# 2. **The facts on capital flows to Central and Eastern Europe and Former Soviet Union**

We start with providing some simple raw statistics for the various capital flows. In principle, one can distinguish capital flows by destination (e.g., public versus private); by type (e.g., debt, of which long-term and short-term, FDI, portfolio, of which bonds and equity) and by origin (e.g., commercial, i.e., private versus official creditors). One can also combine the three distinctions, e.g., by splitting debt-type flows into public and private debt, with the latter further into long and short, and by origin, e.g., commercial versus official. For our purposes, and given the data we have at hand and the patterns in capital flows we observe, we create five categories of capital flows: public debt (official) flows; commercial long-term (LT) debt flows; commercial short-term (ST) debt flows; FDI-flows; and portfolio (bond and equity) flows. For some purposes, it would be useful to further split commercial debt flows into those going to the banking system versus to other sectors of the economy, but it turns out that this can not be done for most of the countries given the data available. Our focus is on net flows; however, while we occasionally also discuss "capital flight" (other than that captured through short-term flows), we do not net out capital flight from our net flow measures. We group countries in two regions: Central Europe and the Baltics; and the rest of Eastern Europe, the Caucasus and Central Asia.<sup>3</sup> The group of countries in Central Europe is relatively homogeneous. The second category groups countries with more diverse economic characteristics. Data for individual countries are reported in Annex 1, where we provide both absolute figures and figures relative to GDP.<sup>4</sup> Descriptive statistics for the different types of flows for all countries (means, medians, standard deviations of flows) are provided in Table 1. Table 2 describes the composition of capital flows by _source_ (private and official) and by _type_ (long-term, short-term, portfolio and FDI). Total capital flows rose from around $1 billion in 1990 to $57 billion in 1997. Pooling together all observations (by country and by year) and measuring them as a share of GDP, the largest types of flows during the 1992-96 period were official debt flows and FDI (on average, respectively 2.7 percent and 2 percent of GDP), followed by portfolio flows (0.4 percent of GDP). Of all these flows, the highest standard deviation was for official flows (standard deviation of 3.6 percent of GDP). The following other stylized facts can be observed.<sup>5</sup> First, the share of official flows has declined sharply over the period (Figure 1). At the beginning of the transition, official flows increased sharply, with bilateral and multilateral sources accounting for most of the flows. In 1992, as some of the transition economies regained access to international credit markets, private flows begun to exceed official flows and by 1997 they accounted for 73 percent of total flows. This development is not different from what has

- 3 The CEE and Baltics country group includes Albania, Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, FYR Macedonia, Hungary, Poland, Romania, Slovakia and Slovenia. The FSU country group irtcludes Armenia, Azerbaijan, Belarus, Georgia, Kazakstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan and Ukraine.

- 4 We had to be careful for the exchange rate used in calculating dollar GDP given the large changes in real exchange rate for this period. Some smoothing was necessary, which was done using the World Bank Atlas _$-_ GDP figures.

- _5_ Sobol, 1996, also highlights the rapid surge in private capital flows to Central and Eastem Europe.

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