DARK MATTER

Dark matter is a term I coined with Federico Sturzenegger to refer to the ’invisible’ foreign assets built up from the export (mostly) of knowhow from one country to another. These types of assets do not usually show up in trade statistics, but they can provide the country exporting dark matter with a large and stable flow of income. At the same time, for the countries that import dark matter it works like an invisible foreign liability, and thus a form of expenditure. We estimate dark matter by looking at the disparity between a country’s net investment income and the net investment income that would have been caused by the accumulation of net foreign assets consistent with its observed current account, assuming a normal interest rate. Countries whose investment income is higher than would be presumed on the basis of their cumulative current account balance have dark matter assets, while countries for which the net investment income is too low, given that balance, will have dark matter liabilities.

For example, between 1980 and 2012 the cumulative US current account deficit represented about 50 percent of 2012 GDP. But the net investment income of the US indicates that is not paying anything for it. By contrast, during the same period, Chile borrowed less than 15 percent of its GDP but pays about 7.5 percent of GDP for it, an implicit interest rate of more than 50 percent. The way the dark matter approach explains this puzzle is by noting that the US borrowed over 100 percent of GDP in gross debt, took about 50 percent of that to pay for its observed current account deficit and the other 50 percent to fund its Foreign Direct Investment (FDI) abroad. Because these investment mix money with knowhow they obtain a much higher return, say 7 percent, than the amount it pays on its liability, say 3 percent. The US can do this but not Chile, because the US has knowhow that it can productively mix with money to invest abroad. By contrast, Chile needs the knowhow of foreign investors to run its mines, power systems and banks and must pay for this knowhow in the form of excess returns on the FDI it receives. When Chile invests abroad, it does so preferentially in exchange-traded assets and these subject to a no-arbitrage condition in its pricing and hence deliver on average the same risk-adjusted return.

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One consequence of dark matter is that there is less reason to worry about global imbalances than is usually assumed: the world, as seen when dark matter is taken into account, looks less out of quilt than the picture that emerges using the standard approach. For emerging economies, their external liabilities look quite different than the standard measures in ways that are not equal across countries: Mexico looks much better than Chile when you include dark matter, reversing the picture that emerges using standard measures, that show Chile as almost a net creditor.