Transcript International Financial Markets

Political Ambiguity and Economic Growth:
The MENA Countries
by
Juliane Brach and
Willem Spanjers
(Kingston University and
Rimini Centre for Economic Analysis)
14th May 2013
University of Bologna at Rimini
Rimini, Italy
Political Ambiguity and Growth: the MENA Countries
Contents:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Introduction
Ambiguity
An Example of Modelling Ambiguity
Decision Making under Ambiguity
Basic Growth Strategies
The Model
The Data
Empirical Results
Concluding Remarks
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Political Ambiguity and Growth: the MENA Countries
1. Introduction
Stylized facts:
• Some MENA countries consistently grow below their
potential.
Basic question:
• May this be due to the impact of ambiguity and fear?
Answer:
• Possibly yes.
• Ambiguity with respect to:
- the internal political situation (e.g. succession)
- the external political situation (e.g. conflict).
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Political Ambiguity and Growth: the MENA Countries
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2. Ambiguity
• Keynes (1937) gives a description of ambiguity:
“By ‘uncertain’ knowledge, let me explain, I do not mean
merely to distinguish what is known for certain from what
is only probable. The game of roulette is not subject, in this
sense, to uncertainty [...]. The sense in which I am using
the term is that [...] there is no scientific basis on which to
form any calculable probability whatever. We simply do
not know.”
[pp. 113-114]
Political Ambiguity and Growth: the MENA Countries
To Keynes, this is not without consequences for
economic theory:
“[T]he fact that our knowledge of the future is fluctuating,
vague and uncertain, renders wealth a peculiarly unsuitable
subject for the methods of the classical economic theory.
This theory might work very well in a world in which
economic goods are necessarily consumed within a short
interval of their being produced. But it requires, I suggest,
considerable amendment if it is to be applied to a world in
which the accumulation of wealth for an indefinitely
postponed future is an important factor; and the greater the
proportionate part played by such wealth accumulation the
more essential does such amendment become.” [p. 113]
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Political Ambiguity and Growth: the MENA Countries
He than continues to discuss its implications:
“Now a practical theory of the future [...] has certain marked
characteristics. In particular, being based on so flimsy a
foundation, it is subject to sudden and violent changes. The
practise of calmness and immobility, of certainty and
security, suddenly breaks down. New fears and hopes will,
without warning, take charge of human conduct. The forces
of disillusion may suddenly impose a new conventional basis
of valuation. All these pretty, polite techniques, made for a
well-panelled board room and a nicely regulated market are
liable to collapse. At all times vague panic fears and equally
vague and unreasoned hopes are not really lulled, and lie but
a little way below the surface.”
[pp. 114-115]
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Political Ambiguity and Growth: the MENA Countries
The Modelling of Ambiguity
• Belief functions
- Dempster (1968) and Shafer (1976)
- Example by Mukerjee (ET 1997)
- E(llsberg)-capacities as in Eichberger and Kelsey (1999).
• Multiple Prior Approach
- in the tradition of Gilboa and Schmeidler (1989).
• Choquet Expected Utility
- in the tradition of Schmeidler (1982/1989)
- Neo-additive capacities as in Chateauneuf et al. (2007).
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Political Ambiguity and Growth: the MENA Countries
3. An Example of Modelling Ambiguity
• Consider a US investor holding Greek assets.
• There are four relevant potential situations θ є Θ
relevant for his payouts:
Market State
Asset Prices
Exchange Rate
θ1
stable
medium
θ2
stable
weak
θ3
low
medium
θ4
low
weak
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Political Ambiguity and Growth: the MENA Countries
• The asset price and the exchange rate are
determined by the state of the economy, ω є Ω,
where:
State of the economy Crisis
Deficit
ω1
mild
medium
ω2
mild
high
ω3
severe
medium
ω4
severe
high
ω5
Greece leaves Eurozone
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Political Ambiguity and Growth: the MENA Countries
• The investors know the probabilities with which
the various states of the economy will occur, but
can not always predict their effects on the asset
market and the foreign exchange market:
Probability
Market States Γ(ω)
ω1
0.2
{θ1}
ω2
0.4
{θ3}
ω3
0.1
{θ2,θ3}
ω4
0.2
{θ4}
ω5
0.1
{θ1,θ2,θ3,θ4}
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Political Ambiguity and Growth: the MENA Countries
• The minimum probability of an event T⊆Θ is
v(T) := Σ ω: Γ(ω) ⊆T P({ω})
• The function v is not additive because:
v({θ2}) = P(∅) = 0
v({θ3}) = P({ω2}) = 0.4
but
v ({θ2,θ3}) = P(∅) + P({ω2}) + P({ω3})
= 0 + 0.4 + 0.1 = 0.5.
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Political Ambiguity and Growth: the MENA Countries
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• Now suppose the portfolio generates the following
payouts for the situation θ є Θ in the asset and
foreign exchange markets:
Markets
θ1
θ2
θ3
θ4
f(θ1)
f(θdecision
f(θ
f(θ4)
2)
3)
• APayout
cautious “pessimistic”
investor
assigns
to state ω the worst outcome that may occur in this
state.
• An exuberant “optimist” decision maker assigns to
the state ω the best outcome that may occur in this
state.
Political Ambiguity and Growth: the MENA Countries
• For a pessimistic decision maker, the outcomes
assigned to the states of nature ω є Ω are:
Prob.
Market States
Outcome
ω1
0.2
{θ1}
f(θ1)
ω2
0.4
{θ3}
f(θ3)
ω3
0.1
{θ2,θ3}
min{f(θ2), f(θ3)}
ω4
0.2
{θ4}
f(θ4)
ω5
0.1
{θ1,θ2,θ3,θ4}
minθєΘ f(θ)
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Political Ambiguity and Growth: the MENA Countries
The expected payout for this pessimistic investor is
now obtained as:
P({ω1}) f(θ1) + P({ω2}) f(θ3) + P({ω4}) f(θ4) +
P({ω3}) min{f(θ2), f(θ3)} +
P({ω5}) minθєΘ f(θ)
=
0.2 f(θ1) + 0.4 f(θ3) + 0.2 f(θ4) +
0.1 min{f(θ2), f(θ3)} + 0.1 minθєΘ f(θ).
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Political Ambiguity and Growth: the MENA Countries
• Consider the payout profiles g:= (5, 10, 3, 0) and
h := (5, 0, 10, 3).
• Now we have
g
min{f(θ2),f(θ3)}
h
3 (for θ3) 0 (for θ2)
andmin
implied
probabilities
over
0 (for
θ4)Θ 0 (for θ2)
θєΘ f(θ)
θ1
θ2
θ3
θ4
g
0.2
0.0
0.5
0.3
h
0.2
0.2
0.4
0.2
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Political Ambiguity and Growth: the MENA Countries
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• So we find that the implied probability weighting
over the market states Θ depends on the ranking of
the payouts over the market states.
• A situation where the probabilities assigned to the
different outcome would normally be referred to
as “superstition”.
• It would also run counter to separating the beliefs
over which outcomes are obtained from the
evaluation of the specific outcomes.
• But the “minimum probability function” (belief
function) v is independent of the outcomes!
Political Ambiguity and Growth: the MENA Countries
Simple Capacity
• Consider the state space S:={1,...,n}, a probability
distribution π and a coefficient γ є [0,1].
• Now the capacity v is a simple capacity if
v(E) := γπ(E) if E ≠ S
1
if E = S.
• Let (t1,...,tn) be a permutation of S such that
f(t1) ≤ ... ≤ f(tn), so minsєS f(s) = f(t1).
• Applying the above procedure now gives
γ Eπ{f(s)} + (1 - γ) minsєS f(s).
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Political Ambiguity and Growth: the MENA Countries
4. Decision Making under Ambigiuty
Let (π1,..., πS) denote the probability estimate
γ ∊ [0,1] denote the level of confidence in
the probability estimate
β ∊ [0,1] denote the level of optimism/
pessimism of the decision maker.
Now the utility of the decision maker is:
U(x1,...,xS ; π1,..., πS ; γ; β) := γ 𝔼{u(x)}
+ (1 – γ)∙β∙max s∊{1,...,S} u(xs)
+ (1 – γ)∙(1-β)∙min s∊{1,...,S} u(xs).
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Political Ambiguity and Growth: the MENA Countries
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5. Basic Growth Strategies
Countries face a trade-off between:
• a medium technology development strategy
characterized by agglomeration effects and overall
increasing returns scale (“urban sectors”)
and
• a low technology development strategy
characterized by overall decreasing returns to
scale and a tendency to geographical dispersion of
economic activity (“rural sectors”).
Political Ambiguity and Growth: the MENA Countries
Low technology development strategy:
- decreasing returns to scale
- low requirements on:
- infrastructure
- the education and judicial systems
- regional and redistributive policies
- openness to international trade
- low vulnerability to financial and political shocks.
- low contribution f(x) to rate of growth where x denotes
the available amount of resources for private and public
investment.
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Political Ambiguity and Growth: the MENA Countries
Medium technology development strategy:
- increasing overall returns to scale
- high requirements on:
- infrastructure
- the education and judicial systems
- regional and redistributive policies
- openness to international trade
- high vulnerability to financial and political shocks
- high contribution g(y) to the rate of growth where y
denotes the available amount resources for private and
public investment.
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Political Ambiguity and Growth: the MENA Countries
6. The Model
• Each country has fixed resources, to invest in:
- low technology sectors
- medium technology sectors
- the oil sector.
• The growth created by further resources invested:
- in low technology decreases due to decreasing
returns to scale.
- in medium technology decreases due to
restrictions on the absorbing capacity of sectors.
- in the oil sector is constant until the maximum
absorbing capacity is reached.
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Political Ambiguity and Growth: the MENA Countries
• Low technology sectors:
- low expected growth: f(x), f ’(x) > 0, f ’’(x) < 0
- worst case f min(x) not too bad.
• Medium technology sectors:
- high expected growth: g(y), g’(y) > 0, g’’(y) < 0
- worst case gmin(y) very bad;
for all attainable x and y: f min(x) > gmin(y) and
f min ’(x) > gmin ’(y) .
• Oil sector:
- expected growth: h(z), h’(z) = hconst for z ≤ zmax
- worst case hmin ’(z) = hconst.
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Political Ambiguity and Growth: the MENA Countries
Case: x + y = c
growth
g’(y)
f ’(x)
•
f min’ (x)
x=0
gmin’ (y)
x*
y*
y=0
c
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Case: x + y = c
growth
γ∙g’(y) + (1-γ)∙g min ’(y)
γ∙f ’(x) + (1-γ)∙f min ’(x)
f min ’(x)
x=0
•
•
gmin ’(y)
x*(γ)
y*(γ)
y=0
c
Political Ambiguity and Growth: the MENA Countries
Case: x + y + z = c
growth
g’(y)
f ’(x)
h’(z) = hmin ’(z)
• •
f min ’(x)
gmin ’(y)
x*
z*
y*
c
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Political Ambiguity and Growth: the MENA Countries
Case: x + y + z = c
growth
h’(z) = γ∙h’(z) +
(1-γ)∙h min ’(z)
γ∙f ’(x) +
(1-γ)∙f min ’(x)
•
x*(γ)
γ∙g’(y) +
(1-γ)∙g min ’(y)
• •
•
z*(γ)
y*(γ)
c
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Political Ambiguity and Growth: the MENA Countries
7. The Data
The data sources we use are:
• GIGA/IMES Database on political succession in
the MENA region.
Created by Juliane Brach at GIGA, available on
request.
• UCD/PRIG Armed Conflict Dataset Codebook,
p. 7.
• Worldbank.
• The analysis focuses on the period 1980 – 2008.
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Political Ambiguity and Growth: the MENA Countries
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The data we consider fall into five groups:
• Growth: average growth of GDP per capita.
• Strategy: industry, agriculture, fuel export.
• Ambiguity: polity form (democratic to autocratic),
government form, formal duration of legislature,
changes of government, years in power, family
ties, type of conflict the country was involved in.
• Control variables: population, ln GDP.
• Interaction: polity form / duration, industry / govt.
form, fuel / govt. form, agriculture / govt. form.
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8. Empirical Results
Preliminary results seem to indicate that in
explaining GDP per capita growth over 1980 - 2008:
• of the ambiguity variables
govt. form, duration and family ties
are significant with the expected signs, but NOT
polity form.
• all the control variables
type of conflict, population and ln GDP,
are significant, as is the strategy variable
– industry.
Political Ambiguity and Growth: the MENA Countries
In explaining GDP per capita level of income over
1980 - 2008:
•of the ambiguity variables
govt. form, duration and family ties
are significant and with the correct signs, but
again the is no significance for the variable
– polity
•the control variable
ln GDP,
is significant, as are all the strategy variables
– industry, agriculture, and fuel exports.
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Political Ambiguity and Growth: the MENA Countries
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•The difference of the results in the two specification
is not in line with what one would expect in standard
growth regressions.
•Two reasons for this come to mind:
- the drivers of growth may be different from the
factors that initially caused the high levels of income
in the region, e.g. initial windfall profits relating to
fuel extraction.
- misspecification and endogeneity problems.
Political Ambiguity and Growth: the MENA Countries
9. Concluding Remarks
• Our preliminary findings seem to be in line with
our initial hypothesis that ambiguity may distort
policy decisions toward low growth strategies.
• The result that the degree of democracy /
autocracy is not significant is surprising.
• The preliminary results seem to provide a good
starting point for a more detailed analysis of the
available data.
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