July 1, 1997

The Dutch black hole

Why has the structural surplus on the Dutch external current account failed to result in a substantial net external asset position? Why is net investment income from abroad only marginally positive?

These questions come down to a space odyssey : a quest for the black hole .

This article analyzes the period 1987-1994. The strong guilder and the composition effect of external share holdings explain two thirds of net asset evaporation. Since liabilities outnumbered assets by almost two to one, significant capital gains on both assets and liabilities worsened the net external asset position considerably. Low net investment income can be attributed partly to a large rate-of-return differential in the direct investment relationship with the US. Moreover, large parts of Dutch external assets generate no investment income. Finally, statistics are likely to underestimate both net external wealth and investment income. Since direct investments are valued at historical cost, countries with large net FDI holdings, such as the Netherlands, are wealthier than official statistics suggest.

Furthermore, individual asset holdings abroad are considerably larger than calculated on the basis of capital outflows. As a result, net asset evaporation is not as dramatic as statistics suggest. Indeed, the parallel with a black hole seems to be close. As the real thing in outer space contains hidden mass, the Dutch black hole contains hidden wealth. An abbreviated version of this Research Memorandum in English -the quest for the black hole - was published in CPB Report 1997/1 (April 1997).

This document is only available in Dutch.


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