challenges of globalization: foreign direct investment and trade

1

Challenges of Globalization: Foreign Direct Investment and

Trade

by Can Erbil

11/10/2006

prepared for HS271 – Frameworks for Development

2

Globalization

“The inexorable integration of markets, nation states, and technologies

to a degree never witnessed before, in a way that is enabling

individuals, corporations, and nation-states to reach round the world

farther, faster, deeper and cheaper than ever before… the spread of

free-market capitalism to virtually every country in the world” (Thomas

Friedman, The Lexus and the Olive Tree, 1999, pp.7-8)

“A social process in which the constraints of geography on social and

cultural arrangements recede and in which people become

increasingly aware that they are receding” (M.Waters, Globalization,

1995, p.3)

“Globalization is defined as a process of growing interdependence

between all people of this planet. People are linked together

economically, and socially, by trade, investments and governance… by

market liberalization, and information, communication and

transportation technologies” (International Labor Organisation)

3

Globalization

“Fundamentally, it [globalization] is the closer integration of the

countries and people of the world which has been brought about by

the enormous reduction of costs of transportation and

communication, and the breaking down of artificial barriers to the

flows of goods, services, capital, knowledge, and (to a lesser extent)

people across borders” Stiglitz.

“Globalisation… does not really mean anything different from an open

and integrated world economy” (Samuel Brittan)

4

Globalization

Globalization is thus concerned with

increased flows of goods, services, capital and labour (?)

Increased flows of information,

with the increased speed of those flows, and

with increased interdependence

One can identify a number of causes or driving factors behind this process:

The liberalization of barriers to trade and mobility.

Developments in technology, and esp. information technology. This allows for both

more communication / information + also increased speed of that communication.

Increased focus on “deeper integration” i.e. not just removal of barriers, but also

harmonization of them. Such as, standards, legal frameworks, institutions and policies.

Changes in policy by governments and between governments.

5

World GDP 1970-2004

0

5 000 000

10 000 000

15 000 000

20 000 000

25 000 000

30 000 000

35 000 000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Years

Val

ue

mil

. $ DCs

Developing countries andterritories

6

FOREIGN DIRECT INVESTMENT Over the past decade, firms based in one country have increasingly made investments to establish and run business operations in other countries.

Over the past two decades, as financial openness has increased across the world, global flows of foreign direct investment have more than doubled

relative to gross domestic product. The flows increased in the 1990s, rising from US$324 billion in 1995 to $US1.5 trillion in 2000. However

investment levels recently fluctuated considerably depending on the prevailing economic and political climate . The global economic

slowdown has reduced financial flows in the past couple of years, against the long-term trend of increases, and political and economic instability have

exacerbated problems in some regions. Capital flows in Latin America dropped from a peak of $US126 billion in 1998 to $72 billion in 2001, reflecting regional problems and global uncertainty.

FDI flows to Argentina fell from $US24 billion in 1999 to $US3billion in 2001.

But FDI has remained strong in East Asia and the Pacific and in Europe and Central Asia.

Developing countries received around a quarter of world FDI inflows in 2001 on average, though the share fluctuated quite a bit from year to year. This

is now the largest form of private capital inflow to developing countries.

7

FDI inflows, global and by group of economies, 1980–2005

(Billions of dollars)

8

Concentration of FDI inflows: the share of the top 5FDI recipients in the world total, 1980-2005

9

World shares of FDI outflows 1970-2004

0%

20%

40%

60%

80%

100%

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Years

Sh

are Developing countries and territories

DCs

World shares of FDI inflows 1970-2004

0%

20%

40%

60%

80%

100%

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Years

Sh

are Developing countries and territories

DCs

10

World FDI outflows 1970-2004

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Years

Va

lue

mil

. $

DCs


World FDI inflows 1970-2004

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Years

Va

lue

mil

. $

DCs


11

FDI Confidence Index Survey 2005

…tracks the impact of likely political, economic and regulatory changes on the

foreign direct investment intentions and preferences of the leaders of top

companies around the world.

12

Private Capital Flows to Developing Countries

14

More open trade raises per capita incomes – and the incomes of the poor

There is a growing consensus in empirical

studies that greater openness to international

trade has a positive effect on country per-capita

income. Trade openness in the figure is adjusted

to remove the influence of geographical factors.

A study by Frankel and Romer (1999) estimates

that increasing the ratio of trade to GDP by one

percentage point raises per-capita income by

between one-half and two percent. Numbers of

other studies reach similar conclusions, though

the estimated size and statistical significance of

the effects vary. (See for example, Edwards

(1998) or, for a more skeptical assessment,

Rodrik (1999).)

A 10 percent increase in the trade to GDP ratio could ultimately raise per-capita

income by five percent (cautiously taking the lower bound of the estimates by

Frankel and Romer), and one would in general also expect a five percent rise in

the income of the poor.

15

World trade flows: 1948-2004

0

2000000

4000000

6000000

8000000

10000000

World X World M DC - X DC - M

LDC - X LDC - M

17

Payoffs from Trade Opening Trade liberalization 'works' by encouraging a shift of labor and capital from import-

competing industries to expanding, newly competitive export industries.

The unemployment caused by trade opening is, in most cases, temporary, being offset

by job creation in other sectors of the economy. The loss of output due to this transitional

unemployment (called the social adjustment cost of trade opening) is also usually small

relative to long-run gains in national income due to opening. Or, put another way, these

adjustment costs are expected to be small compared to the costs of continued

economic stagnation and isolation that would accompany a failure to open up*.

Nevertheless, while adjustment costs are usually small in relative terms, they can still be a

serious issue in many countries because they are often concentrated in a

geographical area or in a few industries. They will also tend to be felt 'up front', while

benefits will tend to be spread out over future periods. Carefully designed social-safety

net and educational or retraining programs to help the most vulnerable affected groups

are thus an important complement for trade reforms in many cases.

18

Payoffs from Trade Opening

The potential costs of trade opening can also be either reduced or worsened by the

overall context of policies in which reform is undertaken.

High macroeconomic instability (big fiscal deficits, high and volatile inflation,

volatile real exchange rates) can aggravate the unemployment costs of trade opening

by fostering uncertainty, which can prevent firms from investing in the export sectors

that are supposed to create new jobs.

A premature capital account liberalization in a country with large fiscal deficits can

have a similar effect, by inducing large capital inflows, causing the country's

exchange rate to rise, thus making its exports uncompetitive.

The collapse of structural reforms in the 'Southern Cone' countries of Latin America

at the end of the 1970s is partly attributed to this kind of inappropriate sequencing of

reforms.

Extremely stringent job security regulations may prevent firms hit by import

competition from laying off workers, driving them into bankruptcy, as appears to have

been the case in Peru in the 1980s.

21

Name of Variable (1)

African Value

(2)

OECD Value

(3)

Foregone Annual Growth

(4) Price of Investment Goods 123 70 0.44% Human Capital (1): Primary School Enrollment 0.42 0.97 1.47% Human Capital (II): Life Expectancy 42 68 2.07% Human Capital (III): Malaria Prevalence 0.80 0.00 1.25% Geography: Fraction of Area in the Tropics 0.85 0.03 1.21% Openness 0.10 0.66 0.67% Public Spending in Consumption 0.16 0.07 0.40% Conflict: Ethno-linguistic Fractionalization 0.58 0.12 0.52%

Why has Africa Grown So Slowly? From Xavier Sala-i Martin

Notes: Column 1 displays the name of the variable. Column 2 shows the average value that the variable has for African countries. Column 3 reports the corresponding value for OECD economies. Finally, Column 4 uses the empirical estimates of Sala-i-Martin, Doppelhoffer and Miller (2003) to compute the additional annual growth rate that Africa would have enjoyed if, instead of the values reported in Column 2, it had had the OECD values reported in Column 3. For example, the average relative price of investment for Africa was 123. The corresponding price for OECD was 70. If investment in Africa had been as low as in OECD, Africa’s annual growth rate would have been 0.44 percentage points larger.

22

Short Selection of Recent Literature on

FDI Financial Liberalization Capital Inflows Trade Liberalization Globalization

23

1) How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of

Financial Markets on Linkages

The empirical literature finds mixed evidence on the existence of positive productivity

externalities in the host country generated by foreign multinational companies. The

authors propose a mechanism that emphasizes the role of local financial markets in

enabling foreign direct investment (FDI) to promote growth through backward

linkages, shedding light on this empirical ambiguity.

In a small open economy, final goods production is carried out by foreign and

domestic firms, which compete for skilled labor, unskilled labor, and intermediate

products. To operate a firm in the intermediate goods sector, entrepreneurs must

develop a new variety of intermediate good, a task that requires upfront capital

investments. The more developed the local financial markets, the easier it is for credit

constrained entrepreneurs to start their own firms. The increase in the number of

varieties of intermediate goods leads to positive spillovers to the final goods sector.

As a result financial markets allow the backward linkages between foreign and

domestic firms to turn into FDI spillovers.

24

How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on

Linkages

Calibration exercises indicate that

a) holding the extent of foreign presence constant, financially well-

developed economies experience growth rates that are almost twice those

of economies with poor financial markets,

b) increases in the share of FDI or the relative productivity of the foreign firm

leads to higher additional growth in financially developed economies

compared to those observed in financially under-developed ones, and

c) other local conditions such as market structure and human capital are

also important for the effect of FDI on economic growth.

25

2) Financial Liberalization in Latin-America in the 1990s: A Reassessment

This paper studies the experience of Latin-America with financial liberalization in the 1990s.

The rush towards financial liberalizations in the early 1990s was associated with expectations

that external financing would alleviate the scarcity of saving in Latin-America, thereby

increasing investment and growth.

Yet, the data and several case studies suggest that the gains from external financing are

overrated. The bottleneck inhibiting economic growth is less the scarcity of saving, and more

the scarcity of good governance.

A possible interpretation for these findings is that in countries where private savings and

investments were taxed in an arbitrary and unpredictable way, the credibility of a new regime

could not be assumed or imposed. Instead, credibility must be acquired as an outcome of a

learning process. Consequently, increasing the saving and investment rates tends to be a time

consuming process. This also suggests that greater political instability and polarization

would induce consumers to be more cautious in increasing their saving and investment

rates following a reform.

Hence, reaching a sustained take-off in Latin-America is a harder task to accomplish than in

Asia.

26

3) Why Doesn’t Capital Flow from Rich to Poor Countries?An Empirical Investigation

The authors examine the empirical role of different explanations for the lack of flows

of capital from rich to poor countries the "Lucas Paradox."

The theoretical explanations include differences in fundamentals across

countries and capital market imperfections.

We show that during 1970-2000 low institutional quality is the leading

explanation.

For example, improving Peru's institutional quality to Australia's level, implies a

quadrupling of foreign investment. Recent studies emphasize the role of

institutions for achieving higher levels of income, but remain silent on the specific

mechanisms. Our results indicate that foreign investment might be a channel

through which institutions affect long-run development.

27

Why Doesn’t Capital Flow from Rich to Poor Countries?An Empirical Investigation

28

4) Foreign Direct Investment and Domestic Economic Activity

How does rising foreign investment influence domestic economic activity?

Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic

operations, but this pattern alone is inconclusive, as foreign and domestic business activities

are jointly determined.

This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic

distributions of foreign investment, to predict changes in foreign investment by a large panel of

American firms.

Estimates produced using this instrument for changes in foreign activity indicate that 10%

greater foreign capital investment is associated with 2.2% greater domestic investment,

and that 10% greater foreign employee compensation is associated with 4.0% greater

domestic employee compensation.

Changes in foreign and domestic sales, assets, and numbers of employees are likewise

positively associated; the evidence also indicates that greater foreign investment is associated

with additional domestic exports and R&D spending.

The data do not support the popular notion that greater foreign activity crowds out

domestic activity by the same firms, instead suggesting the reverse.

29

5) Trade Liberalization, Poverty andinequality: Evidence from the Indian Districts

Although it is commonly believed that trade liberalization results in higher GDP, little is known

about its effects on poverty and inequality.

This paper uses the sharp trade liberalization in India in 1991, spurred to a large extent by

external factors, to measure the causal impact of trade liberalization on poverty and inequality in

districts in India.

Variation in pre-liberalization industrial composition across districts in India and the variation in

the degree of liberalization across industries allow for a difference-in-difference approach,

establishing whether certain areas benefited more from, or bore a disproportionate share

of the burden of liberalization.

In rural districts where industries more exposed to liberalization were concentrated, poverty

incidence and depth decreased by less as a result of trade liberalization, a setback of

about 15 percent of India's progress in poverty reduction over the 1990s. The results are robust

to pre-reform trends, convergence and time-varying effects of initial district-specific

characteristics. Inequality was unaffected in the sample of all Indian states in both urban and

rural areas. The findings are related to the extremely limited mobility of factors across

regions and industries in India.

The findings, consistent with a specific factors model of trade, suggest that to minimize the

social costs of inequality, additional policies may be needed to redistribute some of the

gains of liberalization from winners to those who do not benefit as much.

30

6) Globalization and Poverty

This essay surveys the evidence on the linkages between globalization and poverty. I focus

on two measures of globalization: trade and international capital flows. Past researchers

have argued that global economic integration should help the poor since poor countries have a

comparative advantage in producing goods that use unskilled labor.

The first conclusion of this essay is that such a simple interpretation of general equilibrium

trade models is likely to be misleading.

Second, the evidence suggests that the poor are more likely to share in the gains from

globalization when there are complementary policies in place. Such complementary policies

include investments in human capital and infrastructure, as well as policies to promote credit

and technical assistance to farmers, and policies to promote macroeconomic stability.

Third, trade and foreign investment reforms have produced benefits for the poor in

exporting sectors and sectors that receive foreign investment.

Fourth, financial crises are very costly to the poor.

Finally, the collected evidence suggests that globalization produces both winners and losers

among the poor. The fact that some poor individuals are made worse off by trade or financial

integration underscores the need for carefully targeted safety nets.

31

Capital Flows and Financial

Markets: Case of Turkey

32

After 2001 Financial Crisis

After 2001 financial crisis structural change became inevitable in Turkey. The rehabilitation of institutions and policy change were placed in the agenda and in this respect:

Central Bank Independence

Shift to Floating Exchange Rate Regime

The establishment of the Banking supervision and auditing institution. Following this period:

One party political majority in the assembly

The end of the war in Iraq

The start of EU negotiations

Contributed to the economic stability.

33

5.0

20.0

12.0

35.0

8.0

18.4

10.0

29.7

68.5

7.7

-5

5

15

25

35

45

55

65

75

2001 2002 2003 2004 2005 2006

Target Consumer Price Inflation

Consumer Price Inflation and

(Implicit) Inflation Targets

34

Maturity on Public Debt

(months)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1998 1999 2000 2001 2002 2003 2004 2005 2006

Domestic Debt Stock

Domestic Borrowing

35

Falling inflation and easing fiscal dominance brought high and sustainable growth.

1980-1989

1990-2001

2002-2005

Real Growth

Average 4.0 3.2 7.1

Std. Dev. 3.5 5.9 1.2

Inflation (CPI)

Average 49.6 74.8 16.5

Std. Dev. 25.7 21.9 7.7

36

Capital Flows and Business Cycle

-10000

-5000

0

5000

10000

15000

20000

mil

lion

US

doll

ars

-15

-10

-5

0

5

10

15

20

perc

ent

capital flows (+ inflow) GDP growth

37

Capital Inflows in Turkey

-1.0

0.5

2.0

3.5

5.0

6.5

8.0

9.5

10000

14000

18000

22000

26000

30000P r ivate Sector Cr edi t

Investment E xpendi tur e

Non-bank private sector began to use long term credits which constitutes 48.9 percent of total capital inflows. 96.5 percent of these credits were long term.

38

0.0

0.5

1.0

1.5

2.0

2.5

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

per

cen

t

Foreign Direct Investment / GDP

The share of FDI and long–term capital inflows in total capital inflows is increasing. FDI share: % 41.3Long–term inflows as a share of total credit: % 84.2

39

Short – term capital inflows after/before EU negotiations

For those countries in which the ratio is below “one” short – term capital inflows decreased (except Poland) after the start of EU negotiations.

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Estonia

Latvia

Lithuania

Poland

Slovak Rep.

Slovenia

Turkey

Turkey

Slovenia

Slovak Rep.

Poland

Lithuania

Latvia

Estonia

40

Long – term capital inflows after/before EU negotiations

For those countries in which the ratio is above “one” long – term capital inflows increased after the start of EU negotiations.

0 1 2 3 4 5 6 7 8

Turkey

Czech Rep.

Estonia

Latvia

Lithuania

Poland

Slovenia

Slovenia

Poland

Lithuania

Latvia

Estonia

Czech Rep.

Turkey

41

International risks are also falling

0

10

20

30

40

50

1/ 31/ 2002 1/ 31/ 2003 1/ 31/ 2004 1/ 31/ 2005 1/ 31/ 2006

Chicago Board of Exchange Volatility Index (VIX)

The fall in international investment risks, motivated the investment motivation in high return emerging markets.

42

We observe a fall in the risk premium for Turkey

EMBI presents the risk premium that Turkey pays in terms of foireng currency borrowing.

Turkey's Risk Premium

0

2

4

6

8

10

12

43

2003 2004 2005e 2006fCurrent Account 117.2 150.7 233.3 224.9Foreign Direct Investment 96.7 136.8 135.8 154.8Portfolio Investment 36.8 37.8 61.5 50.2Commercial banks 27.7 62.1 78.4 49.1Non-bank Private Sector 63.9 81.8 82.6 67.8Official Flows -20.8 -27.4 -64.8 -15.5Others -53.6 -44.8 -116.9 -118.5Increase in Rezerves (-) -267.9 -397.1 -409.8 -412.7

Current Account -1.3 6.2 19.1 3.1Foreign Direct Investment 6.2 23.1 20 41.1Portfolio Investment 2 4.8 15.5 19.4Commercial banks 27.3 38.4 54.7 26.3Non-bank Private Sector 30.7 47.3 53.6 42Official Flows -3.4 -9.2 -35.7 -12.8Others -25.4 -52.3 -40.1 -48.9Increase in Rezerves (-) -36.1 -58.4 -87.1 -70.3

Foreign Financing of Developing Countries

Emerging Countries in Europe

Current account deficits of developing countries doubled in the 2003 – 2005 period. Long – term capital inflows was the main instrument to finance the deficit.

44

Current account deficits in new and prospective EU members

Current account deficits and questions regarding its sustainability is not unique for Turkey.

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

perc

ent

of G

DP

Czech Rep. Estonia LatviaLithuania Slovakia Turkey

45

-10

-8

-6

-4

-2

0

2

4

6

8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

MacaristanPolonyaTürkiye

Current Account Deficits

46

5.4 7.6 12.1

24.9 25.8 26.5 27.135.6

48 51.8

236.5

0

20

40

60

80

100In

dia

Tu

rkey

Ru

ssia

Pol

and

Bra

zil

Mex

ico

Arg

enti

ana

Ch

ina

Cze

ch

Hu

ngr

y

Hon

g K

ong

FDI/GDP A comparison among countries (2003)

47

Financial Deepening and Capital Inflows Credit to Private Sector / GDP

0

5

10

15

20

25

30

1996

Q1

1996

Q3

1997

Q1

1997

Q3

1998

Q1

1998

Q3

1999

Q1

1999

Q3

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

48

The change in credit compositons

60

65

70

75

80

85

90Ja

n-03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

10

15

20

25

30

35

Real Sector CreditsHousehold Credits (Right Axis)

49

Real Interest Rates (Ex-post, CPI)

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005

20012002200320042005

50

Short – term interest rates

10

30

50

70

90

110

130

May

-01

Aug-0

1

Nov-0

1

Feb

-02

May

-02

Aug-0

2

Nov-0

2

Feb

-03

May

-03

Aug-0

3

Nov-0

3

Feb

-04

May

-04

Aug-0

4

Nov-0

4

Feb

-05

May

-05

Aug-0

5

Nov-0

5

Central Bank O/N

Benchmark Treasury Bond

Volatility in interest rates declined. Given inflation figures, real interest rates preserve their high levels.

51

60

80

100

120

140

160

180

200Ja

n-80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Real Exchange Rate Index (1995=100)

Capital inflows in floating exchange rate regime appreciates Turkish Lira.

52

Productivity and Unit Labor Costs

54

Coincidence of the take-off and the starting date of globalization:

-Technology, values, politics and economic institutions

55

Are developed countries benevolent towards developing countries?

Foreign Aid“Do Corrupt Governments Receive Less Foreign Aid?” (Alesina and Weder)

“US appears to give more assistance to more corrupt governments”! (which are mostly easier to persuade)

Even in the case of foreign aid, there is some significant concern of benefit and influence

56

Did the developed countries play by the rules of the WC while they were developing?

No.Ex.: US import tariffs in the second half of the 19th century higher than in many developing countries today.Regulations that developing countries face today were non-existent (Ex.: TRIPS increases prices of essential medicine in poor countries).

57

Can we learn from the successful countries?The Case of China:-trade regime: not liberalized significantly and became member of WTO only 2 years ago, still very protected-currency markets: not unified until 1994-financial markets: closed to foreigners until very recently-no significant privatization and no private property rights in the Western sense

58

Can we learn from the successful countries? (continued)

China obviously violated most of the “rules” of globalization set by the Washington Consensus.

Instead, it focused on “institutional innovations suited to its local conditions”:-household responsibility system-township and village enterprises-special economic zones-two-track pricing regime, etc…

59

Caution: “Institutional innovations do not travel well (Rodrik)!” Mimicking China will most probably will not work for most of the countries.Success strategies vary significantly between different countries.Need home-grown strategies and active policy innovations rather than a consensus.“Global integration is not a substitute for a sound country-specific development strategy”. Globalization is no short cut, but can become rather a dead end if governed badly.

60

Shall we give up on “globalization”?

No. world markets are a very vital source of capital and technology, which can provide a set of opportunities for the developing countries.

What needs to be changed is how globalization is “governed”!

developing countries need to have autonomy for developing their own way to integrate their economies to the world economy.

61

How to develop a successful growth strategy?

a la Rodrik:

Two crucial elements:

An investment strategy, and

An institution-building strategy

combination of “carrots and sticks” policies

+

pushing for “international labor mobility”

62

Limitations of the Rodrik Plan:

“The trilemma of global economic governance1.Cannot have nation states, democracy and full economic integration simultaneously.2.Shallow integration, “thin” set of rules more appropriate and realistic.3.Policy autonomy for LDCs valuable”(from Rodrik)

63

Caution!

We cannot conduct controlled experiments in economics.Experimentation and self-discovery is costly (both politically and economically).Some developing countries which have already been disappointed by the results that WC generated cannot afford costly “trial and error” approaches and risky innovations.

64

Where are we today regarding “globalization”?

It has been more than four years since Stiglitz published his “Globalization and Its Discontents” where he was calling for action towards change.Dani Rodrik has also been advocating (for a while) for departure from the WC and he has been warning clearly that the AWC is also bound to cause disappointments for the developing countries.

65

Where are we today regarding “globalization”? (continued)

However, since the Fall of 2001, the world’s attention has been drawn away from the debate of how to govern “globalization” correctly.Regionalism and unilateralism came into the foreground (sharp reductions in international movement of capital and labor).This could be an opportunity for the developing countries.Time for experimentation, for implementing gradual and narrow ranged reforms and investing in know-how.

66

What else could be done?

determine the reasonable framework of experimentation (with disciplined and systematic economic analysis)

work on “mapping desirable institutions to initial structural conditions and political economy” (case studies) – enhances the multiplicity of alternatives instead of “one size fits all”

work on a “narrow range of policy reforms and institutional arrangements”

self-confident political leadership with a strong political and social base (working democracy)

67

What else could be done? (cont’d)

target high economic growth in the short-run with narrow ranged policy reforms and institutional arrangementsand use the high growth period for building high quality institutions

strengthen the institutional base of marketsavoid growth collapses

68

Not everybody agrees!

Sachs “Institutions Don’t Rule” (2002)

geography is more important

malaria risk

But then, policy implications don’t matter a whole lot (not much one can do about geography).

69

Partial association between income and distance from equator

(Source: Rodrik)

e( lg

dp85

| X

,dis

tanc

e )

+ b*

dist

ance

distance.002533 .709911

-1.35559

2.05646

UGANDA

GABON

KENYAZAIRE

SINGAPOR

ECUADOR

TANZANIA

MALAYSIACONGO

COLOMBIA

IVORY CO

SURINAME

GUYANA

TOGO

LIBERIA

NIGERIA

INDONESI

PAPUA N.

GHANA

SRI LANK

SIERRA L

ANGOLA

ETHIOPIA

PANAMA

VENEZUEL

COSTA RI

TRINIDAD

SOMALIA

CAMEROON

GUINEA

PERU

BURKINA

NICARAGU

GUINEA-B

MALI

ZAMBIA

GAMBIA

THAILAND

EL SALVA

NIGER

PHILIPPI

SUDAN

HONDURAS

GUATEMAL

SENEGAL

BOLIVIA

YEMEN

MALAWI

MEXICO

MYANMAR

ZIMBABWEJAMAICA

MOZAMBIQ

DOMINICA

HAITI

MADAGASC

BRAZIL

BOTSWANA

HONG KON

BANGLADE

BAHAMAS

TAIWAN

INDIA

PARAGUAYSOUTH AF

CHINA

EGYPT

PAKISTAN

JORDANISRAEL

AUSTRALI

SYRIA

CHILEMOROCCO

U.S.A.

URUGUAYCYPRUSJAPANMALTA

ARGENTIN

TUNISIA

NEW ZEAL

SPAIN

KOREA, R

GREECE

PORTUGALTURKEY

CANADA

YUGOSLAV

ITALY

SWITZERL

HUNGARY

MONGOLIA

AUSTRIA

FRANCE

LUXEMBOU

POLANDBELGIUM

GERMANY,U.K.

NETHERLA

IRELAND

DENMARKSWEDENNORWAY

FINLANDICELAND

70

Partial association between income and quality of institutions (Source: Rodrik)

e(

lgd

p8

5 |

X,ic

rge

80

) +

b*i

crg

e8

0

institutions2.27083 10

-.815427

2.64108

BOLIVIA

HAITI

EL SALVA

SUDAN

BANGLADE

GUATEMAL

GUYANA

MONGOLIA

LIBERIA

PHILIPPI

UGANDA

ZAIRE

NICARAGU

MALI

SURINAMESYRIA

NIGERIA

GUINEA-B

PERU

HONDURAS

PANAMA

YEMEN

INDONESI

CONGO

GHANA

SOMALIA

MYANMAR

JORDAN

PAKISTAN

ZAMBIA

ANGOLA

ARGENTIN

MOROCCO

SRI LANK

TOGO

EGYPTPARAGUAY

ETHIOPIA

GUINEA

ZIMBABWE

MALAWI

DOMINICA

TUNISIA

TANZANIAMADAGASC

JAMAICA

YUGOSLAV

SENEGAL

BURKINA

MALTA

POLAND

URUGUAY

MOZAMBIQ

TURKEY

COLOMBIAGABON

MEXICO

ECUADOR

SIERRA L

COSTA RIGREECE

VENEZUEL

KENYA

GAMBIA

CAMEROON

CHINA

INDIA

NIGER

CYPRUS

TRINIDAD

ISRAEL

THAILAND

CHILE

BRAZIL

KOREA, R

IVORY CO

MALAYSIA

SOUTH AF

BOTSWANA

BAHAMAS

PAPUA N.

HUNGARY

SPAIN

PORTUGAL

HONG KON

ITALY

TAIWAN

IRELAND

SINGAPOR

FRANCE

U.K.

JAPAN

AUSTRALI

AUSTRIA

ICELAND

GERMANY,

NORWAY

NEW ZEAL

SWEDEN

CANADA

DENMARKFINLANDBELGIUM

U.S.A.

NETHERLA

SWITZERL

LUXEMBOU

71

Partial association between income and trade (Source: Rodrik)

e(

lgd

p8

5 |

X,o

pe

n )

+ b

*op

en

open13.16 318.07

-1.45529

1.81157

MYANMAR

INDIA

ARGENTINU.S.A.

MOZAMBIQ

SIERRA L

BRAZIL

CHINATANZANIA

GHANASUDAN

UGANDA

GUATEMAL

JAPAN

SOMALIA

MEXICO

BANGLADE

COLOMBIA

NIGERIA

BOLIVIA

MADAGASC

PAKISTAN

ETHIOPIA

POLAND

AUSTRALINICARAGU

SYRIA

HAITI

PERU

VENEZUEL

INDONESI

SPAIN

TURKEY

PHILIPPI

ITALY

FRANCE

ECUADOR

URUGUAY

YEMEN

PARAGUAY

THAILAND

NIGER

KENYA

EGYPT

EL SALVA

BURKINA

ZAIRE

CHILE

GREECE

MALAWI

HONDURASCANADA

SOUTH AF

ZIMBABWE

U.K.

FINLANDCAMEROON

YUGOSLAV

MOROCCOGERMANY,

TRINIDAD

GUINEA-B

SRI LANK

COSTA RI

DOMINICANEW ZEAL

KOREA, R

SWEDEN

ANGOLA

SENEGAL

PANAMA

TUNISIA

GUINEA

DENMARK

MALI

ZAMBIA

SWITZERL

PORTUGALIVORY CO

LIBERIA

AUSTRIA

ICELANDHUNGARY

MONGOLIA

SURINAME

ISRAEL

NORWAY

GAMBIA

PAPUA N.

TAIWAN

GABON

MALAYSIA

TOGO

CYPRUSGUYANA

CONGOJORDAN

NETHERLA

IRELANDBOTSWANA

BAHAMAS

JAMAICABELGIUM

MALTA

HONG KON

LUXEMBOU

SINGAPOR

72

ReferencesAlesina, Alberto and Weder, Beatrice, “Do Corrupt Governments Receive Less Aid?”, May 1999, NBER working paper.

Becker, Gary, “When Globalization Suffers, the Poor Take the Heat”, April 21st, 2003, Business Week,.

O’Rouke, Kevin and Williamson, Jeffery, “When Did Globalization Begin?”, April 2000, NBER working paper.

Rodrik, Dani, “In Search of Prosperity: Analytic Narratives on Economic Growth”, Edited and with an introduction by Dani Rodrik. Princeton University Press, 2003.

Rodrik, Dani, “Globalization for Whom?”, July 2002. Published in Harvard Magazine.

Rodrik, Dani, “After Neoliberalism, What?”, August 2002. Remarks at a conference on Alternatives to Neoliberalism.

Rodrik, Dani, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," (with Francisco Rodríguez), Macroeconomics Annual 2000, eds. Ben Bernanke and Kenneth S. Rogoff, MIT Press for NBER, Cambridge, MA, 2001.

Rodrik, Dani, “Has Globalization Gone Too Far?”, Institute for International Economics, Washington, DC, 1997.

73

ReferencesSachs, Jeffery, “Institutions Don’t Rule: A Refutation of Institutional Fundamentalism”, December 2002, Working Paper, Columbia University. Williamson, John, “What Should the World Bank Think about the Washington Consensus?”, The World Bank Research Observer Volume 15, Number 2, August 2000

74

FDI and DevelopmentWhere do We Stand?

Kiichiro Fukasaku Tokyo, 4 December 2001

75

Structure of the Presentation

Introduction Some stylised facts Putting theory at work Empirical evidence Main conclusions

76

Introduction

FDI is one of the defining features of globalisation over the last two decades.

Heterogeneity of FDI (by sector, by destination and by motivation of investors)

Renewed interest in the development dimension of FDI Further trade and investment liberalisation New growth theory Data and measurement

77

Some Stylised Facts

78

Trends in World Merchandise Exports and FDI Outflows (average annual growth rates)

-5

0

5

10

15

20

25

30

35

1981-85 1986-90 1991-95 1996-2000

Period

Gro

wth

(%)

World merchandise exports World FDI outflows

79

Trends in FDI Inflows, Cross-border M&As and Privatisation($ billion)

0

200

400

600

800

1000

1200

1400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

$ B

illi

on

FDI Inflows Cross-border M&As Privatisation

80

Share of Manufacturing in Total FDI Stock- the United States, 1986 and 2000

0

10

20

30

40

50

60

70

80

China Malaysia Singapore ChineseTaipei

Korea Philippines Thailand Japan Hong Kong Indonesia

Asian Host Economies

Per

cen

t

1986

2000

81

Net FDI Source and Recipient Countries ($Billion, three year average 1998-2000)

-150 -100 -50 0 50 100 150

United Kingdom

France

Switzerland

Japan

Spain

Netherland

Denmark

Finland

Italy

Indonesia

Korea, Rep.

Sweden

Australia

Poland

Ireland

Mexico

Argentina

Brazil

China

United States

82

Net FDI Source and Recipient Countries ($Billion, three year average 1991-1993)

-15 -10 -5 0 5 10 15 20 25 30

Japan

United States

Germany

Hong Kong, China

France

Netherland

Switzerland

United Kingdom

Italy

Chinese Taipei

Thailand

Australia

Argentina

Belgium-Luxembourg

Bermuda

Singapore

Malaysia

Mexico

Spain

China

83

FDI-growth nexus FDI-trade linkages FDI and technology transfer FDI, privatisation and corporate

governance Host-government policies for

attracting FDI

Five Main Areas of Interest

84

A Critical Question forEmpirical Analysis

Why are some developing countries more able to take advantage of the gains from trade and investment liberalisation than others?

85

Putting theory at work

86

Benefits of FDI for Host Countries

FDI brings financial resources for domestic capital formation.

FDI increases production, employment and trade, quantitatively and qualitatively.

FDI transfers technologies, hard and soft.

87

International transfer oftechnology through:

Imports of new capital and differentiated intermediate goods

Learning by exporting Trade in technology (patents,

licensing) FDI

88

FDI transfers technologies through:

Intra-firm spillovers within a MNE Intra-industry spillovers in a host country– Vertical linkages– Horizontal linkages (reverse engineering,

competition)– Training workers, investing in human resources

and R&D Inter-industry spillovers in a host country

89

Growth impact of FDI

LKKAFY FFHH ,,

• Short-term impact of KF on Y (FF > 0)‘Crowding in or out’ ? (FHF > 0 or < 0)

• Long-term impact of KF on Y through: A,H,F and

90

Empirical evidence

91

FDI-growth nexus (1)

A majority view: FDI does make a positive contribution to both income growth and TFP in host countries.

Reverse causality, omitted variables, heterogeneity.

Threshold externalities: Developing countries need to have reached a certain threshold of development before being able to capture the benefits associated with FDI (see next).

92

FDI-growth nexus (2)

Income level (Blomström et al. 1994) Educational attainment (Borenzstein

et al. 1998) Local technological capabilities (de

Mello 1999, Xu 2000) Local financial markets (Alfaro et al.

2001, Hermes-Lensink 2000) Crowding in or out (Asia vs. other

areas, Agosin-Mayer 2000)

93

FDI-trade linkages (1)

• A majority view: FDI and trade are more complementary than substituting in the North-South context.

• Data constraints (US, Japan and Sweden)

• Aggregation, causality and endogeneity

• Conceptual issues (volume vs. price)

94


Aggregation (product, industry and macro) product-level substitution (Blonigen

1999) industry-level complementarity (Kawai-

Urata 1995) Causality (time precedence, inconclusive) Endogeneity (FDI-exports both

endogenous) Costs of operating abroad (Amiti-Wakelin

2000, Clausing 2000, Fukasaku-Kimura 2001).

95


Horizontal FDI tends to substitutes exports, depending on the degree of scale economies relative to trade costs. On the other hand, vertical FDI tends to complement exports, as the home country supplies headquarters services and/or intermediate products to the host country (the ‘knowledge-capital’ model of the MNE).

96

FDI and technology transfer (1)

Intra-firm technology transfer: the host-country conditions matter (e.g. income level, past experience on industrialisation - Urata-Kawai 2000)

Efficiency gains from technological spillovers to local firms would not occur automatically.

Competition matters in local markets (Okamoto, 1999)

97


Blomström-Persson (1983, Mexico 1970) Haddad-Harrison (1983, Morocco 1985-89) Blomström-Sjöholm (1998, Indonesia 1991) Kokko et al. (1996/2001, Uruguay 1988) Aitken-Harrison (1999, Venezuela 1976-89) Djankov-Hoekman(1999, Czech, 1992-96) Haskel et al. (2001, UK 1973-92)

98


Both relative and absolute technological capabilities - Perez (1998, Italy 1989-91)Foreign presence affects positively the productivity growth of domestic firms in specialist and scale-intensive sectors (e.g. chemical, machinery, metal, automobile), but not in science-based sectors (e.g. pharmaceutical, IT/electronic).

99

Privatisation

Privatisation have provided a major channel of FDI inflows in both E. Europe and Latin America in the 1990s.

Initial assessment in both OECD and non-OECD countries: overall positive.

But, implementation and regulatory challenges are great.

Power crisis in California, railway crisis in UK.

100

Host-government policies (1)

The importance of host-government policies for attracting FDI and reaping full benefits associated with FDI is clear.

Motives of foreign investors and host-country “fundamentals’

Costs of investment incentives

101

Host-government policies (2)

A comparative survey of FDI regimes in Asia and Latin America

Legal and policy framework for FDI appears to be more open in Latin America than in Asia.

Wide differences across countries in Asia in terms of control at the entry phase and negative lists as well as the approach to IPRs

102

Main conclusions (1)

Host-government policies matter. More discussion is needed as to

how policies work (or do not work). Traditional incentive-based

measures are costly for developing countries facing severe resource constraints.

103

Main conclusions (2)

• The establishment of a multilateral framework of rules on FDI helps increase the collective welfare of host countries (prisoners’ dilemma).

• A regional approach to taking more constructive, rules-based policies to FDI: EU, NAFTA, MERCOSUR, FTAA, ASEAN Investment Area, APEC.

104

Trade openness and economic growth:a cross-country empirical investigation

This paper demonstrates that trade liberalization does not have a simple and

straightforward relationship with growth using a large number of openness

measures for a cross section of countries over the last three decades.

We use two groups of trade openness measures. The regression results for

numerous trade intensity ratios are mostly consistent with the existing literature.

However, contrary to the conventional view on the growth effects of trade

barriers, our estimation results show that trade barriers are positively

and, in most specifications, significantly associated with growth,

especially for developing countries and they are consistent with the

findings of theoretical growth and development literature.

challenges of globalization: foreign direct investment and trade

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