The Macroeconomic Implications of Financial Globalization - International … · 2006. 11. 29. ·...
Transcript of The Macroeconomic Implications of Financial Globalization - International … · 2006. 11. 29. ·...
The Macroeconomic The Macroeconomic Implications of Financial Implications of Financial
GlobalizationGlobalization
EswarEswar Prasad, Prasad, IMFIMF Research DepartmentResearch DepartmentNovember 10, 2006November 10, 2006
The views expressed in this paper are those of the The views expressed in this paper are those of the author(sauthor(s) only, and the presence of them, or of links to them, ) only, and the presence of them, or of links to them, on the on the IMFIMF website does not imply that the website does not imply that the IMFIMF, its Executive Board, or its management endorses or shares the , its Executive Board, or its management endorses or shares the
views expressed in the paper.views expressed in the paper.
Benefits of Financial Integration: Benefits of Financial Integration: TheoryTheory
Efficient international allocation of Efficient international allocation of capitalcapital
Consumption smoothing via Consumption smoothing via international risk sharinginternational risk sharing
Large welfare effects for developing Large welfare effects for developing economieseconomies
Figure 4. GDP (per capita, PPP weighted): 1970-2004
100
150
200
250
300
350
1970 1975 1980 1985 1990 1995 2000
Advanced Economies
Emerging Markets
Emerging (excluding China and India)
Other Developing Economies
Figure 5B. Change in Financial Openness and GDP Growth, 1985-2004Unconditional Relationship
FJIZMB
TUN
TGO
TZA
SEN
ZWE
NER
MUS
MWIKEN
GHA
CMR
DZA
THA
PHL
PAK NPL
MYS
KOR
IDNIND
LKA
BGDEGYISRIRN TTO
JAM
VEN
URY
PER
PRY
MEXHND
GTMSLV
ECU
DOMCRI
COL
CHL
BRABOL ARG
ZAF
NZL
AUSTURESP PRT
GRC FINJPNCAN SWE
NOR
ITA DEU FRADNKAUTUSA
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
-150 -50 50 150 250 350 450
Change in financial openness
Gro
wth
rate
of p
er c
apita
GD
P
Figure 5B. Change in Financial Openness and GDP Growth, 1985-2004Conditional Relationship
USA
AUTDNK FRADEUITA NOR SWECAN
JPN
FINGRCPRTESP
TUR AUS
NZL
ZAFARG
BOLBRA
CHL
COL
CRI DOM
ECU
SLVGTM
HNDMEXPRY
PER
URY
VEN
JAM
TTO
IRN
ISR
EGY
BGDLKA
IND
IDN
KORMYS
NPL
PAK
PHL
THA
DZACMR
GHA
KEN
MWI
MUS
NER
ZWE
SENTZA
TGO
TUN
ZMB
FJI
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
-150 -50 50 150 250 350 450
Change in financial openness
Gro
wth
rate
of p
er c
apita
GD
P
Growth Benefits of Financial Integration: Growth Benefits of Financial Integration: EvidenceEvidence
About 25 studies of growth effectsAbout 25 studies of growth effects
No effect: No effect: 44Mixed:Mixed: 1818Positive:Positive: 33
Growth: Why Such Diverse Results?Growth: Why Such Diverse Results?
Finer measures of integration, de jure or Finer measures of integration, de jure or de facto, tend to yield more positive resultsde facto, tend to yield more positive results
Sample of countries: Effects much weaker Sample of countries: Effects much weaker in poor developing countriesin poor developing countries
Time span of sample: Longer datasets Time span of sample: Longer datasets yield more positive resultsyield more positive results
No robust macroeconomic evidence of No robust macroeconomic evidence of growth benefits growth benefits
Financial Integration and Volatility: Financial Integration and Volatility: EvidenceEvidence
Capital mobility does not increase Capital mobility does not increase probability of sudden stops or current probability of sudden stops or current account reversals (Edwards)account reversals (Edwards)
Banking crises are most disruptive and Banking crises are most disruptive and occur frequently in closed economiesoccur frequently in closed economies
No evidence that financial integration by No evidence that financial integration by itself is proximate determinant of itself is proximate determinant of
financial crisesfinancial crises
But Two Issues on Volatility But Two Issues on Volatility
Relative volatility of consumption Relative volatility of consumption growth increases at low and growth increases at low and intermediate levels of integration intermediate levels of integration
Developing economies, including Developing economies, including emerging markets, have not attained emerging markets, have not attained better risk sharing better risk sharing
Other Ways of Looking at the DataOther Ways of Looking at the Data
Effects of different types of private Effects of different types of private capital flows:capital flows:
> Equity flows> Equity flows> FDI> FDI> Debt> Debt
Macroeconomic vs. microeconomic Macroeconomic vs. microeconomic evidenceevidence
International Financial Integration:Distribution of Gross Inflows(% of Total)
Emerging Markets
0
20
40
60
80
100
FDI Equity Debt
80-84 90-94 00-04
Equity Market Liberalizations Boost Equity Market Liberalizations Boost GrowthGrowth
Bekaert, Harvey, Lundblad Bekaert, Harvey, Lundblad big big positive growth effectspositive growth effects
Henry Henry lower cost of capital, private lower cost of capital, private investment booms, productivity investment booms, productivity growthgrowth
Chari and Henry Chari and Henry allocative allocative efficiencyefficiency
Equity Market Liberalizations Boost Equity Market Liberalizations Boost Growth: Growth: RReally?eally?
Portfolio equity flows relatively smallPortfolio equity flows relatively small
De jure measuresDe jure measures——not actual not actual flowsflows——used in these studiesused in these studies
Equity market liberalizations Equity market liberalizations coincident with other reformscoincident with other reforms
Foreign Direct InvestmentForeign Direct Investment
Should in principle be the bestShould in principle be the best> stable> stable> transfers of technology, expertise> transfers of technology, expertise> right sorts of incentives> right sorts of incentives
But difficult to detect growth effectsBut difficult to detect growth effects> macroeconomic evidence mixed> macroeconomic evidence mixed> microeconomic evidence also weak> microeconomic evidence also weak
Evidence of vertical spilloversEvidence of vertical spillovers
Additional Microeconomic EvidenceAdditional Microeconomic Evidence
Capital controls result in significant Capital controls result in significant efficiency losses efficiency losses
> distortions (e.g. Forbes, 2005)> distortions (e.g. Forbes, 2005)> reductions in discipline> reductions in discipline> administrative costs> administrative costs
Again use of de jure measures, but Again use of de jure measures, but less of a problem in these casesless of a problem in these cases
Summary of New EvidenceSummary of New Evidence
Equity market liberalization seems Equity market liberalization seems to workto work
FDI benefits becoming more FDI benefits becoming more apparentapparent
Benefits more evident in micro data? Benefits more evident in micro data?
The Traditional ViewThe Traditional View
Financial Globalization
More efficient international allocation of capital
Capital deepening
International risk-sharing
GDP growth
Consumption volatility
A Different Perspective A Different Perspective
Traditional Channels
Potential Collateral Benefits
Financial market developmentInstitutional development
Better governanceMacroeconomic discipline
Financial Globalization
GDP / TFP Growth
Consumption volatility
Figure 6A. Financial Openness and Financial Development: 1985-2004Private Credit/ GDP
PNG
FJI
ZMB
TUN
TGO
TZA
SENZWE
NER
MUS
MWI
KEN
GHA
CMRDZA
THA
PHLPAK
NPL
MYS
KOR
IDNIND
LKABGD
EGY
ISR
IRN
TTO
JAMVEN
URY
PERPRYMEXHND
GTM
SLV
ECUDOM CRICOL
CHL
BRABOL
ARG
ZAF
NZL
AUS
TUR
ESPPRT
GRC
FIN
JPN
CANSWE
NORITA
DEU
FRA
DNK
AUT
USA
0
0.2
0.4
0.6
0.8
1
1.2
0 50 100 150 200 250 300Mean financial openness
Priv
ate
Cre
dit/
GD
P
Figure 6A. Financial Openness and Financial Development: 1985-2004Stock Market Capitalization/ GDP
USA
AUT
DNKFRA
DEUITA NOR
SWECANJPN
FIN
GRCPRT
ESP
TUR
AUS
NZL
ZAF
ARG
BOL
BRA
CHL
COL CRI ECUSLV
GTMHND
MEX
PRY
PER
URYVEN
JAMTTO
IRN
ISR
EGY
BGDLKA
INDIDN
KOR
MYS
NPLPAK
PHLTHA
GHAKENMWI
MUSZWE
TZATUN ZMBFJI
CHN
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0 50 100 150 200 250 300Mean financial openness
Stoc
k M
arke
t Cap
italiz
atio
n/ G
DP
.
FG and Financial DevelopmentFG and Financial Development
Foreign ownership of banksForeign ownership of banks
Inflows add to depth of equity Inflows add to depth of equity marketsmarkets
Financial sector FDI has benefitsFinancial sector FDI has benefits
FG and Quality of Institutions, FG and Quality of Institutions, GovernanceGovernance
Openness to foreign capital provides Openness to foreign capital provides incentives for improving corporate incentives for improving corporate governance (Stulz)governance (Stulz)
Corruption, lack of transparency Corruption, lack of transparency discourage FDI, portfolio flows (Wei)discourage FDI, portfolio flows (Wei)
Figure 6B. Financial Openness and Quality of Institutions: 1985-2004Institutional Quality
CHNPNG
FJI
ZMB
TUN
TGO
TZASEN
ZWE
NER
MUS
MWI
KEN
GHA
CMRDZA
THA
PHL
PAKNPL
MYSKOR
IDN
INDLKA
BGD
EGY
ISR
IRN
TTO
JAM
VEN
URY
PER
PRY
MEX
HNDGTM
SLV
ECU
DOM
CRI
COL
CHL
BRABOL
ARG
ZAF
NZLAUS
TUR
ESP PRT
GRC
FIN
JPN
CAN SWENOR
ITA
DEU
FRA
DNKAUT
USA
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
0 50 100 150 200 250 300
Mean financial openness
Inst
itutio
nal Q
ualit
y .
Figure 6B. Financial Openness and Quality of Institutions: 1985-2004Control of Corruption
CHN
PNG
FJI
ZMB
TUN
TGOTZA
SEN
ZWE NER
MUS
MWI
KEN
GHA
CMR
DZATHA
PHL
PAK
NPL
MYSKOR
IDN
IND LKA
BGD
EGY
ISR
IRN
TTO
JAM
VEN
URY
PER
PRY
MEX
HNDGTM
SLV
ECU
DOM
CRI
COL
CHL
BRA
BOL
ARG
ZAF
NZL
AUS
TUR
ESP PRT
GRC
FIN
JPN
CANSWE
NOR
ITA
DEU
FRA
DNK
AUTUSA
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
0 50 100 150 200 250 300Mean financial openness
Con
trol o
f Cor
rupt
ion
Macroeconomic Policy DisciplineMacroeconomic Policy Discipline
Capital account liberalization as Capital account liberalization as commitment device commitment device
Even Stiglitz is on board!Even Stiglitz is on board!
Sadly, limited evidenceSadly, limited evidence
Figure 6C. Financial Openness and Macroeconomic Policies: 1985-2004Monetary Policy
CHNPNG
FJI
ZMB
TUN
TGO
TZA
SEN
ZWE
NER
MUS
MWI
KEN
GHA
CMR
DZA
THA
PHLPAKNPL
MYS
KOR
IDNIND
LKA
BGD
EGY ISR
IRN
TTO
JAM
VENURY
PERPRYMEX
HNDGTM
SLV
ECU
DOM CRICOL
CHL
BRA
BOLARGZAF
NZLAUS
TUR
ESPPRT
GRC
FIN
JPN
CAN SWENOR
ITA
DEUFRA
DNKAUT
USA
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0 50 100 150 200 250 300
Mean financial openness
Log
Infla
tion
Figure 6C. Financial Openness and Macroeconomic Policies: 1985-2004Fiscal Policy
CHN
PNGFJI
ZMB
TUN TGOTZA
SENZWE
NER
MUS
MWI
KENGHA
CMR
DZA
THA
PHL
PAK
NPL
MYS
KOR
IDN
IND
LKA
BGD
EGY
ISR
IRN TTOJAMVEN
URYPER
PRY
MEXHND
GTM SLVECUDOM
CRICOL
CHLBRA
BOLARG
ZAF
NZLAUS
TUR
ESP
PRT
GRC
FIN
JPN
CAN SWE
NOR
ITA
DEU
FRA
DNK
AUTUSA
-15
-10
-5
0
5
10
0 50 100 150 200 250 300
Mean financial openness
Gov
ernm
ent B
udge
t Bal
ance
(%G
DP)
.
Complication: Threshold Effects Complication: Threshold Effects
Threshold ConditionsFinancial market development
Institutional Quality, GovernanceMacroeconomic policies
Trade integration
Financial Globalization
GDP / TFP growth
Risks of Crises
GDP / TFP growth
Risks of Crises
Above Thresholds
Below Thresholds
X?
TENSION !!TENSION !!
Some evidence that financial Some evidence that financial integration catalyzes financial integration catalyzes financial development, improves governance, development, improves governance, imposes discipline on macro policies... imposes discipline on macro policies...
But, in the absence of a basic preBut, in the absence of a basic pre--existing level of these supporting existing level of these supporting conditions, financial integration can conditions, financial integration can wreak havocwreak havoc
Further Work Needed Further Work Needed
Identification of thresholdsIdentification of thresholds
Interactions/tradeInteractions/trade--offs among offs among thresholdsthresholds
Level of integration itself is a Level of integration itself is a thresholdthreshold
Collateral Benefits Collateral Benefits Perspective Useful?Perspective Useful?
Unified conceptual frameworkUnified conceptual framework
CountryCountry--specific requirements, initial specific requirements, initial conditions can be taken into accountconditions can be taken into account
Selective approach to liberalizationSelective approach to liberalization
Can manage risks during transition to Can manage risks during transition to thresholds, but can not eliminate themthresholds, but can not eliminate them