Download final paper - University of Mauritius

FINANCIAL GLOBALISATION AND ECONOMIC RESILIENCE
IN MAURITIUS
K Jankee
1. Introduction
Financial globalisation undoubtedly presents new challenges and opportunities to
developing countries, in particular, to a small island developing economy (SIDS) like
Mauritius. The integration of the domestic financial system in the global financial
markets has been high on the agenda of policy makers since the late 1980s with the onset
of the financial liberalisation programme (see Junglee 2001). The internationalisation of
the financial system formed part of the overall strategy of reaping the full benefits of
economic liberalisation. Policy makers have been motivated to promote the financial
services sector as another major pillar of the economy and establishing Mauritius as a
regional financial center. With this objective, an array of institutional and policy reforms
were implemented in order to develop the financial system and liberalise trade in
financial services. The filing of GATS commitments with respect to financial services in
the case of banking, insurance and securities trading became a logical step towards
greater financial integration.
The objective of this paper is to highlight the institutional and policy changes, which took
place in the Mauritian financial system in order to integrate the global financial markets.
A preliminary assessment of the impact of the liberalisation of trade in financial services
on the financial system will be attempted in terms of capacity building; capital flows and
enhanced efficiency. This case study will help to throw light on the problems that
Mauritius has to face and by SIDS, in general, so as to integrate the world financial
markets.
The globalisation of financial sector in small states may be seen as not only providing a
source of further economic growth through the development of this particular sector but
1
also as enhancing the general resilience of small economies in the face of the inherent
vulnerabilities that they face. Briguglio et al (2004) define resilience as the ability of an
economy to bounce back after a shock, depending upon a plethora of policy issues among
which macroeconomic stability, microeconomic efficiency and good governance. The
globalisation of the financial sector in small states has the potential to contribute to all of
these three aspects of resilience. In terms of macroeconomic stability, it has the potential
to smoothen consumption and income through better access to the international financial
markets for saving and insurance. In terms of microeconomic efficiency, the globalisation
of the financial sector would be expected to enhance the efficiency with which savings
are generated and directed to profitable investment opportunities. In terms of governance,
the globalisation of the financial sector would imply the adoption of international
standards and practices in the area, thereby enhancing the overall level of governance in
the economy with possible spill-over effects into the improvement of corporate
governance.
The rest of the paper is organized as follows: in section 2, a selective review of the
literature will be carried on financial globalisation and developing countries with
emphasis on SIDS in order to provide for a background when analysing the case of
Mauritius. In section 3, we will discuss the impact of financial globalisation on financial
sector developments in Mauritius. Section 4 concludes the paper and provides for some
policy implications.
2. Financial Globalisation and SIDS: A Review of Selected Issues
The characteristics of SIDS underpinning their vulnerability has been heavily discussed
in trade negotiations in international forum during these recent years (see Easterly and
Kraay, 2000, Commonwealth Secretariat, 2000). There is a lot of theoretical and
empirical literature on the presence of major imperfections and gaps in the structure of
financial systems in these developing countries (Knight, 1998; Fry, 1995; Stiglitz, 1995).
Given the existing obstacles in developing the domestic financial market, integration of
these economies in the global financial markets has become a daunting challenge in
2
terms of establishing the appropriate financial architecture. There has been a lot of recent
works on the effects of financial globalisation on developing countries with some
emphasis on SIDS (see Prasad et al. 2003; Whalley 2003).
Various issues have been addressed such as the effects of financial globalisation on
economic growth and welfare, causes of financial globalisation, effects of WTO-driven
financial services trade liberalization, the need for an international regulatory framework
and promotion of financial stability, amongst others. We proceed by a selective review of
literature in this section to be used as a background to analyze the case of Mauritius. At
the outset, Whalley (2003) has pointed out that one should be cautious in interpreting the
literature, as developing countries are heterogeneous in terms of their income levels as
well as level of financial development and the types of financial services have different
impacts on economic growth.
Financial globalisation and economic growth
Although there is theoretical justification for developing countries to participate in the
world financial markets, there is a lot of debate at the empirical level given mixed
evidences and especially following the financial crisis of the 1990s (Edison et al. 2002).
Policy makers in many developing countries have expressed reservations regarding the
extent to which financial globalization could be beneficial to their economies in terms of
market access and competition with developed countries.
Prasad et al. (2003)
investigated the impact of financial globalisation on different types of developing
countries. Financial globalisation can help to raise the growth in developing countries
through a number of channels, which can directly or indirectly determine economic
growth. These are augmentation of domestic savings, reduction in cost of capital (see
Henry 2000, Stilz 1999), transfer of technology from advanced countries (see
Borensztein et al. 1998, MacDougall 1960, Grossman and Helpman 1991), development
of domestic financial sector (Levine 1996, Caprio and Honohan 1999), increase in
production specialization, signalling and better macroeconomic management induced by
3
competition (Kalemi- Ozcan et al. 2001; Gourinchas and Jeanne 2002; Battolini and
Drazen 1997).
At the empirical level although the average income per capita for the group of more
financially integrated open developing countries grew at a higher rate than the less
financially integrated developing countries, there is no robust evidence that financial
globalisation delivers higher economic growth. There is a lot of research claiming that
cross-country differences in per capita incomes stem not from differences in capitallabour ratio but from differences in total factor productivity, which could be explained by
factors like governance and rule of law. There is also evidence of a threshold effect in the
relationship between financial integration and economic growth. A number of researchers
have emphasized the need to build up a certain amount of absorptive capacity in order to
take advantage of financial globalisation. Prasad et al. (2003) discuss the importance of
domestic governance as an element of the absorptive capacity. Developing countries
willing to integrate world financial markets should improve governance. Any country
should develop a full set of sound institutions and adopt the best practices on financial
supervision and transparency. The quality of governance affects economic growth and
other social objectives (see Mauro 1995, Abed and Gupta, 2002)
Financial globalisation and Macroeconomic volatility
In theory, financial globalisation can help developing countries to better manage output
and consumption volatility, thereby enhancing their resilience to exogenous shocks.
Given that developing countries are rather specialized in their output and factor
endowments structures, they are expected to obtain bigger gains than developed countries
through international consumption sharing (see Kose et al. 2003). Access to international
financial markets provides better opportunities for countries to share macroeconomic
risks and thereby, smooth consumption (see Obstfeld and Rogoff , 1998). Empirical
works on the impact of financial globalisation on output and consumption volatility in
developing countries is very limited and inconclusive.
4
According to Razin and Rose (1994), rising financial integration can lead to increasing
specialization of production based on comparative advantage considerations, thereby
making economies more vulnerable to shocks that are specific to industries. They study
the impact of trade and financial openness on the volatility of output, consumption and
investment for a sample of 138 countries over the period 1950 –88 and find no empirical
link between openness and the volatility of these variables.
Easterly et al. (2001),
explores the sources of output volatility using data for a sample of 74 countries over the
period 1960-97. They find that a higher level of development of the financial sector is
associated with lower volatility.
However, an increase in trade openness leads to higher volatility of output in developing
countries. Haussman (1996) find a positive association between volatility of capital flows
and output volatility in developing countries. O’Donell (2001) finds evidence that
countries with more developed financial sectors are able to reduce output volatility
through financial integration. The September world economic outlook, 2002, provides
evidence that financial openness is associated with lower output volatility in developing
countries. Kose et al (2002) find a threshold effect – beyond a particular level, financial
integration significantly reduces volatility. Procyclical behaviour of capital inflows has
been a major factor increasing the volatility of consumption in developing countries
(Kaminsky and Reinhart, 2002). There is also evidence that trade openness has had
significant benefits for some due to strong trade linkages and higher investment ratios.
Prasad et al (2003) show that the potential benefits in terms of reducing consumption
volatility for small states from financial globalisation is much higher than other
developing countries.
Financial services trade liberalisation and financial sector stability
The internationalization of financial services or trade liberalisation has received a lot of
attention since the mid 1990s. There were concerns on the impact of financial services
commitments under GATS on financial sector stability by international organizations
such as IMF and World Bank, among others. Kireyev (2002) studies the impact of the
5
liberalisation of trade in financial services under WTO on the stability of the financial
system. He finds that liberalisation in trade in financial services is conducive to financial
stability. Moreover, according Kono et al. (1997), GATs offers a vehicle for securing
progressive liberalisation on a non-discriminatory basis and reaping the benefits of a
more efficient, stable and diversified financial sector. Trade liberalisation can make the
financial services sector more efficient and stable. However, the authors claim that a
number of challenges must be met if countries are to reap the full benefits from trade
liberalisation. Beck (2000) examines empirically the question whether the presence of
foreign banks and a liberal regime can affect the impact of financial globalisation and
macroeconomic volatility.
3. Financial Globalisation and Financial Sector Developments in Mauritius
Mauritius has filed a “schedule of commitments” to the WTO, under GATS, in 1997 in
respect of three sectors of the financial services namely banking, insurance and securities.
These commitments include market access and national treatment for these three sectors.
According to Kireyev (2002), Mauritius has made fairly liberal commitments in its
schedule of commitments for the financial sector with a score of 0.513 on a scale of 0-1
according to the scoring system. This is comparable to the commitments made by
countries like Canada, Ecaudor, Iceland, Singapore and Switzerland. According to Kono
and Schuknecht (1998), trade liberalisation in financial services can contribute to the
strength and weakness of financial sectors through 3 main channels 1 namely, capital
flows, capacity building and efficiency enhancement. These are analysed below.
Capital flows
Financial services trade liberalisation (FSTL) can affect financial stability via its effects
on capital flows. It is presumed that FSTL allows the use of broad range of financial
1
See appendix section for the sequence of financial sector development in Mauritius.
6
instruments and the presence of foreign banks can contribute to more stable capital flows.
We analyze the level and volatility in net capital flows in Mauritius. Volatility of capital
flows is the coefficient of variation computed as the absolute value of the standard
deviation divided by the mean. The average level of FDI inflows has nearly tripled in the
period 1997-2003. However, in the case of portfolio flows, we see a higher level of
disinvestments in the period 1997-2003.
Table 1: Capital Flows over the years
Average level of capital flows
(Percent of GDP)
1991-1996
1997-2003
0.571
1.516
Foreign
Direct
Inflows
Portfolio Investment -0.041
-0.175
Inflows
Other
Investment -1.086
-4.866
Inflows
Financial Account
0.916
-0.724
Source: Computed from the IFS Year book
Volatility of capital flows
1991-1996
0.406
1997-2003
1.328
0.696
0.721
0.938
0.712
0.7327
1.076
Efficiency enhancement
Table 2 below gives an overview of some efficiency measures of the financial market
over the period 1992 to 2003. The degree of foreign market penetration has risen from
5.57 in 1992 to reach 9.57 in 2003. Its peak was 10.24 in 2001. These indicate that
foreign capital flows have been increasing in the economy over the years. The broad
money indicator also reflects this. It has increased from 69.38 in 1992 to attain a
maximum value of 84.45 in 2003. Broad money has increased in the economy. The third
column indicates the return on Equity while the last column indicates the return on
average assets. Both returns have increased over the years, indicating that investment is
rising in the financial market. Globalisation of the financial market is indeed taking
place.
7
Table 2: Some Efficiency Indicators in the Financial Market
Year
Degree of Foreign Market Broad Money Indicator
Return on Equity
Return
Penetration
Assets
1992
5.57
69.67
n.a
1993
6.49
71.21
n.a
1994
6.46
71.88
13.52
1995
7.58
77.18
16.16
1996
9.35
73.82
16.77
1997
9.90
75.99
15.67
1998
9.46
80.99
20.15
1999
9.43
79.99
18.12
2000
9.71
79.46
19.97
2001
10.24
82.96
19
2002
9.30
84.45
n.a
2003
9.57
82.98
n.a
Source: Computed from the IFS Yearbook 2003 and bank of Mauritius Annual Reports
on
average
n.a
n.a
2.13
2.28
2.16
2.07
2.45
2.22
2.25
2.2
n.a
n.a
Table 3: Performance of the Insurance Industry
Indicators
1992
2000
2001
2002
2003
Total Assets 6106
20854
20857 21845 21548
(Rs M)
% of GDP
12.3
16.9
18.2
19.1
19.2
Average Total 13.54
17.02
Assets as % of
GDP
Total
Gross 1825
9
4388 5300 5322
Premium (s M)
% of GDP
3.7
4.0
4.06
4.08
4.52
Source: Computed from the IFS yearbook 2003 and Bank of Mauritius annual reports
The above table shows that the performance of the industry have improved via different
indicators. For instance, total assets of all insurance companies taken together have risen
from Rs 6106 M in 1992 to reach Rs 21548M in 2003.
This indicates that such
companies are increasing their assets as well as their sizes. This is also reflected as a
percentage of GDP, which has risen from 12.3 % to 19.2 % in 2003. Similarly, the
average total assets as a percentage of GDP have risen from 13.54 percent over the period
1992-1996 to attain 17.02 percent in 1997-2003. Another performance indicator of the
insurance industry is the premiums collected. This has increased from Rs 1825M in 1992
to Rs 5322 M in 2003, indicating that insurance companies are getting more and more
financial investments.
Such is also reflected as a percentage of GDP, which has
8
increased from 4.04% over the period 1992-1996 to reach 4.09% over the period 19972003.
Table 4: Structure and Performance of Total Insurance Market, 2003
(percent)
4 large
9 medium
8 small
1
companies
companies
companies reinsurer
Total Assets
75.98
22.12
2.95
0.8
Equity capital
62.78
32.12
7.12
Retained Profits
85.25
21.25
-8.25
2.954
Gross Premiums
59.692
32.56
8.45
0.12
Equity/ Total Assets
8.52
15.25
22.15
Equity/ Total Premiums
44.2
42.51
37.58
Return on Average Equity
22.58
21.09
15.2
Return on Average Assets
1.85
3.02
3.02
Profits/ Gross Premiums
9.20
8.15
4.65
Source: Estimated on the basis of data collected from the Financial Services Commission.
All
companies
100.0
100.0
100.0
100.0
9.69
43.3
20.7
2.0
8.48
Table 4 above shows the structure and performance of the total insurance market for the
year 2003. These are divided into the 4 largest companies, 9 Medium companies, 8 small
companies and 1 Reinsurer. These are illustrated in the above table but the interesting
feature is that the insurance market is highly concentrated with the structure and
performance concentrated towards the 4 largest companies.
Table 5: Banking sector development s
1970
Number of Commercial
5
Banks (as at June)
Number
of
Bank
Branches
32
(as at June)
Number of Accounts
n.a.
(as at June)
Total
Assets
(Rs
350
million)
Total Credit to Private
Sector
199
(Rs million)
Total
deposits
(Rs
230
million)
1975
1980
1985
1990
1995
2000
10
12
12
13
12
10
53
105
110
117
140
145
2003
10
145
183,095 409,153 638,604 996,753 1,280,043 1,461,189
1,152
3,413
6,769
24,330
56,056
109,866
711
1,970
3,677
11,890
30,474
67,271
982
2,716
5,643
19,584
42,773
75,522
1851439
129,876
73,610
9
103,136
Foreign
million)
Assets
(Rs
Cheque Clearance
(Daily average)
27
21
2,552 5,047
90
483
1,669
4,133
10,294
7,474
9,337
12,982
16,917
22,601
12,449
20302.9
Source: Bank of Mauritius
The above table shows the major developments in the Mauritian baking sector. The
important variable is the amount of foreign assets ( Rs millions) transacted over the years.
From a figure of Rs27 millions in 1971, it reached Rs12449 millions in 2003 to be
indicative of foreign participation and globalisation in the banking market.
The financial market has also opened its wing on the stock market. This is indicative of
the extent of foreign participation in the capital market. As a major process of financial
liberalization, the recent years have witnesses the opening of the Stock Exchange to
foreign participants. The following table gives the evolution of foreign transactions on
the local market in volume terms. In terms of the ratio of domestic participation to
foreign participation, we notice that the extent of foreign participation has risen from 0.58
percent to attain 50.64 percent in 2003.
Activity
Analysis
(%)
Domestic
Foreign
Activity
Source: SEM
Table 6: Globalisation in the Mauritian capital market
Volume (%)
1995
1996
1997
1998
1999
2000
2001
2002
2003
99.42
0.58
79.46
20.34
49.36
50.64
89.94
10.06
75.82
24.18
65.59
34.41
70.55
29.45
78.43
21.57
46.60
53.40
These developments would have contributed to increase the resilience of the economy
from the microeconomic efficiency perspective, by enhancing the generation of saving
and improving the channels through which they are directed to investment.
Capacity building
In terms of capacity building, we find some interesting and positive developments in the
financial system since late 1990s (see Jankee 2003).
There has been a number of
institutional and policy changes which have been implemented to modernize and
liberalise the financial system. The main policy shifts have been in terms of abolition of
exchange controls and capital account liberalization, interest rate liberalization, use of
open market operations, diversification of the financial system, enhancing regulatory
10
framework, internationalization of the stock markets. The main deregulatory measures in
the banking sector were phased over a long period with partial flexibility in commercial
banks’ deposit and lending rates since the mid 1980s and full liberalization of interest
rates in 1988; development of money and capital markets, promotion of financial
instruments and establishment of a wide range of financial institutions. Electronic
banking has transformed the banking system where some commercial banks even
reported that 95% of their total transactions are through electronic banking. The numbers
of Automatic Teller machines (ATMs) have been increasing considerably over the years
from 195 in 1995 to 289 in 2003. Consequently, the number of transactions has risen
from 1524578 in 1995 to 2134469 in 2003. Banking transactions have also been rising
due to the high number of credit cards in transactions.
These have been raising considerable due to new product developments and other
innovative techniques.
In 1995, the number of credit and debit cards was 125456 and
524458 respectively and rose to 164030 and 689037 in 2003. Growth and development in
the banking sector has also been marked with the increases in the number of bank
branches from 117 branches in 1990 and 145 in 2003. Consequently, the number of
inhabitants per branch has fallen from 8398 in 1990 to 8132 in 2004. Information
technology in banking has transformed the system.
For instance, the Port Louis
Automated Clearing House (PLACH) clears a daily average of 18,000 cheques
electronically. The system is based upon the existing system of Mauritius Automated
Clearing and Settlement System (MACSS) to speed up automatic processing of cheques
and the number of bank.
A number of institutional changes have also been undertaken to improve the domestic
financial architecture and move towards the best practice in governance and regulation. A
battery of legislations has taken place to modernize the financial sector and establish the
appropriate framework (Banking Act, Bank of Mauritius Act, Financial reporting act,
Anti money laundering Act, Trusts act 2001, Finance Act 2003, Investment and securities
Bill. Many financial institutions have implementing the guidelines of corporate
governance. Major developments have taken place on the stock exchange in terms of use
11
of technology (central depository system), harmonization to facilitate cross border
transactions and internationalisation. The major innovations in the recent Banking Act are
the provision for a deposit insurance scheme to protect customers, appointment of an
ombudsperson to deal with complaint and prohibiting mergers between financial
institutions that might not be in the public interest, the need for approval of the central
bank for significant transfer of ownership, composition of board of directors, provisions
of information on monetary policy committees and establishment of a credit bureau.
Good governance and international competition are expected to reduce concentration in
the Mauritian banking sector and increase efficiency for the benefit of customers. There
are also other developments in the context of
competition policies and consumer
protection. For instance, there is cross-border prudential supervision across the board to
safeguard consumers from banking competition. The Bank of Mauritius has just signed a
Memoranda of Understanding with the Central Bank of Mozambique and the state Bank
of Pakistan to better protect consumers from bank competition. There is now a greater
sharing of information between home and host country authorities. Moreover, the Basel
committee on Banking Supervision protects customers.
The development of capacity within the financial sector can be seen to contribute to the
economy’s overall resilience from the governance viewpoint. The globalisation of the
financial sector not only attracted more and better resources in the field but also led to an
improvement in the legislative and regulatory framework. This has had positive spillover
effects on virtually all sectors of the economy.
4.0 Resilience Building and Financial Globalisation
According to Briguglio (2004) classification, Mauritius can be defined as “self-made”
with high degree of inherent economic vulnerability which adopts appropriate policies to
enable to cope with or withstand its vulnerability. Given the objective of financial
integration, Mauritius has initiated a number of measures so as to enhance economic
resilience to shocks in the world financial markets. At the macroeconomic level, financial
12
sector development fits in the strategy of economic diversification which would broaden
our economic base and sustain economic growth. As Mauritius develops into a regional
financial sector and liberalises trade in financial services, economic resilience will be
enhanced following higher efficiency in the mobilisation of savings and allocation of
financial resources towards investment. Financial trade liberalisation also enhances
financial sector stability and thus economic resilience especially in terms of the role of
foreign participants in portfolio investments and capital flows. However, with financial
globalization, capacity building is expected to help increasing economic resilience in
Mauritius. In addition to improving the financial architecture and adopting the best
practice in governance and regulatory framework, globalis
ation is leading to further financial integration which would consolidate the financial
system and create new opportunities for economic growth.
5. Conclusion
The objective of this paper has been to discuss the implications of financial globalization
on a small island economy like Mauritius in terms capital flows, financial sector
efficiency, capacity building and economic resilience. The results have been quite mixed.
Financial services trade liberalisation has increased the level capital flows as well as its
volatility. During the post-GATs period, we find negative flows in portfolio investments.
In terms of efficiency enhancement, the financial sector remains lopsided with the
dominant role of banking sector but some internationalisation has taken place. In terms of
capacity building, the impact has been positive with the establishment of various
financial institutions, enactment of appropriate laws and reinforcement and modernisation
of the regulatory framework. Mauritius as a SIDS has no choice but to develop its
financial architecture in order to reap the benefits from globalisation. There is also
evidence that financial globalisation has contributed to some form financial sector
development but increased consumption volatility. Mauritius should seek international
support to develop the financial sector and prepare itself to gain from the globalisation
process.
13
Hence, with the objective of participating in the financial globalisation process, a number
of policy and institutional changes in the financial sector have contributed towards
greater resilience of a small island economy like Mauritius.
References
Abed, George, and Gupta S., 2002, “Governance, Corruption, and Economic
Performances.” (Washington: International Monetary Fund).
Bank of Mauritius annual Reports. Various issues.
Beck D., 2000, “ Private Capital Flows, financial Development, and Economic Growth in
Developing countries,” Bank of Canada working Paper No. 2000-15.
Borensztein, Eduardo, Gregorio J., and Lee J., 1998, “How Does Foreign
Direct Investment Affect Growth?” Journal of International Economics, Vol. 45
(June), pp. 115–35
Bruguglio, L. (2004) “Economic Vulnerability and Resilience : concepts and
measurements .” in lino Briguglio and Eliawony J Kisamga eds, Economic
Vulneralibility and resilience of small states, Islands and Small States Institute and
Commonwealth Secretariat . (2004)
Easterly, William, Islam R., and E. Stiglitz, 2001, “Shaken and Stirred: Explaining
Growth Volatility,” Annual World Bank Conference on Development Economics, ed. by
B. Pleskovic and N. Stern.
Easterly, William, and Levine R., , 2001, “It’s Not Factor Accumulation: Stylized Facts
and Growth Models,” World Bank Economic Review, Vol. 15, pp. 177–219.
Edison, Hali, and Warnock F., 2001, “A Simple Measure of the Intensity of Capital
Controls,” International Finance Discussion Paper No. 705 (Washington: Board of
Governors of the Federal Reserve, August).
––––––, 2003, “Cross-Border Listings, Capital Controls, and Equity Flows to Emerging
Markets,” forthcoming (Washington: Board of Governors of the Federal Reserve).
14
Edison, Hali, Michael Klein, Luca Ricci, and Torsten Sløk, 2002, “Capital Account
Liberalization and Economic Performance: A Review of the Literature,” IMF Working
Paper 02/120 (July), (Washington: International Monetary Fund).
Edison, Hali, Levine R., Ricci L., and Sløk T., 2002, “International Financial
Integration and Economic Growth,” Journal of International Monetary and Finance,
Vol. 21, pp. 749–76.
Fry, M. J., 1978, “Money and Capital or Financial Deepening in Economic
Development?”, Journal of Money, Credit and Banking, Vol. 10, No. 4, pp.
464-75.
Fry, M. J., 1995, Money Interest, and Banking in Economics Development, (Baltimore:
Johns Hopkins University Press).
Gourinchas, Pierre-Olivier, and Jeanne O., 2002,“On the Benefits of Capital Account
Liberalization
for
Emerging
Economies,”
IMF
Working
Paper
(Washington:
International Monetary Fund).
Grossman, Gene M. and Elhanan Helpman, 1991a, Innovation and Growth in the Global
Economy, (Canbridge, Mass. And London: MIT Press)
Henry, Peter, 2000a, “Stock Market Liberalization, Economic Reform, and Emerging
Market Equity Prices,” Journal of Finance, Vol. 55 (April), pp. 529–64.
Hussen, Ricardo and Fernandez-A., 1999, “Foreign direct investment: Good
cholesterol?” IADB Working Paper No. 417 (Washington D. C.)
Junglee K., 2001, “Evolution of the Mauritian Economy”, chapter from Book The
Mauritian Economy, A Reader (Edited by Professor Greenway and Rajen Dabee.)
Kaminisky, Graciela, and Carmen Reinhart, (1999), “ The Twin Crises: The Causes of
Banking nad Balance of payments Problems,” American Economic Review, Vol. 89, no.
3 (June), pp 473-500.
Kono, M. and L. Schuknecht. 1999. “ Financial Services Trade, Capital flows and
Financial Stability.” Geneva: world Trade Organisation.
Knight, M. ed., 1998. Central bank Reforms in the Baltics, Russia and other countries of
the former Solvient Union. IMF Occasional paper No. 157, International Monetary Fund.
Kalemi
O., Kalpana,
Prakash
L., and
Mark S., 2001, “The East
Asian
Crisis:Macroeconomic Developments and Policy Lessons,” IMF Working Paper 98/128
15
(Washington: International Monetary Fund).
Levine, Ross, 1996, “Foreign Banks, Financial Development, and Economic Growth,”
International financial markets: Harmonisation versus competition, pp224 – 254.
Mauro, Paolo, 1995, “Corruption and Growth,” Quarterly Journal of Economics, Vol.
110, pp. 681–712.
———, 1997, “The Effects of Corruption on Growth, Investment, and Government
Expenditure: A Cross-Country Analysis,” Corruption and the Global Economy,
pp. 83-107 (Washington: Institute for International Economics).
––––––, Nathan Sussman, and Yishay Yafeh, 2002, “Emerging Market Spreads: Then
versus Now,” Quarterly Journal of Economics, Vol. 117, No. 2, pp. 695–733.
Obstfeld, Maurica and
Macroeconomics,”
Rogoff K., (1998), “ Foundations of International
(Cambridge, Massachussets:
National
Bureau
of Economic
Research).
O’Donnell, Barry, 2001, “Financial Openness and Economic Performance” (unpublished;
Dublin: Trinity College).
O’Rourke, Kevin, 2001, “Globalization and Inequality: Historical Trends,” CEPR
Discussion Paper No. 2865 (London: Centre for Economic Policy Research).
Stiglitz, J., 1995, "Financial Markets and Development", Oxford Review of Economic
Policy, Vol. 5, pp. 55-68.
Stiglitz, J., 1995, "Financial Markets and Development", Oxford Review of Economic
Policy, Vol. 5, pp. 55-68.
Stulz, Rene, 1999a, “International Portfolio Flows and Security Markets,” International
Capital Flows, NBER Conference Report Series, pp. 257–93 (Chicago and London:
University of Chicago Press).
World Bank (2003). The Road to Financial Integration: Private Capital Flows to
Developing Countries: Oxford University Press, Oxford.
16
17
Appendix 1
Sequencing of Financial Sector Reforms
July 1988
June 1989
July 1991
November1991
July 1992
July 1993
February 1994
June 1994
July 1994
July 1995
July 1996
December 1996
July 1997
July 1998
December 1998
December 1999
November 2000
December 2000
June 2001
February 2002
December 2003
Liberalisation of interest rates
Liberalisation of Exchange rate controls
Issue of Bank of Mauritius bills
Auctioning of bills
Abolition of ceilings on credit to priority sectors
Abolition of credit ceilings on non-priority sectors
Imposition of a credit-deposit ratio
Setting up of the Secondary Market Cell at Bank of Mauritius
Bank Rate linked with weighted average yield of Treasury Bill over preceding 12 weeks plus a margin
Suspension of Exchange Control Act
Establishment of the Interbank Foreign Exchange Market
Bank rate linked to overall yield on Treasury bills at most recent auction plus a margin
Abolition of credit-deposit ratio
Imposition of 15% limit on the overall foreign exchange exposure
Bank rate linked to overall yield on Treasury bills at most recent auction plus a margin
Cash ratio brought down to 6% and non-cash liquid asset ratio to 0%
Issue of 728 days Treasury bills
Over the Counter (OTC) sales to individuals and non-financial Institutions.
Issue of 30-day Treasury bills
Introduction of Reversed REPO Transactions
Introduction of Lombard facility
Introduction of Swap Transactions
Introduction of the Mauritius Automated Clearing and Settlement System
Introduction of Stock Exchange of Mauritius Automated Trading system (SEMATS)
Automation of the Port-Louis Clearing House
Establishment of a Primary Dealer system
Trading of Treasury/Bank of Mauritius Bills on the Stock Exchange
Source: Bank of Mauritius Annual Report, various issues
Appendix 2
Note: Dr Junkee I placed the econometric work as an appendix. You may wish to shorten
it.
In this appendix, we further investigate the impact of financial services trade
liberalisation on capital flows, financial sector developments and consumption volatility
using time series analysis. After performing the augmented Dickey-Fuller test on the
different series such as foreign direct investment, portfolio of investment, capital flows,
total credit, consumption volatility and money supply, we find these series have a unit
root in level form but turn out to be stationary in the first difference.
It is important to infer whether the series has been growing around a deterministic trend
or around a stochastic trend in order to cater for unexpected shocks or mean-reversion.
Therefore, in the different series, we do not have mean-reversion in level form but they
turn out to be well-behaved series in the first difference. The calculated ADF statistics in
18
level forms are less than the critical values but are greater than the critical values in the
first difference. The results are shown in the following table A1.
Table A1: Augmented-Dickey Fuller tests
Critical values
Computed
values
Computed
values
at level forms
at first difference
FDI
-3.56
-8.14
-3.258
Portfolio
-3.56
-7.52
-2.635
Capital flows
-3.56
-5.32
-2.987
Total credit
-3.56
-9.125
-2.897
Consumption
-3.56
-12.56
-3.456
-3.56
-4.36
-3.512
Income level (Y)
-3.56
-6.02
-2.758
Threshold income
-3.56
-8.74
-2.965
volatility
Money
supply
(M)
(Y2)
Significance is looked at the 5% level
Source: calculated
In order to capture the impact of financial globalisation, we model capital flows (CAFL)
as a function of the rate of interest (R), domestic level of national income (Y); exchange
rate ( ER) , and a dummy representing the post-GATS period 1997. According to
theory, a positive coefficient is expected for the rate of interest given its positive impact
on capital flows and in line with the interest rate parity theory. A higher level of domestic
income is taken as the health of the economy is also expected to have positive effect on
capital flows. Exchange rate is expected to have a positive impact on capital flows. We
also analyze the impact of globalization in the financial sector on foreign direct
investment and a portfolio investment.
The equation (1) is estimated using OLS in the first difference and the results are given in
table A2:
CAFLt = α0 +α1R + α2ER + α3 Y + DUMMY + Et
19
(1)
Table A2: Estimated results
Dependent variable
Independent variables
Constant
ΔR
ΔY
ΔER
DUMMY
Adj. R2
S.E. of regression
F-statistic
Durbin Watson statistic
Log likelihood
No. Of observations
Period
CAFL
FDI
PORTF
0.2356
(2.2365)
1.456
(1.236)
2.635
(4.256)
5.236
(3.654)
2.32
(8.69)
0.9852
0.0025
578.56
1.6256
92.565
33
1970-2003
0.1354
(0.5625)
4.125
(1.51)
3.236
(2.568)
0.364
(6.254)
3.654
(5.365)
0.86525
0.01458
526.39
1.6584
92.568
33
1970-2003
0.0563
(2.3625)
4.125
(1.422)
1.236
(2.125)
-0.457
(5.234)
4.562
(6.325)
0.9585
0.1854
458.89
1.8569
95.5698
33
1970-2003
All the coefficients have the expected positive sign. Domestic rate of interest have a
positive effect on capital flows, FDI and portfolio investment but is not statistically
significant indicating the low degree of financial integration. Income has a positive sign
and is highly significant confirming that high economic growth contributes to capital
inflows. As for real exchange rate, we expect a positive relationship with capital flows
(FDI) but a negative one with portfolio investments. We find evidence that real exchange
rate influences FDI but has a negative impact on portfolio investments. One interesting
result is the impact of financial services trade liberalisation on capital flows which is
confirmed by a positive and significant coefficient on the dummy variable.
Next we also test for the influence of globalization on the level of financial sector
development in Mauritius, represented by M/GDP and total credit/GDP. We specify our
models as follows:
M/GDP = α0 + α1 Y + α3 R + α4 ER + α5 CAFLOW + α6 DUMMY + et (2)
20
Total credit/GDP = α0 + α1 Y + α3 ROI + α4 ER + α5 CAFLOW + α6 DUMMY + et (3)
The above equations are estimated using OLS in first differences. The results are given in
table A3.
We find that the dummy variable is statistically significant which is an
indication that financial services liberalisation has significantly contributed positively to
financial sector development in terms of financial depth and higher credit.
There is a lot of debate on the impact of globalisation on output and consumption
volatility (CV). Financial globalisation is expected to reduce output volatility and
consumption volatility according to theory. Moreover, it is claimed that the benefits are
greater for small island economies given their production structures. In the case of
Mauritius, we estimate the specified equation below and the results are given in Table
A3.
CV = α0 + α1Y + α2Y2 + α3ER + α4M/GDP + α5CAFL + DUMMY +Et
Table A3: Estimated results
Dependent variable
M2/GD
TOTAL
Consumpt
P
CREDIT/
ivolatility
GDP
Independent variables
Constant
Δy
Δr
0.256
0.2365
0.548
(4.256)
(6.325)
(4.236)
2.231
2.356
3.265
(5.236)
(14.52)
(8.963)
0.548
5.236
0.425
(8.754)
(4.587)
(4.562)
ΔY2
0.256
(8.963)
ΔM2/GDP
1.235
(4.256)
ΔER
0.9658
0.789
1.236
(4.235)
(5.365)
(8.654)
21
(4)
ΔCAFLOW
DUMMY
5.635
0.9654
2.321
(2.923)
(6.587)
(5.214)
0.256
0.3658
0.236
(5.478)
(9.654)
(8.457)
M2/GDP
2.336
(8.963)
Adj. R2
0.6852
0.56525
0.8524
S.E. of regression
0.0025
0.01447
0.001254
F-statistic
578.56
626.39
425.69
Durbin Watson statistic
1.6254
1.6125
1.628
Log likelihood
92.565
92.568
95.425
No. Of observation
33
33
33
Period
1970-
1970-
1970-
2003
2003
2003
Source: Computed
We find that financial services trade liberalisation has increased consumption volatility
contrary to expectations. We further test for any threshold effect as found in the case of
some developing countries and find no such evidence. The coefficient on Y2 is not
statistically significant. This is an indication that the financial sector might not have
reached the level of development to reap the full benefits of financial globalisation.
References
Abed, George, and Gupta S., 2002, “Governance, Corruption, and Economic
Performances.” (Washington: International Monetary Fund).
Bank of Mauritius annual Reports. Various issues.
Beck D., 2000, “ Private Capital Flows, financial Development, and Economic Growth in
Developing countries,” Bank of Canada working Paper No. 2000-15.
22
Borensztein, Eduardo, Gregorio J., and
Lee J., 1998, “How Does Foreign Direct
Investment Affect Growth?” Journal of International Economics, Vol. 45 (June), pp.
115–35.
Bruguglio, L. (2004) “Economic Vulnerability and Resilience : concepts and
measurements .” in lino Briguglio and Eliawony J Kisamga eds, Economic
Vulneralibility and resilience of small states, Islands and Small States Institute and
Commonwealth Secretariat (2004).
Easterly, William, Islam R., and E. Stiglitz, 2001, “Shaken and Stirred: Explaining
Growth Volatility,” Annual World Bank Conference on Development Economics, ed. by
B. Pleskovic and N. Stern.
Easterly, William, and Levine R., , 2001, “It’s Not Factor Accumulation: Stylized Facts
and Growth Models,” World Bank Economic Review, Vol. 15, pp. 177–219.
Edison, Hali, and Warnock F., 2001, “A Simple Measure of the Intensity of Capital
Controls,” International Finance Discussion Paper No. 705 (Washington: Board of
Governors of the Federal Reserve, August).
––––––, 2003, “Cross-Border Listings, Capital Controls, and Equity Flows to Emerging
Markets,” forthcoming (Washington: Board of Governors of the Federal Reserve).
Edison, Hali, Michael Klein, Luca Ricci, and Torsten Sløk, 2002, “Capital Account
Liberalization and Economic Performance: A Review of the Literature,” IMF Working
Paper 02/120 (July), (Washington: International Monetary Fund).
Edison, Hali, Levine R., Ricci L., and Sløk T., 2002, “International Financial Integration
and Economic Growth,” Journal of International Monetary and Finance, Vol. 21, pp.
749–76.
23
Fry, M. J., 1978, “Money and Capital or Financial Deepening in Economic
Development?”, Journal of Money, Credit and Banking, Vol. 10, No. 4, pp.
464-75.
Fry, M. J., 1995, Money Interest, and Banking in Economics Development, (Baltimore:
Johns Hopkins University Press).
Gourinchas, Pierre-Olivier, and Jeanne O., 2002,“On the Benefits of Capital Account
Liberalization
for
Emerging
Economies,”
IMF
Working
Paper
(Washington:
International Monetary Fund).
Grossman, Gene M. and Elhanan Helpman, 1991a, Innovation and Growth in the Global
Economy, (Canbridge, Mass. And London: MIT Press)
Henry, Peter, 2000a, “Stock Market Liberalization, Economic Reform, and Emerging
Market Equity Prices,” Journal of Finance, Vol. 55 (April), pp. 529–64.
Hussen, Ricardo and Fernandez-A., 1999, “Foreign direct investment: Good
cholesterol?” IADB Working Paper No. 417 (Washington D. C.)
Junglee K., 2001, “Evolution of the Mauritian Economy”, chapter from Book The
Mauritian Economy, A Reader (Edited by Professor Greenway and Rajen Dabee.)
Jankee, K. 2003, “ Interest Rate Management in Developing countries, The case of
Mauritius,” Ph.D Dissertation.
Kaminisky, Graciela, and Carmen Reinhart, (1999), “ The Twin Crises: The Causes of
Banking and Balance of payments Problems,” American Economic Review, Vol. 89, no.
3 (June), pp 473-500.
Kirevey, K, 2002, “ Small Island Economies and Potential Solutions,” American
Economic Review 25, pp 172-179.
24
Kono, M. and L. Schuknecht. 1999. “ Financial Services Trade, Capital flows and
Financial Stability.” Geneva: world Trade Organisation.
Kose, L., Whalley, J. and Gulbras F. (2003), “ On The Causes of Detrimental Trade
between Small and Large Economies,” Proceedings from the Bank of Ireland.
Knight, M. ed., 1998. Central bank Reforms in the Baltics, Russia and other countries of
the former Solvient Union. IMF Occasional paper No. 157, International Monetary Fund.
Kalemi
O., Kalpana,
Prakash
L., and
Mark S., 2001, “The East
Asian
Crisis:Macroeconomic Developments and Policy Lessons,” IMF Working Paper 98/128
(Washington: International Monetary Fund).
Levine, Ross, 1996, “Foreign Banks, Financial Development, and Economic Growth,”
International financial markets: Harmonisation versus competition, pp224 – 254.
Mauro, Paolo, 1995, “Corruption and Growth,” Quarterly Journal of Economics, Vol.
110, pp. 681–712.
———, 1997, “The Effects of Corruption on Growth, Investment, and Government
Expenditure: A Cross-Country Analysis,” Corruption and the Global Economy,
pp. 83-107 (Washington: Institute for International Economics).
––––––, Nathan Sussman, and Yishay Yafeh, 2002, “Emerging Market Spreads: Then
versus Now,” Quarterly Journal of Economics, Vol. 117, No. 2, pp. 695–733.
Macdougall, P, 1960, “ On the concepts of Small Islands,” Proceedings of Economic
letters.
25
Obstfeld, Maurica and
Macroeconomics,”
Rogoff K., (1998), “ Foundations of International
(Cambridge, Massachussets:
National
Bureau
of Economic
Research).
O’Donnell, Barry, 2001, “Financial Openness and Economic Performance” (unpublished;
Dublin: Trinity College).
O’Rourke, Kevin, 2001, “Globalization and Inequality: Historical Trends,” CEPR
Discussion Paper No. 2865 (London: Centre for Economic Policy Research).
Stiglitz, J., 1995, "Financial Markets and Development", Oxford Review of Economic
Policy, Vol. 5, pp. 55-68.
Stiglitz, J., 1995, "Financial Markets and Development", Oxford Review of Economic
Policy, Vol. 5, pp. 55-68.
Stulz, Rene, 1999a, “International Portfolio Flows and Security Markets,” International
Capital Flows, NBER Conference Report Series, pp. 257–93 (Chicago and London:
University of Chicago Press).
Whalley (2003), “ Small Island Economies and Problem Areas,” Journal of Economic
Literature 16, pp 12-25.
World Bank (2003). The Road to Financial Integration: Private Capital Flows to
Developing Countries: Oxford University Press, Oxford.
26
27
28