Appendix II Statistical Tables
- Robert Kahn, Adam Bennett, María Carkovic S., and Susan Schadler
- Published Date:
- September 1993
|t – 1||t||t + 1||t + 2||t + 3||t + 4||Episode|
|Direct investment and debt conversion||1,583||1,015||453||604||–75|
|Debt conversion and extraordinary amortization||–1,558||–428||–22||—||119|
|Financial capital flows||1,247||2,477||391||2,292||40|
|Medium- and long-term||74||141||26||103||1|
|Change in commercial credit||105||252||400||–217||3|
|Public sector, net||–183||–330||–851||–44|
|Nonbank private sector, net||–540||–789||1,450||–23|
|Financial private sector, net||–826||430||–796||69|
|Capital flows recorded in the current account5||—||1,000||600||86|
|Open market and exchange certificate sales||712||2,391||2,823|
|Medium-and long-term, net||–791||345||24|
|Suppliers’ and buyers’ credit||425||435||—|
|Memorandum item Workers’ remittances||3,755||5,467||37|
|Public sector, net||1,299||581||–447||288||–257||–7|
|Public sector, medium-and long-term, net||–2,097||212||–1,122||2,335||3,208||14,390||32|
|Private sector, net||–1,800||7,489||3,353||4,411||497||6,715||34|
|Medium- and long-term||–2,413||5,493||4,822||7,202||4,703||10,493||48|
|Banking sector, medium-and long-term, net||–1,780||–624||1,225||946||–11||2,159||14|
|Public sector, net||164||–89||–312||–1,243||1,016||115||–5|
|Private sector, net||561||2,308||5,627||9,032||9,555||6,048||89|
|Country (first year of inflows)||Tax System and Public Expenditures||Public Enterprises||Financial and Monetary Sectors||Trade||Exchange System and Capital Account||Other|
|Chile (1990)||Tax reform, 1990. Reduced tax credits for investment in export projects.||Privatization, 1987–90. Continuation of extensive privatization program, including telephone companies, electrical power plants, the national airline, and steel and chemical plants.||Financial market reform, 1987–90. Continuation of program including wide-ranging bank supervision reform and measures to encourage growth of private pension funds.||Parallel market legalized, 1990.|
|Colombia (1991)||Public sector employment reduction, 1991. By 20,000 through voluntary separation scheme and privatization of port and railway services.||New financial system law, 1990. Reduced specialization of financial institutions; relaxed barriers to entry into financial industry; allowed full foreign ownership of financial institutions; improved banking supervision.||Trade reform, first phase, 1990–91. Replaced quantitative restrictions with tariffs. Share of freely imported goods rose from 39 percent of total tariff positions in 1989 to 97 percent by the end of 1990. Average effective tariff protection reduced from 75 percent in 1989 to 59 percent in 1990.||Foreign exchange market changes, 1991. Interbank foreign exchange market allowed by transferring foreign direct transactions with the private sector from Banco de la República to commercial banks and other financial intermediaries. Surrender requirements on services lifted.|
|Acceleration of second phase of trade reform, 1991. Reduced level and dispersion of tariffs. Originally scheduled for 1992–95. Average effective tariff protection reduced from 59 percent in 1990 to 25 percent ni 1991. Advanced import deposit (85 percent of value of import license) abolished.||New foreign investment code, 1991. Equalization of tax treatment Limitations on profit remittances abolished in October 1991.|
|Egypt (1991)||General sales tax, 1991. Introduced.||Public sector company reform, 1991. Reorganization to subject companies to commercial criteria.||Interest rate liberalization, 1991. Banks’ lending and deposit rates freed. Weekly Treasury bill auctions started.||Export restrictions reduced, 1991. Products subject to export bans reduced from 20 to 4. Products subject to quotas reduced from 17 to 4 Elimination of prior export approvals for all categories but cotton.||Exchange market unification, 1991. Three exchange rates unified and rate depreciated. Licensed nonbank dealers permitted to enter market Supporting steps: limitation of exchange guarantees, abolition of import accounts, limits on spread in the exchange market and the requirement to open letters of credit for imports.||Price reform, 1988. Wheat and cotton procurement prices raised by one third, Retail prices of consumer goods raised. Several previously regulated food items moved to private distribution. User prices of petroleum products and electricity raised 30 Percent.|
|Recapitalization of public sector banks, 1991.|
|Regulations, 1991. Strengthened standards for loan classification and provisioning in accordance with Basle guidelines; strengthened compliance with reserve requirements and lending limits to single borrower; placed limits on banks’ open foreign exchange positions.||Import bans reduced 1991. Production coverage of import bans reduced from 37 percent in March 1990 to 23 percent in June 1991.||Gradual ogriculture decontrol 1988–90s. Liberalization of most industrial product prices, 1990.|
|Investment decontrol, 1991. Simplified registration and recording procedures.|
|Price reform, 1992. Prices of products with high trade protection freed. Fuel and petroleum prices raised to 67 percent of world equivalent.|
|Mexico (1989)||Tax reform, 1987, 1989. Major reform in 1987 widened tax base, reduced marginal rates, simplified and strengthened tax administration. Reforms deepened in 1989. Dividend deduction replaced by a tax on corporate dividends at the source. Corporate tax rate reduced from 39.2 percent to 37 percent, number of personal tax brackets reduced from 12 to 6, and marginal tax rates reduced.||Privatization, 1988. Reduced number of entities owned by the public sector from 500 to 350 through liquidation, sale and merger, including divestiture of two airlines, truck, steel, and copper companies.||Financial liberalization, 1988–89. Allowed creation of a broad range of new financial instruments and liberalized financial markets, allowing banks to determine freely the term structure of interest rates on deposits and loans.||Continued trade program started in 1985. Maximum tariff gradually reduced from 100 percent in 1985 to 20 percent in 1987; dispersion of tariffs reduced. Average tariff rate fell from 26 percent in 1985 to 10 percent in 1989.||Foreign investment, 1989. Revision of investment code aimed at removing major impediments to foreign investment. Foreign investors allowed to own up to 100 percent of firms in certain industries subject to certain conditions, Partial opening of stock market to foreign investment.|
|Spain (1987)||Pension system reform, 1985. Increased the number of years of contribution required to qualify for a pension from 10 to 15 and raised the share of the income on which contributions are paid. Pensions made dependent on the average wages earned over the last eight years of work instead of the previous two years.||Law of reconversion and reindustrialization, 1984. In firms affected, principally shipbuilding, steel, and textiles, reduced employment by 26 percent during 1984–86. Enterprises’ balance sheets improved through subsidies, transfers, and various loan guarantee schemes.||Financial sector deregulation, 1987. Liberalization of interest rates on demand deposits and savings deposits of less than six months. Substantial reductions in banks’ mandatory investment coefficients.||Import liberalization in the context of EC membership, 1986–87. Most nontariff trade barriers between Spain and the EC eliminated upon accession. Tariffs on industrial imports from EC countries reduced by 22 percent in 1987.||Liberalization of direct investment, 1985. Liberal procedures governing investment in small enterprises extended to all foreign direct investments, regardless of size of enterprise or extent of foreign participation.||National Energy 1984. Domestic energy prices raised to reduce the gap with European averages, Price increases complemented with adoption of conservation measures.|
|Introduction of VAT, 1986. Elimination of export subsidies through tax rebates that previously offset the effect of turn- over and other indirect taxes.||Privatization, 1985–87. Key enterprises in industrial and services sectors sold, including SEAT, Spain’s largest auto manufacturer. Minority holdings in several state-owned companies sold through the stock exchange including the oil concern REPSOL, SA.||Accesion to the EC in 1986. Beginning of captical account liberalization. Spanish investments abroad, including in real estate, liberalized in 1987.||Labor market reform 1984–85. Legal measures to foster greater labor market flexibility, including fixed term contracts and part-time employment, granting of incentives to reduce firms’ labor costs, reduction in the retirement age at full pension, and relaxation of rules governing layoffs.|
|Thailand (1988)||Investment incentives, 1985. Increased tax incentives for investment projects in industrial estates or investment promotion zones.||Improved incentives for direct foreign investment, 1986. The Board of Investment (BOI) streamlined procedures for foreign investors, reduced capital requirements, and lowered the minimum export requirement to 50 percent of production for the first two years of a venture’s operations.||Liberalization of the Alien Business Law, 1986. Visa procedures for expatriates employed in Thailand eased.|
|Financial sector restructuring, 1986–87. Bank of Thailand supported ailing financial institutions through soft loans, credit lines, and equity participation. Guidelines to strengthen the institutions’ balance sheets and reorganize their management issued.|
|if||∊||π||In m||In y||R2||DW||DF [x]|
|1.||Chile||∆i =||1.8 ∆π||–||0.6 0 ECM–1||R2: 0.89||LM(4):||0.44|
|2.||Mexico||∆i =||0.35 ∆i–1||+||1.04 ∆if||+||0.89 ∆π||–||0.39 ∆π–1||–||0.48 ECM–1||R2: 0.78||LM(4):||1.91|
|3.||Spain||∆i =||0.30 ∆π–1||+||69.8 ∆ln y||–||0.50 ECM–1||R2: 0.49||LM(4):||2.91|
|4.||Thailand||∆i =||0.19 ∆i–1||+||0.55 ∆if||–||0.29 ECM–1||R2: 0.40||LM(4):||0.81|
Argy, Victor, and PenttiKouri, “Sterilization and the Volatility in International Reserves,” in National Monetary Policies and the International Financial System,ed. byRobert Z.Aliber (Chicago: University of Chicago Press, 1974).
Bercuson, Kenneth, and LindaKoenig, “The Recent Surge in Capital Inflows to Asia: Cause and Macroeconomic Effects,” paper presented at the South-East Asian Central Banks (SEACEN) and IMF conference on Issues Related to the Recent Surge in Capital Inflows to SEACEN Countries, held in Seoul,Korea, May14–16, 1993.
Calvo, Guillermo, LeonardoLeiderman, and CarmenReinhart, “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,” Staff Papers,International Monetary Fund, Vol. 40 (March1993), pp. 103–51.
Calvo, Guillermo, LeonardoLeiderman, and CarmenReinhart, “The Capital Inflows Problem: Concepts and Issues,” IMF Paper on Policy Analysis and Assessment, PPAA 93/10 (Washington: International Monetary Fund, July1993).
Corden, W. Max, “Does the Current Account Matter? The Old View and the New,” inInternational Financial Policy: Essays in Honor of Jacques J. Polak,ed. byJacobFrenkel and MorrisGoldstein (Washington: International Monetary Fund and De Nederlandsche Bank, 1991), pp. 455–78.
Edwards, Sebastian, and Mohsin S.Khan, “Interest Rate Determination in Developing Countries: A Conceptual Framework,” Staff Papers,International Monetary Fund, Vol. 32 (September1985), pp. 377–403.
Engle, Robert, and ByuingSam Yoo, “Forecasting and Testing in Co-Integrated Systems,” Journal of Econometrics, Vol. 35 (May1987), pp. 143–59.
Ghosh, Atish, and Jonathan D.Ostry, “Do Capital Flows Reflect Economic Fundamentals in Developing Countries?” IMF Working Paper, WP/93/34 (Washington: International Monetary Fund, April1993).
Hausman, Jerry, “Specification Tests in Econometrics,” Econometrica (November1978).
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Kouri, Pentti, and MichaelPorter, “International Capital Flows and Portfolio Equilibrium,” Journal of Political Economy, Vol. 82 (May/June1974), pp. 443–67.
Lipschitz, Leslie, and DonoghMcDonald, “Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe,” IMF Working Paper, WP/91/25 (Washington: International Monetary Fund, March1991).
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Obstfeld, Maurice, “Can We Sterilize? Theory and Evidence,” American Economic Review Papers and Proceedings, Vol. 72 (May1982), pp. 45–50.
Ostry, Jonathan, “Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs,” Staff Papers,International Monetary Fund, Vol. 38 (September1991), pp. 447–79.
Rodriguez, Carlos, “Money and Credit Under Currency Substitution,” Staff Papers,International Monetary Fund, Vol. 40 (June1993), pp. 414–26.
The discussion in this section examines effects in a small open economy with a fixed exchange rate; changes in the exchange rate, however, are considered as a policy response to inflows.
Named after Nigel Lawson’s position during the large capital inflows to the United Kingdom in 1987-88. For a discussion of this issue, see Cordon (1991).
Often there is a desire to distinguish between “temporary” and “permanent” inflows and to liken permanent inflows to the Dutch disease. These terms are unhelpful for two reasons. First, most surges in inflows are stock adjustments in the desired share of international portfolios held domestically—an adjustment that may occur over a protracted period but does not produce a permanent capital inflow. Second, even when increases in inflows are protracted, their direct effect is not comparable with the Dutch disease, which occurs as a result of an increase in permanent income (or wealth) from higher export receipts.
In an empirical investigation of ten Latin American countries, Calvo, Leiderman, and Reinhart (1992) conclude that about half of the inflows to those countries were caused by external factors. However, Ghosh and Ostry (1993) present evidence that capital flows to developing countries generally are driven by economic fundamentals.
Mexico achieved a sizable improvement in its operational balance, although this reflected a reduction in real interest payments that exceeded a deterioration in the primary balance.
The exceptions were Chile and Spain, where banking supervision and regulations had been strengthened in the aftermath of previous bank crises.
See Ostry (1991) for an analysis of the effects of trade liberalization on the current account.
In Mexico, real interest rates prior to the inflow episode were affected by financial turmoil stemming from extremely high inflation.
Rodriguez (1993) presents a simple framework in which the effects of inflows caused by excess money demand are distinguished from those of inflows reflecting an increase in money supply.
Because a large portion of the inflow to Egypt and Colombia was recorded through the current account, a current account offset cannot be calculated. Staff estimates of the “capital” inflow through the current account suggest, however, that the offset was low or negative.
See Lipschitz and McDonald (1991) for a discussion of the interpretation of different measures of real exchange rates.
This concern is discussed in Obstfeld (1982).
The existence of such bias was tested by employing two-stage least squares and conducting a test devised by Hausman (1978).
Data sources and transformations are presented in Box 5.
In modeling forward-looking expectations, the expectation was assumed to be equal to the actual outturn less some random forecasting error, and the two-stage approach recommended by Wickens (1982) was followed.
Including the actual value effectively measures the expectation with error and introduces the potential for simultaneous equation bias. Incorporating it with the foreign rate of interest (which can be measured accurately) would depress the estimated coefficient on the combined variable. Experimentation with this latter approach confirmed this unsatisfactory effect and was therefore dropped.
This biases the results to the extent that short-run changes in expected exchange rate movements are correlated with the other explanatory variables. Since it is not clear whether this correlation would be positive or negative it is not possible to indicate whether or in what direction the other coefficients are biased.
These results may reflect the fact that, for most of the countries, except perhaps Thailand, the exchange rate was periodically allowed to adjust—effectively translating changes in net domestic assets into changes in exchange rates rather than in net foreign assets. The existence of this effect over the relevant sample periods may have depressed the estimated offset coefficients below their true value for a fixed exchange rate regime.
A variant of this approach was first proposed in Edwards and Khan (1985).
The expectational variables again presented problems in estimation. In the long run, expectations, however formed, will tend to be close to the outturn. The superconsistency of ordinary least squares in estimating long-run relationships means that expectational errors, as well as endogeneity, can be overlooked when including actual changes in prices and exchange rates in the equation. Problems recur when moving to embellish these long-run relationships with short-run dynamics.
The absence of suitable market-determined interest rate data for the period considered required the exclusion of Colombia and Egypt. All the 21 time series employed are acceptable as 1(1), except 3, which are 1(0) with strong persistence.
The critical value for these samples is 3.17 for the Dicky-Fuller (0) test at the 5 percent level of significance and 3.37 for the augmented Dicky-Fuller (4) test. When there is more than one variable in the vector, these critical values rise (Engle and Yoo (1987)), reaching 4.15 for five variables. Since only two or three variables are typically significant in each vector, the appropriate critical value lies between 3.17 and 4.15.
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