Advanced International Finance. SciencesPo & PSE Pierre-Olivier Gourinchas. Handout for Lecture 4 01/25/12

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1 Advanced International Finance SciencesPo & PSE Pierre-Olivier Gourinchas Handout for Lecture 4 01/25/12

2 Korea vs. Madagascar Korea Madagascar Investment (percent of GDP) Output growth per worker (percent p.a.) Output per worker in 2000 (PPP) $22,022 $1,599 TFP growth (percent p.a.) TFP in 2000 (percent of U.S.) Net capital inflows (% of GDP) / 44

3 Capital Inflows (percent of GDP) RWA TGO MOZ COG TZA MLI SEN MWI NER MDG CIV HND BOL CRI BEN LKA PER JAM NPL CHL CYP CMR GHA ECU GTM TUN DOM JOR KEN MAR HTI ARGFJI ISR PAK MEXPHL PNGPRY UGA THA ETH BRACOL MUS PAN SLV TUR IDN BGD URY MYS EGY IND TTO AGO NGA ZAF GABSYR KOR IRN CHN VEN HKG BWA SGP TWN Productivity Growth (%) Figure 1: Average productivity growth and average capital inflows between 1980 and 2000.

4 Variable: D/Y 0 (1) (2) (3) (Std. Err.) (Std. Err.) (Std. Err.) Productivity catch-up (π) (0.217) (0.209) (0.227) Initial capital abundance (k 0 /y 0 ) (0.115) (0.109) (0.107) Initial debt (d 0 /y 0 ) (0.003) (0.003) (0.003) Population growth (n) (0.104) (0.099) (0.096) Openness (Chinn-Ito) Openness x π (0.063) (0.062) (0.197) Intercept (0.315) (0.299) (0.289) Number of observations Adjusted-R Table 2: Estimation results : Regression of observed capital inflows D/Y 0 on initial conditions (capital abundance, external debt), population growth, productivity catch-up (π) and the Chinn and Ito (2008) index of capital account openness.

5 Capital Inflows (relative to initial output) TGO CIV NPL SEN CHL ECU AGO PAK PER MLI BEN TZA HNDNERBOL KEN ISR MWI MYS JORCRI PRYCOL LKAIDN TUN MOZ MEX GTM ARG UGA GHA FJI DOM MDG PHL TUR IND RWA CMR ETHPNG PAN MAR COG BGD NGA SLV TTO IRNBRA HTI URY JAM SYR ZAF GAB EGY VEN HKG THA BWA MUS SGP KOR CHN CYP TWN Productivity Catch-Up Predicted: investment saving Figure 2: Productivity catch-up (π) and change in external debt ( D/Y 0 ) together with predicted investment ( D I /Y 0 ) and predicted saving ( D S /Y 0 ) terms.

6 (1) (2) (3) (4) (5) (6) Average Investment Rate Total Convergence Productivity Trend Capital Wedge Obs. (percent of output) i k τ k Non-OECD countries By Income Level: Low Income Lower Middle Income Upper Middle Income High Income (Non-OECD) By region: Africa Latin-America Asia China and India All but China and India All but Africa Table 3: Decomposition of Average Investment Rates between 1980 and 2000, percent of 1 k GDP. Convergence: k 0 π T ỹ 0 ; Productivity: k (1 α) g n; Trend: k (1 α) (g n + δ 1). Group T averages.

7 Capital Wedge (%) MDG MOZ RWA ETH UGA HTI EGY BEN CIV CMR MLI SEN GTM GHA TGO SLV NGA NER KEN BGD PAK AGO BOL SYR IND PRYCOL BWA MUS JOR TTO LKA DOM IDN MWI HND ZAF PNG NPL MAR GAB TUN URY CHN TWN CRI PHL TUR FJI CHL COG MEX ECU MYS PAN BRAARG VEN HKG PER IRN CYP JAM ISR THA TZA KOR SGP Productivity Catch Up Figure 3: Productivity catch-up (π) and capital wedge (τ k ).

8 Predicted and Realized Capital Flows Actual Capital Inflows JOR RWA TGO NPL THA CIV SEN BFA CHL ECU PAK PER BEN MLI AGO HND TZA BOL NER KEN MWI ISR GHA COL TUN MYS CRI IDN CYP PRY MOZ UGA LKA MDG CMR ETH PHL PNG MAR FJI DOM MEX GTM ARG TUR COG IND BGD MUS NGA SLV IRN TTO PAN BRA HTI JAM SYR URY ZAF GAB EGY VEN CHN KOR HKG SGP TWN BWA Predicted Capital Inflows Source: Gourinchas and Jeanne (2009) 42 / 44

9 (1) (2) (3) (4) (5) (6) (7) Observed Convergence Investment Saving Trend Wedge Obs. Capital Flows D/Y 0 D c /Y 0 D i /Y 0 D s /Y 0 D t /Y 0 τ s (percent) Non-OECD countries By Income: Low Income Lower Middle Income Upper Middle Income High Income (Non-OECD) By Region: Africa Latin-America Asia China and India All but China and India All but Africa Table 4: Decomposition of cumulated capital inflows relative to initial output between 1980 and D/Y 0 is the observed ratio. See appendix A for definition of the various components. Saving wedge τ s calibrated to equate observed and predicted capital inflows. Group averages.

10 Saving Wedge (percent) AGO RWA TGO MOZ TZA NER NGA VEN CIV MDG PER HND JORCMR SLV MEX JAM TTO ECU CRI ETH PHL ZAF BOL PNG IRN MLI SEN BEN PAN GTM PRY BRA KEN TUR COL NPL MAR ARG GHA UGA FJI GAB LKA DOM SYR BGD ISR MWI IDNTUN HTI URY COG MYS EGY CHL IND PAK MUS HKG THA BWA KOR CHNCYP TWN SGP Productivity Catch Up Figure 6: Productivity catch-up (π) and saving wedges (τ s ).

11 Thailand 2% Indonesia Malaysia Avg Growth Rate Relative to U.S. 0% -2% Zambia Sri Lanka Tunisia Egypt, Arab Rep. India Dominican Republic Chile Swaziland Brazil Turkey Pakistan Costa Colombia Rica Morocco Nepal SudanEcuador Mexico Panama Uruguay Philippines CameroonHondurasGuatemala Kenya Algeria Gabon Mali RwandaArgentina Jamaica Chad El Nigeria Peru Salvador Bolivia Ghana Senegal Togo Venezuela, RB Nicaragua Cote d Ivoire Madagascar -2% -1% 0% 1% (Govt assets /Y)/T Figure I: Growth and Public Net Foreign Assets. This figure plots average annual growth in real GDP per capita relative to the U.S. against the change in ratio of public net foreign assets to GDP between T represents the number of years: T = 34. Public net foreign assets are international reserves (excluding gold) minus public and publicly guaranteed external debt, both from World Development Indicators (WDI). Real GDP per capita is constant local currency GDP per capita from WDI. The sample includes countries with 1970 GDP per capita less than or equal to USD 10,000 in year 2000 dollars.

12 Thailand 2% Malaysia Indonesia Avg Growth Rate Relative to U.S. 0% -2% Tunisia Sri Egypt, LankaArab Rep. Chile India Dominican Swaziland Republic Brazil TurkeyPakistan Morocco Costa Colombia Rica SudanEcuador Mexico Nepal PhilippinesUruguay Guatemala Kenya Algeria Honduras Cameroon Mali Chad Bolivia El Salvador Rwanda Nigeria PeruArgentina Ghana Senegal Togo Venezuela, RB Nicaragua Zambia Cote d Ivoire Madagascar Panama Gabon Jamaica -2% -1% 0% 1% 2% (Private assets /Y)/T Figure II: Growth and Private Net Foreign Assets. This figure plots average annual growth in real GDP per capita relative to the U.S. against the change in the ratio of private net foreign assets to GDP between T represents the number of years: T = 34. Private net foreign assets are total net foreign assets (Net foreign assets are gross foreign assets minus gross liabilities in current US dollars from EWN Mark II) minus public net foreign assets (from Figure I). Real GDP per capita is constant local currency GDP per capita from World Development Indicators (WDI). The sample includes countries with 1970 GDP per capita less than or equal to USD 10,000 in year 2000 dollars.

13 PPG Capital Inflows (relative to initial output) TGO RWA NGA JOR CIV HND ECU BEN NPL TUR IDN MWI MYS PAK THA UGA ETH PHL MLI PAN KENGHA LKA SEN ARG BGD COLGAB TUN CMR MDG PNG NER IND PER BOL PRYMAR DOM BWA URY VENSLV MEX MUS TTO GTM SYR JAM CRI HTI TZA CHL BRA ISR HKGSGP KOR IRN EGY COG FJI Productivity Catch-Up CHN CYP (a) Net Publicly and Publicly Guaranteed Capital Inflows

14 Private Capital Inflows (relative to initial output) TTO RWA PNG NER CMR ECU PRY SYR MDG VEN ETH GHA GAB COG GTM BRA LKA DOM BGD HTI PAK TGO CIV KEN TZASLV MEXBOL MLI SEN MWI PAN COL ARG TUNURYEGY PERJAM CRI UGA FJI PHL MAR IND HND NGA BEN TUR NPL IDN JOR ISR MYS CHL THA Productivity Catch-Up MUS KOR CHN CYP (b) (opposite of) International Reserves Flows

15 (1) (2) (3) (4) (5) (6) Variable: D i /Y 0 Public Flows Private Flows PPG Debt Reserves (Std. Err.) (Std. Err.) (Std. Err.) (Std. Err.) (Std. Err.) (Std. Err.) Productivity catch-up (π) (0.185) (0.219) (0.158) (0.174) (0.149) Initial capital abundance (k 0 /y 0 ) (0.103) (0.093) (0.088) (0.088) (0.045) (0.075) Initial debt (d 0 /y 0 ) (0.003) (0.003) (0.003) (0.003) (0.001) (0.002) Population growth (n) (0.087) (0.078) (0.074) (0.074) (0.041) (0.063) Openness (Chinn-Ito) (0.060) (0.054) (0.051) (0.050) (0.026) (0.043) Openness x π (0.174) (0.164) (0.085) (0.140) Intercept (0.270) (0.244) (0.231) (0.230) (0.124) (0.196) Number of observations Adjusted-R Table 5: Estimation results : Regression of observed public and private capital flows D pub /Y 0, D priv /Y 0, D ppg /Y 0 and D res /Y 0 on initial conditions (capital, debt), productivity catch-up (π) and the Chinn and Ito (2008) index of capital account openness.