Panel 14: The International Economy and National Economic Development

Friday, April 21st (10:30-11:45am)

13th Symposium on

Development and Social Transformation

Dollarization and its Impact on Ecuador

Ellen Bishop

Panel 14: The International Economy and National Economic Development

13th Symposium onDevelopment and Social Transformation

Dollarization and Its impact on Ecuador

Facts about Ecuador

• Population: 13,547,510 (est. July 2006)

• Capital: Quito• Government Type: Republic• GDP (adjusted for Purchasing Power

Parity): $52.77 billion (est. 2005)• GDP per capita (PPP): $3,900• Poverty Rate: 41% (est. 2003)

What Is Dollarization?

• Dollarization is the most extreme form of a fixed exchange rate regime, where a country replaces their domestic currency with the currency of another country

Advantages and Disadvantages to Dollarization

Advantages• Dollarization can bring

price stability to an economy that has high inflation by anchoring to another country’s currency

• Can reestablish investor confidence investment in financial systems and give needed capital for development

Disadvantages• Lose autonomous

monetary policy because no longer able to print currency

• May lose competitiveness depending on currency movements of the Dollar in markets

• Could be unsustainable due being unable to maintain reserves

Pre-Dollarization Ecuador

• Growth Patterns in Ecuador have been very volatile over the past three decades due mainly to:– Economic

mismanagement– High dependency on

oil export revenues– Political Instability

Financial Crisis in Ecuador: Primary Causes

• Irresponsible fiscal and monetary management– Unsuccessful adjustment economic reforms and periods of

relaxation-loss of credibility– Large increases in public expenditure in 2nd half of 1990s in

public sector and debt payments– Central Bank was unable to control inflation– Liberalization of financial sector without proper supervision &

control• Dependency on oil export revenues to finance government

deficits– Decline in oil prices led to high government deficit

• Effects from El Nino 1998-1999-destroyed many rural areas on costal region as well affecting costal employment

• Political and Institution Instability– Five different presidents between 1988 and end of 1999

Precursors to Financial Crisis

Financial Crisis to Dollarization

• After Inflation levels had reached high levels and with the banking and financial system in ruins, (former) President Jamil Mahuad called for the currency to be dollarized, however he was thrown out of office in a military coup before the realization of his plan

• His successor, Vice President Gustavo Naboa implemented Dollarization in order to realize economic stability and control inflation

• After implementation, Dollarization was successful bringing inflation from over 50% in 1999 to single digits in the first part of the year (1.3% in May)

Financial Crisis, Dollarization & Poverty

• As a result of the financial crisis, poverty levels increased significantly all over the country, although the urban areas have been hit the hardest. As a result of the financial and banking crisis, many of the middle class saw their savings disappear to massive devaluation of the Sucre and bank runs and failures

• Non-monetary poverty also decreased– Deterioration of quality of education– Deterioration of health services and increased cost for

medicines and vaccines– Nutrition suffered as a result of decreased food

production and income-female headed household hit the worst.

Dollarization’s Impact on Poverty

• Aside from stabilizing the price level in the country, Dollarization appears to have had a positive impact on reducing the relative price level of many goods

• Average cost of consumer goods has fallen 16% since 2000. The majority of the decline was directly after implementation of Dollarization

Dollarization’s Impact on Consumer Prices

Dollarization’s Impact on Poverty

• However, the relative gains of lower prices have benefited non-poor households more than poor households. The relative household basket has declined by almost 20%, while poor household basket has only declined by 2%.

• The majority of this difference can be accounted for by decline in the price of durable goods, as non-poor households consume more than non-poor households

What are medium to long term effects of Dollarization?

• Although the short term effect of Dollarization appear positive, the long term effects of Dollarization are not yet clear, as Ecuador remains susceptible to external shocks, which could have an extremely negative impact as the government has limited policy options to exercise under Dollarization, which could make the situation unsustainable, as was the case in Argentina

• The competitiveness of Ecuadorian products remains unpredictable as movements are tied to the US Dollar’s movement. If the currency appreciates, Ecuador must rely more on productivity in order to increase growth and reduce poverty throughout the country.

Conclusions• The financial crisis in

Ecuador was caused by primarily by fiscal and economic mismanagement, political instability and falling oil prices, which adversely affected government revenues and El Nino

• The financial crisis affected all areas in the country, however the urban areas were the hardest hit, where many lost their life savings through the banking and financial crisis

• Dollarization in the short term has proved to be positive for the country by restoring price stability and reducing the cost of the average consumption basket

• The relative decline in prices has mostly benefited non-poor households as a result of the large decline in the cost of durable goods

• The medium to long term effects of Dollarization appear less certain since the country remains susceptible to external shocks which may make the regime unsustainable

Foreign Direct Investment in MacedoniaSlavica Taseva

Panel 14: The International Economy and National Economic Development

13th Symposium onDevelopment and Social Transformation

Foreign Direct Investment (FDI) in Macedonia

Slavica Taseva

Spring Symposium on Development and Social Transformation

Maxwell School of Citizenship and Public Affairs

April 21, 2006

Content:

Macedonia – country facts Foreign Direct Investment (FDI) – theory

and practice FDI in Macedonia – policy status and

recommendations

Macedonia – country facts 25,713 sq km 2.1 mil people GDP per capita

6,800 (PPP US$)

Landlocked Transition

country Independence

Sep 8, 1991 EU candidate

country

FDI – theory and practice

Via Transnational corporations (TNCs) Types:

- Resource-seeking

- Market-seeking

- Efficiency-seeking Growing in volume worldwide

FDI – theory and practiceMotives:TNCs – maximize profit and competitivenessHost countries – spur development

TNCs provide:- Capital- Technology- Skills and

management- Market access

Host countries provide:- Skills- Infrastructure- Services- Supply networks- Institutions

Adapted from Lall, Sanjaya. (2002)

Host country policies on FDI Goal: attract high volume and quality FDI Policies:

- Reduce transaction costs (one-stop-shop for investors)- Investment promotion (image building and investor targeting)- Provide skilled and productive labor, services and infrastructure (not relying on incentives and cheap labor)

Adapted from Lall, Sanjaya. (2002)

Current FDI policies in Macedonia

Investment promotion agency established at the beginning of 2005

One-stop-shop for registering businesses established at the beginning of 2006

Integration in European market (free trade agreements)

FDI incentives

Recommended future FDI policies

Create industrial strategy Target sources of FDI

(countries, industries, corporations) Develop infrastructure Establish industrial parks Align educational system with the needs of

targeted investors for skilled labor Enhance capacity of government institutions and

judiciary

Economic Growth in China

Jessica Elmassian

Panel 14: The International Economy and National Economic Development

13th Symposium onDevelopment and Social Transformation

Economic Development in Economic Development in

ChinaChina

By: Jessica ElmassianBy: Jessica Elmassian

Historical Perspective Historical Perspective

Silk Road Silk Road World ImperialismWorld Imperialism Cultural Attributes Cultural Attributes Role of Government Role of Government Human Capital Human Capital Ideology + Economic Policy= DisasterIdeology + Economic Policy= Disaster Technological Improvement & Structural Change Technological Improvement & Structural Change

Economic Reform and Economic Reform and Open door policyOpen door policy

Third Plenary Session of the Eleventh Chinese Communist Party Third Plenary Session of the Eleventh Chinese Communist Party Central Committee in December 1978, the Chinese Communist Central Committee in December 1978, the Chinese Communist Party (CCP) Party (CCP)

The Third Plenum of the Fourteenth Party Congress in 1993 The Third Plenum of the Fourteenth Party Congress in 1993 enacted the “Decision on Issues Concerning the Establishment of enacted the “Decision on Issues Concerning the Establishment of a Socialist Market Economic Structure,” which stated the a Socialist Market Economic Structure,” which stated the Government’s plan to transform China into a “socialist market Government’s plan to transform China into a “socialist market economy.”economy.”

Trade as a Growth EngineTrade as a Growth Engine

Between 1978 and 1996 China’s GDP grew at nearly 10% a yearBetween 1978 and 1996 China’s GDP grew at nearly 10% a year Trade, including exports and imports, expanded 17% a yearTrade, including exports and imports, expanded 17% a year China’s GDP has quadrupled since 1978.China’s GDP has quadrupled since 1978. In 2005 GDP growth was estimated at 9.3% and reached $1.833 In 2005 GDP growth was estimated at 9.3% and reached $1.833

trillion.trillion. Measured on PPP basis, in 2005, China was the second-largest Measured on PPP basis, in 2005, China was the second-largest

economy in the world after the U.S. economy in the world after the U.S. In 2005, China was the world’s tenth largest exporterIn 2005, China was the world’s tenth largest exporter Exports reaching $752.2 billion and imports totaling $631.8 billion.Exports reaching $752.2 billion and imports totaling $631.8 billion. Trade in goods and services increased 61%between 1994 and Trade in goods and services increased 61%between 1994 and

1995; and trade in goods increased 79%1995; and trade in goods increased 79%

Capital Accumulation – FDI Capital Accumulation – FDI

Between 1985-1996, FDI in China increased at 36% a yearBetween 1985-1996, FDI in China increased at 36% a year China is currently the second largest recipient of FDI, after the China is currently the second largest recipient of FDI, after the

United States.United States.In 2004, China’s contracted FDI reached $153.5 billion.In 2004, China’s contracted FDI reached $153.5 billion.

In 2004 44.2% of total GDP came from gross fixed investment In 2004 44.2% of total GDP came from gross fixed investment

Trade AgreementsTrade Agreements

Increase in Regional Trade Agreements Increase in Regional Trade Agreements 0 in 1948 and was up to 181 in 2002. 0 in 1948 and was up to 181 in 2002.

The WTO The WTO Deals with the rules of trade between nations, and plays vital role in Deals with the rules of trade between nations, and plays vital role in

the negotiations and signings of international trade agreements. the negotiations and signings of international trade agreements. Consists of 149, and China became a member in 2001. Consists of 149, and China became a member in 2001.

Pros: It liberalized trading barriers, strengthened intellectual Pros: It liberalized trading barriers, strengthened intellectual property laws, by demanding full implementation of the Agreement property laws, by demanding full implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), on Trade-Related Aspects of Intellectual Property Rights (TRIPS), lowered import barriers, reduced industrial tariffs from 25perent in lowered import barriers, reduced industrial tariffs from 25perent in 1997 to 8.9 percent in 2005; cut agricultural tariffs from 31 percent 1997 to 8.9 percent in 2005; cut agricultural tariffs from 31 percent to 14 percent in 2005; opened up the market to direct sales and to 14 percent in 2005; opened up the market to direct sales and distribution; and no longer required production in China as a distribution; and no longer required production in China as a requisite to sell there. requisite to sell there.

Cons: SOEs can’t compete; an abundance of labor; no more iron Cons: SOEs can’t compete; an abundance of labor; no more iron rice bowlrice bowl

Fragile Financial SystemFragile Financial System

Monetary Policy & Exchange Rate Monetary Policy & Exchange Rate Banking System Banking System

Non-performing loans (SOEs)Non-performing loans (SOEs)

Securities Market Securities Market

Growth SustainabilityGrowth Sustainability Exports of goods & services Exports of goods & services

2004: RMB 2,595.7 billion2004: RMB 2,595.7 billion 2005: RMB 3,126.6 billion, 2005: RMB 3,126.6 billion, 2006: RMB 3,596.1 billion (forecast by EIU)2006: RMB 3,596.1 billion (forecast by EIU)

Imports of goods and servicesImports of goods and services 2004: RMB -2,723.62004: RMB -2,723.6 2005: RMB -3,115.02005: RMB -3,115.0 2006: -3,621 (forecast by EIU) 2006: -3,621 (forecast by EIU)

In 2005, exports added to GDP growth in the beginning half of the year, but in the last half, In 2005, exports added to GDP growth in the beginning half of the year, but in the last half, import growth undermined the effect of exports while investment and retail spending import growth undermined the effect of exports while investment and retail spending provided for continued growth. provided for continued growth.

Since imports will increase and export growth will lessen, overall GDP growth is expect to Since imports will increase and export growth will lessen, overall GDP growth is expect to slow in 2006. China reported a more than threefold increase in its trade surplus in 2005. slow in 2006. China reported a more than threefold increase in its trade surplus in 2005. China’s trade surplus in 2005 was US$102 billion. China’s trade surplus in 2005 was US$102 billion.

Customs data indicate export growth has actually slowed down since the middle of last Customs data indicate export growth has actually slowed down since the middle of last year, while import growth has increased.year, while import growth has increased.

Policy Considerations Policy Considerations

Balance of growth and distribution Balance of growth and distribution Rural and urban disparitiesRural and urban disparities Strengthening financial sectorStrengthening financial sector Expanding legal institutions (IPR)Expanding legal institutions (IPR)

Developing Stable and Secure Neighbors: EU Economic Foreign Policy in Mediterranean

Dawn M. Hunter

Panel 14: The International Economy and National Economic Development

13th Symposium onDevelopment and Social Transformation

Developing StableDeveloping Stableand Secure Neighborsand Secure Neighbors

The European Union’sThe European Union’s

Economic Foreign PolicyEconomic Foreign Policy

in the Mediterraneanin the Mediterranean

The Euro-Mediterranean The Euro-Mediterranean PartnershipPartnership

Understand the underlying Understand the underlying rationale and imperatives in rationale and imperatives in drawing up the Euro-drawing up the Euro-Mediterranean Partnership by Mediterranean Partnership by analyzing the main factors analyzing the main factors driving the Euro-driving the Euro-Mediterranean relationshipMediterranean relationship

Analyze how the instruments Analyze how the instruments created through the Barcelona created through the Barcelona Process have impacted Process have impacted Mediterranean politics, Mediterranean politics, security, economics and security, economics and culture through tools such as:culture through tools such as:

Human Development IndexHuman Development Index Foreign Direct InvestmentForeign Direct Investment Official Development Official Development

AssistanceAssistance

European ImperativesEuropean Imperativesin the Regionin the Region

DemocracyDemocracy

Peace and SecurityPeace and Security

Commercial Commercial InterestsInterests

Political and Security Political and Security PartnershipPartnership

Seeks to establish a common area of Seeks to establish a common area of peace and stability through:peace and stability through: Political dialogue at bilateral and Political dialogue at bilateral and

regional levelregional level Partnership-building measuresPartnership-building measures Charter for Peace and StabilityCharter for Peace and Stability

Poverty Literacy Education Life Expectancy

Comparison of HDI in Comparison of HDI in Mediterranean CountriesMediterranean Countries

1975 1980 1985 1990 1995 2000 2002

High Human Development

22. Israel 0.794 0.818 0.839 0.857 0.880 0.907 0.908

30. Cyprus  ..    0.791 0.812 0.835 0.855 0.880 0.883

31. Malta 0.726 0.763 0.789 0.824 0.850 0.873 0.875

Medium Human Development

80. Lebanon  ..       ..       ..    0.673 0.732 0.752 0.758

88. Turkey 0.590 0.614 0.651 0.683 0.713    ..    0.751

90. Jordan  ..    0.639 0.663 0.682 0.707 0.741 0.750

92. Tunisia 0.516 0.574 0.623 0.656 0.696 0.734 0.745

102. Palestinian Authority  ..       ..       ..       ..       ..       ..    0.726

106. Syria 0.534 0.576 0.611 0.635 0.663 0.683 0.710

108. Algeria 0.504 0.554 0.603 0.642 0.664 0.693 0.704

120. Egypt 0.438 0.487 0.539 0.577 0.608    ..    0.653

125. Morocco 0.429 0.474 0.510 0.542 0.571 0.603 0.620

Economic and Financial Economic and Financial PartnershipPartnership

Seeks to transform the Mediterranean into a zone Seeks to transform the Mediterranean into a zone of peace and stability through improving the of peace and stability through improving the socio-economic situation of each of the countries socio-economic situation of each of the countries involved through:involved through: conduct a dialogue on the alignment of sectoral conduct a dialogue on the alignment of sectoral

economic policieseconomic policies to foster cooperation between non-governmental to foster cooperation between non-governmental

entities such as chambers of commerce, economic entities such as chambers of commerce, economic institutes and trade promotion bodiesinstitutes and trade promotion bodies

to carry out regional projects which usefully complement to carry out regional projects which usefully complement bilateral measuresbilateral measures

OFA and FDI inOFA and FDI inMEDA Participant CountriesMEDA Participant Countries

1995

1996

1997

1998

1999

2000

2001

2002

2003

Official Development Aid

Algeria, Egypt, Israel, Jordan, Libya, Morocco, Syria, Tunisia

1665

1972

1870

1643

1575

1989

2458

2085

2364

Foreign Direct Investment

Algeria, Egypt, Israel, Jordan, Libya, Morocco, Syria, Tunisia

382 638 960179

9575

3697

4005

1146

2816

Social, Cultural and Human Social, Cultural and Human PartnershipPartnership

The aim of the third basket is toThe aim of the third basket is to bring people on both sides of the Mediterranean basin bring people on both sides of the Mediterranean basin

closercloser to promote better mutual understandingto promote better mutual understanding to improve their perception of each other.to improve their perception of each other.

Overall, the goal is to create a framework whereby Overall, the goal is to create a framework whereby the Mediterranean can follow a similar path as the Mediterranean can follow a similar path as Europe, Europe, “an area in which a number of fundamental “an area in which a number of fundamental treaties such as the Nuclear Non-Proliferation treaties such as the Nuclear Non-Proliferation Treaty, the Convention on Chemical Weapons, and Treaty, the Convention on Chemical Weapons, and the Convention on Biological Weapons, are part of the Convention on Biological Weapons, are part of the shared heritage of all the coastal states.”the shared heritage of all the coastal states.”

Developing StableDeveloping Stableand Secure Neighborsand Secure Neighbors

““As one looks at the future of theAs one looks at the future of theEuro-Mediterranean partnership, surely Euro-Mediterranean partnership, surely

the incentives for inclusion vice the incentives for inclusion vice exclusion, mutual involvement rather exclusion, mutual involvement rather

than mutual disregard, seem more than mutual disregard, seem more compelling now than ever.”compelling now than ever.”

Panel 14: The International Economy and National Economic Development

Friday, April 21st (10:30-11:45am)

Ellen Bishop Dollarization and its Impact on Ecuador

Slavica Taseva Foreign Direct Investment in Macedonia

Jessica Elmassian Economic Growth in China

Dawn M. Hunter Developing Stable and Secure Neighbors:

EU Economic Foreign Policy in the Mediterranean

13th Symposium onDevelopment and Social Transformation