Chapter 5.

Open Economy Growth:

International Trade and Capital Flows

Share of Country Groups in Global Economy (2000)

Group GDP Pop. Exports FDI share

Net Capital Inflow($)

High Income:

%79 %15 %73 %86

Middle Income

%18 %44 %24 %14 221 billion

Low Income:

%3 %41 %3 %0.6 4.5 billion

Share of Turkey in Global EconomyTrillion $ GDP

2008-PPP

GDP per cap. (PPP)

Exports Imports

World $ 69.5 tril. $10,500 (2008)

$16.28 tril. (2008)

$16.21 tril. (2008)

Turkey $ 0.906 tril. $12,000 (2008)

$142 bn (2008)

$205 bn (2008)

Share %1.3 %0.87 %1.26

Rank 16. 87. 33. 23.

Source: CIA world factbook

Share of Turkey in Global Economy TR Total GDP rank: 16th, below Indonesia and

South Korea (S. Korea pop: 48.5 mil., GDP p.c.: $26,000, PPP), above Iran.

Countries with largest exports and imports: (2010, $trillion): Exports: China (1.5), Germany(1.34), US(1.27), Japan(0.8),

France(0.5), S. Korea (0.47), İtaly(0.46), Netherlands (0.45), Canada, UK, Hong Kong, Russia

Imports: US(1.9), China(1.3), Germany(1.1), Japan(0.64), France(0.58), UK(0.54), İtaly(0.46), Hong Kong(0.43), S. Korea(0.42), Netherlands(0.41)

Share of Turkey in Global Economy Economic groups and unions:

EU: As of 2005, 51% of Turkey’s exports and 42% of its imports is with EU countries.

OECD: 60% of Turkey’s exports and 57% of its imports is with OECD countries

Globalization

Liberalization of international trade, production, and int’l capital flows in the post WW-2 era has been named “globalization”. Has accelerated in the 80s and 90s.

Organizations that were established for promoting liberalization of int’l trade, capital flows and production are IMF, The World Bank, GATT(1947) and WTO (1995)

Int’l Trade

Increases competition and productivity There is a positive relationship btw GDP growth

rate and int’l trade volume/GDP (Figure 5.1, from WB)

SE Asia: S. Korea, China, Taiwan, Indonesia, Thailand, Singapore applied export-led growth strategy successfully.

For Turkey see: disticaret.xls. What is trade volume, trade balance (or deficit), exports/imports ratio?

Turkey's foreign trade

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Int’l Trade

How is openness of an economy measured? Trade volume / GDP. Figure 5.6 in Akin. Larger economies are usually more closed than smaller ones because they have enough domestic demand.

Core countries: developed countries that import raw materials and export finished goods.

Periphery countries: Countries that export raw materials (oil, natural gas, metals, unprocessed agricultural products, etc) and import finished goods.

Developed countries’ exports are more diversified: Most developing countries’ exports are dependent on a few products, especially raw material exporters: Gulf countries, Venezuela, Nigeria.

Would it Be Better if Turkey Had Oil Reserves? According to Sachs and Warner (1995), NO!

They studied 95 countries between 1971 and 1989 and found that: income per capita in countries whose raw “materials exports / GNP” ratio exceeded 10% grew 0.7% slower than others. Why so?

Raw materials’ share in exports of S. Korea: 8%, Egypt: 68%, Nigeria 99%, Malaysia 24%, Mexico 22%.

Would it Be Better if Turkey Had Oil Reserves? Because:

Share of basic food and agricultural products in household budgets is falling. These products have very low income elasticities of demand. Total revenue does not increase much, demand is sluggish.

Technology reduces demand for raw materials or in some cases eliminates it by producing synthetically.

International Capital Flows (investments across countries) Two types:

Foreign Portfolio Investments (FPI): Inflows: Foreign residents purchase domestic bonds, stocks,

or lends credits to domestic residents (+ in BOP). Outflows: the other way around, (- in BOP).

Are short-term, easy come, easy go. Fast financial liberalization with poor regulation caused many crises in developing world especially in 80s and 90s. 80s: Latin American debt crisis. 90s financial crises: SE Asia, Russia(97-98). Turkey, Argentina

(2000-01). Could borrow longer term, but confidence matters. Indicators of risk: maturity of debt, forex reserves, exports, current account, budget deficit, stock of debt.

International Capital Flows

Foreign Direct Investments (FDI): Inflows: Foreign residents (companies owned by them)

buying more than 10% of domestic firms and banks or starting new firms or partnerships or branches in the domestic economy by purchasing land, equipment or buildings.

Outflows: domestic residents doing the same in foreign countries.

Difference of FDI and FPI: In FDI, foreign investor has a share larger than 10% in the company so that (s)he has managerial control of the company. In FPI, investor only contributes capital, does not take managerial control of her invested capital.

Multinational Corporations (MNCs, 2011 data)1. Wal Mart - United States (retail) 2. Royal Dutch Shell - Netherlands [2] (Petroleum) 3. ExxonMobil Corporation - United States (Petroleum) 4. BP - United Kingdom (oil) 5. Sinopec - China (Petroleum)6. China National Petroleum - China (Petroleum)7. State Grid - China (Power)8. Toyota Motor - Japan (automobiles) 9. Japan Post Holdings- Japan (Diversified)10. Chevron - United States (Petroleum)

http://en.wikipedia.org/wiki/Fortune_Global_500:

Multinational Corporations (MNCs, 2008 data)

Ranking Sales (bn,$)

Assets (bn,$)

Personnel (thousands)

1 Wal-Mart (US)

263 104,9 1500

10 General Motors (US)

195 448,5 326

25 Honda Motor 72,3 80,1 131,6

52 China national petroleum

56,4 97,7 1024,4

Source: Radelet- Fortune 500

FDI Potential Benefits

Long-term, difficult to escape the country easily (FPI can “fly” easily: “capital flight”).

Technological transfer: new ideas, methods, management skills transferred. Educate local managers or labor.

Create employment, (although < %5) Allows to finance investment above domestic

savings: Dom. Inv. = Dom. Sav. + Foreign Sav. (NCI) (for some countries, NCI<0)

FDI Potential Benefits

Specialization: countries specialize in certain types of production. Cars, electronics. Malaysia first only assembly (labor intensive), but eventually specialized in more capital- and technology-intensive production.

MNCs have strong international market experience. Can increase exports easier than domestic companies because for domestic firms difficult to enter the global market.

FDI Potential Hazards (according to some)

High profit transfers (or re-investment?) If they buy a readily operating firm, may not

bring new technology Might control or “exploit” the natural resources of

the country: especially large, powerful MNCs in poorer countries. Poor country govt.s may not have strong institutions to regulate the MNCs.

Unfair tax advantage relative to domestic firms.Domestic firms may not be as efficient and so may have to close down. Foreign firm could become monopoly then. Could also engage in “predatory pricing” policies.

FDI Potential Hazards (according to some) According to Dani Rodrik (“has globalization gone

too far?”), real wages drop especially in low-skilled sectors due to competition from labor surplus countries, esp. China (assembly, textiles, toys, etc).

Might increase dependency in strategic sectors sensitive to national security such as communications and energy. Sometimes MNCs can be more powerful than the domestic govt.

Global FDI Flows (Radelet)

Million$ 1980 1990 2003 %GDP-2003

China 57 3,487 53,505 3.8

Mexico 2,090 2,549 10,783 1.7

Russia 7,958 1.8

Turkey 18 684 1,562 0.6

Poland 10 89 4,123 2

Bulgaria 1,419 7.1

Serbia 1,360 6.6

FDI flows to Turkey

95 96 97 98 99 00 01 02 03 04 05 06

885 722 805 940 783 982 3352 1137 1752 2883 9801 20070

net FDI Inflows, milion US dollars, see odemelerdengesiOCAK2011.xls for more recent data

Factors that Influence FDI Flows Serin and Çalışkan (2008) studied FDI in SE

European countries including TR: Total GDP as measure of market size has positive effect.

Because domestic demand is sufficient. Positive developments in EU Relations, legal reforms have

positive effect. Taxes: Lower tax rates and lower govt. debt stock attract

more FDI More open economies attract more FDI. Because investor

plans to produce not only for the domestic market but also export to other countries. But in theory, sometimes higher traiffs and protection could also attract FDI. But empirical results show openness increases FDI.

Factors that Influence FDI Flows Factors according to other studies:

Infrastructure: Electricity, transportation (roads, railroads, sea, air), communication (phones, internet), ..

Cost of labor (real wage) Human capital or educated labor force. Although labor cost

might be low, FDI needs qualified labor. Costs of starting a business (Table 11-4 in Radelet), An “unjust” Justice system has negative effect. Property rights, contract enforceability.

Factors that Influence FDI Flows

According to Kaufmann and others from World Bank, governance (institutionalization) has a positive relationship with investment/GDP ratio. 6 measures of governance: Accountability Political stability (coups, armed conflict, violence,

frequent demonstrations and strikes) Effectiveness of govt. Quality of Govt.’s Policymaking Rule of Law Degree of corruption.