The Interim Committee of the Fund’s Board of Governors, in its communique of September 25, 1989, “encouraged the IMF’s Executive Board to continue improving the analytical and empirical framework underlying multilateral surveillance, including the measurement, determinants, and systemic consequences of international capital flows.” At a meeting in December 1989, the Executive Board decided that the Fund should undertake a study on the measurement of international capital flows. To this end, it was agreed that a working party of national and international balance of payments experts, drawn from industrial and developing member countries, be constituted under the chairmanship of Baron Jean Godeaux of Belgium. To support the Working Party, a small group of technical experts was organized and attached to the Statistics Department of the Fund. An interim report was submitted to the Managing Director in December 1990.

Establishment of the Working Party

The Interim Committee of the Fund’s Board of Governors, in its communique of September 25, 1989, “encouraged the IMF’s Executive Board to continue improving the analytical and empirical framework underlying multilateral surveillance, including the measurement, determinants, and systemic consequences of international capital flows.” At a meeting in December 1989, the Executive Board decided that the Fund should undertake a study on the measurement of international capital flows. To this end, it was agreed that a working party of national and international balance of payments experts, drawn from industrial and developing member countries, be constituted under the chairmanship of Baron Jean Godeaux of Belgium. To support the Working Party, a small group of technical experts was organized and attached to the Statistics Department of the Fund. An interim report was submitted to the Managing Director in December 1990.

This final report is presented by the Working Party in accordance with its mandate to investigate the principal sources of discrepancies in the main components of global capital flows and to consider courses of action to be taken by the Fund and national statistical authorities for improving the measurement of these flows over time. This initiative was prompted in large part by the recognition that major discrepancies in reported capital flows introduce a significant element of uncertainty into the conduct of economic policy. These discrepancies, which became apparent on a global scale in the 1980s (Table 3) and were accompanied by large errors and omissions in national balance of payments statements, arose against the background of dramatically accelerated changes in the environment for international capital flows, as outlined subsequently.3

Table 3.

Global Capital Account Discrepancies, 1983–89

(In billions of U.S. dollars; outflows ( – ))

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Source: Balance of Payments Statistics Yearbook, 1990.

Discrepancy between changes in official reserves and liabilities constituting foreign authorities’ reserves (LCFAR).

International Capital Markets in the 1980s

During the 1980s, international capital markets underwent unprecedented changes that gave rise to significant difficulties for the measurement and recording of capital flows. Most industrialized countries removed existing restrictions on cross-border capital flows; many innovative financial instruments were introduced; and financial markets became increasingly integrated in a global framework. Consequently, cross-border financial flows expanded rapidly and now greatly exceed international trade in goods or services. The main features of this evolution were financial liberalization, innovation, and the changing composition of cross-border financial flows. In this process, private capital flows outpaced official capital flows, and the private flows increasingly were arranged outside the traditional domestic financial intermediaries. Many new market participants became active in international finance.

Financial Liberalization

Withering of Exchange Controls

The end of the Bretton Woods system in the early 1970s and the generalization of floating exchange rates were accompanied by the removal of exchange controls. The liberalization of capital account transactions also took place in compliance with the Code of Liberalization of Capital Movements, which was introduced by the OECD, and with the Council Directives of the European Communities (EC).

By the mid-1960s, a number of industrial countries had relatively liberal policies on capital flows; elsewhere, restrictions remained important. The fundamental change in policy attitudes that began in the 1970s became widespread in the 1980s. This change was heralded by the almost “overnight” dismantling of exchange controls in the United Kingdom in October 1979 and the culmination of a longer-term process of liberalization in Japan in December 1980. The German authorities also significantly reduced indirect methods of restraining capital movements in the 1970s. Other industrial countries—including Belgium, France, and Italy—progressively liberalized cross-border financial transactions during the 1980s. Some developing countries also took important steps during the 1980s toward the liberalization of direct and portfolio investment regulations.

The liberalization or abolition of exchange controls had an important effect on many statistical systems and, in some cases (for example, the United Kingdom), there was a clearly substantial and adverse impact on the coverage and quality of the data. New sources, including surveys and estimation procedures, were introduced, and the process of shifting data sources is still in progress. These changes required rapid adaptation by national statistical agencies trying to keep pace with growing difficulties.

Deregulation of Market Entry

Until the 1970s, national financial systems typically were protected from the entry of foreign institutions into domestic markets as part of the effort to isolate domestic markets from external developments. Competition also was stifled by regulations that imposed numerous limitations on financial institutions’ activities and portfolio choices. However, as these limitations were increasingly perceived to hinder efficiency and distort credit allocation, many of them were discarded during the 1970s. Simultaneously, restrictions on the entry of foreign institutions were relaxed, and important strides were made toward greater openness and equality of competitive opportunity in banking and securities activities worldwide.

The United Kingdom—long open to foreign banks—freed the entry of foreign financial firms into securities activities in late 1986, in the context of London’s “Big Bang.” Further market and regulatory changes since 1986 have significantly widened the range of business opportunities available to both domestic and foreign firms. In other EC countries, entry of foreign institutions was eased in the context of the Second Banking Directive, which allows banks (including subsidiaries of non-EC firms) established in an EC member state to open branches freely within the Community. More recently, Japan eased restrictions on the entry of foreign financial institutions, and similar liberalization measures were undertaken in most other OECD countries.

Other Measures of Deregulation

In the 1980s, most industrial countries also underwent a process of extensive domestic financial liberalization that focused on deregulation of fees and charges and on dismantling restrictions on the permissible range of activities by financial institutions. Interest ceilings and other restrictions on remuneration for bank deposits, which were widespread in the United States, Japan, and certain European countries in the 1970s, were lifted or relaxed to the point of insignificance in all industrial countries. There has been a general blurring of distinctions between banking and the securities businesses and a growth of linkages between banking and insurance. From the viewpoint of statistical offices, one consequence has been that traditional sources of data, especially banks, cover less of the ongoing activity, and, even for banks, an increasing share of transactions take the form of operations in securities.

Financial Innovation

Against this background of increased liberalization and competition in the 1980s, deposit money banks and securities firms strove to offer their customers new financial instruments with broad market access and minimal transaction costs.4 A variety of new debt instruments emerged in the domestic U.S. market and the Eurodollar markets and spread to domestic financial markets in other countries. The introduction of floating rate notes (FRNs) in the early 1970s was an early innovation that rapidly overtook the traditional syndicated loan market. The introduction in 1981 of note issuance facilities (NIFs) was another important expansion of choices in instruments.5 More recently, equity-related debt instruments have become significant. The market for derivative products also developed considerably. New contracts for financial futures and options were introduced on major exchanges, while the turnover volume of existing types of contracts increased considerably. Finally, a variety of new instruments—complex swaps, hedges, and such arrangements as international mutual funds, unit trusts, and country funds for cross-border investments—were made available to investors.

Technological advances in communications and data processing supported the trend toward financial innovation. New developments in computer technology, software, and telecommunications permitted more rapid processing and transmission of information, improved settlement of transactions, and less costly confirmation of payments. By linking exchanges in different time zones, these advances ushered in 24-hour global trading for most markets. In consequence, the domestic financial markets of Europe, North America, and Japan became increasingly integrated and linked by large capital flows.

Trends in International Financial Flows in the 1980s

As a result of these processes of liberalization and innovation, international capital flows expanded rapidly in the course of the 1980s.6 After 1982, divergent saving and investment patterns among industrial countries resulted in large current account imbalances and were financed by major shifts in capital flows. The sum of the current account deficits of the industrial countries increased from an average of $60 billion in 1982–83 to more than $200 billion by the end of the decade. The scale of gross capital flows, stimulated by increased cross-border banking and securities activity, the development of the offshore (Eurocurrency) markets, and the entry of foreign institutions into domestic markets, expanded even more rapidly. Private financial flows were the most dynamic source of capital flows and played an increasingly important role in the financing of current account imbalances among industrial countries. Scaled against the huge volume of international financial transactions taking place, the discrepancies in recorded international capital flows are relatively small.

Cross-border bank lending expanded significantly, but irregularly, in the 1980s. The total of outstanding international bank credit (net of interbank claims) rose from $175 billion at the end of 1973 (equivalent to 5 percent of industrial countries’ annual gross domestic product) to $3,430 billion at the end of 1990 (about 20 percent of industrial countries’ annual GDP). The volume of daily transactions on the exchange markets was boosted by the liberalization of interbank transactions; in 1989, turnover reached $120 billion per day in New York alone. Bank lending to nonbanks in industrial countries expanded only moderately; borrowers preferred to tap the bond markets. Following the onset of the debt crisis in 1982, bank lending to developing countries was sharply reduced, as a reflection of the serious debt-servicing difficulties of certain countries, and creditworthy sovereign borrowers made greater recourse to the bond markets.

Capital flows in recent years have been characterized by increasing reliance on securities, that is, a greater use of bonds and other debt instruments in comparison with financing provided by deposit money banks. This change alone weakened the statistical systems that depended largely on reports from financial intermediaries. Syndicated loans were increasingly replaced by issuance of international bonds or other types of Euro-market paper. The international bond market expanded continuously during the 1980s, but was mainly limited to borrowers from industrial countries. The estimated outstanding stock of international bonds increased from about $260 billion at the end of 1982 (equivalent to 3 percent of industrial countries’ annual GDP) to about $1,400 billion at the end of 1990 (more than 8 percent of their annual GDP).

Cross-border equity trading also was a dynamic segment of the international financial markets in the 1980s; the volume of international equity transactions exceeded $1,500 billion by 1989, in comparison with only $73 billion a decade earlier. Foreign investors increased their portfolio allocation in foreign securities in order to take advantage of possible gains abroad and to hedge against domestic risks. Traditional direct foreign investment was augmented by large cross-border mergers and acquisitions and international joint ventures, especially in the United States and the European Community.

Economic Policy Concerns

Progressive deterioration of the quality of information on international capital flows can undermine the conduct of national economic policy and international policy coordination in a number of ways:

  • a. Inconsistencies in current and capital account recording at both the national and global level may indicate errors in national information on saving and investment. Such errors may mislead policymakers in basic choices about fiscal and monetary strategies.

  • b. With greater freedom for capital to react to shifts in policy, it is important to anticipate how monetary policy actions may be affected by cross-border capital flows. For example, an intended tightening of credit markets may be frustrated by capital inflows, or an intended increase in taxes may be aborted by a capital outflow. Similarly, better information about capital flows may help to guide exchange rate policy, especially when capital flows have a significant immediate impact on the exchange markets.

  • c. The enhanced speed and volume of international financial transactions also create greater exposure to possible crises in the clearing systems for international banking accounts, should a major participant be unable to meet scheduled obligations. The availability of accurate and timely data on capital flows can help national authorities assess such risks.

  • d. There are now many occasions when groups of countries seek to coordinate their responses to problems in the international economic system, or when the IMF exercises its surveillance function. At such times, timely and credible data on relevant developments in capital flows are vital.

  • e. It is important for the authorities and the public to have accurate information on the structure of the capital flows affecting a country, that is, on the distribution between relatively stable private flows (such as direct investment), flows of liquid private capital (such as short-term deposits in banks), or interofficial financing. Changes in this structure and in the terms of financing may have policy implications.

  • f. For direct investment, capital flows data giving information on the types of enterprises being financed are useful for analysis of the functioning of the host and creditor economies.

  • g. Countries with large foreign debts and their creditors need to have accurate statistics about such debts and the ways in which capital flows, both inward and outward, are affecting debt management.

Additional instances can be listed, but the Working Party’s main concern about the connection between capital flow statistics and the policy process can be stated succinctly: there are strong indications that this body of information on which good economic management depends is undergoing a serious and progressive deterioration. The size of recorded discrepancies in the global capital account is not the only sign of deterioration. Many errors in the compilation of such data may be offsetting, or transactions may be missed entirely. Thus, problems with the figures may be worse than is immediately apparent. Concerns such as these contributed to the decision to set up the present Working Party.

It is crucial to bear in mind that research on international capital flows is far more complicated than work on current account transactions. For the latter, classifications are clearer and transaction balances for a larger number of component accounts (such as trade, travel, investment income, and transfers) should by definition be zero for the world as a whole. Thus, there is an indication of how much correction is needed for each principal category. With capital flows, however, there is much greater likelihood that the two sides of the same transaction may be recorded under different rubrics in national balance of payments accounts. For example, while the balances for direct and portfolio investment should approach zero at the global level, a capital outflow recorded as a direct investment by the creditor country may be recorded under some other category by the host country if different classification criteria are used. Similarly, an increase in a country’s reserves in the form of securities will be recorded as portfolio investment in the country issuing the securities. Consequently, when the researcher finds a discrepancy in any of the capital account categories (see Table 3), there is uncertainty as to whether the problem is one of classification differences or whether one or the other country simply has erroneous or missing data. The categories combined in “other” sectors are subdivided by type of transactor, so in this rubric the problems of matching inflows and outflows are even more severe.

Working Party Program

The Working Party’s first meeting was held in March 1990 in Washington; subsequently, it met at approximately three-month intervals. From the beginning, its aim was to uncover and correct problems in global capital accounts, whether or not such corrections raised or lowered the global discrepancies. The Working Party decided to focus on a four-year interval, 1986 to 1989, and it organized its study of international capital flows on several levels. Each main category of capital flows was studied intensively on a global scale. Data reported by many individual countries and the procedures used to collect such data were reviewed and discussed with national compilers. Certain studies were carried out to test the applicability of alternative data sources, and a large number of specialized reports and analyses were provided by members of the Working Party, the technical staff, and some outside experts. The research drew extensively on the information and experience of the Fund’s Statistics Department and also was greatly assisted by the professional staffs of the World Bank, OECD, BIS, and Statistical Office of the European Communities (Eurostat).

The Working Party’s principal lines of inquiry were through compilers in individual countries, especially those nations with large capital flows. It established close contact with many countries to consult with them about the details of their published accounts and explore their concepts and procedures. At an early stage of the research, it became apparent that much more than the published capital accounts would be needed. The Working Party therefore designed and circulated to about 70 countries a “Special Questionnaire on International Capital Flows.” The questionnaire requested expanded details of countries’ capital flows, investment positions, income accounts, and statistical procedures. The responses led to many insights into country practices and statistical weaknesses and also served as a basis for follow-up inquiries about important points. At a later stage, the Working Party conducted special surveys of smaller groups of countries to obtain additional information on direct and portfolio investment, on the composition of foreign exchange reserves, on debt statistics, and on details of banking data submitted to the BIS as compared with banking figures in the balance of payments accounts.

Of particular value to the Working Party were the Fund’s international banking statistics (IBS), which are based primarily on the BIS system, data on international securities collected by the BIS, data on cross-border debt collected by the World Bank, and specialized compilations developed by financial market participants and statistical services. These external sources provided, to some degree, a check on certain aspects of countries’ national data, especially for bank-related transactions and transactions in portfolio securities. Wherever adequate geographic details were available in balance of payments accounts, consistency among the accounts of partner countries was also checked. However, geographic details are limited, so bilateral comparisons yielded significant results primarily for direct investment.

Findings for Major Capital Flow Categories

The global capital flow discrepancy indicates that recorded capital outflows have been relatively understated. This bias is consistent with the earlier findings of the Working Party on the Statistical Discrepancy in World Current Account Balances as to the major sources of the discrepancy in the measurement of investment income.7 In the sections that follow, many specific corrections have been suggested for transactions as reported by individual countries, and results have been grouped by type of capital flow. Suggested adjustments have been summarized at the global level in Table 4.8

Table 4.

Global Capital Account Discrepancies and Adjustments, by Major Components, 1986–89

(In billions of U.S. dollars; outflows ( – ))

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Balance of Payments Statistics Yearbook, Part 2, 1990.

Adjustments to each discrepancy include relevant corrections to LCFAR as described in Chapter 8.

Direct Investment

Most of the problems with direct investment statistics have arisen from failure to collect adequate data or from deviations from international standards as established in the Balance of Payments Manual. On the basis of research detailed in Chapter 3, the Working Party found that extensive modifications are indicated for reported capital flows, especially for reinvestment of earnings. The suggested adjustments correct for misclassifications and for missing or inaccurate data in national sources. (Statistical procedures to deal with these problems also are suggested in Chapter 3.) The Working Party’s adjustments have reduced considerably the original pattern of annual net global outflows for direct investments.

The Working Party believes that a crucial factor in improving direct investment statistics is closer adherence to the requirements of the Fund’s Manual. In particular, surveys of direct investors and affiliates are needed in order to compile information on “noncash” transactions such as reinvestment of earnings. National compilers also can benefit (as is demonstrated in this report) from using data collected in partner countries when domestic sources are inadequate.

Portfolio Investment

Most of the recent innovations in international financial practices have borne directly on the measurement of transactions in securities. Consequently, the difficulties of capturing data on these transactions in national statistical systems have grown to the point where the validity of some of the available data is increasingly in doubt. Under current practices the possibilities for verifying the accuracy of data on cross-border purchases and sales of securities are quite limited. The main avenue for verification of national data is comparison with independent statistics on new issues and redemptions of securities, together with some detailed data compiled in a few countries. The Working Party has employed figures collected by the BIS on new bond issues and redemptions and on outstanding amounts of bonded debt as major reference points.

Reference to the BIS bond data and consultations with individual countries have turned up a number of cases in which corrections to portfolio flows were indicated (see Chapter 4). On the basis of this research, a variety of adjustments to recorded data can be recommended to national compilers. The net result of these adjustments, shown in Table 4, has been to add net inflows to the Yearbook-reported balances in each of the four years under study. These adjustments mainly reflect transfers to the portfolio sector of international bond sales that were recorded by a number of borrowing countries as loans under “other capital.” Almost all such adjustments were made to the accounts of the issuers of securities, since the treatment by, and residence of, the purchasers was usually unknown.

Other Capital

Capital flows grouped under the broad heading of “other capital” consist of flows not included in direct investment, portfolio investment, reserves, or liabilities constituting foreign authorities’ reserves (LCFAR). In the Yearbook accounts, this “other” group is subdivided by major category of resident transactor: (1) official, (2) deposit money banks, and (3) other private nonbanks (including some public agencies). “Other capital” flows include a wide variety of financial activity, ranging from trade credit and deposits with foreign banks to marketable short-term instruments and loans from foreign banks, governments, and nonbank lenders. The private nonbank group includes many types of financial institutions (such as insurance companies, finance companies, and security dealers) that have large cross-border flows. Many countries have tended, moreover, to categorize as “other” any capital flows that cannot be specifically identified. As mentioned earlier, the sector accounts in “other capital” are not individually “symmetric” across the world, nor do they cover all transactions of the sectors. When consolidated, however, they should balance at the global level, and it is only at that level that balance should be expected.

The main findings of the Working Party in the “other capital” category have resulted from comparisons of IBS data—on a flow basis as calculated by the IMF—with national balance of payments figures on changes in the claims and liabilities of private nonbanks with banks resident in other countries. While many countries have captured the external operations of their banking sector fairly accurately in national balance of payments statistics, most have experienced great difficulty in obtaining reliable data from private nonbanks on their claims on or borrowings from foreign banks. Consequently, the coverage of this activity by many countries is deficient.

Data reported to the BIS and the Fund by banks in the principal financial centers can be used to derive the amounts deposited with them and borrowed from them by residents of individual foreign countries (see Chapter 6). This information can be compared, in principle, with corresponding data in the balance of payments accounts of countries where the depositors and borrowers reside, although few countries have closely matching data categories. If the derived data clearly show a larger volume of flows (or stocks) vis-à-vis foreign banks than does the national balance of payments accounts, however, it is reasonable to interpret the difference as an indication of the extent to which the balance of payments accounts are deficient.

The statistical adjustment to “other capital” averaged close to –$59 billion over the 1986–89 interval under review and accounted for the bulk of the net reduction in the global imbalance achieved by the Working Party. As shown in Table 5, about half this adjustment, close to –$30 billion, was derived from the international banking data. The table also shows that adjustments to recorded capital flows of private nonbanks dominate these results. This was by far the largest single block of missing capital outflows that the Working Party was able to identify. However, as discussed in Chapter 6, comparisons between the balance of payments and IBS data sources must be used with caution. On a global scale the results indicate the general size of omissions, but at the individual country level, national compilers should make a specific evaluation of the quality of their own data and decide whether their accounts could be improved by substituting the IBS/BIS figures. A number of countries have already begun to use these data.

Table 5.

Adjustments to “Other Capital” Indicated by International Banking Statistics, 1986–891

(In billions of U.S. dollars; outflows ( – ))

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Adjustments for nonbanks are described in Chapter 6. Adjustments for deposit money banks are for offshore financial centers and are described in Chapter 9.

Adjustments for deposit money banks in Table 5 bring into the world totals the banking activity in offshore financial centers (OFCs) that is omitted from national balance of payments statements. These amounts are reported directly by the OFCs in the context of the IBS statistics and are therefore net additions to capital flow totals rather than adjustments to existing estimates as is the case for nonbanks. The banking adjustments were part of a broader picture for OFCs that is explained in Chapter 9.

Adjustments to the “other capital” category, apart from those derived from banking data, consist mainly of reclassifications that shift transactions into the portfolio investment and LCFAR categories. An average inflow of about $10 billion per year has been removed from the resident official sector of “other capital” in the 1986–89 period and shifted into portfolio investment flows. Similar amounts have been shifted from deposit money banks into portfolio investment. Data adjustments for short-term securities also affect this category. (These changes are described in Chapters 4 and 5.)

In establishing the terms of reference for the Working Party, the Executive Board called attention to the problem of concealed international capital flows associated with drug money and other illegal activities. The Working Party investigated various aspects of such flows, as well as the effects on reported capital flows of so-called capital flight. Its conclusion was that information available to statistical agencies on such activities was far from sufficient to allow for a separation of such financial dealings from the general run of international financial traffic (see Chapter 11).

Almost by definition, capital flight has not been registered in the capital-exporting country but often may have been recorded in recipient countries. Thus, this phenomenon may well be a significant contributor to the observed global excess of recorded inflows over outflows. However, estimates of the extent of capital flight have been wide ranging, and they cannot identify countries where the funds were invested. The amount of capital flow associated with drug trafficking is also highly uncertain, but surely is much smaller than commonly cited estimates of the retail value of drug sales in national markets. Moreover, these flows merge indistinguishably with other kinds of poorly recorded outflows.

Reserves and Liabilities Constituting Foreign Authorities’ Reserves

In principle, transactions in foreign exchange reserves, as reported by holders, and in LCFAR, as reported by countries where the funds are invested, should balance at the global level but, in practice, they do not. As shown in Table 3, net increases in reserves (outflows) reported by asset holders generally exceed the LCFAR inflows reported by obligors. The imbalance between these flows has implications for discrepancies in other categories of capital flows. The Working Party investigated the reserves/LCFAR discrepancy primarily from the reserves—or asset—side of the picture (see Chapter 8). For the purposes of this study, a large number of countries provided detailed information on the types of instruments (such as securities and deposits) in their reserve transactions for the 1986–89 period. This information enabled direct comparisons of reserve movements—by type of instrument—to be made with LCFAR transactions as reported by debtor countries. The same data made it possible to isolate certain sources of error in the LCFAR figures, to correct the reserves/LCFAR imbalance, and to make additional adjustments to the portfolio and other capital accounts.

As part of its reserves-related work, the Working Party also found problems with the recording, by some members of the European Monetary System (EMS), of gold swaps with the European Monetary Cooperation Fund. These problems required adjustments to the reported foreign exchange and gold transactions of several EMS-member countries.

Overall Statistical Results

Adjusted Global and Regional Accounts

The Working Party’s statistical results affecting the world capital account can be integrated with adjustments to the current account prepared each year by the Fund on the basis of the 1987 Report on the World Current Account Discrepancy. The initial and revised views of world patterns of international transactions are shown in Table 6. Comparisons of the reported and adjusted balance of payments accounts of major country groups reveal the following major differences:

Table 6.

Global Balance of Payments Accounts As Reported and Adjusted, 1986–891

(In billions of U.S. dollars; outflows ( – ))

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Current account as adjusted by the Statistics Department, plus adjustments by the Working Party for reinvestment of earnings and for special financial institutions; capital account as adjusted by the Working Party.

World totals as shown indicate discrepancies, because in principle these global aggregates should total to zero.

The Bahamas, Bermuda, Cayman Islands, Gibraltar, Hong Kong, the Netherlands Antilles, Panama, and Singapore.

  • a. The large excess of debits in the current account has been nearly eliminated. There was a substantial addition of net credits to developing countries and a smaller addition to industrial countries. The added credits were primarily income on portfolio investment and unrequited transfer receipts.

  • b. Although a sizable discrepancy remains, the excess of credits in the global capital account (nearly as large as the opposite discrepancy in the current account in 1988 and 1989) has been greatly reduced by the adjustments suggested by the Working Party. The effect of the adjustments has varied on an annual basis, but for the entire four-year period there was only a minor change for the industrial countries. For the developing countries (other than OFCs) there was a drop from an average annual net inflow of $12 billion, as reported, to a much smaller $1 billion inflow. The adjustments made by the Working Party to create international capital accounts for the OFCs resulted in increased net outflows—from an annual average of about $5 billion to nearly $14 billion.

  • c. Finally, the generally downward shift in the regional errors and omissions reflects the fact that positive adjustments made to the current account were larger than negative adjustments made to the capital account. Nevertheless they provide an alternative view of the broad economic relationships among some major country groupings and provide a point of departure for further explanations of the measurement problems that remain.

Actions Needed

On the basis of its studies, the Working Party has made a series of recommendations for actions to be taken at the national and international level to improve the data on international capital flows. It believes that implementation of these actions would produce significant gains in the quality of data available to policymakers and the public. The role of the Fund in carrying forward these recommendations will be crucial. Since capital flow adjustments are very heterogeneous and specialized, the Fund will need to coordinate its work with the activities of national compilers. Many of the specific findings of the Working Party (including much country detail not shown in this report) can be used by the Fund in reviewing capital accounts reported by countries in the future.

All countries can benefit from greater accuracy in their international capital accounts, but those whose transactions weigh heavily in the world totals have a special responsibility to improve the quality of their statistics. As Table 7 shows—apart from some OFCs for which comparable data are not available—relatively few countries account for the major part of recorded world capital flows. The Working Party recommends that these leading countries make a particular effort to upgrade and harmonize their capital account statistics.

Table 7.

Countries Ranked by Reported 1986–89 Capital Flows1

(In billions of U.S. dollars)

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Source: Balance of Payments Statistics Yearbook, Part 2, 1990, Table C-13.

1986–89 average of absolute values of capital inflows plus capital outflows.

Prospects and Costs

Finally, the Working Party is concerned that all the evidence points to a progressive degradation of the quality of data in international capital flows. For example, the recently compiled 1991 Yearbook shows a continuation of large global capital account imbalances. In the long run, basic improvements in the data on capital flows can be achieved only when national compilers have the active support of officials responsible for policy decisions. In order to accomplish such improvements, many countries may have to restructure or adapt their compilation procedures. In that connection, the new Balance of Payments Compilation Guide prepared by the Fund will be useful.

The Working Party recognizes the need to contain costs and reporting burdens but believes it is possible, especially with modern computing facilities, to enhance the quality of balance of payments data at moderate expense. To a large extent, the costs associated with adapting compilation systems to new scales and forms of capital flows are transitional rather than ongoing. Of course, national compilers will continue to depend to a considerable extent on the willingness and ability of market participants to provide the rather specialized data needed for the preparation of the capital accounts. Certainly, a primary requirement for securing this cooperation is a convincing explanation to data suppliers that these data are essential and that responsible national authorities give a high priority to supporting this statistical work.

Addendum: Revised Data from the 1991 Yearbook

As the Working Party was completing its assignment, the Statistics Department at the Fund made available the statistics to be published in the 1991 edition of the Yearbook. The new global capital account data are shown in Table 8 (compare with Table 3).

Table 8.

Global Capital Account Discrepancies, 1984–90

(In billions of U.S. dollars; outflows ( – ))

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Source: Balance of Payments Statistics Yearbook, 1991.

The new edition contains revised data for the period to 1989 and initial figures for 1990. At the global level the revised figures show somewhat larger net positive discrepancies up through the 1989 peak. The 1990 discrepancy is about equal to the 1986–89 average of the data in Table 8. Among the principal components, there are a few notable shifts:

  • a. For direct investment a much larger negative discrepancy emerges in 1990; about half of the rise reflects an increase of $13 billion in net outward reinvestment of earnings. The largest net revision to national data apparent at this writing was for the United States, which raised net inward direct investment flows by $11 billion in 1987.

  • b. For portfolio investment, there is some increase in the net positive discrepancy reported for 1989, but the size of the imbalance declines in 1990.

  • c. The heterogenous “other capital” category is not significantly altered for the 1986–89 period, but in 1990 an exceptionally large net positive balance emerges. The main changes in 1990 are large net inflows reported for both deposit money banks and the nonbank private sector. Banking inflows may reflect the investment of the large increase in global reserve assets reported for the year that is not matched by recorded LCFAR.

  • d. Finally, the increase in reserve assets reported for 1990 is far in excess of the reported increase in LCFAR. This could reflect a shift in the holdings of foreign exchange reserves to banks in countries that fail to report such liabilities as obligations to reserve authorities. Thus, the imbalances in the “other capital” and “reserve/ LCFAR” categories may be closely related. Some further analysis would be in order. More generally, it can be seen that large discrepancies of opposite signs continue to be reported for the global current and capital accounts. As noted in this report, although many factors are at work, a strong element linking these discrepancies is the difficulty of recording certain types of capital outflows and of measuring the income receipts corresponding to the rising stock of external assets not recorded in the relevant capital-exporting countries.