What ails Eurozone?

This from Ezra Klein is instructive, 

After it joined the euro area in 2001, Greece went from paying about 7 percent interest on a 10-year bond to a bit more than 3 percent because investors assumed that its debt was backed by Germany and the European Central Bank. This encouraged profligacy in Athens.

When the European economic and monetary union (EMU) became operational from 1 January 1999, all the peripheral eurozone economies experienced windfall gains from the sharp reduction in bond yields and resultant cost of borrowing. Over a four year-period, beginning 1995, the bond yields more than halved and converged around 4% across most of the eurozone economies (see graphics on France, Spain, Portugal, Greece, Italy, Ireland, Belgium).

Governments and, especially, corporates piled up debt, especially by way of borrowings from banks in the core area economies, as they splurged on this sudden access to cheaper capital, triggering off resource mis-allocation and asset bubbles. The boom also led to rise in wages and input prices, with the resultant decline in relative economic competitiveness. Therefore, deleveraging and restoration of external competitiveness is critical to a sustainable resolution of Eurozone's problems.

Update 1 (7/5/2012)

Paul  Krugman has this excellent analysis of how Germany managed its successful reforms last decade. As he writes, Germany benefited hugely from an export boom, driven by a combination of inflation in its periphery and rise in trade competitiveness vis-a-vis its Eruozone partners.

Update 2 (10/5/2012)

Spain is a classic example of a country brought to its knees by reckless private external borrowing. Even today, the government debt as a percentage of the total economic output for Spain is a relatively low ratio of 70 percent, compared with 165 percent for Greece and 120 percent for Italy. But, according to a recent report by McKinsey on global debt, Spain’s nonfinancial private sector debt is 134 percent of gross domestic product, higher than any major economy in the world with the exception of Ireland, where the figures are skewed by the outsize presence of foreign multinationals. Factoring in bank, household and government obligations, the total figure rises to 363 percent of GDP, trailing only Japan at 512 percent and Britain at 507 percent.

Corporates borrowed heavily to invest and to diversify by buying large equity stakes in companies in Spain and elsewhere. Massive public investments in infrastructure helped boost the demand for private supply. The Times writes about a "relentless private sector downsizing in Spain — by individuals weighed down by mortgages and corporations tethered to their boom-time loans — that threatens to make the Spanish economic collapse semipermanent as opposed to cyclical".

Update 3 (23/6/2012)

Jay Shambaugh argues that Euro area is bedevilled by three crises - of banking, sovereign debt, and growth. He writes,

The euro area faces three interlocking crises that together challenge the viability of the currency union. There is a banking crisis – where banks are undercapitalized and have faced liquidity problems. There is a sovereign debt crisis – where a number of countries have faced rising bond yields and challenges funding themselves. Lastly, there is a growth crisis – with both a low overall level of growth in the euro area and an unequal distribution across countries. Crucially, these crises connect to one another. Bailouts of banks have contributed to the sovereign debt problems, but banks are also at risk due to their holdings of sovereign bonds that may face default. Weak growth contributes to the potential insolvency of the sovereigns, but also, the austerity inspired by the debt crisis is constraining growth. Finally, a weakened banking sector holds back growth while a weak economy undermines the banks.

Update 4 (9/7/2012)

Nice article in the Times chronicles how in Spain the regional governments, the regional cajas, and property developers formed a system of trading favors during the boom years. Now that the party is over, the central government is forced to pick up the cost of the revlery.

The long-term economic impact of growing inequality

Inequality has been widening across the world. A recent ADB report expressed concern at the rapid rise in inequality in emerging economies and warned that it puts at risk the spectacular recent economic progress of these economies. In this context, Paul Krugman points to an exploration by Lawrence Mishel of the various causes of this widening inequality.  

Mishel attributes the growth in income inequality over the last 30 years in the US to three dynamics - rising inequality of labor income (wages and compensation), rising inequality of capital income, and an increasing share of income going to capital income rather than labor income. More specifically, he argues that divergence between pay and productivity can go a long way towards explaining this widening of income inequality,

Productivity growth has risen substantially over the last few decades but the hourly compensation of the typical worker has seen much more modest growth, especially in the last 10 years or so. The gap between productivity and the compensation growth for the typical worker has been larger in the “lost decade” since the early 2000s than at any point in the post-World War II period. In contrast, productivity and the compensation of the typical worker grew in tandem over the early postwar period until the 1970s.

He has two illuminating graphics that highlight the magnitude of its contribution. The first graphic illustrates the cumulative growth in productivity per hour worked of the total economy (inclusive of the private sector, government, and nonprofit sector) since 1948 and the cumulative growth in inflation-adjusted hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). Notice that after 1973, productivity grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant.

The next graphic disaggregates the productivity-pay disparity from 1973 to 2011 by charting the accumulated growth since 1973 in productivity; real average hourly compensation; and real median hourly compensation of all workers, and of men and of women. This figure clearly shows the divergence, especially since the early nineties between productivity and different categories of compensation. In simple terms, the share of income received as wages by workers is disproportionately small when compared to the share received by the owners of capital.

In addition, he also finds that workers suffered from adverse terms of trade. In other words, the prices of things they buy (i.e., consumer goods and services) have risen much faster than that of what they produce (consumer goods but also capital goods).

I will leave Mishel to conclude,

Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity. Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. 

Much the same forces are active across the world, including countries like India. The only difference is in its magnitude or severity. 

The impact of China's currency manipulation on emerging economies

The Times points to a recent IMF working paper which suggests that the era of high current account surplus driven external imbalance of the Chinese economy may be coming to an end. The IMF estimates that China's current account surplus, which topped 10% of GDP in 2007, had  shrunk to about 2.8% in 2011 and is estimated to decline to 2.3% in 2012, the smallest since 2001. 

Apart from rising labour costs and the natural shift upwards in the manufacturing value chain, the appreciation of the renminbi over the past decade too has been a contributory factor. Since June 2005, but for period of nearly two years during the 2008 financial crisis, China has allowed the remnminbi to trade in a daily band of 0.5% against the dollar. Since mid-April, 2012, it widened the band and now allws the renminbi to fluctuate up or down in value by as much as 1 percent against a fixed benchmark with the dollar during daily trading. But the central bank continues to set the benchmark for each day’s trading of the renminbi, and it has shown virtually no change this year.

The FT has an excellent interactive graphic that traces the change in the value of renminbi since 2000. It uses four distinct ranges, beginning with before China's WTO entry (January 2000), its first depeg from US dollar (June 2005), its second de-peg from US dollar after re-pegging it during the 2008 crisis (may 2010), and March 2012. The graphic below shows that the renminbi's nominal and real (inflation-adjusted) trade-weighted exchange rates (REER) relative to its major trading partners have appreciated. Further, this appreciation has been higher since June 2005.

However, this appreciation conceals variations. The renminbi has risen steadily against the US dollar, British Sterling, and Japanese Yen over the past decade, but its real appreciation against other currencies from the euro to Brazilian real has been far milder. Accounting for different inflation rates, in real terms while the renminbi has risen by 29% since 2000 against the US dollar, it has actually depreciated against all others - 0.7% against the Euro, 45% against the Brazilian Real, and 30% against the Indian Rupee.

This is also a reflection of the fact that the dollar itself has depreciated against the other major currencies during this period. Therefore, there may be a strong case now for many developing economies that, despite China's exchange rate flexibility since 2005, they are bearing the brunt of China's currency manipulation.  

In particular, India has been amongst the worst affected by China's currency manipulation. In real terms, the renminbi has depreciated by 30% since January 2000. In fact, despite, the rupee's significant depreciation against the dollar, the real rupee-renminbi exchange rate has held steady. In fact, but for India's much higher inflation rate, since 2005, the exchange rate between the two currencies has hardly budged.

In keeping with the trend with others, the renminbi has appreciated in real terms over the past one year. However, it may be premature to consider this as a decisive shift in China's exchange rate policy since this period also conicided with higher than normal inflation in China.

These trends are yet another reason for India to rally other developing countries around an agenda that focuses on China's currency manipulation and its beggar-thy-neighbour impact on other emerging economies. Apart from its substantive nature, this can also add a strategic dimension to India's foreign policy.    

Chief Feedback Officers for public bureaucracies?

The Harvard economist, Greg Mankiw is reported to have said that his job as the Chairman of the Council of Economic Advisors to President George W Bush was not to formulate policies, but to "politely kill off bad ideas"! It is commonplace in governance to have egregiously bad ideas emerging and getting implemented without raising too much critical attention. It will be only after a few millions of dollars are frittered away, couple of years wasted, and even a few lives lost, that many of these ideas get abandoned. So how can we institutionally "kill off bad ideas" in public systems?

In fact, I am inclined to put this right up there at the top as one of our biggest governance challenges. Since very few people have the courage to tell that the emperor has no clothes, bad ideas and even worse implementation strategies persist. So how about an institutionalized agency for providing critical feedback on every new idea or initiative. All such policies could be filtered through the office of this agency before it sees the light of day. 

It is widely acknowledged that deficiencies in channelizing critical feedback on organizational performance or new initiatives is one of the most important reasons for organizations failing or under-performing. Such negative feedback, if appropriately channeled to the notice of the management and thenceforth acted upon, can become the difference between a successful organization and a normal one. Even at a theoretical level, negative feedback plays a critical role in stabilizing any physical system by acting to remedy (attenuate) the deficiencies (excesses) and lapses (deviations) within the system.

In the real world, criticism is not taken kindly in any organization, private or public. They are seen as an affront to the authority of the decision makers and detrimental to organizational discipline. Any informal or formal expression of opposition to a widely held view within the organization is often perceived as undesirable and gets institutionally suppressed.

However, in view of the most often clearly evident informational feedback value, organizations should be valuing negative feedback and be paying a premium for accessing them. In the circumstances, it may be appropriate to have an institutionalized role for those who can serve as sources of negative feedback for the organization.

A designated authority who focuses specifically on finding the negatives/cons in an existing process or proposed initiative can dramatically increase the inflow of valuable information and inputs that can go into increasing the quality of decision-making. The institutionalization of such post can free such critics from the shackles of political correctness and enable them to freely express their sceptical thoughts on the proposed reforms. And given the specific nature of their task, this is one activity that can be easily outsourced without generating too many conflicts of interest.

So how about a Chief Feedback Officer (CFO) who would act as a devil's advocate on existing processes/practices or for new initiatives proposed to be implemented within the organization. In order to signal his or her role even more starkly and drive home its cognitive salience, one could as well call them Chief Critical Officers. A CFO can play a critical role in getting bad ideas nipped in the bud. 

In many respects, such CFO's are more valuable in public sector bureaucracies than private ones. Government bureaucracies suffer from an acute problem of institutionalized suppression of all alternative points of view. Any criticism of government programs are seen as violation of conduct rules and becomes an object of mistrust and scorn. In fact, the absence of effective feedback about the prospects and implementation of government policies has for long been the bane of our governance systems.

These CFOs can become an institutionalized check against entrenched vested interests whose objective is to subvert well-intentioned government programs or push through bad programs that suit their interests. It also acts as a check against ideolgically blinkered decision-making. It is another matter that some of these critics themselves could end up becoming co-opted by these same interests. But on the balance, the numerous benefits far outweigh the few costs.

Further, an institutionalized role for critical voices will also by itself contribute towards increasing the acceptability of these alternative points of view and their ultimate incorporation into the public system and its decision making processes. 

The closest example of such a system is the American Congressional Budget Office (CBO) which seeks to provide objective and non-partisan analysis to aid in economic and budgetary decisions on a wide array of programs covered by the federal budget. In India too, the Prime Minister's Economic Advisory Council seeks to play such a role. But the inherent nature of decision making in countries like India means that such institutions should have a more explicitly negative feedback providing role.

The danger with CFOs is that once the file gets circulated with the negative feedback, in this age of CBI enquiries and activist judiciaries, the environment of decision paralysis could turn into a decision rogor mortis! Happily, there are also ways in which such a turn of events can be avoided!

The wages of fiscal austerity

Martin Wolf has a nice graphic that captures the correlation between fiscal tightening (defined as the percentage point change in the structural or cyclically-adjusted general government deficit) and GDP growth rates in the 2008-12 period across Eurozone.

His conclusion,

The bigger the structural tightening, the larger the fall in GDP. The estimated fit is fairly good for this sort of calculation. Every percentage point of structural fiscal tightening is estimated to lower GDP by 1.5 per cent of its 2008 level. So the 8 percentage points of structural fiscal tightening in Greece lowered its GDP by 12 per cent.

The voices demanding an end to austerity are growing louder. In a hard-hitting op-ed, Lawrence Summers has argued that austerity is a misdiagnosis of Europe's problems,

Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago with ratios well below Germany. Italy had a high debt ratio but a very favourable deficit position. Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth.High deficits are much more a symptom than a cause of their problems. 

Treating symptoms rather than causes is usually a good way to make a patient worse. So it is in Europe. Its financial problems stem from lack of growth. In any financial situation where interest rates far exceed growth rates, debt problems spiral out of control. The right focus for Europe is on growth. In this context increased austerity is a step in the wrong direction.

Furthermore, he suggests that austerity is worsening Europe's problems,

When economies are constrained by demand and safe short-term interest rates are near zero, policy measures that reduce the deficit by 1 per cent have a multiplier of 1 to 1.5. This implies a 1 per cent reduction in a country’s ratio of spending to GDP or an equivalent tax increase reduces its GDP growth rate by 1 to 1.5 per cent.

This means austerity measures at the national level are likely to be counterproductive in terms of creditworthiness. Fiscal contraction reduces incomes, limiting the capacity to repay debts. It achieves only very limited reductions in deficits once the adverse effects of contraction on tax revenues and benefit payments are taken into account. And it casts a shadow over future growth prospects by reducing capital investment and raising unemployment, which takes a toll on the capacity and willingness of the unemployed to work. These considerations are magnified in Europe as a whole. Slowdowns in one country reduce demand for the exports of others.

Christina Romer points to the need to adopt a twin-track approach to both restoring growth and addressing deficit problems. She advocates front-loaded and immediate fiscal spending to provide the growth stimulus and back-loaded and clearly defined tax increases and spending cuts to reduce the deficts. This has to be coupled with short to medium-term commitment to support these economies with bond-buying programs so as to keep their cost of borrowing and debt-service under control. She points to the successful examples of US in 1983 (with its backloaded Social Security reforms), Sweden in 1995 (to cut its deficit by 8% of G.D.P. over the next three years), and Australia in late nineties.

Happily, as the wages of austerity become clearer and more bitter, there appears to be some realization in Europe that the current path is unsustainable. However, the biggest challenge will be with breaking the entrenched German belief in fiscal adjustment. This becomes all the more formidable given the magnitude of fiscal transfer and monetary accommodation required.

Update 1 (6/5/2012)

Ezra Klein points to this graphic that highlights how austerity in UK is failing. Since 2010, when the David Cameron government introduced its austerity policies, the economy appears to have hit a wall.

 

West European Health Care Systems

Among the various health insurance systems operating across the world, the West European models of "managed competition" tries to strike a balance between the market-driven American and the  government-run British systems. In my op-ed last week, I had indicated my preference that the West European model should form the basis for designing the national health insurance system for India. Though the Dutch, Swiss and German health insurance models have several similarities, there are also important differences. This post will critically examine these three health care systems.

Germany has a statutory health insurance system, covering nearly 87% of its population. It is financed through a payroll tax, where employers and employees contribute equal shares. The payroll tax at 15.5% of income forms the premium. Employees and pensioners pay 8.2% of their gross wages/pensions, while employers/pension funds must contribute 7.3%, for a total contribution of 15.5% of gross wages/pensions upto a maximum wage of (or pension) of 44,550 euros. Unemployment insurance pays the premiums for unemployed individuals, and pension funds share with the elderly in financing their premiums, which are set below actuarial costs for the elderly. For long-term unemployed people with a fixed low entitlement, the government employment agency pays a fixed per capita premium. A uniform contribution rate will be set by the government for all others.

Premiums for children are covered by government out of general revenues. All coverage is for the entire family. Employees/pensioners earning above 49,500 euros (in 2011) are free to opt out of the statutory system and purchase private, commercial coverage, but if they do, they cannot ever return to the statutory system unless they are paupers.

The health insurance premiums paid by Germans are collected in a national, government-run central fund that effectively performs the risk-pooling function for the entire system. This fund redistributes the collected premiums to some 200 independent, non-governmental, competing, nonprofit “sickness funds” among which Germans can choose. These sickness funds act as purchasing agents on behalf of the central fund and patients and premiums are paid based on the individual's actuarial risk calculated using over 80 variables by the administrators of the sickness fund.

In addition there are 46 private health insurers operated on commercial principles which provide comprehensive coverage to the remaining 11% of the population (including civil servants) and also top-up supplementary coverage, if demanded, to those on statutory insurance. Recent federal legislation has forced private insurers to levy on younger people higher premiums than their actuarial risk can justify to build up an old-age reserve, thus preventing premiums from climbing too rapidly with age.

The Dutch health care system consists of three parts. The first tier covers exceptional medical expenses (long-term care and high-cost treatment), the second covers a basic package of benefits, and the third forms private health insurance. The first two are mandatory, while the third is obligatory and takes care of supplementary coverage. The first is financed by income-related salary deductions, co-payment by consumers, and government grant. However, it is the second tier, which was reformed in 2006, that has been the object of much international attention.

The second tier provides a standard package of healthcare benefits to all citizens. The standard benefits package includes both primary and tertiary care. The services are intermediated by competing private and for-profit insurers through various private and public service providers. Each insurer has to offer the standard plan at a flat rate premium, irrespective of age, to all citizens. Coverage is mandatory for all citizens. Consumers can comparison shop and purchase insurance from any of the insurers.

The insurers are private sickness funds who compete with each other in attracting citizens. The premiums are not determined by the government, but by the individual sickness funds. They attract citizens by offering lower premiums on the basic coverage plan, though with conditions like co-payments and restricted provider choice. Some insurers give consumers the option of accessing service providers of their choice (other than those contracted-in by the insurer) by introducing co-payments.

Insurers also offer collective policies aimed at specific groups of people. These policies, which have lower premiums, can be purchased by employers or local governments for specific categories of people whose premiums are paid by the government. 

Insurance contributions come either as income-related (for self-employed too) salary deduction (with a maximum ceiling) and nominal flat-rate premiums. The former are deducted from the taxable income of employees or social security beneficiaries by the employer or from a share of their income by the self-employed. However, the employers reimburse this amount and employees pay tax on it. The income-related contribution is set at 6.9 percent of the first €32,369 (US$45,442) of annual taxable income.

Income-related contributions of employees come in equal parts from employers and employees. The level of contribution (or the percentage) is determined so as to ensure that atleast 50% of the total inflows into the Health Insurance Fund come from income-related contributions. The government contributes about 5% and the rest 45% is obtained from individual permium payments.

The latter are paid by all those insured or come from the tax-credits provided by government for those who cannot afford their nominal premium. The percentage of income-related deduction is set by the government, mostly nationally, while the flat rate premiums are determined by individual insurers. The insurance coverage costs of children under the age of 18 are borne by the government. All these contributions flow into the Health Insurance Fund (HIF). A process of "risk-equalization" takes place and payments are then made to insurers.

Insurers, especially the larger ones, operate at national-level and offer plans across the country. This also means that premium-setting is on a national-level. Each year, the Ministry of Health sets the standard benefits package premium, which forms the basis for tax-credit payments. The insurers set their respective individual premiums around this rate. It is also mandated that if the real average of the premiums offered by the health insurers differs by more than Euros 25 from the standard premium, the government must adjust the latter.

In this model, the insurers cannot make profits on their basic plan coverage. Insurers offer lower premiums and differentiate themselves only to attract more citizens so as to capture their supplemental coverage.

Switzerland too has a mandatory coverage health insurance system. The coverage includes all regular illness and related primary and tertiary care, in the form of a standard benefits package based insurance plan.

Private and non-profit insurers compete, at the canton level, to provide this standard insurance plan. The premium charged by an insurer for this plan should be the same for all adults, irrespective of age and pre-existing health conditions. Unlike the Dutch model, plans operate and set premiums at canton level. Therefore premiums vary considerably across regions. Though individual insurers determine their own premiums, they are not allowed to profit from the mandated benefits package. They should make their profits from supplemental coverage.

The insurers are allowed to charge a minimum deductible and even coinsurance on the standard benefits plan. Insurers differentiate themselves to attract consumers by offering lower premium plans which have higher deductibles. Consumers who cannot afford the premiums and the taxes are subsidized by government. Patients have choice of doctors and service providers within each canton.

This health insurance system is financed through a mixture of income contributions, deductibles and some government contribution. There are no employer-sponsored or government-run insurance plans and everyone buys insurance from the private insurers. Consumers pay the insurance premium for the basic plan up to 8% of their personal income. However, if the premium is higher than this, then the government gives the insured a cash subsidy to pay for any additional premium.

Service providers prices are set annually through negotiations held between associations of insurers and associations of service providers at canton level. The Swiss model is praised by conservatives who are attracted by the fact that consumers are forced to individually choose their insurers. This is in contrast to employer or government-chosen insurance plans.

See this excellent comparative study of Dutch and Swiss health insurance systems. This is another very good comparison of various health insurance models.

Divergence in the interests of Germany and Europe?

FT has this quote from German economist Hans Werner Sinn about how Germany managed to emerge from the problems related to re-unification and labour market rigidity in the nineties.

The demographic problem, the high costs in the new Länder [eastern Germany], are still there. But the problems of west Germany being too expensive, with wages too high, has been resolved . . . What helped was that other countries inflated away from Germany. That has contributed greatly to Germany’s success.

Werner Sinn also talks about how Germany benefited from the Eurozone crisis with German savings remaining in the country and boosting investment.

Capital markets have now understood that you can burn a lot of money in southern Europe. Germans’ savings, which previously drained to the south, often via the French banking system, now prefer to stay in the safe home haven, even if the rate of return is less. This has been the driving force behind Germany’s boom of the past two years. 

This German success has created problems elsewhere, especially among the peripheral economies. The single biggest challenge for these economies is to restore their external competitiveness. However, given the single currency, regaining competitiveness would require extended duration of inflation in Germany and deflation in periphery. This has to be coupled with fiscal loosening by both consumers and governments in Germany so as to provide demand for producers in the peripheral economies. Both look extremely difficult propositions.

Update 1 (12/5/2012)

The German government reported that the country’s trade surplus with the other 16 countries in the euro zone was 62.2 billion euros in the 12 months through March, down 29% from the level a year ago, and the lowest for any 12-month period since 2002.However, its trade surplus with countries not in the European Union has risen, offsetting the decline within the euro zone. That figure climbed to 62.9 billion euros, a record figure that is up 115% over the previous year. Germany’s overall trade surplus was at 162.7 billion euros, 3 percent higher than it was a year ago. 

And it appears that these trends will continue. German factories say orders continue to rise from buyers outside the euro zone, and continue to decline from companies within the zone.

Update 2 (26/6/2012)

Gunnar Beck strikes a contrarian note to the widely cited claim that Germany benefited enromously from the single currency and therefore ought to now be willing to take the losses, if any, to keep the eurozone in tact. He argues, pointing to a series of figures and Germany's less than impressive economic performance since 1995 (when EMU was launched), that Germany did not benefit much from the Eurozone. He writes,

Between 1998 and 2011, German exports grew by 117 percent, according to the Federal Statistical Office. But if the euro was so vital to Germany’s external trade, then the increase in exports to euro zone members would have been greater than the increase to other countries. In fact, the reverse is the case... German exports rose most — by 154 percent — to the rest of the world; by 116 percent to non-euro E.U. members; and least of all, 89 percent, to other euro zone members. In 1998 the euro zone still accounted for 45 percent of all German exports; in 2011 that share had declined to 39 percent...

Between 1995 and 2008, Germany saved more than most, yet it exhibited the lowest net investment rate of all O.E.C.D. countries. On average, from 1995 to 2008, 76 percent of aggregate German savings (private, governmental and corporate) were invested abroad.