Download Sources for Financing Domestic Capital

Sources for Financing Domestic
Capital
Is Foreign Saving a Viable Option for
Development Countries?
Stephanie Carret
&
Jinjie Cui (Eric)
Faculty of Economic Science
University of Warsaw
7th January, 2010
S.Carret & J.Cui
Development Workshop
1
The Planning for today
1. Review of paper: main ideas
2. Analysis of illustrative graphs
3. Other views on the subject
4. What questions can we raise
S.Carret & J.Cui
Development Workshop
2
The point of this paper
• Capital account liberalization
– Controversial policy in the 90’s
• Early 90’s
–
–
–
–
Waves of market-oriented liberalization
Greater financial liberalization
Optimism about growth prospects
Growing financial integration
• Expected capital stock increased with available foreign savings
– This papers tries to test this assumption
This paper shows economic growth depends on all factors
explaining magnitude & quality of investments in all types of K
Political economy factors & political risk diversification
– Important to understand the link growth-SFR
S.Carret & J.Cui
Development Workshop
3
Data used & Methodology
• Data
– World Development Indicators database
– 47 developing & 22 OECD countries
– Between 1981 and 2001
• Methodology
– National income accounts
– SFR: what is the autarky stock of tangible K
supported by actual domestic past savings relative
to actual stock of K
– Panel comparison accross countries & time
S.Carret & J.Cui
Development Workshop
4
Regional findings
• Latin America & Africa
– Rely more on foreign savings to finance their finance their
tangible K
– Weak trend of SFR greater dispersion
– Relatively low growth rates
• Asia
–
–
–
–
SFR increased, especially post-1997 crisis
Asia has financed domestically its rapid increase in K
Precautionnary savings post-crisis: increased SFR
High growth rates
• OECD
– Increase in standard deviation of SFR*
S.Carret & J.Cui
Development Workshop
5
Main Conclusions
• Self-financing ratio in developing countries
– Evaluate impact of growing global financial integration on
sources of financing domestic capital stocks
• Results found
– 90% of stock of capital is self financed & Stable through the 90’s*
– No significant correlation found between
• Financial integration and self-financing ratios
– During 90’s, countries with higher SFR grew faster
– No « growth bonus » when increased financing share of foreign
saving
– Better institutions associated with lower volatility of SFR
• Financial integration helped facilitating assets diversification…
– … but failed to offer new sources of financing capital
S.Carret & J.Cui
Development Workshop
6
Figure 1 Self-financing ratios, means
and standard deviations
S.Carret & J.Cui
Development Workshop
7
Figure 2 Growth and self-financing ratio,
cross-country analysis, 1990s
S.Carret & J.Cui
Development Workshop
8
Table 1 Explaining average per capita
growth rates in the 90s (T-statistics are
presented in italics)
S.Carret & J.Cui
Development Workshop
9
Table 2 Explaining standard deviation of
self-financing rates in the 90s
S.Carret & J.Cui
Development Workshop
10
Figure 3 The association between deeper
de-facto financial integration and changes
in self-financing ratios
S.Carret & J.Cui
Development Workshop
11
Figure 4 Self-financing ratio, means across
regions
S.Carret & J.Cui
Development Workshop
12
Figure 5 Annual GDP per capita growth,
means across regions
S.Carret & J.Cui
Development Workshop
13
Figure 6 Self-financing ratios and GDP per
captia growth rates in selected countries
that did not experience major financial crisis
S.Carret & J.Cui
Development Workshop
14
Figure 7 Self-financing ratios and GDP per
capital growth rates in selected countries
that experienced major financial crisis
S.Carret & J.Cui
Development Workshop
15
3. Other views on the subject
the case of foreign investment
• « Foreign investment in developing contries: does it crowd in
domestic investment? », by M.Agusin and R.Machado, in Oxford
Development Studies, 2005
• To what extent MNE’s FDI in developing countries are crowding
in and out domestic investment?
• Establish an investment theoratical model including FDI variable
– 12 countries in 3 developing regions (Africa, Asia, S.America)
– Testing between 1971-2000
• Conclusions
– At best, domestic investment unchanged for 3 regions
– S.America & Africa, crowding out movements (70’s & 90’s)
– Need for more policies to make FDI more effective
• Develop the domestic component of total investment
• Limit liberalization on FDI? Screening policies? Quality ladder?
– Question of FDI impact on development & total investment
S.Carret & J.Cui
Development Workshop
16
4. What questions can we raise?
• When to liberalize? Is it needed to liberalize?
• Did the Washington Consensus did worse
than better?
– Case of Latin America
– Case of East Asia
• What about the role of the state?
• How to invest foreign savings in capital
financing?
S.Carret & J.Cui
Development Workshop
17
Source:
Paper:
“Source for financing domestic capital – Is foreign
saving a viable option for developing countries”, by
J.Aizenman,B.Pinto & E.Radziwill, in NBER working
paper 10624, 2004.
S.Carret & J.Cui
Development Workshop
18
Questions?
Thank you for your attention!
S.Carret & J.Cui
Development Workshop
19