ESTP Course Programme Balance of Payments – Introductory course Paris, 22-23 May 2014 Introduction to Conceptual Framework

A few words about BOP in history … BOP : XVIIth century mercantilism Balance of payments = assessing increase or decrease in gold reserves BOP : XIXth century David Ricardo, understanding of « comparative advantage », attempts at lowering trade barriers Balance of payment statistics lag behind the development of international trade, episodes of trade disputes and BoP crisis BOP : XXth century mid 30s crisis, deglobalisation, setting up of the IMF and multilateralism: regular improvement trend of BoP statistics . Now : financial crisis, new era of globalisation!

Scope of International Accounts The International accounts for an economy summarize the economic relationships between residents of that economy and the rest of the world. They comprise: The international investment position (IIP), the stock of financial assets and liabilities compiled on a specific date; The balance of payments, a statement that systematically summarizes economic transactions for a specific time period; and The other changes in financial assets and liabilities account covering other flows, such as valuation changes that reconcile the balance of payments and the IIP for a specific period.

Scope of an Economy International accounts are generally compiled for individual countries but could be constructed in respect of a group of economies, e.g., Euro Area, BCEAO, BEAC, and the ECCB as well as regions within a country.

Definition of the International Investment Position The international investment position (IIP) is a statistical statement that shows at a point in time the value of financial assets of residents of an economy comprised of claims on nonresidents and gold bullion held as reserve assets; and the liabilities of an economy to nonresidents. The difference between the assets and liabilities is the net position and represents either net claims on or net liabilities to the rest of the world. The consolidated balance sheet for the nation includes the stock of nonfinancial assets in addition to the IIP.

Definition of the International Investment Position The IIP relates to different points in time, and has an opening value (beginning of the period) and a closing value (or end of the period). The integrated IIP statement reconciles the opening and closing value of the IIP through transactions in financial items and other changes (other volume changes and revaluations).

Definition of the Balance of Payments The balance of payments is a statistical statement in double entry format that summarizes transactions in goods, services, primary and secondary income, and financial items between residents and nonresidents during a period. Since each transaction in the balance of payments is recorded as consisting of two entries of equal and opposite sign, the sum of the entries is conceptually zero, that is the accounts as a whole are in balance.

Accounting Convention for International Accounts The accounting convention for BOP compilation: Double-entry recording principle, similar to business accounting. Each transaction leads to at least two entries, traditionally referred to as a credit entry and a debit entry, in the books of the transactor. This principle ensures that the total of all credit and debit entries for all transactions are equal, thus permitting a check on the consistency of accounts for a single unit.

Accounting Convention for International Accounts International accounts deal with interactions among a multitude of units in parallel and thus require special care from a consistency point of view. E.g. a liability of one unit is mirrored in a financial asset of another unit. Consequently, they should be identically valued, allocated in time, and classified, to avoid inconsistencies in aggregating data into regional or global totals. Even though international accounts show data for one economy’s flows and positions with nonresidents, the underlying accounting system is implicitly based on a quadruple accounting system (i.e. including geographical allocation of transactions)

The Compiling Economy Records Credit (CR) entries for: exports of goods provision of services provision of factors of production to another economy financial items reflecting a reduction in the economy’s external assets, or an increase in external liabilities

The Compiling Economy Records Debit entries (DR) for: imports of goods, acquisition of services, use of production factors provided by another economy, financial items reflecting an increase in assets or a decrease in liabilities. N.B. The financial account records net acquisitions of assets and net incurrence of liabilities but their interpretation in relation to the rest of the BOP follows the accounting convention.

Categories of Transactions Exchanges: provision and acquisition of economic values is two-sided. Exchanges of goods and services for financial items. Payments for, or receipts of primary income on, the factors of production. Many international transactions recorded in the BOP do not involve payments of money: Barter (exchange of goods and services for other goods and services). Exchanges of financial items for other financial items. The inclusion of transactions other than those involving money payments constitute the principal difference between a BOP statement and an exchange record.

Categories of Transactions When one transactor provides an economic value to another transactor but does not receive an equivalent value in return, the lack of economic value on one side must be balanced by an offsetting entry, referred to in BOP and national accounts as secondary income or capital transfers.

Imputation of Transactions Imputation of transactions refers to constructing entries in the accounts when no separate transactions are identified by the parties involved. Only in specific cases: Retained earnings of direct investment enterprises are attributed to direct investors as if the retained earnings had been distributed and then reinvested by them in the direct investment enterprise. Investment income earned on technical reserves held by insurance corporations is deemed to be payable to policyholders who are then deemed to pay this income back to insurance corporations as premium supplements even though, in terms of actual cash flows, the property income is retained by the insurance corporations. Retained earnings of investment funds are treated as if they were distributed to shareholders who are then deemed to reinvest in the investment fund.

Institutional Sectors and Residence

Introduction Introduction Economic Territory Institutional Units Institutional Sectors Residence Associated Issues Reference: Chapter 4 of BPM6

Introduction Basic concepts for all macroeconomic statistics International accounts defined as transactions and positions between residents and nonresidents. Identical concepts of residence are used in the BPM6, MFSM, GFSM, and the SNA.

Economic Territory The economic territory of a country is the relevant geographical area to which the concept of residence is applied. Consists of the geographic territory administered by a government; Usually a country, but not necessarily. Economic and currency unions. Special zones, total excluding special zones May have different laws and policies with “free trade zones” or other special zones. National total still needed for global totals and for bilateral comparisons.

Economic Territory A special type of economic territory is that of international organizations. Not subject to laws of host country. Not useful to consider as part of host economy. IMF and UN not US residents. However, they have transactions with host economy. Both global and regional organizations. Governmental-type functions, not businesses.

Institutional Units Institutional units are the entities that own assets, incur liabilities, make contracts. Because they are decision-making units, they should have, or be capable of having, their own accounts.

Institutional Units Types of institutional units: I. Households including the individuals who make up a household may include household businesses II. Corporations financial corporations nonfinancial corporations unincorporated businesses that are separate from their owners (quasicorporations) including branches government-owned enterprises included in corporations sector, but may wish to show separately III. Nonprofit institutions serving households (NPISHs) IV. General government V. International organizations not a resident of any national economy

Institutional Sectors

Institutional Sectors Central bank and other deposit-taking corporations allow links to monetary statistics Monetary authorities sector (as in BPM5) compiled when relevant (i.e., when some or all reserves held outside the central bank; otherwise unnecessary because the same as the central bank) General government allows links with government finance statistics.

Institutional Sectors Other sectors Other financial corporations: Insurance, pension funds, other financial intermediaries, captives, financial auxiliaries. Nonfinancial corporations, households, and NPISHs. Other splits to be consistent with SNA (e.g., balance sheet approach).

Residence – General Concept of residence Economic connections of a unit to an economic territory. Not based on nationality or legal criteria. Not based on currency used. Expressed as an economic unit’s center of predominant economic interest.

Residence - General Center of predominant economic interest Dwelling, place of production, or other premises, within the economic territory of the country on, or from, which the unit engages, or intends to engage, in economic activities and transactions on a significant scale, for an indefinite or long period.

Residence - Households Households and individuals A household has a center of economic interest when members of that household maintain, within a country, a dwelling or succession of dwellings that the members treat and use as their principal residence.

Residence - Households Households and individuals The guideline for determining residence is presence or the intention to be present; for a period of one year or more. In practice, tends to be identified in groups, rather than individuals.

Residence - Households Special cases: Diplomatic representatives But: non-diplomats, locally engaged staff; international organization staff. Members of the armed forces Students Medical patients Ship’s crew

Residence - Households Special cases: Border workers Commuters Predominant center of economic interest Guest workers, expatriate experts

Residence - Enterprises Normally enterprises will have a location in a single economy because of: Companies law; Taxation law. Enterprises An enterprise has a center of economic interest and is a resident unit of a territory when the enterprise is engaged in a significant amount of production and plans to do so over an indefinite or long period of time.

Residence - Enterprises Particular types of enterprises Operators of mobile equipment For example, airline, railway, trucking, shipping. Based on residence of the operating enterprise, rather than location of the equipment. Shipping not based on registration.

Residence - Enterprises Shelf companies, shell companies, special purpose vehicles (SPVs), special purpose entities (SPEs): No or little physical presence. Residence according to country of incorporation/registration. Not according to location of assets, owners, or administering office. Always related to another corporation, possibly resident in another economy Fees but may have very large investment income managed on behalf of parent enterprise

Residence - Enterprises Special zones or legislative exemptions for particular enterprises: Manufacturing (e.g., free trade zones); Financial or other services (e.g., “offshore financial centers”). Large, long-term construction or installation projects Site office. Agents Transactions on behalf of principal included in economy of principal. Agent’s own services in agent’s economy.

Other Issues Associated with Residence - Data by Partner Economy BPM6 provides a detailed discussion of data by partner economy Issues for: Goods (country of origin, consignment, destination) Freight and insurance Financial instruments: - Basic principle is based on the economy of residence of the counterparty to the transaction or financial position - For BOP, partner attribution for financial account could be on “transactor” or “debtor/creditor” approach

Other Issues Associated with Residence Change in residence of units Migration of persons Migration of corporations Rare, but euro-companies can migrate within EU. What is called corporate inversion or restructuring usually involves moving assets and liabilities between related companies, rather a single company being able to change its residence.