Exploding net errors and omissions as a capital flight phenomenon: the case of Slovakia

This article empirically explores determinants of net errors and omissions (NEO) of Slovakia during the 1997-2014 period, with emphasis on the 2008-2014 sub-period when a distinct downturn in the NEO time series is observed. Given the statistically significant link between the evolution of foreign direct investments and NEO, we cannot rule out possible prevalence of tax optimization as a part of capital flight phenomenon in developed countries. Our findings also suggest that services sector plays a pivotal role in determining the adverse NEO development in the post-2008 period. However, given the absence of detailed bidirectional data for trade with services, role of misinvoicing practices in the Slovak balance of payments statistics might not be further investigated. Our results further strengthen the call for a deeper understanding of forces driving the NEO evolution in other developed and developing countries suffering from capital flight phenomenon.