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Homework 2
Economics 2000
Assigned: Thursday, October 14th, 2014
Due: Friday, October 31st, 2014
1.
Institutions vs. Geography. In class, we have examined two competing
theories explaining under-development. One theory focuses on geographical
shortcomings. Another suggests that good institutions that minimize transactions costs
and the exercise of property rights. Economist Jeffrey Sachs is a leading exponent of the
former theory. In a review of “Why Nations Fail,” by Daron Acemoglu and James
Robinson1, he wrote, “Compare Bolivia and Vietnam in the 1990s, both places I
experienced firsthand as an economic adviser. Bolivians enjoyed greater political and
civil rights than the Vietnamese did, as measured by Freedom House, yet Bolivia's
economy grew slowly whereas Vietnam's attracted foreign investment like a magnet. It is
easy to see why: Bolivia is a landlocked mountainous country with much of its territory
lying higher than 10,000 feet above sea level, whereas Vietnam has a vast coastline with
deep-water ports conveniently located near Asia's booming industrial economies.
Vietnam, not Bolivia, was the desirable place to assemble television sets and consumer
appliances for Japanese and South Korean companies.” Explore this assessment using
data.
A.
Measure FDI. Quantify Sachs’ assertion:
i.
Calculate the average FDI inflows for the two countries using Foreign direct
investment, net inflows (% of GDP) for 2004-2013. Is this indeed larger in Vietnam?
Calculate average FDI inflows for the same years for Lower Middle Income economies as a
group. Is Bolivia or Vietnam exceptional? Consider the importance of trade in the two
economies.
Over the last decade, Vietnam’s track record in FDI is indeed exceptional. We can show
the average for Vietnam, Bolivia, and lower Middle Income Economies
Foreign direct investment, net inflows (% of GDP)
Bolivia
Vietnam Lower middle income
Average
2.54
5.87
2.51
ii.
What is the share of GDP accounted for by exports in the two economies in 2012
(use Exports of goods and services (% of GDP)). Can geography explain the difference? Use
the World Bank’s Doing Business survey of some objective measures of the cost of
Trading Across Borders for both Bolivia and Vietnam.
Trade is important to both Vietnam than Bolivia, but has become substantially larger
than Bolivia. This backs up Sachs idea that FDI is motivated by companies wanting to
take advantage of Vietnam as a trading platform:
1
Read at the library Link here.
Bolivia
Vietnam
47.25236 80.02862
Exports of goods and services (% of GDP) 2012
If we examine the Doing Business Survey, we see that along this dimension, Vietnam is a
better place to engage in international trade (ranking #65 overall) compared to Bolivia
which is very poor (ranking #126).
Trading
Across
Borders
rank
ii.
Bolivia
Vietnam
Docume
nts to
export
(number
)
Time to
export
(days)
126
7
21
1,440
65
5
21
610
The biggest difference comes in the measure of the Cost to Export a container from the
country which is more than twice as expensive. This may include fees or transportation
costs. Given the landlocked nature of Bolivia, it is not perhaps surprising that it would be
expensive to export.
iii.
Examine the quality of transportation infrastructure. Get data on Road density (km
of road per 100 sq. km of land area) and Roads, paved (% of total roads) for 2007. Which
country has better transportation?
Series Name (2007)
Road density (km of road per 100 sq. km of land area)
Roads, paved (% of total roads)
Bolivia
Vietnam
6.80
48.33
6.81
47.62
Another reason for Vietnam’s trading focus may come from infrastructure. It seems clear
that Vietnam has a much denser road network with paved roads than Bolivia.
B.
Background. Compare the level of development of Bolivia and Vietnam using
GNI per capita, Atlas method (current US$) for 2013 from the World Development
Indicators. Compare the industrialization of the two countries using Manufacturing, value
added (% of GDP) from the most recent year 2012. Are the two countries of comparable
level of development? Compare economic growth in the two countries over the last
decade using the average of GDP per capita growth (annual %) for 2004-2013.
Bolivia
Vietnam
2013
2550
1730
2012 13.48252 17.39064
GNI per capita, Atlas method (current US$)
Manufacturing, value added (% of GDP)
Bolivia has a substantially higher income levels, but Vietnam has a somewhat greater
level of industrialization.
GDP per capita growth (annual %)
Average
Bolivia
Vietnam
3.12
5.21
Vietnam’s economic growth has been much higher.
Cost to
export
(US$ per
containe
r)
C. Governance.
i.
Assess the type of government. Use the most recent Freedom House Freedom in
the World to compare the level of democracy.
Bolivia
Vietnam
2014 Civil Liberties
Partly Free
3
Not Free
5
Political Rights
3
7
Sachs points out correctly that Bolivia has a more democratic system than Vietnam
where Political Rights are the lowest on a scale of 7 out of 7.
ii.
Assess the quality of government. Use Worldwide Governance Indicators Table
View to assess the percentile ranking in 2013 of Bolivia and Vietnam in terms of Political
Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory
Quality, Rule of Law. Which country does well on which measure?
This assessment is
Indicator -- 2013
Political Stability and Absence of Violence/Terrorism
Government Effectiveness
Regulatory Quality
Rule of Law
Bolivia
36.49
41.63
23.44
14.22
Vietnam
55.92
44.02
28.23
39.34
Along these indicators, Vietnam does better on all dimensions of governance but
especially the Rule of Law, where Bolivia is only in the 14th percentile indicating the
system protecting property rights is quite poor.
iii.
How big a problem is corruption in these economies? See the Corruptions
Perceptions Index from Transparency International 2013 . What is the rank out of 177?
Corruptions Perceptions Index
Bolivia
Vietnam
106/177
116/177
D.
Compare Institutions. Examine how well the institutions of the two countries
might be doing in supporting the economy.
i.
Use the objective Doing Business measure to compare the transactions
environment in the two countries. Contract Enforcement to the effectiveness of the legal
environment. Which country ranks higher in this measure?
Economy ▲
Bolivia
Vietnam
Enforcing
Contracts rank
Time (days)
Cost (% of claim)
Procedures (number)
131
591
33.2
40
46
400
29
36
ii.
Use the Registering Property and Starting a Business measures to assess the
degree to which property rights can be exercised. How do these countries rank along this
dimension?
Economy ▲
Registering
Property rank
Bolivia
Vietnam
Economy ▲
Bolivia
Vietnam
Starting a
Business rank
Procedures
(number)
Time (days)
Cost (% of property value
144
7
91
4.7
51
4
57
0.6
Procedures
(number)
Cost (% of income
per capita)
Time (days)
Paid-in
Min.
Capital
(% of
income
per
capita)
180
15
49
71.6
1.8
109
10
34
7.7
0
iii.
On which of the dimensions of Doing Business does Vietnam rank the best. On
which dimension does Bolivia do the best.
TOPICS
Starting a Business
Dealing with Construction Permits
Getting Electricity
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Resolving Insolvency
Vietnam
109
29
156
51
42
157
149
65
46
149
Bolivia
180
136
128
144
130
138
185
126
131
67
Bolivia does better in Electricity, and Protecting Investors and much better in
Resolving Insolvency. Bolivia’s business environment is in the top 100 only in
Rersolving Insolvency. Along the other dimensions, Vietnam does better and is
Top 30 in terms of Dealing with Construction Permits.
Write a paragraph summarizing your findings. What factors make you think that
Bolivia’s relative performance can be explained by its landlocked nature? What factors
make you think the relative performance can be explained by institutional quality.
As suggested by the quotation, Vietnam has been a more attractive to Foreign Direct
Investment compared to Bolivia despite Vietnam being less democratic. Geography could
play a role. Bolivia is landlocked and mountainous and the cost of exporting from Bolivia
is very high. These costs may, however, be exacerbated by Bolivia’s poor transportation
network. Exports are low relative to Vietnam.
The more democratic government in Bolivia has not translated into better market
institutions. Along the dimensions of the quality of governance, Vietnam seems superior
than Bolivia, but Bolivia is especially sub-standard in terms of the Rule of Law.
According to the objective measures, contract enforcement is of a quality ahead of its
level of economic development, Along a variety of objective measures of the business
environment, Bolivia does very badly in terms of the institutions that support markets.
2.
E-Commerce in ASEAN. E-commerce has shown enormous success in filling
institutional gaps in China. Assess the market potential in some potentially comparable
Southeast Asian nations: Malaysia, the Philippines, and Thailand.
A. Infrastructure.
i. Internet. Use data from the World Bank Jobs Database to get information on
Internet users (per 100 people), and Fixed broadband Internet subscribers (per 100
people) for the most recent year available for these three countries plus China.
China
Thailand
Malaysia
Philippines
Internet users (per 100 people)
38.30
23.70
61.00
29.00
Fixed broadband Internet subscribers (per 100 people)
11.61
5.03
7.44
1.89
ii. Transport. Examine the World Economic Forum Global Competitiveness Report
which provides subjective measures of the quality of the transport
infrastructure in various countries. How do the individual ASEAN economies
compare with China?
Transport infrastructure, 1-7 (best)
Malaysia
China
Thailand
Philippines
5.7
5
4.6
3.5
Rank
11
21
36
74
iii. Information. Find data from World Bank Jobs Database to assess the availability
of consumer credit information for the four countries. Use the most recent
measure of Public credit registry coverage (% of adults) and Private credit bureau
coverage (% of adults) to assess the quality of information in each country.
China
Thailand
Malaysia
Philippines
(% of adults)
Public credit registry coverage
27.7
0
56.1
0
Private credit bureau coverage
0
44.1
81.8
9
B. Payments e-Commerce requires use of electronic payments. Use the Global
Financial Inclusion database to assess penetration of electronic payments methods
in the three ASEAN countries and China. Get the most recent value of Credit card,
older adults (% age 25+), Mobile phone used to pay bills, older adults (% age 25+) , and
Debit card, older adults (% age 25+). How do these countries compare with China in
terms of potential for on-line payment?
(% age 25+)
Credit card, older adults
Mobile phone used to pay bills, older adults
Debit card, older adults
China
8.19
0.96
38.87
Philippines
3.59
2.29
13.89
Thailand
4.71
0.26
43.38
Malaysia
15.67
2.73
26.64
C. Informal Institutions In the case of China, e-commerce has been on the
consumer to consumer model (C2C). This might depend on the level of
interpersonal trust. Get information from the World Values Survey on the levels
of trust in the economy. The traditional measure of trust from this source is based
on the answer to the question “Generally speaking, would you say that most
people can be trusted or that you need to be very careful in dealing with people?”
Report the responses to Question V24 from Survey Wave 6 for China, Malaysia
and the Philippines and to Question V23 from Survey Wave 5 for Thailand. How
do the countries compare in terms of social trust?
Most people can be trusted
World Values Survey
Wave 6: 2010-2014
China
Most people can be trusted
Need to be very careful
No answer
Don´t know
(N)
32
65.7
0.9
1.4
4.8
60.3
35.2
1.8
2.6
2.3
Malaysia Philippines
8.5
3.2
91.5
96.4
0
0
0
0.5
1.3
1.2
Wave 5: 2005-2009
Thailand
41.3
58.1
0.6
0
1.534
Along these dimensions, write a paragraph or two assessing the potential for the growth
of e-commerce in the ASEAN countries. What additional cross-country data on the
background or resources of these countries might be useful in assessing this potential?
Many of the private market institutions and infrastructure that might underlie an on-line
consumer market place seem to be relatively strong in both Malaysia and China. A
majority of Malaysians use the internet and Malaysia is second behind only China in
terms of fixed broadband use. Malaysia has the highest rated transport network in
Southeast Asian countries (excepting Singapore) and has the broadest coverage of
consumer credit. Payments systems in Malaysia seem deep with a larger fraction using
credit cards and mobile phone payments, though they are behind in terms of debit cards.
The main question about Malaysia might be in terms of social capital. The degree of
interpersonal trust in China is quite high for a developing economy. This social trust
might help build consumer-to-consumer internet. By contrast, trust is quite low and
Malaysia, so an internet business may need to adapt. By contrast, Thailand has relatively
high levels of trust and may have advantages for internet business along these lines.
Additional information to be considered would be how easy it is to start a formal
business, the protection of property rights which may be obtained from Doing Business.
Additional information on education could also be useful.