Transcript East Asia and Global Imbalances: Saving, Investment, and

East Asia and Global Imbalances:
Saving, Investment, and
Financial Development
Menzie Chinn
University of Wisconsin and NBER
Hiro Ito
Portland State University
Presentation at the 2nd Annual Open Macroeconomics and Development
conference, Université de la Méditerranée CEDERS, July 2-3, 2007.
Motivation
“… some of the key reasons for the large U.S. current account deficit
are external to the United States, ... Providing assistance to
developing countries in strengthening their financial institutions …
could … increase both the willingness of those countries to accept
capital inflows and the willingness of foreigners to invest there. …
Thus, we probably have little choice except to be patient as we work
to create the conditions in which a greater share of global saving can
be redirected away from the United States and toward the rest of the
world - particularly the developing nations.”
Bernanke (2005)
Global Imbalances
Source: Figure 1.14, IMF, World Economic Outlook, Sept. 2006
What is the main cause of US
current account deficits?
Twin deficit hypothesis
 public dissaving due to U.S. fiscal
policy shift in 2001
Saving glut hypothesis
 Excess net saving in East Asia
 US comparative advantage in financial
market development
Chinn and Ito (2007)
A 1 %-point increase in the budget balance would increase the
CA balance by 0.10 to 0.49 %-points for industrialized countries
US CA deficit slightly underpredicted, E. Asian surplus slightly
underpredicted.
More FD leads to higher saving for countries with
underdevelopment institutions and closed financial markets that
includes most of East Asian EMGs
FD reduces the level of CA, especially for non-U.S. IDCs and
Asian EMGs, but that effect is achieved, not through a reduction
in savings, but through increased levels of investment
What do we do in this paper?
We undertake a closer look at the effect of FD on CA
balances and the S-I determination by investigating
The effect of different types of FD (e.g., banking, equity,
or bond)
Different dimensions of FD, such as size, degree of
activity, and efficiency
How FD interacts with financial openness and
institutional development
How/whether FD functions as a magnifier for the effect
of budget balances
Findings
Budget balances matter for IDCs when bond markets are
incorporated
Both credit to the private sector and stock market
capitalization appear to be equally important determinants
of CA behavior.
Increases in the size of financial markets induce an
increase in the CA balance in developing countries.
However, because of nonlinearities incorporated into the
specifications, this characterization is conditional
Countries with highly developed financial markets could
experience a smaller current account balance when they
increase the level of financial openness
Empirical Approach
Data span 1986-2005, 19 IDCs, 70 LDCs
Use five year panels to focus on medium-term
determinants
Macro variables: BuS, initial NFA, per capita income, per
capita income squared, income growth, TOT variability
Demographics
Structural/Policy: Trade, capital acct openness (Chinn-Ito),
financial deepening
All the variables, except for net foreign assets to GDP, are
expressed as deviations from their GDP-weighted world
mean
Empirical Model
yi ,t    1 FDi ,t   2 LEGALi ,t   3 KAOPENi ,t
  4 FDi ,t  LEGALi ,t    5 LEGALi ,t  KAOPENi ,t 
  6 KAOPENi ,t  FDi ,t 
 X i , t   ui , t
Dependent variables (y) = the CA balance,
national saving, and investment
(1)
Measures of Financial Development,
Financial Openness, Legal
Development
LEGAL = first principle component of Law and
Order, Corruption and Bureaucratic Quality
(Sourced from ICRG).
KAOPEN = Chinn-Ito index, based upon the
IMF’s Annual Report on Exchange Arrangements
and Exchange Restrictions (AREAER)
Measures of Financial Development,
Financial Openness, Legal
Development
FD: Financial development
 SIZE = the sum of private credit creation (PCGDP) and
stock market capitalization (SMKC), % of GDP
 ACTIVENESS – stock market total value (SMTV, % of
GDP), stock market turnover (SMTO)
 EFFICIENCY – (INV)NETINT = bank’s net interest
revenue as a share of its total assets
 BOND MARKET – private bond market capitalization
(PVBM) and public bond market capitalization (PBBM)
Figure 2: Financial Market Development (Size)
Figure 4: Private Bond Market Development
Private Bond Market Capitalization (% of GDP)
50
0
0
100
200
pvbm (pvbm/GDP)
300
100
400
Fin. Market Development (size)
1981-1985
1986-1990
1991-1995
U.S.
Japan
China
Middle East & N. Africa
1996-2000
1986-1990
2001-2005
1991-1995
U.S.
Japan
China
Middle East & N. Africa
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1996-2000
2001-2005
Western Europe
East Asia & Pacific ex. China
Latin America
Others
Figure 5: Public Bond Market Development
Figure 3: Financial Market Development (Activeness)
Public Bond Market Capitalization (% of GDP)
0
100
50
0
50
100
150
pbbm (pbbm/GDP)
200
150
Stock Market Total Value (% of GDP)
1981-1985
1986-1990
1991-1995
U.S.
Japan
China
Middle East & N. Africa
1996-2000
2001-2005
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1986-1990
1991-1995
U.S.
Japan
China
Middle East & N. Africa
1996-2000
2001-2005
Western Europe
East Asia & Pacific ex. China
Latin America
Others
Figure 6: Legal and Institutional Development
60
0
20
40
legal
80
100
Legal/Inst. development, US=100
1981-1985
1986-1990
1991-1995
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1996-2000
2001-2005
Japan
China
Middle East & N. Africa
Figure 7: Financial Openness by Region
80
60
40
20
0
KA Openness (KAOPEN)
100
Financial Openness, US=100
1981-1985
1986-1990
1991-1995
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1996-2000
2001-2005
Japan
China
Middle East & N. Africa
Table 1: Current Account Regressions
with SIZE
Industrial
Less
Countries Developed
(IDC)
(LDC)
(1)
(2)
Government budget balance
…
…
Financial Develop. (SIZE)
Legal development (LEGAL)
SIZE x LEGAL
Financial open. (KAOPEN)
KAOPEN x LEGAL
KAOPEN x SIZE
…
…
Observations
Adjusted R-squared
LDC
w/out
Africa
(3)
Emerging
Market
(EMG)
(4)
0.236
[0.162]15%
0.151
[0.112]
0.211
[0.134]
0.146
[0.117]
…
…
…
…
…
…
…
…
-0.032
[0.015]**
0.023
[0.012]**
0.014
[0.012]
0.016
[0.012]
0.01
[0.008]
0.03
[0.014]**
0.015
[0.010]
0.017
[0.009]*
0.015
[0.006]**
-0.013
[0.006]**
0.001
[0.002]
-0.006
[0.003]*
…
…
…
…
…
…
…
…
81
0.52
156
0.55
125
0.52
125
0.59
0.015
0.014
[0.012]
[0.009]
0.02
0.021
[0.011]*
[0.010]**
0.013
0.019
11%
[0.008]
[0.007]***
-0.014
-0.014
[0.008]*
[0.007]**
0.001
0
[0.002]
[0.002]
-0.009
-0.008
[0.004]** [0.003]**
Table 2: Current Account Regressions
with SIZE, SMTO, and INVNETINT
Industrial
Less
Countries Developed
(IDC)
(LDC)
(1)
(2)
Government budget balance
Financial Develop. (SIZE)
Stock Market Activeness (SMTO)
Net Interest Margin (INVNETINT)
INVNETINT x KAOPEN
Legal/Inst. development (LEGAL)
SIZE x LEGAL
Financial openness (KAOPEN)
KAOPEN x LEGAL
KAOPEN x SIZE
Observations
Adjusted R-squared
0.187
[0.191]
-0.03
[0.013]**
0.015
[0.012]
-0.901
[0.505]*
0.809
[0.367]**
0.025
[0.011]**
0.01
[0.012]
0.019
[0.010]*
0.002
[0.008]
0.029
[0.013]**
77
0.56
LDC
w/out
Africa
(3)
Emerging
Market
(EMG)
(4)
0.228
0.231
0.237
[0.113]**
[0.152]
[0.126]*
0.019
0.02
0.02
[0.009]**
[0.011]*
[0.009]**
0.009
0.007
0.009
[0.004]**
[0.004]*
[0.005]*
0.374
0.376
0.246
[0.152]**
[0.197]*
[0.152]11%
0.042
0.081
0.018
[0.066]
[0.076]
[0.062]
0.031
0.032
0.032
[0.009]*** [0.012]*** [0.009]***
0.024
0.022
0.027
[0.006]*** [0.008]*** [0.006]***
-0.016
-0.017
-0.019
[0.006]*** [0.008]** [0.007]***
0
0.002
0
[0.002]
[0.002]
[0.002]
-0.009
-0.012
-0.011
[0.003]*** [0.004]*** [0.003]***
140
114
112
0.63
0.58
0.65
Robustness Checks
2SLS analysis – instrument the SIZE variable
with the determinants of financial development:
inflation rate, legal origins, and regional
dummies
 Generally, qualitatively similar results. The
estimation results for LDCs and EMGs get stronger
Robustness Checks (con’t)
Repeat the exercise using a different FD measure
 First principle component of private credit creation
(PCGDP), stock market capitalization (SMKC), stock
market total value (SMTV), private bond market
capitalization (PVBM), public bond market capitalization
(PBBM), inverted net interest rate margin (INVNETINT),
and life insurance premium as a ratio to GDP (LIFEINS)
 The results get stronger for LDCs and EMGs, but
weaker for IDCs
Figure 2: Financial Market Development (Size)
300
200
0
100
SIZE (PCGDP+SMKC)
400
Fin. Market Development (size)
1981-1985
1986-1990
1991-1995
1996-2000
U.S.
Japan
China
Middle East & N. Africa
2001-2005
Western Europe
East Asia & Pacific ex. China
Latin America
Others
Figure 8: Comparison by “Financial Development Index”
128.1
115.6
100
83.2
74.9
73.6
50
56.1
44.8
44.2
25.3
70.1
65.4
55.2
47.6 46.4
29.7
74.8
66.0
60.2
61.3
43.6
48.3
42.0
47.6 49.2
39.1
25.1
24.9
0
Financial Development (fd)
150
Financial Development Index, US=100
1986-1990
1991-1995
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1996-2000
2001-2005
Japan
China
Middle East & N. Africa
Figure 2: Financial Market Development (Size)
300
200
100
0
SIZE (PCGDP+SMKC)
400
Fin. Market Development (size)
1981-1985
1986-1990
1991-1995
1996-2000
U.S.
Japan
China
Middle East & N. Africa
2001-2005
Western Europe
East Asia & Pacific ex. China
Latin America
Others
Figure 9: “Adjusted” Financial Market Size
Adjusted Fin. Market Development (size2), US=100
150
130.1
100
127.0
50
78.2
55.9
47.6 51.6
33.3
25.9
14.4
72.7
62.4
52.9
50.2
30.7
24.1
13.8
49.2
26.8
22.0
17.3
2.9
60.6
51.4
50.7
22.6
14.3 17.5
7.3
26.7
16.1 17.7
13.1
0
size2 (Adj.PCGDP+SMKC)
159.3
1981-1985
1986-1990
1991-1995
Western Europe
East Asia & Pacific ex. China
Latin America
Others
1996-2000
2001-2005
Japan
China
Middle East & N. Africa
Adjustment for Government-owned
Financial Institutions
PCGDP might be an inaccurate measure of
FD
In some economies, a large portion of
financial intermediary is provided by public
financial institutions (e.g., China)
Adjustment for Government-owned
Financial Institutions (cont’d)
Adjust PCGDP by following the procedure
outlined by Bekaert et al. (2006)
 Use the La Porta et al. (2002) estimates of the
ratios of government ownership of banks, and
interpolate data over our sample period
Using the “adjusted” PCGDP, we reconstruct
the SIZE variable (SIZE2A) and reestimate
Adjustment for Government-owned
Financial Institutions (cont’d)
Interestingly, the estimation results are
intact
Table 3: Total Effects of a 10 % Point
Increase in FD (SIZE) Cond’l on LEGAL
and KAOPEN (in percentage points)
C: Matrix for Emerging Asia
B. Emerging Market Countries
CURRENT ACCOUNT
Low 10 percentile
LEGAL
Mean
High 10 percentile
closed 
Low
10 percentile
KAOPEN
-0.186
-0.327
-0.565
0.113
0.450
-0.028
0.310
-0.267
0.071
Mean

open
High
10 percentile
NATIONAL SAVING
Low 10 percentile
LEGAL
Mean
High 10 percentile
Low
10 percentile
LEGAL
-0.193
-0.071
0.066
-0.206
-0.084
0.053
-0.227
-0.106
0.032
0.079
-0.054
-0.204
0.130
-0.003
-0.153
0.216
0.084
-0.066
INVESTMENT
Low 10 percentile
LEGAL
Mean
High 10 percentile
KAOPEN
Mean
High
10 percentile
Low
10 percentile
Mean
Bangladesh
Indonesia,
Philippines,
Sri Lanka
China
India, Korea,
Malaysia,
Thailand,
ex-China EA
High
10 percentile
Hong Kong,
Singapore
Table 4: Total Effects of a One Unit
Increase in KAOPEN Cond’l on LEGAL
and FD (in percentage points)
B. Emerging Market Countries
Less devl’d 
SIZE
 More devl’d
Low
10 percentile
Mean
High
10 percentile
Low 10 percentile
0.216
-0.607
-2.520
Mean
0.216
0.216
-0.607
-0.607
-2.520
-2.520
-0.374
-0.927
-1.553
-0.449
-1.002
-1.627
-0.623
-1.176
-1.801
-0.036
-0.589
-1.214
0.263
-0.290
-0.915
0.959
0.406
-0.220
CURRENT ACCOUNT
LEGAL
High 10 percentile
NATIONAL SAVING
Low 10 percentile
LEGAL
Mean
High 10 percentile
INVESTMENT
Low 10 percentile
LEGAL
Mean
High 10 percentile
C: Ranking of Financial Openness
for Emerging Asia
Country
Hong Kong
Singapore
Indonesia
Philippines
Korea
Malaysia
Thailand
China
KAOPEN [0, 4.37]
4.37
4.37
2.99
1.95
1.71
1.71
1.71
0.66
Table 5: The Impact of Public Bond
Market Development in CA Regressions
Government budget balance
Budget balance x PBBM
Public Bond Mkt. Dev. (PBBM)
Financial Develop. (SIZE)
Industrial
Countries
(IDC)
Emerging
Market
(EMG)
Industrial
Countries
(IDC)
Emerging
Market
(EMG)
(1)
0.503
[0.153]***
-0.767
[0.394]*
0.005
[0.017]
-0.022
[0.011]*
(2)
0.105
[0.300]
-0.216
[1.116]
-0.054
[0.038]
0.013
[0.014]
0.02
[0.010]**
0.024
[0.012]*
-0.008
[0.009]
0.022
[0.006]***
0.005
[0.011]
80
0.65
0.019
[0.013]
0.016
[0.009]*
-0.024
[0.010]**
-0.002
[0.003]
-0.009
[0.004]**
72
0.60
(3)
0.619
[0.176]***
-1.11
[0.278]***
-0.004
[0.015]
-0.027
[0.012]**
0.022
[0.009]**
-0.332
[0.445]
-0.395
[0.493]
0.016
[0.011]
0.031
[0.012]**
-0.011
[0.009]
0.022
[0.009]**
0.001
[0.010]
76
0.71
(4)
0.199
[0.309]
0.628
[1.375]
-0.135
[0.036]***
0.02
[0.012]
0.016
[0.006]***
0.686
[0.238]***
0.226
[0.083]***
0.032
[0.010]***
0.028
[0.007]***
-0.026
[0.009]***
-0.001
[0.003]
-0.017
[0.003]***
65
0.77
Stock Market Activeness (SMTO)
Net Interest Margin (NETINT)
NETINT x KAOPEN
Legal/Inst. development (LEGAL)
SIZE x LEGAL
Financial openness (KAOPEN)
KAOPEN x LEGAL
KAOPEN x SIZE
Observations
Adjusted R-squared
Debtor
Industrial
Countries
(IDC)
(5)
0.481
[0.241]*
-0.741
[0.590]
0.016
[0.019]
-0.034
[0.015]**
0.027
[0.012]**
-0.309
[0.460]
-0.327
[0.518]
0.026
[0.015]*
0.034
[0.014]**
-0.015
[0.011]
0.022
[0.010]**
-0.003
[0.011]
55
0.63
Debtor
Emerging
Market
(EMG)
(6)
0.076
[0.366]
0.952
[1.664]
-0.144
[0.038]***
0.038
[0.016]**
0.015
[0.006]**
0.616
[0.306]*
0.208
[0.108]*
0.027
[0.013]**
0.025
[0.010]**
-0.022
[0.010]**
-0.002
[0.003]
-0.012
[0.006]**
58
0.49
Ending Thoughts
Both credit to the private sector and stock
market capitalization appear to be equally
important determinants of CA behavior.
Ending Thoughts (cont’d)
The effect of FD is contingent upon
legal/institutional development and financial
openness
 EMG countries with lower levels of legal/inst.
development could experience a worsening in CA
while the deterioration is severe when the country is
more financially open).
 The CA worsening is due to a ↓in NS and an ↑in I
Ending Thoughts (cont’d)
The effect of financial opening is contingent
upon legal/institutional development and FD
 Financial opening could induce EMG countries to
experience a deterioration in CA balances esp. when
they are characterized by highly developed financial
markets
Ending Thoughts (cont’d)
Budget balances matters for IDCs when bond
markets are incorporated – the estimation
results are consistent with the higher end of the
range of 0.10 – 0.49 found in Chinn and Ito
(2007)