Download Econ 355 - Class transcript, Nov 19 *Assignment #5 DUE NOW

Econ 355 - Class transcript, Nov 19
*Assignment #5 DUE NOW.
*one more assignment (due Dec 1st) to be posted next Tue, Nov 24
TODAY: International finance, investment and foreign aid (ch. 14)
I.
Data patterns
What are international capital flows?
1. Foreign direct (e.g., factories) or portfolio (financial asset) investment
2. Public (gov’t or int’l organizations) and private (NGO) foreign aid
3. Remittances (transfers from international migrants to home countries)
1. Private foreign direct investment (FDI)
• What is it? Investment by foreigners into firms in a given country (e.g. Apple’s plant in
China); used to produce goods
• Patterns:
o World as a whole: general increase in FDI since the 1980s; peak around 1998;
then huge fall; then another increase and new peak in 2007; then smaller decline
till now
o FDI to developing countries: gradual increase; accelerated a lot after 2007 (now
FDI to LDCs account for much larger fraction of world FDI than in the 1980s or
1990s)
o Some numbers: annual FDI to LDCs was $2.4 bln in 1962; grew to $35 bln in
1990; $335 bln in 2005; and more than $500 bln nowadays
o Most of it goes to well-performing (growing) LDCs, like China (e.g. out of $335
bln in 2005; $118 bln went to China)
o On the other hand, Africa receives much smaller fraction (e.g. 3% in 2005); this is
problematic for the Solow model (poorest should have highest return on capital)
o Fig. 14.2 – a lot of volatility in FDI growth rates
o Fig. 14.3 – FDI now accounts for the vast majority of capital flows to LDCs (not
foreign aid, not portfolio flows (in fact the portfolio flows are negative)
o Fig. 14.4 – in the late 2000s – growth of FDI (and remittances) to low-income
countries as well; now FDI is only just a bit lower than foreign aid to those
countries
o In contrast, FDI is the majority of flows to middle-income LDCs; followed by
remittances (see fig. 14.4)
Multinational corporations (MNCs)
*MNCs are behind most of the FDI (firms than operate in several countries)
*two defining characteristics: large size and large fraction of foreign trade (FDI is
intrinsically related to foreign trade)
*some facts: 350 largest firms account for 40% of world rade
*8 of the top 10 non-financial MNCs ranked by assets had worldwide sales of more than
$150 bln in 2004.
*MNC controversy – most about social, equity, etc. issues, not economic impact
Economic arguments in favour of MNCs/FDI
1.
FDI supplement domestic savings to enable higher investment in LDCs, which
may lead to higher growth (positive outcome on GDP)
2.
alleviate current account deficits; generate exports
3.
source of tax revenue
4.
(perhaps most important for the long-run) FDI/MNC can help spread new
technologies or management techniques
Arguments (stories) against FDI/ MNC
1. inhibit domestic firms or crowding out other investment (a lot of politics, little
economic evidence)
2. profits/royalties repatriation - may not benefit the local economy (but what about the
jobs created or the know-how?) [actually, a lot of UC companies do not want to
repatriate profits back – because of high taxes]
3. tax contributions from MNCs can be very low (due to concessions from local
governments, tax free zones, special economic zones)
4. uneven impact on development (MNCs/FDI benefit mostly urban areas)
Econ 355 - class transcript – Nov 24
*ASSIGNMENT #6 POSTED TODAY – DUE TUESDAY, DEC. 1st
*2013 FINAL WILL BE POSTED TOO.
Reconciling the debate:
• the market or the government as driver of the development process
• the evidence seems to show (on average) that developing countries which “opened up” to
foreign capital and trade did better in terms of growth compared to those that did not (can
look at the same country, e.g. China over different periods of time – 60s vs. 90s).
• growth vs. inequality (some evidence suggesting that inequality can increase after
opening up to FDI/trade)
II.
Portfolio investments
*these are investments in financial instruments (bonds, stocks, etc.) done by citizens of other
countries (e.g., I buy stocks in a Chinese company)
*Fig. 14.3 showed that in most years, the overall flow of portfolio investments goes from
LDCs to HICs (not the other way around)
*high risk and volatility
*frequent crises: Mexico (94-95); East Asia (97-98); Russia (98), Argentina (01-02), etc.
*why people make portfolio investments?
- invest in higher yield assets in LDCs
- diversify
*a lot of debate – speculation, call for capital controls
III.
Remittances
• remittances – flows of money from migrants (typically in HICs) to their home countries
• why? Huge difference in incomes (for same person, same job) across HICs and LDCs
• the sizes are large; both in terms of absolute amount or share of GDP (up to 30% of GDP
in some countries)
•
•
•
•
the data actually represent lower bound for the actual remittances (actual number likely
much larger)
recent huge increase – why?
Better reporting? (after 9/11) + new technologies
Economics perspective: consumption smoothing within family
IV.
FOREIGN AID
*in practice, foreign aid defined by 2 criteria:
1. non-commercial objective (from the donor’s point of view, the person/country who
gives the aid)
2. concessional terms (“below market” rates)
*this definition is not non-controversial, e.g. what about military aid? (often military aid
excluded)
*basically:
foreign aid = official grants + concessionary loans
could be in money or in kind (goods)
*Measurement problems (a lot!)
- how to evaluate preferential tariffs
- how to aggregate different loans and grants
- tied-aid: (either by source: the recipient country must purchase products from the donor;
or by project: can only use it for specific purpose) – may be very inefficient
DATA
*public aid (given by countries/int’l organizations) – official name is “Official development
assistance” (ODA) = bilateral grants + loans + multilateral grants/loans (e.g. IMF/ World
Bank)
*ODA grew from as little as $29 bln in 1985 to 122 bln in 2008 (see Table 14.2)
*ODA amounts have increased over time, but many countries now give less as fraction of
their GDP than in the 1980s
*”ODA is allocated in some strange and arbitrary ways” (Table 14.3)
- foreign aid is not allocated to help the poorest people in the world
(compare S. Asia - $8 per person vs. Middle East/N. Africa with $79 in 2008)
- Iraq ($750 of aid per capita) and Afghanistan ($93 per capita) – largest
recipients of ODA in 2005; India ($2 per capita)
- 1976-2004 Israel and Egypt were the two countries receiving most of US
foreign aid
*aid is allocated primarily driven by political or military interests (not by need)
Why donors give aid?
*primarily for political/strategic reasons and economic self-interest
* very little humanitarian component (mostly disaster relief)
1. Political motives
- the Marshal Plan (US aid to restart the Western European economies after
WWII to prevent the spread of communism)
-
-
special interest (over the period 1950-2000 US aid patterns they switched
from S. Asia; S-E. Asia, L. America, Middle East, Eastern Europe, Middle
East…)
propping up with aid “friendly” regimes (or former colonies)
*Economic motives (discussed earlier)
- financing gap model (aid can increase investment, generate growth)
- what was the evidence? – Easterly ch.3 – very poor support of this
Why developing countries accept/ask for aid?
*economic rationale – aid can help the economy (too poor to save or invest)
*LDCs would like less tied-aid; longer-term loans
*most aid does satisfy these properties
*moral hazard problem for the recipients: typically more aid (WB) is given to poor
countries; if get slightly richer – you lose aid – no incentive to improve
*how to fix? Impose conditions (track record on verifying those ex-post is very bad)
*moral hazard on the donor side too – need to spend the budget (incl. aid); very hard
to commit to say “no more money for you” in face of poverty, etc.
*receiving aid erodes political accountability of the local government (the gov’t
budget is made of foreign aid, not taxpayers’ money) (Dambisa Moyo)