CAPITAL FLOWS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000200250016-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 21, 2016
• Document Release Date: January 21, 2009
• Sequence Number: 16
• Publication Date: May 1, 1984
• Content Type: MEMO

CONFIDENTIAL
Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
MEMORANDUM FOR: National Intelligence Officer for Economics
FROM: Director of Central Intelligence
SUBJECT: Capital Flows
Ken Dam handed me this at lunch on Friday and asked what
kind of work the Agency does on capital flows. If you can
prepare a short response I will send it on to him.
 :O'`%i
Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
. . I WMIIGU~ IES DEPARTMENT OF COMMERCE
The Under Secretary for International Trade
Washington, O.C. 20230
'84 APR 26 P3:13 APR 8 3 1981
Honorable Kenneth W. Dam
Deputy Secretary of State
Department of State
Washington, D. C. 20520
Enclosed is a copy of an analysis of recent U.S. international
capital flows with detailed consideration of the European
Community. This analysis had its genesis in recent discussions I
have had with the members of the European Parliament's Committee
on External Relations.
The analysis in the paper focuses on several popular notions
raised in recent months by European economic leaders. In summary,
the conclusion is reached that given the small level of U.S. net
capital inflows relative to capital formation in the world economy
during 1980-1983, investment levels could not have been materially
retarded. Moreover, the analysis reviews levels of U.S. lending
to the EC between 1981 and 1983 and finds the EC a capital
importer from the United States until late 1983.
Should you have any questions or comments, please let me know.
Sincerely,
 Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
ITA
UNITED STATES-EC
CAPITAL FLOWS
1980-1984
Prepared by: Charles M. Ludolph
Office of the European Community
FC Policy Division
March 1984
NOTF: This paper does not necessarily represent the
position of the U.S. Department of Commerce,
but is circulated to stimulate discussion and
critical comment.
U.S. DEPARTMENT OF COMMERCE
Approved For Release 2009/01/21: CIA-RDP85-01156R000200250016-2
 Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
A. EXECUTIVE SUMMARY
Recently there has been an increasing level of concern on the part
of Europeans that the strong U.S. dollar and high levels of U.S.
interest rates are having a direct effect upon the European economic
recovery.
The magnitude of such concerns can be seen in a recent statement to
the Congress of European Socialist Movement by French Finance
Minister Delors. He stated that $150 billion had 'flown' to the
United States in 1983 and that he expected such flows to be as much
as $300 billion by 1988.
0 An examination of U.S. capital flows for 1979-1983 shows that in
general, while recent trends in the current balance of payments
indicate that the EC may become a net lender to the United
States in 1984, between 1979 and 1983 capital was flowing out of
the United States to Europe.
0 Global net private capital inflows into the United States were
more moderate than believed by Europeans, i.e., $20.5 billion in
1982 and about $45 billion in 1983. This is much lower than
Delors' estimate of $150 billion in 1983 and hardly enough to
materially affect investment in the world. For example, gross
fixed capital formation in the OECD countries, not including the
United States, in 1982 was about $1.2 trillion.
Wnile the United States was a net capital importer from the
world in 1982 and 1983, it was, during the same period, a net
capital exporter to Europe. In point of fact, during 1980-1983
the United States exported about $8-$10 billion in net private
capital annually to Europe--mostly short-term funds seeking
slightly higher interest rates during a period of flat loan
demand in the United States.
0 At the same time, EC long-term funds in the form of direct
investment purchases of securities have flowed into the United
States at a rate of $6-$8 billion in 1981 and 1982. These
long-term flows have subsided in the second quarter of 1983 and
thereafter. Again, this magnitude of outflow from Europe to the
United States hardly seems sufficient to retard investment
growth.
 Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
B. BACKGROUND
While recent U.S.-EC economic and commercial relations have been
marred by disputes on trade in agriculture and basic industrial
products, an underlying source of bilateral concern has been the
poor performance of the European economies characterized by slow
growth and weak recovery from the recent recession. The bilateral
concern has been heightened by the contention of some Europeans that
the recovery in Europe has been delayed and economic growth slowed
by U.S. monetary and fiscal policies during 1980-1983. In the last
three to four years, these European concerns have focused on the
value of the U.S. dollar relative to most European currencies;
however, recently there has been an increasing interest in the level
of U.S. interest rates and their direct effect upon the European
recovery.
European concern for these trends has heightened and can be seen in
recent French suggestions that consideration should be given to
penalizing European capital expatriated to the United States. In a
recent statement to the Congress of European Socialist Movement,
French Finance Minister Delors stated that $150 billion had 'flown'
to the United States in 1983 and that he expected such flows to be
as much as $300 billion by 1988.
Moreover, Andreas Papandreau, the Greek Prime Minister and until
recently President of the European Council, gave word to the
concerns for the alleged drain on European liquidity and savings
caused by the high U.S. interest rates and the supposed check on
recovery and growth in Europe by insisting that 'it is up to us to
defend against further losses of liquidity which is very much needed
for our recovery..... (to) put an end to this unproductive capital
flow and to facilitate the return of European capital to Europe...is
fundamental for reestablishing European prosperity....'
This paper takes a close look at the allegation that significant
amounts of European capital have been attracted into the United
States in recent years.
 C. U.S. CAPITAL FLOWS
An examination of U.S. capital flows as summarized in the U.S.
balance of payments gives direct indication of the relative
significance of specific types of capital flows between the U.S. and
the world. The figures in Table I present trends in international
capital flows between the United States and the world during the
period 1975-1983. The figures in each column present the level of
net flows into the U.S. (inflows) and out of the U.S. (outflows) for
an average quarter year during 1975-1979 for four major categories
of investment, i.e., direct investment, purchases of securities,
flows of non-banks, flows of banks. As indicated in the note to the
table, inflows are generally represented as a positive number and
show the magnitude of the net flow into the United States of foreign
capital in various forms. Similarly, outflows represent U.S.
investment overseas in the form of claims on foreign assets and
other forms of U.S. capital flows to the world.
It should be understood at the outset that the accounting for
capital flows is subject to problems of under-reporting and other
errors and omissions and that the statistical discrepancy category
reflects the magnitude of the flows in the current or capital
account not directly accounted for in the balance of payments
categories. Further, although there is some controversy as to how
much of the statistical discrepancy is attributable to errors in the
current account or capital account, it is widely accepted that such
errors in recent years have grown sharply and are more probably
attributable to the capital account. Analytically, this is the
conservative approach for examining European concerns since such
treatment would imply U.S. capital inflows. At the same time, while
this shows what might be the worst case, it should be remembered
that the dollar's importance as a reserve currency increases the
chance that third country transfers of capital through Europe make
it very difficult to interpret errors and omissions of these
accounts on.a geographic basis.
Examination of figures in Table I shows some interesting differences
in trends of the various categories of U.S. capital flows with the
world between 1975-1979 and 1980-1983.
For example, on a net basis, the average quarterly direct investment
capital flow in 1975-1979 was substantially outward amounting to a
total flow per quarter of $2.4 billion per quarter or almost $10
billion per year during 1975-1979. By 1982, this category of
outflow had stopped and the U.S. experienced its first year of net
direct investment inflow from the world in the post-World War II
era. By 1983, the net inflows were slowing sharply due to economic
recovery, and in 1980-1983 a substantial portion of net inflows in
direct investments reflected large borrowings in Eurobonds by U.S.
parent companies through their finance affiliates in the Netherlands
Antilles.
 These capital flows include purchases of plant and equipment,
working capital, inventory financing, as well as exchange rate
speculation and various other categories of capital transfers.
These flows are influenced by the response of entrepreneurs to
changes in interest rates and interest rate differentials between
financial markets, as well as economic recession, inflation, and
poor domestic sales. In addition, the effect of policy changes and
deflation also had impact for the real rate of return on productive
assets in the United States which also contributed to trends in
direct-investment flows in 1980-1983.
A disaggregation of these trends in direct investment by category
shows that the most important contributor to this reversal in flows
was the steady U.S. disinvestment and repatriation of foreign equity
and inter-company accounts indicated by the positive quarterly
figures in the outflows in the equity category. It is also
noteworthy that foreign equity flows in the United States grew
substantially from an average of $1.0 billion per quarter in
1975-1979 to almost $3.0 billion per quarter in 1980-1982.
Capital flows reported by U.S. non-banking concerns involve mostly
short-term debt and a significant portion of it are trade credits.
The increase in the volume of U.S. international trade and the trade
deficit contributed to making this account a substantial inflow in
1981-1983 rather than a small net outflow as was the case in
1975-1979.
Short-term capital flows reported by U.S. banks have been
substantially outward since 1975. Only in second quarter 1983 do we
see a net inflow of short-term funds. Moreover, levels of net
flows both in and out of the country were surprisingly large,
particularly from third quarter 1982 through third quarter 1983- a
period of extreme short-term interest rate volatility and
variability. During these five quarters, $150 billion was loaned
overseas in short-term instruments by U.S. investors and an equally
remarkable $100 million was loaned in the United States by
foreigners. It is also noteworthy that these flows were
particularly sensitive to differentials in short-term interest
rates, as well as poor banking conditions, e.g., plagued with weak
assets and increasing loan-loss reserves.
In the aggregate, it can be seen from the total net private capital
flows, which do or do not include the U.S. capital inflows implied
by the statistical discrepancy, that beginning in 1983 under the
latter concept or beginning in 1982 under the former concept, the
U.S. experienced total net private capital inflows ranging from $1
to $5 billion per quarter from the world--most of which is
 attributable more to a decline in the flow of U.S. short-term
investment abroad as an increase in foreign investment in the U.S.
That is, by 1983 there was a shift to a capital inflow into the
United States because there was an absence of foreign demand for
dollar credits and a strong demand by U.S. banks for funds.
The information in Table II summarizes exactly the same categories
of capital flows over the same time period, except that this table
presents the net private international capital flows between the
United States and the European Community. In this table, we see
similar trends in long-term investment flows between the United
States and Europe as in the previous analysis of flows between the
U.S. and the world. As long-term interest rate differentials began
to favor investment in the United States, Europeans increased their
quarterly average direct investment from $1.2 billion per quarter in
1975-1979 to $1.5 billion during 1980-1983. Similarly, purchases of
securities increased from about $350 million per quarter in
1975-1979 to about $1.3 billion per quarter in 1981-1983.
U.S. long-term outflows declined during the same period to a
negligible level in 1982-1983. This indicates that during the
period of large, long-term interest rates differences between the
U.S. and Europe, the U.S. experienced, at most, an increase of $6
billion net inflow per year from Europe in long-term capital.
Short-term capital. flows between the United States and Europe were
substantial and grew significantly in 1981-1983. Until late 1982,
short-term capital flows reported by U.S. banks were largely toward
the higher interest rates in Europe, which began in 1980-81, peaked
in 1982, but continued through 1983. Beside the outflow of U.S.
capital reported by U.S. banks, it is also noteworthy that 'foreign'
inflows reversed during 1980-1981. This not only reflects trends in
the potential returns on short-term investment but also is a
by-product of the nature of accounting in this category of capital
flows. Since foreign branches of U.S. banks are considered foreign
investors for this accounting, much of the claims reported by U.S.
banks reflect the interest of their foreign branches. Thus,
beginning in the second quarter of 1980 not only did the outward
flow of U.S. assets increase substantially, but 'foreigners,' mainly
foreign branches of U.S. banks, disinvested. This trend continued
until late 1981 and early 1982, when outflows of U.S. capital began
to abate and were mainly attributable to the simultaneous decline of
the differential in short-term interest rates and the sharp decline
in the level of loans to LDCs.
The result of these trends is that during 1980-1983 U.S.-European
capital accounts can be characterized as consistently an outflow,
particularly in the form of short-term investment in the Eurodollar
market.
 bbtal lot Private Without
Statistical Discrepancy
Total Het Private With
Statistical Discrepancy
PRIVATE SECPOR 1HTi1IUITIQW. CBPITAL FLWBM U.S.-WOW
(1975-1983) J $
(billions 3)
1975-79 V 1900 1901 1982 1983
I II III IV I II III IV I II III IV I II
-5.0 ?6.3 -24.6 -12.2 -6.3 -15.2 -2.8 7.1 -15.7 2.0 -8.5 -7.4 -7.1 -3.4 na
-0.4 12.6 -7.8 -6.3 -5.7 -0.1 3.4 8.9 -8.7 6.5 -1.5 8.9 6.6 5.6 m
alpnity and Intermsp-ry Accounts
Inflows 1.0
Outflows -1.3
Reinvested Earnings of Incorporated
Affiliates
Inflows 0.6
Outflows -2.7
0.9 2.8 0.2 0.7 1.6 3.4 3.4 0.5 1.9 2.9 2.8 2.9 2.0 1.1
0.4 1.0 0.5 -3.5 1.9 -1.7 1.7 2.3 0.7 2.4 1.7 3.6 1.4 2.4
1.3 1.1 2.5 1.4 1.0 1.2 1.1 ' 0.9 0.1 0.0 -0.2 -0.2 0.0 0.4
-5.9 -3.9 -3.0 -3.4 -4.0 -3.5 -2.3 -3.1 -1.3 -1.1 -1.2 -1.7 -1.1 -2.9
Purchase of Securities (Stocks,
Buds, etc.)
Inflow 1.1 5.7 -0.8 0.0 3.1 3.9 4.3 0.3 1.6 2.6 4.5 1.8 4.2 5.9 5.4
Outflow -1.4 -0.8 -1.3 -0.8 -0.4 -0.5 -1.5 -0.6 -2.0 -0.6 -0.5 -3.3 -3.5 -1.8 -3.2
Claus and liabilities by U.B.
nonBanks
Inflows 0.2 0.4 1.1
Outflws -0.6 -1.1 0.1
0.4 3.2 -0.8 -0.2 1.0 -0.5 -0.2 -2.5 -0.4 0.0 -2.1 na
0.3 -2.0 -3.2 2.5 0.9 -0.5 3.9 -0.3 1.0 2.3 -2.4 na
 Claims aryl Liabilities Reported
by U.S.
Banks
Inflows.
3.4
6.6
-4.5
0.9
7.7
-3.9
7.7
16.9
20.5
25.7
24.0
11.0
2.0
10.6
1.1
Outflows
-5.3
-1.2
-20.2
-12.4
-13.1
-11.2
-15.0
-15.3
-42.6
-32.6
-30.7
-20.6
-17.5
-15.9
3.5
J Inflate represent floes of non-official private foreign investment into the U.S. 'typically denoted by a positive niS er, a negative sign (-)
on an inflow represents a disinvestment on the part of foreigners. Outflows represent flats of non-official private U.S. capital to foreign
investments. Typically represented by a negative sign, a positive outflow denotes a net disinvestment of U.S. claims on foreign assets and a
return of U.S. capital to the U.S. In sumary, a negative sign means an outflow of capital from the United States, by %dwever awns it.
5 year simple quarterly average.
V Difference between current account balance and capital octant balance.
Sources Bureau of Pmnxmic Analysis, Survey of Current Business, June 1901, December 19021 Decei er 1983.
 Approved For Release 2009/01/21 : CIA-RDP85-01156R000200250016-2
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1900
1901
1902
1903
1975-79
I
II
III
IV
I
II
III
IV
I
II III
IV
I
II
Claim And Liabilities ityorted
by U.S. Barks
__
1
7
4
1
2
0
Lnflau
2.9
-0.9
-4.6
-0.5
2.5
-1.9
-6.1
-2.8
1.9
4.6
5.3
0.4
.
-
.
5
3
.
6
5
Outflow
1.4
0.0
-6.1
1.9
-1.9
-5.4
-3.5
-3.9
-6.9
-12.1
-7.0
-0.6
-8.7
.
-
.
Statistical Discrepancy
-2.1
-4.9
3.0
-4.1
2.4
-0.9
6.3
0.4
-1.9
0.9
-0.6
-r.2
7.9
1.7
-5.9
Inflows represent flaws of non-official private foreign investment into the U.B. typically denoted by a positive number, a negative sign (-)
on an inflow represents a disinvestment an the part of foreigners. Outflow represent flows of narofficial private U.S. capital to foreign
investments. Typically represented by a negative sign, a positive outflow denotes a net disinvestment of U.S. claim on foreign assets and a
return of U.S. capital to the U.S. In summary, a negative sign means an outflow of capital from the United States, by whoever aeos it.
J 5 year simple quarterly average.
J Difference between current account balance and capital account balance.
Sources Bureau of Dooummic Analysis. Survey of current Business. June 1981, December 1902, Decaixr 1903.