Download Panel 14 - Maxwell School

13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and
National Economic Development
Friday, April 21st (10:30-11:45am)
13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and National
Economic Development
Dollarization and its Impact on Ecuador
Ellen Bishop
Dollarization and Its impact on
Ecuador
Facts about Ecuador
•
•
•
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Population: 13,547,510 (est. July 2006)
Capital: Quito
Government Type: Republic
GDP (adjusted for Purchasing Power Parity):
$52.77 billion (est. 2005)
• GDP per capita (PPP): $3,900
• Poverty Rate: 41% (est. 2003)
What Is Dollarization?
• Dollarization is the most extreme form
of a fixed exchange rate regime, where a
country replaces their domestic
currency with the currency of another
country
Advantages and Disadvantages to
Dollarization
Advantages
• Dollarization can bring
price stability to an
economy that has high
inflation by anchoring to
another country’s currency
• Can reestablish investor
confidence investment
in financial systems and
give needed capital for
development
Disadvantages
• Lose autonomous
monetary policy because
no longer able to print
currency
• May lose competitiveness
depending on currency
movements of the Dollar
in markets
• Could be unsustainable due
being unable to maintain
reserves
Pre-Dollarization Ecuador
• Growth Patterns in
Ecuador have been very
volatile over the past
three decades due
mainly to:
– Economic
mismanagement
– High dependency on oil
export revenues
– Political Instability
Financial Crisis in Ecuador: Primary
Causes
• Irresponsible fiscal and monetary management
– Unsuccessful adjustment economic reforms and periods of relaxation-loss
of credibility
– Large increases in public expenditure in 2nd half of 1990s in public sector and
debt payments
– Central Bank was unable to control inflation
– Liberalization of financial sector without proper supervision & control
• Dependency on oil export revenues to finance government deficits
– Decline in oil prices led to high government deficit
• Effects from El Nino 1998-1999-destroyed many rural areas on costal
region as well affecting costal employment
• Political and Institution Instability
– Five different presidents between 1988 and end of 1999
Precursors to Financial Crisis
Financial Crisis to Dollarization
• After Inflation levels had reached high levels and
with the banking and financial system in ruins,
(former) President Jamil Mahuad called for the
currency to be dollarized, however he was thrown
out of office in a military coup before the
realization of his plan
• His successor, Vice President Gustavo Naboa
implemented Dollarization in order to realize
economic stability and control inflation
• After implementation, Dollarization was successful
bringing inflation from over 50% in 1999 to single
digits in the first part of the year (1.3% in May)
Financial Crisis, Dollarization &
Poverty
• As a result of the financial crisis, poverty levels increased
significantly all over the country, although the urban areas
have been hit the hardest. As a result of the financial and
banking crisis, many of the middle class saw their savings
disappear to massive devaluation of the Sucre and bank runs
and failures
• Non-monetary poverty also decreased
– Deterioration of quality of education
– Deterioration of health services and increased cost for medicines and
vaccines
– Nutrition suffered as a result of decreased food production and
income-female headed household hit the worst.
Dollarization’s Impact on Poverty
• Aside from stabilizing the
price level in the country,
Dollarization appears to
have had a positive impact
on reducing the relative
price level of many goods
• Average cost of consumer
goods has fallen 16% since
2000. The majority of the
decline was directly after
implementation of
Dollarization
Dollarization’s Impact on Consumer
Prices
Dollarization’s Impact on Poverty
• However, the relative gains of lower prices have benefited non-poor
households more than poor households. The relative household basket
has declined by almost 20%, while poor household basket has only
declined by 2%.
• The majority of this difference can be accounted for by decline in the
price of durable goods, as non-poor households consume more than
non-poor households
What are medium to long term
effects of Dollarization?
• Although the short term effect of Dollarization appear
positive, the long term effects of Dollarization are not yet
clear, as Ecuador remains susceptible to external shocks,
which could have an extremely negative impact as the
government has limited policy options to exercise under
Dollarization, which could make the situation unsustainable,
as was the case in Argentina
• The competitiveness of Ecuadorian products remains
unpredictable as movements are tied to the US Dollar’s
movement. If the currency appreciates, Ecuador must rely
more on productivity in order to increase growth and
reduce poverty throughout the country.
Conclusions
• The financial crisis in Ecuador
was caused by primarily by fiscal
and economic mismanagement,
political instability and falling oil
prices, which adversely affected
government revenues and El
Nino
• The financial crisis affected all
areas in the country, however
the urban areas were the hardest
hit, where many lost their life
savings through the banking and
financial crisis
• Dollarization in the short term
has proved to be positive for the
country by restoring price
stability and reducing the cost of
the average consumption basket
• The relative decline in prices has
mostly benefited non-poor
households as a result of the
large decline in the cost of
durable goods
• The medium to long term
effects of Dollarization appear
less certain since the country
remains susceptible to external
shocks which may make the
regime unsustainable
13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and National
Economic Development
Foreign Direct Investment in Macedonia
Slavica Taseva
Foreign Direct
Investment (FDI)
in Macedonia
Slavica Taseva
Spring Symposium on Development and Social Transformation
Maxwell School of Citizenship and Public Affairs
April 21, 2006
Content:
Macedonia – country facts
 Foreign Direct Investment (FDI) – theory
and practice
 FDI in Macedonia – policy status and
recommendations

Macedonia – country facts
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25,713 sq km
2.1 mil people
GDP per capita
6,800 (PPP US$)
Landlocked
Transition
country
Independence
Sep 8, 1991
EU candidate
country
FDI – theory and practice
Via Transnational corporations (TNCs)
 Types:
- Resource-seeking
- Market-seeking
- Efficiency-seeking
 Growing in volume worldwide

FDI – theory and practice
Motives:
TNCs – maximize profit and competitiveness
Host countries – spur development
TNCs provide:
- Capital
- Technology
- Skills and
management
- Market access
Host countries provide:
- Skills
- Infrastructure
- Services
- Supply networks
- Institutions
Adapted from Lall, Sanjaya. (2002)
Host country policies on FDI
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
Goal: attract high volume and quality FDI
Policies:
- Reduce transaction costs (one-stop-shop
for investors)
- Investment promotion (image building and
investor targeting)
- Provide skilled and productive labor,
services and infrastructure (not relying on
incentives and cheap labor)
Adapted from Lall, Sanjaya. (2002)
Current FDI policies in Macedonia
Investment promotion agency established
at the beginning of 2005
 One-stop-shop for registering businesses
established at the beginning of 2006
 Integration in European market (free trade
agreements)
 FDI incentives

Recommended future FDI policies
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Create industrial strategy
Target sources of FDI
(countries, industries, corporations)
Develop infrastructure
Establish industrial parks
Align educational system with the needs of
targeted investors for skilled labor
Enhance capacity of government institutions and
judiciary
13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and National
Economic Development
Economic Growth in China
Jessica Elmassian
Economic Development in
China
By: Jessica Elmassian
Historical Perspective
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Silk Road
World Imperialism
Cultural Attributes
Role of Government
Human Capital
Ideology + Economic Policy= Disaster
Technological Improvement & Structural Change
Economic Reform and
Open door policy
 Third Plenary Session of the Eleventh Chinese Communist Party
Central Committee in December 1978, the Chinese Communist
Party (CCP)
 The Third Plenum of the Fourteenth Party Congress in 1993
enacted the “Decision on Issues Concerning the Establishment of
a Socialist Market Economic Structure,” which stated the
Government’s plan to transform China into a “socialist market
economy.”
Trade as a Growth Engine
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Between 1978 and 1996 China’s GDP grew at nearly 10% a year
Trade, including exports and imports, expanded 17% a year
China’s GDP has quadrupled since 1978.
In 2005 GDP growth was estimated at 9.3% and reached $1.833
trillion.
Measured on PPP basis, in 2005, China was the second-largest
economy in the world after the U.S.
In 2005, China was the world’s tenth largest exporter
Exports reaching $752.2 billion and imports totaling $631.8 billion.
Trade in goods and services increased 61%between 1994 and
1995; and trade in goods increased 79%
Capital Accumulation – FDI
 Between 1985-1996, FDI in China increased at 36% a year
 China is currently the second largest recipient of FDI, after the
United States.
In 2004, China’s contracted FDI reached $153.5 billion.
 In 2004 44.2% of total GDP came from gross fixed investment
Trade Agreements
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Increase in Regional Trade Agreements
 0 in 1948 and was up to 181 in 2002.
The WTO
 Deals with the rules of trade between nations, and plays vital role in
the negotiations and signings of international trade agreements.
 Consists of 149, and China became a member in 2001.
 Pros: It liberalized trading barriers, strengthened intellectual
property laws, by demanding full implementation of the
Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), lowered import barriers, reduced industrial tariffs
from 25perent in 1997 to 8.9 percent in 2005; cut agricultural
tariffs from 31 percent to 14 percent in 2005; opened up the
market to direct sales and distribution; and no longer required
production in China as a requisite to sell there.
 Cons: SOEs can’t compete; an abundance of labor; no more iron
rice bowl
Fragile Financial System
 Monetary Policy & Exchange Rate
 Banking System
 Non-performing loans (SOEs)
 Securities Market
Growth Sustainability
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Exports of goods & services
 2004: RMB 2,595.7 billion
 2005: RMB 3,126.6 billion,
 2006: RMB 3,596.1 billion (forecast by EIU)

Imports of goods and services
 2004: RMB -2,723.6
 2005: RMB -3,115.0
 2006: -3,621 (forecast by EIU)
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In 2005, exports added to GDP growth in the beginning half of the year, but in the
last half, import growth undermined the effect of exports while investment and retail
spending provided for continued growth.
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Since imports will increase and export growth will lessen, overall GDP growth is
expect to slow in 2006. China reported a more than threefold increase in its trade
surplus in 2005. China’s trade surplus in 2005 was US$102 billion.

Customs data indicate export growth has actually slowed down since the middle of
last year, while import growth has increased.
Policy Considerations
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Balance of growth and distribution
Rural and urban disparities
Strengthening financial sector
Expanding legal institutions (IPR)
13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and National
Economic Development
Developing Stable and Secure Neighbors: EU
Economic Foreign Policy in Mediterranean
Dawn M. Hunter
Developing Stable
and Secure Neighbors
The European Union’s
Economic Foreign Policy
in the Mediterranean
The Euro-Mediterranean
Partnership
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Understand the underlying
rationale and imperatives in
drawing up the EuroMediterranean Partnership by
analyzing the main factors driving
the Euro-Mediterranean
relationship
Analyze how the instruments
created through the Barcelona
Process have impacted
Mediterranean politics, security,
economics and culture through
tools such as:
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Human Development Index
Foreign Direct Investment
Official Development Assistance
European Imperatives
in the Region

Democracy

Peace and Security
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Commercial Interests
Political and Security Partnership

Seeks to establish a common area of
peace and stability through:
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Political dialogue at bilateral and regional level
Partnership-building measures
Charter for Peace and Stability
Poverty
Literacy
Education
Life Expectancy
Comparison of HDI in
Mediterranean Countries
1975
1980
1985
1990
1995
2000
2002
High Human Development
22. Israel
0.794
0.818
0.839
0.857
0.880
0.907
0.908
30. Cyprus
..
0.791
0.812
0.835
0.855
0.880
0.883
31. Malta
0.726
0.763
0.789
0.824
0.850
0.873
0.875
Medium Human Development
80. Lebanon
..
..
..
0.673
0.732
0.752
0.758
88. Turkey
0.590
0.614
0.651
0.683
0.713
..
0.751
90. Jordan
..
0.639
0.663
0.682
0.707
0.741
0.750
92. Tunisia
0.516
0.574
0.623
0.656
0.696
0.734
0.745
102. Palestinian Authority
..
..
..
..
..
..
0.726
106. Syria
0.534
0.576
0.611
0.635
0.663
0.683
0.710
108. Algeria
0.504
0.554
0.603
0.642
0.664
0.693
0.704
120. Egypt
0.438
0.487
0.539
0.577
0.608
..
0.653
125. Morocco
0.429
0.474
0.510
0.542
0.571
0.603
0.620
Economic and Financial Partnership

Seeks to transform the Mediterranean into a zone of
peace and stability through improving the socioeconomic situation of each of the countries involved
through:
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conduct a dialogue on the alignment of sectoral economic
policies
to foster cooperation between non-governmental entities such as
chambers of commerce, economic institutes and trade promotion
bodies
to carry out regional projects which usefully complement
bilateral measures
OFA and FDI in
MEDA Participant Countries
1995
1996
1997
1998
1999
2000
2001
2002
2003
1643
1575
1989
2458
2085
2364
1799
575
3697
4005
1146
2816
Official Development Aid
Algeria, Egypt, Israel, Jordan, Libya, Morocco, Syria, Tunisia
1665
1972
1870
Foreign Direct Investment
Algeria, Egypt, Israel, Jordan, Libya, Morocco, Syria, Tunisia
382
638
960
Social, Cultural and Human
Partnership

The aim of the third basket is to
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bring people on both sides of the Mediterranean basin closer
to promote better mutual understanding
to improve their perception of each other.
Overall, the goal is to create a framework whereby the
Mediterranean can follow a similar path as Europe, “an
area in which a number of fundamental treaties such as
the Nuclear Non-Proliferation Treaty, the Convention on
Chemical Weapons, and the Convention on Biological
Weapons, are part of the shared heritage of all the
coastal states.”
Developing Stable
and Secure Neighbors
“As one looks at the future of the
Euro-Mediterranean partnership, surely the
incentives for inclusion vice exclusion, mutual
involvement rather than mutual disregard,
seem more compelling now than ever.”
13th Symposium on
Development and Social Transformation
Panel 14: The International Economy and
National Economic Development
Friday, April 21st (10:30-11:45am)
Ellen Bishop
Dollarization and its Impact on Ecuador
Slavica Taseva
Foreign Direct Investment in Macedonia
Jessica Elmassian
Economic Growth in China
Dawn M. Hunter
Developing Stable and Secure Neighbors:
EU Economic Foreign Policy in the
Mediterranean