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The Politics of Accounting

To anyone familiar with basic balance of payments accounting, it will come as no surprise that income from foreign investments are included under current account transactions. To students learning balance of payments accounting however, this can be quite confusing. Why should the foreign investment be considered part of the financial account, but the income from the investment be included in the current account? After all, a capital gain or loss will be recorded in the financial account, why not interest and dividend income?

The typical answer provided in most textbooks is that the supply of capital can be thought of as the provision of a service (a very contentious proposition in the history of economic thought one might add!). But if “supplying capital” is a service, why is not included in services? 

I have recently been reading Cheryl Payer’s (old) book, “The Debt Trap: The International Monetary Fund and the Third World” (available from Monthly Review Press here). She offers another suggestion as to why investment income is included among the items in the current account. She argues that:
“Placing investment income firmly in the ‘goods and services’ section of the balance of payments ensures that restrictions on payments to foreign investors cannot legitimately be imposed under IMF rules, while its inclusion in the capital account would allow them.”
Payer is referring here to the well known “asymmetry” in the regulation of current and capital transactions as written into the IMF Articles of Agreement. While there are options available for countries to place controls on capital, “no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions” (Article VII, section 2). This reflects the view that the control of capital was central to the maintenance of international economic stability, a view held by both Keynes and White at Bretton Woods. Since then of course, the IMF has made attempts to resolve this asymmetry by encouraging countries to not exercise controls on the movement of capital (recent changes in tone aside).

In Payer’s view then, the placement of investment income in the current account functions to protect this income from possible regulation or restriction. And of course,  for many of the low and middle income countries net interest payments have been increasingly negative:

Income payments and Receipts for low and middle income countries:


  1. Nathaniel,

    I am not sure if there is an element of politics. IMO, the BOP accounting is reasonably right in its treatment of investment income.

    Also capital gains and losses go into the revaluation account.

    A capital account transaction - such as a purchase of stocks by foreigners by itself changes the composition of assets and liabilities. By itself it doesn't change net claims on residents.

    Investment income paid to foreigners on the other hand increases foreigners' net claims on residents.

    So investment income is like an import/export transaction where net claims change and it is reasonable to assume that investment income be included in the current account and investment itself be included in the financial account.

    Revaluations in the BPM6 language appears in the "Other Changes in Financial Assets and Liabilities Account".

  2. Also Wynne Godley's transactions flow matrix - although doesn't have BOP directly but is consistent with it because it has current and capital account and can be used for open economies as well.

    If you include investment income in the capital account, rows and columns won't add to zero.

  3. Hi Ramanan,

    Thanks for your comment. Of course I didn't mean to suggest that there are no reasons for separating out investment income from investment. I am also not sure if the reason I mentioned above had anything to do with the actual decision to construct BOP accounting in this way. Rather what I wanted to emphasize was Cheryl Payer's point that the consequence of the accounting is that investment income has a different status than investment flows, relevant to its regulation. I should have made this clearer.

    Payer cites from (an admittedly old) IMF publication:

    "Since a member country is free to regulate capital movements and may attach conditions to the inflow of capital, it has sometimes been assumed that it may, as a capital control measure, also require the investment to forego the repatriation of income, amortization, or depreciation as a condition of permitting the capital inflow. This is not so as the terms of Article IV, Section 3 make clear. Such a requirement would clearly be a restriction on the making of payments for current transactions and accordingly prohibited under the Fund agreement."

  4. Yeah agreed.

    I only realized your point after commenting.

    As in the argument (by IMF etc) that investment income shouldn't be under capital control because it is in the current account is not a valid argument.

  5. I assume that Keynes and others saw the virtue of foreign investment but thought that if it started causing trouble the government should intervene. The way the accounts are set up a government can stop investors from pouring hot funds into an economy if problems arise but, during times when this is not a problem and cross-border investment is desirable, investors will not have to worry about future capital controls ruining the return on their investment which would, of course, increase uncertainty and lead to lower foreign investment. The accounts/rules thus allow governments to flexibly manage their capital flows while minimising the amount of uncertainty this might cause -- in turn, this minimises the effects on aggregate demand that these rules might have.

  6. Philip, there is a degree of freedom in that respect. Depending on whether or not the government even has a the capacity to intervene and regulate such affairs is the ultimate question. If you are in the periphery and suffer a balance of payment constraint, you at the mercy of global finance capital. And, given the extent to which the IMF institutionalizes national income accounting measures, it is no surprise that the logics underlying the formulations are inherently political, as my colleague Nathaniel Cline's post suggests.

  7. Could you comment on this Brad DeLong post about I,S and Keynes? Its short


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