Transcript Macroeconomics, foreign trade and the European Union. Basics.

Balance of Payments.
The situation of transition countries
Balance of payments. – Global imbalances
Today‘s topics
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Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Going a step back. – situation in emerging markets
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End of the last lecture: in the middle term current account
should be balanced
We were talking about countries like the US, France and
German. These are highly developed industry countries
The transformation process from socialistic plan economies
to market economies and the thereby caused growth process
causes some adjustments in the theory. However the longrun aim remains a balanced current account.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Supply and money in socialism.
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Supply with goods during the socialist times was not sufficient in
most countries (CSSR, GDR reached acceptable levels for many
fields)
As people couldn’t buy all goods desired, they were forced to
save money, although they didn’t desire it.
some scientists doubt that “money” in socialism was money in
the closer definition of economists. (means of exchange
didn’t work properly, as it wasn’t accepted everywhere; means of
storage of value didn’t work, as couldn’t use saved money to buy
goods)
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
At the turning point towards transition
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When transformation started this discussion looses
importance, by transferring currencies into convertible
currency, they suddenly fulfill the means of money.
The unwanted savings are now available for demand for
goods
However the productivity of the given countries didn’t
increase yet
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Saving rates in selected former socialistic states
60
50
Euro area EMU
40
Poland POL
30
Russian
Federation RUS
Slovak Republic
SVK
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10
1985
1986
1987
1988
1989
1990
1991
1992
1993
0
Source: www.worlbank.org
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Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Analysis of the data (1)
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having at a look at the data we can see them reflecting
different facts:
Poland and Russia (USSR) with bad supply situation have
high (unwanted) savings
The shift of start of transformation between Poland (first
half 1989) and Russia (beginning 1992) is visible in the shift
of the breakdown of savings
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Analysis of the data (2)
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Inflation plays a role in savings (trivial). Poland (early
90s, stabilized in 1993) and Russia (mid of 90s stabilized in
1996) show extraordinary high inflation rates, therefore the
saving brakes down and the saved “socialist” money lost .
CSSR as said before had relatively good supply and thus not
such a high price driving excess demand. Inflation raise
moderate, saving rate went down, but not overshot and
ended up with a standard rate.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Life cycle modelling
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In the following a model for economic development of
transition economies will be shown
The model orientates on the Life cycle Analysis first
developed by Franco Modigliani
Life cycle analysis is used on two stages: To analyze the
economy as a whole and to analyze behavior of people taking
into concern the demographic situation which is unusual for
emerging markets
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The youth
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The first years of a child are not productive. Consummation
is far above earnings. Money can be invested in education or
in Consummation.
As said before productivity after the collapse: low
Forced savings disappear, people buy things they couldn’t
Decision: Investment or Consummation
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development – a rational approach
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Products are not competitive; investments into production
facilities are necessary
As there is no capital available, capital inflow from abroad is
necessary. However this foreign investment should not be as
short run credit, but as long term FDI with positive spill
over effects
Technology and know how should be adapted.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development – a rational approach (2)
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The demand for consume increases, as products are now
available. Lost consummation is caught up.
As of the low given economic level high growth is expected.
According to intertemporal consummation smoothing
future income is spent .
Meaning: Investment is increasing, savings are decreasing 
S = I + CA then leads to CA deficits
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
How one should act… (childhood)
to insist on balanced Current Account / Capital Account
would thus be a dangerous way, avoiding the needed impulse
for economic development.
However important points are:
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using long term productive capital inflows, enabling spill overs
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using experience of foreign firms in effective market behavior
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through FDI: exporting the risk of failing abroad (credit: loss is domestic!)
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not increasing gross foreign debt. (FDI don’t increase debt)
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Dangers of the development
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often: fixed exchange rates; in times of high interest rates a
strong capital inflow will appear. As market mechanisms and
potential are still limited danger of misallocation.
To positive future expectations. Consummation as of
intertemporal smoothing grows to strong.  non
sustainable CA; loss of trust and capital inflow
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The young adult.
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after finishing the education, the young adult starts to be
productive
the demand for goods is not increasing though. The higher
income now is used to pay for the credits.
A shift from short run spending (consummation) to longer
run investments (flat, house, interior) can be observed
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development – improving of trade balance
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Through the FDI driven modernization of the economy it
got more compatible.
As product quality improved, exports are starting to grow.
formerly imported half and market products can be
substituted by local production
These three points lead to an improving Current Account.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development – worsening of factor
incomes
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the balance of factor incomes is worsening:
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in the former years an inflow of capital took place.
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FDI firms start to work profitable: Outflows of the gains
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The credits taken have to be served: interest payments
Aim of economic policy should be to keep the re-investment rate high
New situation: still deficits in Current Account, but not mainly
driven by trade anymore but by factor incomes
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Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Dangers in this stage
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The production development is only concentrated on the
domestic demand. Then the exports will not increase, but
the CA will worsen, as factor incomes worsen and trade
keeps its level
if the re-investment level is low, the balance of factor
incomes gets strongly negative. This would also be a warning
signal: the domestic economy is not attractive enough to
invest in.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The adult.
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live is settled. All bigger investments for live are done
(house, flat etc.). They just need to be kept.
Credits are paid off, however investments for the old ages
are now built.
the last point means: we are not taking money from anyone
anymore but lending it!
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development
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The economy reached the level of an industrial country in
means of productivity, competitiveness and technology
As the catching-up process comes to an end, the level of
investment declines (from an extraordinary high) to a
normal level
This means the re-investment ratio of the FDI declines,
leading to a worse balance of factor incomes
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development (2).
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The domestic returns on investment are not necessary any
more in whole to cover the demand on investment. Capital
can be exported
At this turning point the capital balance and thus the current
account should be balanced
Taking the point above, the development of surpluses in
trade should strengthen as balance of factor incomes worsen
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Dangers in this stage.
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Exports are to weak. The CA can not be balanced and an
persistent deficit occurs.
If to big shares of the production are going out as exports
and the economy doesn’t serve the domestic demand to a
bigger extend, the accounts can be balanced, but there is no
growth in the domestic wealth. (Chinese disease)
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The settled adult
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Live is balanced in financial respects.
There are times to save more money, time to spend more
money (for example saving for and buying a new car)
The standard of living should be kept at the same level on
average.
In the professional live, the leading positions are reached,
others can be instructed, knowledge is given to the younger
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Expected development
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There are times of capital exporting (= saving surplus) and
times when, consumers use savings for consummation (CA
deficits; capital importing)
Over the time the periods of surpluses and deficits are
balanced, so that there is no structural debt or crediting
Technological standards reach highest means. Know how can
be exported with high roi rates.
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Dangers in this stage
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People are used to fast growing of there wealth level. The
intertemporal consummation smoothing is not working
properly: higher than realistic income growth is expected;
spendings are to high; structural CA deficits. (case: USA)
high specialization in high tech export goods connected with
a weak domestic demand lead to structural surpluses, not
paying back the wealth to its creators (people in the
country) (cases: Germany, Japan)
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Summary
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To expect a balanced current account of growing economies
would be misleading, as it would hinder their growth
To allow deficits helps in economical development, as inflow
of knowhow, building up a domestic markets, giving the
chance for consummation are important
There are several dangers of non sustainable development at
the different stages, which have to be observed carefully to
reach the wanted aim of development
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
Is Russia a good example of such a TE?
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NO! …. But why?
Russia’s data of the current account is “polluted” by the
income of raw materials (oil, gas, gold etc.)
As of missing pressure to allocate capital efficient (no
absence of capital), the adjustment mechanisms don’t work
“Politic of economic strength”; Russia is very closed to
foreign capital and investments, hindering the mechanisms
to work
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The Russian current account
Current Account
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100000
80000
60000
Current Account
40000
20000
0
-20000
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95 96 97 98 99 00 01 02 03 04 05 06 07
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
The Russian current account
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share of raw materials on the export
0.85
0.8
0.75
0.7
share of raw…
0.65
0.6
95 96 97 98 99 00 01 02 03 04 05 06 07
Source: www.gks.ru (Росстат);
author‘s calculations
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Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
trying to adjust the current account development
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500000
400000
300000
200000
100000
0
-100000 95 96 97 98 99 00 01 02 03 04 05 06 07
-200000
-300000
-400000
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
Export
adjusted 15%
Exports
Import
adjusted current
account
In million US Dolkars
Source: www.gks.ru (Росстат)
author’s calculations
05.04.2011
Balance of payments in transition countries
Paradox: balance of factor incomes
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balance of factor incomes
0
-5000
-10000
-15000
-20000
-25000
-30000
-35000
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95 96 97 98 99 00 01 02 03 04 05 06 07
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
balance of factor
incomes
In million US Dolkars
Source: www.gks.ru (Росстат)
author’s calculations
05.04.2011
Balance of payments in transition countries
interpretation
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The Russian economy is monofocused on raw materials like
oil, gas, metals.
Through exporting these high current account surpluses are
realized
The share of raw material in exports is rather growing then
becoming smaller: this means the importance of classical
technical export industries (machinery, cars, other
technological products) is not growing
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
interpretation (2)
Yesterday we saw the paradox of the USA, having a positive
balance of factor income although persistent CA deficits.
Russia shows the evidence vice versa!
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Russian foreign investments are ineffective. High currency reserves of the central
bank are invested conservatively.
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Russian econonomy often invests in prestige objects, „to be seen“, however, the
investments are often not profitable (example: Gazprom pays 200 million Euros
just to be main sponsor of a German football team (Schalke 04))
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conclusion: russian economy is not up to date. If foreign firms can reach high
returns on investment in Russia, we can conclude, that the stage of economy is lower
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011
Balance of payments in transition countries
conclusion
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There is many evidence from Eastern Europe showing, that
the model developed is working. It gives good rules of
judgement how far a transformation country already
developed
Applied to Russia we can get only some results by trying to
eliminate the consequences of vast raw material exports
As result we see, that Russia seems to be stuck then in the
2nd stage as of its structural deficit in the Current Account
Dipl.- Kfm. Thomas Stiegler, University of Göttingen.
05.04.2011