Measuring Illegal Outflows: A Rejoinder

Arun Kumar’s comment “Measuring Illegal Outflows from the Indian Economy: Some Methodological Issues” (29 September 2012) on my paper (“An Empirical Study on the Transfer of Black Money from India: 1948-2008”, EPW, 9 April 2011) provides me an opportunity to clarify some basic issues related to the methods used to estimate illegal capital flight or illicit financial flows. The concerns raised in that comment are addressed here.

A ratio of a stock to a flow does not reflect confusion among economists about the nature of the numerator and the denominator; rather, such a ratio can capture the seriousness of the issue at hand. For instance, the outstanding stock of external debt to gross domestic product (GDP) ratio figures prominently whether in technical analysis involving debt sustainability or in extensive discussions in the media regarding the recent debt crisis facing advanced economies. Specifically, in the literature on capital flight, Claessens and Naudé (1993), Ndikumana and Boyce (2008) and others have used cumulative capital flight to GDP ratios to highlight the extent of the problem facing many developing countries. In fact, as I pointed out, the World Bank residual method adjusted for trade misinvoicing is well-established. Numerous economists have applied it to estimate capital flight since the method was first developed at the World Bank in 1985. As Ajayi (1997:14) states: