Engineering economic miracles: attracting capital from abroad or

mobilizing domestic savings? 

Presentation of a book "Strategies of Economic

Development"

October 2011

Vladimir Popov, Vladimir Popov, UN, DESA

СОДЕРЖАНИЕСОДЕРЖАНИЕ

ПРЕДИСЛОВИЕ К. С. ДЖОМОПРЕДИСЛОВИЕ К. С. ДЖОМО

ПРЕДИСЛОВИЕ АВТОРА ПРЕДИСЛОВИЕ АВТОРА

ВВЕДЕНИЕ. ДИНАМИКА ПРОИЗВОДСТВА ПРИ ПЕРЕХОДЕ К РЫНКУ:ВВЕДЕНИЕ. ДИНАМИКА ПРОИЗВОДСТВА ПРИ ПЕРЕХОДЕ К РЫНКУ:ВЛИЯНИЕ ОБЪЕКТИВНЫХ УСЛОВИЙ, ИНСТИТУТОВ ИЭКОНОМИЧЕСКОЙВЛИЯНИЕ ОБЪЕКТИВНЫХ УСЛОВИЙ, ИНСТИТУТОВ ИЭКОНОМИЧЕСКОЙПОЛИТИКИ ПОЛИТИКИ

ГЛАВА 1. ЦЕЛИ МАКРОЭКОНОМИЧЕСКОЙ ПОЛИТИКИ. ФИНАНСОВАЯГЛАВА 1. ЦЕЛИ МАКРОЭКОНОМИЧЕСКОЙ ПОЛИТИКИ. ФИНАНСОВАЯИ МОНЕТАРНАЯ ПОЛИТИКА И МОНЕТАРНАЯ ПОЛИТИКА

ГЛАВА 2. МЕЖДУНАРОДНЫЕ АСПЕКТЫ МАКРОЭКОНОМИЧЕСКОЙ ПОЛИТИКИ –ГЛАВА 2. МЕЖДУНАРОДНЫЕ АСПЕКТЫ МАКРОЭКОНОМИЧЕСКОЙ ПОЛИТИКИ –ВАЛЮТНЫЙ КУРС, ПЛАТЕЖНЫЙ БАЛАНС, ВНЕШНИЙ ДОЛГ, ДВИЖЕНИЕ КАПИТАЛАВАЛЮТНЫЙ КУРС, ПЛАТЕЖНЫЙ БАЛАНС, ВНЕШНИЙ ДОЛГ, ДВИЖЕНИЕ КАПИТАЛА

ГЛАВА 3. ПРОМЫШЛЕННАЯ ПОЛИТИКА – ЭКСПОРТНАЯ ОРИЕНТАЦИЯГЛАВА 3. ПРОМЫШЛЕННАЯ ПОЛИТИКА – ЭКСПОРТНАЯ ОРИЕНТАЦИЯИ ИМПОРТОЗАМЕЩЕНИЕ И ИМПОРТОЗАМЕЩЕНИЕ

ГЛАВА 4. ПРОМЫШЛЕННАЯ ПОЛИТИКА – ИНСТРУМЕНТЫ ПОДДЕРЖКИГЛАВА 4. ПРОМЫШЛЕННАЯ ПОЛИТИКА – ИНСТРУМЕНТЫ ПОДДЕРЖКИНАЦИОНАЛЬНЫХ ПРОИЗВОДИТЕЛЕЙ НАЦИОНАЛЬНЫХ ПРОИЗВОДИТЕЛЕЙ

ГЛАВА 5. РЕФОРМИРОВАНИЕ ГОСУДАРСТВЕННЫХ ПРЕДПРИЯТИЙ ГЛАВА 5. РЕФОРМИРОВАНИЕ ГОСУДАРСТВЕННЫХ ПРЕДПРИЯТИЙ

ГЛАВА 6. ПОЛИТИКА В ОТНОШЕНИИ ФИНАНСОВОГО СЕКТОРА ГЛАВА 6. ПОЛИТИКА В ОТНОШЕНИИ ФИНАНСОВОГО СЕКТОРА

ГЛАВА 7. СОЦИАЛЬНАЯ ПОЛИТИКА ГЛАВА 7. СОЦИАЛЬНАЯ ПОЛИТИКА

ВМЕСТО ЗАКЛЮЧЕНИЯ: СЕКРЕТ УСПЕХА ВМЕСТО ЗАКЛЮЧЕНИЯ: СЕКРЕТ УСПЕХА

ЛИТЕРАТУРА ЛИТЕРАТУРА

Countries that managed to achieve Countries that managed to achieve high growth rates were mostly net high growth rates were mostly net creditors, not net borrowers; their creditors, not net borrowers; their current accounts were positive, i.e. current accounts were positive, i.e. they were saving more than they they were saving more than they were investing. were investing.

Mobilization of domestic savings is a Mobilization of domestic savings is a must, if growth rate is to be must, if growth rate is to be increased increased

Figure 10. Average annual growth rates of GDP per Figure 10. Average annual growth rates of GDP per capita and average current account as a % of GDP, capita and average current account as a % of GDP,

1970-20071970-2007

Average current account as a % of GDP and growth of GDP per capita, %, in 1970-2007

R2 = 0,1643

-5

-3

-1

1

3

5

7

-25 -20 -15 -10 -5 0 5 10 15

Average current account balance as a % of GDP

Ave

rag

e g

row

th r

ates

of

GD

P p

er c

apit

a, %

St. Vincent and Grenadines

China

Botswana

Singapore

Hong Kong, China

Korea

ThailandIreland

Seychelles

MalaysiaMalta

Growth goes hand in hand with Growth goes hand in hand with current account surpluscurrent account surplus

yy = 0.68* = 0.68* YcapYcap + 0.12*** + 0.12***CACA + 0.05, + 0.05,

(1.80) (3.44)(1.80) (3.44) N=91, RN=91, R22 = 0.23, robust standard errors, T- = 0.23, robust standard errors, T-

statistics in brackets below,statistics in brackets below,

where where yy –annual average growth rates of per capita –annual average growth rates of per capita

GDP in 1960-99, %, GDP in 1960-99, %, YcapYcap – logarithm of per capita PPP GDP in – logarithm of per capita PPP GDP in

1975,1975,CACA – average current account to GDP ratio in – average current account to GDP ratio in 1960-99,%1960-99,%

Figure 11. ODA and official aid to developing countries in Figure 11. ODA and official aid to developing countries in current dollars (left scale) and oil prices per barrel in 2007 current dollars (left scale) and oil prices per barrel in 2007

dollars (right scale)dollars (right scale)

ODA and official aid to developing countries and oil prices per barrel in 2007 $

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100 Officialdevelopmentassistance(current US$),left scale

Officialdevelopmentassistance andofficial aid(current US$),left scale

Oil prices, $ 2007per barrel, rightscale

USSR collapsed

9/11

IN RECENT YEARS CAPITAL IS FLOWING UPHILLIN RECENT YEARS CAPITAL IS FLOWING UPHILL

Source: World Economic Situation and Prospects 2010. United Nations, Source: World Economic Situation and Prospects 2010. United Nations, NY, 2010.NY, 2010.

Views of Global ImbalancesViews of Global Imbalances

What is the conventional view in the What is the conventional view in the US?US?

China is considered to be a currency China is considered to be a currency manipulator – by accumulating manipulator – by accumulating reserves it artificially undervalues its reserves it artificially undervalues its currency, gains unfair trade currency, gains unfair trade advantages, and drives the US into advantages, and drives the US into trade deficit and debt accumulation. trade deficit and debt accumulation.

The US has several optionsThe US has several options Do nothing and wait until the ratio of external Do nothing and wait until the ratio of external

debt to GDP will increase to 60% and more, so debt to GDP will increase to 60% and more, so that foreign creditors will pull their money that foreign creditors will pull their money out of the US. The US $ will depreciate, the out of the US. The US $ will depreciate, the adjustment would occur via improvement of adjustment would occur via improvement of the current accountthe current account

Press China into revaluation of the yuan (the Press China into revaluation of the yuan (the burden of adjustment is on China, but the burden of adjustment is on China, but the adjustment in the US would be painful as adjustment in the US would be painful as well)well)

Initiate adjustment with domestic policy toolsInitiate adjustment with domestic policy tools Cut government budget deficitCut government budget deficit Impose import dutiesImpose import duties Promote exportsPromote exports Accumulate FOREX in yuansAccumulate FOREX in yuans

““+” and “-” of the US +” and “-” of the US optionsoptions

Adjustment (less consumption, more Adjustment (less consumption, more savings) is going to be painful in any savings) is going to be painful in any case, but soft landing is better than case, but soft landing is better than hard landinghard landing

Politically, it seems to be easier to Politically, it seems to be easier to sell the adjustment to the US sell the adjustment to the US electorate, if it is initiated by Chinese electorate, if it is initiated by Chinese government, not the US governmentgovernment, not the US government

Chinese view:Chinese view: many oppose accumulation of reserves, saying many oppose accumulation of reserves, saying that Chinese money is used for the development of the US that Chinese money is used for the development of the US

economy and that it could be better used at home. Reserves are economy and that it could be better used at home. Reserves are invested into US treasury bills with very low returns invested into US treasury bills with very low returns

Foreign exchange reserves (including gold) as a % of GDP and PPP GDP, China

0

5

10

15

20

25

30

35

40

45

50

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

RES/GDP

RES/GDPppp

Fig. 3.1. Foreign exchange reserves as a % of GDP, average ratios for 1960-99

LibyaSaudi ArabiaMalaysia

KuwaitThailandIrelandMauritiusIsraelIran(74-99)

UAEChile

EgyptChina(77-99)Nigeria

ItalyPhilippines

Indon(67-99)FranceKorea, Rep.

Germ(91-99)Turkey(68-99)Argentina

UKBrazilIndiaRussia(93-99)MexicoJapan

Congo, Rep.

HK(90-99)

US

Pakistan

SingaporeBotswana (1976-99)

0 10 20 30 40 50 60 70

%

Mao with two Mao with two heroes of Anti-heroes of Anti-Japanese war Japanese war

(fictional (fictional characters from characters from modern Beijing modern Beijing

opera) is opera) is coming to back coming to back get the Chinese get the Chinese gold from Bush. gold from Bush. Gold (FOREX) Gold (FOREX) was given to was given to Bush by Jiang Bush by Jiang Zemin, whose Zemin, whose portrait is on portrait is on

the wall. At the the wall. At the table - table -

corrupted corrupted former party former party secretary of secretary of

Shanghai and Shanghai and liberal liberal

economist.economist.

Chinese view Chinese view

Even though many economists are Even though many economists are against accumulation of FOREX, against accumulation of FOREX, there is a gut feeling that there is a gut feeling that appreciation of yuan can stop appreciation of yuan can stop Chinese rapid growthChinese rapid growth

Japanese rapid growth came to an Japanese rapid growth came to an end shortly after the 1995 Plaza end shortly after the 1995 Plaza accord revaluation of yen. accord revaluation of yen.

Source: WDI.Source: WDI.

Japan - exchange rate and GDP growth

0

50

100

150

200

250

300

350

400

Exch

ange

rate

(Yen

s pe

r $1)

-4

-2

0

2

4

6

8

10

12

14

GD

P gr

owth

(5 y

ear m

ovin

g av

erag

es),

%

 Official exchange rate (LCU perUS$, period average)

5 per. Mov. Avg. ( GDP growth(annual %))

Non-conventional viewNon-conventional view Undervaluation of exchange rate via Undervaluation of exchange rate via

accumulation of FOREX = industrial accumulation of FOREX = industrial policy to promote export oriented policy to promote export oriented growthgrowth

If all countries use these policies, all If all countries use these policies, all will loosewill loose

For developed countries this policy For developed countries this policy does not workdoes not work

For developing countries it works and For developing countries it works and they should have policy space to use they should have policy space to use this tool to promote catch up this tool to promote catch up development development

Literature reviewLiterature review Rodrik, D. "The Real Exchange Rate and Economic Rodrik, D. "The Real Exchange Rate and Economic

Growth," Growth," Brookings Papers on Economic ActivityBrookings Papers on Economic Activity, , 2008:2. 2008:2.

Polterovich, V. and V. Popov. Polterovich, V. and V. Popov. Accumulation of Accumulation of Foreign Exchange Reserves and Long Term Foreign Exchange Reserves and Long Term Economic Growth).Economic Growth). – In: – In: Slavic Eurasia’s Slavic Eurasia’s Integration into the World EconomyIntegration into the World Economy. Ed. By S. . Ed. By S. Tabata and A. Iwashita. Slavic Research Center, Tabata and A. Iwashita. Slavic Research Center, Hokkaido University, Sapporo, 2004. Hokkaido University, Sapporo, 2004.

Easterly, W. The Lost Decades: Explaining Developing Countries Stagnation 1980-1998. World Bank, 1999 . .

Dollar, D. Outward-oriented developing economies really do grow more rapidly: evidence from 95 LDCs, 1976-1985. – Economic Development and Cultural Change, Vol. 40, No. 3, April 1992, pp.523-44.

How FOREX accumulation How FOREX accumulation influences growthinfluences growth

This is not a short-term Keynesian effect, but the long term This is not a short-term Keynesian effect, but the long term effect operating through export externality + inflow of FDIeffect operating through export externality + inflow of FDI

In developed countries trade/GDP ratios are already at In developed countries trade/GDP ratios are already at optimal level, in developing countries – belowoptimal level, in developing countries – below

Undervaluation of the currency, unlike import duties and Undervaluation of the currency, unlike import duties and subsidies, is a non-selective industrial policy, i.e. clean subsidies, is a non-selective industrial policy, i.e. clean bureaucracy is not needed to use this growth promoting bureaucracy is not needed to use this growth promoting tooltool

There is strong empirical evidence that There is strong empirical evidence that

FOREX => undervaluation of currency => increase FOREX => undervaluation of currency => increase in export/GDP and trade/GDP ratios => increase inin export/GDP and trade/GDP ratios => increase in growth ratesgrowth rates

Fig. 3.3. Average ratio of gross international reserves to GDP and average annual growth rates of GDP per capita in 1960-99, %,

R2 = 0,2396

-2

0

2

4

6

0 20 40 60

Average ratio of gross international reserves to GDP

Aver

age

annu

al g

row

th ra

tes

of G

DP p

er c

apita

Singapore

Chad

Korea

JapanMalaysia

ThailandPortugal

Sierra-LeoneVenezuela

HK

Botswana

China

Switzerland

What are the determinants of the What are the determinants of the accumulation of FOREX?accumulation of FOREX?

delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + 0.24(delta T/Y)0.24(delta T/Y)

(R(R22=34%, N=82, all coefficients significant at =34%, N=82, all coefficients significant at 0.1% level). 0.1% level).

Then we considered the residual as the policy-Then we considered the residual as the policy-induced change in reserves.induced change in reserves.

Afterwards we used the Afterwards we used the policy induced change policy induced change in foreign exchange reservesin foreign exchange reserves as one of the as one of the explanatory variables in growth regressions explanatory variables in growth regressions together with import taxes and change in together with import taxes and change in government revenues/GDP ratiogovernment revenues/GDP ratio

Does policy induced FOREX Does policy induced FOREX accumulation influence growth?accumulation influence growth?

GROWTH = CONST. + CONTR. VAR. + GROWTH = CONST. + CONTR. VAR. + Rpol (0.10 – 0.0015Ycap75us) Rpol (0.10 – 0.0015Ycap75us)

RR22 = 56%, N=70, all variables are = 56%, N=70, all variables are significant at 10% level or less,significant at 10% level or less,

where Ycap75us – PPP GDP per capita in where Ycap75us – PPP GDP per capita in 1975 as a % of the US level. 1975 as a % of the US level.

It turns out that there is a threshold level of It turns out that there is a threshold level of GDP per capita in 1975 – about 67% of the GDP per capita in 1975 – about 67% of the US level: countries below this level could US level: countries below this level could stimulate growth via accumulation of FER in stimulate growth via accumulation of FER in excess of objective needs, whereas for excess of objective needs, whereas for richer countries the impact of FER richer countries the impact of FER accumulation was negative accumulation was negative

Reserves/GDP ratios and GDP per capita growth rates for 12 fastest developing economies in 1975-99, unweighted average, % ("0" is the year of take-off)

0

1

2

3

4

5

6

7

8

9

10

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5

10

15

20

25

30

35

GDP growth rates (actual and 5-year moving average),

left scale

Reserves/GDP ratios, right scale

Pre-take-off stage Take-off stage Complacency stage New push and stabilization

FDI inflow, % of GDP, left scale

If FOREX accumulation really If FOREX accumulation really stimulates growth, should stimulates growth, should

developing countries be allowed developing countries be allowed to do it?to do it?

Developed countries get a chance to Developed countries get a chance to consume more than they produceconsume more than they produce

It is counterintuitive that for It is counterintuitive that for promoting growth capital should flow promoting growth capital should flow flows uphill, but it is a factflows uphill, but it is a fact

There is still some room for the There is still some room for the increase in debt in developed increase in debt in developed countriescountries

Source: WDI.Source: WDI.

Average current account as a % of GDP and growth of GDP per capita, %, in 1970-2007

R2 = 0.1643

-5

-3

-1

1

3

5

7

-25 -20 -15 -10 -5 0 5 10 15

St. Vincent and Grenadines

China

Botswana

Singapore

Hong Kong, China

Korea

ThailandIreland

Seychelles

MalaysiaMalta

Euro area: net international liabilities of 16% of GDP

(Source:(Source:ECB.ECB.

Source: Japan's International Investment Position at Year-End 2008. International Department, Bank of Japan. BOJ Reports and Research papers, August 2009

Japan: Net international assets of nearly 50% of GDP

Source: Japan's

International Investment Position at Year-End

2008. International Department,

Bank of Japan. BOJ

Reports and Research papers,

August 2009

The New World Economic The New World Economic Order and Reserve Order and Reserve

Accumulation Accumulation Reserve accumulation works as a development Reserve accumulation works as a development

tool (theoretically, every externality could be tool (theoretically, every externality could be taken care of through taxes, but in practice it does taken care of through taxes, but in practice it does not work)not work)

Reserve accumulation in poor countries will not Reserve accumulation in poor countries will not continue forever, it will come to an end, once they continue forever, it will come to an end, once they will catch up with the Westwill catch up with the West

Because protectionism is currently outlawed by Because protectionism is currently outlawed by WTO, exchange rate protectionism is the only WTO, exchange rate protectionism is the only available toolavailable tool

Economic miracles were based od mobilization of Economic miracles were based od mobilization of domestic savings, not on external financingdomestic savings, not on external financing