Long-Term Capital Movements

18

Table 4 presents results of cross-sectional regressions of net foreign assets on log output per capita,
public debt and demographic variables, where all variables are averages during the period 1990-98.²⁸

Relative output per capita is the only significant variable in explaining the cross-sectional
variation in net foreign asset positions across industrial countries. As in the time series dimension,
richer countries have larger net foreign asset positions, although the cross-section point estimate is
40-50 percent smaller in magnitude. Neither public debt nor demography is helpful in explaining the
1990s cross-section for industrial countries.

Our fundamentals are more successful in explaining cross-country differences in net external
positions among developing countries. In contrast to the time series result, we find a positive
association between output per capita and net foreign assets in the cross-section, although the point
estimate is typically small and not significant in column (6). Similar to the time series evidence, the
cross-sectional effect of public debt is negative and significant: developing countries with larger
public debts also have larger net external liabilities. Columns (4)-(6) also suggest a significant impact
of the demographic structure on the cross-section distribution of net foreign asset positions among
developing countries, with a pattern that is qualitatively similar to that found in the time series data.

The differences in the coefficients on income between the industrial and developing sample,
both in the time series and in the cross-section, suggest that the underlying relation between net
foreign assets and output per capita is nonlinear. We report results using a quadratic cross-sectional
relation between output per capita and net foreign assets for developing countries in column (7).²⁹ The
specification does pick up a non-monotonicity but the turning point is at a low threshold ($1170

²⁸ Results are virtually unchanged if we focus on a single year, given that these variables move only slowly year
to year.

²⁹ A similar specification for the whole sample gives statistically weaker results, with an estimated “turning
point” below output per capita of US$1000. It makes little difference to the results if Singapore is included or
CUMCA is used as the net foreign asset measure.

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