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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