Transcript Impacts of External Shocks on Nations’ Policy Responses

Impacts of External Shocks on
Nations’ Policy Responses and
Economic growth
—World Economic
Synchronization
World Economic Synchronization
World Economic Synchronization
High income
7
World
LDC
6
4
3
2
1
Year
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
-1
19
75
0
19
73
GDP Growth Rate %
5
World Economic
Synchronization
-External Shocks
-Policy Responses
-Trade as a ‘gear’
Methodology
-External Shock Accounting
-Differenced-Data Models
-Multiple Linear Dynamic Models
-Cointegration Test and Chow Test
Bacha’s model
-- for External Shock Accounting
Basic form of the model is
Changes in Ratio of Current Account
Deficit to GDP =
+ Changes in External Shocks
- Changes in Policy Responses
+ Error Term
Bacha’s Model Derivation
Dt  (Mt - Et) + (Vt - Tt)
(1)
Dt/Yt = PtmjtCt/Yt+ PtmjtIt/Yt + rtFt-1/Yt+ Vt/Yt- Rt/Yt
-P txxtWt/Yt - Tt/Yt
(2)
d(Dt/Yt) = jtAt/Ztd(rtm) - xtWt/Ztd(rtx) + Ft-1/Ytd(rt)
- Xtrtxd(Wt/Zt) + rtd(Ft-1/Yt) + d(Vt/Yt) - (Rt/Yt)
- d(Tt/Yt) + jtrtmd(Ct/Zt) + jtrtmd(It/Zt)
+rtmAt/Ztd(jt) -rtxWt/Ztd(xt) + ε
(3)
Model Components: External Shocks
•
[js(As/Zs)dpmt - xs(Ws/Zs)dpxt]…
Terms of trade deterioration
• [ - Fs-1/Ysdrt ] …
interest rate shock
• [- xspxsd(Wt/Zt)]…
retardation of world trade
growth.
burden of debt accumulation
• [ rsd(Ft-1/Yt)]…
• [d(Vdt/Yt)]…
• [- d(Rt/Yt)]…
• [- d(Tt/Yt)]…
change in net direct
investment income to abroad
change in workers'
remittances
change in unrequited transfers
Model Components: Policy Responses
• [ jspmsd(Ct/Zt)]…
consumption contraction
• [ jspmsd(It/Zt)]…
investment reduction
• [ pms(As/Zs )djt]…
import replacement
• [ - pxs(Ws/Zs)dxt]…
export penetration
• [+ ε] …
interaction effects
and adding-up errors.
External Shocks
-- Attribution to LDC Economic
Performance
Measured Impact of in External Shocks
Unfavorable Shocks Impacts on
GDP
(1991-2005)
Other Ex.
Shocks , 0.01%
World Trade, 3%
Terms-of-trade,
4%
Intereste Rate,
1%
Measured Impact of in External Shocks
A Comparison of External Shocks Impacts on GDP Growth
3
Terms of Trade
Interest Rate
World Trade
Remaining 4 Minor Shocks
Reducing GDP Growth %
2.5
2
1.5
1
0.5
0
-0.5
-1
1987-91
1992-1995
1996-2000
Year
2001-2005
Counterintuitive Relationship between
External Shocks and GDP Growth
GDP Growth Comparison
LDC Having Favorable vs. Unfavorable External Shocks
favorable
unfavorable
GDP Growth Rate
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1973-77
1978-82
1982-86
1987-91
Years
1992-95
1996-2000 2001-2005
Policy Responses
-- Attribution to LDC Economic
Performance
Policy Response Roles
• Synchronization Transmission Mechanism
• Reducing External Shock Impact by
Improving Current Account Balance
• ↑ measure of adverse external shocks,
↑ favorable impacts of policy responses
• Policy responses correlate with the cycles
in LDC economic growth
• Policy responses to the shocks might
cause future structural adjustments
Policy Response to External Shocks
Policy Responses as Economic adjustment
80%
75%
% of 30 LDCs
70%
58%
60%
50%
40%
30%
20%
10%
0%
Improve Trade Ratio
decreasing spending
Policy Responses
Policy Response to External Shocks
Policy Response to External Shocks
• The primary policy response was export
penetration, averaging from 4.1% to 6.4%;
• The secondary policy response was import
substitution, averaging from 2% to 3.9%;
• The investment reduction was the third and the
consumption contraction the fourth;
• ‘Belt-tightening’ would sacrifice economic growth
in both the long-run and short-term;
• Trade policies, served as a “gear” of economic
synchronization.
A comparison of LDC GDP growth of adopting
export penetration policy
A Comparison of LDC with Favorable vs.
Unfavorable Changes of Export-Penetration
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1973-77
Favorable
1978-82
Unfavorable
1982-86
1987-91
Year
1992-95
1996-00
2001-05
Tests and Analysis on Policy
Responses
Methods:
-Multiple Linear Dynamic Models
-Stability Test and Chow Test
Tests and Analysis on Policy Responses
(1)
• A Test of policy sensitivity to external
shocks:
(PRi = bi + bi ESi + ,)
• Statistic measurements provided by policy
parameters
• Export penetration as the primary policy
response
A Test of Policy sensitivity to external shocks:
PRi = bi + bi ESi + ,
where PRi = policy responses and ESi = External shocks
Export penetration as the primary policy response
Constant
coefficient
(t-ratio for X
coefficient)
R Squared
Export-penetration on
external shocks
-0.77
-0.43
-6.12 *
0.22
Import-replacement on
external shocks
0.5
-0.13
-2.2
0.03
Consumption-contraction
on external shocks
-0.01
-0.03
-0.93
0.01
Investment-reduction on
external shocks
-0.27
0.04
1.25
0.01
Regression Model:
PRi = b0 + b1 ES + 
Notes: N = 139; * denotes statistically significant at the 1% level (one tail).
Tests and Analysis on Policy Responses
(2)
• Trend analysis of long-run LDC exportpenetration responses to external shocks:
(EPi = a + bi ESi + )
• The impacts of export penetration policy
on current-account balances were rising;
• That response tripled to 91% from 32%
through the period of 1992-2005, almost
doubled from the period of 1996-00.
LDC export-penetration responses to
external shocks in long-run?
Model: EPi = a + bi ESi + 
Period
Constant
(bi )
Coefficient **
(t-ratio)
R Squared
1987-91
1.34
-0.32
(-3.04)*
0.22
1992-95
0.9
-0.37
(-4.17)*
0.34
1996-00
-4.84
-0.48
(-2.84)*
0.19
2001-05
-1.18
-0.91
(-5.46)*
0.5
Notes:* denotes statistically significant at the 1% level (one tail); **
Negative sign indicates reactions of domestic policies result in
favorable; The impacts of export penetration policy on currentaccount balances were rising
Tests and Analysis on Policy Responses
(3)
• Test the Consistency and the Continuity of
Export Orientated Policy:
Chow Test was used:
F = (SSR2/df2)/(SSR1/df1)
Result: No presence of structure break
High-Growth LDC versus Low-Growth LDC
(1)
• Export-penetration policy efforts differentiated
high-growth LDC (HLDC) from low-growth
LDC (LLDC)
• Export-penetration policy was used more by
HLDCs than by LLDCs to offset external
shocks.
High-Growth LDC versus Low-Growth LDC
(2)
• HLDC export oriented policy accounted for 55
cents, offsetting every dollar loss caused by
external shocks to the current account balance;
• HLDC export oriented policy measure was
120% greater than the measure of LLDC
policy response, accounted for only 25 cents;
• HLDC experienced three times as much
external shock as LLDC did in the period
1987-2005.
Why did some LDCs perform better
when they were facing more
substantial external shocks?
Why..?
• The greater measures of external
shocks that LDCs experienced,
the more open their economies
were
Why..?
• The greater measures of external
shocks forced those LDCs to
make some necessary economic
adjustments, especially, adopting
export oriented policies to offset
the adverse impact of external
shocks.
Why…?
• LLDCs minimized their exposure to
external shocks, but also minimized their
opportunities.
For Instances:
– Lacking of foreign direct investment (FDI)
means lower current-account deficit
– Less Trade results less the shock of terms of
trade
Thanks. Questions please.
Martin K. Zhu, Ph.D.
Senior Economist
U.S. Department of Agriculture