Archive for May 28th, 2007

The much-talked about PM speech

May 28, 2007

The media is full of comments on the speech Prime Minister gave to a CII meeting. You can read the speech here.

The comments: Business Standard, Economic Times, Indian Express

More on Capital Flows and growth

May 28, 2007

I had posted earlier on this topic here and here. The last one was a summary of an excellent survey (which is a summary of the empirical work done so far) which showed capital flows do not help in growth as theory suggests. It also showed that equity flows are better than debt flows.

I came across this another State of the art paper by Eswar Prasad, Raghuram Rajan and Arvind Subramanian titled Foreign Capital and Economic Growth. It has looked at some very interesting arguments:

“Developing countries that have relied more on foreign finance have not grown faster in the long run, and have typically grown more slowly. By contrast, we find that among industrial countries, those that rely more on foreign finance do appear to grow faster.”

Reasons:

First, the positive correlation between current account balances and growth is stronger among less financially developed countries

. In these countries, the range of profitable investment opportunities, as well as private consumption, for those that experience growth episodes, may be constrained by financial sector impediments, so investment can be financed largely through domestically generated savings.

Second,a developing country may actively choose not to absorb too much foreign capital in order to avoid exchange rate overvaluation. In turn, this ensures that the country’s manufacturing/tradable goods sector is competitive, thus allowing it to play its customary important role in fostering growth.

The paper is different as it mentions the role of financial system in absorbing capital flows which has been missing in previous papers (as finance has never been really thought as important in most previous work on economics). This paper attempts at correcting that biased viewpoint.

Further the paper adds:

The apparent perversity of overall foreign financing is even more dramatic when one examines the allocation of capital across developing countries……within this group capital should flow in greater amounts to countries that have grown the fastest, that is, countries that are likely to have the best investment opportunities. Does it?

Their research shows that it doesn’t infact capital flows mostly to medium and low growth developing countries!! Another puzzle is that when we look at FDI it does flow to top performing developing countries.

It is an excellent analysis once again from the team. However, the paper is a bit confusing as somehow the flow is not as clear-cut as it is in most Rajan papers. Perhaps it is missing Zingales (Rajan’s co-author in most papers) factor.

Summary of all papers I have read so far including this one: There is no relationship between openness of an economy to economic growth.  

Assorted Links

May 28, 2007

1. Both Goldman Sachs and Nasdaqplan to float seperate exchange for private equity/venture capital deals.

“Last year, according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission…..Under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers and investors with at least $100 million of assets and there are no more than 499 stockholders.”

2. Read about the Norway Pension Fund.

” Norway has amassed a fortune of more than $300 billion over the last decade, thanks to its profits from oil exports. Yet few countries are more ambivalent about their vast wealth than this modest, socially conscious society of less than five million people.

So rather than managing their monstrous nest egg simply for the best returns, the reluctant billionaires of Norway are using the money to advance an ambitious ethical code they established in 2004 for their oil reserve, known as the Government Pension Fund.

Norway’s investment choices have become a focus of attention in the last nine months over the exclusion of Wal-Mart, the American retailer whose big-box stores do not exist in this pristine country.”

3. It is not just that World Bank, IMF are in crisis we have Asian Development Bank joining the race as well.

4. Check out this mapwhich gives a snapshot of how your country fares in terms of business conditions. It is great collaboration between World Bank and Google Earth.

5. Heterodox economists?

Thanks to Finance Professor for 1, Marginal Revolution for 2 & 5.


%d bloggers like this: