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In Figure 9 we show the distribution of adjusted retams ψit and the trade balance tb*ιt among
industrial and developing countries for the periods 1980-89 and 1990-98.34 The low growth and real
depreciation associated with the debt crisis are reflected in the high number of less developed
countries with large negative adjusted returns during the 1980s, a number that declines in the 1990s.
Among industrial countries one observes an increase in the number of countries with large negative
adjusted returns during the 1990s, and correspondingly in the countries running large trade surpluses.
The increase in rates of return generated by the capital gains on equity holdings during the 1990s are
one factor behind this development. Figure 9 also highlights that there is more dispersion in the trade
balance among developing than among industrial countries.
Figure 10 presents scatter diagrams illustrating the cross-sectional relation between the
adjusted returns term and the trade balance for the industrial and developing countries for the period
1980-98. The Figures also show a line with a negative slope of 45 degrees that corresponds, for a
given level of adjusted returns, to the trade balance that would keep the net foreign asset position
constant (in the absence of capital transfers such as debt forgiveness). In both samples there is a
strong negative relationship between adjusted returns and trade balance. Some observations are
noteworthy. First, the United States’ adjusted returns term is positive, a reflection of the positive rate
of return differential between its external assets and liabilities. This implies that a trade deficit of 0.5
percent of GDP over the past 2 decades would have been consistent with an unchanged net foreign
asset position. In fact the trade deficit has been much larger, in connection with the deterioration of
34 The construction of the ‘adjusted returns’ term ψit is complicated by the measurement problems associated
with capital gains and losses briefly discussed in Section 2. For industrial countries, the series for KGtt includes
the difference between the change in the outstanding stock and the flow for portfolio equity investment assets
and liabilities, foreign direct investment assets and liabilities, and foreign exchange reserves. These differences
are particularly significant for portfolio equity assets and liabilities, especially during the 1990s, because of the
fluctuations in market values generated by stock markets trends and volatility. Our data do not allow us to
estimate capital gains and losses on the debt portfolio of industrial countries. For developing countries, the
series on capital gains and losses includes one additional item--the impact of cross-currency fluctuations on the
outstanding stock of gross external debt (data that are reported in the World Bank’s Global Development
Finance database).