challenges of globalization: foreign direct investment and trade
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Challenges of Globalization: Foreign Direct Investment and Trade. by Can Erbil 11/10/2006 prepared for HS271 – Frameworks for Development. Globalization. - PowerPoint PPT PresentationTRANSCRIPT
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Challenges of Globalization: Foreign Direct Investment and
Trade
by Can Erbil
11/10/2006
prepared for HS271 – Frameworks for Development
2
Globalization
“The inexorable integration of markets, nation states, and technologies
to a degree never witnessed before, in a way that is enabling
individuals, corporations, and nation-states to reach round the world
farther, faster, deeper and cheaper than ever before… the spread of
free-market capitalism to virtually every country in the world” (Thomas
Friedman, The Lexus and the Olive Tree, 1999, pp.7-8)
“A social process in which the constraints of geography on social and
cultural arrangements recede and in which people become
increasingly aware that they are receding” (M.Waters, Globalization,
1995, p.3)
“Globalization is defined as a process of growing interdependence
between all people of this planet. People are linked together
economically, and socially, by trade, investments and governance… by
market liberalization, and information, communication and
transportation technologies” (International Labor Organisation)
3
Globalization
“Fundamentally, it [globalization] is the closer integration of the
countries and people of the world which has been brought about by
the enormous reduction of costs of transportation and
communication, and the breaking down of artificial barriers to the
flows of goods, services, capital, knowledge, and (to a lesser extent)
people across borders” Stiglitz.
“Globalisation… does not really mean anything different from an open
and integrated world economy” (Samuel Brittan)
4
Globalization
Globalization is thus concerned with
increased flows of goods, services, capital and labour (?)
Increased flows of information,
with the increased speed of those flows, and
with increased interdependence
One can identify a number of causes or driving factors behind this process:
The liberalization of barriers to trade and mobility.
Developments in technology, and esp. information technology. This allows for both
more communication / information + also increased speed of that communication.
Increased focus on “deeper integration” i.e. not just removal of barriers, but also
harmonization of them. Such as, standards, legal frameworks, institutions and policies.
Changes in policy by governments and between governments.
5
World GDP 1970-2004
0
5 000 000
10 000 000
15 000 000
20 000 000
25 000 000
30 000 000
35 000 000
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Years
Val
ue
mil
. $ DCs
Developing countries andterritories
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FOREIGN DIRECT INVESTMENT Over the past decade, firms based in one country have increasingly made investments to establish and run business operations in other countries.
Over the past two decades, as financial openness has increased across the world, global flows of foreign direct investment have more than doubled
relative to gross domestic product. The flows increased in the 1990s, rising from US$324 billion in 1995 to $US1.5 trillion in 2000. However
investment levels recently fluctuated considerably depending on the prevailing economic and political climate . The global economic
slowdown has reduced financial flows in the past couple of years, against the long-term trend of increases, and political and economic instability have
exacerbated problems in some regions. Capital flows in Latin America dropped from a peak of $US126 billion in 1998 to $72 billion in 2001, reflecting regional problems and global uncertainty.
FDI flows to Argentina fell from $US24 billion in 1999 to $US3billion in 2001.
But FDI has remained strong in East Asia and the Pacific and in Europe and Central Asia.
Developing countries received around a quarter of world FDI inflows in 2001 on average, though the share fluctuated quite a bit from year to year. This
is now the largest form of private capital inflow to developing countries.
7
FDI inflows, global and by group of economies, 1980–2005
(Billions of dollars)
8
Concentration of FDI inflows: the share of the top 5FDI recipients in the world total, 1980-2005
9
World shares of FDI outflows 1970-2004
0%
20%
40%
60%
80%
100%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Years
Sh
are Developing countries and territories
DCs
World shares of FDI inflows 1970-2004
0%
20%
40%
60%
80%
100%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Years
Sh
are Developing countries and territories
DCs
10
World FDI outflows 1970-2004
0
200 000
400 000
600 000
800 000
1 000 000
1 200 000
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Years
Va
lue
mil
. $
DCs
Developing countries andterritories
World FDI inflows 1970-2004
0
200 000
400 000
600 000
800 000
1 000 000
1 200 000
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Years
Va
lue
mil
. $
DCs
Developing countries andterritories
11
FDI Confidence Index Survey 2005
…tracks the impact of likely political, economic and regulatory changes on the
foreign direct investment intentions and preferences of the leaders of top
companies around the world.
12
Private Capital Flows to Developing Countries
13
14
More open trade raises per capita incomes – and the incomes of the poor
There is a growing consensus in empirical
studies that greater openness to international
trade has a positive effect on country per-capita
income. Trade openness in the figure is adjusted
to remove the influence of geographical factors.
A study by Frankel and Romer (1999) estimates
that increasing the ratio of trade to GDP by one
percentage point raises per-capita income by
between one-half and two percent. Numbers of
other studies reach similar conclusions, though
the estimated size and statistical significance of
the effects vary. (See for example, Edwards
(1998) or, for a more skeptical assessment,
Rodrik (1999).)
A 10 percent increase in the trade to GDP ratio could ultimately raise per-capita
income by five percent (cautiously taking the lower bound of the estimates by
Frankel and Romer), and one would in general also expect a five percent rise in
the income of the poor.
15
World trade flows: 1948-2004
0
2000000
4000000
6000000
8000000
10000000
World X World M DC - X DC - M
LDC - X LDC - M
17
Payoffs from Trade Opening Trade liberalization 'works' by encouraging a shift of labor and capital from import-
competing industries to expanding, newly competitive export industries.
The unemployment caused by trade opening is, in most cases, temporary, being offset
by job creation in other sectors of the economy. The loss of output due to this transitional
unemployment (called the social adjustment cost of trade opening) is also usually small
relative to long-run gains in national income due to opening. Or, put another way, these
adjustment costs are expected to be small compared to the costs of continued
economic stagnation and isolation that would accompany a failure to open up*.
Nevertheless, while adjustment costs are usually small in relative terms, they can still be a
serious issue in many countries because they are often concentrated in a
geographical area or in a few industries. They will also tend to be felt 'up front', while
benefits will tend to be spread out over future periods. Carefully designed social-safety
net and educational or retraining programs to help the most vulnerable affected groups
are thus an important complement for trade reforms in many cases.
18
Payoffs from Trade Opening
The potential costs of trade opening can also be either reduced or worsened by the
overall context of policies in which reform is undertaken.
High macroeconomic instability (big fiscal deficits, high and volatile inflation,
volatile real exchange rates) can aggravate the unemployment costs of trade opening
by fostering uncertainty, which can prevent firms from investing in the export sectors
that are supposed to create new jobs.
A premature capital account liberalization in a country with large fiscal deficits can
have a similar effect, by inducing large capital inflows, causing the country's
exchange rate to rise, thus making its exports uncompetitive.
The collapse of structural reforms in the 'Southern Cone' countries of Latin America
at the end of the 1970s is partly attributed to this kind of inappropriate sequencing of
reforms.
Extremely stringent job security regulations may prevent firms hit by import
competition from laying off workers, driving them into bankruptcy, as appears to have
been the case in Peru in the 1980s.
20
21
Name of Variable (1)
African Value
(2)
OECD Value
(3)
Foregone Annual Growth
(4) Price of Investment Goods 123 70 0.44% Human Capital (1): Primary School Enrollment 0.42 0.97 1.47% Human Capital (II): Life Expectancy 42 68 2.07% Human Capital (III): Malaria Prevalence 0.80 0.00 1.25% Geography: Fraction of Area in the Tropics 0.85 0.03 1.21% Openness 0.10 0.66 0.67% Public Spending in Consumption 0.16 0.07 0.40% Conflict: Ethno-linguistic Fractionalization 0.58 0.12 0.52%
Why has Africa Grown So Slowly? From Xavier Sala-i Martin
Notes: Column 1 displays the name of the variable. Column 2 shows the average value that the variable has for African countries. Column 3 reports the corresponding value for OECD economies. Finally, Column 4 uses the empirical estimates of Sala-i-Martin, Doppelhoffer and Miller (2003) to compute the additional annual growth rate that Africa would have enjoyed if, instead of the values reported in Column 2, it had had the OECD values reported in Column 3. For example, the average relative price of investment for Africa was 123. The corresponding price for OECD was 70. If investment in Africa had been as low as in OECD, Africa’s annual growth rate would have been 0.44 percentage points larger.
22
Short Selection of Recent Literature on
FDI Financial Liberalization Capital Inflows Trade Liberalization Globalization
23
1) How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of
Financial Markets on Linkages
The empirical literature finds mixed evidence on the existence of positive productivity
externalities in the host country generated by foreign multinational companies. The
authors propose a mechanism that emphasizes the role of local financial markets in
enabling foreign direct investment (FDI) to promote growth through backward
linkages, shedding light on this empirical ambiguity.
In a small open economy, final goods production is carried out by foreign and
domestic firms, which compete for skilled labor, unskilled labor, and intermediate
products. To operate a firm in the intermediate goods sector, entrepreneurs must
develop a new variety of intermediate good, a task that requires upfront capital
investments. The more developed the local financial markets, the easier it is for credit
constrained entrepreneurs to start their own firms. The increase in the number of
varieties of intermediate goods leads to positive spillovers to the final goods sector.
As a result financial markets allow the backward linkages between foreign and
domestic firms to turn into FDI spillovers.
24
How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on
Linkages
Calibration exercises indicate that
a) holding the extent of foreign presence constant, financially well-
developed economies experience growth rates that are almost twice those
of economies with poor financial markets,
b) increases in the share of FDI or the relative productivity of the foreign firm
leads to higher additional growth in financially developed economies
compared to those observed in financially under-developed ones, and
c) other local conditions such as market structure and human capital are
also important for the effect of FDI on economic growth.
25
2) Financial Liberalization in Latin-America in the 1990s: A Reassessment
This paper studies the experience of Latin-America with financial liberalization in the 1990s.
The rush towards financial liberalizations in the early 1990s was associated with expectations
that external financing would alleviate the scarcity of saving in Latin-America, thereby
increasing investment and growth.
Yet, the data and several case studies suggest that the gains from external financing are
overrated. The bottleneck inhibiting economic growth is less the scarcity of saving, and more
the scarcity of good governance.
A possible interpretation for these findings is that in countries where private savings and
investments were taxed in an arbitrary and unpredictable way, the credibility of a new regime
could not be assumed or imposed. Instead, credibility must be acquired as an outcome of a
learning process. Consequently, increasing the saving and investment rates tends to be a time
consuming process. This also suggests that greater political instability and polarization
would induce consumers to be more cautious in increasing their saving and investment
rates following a reform.
Hence, reaching a sustained take-off in Latin-America is a harder task to accomplish than in
Asia.
26
3) Why Doesn’t Capital Flow from Rich to Poor Countries?An Empirical Investigation
The authors examine the empirical role of different explanations for the lack of flows
of capital from rich to poor countries the "Lucas Paradox."
The theoretical explanations include differences in fundamentals across
countries and capital market imperfections.
We show that during 1970-2000 low institutional quality is the leading
explanation.
For example, improving Peru's institutional quality to Australia's level, implies a
quadrupling of foreign investment. Recent studies emphasize the role of
institutions for achieving higher levels of income, but remain silent on the specific
mechanisms. Our results indicate that foreign investment might be a channel
through which institutions affect long-run development.
27
Why Doesn’t Capital Flow from Rich to Poor Countries?An Empirical Investigation
28
4) Foreign Direct Investment and Domestic Economic Activity
How does rising foreign investment influence domestic economic activity?
Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic
operations, but this pattern alone is inconclusive, as foreign and domestic business activities
are jointly determined.
This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic
distributions of foreign investment, to predict changes in foreign investment by a large panel of
American firms.
Estimates produced using this instrument for changes in foreign activity indicate that 10%
greater foreign capital investment is associated with 2.2% greater domestic investment,
and that 10% greater foreign employee compensation is associated with 4.0% greater
domestic employee compensation.
Changes in foreign and domestic sales, assets, and numbers of employees are likewise
positively associated; the evidence also indicates that greater foreign investment is associated
with additional domestic exports and R&D spending.
The data do not support the popular notion that greater foreign activity crowds out
domestic activity by the same firms, instead suggesting the reverse.
29
5) Trade Liberalization, Poverty andinequality: Evidence from the Indian Districts
Although it is commonly believed that trade liberalization results in higher GDP, little is known
about its effects on poverty and inequality.
This paper uses the sharp trade liberalization in India in 1991, spurred to a large extent by
external factors, to measure the causal impact of trade liberalization on poverty and inequality in
districts in India.
Variation in pre-liberalization industrial composition across districts in India and the variation in
the degree of liberalization across industries allow for a difference-in-difference approach,
establishing whether certain areas benefited more from, or bore a disproportionate share
of the burden of liberalization.
In rural districts where industries more exposed to liberalization were concentrated, poverty
incidence and depth decreased by less as a result of trade liberalization, a setback of
about 15 percent of India's progress in poverty reduction over the 1990s. The results are robust
to pre-reform trends, convergence and time-varying effects of initial district-specific
characteristics. Inequality was unaffected in the sample of all Indian states in both urban and
rural areas. The findings are related to the extremely limited mobility of factors across
regions and industries in India.
The findings, consistent with a specific factors model of trade, suggest that to minimize the
social costs of inequality, additional policies may be needed to redistribute some of the
gains of liberalization from winners to those who do not benefit as much.
30
6) Globalization and Poverty
This essay surveys the evidence on the linkages between globalization and poverty. I focus
on two measures of globalization: trade and international capital flows. Past researchers
have argued that global economic integration should help the poor since poor countries have a
comparative advantage in producing goods that use unskilled labor.
The first conclusion of this essay is that such a simple interpretation of general equilibrium
trade models is likely to be misleading.
Second, the evidence suggests that the poor are more likely to share in the gains from
globalization when there are complementary policies in place. Such complementary policies
include investments in human capital and infrastructure, as well as policies to promote credit
and technical assistance to farmers, and policies to promote macroeconomic stability.
Third, trade and foreign investment reforms have produced benefits for the poor in
exporting sectors and sectors that receive foreign investment.
Fourth, financial crises are very costly to the poor.
Finally, the collected evidence suggests that globalization produces both winners and losers
among the poor. The fact that some poor individuals are made worse off by trade or financial
integration underscores the need for carefully targeted safety nets.
31
Capital Flows and Financial
Markets: Case of Turkey
32
After 2001 Financial Crisis
After 2001 financial crisis structural change became inevitable in Turkey. The rehabilitation of institutions and policy change were placed in the agenda and in this respect:
Central Bank Independence
Shift to Floating Exchange Rate Regime
The establishment of the Banking supervision and auditing institution. Following this period:
One party political majority in the assembly
The end of the war in Iraq
The start of EU negotiations
Contributed to the economic stability.
33
5.0
20.0
12.0
35.0
8.0
18.4
10.0
29.7
68.5
7.7
-5
5
15
25
35
45
55
65
75
2001 2002 2003 2004 2005 2006
Target Consumer Price Inflation
Consumer Price Inflation and
(Implicit) Inflation Targets
34
Maturity on Public Debt
(months)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1998 1999 2000 2001 2002 2003 2004 2005 2006
Domestic Debt Stock
Domestic Borrowing
35
Falling inflation and easing fiscal dominance brought high and sustainable growth.
1980-1989
1990-2001
2002-2005
Real Growth
Average 4.0 3.2 7.1
Std. Dev. 3.5 5.9 1.2
Inflation (CPI)
Average 49.6 74.8 16.5
Std. Dev. 25.7 21.9 7.7
36
Capital Flows and Business Cycle
-10000
-5000
0
5000
10000
15000
20000
mil
lion
US
doll
ars
-15
-10
-5
0
5
10
15
20
perc
ent
capital flows (+ inflow) GDP growth
37
Capital Inflows in Turkey
-1.0
0.5
2.0
3.5
5.0
6.5
8.0
9.5
10000
14000
18000
22000
26000
30000P r ivate Sector Cr edi t
Investment E xpendi tur e
Non-bank private sector began to use long term credits which constitutes 48.9 percent of total capital inflows. 96.5 percent of these credits were long term.
38
0.0
0.5
1.0
1.5
2.0
2.5
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
per
cen
t
Foreign Direct Investment / GDP
The share of FDI and long–term capital inflows in total capital inflows is increasing. FDI share: % 41.3Long–term inflows as a share of total credit: % 84.2
39
Short – term capital inflows after/before EU negotiations
For those countries in which the ratio is below “one” short – term capital inflows decreased (except Poland) after the start of EU negotiations.
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Estonia
Latvia
Lithuania
Poland
Slovak Rep.
Slovenia
Turkey
Turkey
Slovenia
Slovak Rep.
Poland
Lithuania
Latvia
Estonia
40
Long – term capital inflows after/before EU negotiations
For those countries in which the ratio is above “one” long – term capital inflows increased after the start of EU negotiations.
0 1 2 3 4 5 6 7 8
Turkey
Czech Rep.
Estonia
Latvia
Lithuania
Poland
Slovenia
Slovenia
Poland
Lithuania
Latvia
Estonia
Czech Rep.
Turkey
41
International risks are also falling
0
10
20
30
40
50
1/ 31/ 2002 1/ 31/ 2003 1/ 31/ 2004 1/ 31/ 2005 1/ 31/ 2006
Chicago Board of Exchange Volatility Index (VIX)
The fall in international investment risks, motivated the investment motivation in high return emerging markets.
42
We observe a fall in the risk premium for Turkey
EMBI presents the risk premium that Turkey pays in terms of foireng currency borrowing.
Turkey's Risk Premium
0
2
4
6
8
10
12
43
2003 2004 2005e 2006fCurrent Account 117.2 150.7 233.3 224.9Foreign Direct Investment 96.7 136.8 135.8 154.8Portfolio Investment 36.8 37.8 61.5 50.2Commercial banks 27.7 62.1 78.4 49.1Non-bank Private Sector 63.9 81.8 82.6 67.8Official Flows -20.8 -27.4 -64.8 -15.5Others -53.6 -44.8 -116.9 -118.5Increase in Rezerves (-) -267.9 -397.1 -409.8 -412.7
Current Account -1.3 6.2 19.1 3.1Foreign Direct Investment 6.2 23.1 20 41.1Portfolio Investment 2 4.8 15.5 19.4Commercial banks 27.3 38.4 54.7 26.3Non-bank Private Sector 30.7 47.3 53.6 42Official Flows -3.4 -9.2 -35.7 -12.8Others -25.4 -52.3 -40.1 -48.9Increase in Rezerves (-) -36.1 -58.4 -87.1 -70.3
Foreign Financing of Developing Countries
Emerging Countries in Europe
Current account deficits of developing countries doubled in the 2003 – 2005 period. Long – term capital inflows was the main instrument to finance the deficit.
44
Current account deficits in new and prospective EU members
Current account deficits and questions regarding its sustainability is not unique for Turkey.
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
perc
ent
of G
DP
Czech Rep. Estonia LatviaLithuania Slovakia Turkey
45
-10
-8
-6
-4
-2
0
2
4
6
8
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MacaristanPolonyaTürkiye
Current Account Deficits
46
5.4 7.6 12.1
24.9 25.8 26.5 27.135.6
48 51.8
236.5
0
20
40
60
80
100In
dia
Tu
rkey
Ru
ssia
Pol
and
Bra
zil
Mex
ico
Arg
enti
ana
Ch
ina
Cze
ch
Hu
ngr
y
Hon
g K
ong
FDI/GDP A comparison among countries (2003)
47
Financial Deepening and Capital Inflows Credit to Private Sector / GDP
0
5
10
15
20
25
30
1996
Q1
1996
Q3
1997
Q1
1997
Q3
1998
Q1
1998
Q3
1999
Q1
1999
Q3
2000
Q1
2000
Q3
2001
Q1
2001
Q3
2002
Q1
2002
Q3
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
48
The change in credit compositons
60
65
70
75
80
85
90Ja
n-03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
10
15
20
25
30
35
Real Sector CreditsHousehold Credits (Right Axis)
49
Real Interest Rates (Ex-post, CPI)
0
5
10
15
20
25
30
35
2001 2002 2003 2004 2005
20012002200320042005
50
Short – term interest rates
10
30
50
70
90
110
130
May
-01
Aug-0
1
Nov-0
1
Feb
-02
May
-02
Aug-0
2
Nov-0
2
Feb
-03
May
-03
Aug-0
3
Nov-0
3
Feb
-04
May
-04
Aug-0
4
Nov-0
4
Feb
-05
May
-05
Aug-0
5
Nov-0
5
Central Bank O/N
Benchmark Treasury Bond
Volatility in interest rates declined. Given inflation figures, real interest rates preserve their high levels.
51
60
80
100
120
140
160
180
200Ja
n-80
Jan-
81
Jan-
82
Jan-
83
Jan-
84
Jan-
85
Jan-
86
Jan-
87
Jan-
88
Jan-
89
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Real Exchange Rate Index (1995=100)
Capital inflows in floating exchange rate regime appreciates Turkish Lira.
52
Productivity and Unit Labor Costs
54
Coincidence of the take-off and the starting date of globalization:
-Technology, values, politics and economic institutions
55
Are developed countries benevolent towards developing countries?
Foreign Aid“Do Corrupt Governments Receive Less Foreign Aid?” (Alesina and Weder)
“US appears to give more assistance to more corrupt governments”! (which are mostly easier to persuade)
Even in the case of foreign aid, there is some significant concern of benefit and influence
56
Did the developed countries play by the rules of the WC while they were developing?
No.Ex.: US import tariffs in the second half of the 19th century higher than in many developing countries today.Regulations that developing countries face today were non-existent (Ex.: TRIPS increases prices of essential medicine in poor countries).
57
Can we learn from the successful countries?The Case of China:-trade regime: not liberalized significantly and became member of WTO only 2 years ago, still very protected-currency markets: not unified until 1994-financial markets: closed to foreigners until very recently-no significant privatization and no private property rights in the Western sense
58
Can we learn from the successful countries? (continued)
China obviously violated most of the “rules” of globalization set by the Washington Consensus.
Instead, it focused on “institutional innovations suited to its local conditions”:-household responsibility system-township and village enterprises-special economic zones-two-track pricing regime, etc…
59
Caution: “Institutional innovations do not travel well (Rodrik)!” Mimicking China will most probably will not work for most of the countries.Success strategies vary significantly between different countries.Need home-grown strategies and active policy innovations rather than a consensus.“Global integration is not a substitute for a sound country-specific development strategy”. Globalization is no short cut, but can become rather a dead end if governed badly.
60
Shall we give up on “globalization”?
No. world markets are a very vital source of capital and technology, which can provide a set of opportunities for the developing countries.
What needs to be changed is how globalization is “governed”!
developing countries need to have autonomy for developing their own way to integrate their economies to the world economy.
61
How to develop a successful growth strategy?
a la Rodrik:
Two crucial elements:
An investment strategy, and
An institution-building strategy
combination of “carrots and sticks” policies
+
pushing for “international labor mobility”
62
Limitations of the Rodrik Plan:
“The trilemma of global economic governance1.Cannot have nation states, democracy and full economic integration simultaneously.2.Shallow integration, “thin” set of rules more appropriate and realistic.3.Policy autonomy for LDCs valuable”(from Rodrik)
63
Caution!
We cannot conduct controlled experiments in economics.Experimentation and self-discovery is costly (both politically and economically).Some developing countries which have already been disappointed by the results that WC generated cannot afford costly “trial and error” approaches and risky innovations.
64
Where are we today regarding “globalization”?
It has been more than four years since Stiglitz published his “Globalization and Its Discontents” where he was calling for action towards change.Dani Rodrik has also been advocating (for a while) for departure from the WC and he has been warning clearly that the AWC is also bound to cause disappointments for the developing countries.
65
Where are we today regarding “globalization”? (continued)
However, since the Fall of 2001, the world’s attention has been drawn away from the debate of how to govern “globalization” correctly.Regionalism and unilateralism came into the foreground (sharp reductions in international movement of capital and labor).This could be an opportunity for the developing countries.Time for experimentation, for implementing gradual and narrow ranged reforms and investing in know-how.
66
What else could be done?
determine the reasonable framework of experimentation (with disciplined and systematic economic analysis)
work on “mapping desirable institutions to initial structural conditions and political economy” (case studies) – enhances the multiplicity of alternatives instead of “one size fits all”
work on a “narrow range of policy reforms and institutional arrangements”
self-confident political leadership with a strong political and social base (working democracy)
67
What else could be done? (cont’d)
target high economic growth in the short-run with narrow ranged policy reforms and institutional arrangementsand use the high growth period for building high quality institutions
strengthen the institutional base of marketsavoid growth collapses
68
Not everybody agrees!
Sachs “Institutions Don’t Rule” (2002)
geography is more important
malaria risk
But then, policy implications don’t matter a whole lot (not much one can do about geography).
69
Partial association between income and distance from equator
(Source: Rodrik)
e( lg
dp85
| X
,dis
tanc
e )
+ b*
dist
ance
distance.002533 .709911
-1.35559
2.05646
UGANDA
GABON
KENYAZAIRE
SINGAPOR
ECUADOR
TANZANIA
MALAYSIACONGO
COLOMBIA
IVORY CO
SURINAME
GUYANA
TOGO
LIBERIA
NIGERIA
INDONESI
PAPUA N.
GHANA
SRI LANK
SIERRA L
ANGOLA
ETHIOPIA
PANAMA
VENEZUEL
COSTA RI
TRINIDAD
SOMALIA
CAMEROON
GUINEA
PERU
BURKINA
NICARAGU
GUINEA-B
MALI
ZAMBIA
GAMBIA
THAILAND
EL SALVA
NIGER
PHILIPPI
SUDAN
HONDURAS
GUATEMAL
SENEGAL
BOLIVIA
YEMEN
MALAWI
MEXICO
MYANMAR
ZIMBABWEJAMAICA
MOZAMBIQ
DOMINICA
HAITI
MADAGASC
BRAZIL
BOTSWANA
HONG KON
BANGLADE
BAHAMAS
TAIWAN
INDIA
PARAGUAYSOUTH AF
CHINA
EGYPT
PAKISTAN
JORDANISRAEL
AUSTRALI
SYRIA
CHILEMOROCCO
U.S.A.
URUGUAYCYPRUSJAPANMALTA
ARGENTIN
TUNISIA
NEW ZEAL
SPAIN
KOREA, R
GREECE
PORTUGALTURKEY
CANADA
YUGOSLAV
ITALY
SWITZERL
HUNGARY
MONGOLIA
AUSTRIA
FRANCE
LUXEMBOU
POLANDBELGIUM
GERMANY,U.K.
NETHERLA
IRELAND
DENMARKSWEDENNORWAY
FINLANDICELAND
70
Partial association between income and quality of institutions (Source: Rodrik)
e(
lgd
p8
5 |
X,ic
rge
80
) +
b*i
crg
e8
0
institutions2.27083 10
-.815427
2.64108
BOLIVIA
HAITI
EL SALVA
SUDAN
BANGLADE
GUATEMAL
GUYANA
MONGOLIA
LIBERIA
PHILIPPI
UGANDA
ZAIRE
NICARAGU
MALI
SURINAMESYRIA
NIGERIA
GUINEA-B
PERU
HONDURAS
PANAMA
YEMEN
INDONESI
CONGO
GHANA
SOMALIA
MYANMAR
JORDAN
PAKISTAN
ZAMBIA
ANGOLA
ARGENTIN
MOROCCO
SRI LANK
TOGO
EGYPTPARAGUAY
ETHIOPIA
GUINEA
ZIMBABWE
MALAWI
DOMINICA
TUNISIA
TANZANIAMADAGASC
JAMAICA
YUGOSLAV
SENEGAL
BURKINA
MALTA
POLAND
URUGUAY
MOZAMBIQ
TURKEY
COLOMBIAGABON
MEXICO
ECUADOR
SIERRA L
COSTA RIGREECE
VENEZUEL
KENYA
GAMBIA
CAMEROON
CHINA
INDIA
NIGER
CYPRUS
TRINIDAD
ISRAEL
THAILAND
CHILE
BRAZIL
KOREA, R
IVORY CO
MALAYSIA
SOUTH AF
BOTSWANA
BAHAMAS
PAPUA N.
HUNGARY
SPAIN
PORTUGAL
HONG KON
ITALY
TAIWAN
IRELAND
SINGAPOR
FRANCE
U.K.
JAPAN
AUSTRALI
AUSTRIA
ICELAND
GERMANY,
NORWAY
NEW ZEAL
SWEDEN
CANADA
DENMARKFINLANDBELGIUM
U.S.A.
NETHERLA
SWITZERL
LUXEMBOU
71
Partial association between income and trade (Source: Rodrik)
e(
lgd
p8
5 |
X,o
pe
n )
+ b
*op
en
open13.16 318.07
-1.45529
1.81157
MYANMAR
INDIA
ARGENTINU.S.A.
MOZAMBIQ
SIERRA L
BRAZIL
CHINATANZANIA
GHANASUDAN
UGANDA
GUATEMAL
JAPAN
SOMALIA
MEXICO
BANGLADE
COLOMBIA
NIGERIA
BOLIVIA
MADAGASC
PAKISTAN
ETHIOPIA
POLAND
AUSTRALINICARAGU
SYRIA
HAITI
PERU
VENEZUEL
INDONESI
SPAIN
TURKEY
PHILIPPI
ITALY
FRANCE
ECUADOR
URUGUAY
YEMEN
PARAGUAY
THAILAND
NIGER
KENYA
EGYPT
EL SALVA
BURKINA
ZAIRE
CHILE
GREECE
MALAWI
HONDURASCANADA
SOUTH AF
ZIMBABWE
U.K.
FINLANDCAMEROON
YUGOSLAV
MOROCCOGERMANY,
TRINIDAD
GUINEA-B
SRI LANK
COSTA RI
DOMINICANEW ZEAL
KOREA, R
SWEDEN
ANGOLA
SENEGAL
PANAMA
TUNISIA
GUINEA
DENMARK
MALI
ZAMBIA
SWITZERL
PORTUGALIVORY CO
LIBERIA
AUSTRIA
ICELANDHUNGARY
MONGOLIA
SURINAME
ISRAEL
NORWAY
GAMBIA
PAPUA N.
TAIWAN
GABON
MALAYSIA
TOGO
CYPRUSGUYANA
CONGOJORDAN
NETHERLA
IRELANDBOTSWANA
BAHAMAS
JAMAICABELGIUM
MALTA
HONG KON
LUXEMBOU
SINGAPOR
72
ReferencesAlesina, Alberto and Weder, Beatrice, “Do Corrupt Governments Receive Less Aid?”, May 1999, NBER working paper.
Becker, Gary, “When Globalization Suffers, the Poor Take the Heat”, April 21st, 2003, Business Week,.
O’Rouke, Kevin and Williamson, Jeffery, “When Did Globalization Begin?”, April 2000, NBER working paper.
Rodrik, Dani, “In Search of Prosperity: Analytic Narratives on Economic Growth”, Edited and with an introduction by Dani Rodrik. Princeton University Press, 2003.
Rodrik, Dani, “Globalization for Whom?”, July 2002. Published in Harvard Magazine.
Rodrik, Dani, “After Neoliberalism, What?”, August 2002. Remarks at a conference on Alternatives to Neoliberalism.
Rodrik, Dani, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," (with Francisco Rodríguez), Macroeconomics Annual 2000, eds. Ben Bernanke and Kenneth S. Rogoff, MIT Press for NBER, Cambridge, MA, 2001.
Rodrik, Dani, “Has Globalization Gone Too Far?”, Institute for International Economics, Washington, DC, 1997.
73
ReferencesSachs, Jeffery, “Institutions Don’t Rule: A Refutation of Institutional Fundamentalism”, December 2002, Working Paper, Columbia University. Williamson, John, “What Should the World Bank Think about the Washington Consensus?”, The World Bank Research Observer Volume 15, Number 2, August 2000
74
FDI and DevelopmentWhere do We Stand?
Kiichiro Fukasaku Tokyo, 4 December 2001
75
Structure of the Presentation
Introduction Some stylised facts Putting theory at work Empirical evidence Main conclusions
76
Introduction
FDI is one of the defining features of globalisation over the last two decades.
Heterogeneity of FDI (by sector, by destination and by motivation of investors)
Renewed interest in the development dimension of FDI Further trade and investment liberalisation New growth theory Data and measurement
77
Some Stylised Facts
78
Trends in World Merchandise Exports and FDI Outflows (average annual growth rates)
-5
0
5
10
15
20
25
30
35
1981-85 1986-90 1991-95 1996-2000
Period
Gro
wth
(%)
World merchandise exports World FDI outflows
79
Trends in FDI Inflows, Cross-border M&As and Privatisation($ billion)
0
200
400
600
800
1000
1200
1400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
$ B
illi
on
FDI Inflows Cross-border M&As Privatisation
80
Share of Manufacturing in Total FDI Stock- the United States, 1986 and 2000
0
10
20
30
40
50
60
70
80
China Malaysia Singapore ChineseTaipei
Korea Philippines Thailand Japan Hong Kong Indonesia
Asian Host Economies
Per
cen
t
1986
2000
81
Net FDI Source and Recipient Countries ($Billion, three year average 1998-2000)
-150 -100 -50 0 50 100 150
United Kingdom
France
Switzerland
Japan
Spain
Netherland
Denmark
Finland
Italy
Indonesia
Korea, Rep.
Sweden
Australia
Poland
Ireland
Mexico
Argentina
Brazil
China
United States
82
Net FDI Source and Recipient Countries ($Billion, three year average 1991-1993)
-15 -10 -5 0 5 10 15 20 25 30
Japan
United States
Germany
Hong Kong, China
France
Netherland
Switzerland
United Kingdom
Italy
Chinese Taipei
Thailand
Australia
Argentina
Belgium-Luxembourg
Bermuda
Singapore
Malaysia
Mexico
Spain
China
83
FDI-growth nexus FDI-trade linkages FDI and technology transfer FDI, privatisation and corporate
governance Host-government policies for
attracting FDI
Five Main Areas of Interest
84
A Critical Question forEmpirical Analysis
Why are some developing countries more able to take advantage of the gains from trade and investment liberalisation than others?
85
Putting theory at work
86
Benefits of FDI for Host Countries
FDI brings financial resources for domestic capital formation.
FDI increases production, employment and trade, quantitatively and qualitatively.
FDI transfers technologies, hard and soft.
87
International transfer oftechnology through:
Imports of new capital and differentiated intermediate goods
Learning by exporting Trade in technology (patents,
licensing) FDI
88
FDI transfers technologies through:
Intra-firm spillovers within a MNE Intra-industry spillovers in a host country– Vertical linkages– Horizontal linkages (reverse engineering,
competition)– Training workers, investing in human resources
and R&D Inter-industry spillovers in a host country
89
Growth impact of FDI
LKKAFY FFHH ,,
• Short-term impact of KF on Y (FF > 0)‘Crowding in or out’ ? (FHF > 0 or < 0)
• Long-term impact of KF on Y through: A,H,F and
90
Empirical evidence
91
FDI-growth nexus (1)
A majority view: FDI does make a positive contribution to both income growth and TFP in host countries.
Reverse causality, omitted variables, heterogeneity.
Threshold externalities: Developing countries need to have reached a certain threshold of development before being able to capture the benefits associated with FDI (see next).
92
FDI-growth nexus (2)
Income level (Blomström et al. 1994) Educational attainment (Borenzstein
et al. 1998) Local technological capabilities (de
Mello 1999, Xu 2000) Local financial markets (Alfaro et al.
2001, Hermes-Lensink 2000) Crowding in or out (Asia vs. other
areas, Agosin-Mayer 2000)
93
FDI-trade linkages (1)
• A majority view: FDI and trade are more complementary than substituting in the North-South context.
• Data constraints (US, Japan and Sweden)
• Aggregation, causality and endogeneity
• Conceptual issues (volume vs. price)
94
FDI-trade linkages (2)
Aggregation (product, industry and macro) product-level substitution (Blonigen
1999) industry-level complementarity (Kawai-
Urata 1995) Causality (time precedence, inconclusive) Endogeneity (FDI-exports both
endogenous) Costs of operating abroad (Amiti-Wakelin
2000, Clausing 2000, Fukasaku-Kimura 2001).
95
FDI-trade linkages (3)
Horizontal FDI tends to substitutes exports, depending on the degree of scale economies relative to trade costs. On the other hand, vertical FDI tends to complement exports, as the home country supplies headquarters services and/or intermediate products to the host country (the ‘knowledge-capital’ model of the MNE).
96
FDI and technology transfer (1)
Intra-firm technology transfer: the host-country conditions matter (e.g. income level, past experience on industrialisation - Urata-Kawai 2000)
Efficiency gains from technological spillovers to local firms would not occur automatically.
Competition matters in local markets (Okamoto, 1999)
97
FDI and technology transfer (2)
Blomström-Persson (1983, Mexico 1970) Haddad-Harrison (1983, Morocco 1985-89) Blomström-Sjöholm (1998, Indonesia 1991) Kokko et al. (1996/2001, Uruguay 1988) Aitken-Harrison (1999, Venezuela 1976-89) Djankov-Hoekman(1999, Czech, 1992-96) Haskel et al. (2001, UK 1973-92)
98
FDI and technology transfer (3)
Both relative and absolute technological capabilities - Perez (1998, Italy 1989-91)Foreign presence affects positively the productivity growth of domestic firms in specialist and scale-intensive sectors (e.g. chemical, machinery, metal, automobile), but not in science-based sectors (e.g. pharmaceutical, IT/electronic).
99
Privatisation
Privatisation have provided a major channel of FDI inflows in both E. Europe and Latin America in the 1990s.
Initial assessment in both OECD and non-OECD countries: overall positive.
But, implementation and regulatory challenges are great.
Power crisis in California, railway crisis in UK.
100
Host-government policies (1)
The importance of host-government policies for attracting FDI and reaping full benefits associated with FDI is clear.
Motives of foreign investors and host-country “fundamentals’
Costs of investment incentives
101
Host-government policies (2)
A comparative survey of FDI regimes in Asia and Latin America
Legal and policy framework for FDI appears to be more open in Latin America than in Asia.
Wide differences across countries in Asia in terms of control at the entry phase and negative lists as well as the approach to IPRs
102
Main conclusions (1)
Host-government policies matter. More discussion is needed as to
how policies work (or do not work). Traditional incentive-based
measures are costly for developing countries facing severe resource constraints.
103
Main conclusions (2)
• The establishment of a multilateral framework of rules on FDI helps increase the collective welfare of host countries (prisoners’ dilemma).
• A regional approach to taking more constructive, rules-based policies to FDI: EU, NAFTA, MERCOSUR, FTAA, ASEAN Investment Area, APEC.
104
Trade openness and economic growth:a cross-country empirical investigation
This paper demonstrates that trade liberalization does not have a simple and
straightforward relationship with growth using a large number of openness
measures for a cross section of countries over the last three decades.
We use two groups of trade openness measures. The regression results for
numerous trade intensity ratios are mostly consistent with the existing literature.
However, contrary to the conventional view on the growth effects of trade
barriers, our estimation results show that trade barriers are positively
and, in most specifications, significantly associated with growth,
especially for developing countries and they are consistent with the
findings of theoretical growth and development literature.