Download (b) Stabilization funds: the lost paradise?

IN SEARCH OF A BETTER WORLD
Stabilization Policies in Developing Countries
Javier Santiso
Chief Development Economist & Deputy Director
OECD Development Centre
Ministry of Economy & Finance
Madrid  February 2-3 2006
1
1 Catching up versus falling down
2 The quest for efficient stabilization
(a) Macroeconomic anchoring
(b) Stabilization funds: the lost paradise?
(c) Remittances: a new holy grail?
3 Conclusions
2
Growth performance in developing countries
has been disappointing and highly volatile
Growth volatility rates
in the past 25 years
Latin America
2.3%
South-East Asia
2.2%
USA
2.1%
European Union
1.1%
World
1.0%
Source: The World Bank (2006)
3
In Latin America, macroeconomic
volatility has been a major issue…
9
8
Standard Deviation of Real GDP Growth**
7.9
standard deviation
7
6
5.3
4.7
5
4.1
4
3.4
3
3
2.2
2
1
0
MENA
SubSaharan
Africa
LAC
Other EastAsia &
Pacific
South Asia
East Asian
miracle
Industrial
countries
Source: Hausmann/Reisen (1996)
** 1970-1992
4
…and still remains a serious concern…
0.08
Currernt Account Volatility (standard deviation as ratio of GDP*)
standard deviation/GDP
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
a
el
u
ez
n
Ve
m
lo
o
C
a
bi
ile
h
C
M
o
cc
o
or
yp
g
E
t
o
M
a
ic
ex
ta
s
Co
c
Ri
in
nt
e
g
Ar
a
n
ai
p
S
i
az
r
B
l
S.
U.
Source: LACEA (2005)
* periods between 1970 and 2000
5
…although the situation has
improved over past years
Cyclical Volatility Estimates (standard deviations in %)
Cyclical Volatility
Foreign Output
Domestic Output
Fixed Investment
1870-1929
3.46
6.49
107.8
1930-1970
7.08
4.56
67.96
1971-2004
2.97
5.01
16.39
1870-1929
3.46
4.84
37.16
1930-1970
7.08
3.25
29.56
1971-2004
2.97
2.94
15.82
1870-1929
3.46
6.25
76.05
1930-1970
7.08
7.69
64.6
1971-2004
2.97
5.35
16.1
1870-1929
3.46
7.29
79
1930-1970
7.08
2.9
102.36
1971-2004
2.97
3.3
14.93
Argentina
Brazil
Chile
Mexico
Source: IMF (2005)
6
As a consequence per capita income gap has
increased
40,000
GDP per capita (constant 2000 US$)
USA
35,000
30,000
High Income
Countries
25,000
20,000
15,000
10,000
5,000
LAC
Lower & Middle
Income
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: Based World Development Indicators (2005)
7
GDP per capita growth minus world per capita growth
(% annualized)
While Latin American countries
experienced a decline…
1970
3
1990
Mexico
Chile
Brazil
2
1
1950
1990
1960
1990
0
1970
1950
1960
2000/06
1960
-1
1980
1970
1950
-2
2000/06
2000/06
1980
-3
1980
-4
-30
-10
10
30
50
70
90
deviation (%) of GDP per capita with respect to world average
($ 1990)
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decade
Source: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
8
GDP per capita growth minus world per capita growth
(% annualized)
While Latin American countries
experienced a decline…
1990
2
Venezuela
Colombia
1970
1
1950
1990
0
1990
1950
1960
1980
-1
-2
Argentina
1960
1970
1950
1960
1970
2000/06
2000/06
-3
-4
-5
1980
2000/06
1980
-6
-50
0
50
100
150
200
250
300
deviation (%) of GDP per capita with respect to world average
($ 1990)
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decade
Source: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
9
GDP per capita growth minus world per capita growth
(% annualized)
…the Asian countries experienced
an historical jump
5,5
1990
4,5
3,5
2000/06
1980
1950
2,5
1980
2000/06
1,5
1970
0,5
1980
-0,5
1950
-1,5
1970
China
India
-55
-45
1960
1960
-2,5
-85
-75
-65
deviation (%) of GDP per capita with respect to world average
($ 1990)
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decade
Source: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
10
1 Catching up versus falling down
2 The quest for efficient stabilization
(a) Macroeconomic anchoring
(b) Stabilization funds: the lost paradise?
(c) Remittances: a new holy grail?
3 Conclusions
11
Stabilization through fiscal
mechanisms is difficult…
M
ex
ic
o*
Ec
ua
do
r
Pa
ra
gu
ay
El
Sa
lv
ad
or
Pe
ru
Pa
na
m
a
ep
ub
lic
D
om
in
ic
an
R
ia
*
Bo
l iv
ol
om
bi
a
C
hi
le
C
Ta
x
R
ev
en
ue
LA
C
(a
vg
.)
as
on
du
r
H
ic
a*
R
os
ta
C
Ar
ge
nt
in
a
40
35
30
25
20
15
10
5
0
Br
az
il
percent
Tax Revenue as GDP percentages (2004)
simple averages; including social security
* without taxes on hydrocarbons
Source: Lora (2006)
12
…so is stabilization through reserves…
818.9
Reserves in bn US$
300
250
200
150
100
50
0
China
South
Korea
India
Singapore
Malaysia
Thailand
Poland
Czech
Republic
Saudi
Arabia
Venezuela
South
Africa
Chile
Colombia
Pakistan
Reserves in % GDP
120%
100%
80%
60%
40%
20%
In
di
a
pp
in
es
C
hi
le
H
un
ga
ry
Ar
ge
nt
in
a
Po
la
nd
Tu
rk
ey
C
ol
om
b
In
do ia
ne
Sa
si
ud
a
iA
ra
bi
a
M
ex
ic
o
Br
az
il
Pa
So k is
ta
ut
n
h
Af
ric
a
Ph
i li
Pe
ru
Si
ng
ap
or
H
e
on
g
K
on
Ta g
iw
an
M
al
ay
si
a
C
So
hi
na
ut
h
Ko
re
Th a
ai
la
nd
R
us
si
a
C
ze
Eg
ch
yp
t
R
ep
ub
li c
Is
ra
Ve
ne el
zu
el
a
0%
Source: Economist Intelligence Unit (2006) and World Bank (GDP 2004)
13
Developing countries following this strategy
face social costs and economic arbitrage
 According to Guidotti-Greenspan rule, liquid reserves should equal a
country’s foreign liabilities.
 This strategy implies costs arising from spread between private sector’s
cost of short-term borrowing abroad and the yield Central Banks earn on
liquid foreign assets.
 According to Rodrik (2005), social costs of holding reserves can amount to
1% of developing countries’ GDP (assuming spread of 5%).
 This amount is roughly the same as the projected gains for developing
nations from successful conclusion of the Doha negotiations.
 “Insurance premium” to stabilise a country through reserves may
therefore outweigh expected benefits.
 Contrary to what has happened, strategy should be to increase reserves
AND simultaneously reduce short-term liabilities.
14
Stabilization through financial market
access in local currencies is for a lucky few…
Date Issued
Maturity
Amount issued
(mill. US$)
Argentina
Dec-96
Dec-98
250
Argentina
Feb-97
Feb-07
500
Argentina
Jun-97
Jul-49
500
Argentina
Jul-97
Jul-49
500
Argentina
Jun-01
Sep-08
931
Uruguay
Oct-03
Oct-06
290
Uruguay
Aug-04
Feb-06
250
Colombia
Feb-05
Oct-15
325
Brazil
Sep-05
Jan-16
1479
Colombia
Nov-05
Mar-10
500
Country
Source: BIS (2005)
15
1 Catching up versus falling down
2 The quest for efficient stabilization
(a) Macroeconomic anchoring
(b) Stabilization funds: the lost paradise?
(c) Remittances: a new holy grail?
3 Conclusions
16
Latin American growth is linked to the
performance of primary products…
Export of commodities/
GDP and BBVA-MAP Latam
Total exports
6%
2004
Venezuela
83%
Peru
71%
30%
GDP growth rate
5%
20%
4%
10%
3%
Chile
60%
Colombia
46%
2%
BBVA-MAP growth rate
Source: BBVA
based on national statistics
2004
2003
2002
2001
2000
-30%
1999
31%
1998
Latam
Correlation = 0,65
1997
-1%
1996
14%
1995
Mexico
-20%
1994
30%
1993
Brazil
0%
1992
38%
-10%
1%
1991
Argentina
0%
Source: BBVA; BBVA-MAP Latam index monitors the
trading prices of commodities in the region
17
Source: CAF (2004)
Coffee
Gas (USA)
Oil
Copper
Aluminium
Tin
Zinc
Silver
Bananas
Soy
Shrimp
Gold
Sugar
Production Goods (USA)
Consumer Goods (USA)
Capital Goods (USA)
Estimated deviation of the annual change rate
…where price volatility
is particularly high
45%
40%
35%
30%
25%
20%
15%
10%
5%
18
Changes in commodity prices have a
large impact on the public budget…
Impact of higher oil prices for net oil exporters in 2006
14
12
Impact of US$ 1 change in fiscal
accounts
% of GDP
10
Estimated fiscal windfall* relative
to budget assumption of 2006
8
6
4
2
0
Venezuela
Russia
Ecuador
Colombia
Mexico
Source: Based on J.P. Morgan (2005)
* using average WTI forecast of crude oil price of US$ 56.25
19
…but countries have varying success in using
this revenue for macroeconomic stabilization
5
Colombia, Mexico, Russia (4.5)
4
3
2
1
Algeria (3.5)
Nigeria (2.5)
Chad, Ecuador,
Venezuela (1)
0
Source: Own estimates and J.P. Morgan (2006)
Scale runs from 0 (bad) to 5 (very good)
Oil revenues are captured in stabilization
funds while money is spent on debt repayment,
investment projects, or stabilization programmes
Oil revenues above budget assumption are
channelled into stabilization fund while some portion
is used to finance larger public budget
Newly set-up stabilization fund has so far financed
deficits rather than being used to build up savings
Stabilization funds are either not utilised (Venezuela)
or financial resources are used to support the budget
rather than to repay debt
Chad has defied The World Bank by changing in
2006 its laws on managing petroleum revenues, to
gain more freedom on spending it.
20
…success stories are rare
IN THEORY
IN PRACTICE:
 When commodity prices
are high revenues are set
aside
 When prices soar, funds
are dropped (Zambia in
1970s with mineral fund)
 When prices go down,
funds are used to cushion
the blow
 When they go up or down,
the orgy of domestic
spending continues
(Venezuela after 1974)
 Commodity shocks have
the same impacts
 Institutions are key
stabilisers (Lynn, 1997)
21
The paradox of plenty
COMMODITY BONANZAS…
AND THEIR CONSEQUENCES:
 Sudden inflow of dollardenominated revenues
 Sharp appreciations and
loss of competitiveness
 Rent-seeking behaviour in
weak institutional contexts
 Wasteful government
spending and cronyism
 Military spending and
conflict propensity
 Civil war in an African
country varies from less than
1% to nearly 25% depending
on resources (Collier, 2002)
22
Beyond economics: resource rents
countries show lower democracy scores
Period
Sample
High Natural
Rents Countries
1970
3.29 (4.16)
0.96 (2.56)
1974
3.08 (4.22)
0.89 (2.56)
1978
3.18 (4.28)
1.32 (3.09)
1982
3.43 (4.29)
1.76 (3.41)
1986
3.72 (4.35)
1.28 (3.08)
1990
4.52 (4.27)
1.89 (3.49)
1994
5.29 (3.96)
2.00 (3.48)
1998
5.26 (3.98)
1.92 (3.43)
1970-1998
4.03 (4.26)
1.46 (3.11)
Source: Based on Collier and Hoeffler (2005)
Range: 0 (low) to 10 (high)
23
One way of fostering growth is
through cluster approaches…
Average growth rate of certain regional clusters (1998)
Flowers, Colombia
Coffee, Colombia
Oil, Venezuela
Fruits, Colombia
Asparagus, Peru
Bananas, Ecuador
Soy , Bolivia
Shrimp, Ecuador
Iron, Venezuela
Fish Flour, Peru
Wood , Bolivia
Minerals, Peru
Flowers, Ecuador
Minerals , Bolivia
Oil, Ecuador
Aluminum, Venezuela
Gas, Bolivia
0.0
1.0
2.0
3.0
0.0
Source: CAF (2004)
24
…but success has so far been limited
Development Level of natural resource clusters in the Andean region (0=low, 10=high)
Country
Bolivia
Cluster
Exploitation
and Export,
minimum
processing
Processing and
export, import
substitutions and
public goods
delivery
Export of some
of the goods
and services
that are
substituted
Export of processed refined products,
inputs, machines and services associated to
the cluster. The firms of the country
associated to the cluster start to invest
abroad
Gas
Wood
Minerals
Soy
10
10
10
10
0
7
4
8
0
2
4
4
0
2
0
2
Coffee
Flowers
Fruits
10
10
10
8
10
10
8
10
8
4
5
1
Bananas
Shrimp
Flowers
Oil
10
10
10
6
10
9
5
3
2
2
2
2
2
2
2
2
Asparagus
Fish Flower
Minerals
10
10
10
9
5
2
1
3
1
8
2
7
Aluminum
Iron
Oil
10
10
10
0
5
8
0
4
5
0
1
5
Colombia
Ecuador
Peru
Venezuela
Source: Osmel Manzano, 2006
25
1 Catching up versus falling down
2 The quest for efficient stabilization
(a) Macroeconomic anchoring
(b) Stabilization funds: the lost paradise?
(c) Remittances: a new holy grail?
3 Conclusions
26
Remittances have grown stronger
than official flows and FDI…
180
160
140
120
Remittances
100
Official flows
80
FDI
60
40
in absolute terms…
20
0
Year 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
3.5
…and as a
percentage of GDP
3
2.5
2
Remittances
Official flows
1.5
FDI
1
0.5
0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: Guiliano and Ruiz-Arranz, IMF (2005)
27
…largely outweighing the inflow of capital
through development assistance
180
in bn of US$
160
200.0%
175.9%
Percentage change between 1995 and 2004
140
bn US$
120
150.0%
100
1995
80
100.0%
2004
60
55.1%
50.0%
40
33.9%
20
-20.0%
0.0%
0
Workers
remittances
Foreign direct
investment
Official development Private debt and
assistance
portfolio equity
Workers remittances
Foreign direct
investment
Official development
assistance
Private debt and
portfolio equity
-50.0%
Source: Based on OECD and World Bank (2006)
28
Remittances flows are particularly strong
towards low-income countries…
Billions of Dollars
Nigeria
Share of GDP
2.8
10
Yemen, Rep.
United States
3
Kiribati
Colombia
3.2
Vietnam
3.2
Portugal
3.2
Egypt, Arab Rep.
3.3
Bangladesh
3.4
Brazil
3.6
Pakistan
3.9
Serbia
4.1
Morocco
4.2
6.4
Germany
6.5
Belgium
6.8
Spain
6.9
Albania
11.7
Nicaragua
11.9
Tajikistan
12.1
Samoa
12.4
Lebanon
12.4
Dominican Rep.
13.2
Philippines
13.5
15.5
16.2
EI Salvador
Serbia and Montenegro
17.2
Jamaica
17.4
20.4
Jordan
Philippines
11.6
France
Bosnia and Herzegovina
12.7
18.1
China
India
25.8
Moldova
21.7
15
24.8
Lesotho
21.3
10
22.5
Haiti
Mexico
5
11.7
Honduras
United Kingdom
0
11.3
Nepal
20
27.1
Tonga
25
31.1
0
5
10
15
20
25
30
35
Source: Based on OECD and The World Bank (2006)
29
…having a large impact on a country’s
indebtedness classification
800
Indebtedness classification including and excluding remittances
732
700
debt in % of exports
600
excluding remittances
including remittances
500
400
355
300
257
208
200
145
178
114
116
100
124
82
0
Lebanon
Ecuador
Morocco
El Salvador
Guatemala
Source: Based on The World Bank (2005); data: 2003
30
Although remittances seem to have a procyclical effect in 2/3 of developing countries…
Yemen, Rep. of
Albania
Russia
Estonia
Dominican Republic
Papua New Guinea
Thailand
Nepal
Turkey
Maldives
Country Correlations between the
Cyclical Components of Remittances
and GDP (1975-2002)
Morocco
Cote d Ivoire
Kenya
Togo
Mali
Oman
Vanuatu
Dominica
Eritrea
Indonesia
Honduras
Brazil
Nigeria
Pakistan
Argentina
Ethiopia
Benin
Poland
Slovak Republic
Lebanon
-1
-0.8
-0.6
-0.4
Source: Giuliano/Arranz (2005)
-0.2
0
0.2
0.4
0.6
0.8
1
31
…there is also evidence that remittance
flows can act counter-cyclicaly
Remittances as a percentage of private consumption,
two years before and two years after natural disaster
18
15.5
16
14
percent
12
10.4
10
7.9
11.3 10.8
11.3
9.6
8.9
8.4
8
6
4
7.7
5.7
5.1
4.4 4.7
3.8 4.2
8.4
5.2 5.5 5.6
2
0
Bangladesh
Dominican Republic
Haiti
Honduras
Remittances as a share of personal consumption,
two years before and two years after political conflict
Remittances as a share of personal consumption, two
years before and two years after financial crisis
18
16.9
17.0
16.9
2.5
2.0
16
2.1
2
2.0
1.9
1.7
1.5
1.4
1.5
1.2
1.1
2.0
14
1.8
12.7
12.3
12
10
1.0
1.1
8
1
6
0.5 0.5
4
0.5
2.9
2
0.7
3.2
1.0
0.8
0
0
Mexico
Indonesia
Thailand
Source: Based on The World Bank (2006)
Note: in a 5 year interval, red denotes year of external shock
Albania
Sierra Leone
32
Remittances flows could even grow further
through adequate policy measures
Estimated increase in formal remittances through transactions cost reduction
140
122
120
99
percent
100
73
80
60
55
54
South Asia
All developing
countries
40
20
0
Sub-Saharan Africa
Latin America and the
Caribbean
Eastern Europe and
Central Asia
Source: The World Bank (2006)
* assuming reduction of transactions cost to 2-5% and elimination of dual exchange rates
33
The central issue for developing countries:
Transaction costs but not in all countries
Remittances costs in Mexico
Remittances costs in Latin America *
(%, for 200 USD)
(%, 200 USD)
10.6
* From USA; 2004
Source: PEW Hispanic Center
34
Average
Ecuador
Peru
El Salvador
Colombia
7.9
7.3 7.3 7.3 6.9
6.4 5.8
5.6 5.4
Nicaragua
Bolivia
Venezuela
2004
Haiti
7.3
Jamaica
7.4
Cuba
Rep.
Dominicana
Source: Pew Hispanic Center
2002
2001
2000
8.1
2003
9.2
Guatemala
8.9 8.6
8.2
Honduras
11.3
México
12.1
13.0
The central issue for developing countries:
How to capitalize remittances’ bonanza?
Uses of remittances in Mexico in 2004
% of total
78.0
7.0
5.0
Consummer Education Savings
Goods
4.0
Others
1.0
1.0
Investment Households
Source: Fomin y Pew Hispanic Center
35
The central issue for developing countries:
How to capitalize remittances’ bonanza?
 More remittances channeled through formal financial systems in order to
increase the potential tax base of the recipient country.
 More competition, combined with appropriate legislations and institutions,
in order to reduce transaction costs: -60% between USA and Mexico since
2000.
 More interconnected banking systems between OECD and non OECD
countries in order to facilitate the access to credit in low income countries.
 Trans-national systems of guarantees in order to facilitate the access to
credit for durable goods.
 Banking accounts in hard currencies in recipient countries in order to
transfer the exchange rate risk, and highly remunerate in order to
incentive savings and capital accumulation in low income countries.
 Banking accounts in sending countries highly remunerated (spread with
the market covered by the State as ODA?), if the previous option is not
technically feasible (second best option).
36
1 Catching up versus falling down
2 The quest for efficient stabilization
(a) Macroeconomic anchoring
(b) Stabilization funds: the lost paradise?
(c) Remittances: a new holy grail?
3 Conclusions
37
GDP per capita growth minus world per capita growth
(% annualized)
European countries experienced an
impressive catching up process …
4,5
1960
Spain
3,5
Italy
1950
1960
2,5
Portugal
1960
1970
1,5
1970
1990
1990
1970
1950
0,5
1990
1950
1980
-0,5
1980
1980
2000/06
-1,5
2000/06
-2,5
2000/06
-3,5
0
50
100
150
200
250
deviation (%) of GDP per capita with respect to world average
($ 1990)
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decade
Source: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
38
… which invite to focus on some of the
key drivers of their success stories
 European anchoring and sound macro-economic policies have been major
drivers of the impressive Spanish catching up.
 Interestingly Spain has been a major recipient of remittances: Spanish
emigrants had a positive impact in the development of Spanish financial
sector.
 What could be the lessons of the Made in Spain for developing countries?
Highly remunerated banking accounts in hard currencies for recipient
countries? A Policy Dialogue activity in order to share experiences
between bankers and policy makers.
 Spain is a major sending country of remittances (3,4 billons of Euros in
2004 according to the Banco de España), most of them towards 3 countries
(Ecuador, Colombia and Morocco) and at the same time Spanish private
institutions are major financial operators in Latin America.
 A window of opportunity for innovative development finance based on
public private partnerships and co-development finance?
39
Thank you
for your attention!
40