Unrecorded capital flows and accumulation of foreign assets: the case of Croatia

This paper evaluates the magnitude of unrecorded capital flows and the resulting unrecorded accumulation of foreign assets for Croatia, over the period between 2000 and 2007. The problem of unrecorded capital outflows, often labeled as capital flight, has gained significance in the present global financial and economic crises, because of increasing capital scarcity in many emerging markets and transition economies including Croatia. The findings reveal relatively large amounts of unrecorded foreign asset accumulation over the observed period. A large portion of this accumulation relates to cumulative amounts of net errors and omissions term, which is interpreted as unrecorded capital flow. There are reasons to believe that this net errors and omissions item in Croatia possibly partly represents the unrecorded accumulation of foreign cash from foreign tourist spending, and/or partly results from overstated tourism income in the official statistics. However, even after excluding this item from the calculation of capital flight, the remaining unrecorded accumulation of foreign assets over the period is still substantial. Consequently, if these unrecorded flows are taken into account, Croatia’s net international investment position is improved