Hong Kong has been producing full balance of payments estimates for the past couple of years. But how much do they tell us about the health of the economy?
Benjamin Disraeli, the nineteenth-century British prime minister, said: "There are three kinds of lies: lies, damned lies and statistics".
The implied criticism of statisticians is rather unfair. They are mostly very conscious of the distinction between fact and estimate, and of the limitations of some of the estimates which they are driven to compile. If they have a fault, it is perhaps in failing to always stress such qualifications to their customers.
The analysis of economic statistics didn't feature much in Disraeli's day. Were he alive today, he might have reserved more of his sarcasm for those who seek to spin a story from the numbers, than for those who merely do their best to compile them.
But, in defence of the analysts, drawing any sort of story from the numbers can prove a daunting challenge. Take, for example, the balance of payments statistics. Hong Kong has only been producing full sets of balance of payments estimates for the past couple of years; the latest figures, for the third quarter of 2000, were published a week ago. These statistics rest on a complex mix of recording methodology, economic concepts and accounting conventions.
The basic principle is that the accounts must balance. Consider the simple example of the import of a television (a minus on the trade account) which is financed by a payment from a bank deposit to the exporter's bank account, or by trade credit granted by the foreign exporter to the importer; either of these funding channels represents an increase in Hong Kong's external financial liabilities (or decrease in external assets) and appears as a plus in the financial segment of the accounts.
By convention, all capital and financial flows, except those arising from transactions in official foreign reserves undertaken by the Monetary Authority on behalf of the Exchange Fund, are added to current transactions (together with implied errors and omissions) "above the line" in arriving at what is termed the "overall" surplus or deficit in the balance of payments accounts. This overall position is exactly balanced by the net change in reserves arising from Exchange Fund transactions, which is the one item appearing "below the line".
Under Hong Kong's monetary arrangements, these Exchange Fund transactions relate for much of the time mainly to accumulations or drawdowns of the fiscal reserves, fluctuations in the note issue or relatively narrow movements in bank liquidity held in balances with the Exchange Fund. In this sense, the "overall" balance informs us more about the operations of the Exchange Fund and the mechanism of the currency board than it does about Hong Kong's external economic ties. In order to shed light on the latter we would need to examine some of the above-the-line components, rather than just the single "overall" figure.
Even there, interpretation can be problematic. For example, there may be a huge plus on current account, more or less matched by a huge minus on capital and financial account. This can be a source of confusion to many commentators, who are disposed to regard the current surplus as a "good thing" but the capital outflow as a "bad thing".
In fact, there are no clearly identifiable saints or sinners in this story. A surplus on current account would not be a matter for congratulation if it was accompanied by recession, depressed consumer confidence or negligible profits. A capital outflow might be considered virtuous if it represented, say, the investment of profits, but might signal concern if it represented capital flight. And so on.
The balance of payments is made up of many different sets of transactions, with many interdependencies amongst them, as well as between them and developments in the wider economy at home and abroad. It may be misleading to look at any one set in isolation. And any assessment of the external situation will inevitably require some attention also to the prevailing performance of financial variables, such as interest rates or the exchange rate.
I would caution strongly against preconceptions as to what is an appropriate or optimal composition of our external accounts. If one believes that the market allocates resources efficiently, then, especially in Hong Kong's environment of open markets for trade and capital, one should perhaps not worry unduly about such questions, provided that other financial or monetary indicators are not sounding alarm bells.
After all, Hong Kong's economy fared pretty well even before we had detailed balance of payments statistics to worry over, and the history books suggest that Disraeli's did too.
Tony Latter
Deputy Chief Executive
4 January 2001
Statistics about Balance of Payments can be found here.
ANSWERS TO THE CHRISTMAS QUIZ 2000
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