impacts of external shocks on nations’ policy responses and economic growth
DESCRIPTION
Impacts of External Shocks on Nations’ Policy Responses and Economic growth. —World Economic Synchronization. World Economic Synchronization. World Economic Synchronization. -External Shocks -Policy Responses -Trade as a ‘gear’. Methodology. External Shock Accounting - PowerPoint PPT PresentationTRANSCRIPT
Impacts of External Shocks on Nations’ Policy Responses and
Economic growth
—World Economic Synchronization
World Economic Synchronization
World Economic Synchronization
-1
0
1
2
3
4
5
6
7
Year
GD
P G
row
th R
ate
%
High income World LDC
World Economic Synchronization
-External Shocks
-Policy Responses
-Trade as a ‘gear’
Methodology
-External Shock Accounting-Differenced-Data Models-Multiple Linear Dynamic Models-Cointegration Test and Chow Test
Bacha’s model-- for External Shock Accounting
Basic form of the model isChanges in Ratio of Current Account Deficit to GDP =
+ Changes in External Shocks
- Changes in Policy Responses
+ Error Term
Bacha’s Model Derivation
Dt (Mt - Et) + (Vt - Tt) (1)
Dt/Yt = PtmjtCt/Yt+ PtmjtIt/Yt + rtFt-1/Yt+ Vt/Yt- Rt/Yt -P
txxtWt/Yt - Tt/Yt (2)
d(Dt/Yt) = jtAt/Ztd(rtm) - xtWt/Ztd(rtx) + Ft-1/Ytd(rt)
- Xtrtxd(Wt/Zt) + rtd(Ft-1/Yt) + d(Vt/Yt) - (Rt/Yt)
- d(Tt/Yt) + jttmd(Ct/Zt) + jttmd(It/Zt) +tmAt/Ztd(jt) -
txWt/Ztd(xt) + ε (3)
Model Components: External Shocks
• [js(As/Zs)dpmt - xs(Ws/Zs)dpxt]… Terms of trade deterioration
• [ - Fs-1/Ysdrt ] … interest rate shock
• [- xspxsd(Wt/Zt)]… retardation of world trade
growth.• [ rsd(Ft-1/Yt)]… burden of debt accumulation• [d(Vd
t/Yt)]… change in net direct investment income to
abroad • [- d(Rt/Yt)]… change in workers'
remittances• [- d(Tt/Yt)]… change in unrequited
transfers
Model Components: Policy Responses
• [ jspmsd(Ct/Zt)]… consumption contraction
• [ jspmsd(It/Zt)]… investment reduction
• [ pms(As/Zs )djt]… import replacement
• [ - pxs(Ws/Zs)dxt]… export penetration
• [+ ε] … interaction effects and adding-up errors.
External Shocks
-- Attribution to LDC Economic Performance
Measured Impact of in External Shocks
Unfavorable Shocks Impacts on GDP
(1991-2005)
Terms-of-trade, 4%
Intereste Rate, 1%
World Trade, -3%
Other Ex. Shocks , 0.01%
Measured Impact of in External Shocks
A Comparison of External Shocks Impacts on GDP Growth
-1
-0.5
0
0.5
1
1.5
2
2.5
3
1987-91 1992-1995 1996-2000 2001-2005
Year
Red
ucin
g G
DP
Gro
wth
%
Terms of Trade Interest Rate World Trade Remaining 4 Minor Shocks
Counterintuitive Relationship between
External Shocks and GDP Growth GDP Growth Comparison
LDC Having Favorable vs. Unfavorable External Shocks
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1973-77 1978-82 1982-86 1987-91 1992-95 1996-2000 2001-2005
Years
GD
P G
row
th R
ate
favorable unfavorable
Policy Responses
-- Attribution to LDC Economic Performance
Policy Response Roles• Synchronization Transmission Mechanism• Reducing External Shock Impact by
Improving Current Account Balance• ↑ measure of adverse external shocks,
↑ favorable impacts of policy responses• Policy responses correlate with the cycles
in LDC economic growth • Policy responses to the shocks might
cause future structural adjustments
Policy Response to External Shocks
Policy Responses as Economic adjustment
75%
58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Improve Trade Ratio decreasing spending
Policy Responses
% o
f 30
LD
Cs
Policy Response to External Shocks
A Comparison of Policy Response Impacts
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1987-91 1992-95 1996-00 2001-05
Year
By Improving export penetration By Raising import replacement By Consumption contraction By Investment reduction
Policy Response to External Shocks
• The primary policy response was export penetration, averaging from 4.1% to 6.4%;
• The secondary policy response was import substitution, averaging from 2% to 3.9%;
• The investment reduction was the third and the consumption contraction the fourth;
• ‘Belt-tightening’ would sacrifice economic growth in both the long-run and short-term;
• Trade policies, served as a “gear” of economic synchronization.
A comparison of LDC GDP growth of adopting export penetration policy
A Comparison of LDC with Favorable vs. Unfavorable Changes of Export-Penetration
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1973-77 1978-82 1982-86 1987-91 1992-95 1996-00 2001-05
YearFavorable Unfavorable
Tests and Analysis on Policy Responses
Methods:-Multiple Linear Dynamic Models-Stability Test and Chow Test
Tests and Analysis on Policy Responses(1)
• A Test of policy sensitivity to external shocks:(PRi = bi + bi ESi + ,)
• Statistic measurements provided by policy parameters
• Export penetration as the primary policy response
A Test of Policy sensitivity to external
shocks: PRi = bi + bi ESi + ,
where PRi = policy responses and ESi = External shocks Export penetration as the primary policy response
Regression Model: PRi = ES + Constant coefficient
(t-ratio for X coefficient)
R Squared
Export-penetration on external shocks
-0.77 -0.43 -6.12 * 0.22
Import-replacement on external shocks
0.5 -0.13 -2.2 0.03
Consumption-contraction on external shocks
-0.01 -0.03 -0.93 0.01
Investment-reduction on external shocks
-0.27 0.04 1.25 0.01
Notes: N = 139; * denotes statistically significant at the 1% level (one tail).
Tests and Analysis on Policy Responses(2)
• Trend analysis of long-run LDC export-penetration responses to external shocks: (EPi = a + bi ESi + )
• The impacts of export penetration policy on current-account balances were rising;
• That response tripled to 91% from 32% through the period of 1992-2005, almost doubled from the period of 1996-00.
LDC export-penetration responses to
external shocks in long-run? Model: EPi = a + bi ESi +
Period Constant (bi ) Coefficient **
(t-ratio) R Squared
1987-91 1.34 -0.32 (-3.04)* 0.22
1992-95 0.9 -0.37 (-4.17)* 0.34
1996-00 -4.84 -0.48 (-2.84)* 0.19
2001-05 -1.18 -0.91 (-5.46)* 0.5
Notes:* denotes statistically significant at the 1% level (one tail); ** Negative sign indicates reactions of domestic policies result in favorable; The impacts of export penetration policy on current-account balances were rising
Tests and Analysis on Policy Responses(3)
• Test the Consistency and the Continuity of Export Orientated Policy:
Chow Test was used:
F = (SSR2/df2)/(SSR1/df1)
Result: No presence of structure break
High-Growth LDC versus Low-Growth LDC(1)
• Export-penetration policy efforts differentiated high-growth LDC (HLDC) from low-growth LDC (LLDC)
• Export-penetration policy was used more by HLDCs than by LLDCs to offset external shocks.
High-Growth LDC versus Low-Growth LDC (2)
• HLDC export oriented policy accounted for 55 cents, offsetting every dollar loss caused by external shocks to the current account balance;
• HLDC export oriented policy measure was 120% greater than the measure of LLDC policy response, accounted for only 25 cents;
• HLDC experienced three times as much external shock as LLDC did in the period 1987-2005.
Why did some LDCs perform better when they were facing more substantial external shocks?
Why..?
• The greater measures of external shocks that LDCs experienced, the more open their economies were
Why..?
• The greater measures of external shocks forced those LDCs to make some necessary economic adjustments, especially, adopting export oriented policies to offset the adverse impact of external shocks.
Why…?
• LLDCs minimized their exposure to external shocks, but also minimized their opportunities.
For Instances:– Lacking of foreign direct investment (FDI)
means lower current-account deficit– Less Trade results less the shock of terms of
trade
Thanks. Questions please.
Martin K. Zhu, Ph.D.
Senior Economist
U.S. Department of Agriculture