Cash sloshes around the world in unexpected ways

MONEY MAKES the world go round. But where in the world is it going? In theory the answer lies in statistics published by the likes of America’s Treasury Department and the International Monetary Fund (IMF), which track cross-border flows of debt and equity investments. In practice creative corporate accounting mucks up the official figures. A growing body of research is trying to clean up the mess.

Accounting for corporate behaviour would be simple, if it could be organised neatly according to national boundaries. Petrobras, a Brazilian oil giant, would sell its bonds directly to American or European investors. In reality many companies raise funds through foreign subsidiaries set up for the purpose. Petrobras raises debt through its subsidiary Petrobras Global Finance BV, based in the Netherlands.

Such financial contortions cloud economists’ view of global investments. When a subsidiary transfers the cash from the loan to its parent, this can show up (misleadingly) as foreign direct investment (FDI). A recent study by Jannick Damgaard of the Danish central bank, Thomas Elkjaer of the IMF and Niels Johannesen of the University of Copenhagen estimated that as much as 40% of measured FDI flows were in fact “phantom” flows through shell companies.

Another recent study by Antonio Coppola of Harvard University, Matteo...

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