Javier Santiso

Angel or Devil: China's Trade Impact on Latin American Emerging Markets

China’s economy has expanded by leaps and bounds, with dazzling progress since it first opened to foreign investment and reform in 1978. Over the last 25 years and after a long period of economic autarky, the country has emerged as a major player in world trade. Its accession to the World Trade Organisation (WTO) in 2001 was a milestone. China presents both a threat and an opportunity for Latin American emerging markets. On average and despite some exceptions, Latin America is a clear trade winner from Chinese global integration. This contribution studies China’s exporting and importing structure, using a database of 620 different goods. It builds two indices of trade competition to compare Chinese impacts over 1998-2004 on 34 economies, of which 15 are Latin American. The results generally confirm that there is no relevant trade competition between China and Latin America. Not surprisingly, countries that export mainly commodities face lower competition, because China is a net importer of raw materials. But the emergence of China is also a wake-up call for Latin American countries. More reforms are needed, especially in infrastructures if the region wishes to maintain its comparative advantages. Latin America will have also to deal with the Chinese bonanza. The dark side of this windfall is the risk of being stuck out of the global value chain in a raw material corner. L’economie de la Chine s’est developpee a pas de geants, en progressant de maniere spectaculaire depuis qu’elle a commence a s’ouvrir aux investissements etrangers et s’est reformee en 1978. Tout au long des 25 dernieres annees et suite a une longue periode d’autarcie economique, le pays s’est impose en tant qu’acteur majeur du commerce mondial. Son adhesion a l’Organisation Mondiale du Commerce (OMC) en 2001 a ete un evenement de taille. Ainsi, la Chine represente a la fois une menace et une opportunite pour les marches emergents d’Amerique latine. En moyenne et en depit de certaines exceptions, l’Amerique latine fait partie des gagnants de l’integration globale de la Chine. Ce document etudie les structures d’importation et d’exportation de la Chine, en s’appuyant sur une base de donnees composee de 620 biens. Deux indices de competitivite commerciale ont ete elabores afin de comparer les impacts de la Chine sur 34 economies tout au long de la periode 1998-2004, 15 d’entre elles etant des economies latino-americaines. De maniere generale, les resultats confirment qu’il n’y a pas de concurrence importante entre la Chine et l’Amerique latine. Mais l’emergence de la Chine appelle aussi les pays latino-americains a se reveiller. Si la region souhaite maintenir ses avantages comparatifs, d’autres reformes sont necessaires, en particulier au niveau des infrastructures.

Three Temporal Dimensions to the Consolidation of Democracy

The study of democratization, more than most fields of comparative political inquiry, should be sensitive to the time factor. When something happens, as well as in what order and with what rhythm, can be even more important in determining the outcome than whether something happens or what happens. As “transitologists” and “consolidologists” have moved away from structural determinants of democracy toward a more process- and actor-oriented approach, they have also had to become more explicit about different dimensions of temporality. In this article, we explore three of them: time, timing and tempo.

Herding in Aid Allocation

Although there exists a vast literature on aid efficiency (the effect of aid on GDP), and that aid allocation determinants have been estimated, little is known about the minute details of aid allocation. This article investigates empirically a claim repeatedly made in the past that aid donors herd. Building upon a methodology applied to financial markets, this article finds that aid donors herd similarly to portfolio funds on financial markets. It also estimates the causes of herding and finds that political transitions towards more autocratic regimes repel donors, but that transitions towards democracy have no effect. Finally, identified causes of herding explain little of its overall level, suggesting strategic motives play an important role.

Crushed Aid: Fragmentation in Sectoral Aid

This paper measures and compares fragmentation in aid sectors. Past studies focused on aggregate country data but a sector analysis provides a better picture of fragmentation. We start by counting the number of aid projects in the developing world and find that, in 2007, more than 90 000 projects were running simultaneously. Project proliferation is on a steep upward trend and will certainly be reinforced by the emergence of new donors. Developing countries with the largest numbers of aid projects have more than 2 000 in a single year. In parallel to this boom of aid projects, there has been a major shift towards social sectors and, as a consequence, these are the most fragmented. We quantify fragmentation in each aid sector for donors and recipients and identify which exhibit the highest fragmentation. While fragmentation is usually seen as an issue when it is excessive, we also show that some countries suffer from too little fragmentation. An original contribution of this paper is to develop a monopoly index that identifies countries where a donor enjoys monopoly power. Finally, we characterise countries with high fragmentation levels. Countries that are poor, democratic and have a large population get more fragmented aid. However, this is only because poor and democratic countries attract more donors. Once we control for the number of donors in a country-sector, democratic countries do not appear different from non-democratic ones in any sector and poor countries actually have a slightly less fragmented aid allocation.

In Search of a Better World

Bond financing has replaced bank loans and other sources of capital flows as a major source of funding for emerging markets. This shift has been particularly impressive in Latin America. Disentangling the dynamics of emerging bond markets and the information flow about them has attracted the attention of the OECD. Are decisions about bond market investments based on good and neutral information, or is something else driving investors’ choices?

Are Sovereign Wealth Funds' Investments Politically Biased? A Comparison with Mutual Funds

Global allocation of capital and fluctuations in asset prices are increasingly influenced by the activities of Sovereign wealth funds (SWFs). The Santiago Principles called for higher transparency, stressing that SWFs should exhibit clearer governance standards and sound portfolio management principles. Although asset allocation strategies for these funds are not known, SWFs are suspected to follow other factors besides risk-return objectives. This paper attempts to shed light on some of these concerns. The fear that sovereigns with political motivations use their financial power to secure large stakes in Western companies is shown to be unfounded. We find that SWF investment decisions do not differ greatly from those of other wealth managers. We propose to use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investment at the firm level and analyse these investments on a geographical and sector basis. Moreover, we compare target investments for these two groups by looking at the political regime in the sending and recipient country, under the hypothesis that this variable is not determinant for SWF investments. Finally, we provide a comparison of SWFs and other public funds based on governance features related to investment. We argue that double standards for regulation should be avoided and efforts to achieve higher transparency should be made by all investing actors. L’allocation globale de capitaux et les fluctuations des prix des actifs sont de plus en plus influencees par les activites des fonds souverains. Les Principes de Santiago appelaient a davantage de transparence, insistant sur la necessite pour les fonds souverains de clarifier leurs standards de gouvernance et de renforcer leurs politiques de gestion de portefeuille. Bien que leurs strategies ne soient pas clairement identifiees, les fonds souverains sont soupconnes de repondre a des objectifs autres que ceux lies au ratio risque-rendement. Cet article tente de repondre a ces questions. La crainte de voir les fonds souverains guides par des motivations politiques utiliser leur pouvoir financier pour s’assurer de larges parts dans les compagnies occidentales se revele infondee. Nous montrons que les decisions d’investissement des fonds souverains ne different pas fondamentalement de celles d’autres gerants de fonds. Nous proposons d’utiliser les fonds mutuels comme categorie de reference pour l’etude des allocations d’investissement des fonds souverains. Nous recueillons des donnees sur l’investissement des fonds souverains et des fonds mutuels sur les marches d’actions et analysons leurs strategies geographiques et sectorielles. Nous comparons ensuite les investissements pour ces deux groupes d’investisseurs en regardant le regime politique dans les pays emetteur et destinataire, sous l’hypothese que cette variable n’est pas determinante quand ils investissent. Enfin, nous effectuons une etude comparative des fonds souverains et d’autres types de fonds a partir de l’analyse de certains aspects lies a la gouvernance et la politique d’investissement. Nous deconseillons fortement l’instauration d’une regulation fondee sur le principe du« deux poids, deux mesures » et recommandons d’accentuer les efforts en faveur d’une plus grande transparence de la part des investisseurs.

Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation

This paper presents stylised facts about development aid and capital flows to developing countries. It compares their volumes and volatilities and finds that foreign aid is not the major source of finance for these countries any more, though not for all regions. The expansion of private flows has usually come at the cost of an increased volatility that adds up to aid volatility, already considered to be an issue. We do not find any negative and significant correlations between aid shocks and capital flow shocks. Investigating complementarity between flows, we show that in a cross section of countries official development aid (ODA) and capital flows are substitutes but not within countries. On the other hand capital flows are complements both across and within countries. We also make use of a private funds database in order to underline the differences between portfolio investors to emerging markets and aid donors. To our knowledge this paper is the first to use such data in comparison with aid flows. We find that private portfolio equity is more volatile than ODA, and that it is neither a substitute nor a complement of ODA, both across and within countries. We argue that these results reinforce the calls for a new stabilising role of ODA. We then study aid donors and private funds portfolios to contribute to the current debate on aid fragmentation by providing trends for the last 50 years. We show that aid donors have constantly been fragmenting their portfolios by giving aid to an increasing number of countries, but also by making asset allocations more equal across countries. Private portfolio equity funds, on the other hand, have done the opposite for ten years and put a heavy weight on few countries in their portfolios. These observations complement the existing results about the progressive nature of aid flows and the regressive nature of private flows.

Are Sovereign Wealth Funds Politically Biased? A Comparison with other Institutional Investors

Purpose – To study the allocation in equity markets of sovereign wealth funds’ (SWF) investments with respect to other institutional investors. To analyze the role of political regimes in the sending and recipient countries as a determinant of the allocation of SWF investments. Methodology/approach – We use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investments at the firm level and analyse them on a geographical and sector basis. We compare target investments for these two groups by looking at the political regime in the sending and recipient country, using different political indicators (Polity IV, Bertelsmann). We provide a comparison of SWFs and pension funds based on governance features related to investment. Findings – We find that the fear that sovereigns with political motivations use their financial power to secure large stakes in OECD countries is not confirmed by the data. SWF investment decisions do not differ greatly from those of other wealth managers. Although there can be differences in the allocation, political regimes in the recipient countries do not play a role in explaining the allocation of sovereign wealth funds. Social implications – Investment from public institutions, such as sovereign wealth funds, can have significant implications at the economic and social level. Sovereign funds are potential sources of capital for emerging economies, and therefore can enchance economic growth. It is important to understand to what extent public institutional investors behave differently from private investors. The “political bias” is not a relevant factor for sovereign funds, or for other institutional investors, for allocating their capital. More often than not, their asset allocation strategies converge with other large investors, these being driven by financial and not political bias. Originality/value of the chapter – The chapter is an original contribution providing a firm-level analysis of equity holdings for two groups of institutional investors. Moreover, it emphasizes the political dimension of institutional investments, highlighting the priorities and constraints of public investors participating in financial markets. The chapter suggests that SWFs do not discriminate by the political regime of the recipient country in their asset allocation.

NEW STRATEGIES FOR EMERGING DOMESTIC SOVEREIGN BOND MARKETS

The forces shaping the revolution in banking and capital markets have radically changed the financial landscape during the past three decades. A remarkable feature of this changing new landscape has been the astonishing rate of internationalisation of the financial system in the last two decades, with emerging markets becoming increasingly important participants. At times, this participation led to an excessive reliance on foreign financing, making the participation of these countries in the global financial system more vulnerable to shifts in expectations and perceptions. The sovereign debt management strategy suffered from many structural weaknesses, failing to take into account international best practices in financing budget deficits and developing domestic government securities markets. Consequently, emerging markets experienced serious financial crisis episodes. Against this background, the paper focuses on new and more sophisticated strategies to develop domestic bond markets, taking into account the risk profile, complexities and other constraints of emerging markets. The paper’s central thesis is that risk-based public debt management and liquid domestic bond markets are important, mutually reinforcing strategies for emerging financial markets to attain: i) enhanced financial stability, and ii) a more successful participation in the global financial landscape. It will also be shown that this twin-strategies approach requires taking a macroeconomic policy perspective. Le paysage des marches de capitaux internationaux a change de maniere drastique au cours de ces dernieres annees. Un levier particulierement puissant de ces changements a ete celui de l’internationalisation des marches financiers au cours des deux dernieres decennies, les marches emergents acquerant en particulier un nouveau protagonisme. Cette reemergence s’est, dans le passe recent, accompagnee de crises et de turbulences, la dependance a l’egard des flux de portefeuille etrangers s’accompagnant d’une vulnerabilite accrue de la part des economies emergentes, tributaires des changements d’anticipations et de perceptions prevalant sur les marches internationaux. La strategie de la gestion de la dette d’Etat a ainsi pâtit de nombreuses defaillances, se trouvant notamment incapable de prendre la pleine mesure des meilleures pratiques internationales en matiere de financement budgetaire et de developpement de marches de capitaux locaux solides. En consequence les marches emergents ont aligne les episodes de crises financieres. Le papier ici presente met en perspective les evolutions les plus recentes et avec elles la profonde transformation en cours des marches de capitaux emergents. Il souligne en particulier l’apparition de nouvelles strategies de gestion des risques lies aux dettes emergentes, des strategies plus sophistiquees prenant davantage en compte le profil des risques sous-jacents, ainsi que les nouvelles complexites et contraintes dominant les marches emergents. La these centrale du papier est que la combinaison des gestions actives des risques de dette publique et la prise en compte des liquidites affluant vers les marches de dettes domestiques sont des strategies qui se renforcent mutuellement pour : i) atteindre une plus grande stabilite financiere ; ii) optimiser l’integration de ces economies dans le systeme financier international.

Wall Street and the Mexican Crisis: A Temporal Analysis of Emerging Markets

The purpose of this article is to demonstrate that the Mexican episode provides an excellent laboratory for exposing the interactions between political and economic time-scales. The events in Mexico invite us to take a closer look at what has become a crucial factor in world affairs, namely the mechanisms driving the financial markets and their interactions with the international system. The latter, led by the United States, was forced to adjust its own reaction time to that of the financial markets in record time. States which had long been the unquestioned masters of time are now confronted with a driving force whose scope and paroxysms are among the major challenges as the twentieth century draws to a close.