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Daniel Gros, Director of of
Centre for European Policy Studies, has two interesting papers on his site,
both dealing with anomalies in the balance of payment statistics:
·
Foreign Investment in
the US (I): Disappearing in a black hole?
·
Foreign Investment in
the US (II):Being taken to the cleaners?
Gros shows that, to take the official statistics at face
value implies the unlikely conclusion that foreign investment in the US is to a large extent, entirely wasted. A more likely conclusion, as Gros explains, is
that the balance of payments statistics like other government-generated
statistics, such as the CPI, paints a better picture than the actual reality.
From (I)
One must thus conclude that the US has acted like a
black hole for capital from the rest of the world: one can observe a large
amount of investment flowing into the US, but after some time it disappears
from the statistics (and foreign investment in the US that takes the form of
FDI earns almost no return).
From (II)
The official data on reinvested earnings reported in the
US balance of payments cannot be taken at face value. This much is suggested
by a simple comparison between the reinvested earnings reported on US direct investment abroad and those reported by foreign direct investment in the US. The former, i.e. what US firms report for their investment abroad, has amounted to over
$1,100 billion over the last 20 years (1982-2004). The latter, i.e. what
foreign firms report for their investment in the US, has amounted to less
than $20 billion over the same period (on average less than $1 billion per
annum)! It is difficult to accept this difference at face value, particularly
since there is little difference in terms of distributed earnings between US FDI abroad and foreign FDI in the US and given that there is little difference in the reported
returns on portfolio equity investment.
The first paper deals with the "stock", i.e.
the discrepancy between the sum of past current account deficits and the net US international investment position. Gros explains how the stock data and the flow data
are calculated by entirely different means. His conclusion is that a
substantial portion of foreign investment holdings in the US are not included in the stocks, making the US net investment position appear much better than it
actually is.
The second piece deals with the
"flow", i.e. the income component of the balance of payments on an
annual basis. The income on foreign direct investment is one component that
has been favorable to the US. For this to be true would require that US firms
earn a significantly higher rate of return on their foreign investments than
do foreign firms on their US investments. This has been attributed by some
economists to "dark
matter", a mysterious substance that makes US foreign investments
worth much more than their reported value. Gros argues that rates of return
in both directions are about the same, and that the discrepancy in the income
component is due to the computation of the income on FDI and the ability of
foreign firms to shift taxable income. The income on FDI is notmeasured
directly, it is an imputed value derived from a computer model, something
like the hypothetical employment numbers generated by the BLS birth-death
model.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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