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Transcript
1
SOURCES OF
DUTCH DISEASE::
EVIDENCE FROM TRANSITION ECONOMIES,
1990-2007
Lo Bue Maria Carmela, M.A.
Chair of Development Economics
Georg-Augusta Universität, Göttingen
Contact.: [email protected]
Working Paper, June 2011
EADI-DSA 2011 Conference
19 - 22 September 2011, York, UK
Outline
I.
Introduction
II. Theoretical background
III. Capital inflows patterns in the EE-FSU region
IV. Empirical methodology
V. Interpretation of the results
VI. Concluding remarks
2
Introduction
• During the last decade, the countries which have emerged from the former communist bloc of
Eastern Europe and the former Soviet Union (EE-FSU) have all received large inflows of foreign
currency, in the form of either aid, remittances, FDI, portfolio inflows or revenues from exports of
oil minerals and metals .
•On one hand these currency inflows could have raised investment and encouraged economic
growth.
•On the other hand, destabilizing side-effects could have been brought about by the
appreciation of the Real Exchange Rate (RER) and its detrimental effects on countries
competiveness.
“Real Exchange Rate problem”
•“It is the possibility that capital inflows bring an appreciation of the real exchange rate with
adverse effects on traded-goods production in the domestic economy” [Corden, 1994].
3
Introduction
Need to consider differences in the forms of inflows received, differences in the types of
recipients, differences in neutralizing/alleviating options at the disposal of policy makers.
Inflows
Revenues from natural resources exports
Recipients
Government - Oil companies
Aid
Government
Remittances
Households
FDI & Portfolio inflows
Government
MNCs and national enterprises
Individual agents
Aim of the paper: To ascertain whether these different types of currency inflows generate a
greater or smaller real exchange rate appreciation.
To identify which of those is likely to affect the most the RER and-through
it- the prospect for growth in the EE-FSU region
4
The Dutch Disease: one curse, different sources (A short theoretical excursus)
Most agreed definition of D.D. : reduction in a country’s export performance as a result of an
appreciation of the real exchange rate after a rapid increase in the export and /or in the price
of a natural resource. (“Traditional “ form of D.D.)
As depicted in Corden and Neary model (1982):
Three sectors in the economy:
Booming “B”
Lagging “L”
Non – Tradable “NT”
Two effects:
Spending effect
PNT /PT
5
Resource movement effect
Direct Deindustrialization
Indirect Deindustrialization
“Non-Traditional” forms of Dutch Disease
Aid
•Two Sectors : Tradable and Non Tradable
•Three Effects:
DN 
1. Spending effects 
PN /PT
2. Resource-Movement effect  T NT
D T  TD
3. Expenditure-Substitution effect 
4. Destination of aid (import of capital goods, inputs; expenditure in infrastructure …)
Remittances
• Motivation: self-interested vs. altruistic purposes
• Recipients’ propensity to save/consume (effects on interest rates)
• Households' expenditure pattern (biased towards NT goods)
FDI & Portfolio inflow
•Possible adverse effects on the Terms of Trade, Instability in the Balance of Payments and on the
domestic rate of saving/ investment
•Exchange rate regime and monetary policy
6
Capital inflows patterns in the EE-FSU region. (A short overview)
7
Net currency inflows (trend)
Aid (GDP%)
Remittances (GDP%)
19
16
17
14
15
12
13
10
11
8
9
6
7
4
5
2
3
0
FDI (GDP%)
16
35
14
30
12
10
8
25
20
6
15
4
10
2
0
-2
-4
8
Net Export Fuels+Ores (GDP%)
5
0
Real Exchange Rate
9
The model
Data: 19 EE-FSU countries; 1990-2007
Variable Name
RER
Variable Label
Real Exchange Rate
Source
Author’s compilation
Unit of measure
Index, 2000=100
Net Export of fuels, ores, metals,
Net
Export
precious stones and non-monetary
Percentage of the GDP
gold
Aid
Net Official Aid/GDP
DAC-OECD
Percentage of the GDP
Remittances
Workers’ Remittances/GDP
World Bank
Percentage of the GDP
FDI
Foreign Direct Investment/GDP
UNCTAD
Percentage of the GDP
Government
General Government
Expenditure/GDP
EBRD
Percentage of the GDP
Expenditure
Employment
Share of informal sector in total
in informal sector
employment
WTO
Dummy denoting a year/country
dummy
joining WTO
Dummy denoting a country/year hit
CRISIS
dummy
10
UNCTAD
by the Russian and Albanian financial
crisis
ILO
Author’s
compilation
Percentage of total employment
(1=access to WTO, 0=all other cases)
(1=years of Russian and Albanian crisis for
Author’s
compilation
countries identified as Russian and
Albanian main trade partners, 0=all other
cases)
Econometric specification of the model and estimation approach
i. Linear and Non Linear effects
ii. Time Lag effects
In both cases we implement generalized least squares (GLS) serial correlation and
heteroskedasticity robust method.
11
Table 1: Model I , Non Linear Effects
12
Interpretation of the results (Table 1)
• One point percentage of increase in remittances leads to an appreciation of 4.11% in the RER,
• One point percentage of increase in FDI leads to an appreciation of 1.78% in the RER,
• One point percentage of increase in aid leads to an appreciation of 4.9% in the RER (see col.1).
•Any significant effect of net exports of mineral resources on the dep.var.
•Effect of saving and stabilization funds,
•Increased imports (in capital goods) to enhance productivity in the oil sector,
•Extra revenues stemming from rents increased the demand for imported goods (i.e. cars,
luxury goods).
•Oil price has a significant effect (but relatively small).
13
Interpretation of the results (Table 1)
cntd.
•Non Linearity trend for remittances and FDI.
•Keep in mind that recipients in these cases are mostly private agents
(household and firms)
for very large inflows incentives to save/invest money and/or to
increase the demand for imported goods.
•Estimated turning point: 22.6 (for remittances) and 19.7 (for FDI).
•Negative effect of the abolition of trade barriers
greater incentives for the foreign counterparts to trade and relatively
small incentive from the import side (limiting the outflows of money from
the country).
14
Interpretation of the results (Table 1)
cntd.
•Negative effect of the financial crisis
Trade effect (deterioration in trade exchanges after the crisis) >
depreciating effect (following the removal of foreign-owned capital
•Positive effect of government expenditure
increased the volume of import. Provision of social assistance and
pension funds (benefiting mostly low-income households)
•Negative effect of employment in the informal sector
expansion of the NT sector as suggested by the “resource movement
effect”
15
Table 2: Model II , Lagged Effects
16
Interpretation of the results (Table 2)
•Inclusion of lagged variables leads to significant and large appreciating
effects on the RER.
•The results reported in columns 2 to 7, emphasize that only FDI, aid and
remittances have a significant positive impact on the RER, where 1 point
percentage of GDP increase in FDI, aid and remittances occurred in the
previous year will lead to a 1.9%, 4.2% and 3.5% increase in RER
respectively
 This results confirm our initial hypothesis on the existence of time
effects (i.e. due to the limited absorbing capacity in recipient countries)
17
Concluding Remarks (1/4)
Dutch Disease effects may differ among themselves because of
differences in the recipients of the inflows, their average volume,
destination and the ability of policy makers to moderate their effects.
For resource-endowed countries, the resource curse seemed to have been
not in place (or not very important)
•Use of stabilization funds
•Existence of slack in these economies and /or limited factor mobility
between sectors
•Use of tax windfalls to improve the competiveness of the
manufacturing sector.
18
Concluding Remarks (2/4)
Other countries (Albania, Armenia, Bulgaria, Kyrgyz Rep., Moldova,
Mongolia and Tajikistan) relied on foreign aid assistance up to late 90s
and on a large inflows of remittances later on.
•Difficulty in establish off-setting policies .
•“Unpopular” measures (i.e. discouraging agents to convert
remittances in domestic currency, or levying taxes on remittances).
• A more feasible measure is the sterilization (i.e. the sale of State or
Central Bank bonds) to drain liquidity and cushion the inflationary
spiral.
19
Concluding Remarks (3/4)
Increasing supply of foreign funds has lead to increase in the demand
( RER appreciation and high real wages).
As also noted by Grafe and Wyplosz (1997), the RER appreciation in
this case could not be the result of a Balassa-Samuelson effect (given
that under central planning services were very underdeveloped,
productivity gains in the NT sector must have been very large).
20
Concluding Remarks (4/4)
Off-setting policies in the case of FDI can be more easily implemented :
• sterilization through reinforced controls and /or taxes on capital
inflows,
• intervening through the banking system (i.e. increasing the reserve
requirements on banks or shifting government deposits from
commercial banks to central bank).
For the prospect of future research, need to rely on more data (REER,
portfolio inflows, destination of consumption) to give a more accurate
explanation of the dynamics of the DD in EE-FSU transition economies.
21