Dr. Menbere Workie on Net Errors and Omissions (NEO)
In his latest publication (co-authored with Dr. Siranova, M.) in the Applied Economics journal, Assoc. Prof. Dr. Menbere Workie from the business & management department, examines whether net errors and omissions (NEO) reflect capital flight and/or are driven by the real sector of the economy. The results suggest that NEO are predominantly driven by the service sector and the evolution of foreign direct investment. This seems to suggest that NEO, as a commonly used proxy for capital flight, shouldn’t be taken for granted. As such, this study has substantial policy implications.
The study can be accessed here:
Siranova, M. and Tiruneh Workie, M. (2017, In press) “Exploding net errors and omissions as a capital flight phenomenon: the case of Slovakia” Applied Economics, http://dx.doi.org/10.1080/00036846.2017.1380288
This article empirically explores determinants of net errors and omissions (NEO) of Slovakia during the 1997–2014 period, with emphasis on the 2008–2014 sub-period when a distinct downturn in the NEO time series is observed. Given the statistically significant link between the evolution of foreign direct investments and NEO, we cannot rule out possible prevalence of tax optimization as a part of capital flight phenomenon in developed countries. Our findings also suggest that services sector plays a pivotal role in determining the adverse NEO development in the post-2008 period. However, given the absence of detailed bidirectional data for trade with services, role of mis-invoicing practices in the Slovak balance of payments statistics might not be further investigated. Our results further strengthen the call for a deeper understanding of forces driving the NEO evolution in other developed and developing countries suffering from capital flight phenomenon.
Net errors and omissions (NEO), balance of payments, illicit capital flows, balancing item
Non-Executive (Extended) Summary
While there is a widespread recognition about the volatility of errors and omissions that serve as a balancing item on countries balance of payments data, there are only a few studies that empirically identify the macroeconomic determinants of errors and omissions. There is also a large body of literature that considers errors and omissions as a proxy for “hot-money” illicit financial flows without through empirical investigations. This paper shows that errors and omissions are predominantly the results on the real sector of the economy. The results also suggest that given the strong link between the evolutions of foreign direct investment and services and errors and omissions, tax optimization efforts by the private sector is difficult to rule out. The study also sends a warning signal that given the level and volatility of errors and omissions a more thorough and policy-oriented study is necessary.