International Mobility of the Wealthy and their Assets: A Primer

The wealthy face at least three critical decisions in a volatile world facing varying national conditions, including in which countries they wish to reside, in what nations and jurisdictions they want to place their assets and how to allocate their wealth among different assets such as company shares, residential and commercial property, bonds, works of art, gold and other valuable commodities. The geography of wealth creation and circulation matters. In general, people tend to move from unstable countries with lagging financial systems and poorly secure property rights to more prosperous nations in which the rule of law and security prevails. Also high wealth individuals often prefer having residence rights in countries in which mobility to other nations is guaranteed and taxes are low.  The evidence shows that mobile high wealth individuals tend to prefer high-income, advanced economies with solid institutions. In addition, small nations (often islands) and special jurisdictions that offer generous investment migration schemes also attract high wealth individuals.[1] These regimes provide special advantages to acquire permanent residence and citizenship in the host country in exchange for capital contributions to special government funds, the acquisition of real estate and the opening of bank accounts. In addition, free entry to a large number of countries is an attractive feature of investment migration schemes.  

SIZE, GEOGRAPHICAL LOCATION AND MOBILITY OF THE WEALTHY  

It is estimated that in 2017 there were in the world economy around 36 million “high-net worth individuals, HNWIs”, defined as people with net assets above one million dollars.[2] As an illustrative example, let us create a fictitious country called “wealthystan” populated only by millionaires (HNWIs). In this case, that country would have a total population roughly equivalent to that of Canada. This would be a very rich country whose inhabitants control near 45 percent of global personal wealth, although its population would comprise only 0.5 percent of world population.  

Nevertheless, wealthystan would not be an egalitarian society. Rather, it is a highly socially stratified nation according to the levels of wealth of their citizens: the estimates show that 31.3 million individuals (87 percent of the population) would have net assets between one and five million dollars, near 150,000 people would be “ultra-HNWIs” (net assets above $ 50 million), 5,700 would be “Demi-billionaires” (net assets above $ 500 million) and there would be 2,252 billionaires, (net assets over $ one billion).[3] Wealth concentration is high in this imagined country of the rich.  

In terms of actual countries, millionaires (HNWIs) are concentrated mostly in the United States that holds 43 percent of the world’s millionaires, followed by Japan with 7 percent of the total, the United Kingdom (6 percent) and France, Germany and China, each with 5 percent of the HNWIs. In addition, if we go further up in wealth levels, the four countries that concentrate the largest number of ultra-HNWIs (as indicated, those with net wealth above $ 50 million) are the United States (72,000), China (18,100), Germany (7,200) and the United Kingdom (4,200).[4]  Except China , these are all mature capitalist economies.  

INFLOWS AND OUTFLOWS OF HNWIS 

The international mobility of wealthy individuals has also been increasing in recent years. According to data prepared by wealth management and international real estate companies[5] in 2017 there were nearly 95,000 HNWIs that moved to reside abroad compared to 82,000 HNWIs in 2016 and 65,000 in 2015.[6] The three most preferred country destinations for HNWIs in 2017 (countries with net inflows of HNWIs above 1,000 individuals) were Australia, the United States and Canada, followed by the United Arab Emirates and small countries in the Caribbean such as Bermuda, Cayman Island, Virgin Island, St. Kitts and Nevis. [7] In many cases the wealthy target certain cities to reside, those most preferred include Auckland, Sydney, Melbourne, and Perth, Tel Aviv, Dubai, New York, San Francisco and Vancouver. In contrast, cities that experienced outflows of HNWIs above 1,000 in 2017 were Istanbul, Jakarta, Lagos, London, Moscow, Paris and Sao Paulo. 

Countries with the largest net outflows of HNWIs in 2017 are headed by China and India followed by Turkey, France, the United Kingdom and Russia, Brazil and Venezuela. Taxation levels and, possibly, terrorist activity in some cases, may account for the inclusion of the UK and France in the group. In turn, heightened economic crises and political turbulence in Brazil and Venezuela also can explain outflows of HNWIs from these countries.   

EVIDENCE ON OFFSHORE WEALTH 

Not only people but also financial assets move around the world in search for returns and protection.  In fact, a proportion of global personal wealth generated at national level is held “offshore” in special tax jurisdictions (“fiscal paradises”) such as the Cayman Island, Virgin Island, British Virgin Island, Switzerland, Panama, Jersey Island, Hong Kong, Singapore and Macau. These jurisdictions offer discretion for owners of bank accounts and property and maintain low taxes (or no taxation at all) to attract foreign assets. Estimates of “offshore wealth” for the period 2005-2015 fluctuate between 10 to 13 percent of global GDP, though some estimates may be even higher. [8] It is important to consider that a large proportion of offshore wealth tends to be undeclared to the tax authorities of the origin country; this has two main consequences: the loss of tax revenues in countries where wealth was generated (even if there is no direct wealth tax in a country; interests, dividends and rents are often taxed in most economies) and the distortion of the statistical measures of wealth distribution (particularly the degree of  wealth concentration at the top) thereby misinforming policy formulation in areas such as tax policy and business regulation. [9]  

THE CHANGING LOCATIONS OF OFFSHORE WEALTH  

Historically, Switzerland was the main supplier of cross–border wealth management services starting in the 1920s. In the 1930s and 1940s, the Swiss took advantage of its neutrality in Second World War to receive large deposits from wealthy Europeans in belligerent countries.  In 2005 Switzerland held 46 percent of global offshore wealth but this share declined to around 26 percent in 2015. [10] The decline in the importance of Switzerland (and other European tax havens) has been matched by an increase in the relative share of American and Asian tax havens between 2005 and 2015. In 2015, the Cayman island was the most important recipient of offshore wealth in the American havens (accounting for 7.9 percent of world offshore wealth), followed by the US (7.5 percent) and Panama (1.6 percent). The main recipient of world offshore wealth is an Asian tax haven: Hong–Kong, representing 16.5 percent of the world total (mostly coming from mainland China) followed by Singapore (10 percent). Among the European tax havens, the most important center is the UK (8.9 percent) followed, closely, by Luxembourg (8.3 percent).[11] 

MAIN DIFFERENCES IN OFFSHORE WEALTH ACROSS COUNTRIES  

As already mentioned an estimate of the world average ratio of offshore wealth is around 10 percent of GDP. Nevertheless, this masks very considerable variations across countries in the degree to which nationals hold their assets abroad. In fact, the ratio of offshore wealth varies from 2–4 percentage points of GDP in Korea, Sweden, Norway, Denmark, Japan and China, around 35 percent in Greece and Argentina and up to 40-70 percent in Russia[12], Saudi Arabia, Venezuela and United Arab Emirates. It is interesting to note that countries traditionally subject to bouts of economic and financial volatility and where inequality has been on the rise in recent years such as Argentina, Greece, Russia and Venezuela appear with rather high ratios of offshore wealth to GDP in comparison to more stable and less unequal nations.  

In addition, there seems to be a considerable “regional bias” in the choice of tax havens. American tax havens such as Virgin Island, and Panama receive an important proportion of wealth from wealth holders residing in the Americas. In turn, the French, Belgians and Portuguese hold part of their offshore wealth mainly in Switzerland and Luxembourg and wealthy Russians prefer Switzerland and Cyprus. The Asian wealth-holders, in turn, are inclined to hold their offshore assets in Singapore, Hong Kong, Macao and Jersey Island (a British territory).   

THE MAIN TRENDS OF THE WEALTHY 

The three main trends in the global economy pertaining the geography and distribution of wealth formation are the high concentration of global personal wealth in a small segment of the population, the increasing global mobility of high net worth individuals across countries and cities, and the growing importance of personal wealth that is maintained offshore, say outside the countries where that wealth was generated, a trend more marked for unstable and/or unequal countries. The wealthy elite has incentives to circulate internationally across countries and cities where their families can find a high quality of life and their assets are better protected.  The international mobility of wealthy individuals is facilitated by investment migration regimes that offer visas and citizenship rights in exchange for capital contributions to the host country. This is in contrast with bureaucratic migration systems facing less wealthy migrants coming from the periphery of the world economy, a tension that can not be disregarded. The relation between development levels, inequality and physical mobility of the wealthy is nuanced and subject to outliers. Two advanced capitalist countries such as France and the UK in recent years are reported to face outflows of HNWI and these trends seem more related to taxation levels and insecurity. In turn, citizens of high inequality countries such as Russia, United Arab Emirates and Venezuela hold an important proportion of their wealth offshore, suggesting a direct relation between inequality and offshore wealth. Finally, results show that the link between tax levels at home and offshore wealth may be tenuous judging by the low proportion of offshore wealth held by Scandinavian countries that are high-tax nations.  

Notes:

[1] A citizen of, say, the Caribbean island of Saint Kitts and Nevis has access to free-visa entry to 152 countries. In turn, a citizen of Cyprus, a EU-member state, has access to 172 nations without visa.

[2] See Credit Suisse (2017) Global Wealth Report, 2017  and Andres Solimano (2018) “Global Mobility of the Wealthy and their Assets in an Era of Growing Inequality” .paper prepared for the academic workshop- IMC Forum 2018, June 4-6, Geneva.

[3] The data comes from Credit Suisse (2017) and Forbes list.

[4] Other countries with significant concentrations of Ultra-HWNIs are France, Australia, Canada, (each with 3,000 HNWIs), Switzerland (2,800), Italy (2,600) and Korea (2,300); see Credit Suisse (2017). Countries with very large levels of wealth per capita are small jurisdictions in Europe such as Monaco, Liechtenstein, Luxembourg, Cyprus, Malta and others. In Monaco, for example, it is estimated that one-third of its total population (of around 35,000 people) is composed by HNWIs (residents do not pay income-taxes in Monaco).

[5] See The Wealth Report prepared by the London-based global property company Knight-Frank, (Knight-Frank, 2018) , TheGlobalWealth Report (Credit Suisse, 2017) and the  Global 

[6] New World Wealth, NWW, Research and Markets (2018) Global Wealth Migration Review, Johannesburg.

[7] The exact meaning of “effective residence” in some of these countries —particularly small islands— is unclear. Some of these nations offer residence permits and citizenship that require minimal staying periods besides financial contributions to national development funds and purchase of real estate and government bonds.

[8] Alstadsaeter, Johannesen and Zucman (2017a) “Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality” NBER Working Paper 23805 and Boston Consulting Group.

[9] Wealth and income distribution estimated using tax–based data is often deemed more accurate than using survey data but this assumes, implicitly, that tax information is accurate and complete. A discussion of these issues can be found in Solimano, A. (2017) Global Capitalism in Disarray. Inequality, Debt and Austerity, Oxford University Press.

[10] Solimano (2018), op.cit.

[11] Alstadsaeter, Johannesen and Zucman (2017a), Statistical Appendix.

[12] Russia is in this range when offshore wealth is estimated through the Net Errors and Omission (NEO methodology), see Novokmet, Piketty and Zucman, (2017).

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