John S. Smith
The International Monetary Fund has recently published the fourth edition of its Balance of Payments Manual. The Manual is aimed at helping member countries compile and report their data in a uniform manner. The last edition was published in 1961 and was the third in a series that was begun in 1948.
In the long period during which the last edition was in use, many changes occurred in both the conduct of international transactions and the arrangements for the international monetary system. These developments have been recognized in practice, for example, in the balance of payments statistics published in the Fund’s Balance of Payments Yearbook and in the Annual Report of the Executive Directors. The evolutionary changes that have been introduced on an ad hoc basis, however, have made it increasingly difficult to square balance of payments statements as published with the literal recommendations of the Manual. The issuance of a new Manual not only remedies this situation but provides the foundation for additional improvements in methodology and presentation that even now appear desirable.
The Balance of Payments Manual is the natural outgrowth of the Fund’s concern with the balance of payments problems of its members. Before the Fund can help in correcting these problems, their sources must be identified and their dimensions measured. Such work obviously requires a statistical basis understood by both the Fund and its member countries. The relevant statistics take the form of the integrated body of data on a country’s international transactions known as a balance of payments statement.
The broad principles employed in balance of payments accounting were recognized, of course, at least as long ago as the middle of the eighteenth century. Particularly after World War I, an increasing number of countries began presenting national statements, generally based on these principles but employing varying classification schemes. By the time the International Monetary Fund began operations in 1946, some attempt had already been made by the League of Nations to introduce standards that would be widely applied.
The Fund was made responsible for the correction and temporary financing of payments imbalances which involved formulating an international approach to these problems. Member countries, when they subscribed to the Articles of Agreement, were obligated to compile balance of payments statements and report the data to the Fund. This obligation greatly increased the practical need for generally applicable statistical standards in the balance of payments field—to ensure the equitable treatment of member countries if not simply to enable the Fund to deal effectively with the individual situations of so many member countries. The Fund, therefore, issued its first Manual in 1948 as a guide for member countries in reporting these statements.
Statistical standards, of course, are not immutable. Changes occur over time in the way in which international transactions are conducted, as well as in the international monetary system that constitutes the setting for them. Furthermore, technicians on the Fund staff are continuously in touch with national compilers and become aware of any problems of interpreting the recommendations of the Manual and practical difficulties in applying them. Finally, other standards with which the Manual is coordinated, particularly that for national income and related statistics promulgated by the United Nations, are revised from time to time, and adjustments are needed in the Manual to maintain a high degree of compatibility with these other standards.
Cooperation of national experts
A major effort went into the production of the new Balance of Payments Manual. All of the technical aspects of balance of payments compilation were reopened on this occasion for consideration. At the same time, a fresh look was taken at the analytic approaches that are currently being employed, especially now that the exchange rates for major currencies are floating and persistent problems of structural adjustment are widespread. These factors have led to a complete rewriting of the volume.
In the preparation of successive edition of the Balance of Payments Manual, close consultation has always taken place between the staff of the Fund and the compilers in national offices. National expert have perhaps been involved even more closely in the production of the new edition than in that of any of its predecessors. A small, representative group of national compilers was co-opted at the outset to assist members of the Fund staff in planning the volume, and, by the time this stage of reviewing a final draft was reached, experts from no less than 2 member countries and international organizations had participated in at least one series of meetings on the project. More over, national offices were asked to reply to a survey about their practices and preferences regarding difficult technical aspects, in particular, the recording on merchandise trade and direct investments. A draft of the complete volume was also sent for comment to all the national officer in member countries, which serve as the Fund’s statistical correspondents on balance of payments matters.
As the result of this input from experts with a wide variety of views and experience, and the controversial nature of many of the points at issue, some of the material in the new edition may not be as simple and straightforward as it could otherwise have been. Definitions based largely on general or theoretical considerations are often rather simple to formulate in mutually consistent way. When these definitions are formulated so that they are more suitable for practical use, the qualifications and reservations that are introduced tend to increase the complexity of the explanations and to make the necessary distinctions seem less clearly defined. The drawbacks of this method of producing a Manual, however, are more than offset by the assurance that its recommendations will be realistic and generally acceptable to compilers.
Contents of the Manual
Every edition of the Manual has contained recommendations, accompanied by explanations, on two main aspects of balance of payments compilation and reporting. One part deals with basic concepts and underlying principles, while the other refers to the definition of individual series and the classification of transactions into meaningful categories.
The principles in question are those that apply generally to all the series. They cover such topics as the residents of an economy, the nature of transactions, valuation and time of recording, and the unit of account and procedure for conversion. The interpretation of these principles has not changed greatly through successive editions of the Manual. The new Manual, however, goes to much greater length in discussing and explaining them. Some of the principles are admittedly rather complicated and do not lend themselves readily to description in terms of concrete attributes or observable characteristics. As a result, experience has shown that some of the most serious problems of comparability can stem from the way in which these principles are applied at the national level. The much Puller treatment given to them in the new Manual is intended to promote a clearer understanding of their rationale and cleaning.
The scheme by which transactions are classified, in contrast, has undergone considerable alteration. The formulation of such a scheme is almost entirely a matter of judgment, but the considerations are by no means purely technical. Individual items must be selected in light of the types of analysis they are intended to serve. Furthermore, the Fund’s list must be suitable for countries with greatly differing balance of payments structures, as well as very disparate levels of sophistication in their statistics. The new Manual recommends a comprehensive and integrated list of statistical series that can be presented in a number of different arrangements to satisfy various analytic needs. These series are thus conceived as the building blocks for constructing several alternative versions of the final balance of payments statement.
Despite the thorough overhaul of the manual, and the significant changes that have been introduced (particularly with regard to classification), the Fund’s recommendations for balance of payments compilation continue to maintain a high degree of continuity. Users of the statistics, therefore, are not likely to experience any serious difficulty in shifting over from statements based on the third edition of the Manual to those derived in accordance with the new recommendations. This change will not occur immediately in any case, as compilers will need some time to adapt their procedures to the fourth Manual’s recommendations. Moreover, most differences will be either fairly obvious or else not so substantial as to be seriously misleading, even to a user who is not a specialist in the field of balance of payments accounting. Indeed, one reassuring outcome of the re-examination of the Manual is that its concepts and principles continue to be generally valid. The recommendations have thus not needed an altogether new direction in order to align them with current requirements.
Analytic features in the new edition
The objective of balance of payments compilation is obviously to obtain information that can be used for economic analysis. Economists, however, are by no means in agreement about how the balance of payments should be analyzed. The second Manual aroused controversy because it advocated one approach (“compensatory official financing”) to the exclusion of several possible alternatives. As a result, a specific aim of the third edition was to avoid the appearance of any particular analytic orientation.
The fourth Manual can be seen as steering a middle course between the extremes represented by its two immediate predecessors. In the first place, it explicitly acknowledges and discusses the relevance and importance of analytic considerations for the classification of balance of payments items. Particular series are of interest primarily because of what they can contribute from various viewpoints to the understanding of balance of payments developments. It has seemed natural, therefore, to refer in the Manual to the analytic factors that were taken into account in the treatment of the individual items.
Second, the latest version can be seen as going somewhat further toward separately identifying categories of capital transactions on the basis of their economic function rather than solely by formal criteria. Direct investment is one functional type that has always been singled out by the Fund’s Manuals, but now portfolio capital and official reserves are also to be distinguished. Reserves, for example, were not shown as a main category in the previous Manual, even though their importance in balance of payments analysis was recognized, because objective criteria could not be devised that would permit them to be separated in all cases. This difficulty has now been found to be outweighed by the desirability of having reserve figures shown separately in analytic presentations.
Finally, a chapter has been added in the new Manual that is addressed specifically to the subject of balance of payments analysis. The text is wholly descriptive, although it does discuss specific analytic balances that are often constructed by grouping the individual items that comprise the balance of payments statement. Thus, the chapter explains and compares the coverage of various versions of the current account balance, the basic balance, and overall balances, such as the official settlements balance. It also points out the purposes that the various approaches are designed to serve, as well as the principal merits that have been claimed, and deficiencies that can be cited, for particular balances.
No preference is expressed in the new Manual, however, for any one method of appraising balance of payments developments. The interpretation to be placed on payments balances often has implications for policy or politics; the construction of those balances, therefore, is likely to be controversial. A further impediment to setting up standards in this field is that the situation differs from country to country and changes from time to time, so that universal or lasting recommendations cannot be formulated. The Manual thus stops short of attempting to specify any uniform presentation of a balance of payments statement for analytic purposes.