WP/04 The Inernaional Invemen Poiion of Jamaica: An Eimaion Approach Dane Docor* Economic Informaion & Publicaion Deparmen Bank of Jamaica Ocober 2004 Abrac Thi paper eek o inroduce he inernaional invemen poiion, IIP and idenifie mehodologie ha can be employed in eimaing i for Jamaica. In doing hi, he paper ouline wo main mehodologie, he adjued cumulaive curren accoun mehod, ACUMCA, and he adjued cumulaive flow mehod, ACUMFL. The analyi reveal ha Jamaica ha mainained a negaive ne inernaional invemen poiion, for he period 1970 o 2003. Thi negaive ne IIP ouline ha Jamaica foreign ae 1 are le ha heir foreign liabiliie. The major componen of he foreign liabiliie ha conribue o hi negaive poiion i he counry exernal deb ock. Keyword: Foreign ae, exernal deb, foreign direc invemen, equiy flow JEL Claificaion: F21, F32 * The view expreed doe no necearily reflec hoe of he Bank of Jamaica. 1 Noe ha hroughou he paper ae and liabiliie refer o financial ae and liabiliie.
1.0 Inroducion The liberalizaion of mo financial marke ha creaed an increaed concern in he movemen of capial beween counrie. Wih hi new developmen, counrie are eeking o proec hemelve from exernal hock ha are caued by rapid capial fligh, a wa he cae in he Aian crii. Informaion ha can be ued o ae he vulnerabiliy of a counry o hee hock i preen in i ock of exernal ae and liabiliie. A aiical preenaion of he exernal ae and liabiliie of a counry for a paricular period i known a he Inernaional Invemen Poiion (IIP). Macro-economi, inveor and reearcher ue he IIP a a aiical ool for advice on policy making and deciion on macroeconomic abiliy. The knowledge of he financial obligaion of iniuion wihin an economy can provide vial informaion on he demand for foreign exchange for exernal deb paymen. Therefore, he cenral bank can formulae policie o mainain abiliy in he foreign exchange marke when he demand increae. Thi ock of exernal liabiliie can caue a negaive effec on he banking yem when here i exchange rae devaluaion. Lane (2000) uppored he above argumen in hi paper where he aed ha he level and compoiion of gro inernaional invemen poiion maer for macroeconomic adjumen o hock. He furher noed ha he ize of he gro inernaional invemen poiion can be inerpreed a a volume-baed meaure of financial openne and he level of inegraion ino he inernaional capial marke, ju a expor/gro domeic produc, GDP and impor/gdp raio do for openne o rade in good and ervice. In ligh of he above, he main objecive of he paper i o conruc reaonable eimae of he ock of foreign ae and liabiliie and heir ubcomponen for Jamaica uing he balance of paymen, BOP, daa for he period 1970-2003. The analyi alo highligh wo meaure ued o eimae he ock of foreign direc invemen ae and liabiliie. Finally, inference are drawn from he eimae of he ock of exernal ae and liabiliie of Jamaica. The mehodological framework followed in hi paper imiae he meaure of exernal ae and liabiliie oulined in Lane, Milei-Ferrei (2000). Firly, he balance of paymen accouning yem i preened o how he link beween he BOP and he inernaional invemen poiion. Thi linkage permi he conrucion of equaion of he componen of he 2
BOP and he formulaion of oher yem of equaion o eimae he ock of exernal ae and liabiliie of Jamaica. To accomplih hi objecive, he componen of he financial accoun are grouped ino five main componen: foreign direc invemen, porfolio invemen, deb, oher invemen and foreign exchange reerve. The individual componen are hen eimaed and accumulaed o ge he ne foreign ae poiion. Sinn (1990) and Rider (1994) were he fir o conruc deail meaure of foreign ae and liabiliie for 145 counrie, uing daa from he Inernaional Moneary Fund, he Unied Naion and naional ource 2. Sinn work i he mo comprehenive projec underaken o dae, bu i cover only a limied period, 1970-1987. Rider (1994), on he oher hand, performed imilar meaure for he ock of foreign ae and liabiliie of indurial counrie, for he period 1984-1993 3. Hudon and Senne (2003) were he fir o conruc eimae of Jamaica IIP. Their work aeed he uainabiliy of he Jamaican curren accoun uing an iner-emporal model of curren accoun deerminaion. In addiion, hey applied radiional mehod of evaluaing he pah of a counry ne exernal liabiliie, which provided eimae of privae, and public ecor IIP of Jamaica 4. A five year foreca of Jamaica IIP were alo preened in heir analyi. The Bank of Jamaica eek o compile he IIP aiic by 2005, however hi paper eek o provide an eimaion of he IIP uing mehod preened in he lieraure. The IIP and BOP are excepional aiical ool ha are ued widely o explain macroeconomic condiion wihin an economy. Given hi imporance, reearcher have dedicaed much ime in formulaing eimaion model ha ue he BOP daa o eimae he IIP aiic. A imilar approach i aken in hi paper. The re of he paper i rucured a follow. Secion 2 preen he balance of paymen accouning framework ued o eimae he foreign ae and liabiliie, ecion 3 ouline he daa ource, ecion 4 highligh he reul obained and ecion 5 conclude. 2 Lane, Phillip, and Gian Milei-Ferrei (2000), The Exernal Wealh of Naion: Meaure of Foreign Ae and Liabiliie For Indurial and Developing Counrie CEPR Dicuion Paper 3 Ibid 4 Hudon, Suzee and Rober Senne (2003), Curren Accoun Suainabiliy in Jamaica, working paper, Bank of Jamaica 3
2.0 Balance of Paymen Accouning Framework The ne exernal poiion of a counry i he ummaion of i ne deb poiion, ne equiy poiion, ne foreign direc invemen poiion, ne oher invemen and i foreign exchange reerve. Tha i, NFA = DEBTA + EQA + FDIA + OA + FX DEBTL EQL FDIL OL (1) where DEBTA (L), EQA (L), OA (L) and FDIA (L) repreen he ock of deb, porfolio equiy, oher invemen and foreign direc invemen ae (liabiliie) while FX are he foreign exchange reerve. Thi ecion ouline he eimaion echnique ued o calculae he ock of exernal ae and liabiliie. Two mehodologie are employed, he adjued cumulaive curren accoun, ACUMCA and he adjued cumulaive flow, ACUMFL, mehod oulined in Lane, Milei-Ferrei (2000). The ACUMCA mehod involve he accumulaion of he curren accoun balance, adjuing he capial accoun for capial ranfer, deb forgivene or reducion and oher governmen ranfer. Excepional financing ha affec he curren accoun hould alo be included. For example, arrear on principal, inere paymen on exernal liabiliie and pecial loan conraced for balance of paymen purpoe will impac he capial accoun balance. Valuaion adjumen are alo incorporaed for financial ae recorded in he financial accoun of he BOP. When financial ae are no held in he currency ued for he BOP compilaion, hen price and exchange rae change will impac on he value of he exernal ae and liabiliie. Therefore, he ACUMCA mehod mu capure he relaive capial gain or loe on hee financial ae and liabiliie. Correcly accouning for valuaion change of exernal financial ae i he one of he mo difficul ak encounered in BOP and IIP compilaion. Thi iue i even more complex for FDI and equiy ae and liabiliie. Forunaely, here i no ignifican concern in financial ae and liabiliy valuaion for Jamaica a mo financial inrumen are denominaed in US dollar. The BOP daa i alo recorded in US dollar. Wihin he financial accoun of he BOP, here i a componen ha meaure unrecorded ranacion of he curren accoun, financial accoun or boh. Thi iem i ermed ne error and 4
omiion. Ne error and omiion normally reflec unrecorded capial flow or unrecorded curren accoun flow. However, capial flow among counrie i prevalen in he modern financial marke where money can be ranferred or ranformed ino everal medium of exchange, hu making i difficul o capure all capial flow. Therefore, ne error and omiion will be reaed a unrecorded capial flow. The fifh ediion of he Balance of Paymen manual, BPM5, publihed by he Inernaional Moneary Fund, IMF, ae ha he curren accoun, CA, balance for a counry i equal o he ne change of he financial and capial accoun balance. Tha i, CA = ( KA + FA ) (2) where KA and FA repreen he capial and financial accoun balance repecively. The financial accoun can be defined furher a he um of he ne change in porfolio invemen, foreign direc invemen, oher invemen, deb capial and foreign exchange ock. FA = ( EQ + FDI + OI + DEBTL DEBTA + FX ) (3) Therefore, ubiuing equaion 3 ino equaion 2 reul in he following fundamenal BOP relaion. CA = EQ + FDI + OI + DEBTA DEBTL KA + FX (4) where, FDI = ( FDIA + FDIL ) EQ = ( EQA + EQL ) DEBTL = PDL + IMF + EF DEBTA = ( PDA + EO ) OI = ( OA + OL ) EO repreen error and omiion, while PDA (L) repreen porfolio deb ae and liabiliie repecively. Therefore, he curren accoun can be defined a he um of he ne change in porfolio invemen, foreign direc invemen, oher invemen, deb capial and foreign exchange ock and capial ranfer. 5
If he curren accoun balance i ummed over period, where period occurred before he period, hen, Σ CAi = DEBTA ( ) DEBTL ( ) + EQ ( ) + FDI ( ) + OI ( ) + FX ( ) KA ( ) (5) Equaion 5 and 1 are ued o ge an approximae eimae of he ne foreign ae of a counry a ime. NFA( ) NFA( 1) + = NFA( 1) + DEBTA + OA ( ) OL ( ) + FX CA + KA ( ) ( ) DEBTL ( ) i ( ) + EQA ( ) EQL ( ) + FDIA ( ) FDIL ( ) (6) Equaion 6 ouline he wo mehod employed in he paper. The lef hand ide of he equaion ae ha he change he NFA i equal o he adjued accumulaive curren accoun. On he oher hand, he righ hand ide how ha he change in he NFA i equal o he ummaion of he individual componen of he financial accoun. The econd mehod uilized in hi paper i he adjued cumulaive flow mehod, ACUMFL, which i ued for developing counrie. Thi mehod involve he ummaion of he individual ock eimae of he ne foreign ae poiion oulined in equaion 6. Tha i, he ummaion of he ne deb, ne equiy, ne foreign direc invemen, ne oher invemen and he ne inernaional reerve poiion for he counry give he ne foreign ae a een in equaion 5. In hi analyi, he iniial value of he ne foreign ae for 1970 i obained by equaing he iniial NFA o he ummaion of he individual ock eimae. The deb ock and he foreign exchange reerve are readily available for Jamaica. Iniial ock of FDI liabiliie and ae are no eaily obained and will be eimaed uing an accumulaion of capial flow mehod below. For porfolio ae and liabiliie, he baic procedure of cumulaing flow i employed, auming an iniial ock value of zero. 6
2.1 Foreign Direc Invemen The ock of FDI ae, FDIA, and FDI liabiliie, FDIL, of Jamaica i eimaed uing wo echnique. Firly, he FDI inflow are accumulaed o provide an average eimae of he ock of FDIL. A imilar proce i followed for he FDI ae. The oher mehod ue a book value eimaion mehodology oulined in Lane, Milei-Ferrei (2000) paper where he eimae of FDIA and FDIL are baed on accumulaive flow which alo include reinveed earning. Lane, Milei-Ferrei (2000) ue a book value eimaion mehod o ge he FDIL, which i baed on he aumpion ha he relaive price of capial good acro counrie follow relaive conumer price index, CPI. Thi implie ha he change in he domeic price of capial good i he um of he change in he relaive price of capial beween Jamaica and he US, ince hi i he currency of denominaion of he flow, plu he increae in he US price of capial. Tha i, FDIL = FDIL 1 reeru reeru 1 + FDIL (7) where reeru i Jamaica real effecive exchange rae vi-à-vi he US dollar and an increae meaure an appreciaion. Depreciaion of exiing capial ock i aumed zero. However, in an inflaionary environmen, we aumed real capial depreciaion i offe by reinveed profi, herefore eliminaing he need for an inflaion-adjumen erm. In he abence of iniial ock daa, cumulaive flow are ued daing back o 1960. Eimae of he ock of FDI abroad are baed on he aumpion ha he invemen paern of a counry reflec i rade paern. The echnique require an addiional adjumen deigned o accoun for he impac of change in he exchange rae of he counrie where he invemen ake place vi-à-vi he US dollar. FDIA = FDIA 1 reerpc reerpc 1 + FDIA (8) reerpc = cpi cpi e pc p $ u 7
where pc and for parner counrie, u for Unied Sae, cpi x i he conumer price index of counry x and e pc i he dollar/parner counrie nominal exchange rae. The erm wihin he bracke i equal o one plu he change in he purchaing power of he bake of he parner counry currencie vi-à-vi he US dollar beween he end of year and -1. 2.2 Porfolio Invemen Porfolio invemen a ouline in he fifh ediion of he Balance of Paymen Manual are deb and equiy ecuriie ha are raded in organized financial marke. Deb ecuriie include bond, debenure, noe, money marke or negoiable deb inrumen, and financial derivaive or econdary inrumen uch a opion ha are ued for hedging again rik, invemen and rading purpoe. Equiy ecuriie cover all inrumen and record acknowledging, afer he claim of all credior have been me, claim o he reidual value of incorporaed enerprie. Share, ock, paricipaion, or imilar documen uually denoe ownerhip of equiy inrumen. Porfolio invemen in Jamaica were no ignifican unil 1997. Tha i, he balance of paymen daa for Jamaica did no repor porfolio invemen before 1997. A a reul, he accumulaed flow imple average mehod can be employed o eimae he porfolio invemen abroad and hoe made by foreign inveor. Thee ype of invemen have become popular wihin he financial marke in recen ime. 2.3 Exernal Deb Ae and Liabiliie For mo developing counrie, he ock of exernal deb i widely available. Counrie like Jamaica produce andard repor on he compoiion of i exernal deb ock. Thi informaion i imporan a inernaional inveor ue i a an indicaor of he counry indebedne. Deb ae, DEBTA, are of equal imporance a i provide an indicaion of a counry invemen abroad. Thi ock of deb ae i no readily available a he deb liabiliie, DEBTL, and i minimal for developing counrie. The value of DEBTA i aumed zero for Jamaica for he period of review. 8
In he abence of he ock of exernal deb ae and liabiliie, Lane, Milei-Ferrei (2000) propoed he ue of cumulaive flow, uing iniial ock obained by Sinn (1990). Alernaely we could employ a reidual approach by aking he cumulaive curren accoun balance a he appropriae NFA meaure, and hen calculae he DEBTA a DEBTA = NFA + FDI EQ + DWB FX. (9) The paper follow he former, and uilize he daa ock available from he ource menioned. 2.4 Foreign Exchange Reerve The ock of foreign exchange reerve, FX, i he mo eaily acceible daa erie for our analyi. Mo cenral bank produce hi ock on a regular bai. Bank of Jamaica publihe FX daa on a monhly and yearly bai. 2.5 Oher invemen Thi componen accoun for he ock of foreign ae and liabiliie of financial iniuion. The financial iniuion comprie of he commercial bank, merchan bank, finance houe, ru companie, and building ocieie. Thee iniuion are conidered o be he core componen of he financial ecor in Jamaica, and repreen majoriy of he financial marke. Therefore, he ock of foreign ae and liabiliie provide a reaonable approximaion of he financial marke. 3.0 Daa The daa were ourced from he Inernaional Moneary Fund Balance of Paymen (BOPS) and Inernaional Financial Saiic (IFS), he World Bank World Deb Table and Global Developmen Finance, he Unied Naion Conference on Trade and Developmen, UNCTAD, OECD aiic, Bank of Jamaica and he Miniry of Finance. Sock daa for he componen of he ne foreign ae poiion are only available for he deb liabiliie and he foreign exchange reerve. A a reul, he oher componen will be eimaed uing cumulaive flow daa for he balance of paymen aiic. 9
Jamaica ock of exernal deb i publihed on he Miniry of Finance webie, wih annual daa for he year 1980-2003. Thi informaion i no ufficien for he period under review. A a reul, he gro deb ock repored in he World Deb Table of he World Bank i ubiued for he miing year. Minue difference were een in he daa received from he wo ource, bu he informaion received from he Miniry of Finance wa conidered more crediable and accurae. Deb ae are no a common feaure of Jamaica foreign ae and a uch, i i aumed inignifican for he IIP eimaion. Sock of FDI ae and liabiliie are alo no available. A menioned in ecion 2, he only reaonable meaure of FDI ock i obained by cumulaing he FDI inflow and ouflow. Thee flow daa are ourced from he financial accoun of he balance of paymen daa erie a he Bank of Jamaica for he period 1960-2003. Since here are no FDI ock, he flow are accumulaed from 1960-1969 o obain a crude eimae of he iniial ock for 1970. Thi eimaion echnique i no unique o our calculaion a UNCTAD ue i o meaure heir FDI ock of Jamaica. Porfolio invemen ae and liabiliie will alo be eimaed. The eimaion echnique i imilar o ha ued for he FDI ock. Tha i, EQA and EQL are obained by accumulaing he inflow and ouflow recorded in he BOP daa erie for he period 1997-2003. Prior o 1997, he porfolio invemen flow were no ignifican and a uch were no recorded in he BOP daa. Therefore, he iniial ock of EQA and EQL for 1997 are aumed zero. The cumulaive flow mehod wa hen employed for he proceeding year o ge he annual ock daa, a oulined in able 3. The ock of foreign exchange reerve of Jamaica i ourced from he IFS daa erie obained from he IMF. The FX ock ue in our calculaion exclude he ne foreign ae of commercial bank, exernal ae of he cenral governmen and he Bank of Jamaica ne reerve. S.D.R. are included, a hey are conidered exernal ae of he counry. The foreign ae and liabiliie of he commercial bank and oher financial iniuion are included in he oher invemen componen of he IIP. A oulined above, he paper conider wo main meaure: he adjued cumulaive curren accoun mehod, ACUMCA and he adjued cumulaive flow mehod, ACUMFL. The 10
ACUMCA mehod incorporae he impac of capial ranfer, valuaion change, capial gain and loe on equiy and FDI and deb reducion and forgivene. ACUMFL on he oher hand, accumulae he ock of he componen of he ne foreign ae poiion oulined in equaion 1. Thee ock were derived moly from eimaion echnique dicued in ecion 2 hrough crude meaure. The ACUMCA mehod reflec he forma oulined in he BPM5 in calculaing he IIP. The manual ae ha he IIP i equal o he iniial ock poiion plu change in he poiion caued by ranacion, price and exchange rae change, and oher adjumen. The ACUMCA aume an iniial ock poiion of zero in 1960, o which ranacion are incorporaed uing BOP daa. The impac of price change in he model i minimal a he BOP daa i compiled in US dollar. I i alo aume ha he inflaion rae of he US economy i a lea equal o he rae of depreciaion of he capial ock alo denominaed in US dollar. Exchange rae change did no affec he eimaion a all daa are denominaed in US dollar. The furher adjumen made o he ock poiion were change ha are non-bop ranacion. The econd mehod conidered involve he accumulaion of he individual ock componen of equaion 6. Tha i, ACUMFL i compued by umming he ne deb, ne FDI, ne porfolio invemen, ne oher invemen and foreign exchange reerve poiion. Only he exernal deb liabiliie and he ne foreign exchange reerve poiion are available in ock daa. The oher componen were eimaed uing he echnique preened above. Thi mehodology i repreened in equaion 6. The iniial ne foreign ae poiion i no available and an eimae wa obained by cumulaing he flow of he individual componen o 1970. 4.0 Reul Figure 1 how he correlaion beween he FDIA and he FDIL eimae obained under he cumulaive flow mehod and he book value mehod. The graph of he eimae of FDIL follow each oher more cloely ha he graph of he eimae of FDIA. Depie he mall variaion een in he FDIA graph, he rend oberved in boh graph are conien and how ha foreign direc invemen ock have increaed conienly over he period 1970 o 2003. However, he ock of FDIL i a lea wice he ize of he ock of he FDIA. Thi mean ha Jamaica i receiving more FDI flow from abroad han i i inveing overea. 11
Deailed analyi wa done on he foreign direc invemen ock ince hi caegory accoun for a ignifican porion of he inernaional invemen poiion. Thi componen reflec he major invemen or projec underaken by privae inveor in Jamaica. Major FDI flow are received from he bauxie or he alumina and ourim indury, he finance and elecommunicaion ecor and he manufacuring and energy ecor. The eimae of he ock of FDI liabiliie have adequaely covered he manufacuring, energy, finance, elecommunicaion and ourim ecor ince hee recen flee of invemen would have been capured in he BOP daa. Figure 1: Eimae of FDIA and FDIL uing Book Value Mehod and Cumulaive Simple Mehod Eimaion of FDIA Eimaion of FDIL 1800 7000 US$MN 1600 1400 1200 1000 800 600 400 FDIA Simple FDIA BVM US$MN 6000 5000 4000 3000 2000 FDIL Simple FDIL BVM 200 1000 0 0 1970 1973 1 976 1979 1982 1985 1988 1991 1994 1997 2000 2003 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 The reul obained for he eimae of ACUMCA and ACUMFL are depiced in figure 2. The graph how ha boh mehod are highly correlaed and follow imilar pah of a negaive ne inernaional invemen poiion. In 1970, Jamaica had a negaive ne IIP of US$1.3 billion and US$603 million for he ACUMFL and ACUMCA mehodologie repecively. The difference beween he mehodologie accoun for hi wide gap in he eimae. The ACUMCA mehod ha a low iniial ock eimae uing he adjued cumulaive curren accoun mehod, a daa on curren accoun balance are no available before 1960. However, he eimae of IIP for 2003, uing he ACUMCA and ACUMFL mehod were US$9.1 billion and US$5.7 billion repecively. Regardle of he ignifican difference een in he eimae for IIP, figure 2 and he correlaion from able 4 confirm ha he dacumca and dacumfl are highly relaed. Tha i, he fir 12
difference of ACUMCA and ACUMFL expreed a a raio of gro domeic produc, GDP, how a correlaion of 43.9 per cen. Thi reul i imporan a i highligh he fac ha boh mehodologie ued depic a conien rend for he IIP ock over he review period. Anoher imporan reul of he analyi i obained from he correlaion beween he fir difference of each eimae and he curren accoun balance for he period 1970-2003. Thi reul i criical in our analyi a i underpin he BOP heory. Recall ha, he change in capial ock over a ime i equal o he ne capial flow for he period. Similarly, he change in he IIP over a Figure 2: Eimae of ACUMCA and ACCMFL ACUMFL & ACUMCA ACUMFL & ACUMCA per GDP 0 0.0% -1000-2000 -50.0% -3000 US$MN -4000-5000 -6000 per cen -100.0% -150.0% -7000-8000 -9000 ACUMFL ACUMCA -200.0% ACUMFL/GDP ACUMCA/GDP -10000-250.0% period i equal o he ne flow een in he adjued curren accoun. Tha i, he curren accoun balance adjued by he capial accoun, for a paricular year i approximaely equal o he ne change een in he IIP over he previou year. Recall equaion 6, NFA( ) i NFA( 1) + CAi + KA ( ), hi can be approximaed o NFA ( ) NFA( 1) + CA( ) + KA( ). Therefore, he change in he IIP i equal o he adjued curren accoun: IIP IIP CA( ) KA( ) (10) 1 + An eimaion wa conduced o verify he accuracy of he reul obained. 13
ACUMFL = 1 + β 2 ACA + β 3 ACUMFL 1 β (11) where β i, repreen he reidual and he coefficien. Table 8 preen he reul for he coefficien and he reidual. The R-quared, F-aiic and he DW aiic ugge ha he reul were inadequae o our a prior expecaion. The -aiic of he coefficien on he adjued curren accoun variable wa no ignifican, which mean ha equaion 11 doe no explain equaion 10 ufficienly. Furher inveigaion were done, bu he reul became more puriou. Thi reuled from he inadequacy of he daa hrough miing daa for he ime erie of each variable coupled wih he biaed creaed from he change in BOP mehodology in 1994. Figure 3 provide a graphical explanaion of he equaion above. The graph how a relaively conien rend over he period under conideraion. Depie he variaion from he curren accoun graph, he correlaion marix how a 99.9 per cen and 44.1 per cen relaion for each of he eimae (dacumca and dacumfl) and he curren accoun balance. The relaively low correlaion obained for he ACUMFL mean ha he eimae are no accuraely accouning for 55.9 per cen of he IIP over he period. I could alo mean ha he curren accoun balance given for he period have no accuraely refleced all daa for he financial accoun. Figure 3: Relaion beween dacumca, dacumfl & he Curren Accoun Curren Accoun, dacumca & dacumfl 0.3 0.1 0.2 0.05 per GDP US$MN 0.1 0-0.1-0.2-0.3-0.4-0.5 dacumca dacumfl CA 0-0.05-0.1-0.15-0.2-0.25-0.3-0.35 per GDP US$MN -0.6-0.4 14
The eimae of IIP obained from he cumulaive flow mehod how ha Jamaica mainained a relaively able negaive ne IIP over he la 20 year. Depie an increae rend in oal foreign liabiliie, he ne IIP remained able ince 1983. A compenaory increae in oal foreign ae wa alo oberved during hi period a hown in figure 4. Figure 4: The Inernaional Invemen Poiion of Jamaica Inernaional Invemen Poiion of Jamaica US$MN 12000.00 10000.00 8000.00 6000.00 4000.00 2000.00 0.00-2000.00-4000.00-6000.00-8000.00 5.0 Concluion Toal Ae Toal Liabiliie IIP 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 In ummary, he paper provide alernaive eimae for he IIP. The mehodologie ued provided conien reul for he ne ae poiion of Jamaica (a confirmed by a 91 per cen correlaion). The analyi alo provided deailed eimae for he foreign direc invemen ae and liabiliie of Jamaica. Table 7 ouline he principal reul of he paper for he ix-year period 1998-2003. The able how ha all componen of he IIP increae for boh he ae and liabiliie caegorie. A a reul, he ne IIP deerioraed by 13.64 per cen during he period a he growh in ae wa le han he growh in liabiliie. The increae in liabiliie wa caue by higher FDI invemen from new elecommunicaion companie, bauxie indury owner, hoel indury inveor and energy ecor developmen from overea. Thi influx of FDI ha conribued ignificanly o he exernal liabiliie of Jamaica. FDI inflow for 2003 reached a high of US$721 MN coming from US$17 MN received 20 year earlier. The ock of FDI liabiliie grew by 339.4 per cen over he ame period, increaing o 52.2 per cen of oal liabiliie. A a reul, he paper placed pecial emphai on 15
eimaing he ock of FDI. The mehod employed gave highly correlaed eimae for he FDIA and FDIL. Anoher ylized fac obained wa ha he ock of exernal deb i negaively correlaed wih he ne foreign ae poiion. Thi a priory expecaion wa obviou from he one and wa no urpriing. Jamaica IIP i everely biaed wih a high exernal deb ock. Thi compoiion of deb i he driving force behind he increae in liabiliie and he predominanly negaive ne IIP. The exernal deb ock accoun for approximaely 62 per cen of he oal ock of exernal liabiliie of Jamaica over he period 1970-2003. In 2003, he exernal deb ock repreened 55.6 per cen of GDP. Thi i an indicaion of he dependence of he counry on he global communiy for financial uppor. A a reul, Jamaica i expoed o he dynamic of he macroeconomic variable of he world marke, in paricular inere rae. The analyi howed ha here i poiive correlaion beween he GDP per capia and he gro foreign ae poiion of Jamaica. Thi mean ha he higher he ne foreign ae poiion he higher he GDP per capial. In addiion, one can inerpre hi o mean ha high gro foreign ae poiion uppor growh wihin he economy. Lane (2000) uppored hi concluion a he explained ha he ize of he gro inernaional invemen poiion of a counry erve a an indicaor for growh. The core reul obained from he paper involve he compoiion of he oal foreign ae and oal foreign liabiliie. Thi ock daa how he level of indebedne of he counry, in paricular he oal obligaion of Jamaica o oher counrie. Thi level of dependence ha everal implicaion for macroeconomic analyi. The analyi poin o he fac ha over he period 1970-2003, Jamaica oal exernal ae were inufficien o cover heir oal exernal liabiliie. Table 7 provide ome ueful indicaor of he vulnerabiliy of he counry o exernal hock. Toal liabiliie repreened approximaely 139.7 per cen of GDP in 2003. In he ame year, ACUMFL amouned o 75.3 per cen of GDP and projeced o grow by 5.3 per cen per year. Thi reul indicae ha Jamaica i exremely indebed o exernal economie o mainain heir growing deb ock. Thi level of dependence expoe he counry o exernal hock. In concluion, he ock of daa compued can be ued o addre iue concerning Jamaica macroeconomic developmen. Alhough he reul obained are preliminary, hey erve a an 16
indicaion of he compoiion of he IIP of he counry. The reul can alo be ued a a benchmark for he inernaional invemen poiion ha will be compued hrough urvey. The paper alo encourage furher work on he componen of he IIP and he long-run relaion beween ne foreign ae and oher macroeconomic variable. Appendix 1.0 Real Effecive Exchange Rae 5 Real effecive exchange rae (REER) are he mo frequenly ued indicaor of flucuaion in he compeiivene of counrie. Thi mehodology provide a uiable mean of analyzing he relaive movemen of macroeconomic indicaor of co and price, beween a counry and i rading parner. In calculaing effecive exchange rae, i i imporan ha an appropriae weighing yem and definiion of he exchange rae be employed. There are wo alernaive definiion of he exchange rae, he price of domeic currency in erm of a foreign currency and he price of he foreign currency in erm of he domeic currency. We will denoe he price of one uni of he i h rading parner currency a ime, in erm of he domeic currency by R i. The price of he domeic currency a ime in erm of he i h rading parner currency will be repreened by S i (S i = 1/R i ). The geomeric weighing yem i ued o compue he effecive exchange rae (EER) indice: EER1 = 100Π( S i ) w i EER2 = 100/Π(R i ) w i Boh geomerically weighed indice EER1 and EER2 are idenical. The difference arie from he definiion of he exchange rae employed. A a reul, of i ymmeric naure, he geomeric weighing yem ha become andard in calculaing real effecive exchange rae. The conrucion of he above indice require appropriae weigh for each rading parner. Daa from he balance of paymen, in paricular he daa on rade in good and ervice, are uually ued o weigh he differen currencie. We can calculae boh expor and impor indice, a well 5 Excerp from, Henry, Chandar (2001) Meauring Compeiivene in Jamaica working paper, Bank of Jamaica 17
a overall rade indice. An expor-weighed index i calculaed by weighing each currency by he hare of expor o ha counry. W i x = X i / X i where X i = Expor o counry i X i = Toal expor W i x = Proporion of oal expor o counry i Impor indice are alo calculaed from weigh generaed by heir hare of impor o he local economy. W m i = M i / M i where M i = Impor from counry i M i = Toal impor W i m = Proporion of oal impor from counry i The overall weigh given o a paricular counry, W i can be calculaed from a imple average or a weighed average of he impor and he expor weigh. W i = ( W x i + W m i )/ 2 or W i = W x i V x + W m i Vm where V x = X i /( X i + M i ) and V m = M i /( X i + M i ) I i imporan o highligh ha a counry exchange rae i uually expreed in erm of a major inernaional currency uch a he US dollar and bilaeral rae for mo currencie are no uually quoed. Thu, in mo cae, bilaeral rae have o be calculaed. In hi paper, all exchange rae obained are linked o ha Unied Sae dollar. Bilaeral rae were obained from he following relaionhip. R i = R n /R ip where S i = R ip /R n 18
R i = he amoun of he local currency per uni of he i h rading parner currency R n = he amoun of he local currency per US dollar R ip = he number of uni of he i h rading parner currency per US dollar S i = he number of uni of he i h rading parner currency per local currency. I hould be noed ha for Jamaica, ix rading parner conribue o approximaely 80 per cen of i economic rade. The remaining 20 per cen of inernaional rade i pread acro many economie. Therefore, in calculaing EER, only rade weigh relaing o en (10) major rading parner are ued in calculaing he above indice for Jamaica (Table 5). Having eablihed he nominal effecive exchange rae he real effecive exchange rae i calculaed by adjuing he EER by chooing he appropriae deflaor. The deflaor generally ued are indice of CPI, GDP deflaor, wage index, wholeale and expor price indice. In hi exercie, he deflaor choen are wage indice, GDP deflaor and he CPI. Expor price were excluded a given he conracual naure of he price of major expor; he counry i a price aker in hi marke. Wholeale price, are alo omied becaue of daa unavailabiliy. The wage index, GDP deflaor and he CPI will be ued in he calculaion of he geomeric indice. Impor, expor and oal rade will weigh he calculaion of hee indexe. The indice are defined hu: Geomeric Index REER = 100Π(S i /P i ) wi where: S i = an index of he price of he home currency in erm of he i h rading parner currency a ime R i = an index of he price of one uni he i h of he currency of he home counry. rading parner currency a ime.in erm P i = raio of he price index of he i h rading parner in period o he price index of he home counry in period (wih he ame bae year a ha ued o calculae S i ). w i = normalized weigh of he i h rading parner currency. 19
2.0 Table & Graph Table 1: Eimaion of FDIL and FDIA uing he Cumulaive Flow Simple Mehod Foreign Direc Invemen Year Inflow Ouflow FDIA Simple FDIL Simple 1960 64.90 37.30 37.3 64.90 1961 64.90 37.30 74.60 129.80 1962 64.90 37.30 111.90 194.70 1963 26.80 38.30 150.20 221.50 1964 24.00 39.80 190.00 245.50 1965 17.00 35.70 225.70 262.50 1966 42.80 30.60 256.30 305.30 1967 5.80 14.80 271.10 311.10 1968 120.72-271.10 431.82 1969 101.64-271.10 533.47 1970 161.41-271.10 694.88 1971 119.23 0.72 271.82 814.11 1972 32.05 4.43 276.25 846.16 1973 44.00 21.78 298.03 890.16 1974 64.35 41.03 339.06 954.51 1975 3.41 5.28 344.34 957.92 1976 8.25 8.80 353.14 966.17 1977 7.70 14.70 367.84 973.87 1978 11.90 38.60 406.44 985.77 1979 12.30 38.70 445.14 998.07 1980 64.90 37.30 482.44 1062.97 1981 26.80 38.30 520.74 1089.77 1982 24.00 39.80 560.54 1113.77 1983 17.00 35.70 596.24 1130.77 1984 42.80 30.60 626.84 1173.57 1985 5.80 14.80 641.64 1179.37 1986 10.40 15.00 656.64 1189.77 1987 64.60 11.10 667.74 1254.37 1988 1.90 13.90 681.64 1256.27 1989 90.30 33.20 714.84 1346.57 1990 174.90 37.00 751.84 1521.47 1991 171.20 38.00 789.84 1692.67 1992 190.40 48.00 837.84 1883.07 1993 139.20 61.30 899.14 2022.27 1994 86.50 52.70 951.84 2108.77 1995 147.40 66.30 1018.14 2256.17 1996 183.70 93.30 1111.44 2439.87 1997 203.30 56.60 1168.04 2643.17 1998 369.10 82.00 1250.04 3012.27 1999 523.70 94.90 1344.94 3535.97 2000 455.80 74.00 1418.94 3991.77 2001 613.90 89.00 1507.94 4605.67 2002 478.80 73.90 1581.84 5084.47 2003 720.70 116.30 1698.14 5805.17 FDIL = Inflow -1 + Inflow & FDIA = Ouflow -1 + Ouflow Thi mehodology i ued by UNCTAD o calculae he FDI ock from he flow repored in he balance of paymen daa. Thi meaure i conidered a reaonable eimae for developing counrie ha had minimal FDI inflow and ouflow before he 1960 era. 20
Table 2: Eimaion of FDIL and FDIA uing he Book Value Mehod Year Inflow Ouflow REER_JA REER_US CPI_JA CPI_US E_RATE_JA E_RATE_US FDIA BVM FDIL BVM 1970 161.41 0.00 100.00 100.00 0.90 25.48 0.83 1.20 296.98 722.46 1971 119.23 0.72 98.90 100.09 0.94 26.57 0.83 1.20 294.44 842.37 1972 32.05 4.43 106.52 106.45 1.00 27.44 0.77 1.30 321.57 927.89 1973 44.00 21.78 97.09 102.79 1.17 29.15 0.90 1.11 314.86 940.02 1974 64.35 41.03 108.47 110.69 1.49 32.37 0.91 1.10 392.82 1076.61 1975 3.41 5.28 114.27 115.59 1.75 35.32 0.91 1.10 419.08 1127.63 1976 8.25 8.80 118.55 118.12 1.92 37.35 0.91 1.10 443.59 1160.56 1977 7.70 14.70 120.75 121.33 2.14 39.77 0.91 1.10 466.53 1199.86 1978 11.90 38.60 95.82 106.95 2.88 42.81 1.41 0.71 408.79 1069.57 1979 12.30 38.70 90.01 102.48 3.72 47.64 1.76 0.57 422.70 1037.13 1980 64.90 37.30 100.15 108.83 4.73 54.07 1.78 0.56 507.63 1166.31 1981 26.80 38.30 102.67 110.32 5.34 59.65 1.78 0.56 558.71 1209.04 1982 24.00 39.80 105.21 110.55 5.69 63.33 1.78 0.56 612.35 1235.62 1983 17.00 35.70 103.01 110.27 6.34 65.36 1.93 0.52 635.20 1249.51 1984 42.80 30.60 62.14 81.72 8.11 68.18 3.94 0.25 413.77 968.82 1985 5.80 14.80 53.48 74.78 10.19 70.61 5.56 0.18 370.90 892.26 1986 10.40 15.00 61.07 81.04 11.73 71.92 5.48 0.18 438.57 977.41 1987 64.60 11.10 61.88 82.28 12.51 74.61 5.49 0.18 455.52 1056.96 1988 1.90 13.90 63.44 84.22 13.54 77.61 5.49 0.18 480.86 1083.82 1989 90.30 33.20 67.04 86.35 15.48 81.35 5.74 0.17 541.34 1201.41 1990 174.90 37.00 61.56 82.51 18.89 85.74 7.18 0.14 534.09 1322.93 1991 171.20 38.00 52.44 75.43 28.53 89.37 12.12 0.08 492.99 1380.55 1992 190.40 48.00 47.10 71.28 50.58 92.08 22.96 0.04 490.80 1495.07 1993 139.20 61.30 51.64 75.03 61.75 94.80 24.95 0.04 599.35 1713.01 1994 86.50 52.70 51.57 74.70 83.40 97.27 33.09 0.03 651.31 1791.95 1995 147.40 66.30 56.20 78.93 100.00 100.00 35.14 0.03 776.10 2040.85 1996 183.70 93.30 66.50 86.24 126.41 102.93 37.12 0.03 1011.62 2413.55 1997 203.30 56.60 75.99 92.35 138.61 105.34 35.40 0.03 1212.51 2787.83 1998 369.10 82.00 79.19 94.30 150.58 106.97 36.55 0.03 1345.60 3215.73 1999 523.70 94.90 75.89 92.67 159.55 109.31 39.04 0.03 1384.47 3683.81 2000 455.80 74.00 72.32 90.29 172.58 113.00 42.70 0.02 1393.35 4044.90 2001 613.90 89.00 70.25 88.46 184.65 116.20 46.00 0.02 1442.47 4576.97 2002 478.80 73.90 70.99 88.53 197.72 118.04 48.42 0.02 1531.55 5059.56 2003 720.70 116.30 64.18 83.47 218.12 120.72 57.74 0.02 1500.80 5490.58 F DIA * = F DIA * 1 reerpc reerpc 1 + F DIA * FDIL * = FDIL * 1 reeru reeru 1 + FDIL * The above mehodology i oulined in Lane, Milei-Ferrei (2000) paper on meaure of foreign ae and liabiliie for indurial and developing counrie. 21
Table 3: Eimaion of Porfolio Invemen Ae and Liabiliie uing he Cumulaive Flow Simple Mehod Porfolio Invemen DATE Inflow Ouflow EQA EQL 1970 - - - - 1971 - - - - 1972 - - - - 1973 - - - - 1974 - - - - 1975 - - - - 1976 - - - - 1977 - - - - 1978 - - - - 1979 - - - - 1980 - - - - 1981 - - - - 1982 - - - - 1983 - - - - 1984 - - - - 1985 - - - - 1986 - - - - 1987 - - - - 1988 - - - - 1989 - - - - 1990 - - - - 1991 - - - - 1992 - - - - 1993 - - - - 1994 - - - - 1995 - - - - 1996 - - - - 1997 5.70 - - 5.70 1998 10.90 3.90 3.90 16.60 1999 8.60 3.70 7.60 25.20 2000 5.90 70.00 77.60 31.10 2001 69.70 39.30 116.90 100.80 2002 155.80 351.30 468.20 256.60 2003 156.00 348.00 816.20 412.60 EQL = Inflow -1 + Inflow & EQA = Ouflow -1 + Ouflow 22
Table 4: Correlaion beween variable* Correl(CA,dACUMFL) 44.1% Correl(CA,dACUMCA) 99.9% Correl(ACUMFL,ACUMCA) 90.9% Correl(dACUMFL,dACUMCA) 43.9% Correl(dACUMFL, GDP) 37.7% Correl(dACUMCA,GDP) 4.9% Correl(EXTDEBT,GDP) -60.1% *Noe ha each of he variable lied in he able are expreed a a raio of GDP for he period 1970-2003. Table 5: Percenage Conribuion o Trade in Good and Service by Trading Parner Trading Parhner Conribuion o oal rade in Good and Service (%) USA 52.9 EURO 10.8 UK 8.5 CANADA 7.3 T&T 5.0 JAPAN 4.7 NORWAY 2.0 MEXICO 1.6 VENEZUELA 1.3 GHANA 1.1 BRAZIL 0.9 RUSSIA 0.7 BARBADOS 0.6 CHINA 0.5 TURKEY 0.5 SWEDEN 0.5 KOREA 0.4 SWITZERLAND 0.4 GUYANA 0.4 23
Table 6: Vulnerabiliy Indicaor (per cen) YEAR 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 EXTDEBT/GDP 87.40 89.26 74.53 61.03 52.96 51.92 51.10 54.61 61.50 51.97 55.61 EXTDEBT/Toal FL 67.06 66.40 63.82 59.04 55.22 52.85 49.50 49.79 49.50 43.31 40.86 FDIL/GDP 36.50 37.07 35.69 37.00 37.74 41.80 48.14 51.73 56.80 60.48 69.31 FDIL/Toal FL 28.01 27.58 30.56 35.79 39.34 42.54 46.63 47.16 45.72 50.40 50.92 Toal FL/GDP 130.32 134.44 116.77 103.37 95.92 98.25 103.24 109.69 124.23 120.00 136.12 ACUMFL/GDP 99.61 95.99 83.66 66.19 62.63 64.95 70.01 68.38 69.39 61.04 73.87 ACUMCA/GDP 111.32 106.39 91.66 82.54 77.38 78.56 81.82 84.77 91.65 101.64 125.85 Table 7: Ne Inernaional Poiion of Jamaica Ne Inernaional Poiion of Jamaica US$Million 1998 1999 2000 2001 2002 2003 Ae 2562.15 2542.76 3229.71 4419.57 4887.96 4848.36 Direc Invemen 1345.60 1384.47 1393.35 1442.47 1531.55 1500.80 Porfolio Invemen 3.90 7.60 77.60 116.90 468.20 816.20 Financial Derivaive 0.00 0.00 0.00 0.00 0.00 0.00 Oher Invemen 503.20 596.17 705.07 959.66 1243.11 1336.50 Reerve Ae 709.45 554.52 1053.69 1900.54 1645.10 1194.86 Liabiliie 7558.93 7899.49 8576.33 10011.25 10038.82 10526.78 Direc Invemen 3215.73 3683.81 4044.90 4576.97 5059.56 5490.58 Porfolio Invemen 16.60 25.20 31.10 100.80 256.60 412.60 Financial Derivaive 0.00 0.00 0.00 0.00 0.00 0.00 Oher Invemen 4326.60 4190.48 4500.33 5333.48 4722.67 4623.60 Ne -4996.77-5356.73-5346.62-5591.68-5150.87-5678.42 24
Table 8: Regreion of ACUMFL and he adjued CA Dependen Variable: ACUMFL Mehod: Lea Square Dae: 09/23/04 Time: 15:02 Sample (adjued): 1971 2003 Included obervaion: 33 afer adjumen ACUMFL=C(1)+C(2)*ACA+C(3)*ACUMFL(-1) Coefficien Sd. Error -Saiic Prob. C(1) -281.44010 141.53650-1.98846 0.05600 C(2) 0.24031 0.22984 1.04557 0.30410 C(3) 0.94622 0.03508 26.97450 0.00000 R-quared 0.962802 Mean dependen var -3948.348 Adjued R-quared 0.960322 S.D. dependen var 1382.988 S.E. of regreion 275.4832 Akaike info crierion 14.16144 Sum quared reid 2276729 Schwarz crierion 14.29748 Log likelihood -230.6637 Durbin-Waon a 2.023631 Figure 5: Componen of he IIP of Jamaica for he period 2003-1998 Direc Invemen Porfolio Invemen US$ MN 6000 4000 2000 0-2000 Ae Liabiliie Ne 1998 1999 2000 2001 2002 2003 US$ MN 900 800 700 600 500 400 300 200 Ae Liabiliie Ne -4000-6000 100 0-100 1998 1999 2000 2001 2002 2003 Oher Invemen Reerve Ae US$ MN 6000 4000 2000 0-2000 -4000-6000 Ae Liabiliie Ne 1998 1999 2000 2001 2002 2003 US$ MN 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Reerve Ae 1998 1999 2000 2001 2002 2003 25
Reference Docor, Dane and Chandar Henry(2003), Inernaional Invemen Poiion: The Jamaican Conex Reearch Noe, Bank of Jamaica Henry, Chandar(2001), Meauring Compeiivene in he Jamaican Economy Working paper Bank of Jamaica Hudon, Suzee and Rober Senne (2003), Curren Accoun Suainabiliy in Jamaica, working paper, Bank of Jamaica Inernaional Moneary Fund (1993), Balance of Paymen Manual, 5 h ediion Inernaional Moneary Fund (1993), Balance of Paymen Saiic (variou year) Inernaional Moneary Fund (1993), Inernaional Financial Saiic (variou year) Lane, Phillip (2000a). Inernaional Invemen Poiion: A Cro-Secional Analyi, Journal of Inernaional Money and Finance 19, 513-534 Lane, Phillip, and Gian Milei-Ferrei (1999), The Exernal Wealh of Naion: Meaure of Foreign Ae and Liabiliie For Indurial and Developing Counrie CEPR Dicuion Paper 2231 Lane, Phillip, and Gian Milei-Ferrei (2000), The Tranfer Problem Reviied: Ne Foreign Ae and Real Exchange Rae CEPR Dicuion Paper 2511 June Meinen, Gerhard, Pei Verbie and Peer-Paul de Wolf (1998), Perpeual Invenory Mehod: Service Live, Dicard Paern and Depreciaion Mehod, Deparmen of Naional Accoun, Saiic Neherland Miguel, Joe and Albala-Berrand (2003), An Economical Approach o Eimae a Benchmark Capial Sock. An Opimal Conien Mehod, Working Paper 503, Deparmen of Economic, Univeriy of London. 26
Unied Naion Conference on Trade and Developmen, World Invemen Repor 2003 (www.uncad.org/fdiaiic) Unied Naion Conference on Trade and Developmen, World Invemen Repor: FDI Daabae 1970-2003 (hp://www.uncad.org/templae/page.ap?iniemid=1485&lang=1) World Bank, World Deb Table and Global Developmen Finance, variou iue World Bank, World Developmen Indicaor, variou iue Maon, Paul, Jeroen Kremer and Jocelyn Horne (1994), "Ne Foreign Ae and Inernaional Adjumen: The Unied Sae, Japan and Germany", Journal of Inernaional Money and Finance 13, 27-40 OECD (1972), "Sock of Privae Direc Invemen by DAC Counrie in Developing Counrie End 1967", Pari OECD 27