Forex and Growth

8/8/2019 Forex and Growth

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Victor Polterovich, Vladimir Popov Victor Polterovich, Vladimir Popov

ACCUMULATION OF FOREX AND ACCUMULATION OF FOREX ANDLONG TERM ECONOMIC GROWTHLONG TERM ECONOMIC GROWTH


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In many countries accumulation of FOREXIn many countries accumulation of FOREXgoes hand in hand with economic growthgoes hand in hand with economic growth

Mauritius - Annual growth rates and reserves /GDP ratios (5-year moving averages)

-4

-2

0

2

4

6

8

10

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

3

8

13

18

23

28

GDP per capita growth rates (left scale)

Res /GDP (right scale)


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Malaysia - Annual growth rates and reserves/GDP ratios (5-year moving averages)

1

2

3

4

5

6

7

1 9 6

0

1 9 6

2

1 9 6

4

1 9 6

6

1 9 6

8

1 9 7

0

1 9 7

2

1 9 7

4

1 9 7

6

1 9 7

8

1 9 8

0

1 9 8

2

1 9 8

4

1 9 8

6

1 9 8

8

1 9 9

0

1 9 9

2

1 9 9

4

1 9 9

6

1 9 9

8

13

15

17

19

21

23

25

27

29

31

33


Res/GDP (right scale)


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Chile - Annual growth rates and reserves /GDP ratios (5-year m oving averages)

-4

-2

0

2

4

6

8

1 9 6

0

1 9 6

2

1 9 6

4

1 9 6

6

1 9 6

8

1 9 7

0

1 9 7

2

1 9 7

4

1 9 7

6

1 9 7

8

1 9 8

0

1 9 8

2

1 9 8

4

1 9 8

6

1 9 8

8

1 9 9

0

1 9 9

2

1 9 9

4

1 9 9

6

1 9 9

8

0

5

10

15

20

25


Res/GDP (right s cale)


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China - Annual growth rates, terms of trade and reserves/GDP ratios (5-year moving averages)

-10

-5

0

5

10

15

1 9 6

0

1 9 6

2

1 9 6

4

1 9 6

6

1 9 6

8

1 9 7

0

1 9 7

2

1 9 7

4

1 9 7

6

1 9 7

8

1 9 8

0

1 9 8

2

1 9 8

4

1 9 8

6

1 9 8

8

1 9 9

0

1 9 9

2

1 9 9

4

1 9 9

6

1 9 9

8

100

100

100

100

100

100

100

100


Res/GDP (left scale)

Terms of trade (right scale)


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India - Annual growth rates, terms of trade and reserves/GDP ratios (5-year moving averages)

0

1

2

3

4

5

6

7

8

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

40

50

60

70

80

90

100

110

GDP per capita growth rates

Res/GDP



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Indonesia - Annual growth rates and rese rves/GDP ratios (5-year m oving averages)

-1

0

1

2

3

4

5

6

7

1 9 6

0

1 9 6

2

1 9 6

4

1 9 6

6

1 9 6

8

1 9 7

0

1 9 7

2

1 9 7

4

1 9 7

6

1 9 7

8

1 9 8

0

1 9 8

2

1 9 8

4

1 9 8

6

1 9 8

8

1 9 9

0

1 9 9

2

1 9 9

4

1 9 9

6

1 9 9

8

-1

1

3

5

7

9

11

13

15GDP per capita growth rates (left scale)



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Sri Lanka - Annual growth ratesand reserves /GDP ratios (5-year moving averages)

60

70

80

90

100

110

120

130

140

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

0

2

4

6

8

10

12Res/GDP (right scale)

GDP per capita growth rates (right scale)

Terms of trade index (left scale)


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But in other countries the relationship betweenBut in other countries the relationship betweenFOREX accumulation and growth is not that obvious...FOREX accumulation and growth is not that obvious...

Thailand - Annual growth rates , terms of trade and reserves/GDP ratios (5-year moving averages)

0

5

10

15

20

25

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

40

60

80

100

120

140

160


Res/GDP (left scale)



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Korea - Annual growth rates and reserves/GDP ratios (5-year moving averages)

3

4

5

6

7

8

9

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

3

4

5

6

7

8

9

10

11




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Sing po nnu g o h nd io o ing g

p pita gr o th rates (left scale)



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Egypt - algrowt r ates a r eserves/G r at os ( -year ovingaver ages )

1

2

3

4

5

6

7

8

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

0

5

10

15

20

25

30

G per capita growt r ates ( eft scale)

es /G (right scale)


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But in other countries the relationship between FOREX But in other countries the relationship between FOREX accumulation and growth is not that obvious...accumulation and growth is not that obvious...

Botswana - Annual growth rates and reserves /GDP ratios (5-year moving averages)

1

3

5

7

9

11

13

15

17

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

10

20

30

40

50

60

70

80

90

100

110GDP per capita growth rates (left scale)

Res/GDP (right s cale)


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RussiaRussia - - accumulation of FOREX and growthaccumulation of FOREX and growth

Fig. GDP growth rates (%, right scale) and year end gross foreign exchangereserves , including gold, bln. $, left log scale

1

10

100

1000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005-15

-10

-5

0

5

10

15

GDP growth rates

FOREX


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Fig. 3.3. Average ratio of gross international reserves to GDP and average annugrowth rates of GDP per capita in 1960-99, %,

R2 = 0,2396

-2

0

2

4

6

0 20 40 60

Average ratio of gross international reserves to GDP

A v e r a g e a n n u a

l g r o w

t h r a

t e s

o f G D P

e r c a

i t a

Singapore

Chad

Korea

JapanMalaysia

ThailandPortugal

Sierra-LeoneVenezuela

HK

Botswana

China

Switzerland


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Fig. 3.7. Increase in the ratio of gross international reserves to GDP, p.p., and averageratio of gross capital investm ent to GDP in 1960-99, %, for ... countries

R2 = 0,1353

5

10

15

20

25

30

35

40

-20 -10 0 10 20 30 40 50 60 70 80

Increase in the ratio of gross international reserves to GDP, p.p.

A v e r a g e r a

t i o o

f g r o s s c a p i t a

l

i n v e s

t m e n

t t o G D P

Singapore

Chile

Guyana

Korea

Japan

PhilippinesSierra-Leone

China (est.)

GabonAlgeria

Congo,Rep.


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Fig. 3.3A. Average ratio of FOREX to GDP and GDP per capita growth rates in 1960-9

R2 = 0,0001

1

1,5

2

2,5

3

3,5

4

4,5

0 5 10 15 20 25 30 35

Average ratio of reserves to GDP in 1960-99, %

G D P p e r c a p

i t a a v e r a g e a n n u a

l

r o

w t h r a

t e s

i n 1 9 6 0

- 9 9

Switzerland

Portugal

Japan

Ireland

New Zealand


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Table 2. Some macroeconomic indicators for rapidly growing countries in 1960-99Countries Annual average

GDP per capitaGrowth rate, %

Increase in

FER/ GDP ratio,1960-99

Average

FER/GDPratio, %

Highest FER/

GDP ratio in1960-99, %

Average FER in

months of import,1975-99Botswana 6,13 86,93

(1976-99)68,89(1976-99)

121,82(1998)

13,64

China 4,94 13,72

(1977-99)

8,68

(1977-99)

16,31

(1999)

7,36

Hong Kong,China

5,12 27,59(1990-99)

42,74(1990-99)

60,56(1999)

3,61

Japan 4,18 2,37 3,42 6,76(1999)

3,54

Korea, Rep. 5,82 14,17 5,89 18,21(1999) 2,11

Singapore 5,87 72,76 60,55 90,52(1998)

4,76

Thailand 4,51 14,44 14,75 27,97

(1997)

4,47


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Literature overviewLiterature overviewRodrik (1986) developed a model demonstrating howRodrik (1986) developed a model demonstrating how

disequilibrium exchange rate in the presence of foreign tradedisequilibrium exchange rate in the presence of foreign tradeexternalities could lead to the acceleration of growth.externalities could lead to the acceleration of growth.In this early paper Rodrik assumes the import externality,In this early paper Rodrik assumes the import externality,which is used via the overvaluation of the exchange rate thatwhich is used via the overvaluation of the exchange rate thatstimulates imports of machinery and equipment.stimulates imports of machinery and equipment.

It was shown for developing countries that overvaluation ofIt was shown for developing countries that overvaluation of

the exchange rate is detrimental for economic growth bythe exchange rate is detrimental for economic growth byincluding the variable that characterizes the undervaluation ofincluding the variable that characterizes the undervaluation ofthe exchange rate into standard growth regressions (Dollar,the exchange rate into standard growth regressions (Dollar,1992; Easterly, 1999).1992; Easterly, 1999).

Aghion, Bacchetta, Ranciere, Rogoff (2006) examine mainly Aghion, Bacchetta, Ranciere, Rogoff (2006) examine mainlythe impact of volatility of the real exchange rate on productivitythe impact of volatility of the real exchange rate on productivitygrowth, but also look at the impact on growth ofgrowth, but also look at the impact on growth ofunder/overvaluation of the exchange rate (the measure ofunder/overvaluation of the exchange rate (the measure ofovervaluation is basically the residual from the regression ofovervaluation is basically the residual from the regression ofRER on the GDP per capitaRER on the GDP per capita to control for the Balassato control for the Balassa- -Samuelson effectSamuelson effect and a couple of regional dummies. They findand a couple of regional dummies. They findthat overvaluation of RER negatively affects economic growth,that overvaluation of RER negatively affects economic growth,especially in poorer countries.especially in poorer countries.


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Literature overview: BalassaLiterature overview: Balassa- -

Samuelson effect Samuelson effect Grafe and Wyplosz (1997) argue that even if theGrafe and Wyplosz (1997) argue that even if theappreciation of the exchange rate in transition economiesappreciation of the exchange rate in transition economiesundermines business profits (in the export sector and inundermines business profits (in the export sector and inindustries that compete with imports), this should notindustries that compete with imports), this should notnecessarily lead to a deterioration of the current account,necessarily lead to a deterioration of the current account,since the need for capital accumulation in transitionsince the need for capital accumulation in transitioneconomies declineseconomies declines - - that is, they can operate with lowerthat is, they can operate with lowersavings ratios than they could before the transition.savings ratios than they could before the transition.

Halpern and Wyplosz (1997) argue that real appreciation inHalpern and Wyplosz (1997) argue that real appreciation intransition economies will continue until the transition istransition economies will continue until the transition isover, which may be decades away.over, which may be decades away. Another study (ESE, 2001) found evidence of Balassa Another study (ESE, 2001) found evidence of Balassa- -Samuelson effect in transition economies of Eastern EuropeSamuelson effect in transition economies of Eastern Europeand former Soviet Union in the 1990s. The period is tooand former Soviet Union in the 1990s. The period is tooshort, however, and the increases in RER that actually tookshort, however, and the increases in RER that actually tookplace in most transition economies may be the reaction toplace in most transition economies may be the reaction tothe overshooting initial devaluations that occurred in thethe overshooting initial devaluations that occurred in thebeginning of the 1990s, when convertibility was introduced.beginning of the 1990s, when convertibility was introduced.


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BalassaBalassa- -Samuelson effect: real exchange rate (nationalSamuelson effect: real exchange rate (nationalprices for nonprices for non- -tradables as compared to foreign prices)tradables as compared to foreign prices)

increase with the growth of GDP per capitaincrease with the growth of GDP per capita

Fig. 3.6. PPP GDP per capita in 1999 and the ratio of dom es tic to US prices of tradablesand non-tradables in 1993, %

R2 = 0,6582

R2 = 0,723

0

20

40

60

80

100

120

140

160

180

200

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

PPP GDP per capita in 1999, dollars

R a t i o o f d o m e s t i c t o U S p r i c e s o f

t r a d a b l e s a n d n o n - t

r a d a b l e s

, % Cloth-dom/USHealth-dom/US


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Real exchange rate of national currencies versus theReal exchange rate of national currencies versus theUS dollar for major groups of countriesUS dollar for major groups of countries

Fig. 3.5. Ratio of official to PPP exchange rate (LCU per $1) in 1975-99 for groups of countries (unwe ighted average)

20

30

40

50

60

70

80

90

100

110

120

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

R a t i o o f o f f i c i a l t o P P P e x c h a n g e r a t e

, %

Averagedeveloped

FAST RICH 6

Allcountries

Averagedeveloping

FAST POOR10


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Table 1. Ratio of actual exchange rate of national currencies in $US to PPP forcountries in 1993, % (figures in brackets - for 1996)

Countries/regions Ratio, % Countries/regions Ratio, %OECD* 116 Transition economies* 81

- Germany 126 (133) -Central Europe* 54- Japan 165 (158) - Bulgaria 30 (25)- U.S. 100 (100) - Croatia 65 (94)- Portugal 73 (77) - Czech Republic 36 (48)

Developing countries* 44 - Hungary 62 (63)-Asia* 36 - Poland 48 (59)

- India 24 (23) - Romania 31 (34)- Indonesia 30 (33) - Slovak Republic 37 (47)- Korea 72 (81) - Slovenia 69 (78)- Malaysia (44) -USSR* 91- Philippines 35 (34) -Armenia (20)

- Thailand 43 (45) - Azerbaijan (32)- Turkey 54 (48) - Belarus 8 (30)

-Latin America* 46 - Estonia 29 (64)- Argentina (90) - Georgia (29)**- Brazil (70) - Kazakhstan (39)- Chile (43) - Kyrghyzstan (19)- Mexico 58 (45) - Latvia 27 (50)- Peru (56) - Lithuania 19 (47)

- Venezuela (36) - Moldova 14 (28)-Middle East* 83 - RUSSIA 26 (70)- Kuwait (67) - Tajikistan (3)-Saudi Arabia (68) - Turkmenistan (45)

- United Arab Emirates (100) - Ukraine 19 (39)-Africa* 37 - Uzbekistan (22)

- Ethiopia (20) China 22 (20)- Mozambique (17) Mongolia (21)- Nigeria 36 (90) Vietnam (20)

* 1990. ** 1995.


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How the accumulation of FOREX is financed?How the accumulation of FOREX is financed?

Formally, the following identities hold:Formally, the following identities hold:

M=M= FOREX+FOREX+ BBCBCBBD =BD = BBCBCB ++ BBPP

FOREX =FOREX = M + BS +M + BS + BBPP ,,

wherewhere FOREXFOREX increase in foreign exchangeincrease in foreign exchangereserves,reserves,MM increase in money supply,increase in money supply,

BSBS budget surplus (BDbudget surplus (BD budget deficit),budget deficit),BBPP increase in bonds held by the public,increase in bonds held by the public,BBCBCB -- increase in bonds held by the central bank.increase in bonds held by the central bank.

The last identity implies that the increase in foreignThe last identity implies that the increase in foreignexchange reserves can be financed by the increase inexchange reserves can be financed by the increase inmoney supply, i.e. inflation tax on everyone (money supply, i.e. inflation tax on everyone ( M),M),budget surplus (BS), accumulation of debt held by thebudget surplus (BS), accumulation of debt held by the

public (public ( BBPP).22).22


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How the accumulation of FOREX is financed?How the accumulation of FOREX is financed?Table 3. Factors explaining the level of FER in 1960-99 and the sources of FER accumulation - cross country OLS regression results

Dependent variable Averageratio of

FER toGDP in1960-99,%

Averageratio of

FER toGDP in1960-99,%

Increase inthe ratio of FER to GDPfrom 1960to 1999, p.p

Increase inthe ratio of FER toGDPfrom 1960to 1999, p.p

Increase inthe ratio of FER to GDfrom 1960to 1999, p.p

Number of observations 172 122 62 58Average budget surplusin 1960-99, % of GDP

0.55* 1.0*** 1.07***

Average governmentdebt in 1960-99, % of GDP

0.08* 0.09**

Average annual inflation

(GDP deflator), 1960-99, %

0.05 0.07

Average import of goodsand services, % of GDP

0.29*** 0.32***

2000 investmentclimate index, ICRG, %

0.18**

Constant 0.09 -13.1** 7.1*** 5.6** 4.5*

Adjusted R 2

26 32 2 8 7*, **, *** - Significant at 10%, 5% and 1% level respectively.


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Fig. 3.1. Fore ign exchange res er ves as a % of GDP, average ratios for 1960-99

LibyaSaudi Arabia

MalaysiaKuw ait

ThailandIreland

MauritiusIsraelIran(74-99)

UAEChile

EgyptChina(77-99)

NigeriaItaly

PhilippinesIndon(67-99)

FranceKorea, Rep.

Germ(91-99)Turkey(68-99)

Argentina

UKBrazilIndiaRussia(93-99)

MexicoJapan

Congo, Rep.

HK(90-99)

US

Pakistan

SingaporeBots w ana (1976-99)

0 10 20 30 40 50 60 70 %


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Fig. 3.2. Share of gold in reserves inthe w orld and inthe US(%,left scale) and the ratio of f oreign exchange reservesto GDP inthe world(%,right scale)

0

10

20

30

40

50

60

70

80

90

100

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

S h a r e o f g o

l d i

n r

e s e r v e s ,

%

0

1

2

3

4

5

6

7

8

9

10Share of gold in reserves

in the US(left s ale)

atio of reserves to GDP (right scale)

Share of gold in reservesin the world(left scale)

atio of net reserves (excluding gold) to GDP(right scale)


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Fig. 3.2A. Average ratio of imports to GDP and average ratio of reserves to GDP in 1960-99, %

R2 = 0,2611

0

1020

30

40

50

60

70

80

90

100

0 20 40 60 80 100 120 140 160 180

Import as a % of GDP

F E R a s a

% o

f G D P

Lebanon

SingaporeBotswana

Malta


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W hy a country keeps FOREX?W hy a country keeps FOREX?The standard formula for explaining FER is:The standard formula for explaining FER is:

, where, whereY Y is income,is income,

O O is the measure of openness of the economyis the measure of openness of the economy(external trade to GDP ratio),(external trade to GDP ratio),is the volatility of openness,is the volatility of openness,

ii is the opportunity costs of holding foreignis the opportunity costs of holding foreignexchange reserves (difference between theexchange reserves (difference between the

interest rate earned on FER invested into shortinterest rate earned on FER invested into short- -term low risk securities and interest rate onterm low risk securities and interest rate onalternative investment).alternative investment).The collapse of the BrettonThe collapse of the Bretton- -Woods fixedWoods fixedexchange rates system in 1971 did not have aexchange rates system in 1971 did not have alarge impact on the demand for FER (Grennes,large impact on the demand for FER (Grennes,1984, Ch. 22).1984, Ch. 22).

H K FE W iOOY FER !

OW


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What are the determinants of theWhat are the determinants of theaccumulation of FOREX?accumulation of FOREX?

delta R = 38delta R = 38 11.4logYcap75 + 0.1(T/Y) +11.4logYcap75 + 0.1(T/Y) +0.24(delta T/Y)0.24(delta T/Y)

(R(R22=34%, N=82, all coefficients significant at 0.1%=34%, N=82, all coefficients significant at 0.1%

level).level).

Then we considered the residual as the policyThen we considered the residual as the policy- -induced change in reserves.induced change in reserves.

Afterwards we used the Afterwards we used the policy induced change inpolicy induced change inforeign exchange reservesforeign exchange reserves as one of theas one of theexplanatory variables in growth regressionsexplanatory variables in growth regressionstogether with import taxes and change intogether with import taxes and change in

government revenues/GDP ratiogovernment revenues/GDP ratio


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Does policy induced FOREXDoes policy induced FOREXaccumulation influence growth?accumulation influence growth?

GROW TH= CONST.+CONTR.VAR.+ T(0.06GROW TH= CONST.+CONTR.VAR.+ T(0.06 0.0027Ycap75us)+ Rpol (0.070.0027Ycap75us)+ Rpol (0.07- -0.006T)0.006T)The control variables are the rule of law index The control variables are the rule of law index for 2001, the size of the economy in 1975, andfor 2001, the size of the economy in 1975, andthe population growth rates in 1975the population growth rates in 1975- -99.99.N=74, R2=44%, all coefficients are significant at N=74, R2=44%, all coefficients are significant at less than 10% level, except for coefficients of less than 10% level, except for coefficients of Rpol (11%) and the PPP GDP in 1975 (16%).Rpol (11%) and the PPP GDP in 1975 (16%).


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What determines the accumulation of FOREX?What determines the accumulation of FOREX? Another definition of policy Another definition of policy- -induced changes in FOREXinduced changes in FOREX

W e also experimented with another definitionof policy induced change in foreign exchangereserves, as a residual from regression linking theincrease in reserves to GDP ratio to the following

ratios: trade/GDP, increase in trade/GDP, externaldebt/GDP(ED/Y) and debt service/GDP(DS/Y):

N=59, R 2=36%, all coefficients significant at lessthan 7%.

)/(28.0)/(2.0)/(06.0)/(6.03.3 Y T Y T Y DY DS (!(


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GROW TH=CONST.+CONTR.VAR.+T(0.001RISK0.0038Ycap75us)+Rpol(0.23-0.014T),N=48, R 2 = 46, all coefficients significant at 7%

or less,control variables PPP GDP per capita in 1975and population growth rate.


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GROW TH = CONST. + CONTR. VAR. +GROW TH = CONST. + CONTR. VAR. +Rpol (0.10Rpol (0.10 0.0015Ycap75us)0.0015Ycap75us)

R2 = 56, N=70, all variables are significant at R2 = 56, N=70, all variables are significant at 10% level or less,10% level or less,where Ycap75uswhere Ycap75us PPP GDP per capita in 1975PPP GDP per capita in 1975as a % of the US level.as a % of the US level.It turns out that there is a threshold level of It turns out that there is a threshold level of GDP per capita in 1975GDP per capita in 1975 about 67% of the USabout 67% of the USlevel: countries below this level could stimulatelevel: countries below this level could stimulategrowth via accumulation of FER in excess of growth via accumulation of FER in excess of objective needs, whereas for richer countries theobjective needs, whereas for richer countries theimpact of FER accumulation was negativeimpact of FER accumulation was negative


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Does policy induced FOREX accumulation influence growth?Does policy induced FOREX accumulation influence growth?

Table 4a. Factors explaining the average growth rate of GDP per capita in 1975-99 - cross

country OLS regression results, robust estimates

Dependent variable Average growth rate of GDP per capita in 1975-99 Number of observations 92 77 90 90 90 70 70Average population growth rate in1975-99, %

-0.88***

-0.68**

-0.77***

-.086***

-0.76***

-1.22***

-0.93***

Log PPP GDP per capita in 1975, $US -1.16* -1.44** -1.15**1984-90 investment climate index,ICRG, %

0.06***

Average investment/GDP ratio in

1975-99

0.12

***

0.11

***Annual average inflation in 1975-99, % -0.01* -0.01

**-0.01**

-0.01** -0.01**

Total population in 1999, million 3*10 -09

***3*10 -09

***2*10 -09

**3*10 -09

**Population density in 1999, people per 1 sq. km

.0005***

.0003* .0007***

.0004***

Increase in the ratio of FER to GDPfrom 1975 to 1999, p.p.

0.037*

0.05**

0.040***

0.040**

0.032*

Increase in the ratio of FER to GDP,determined by objective factors according to equation (1)

0.068**

Policy-determined increase in the ratioof FER to GDP in 1975-99 - R( pol

0.10** 0.059*

Interaction term = (Policy-determined ithe ratio of FER to GDP in 1975-99 )*(Per capita PPP GDP in 1975, % of USlevel)

-0.0015**

Constant 2.8*** 2.9 0.11 2.65*** 0.2 7.3*** 3.0***Adjusted R 2 27 38 50 46 55 56 56*, **, *** - Si nificant at 10%, 5% and 1% level res ectivel .


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Ratio of official to PPP exchange rate in fast growing developing countries,1975-99 (over 3% a year increase in GDP per capita)

20

30

40

50

60

70

80

90

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

R a t i o o f o f f i c i a l t o P P P e x c h

a n g e r a t e

, %

ChileBotswana

MalaysiaEgypt, Arab Rep.MauritiusThailandFAST POOR 10

Sri LankaIndonesiaChinaIndia


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Ratio of official to PPP exchanger ate in fast gr owing developed countr ies, 1975-99 (over 3% a year incr ease in GDP per capita)

40

60

80

100

120

140

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

R a

t i o o

f o

f f i c

i a l t o P P P e x c

h a n g e r a t e

, %

Hong Kong, China

Luxembour g

Singapor e

Ir eland

FAST RICH 6

Cypr us

Kor ea, Rep.


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Table 5. Factors explaining the average ratio of domestic to US prices in country OLS regression resultsDependent variable = average ratio of domestic to US prices in 1975-99

Number of observations 89 78 78 72 (dev. oPPP GDP per capita in 1975 .006***2000 investment climate index,ICRG, %

1.00*** 1.37***

Increase in the ratio of FER toGDP from 1975 to 1999, p.p. -0.53** -.88*** -0.54* -.57***

Average ratio of trade to PPPGDP in 1980-99

.35*** .39*** .41***

Average external balance in 1975-99, % of GDP

1.37***

Net fuel imports, % of total imports -.27***Constant 33.8*** -17.3 162.7*** 39.7Adjusted R 2 64 53 45 62*, **, *** - Significant at 10%, 5% and 1% level respectively.


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Table 6. Correlation coefficients between prices of tradadbles and non- tradables (55observations)

All domesticto US prices,1980-99

Domestic pricesof clothing to US prices

Domestic pricesof healthcare toUS prices

1975 PPPcapita

All domestic to US prices, 1980-99 1Domestic prices of clothing to US

prices0.6681 1

Domestic prices of healthcare to US prices

0.7061 0.8392 1

1975 PPP GDP per capita 0.7009 0.8365 0.8946 1

Table 7. Factors explaining 1993 price levels of health care and education, clothing andfootwear Dependent variable Ratio of p

health care toclothing

Ratio of peducation toclothing

Ratio of health care pri

prices

Ratio of clothing and

prices to the U Number of observations 77 77 58 58PPP GDP per capita in 1999 .000647* .0008086* 0.0033*** 0.0032***Average ratio of domestic toUS prices in 1975-99

0.26** 0.28**

Increase FER/GDP ratio in1980-99

-0.33** -0.32 (T stat=-

Constant 38.93*** 34.57*** 17.95*** 41.52***

Adjusted R 2

23 23 78 64*, **, *** - Significant at 10%, 5% and 1% level respectively.

T bl 8 F t l i i g th g h f i t t i GDP i 1975 99


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Table 8a. Factors explaining the average share of investment in GDP in 1975-99 crosscountry OLS regression resultsDependent variable = average share of investment in GDP in 1975-99

Number of observations 79 79 79 72 59 (dev.only)

85 46 46 48 42

Log PPP GDP per capitaIn 1975

-.0008**

2000 investmentclimate index, ICRG, %

0.17***

0.17***

0.21***

0.27***

0.15***

0.23***

0.26***

0.24***

1984-90 investmentclimate index, ICRG, %

0.14***

0.14***

Increase in the ratio of FER to GDP from 1975To 1999, p.p.

0.15***

0.24***

0.22***

0.23***

0.19***

0.26***

Policy-determined in-Crease in the ratio of FER to GDP from 1975To 1999, p.p.

0.28***

0.22***

Ratio of prices for health-Care to prices for clothingIn 1993

-0.06***

-0.07***

-0.08***

-0.08***

Average external balanceIn 1960-99, % of GDP

-0.21***

-0.20**

Net fuel imports in 1960-99, % of total imports

-0.09***

-0.12***

-0.09***

-0.12***

-0.06***

-0.15***

-0.13***

-0.11***

Interaction term =(increase in reserves) x(foreign/domestic prices)x(external balance)

0.03* 0.03*

Constant 10.3***

9.5***

6.3**

33.8***

4.63 11.3***

10.7***

9.6***

11.5***

20.2***

Adjusted R 2

17 34 39 37 42 16 37 63 44 55*, **, *** - Significant at 10%, 5% and 1% level respectively.


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Investment/GDP ratio andInvestment/GDP ratio andexport/GDP ratioexport/GDP ratio

Fig. 3.8. Inves tment/GDP ratio and aver age ratio of fore ign trade to PPP GDP in 1980-99

R2 = 0,0611R

2

= 0,1359

0

20

40

60

80

100

120

140

160

180

5 15 25 35 45 55 65

Inves tment/GDP ratio in 1960-99 and in 1980-99

E x p o r t

/ G D P i n 1 9 6 0 - 9

9

0

50

100

150

200

250

300

350

400

T r a d e

/ G D P i n 1 9 8 0 - 9

i 9

Exp/GDP-av60-99

Trade/PPPGDP-av80-99


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Table 3.9. Factors explaining the share of export and foreign trade in GDP in 196 cross country OLS regression results

Dependent variable Increase in the ratioof export to GDP in1960-99

Av erage ratioof trade toPPP GDPin 1980-99

Increase in the ratioto PPP GDPin 1980-99, p.p.

Number of observations 59 47 30 94 62 86 93 81

Log PPP GDP per capitain 1975

15.59***

26.7***

PPP GDP per capita in1975

0.0085***

0.007***

PPP GDP per capita in1999

.003***

2000 investmentclimate index, ICRG

0.76*

Average ratio of exportto GDP in 1960-99

0.77***

0.71***

Average ratio of trade toPPP GDP in 1960-99,%

-0.19***

Terms of trade improve-ment index, 1960-99

-0.23***

Net fuel imports in 1960-99, % of total imports

0.39***

-.31** 0.53***

0.40***

Increase in the ratio of FER to GDP from 1960 to1999, p.p.

1.06***

0.37(Tst=

1.6)

0.56*

Average ratio of domesticto US prices in 1980-99, %

-0.49***

-0.18**

Increase in the ratio of FER to GDP from 1960 to1980 , p.p.

1.79***

Increase in the ratio of FER to GDP from 1980 to1999, p.p.

0.78***

1.44***

0.58***

0.74***

PPP GDP in 1999, bill.$ -.004 -0.009***

-.009**

Average annual FDI netinflow in 1980-99, % of GDP

4.9**

Constant -25.5 12.3 -67.9**

-15.40***

.87 8.9***

3.82 -80***

Adjusted R 2 41 38 61 21 49 29 19 57*, **, *** - Significant at 10%, 5% and 1% level respectively.


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Accumulation of FOREX and FDI Accumulation of FOREX and FDI

Fig. 3.9. Incre ase in the ratio of FOREX to GDP in 1960-99 and average net inflow s of FDIas a % of GDP in 1980-99

R2 = 0,5093

R2 = 0,2686

-4

-2

0

2

4

6

8

-15 -5 5 15 25 35 45 55 65 75

Increase in the ratio of FOREX to GDP in 1960-99, p.p.

A v e r a g e a n n u a l n e t i n f l o w o f F D I a s a %

o f G D P

FDI in 1980-99FDI in 1990-99


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Real exchange rate in fast growing developing countriesReal exchange rate in fast growing developing countriesthi e ti we em trate h we er that

Fig.6. Average real exchange rate versus the US $ (Year 12 = 100%) in fast

growing developing economies, year "0" denotes the point of take-off

50

70

90 110

130

150

170 190

210

230

250

-5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25

Botswana Chile China Egypt, Arab Rep. India Indonesia Korea, Rep. Malaysia Mauritius Singapore Sri Lanka Thailand FAST POOR


49/52


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Reserves/GDP ratios and GDP per capita growth rates for 12 fastest developing economies in1975-99, unweighted average, % ("0" is the year of take-off)

-8

-6

-4

-2

0

2

4

6

8

10

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5

10

15

20

25

30

35

GDP growth rates(actual and 5-year moving average),

left scale

Reserves/GDP ratios,right scale

Pre-take-off stage Take-off stage Complacency stage New push and stabilization

FDI inflow , % of GDP,left scale

External balance,% of GDP, left scale

Trade balance, % of GDP


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Fig. 3. 12. Average real exchange rate versus the US $ (Year 12 = 100%), trade balance and net

inflow of FDI as a % of GDP in 12 fast growing developing economies, year "0" denotes thepoint of take-off

70

80

90

100

110

120

130

140

150

160

170

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25-8

-6

-4

-2

0

2

4

6RER, left scale

FDI, right scale

Trade balance, 3-year movingaverage, right scale

Th d lTh d l


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The modelThe model

Y 3P r i c e p

Y 2

Y 3q

d k 2 / d t

d k 3 / d t

Y 1 + I

k 1 / d t Y 1 P r ic e = 1 I m p o r t I

C O N S U M E R

3E X P O R TT R A D E

k 3

P R O D U C E R 1( i n v e s tm e n t g o o d s )

k 1

P R O D U C E R 2( c o n s u m p t io n g o o d s )

k 2

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