Transcript From Riches to Rags, and Back? Nauro F. Campos Menelaos G

From Riches to Rags, and Back?
Explaining the Growth Trajectory of
Argentina since the 1890s
Nauro F Campos
Menelaos Karanasos
For presentation at the
3rd EMG Conference on Emerging Markets Finance
London, 5-6 May 2011
Bin Tan
Motivation
• What is the relationship between financial
development and economic growth?
• Twist 1: over the very long-run (“historical
reasons”)
• Twist 2: novel econometric framework:
impact on growth AND on growth volatility
• Why focus on Argentina?
Part of a larger project
• This paper: what are the main reasons?
• Financial development and SR/LR (JBF)
• Political institutions as source of uncertainty
(EcLett)
• Apocalypse when? Structural breaks (draft)
Questions for this paper
• What is the relationship between, on the one hand,
financial development (domestic and international),
public deficits and inflation, openness and political
instability and, on the other hand, economic growth
and growth volatility?
• Are the impacts of these variables direct or indirect
(via the conditional growth volatility)?
• Do these effects vary over time, in general and, in
particular, do these vary with respect to shortversus long-run considerations?
What did we do?
• Power-GARCH
• Annual data, 100+ years: 1896-2000
• Growth and the “historical reasons”
• Argentina and the Argentine puzzle
RESULTS
(a) Direct
(b) Indirect
(c) SR/LR
(d) Breaks
(Direct) Effects of “Historical
Factors” on Economic Growth
Do these direct effects change in
the presence of other historical
factors?
Findings thus far
(a) financial dev has
positive & sig direct
effect on growth
(b) trade openness
negative & sig
effect on growth
(c) “informal” PI
negative & sig
effect on growth
(guerrilla warfare)
What about their
INDIRECT
effects? Through
Growth Volatility?
Indirect Effect of FD/SPI on Growth
Findings
(a) financial dev has
positive & sig direct •
effect on growth
(b) trade openness
negative & sig
effect on growth
•
(c) “informal” PI
negative & sig
effect on growth
(guerrilla warfare)
“formal” political
instability (const
change) negative
and sig indirect effect
trade openness
negative and sig
indirect effect
Robustness
• SR/LR
• Structural breaks
Dynamic (SR/LR effects):
Pesaran-Shin ARDL (P)ARCH
Main conclusions
Findings
(a) Direct effects: financial development and
trade openness,“informal” political instability
(b) Indirect: “formal” political instability
(c) SR/LR: the effect of political instability
(negative) is similar in the long- and shortrun, that of financial development is
negative in the short- and positive in the
long-run whereas trade openness has only
a positive long-run impact.
Thank you!
What did we find?
(a) Direct effects: financial development and
trade openness, “informal” political
instability
(b) Indirect: “formal” political instability
(c) SR/LR: the effect of political instability
(negative) is similar in the long- and shortrun, that of financial development is
negative in the short- and positive in the
long-run whereas trade openness has only
a positive long-run impact.
Outline
1. Introduction
2. Argentine puzzle
3. Related lits: FD, Macro volatility, SPI and
Econometric fwk
4. Data
5. Power GARCH results
6. Conclusions
7. Extensions
The Argentine Puzzle
• Argentina: only country that was developed in 1900
and is developing in 2000. HOW & WHY?
• Ypc in 1913: USD 3,797 (in 1992 USD). France and
Germany: USD 3,452 and USD 3,134
• “Argentina’s ratio to OECD income fell to 84
percent in 1950, 65 percent in 1973, and a mere 43
percent in 1987 (…) Argentina is therefore unique”
(della Paolera and Taylor, 2003).
Argentine puzzle (cont)
• WHY? Finance
• Taylor (1992, 2003)
• Highly concentrated: Buenos Aires vs provinces
• Financial system with low access: high wealth
(land) inequality
• Low savings rates
• Dependence on foreign capital (UK and railroads)
Argentine puzzle (cont)
• WHY?
• Political instability seems to play a key role:
• “The political history of Argentina (…) reveals an
extraordinary pattern where democracy was
created in 1912, undermined in 1930, re-created in
1946, undermined in 1955, fully re-created in 1973,
undermined in 1976, and finally reestablished in
1983” (Acemoglu and Robinson, 2005).
Argentine puzzle (cont)
• WHY? Two other important reasons
• Macro volatility: public deficit and (since
1970s) inflation (della Paollera et al 2003)
• Trade openness: 50% in 1910, 20% in 1950
(Véganzonès and Winograd 1996)
The Other 4
Related Lits
1. The Financial Dev Literature
• Cross-country M3, bank deposits, private credit,
SM (all as %GDP), 5-year averages, from 1960
2. Macro Volatility Literature
• Ramey and Ramey (AER 1995) show that output
growth rates are adversely affected by their volatility, …
• while Grier and Tullock (JME 1989) find that higher
standard deviations of growth are associated with
higher mean rates.
• Simple measures of volatility that don’t support
decomposition (predictable / unpredictable)
• So using a framework that supports this decomposition
would be hopefully a contribution
3. Development: SPI
• SPI: standard is composite of coups,
revolutions and assassinations, higher
frequency (5-year averages since 1960, crosscountry)
• Maybe we can learn something if we focus
instead on individual SPI series, annual
frequency
• What about different types of SPI? Here we
look at informal/formal
4. Econometrics
• Use of Power GARCH (Ding, Granger and Engle 1993)
• “The PARCH model increases the flexibility of the
conditional variance specification by allowing the data
to determine the power of growth for which the
predictable structure in the volatility pattern is the
strongest. There is no strong reason for assuming that
the conditional variance is a linear function of lagged
squared errors. The common use of a squared term in
this role is most likely to be a reflection of the normality
assumption traditionally invoked. However, if we accept
that growth data are very likely to have a non-normal
error distribution, then the superiority of a squared term
is unwarranted and other power transformations may
be more appropriate”
PGARCH: Costs & Benefits
• Benefits
Conditional variance
Appropriate TS method
• Costs
Computational and Assumptions
Direct Effect of FD/SPI on Growth
Indirect Effect of FD/SPI on Growth
Data
Main sources
• Mitchell, International Historical Statistics
• della Paolera and Taylor, New Economic
History of Argentina (CUP, 2003)
• Bordo, Eichengreen et al, EP, 2001
• Lee Aston & Andres Gallo, JLE, forth.
• Arthur Banks’ dataset
• British and Bank of England Libraries
Data: Growth
• Growth is real per capita GDP growth
• Source is DataBanks 1896-2000
• Note we have other growth, from other sources, but not yet ready to
report
Data: Financial Development
•
Financial development
•
Std is M3/GDP and Credit to Private/GDP
1.
2.
3.
4.
M3/GDP
M1/GDP
Total deposits in saving banks/GDP
Private deposits in commercial banks/GDP
Data: Political Instability (Informal)
•
“Informal” political instability: std is coups, revolutions and
assassinations
•
Assassinations are defined as “any politically motivated murder or
attempted murder of a high government official or politician”
•
General strikes are defined “as any strike of 1,000 or more industrial
or service workers that involves more than one employer and that is
aimed at national government policies or authority.”
•
Guerrilla warfare covers any armed activity, sabotage, or bombings
carried on by independent bands of citizens or irregular forces and
aimed at the overthrow of the present regime
•
Anti-government demonstrations which are any peaceful public
gathering of at least 100 people for the primary purpose of displaying
or voicing their opposition to government policies or authority
Data: Political Instability (formal)
•
“Formal” political instability: within political system
•
Legislative elections: number of elections for the lower house each year
•
Constitutional changes: number of basic alterations in a state's
constitutional structure, the extreme case being the adoption of a new
constitution that significantly alters the prerogatives of the various
branches of government.
•
Size of the cabinet: number of ministers of "cabinet rank" (but excluding
undersecretaries, parliamentary secretaries, ministerial alternates, etc,
and include president and vice-president in a presidential system).
•
Number of cabinet changes measures the number of times in a year that
a new premier is named and/or at least 50% of the cabinet posts are
occupied by new ministers.
Data: Trade Openness
Data: Public deficit & Inflation
Next steps
• Forecasting growth: counterfactual to
isolate the finance effect
• Bivariate GARCH FD-growth, smallish n?
• Panel (other LAC countries? BRAZIL)