Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw

S.Carret & J.CuiS.Carret & J.Cui Development WorkshopDevelopment Workshop 11

Sources for Financing Domestic Capital

Is Foreign Saving a Viable Option for Development Countries?

Sources for Financing Domestic Capital

Is Foreign Saving a Viable Option for Development Countries?

Stephanie Carret&

Jinjie Cui (Eric)

Faculty of Economic ScienceUniversity of Warsaw

7th January, 2010

Stephanie Carret&

Jinjie Cui (Eric)

Faculty of Economic ScienceUniversity of Warsaw

7th January, 2010


The Planning for todayThe Planning for today

1. Review of paper: main ideas2. Analysis of illustrative graphs3. Other views on the subject4. What questions can we raise

1. Review of paper: main ideas2. Analysis of illustrative graphs3. Other views on the subject4. What questions can we raise


The point of this paperThe 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


Data used & MethodologyData 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


Regional findingsRegional 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*


Main ConclusionsMain 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


Figure 1 Self-financing ratios, means and standard deviationsFigure 1 Self-financing ratios, means and standard deviations


Figure 2 Growth and self-financing ratio, cross-country analysis, 1990sFigure 2 Growth and self-financing ratio, cross-country analysis, 1990s


Table 1 Explaining average per capita growth rates in the 90s (T-statistics are presented in italics)

Table 1 Explaining average per capita growth rates in the 90s (T-statistics are presented in italics)


Table 2 Explaining standard deviation of self-financing rates in the 90sTable 2 Explaining standard deviation of self-financing rates in the 90s


Figure 3 The association between deeper de-facto financial integration and changes in self-financing ratios

Figure 3 The association between deeper de-facto financial integration and changes in self-financing ratios


Figure 4 Self-financing ratio, means across regionsFigure 4 Self-financing ratio, means across regions


Figure 5 Annual GDP per capita growth, means across regionsFigure 5 Annual GDP per capita growth, means across regions


Figure 6 Self-financing ratios and GDP per captia growth rates in selected countries that did not experience major financial crisis

Figure 6 Self-financing ratios and GDP per captia growth rates in selected countries that did not experience major financial crisis


Figure 7 Self-financing ratios and GDP per capital growth rates in selected countries that experienced major financial crisis

Figure 7 Self-financing ratios and GDP per capital growth rates in selected countries that experienced major financial crisis


3. Other views on the subjectthe case of foreign investment3. Other views on the subjectthe 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


4. What questions can we raise?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?


Source: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.


Questions?Questions?

Thank you for your attention!Thank you for your attention!

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Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw