Trends in the Flow of International Private Capital, 1957-65

SUBSTANTIAL GROWTH has occurred in the flow of private capital over the last eight or nine years. Nevertheless, it is a common contention, at least among the less developed countries, that a good deal more could be usefully absorbed. By its very nature, however, private capital tends to flow toward areas of greatest potential yield, and these are not always the less developed countries. This paper attempts to review developments in the flow of private capital during 1957–65 within the limitations of the basic data.

Abstract

SUBSTANTIAL GROWTH has occurred in the flow of private capital over the last eight or nine years. Nevertheless, it is a common contention, at least among the less developed countries, that a good deal more could be usefully absorbed. By its very nature, however, private capital tends to flow toward areas of greatest potential yield, and these are not always the less developed countries. This paper attempts to review developments in the flow of private capital during 1957–65 within the limitations of the basic data.

SUBSTANTIAL GROWTH has occurred in the flow of private capital over the last eight or nine years. Nevertheless, it is a common contention, at least among the less developed countries, that a good deal more could be usefully absorbed. By its very nature, however, private capital tends to flow toward areas of greatest potential yield, and these are not always the less developed countries. This paper attempts to review developments in the flow of private capital during 1957–65 within the limitations of the basic data.

Despite appreciable progress since World War II in the compilation of balance of payments statistics, global analysis of private capital flows remains a particularly frustrating field of study. Even a high degree of sophistication in the collection and compilation of capital flow data is no guarantee of incontestable accuracy. This fact is indicated, for instance, by the U.S. balance of payments estimates, which in each of the last six years have shown substantial debit errors and omissions (aggregating almost $5 billion) directly following a succession of years of large credit errors and omissions. While the absolute amount of errors and omissions cannot be entirely attributed to capital movements, substantial changes in errors and omissions are likely to reflect to a large extent changes in unrecorded capital transactions.

This paper is divided into five sections. The first section examines the statistics on a broad global basis in an attempt to gauge the rough magnitude of flows between the industrial and nonindustrial countries, analyzed between long-term and short-term capital. In the second and third sections, more detailed consideration is given separately to individual countries’ figures for long-term and short-term flows and the magnitude of countries’ errors and omissions items. In the first three sections, the review is based on the annual averages for two four-year periods, 1957–60 and 1961–64. Section IV examines the annual figures to determine, where possible, the effect of trend and random influences. In Section V, detailed consideration is given to the U.S. figures for private capital flows. It should be noted that the paper as a whole deals only with statistics for some 74 countries reporting data on their balance of payments to the Fund and, therefore, falls short of universal coverage.

Before proceeding with a review of developments, it may be useful to outline some of the broad problems of aggregating the data, and of reconciling the statistics of flows between countries and areas. The difficulties stem from differences of definition, timing, and coverage. The data used were obtained primarily from the Fund’s Balance of Payments Yearbooks, for which the principles of classification are, as far as possible, uniform from country to country. In the Yearbook, movements of capital are classified by the sector of the domestic creditor or debtor involved in transactions with foreigners—the five sectors being the “private” and “central” monetary sectors, the “central” and “local” government sectors, and the private nonmonetary sector. This paper is limited to a consideration of private monetary and nonmonetary (including local government) sector capital movements only. Central government capital movements are not examined, but the errors and omissions item for each country is taken into consideration.

Although the Yearbook sectors are defined on an institutional basis, the main purpose of the sector classification itself is to distinguish assets and liabilities with different behavior. The border line between the sectors depends to some extent on the behavior and functions of the underlying transactions. In the Yearbook, public corporations whose international transactions are similar to those of private corporations are classified with the private sector. But transactions of public corporations that are instruments of central government policy are allocated to the sector for central government and are not, therefore, included in this study. Liabilities of one sector, e.g., the private nonmonetary sector, that are guaranteed by another sector, e.g., the central government sector, are allocated to the sector of the debtor rather than to that of the guarantor. By definition, the global figures for private capital movements contain asymmetries, because certain transactions classified as inflows of private capital by one country are represented as outflows of government capital by the other party to the transactions (e.g., foreign private sector borrowings from the U.S. Export-Import Bank). Conversely, outflows of private capital from one country may be inflows of government capital for the borrower (e.g., loan subscriptions by U.S. private individuals to issues by foreign governments in the U.S. market).

Several other sources of asymmetry should be borne in mind in interpreting aggregate capital flow figures. For instance, asymmetry results when capital, recorded for the private sector of the recipient, comes from international nonmonetary institutions such as the International Bank for Reconstruction and Development (World Bank), whose own transactions are not covered in the tables. Some asymmetry also results from the fact that reinvestment by foreign-owned subsidiary companies of their undistributed earnings is not universally included by reporting countries. Timing may also be a problem, but the magnitude of its influence is difficult to assess. Two four-year periods (1957–60 and 1961–64) have been set up in the analysis in an attempt to minimize the effects of timing disparities, although annual data are also separately analyzed.

Finally, of course, coverage is undoubtedly deficient. This paper covers 14 industrial and some 60 nonindustrial countries. A considerable gap is created by the omission, because of a dearth of statistics, of about 40 other countries and dependent territories, together with the Soviet countries and Mainland China. Among the important omissions are the overseas franc area countries, some Middle East oil-producing countries, and Hong Kong. These missing countries and territories are likely to have been, on balance, net importers of private capital.

I. Flows of Capital from the Industrial to the Nonindustrial Countries

The published statistics confirm, as Table 1 shows, the long-accepted notion that the total net flow of private capital from the industrial to the nonindustrial countries is substantial. This flow seems to be clearly demonstrable, however, only for long-term capital; for short-term capital the reverse situation may more usually apply.

Table 1.

Net Private Capital Flows and Errors and Omissions, Averages 1957–60 and 1961–64, and 19651

(In millions of U.S. dollars)

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Sources: International Monetary Fund, Balance of Payments Yearbook, for various years, and country publications.

Outflow (—).

Covers direct investment (including, where published, reinvested earnings), portfolio investment, loans, long-term commercial credits, local government long-term capital, and miscellaneous transactions such as purchases and sales of noncommercial real estate.

Includes changes in commercial bank assets and liabilities, mainly of a short-term character (for the United States and United Kingdom, in any sector’s liquid or quasi-liquid liabilities to foreign nonofficial holders), private sector deposits in foreign banks and other liquid foreign assets, commercial short-term debt, and miscellaneous transactions.

The United States; EEC countries (Belgium-Luxembourg, France, Germany, Italy, and the Netherlands); EFTA countries excluding Portugal (Austria, Denmark, Norway, Sweden, Switzerland, and the United Kingdom); Canada; and Japan.

About 60 countries; omits about 40 countries and territories, including the Soviet countries, Mainland China, overseas franc area countries, some Middle East oil-producing countries, and Hong Kong.

On long-term account, there seems to be a reasonably clear indication that the net outflow of private capital from the industrial to the nonindustrial countries has averaged over US$2 billion a year in the past decade. In both 1963 and 1964 it exceeded $3 billion; in 1965 preliminary figures suggest a very sharp rise to $4.8 billion (Table 1). The negative “residual” item for long-term capital that is observed in the table is the result of many influences, some of which may have offsetting signs. However, two factors are especially important. First, the “residual” is partly explained by the failure of many countries to record the profits due, but not remitted, of subsidiaries operating in those countries (the capital outflow figures for the United States and the United Kingdom in this paper include undistributed earnings of more than $1 billion a year, but much of this is not reflected in counterpart capital receipts figures among the beneficiary countries). Second, the negative “residual” may also be explained by the omission from the table of many less developed countries that are likely to have been net recipients of long-term capital, but for which no data are available.

On short-term account, the industrial countries have clearly been net recipients. However, the “residual” for net short-term capital suggests considerable asymmetry in the reporting of short-term capital flows, and the direction of the net flows between industrial and nonindustrial countries is difficult to pinpoint, given the incomplete coverage of the data. In fact, it is widely held that net movements of short-term capital have not been from the industrial to the nonindustrial countries, but rather that there has been a persistent, if volatile, net flow of such capital in the opposite direction, stimulated by political or economic instability in the countries in which the flows originate. The published figures actually show a net inflow of short-term capital to the nonindustrial countries over the two four-year periods, but the large negative net errors and omissions item for these countries suggests that some capital outflows have passed unidentified. Flows so stimulated are probably rarely reversed, being reflected in a steady build-up of private deposits or other assets in North America and Europe. On the other hand, trade credits are also important in the short-term capital flow figures (and probably also in the errors and omissions items) for the nonindustrial countries. Such credits are constantly being reversed on settlement of the debt, but there tends to be a steady long-run rise in the outstanding total of these credits, making for a net short-term capital inflow into the nonindustrial countries. Whether this inflow is large enough to offset the outflows that result from political and related factors is difficult to determine.

Undoubtedly some of the figures missing from the short-term capital column in the table are hidden in the “errors and omissions” column. So far as short-term capital flight is inspired by political unrest, it is likely to be of a type that cannot accurately be identified, so that it may appear as a negative entry in the “errors and omissions” items of the nonindustrial countries—provided, of course, that there has been a corresponding credit entry recorded elsewhere in the balance of payments of the country concerned. However, a rather frequent method of exporting capital entirely eludes the balance of payments statistics of the capital-losing country; this outflow occurs when an exporter in nonindustrial country A underinvoices his exports, the margin going into a private account in perhaps industrial country B, the country importing the merchandise. Then, if country B records the transaction accurately, there is in Table 1 a recorded short-term capital inflow for the industrial country, but no recorded capital outflow for the nonindustrial country and, as a result, asymmetry in the short-term capital figures. A similar asymmetry can arise from overinvoicing of imports.

While reasonably satisfactory conclusions can be drawn from the figures in Table 1 for net long-term and short-term capital, it is naturally more difficult to interpret the “errors and omissions” column of the table. As suggested above, part of the net negative figure for the nonindustrial countries probably belongs in the “short-term capital” column. But it is more difficult to allocate the net positive errors and omissions of the industrial countries. To some extent, no doubt, unrecorded current account items contribute to the errors and omissions of the industrial countries, but it is likely that unrecorded capital is the more significant element. Two countries have especially large net errors and omissions. Switzerland, for which little private sector capital is identified, contributed heavily before 1965 to the credit errors and omissions figures for the industrial countries (about $700 million a year during 1961–64). There could be inadequate coverage of some of Switzerland’s current account items (for instance, travel receipts), but since many types of capital transactions are not revealed in its published balance of payments statistics, there is some reason to believe that the credit for net errors and omissions reflects in large part unrecorded capital inflows. It is impossible to determine the exact magnitude of this private capital flow into Switzerland, much less to divide it into long-term and short-term; the figures suggest that it might in many years have been of the order of $300–500 million. The United States also has a particularly large net errors and omissions item. During 1957–59 the entry was positive; during 1960–65 it was negative and averaged some $800 million a year. (Consideration is given to this in Section IV, below.)

II. The Pattern of Long-Term Private Capital Flows

Although there has been a net outflow of long-term capital from the industrial countries as a group, the predominant sources of this net flow in 1957–60 and 1961–64 were the United States and the United Kingdom (Table 2).

Table 2.

Net Long-Term Private Capital Flows, Averages 1957–60 and 1961–64

(In millions of U.S. dollars)

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Sources: See Table 1.

Including, where available, commercial bank and local government long-term capital.

Including reinvested earnings.

Transactions of oil and insurance companies appropriate to this item are included indistinguishably in “Other net long-term.” Figures for 1957 are estimated.

Not available separately; included with “Other net long-term.”

For 1957–59 not available separately; included with “Other net long-term.”

Includes an adjustment for repatriated Italian banknotes, a part of which, if details were available, would be more accugrately classified as short term (see Table 5).

Excluding Portugal.

For Austria, direct investment figures not available separately; included with “Other net long-term.” For Switzerland and for Sweden (before 1962), direct investment figures are not available and are part of errors and omissions (see Section III).

For Switzerland, includes issues and redemptions only of foreign bonds in Switzerland.

Includes some local government short-term capital.

Australia, Cyprus, Finland, Greece, Iceland, Ireland, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia. For Australia, data cover fiscal years ended June 30.

For these two periods, Table 2 divides long-term private capital into direct investment inflows and outflows, and other (net) long-term capital. The persistent negative asymmetry for direct investment and positive residual for other long-term capital suggests that some outflows classified as direct investment are not so recorded among the inflows of the recipients. These figures are also influenced by the asymmetrical treatment of undistributed profits and by incomplete country coverage (an assessment of the effect of which is attempted at the end of this section). Despite these problems, some useful conclusions can be drawn from the figures.

Direct Investment

The total supply of direct investment funds (emanating almost exclusively from industrial countries) grew at an impressive rate. In the first four-year period it averaged $3.8 billion a year, and by the second four-year period, some $4.7 billion (by 1964 it reached $5.5 billion, and by 1965, more than $6.7 billion—annual figures are considered in a later section). The main supplier of this direct investment capital was the United States, which accounted for roughly 70 per cent of the total. U.K. direct investment abroad accounted for nearly 15 per cent and the European Economic Community (EEC) countries for slightly less.

The direction of the flow of direct investment is also interesting. Almost 50 per cent of the recorded gross outflows from the industrial countries went to other industrial countries. Of the annual average gross outflow from the industrial countries of over $4.7 billion in the period 1961–64, some $2.2 billion represented investment in other industrial countries. Recorded direct investment receipts of the nonindustrial countries covered by this study amounted to $1.1 billion a year during the second four-year period, of which some $0.5 billion went to the 12 more developed nonindustrial countries.

The pattern of growth in direct investment from the first to the second four-year period suggests a decrease in the flow to the nonindustrial countries as a group. Most of the decline, however, was in the receipts of certain Latin American countries. Direct investment claims of the industrial countries rose by about 24 per cent, or roughly 6 per cent a year. But receipts by the industrial countries rose by 40 per cent, or almost 10 per cent a year. Among the industrial countries, the EEC countries were the pace setters. Direct investment in these countries averaged $890 million a year during the second four-year period, considerably more than double the annual rate of the preceding four years. Part of this increase represented direct investment by EEC members in partner countries within the group. But U.S. direct investment in the EEC area also rose appreciably.

Despite the change in direct investment in nonindustrial countries shown by the aggregate figures, all the areas, except Latin America, registered appreciably greater direct investment receipts in the second than in the first four-year period. The deterioration for the Latin American group was quite widespread, but it affected particularly the larger countries. Argentina, Brazil, Chile, and Peru, for instance, experienced a collective decline in annual net inflow of some $330 million between the two four-year periods. In addition, Venezuela, a particular case because of the significance of foreign oil investment, changed from being a net receiver of some $240 million annually for the first four-year period to experiencing net disinvestment of about $100 million annually in the second four-year period. Among the other Latin American countries, Mexico appears to have been the only one to receive a significant increase, in absolute terms, in direct investment capital between the two four-year periods.

Other Long-term Capital

For practical reasons, these figures have been shown net in Table 2—in fact, many countries do not publish separate receipt and payment figures for this item, and even if they did, a further subdivision by asset and liability would be necessary to permit a thorough interpretation of the flows. For the United States, the most important transactions included in “other long-term capital” are U.S. commercial bank long-term loans to foreigners and portfolio transactions in existing securities and in new issues, a rather less significant role being played by nonbank long-term loans and trade credits. For the other industrial countries, the inflow figures, in principle, cover receipts from non-U.S. sources, plus the bulk of the total outflow of “other long-term capital” from the U.S. private sector. For the nonindustrial countries, the inflow figures include receipts from non-U.S. sources, plus the rest of the outflow of “other long-term capital” from the U.S. private sector,1 plus some capital from the U.S. Government sector, together with some from international nonmonetary institutions.

The figures for “other long-term capital” in the table include a certain amount of direct investment capital that for various reasons is not separately identifiable. Nevertheless, they suggest that, on a net basis especially, the dominating, almost exclusive, source of supply is the United States. The significance of the United Kingdom is rather marginal—in fact, the net outflow figure in the table is mostly explained by the fact that the United Kingdom includes direct investments by oil and insurance companies indistinguishably in “other long-term capital.”

Table 2 also suggests that in the second four-year period Italy was an important net exporter of “other long-term capital.” However, interpretation of the figures for Italy is especially difficult. In recent years, Italians have found it profitable, for taxation and other reasons, to deposit Italian lira banknotes in accounts abroad and to reinvest subsequently in Italian securities from the foreign address. Since these investments cannot be distinguished from bona fide investments by “genuine” foreigners, the balance of payments statistics for investment receipts from foreigners as published by Italy are known to be overstated. However, the aggregate value of repatriated banknotes is known, and while some of these notes were probably legitimately exported in settlement for goods and services purchased abroad or, especially in 1962 and 1963, as genuine flight capital, the entire figure for repatriated notes has in this paper been entered as a debit against Italy’s “other long-term capital” credit figures. If it were possible to include only the genuine outflow, and to eliminate funds for current payments, the “other long-term capital” outflow figure for Italy in Table 2 would be smaller or perhaps be replaced by an inflow. In any case, most of the net debit entry probably represents a correction of the overstatement of the normally published inflow of “other long-term capital” rather than a genuine outflow of such capital.

The U.S. outflow was mainly in the form of subscriptions to new foreign issues on the U.S. market and U.S. commercial bank long-term loans to foreigners. The new issues averaged about $1.0 billion a year in 1961–64 while long-term loans by U.S. banks averaged $0.5 billion a year. The new foreign issues floated on the U.S. market were placed primarily by Canada. Of the average of $1.0 billion a year for new issues in 1961–64, Canada took a little more than 50 per cent. The balance was fairly evenly divided among Japan, Western Europe, Latin America, and the rest of the world (see Table 9). The bulk of the outflow of commercial banks’ long-term capital went to Western Europe, Canada, and Japan.

Some of the large and persistent positive residual for other net long-term capital in Table 2 is probably an offset to the similarly persistent large negative residual for direct investment. But much of it is explained by the fact that some private sector loan receipts had their counterpart as outflows from foreign government sectors, or from international nonmonetary institutions such as the International Bank for Reconstruction and Development (World Bank), the International Development Association, and the Inter-American Development Bank.

Although the asymmetries present in the “other long-term capital” figures make interpretation difficult, genuine growth in the flow of this capital apparently occurred from the first to the second four-year period, mainly benefiting Japan and the nonindustrial countries. For Canada (still the leading individual recipient) the inflow in the second period was little more than half that during 1957–60, while the average net inflow into the EEC countries was almost unchanged. Japan, however, became an important new recipient, borrowing especially heavily in 1962, 1963, and 1964 from the United States and Europe; furthermore the net receipts of the nonindustrial countries as a group rose to some $940 million a year for 1961–64, almost three times the average annual inflow for 1957–60. Table 2 shows that most areas within the nonindustrial group benefited. The exception was Africa/Middle East, where two or three of the politically more volatile members experienced a reduced net inflow or a net outflow. The more developed nonindustrial countries, with the exception of South Africa where there was a persistent net outflow for the entire period, received greatly enlarged inflows.

Before leaving this analysis of long-term capital, it may be useful to try to suggest the rough order of magnitude of the factors affecting the “residual” items for long-term capital in the tables above. This is attempted in Table 3, but it should be borne in mind that the estimates in that table lean very heavily on elements of subjective judgment.

Table 3.

Reconciliation of Long-Term Private Capital Flows, Averages 1957–60 and 1961–64

(In millions of U.S. dollars)

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Source: The figures above contain a number of personal estimates, based in part on a variety of published information including statistics from the International Monetary Fund, Balance of Payments Yearbook, and the U. S. Department of Commerce, Survey of Current Business, for various years.

III. The Pattern of Short-Term Private Capital Flows and Countries’ Errors and Omissions

From the preceding section, it is obvious that global analysis of private long-term capital flows is beset with problems. It is even more difficult to present a clear picture of private short-term capital flows. From time to time, crises in exchange markets have considerably disturbed an already volatile time series. For these reasons, the four-year time periods chosen for the over-all analysis may not be the best for a review of short-term flows. However, in a later section, annual figures are examined for evidence, such as there is, of trend and random movement. Table 4 gives details of changes in commercial bank assets and liabilities together with countries’ other net short-term capital statistics and their published figures for net errors and omissions. These data lead to some interesting conclusions.

Table 4.

Flows of Commercial Bank and Other Private Short-Term Capital and Net Errors and Omissions, Averages 1957–60 and 1961–64

(In millions of U.S. dollars)

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Sources: See Table 1.

Increase (—) in assets or decrease (—) in liabilities is capital outflow. For the United States and the United Kingdom, figures do not include liabilities to and claims on foreign official holders, but include certain liabilities of the nonbank sector.

Liabilities net of claims, and for 1957–60 including private short-term capital.

Included with errors and omissions.

Excluding Portugal. For Sweden other short-term capital, and for Switzerland other short-term capital and most commercial bank capital, is included with errors and omissions.

Includes net errors and omissions and, for 1957–60, commercial bank capital.

Australia, Cyprus, Finland, Greece, Iceland, Ireland, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia. For Australia, data cover fiscal years ended June 30.

Table 5.

Net Long-Term Private Capital Flows, 1957–651

(In millions of U.S. dollars)

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Sources: See Table 1.

Figures for 1965 are preliminary and include estimates. Footnotes to Table 2 apply also to this table but figures may differ slightly because of rounding. For Australia, figures relate to fiscal years ended June 30.

Canadian published figures (which do not include reinvested earnings, investments other than those of the controlling interests, and intercompany balances).

Contains offset for reinvestments by Canada on account of Columbia River Treaty.

For Italy, includes debit adjustments for total repatriated Italian banknotes. A significant proportion of the banknote movement is thought to result from the export of notes by Italians for subsequent long-term investment in Italy under a foreign address for tax avoidance and other purposes. Alternatively, some of the movement undoubtedly reflected genuine short-term flight capital, particularly in 1962 and 1963, when an adjustment would have been appropriate to the short-term capital figures in Table 7. (The proportion of the movement that reflects genuine payment for goods and services is probably small.) Since there is no way of accurately separating these elements, the entire adjustment has here been made to the “other net long-term capital” figures.

Commercial Banks 2

The figures in Table 4 represent changes in the foreign short-term assets and liabilities of commercial banks in the reporting countries. Unlike the direct investment claims and liabilities, the commercial bank asset and liability columns are not in theory mutually symmetrical; an increase in commercial bank assets (capital outflow) of one country is often not matched by an increase in the liabilities of a commercial bank in another. For example, the increase may have its counterpart in an increase in the liabilities or a decrease in the assets of a foreign central monetary authority. The matching entry may also occur in the private sector and will, errors and omissions excepted, appear in the figures of “other net short-term capital.” On the other hand, many of the industrial countries are at pains to maintain a relatively well-balanced commercial bank net position with quite large changes in both gross assets and liabilities. The review is here virtually confined, therefore, to observing the rate of growth of commercial bank assets and liabilities and the distribution of this rate of growth between countries.

There has in fact been a quite appreciable rate of increase in the accumulation of foreign claims by the world’s commercial banks. This increase probably reflects not only the development of the Euro-currency market but also increased claims in the form of trade credits of a traditional type extended by the industrial countries, together with some regular accumulation of foreign exchange assets. In 1957–60, commercial bank short-term claims rose by $1.0 billion a year (excluding the United Kingdom, Switzerland, and Canada, for which full details are not available). In the period 1961–64, claims rose by $2.7 billion a year (excluding again the United Kingdom and Switzerland, but including Canada). Leaving aside Canada, the accumulation of claims in the second period was double that in the first. Increases in claims of the U.S. commercial banks accounted for roughly one third of the total. The EEC countries as a group increased their claims substantially, especially Belgium, France, and Germany; for Japan the average increase in the second four-year period was more than four times greater than the average increase in the period 1957–60. Details are not available for 1957–60, but increases in claims of Canada’s commercial banks were very large in 1961–64. In the nonindustrial countries the asset holdings of the commercial banks expanded in the second period after little change in the first period; however, this expansion was more than offset by the accumulation of liabilities.

Commercial bank liabilities increased at a somewhat slower rate than that of assets, from an annual average of $1.5 billion a year in 1957–60 to $2.8 billion a year (excluding Canada) in 1961–64. Again the over-all totals are affected by the exclusion, through lack of data, of Switzerland, while the liability change shown for the United Kingdom in the table is actually net of claims. The increase in commercial bank liabilities to foreign nonofficial holders in the second period was more than double that in the first for the United States and the EEC countries, while the increase in Canada’s commercial bank liabilities, at least in the second period, almost matched the rise in assets. For the United Kingdom, a net increase in liabilities (net of claims) of $500 million a year during 1957–60 was replaced by a net decrease of over $200 million3 a year during 1961–64. In the nonindustrial countries, accumulation of liabilities by commercial banks also speeded up, largely reflecting credits obtained from the industrial countries.

The commercial banks in nonindustrial countries received some net capital inflow in both periods, and the inflow in the second period was a little larger than in the first. Still the amount was small compared with that received on net long-term account. As for the flows among the industrial countries, so many factors were present that it is very difficult to separate in the four-year aggregates the flows that resulted from trade credits from flows stimulated by interest differentials or from those that were purely speculative. The growth of the Euro-currency market (a function of all these influences) has produced, and been produced by, the build-up of a complex network of claims and deposit liabilities among the commercial banks of the industrial countries.

Other private short-term capital and countries’ net errors and omissions4

The figures for other private short-term capital shown in Table 4 are the net result of changes in the private nonmonetary sector’s short-term assets and liabilities. These liabilities represent short-term obligations to foreigners, mainly in the form of trade credits but also in the form of deposits by others than banks. Assets include foreign exchange holdings of the private sector and deposits in foreign banks, as well as private holdings of foreign government and corporate short-term obligations. Also included are short-term commercial claims arising from the financing of trade.

Although many reservations must be kept in mind in interpreting the data, the figures in Table 4 suggest some interesting features. Among the industrial countries, several were consistent net exporters of (other) short-term capital. The most important of these in recent years was the United States, for which net outflows occurred every year during 1959–64. Furthermore the size of the U.S. errors and omissions item suggests some unrecorded short-term capital outflows. For a number of years before 1959, however, the United States apparently had been a consistent net recipient of this type of capital. The U.S. figures are considered in more detail in Section V. Consistent net outflows of “other short-term private capital” were also recorded for France and Italy and, to a lesser extent, for Belgium and Norway during the period considered.

Among the recipient countries, Canada seems to have been the most prominent, although the figures shown in Table 4 for 1957–60 are a composite of commercial bank and other short-term capital and include errors and omissions. Both Germany and Japan were important recipients of such short-term capital during the second four-year period. The large errors and omissions for “other EFTA5 countries” is chiefly due to the figure for Switzerland, and it may be a reflection of some unrecorded short-term capital inflows, both commercial bank and other.

Among the nonindustrial countries, there seems to have been a considerable net outflow, part of it identified, but the bulk of it unidentified. The dominant influences in this movement probably were a fairly gradual increase in short-term trade credits received (capital inflow associated with increased liabilities to foreigners), rather more than offset by increases in deposits of residents of these countries in foreign banks, located in North America and Europe (capital outflow associated with increased foreign assets). Logically, the second influence might be expected to be less pervasive among the more developed nonindustrial countries, an expectation supported by the net inflow figures for other short-term capital plus the errors and omissions item for these countries in Table 4. In contrast, the picture for the Latin American countries was one of substantial net outflow; U.S. figures for bank liabilities to foreigners suggest a steady build-up of deposits by Latin Americans. For the Africa/Middle East group, the “other short-term capital” figures suggest an inflow that probably resulted mainly from expanding trade credits, but the rather large negative errors and omissions also suggest possible unrecorded capital outflow. A similar pattern is apparent in the figures for the other Asia group.

IV. Trends in the Annual Figures

While the comparison of annual averages for the two four-year periods, by smoothing random fluctuations, provides a fairly accurate indication of the magnitudes involved in the private capital flows of recent years, a brief look at the annual figures is also in order for purposes of distinguishing the trend, if any, and, especially for short-term capital, the rough extent of random and speculative influences. Annual figures for long-term capital are given in Table 5, changes in commercial bank assets and liabilities in Table 6, and details of other private short-term capital and countries’ errors and omissions in Table 7.

Table 6.

Changes in Commercial Bank Claims and Liabilities, 1957–651

(In millions of U.S. dollars)

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Sources: See Table 1.

Figures for 1965 are preliminary and include estimates. Footnotes to Table 4 apply also to this table, but figures may differ slightly because of rounding. The totals shown in parentheses for 1957–62 are not comparable with the totals for 1963–65 (see footnotes 3, 4, and 6).

Excluding, where available, long-term.

For 1957–62, liability figures are available only net of claims.

For 1957–60, commercial bank assets and liabilities are included with “other net short-term capital” (see Table 7). Also, for 1965, full details of commercial bank foreign assets and liabilities are not available; shown are changes in “selected foreign currency assets and liabilities of chartered banks in Canada,” which is the major component of commercial bank foreign assets and liabilities.

For Switzerland, the commercial bank figures cover only issues and redemptions of foreign bonds in Switzerland. All other private capital, both long-term and short-term, is included in errors and omissions (see Table 7).

For 1957–60, excludes liabilities to nonbanks, details of which are not available separately.

Table 7.

Other Net Short-Term Private Capital and Countries’ Errors and Omissions, 1957–651

(In millions of U.S. dollars)

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Sources: See Table 1.

Figures for 1965 are preliminary and include estimates. Footnotes to Table 4 apply also to this table but figures may differ slightly because of rounding. Figures shown in parentheses are not completely comparable with those that follow in the time series (see footnote 2).

Including net errors and omissions and, for 1957–60, net commercial bank assets and liabilities.

See footnote 2, above.

Long-term Capital

With the exception of 1957 and 1960, which appear to have been years of abnormally high investment, the total of countries’ direct investment abroad, as reflected in recorded increases in claims, moved steadily upward; it rose from about $3.0 billion in 1958 to $5.5 billion in 1964 and to almost $6.8 billion in 1965 (Table 5 and Chart 1). Between 1958 and 1965, U.S. direct investment abroad (which includes reinvested earnings) more than doubled, reaching $4.9 billion. U.K. direct investment abroad, which runs about one fifth as large as that of the United States, almost doubled; it was $760 million in 1965, and probably would have been greater if details of oil and insurance company investments included in “other long-term capital” were available separately. The aggregate annual increase in direct investment claims of the EEC countries quadrupled. In 1965, total direct investment abroad by the EEC countries exceeded that of the United Kingdom (although the figures include some inter-investment among the EEC countries).

Chart 1.
Chart 1.

Changes in Direct Investment Claims, 1957–65

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1967, 001; 10.5089/9781451956191.024.A001

Chart 2 shows that, as recipients of direct investment, the industrial countries are also prominent, at times absorbing more than one half of the gross outflows from industrial countries. Among these countries, the significant developments in the annual figures during 1957–65 provided in Table 5 were (1) the spectacular upswing in investment receipts by the EEC countries (from $150 million in 1957 to $1,350 million in 1965, some of which was intra-EEC investment); (2) a steady inflow into the United Kingdom (the high figure for 1961 reflects a $370 million Ford Motor Company investment); (3) a large relative increase in investment receipts by the “other industrial” countries (other EFTA and Japan) from $40 million in 1957 to $250 million in 1965, with Denmark and Japan accounting for most of the increase; and (4) an apparent substantial tapering off of direct investment in Canada6 since the high inflow of 1960.

Chart 2.
Chart 2.

Changes in Direct Investment Liabilities, 1957–65

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1967, 001; 10.5089/9781451956191.024.A001

1 Canadian published figures (which are considerably lower than U.S. published figures of direct investment in Canada (see footnote 2, Table 5)).2 Argentina, Brazil, Chile, Peru, and Venezuela.3 Fiscal years ended June 30.

The annual figures in Chart 2 also provide an interesting picture of the direct investment receipts of the nonindustrial countries. For the more developed nonindustrial countries, Table 5 suggests a rapidly increasing flow of direct investment receipts (except in 1962, when Australia’s receipts fell sharply at the time of a domestic recession). Steady growth in direct investment liabilities during this period was also recorded by many other nonindustrial countries in Europe, Africa, and Asia, but especially by Greece, Turkey, Israel, Nigeria, Thailand, and Malaysia.

In direct contrast to the virtually universal growth of direct investment in this period was the experience of the Latin American countries as a group, as Table 5 shows. For these countries, direct investment fell dramatically, from $1.6 billion in 1957 (when it was unusually high) to less than $0.3 billion in 1961, 1962, and 1963. This fall was due mainly to lower investments in Argentina, Brazil, Chile, Peru, and Venezuela (see Chart 2).

Annual figures for “other net long-term private capital” are also provided in Table 5, and are illustrated in Chart 3. As has been explained previously, the outflow and inflow figures for “other net long-term private capital” are not, by definition, symmetrical. Nevertheless, much of the outflow from the large suppliers of this type of capital (the United States and the United Kingdom) is probably reflected in inflows into the private sector of the other industrial and the nonindustrial countries. Chart 3 seems to suggest that for some countries, trend is a powerful influence, while for others cyclical influences may predominate.

Chart 3.
Chart 3.

Long-Term Private Capital Flows (Other than Direct Investment), 1957–65

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1967, 001; 10.5089/9781451956191.024.A001

It would be reasonable to expect a fairly strong trend component in the U.S. figures, interrupted from time to time by special factors such as the unusually heavy loan flotations on the U.S. market in 1958 and the directives aimed at restraining capital outflow in 1965. In contrast there has perhaps been a more dominant cyclical influence7 on the figures for the United Kingdom, which may have a counterpart in the figures for the EEC and Canada (in Chart 3, it can be seen that these three sets of figures tend to converge in 1962 and then diverge again in 1963 and 1964). On the other hand, for the nonindustrial countries, Chart 3 seems to suggest that the “other long-term private capital” inflow is primarily a function of trend. The United States, as the dominant supplier of this type of capital, seems to be subject not only to a steadily growing long-run demand for resources emanating mainly from the nonindustrial countries but also to a demand from the other industrial countries tending to be influenced by cyclical patterns.

Short-term Capital

Annual figures for short-term capital flows, and countries’ net errors and omissions, are provided in Tables 6 and 7. As might be expected, the figures are much affected by random movements. Nevertheless, several general features are distinguishable:

(1) The official program for improving the U.S. balance of payments was probably the dominant reason for the striking reversal in 1965 in the traditional capital outflow associated with increased U.S. commercial bank short-term claims on the foreign private sector (Table 6). This movement was largely offset by the lower inflow in 1965 associated with U.S. commercial bank liabilities to the foreign private sector; however, a marked improvement occurred in the U.S. “other net short-term capital” figures (Table 7), also mainly because of the balance of payments program. The total improvement in 1965 for the United States, on these three items plus the lower negative errors and omissions, amounted to $2.1 billion.

(2) The EEC countries experienced a particularly heavy build-up of commercial bank claims throughout most of the period, but especially in 1965, when Italy’s claims expanded enormously. In total, however, the increase in EEC countries’ liabilities more than matched the build-up of their claims. For Canada, large increases in claims in 1961, 1963, and 1964 occurred in conjunction with increases in liabilities. In 1965 the pattern changed, and both claims and liabilities fell sharply. In Japan, commercial bank liability increases consistently exceeded asset increases until 1965, when the rate of increase of liabilities fell off sharply. The figures for each of these countries have been greatly influenced by the growth of the Euro-currency market and, in 1965, by the U.S. measures of capital restraint.

(3) Capital outflows dominated the U.S. figures for “other net short-term capital” (Table 7) during 1960–64; this dominance was probably due to an expansion in short-term trade credits granted and a build-up in deposits of U.S. corporations abroad. A sharp reversal of the latter movement in 1965 was the main factor in the “other short-term capital” inflow in that year.

(4) The Canadian figures for “other net short-term capital” for 1957–60 are affected by the inclusion of changes in commercial bank assets and liabilities. Since 1960, there has been a steady inflow, a reflection partly of reductions by residents in bank balances held abroad and partly of increased borrowing from nonresidents by Canadian finance companies. However, an additional factor was probably a steady expansion in intercompany accounts of direct investment companies operating in Canada; Canadian statistics treat these accounts as short-term capital rather than direct investment.

(5) The figures for errors and omissions of the United States (Table 7) changed from consistently positive to consistently negative, beginning in 1960. The similarity in pattern to the behavior of the U.S. figures for “other net short-term capital” suggests that some of the U.S. errors and omissions relate to that item.

(6) The errors and omissions item for Switzerland includes virtually all private long-term and short-term capital and is usually positive. During 1960–64 this item was exceptionally large and positive.

(7) Attempts to rationalize the interarea flows that are suggested by the statistics of short-term capital and errors and omissions are hazardous. The outflow from the United States of short-term nonmonetary capital (including some of the negative errors and omissions item) during 1960–64 had its counterpart in inflows into both the other industrial and the nonindustrial countries. However, for the nonindustrial countries, there was probably throughout this period an offsetting outflow of short-term capital (and negative errors and omissions), so that the net result was as seen in Table 7—net outflows from both the United States and the less developed countries and net inflows into Europe and Canada.

V. Details of Private Capital Flows for the United States

Because of the dominant position of the United States among the world’s capital markets, it is perhaps useful to examine briefly the pattern of capital flows into and out of that country since 1957. Table 8 separates the components of long-term and short-term capital into changes in claims of U.S. residents on foreigners and liabilities of U.S. residents to foreigners. Charts 4 and 5 illustrate the changes that have occurred during the period.

Table 8.

United States: Private Capital Flows, 1957–651

(In millions of U.S. dollars)

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Sources: U.S. Department of Commerce, Survey of Current Business, September 1965, June 1966, and September 1966.

The totals shown in parentheses for 1957–59 are not comparable with the totals for 1960–65.

Contains offset for reinvestments by Canada on account of Columbia River Treaty.

Table 9.

Recipients of U. S. Direct Investment, Portfolio Investment in New Issues, and Commercial Bank Long-Term Capital, 1957–651

(In millions of U.S. dollars)

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Sources: U.S. Department of Commerce, Survey of Current Business, and U. S. Treasury, Bulletin, various issues.

Includes reinvested earnings. Figures for 1965 are preliminary. Minus sign indicates net U. S. disinvestment or net inflow to the United States. Some figures are rounded.

Includes subscriptions to new issues of World Bank.

Chart 4.
Chart 4.

U.S. Long-Term Private Capital Flows, 1957–65

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1967, 001; 10.5089/9781451956191.024.A001

Chart 5.
Chart 5.

U.S. Commercial Bank and Other S