Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw

1. Sources for Financing Domestic Capital Is Foreign Saving a Viable Option for Development Countries? Stephanie Carret & Jinjie Cui (Eric) Faculty of Economic Science University of Warsaw 7th January, 2010 Development Workshop

2. The Planning for today 1. Review of paper: main ideas 2. Analysis of illustrative graphs 3. Other views on the subject 4. What questions can we raise Development Workshop

3. The point of this paper • Capital account liberalization • Controversial policy in the 90’s • Early 90’s • Waves of market-oriented liberalization • Greater financial liberalization • Optimism about growth prospects • Growing financial integration • Expected capital stock increased with available foreign savings • This papers tries to test this assumption This paper shows economic growth depends on all factors explaining magnitude & quality of investments in all types of K Political economy factors & political risk diversification • Important to understand the link growth-SFR Development Workshop

4. Data used & Methodology • Data • World Development Indicators database • 47 developing & 22 OECD countries • Between 1981 and 2001 • Methodology • National income accounts • SFR: what is the autarky stock of tangible K supported by actual domestic past savings relative to actual stock of K • Panel comparison accross countries & time Development Workshop

5. Regional findings • Latin America & Africa • Rely more on foreign savings to finance their finance their tangible K • Weak trend of SFR greater dispersion • Relatively low growth rates • Asia • SFR increased, especially post-1997 crisis • Asia has financed domestically its rapid increase in K • Precautionnary savings post-crisis: increased SFR • High growth rates • OECD • Increase in standard deviation of SFR* Development Workshop

6. Main Conclusions • Self-financing ratio in developing countries • Evaluate impact of growing global financial integration on sources of financing domestic capital stocks • Results found • 90% of stock of capital is self financed & Stable through the 90’s* • No significant correlation found between • Financial integration and self-financing ratios • During 90’s, countries with higher SFR grew faster • No « growth bonus » when increased financing share of foreign saving • Better institutions associated with lower volatility of SFR • Financial integration helped facilitating assets diversification… • … but failed to offer new sources of financing capital Development Workshop

7. Figure 1 Self-financing ratios, means and standard deviations Development Workshop

8. Figure 2 Growth and self-financing ratio, cross-country analysis, 1990s Development Workshop

9. Table 1 Explaining average per capita growth rates in the 90s (T-statistics are presented in italics) Development Workshop

10. Table 2 Explaining standard deviation of self-financing rates in the 90s Development Workshop

11. Figure 3 The association between deeper de-facto financial integration and changes in self-financing ratios Development Workshop

12. Figure 4 Self-financing ratio, means across regions Development Workshop

13. Figure 5 Annual GDP per capita growth, means across regions Development Workshop

14. Figure 6 Self-financing ratios and GDP per captia growth rates in selected countries that did not experience major financial crisis Development Workshop

15. Figure 7 Self-financing ratios and GDP per capital growth rates in selected countries that experienced major financial crisis Development Workshop

16. 3. Other views on the subjectthe case of foreign investment • « Foreign investment in developing contries: does it crowd in domestic investment? », by M.Agusin and R.Machado, in Oxford Development Studies, 2005 • To what extent MNE’s FDI in developing countries are crowding in and out domestic investment? • Establish an investment theoratical model including FDI variable • 12 countries in 3 developing regions (Africa, Asia, S.America) • Testing between 1971-2000 • Conclusions • At best, domestic investment unchanged for 3 regions • S.America & Africa, crowding out movements (70’s & 90’s) • Need for more policies to make FDI more effective • Develop the domestic component of total investment • Limit liberalization on FDI? Screening policies? Quality ladder? • Question of FDI impact on development & total investment Development Workshop

17. 4. What questions can we raise? • When to liberalize? Is it needed to liberalize? • Did the Washington Consensus did worse than better? • Case of Latin America • Case of East Asia • What about the role of the state? • How to invest foreign savings in capital financing? Development Workshop

18. Source: Paper: “Source for financing domestic capital – Is foreign saving a viable option for developing countries”, by J.Aizenman,B.Pinto & E.Radziwill, in NBER working paper 10624, 2004. Development Workshop

19. Questions? Thank you for your attention! Development Workshop