charity begins at home: the role of swfs as stabilizers and long … · 2016. 4. 4. · swfs...

Charity Begins at Home:The Role of SWFs as Stabilizers and Long-term Investors

Ibrahim Elbadawi, Raimundo Soto, Hoda Youssef and Chahir Zaki

OIL, MIDDLE EAST, AND THE GLOBAL ECONOMY

RONALD TUTOR CAMPUS CENTER (TCC), APRIL 1-2, 2016

Objectives

Assess the role of Sovereign Wealth Funds (SWFs) in thedomestic economy as:

1. A macro stabilizing instrument, and

2. A financier of long-term investment, most notably ininfrastructure and housing.

Objectives

1. Macroeconomic Stabilization:

Analysing the effectiveness of SWFs as a shock absorber during episodesof oil and other commodity price shocks, along three performanceindicators:

Shoring up the credibility of exchange rate regimes: mainly currency pegs

Promoting counter-cyclicality of fiscalpolicy

Stabilizing stock markets ????: data permitting

Objectives

2. Financing long-term investment

Analyse the investment patterns of SWFs of Arab and other countries to:

Understand the determinants of SWFs investment decisions in the domestic economy and abroad

Undertake a normative analysis as to whether home countries could have done better by investing in domestic economy to achieve long-term developmental goals

Understand the role of other factors, including the institutional environment and the productivity of non-resource sectors in explaining the rationale for “investing in investing” (Collier, 2013)

The Context

The proposed analytical framework will distinguish between two main typesof resource-rich countries in the region:

1-“Resource-rich but capital-poor” countries: benefit from large resourcerevenue but still face large infrastructure and housing deficits (such asAlgeria).

• The case for the optimality of domestic investment in their domesticeconomies: potentially higher returns

• However, success requires “investing in investing”:- Public Investment Management Index (PIMI)- Ease of Doing Business Index

2-“Resource-rich and capital rich” countries: have relatively closed theirinfrastructure gaps and have piled up savings in SWFs and invested mainlyabroad (mainly GCC).

• The case for the optimality of investment in the “neighbourhood”- Higher returns- Strategic geo-political considerations

• Again, success requires “investing in investing” by neighbouring countrieshoping to attract investment by SWFs from the GCC

Do SWF shore up pegs?

• Compute random-effects panel-data probit model

𝑃𝑟𝑜𝑏(𝑝𝑒𝑔 = 1)𝑖𝑡 = 𝑓 𝛼𝑖 , 𝑅𝐻𝑆𝑖𝑡 + 𝜀𝑖𝑡

• RHS includes

• Macro economic variables (economic size; trade structure, TOT shocks)

• Institutional variables (political checks and balances, financial openness)

• Resources rents, oil and mineral exporting countries (+10% of GDP)

• Sovereign wealth funds dummies and interactions

Sovereign Wealth Funds and Exchange Regimes


• Data• Country de facto pegs: Klein and Shambaugh (2014) defined as

“exchange rates do not adjust by more than 2% at the end of each month and over the course of one year”. Data for around 125 countries.

• Macroeconomic variables: standard IMF/WB definitions for economic size, trade (% GDP), terms of trade shocks (HP filtered), resource rents.

• Trade concentration index: own methodology

• Institutional variables: checks and balances (Henisz, WB), democracy (Polity IV), capital account openness (Chinn-Ito)

• Sovereign wealth funds dummy (from SWF Institute) and interactions



• Results • Standard results are in line with received knowledge:

• Larger economies tend to peg less their currencies

• Countries where trade is more important tend to peg less their currencies

• Pegging is being less used worldwide (negative trend)

• New results (robust to controlling for resource rents and SWF)

• We found no effect of terms of trade shocks (price effects, not quantity)

• Countries where trade is more concentrated tend to peg more their currencies

• Financially open economies tend to peg more their currencies

• Negative (less significant) effects of higher political controls or democracy on probability of peg


Do SWF shore up pegs?• Results

• Higher oil rents lead to higher propensity to peg, particularly GCC economies (Resource-rich and capital rich)

• Mineral rents do not lead to higher propensity to peg

• Presence of SWF • Lowers the probability of a peg in non-resource abundant economies• Raises the probability of a peg in oil exporters and much more in GCC countries

• SWF inception (as opposed to presence) is insignificant (as expected)

• Missing from analysis• Strength of flex exchange rate lobby: share of agriculture+ manufacturing/GDP• Marginal economic effects as opposed to statistical significance• Presence of SWF vs use of SWF (SWF restrictions/nature)• Identify channels of transmission more precisely• Extend time frame backwards (mineral countries with SWF)


Econometric resultsProbit models

Dependent variable: dummy for having pegged exchange rate

(as defined by Klein and Shambaugh)

1 2 3 4 5 6 7

Size (GDP real) -0.220** -0.234** -0.216** -0.257** -0.244** -0.215** -0.246** Trade (% GDP) -0.206 -0.192 -0.260 -0.321* -0.339* -0.277 -0.316* Trade concentration 0.427*** 0.497*** 0.461*** 0.382*** 0.368*** 0.396*** 0.348** Terms of trade shocks -0.071 -0.064 -0.046 -0.109 -0.126 -0.135 -0.122 Cap. Account Openness 0.746*** 0.650*** 0.662*** 0.661*** 0.683*** 0.674*** Checks and balances -0.365 -0.311 -0.327 -0.329 -0.325 Oil exporter (+10% of GDP) 0.645*** 0.664*** 0.444*** 0.571** Mining exporter (same) -0.453 -0.556** -0.330 Sovereign wealth fund 0.709** 0.312 SWF*oil exporter Start of SWF Start of SWF*oil exporter N 124 124 124 124 124 124 124 Obs 2,272 2,267 2,152 2,152 2,152 2,152 2,152

Time dummies included.


Do SWF reduce fiscal procyclicality?

• Methodology• Isolate cyclical components using HP filter + Ravn-Uhlig optimal

smoothing parameter.

• Use government consumption instead of government expenses

• Lack of data

• Correlation between consumption and expenses cycles is 0.94

• Use government consumption levels (in logs) not as share of GDP (endog.)

• Use resource rents per capita (in logs) not as share of GDP (endogenous)

Sovereign Wealth Funds and Fiscal Procyclicality


• Stage 1: Compute Random-Coefficient panel data model

𝐶𝑦𝑐. 𝐺𝑜𝑣. 𝐸𝑥𝑝𝑖𝑡 = 𝛼𝑖 + 𝛽𝑖 𝐶𝑦𝑐. 𝑅𝑒𝑛𝑡𝑠. 𝐶𝑎𝑝𝑖𝑡𝑎𝑖𝑡 + 𝜀𝑖𝑡

• cyclical component of government expenditures (HP filtered, real)

• cyclical component of resource rents per capita (HP filtered, real)

• Stage 2: correlate estimated 𝛽𝑖 with • Macroeconomic variables (rents per capita, foreign reserves)

• Institutional variables (openness, exchange regimes, political)

• Sovereign wealth funds (dummy and interactions)

• Stage 3: checks for “graduation effects”



• Results Stage 1:• Countries with higher rents per capita tend to have higher fiscal

procyclicality, especially oil exporters (figures)

• Oil countries seem to drive the result, mineral countries not as procyclical

• Results Stage 2:• Fiscal Cyclicality is reduced by:

• Higher levels of checks and balances (political constraints)

• Floating exchange rates

• Less open capital accounts

• Sovereign Wealth Funds

• Are associated with higher fiscal procyclicality (probably reflects reverse causality)

• Are ineffective in reducing procyclicality in oil-exporters, but are effective in mineral exporters



Sample 1990-2013

Do SWF reduce fiscal procyclicality?Correlation between Cycles in Goverment Consumption

and Cyles in Resources per capita, 1990-2013



• Methodology

• Results Stage 3:• Evidence of incipient graduation for some Arab oil-rich economies,

i.e., learning from experience and ability of redraft fiscal layout

• Also some evidence of countries relapse

• Formal tests are due.

• Missing from analysis• Marginal economic effects as opposed to statistical significance

• Study the impact of the absence of automatic stabilizers (VAT, income tax) that is typical of resource rich economies

• Fiscal rules and other institutional stabilizers, including exchange regime



Graduation Effects in Fiscal Procyclicality

Do SWF support long-term investment?

• Methodology• Estimate models of the likelihood of SWF allocating funds to

• Investing abroad (cross border)• Investing in investing

• As well as the value of transactions• Control variables:

• Size of home economy• Size of recipient economy• Economic sectors• Polity indicators in both the home and recipient economies

• Missing from analysis• Measure of infrastructure deficit • Proxy for investment rate of return: economic governance indicators (World

Bank’s Doing Business; Control of Corruption; Gov Effectiveness ..)• Strategic considerations: whether or not the recipient country is a neighbor or

within the region of the country owning the SWF

Sovereign Wealth Funds and Financing Long-term Investment

Econometric Results

Sovereign Wealth Funds and Financing Long-term Investment

The road ahead

• Complete building of the data base:

• Indicators of Governance of SWFs

• Indicators of economic rates of returns

• SWF’s interventions in stock markets

• Estimate more robust regressions

• Address the missing aspects identified above

• Address potential endogeniety issues and other diagnostics

• Robustness checks

• Data permitting, assess the role of SWFs as stabilizers of

stock markets

Conclusions

Export concentration index

• Database of annual exports (value) from country “i” to country “j” of goods, classified at 4-digit ISIC level. (Hidalgo et al, 2013)

• 119 countries, 1962-2013, 112+ million observations

• Number of countries changes (split and merge).

• Use Herfindhal index on 26 groups of goods to measure concentration in value (US$), year by year, by country.

• Herfindhal Index is between 0 and 1, higher is more concentrated.

Sovereign Wealth Funds and Exchange Regimes (appendix)

charity begins at home: the role of swfs as stabilizers and long … · 2016. 4. 4. · swfs...

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