Growth implosions and debt explosions

Transcription

1 Growh implosions and deb explosions Do growh slowdowns cause public deb crises? Published a By William Easerly, Cener for Global Developmen and My Aun Marilyn

2 Growh Implosion: The World Growh Slowdown GDP Growh Rae (Unweighed world average)

3 Deb explosion: he rise in public deb o GDP raios (world 60% 55% 50% 45% 40% 35% 30% 25% 20% average)

4 Change in growh o and Log Change in public deb o GDP raios Log annual change in deb raio from 1975 o 1994 (average for quinile) 7% 6% 5% 4% 3% 2% 1% 0% -5% -4% -3% -2% -1% 0% 1% Change in growh o (by quiniles from wors o bes)

5 Growh rae of deb raio and change in growh has negaive associaion: Significan correlaion of -.41 Regression of annual change in deb raio on change in growh: change in growh has coefficien no significanly differen han -1 (and coefficien on growh in each period is uniy of opposie sign when enered separaely) Implies borrowing was calibraed o old growh rae raher han o new growh rae

6 Message of his paper Don borrow a lo when your growh is going down!

7 My Aun Marilyn pus i in more earhy language: Never ake a sleeping pill and a laxaive on he same nigh.

8 Ouline The growh slowdown as an explanaion for various deb crises: he HIPCs, middle income counries, and indusrial counries The role of growh in he governmen s ineremporal budge consrain Policy conclusions: increasing growh is a fiscal adjusmen measure!

9 The birh of deb crises Y D g r Y A S T G Y D )* ( ) ( = Firs expression is he primary defici as a raio o GDP. Knowing daa on Change in D/Y, r, g, and D/Y, we can back ou primary defici (laer we ll calculae i from primary daa for a smaller sample)

10 Daa sources Public Deb (for concessional deb, presen value of deb service from World Bank, for non-concessional deb Loayza, Schmid- Hebbel, and Serven 1998)

11 The evoluion of public deb Toal ne public deb GDP Growh rae Implied primary defici/ GDP, Highly indebed poor counries 48% 94% 1.8% * -0.44% No highly indebed poor counries 28% 41% 4.4% 0.14% Highly indebed middleincome counries 27% 56% 3.4% 0.52% No highly indebed middle income counries 9% 24% 3.4% 0.40% Indusrial counries 29% 59% 2.4% ** 0.06%

12 HIPCs became HIPCs no because of primary deficis (hey acually had primary surpluses) bu because of low growh

13 Similarly indusrial counries had high public deb raios by 1994 because of slow growh

14 Public deb o GDP raios, acual and counerfacual a growh rae 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% HIPC Indusrial 1975 acual 1994 acual 1994 counerfacual

15 Public deb o GDP raios, acual and counerfacual a growh rae 120% 100% 80% 60% 40% 20% acual 1975 acual 1994 counerfacual1994 0% Cosa Rica Coe d'ivoire Gabon Ialy Togo

16 Policy variables explain low HIPC growh and hus he HIPC deb crisis

17 Replicaion of Easerly and Rebelo 1993 Growh Regression for Fiscal Variables and Oher Conrols Dependen Variable: Per Capia Growh Esimaion Mehod: Seemingly Unrelaed Regression Pooled sample of 70s, 80s, 90s Variable Coefficien -Saisic Consan Public Spending on Transpor and Communicaion/GDP Governmen Surplus/GDP Iniial Income Primary enrollmen Secondary Enrollmen M2/GDP Real Overvaluaion

18 Differenials in policy variables HIPCs vs. non-hipc low income counries 1990s (-sas below) Public Spending on Transpor and Policy differen ials Growh effec Ne worh effec Communicaion/GDP % -12% Governmen Surplus/GDP % -5% Primary enrollmen % -12% Secondary Enrollmen % -6% M2/GDP % -9% Real Over-valuaion % -13% 1.94 Toal explained growh or ne worh differenial -1.8% -49% Acual growh or public deb differenial -1.9% 57

19 Policy implicaions World Bank and IMF should be begging counries o spend more on infrasrucure and educaion (wih suiable incenives for qualiy spending of course) o promoe growh during fiscal adjusmen programs. Avoid repeaed myopic fiscal adjusmens Haii has goen 22 IMF sand-bys!

20 The Idio s Guide o Fiscal Policy (i.e. guide for poliicians) There doesn exis a one-period resource envelope or budge consrain for he governmen There is only he ineremporal governmen budge consrain. Any public spending ha carries an above-normal financial rae of reurn should be done, jus like in he privae secor solve he problem of financing high reurn projecs, don cu he projecs!

21 The role of growh in he governmen s ineremporal budge consrain

22 The governmen s ineremporal budge consrain 0 e r ( T + S + A G ) d D 0 T axes S seignorage A aid recieps G governmen spending D Public ne deb a ime zero

23 Define governmen ne worh as: presen value of primary surplus (assuming fiscal raios remain consan) - deb Y D g r Y G A S T Y W + + = ) ( Solvency consrain is ha W/Y 0

24 Condiion for ineremporal budge consrain o be saisfied assuming consan fiscal raios σ=t/y+ A/Y + S/Y-G/Y σ = D 0 r g Y 0

25 The effec of growh on ne worh W / Y g = σ ( r g) 2 Evaluae a poin of zero ne worh (jus solven) W / Y g = D Y ( r g)

26 Effec of growh on ne worh and change in deb, 1975 and 1994 Growh rae Change in deb raio 75 o 94 Growh effec on ne worh o GDP Highly indebed poor counries 3.6% 1.8% 46% -25% No highly indebed poor counries 3.7% 4.4% 13% 10% Highly indebed middleincome counries 4.9% 3.4% 29% -21% No highly indebed middle income counries 4.9% 3.4% 15% -7% Indusrial counries 4.5% 2.4% 30% -23%

27 More daa sources Governmen expendiures, axes (IMF Governmen Finance Saisics) Aid from World Bank projec: Chang, Fernandez-Arias, and Serven 1999 Seignorage I calculae from IMF as (g+π)/(1+g+π) *H/Y

28 Slow growh (suiably insrumened) ineraced wih iniial deb explains number of deb reschedulings in HIPCs and HIMCs compared o oher LDCs.

29 Resuls on deb rescheduling and growh for developing counries # of deb reschedulings, Dependen variable Esimaion mehod TSLS 94 GMM Coef- T- Coef- T- ficien saisic ficien saisic Consan Primary fiscal surplus/gdp, PV Deb/GDP, Growh8094* Deb/GDP observaions Insrumens for all equaions: PV Deb/GDP 1980, Trading parner growh*pv Deb/GDP, Africa dummy*pv Deb/GDP, Lain America dummy*pv Deb/GDP, Trading Parner Growh, Africa dummy, Lain America dummy

30 Define ineremporal fiscal imbalance as difference beween acual (permanen componen of) primary surplus and required primary surplus for solvency Y D g r Y G A S T Y G A S T Y IFB ) ( + + = + + = σ

31 Fiscal adjusmen and ineremporal fiscal imbalance Primary surplus/ GDP, (permanen Iner-emporal fiscal imbalance/ GDP Highly indebed poor counries -0.5% 4.3% -1.6% 0.4% No highly indebed poor counries -1.6% 4.1% -2.3% 3.4% Highly indebed middleincome counries -1.5% 5.6% -1.8% 4.1% No highly indebed middle income counries 0.2% 3.8% 0.1% 3.2% Indusrial counries -2.2% 0.2% -2.7% -2.0%

32 Developing counries had aained solvency by 1994, indusrial counries had no. Indusrial counries failed o adjus o he fiscal consequences of he growh slowdown.

33 The HIPCs were only solven by 1994 because of increased aid flows and inflaion ax, no because of domesic fiscal adjusmen Highly indebed poor counries Primary surplus/ GDP, (permanen Ineremporal fiscal imbalance/ componen) GDP Including aid and inflaion ax -0.5% 4.3% -1.6% 0.4% Excluding aid -3.2% -2.2% -4.4% -6.2% Excluding aid, excluding inflaion ax -4.1% -4.1% -5.3% -8.1%

34 HIPC deb relief program may reflec aid-weariness by donors, desire o subsiue once for all deb relief for coninuing flow of aid

35 Riches counries have ineremporal fiscal balance of 5.5 percenage poins of GDP if pension liabiliies are included. Auerbach and Gale 2000 esimae ineremporal fiscal imbalance of percen in US (depending on wheher a ax cu is implemened)

36 Perhaps we now need a program of deb relief for highly indebed rich counries (HIRC). (Jus kidding)

37 When rouble arises & hings look bad, here is always one individual who perceives a soluion & is willing o ake command. Very ofen, ha person is crazy. --Aun Marilyn

38 Growh implosions and deb explosions: conclusions Growh slowdowns were a major conribuing facor o he HIPC deb crisis, he middle income deb crisis, indusrial counries deb crisis, and maybe a angenial facor in he Eas Asian financial crisis. A negaive growh shock is a fiscal shock o which governmens mus adjus like oher fiscal shocks Fiscal adjusmen programs are myopic if hey reduce growh-enhancing public expendiures -- acions o increase growh should be par of fiscal adjusmen.