7 WORKI'JG PAPERS

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IntemationalEconomics Uspartment TheWorld Bank September1993 WPS1186 Public Disclosure Authorized

Recent Estimates of Capital Flight Public Disclosure Authorized

Stijn Claessens and DavidNaude Public Disclosure Authorized

Estimates of capital flight calculatedusing several methodolo- gies do not differ widely.Capital flight is more widespreadthan commonly assumed and, relative to GDP, evenly distributed.

Public Disclosure Authorized The capital flight-GDPLorenz curve is close to the 45-degree line.

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Debtand Inllkdnal Fbwnoo

WPS 1186

This paper - a product of the Debt and InternationalFinance Division, InternationalEconomics Tepartment- is part of a larger effort in the departmentto studythe integrationof developingcountries in world financialmarkets. Copies of the paper are availablefree fromthe WorldBank, 1818H Street NW, Washington,DC 20433. Please contact Rose Vo, room S8-042, extension 31047. (Septemrber1993, 27 pages). For individualcountry data, availableon a floppydisk, contact ShelleyFu, extension 33885 (fax 477-)661). Researchersand policymakershave in recent Claessensand Naudd discuss the data used years paid considerableattention to the phenom- for calculatingcapital flightand the adjustment enon of capital flight.Researchers have focused that must be made. They present aggregate on four questions: What conceptshould be used capital flightfigures using the various measuires to measure capital flight? What figure for capital for o4 developingcountries. flight will emerge,using this measure?Can the occurrenceand magnitudeof c-apitalflight be The figuresshow a pattem of increasing explainedby certain (economic)variables? What capital flightuntil 1988, followedby a return of policy changescan be useful to reversecapital flight capital between 1989 and 1991. f-light? Claessensand Naude present regional Claessensand Naude focus strictlyon aggregatesof capital flightand rank countries presentingestimates of capital flightusing a and regionsby the level of capital flight relative number of alternativemethodologies. In their to GDP. They find that capital flightis more discussionof these methodologies,they show widespreadthan commonlyassumed and, that althoughthe approachesto measuring relative to GDP, is rather evenly distributed.The capital flightdiffer, the identitiesused in balance capital flight-GDPLorenz curve is above the 45- of paymentdata make thcm close in final degree line, indicatingthat countrieswith a measurement.In particular,the so-calledWorld smallerGDP have more capital flightthan one Bank residual and Dooleymethods - presented would expect if it were distributedproportionate in the past as very differentapproaches to to GDP. measuringcapital flight - actually produce similar measurements.

The PolicyResearch Working Paper Series disseminates the findings of workunder way in the Bank.An objectiveof the series is to get these findings out quickly,even if presentationsare less than fully polished.The findings, interpretations,and conclusionLsin these papersJo not necessarilyrepresent official Bankpolicy.

Producedby the PolicyResearch 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 mnagnituideof capital flight be explained by certain (economic) variables; and what policy implicationsfollow (e.g., which policy changes can he useful in reversingcapital 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 methodologieswhich have been used for measuringcapital flight. The paper draws attention to the fact that, while the alternative methodologiesmay differ in their approach to meastiring capital flight, tne identities used in balance of payment data make these methodologiesclose 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 adjustmentswhich need to be made. It then presents aggregate capital flight figures using the various measures for a group of 84 developing countries. (Individualcountry 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 - ResiduialMethods 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. 14

V - References p. 22

Annexes I. Introduction

Over thle years, "capital flight" has received much attention from researchers and policy makers (see, for example, WorldBank, 1985 and 1993). Using estimates of capital flight from developing countries, authors have drawn attention to the magnitude of this phenomenon--particularlyfor Latin Amer'a. It is generally agreed that these large private capital outflows have represented an important macroeconomicproblem 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 understandingof 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 implicationsfollow (for example, how to reverse 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 exist. Nor was any adjustmentmade for country-specificinformation or circumstances2. For individual countries or time periods, researchers may want to make adjustmentsto 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 developingcountries.

Ilndividualcountry data are availablefrom the WorldBank on a floppydisk (contact:Ms. ShellyFu, Tel. (202) 473-3885, Fax. 477-0661). 2Eggerstedtet al. (1992), for example,draw attentionto the fact that most capital flight measuresdo not correct for the foreign currencydeposits held by state-ownedcompanies. 2

H. Different Measuresof Capital Flight

What is capital flight? Definitions are manv They can be broad, woveringall 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 rneasureto create another. Finally, data sources differ, which give conflicting final figtlres and make comparisonsamong the various measuresdifficult. 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);3 hot money measutl,s (Cuddington); and measuring trade misinvoicing. For each, there are variations which lead to (minor) differences. The startingpoint for all measures is balance-of-paymentfigures.

Balance of payments. Let us take a stylized balance-of-paymentsframework, using standard notaijon, but supplementedby World Bank debt data and based on the EMF's Balance of Payments Yearbook.4

3Wewill showbelow that in -ffecttne Dooleymethod is also a residualmethod. 4 Thepresentation of itemsbelow follows that in Ciimbyand Levich(1987), Chang and Cumby(1991) and Chang,Claessens and Cumby(1993). The Balanceof PaymentsYearbook line item numbersare thosereported in the hardcopy of the'BOP Year books. The correspondingcodes are listedin Annex3. 3

Table 1: Balance of Payments

A. Current Account (IMF BoPY* line 1 .44), which includes Al. Travel: credit (IMF BoPY line 9) A2. Reinvestedearnings on direct investmentabroad (IMF BoPY line 11) A3. Reinvestedearnings on direct investmentdomestically (IMF BoPY line 12) A4. Other investmentincome: credit (IMF BoPY line 19)

B. Net Equity Flows of which: B1. Net foreign direct investmnent(IMF BoPY line 45..52) B2. Portfolio Investment: Corporate equities (IMF BoPY line 59..61)

C. Other short-termcapital of other sectors: net (IMF BoPY line 93 .97) of r.'hich: Cl Other assets (IMF BoPY line 94)

D. Portfolio investment,other bonds (IMF BoPY line 56-58)

E. Change in deposit money banks' foreign assets (IFS line 7a.dzf)

F. R,..erves (IMF BoPY line 98.. 111)

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

H Other long-term capital of resident official sector (IMF BoPY line 62- 68)

or

H'. Change in external debt (World Debt Tables - see further section 4)

* IMF Balance of Payments Yearbook.

Since all capital flight measures attempt to estimate private capital flows, this would imply that capital flight can be simply measuredas 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;.idcnough. 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-paymentside:itity and proxying other balance-of-payments items. How? The balance-of-paymentsidentity 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-paymensfor 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.5 User of funds include the currei'+-accountdeficit 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-paymentsitems, 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-paymentsdata. 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-paymentsidentity, 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 acLordingto World Bank deta (H-H').6

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 mnethoddiffers 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 substractstravel (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-paymentsaccounts arid making three adjustmentsto 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-sectoracquisition 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 internationalmarket interest rate (for exaimple,the one-year US Treasury Bill rate). If investmentincome is under- reported, then the imputed stock of external assets will less than external assets using balance-of-paymentsfigures (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.7

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 UnreportedForeign Claims = A + B + C - D where

A. CumulativeRecorded non-equityBalance 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-termCapital (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. CumulativeErrors and Ormissions(IMF BoPY line 112)

C. Adjustmenitfor UnrecordedClaims

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

where: CumulativeRecorded Balance of PaymientsLiabilities

= C1 + C2 + C3 + C4 + C5 + C6 + C7 + C8

o/w Other Long-termnCapital (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 Residentofficial 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 investmlenitincome: 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 (sholl- term, 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.8 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 non- FDI 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 countrynmeans 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 ancdomissions 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 DOT-imports of world with that country as partner, line IMP_cif) Xc: Exports as reported by the country FOB (IMF DOT-exports of country with world as partner, line EXP_fob) Mc: Imports as reported by the country CIF (IMF DOT-imports of country with world as partner, line IMP cif) Mw: Exports to that country as reported by the world FOB (IMF DOT-imports of world with that country as partner, line 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 unpuiblislheddata is the currency-adjuistment factor.) The IMF Balance of Payments Yearbook (BoPY) is the source for almost all BOP cuirrent and capital-accounlititenms. Data from thie BoPY were taken fromiithe 13 March 1993 update of the IMF BoPY- tape. The World Bank Debtor Reporting System (DRS) is the source for all external debt statistics. The external debt figures comilefroml 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. IFS- data 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 oimissionlsare 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, Limangein 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 (reschieduiledor 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 exchange- rate 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 thliusof 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-accoLiuntdeficit will be overstated on an actual cash flow basis and thus the resicidialestimiiates 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 thiechange 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 private- sector 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 measuireof capital flight is also provided which includes PNG- debt (and the necessary adtjustimientsfor 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, non- guaranteed 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.14

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 long- tern debtand all short-termdebt. MorganGuaranty (1986) excludes the increasein short-termforeign assets of the bankingsystem from the increasein total privatesector claims. Acquisitionof foreign assets by nonbankagents, however, continuesto be consideredcapital flight by Morgan. Since Morgan offersno explanationfor treatingthe bankingsystem differently from other firmsand individuals.we do not pursueits distinctionhere. 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,0sof USS 190

100

80

71 72 73 74 76 79 77 78 79 80 8l 8. 8 84 85 86 87 88 8Y 90 9

-50

.100

World Bank Residual Dooley

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 calculationswas 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 legitimateforeign 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 contemporaneouscorrelation.

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-paymentsfigures on the flow of public and publicly guaranteeddebt 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 1986- 89, 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-paymentsaccounts in those years.

Figure 2: World Bank Residual and Hot Money (Annual Flows) Bl11ons of USS

120

t 00

80

e0

40

20 e

0 -f--'..._ ... .

71 72 73 74 76 78 77 78 79 80 81 82 83 84 86 86 87 88 8a 90 91

.20

World Bank Residual Hot Money 1

The three misinvoicing measures are exports underinvoicing, imports overinvoicingand 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 overinvoicedup to 1985 and undervoicedthereafter. 16

While the underinvoicing of exports is consistent with capital flight, the systematicunderinvoicing of imports after 1981 and the overinvoicingof exports before 1985 are not. Underinvoicingof 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 exchangeeamings (see Eggerstedt et al. (1993). Taking the two misinvoicingmeasures 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 misinvoicingestimates are a useful approximationfor 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.

Figure3: CapitalFlight Due to Trade Misinvoicing(Annual Flows) 8llon of US$

30 T

1 6 -.-

7Z .72 73 74 76 7e 77 78 79 sO 81 82 83 84 85 8e 87 es 89 90 91

-16 -r

-30 -

-46 -

Trade Misinvoicing, - Trade Misinvoicing, Trade Misinvoicing, Total Exports Imports

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 respectivelyfor 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

Figure4: WorldBank and DooleyCombined with TradeMisinvoicing (Annual Flows) BSllhoneof USt

160 T

100

X\ 50

°--0 - / ------71 72 73 74 78- -1_ 77 78 79 80 81 82 83 84 86 8e 87 88 89 90 91

World BankResidual + Trade Misinvoicin - Dooley + Trade Misinvoicing

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 accumulatedstock of flight capital was $500 billion, or about 44 percent of their stock of external debt. The Dooley measure shows capital- flight 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.

Figure5: Stocksof FlightCapital (with and withoutinterest compounding)

600

4C0

300

200

100

0. t : *- . -_.. . . . 71 72 73 -74A, 75 76 77 78 79 90 8 82 83 84 85 86 87 88 89 90i 6 -100

- - - -World Bank Dooley + Trade World Bank Dooley + Trade Residual + Misinvoicing Residual + Misinvoicing(no Trade (with interes:) Trade interest) Misinvoicing Misinvoicing(no (with interest) interest) 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 mneasureabout 44 percent in 1985 and 37 percent in 1991 (see Figure 6).

Figure6: Top Ten Countriesfor WorldBank Residual Measure AverageAnnual Flows 1981-1991 M,Ilons of US$ 4500

4000

3500

3000

2500

2000

1 500

1000U

0 4-'- -- - ~-- -- China Argentina Mexico Venezuela Poland Brazil Nigeria Egypt, Turkey Indonesia Arab Rep.

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 (excludingmisinvoicing) represented more than 85 percent of the region's GDP. By this measure, capital flight was, relatively, the largest for the Middle-Eastand 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-EastAsia, only 15 percent of 1991 GDP. 19

Figure7: Ratioof FlightCapital to GDPby Region World BankResidual, Stocks 1991 Per,entge5 120

100

80

40 20 ioE E. t Asia Europe and Latin North U.*.._+.-,_ South Asia ..i Sub- All and the Central America Africa and Saharan Developing Pacific Asia and the the Middle Africa Countries Caribbean East

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-measureddebt stock (Figure 9).

Figure8: TopTen Countriesfor the Ratioof FlightCapital to GDP World BankResidual. Stocks - 1991 Percentoage

300 r

2001

1100

50 Ii Sudan Egypt, Panama Gabon Bulgaria Nigeria Venezuela Syrian Jordan Uganda Arab Rep. Arab Rep. 20

Figure 9: Top Ten Countriesfor the Ratio of Flight Capitaito Debt Sock World Bank Alsidual,Stocks 1991 Pwcarn,ge 900

coo_

700

400

300 100IiiliEE 0 Romania Vanuatu Oman Gabon Venezuela Egypt, Trinidad Panama Lesotho Malaysia Arab Rep. and Tobago

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 remaining20 percent of the countries represent more than 80 percent of all capital flight stock.

Figure 10: Lorenz Curveof Flight Capital - World BankResidual, Stocks - 1991

.. I 0.8 t*

0.6

Share of Stock of I., Total Flight Capital

0.2 -

O -+- -- e-- S--, - o0.1 b0.2 03 0.4 0.6 0oe 0. 0.8 0.9

-0.2

Deciles 21

Figure 11: Lorenz Curve of Flight Capital weighted by GDP World Bank Residual, Stocks - 1991

0,8 -

0 a Shtia of Stock of Total FlightCapital 0.4

0 0.1 0.2 0.3 0.4 05 0F. 0.7 0.8 0.9 1 GDPDeciles

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 developingcountries. 22

V. Recent Papers on CapitalFlight

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, Przemyslawand 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 InternationalEconomics, 68-78.

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

______1993, Global Economic Prospects. Washington, DC, World Bank. AnnexI1- SummaryTable for the 84-CountrySaMple16 - Billions of US$

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1-980 WorldBank Residual 1961 1982 1983 19t4 9t5 !956 1987 19J5 1989 199fl 1991 0 -0 -I 2 2 3 -4 56 10 2 1 37 +C-hange in AdjustodDebt Stock 0 6 9 IS 27 33 21 32 64 98 106 -16 -3 IS 12 la 26 29 89 65 73 95 79 70 56 39 f AdjuwtedDebt Stock 37 43 52 63 81 46 S2 106 105 -I 20 S0 107 136 226 291 365 464 543 613 668 708 754 835 t Debt OusstaM. hDiab ...... All . ..52 61 72 BB III 139 942 1047 1046 1066 1145 173 272 349 423 529 618 697 759 791 S79 962 10S0 - Debi Outstanl. i& Disb. PNG is 17 20 23 29 33 37 1066 1073 1144 1202 + Debt 43 51 59 69 SS 93 101 97 W9 So 73 Reduction,PPG 0 0 0 0 0 0 a 0 61 54 63 74 + Debt 0 0 0 0 0 0 0 9 1 4 11 Reduction,Short-Tema 0 0 0 0 0 0 0 0 11 21 21 - Exc-hange 0 0 0 0 0 0 0 0 0 0 0 RateImpact 0 0 0 1 1 -2 0 4 0 0 0 + Foreign Direct IrBvcstiment 7 -0 -3 -12 -9 -10 -14 36 47 69 -31 -16 2 2 2 3 3 6 4 5 7 37 4 + Current Account 9 S 12 10 IL S 9 S 1`2 la 21 22 -6 -8 -6 -4 -9 -29 -27 -31 -44 -42 29 + Inereasein Rescrves -52 -83 -76 -35 -14 -23 -34 -3 -4 -12 -I -33 I -0 -5 -9 -10 2 -11 -8 -9 -16 -11 12 t Corporxte Equities 0 23 5 -13 -0 7 -20 -14 -27 -46 -52 -0 0 0 0 0 0 -0 0 0 0 0 0 WorkJ Ban Residual 0 0 0 0 2 2 3 3 0 t PNG 0 0 1 4 7 7 -0 62 + World Bank Residual IS 30 46 37 32 41 17 24 55 91 94 -23 0 -0 -I 2 2 3 -4 56 10 21 37 6 2S + Ct nge in DOD. PNG 0 18 27 33 21 32 64 98 106 -16 -3 IS 2 3 3 6 4 4 6 S 9 9 19 5 • Debt Reduction,PNG (change) 0 0 Fi 4 -S -9 -7 -12 -7 9 11 0 0 0 0 0 0 0 0 0 0 0 0 aogn 0 0 0 0 0 0 0 ' 0 0 -I1 -2 -I -4 2 -8 51 1 13 27 1 + World B nk Residmal 0 0 1 2 2 3 1 23 30 22 29 61 100 106 -24 -16 5 4 56 10 21 37 IS 27 33 21 32 64 9S - Changein DepositMoney Bans 0 0 1 3 6 2 106 -16 -3 I f 3 5 9 9 10 7 4 3 -2 3 3 DepositMoney Banks 3 4 5 S 14 17 19 -2 0 a 13 12 25 34 44 54 62 67 69 68 71 73 71 72 Cline 0 -4 S0 95 100 -6 7 -11 -6 -16 41 -12 -5 3 -17 -5 5 + Morgw 0 I1 -2 -I 4 2 -6 0 31 64 64 -72 -74 47 -Travel S9 51 1 13 27 If 23 30 22 29 61 h Tourism 3 3 4 5 6 7 S 10t) 106 -24 -16 5 -Reinvested 10 12 15 17 IS IS 17 19 20 24 30 36 Famrnigo,Credit 0 -0 -0 0 0 0 0 0 40 47 42 -Reinveled E mings. Dcbit 0 0 0 0 0 0 0 0 0 0 0 0 -0 -0 -0 -0 -I -I I -2 -2 -2 0 0 Other InvestmentIncomc: Private -3 -3 -3 -2 -1 -2 -2 -2 -2 -2 -2 -2 0 0 0 1 2 '2 2 2 3 5 9 Doolcy 13 13 10 I11 10 9 8 a la 13 1 1 0 -4 -5 0 -17 -12 6 52 9 19 41Chbange in AdjtistodDcbt Sto,k 0 6 9 4 24 30 57 30 IS5 56 I19 140 -9 -82 -92 12 IS 26 29 S9 65 73 95 79 70 56 39 - tCapitalAccount 6 S 46 S2 lobm !05 -1 20 go 5 4 10 33 30 31 46 41 56 96 93 38 - Net Errors & Omissions -0 -0 0 20 27 36 4 7 S 1 32 -0 -2 -4 -5 -I -2 1 -4 -14 -17 -3 -5 + Increaein Reacres -I -0 -5 -9 -10 4 2 -I -3 4 0 1 2 -11 -S -9 -16 -11 12 23 5 -13 -0 7 + FoireignDircect Investment 2 2 2 3 3 6 -20 -14 -27 -46 -52 + 4 5 7 9 a 12 10 a S 9 S Comporte Equities 0 -0 0 0 0 0 0 I: la 21 22 29 -Change -0 0 0 0 0 0 0 0 0 0 2 r StockofRepoiedAssts O 3 3 1 19 IS5 0 2 3 3 0 f Sloct of Repontod 4 0 3 41 -6 -3 -24 -10 17 a -21 -34 Assets I11 15 21 24 45 64 71 79 S4 -7 79 110 + InvcstmnenlInconie 92 145 IS9 1S9 1S6 192 227 252 246 227 235 0 0 0 2 4 4 4 4 6 333 436 / US TreasuryBill Rate 9 I17 22 20 16 IS 17 15 14 15 4 6.4 4.3 4.1 7.0 7.9 5.S 5.0 5.3 7.2 10.0 25 24 11.6 14.1 10.7 8.6 9.6 7.5 6.0 5.S 6.7 S.l 7.5 5.4 Hi tMoncy I 0 0 -0 1 3 5 -Net Effrso h Omiwions 6 3 3 3 7 20 24 7 12 11 0 -0 -0 0 _0 _2 _4 _5 -I _2 1 7 7 -I 3 2 -Othr Shon-TeanCVital. Debit -4 -14 -17 -3 -5 4 -2 -I -3 4 0 1 -0 -0 -0 -0 -0 -0 -2 -2 -2 -4 -4 -6 -S -4 -7 -7 2 -6 -3 -3 -3 -3 Hot Mome 2 -I -0 -0 I 1 -NelEro h. oOmi 3 5 0 5 -3 3 22 30 19 15 13 -3 io -0 -0 0 -0 -2 -4 -5 -I1 -2 3 5 3 -10 -10 _-Other Sboni-Tcnn 1 -4 -14 -17 -3 -5 4 -2 -I1 -3 4 Capital, Net I 0 -0 -0 0 1 -0 0 -3 0 1 2 0 -9 -14 -16 -10 -Y 5 -2 -2 -7 10__ Hot Money3 -I -0 -0 I 1 3 -Hot Money 2 5 0 5 -3 4 22 29 19 15 12 -5 0 -I -0 -0 I 1 3 5 0 5 -3 3 -I -15 -19 - nve tmenl in Bornds 3 22 30 19 15 13 -3 3 5 3 -10 -10 0 0 -0 -0 -0 -0 -0 -0 -0 0 -0 0 -CorporateEquitics 0 -0 0 -0 -0 0 0 0 0 0 2 10 0 0 0 0 0 -0 0 0 0 0 0 0 TnhdeMisinv.oicing, Exporb 0 0 0 _ 2 3 3 0 -5 4 -7 -9 12 -16 -19 -19 -23 -2S 44 -16 + Expoon (world vrww adj to FOB) 37 39 46 611 10S -12 -15 -9 -2 10 I10 13 24 25 20 106 124 14S 160 214 273 307 2S6 285 31S 320 309 + Expons(wofld view, CIF) 42 45 53 iS 123 IIS 363 423 469 522 561 / FOB-CiFConvcesionFactor 13S 164 178 238 304 339 315 313 349 351 339 397 115 115 115 114 113 III III 463 512 571 612 - Exponsu(country Ili III III III 110 110 110 ]10 110 110 109 109 vicw, FOB) 40 38 50 73 115 113 133 155 109 109 109 17S 236 293 324 299 301 329 324 301 355 413 447 TAde Misinvoicing. Impons 2 3 3 499 543 2 3 11 10 13 16 11 19 -2 -S 0 -11 + ImpoiU (country view, adj toFOBR) 39 43 50 69 112 133 -9 -12 -16 -19 -15 -26 -10 + Imporu 141 166 202 239 307 342 29S 277 281 289 291 32S (country view, CIF) 46 50 57 79 12S 146 154 182 380 417 474 542 /FOI-C[F Convcrmon 221 262 335 376 32S 305 309 318 321 361 418 45S Fn--tor 115 115 115 114 113 III III III III 519 591 - mporb (world vicw. FOB) III III 110 110 110 110 110 110 109 109 109 42 47 54 77 123 135 143 166 193 237 109 109 305 347 309 279 295 301 307 348 405 437 503 TradeMuinvocn Total -2 -I 4 -7 556 i Tnadc -9 -6 -9 -6 -7 -17 -25 -IS -20 -14 -20 -11 MisLnoicing, ExpoiU -5 4 -7 -9 -12 -16 -19 -19 -2 -6 -7 9 -I 10 t TradeMisinvoicing Imporst -23 -28 -44 -16 -12 -15 -9 -2 10 10 13 24 2 3 3 2 3 11 10 13 16 11 25 20 19 -2 -S 0 11i 9 -12 -16 -19 -15 -26 -10

16Thistable wasderived through simpleaggregation of individualseries; this implies that items may sometimesnot add to the total sincewheii imnportantitems were nmissingthe total wasset to zero whiileother ilems miaylhave been available,this is miostlytrue for early years.Also the CIF-FOB factorhas beenrecalculated as ain weighted average. Annex 2 - The Sample of 84 Countries East Asia and the Pacific Europe and Central Asia Latin America and the North Africa and the South Asia Sub-Saharan Africa Caribbean Middle East China Bulgaria Argentina Algeria Bangladesh Benin Fiji Cyprus Barbados Egypt, Arab Rep. Nepal Botswana Indonesia Czechoslovakia Bolivia Jordan Pakistan Burkina Faso Korea, Rep. Hungary Brazil Morocco S-r Lanka Chad Malaysia Malta Chile Oman Comoros Philippines Poland Colombia Syrian Arab Rep. Co igo Solomon Islands Portugal Costa Rica Tunisia Cote d'lvoire Thailand Romania Dominica Ethiopia Vanuatu Turkey Dominican Rep. Gabon Western Samoa Yugoslavia Ecuador Gambia, The El Salvador Ghana G renada Kenya Guatemala Lesotho Haiti Madagascar Honduras Mali Jamaica Niger Mexico Nigeria Nicaragua Rwanda Panama Senegal Paraguay Seychelles Peru Sudan St. Kitts and Nevis Swaziland St. Lucia Tanzania St. Vincent Togo Trinidad and Tobago Uganda Uruguay Zaire Venezuela Annex 3 - Description of Input Series!' Output Name Database Label Field Database Name Last Update Travel & Tourism BOP ID.A D4Q Travel: credit (BOP line 9) 13 March 1993 Reinvested Earnings, Credit BOP IEIA DAQ Reinvested earnings on direct investment abroad (BOP line 11) 13 March 1993 Reinvested Earnings, Debit BOP I El B D4Q Reinvested earnings on direct investment in the country (line 12) 13 March 1993 Investment Income BOP IG.A D4Q Other investment income: credit (BOP lines 15,17 and 19) 13 March 1993 Other Investment Income: Private BOP IG3A D4Q Other invetsment income: credit (BOP line 19) 13 March 1993 Investment in Bonds BOP 6N IX D4Q Portfolio investment: other bonds (BOP lines 56 to 58) 13 March 1993 Corporate Equities BOP 6PIX D4Q Portfolio investment: corporate equities (BOP lines 59 to 61) 13 March 1993 Other Short-Term Capital, Net BOP 8.2X D4Q Other short-term capital of other sectors (BOP lines 93 to 97) 13 March 1993 Other Short-Term Capital, Debit BOP 8K2X D4Q Other short-term capital of other sectors: other assets (line 94) 13 March 1993 Increase in Reserves BOP 2.. X D4Q Reserves (BOP lines 98 to 111) 13 March 1993 Foreign Direct Investment BOP 3. .X D4Q Direct investment: net 13 March 1993 Capital Account BOP ... X D4Q Capital account 13 March 1993 Current Account BOP A.. C D4Q Current account 13 March 1993 Net Errors & Omissions BOP .A.X D4Q Net errors and omissions 13 March 1993 US Treasury Bill Rate IFS 60C . ZF USA US Treasury Bill Rate 12 March 1993 Deposit Money Banks IFS .7A.DZF Deposit Money Banks: Assets 12 March 1993 FOB-CIF Conversion Factor IFS .. V.. Z. FOB-CIF Conversion Factor 12 March 1993 Debt Outstand. & Disb., All DRS SLT_ALL PLUSIMF DOD Total external liabilities (short and long term + IMF credit) 29 January 1993 Debt Outstand. & Disb., PNG DRS PNG_ALL TOTAL DOD Private nonguaranteed, all creditors, total 29 January 1993 Exports (country view. FOB) DOT EXP_FOB CRY Exports of goods & services, FOB, as reported by the country 16 March 1993 Imports (country view, CIF) DOT IMP_CIF CRY Imports of goods & services, CIF, as reported by the country 16 March 1993 Imports (world view, FOB) DOT EXP_FOB WLD Exports of goods & services, FOB, as reported by the world 16 March 1993 Exports (world view, CIF) DOT IMP CIF WLD Imports of goods & services, CIF, as reported by the world 16 March 1993 Debt Reduction, PPG DRS DRP Debt Reduction, PPG 29 January 1993 Debt Reduction, Short-Term DRS DRS Debt Reduction, Short-Term 29 January 1993 Debt Reduction, PNG DRS DRN Debt Reduction, PNG 29 January 1993 ExchanigeRate, Impact DRS XR1 Exchange Rate Impact 29 January 1993

7 l 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 Importanceof the 84-CountrySample in DevelopingWorld' 8

GDP of the 84-Country Sample as a share of GDP of GEPWorld

10oo0% I- -.-.-.-..-..... _-.

90%

90% _

70%

80%

60%

40%

30%

20% - 10%-

0% --- I 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 198e 1987 1988 1989 1990 1991 7 ______I E 84 DevelopingCountries Ci Complementfor GEPworld

Stock of Flight Capital of the 84-Country Sample as a Share of Stock of Flight Capital of GEPWorld

100% - -- 90% _

/0%

70%

D0%

D0%

40%

30%

20%

10%

0% 1977 1978 1979 1980 1981 1982 1983 1994 1995 1988 1987 1988 1989 1990 1991 Z 84 DevelopingCountries Complementfor GEPworld

18GEPworld refers to 151countries as used in Global EconomicProspects, 1993.The WorldBank, The GEP world figure of capital flight does not include data for all countries(outside the 84) for all years. Policy ResearchWorking Paper Series

Contact Titlb Author Date for paper

WPS1164 Power,Distortions, Revolt, and HansP. Binswanger July 1993 H. Binswanger Reformin AgriculturalLand Relations KlausDeininger 31871 GershonFader

WPS1165 SocialCosts of theTransition to BrankoMilanovic August1993 R. Martin Capitalism:Poland, 1990-91 39026

WPSI166 TheBehavior of RussianFirms in SimonCommander August1993 0. del Cid 1992:Evidence from a Survey LeonidLiberman 35195 CeciliaUgaz Ru. an Yemtsov

WPS1167 Unemploymentand Labor Market SimonCommander August1993 0. delCld Dynamicsin Russia LeonidLiberman 35195 RuslanYemtsov

WPS1168 HowMacroeconomic Projections RashidFaruqee August1993 N. Tannan in PolicyFramework Papers for the 34581 AfricaRegion Compare with Outcomes

WPS1169 Costsand Benefits of Debtand EduardoFernandez-Arias August 1993 R. Vo DebtService Reduction 33722

WPS1170 JobSearch by EmployedWorkers: AvnerBar-Ilan August1993 D. Ballantyne The Effectsof Restrictions AnatLevy 37947

WPS117'iFinance and Its Reform:Beyond GerardCaprio, Jr. August1993 P. Sintim- Laissez-Faire LawrenceH. Summers Aboagye 38526

WPS1172 LiberalizingIndian Agriculture: GarryPursell September1993 D. Ballantyne AnAgenda for Reform AshokGulati 37947

WPS1173 Morocco'sFree Trade Agreement with ThomasF. Rutherford September1993 N. Artis theEuropean Community: E. E. Rutstr6m 38010 A QuantitativeAssessment DavidTarr

WPS1174 AsianTrade Barriers Against Primary RaedSafadi September1993 J. Jacobson andProcessed Commodities AlexanderYeats 33710

WPS1175 OECDTrade Barriers Faced by the BartlomiejKaminski September1993 J. Jacobson SuccessorStates of the Soviet AlexanderYeats 33710 Union

WPS1176 CashSocial Transfers, Direct Taxes, BrankoMilanovbc September1993 R. Martin andIncome Distribution in Late 39065 Socialism

WPS1177 EnvironmentalTaxes and Policies NeilBruce September1993 C. Jones for DevelopingCountries GregoryM. Ellis 37699 Policy Resarch Working Paper Series

Contact Title Author Date for paper

WPS1178 Productivityof PublicSpending, JohnBaffes September1993 C. Jones SectoralAllocation Choices, and AnwarShah 37699 EoonomicGrowth

WPS1179 Howthe Market Transition Affected BartiomibjKaminski September1993 P. Kokila ExportPerformance in theCentral 33716 EuropeanEconomies

WPS1180 TheFinancing and Taxation of U.S. HarryHuizinga September1993 R. Vo DirectInvestment Abroad 31047

WPS1181 ReformingHealth Care: A Casefor ZeljkoBogetic September1993 F. Smith Stay-WellHealth Insurance DennisHeffley 36072

WPS1182 CorporateGovernance in Central CherylW. Gray September1993 M.Berg andEastern Europe: Lessons from RebeccaJ. Hanson 31450 AdvancedMarket Economies

WPS1183 WhoWould Vote for Inflationin CheikhKane September1993 T. Hollestellb Brazil?An IntegratedFramework JacquesMorisett 30968 Approachto Inflationand Income Distribution

WPS1184 ProvidingSocial Benefits in Russia: SimonCommander September1993 0. del Cid Redefiningthe Rolesof Firmsand RichardJackman 35195 andGovernment

WPS1185 ReformingHungarian Agricultural MorrisE. Morkre September1993 N. Artis TradePolicy: A Quantitative DavidG. Tarr 37947 Evaluation

WPS1186 RecentEstimates of CapitalFlight StijnClaessens September1993 R. Vo DavidNaud6 31047

WPS1187 HowShould Sovereign Debtors AndrewWarner September1993 J. Queen RestructureTheir Debts? Fixed 33740 InterestRates, Flexible Interest Rates,or Inflation-indexed

WPS1188 Developmentalism,Socialism, and MarioMarcel September1993 S. Florez FreeMarket Reform: Three Decades AndresSolimano 39075 of IncomeDistribution in Chile

WPS1189 CanCommunist Economies AlanGelb September1993 PRDTM TransformIncrementally? China's Gary Jefferson 37471 Experience InderjitSingh

WPS1190 The Government'sRole in Japanese YoonJe Cho September1993 T. Ishibe andKorean Credit Markets: A New ThomasHellmann 37665 InstitutionalEconomics Perspective