1. S.Carret & J.CuiDevelopment Workshop1 Sources for Financing Domestic Capital Is Foreign Saving a Viable Option for Development Countries? Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw 7th January, 2010 Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw 7th January, 2010

2. S.Carret & J.CuiDevelopment Workshop2 The Planning for today 1. Review of paper: main ideas 2. Analysis of illustrative graphs 3. Other views on the subject 4. What questions can we raise 1. Review of paper: main ideas 2. Analysis of illustrative graphs 3. Other views on the subject 4. What questions can we raise

3. S.Carret & J.CuiDevelopment Workshop3 The point of this paper Capital account liberalization – Controversial policy in the 90’s Early 90’s –Waves of market-oriented liberalization –Greater financial liberalization – Optimism about growth prospects –Growing financial integration Expected capital stock increased with available foreign savings –This papers tries to test this assumption This paper shows economic growth depends on all factors explaining magnitude & quality of investments in all types of K Political economy factors & political risk diversification –Important to understand the link growth-SFR Capital account liberalization – Controversial policy in the 90’s Early 90’s –Waves of market-oriented liberalization –Greater financial liberalization – Optimism about growth prospects –Growing financial integration Expected capital stock increased with available foreign savings –This papers tries to test this assumption This paper shows economic growth depends on all factors explaining magnitude & quality of investments in all types of K Political economy factors & political risk diversification –Important to understand the link growth-SFR

4. S.Carret & J.CuiDevelopment Workshop4 Data used & Methodology Data –World Development Indicators database –47 developing & 22 OECD countries –Between 1981 and 2001 Methodology –National income accounts – SFR : what is the autarky stock of tangible K supported by actual domestic past savings relative to actual stock of K –Panel comparison accross countries & time Data –World Development Indicators database –47 developing & 22 OECD countries –Between 1981 and 2001 Methodology –National income accounts – SFR : what is the autarky stock of tangible K supported by actual domestic past savings relative to actual stock of K –Panel comparison accross countries & time

5. S.Carret & J.CuiDevelopment Workshop5 Regional findings Latin America & Africa –Rely more on foreign savings to finance their finance their tangible K –Weak trend of SFR greater dispersion –Relatively low growth rates Asia –SFR increased, especially post-1997 crisis –Asia has financed domestically its rapid increase in K –Precautionnary savings post-crisis: increased SFR –High growth rates OECD –Increase in standard deviation of SFR* Latin America & Africa –Rely more on foreign savings to finance their finance their tangible K –Weak trend of SFR greater dispersion –Relatively low growth rates Asia –SFR increased, especially post-1997 crisis –Asia has financed domestically its rapid increase in K –Precautionnary savings post-crisis: increased SFR –High growth rates OECD –Increase in standard deviation of SFR*

6. S.Carret & J.CuiDevelopment Workshop6 Main Conclusions Self-financing ratio in developing countries –Evaluate impact of growing global financial integration on sources of financing domestic capital stocks Results found – 90% of stock of capital is self financed & Stable through the 90’s* – No significant correlation found between Financial integration and self-financing ratios –During 90’s, countries with higher SFR grew faster –No « growth bonus » when increased financing share of foreign saving – Better institutions associated with lower volatility of SFR Financial integration helped facilitating assets diversification … –… but failed to offer new sources of financing capital Self-financing ratio in developing countries –Evaluate impact of growing global financial integration on sources of financing domestic capital stocks Results found – 90% of stock of capital is self financed & Stable through the 90’s* – No significant correlation found between Financial integration and self-financing ratios –During 90’s, countries with higher SFR grew faster –No « growth bonus » when increased financing share of foreign saving – Better institutions associated with lower volatility of SFR Financial integration helped facilitating assets diversification … –… but failed to offer new sources of financing capital

7. S.Carret & J.CuiDevelopment Workshop7 Figure 1 Self-financing ratios, means and standard deviations

8. S.Carret & J.CuiDevelopment Workshop8 Figure 2 Growth and self-financing ratio, cross-country analysis, 1990s

9. S.Carret & J.CuiDevelopment Workshop9 Table 1 Explaining average per capita growth rates in the 90s (T-statistics are presented in italics)

10. S.Carret & J.CuiDevelopment Workshop10 Table 2 Explaining standard deviation of self-financing rates in the 90s

11. S.Carret & J.CuiDevelopment Workshop11 Figure 3 The association between deeper de-facto financial integration and changes in self-financing ratios

12. S.Carret & J.CuiDevelopment Workshop12 Figure 4 Self-financing ratio, means across regions

13. S.Carret & J.CuiDevelopment Workshop13 Figure 5 Annual GDP per capita growth, means across regions

14. S.Carret & J.CuiDevelopment Workshop14 Figure 6 Self-financing ratios and GDP per captia growth rates in selected countries that did not experience major financial crisis

15. S.Carret & J.CuiDevelopment Workshop15 Figure 7 Self-financing ratios and GDP per capital growth rates in selected countries that experienced major financial crisis

16. S.Carret & J.CuiDevelopment Workshop16 3. Other views on the subject the case of foreign investment « Foreign investment in developing contries: does it crowd in domestic investment? », by M.Agusin and R.Machado, in Oxford Development Studies, 2005 To what extent MNE’s FDI in developing countries are crowding in and out domestic investment ? Establish an investment theoratical model including FDI variable –12 countries in 3 developing regions ( Africa, Asia, S.America ) –Testing between 1971-2000 Conclusions –At best, domestic investment unchanged for 3 regions –S.America & Africa, crowding out movements (70’s & 90’s) –Need for more policies to make FDI more effective Develop the domestic component of total investment Limit liberalization on FDI? Screening policies? Quality ladder? –Question of FDI impact on development & total investment « Foreign investment in developing contries: does it crowd in domestic investment? », by M.Agusin and R.Machado, in Oxford Development Studies, 2005 To what extent MNE’s FDI in developing countries are crowding in and out domestic investment ? Establish an investment theoratical model including FDI variable –12 countries in 3 developing regions ( Africa, Asia, S.America ) –Testing between 1971-2000 Conclusions –At best, domestic investment unchanged for 3 regions –S.America & Africa, crowding out movements (70’s & 90’s) –Need for more policies to make FDI more effective Develop the domestic component of total investment Limit liberalization on FDI? Screening policies? Quality ladder? –Question of FDI impact on development & total investment

17. S.Carret & J.CuiDevelopment Workshop17 4. What questions can we raise? When to liberalize? Is it needed to liberalize? Did the Washington Consensus did worse than better? –Case of Latin America –Case of East Asia What about the role of the state? How to invest foreign savings in capital financing? When to liberalize? Is it needed to liberalize? Did the Washington Consensus did worse than better? –Case of Latin America –Case of East Asia What about the role of the state? How to invest foreign savings in capital financing?

18. S.Carret & J.CuiDevelopment Workshop18 Source: Paper: “Source for financing domestic capital – Is foreign saving a viable option for developing countries”, by J.Aizenman,B.Pinto & E.Radziwill, in NBER working paper 10624, 2004. Paper: “Source for financing domestic capital – Is foreign saving a viable option for developing countries”, by J.Aizenman,B.Pinto & E.Radziwill, in NBER working paper 10624, 2004.

19. S.Carret & J.CuiDevelopment Workshop19 Questions? Thank you for your attention!