Helmut Reisen

Which Types of Capital Inflows Foster Developing-Country Growth?

As a result of the Asian crisis, both the virtues of domestic savings and the risks of foreign savings have been emphasized in the debate on development finance. In particular, East Asia, with its enviable saving rates, it has been argued by economists such as Joe Stiglitz and Jagdish Bhagwati, does not need foreign funds for investment and growth. This paper explores the benefits of private capital inflows by reviewing the analytical arguments advanced in the literature and by building fresh empirical evidence. Particular attention is given to the independent growth impact of the various broad categories of flows in the recipient emerging markets. The paper provides panel data analysis covering 44 countries over the period 1986-97; correcting for standard growth determinants, it measures the independent growth effect of foreign direct investment, portfolio equity investment, bond flows, as well as short-term and long-term bank lending. The findings suggest that developing countries should not solely rely on national savings, but rather should encourage foreign direct investment and portfolio equity inflows so as to stimulate long-term growth prospects. Copyright 2001 by Blackwell Publishers Ltd.

Emerging market risk and sovereign credit ratings

In principle, the sovereign credit rating industry could help mitigate the congestion externalities common to world capital markets that arise from the failure of market participants to internalise the social cost of external borrowings. This would require that modifications in ratings on government bonds convey new information to market participants, with changes in credit ratings leading to changes in country risk premia. Using panel data analysis and event studies this paper presents econometric evidence that changes in credit rating have a significant impact on international financial markets. In line with earlier studies, our event study finds a highly significant announcement effect when emerging-market sovereign bonds are put on review with negative outlook. Our findings imply that the sovereign rating industry has the potential to help dampen excessive private capital inflows into the emerging markets with negative rating announcements ... En principe, l’existence d’agences d’evaluation financiere (the sovereign credit rating industry) pourrait contribuer a limiter les externalites dues a l’afflux de capitaux etrangers et communes a tous les marches des capitaux du fait de l’incapacite des acteurs du marche a internaliser le cout social des emprunts exterieurs. Toute nouvelle cotation des obligations d’Etat devrait transmettre de nouvelles informations aux intervenants sur le marche et les changements dans les evaluations financieres devraient se repercuter sur l’evolution du risque pays. Ce document technique repose sur une analyse en donnees de panel et sur des etudes de cas ; il ressort de l’analyse econometrique que les changements dans les cotations ont des repercussions importantes sur les marches financiers internationaux. Notre analyse, qui s’inscrit dans le prolongement des travaux precedents, met en evidence un effet d’annonce tres significatif quand les perspectives d’evolution des obligations d’Etat sur ...

Do funded pensions contribute to higher aggregate savings? A cross-country analysis

Do Funded Pensions Contribute to Higher Aggregate Savings? A Cross-Country Analysis.—In this paper we test the hypothesis that increases in funded pension wealth contribute to higher aggregate savings by employing a panel data set of ten countries over the 1982–1993 period. We develop a proxy for changes in funded pension wealth for this sample of countries based on pension fund asset data. Using this measure and controlling for other determinants of savings, we estimate the relationship between aggregate saving rates and changes in funded pension wealth. Our results suggest that the build-up of pension assets exerts a positive and statistically significant effect on aggregate saving rates, and that this impact differs for OECD and non-OECD countries. JEL no. E21, G23, O57ZusammenfassungTragen Renten in einem Kapitaldeckungssystem zu einer höheren Ersparnis in der Volkswirtschaft bei? Eine länderübergreifende Analyse.—Die Verfasser prüfen die Hypothese, daß Erhöhungen des Vermögens in einem Rentensystem mit Kapitaldeckung zu einer höheren aggregierten Ersparnis führen und verwenden dafür Paneldaten aus zehn Ländern für die Zeit von 1982 bis 1993. Sie entwickeln einen Näherungswert für Veränderungen des Rentenvermögens in diesen Ländern, der auf Daten über Rentenfonds basiert. Mit Hilfe dieses Maßes und unter Berücksichtigung anderer Determinanten der Ersparnisbildung schätzen sie die Beziehung zwischen der aggregierten Sparquote und den Veränderungen im Rentenvermögen im Falle eines Kapitaldeckungsverfahrens. Ihre Ergebnisse deuten darauf hin, daß die Ansammlung von Rentenvermögen einen positiven und statistisch signifikanten Einfluß auf die aggregierte Sparquote ausübt und daß diese Wirkung unterschiedlich ist, je nachdem ob es sich um OECD-Länder oder um Länder handelt, die nicht der OECD angehören.

Liberalizing foreign investments by pension funds: Positive and normative aspects

The paper evaluates the economics of foreign investment regulation for pension funds, with a focus on developing countries, where fully-funded pension systems are being started de novo. The analysis produces three observations. First, the benefits of global portfolio diversification apply particularly to developing-country pension assets because the volatility of asset returns is high while the risk tolerance of pensioners is low. Second, restrictions of foreign investment by domestic pension funds can hardly be justified on grounds of financial-development arguments: cross-country evidence which little support for the claim that the accumulation of pension assets would provide strong externalities for financial development. Moreover, the home bias generally observed in pension fund investment should translate into sufficient potential demand for domestic financial assets so as to deepen markets and develop the institutional infrastructure. Third, a case for initial localisation ... Ce document evalue l’economie de la reglementation des investissements a l’etranger des caisses de retraite, notamment pour les pays en developpement (PED) ou les systemes de retraite par capitalisation sont recents. L’analyse conduit a trois observations. Premierement, elle montre que les produits d’epargne retraite des PED peuvent tout particulierement beneficier d’une diversification des portefeuilles au niveau mondial ; en effet, les rendements des actifs sont tres volatils alors que les retraites sont tres vulnerables. Deuxiemement, l’argument du developpement financier peut difficilement justifier les limitations a l’investissement etranger par les fonds de pension nationaux : cette etude internationale ne confirme pas vraiment l’idee selon laquelle l’accumulation de produits d’epargne retraite conduirait a des retombees positives importantes pour le developpement financier. De plus, le biais national generalement observe dans les investissements de caisses de retraite ...

Towards Capital Account Convertibility

• Advanced developing countries are increasingly encouraged to remove existing capital controls, but mixed experiences with capital account opening caution that reform must be carefully designed to increase efficiency and growth without compromising stability • A gradual dismantling of capital controls is recommended, based on progress made in tax reform, exchange rate management, enforcement of bank competition and supervision, and solving domestic banks bad-loan problems

The Macroeconomic Effects of Large Exchange Rate Appreciations

Although currency adjustment is often proposed as a policy tool to reduce current account imbalances, there is no consensus regarding the macroeconomic effects. In this paper we study the macroeconomic aftermath of large exchange rate appreciations. Using a sample of 128 countries over the period 1960–2008, we identify 25 episodes of large nominal and real appreciations shocks. We use narrative identification of exogenous appreciation episodes and study the macroeconomic effects in a dummy-augmented panel autoregressive model. Our results indicate that exchange rate appreciations tend to have strong effects on current account balances. Within 3xa0years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, but the output costs are small and not statistically significant. All these effects appear somewhat more pronounced in developing countries.

Sovereign credit ratings, emerging market risk and financial market volatility

This article presents event studies that find a significant effect on dollar bond yield spreads when rating agencies put emerging-market sovereign bonds on review with negative outlook. The finding has two conditional implications. If rating agencies can be turned from late into early warning signals, they would have the potential to dampen boom-bust cycles in emerging-market flows. If rating agencies cannot improve on their reactive approach witnessed in the run-up and aftermath of recent currency crises, regulation and guidelines stipulating a certain rating status for institutional investment will continue to intensify boom-bust cycles. The paper concludes with regulatory suggestions for both outcomes.

Sustainable and Excessive Current Account Deficits

Both the Mexican crisis of 1994–95 and the Asian financial crisis of 1997–98 have been preceded by large current account deficits run by the affected economies. External deficits are often assumed to play an important role in the propagation of financial crises in emerging markets. Policymakers are faced with a new challenge: that of resisting or accepting the large current account deficits that may result from heavy private capital inflows. This paper aims at providing some guidance:First, the Lawson Doctrine – according to which current account deficits that result from a shift in private-sector behaviour should not be a public policy concern – has been discredited by recent currency crises in Latin America and Asia. Second, define the size of current account deficits that should be sustainable in the long run. Third, the intertemporal approach to the current account does not provide a reliable benchmark to define when deficits become ‘excessive’. Fourth, large external deficits should be resisted if unsustainable currency appreciation, excessive risk-taking in the banking system and a sharp private spending boom are seen to coincide.

How to spend it: Commodity and non-commodity sovereign wealth funds

Sovereign wealth funds have become important players in global financial markets. But their investments have repeatedly raised concerns, such as fear of industrial espionage or geopolitical threats. This paper argues that the principal motivation for setting up SWFs should put such concerns into the appropriate perspective. Development economics can explain both the funding sources and the motives that have led to the recent SWF boom, thus helping to prevent the imposition of investment restrictions in OECD countries.

Pension Fund Investment from Ageing to Emerging Markets

• The rapid ageing of populations in the rich economies can be expected to stimulate strong growth in private funded pensions, providing a massive potential of foreign finance for developing countries. • Pension managers can reap big diversification benefits by investing on the emerging stock markets of the younger economies, benefits which are largely unexploited so far. • The authorities in OECD countries should consider removing regulatory constraints imposed on pension assets that deprive retirees from the pension-improving benefits of global diversification. • Policy makers in developing countries should design policies that reassure institutional investors on default risk and stock market illiquidity, if they want to tap a higher share of OECD pension assets.