The Economist – 7 September 2013 – The capital-freeze index Stop signs

The Economist – 7 September 2013 – The capital-freeze index Stop signs


The capital-freeze index

Stop signs

Which emerging markets are most vulnerable to a freeze in capital inflows?

REPLACEMENT: Some errors were identified in a previously published version of this index. We have revised our calculations and this page now displays the corrected figures and analysis. This was amended on September 19th 2013.

The capital-freeze index
  • Current acc.
  • Debt
  • Credit
  • Openness
  • Currencies
  • 20130921_overall3
    *Based on current-account balance, credit growth, short-term gross external debt and external debt payments as % of reserves, and financial openness

    Sources: Economist Intelligence Unit; IMF; SWF Institute; World Bank; Haver Analytics; Chinn and Ito (2008); The Economist

  • 20130907_current_0

    Source: IMF

  • 20130921_debt2

    Sources: Economist Intelligence Unit; IMF; Sovereign Wealth Fund Institute; The Economist

  • 20130907_credit2

    Source: World bank

  • 20130921_openness2

    Source: “A New Measure of Financial Openness”, by Menzie Chinn and Hiro Ito, Journal of Comparative Policy Analysis, 2008

  • 20130907_currency2

    Source: Haver Analytics

IT IS a stomach-churning feeling: the moment you discover a spreadsheet goof that has led to publication of a big error. When news of an Excel blunder undermined high-profile research on government debt by Carmen Reinhart and Kenneth Rogoff, the two economists became the butt of national jokes. (“Even worse,” said Stephen Colbert, a television comedian, “none of their pie charts contained real pie.”)

Fewer big decisions will have been made on the back of our capital-freeze index (“Stop signs”, September 7th). But there was a blunder. The index draws on four variables to assess the vulnerability of emerging markets to a freeze in capital inflows—the current-account balance, levels of short-term external debt and external-debt payments relative to government reserves, credit growth, and the Chinn-Ito measure of financial openness. The original version pulled data on the financial-openness variable from the wrong place in the spreadsheet, changing the results.

That error is corrected in a new index published this week (see chart). We have made another change, too, to simplify the index. Instead of scoring each variable according to our own thresholds, we now add a country’s rankings for each measure together in order to obtain a final score (which is then normalised so that the riskiest score is 20, as it was in the original version).


Turkey remains top (ie, most at risk) in the revised index; India and South Africa both fall down the rankings; Mexico overtakes Colombia. But the biggest change is to the rankings of central and eastern European economies. Open capital accounts push Romania and Poland, previously in the safer half of the index, to the second- and third-most-vulnerable positions overall.

Some readers wrote in to suggest that an open capital account should not count against an economy. Open financial systems, they reckoned, are associated with better financial institutions, which may reduce the probability of crisis. But ours is designed to be an index of vulnerability. Given other factors, like a high level of short-term debt and a big current-account deficit, an open capital account may indeed allow money to rush out.

In revising our index we also looked at what would happen if other variables were introduced. Research suggests that, in addition to our four measures, statistics like gross external debt as a share of GDP, currency over- or undervaluation, and the share of foreign-currency-denominated debt are all risk factors.

Interestingly, the addition of these variables made richer economies look even riskier. Turkey still remained at the top (as it does in all iterations of the index, right or wrong), but it was followed by Ukraine, Romania, Hungary, Chile and Poland. Such places tend to have higher overall debt levels, less reserve coverage of short-term debt and less undervalued currencies.

Barring Turkey, they are also places whose currencies have been spared much of the recent turmoil. It may be that investors are more trusting of more mature economies with higher debt levels. Confidence counts for a lot in markets, after all. That is also true of newspapers. We apologise for the error, and have added new data-checking procedures to make a repetition less likely in future.


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