Transcript Chapter 5

Chapter 5.
Open Economy Growth:
International Trade and Capital Flows
Share of Country Groups in Global
Economy (2000)
Group
GDP
Pop.
Exports
FDI
share
Net
Capital
Inflow($)
High
Income:
%79
%15
%73
%86
Middle
Income
%18
%44
%24
%14
221 billion
Low
Income:
%3
%41
%3
%0.6
4.5 billion
Share of Turkey in Global Economy
Trillion $
GDP
2008-PPP
GDP per
cap. (PPP)
Exports
Imports
World
$ 69.5 tril.
$10,500
(2008)
$16.28 tril.
(2008)
$16.21 tril.
(2008)
Turkey
$ 0.906 tril.
$12,000
(2008)
$142 bn
(2008)
$205 bn
(2008)
Share
%1.3
%0.87
%1.26
Rank
16.
33.
23.
Source: CIA world factbook
87.
Share of Turkey in Global Economy


TR Total GDP rank: 16th, below Indonesia and
South Korea (S. Korea pop: 48.5 mil., GDP p.c.:
$26,000, PPP), above Iran.
Countries with largest exports and imports: (2010,
$trillion):


Exports: China (1.5), Germany(1.34), US(1.27), Japan(0.8),
France(0.5), S. Korea (0.47), İtaly(0.46), Netherlands
(0.45), Canada, UK, Hong Kong, Russia
Imports: US(1.9), China(1.3), Germany(1.1), Japan(0.64),
France(0.58), UK(0.54), İtaly(0.46), Hong Kong(0.43), S.
Korea(0.42), Netherlands(0.41)
Share of Turkey in Global Economy

Economic groups and unions:


EU: As of 2005, 51% of Turkey’s exports and 42%
of its imports is with EU countries.
OECD: 60% of Turkey’s exports and 57% of its
imports is with OECD countries
Globalization


Liberalization of international trade, production, and
int’l capital flows in the post WW-2 era has been
named “globalization”. Has accelerated in the 80s
and 90s.
Organizations that were established for promoting
liberalization of int’l trade, capital flows and
production are IMF, The World Bank, GATT(1947)
and WTO (1995)
Int’l Trade




Increases competition and productivity
There is a positive relationship btw GDP growth
rate and int’l trade volume/GDP (Figure 5.1, from
WB)
SE Asia: S. Korea, China, Taiwan, Indonesia,
Thailand, Singapore applied export-led growth
strategy successfully.
For Turkey see: disticaret.xls. What is trade volume,
trade balance (or deficit), exports/imports ratio?
Turkey's foreign trade
150 000 000
140 000 000
130 000 000
120 000 000
110 000 000
100 000 000
90 000 000
80 000 000
exports
imports
70 000 000
60 000 000
50 000 000
40 000 000
30 000 000
20 000 000
10 000 000
2003
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1943
1939
1935
1931
1927
1923
0
19
5
19 0
6
19 0
1970
8
19 0
8
19 3
1984
8
19 5
8
19 6
1987
8
19 8
8
19 9
1990
9
19 1
1992
9
19 3
94
1
19 9 9
9 5
19 6(2
9
19 7(2)
1998( )
9 2
20 9(2)
0
20 0(2)
2001( )
02 2)
20 (2
0
20 3(2)
04 )
(2
)
Turkey's Trade Deficit / GNP (% )
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Int’l Trade




How is openness of an economy measured?
Trade volume / GDP. Figure 5.6 in Akin. Larger
economies are usually more closed than smaller ones
because they have enough domestic demand.
Core countries: developed countries that import raw
materials and export finished goods.
Periphery countries: Countries that export raw
materials (oil, natural gas, metals, unprocessed
agricultural products, etc) and import finished goods.
Developed countries’ exports are more diversified: Most
developing countries’ exports are dependent on a few
products, especially raw material exporters: Gulf
countries, Venezuela, Nigeria.
Would it Be Better if Turkey Had Oil
Reserves?

According to Sachs and Warner (1995), NO!


They studied 95 countries between 1971 and
1989 and found that: income per capita in
countries whose raw “materials exports / GNP”
ratio exceeded 10% grew 0.7% slower than
others. Why so?
Raw materials’ share in exports of S. Korea:
8%, Egypt: 68%, Nigeria 99%, Malaysia 24%,
Mexico 22%.
Would it Be Better if Turkey Had Oil
Reserves?

Because:


Share of basic food and agricultural products in
household budgets is falling. These products have
very low income elasticities of demand. Total
revenue does not increase much, demand is
sluggish.
Technology reduces demand for raw materials or
in some cases eliminates it by producing
synthetically.
International Capital Flows (investments
across countries)

Two types:

Foreign Portfolio Investments (FPI):


Inflows: Foreign residents purchase domestic bonds, stocks,
or lends credits to domestic residents (+ in BOP). Outflows:
the other way around, (- in BOP).
Are short-term, easy come, easy go. Fast financial
liberalization with poor regulation caused many crises in
developing world especially in 80s and 90s.


80s: Latin American debt crisis.
90s financial crises: SE Asia, Russia(97-98). Turkey, Argentina
(2000-01). Could borrow longer term, but confidence matters.
Indicators of risk: maturity of debt, forex reserves, exports, current
account, budget deficit, stock of debt.
International Capital Flows

Foreign Direct Investments (FDI):



Inflows: Foreign residents (companies owned by them)
buying more than 10% of domestic firms and banks or
starting new firms or partnerships or branches in the
domestic economy by purchasing land, equipment or
buildings.
Outflows: domestic residents doing the same in foreign
countries.
Difference of FDI and FPI: In FDI, foreign investor has a
share larger than 10% in the company so that (s)he has
managerial control of the company. In FPI, investor only
contributes capital, does not take managerial control of her
invested capital.
Multinational Corporations (MNCs, 2011
data)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Wal Mart - United States (retail)
Royal Dutch Shell - Netherlands [2] (Petroleum)
ExxonMobil Corporation - United States (Petroleum)
BP - United Kingdom (oil)
Sinopec - China (Petroleum)
China National Petroleum - China (Petroleum)
State Grid - China (Power)
Toyota Motor - Japan (automobiles)
Japan Post Holdings- Japan (Diversified)
Chevron - United States (Petroleum)
http://en.wikipedia.org/wiki/Fortune_Global_500:
Multinational Corporations (MNCs, 2008
data)
Ranking
Sales
(bn,$)
Assets
(bn,$)
Personnel
(thousands)
1
Wal-Mart (US) 263
104,9
1500
10
General
Motors (US)
195
448,5
326
25
Honda Motor
72,3
80,1
131,6
52
China
national
petroleum
56,4
97,7
1024,4
Source: Radelet- Fortune 500
FDI Potential Benefits






Long-term, difficult to escape the country easily
(FPI can “fly” easily: “capital flight”).
Technological transfer: new ideas, methods,
management skills transferred. Educate local
managers or labor.
Create employment, (although < %5)
Allows to finance investment above domestic
savings:
Dom. Inv. = Dom. Sav. + Foreign Sav. (NCI)
(for some countries, NCI<0)
FDI Potential Benefits


Specialization: countries specialize in certain
types of production. Cars, electronics. Malaysia
first only assembly (labor intensive), but
eventually specialized in more capital- and
technology-intensive production.
MNCs have strong international market
experience. Can increase exports easier than
domestic companies because for domestic firms
difficult to enter the global market.
FDI Potential Hazards (according to
some)




High profit transfers (or re-investment?)
If they buy a readily operating firm, may not
bring new technology
Might control or “exploit” the natural resources of
the country: especially large, powerful MNCs in
poorer countries. Poor country govt.s may not
have strong institutions to regulate the MNCs.
Unfair tax advantage relative to domestic
firms.Domestic firms may not be as efficient and
so may have to close down. Foreign firm could
become monopoly then. Could also engage in
“predatory pricing” policies.
FDI Potential Hazards (according to
some)


According to Dani Rodrik (“has globalization gone
too far?”), real wages drop especially in low-skilled
sectors due to competition from labor surplus
countries, esp. China (assembly, textiles, toys, etc).
Might increase dependency in strategic sectors
sensitive to national security such as
communications and energy. Sometimes MNCs can
be more powerful than the domestic govt.
Global FDI Flows (Radelet)
Million$
1980
1990
2003
%GDP-2003
China
57
3,487
53,505
3.8
Mexico
2,090
2,549
10,783
1.7
7,958
1.8
Russia
Turkey
18
684
1,562
0.6
Poland
10
89
4,123
2
Bulgaria
1,419
7.1
Serbia
1,360
6.6
FDI flows to Turkey
95
96
97
98
99
00
01
02
03
04
885 722 805 940 783 982 3352 1137 1752 2883
net FDI Inflows, milion US dollars, see
odemelerdengesiOCAK2011.xls for more
recent data
05
06
9801
20070
Factors that Influence FDI Flows

Serin and Çalışkan (2008) studied FDI in SE
European countries including TR:




Total GDP as measure of market size has positive effect.
Because domestic demand is sufficient.
Positive developments in EU Relations, legal reforms have
positive effect.
Taxes: Lower tax rates and lower govt. debt stock attract
more FDI
More open economies attract more FDI. Because investor
plans to produce not only for the domestic market but also
export to other countries. But in theory, sometimes higher
traiffs and protection could also attract FDI. But empirical
results show openness increases FDI.
Factors that Influence FDI Flows

Factors according to other studies:






Infrastructure: Electricity, transportation (roads, railroads,
sea, air), communication (phones, internet), ..
Cost of labor (real wage)
Human capital or educated labor force. Although labor cost
might be low, FDI needs qualified labor.
Costs of starting a business (Table 11-4 in Radelet),
An “unjust” Justice system has negative effect.
Property rights, contract enforceability.
Factors that Influence FDI Flows

According to Kaufmann and others from World
Bank, governance (institutionalization) has a
positive relationship with investment/GDP ratio. 6
measures of governance:






Accountability
Political stability (coups, armed conflict, violence,
frequent demonstrations and strikes)
Effectiveness of govt.
Quality of Govt.’s Policymaking
Rule of Law
Degree of corruption.