metadata: authors: 0: author: Claessens,Constantijn A.
1: author: Naude, David
docna: 0: docna: Recent estimates of capital flight
docty: Policy Research Working Paper
subtopic: Investment and Investment Climate,Public Sector Economics,International Trade and Trade Rules,Macroeconomic Management,Public Finance Decentralization and
            Poverty Reduction
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Researchers and policymakers have in
            recent years paid considerable attention to the phenomenon
            of capital flight. Researchers have focused on four
            questions: What concept should be used to measure capital
            flight? What figure for capital flight will emerge, using
            this measure? Can the occurrence and magnitude of capital
            flight be explained by certain (economic) variables? What
            policy changes can be useful to reverse capital flight? The
            authors focus strictly on presenting estimates of capital
            flight using a number of alternative methodologies. In their
            discussion of these methodologies, they show that although
            the approaches to measuring capital flight differ, the
            identities used in balance of payment data make them close
            in final measurement. In particular, the so-called World
            Bank residual and Dooley methods - presented in the past as
            very different approaches to measuring capital flight -
            actually produce similar measurements. The authors discuss
            the data used for calculating capital flight and the
            adjustment that must be made. They present aggregate capital
            flight figures using the various measures for 84 developing
            countries. The figures show a pattern of increasing capital
            flight until 1988, followed by a return of flight capital
            between 1989 and 1991. The authors present regional
            aggregates of capital flight and rank countries and regions
            by the level of capital flight relative to GDP. They find
            that capital flight is more widespread than commonly assumed
            and, relative to GDP, is rather evenly distributed. The
            capital flight-GDP Lorenz curve is above the 45-degree line,
            indicating that countries with a smaller GDP have more
            capital flight than one would expect if it were distributed
            proportionate to GDP.
repnme: repnme: Recent estimates of capital flight
display_title: Recent estimates of capital flight
listing_relative_url: /research/1993/09/698874/recent-estimates-capital-flight
topicv3: Capital Account m1326277 1134,Trade m1326924 698,Balance of Payments m1326965 441,Treasury m1327009 1045,Investment Entry m1504647 2544
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: International Economics Department
no_of_pages: 34
model_extractions: _ <!-- Start of picture text -->
*  t  ~~~~~~~  R  ~  ~~Polloy !"<br>Debt  and  Inllkdnal  Fbwnoo<br><!-- End of picture text -->

<!-- Start of picture text --> WPS 1186<br><!-- End of picture text -->

- This paper a product of the Debt and International Finance Division, International Economics - Tepartment is part of a larger effort in the department to study the integration of developing countries in world financial markets. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rose Vo, room S8-042, extension 31047. (Septemrber 1993, 27 pages). For individual country data, available on a floppy disk, contact Shelley Fu, extension 33885 (fax 477-)661).

Researchers and policymakers have in recent years paid considerable attention to the phenomenon of capital flight. Researchers have focused on four questions: What concept should be used to measure capital flight? What figure for capital flight will emerge, using this measure? Can the occurrence and magnitude of c-apital flight be explained by certain (economic) variables? What policy changes can be useful to reverse capital f-light?

Claessens and Naude focus strictly on presenting estimates of capital flight using a number of alternative methodologies. In their discussion of these methodologies, they show that although the approaches to measuring capital flight differ, the identities used in balance of payment data make thcm close in final measurement. In particular, the so-called World - Bank residual and Dooley methods presented in the past as very different approaches to - measuring capital flight actually produce similar measurements.

Claessens and Naudd discuss the data used for calculating capital flight and the adjustment that must be made. They present aggregate capital flight figures using the various measuires for o4 developing countries.

The figures show a pattem of increasing capital flight until 1988, followed by a return of flight capital between 1989 and 1991.

Claessens and Naude present regional aggregates of capital flight and rank countries and regions by the level of capital flight relative to GDP. They find that capital flight is more widespread than commonly assumed and, relative to GDP, is rather evenly distributed. The capital flight-GDP Lorenz curve is above the 45degree line, indicating that countries with a smaller GDP have more capital flight than one would expect if it were distributed proportionate to GDP.

The Policy Research Working Paper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusionLs inthese papers Jo not necessarily represent official Bank policy.

Produced by the Policy Research Dissemination Censer
# **RECENT EST[MATES OF CAPITAI FLIGHT**

by Stijn Claessens World Bank and David Naude World Bank The opinions expressed do not necessarily represent those of the World Bank or its Board of Directors. The paper draws on joint work with Kevin Chang and Bob Cumby. We would like to thank Kevin Chang, Bob Cumby and Mike Dooley for useful comments, David Stewart and Cliff Papik for support with the data, and Vince McCulough for editorial assistance.
# **Summary**

The phenomnenon "capital flight" has over the years received considerable interest from researchers as well as policy makers. Papers on capital flight deal with one or more of the four following questions: what is the right concept to use for measuring capital flight; what is the figure for capital flight following from this measure; can the occurrence and mnagnituide of capital flight be explained by certain (economic) variables; and what policy implications follow (e.g., which policy changes can he useful in reversing capital flight).

The purpose of this paper is not to add any new insights on which (if any) capital flight measure is the right one to use or what causes capital flight. Neither will the paper attempt to draw any policy iimplications. The sole purpose of this paper is to present recent estimates of capital flight using a number of alternative, existing methodologies.

The paper first discusses the various methodologies which have been used for measuring capital flight. The paper draws attention to the fact that, while the alternative methodologies may differ in their approach to meastiring capital flight, tne identities used in balance of payment data make these methodologies close in final measurement. In particular, the so called "World Bank Residual" and the "Dooley" methods, while in the past presented as very different approaches to meastring capital flight, are actually very close in measurement.

The paper discusses in detail the data used for calculating capital flight figures and the various adjustments which need to be made. It then presents aggregate capital flight figures using the various measures for a group of 84 developing countries. (Individual country data are available from the World Bank on a floppy disk, contact Ms. Shelley Fu, tel. (202) 473-3885, fax. (202) 477-0661). I'he figures calculated bear out that the various capital flight figures are highly correlated and, with the exception of a few years, show the same pattern of (increasing) capital flight until 1988, followed by a reversal (return of flight capital) in the years 1989-1991.

The paper also presents various regional aggregates of capital flight, and ranks countries and regions by the lev'el of capital flight relative to GDP. The paper tinds that capital flight is a much wider spread phenomenon than commonly asserted. When compared to the respective countries' GDP, capital flight is quite even distributed. The capital flight-GDP Lorenz-curve is even above the 45-degree line, indicating that countries with smaller GDP have more capital flight than one would expect if it were distributed over countries proportionately to GDP.
# **Table of Contents**

|**I**-|Introduction|p.1|
|---|---|---|
|II -|Different Measures of Capital Flight|p. 2|
||1 - Residuial Methods of Capital Flight|p. 4|
||2 - The Dooley Method|_P.5_|
||3 - Hot Money (Cuddington) Method|p. 8|
||4- Trade Misinvoicing|p. 8|
|III-|Data Issues|p. 10|
|IV -|Capital Flight: Some Figures|p.<sup>14</sup>|
|V-|References|p. 22|

# Annexes
# **I. Introduction**

Over thle years, "capital flight" has received much attention from researchers and policy makers (see, for example, World Bank, 1985 and 1993). Using estimates of capital flight from developing countries, authors have drawn attention to the magnitude of this phenomenon--particularly for Latin Amer 'a. It is generally agreed that these large private capital outflows have represented an important macroeconomic problem for many developing countrics in the past two decades. The reversal of capital flight in the early-1990's for some Latin American countries has added a new dimension to this phencmenon. Yet, capital flight remains a little understood aspect of these countries' economies and it even remains difficult to ascertain the magnitude of capital flight. Consequently, a better understanding of the extent of past capital flight, as well as a reliable measure of possible capital flight reversals in recent years, may be a useful input to a realistic assessment of current prospects for renewed invetrment and growth in developing countries.

Papers on capital flight try to answer a number of questions. What is the best way to measure capital flight? Can the occurrence and magnitude of capital flight be explained by (economic) variables? And what policy implications follow (for example, how to rev erse capital flight)? This paper is not intended to debate what causes capital flight or the best measure; nor will it draw policy implications. Its sole purpose is to provide a set of consistent figures on capital flight using existing measures for 84 developing countries over a long period (1971-91). T'his should be useful for researchers, since much detailed data used here originates from the World Bank and IMF and may not be generally available. ' Since capital flight -' calculated for many developing countries, no attempt was made to correct the figures in cases where data problems are known (or appear) to 2 exist. Nor was any adjustment made for country-specific information or circumstances. For individual countries or time periods, researchers may want to make adjustments to the data calculated here.

Section II describes different concepts and methodologies used for measuring capital flight. Section m describes the data and daa sources used. Some summary figures are provided in section IV on the various measures for 84 countries and for groups of developing countries (regional) and compares the capital flight measures to other (macro-) variables. Section V lists recent papers on capital flight. Detailed capital flight numbers ale found in Annex 1, while country coverage and notts on data are in Annexes 2 and 3. Annex 4 provides the relative coverage fcr the 84 countries compared to all developing countries.

Ilndividual country data are available from the World Bank on a floppy disk (contact: Ms. Shelly Fu, Tel. (202) 473-3885, Fax. 477-0661).

> 2Eggerstedt et al. (1992), for example, draw attention to the fact that most capital flight measures do not correct for the foreign currency deposits held by state-owned companies.
2

# **H. Different Measures of Capital Flight**

What is capital flight? Definitions are manv They can be broad, wovering all private outflows, or narrow, seeking to exclude some "normal" flows oi international transactions. for each definition, moreover, there are several different measures. And some measures are complementary; for example, trade misinvoicing can be added to one rneasure to create another. Finally, data sources differ, which give conflicting final figtlres and make comparisons among the various measures difficult. For instance, Erbe (1985) uses the same methodology as the World Bank (1985) but uses OECD (not Bank) debt data. Hardly surprising, then, that many measures of capital flight can be constructed. The four most common approaches are the residual measure (used by the World Bank, Morgan Guaranty and Cline); measuring the stock of unreported foreigrn assets (Dooley's method);<sup>3</sup> hot money measutl,s (Cuddington); and measuring trade misinvoicing. For each, there are variations which lead to (minor) differences. The starting point for all measures is balance-of-payment figures.

Balance of payments. Let us take a stylized balance-of-payments framework, using standard notaijon, but supplemented by World Bank debt data and based on the EMF's Balance of Payments Yearbook.<sup>4</sup> 3We will show below that in -ffect tne Dooley method is also a residual method. 4The presentation of items below follows that in Ciimby and Levich (1987), Chang and Cumby (1991) and Chang, Claessens and Cumby (1993). The Balance of Payments Yearbook line item numbers are those reported in the hard copy of the' BOP Year books. The corresponding codes are listed in Annex 3.
3

**Table 1: Balance of Payments**

<!-- Start of picture text --> A. Current Account (IMF BoPY* line 1 .44),<br>which includes<br>Al. Travel: credit (IMF BoPY line 9)<br>A2. Reinvested earnings on direct investment abroad (IMF BoPY line<br>11)<br>A3. Reinvested earnings on direct investment domestically (IMF<br>BoPY line 12)<br>A4. Other investment income: credit (IMF BoPY line 19)<br>B. Net Equity Flows<br>of which:<br>B1. Net foreign direct investmnent (IMF BoPY line 45..52)<br>B2. Portfolio Investment: Corporate equities (IMF BoPY line 59..61)<br>C. Other short-term capital of other sectors: net (IMF BoPY line 93 .97)<br>of r.'hich:<br>Cl Other assets (IMF BoPY line 94)<br>D. Portfolio investment, other bonds (IMF BoPY line 56-58)<br>E. Change in deposit money banks' foreign assets (IFS line 7a.dzf)<br>F. R,..erves (IMF BoPY line 98.. 111)<br>G. Net errors and omissions (IMF BoPY line 112)<br>H Other long-term capital of resident official sector (IMF BoPY line 62-<br>68)<br>or<br>H'. Change in external debt (World Debt Tables - see further section 4)<br>* IMF Balance of Payments Yearbook.<br><!-- End of picture text --> Since all capital flight measures attempt to estimate private capital flows, this would imply that capital flight can be simply measured as the sum of identified outflows (C + D + E). And, if all unidentified capital flows were private capital outflows, then net errors and omissions (G) would also be included.
4 This seems straightforw;.id cnough. So, why so many different measures? The main reason is doubts about tGe quality and accuracy of the balance-of-payments statistics. As a result, analysts have pieferred to derive the annual piivate capital flows by using the balance-of-payments ide:itity and proxying other balance-of-payments items. How? The balance-of-payments identity implies that: A + B + _C_ + D + 8i + F + G -t H = Q.

01' C + D + E + =- (A + i + F + H) The second equation implies that p.ivate capital flows plus net errors and omissions (capital flight) is equal to (the negative of) the sum of the cuffent-account deficit, net equity flows (FDI and corporate equity), iprreases in reserves, and other long-term capital of the official resident sector. Measuring capital flight through either side of the equation give the same result. On the left hand side of the equation, however, analysts can use only balance-of-paymens for some statistics. On the right hand side, however, there is more (and presumably better) information available elsewhere. So, tP- starting point for most capital flight methods is the right hand side of the equationt.

# Residual Method.

This measures the "residual" of the "sources of funds" over the "uses of funds". Sources of funds include all net official inflows (increases in net external indebtedness of the public sector) and the net flow of foreign direct investment.<sup>5</sup> User of funds include the currei'+-account deficit and additions to reserves. Outward capital flight exists when sources of funds exceed uses of funds, and vice-versa for inward capital flight. In terms of balance-of-payments items, capital flight under the residual method is thus the sum of: A + B + F + H. By the balance of payments identity, this is also equalto-(C + D + E + G).

The residual method, however, does not rely only on balance-of-payments data. For some items, other sources are used to get a better estimate of private capital flows. Most notable is item H (other long-term capital of resident offic;al sector or net official external borrowing), for which the year-to-year change in external debt according to World Bank data (H') may be more accurate. Thus. the residual method measures capital flight as A + B + F + H'; by the balance-of-payments identity, this is equal to - [C + D + E + G + (H-H')]. Capital flight is simply the sum of identified private capital outflows (C + D + E), the net errors and omissions from the balance-of-

> **51n contrast to** much of the literature, we **inclide** net acquisition of corporate equities in **our** measure of **foreign direct** investment. Apart from establishing major ownership control, flows of corporate equities **tepresent a** claim on **a** country's resources similar to foreign direct investment.
_5_ payments accounts (G), and the difference between reported net official capital and the change in external debt acLording to World Bank deta (H-H').<sup>6</sup> The World Bank, Morgan, and Cline methods use variations of the residual method.

World Bank: A + B + F + H' Morgan: A + B + E + F + H' Cline: A - (Al +A2+A3+A4) + B + E + F + H' The Morgan mnetho **d** iffers slightly from the World Bank's. It includes E, the change in banking system's foreign assets (which has a negative sign in BoPY and is thus subtracted). The Cline method is similar to Morgan's but substracts travel (credit), reinvested FDI Income (abroad and domestically), and other investmeni income (credit).

# The Doolgy Method.

This seeks to measure the stock of privately held foreign assets that do not generate income reported to the domestic authorities. It does so by cumulating the identified capital outflows in the balance-of-payments accounts arid making three adjustments to capture unreported capital flows. The first is to add errors and oixiissions (G). The second is based on a comparison of the World Bank data on the stock of external debt and the external borrowing flows reported in the balance-of-payments accounts. Dooley adds the difference between each year's change in external debt (according to the World Bank) and the lows as officially recorded (that is, H' - H) to his estimate of the increase in private-sector foreign assets. Dooley assumes thus that the entire difference is private-sector acquisition of foreign assets.

The third adjustment is to calculate the stock of external assets needed to give the (balance-of-payments) investment income, by using an international market interest rate (for exaimple, the one-year US Treasury Bill rate). If investment income is underreported, then the imputed stock of external assets will less than external assets using balance-of-payments figures (and after making the previous two adjustments). The difference between the two is the stock of flight capital; and difference from year-to year is the measure of capital flight.<sup>7</sup> 61f both the balance of payments and the World 3ank report net official capital accurately, then the change in the stock of debt reported by the World Bank will match the net borrowing flows reported in the balance-of-payments accounts. This is often not the case. Exchange rate revaluation effects, debt reclassification, and "discoveries" of existing debt may cause estimates to diverge. If, however, a discrepancy remains after corrections for these effects are made (see section 4), then the un:ecordel increase in external liabilities must be due to an urnderestimation of balancing transactions, such as an unrecorded increase in external assets by the private sector (that is, capital flight).

7As the Dooley method obtains sorne stock figures for external assets a. ' lainis by cumulating balance of payments flows figures, flight ca.pital depends on the stock assumed **ii** the ini al year (i.ormally zero).
6 The Dooley method can, thus, be described as: Stock of Unreported Foreign Claims **=** A + B + C - D

## where

# A. Cumulative Recorded non-equity Balance of Payments Assets

= AI + A2 + A3 + A4 + A5 + _So_ + A7 + A8 o/w Other Long-term Capital (Assets) Al ?ortfolio investment (IMF BoPY **lines** 53,36) A2 Resident official sector (IMF BoPY lines 62..64) A3 Depo0t money banks (IMF BoPY lines 69..71) A4 Other sectors (IMF BoPY lines 77..79) o/w other Short-term Capital (Assets) AS Resident official sector (IMF BoPY lines 84.. 85) A6 Deposit money banks (IMF BoPY line 89) A7 Other sectors (IMF BoPY lines 93..94) A8 Reserves (IMF BoPY lines 98.. 109)

- B. Cumulative Errors and Ormissions (IMF BoPY line 112)

- C. Adjustmenit for Unrecorded Claims

- Stock of external debt as reported to the World Bank (see Section 4) Cumulative Recorded Balance of Payments Liabilities

where: Cumulative Recorded Balance of Paymients Liabilities = C1 + C2 + C3 + C4 + C5 + C6 + C7 + C8 o/w Other Long-termn Capital (Liabilities) Cl Portfolio investr"!nt (IMF BoPY lines 54,55,57,58)

- C2 Resident officiai aector (IMF BoPY lines 65..68)

- C3 Deposit money banks (IMF BoPY lines 72..76)

- C4 Other sectors (IMF BoPY lines 80..83)

- o/w Other Short-term Capital (Liabilities)

- C5 Resident official sector (IliF BoPY lines 86. .88)

- C6 Deposit money banks (IMF BoPY lines 90..92)

- C7 Other sectors (IMF BoPY lines 95..97)

- C8 Reserves: IMF credit (IMF BoPY lines 110.. 111)

Consequently, flow figures are more meaningful than stock figures because they do not depend on any assumptior for **the** initial stock value.
# D. Capitalized Reported non-FDI Inconme

- = Flow of other investmlenit income: credit (IMF BoPY lines 15,17,19) / One-year US Treasury Bill rate (IFS line 60c..zf, US)

While the residual and Dooley methods differ greatly in conceptuial approach (one looks at flows, the other at stock figures), they u.se some of the sant'. measuires, or those closely linked through the balance-of paymenits identity. Under the residual method, capital flight equals A + B + F + H'. By the balance-of-payments identity, this equals - (C +D + E + G+ (LI-H')), the negative of private capital flows (shollterm, including banks and 'ionbanks, and long-term; C, D and E). errors **and** omissions, and the difference between World Bank and balance-of-payments reported versions of offici.0 capital. These last four items are those that Dooley uses to cal2ulate the total reported and unreported) assets held abroad. These annual changes in total (reported and unreported) assets held abroad, according to tne Dooley method, are simply annual capital-flight estimates according to the residual method.

These similarities also imply that the Dooly estimate can be made more easily by taking the World Bank residual flow measure and the subtracting the flow of capital corresponding to the series for the imputed stocks of reported assets. It is not possible however, to equah. the year-to-year difference in the imputed stock of reported assets with a flow, since they include both new flows froin the country, as well as interest earned abroad but not repatriated.<sup>8</sup> In principle, new flows and reinvested earnings should be reflected in the capital account, just as retained earnings on FDI enter the capital account. In Dooley, the new flows reported in the capital account are deemed unreliable. Why otherw:se impuite the stock of reported assets from the cu.rent-account and not measure it directly from the capital account'? And. in practice, earnings on nonFDI inivestments which are reinvested abroad are seldom reported &cujrately in the capital accoullt of developing coLlntries.

This implies that the year-to-year change **in** the irnputed stock of reported assets cannot be divided between a new flow from the country and earnings reinvested. An arbitrary assumption has to be made that none of the reinvested interest enters the capital accouint, that all earned interest is reinvested and, thus. that the year-to-year difference in stocks includes interest accrued.9 The flow on reported assets is therefore calculated as the difference between the stock this year miniuis the stock last year grossed up by one plus the interest rate. The Dooley measuire of the flow of capital flight is then obtained by subtracting this flow from thie World Bank residual measLure of the annual flow of capital flight.

8New flows from the countryn means new flows beyond those occurring through reinvestment of interest earnings.

9For some individual countries, better adjustine)its canl perhaps be made. See for example Eggerstedt et al. (1993) for Mexico.
8

## Hot Money Method.

This calculates private capital flows directly by taking the (negative of) errors ancd omissions and private short-term capital figtires from the balance-of-payments. The measure of private short-tenm capital varies (from country to country) in sorne of the studies employing this method and three different hot money measures has thus developed.

> Hot Money 1 = - (G + C1) Hot Money 2 = - (G + C) Hot Money 3 = - (G + C + D1 + D2)

## Where

- G Net errors and omissions (IMF BoPY line 112)

- C Other short-term capital of other sectors (IMF BoPY line 93 ..97) of which:

- C1. Other assets (IMF BoPY line 94)

- DI Portfolio investment: other bonds (IMF BoPY line 56.. 58)

- D2 Portfolio investment: corporate equities (IMF BoPY line _59._ .61)

## Trade Misinvoicing

Export underinvoicinig and import overinvoicing can hide capital flight, and differences in statisLics of the reporting country and its trading partners can help identify it. '° Here, we adopt the industrial countries' reported trade figures as the standarc6 of reference from which to calculate invoicing biases and use the IMF Direction of Trade (IMF-DOT) data. To put imports as reported by the country and imports as reported by the world (exports by the country) on a comparable basis, both are adjusted from a CIF (cost, insurance, freight) basis to a FOB (free-on-board) basis. This implies that reported imports, nonnally expressed on a CIF basis, are adjusted downward bv a couintry-specific CIF/FOB ratio so that exports and imports can be compared on a consistent FOB basis.

## Export misinvoicing = (Xw/CIFFOB factor) - Xc

# Import misinvoicing = (MC/CIFFOB factor) - Mw

> 10 Difference in trade statistics can he due not only to capital flight (under-invoicing exports, over-invoicing imports), but also tax evasion (under-invoicing for both exports and imports), inconsistent reporting methods, and bad reporting.
9

|where||
|---|---|
|Xw:|Imports from that country as reported by the world CIF (IMF<br>DOT-imports of world with that country as partner, line<br>IMP_cif)|
|Xc:|Exports as reported by the country FOB (IMF DOT-exports of<br>country with world as partner, line EXP_fob)|
|Mc:|Imports as reported by the country CIF (IMF DOT-imports of<br>country with world as partner, line IMP cif)|
|Mw:|Exports to that country as reported by the world FOB (IMF<br>DOT-imports of world with that country as partner, line<br>EXP fob)|
|CIFFOB factor:|CIF to FOB ratio (IFS line ..v..z.)|

Imports are adjusted downward by a country-specific CIF/FOB ratio. In this paper, a positive sign signifies capital flight (overinvoicing of imports or underinvoicing of exports) and a negative sign signifies reverse capital flight (underinvoicing of imports and overinvoicing of exports). Since both export underinvoicing and import overinvoicing add to capital flight, the two should be added for the net effect of trade misinvoicing on capital flight.
# **111. Data** Issues

Sources: This paper relies on World Bank and IMF data, and ptiblished data. (The only unpuiblislhed data is the currency-adjuistment factor.) The IMF Balance of Payments Yearbook (BoPY) is the source for almost all BOP cuirrent and capital-accounlit itenms. Data from thie BoPY were taken fromii the 13 March 1993 update of the IMF BoPYtape. The World Bank Debtor Reporting System (DRS) is the source for all external debt statistics. The external debt figures comile froml thie DRS-data base (as frozeni on 29 January 1993) **and** used for the putblished World Debt Tables 1992/93. The IMF Direction Of Trade (DOT) statistics provide the trade data. Data froin DOT were taken from the 16 March 1993 update of the tape. The one-year US-Treasury interest rate information came from the IMF International Financial Statistics (IFS) data set. IFSdata were also used for the change in the deposit money banks foreign assets. Data from the IFS were taken from the 12 March 1993 update of the tape.

As data are constantly revised, variations can arise becauise of different vintages of data and differences between the published versions of data and tapes (and other computerized data sources). The effect of such variations on calculations, however, should be small.

# IMF Balance of Payments Yearbook (BoPY) Data

Although no adjustments were made to any of the BoPY-figures, some conventions are worth mentioning: a) Signs: Items in the IMF BoPY are prefixed by signs: + for debits (for example, exports), - for credits (for example, imports). In the capital account, assets (lending) and liabilities (borrowing) are stocks which increase (-/+) or decline (+/-). Net figures (flows) and net balances (stocks) are calculated not hy subtractinig debits from credits, but by adding them, for example, exports + imports = the trade balance. Thus, the capital account, reserves, and errors and oimissionls are added to (rather than subtracted from) the currenit accounlt to arrive at the overall balance.

b) Aggregated versus Detailed Presentation: The Aggregated Presentation in the BoPY provides capital account and reserves figures net of counterpart items (valuation changes in reserves, {de}monetization of gold, and SDR's), exceptional financing, and liabilities constituting foreign authorities reserves, which are slhown separately. As a result, the current account. capital account, Limange in reserves, and errors and omissions in the aggregated accouints do not add to zero. They do, however, balance in the Detailed Presentation, which incluides counterpart items. Throughout, this paper uses the Detailed Presentation.
# World Bank Debtor Reporting System

External debt data from the World Bank Debtor Reporting Systeim (DRS), employed for the residuial and Dooley measurLs, cannot be used directly. The mieasures require putting together a few separate components to obtain the annual net increase in external liabilities. The stalling point is the year-to-year change in the dollar-mlieasuire(d debt stock. This can inaccurately reflect net borrowings (new disbursements minuis principal repayments), since it may incilide tht effects of, say, cross-ctirrency exchange-rate flucttiation.s, debt found (reschieduiled or converted), and debt forgiveni or reduced. To correct for these, the change in debt stock (inclusive of short-terim, IMF, and exclusive of private, non-guaranteed debt) is reduced by the change in debt stocks due to cross-currency exchange-rate fluctuiations, while forgiven or reduced debt and debt service is added back to the annual change.

a) Cross-Currency Exchange-Rate Fluctuations: One problem in using the change in dollar-measured debt stock is that non-dollar denomninated debt will fluctuiate in dollar terms from year to year (in addition to any net flows) due to cross-currency exchangerate fluctuations, Excludinig that part of the change due to such fluctuiations, however, can only be done for the public and publicly guaranteed portion of external (debt (PPG) since the currency mix is known only for these loans. (For World Bank loans, it is done only after 1983.) The currency adjuistment on SDR denomilinated debt (for example, IMF credits) has not been calculated.

b) Debt "found": Debt stocks miay increase eacih year because of debt found (for instance, during a rescheduling), debt which was incurred earlier. Since thlis "discovery" is often not reflected in (past) net flows. the change in the stock of debt is preferable to net flow figures, but may not reflect when the debt was incurred. We didn't correct the yearly change for any debt foLuind, but incurred earlier.

c) Debt converted: When private-sector extenial debt is converted to public-sector debt (in, say, a rcscheduling agreement). the private sector substituites a liability to the government for a foreign liability. Although there has been no new net flow of lunds. the private sector will increase its net foreign assets, which may increase the measuire of capital flight. The change in the stock of debt yields better estimates of increases il the private sector's net foreign assets (and thlius of capital flight) than the flow of net borrowings.

d) Capitalizations: The annual stock of debt may change because of capitalization ot arrears, reschedulinig of principal or interest payments due. and capitalization of (interest) penalties imposed, all to the extent that are not fully reflected in net flows ot borrowings. Whether to include rescheduled interest (and other capitalizations) or not? In principle, balance-of-payments data show interest paymentis due. rathier thiall inade. As a result, when interest is rescheduled withinl the year, the currenlt-accoLiunt deficit will be overstated on an actual cash flow basis and thus the resicidial estimiiates of private capital flows understated. Incliding rescheduled interest duie as an ofticial flow in the
12 capital account will correct this. If, however, interest paid is measured in the current accouInt (and no new flow for the rescheduled interest payments is recorded in the capital accounit) using the adjiusted change in the stock of debt, including rescheduled interest, will overstate thie extent to which the private sector has increased its claims ab)road." This paper uses current-accouint figtures from the balance of payments and loes not correct thie change in debt stock for the possibility that interest paid (instead of interest dIlue) is recorded in the balance of payments.

e) Adhistment for Forgiveness: Forgiveness of debt, principal, and interest and other debt and debt service re(ductions (throuigh market-based transactions) will decrease the debt stock in that year. This would imply a lower annual change in the stock of debt, but with no correspontding net flow (or decrease in capital flight). Therefore, the debt stock figures are adjusted for the net amounts forgiven or reduced each year. ' f) Private Non-G(uaranteed Debt (PNG): Including or excluding private non-guaranteed debt in capital flight depends on whether gross or net private sector foreign assets are to be measuired. If net private external claims are to be measured, the relevant debt figure is the change in public and publicly guarantee(d external debt. If it is gross privatesector foreigin assets, then the change in private, non-guaranteed debt should be incltlded, and the residual measuire of capital flight will be higher. However, since private external indebtedness represents an actual liability of the private sector (expected to be serviced and repaid by the private sector), arguably the simultaneous acquisition of a foreign asset and foreign liability shouild not be considered "capital fliglht". In calculating the World Bank residual measures net acquisition of foreign assets by the private sector is chosen as the relevant measure and PNG-debt is thus excluded'. However, a measuire of capital flight is also provided which includes PNGdebt (and the necessary adtjustimients for debt reduction. forgiveness, etc.).

h) Short-Termi Debt: The same argument for excluding PNG-debt can be made for short-tenr debt-niamilely, that it sihould be included when measuring gross capital outflows, while only public and publicly guaranteed short-term debt should be used for net capital outtflows. Untfortuniately. World Bank data on short-term external debt are not clisaggregated between public and private flows. Anecdotal evidence for Sub'"l1Ihe same reasoning suge,ests that interest arrears ought to be added to the stock of debt if interest due hut unpaid is included in the current-account bal-snce-of-pavnments data. '"For market-hased debt reductions transactions. for example, debt huyhacks. the change in debt stock is only1 corrected bN the discount in the transaction. The repaNyment part. say the cash used in a buNback (the price times the face value of the debt). represents a prepayment bN the borrower, and a corresponding reductioll in net liabilities. This is normally reported in the W'orld [)ebt Tables under tile line Amortizations. Once corrected for the discount in the debt reduction transactions, the year to year chanige in the debt stockls Vould thus corre..pond to the net borroAings (abstracting from possible other di tetrences).

In examining net private sector acquisition of foreign assets. we differ from much preNious literature. Dooley et. aL. ( 1985). the World Bank ( 1985), and Miorgan Guaranty, ( 1986) all use private, nonguaranteed debt in addition to public and publicly guaranteed debt in computing residual estimates of private sector acquisition of foreign assets.
13 Saharan Africa suggest that much short-term debt is publicly guaranteed, but this is probably not so for Latin America and Asia with their freer private sector. Including short-term debt can thus be seen as calculating a upper bound of capital flight as measured by this method, and excluding the short term as a lower bound. For the purposes of this paper, short-term debt is included.<sup>14</sup>

# Data Convention: Interest Compounding

Given the assumption made for the Dooley measure of flows on the imputed stocks of reported foreign assets (that is, no reinvested earnings are reported in the capital account) and the corresponding calculation of the flow figures, all flows reported here are on the same basis and are not compounded for interest earned abroad. All flows can be grossed **ip** using an international interest rate for a flight capital measuire which includes the cumulative returns on the assets held abroad.

14Erbe (1985) uses OECD data on medium and long-term gross external indebtedness with estimates of short-term debt for some countries. Cumby and Levich (1987) use public and publicly guaranteed longtern debt and all short-term debt. Morgan Guaranty (1986) excludes the increase in short-term foreign assets of the banking system from the increase in total private sector claims. Acquisition of foreign assets by nonbank agents, however, continues to be considered capital flight by Morgan. Since Morgan offers no explanation for treating the banking system differently from other firms and individuals. we do not pursue its distinction here.
14

# **IV. Capital Flight: Some Figures**

We calculated capital flight usirng eight of the different measures--World Bank Residual, idem plus Private Non-Guaianteed debt, Dooley, Morgan, Cline, and three Hot Money Methods--as well as measures of trade misinvoicing (see Annex 1). These measures require many data items from various sources over a long period, starting in 1971. For many developing countries, consistent data are not always available. Here, we study a group of developing countries for which data were available at least since 1975: we did not exclude any countries for which the most recent year was missing. These selection criteria led to a sample of 84 countries (see Annex 2). The 1990 GDP of these represent about 75 percent of all (151) developing countries' GDP. We have verified that there is a close relationship between capital flight in the 84 countries and all countries (Annex 4).

Annual flows in 1971-90 for the 84 countries using the World Bank Residual and Dooley methods, follow a similar pattern (Figure 1). This is hardly surprising given the similarities in approach. The exceptions are 1990 and 1991, when Dooley shows much less capital flight than the World Bank Residual measure. Why the difference?

**Figure 1: World Bank Residual and Dooley Measure of Capital Flight (Annual Flows)**

8p[,o,0s of USS 190 <!-- Start of picture text --> 100<br>80<br>71 72 73 74 76 79 77 78 79 80 8l 8. 8 84 85 86 87 88 8Y 90 9<br>-50<br>.100<br>World Bank Residual Dooley<br><!-- End of picture text --> Unlike other measures, the Dooley method attempts to distinguish between legitimate and illegitimate foreign assets by excluding the stock of imputed legitimate foreign exchange holdings (obtained by dividing reported foreign interest earnings by an international interest rate, one-year U.S. Treasury bill rate). Since all measures calculate the stock of total foreign holdings in a similar way, exclusion of legitimate foreign assets must account for any major divergence.
_15_ The U.S. Treastiry bill rate used in these calculations was 5.4 percent in 1991, down from 8.1 percent in 1989. All else equal, lower interest rates will increase the imputed stock of legitimate foreign assets, leading to lower capital flight under the Dooley measure. Reported interest earnings were $24 billion in 1991, up from $19 billion in 1989. These two effects reinforced each other, resulting in substantially higher and increasing estimated stocks of legitimate foreign assets for 1990 and 1991-up from $235 billion in 1989 to $436 billion in 1991, and thus lower capital flight for these years under Dooley (see table in Anniex 1). In general, the Dooley measure is more variable than the World Bank residual measure because it depends on a ratio of two variables (reported earnings and the international interest rate), which may have little contemporaneous correlation.

The (broadest) Hot Money and the World Bank Residual measure are ,,lotted in Figure 2. The variation between Hot Money measures and the World Bank Residual measure arises from differences between balance-of-payments figures on the flow of public and publicly guaranteed debt and World Bank data on the change in the stock of public-sector external debt (adjusted for currency-movements, resch dulings, etc.). Even so, the two measures broadly reflect the same trends, save for 1977, and 198689, when the Hot Money measure shows lower capital flight. This suggests that large increases in public-sector debt went unrecorded in t'ie balance-of-payments accounts in those years.

**Figure 2: World Bank Residual and Hot Money (Annual Flows)**

<!-- Start of picture text --> Bl11ons of USS<br>120<br>t 00<br>80<br>e0<br>40<br>20 e<br>0 -f--'..._ ... .<br>71 72 73 74 76 78 77 78 79 80 81 82 83 84 86 86 87 88 8a 90 91<br>.20<br>World Bank Residual Hot Money 1<br><!-- End of picture text --> The three misinvoicing measures are exports underinvoicing, imports overinvoicing and the sum of the two (Figure 3); positive numbers for exports indicate underinvoicing and for imports overinvoicing, while negative numbers for exports denote overinvoicing and for imports underinvoicing. Underinvoicing of imports is clear after 1981. Exports are overinvoiced up to 1985 and undervoiced thereafter.
16 While the underinvoicing of exports is consistent with capital flight, the systematic underinvoicing of imports after 1981 and the overinvoicing of exports before 1985 are not. Underinvoicing of imports may be because many developing countries have heavy import taxes and other value-based irnport restrictions, counteracting capital-flight incentives to overinvoice imports. Trade co.itrols, especially on imports, give incentives not to record goods. Reasons for overinvoicing exports before 1985 may be related to export subsidies and other incentives to generate legitimate foreign exchange eamings (see Eggerstedt et al. (1993). Taking the two misinvoicing measures together, there is negative capital flight until 1989 (a lower trade surplus reported by the trading partners than reported by the countries), implying unrecorded capital inflows to these 84 countries.

Assuming that these trade misinvoicing estimates are a useful approximation for actual unrecorded imports and exports, we adjust our capital flight based estimates accordingly, since funds spent on imported goods would no longer constitute assets controlled by the country.

<!-- Start of picture text --> Figure 3: Capital Flight Due to Trade Misinvoicing (Annual Flows)<br><!-- End of picture text --> <!-- Start of picture text --> 8llon of US$<br>30 T<br>1 6 -.-<br>7Z .72 73 74 76 7e 77 78 79 sO 81 82 83 84 85 8e 87 es 89 90 91<br>-16 -r<br>-30 -<br>-46 -<br>-<br>Trade Misinvoicing, Trade Misinvoicing, Trade Misinvoicing, Total<br>Exports Imports<br><!-- End of picture text --> What happens when misinvoicing is added to the World Bank residual and Dooley measures? They both show that outward capital flight flows peaked in 1988 at about $100 billion and $130 billion respectively for each measure (see Figure 4). It is also seen that capital flight was reversed in 1989 and 1990. According to anecdotal evidence, this has continued in 1991 and 1992. In the past four years, much flight capital has reportedly returned particularly to three Latin American countries-Argentina, Brazil, and Mexico."5 150ur numbers show for Mexico a return of flight capital of about $20 billion total in 1989. 1990 and 1991. For Argentina and Brazil. our data show lower levels of capital flight reversal during the same period.
17 <!-- Start of picture text --> Figure 4: World Bank and Dooley Combined with Trade Misinvoicing (Annual Flows)<br><!-- End of picture text --> <!-- Start of picture text --> BSllhone of USt<br>160 T<br>100<br>X\<br>50<br>° --0 - / ---- ------<br>71 72 73 74 78- -1_ 77 78 79 80 81 82 83 84 86 8e 87 88 89 90 91<br>World Bank Residual + Trade Misinvoicin - Dooley + Trade Misinvoicing<br><!-- End of picture text --> Over a long period (in this case, 20 years) stock figures of flight capital are more interesting that annual flow figures. According to the World Bank Residual method, at the end of 1991, the accumulated stock of flight capital was $500 billion, or about 44 percent of their stock of external debt. The Dooley measure shows capitalflight stock of about $140 billion (12 percent of debt stock). The difference between the two (about $360 billion) is equal to the imputed stock of reported assets held abroad.

**Figure 5: Stocks of Flight Capital (with and without interest compounding)**

<!-- Start of picture text --> 600<br>4C0<br>300<br>200<br>100<br>0 .t : * - . -_. . . . .<br>71 72 73 -74A, 75 76 77 78 79 90 8 82 83 84 85 86 87 88 89 90i 6<br>-100<br>- - - -World Bank Dooley + Trade World Bank Dooley + Trade<br>Residual + Misinvoicing Residual + Misinvoicing (no<br>Trade (with interes:) Trade interest)<br>Misinvoicing Misinvoicing (no<br>(with interest) interest)<br><!-- End of picture text -->
lx Most analytical attention has focused on Latin America's capital flight. In absolute amount, this accounts for a large share of the total capital flight--by our mneasure about 44 percent in 1985 and 37 percent in 1991 (see Figure 6).

**Figure 6: Top Ten Countries for World Bank Residual Measure Average Annual Flows 1981-1991**

<!-- Start of picture text --> M,Ilons of US$<br>4500<br>4000<br>3500<br>3000<br>2500<br>2000<br>1 500<br>1000U<br>0 4-'- -- - ~-- --<br>China Argentina Mexico Venezuela Poland Brazil Nigeria Egypt, Turkey Indonesia<br>Arab Rep.<br><!-- End of picture text --> Capital flight, however, is more widespread than previously thought, and is more important for many developing countries, not just Latin America. Relative to GDP, exports, and external debt, for instance, capital flight of Latin American countries is much less than most others. For Sub Saharan Africa, t': stock of capital flight at the end of 1991 (excluding misinvoicing) represented more than 85 percent of the region's GDP. By this measure, capital flight was, relatively, the largest for the Middle-East and North Africa region, with a ratio of a stock of flight capital to GDP of 118 percent. For **all** other regions, the ratio was 30 percent or less at the end of 1991. Least capital flight was in South-East Asia, only 15 percent of 1991 GDP.
19

**Figure 7: Ratio of Flight Capital to GDP by Region World Bank Residual, Stocks 1991**

<!-- Start of picture text --> Per,entge5<br>120<br>100<br>80<br>40<br>20<br>ioE ..i<br>E. t Asia Europe and Latin North South Asia Sub- U.*.._+.-,_ All<br>and the Central America Africa and Saharan Developing<br>Pacific Asia and the the Middle Africa Countries<br>Caribbean East<br><!-- End of picture text --> Ranking the 84 countries by the stock of flight capital to GDP shows that only three are Latin American (Nicaragua, Bolivia and Venezuela), four are African (Gabon, Zambia, Sudan and Uganda) and three are from the Middle-East and North Africa (Egypt, Syria and Jordan). For Gabon, the stock of capital flight is almost triple its 1991 GDP (Figure 8). Much the same picture emerges when the stock of capital flight is compared to external debt, adjusted to exclude the effect of cross-currenicy movements on the dollar-measured debt stock (Figure 9).

**Figure 8: Top Ten Countries for the Ratio of Flight Capital to GDP World Bank Residual. Stocks - 1991**

<!-- Start of picture text --> Percentoage<br>300 r<br>2001<br>1100<br>50 Ii<br>Sudan Egypt, Panama Gabon Bulgaria Nigeria Venezuela Syrian Jordan Uganda<br>Arab Rep. Arab Rep.<br><!-- End of picture text -->
**20**

Figure 9: Top **Ten** Countries for the Ratio of Flight Capitai to Debt Sock World Bank Alsidual, **Stocks** 1991 <!-- Start of picture text --> Pwcarn,ge<br>900<br>coo_<br>700<br>400<br>300<br>100IiiliEE<br>0<br>Romania Vanuatu Oman Gabon Venezuela Egypt, Trinidad Panama Lesotho Malaysia<br>Arab Rep. and<br>Tobago<br><!-- End of picture text --> That capital flight is widespread in relative terms is clearly demonstrated by some Lorenz-curves, when capital flight in dollars is ranked from smallest to largest (Figure 10). By this measure, 80 percent of the countries represent less than 20 percent of all capital fight stock. For about 65 percent (or 38 countries), there is negative cap.tal flight. The remaining 20 percent of the countries represent more than 80 percent of all capital flight stock.

Figure 10: Lorenz Curve of Flight Capital - World **Bank** Residual, Stocks - 1991 <!-- Start of picture text --> .. I<br>0.8 t*<br>0.6<br>Share of Stock of I.,<br>Total Flight Capital<br>0.2 -<br>O -+- -- e-- S--, -<br>o 0.1 b 0.2 03 0.4 0.6 0oe 0. 0.8 0.9<br>-0.2<br><!-- End of picture text --> Deciles
21 <!-- Start of picture text --> Figure 11: Lorenz Curve of Flight Capital weighted by GDP<br>World Bank Residual, Stocks - 1991<br>0,8 -<br>0 a<br>Shtia of Stock of<br>Total Flight Capital<br>0.4<br>0 0.1 0.2 0.3 0.4 05 0F . 0.7 0.8 0.9 1<br>GDP Deciles<br><!-- End of picture text --> When deciles of GDP are ranked against deciles of share of capital flight stock, the picture changes drastically (Figure I1). The curve is close to (but above) the 45 degree-line, indicating that countries with smaller GDP have a higher share of capital flight. Capital flight is thus not just widespread but is a substantial drain of scarce external resources for many developing countries.
22

# **V. Recent Papers on Capital Flight**

Cuddington, John T., 1986, "Capital flight: Estimates, issues, and explanations," Studies in International Finance, no. 58, Princeton University Department of Economics, Princeton, NJ.

Chang, P. H. Kevin and Robert E. Cutinby, 1991, "Capital Flight in Sub-Saharan African Countries," in Ishrat Husain and John Underwood, eds, Africaii External Finance in the 1990s, Washington, DC, World Bank, 162-184.

Chang, P. H. Kevin, Stijn Claessens and Robert E. Cumby, 1993, "Conceptual and Methodological Issues in the Measurement of Capital Flight," forthcoming in a volume edited by Benu Varman-Schneider, Christian-Albraechts-Universitat, Kiel.

Cumby, Robert E. and Richard M. Levich, 1987, "On the Definition and Magnitude of Recent Capital Flight," in Donald R. Lessard and John Williamson, eds, Capital Flight and Third World Debt, Washington, DC, Institute for International Economics, 27-67.

Dooley, Michael P., William Helkie, Ralph Tryon, and John Underwood, 1986, "An analysis of external debt positions of eight developing countries through 1990," Journal of Development Economics, Vol 21, no. 2, 283-318.

Dooley, Michael P., 1986, "Country-specific risk premiums, capital flight and net investment income payments in selected developing countries," International Monetary Fund, mimeo.

Dooley, Michael P., 1987, "Comment," in Donald R. Lessard and John Williamson, eds, Capital Flight and Third World Debt, Washington, DC, Institute for International Economics, 79-81.

Dooley, Michael P., 1988, "Capital flight: A response to differences in financial risks,' International Monetary Fund Staff Papers, 35, September, 422-436.

Eggerstedt, Harald, Rebecca Brideau Hall, and Sweder van Wijnbergen, 1993, "Measuring Capital Flight: A Case Study of Mexico," Working Paper, No. 1121, The World Bank.

Erbe, Suzanne, 1985, "The flight of capital from developing countries," Intereconomic.s, November/December, 268-275.

Gajdeczka, Przemyslaw, 1989, "Financial Flows to Developing Countries," Ouarterly Review, World Bank, March.
23 Gajdeczka, Przemyslaw and Daniel Oks, 1989, "Domestic deficits, debt overhang, and capital outflows in developing countries," in Finance and the Intemational Economy, R. O'Brien and I. Iversen, eds., (Oxford University Press), 103-120.

Gulati, Sunil, (1987), "A Note on Trade Misinvoicing," in Donald R. Lessard and John Williamson, eds, Capital Flight and Third World Debt, Washington, DC, Institute for International Economics, 68-78.

International Monetary Fund, 1987, Final Report of the Working Party of the Statistical Discrepancy in World Current Account Balances, Washington, D.C.: International Monetary Fund.

Khan, Mohsin S., and Nadeem Ul Haque, 1987, "Capital flight from developing countries," Finance and Development, March.

Kindleberger, Charles P., 1987, "A historical perspective," in Donald R. Lessard and John Williamson, eds, Capital Flight and Third World Debt, Washington, DC, Institute for Intemational Economics, 7-26.

Lessard, Donald R. and John Williamson, 1987, "Introduction" and "The problem and policy responses," in Donald R. Lessard and John Williamson, eds, Capital Flight and Third World Debt, Washington, DC, Institute for Intemational Economics, 1-5 and 201-254.

Morgan Guaranty Trust Company, 1986, "LDC capital flight," World Financial Markets, March.

World Bank, 1985, World Development Report, Washington, DC, World Bank.

_________ 1993, Global Economic Prospects. Washington, DC, World Bank.
<!-- Start of picture text --> Annex I1- -<br>Summary Table for the 84-Country SaMple16 Billions of US$<br>TAde Misinvoicing. Impons Trade Muinvocn Hot Hot Money 3 Tnhde Misinv.oicing, Exporb WorldBank Residual WorkJ Ban Residual Cline Doolcy Hi tMoncy I _-Other Sboni-Tcnn Capital, Net Mome - Exponsu(country vicw, FOB) + ImpoiU (country view, + Imporu (country view, CIF) i t Trade Misinvoicing Imporst -- tCapital Account - Net Errors & Omissions + Increae in Reacres + Foireign Dircect Investment -Change r Stock ofRepoiedAssts + Expoon +C-hange in Adjustod Debt Stock + Current Account + Inerease in Rescrves t Corporxte Equities + World Bank Residual + Ct nge in DOD. PNG • + World B nk Residmal + Morgw 41 + Compor te Equities -Othr Shon-Tean CVital. Debit -Hot Money 2 - nve tmenl in Bornds -Corporate Equitics + Foreign Direct IrBvcstiment -Travel h Tourism -Reinvested Famrnigo, Credit -Net Effrso -NelEro aogn -Reinve led E mings. Dcbit Other Investment Incomc: Private Change in Deposit Money Bans Tnadc MisLnoicing, ExpoiU Chbange / FOB-CiFConvcesionFactor Debt Reduction, PNG (change) f Deposit Money Banks f Sloct of Repontod Assets + /FOI-C[F Convcrmon Fn--tor -f Adjuwted Debt Stock mporb Expons (wofld view, CIF) / US Treasury Bill Rate -- Exc-hange Rate Impact + Invcstmnen t Debt OusstaM. h Diab ...... + Debt Reduction, PPG + Debt Reduction, Short-Tema 2 Debi Outstanl. i& Disb. PNG in (world h (world vicw. FOB) h. Adjtistod Dcbt Sto,k Omiwions o Omi Total vrww t lInconie io PNG adj adj to FOB) toFOBR) All . 1970 115 115 6.4 .. 37 42 40 39 46 42 -2 -5 52 I11 -I -0 -I -I -5 37 is -0 -0 -I -0 -0 -6 0 0 2 2 0 0 0 0 0 0 3 0 3 0 0 0 0 6 2 0 O 0 0 I 0 0 0 0 0 2 I 0 0 0 1971 115 115 4.3 47 45 38 43 50 39 -I 4 43 61 -0 1 5 -0 -0 -0 -0 -0 -0 -0 4 -0 17 -8 -0 -0 -0 -I1 -4 -0 -0 -4 -0 -0 3 3 0 0 0 2 0 0 4 3 0 6 S 2 3 0 0 6 0 0 0 2 0 I1 1972 115 115 4.1 46 53 50 50 57 54 2 1 -7 4 -7 52 72 20 -5 -0 -0 -0 -0 -0 -0 -0 -I -6 -5 -I -2 -6 -2 -0 -0 -5 3 0 9 5 0 2 0 0 0 3 9 0 0 2 0 3 0 5 4 0 3 0 0 1 1 1 1973 114 114 7.0 611 iS 73 69 79 77 -9 12 24 -0 -9 -7 12 63 BB 23 -0 -9 -0 -0 -0 -4 -9 -I -I -0 0 2 2 0 0 4 3 2 0 0 3 0 4 2 3 0 2 3 S 7 5 1 0 1 2 1 _0 I I I 1 1974 10S 123 113 115 112 12S 113 123 -12 -10 7.9 III -10 -11 -17 45 IS 10 19 -0 1 2 -9 la 81 29 14 -I -2 -0 -2 -9 -4 4 _2 0 0 3 3 6 6 0 2 3 0 4 3 1 1 2 0 0 3 0 7 2 6 0 2 1 1 1975 133 146 135 -16 106 IIS III 113 III -16 5.S 107 139 173 -29 -12 33 64 1 1 -6 1 1 26 33 17 26 IS5 -0 -2 -6 -I -4 -0 -4 _4 3 3 0 4 0 2 3 2 2 7 0 '2 2 6 0 4 5 3 1 3 0 0 6 2 0 7 3 1976 13S 141 154 III 143 -19 -19 124 III 133 136 -16 -11 5.0 -27 -11 10 10 29 30 71 -9 29 37 19 -5 -2 -5 -0 -0 -0 -4 -8 -4 4 2 4 0 6 _5 5 5 5 0 0 0 4 0 4 0 3 S9 S 0 6 0 4 a I 1977 14S 164 Ili 155 166 182 III 166 -19 226 272 5.3 -19 -31 31 79 13 13 43 62 51 56 25 41 51 52 S9 -0 -0 -6 56 89 56 10 -2 -I -S -0 -I -2 -I1 -8 -0 0 0 5 0 2 5 4 4 3 0 0 0 0 4 5 6 0 1978 202 221 III 193 -23 160 178 III 17S -23 291 349 -12 7.2 -44 65 46 S4 16 -7 16 65 51 34 12 -2 -3 -0 10 -9 IS 10 10 -2 -2 -9 -2 _2 5 5 0 0 S 0 9 0 3 9 7 0 0 6 3 5 0 0 7 7 1 1 10.0 1979 239 262 237 214 238 III 236 III -17 -2S -28 365 423 -16 -42 -16 21 44 73 41 92 1 1 1 1 2 1 73 59 30 21 13 13 1 5 -2 19 -4 -3 -3 -3 -0 -5 0 9 3 9 3 2 0 0 9 0 9 0 9 0 5 1 0 1 1 0 1-980 11.6 273 304 293 307 335 305 III III -25 -44 464 529 -11 145 -52 -11 44 95 56 41 19 19 95 69 46 37 27 37 54 27 17 -0 37 10 -3 -4 I17 -4 -4 -4 -3 4 0 4 3 0 3 0 9 a 0 7 3 0 0 S 0 9 0 1961 14.1 342 347 307 339 324 376 110 IS9 -16 110 -IS -16 543 618 -17 -14 -14 -14 -12 -83 62 24 79 96 22 20 22 22 22 -2 -2 79 SS 37 1 1 IS IS 13 12 12 -6 -6 -9 IS 12 12 18 19 If -3 0 0 0 0 0 0 7 0 0 1982 10.7 2S6 315 299 29S 32S 309 110 110 -20 -12 697 1S9 -17 -14 -12 613 -17 -17 -76 30 23 27 67 30 70 93 23 10 20 24 30 29 -S -S 27 70 93 10 23 32 27 -5 23 IS -3 13 -3 -S -9 0 0 4 0 0 0 0 0 5 0 1983 285 313 301 277 305 110 279 110 -14 -15 668 759 101 -24 1S6 8.6 -16 -15 -10 -35 56 38 33 56 41 33 30 33 69 30 17 10 57 1 6 19 -3 19 19 -0 -2 -3 -3 -4 0 0 0 0 3 5 0 5 a 0 7 0 0 IL 5 0 Fi 19t4 31S 349 329 281 309 295 ]10 -11 110 -20 708 791 S79 -13 -10 192 9.6 -10 -14 -14 -13 68 39 20 15 15 -9 11i 21 39 97 21 22 21 22 19 I11 30 IS 12 15 -5 -0 -9 17 -2 -6 -1 -5 -5 -7 4 0 0 S 0 0 0 S 0 0 289 318 301 227 320 351 110 324 110 -11 9t5 754 7.5 -23 32 71 29 20 46 27 1 2 1 3 -9 -2 32 46 36 24 32 29 -2 10 IS5 17 1 7 1 1 -7 13 4 -Y -2 W9 -0 -S 4 -0 4 9 0 9 0 0 0 9 0 9 0 0 3 0 !956 339 291 321 307 252 309 110 301 110 -12 835 962 6.0 -12 -34 10 64 S2 So 47 55 64 61 64 73 31 61 24 56 S2 36 10 -2 -2 1 5 -2 -3 -2 -5 -3 -9 0 0 9 2 7 S 0 a 0 2 5 0 0 S 7 0 0 3 1 1987 10S0 363 397 355 32S 361 109 348 246 109 -16 942 100 10t) lobm -20 5.S -16 106 -20 -21 30 -6 10 98 73 69 91 98 9S 71 64 I: I10 1`2 -7 -2 -2 I19 -I 14 -I -6 -I1 -2 -3 0 0 8 4 2 7 3 0 3 0 _ 4 0 2 19J5 1047 1066 380 418 405 423 463 413 109 106 140 !05 227 109 -19 -19 106 105 106 106 106 -14 -34 6.7 -31 -14 -12 13 72 64 36 1 3 -7 61 94 la 1 5 -2 1 1 la -2 -3 -3 -3 -3 -4 0 a 7 3 5 0 2 0 2 0 0 2 7 5 1989 1046 1073 469 512 447 417 45S 437 235 109 109 -15 -27 S.l -15 -16 -12 -27 -23 -16 -24 -16 -72 -24 24 -16 24 S0 40 21 54 21 -7 -2 la -9 -1 -7 -I -3 -7 -I -I 1 1 9 0 0 S 4 4 3 4 3 0 3 0 3 a 3 4 199fl 1066 1144 474 503 522 571 499 519 109 333 109 -26 -26 -82 7.5 -15 -10 -46 -16 -74 -16 -46 -10 25 95 47 20 22 25 -I 20 63 21 37 22 13 13 79 25 10__-3 -3 -2 -3 -3 -I 6 9 0 0 1 0 3 0 0 2 3 0 3 3 ' 1991 11451202542591556561612109543109-10436-10-5210047-92-521105.4-10-19-1020-33 10 421 1 go 32291020S07421292SIS1 1I12-224IS-30004005510211<br>16This table was derived through<br>simple aggregation of individual series; this implies that items may sometimes not add to the total since wheii imnportant items were nmissing the<br>total was set to zero whiile other ilems miay lhave been available, this is miostly true for early years. Also the CIF-FOB factor has been recalculated as ain weighted average.<br><!-- End of picture text -->
Annex 2 - **The Sample of 84** Countries

|East Asia and the Paci<br>China|fic Europe and Central Asia Latin America and the<br>Caribbean<br>Bulgaria<br>Argentina|North Africa and the<br>Middle East<br>Ali|South Asia<br>|Sub-Saharan Africa<br>|
|---|---|---|---|---|
|Fiji|<br> <br>Cyprus<br>Barbados|gera<br>Et Ab R|Bangladesh<br>|Benin<br>|
|Indonesia<br>Korea, Rep.|<br> <br>Czechoslovakia<br>Bolivia<br>Hungary<br>Brazil|gyp, ra ep.<br>Jordan<br>M|Nepal<br>Pakistan<br>|Botswana<br>Burkina Faso<br>|
|<br>Malaysia|<br> <br>Malta<br>Chile|orocco<br>O|S-r Lanka|Chad<br>|
|Philippines|<br>Poland<br>Colombia|man<br>Si Ab||Comoros<br>|
|<br>Solomon Islands|<br>Portugal<br>Costa Rica|yran ra Rep.<br>Tunisia||Co igo<br>'|
|Thailand|<br> <br>Romania<br>Dominica|||Cote dlvoire<br>|
|Vanuatu|<br>Turkey<br>Dominican Rep|||Ethiopia<br>|
|Western Samoa|<br>.<br>Yugoslavia<br>Ecuador|||Gabon<br>|
||<br> <br>El Salvador<br>G renada|||Gambia, The<br>Ghana<br>|
||<br>Guatemala<br>Haiti|||Kenya<br>Lesotho<br>|
||<br>Honduras<br>Jamaica|||Madagascar<br>Mali<br>|
||<br>Mexico|||Niger<br>|
||<br>Nicaragua|||Nigeria<br>|
||<br>Panama|||Rwanda<br>|
||<br>Paraguay|||Senegal<br>|
||<br>Peru|||Seychelles<br>|
||<br>St Kitts and Ni|||Sudan<br>|
||. evs<br>St Lucia|||Swaziland<br>|
||.<br>St Vincent|||Tanzania<br>|
||.<br>Trinidad and Tobao|||Togo<br>|
||g<br>Uruguay|||Uganda<br>|
||<br>Venezuela|||Zaire|
Annex 3 - Description of Input Series!'

|Output Name<br>|Databas|e Label|Field Database Name|Last Update|
|---|---|---|---|---|
|Travel & Tourism<br>|BOP<br>|ID.A<br>|D4Q Travel: credit (BOP line 9)|13 March 1993|
|Reinvested Earnings, Credit<br>|BOP<br>|IEIA<br>|DAQ Reinvested earnings on direct investment abroad (BOP line 11)<br>|13 March 1993<br>|
|Reinvested Earnings, Debit<br>|BOP<br>|IElB<br>|D4Q Reinvested earnings on direct investment in the country (line 12)|13 March 1993|
|Investment Income<br>|BOP<br>|IG.A<br>|D4Q Other investment income: credit (BOP lines 15,17 and 19)<br>|13 March 1993|
|Other Investment Income: Private<br>|BOP<br>|IG3A<br>|D4Q Other invetsment income: credit (BOP line 19)|13 March 1993|
|Investment in Bonds<br>|BOP<br>|6N IX<br>|D4Q Portfolio investment: other bonds (BOP lines 56 to 58)<br>|13 March 1993|
|Corporate Equities<br>|BOP<br>|6PIX<br>|D4Q Portfolio investment: corporate equities (BOP lines 59 to 61)|13 March 1993|
|Other Short-Term Capital, Net<br>|BOP<br>|8.2X<br>|D4Q Other short-term capital of other sectors (BOP lines 93 to 97)<br>|13 March 1993|
|Other Short-Term Capital, Debit<br>|BOP<br>|8K2X<br>|D4Q Other short-term capital of other sectors: other assets (line 94)|13 March 1993|
|Increase in Reserves<br>|BOP<br>|2.. X<br>|D4Q Reserves (BOP lines 98 to 111)<br>|13 March 1993|
|Foreign Direct Investment<br>|BOP<br>|3. .X<br>|D4Q Direct investment: net|13 March 1993|
|Capital Account<br>|BOP<br>|... X<br>|D4Q Capital account|13 March 1993|
|Current Account<br>|BOP<br>|A.. C|D4Q Current account|13 March 1993|
|Net Errors & Omissions<br>|BOP<br>|.A.X|D4Q Net errors and omissions|13 March 1993|
|US Treasury Bill Rate<br>|IFS<br>|60C. ZF<br>|USA US Treasury Bill Rate|12 March 1993|
|Deposit Money Banks<br>|IFS<br>|.7A.DZF|Deposit Money Banks: Assets|12 March 1993|
|FOB-CIF Conversion Factor<br>|IFS<br>|.. V.. Z.<br>|FOB-CIF Conversion Factor<br>|12 March 1993|
|Debt Outstand. & Disb., All<br>|DRS<br>|SLT_ALL PLUSIMF|DOD Total external liabilities (short and long term + IMF credit)|29 January 1993|
|Debt Outstand. & Disb., PNG<br>|DRS<br>|PNG_ALL TOTAL<br>|DOD Private nonguaranteed, all creditors, total<br>|29 January 1993|
|Exports (country view. FOB)<br>|DOT<br>|EXP_FOB<br>|CRY Exports of goods & services, FOB, as reported by the country|16 March 1993|
|Imports (country view, CIF)<br>|DOT<br>|IMP_CIF<br>|CRY Imports of goods & services, CIF, as reported by the country<br>|16 March 1993|
|Imports (world view, FOB)<br>|DOT<br>|EXP_FOB|WLD Exports of goods & services, FOB, as reported by the world|16 March 1993|
|Exports (world view, CIF)<br>|DOT<br>|IMP CIF<br>|WLD Imports of goods & services, CIF, as reported by the world|16 March 1993|
|Debt Reduction, PPG<br>|DRS<br>|DRP|Debt Reduction, PPG|29 January 1993|
|Debt Reduction, Short-Term<br>|DRS<br>|DRS<br>|Debt Reduction, Short-Term|29 January 1993|
|Debt Reduction, PNG<br>|DRS<br>|DRN<br>|Debt Reduction, PNG<br>|29 January 1993|
|Exchanige Rate, Impact|DRS|XR1|Exchange Rate Impact|29 January 1993|

l<sup>7</sup> BOP. IFS and DOT are all I'F databases, respectivelv: Balance of Pavments, International Financial Statistics and Direction of Trade; thev reside on the BESD svstem. DRS is the World Bank. IECDI Debt Reporting System database
**Annex 4** - **Relative Importance of the 84-Country Sample in Developing World'**<sup>**8**</sup>

**GDP** of the 84-Country Sample as a share of GDP of GEP World

<!-- Start of picture text --> 10oo0% I- -.-.-.-..-..... _-.<br>90%<br>90% _<br>70%<br>80%<br>60%<br>40%<br>30%<br>20% -<br>10%-<br>0% --- I<br>1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 198e 1987 1988 1989 1990 1991<br>7 E __ 84 Developing Countries _______ C i Complement for GEP world_ _ __I<br><!-- End of picture text --> Stock of Flight Capital of the 84-Country Sample as a Share of Stock of Flight Capital of GEP World <!-- Start of picture text --> 100% - --<br>90% _<br>/0%<br>70%<br>D0%<br>D0%<br>40%<br>30%<br>20%<br>10%<br>0%<br>1977 1978 1979 1980 1981 1982 1983 1994 1995 1988 1987 1988 1989 1990 1991<br>Z 84 Developing Countries Complement for GEP world<br><!-- End of picture text --> 1<sup>8</sup> GEP world refers to 151 countries as used in Global Economic Prospects, 1993. The World Bank, The GEP world figure of capital flight does not include data for all countries (outside the 84) for all years.
**Policy Research Working Paper Series**

|**Titlb**|**Author**|**Date**|**Contact**<br>**for paper**|
|---|---|---|---|
|WPS**1**64 Power, Distortions,<br>Revolt, and<br>Reform in Agricultural<br>Land Relation|Hans P. Binswanger<br>s Klaus Deininger<br>Gershon Fader|July 1993|H. Binswanger<br>31871|
|WPS**1**65 Social Costs of the Transition to<br>Capitalism:<br>Poland, 1990-91|Branko Milanovic|August 1993|R. Martin<br>39026|
|WPSI 166 The Behavior of Russian Firms in<br>1992: Evidence<br>fromaSurvey|Simon Commander<br>Leonid Liberman<br>Cecilia Ugaz<br>Ru. an Yemtsov|August 1993|0. del Cid<br>35195|
|WPS**1**67 Unemployment<br>and Labor Market<br>Dynamics in Russia|Simon Commander<br>Leonid Liberman<br>Ruslan Yemtsov|August 1993|0. del Cld<br>35195|
|WPS1 168 How Macroeconomic<br>Projections<br>in Policy Framework<br>Papers for the<br>Africa Region Compare with Outcom|Rashid Faruqee<br>es|August 1993|N. Tannan<br>34581|
|WPS**1**69 Costs and Benefits of Debt and<br>Debt Service Reduction|Eduardo Fernandez-Ari|as August 1993|R. Vo<br>33722|
|WPS**1**70 Job Search by Employed<br>Workers:<br>The Effects of Restrictions|Avner Bar-Ilan<br>Anat Levy|August 1993|D. Ballantyne<br>37947|
|WPS117'i Finance and Its Reform: Beyond<br>Laissez-Faire|Gerard Caprio, Jr.<br>Lawrence<br>H. Summers|August 1993|P. Sintim-<br>Aboagye<br>38526|
|WPS**1**72 Liberalizing<br>Indian Agriculture:<br>An Agenda for Reform|Garry Pursell<br>Ashok Gulati|September<br>1993|D. Ballantyne<br>37947|
|WPS**1**73 Morocco's<br>Free Trade Agreement<br>with<br>the European Community:<br>A Quantitative Assessment|Thomas F. Rutherford<br>E. E. Rutstr6m<br>David Tarr|September<br>1993|N. Artis<br>38010|
|WPS1 174 Asian Trade Barriers Against Primary<br>and Processed<br>Commodities|Raed Safadi<br>Alexander Yeats|September<br>1993|J. Jacobson<br>33710|
|WPS**1**75 OECD Trade Barriers Faced by the<br>Successor<br>States of the Soviet<br>Union|Bartlomiej<br>Kaminski<br>Alexander Yeats|September<br>1993|J. Jacobson<br>33710|
|WPS**1**76 Cash Social Transfers,<br>Direct Taxes,<br>and Income Distribution<br>in Late<br>Socialism|Branko Milanovbc|September<br>1993|R. Martin<br>39065|
|WPS**1**77 Environmental<br>Taxes and Policies<br>for Developing<br>Countries|Neil Bruce<br>Gregory M. Ellis|September<br>1993|C. Jones<br>37699|
Policy **Resarch** Working Paper **Series**

|**Title**|Author|Date|Contact<br>**for paper**|
|---|---|---|---|
|WPS**1**78 Productivity<br>of Public Spending,<br>Sectoral Allocation Choices, and<br>Eoonomic<br>Growth|John Baffes<br>Anwar Shah|September<br>1993|C. Jones<br>37699|
|WPS**1**79 How the Market Transition<br>Affected<br>Export Performance<br>inthe Central<br>European Economies|Bartiomibj<br>Kaminski|September<br>1993|P. Kokila<br>33716|
|WPS1 180 The Financing and Taxation of U.S.<br>Direct Investment<br>Abroad|<br>Harry Huizinga|September<br>1993|R. Vo<br>31047|
|WPS**1**81 Reforming<br>Health Care: A Case for<br>Stay-Well Health Insurance|Zeljko Bogetic<br>Dennis Heffley|September<br>1993|F. Smith<br>36072|
|WPS**1**82 Corporate<br>Governance<br>in Central<br>and Eastern Europe: Lessons from<br>Advanced Market Economies|Cheryl W. Gray<br>Rebecca J. Hanson|September<br>1993|M. Berg<br>31450|
|WPS1 183 Who Would Vote for Inflation in<br>Brazil? An Integrated<br>Framework<br>Approach<br>to Inflation and Income<br>Distribution|Cheikh Kane<br>Jacques Morisett|September<br>1993|T. Hollestellb<br>30968|
|WPS**1**84 Providing Social Benefits in Russia:<br>Redefining<br>the Roles of Firms and<br>and Government|Simon Commander<br>Richard Jackman|September<br>1993|0. del Cid<br>35195|
|WPS**1**85 Reforming Hungarian<br>Agricultural<br>Trade Policy: A Quantitative<br>Evaluation|Morris E. Morkre<br>David G. Tarr|September<br>1993|N. Artis<br>37947|
|WPS**1**86 Recent Estimates<br>of Capital Flight|Stijn Claessens<br>David Naud6|September<br>1993|R. Vo<br>31047|
|WPS**1**87 How Should Sovereign<br>Debtors<br>Restructure<br>Their Debts? Fixed<br>Interest Rates, Flexible Interest<br>Rates, or Inflation-indexed|Andrew Warner|September<br>1993|J. Queen<br>33740|
|WPS**1**88 Developmentalism,<br>Socialism,<br>and<br>Free Market Reform: Three Decade<br>of Income Distribution<br>in Chile|Mario Marcel<br>s Andres Solimano|September<br>1993|S. Florez<br>39075|
|WPS**1**89 Can Communist<br>Economies<br>Transform Incrementally?<br>China's<br>Experience|Alan Gelb<br>Gary Jefferson<br>Inderjit Singh|September<br>1993|PRDTM<br>37471|
|WPS**1**90 The Government's<br>Role in Japanese<br>and Korean Credit Markets: A New<br>Institutional Economics<br>Perspectiv|Yoon Je Cho<br>Thomas Hellmann<br>e|September<br>1993|T. Ishibe<br>37665|