The Macroeconomic Implications of Financial Globalization

Transcription

1 The Macroeconomic Implications of Financial Globalization Eswar Prasad, IMF Research Department November 10, 2006 The views expressed in this paper are those of the author(s) ) only, and the presence of them, or of links to them, on the IMF website does not imply that the IMF,, its Executive Board, or its management endorses or shares the views expressed in the paper.

2 Benefits of Financial Integration: Theory Efficient international allocation of capital Consumption smoothing via international risk sharing Large welfare effects for developing economies

3 Figure 4. GDP (per capita, PPP weighted): Advanced Economies 300 Emerging Markets Emerging (excluding China and India) 250 Other Developing Economies

4 Figure 5B. Change in Financial Openness and GDP Growth, Unconditional Relationship Growth rate of per capita GDP CRI KOR THA MUS CHL IND IDN MYS LKA DOM TUN ESP PRT BGDEGY TUR AUS NOR PAK NPLJPN GHA ISR URY GRC USA FIN CAN TZA TTO ITA DEU AUT DNK FRA SWE JAM IRN SLV ZMB COL NZL GTM MEX PHL BRA SEN PERBOL ECU FJI ARG HND KENMWI DZA PRYZAF VEN TGO NER ZWE CMR Change in financial openness

5 0.06 Figure 5B. Change in Financial Openness and GDP Growth, Conditional Relationship 0.05 Growth rate of per capita GDP MUS CHL 0.02 EGY MYS CRI DOM TUN IND GTM KOR 0.01 ISR SLV TUR GHA COL TTO USA BGD LKA PAK IDN URY AUS 0 TZA SEN ZAF MEX IRN FJI THA CAN ESP BOLBRA VEN ITA AUT NOR PRT HND DNK FRA FINSWE KEN PRY GRCARG ECU NZL DEU JAM NER DZA NPL ZMB CMR PHL JPN PER TGO MWI ZWE Change in financial openness

6 Growth Benefits of Financial Integration: Evidence About 25 studies of growth effects No effect: 4 Mixed: 18 Positive: 3

7 Growth: Why Such Diverse Results? Finer measures of integration, de jure or de facto, tend to yield more positive results Sample of countries: Effects much weaker in poor developing countries Time span of sample: Longer datasets yield more positive results No robust macroeconomic evidence of growth benefits

8 Financial Integration and Volatility: Evidence Capital mobility does not increase probability of sudden stops or current account reversals (Edwards) Banking crises are most disruptive and occur frequently in closed economies No evidence that financial integration by itself is proximate determinant of financial crises

9 But Two Issues on Volatility Relative volatility of consumption growth increases at low and intermediate levels of integration Developing economies, including emerging markets, have not attained better risk sharing

10 Other Ways of Looking at the Data Effects of different types of private capital flows: > Equity flows > FDI > Debt Macroeconomic vs. microeconomic evidence

11 International Financial Integration:Distribution of Gross Inflows (% of Total) Emerging Markets FDI Equity Debt

12 Equity Market Liberalizations Boost Growth Bekaert, Harvey, Lundblad big positive growth effects Henry lower cost of capital, private investment booms, productivity growth Chari and Henry allocative efficiency

13 Equity Market Liberalizations Boost Growth: Really? eally? Portfolio equity flows relatively small De jure measures not actual flows used in these studies Equity market liberalizations coincident with other reforms

14 Foreign Direct Investment Should in principle be the best > stable > transfers of technology, expertise > right sorts of incentives But difficult to detect growth effects > macroeconomic evidence mixed > microeconomic evidence also weak Evidence of vertical spillovers

15 Additional Microeconomic Evidence Capital controls result in significant efficiency losses > distortions (e.g. Forbes, 2005) > reductions in discipline > administrative costs Again use of de jure measures, but less of a problem in these cases

16 Summary of New Evidence Equity market liberalization seems to work FDI benefits becoming more apparent Benefits more evident in micro data?

17 The Traditional View Financial Globalization More efficient international allocation of capital Capital deepening International risk-sharing GDP growth Consumption volatility

18 A Different Perspective Traditional Channels Financial Globalization Potential Collateral Benefits Financial market development Institutional development Better governance Macroeconomic discipline GDP / TFP Growth Consumption volatility

19 1.2 Figure 6A. Financial Openness and Financial Development: Private Credit/ GDP 1 JPN DEU Private Credit/ GDP AUT PRT FRA ESP NZL MYS THA KOR ZAF AUS ISR FIN ITA NOR DNK CAN TUN SWE CHL MUS GRC USA SLV IDN EGY FJI TTO BOLURY PHL IND BRA BGD PAK HND DZA LKA KEN IRN SEN ECU PNG TGOJAM ZWE NPL DOM MEX GTMCOL PRY CMRPER CRI ARG TUR VEN NER GHATZAMWI ZMB Mean financial openness

20 Figure 6A. Financial Openness and Financial Development: Stock Market Capitalization/ GDP ZAF MYS Stock Market Capitalization/ GDP USA JPN FIN SWE AUS CAN CHL FRA ESP JAM DNK THAPHL ISR NZL KOR GRC TTO DEU MUS ITA NOR IND CHN ZWE BRA ARG PRT MEX IRN TUR EGY PAKCOL SLVLKA KEN IDN PER GHA AUT NPL FJI CRI ECUVEN TUN BOL MWI HND ZMB BGD GTM PRY TZAURY Mean financial openness

21 FG and Financial Development Foreign ownership of banks Inflows add to depth of equity markets Financial sector FDI has benefits

22 FG and Quality of Institutions, Governance Openness to foreign capital provides incentives for improving corporate governance (Stulz) Corruption, lack of transparency discourage FDI, portfolio flows (Wei)

23 2.5 Figure 6B. Financial Openness and Quality of Institutions: Institutional Quality Institutional Quality NZL FIN AUS NOR CAN DEU AUT USA ESP PRT JPN CHL CRI ITA MUS GRC ISRURY KOR TTO MYS ZAF THA TUN BRAMEX SLV ARG JAM IND FJI PHLGHA TUR DOM CHN LKA EGY PERSEN BOL TZAMWI HND GTM BGD NPL COL PNG NER ECU IRN PRY PAK CMR KEN IDN VEN TGO ZWE DZA FRA DNK SWE ZMB Mean financial openness

24 3 Figure 6B. Financial Openness and Quality of Institutions: Control of Corruption USA AUS NZL NOR CAN DEU FIN AUT DNK SWE Control of Corruption ESPCHL PRT JPN ISR CRI ITA GRC URY MUS ZAF MYS KOR TUN FJI TTO BRA TUR LKA EGY CHN PER IND MEX THA SEN PHL GHA JAM NPL COL DOM SLV ARG IRN DZA BGDZWE GTM PNGMWI NER TGO PAK VEN BOL HND PRY IDN ECU TZA CMR KEN FRA ZMB Mean financial openness

25 Macroeconomic Policy Discipline Capital account liberalization as commitment device Even Stiglitz is on board! Sadly, limited evidence

26 0 Figure 6C. Financial Openness and Macroeconomic Policies: Monetary Policy Log Inflation TUR ZWE ECU VEN URY BRA GHA MWI IRN MEX COL JAM DOM PRY PER GTM BOL TZA KEN ISR HND ZAFLKA DZA PAK NPL IDN EGYARG IND SLV GRC CHL PHL PNG BGDCHN MUS TTO PRT KOR TUN NERITA ESP FJI CMRTHA AUS NZL USA NOR SEN CAN TGO MYS FIN AUT DEU DNK FRA SWE ZMB JPN Mean financial openness

27 10 Figure 6C. Financial Openness and Macroeconomic Policies: Fiscal Policy Government Budget Balance (%GDP) DZA NOR KOR DOM PRY CMRTHA CHN IDN VEN JAM BGD GTM SLV ECU CHL BRA AUS NZL DEU IRN MUS PHL TTO IND COL URY MEX PER CRI GHAESP FIN AUT USA TUN TZA CAN MYS TGO PAK ZAF KEN EGY HND PNG ZWE BOL JPN FJIARG PRT TUR SEN NPL NER ITA ISR LKA MWI GRC FRA DNK SWE ZMB Mean financial openness

28 Complication: Threshold Effects Above Thresholds GDP / TFP growth Risks of Crises Financial Globalization X Threshold Conditions Financial market development Institutional Quality, Governance Macroeconomic policies Trade integration Below Thresholds GDP / TFP growth Risks of Crises?

29 TENSION!! Some evidence that financial integration catalyzes financial development, improves governance, imposes discipline on macro policies... But, in the absence of a basic pre- existing level of these supporting conditions, financial integration can wreak havoc

30 Further Work Needed Identification of thresholds Interactions/trade-offs offs among thresholds Level of integration itself is a threshold

31 Collateral Benefits Perspective Useful? Unified conceptual framework Country-specific requirements, initial conditions can be taken into account Selective approach to liberalization Can manage risks during transition to thresholds, but can not eliminate them