would be congruent with the Swiss data, which showedthat households directly own equities and bonds in addition totheir Irish and Luxembourg fund shares.
V.B. How Known Issues with Available Data Affect My Estimate

36. In principle, these anomalies could also be attributed to problems in the2008 CPIS and in my imputations. However, there is no particular reason these
problems should specifically cause anomalies for France, Japan, Netherlands, andthe United States, as in Figure VII. Note that France is also one of the leading
mutual fund centers in Europe, along with Luxembourg and Ireland, and many
multinational corporations are headquartered in the Netherlands.
37. See Online Appendix Section A.1.2. In Europe, Germany and Italy traditionally measured portfolio positions by cumulating flows and adjusting for valuation, but security-by-security surveys were introduced in 2006 and 2008,
respectively. See Online Appendix Sections A.1.1 (Germany) and B.2.3 (Italy).
38. At the end of 2011, in the frame of the introduction of a new reporting form,
the TIC SLT, the Federal Reserve Board significantly expanded its coverage of U.S.
hedge and private equity funds (see Section VI.B). Singapore integrated semi-official investors in its IIP and CPIS data.

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My estimate that about 6% of household financial wealth isheld unrecorded in all the world’s tax havens relies on two
assumptions. First, portfolio asset figures must accurately reflect
the securities held by corporations and governments and those
held onshore by households (H1); second, portfolio liabilities mustbe accurate (H2). Here I briefly review the main known issues
with countries’ portfolio data and discuss how relaxing the two
assumptions affects the results.
On the asset side, asset-backed securities and short positions
are sometimes imperfectly recorded—this, however, cannot
explain the considerable amount of globally missing mutualfund shares. The assets surveys of a number of economies also
have idiosyncratic weaknesses: in the United States, somehedge and private equity funds for a long time have been unawareof their reporting duties; in Singapore, official statistics have traditionally excluded important semi-official holders of portfolio
claims.37 Yet it is unlikely that these shortcomings play an important role for the 2008 pattern of anomalies identified in Figure VII.
Between 2009 and 2011, both the United States and Singapore
significantly strengthened their assets data,38 but this did notTHE MISSING WEALTH OF NATIONS

1351

V.C. Consistency between Flow and Stock Anomalies
A last consistency check comes from the flow data. The global
assets–liabilities gap  has its counterpart in the world balance of
39. Note that here I do not attempt to estimate the holdings of non-CPIS reporters, including those of Cayman-based hedge funds.

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affect much the pattern of debtor-reported/creditor-derived
anomalies. In 2011, for instance, Luxembourg reported close to$2.6 trillion in portfolio equity liabilities, and this was still considerably larger than the $1.4 trillion of equity claims on
Luxembourg reported in the CPIS; similarly, Ireland had close
to $1.5 trillion in equity liabilities and yet CPIS creditors only
$0.5 trillion in assets.39 Despite notable statistical improvementsin the United States, identifiable equity claims on the Caymans
remained smaller than the size of the Caymans fund industry.
A second potential issue has to do with liability figures, whichmight be overestimated. Take a French person who owns Frenchequities via a Swiss bank. From the viewpoint of international
statistics, these equities are not cross-border claims, but they will
likely be recorded by French statisticians as liabilities for France.
In this case, the use of offshore banks by households does not bias
asset data downward but liability data upward. However, suchround-tripping does not affect the article’s argument. Too many
liabilities are recorded globally, and the observed assets–liabilities gap still directly reflects household offshore portfolios.
Liability figures, on the contrary, may be underestimated.
Take a French saver who owns U.S. equities via a Swiss bank.
U.S. statisticians will not always be able to record these equities
as U.S. liabilities. But these equities will not be recorded on theasset side of the French IIP either. So accounting for them would
both deteriorate the U.S. net foreign asset position and improvethat of France by the same amount. The wealth held in tax
havens would be even greater than I have found.
In sum, available aggregate portfolio data do not always
verify my two identification assumptions. In light of what weknow today, however, nothing indicates that my methodology
substantially over- or underestimates the wealth offshore.
Although future improvements in portfolio statistics will
make it possible to refine my estimate, there is no particularreason to expect they could radically affect the order of magnitude
I find.

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QUARTERLY JOURNAL OF ECONOMICS

40. Section D.4 of the Online Appendix discusses five concrete case studies oftransfers and how they should be recorded.

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payments computed by the IMF independently from the present
study. The IMF world balance of payments includes all countries’
reports plus undisclosed IMF estimates for all nonreporters. It
displays two inconsistencies. First, more investment income ispaid than received each year (Anomaly 2). In 2008, the discrepancy amounted to D = $156 billion (see Online Appendix Table
A21). To see how this flow anomaly fits in with my estimatedstock anomaly, denote r the yield on the missing portfolios —that is, the flow of missing dividends and interest divided by thestock of missing securities. A missing flow of $156 billion implies ayield of r = 3.5%, consistent with the average yield on recorded
cross-border securities (see Online Appendix Table A22).
Second, barring one exception in 1998, there are more securities sold than purchased globally (Anomaly 3). Again, thisanomaly fits in well with the portfolio assets–liabilities gap .
To see why, denote It the net unrecorded purchases of securities,
and VALt the net capital gains on existing unrecorded portfolios.
We can write the change in the stock of unrecorded portfolios 
between t – 1 and t as t – t–1 = It + VALt. Table IV breaks down by this equation. A reasonable pattern emerges: steady
inflows, negative valuation effects during equity bear markets,
positive valuation effects during bull markets, and reasonable
yields r throughout the period.
One anomaly that is not systematic in the data is ‘‘net errors
and omissions’’ in individual countries’ balances of payments(Anomaly 4). Over the 1970–2004 period, some countries haveexhibited large net errors, such as Italy, Norway, or Russia(Lane and Milesi-Ferretti 2007, table 3, 243). But some EU countries and the United States have not. Does that invalidate
my results? Not at all, for two reasons. First, transfers of funds
offshore need not systematically cause net errors—carrying
banknotes overseas, granting a loan to a shell offshore company,
and receiving wage on an offshore account will not.40 Conversely,‘‘net errors’’ reflect many issues unrelated to tax havens—such as
differences in the timing of trade and financial transactions—that make them a poor indicator of the magnitude of capitalflight.

1353

THE MISSING WEALTH OF NATIONSTABLE IV

THE ANOMALIES CAUSED BY UNRECORDED ASSETS ARE INTERNALLY CONSISTENT

Stock (), $billion
Inflows (I), $billion
Valuation (VAL), $billion
Interest and dividends (D),$billionYield (r = D/)

2001

2002

2003

2004

2005

2006

2007

2008

2,532
38
n.a.
126

2,392
164
304
124

2,858
153
313
118

3,316
240
218
121

3,676
230
130
128

3,760
116
31
121

5,131
189
1,182
106

4,490
364
1,006
156

5.0%

5.2%

4.1%

3.6%

3.5%

3.2%

2.1%

3.5%

VI. Implications of Tax Havens for International
Imbalances
In 2008, globally identifiable portfolio liabilities exceeded
assets by about $4.5 trillion. The missing assets must belong tosome countries. This section proposes scenarios as to how
accounting for them affects international imbalances—bothstock and flow imbalances, commonly referred to as ‘‘global imbalances.’’ The scenarios are thought experiments such as: What is
the true U.S. net foreign asset position if the United States owns
20% of the unrecorded wealth? As such, they are speculative.
However, a number of qualitative findings emerge.
VI.A. The Eurozone and the Rich World Are Probably
Net Creditors
As we have seen, about one-third of the missing assets canreadily be attributed to households with Swiss accounts, and theremaining two-thirds probably belong to households withaccounts in other tax havens. The SNB’s statistics suggest that
more than half the offshore wealth in Switzerland belongs to
Europeans. Although we do not know who owns the offshore
wealth in the Cayman Islands and Singapore, surveys of wealthmanagers give some direction. For instance, the Boston
Consulting Group (2009) estimates that 42% of all offshore
wealth belongs to Europeans and 60% to residents of richcountries.
Table V presents scenarios as to how unrecorded assets affectthe net position of the eurozone, officially the world’s second

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Notes. This table reports on the estimated stocks and flows of unrecorded portfolios. Inflows are thenet purchases of securities from unrecorded accounts. Valuation denotes the net capital gains/losses on
unrecorded portfolios. Interest and dividends are the income earned by the owners of unrecorded portfolios. Source. Online Appendix Tables A3 and A21; IMF, Balance of Payments Statistics, 2010, Table C-1,‘‘Global discrepancies in balance of payments statistics.’’

1354

QUARTERLY JOURNAL OF ECONOMICSTABLE VACCOUNTING FOR THE WEALTH IN TAX HAVENS CAN TURN THE EUROZONE INTO A NET
CREDITOR
Share (%) of offshore
portfolios in Switzerland
belonging to eurozone
residents

0

25

50

75

11
6
5
3

6
0
1
2

0
5
7
8

6
11
12
13

Notes. The official eurozone’s net foreign asset position/GDP ratio averaged 11% over the 2001–2008
period. If eurozone residents owned 40% of the unrecorded assets held through Switzerland and 50% of
those held through the other tax havens, the true net foreign asset position/GDP ratio of the eurozone
averaged +5%. Source. Online Appendix Table A28.

largest net debtor. Accounting for the offshore wealth in
Switzerland alone considerably improves the eurozone’s position.
If in addition the eurozone owns 25% of the offshore portfolios in
the world’s other tax havens, then it is balanced. If it owns 50% of
all the unrecorded portfolios, it is in fact a sizable net creditor. In
all plausible scenarios, the eurozone shifts into the black.
Table VI presents similar computations for the UnitedStates. Accounting for unrecorded assets improves the U.S. net
position, albeit by a smaller amount. If U.S. residents own 20% of
all unrecorded wealth—say, 15% of the offshore wealth in Swissbanks and 25% of the other missing assets—then the net positionof the United States is significantly better than in the official
data: –12% of gross domestic product (GDP) on average over
2001–2008 as opposed to –18% in the data.
My benchmark scenario where the eurozone owns about
half the unrecorded wealth and the United States 20% turns
the overall rich world into a net creditor. This result is robust
to alternative assumptions. The rich world shifts into the black
as long as it owns more than half the globally unrecorded assets.
Available Swiss data suggest that it is a lower bound, which ishardly surprising because residents of rich countries own 80% ofrecorded world wealth (Davies et al. 2011). Remember alsothat most of the unrecorded assets are Luxembourg, Irish, andCaymans fund shares. We have reason to believe that these fundshares belong mainly to Europeans (especially Luxembourg
fund shares) and Americans (especially Caymans fundDownloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013

0
40
50
60

Share (%) of offshore portfolios in havens otherthan Switzerland belonging to eurozone residents

1355

THE MISSING WEALTH OF NATIONSTABLE VIACCOUNTING FOR THE WEALTH IN TAX HAVENS IMPROVES THE U.S. NET FOREIGN ASSETPOSITION
Share (%) of offshore portfolios
in havens other than Switzerland
belonging to U.S. residents

Share (%) of offshore
portfolios in Switzerland
belonging to U.S.
residents

0

25

50

75

0
5
15

18
17
16

13
13
12

9
8
7

5
4
3

shares).41 Developing countries have offshore accounts too, butplausibly not more than 30% of all offshore wealth: about 10% foroil exporters and 20% for non–oil developing countries is a reasonable take in light of available evidence.42 Last, among richcountries, Japanese residents do not seem to use tax havens
extensively—they own less than 1% of Swiss bank deposits—plausibly because capital income is much less taxed in Japan
than in other developed economies.43
VI.B. Implications for Current Account Dynamics
Accounting for tax havens sheds light on the true size of
debtor and creditor positions: the eurozone is likely to be a net
41. Felettigh and Monti (2008) document that about half the foreign equity
holdings recorded by Italy are in Luxembourg funds. The ECB (2009) considers
that most of the missing assets on Luxembourg and Ireland probably belong toeurozone residents. Lane and Milesi-Ferretti (2007) document that Irish statisticians recorded five times more U.S. investments in Irish equities than U.S. statisticians did in 2004, so U.S. residents may own a significant fraction of the missing
claims on Ireland.
42. The hypothesis that Middle Eastern oil exporters own 10% of the globallyunrecorded portfolios  implies total portfolio holdings for Middle Eastern countries well in line with the literature, see Online Appendix Table A8. Middle Easterncountries own 10% of Swiss bank deposits and non–oil developing countries 25%,
see Online Appendix Table A26.
43. In 2005, the Organisation for Economic Co-operation and Development
reported that the net personal tax rate on dividends was 22% in Germany and
32% in France, as opposed to 10% in Japan, and 18% in the United States.

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Notes. The official U.S. net foreign asset position/GDP ratio averaged 18% over the 2001–2008
period. If U.S. residents owned 15% of the unrecorded assets held through Switzerland and 25% of
those held through the other tax havens, the true net foreign asset position/GDP ratio of the U.S. averaged 12%. Source. Online Appendix Table A29.

1356

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creditor and the United States less indebted than in the official
statistics. Although my methodology focuses on positions rather
than transactions, the results have two implications for the analysis of current accounts dynamics.
First, we know that capturing household offshore portfolios
has always been impossible. Although available data do notenable me to estimate the wealth held unrecorded before 2001,
accounting for the missing assets must improve the pre-2001 net
positions of Europe and the United States. The rich world wastherefore probably a sizable net creditor in the 1980s and 1990s(Figure I). Now, if the rich world starts from a positive position in
the mid-1990s, then poor-to-rich flows are a factor of convergencerather than divergence in the external positions of countries:
developing countries are simply repaying their debts to advanced
economies, as if output convergence was accompanied by net
external wealth convergence. Although this is not necessarily
what theory predicts—many open-economy models do not haveclear-cut predictions on steady-state net foreign asset positions,and in standard models one can have persistent inequalities in
net wealth even if output converges—it seems important to keep
this possibility in mind when analyzing the determinants of current account imbalances and the risks involved.
A second implication of my findings is that some of the mostegregious inconsistencies between financial flow and stock data,in both Europe and the United States, may be related to tax
havens.
Consider households moving portfolio securities to offshoreaccounts. The securities leave the radar of domestic statisticalsystems. This tends to make recorded portfolio positions smaller
than cumulated past financial flows adjusted for valuation
changes. Such capital flight probably explains in part why the
eurozone’s net international position has deteriorated fromabout 0 in 1985 to –14% of GDP in 2011, despite zero current
account deficit. A case in point is the dramatic evolution of
Ireland’s net international position during the crisis, fromabout –20% of GDP in 2007 to –100% in 2010. This development
cannot satisfactorily be explained by financial flows and valuation losses (Lane 2011–2012). Capital flight in the midst of the
eurozone crisis has probably played a significant role.
Conversely, statisticians sometimes improve their coverageof the wealth held in tax havens. The United States, in particular,
keeps discovering new portfolio assets from year to year

THE MISSING WEALTH OF NATIONS

1357

VI.C. Remaining Anomalies in International Statistics
The failure to record the personal wealth in tax havens iscertainly not the only issue in the investment statistics of countries. Could other errors in the data offset the improvement inrich countries’ IIP resulting from accounting for households’ offshore wealth? There is one necessary (though not sufficient) condition for countries’ IIP to be accurate: globally, recorded claims
should match liabilities. Here I briefly discuss scenarios where
this condition is verified.
Accounting for tax havens can entirely solve the global
assets–liabilities discrepancy for one category of claims: portfolio
investments. It can also explain why more investment income ispaid than received, which is the key driver of the current accountdeficit that the world has tended to run up (Motala 1997). Twoanomalies remain, however. First, contrary to the phenomenon
found for portfolio securities, for foreign direct investments(FDIs), slightly more assets can be identified than liabilities(Lane and Milesi-Ferretti 2007, figure 2, 232). Second, in a spectacular reversal of past trends, the world started running up a

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(Curcuru, Dvorak, and Warnock 2008; Lane and Milesi-Ferretti2009). These discoveries partly reflect an improvement in the
coverage of U.S. corporations’ offshore assets. One prominent
example is the 2011 U.S. portfolio asset survey, which significantly improved the coverage of the Caymans hedge fundshares held by U.S. companies: the 2011 survey found close to$500 billion in Cayman equity assets, three times the 2010 level.
Such improvements partly explain why the deterioration of the
U.S. position has been much smaller than U.S. borrowing andvaluation effects would suggest, a puzzle that has attracted considerable attention since the work of Gourinchas and Rey(2007b). The results of the 2011 U.S. survey may be pointing toa gradual reduction in the total amount of unrecorded wealth, as
it identified some $500 billion in previously unreported holdings(see Department of the Treasury, Federal Reserve Bank of New
York, and Board of Governors of the Federal Reserve System2012, table 4, 7). But a lot of wealth clearly remains to be discovered globally: the United States still does not attempt to capture
households’ offshore portfolios, and in other countries such as
Ireland, new waves of capital flight seem to vastly exceed discoveries of previously unreported assets.

1358

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current account surplus in 2004. The surplus has been driven by
the trade balance: since 2004, recorded exports have exceeded
imports significantly (Figure VIII). Although there is no reason
why the FDI and trade anomalies should be linked with household offshore assets, a brief discussion of their likely sources is inorder.
FDI data raise huge challenges. Direct investments aredecentralized, unlike portfolio holdings. Statisticians have only
recently started spreading best practices and harmonizing data
across countries by means of a Coordinated Direct Investment
Survey conducted for the first time in 2009. Most important,direct investments have no observable market value, because
they do not usually take the form of traded securities.
Developing countries compile FDI statistics on a book value
basis, whereas most rich countries try to infer market values
based on the market prices of portfolio investments. Because
asset prices rose more in developing than in rich countries in
the 2000s, much of the direct investment discrepancy may comefrom the fact that the book values recorded by the developing
countries for their direct investment liabilities are too low. The
developing world may be more indebted than we think.
The trade discrepancy also likely comes from errors in developing countries’ statistics. There is no particular reason to believethat exports are overestimated in rich countries. In fact, the U.S.
Census Bureau (1998) has argued that U.S. goods exports havetended to be systematically underestimated, by as much as 10%.
In contrast, there is substantial evidence that the developingworld underestimates its imports: Fisman and Wei (2004) showthat China’s imports from Hong Kong are systematically underreported for tax reasons. Now, developing countries’ IIPs are still
mostly compiled by cumulating current account flows (in particular for the ‘‘other assets’’ category). If developing countries’ current account balances are overestimated, then their net foreign
assets are also overestimated. Once again, the developing world
may be more indebted than we think.
If the FDI and trade discrepancies are due purely to errors indeveloping countries’ statistics, then they do not affect the resultsof this article: when the world IIP is purged of all its errors, therich world and the eurozone are net creditors, and the developingworld a net debtor. If each country contributes to the FDI and
trade discrepancies in proportion to the size of its internationalbalance sheet—a worst-case scenario given the available

1359

THE MISSING WEALTH OF NATIONS

500
Current AccountTrade Balance300

FDI Income
Portfolio and Other Investment Income

200
100
0
-100
-200
1994

1996

1998

2000

2002

2004

2006

2008

FIGURE VIII
The World Now Runs a Large Trade Surplus
This figure charts the statistical anomalies in the world’s balance of payments, which includes data for all countries and territories. Each year, more
portfolio and other investment income is paid than received, the flow counterpart of missing assets in international investment positions. Since 2004, theworld has been running a large trade surplus, driving a large current accountsurplus. Source: Online Appendix Table A21.

evidence—the central conclusions of this article still hold. The
eurozone remains a net creditor (albeit smaller) and the richworld is roughly balanced.44
As a final word of caution, it is worth remembering that in
top of the FDI and trade issues, there are substantial uncertainties on cross-border holdings of real estate, which in many countries are insufficiently captured or even not at all. Curcuru,
Thomas, and Warnock (2009) estimate that on net real estateincreased U.S. liabilities of $565 billion in 2007. Emerging economies might own a substantial fraction of foreign-owned U.S.
and European real estate and miss these holdings in their statistics. Further studies are called for on this important issue toimprove estimates of the debtor and creditor positions of leading
economies.
44. See Online Appendix Tables A31 and A32. Online Appendix Table A30
provides a line-by-line reconciliation of  with the world net foreign asset discrepancy (the world’s puzzling net debt).

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Billions of current U.S. dollars

400

1360

QUARTERLY JOURNAL OF ECONOMICS

VII. Conclusion: Two Proposals to Improve Official
Statistics

Downloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013This article takes a serious look at the enormous challenges
that the personal wealth management activities of tax havenspose for international data. The main finding is that around 8%of the global financial wealth of households is held in tax havens,
three-quarters of which goes unrecorded. Available evidence suggests that offshore assets belong in the main to residents of richcountries, in particular to Europeans. On the basis of plausible
assumptions, accounting for the wealth in tax havens turns
the eurozone into a net international creditor and significantly
improves the U.S. net position. Contrary to conventional wisdomthat views Europe and the United States as severely indebted
economies, the rich world is still overall likely to be a net creditor.
Much of the literature on global imbalances has been preoccupied
with major divergence trends in current accounts and net positions that could ultimately cause a sharp drop in the dollar andrecessions in rich countries. My results suggest that poor-to-rich
capital flows may be a factor of convergence rather than divergence in the net foreign asset positions of countries.
Accurate foreign asset data are crucial to many research andpolicy issues. They form a key input for the analysis of patterns incapital flows. Countries with high recorded net foreign debt arelabeled high-risk, which has direct consequences on their borrowing terms and increases the chances of disorderedly adjustments.
Better investment data would improve the ability to track fundamental aspects of globalization and to monitor financial stability.
All of this calls for changes to be made to the way data arecompiled.
Two simple reforms would make for substantial improvements. First, statistics showing that 60% of Swiss deposits are
owned by a small set of unpopulated tax havens are unhelpful.
Cross-border banking data on the household sector should becompiled on a beneficial ownership basis. A bank deposit owned
in Switzerland by a French individual through a sham Panamanian corporation should not be recorded as a Panamanian but as aFrench deposit. The key principle of anti–money laundering regulations is that bankers need to know at all times who are thebeneficial owners of the funds they manage, even if they are held
via a long chain of intermediate entities. Banks should be asked
to use this information to compile cross-border banking data on

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1361

Paris School of Economics

Supplementary Material
An Online Appendix for this article can be found at QJE
online (qje.oxfordjournals.org).
References
Aguiar, M., and M. Amador, ‘‘Growth in the Shadow of Expropriation,’’ Quarterly
Journal of Economics, 126 (2011), 651–697.
Alfaro, L., S. Kalemli-Ozcan, and V. Volosovych, ‘‘Sovereigns, Upstream Capital
Flows and Global Imbalances,’’ NBER Working Paper 17396, 2011.
Atkinson, A., T. Piketty, and E. Saez, ‘‘Top Incomes in the Long Run of History,’’
Journal of Economic Literature, 49, no. 1 (2011), 3–71.
BEA (Bureau of Economic Analysis), U.S. International Transactions Accounts(Washington, DC: BEA, 2011).

Downloaded from http://qje.oxfordjournals.org/ by guest on July 6, 2013

the household sector. It would not require much extra work, since
the information already exists within the banks.
Second, countries should exchange data on portfolio securities held offshore by households. All international financial centers should report to the Bank for International Settlements on
the value of the securities held in custody by foreign residents intheir banks—just as they do today for bank deposits. Custodial
surveys have a long history and they do not raise any great practical problems. The reform would not violate any bank secrecy
provisions. But it would only work if custodial holding data
were also established on a beneficial ownership basis.
The combination of both reforms would enable statisticians
to fill in long-standing gaps in portfolio investment data. As thisarticle has argued, this would radically change the international
investment positions of rich countries.
A third source can be used as input to the statistics on theexternal positions of countries: tax data. These data would be
reliable if offshore financial institutions exchanged information
with foreign tax authorities on an automatic basis. Since thebeginning of the financial crisis, and under G20 pressure, anumber of tax havens have started exchanging bank information
with foreign countries. But they only provide information ‘‘onrequest’’: in practice, the amount of information exchanged
remains negligible (Johannesen and Zucman 2013). Absent automatic information exchange, tax data may well remain an unreliable source to capture the offshore wealth of households.

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