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UNIVERSITI PUTRA MALAYSIA

TRANSPARENCY EFFECTS ON CAPITAL FLOW, ECONOMIC GROWTH AND INCOME INEQUALITY

CHIA POH SAN

SPE 2020 5

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TRANSPARENCY EFFECTS ON CAPITAL FLOW, ECONOMIC GROWTH

AND INCOME INEQUALITY

By

CHIA POH SAN

Thesis submitted to the School of Graduate Studies, Universiti Putra Malaysia,

in Fulfilment of the Requirements for the Degree of Doctor of Philosophy

August 2019

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COPYRIGHT

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Copyright© Universiti Putra Malaysia

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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment of

the requirement for the degree of Doctor of Philosophy

TRANSPARENCY EFFECTS ON CAPITAL FLOW, ECONOMIC GROWTH

AND INCOME INEQUALITY

By

CHIA POH SAN

August 2019

Chairman : Professor Law Siong Hook, PhD

Faculty : Economics and Management

This thesis aims to investigate the effect of transparency on capital flows, economic

growth and income inequality. The first objective is to analyse the overall development in

transparency and capital flows to developing countries which are motivated by the fact

that the primary concern of Lucas Paradox’s is why international capital is flowing less to

developing countries. The second objective is to examine whether the countries with

natural resource endowment can generate a higher economic growth by taking into

account the aggregate transparency and sub-aggregate transparency namely, information

transparency and accountability transparency using the analysis of cross-section countries.

Thirdly, the study evaluates the interrelationship among economic growth, income

inequality and transparency in developing countries.

The first objective uses two datasets from (i) the Global Index of Information

Transparency and Accountability and (ii) the International Finance Institutes (IIF). The

methods applied are panel heterogeneity estimators, namely the Common Correlation

Effect Mean Group (CCEMG) and the Augmented Mean Group (AMG) which are used

to examine the effect of transparency on the types of capital flows to developing countries.

The number of developing countries totalled 28 countries over the period 1991 -2010.

Several important findings are revealed from the study. Firstly, FDI has a weak

relationship with transparency in developing countries. However, the portfolio investment

has a positive and statistical significance with transparency and accountability

transparency. Bank lending has a weak relation with accountability transparency, while

the official flow is positively significant with information transparency. However, the

inclusion of the interaction term between GDP per capita with transparency, the

information transparency and accountability transparency, and the empirical result

revealed that transparency is the determinant of portfolio investment and official flow,

while information transparency and accountability are determinants of FDI. Thus, the

empirical findings demonstrated that transparency can resolve the Lucas paradox issue

that only developing countries can have a higher transparency leading to a higher capital

flow.

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The second objective is motivated by the lack of systematic studies on the role of

transparency on economic growth in natural resource endowment countries based on the

system generalised method of moments (GMM) estimation. The sampling countries

consisted of 73 countries over the period from 2006 to 2010. The empirical results showed

that aggregate transparency and sub-aggregate, information transparency negatively

affected the economic growth in natural resource countries. The sampling countries are

further divided into two types of resources, point (fuel export) and diffuse (food export)

resources. The empirical results revealed that fuel export is negatively associated with

economic growth, while food export countries are positively associated with economic

growth. The inclusion of the interaction term into analysis, interaction terms between

transparency and accountability with natural resource rents are positively significant

determinants of GDP per capita. Furthermore, all the interaction terms with fuel export is

a positive significant determinant of GDP per capita, while the interaction terms with food

export are insignificant or have benign effects to economic growth in natural resource

countries despite transparency improvement.

The third objective, utilises the Vector Autoregressive model to identify the

interrelationship among transparency, income inequality and economic growth.

Transparency and accountability transparency are identified as the key drivers for

economic growth. The empirical result reveals that transparency and accountability

transparency are positively significant determinants of GDP per capita. This finding is

supported by several previous empirical literature which stated the good macroeconomic

policies and better institution. The inclusion of financial development as an additional

variable into the same model specifications, transparency and financial development play

a crucial role for economic growth, while economic growth and transparency are

determinants of financial development.

In policy implications, the transparency is an important determinant for various types of

capital flow, although bank lending has responded unfavourably to transparency. Given

this, the policymakers in developing countries should take into serious consideration the

transparency initiatives in order to enhance capital-growth nexus and to ensure capital

large effects has by far been beneficial to growth. Transparency reform initiatives that

improve oil extractive industry in respect of governance and support facilitate oil rents

channel to productive investment, reduce rent-seeking and corruption in public officials.

Lastly, transparency could be achieved indirectly by enhancing the existing transparency

reform policies that promote good governance in order to curb the inequality and

redistribution resource among population. In conclusion, countries who pursue higher

transparency are allowed to reap the benefits from the capital flow in host countries,

transforming the resource curse to bless economic growth and reduce income inequality.

Though the effect of transparency does not undergo a faster economic growth rate, but at

least it will result to a stable growth.

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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai

memenuhi keperluan untuk ijazah Doktor Falsafah

KESAN KETELUSAN TERHADAP ALIRAN MODAL, PERTUMBUHAN

EKONOMI DAN KETIDAKSEIMBANGAN PENDAPATAN

Oleh

CHIA POH SAN

Ogos 2019

Pengerusi : Profesor Law Siong Hook, PhD

Fakulti : Ekonomi and Pengurusan

Tesis ini bertujuan untuk mengkaji kesan ketelusan ke atas aliran modal, pertumbuhan

ekonomi dan ketidaksamaan pendapatan. Objektif pertama menyelidikan keseluruhan

pembangunan dalam ketelusan dan aliran modal ke negara-negara sedang berkembang

berpunca daripada fakta mengenai masalah Lucas Paradox yang memberi perhatian

tentang modal antarabangsa kurang mengalir ke negara-negara yang sedang berkembang.

Objektif kedua mengkaji negara-negara kekayaan sumber asli boleh menpertingkatkan

pertumbuhan ekonomi yang lebih tinggi dengan mengambil kira ketelusan agregat dan

ketelusan sub-agregat iaitu transparansi maklumat dan ketelusan akauntabiliti

menggunakan analisis negara-negara rentas. Ketiganya, kajian ini menilai hubungan

antara pertumbuhan ekonomi, ketidakseimbangan pendapatan dan ketelusan di negara-

negara sedang berkembang.

Kajian menggunakan dua jenis data daripada (i) Global Index of Information

Transparency and Accountability dan (ii) Institusi Kewangan Antarabangsa (IIF). Kajian

mengganukan panel heterogeneity seperti berikut, Common Correlated Effect Mean

Group (CCEMG) dan Augmented Mean Group (AMG) untuk meyelidikan kesan

ketelusan atas pelbagai aliran modal ke negara-negara sedang berkembang. Bilangan

negara sedang berkembang adalah 28 negara dalam tempoh 1991 -2010. Beberapa

penemuan penting ditonjolkan daripada kajian ini. Pertama, Pelaburan Langsung Asing

mempunyai hubungan lemah dengan ketelusan di negara-negara sedang berkembang.

Walau bagaimanapun, pelaburan portfolio mempunyai positif dan statistik yang ketara

dengan ketelusan dan ketelusan akauntabiliti. Pinjaman bank mempunyai hubungan yang

lemah dengan ketelusan akauntabiliti, manakala aliran rasmi secara positif atas ketelusan

maklumat. Walau bagaimanapun, interaksi antara KDNK per kapita dengan ketelusan,

ketelusan maklumat dan ketelusan akauntabiliti, hasil kajian menunjukkan bahawa

ketelusan adalah penentu pelaburan portfolio dan aliran rasmi, manakala ketelusan dan

akauntabiliti maklumat adalah penentu FDI. Oleh itu, hasil kajian terbukti bahawa

ketelusan adalah penyelesaisan masalah untuk Lucas paradoks hanya negara-negara

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sedang berkembang mempunyai ketelusan yang lebih tinggi dapat meningkatkan aliran

modal.

Objektif kedua didorong oleh kurangnya kajian secara sistematik mengenai peranan

ketelusan terhadap pertumbuhan ekonomi negara-negara sumber alam semula jadi

berdasarkan system generalised methods of moment (GMM). Sampel negara-negara

terdiri daripada 73 negara dari tempoh 2006 hingga 2010. Hasil kajian menunjukkan

bahawa ketelusan dan sub-agregat, ketelusan maklumat mempengaruhi pertumbuhan

ekonomi negara sumber asli secara negatif. Selain itu, sampel negara-negara juga

dibahagikan berdasarkan dua jenis sumber, eksport bahan api dan eksport sumber

makanan. Penemuan terbukti bahawa eksport bahan api dikaitkan secara negatif dengan

pertumbuhan ekonomi, manakala negara-negara eksport makanan secara positif dikaitkan

dengan pertumbuhan ekonomi. Selain itu, interaksi interaksi antara ketelusan dan

akuntabilitas dengan sewa sumber asli adalah penentu positif KDNK per kapita.

Selanjutnya, semua istilah interaksi dengan eksport bahan api mempunyai penentu positif

KDNK per kapita, manakala interaksi dengan eksport makanan kurang memberi kesan

yang signifikan kepada pertumbuhan ekonomi negara sumber semula jadi walaupun

penambahbaikan ketelusan.

Tujuan ketiga, kajian menggunakan panel Autoregressive Vektor untuk mengenal pasti

hubungan interaksi antara ketelusan, ketidakseimbangan pendapatan dan pertumbuhan

ekonomi. Ketelusan dan ketelusan akauntabiliti telah dikenal pasti penentu utama bagi

pertumbuhan ekonomi. Hasil kajian juga menunjukkan bahawa ketelusan dan transparansi

akauntabiliti adalah penentu positif KDNK per kapita. Penemuan ini disokong oleh

beberapa siri kajian terdahulu yang telah dibukitkan bahawa dasar makroekonomi yang

baik dan institusi yang lebih baik. Dengan kemasukan kewangan sebagai pembolehubah

tambahan, ketelusan dan kewangan memainkan peranan yang penting untuk pertumbuhan

ekonomi, manakala pertumbuhan ekonomi dan ketelusan adalah penentu untuk kewangan.

Pada implikasi dasar, ketelusan adalah penentu penting dalam jenis aliran modal,

walaupun pinjaman bank kurang bertindak balas dengan ketelusan. Dengan ini, penggubal

dasar di negara-negara sedan berkembang harus mengambil kira serius terhadap inisiatif

ketelusan untuk meningkatkan perhubungan pertumbuhan modal dan memastikan kesan

besar modal yang jauh memberi manfaat kepada pertumbuhan. Inisiatif pembaharuan

ketelusan yang meningkatkan industri minyak ekstraktif dalam aspek tadbir urus dan

menyalurkan sumbangan minyak ke pelaburan produktif, mengurangkan salahguna

minyak sewa dan rasuah di kalangan pegawai awam. Akhir sekali, ketelusan boleh dicapai

secara tidak langsung dengan meningkatkan dasar pembaharuan ketelusan yang sedia ada

yang menggalakkan tadbir urus yang baik untuk membendung ketidakseimbangan dan

sumber pengagihan semula di kalangan penduduk. Sebagai kesimpulan, negara

meneruskan ketelusan yang lebih tinggi dapat memperolehi faedah daripada aliran modal

untuk negara-negara sedang berkembang, menjana sumber untuk memberkati

pertumbuhan ekonomi dan juga mengatasi ketidakseimbangan pendapatan. Kesan

ketelusan tidak mementingkan kadar pertumbuhan ekonomi yang lebih cepat, namun ia

memberi sekurang-kurangnya pertumbuhan yang stabil.

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ACKNOWLEDGEMENTS

I would like to express my deepest gratitude and thanks to chairman of committee

members, Professor Dr. Law Siong Hook who has the utmost brilliance, kindness and

generosity in my throughout PhD journey. He is not only a supervisor, but a greatest

mentor of my life in Master and PhD studies. He continually conveyed a spirit of

dedication in regard to research and his unwavering enthusiasm for economics have

sharpened my achievement nowadays. Without his guidance and persistent help, my

PhD journey would not have been possible.

My appreciation also extends to my committee members, Associate Professor Dr. Wan

Azman Saini Wan Ngah and Associate Professor Dr. Lee Chin for their assistance and

suggestion in my dissertation.

Last, I am indebted to my family, whose value to me throughout my life and full

support to me. I acknowledge my wife and son who is my champion and who blessed

in life.

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This thesis was submitted to the Senate of the Universiti Putra Malaysia and has

been accepted as fulfilment of the requirement for the degree of Doctor of

Philosophy. The members of the Supervisory Committee were as follows:

Law Siong Hook, PhD

Professor

School of Business and Economics

Universiti Putra Malaysia

(Chairman)

Wan Azman Saini Wan Ngah, PhD

Associate Professor



(Member)

Lee Chin, PhD

Associate Professor



(Member)

ZALILAH MOHD SHARIFF, PhD

Professor and Dean

School of Graduate Studies


Date:

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Declaration by graduate student

I hereby confirm that:

this thesis is my original work;

quotations, illustrations and citations have been duly referenced;

this thesis has not been submitted previously or concurrently for any other degree

at any institutions;

intellectual property from the thesis and copyright of thesis are fully-owned by

Universiti Putra Malaysia, as according to the Universiti Putra Malaysia

(Research) Rules 2012;

written permission must be obtained from supervisor and the office of Deputy

Vice-Chancellor (Research and innovation) before thesis is published (in the form

of written, printed or in electronic form) including books, journals, modules,

proceedings, popular writings, seminar papers, manuscripts, posters, reports,

lecture notes, learning modules or any other materials as stated in the Universiti

Putra Malaysia (Research) Rules 2012;

there is no plagiarism or data falsification/fabrication in the thesis, and scholarly

integrity is upheld as according to the Universiti Putra Malaysia (Graduate

Studies) Rules 2003 (Revision 2012-2013) and the Universiti Putra Malaysia

(Research) Rules 2012. The thesis has undergone plagiarism detection software

Signature: Date:

Name and Matric No: Chia Poh San (GS37291)

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Declaration by Members of Supervisory Committee

This is to confirm that:

the research conducted and the writing of this thesis was under our supervision;

supervision responsibilities as stated in the Universiti Putra Malaysia (Graduate

Studies) Rules 2003 (Revision 2012-2013) were adhered to.

Signature:

Name of Chairman

of Supervisory

Committee:

Professor Dr. Law Siong Hook

Signature:

Name of Member

of Supervisory

Committee:

Associate Professor Dr. Wan Azman

Saini Wan Ngah

Signature:

Name of Member

of Supervisory

Committee:

Associate Professor Dr. Lee Chin

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TABLE OF CONTENTS

Page

ABSTRACT i

ABSTRAK iii

ACKNOWLEDGEMENTS v

APPROVAL vi

DECLARATION viii

LIST OF TABLES xiv

LIST OF FIGURES xvii

CHAPTER

1 INTRODUCTION 1

1.1 Issues 3

1.1.1 Capital Flow to Developing Countries 3

1.1.2 Sub-Indicators of Transparency, Information

Transparency and Accountability Transparency 8

1.1.3 Lucas Paradox Theory on Capital Flow to Developing

Countries 10

1.1.4 Impact of Transparency on Types of Capital Flow 11

1.1.5 Natural Resources Rents and Economic Growth 16

1.1.6 Natural Resources Rent and Transparency Effects in

Developing Countries 16

1.1.7 Transparency, Natural Resource and Economic

Growth in Developing Countries 18

1.1.8 Interaction Term between Transparency with Natural

Resource on Economic Growth 21

1.1.9 Relationship between Income Inequality on Economic

Growth 21

1.1.10 Transparency, Income Inequality and Economic


1.1.11 The Role of Transparency on Income Inequality and

Economic Growth 25

1.2 Problem Statement 28

1.2.1 Transparency Impact on Capital Flow to Developing

Countries 28

1.2.2 Transparency Effects on Economic Growth in Natural

Resources Endowment Countries 30

1.2.3 The Effect of Transparency on Income Inequality and

Economic Growth 31

1.3 Research Objectives 32

1.4 Significance of the Study 32

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2 LITERATURE REVIEW 34

2.1 Theoretical on International Capital Flows 34

2.1.1 Empirical Studies on International Capital Flow and

Institution Quality 36

2.1.2 Theoretical on Natural Resource and Economic

Growth 39

2.1.3 Empirical Tests on Role of Institutions on Economic

Growth 41

2.1.4 Theoretical on Income Inequality and Economic

Growth 44

2.1.5 Role of Institution Quality on Economic Growth and

Inequality 45

2.1.6 Financial Development, Inequality and Economic

Growth 46

2.1.7 Empirical Result on Governance, Inequality and

Economic Growth 47

3 MODEL, METHODOLOGY AND DATA 50

3.1 Introduction 50

3.2 Transparency and Types of Capital Flows 50

3.2.1 Lucas Paradox Theory on Capital Flows 50

3.2.2 Omitted Factor of Production 51

3.2.3 Government Policies 51

3.2.4 Institutions 52

3.2.5 Sovereign Risk 52

3.2.6 Model Specification 53

3.2.7 Interaction Term between Transparency with

Economic Growth on Capital Flow 54

3.2.8 Econometric Methodology 55

3.2.9 Heterogeneity Panel Estimator Group 56

3.2.10 Common Correlated Effect Mean Group (CCEMG) 57

3.2.11 Augmented Mean Group (AMG) 57

3.2.12 The advantages of CCEMG and AMG Methodologies 58

3.2.13 Dependant Variable 58

3.2.14 Independent Variables 59

3.2.15 Data Sources 61

3.2.16 Correlation between Dependent and Independent

Variables 64

3.3 Effect of Transparency on Economic Growth in Natural

Resources Endowment Countries 64


3.3.2 Interaction between Natural Resources with

Transparency on Economic Growth 66

3.3.3 Econometric methodology 67

3.3.4 Dependant Variable 69

3.3.5 Independent Variables 69



Variables 73

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3.4 The Interrelationship between Transparency, Income

Inequality, Financial Development and Economic Growth 73


3.4.2 Econometric Methodology 76

3.4.3 Dataset and Variables 76



Variables 80

4 EMPIRICAL RESULTS AND DISCUSSION 81

4.1 Introduction 81

4.1.1 Impact of Transparency, Information Transparency

and Accountability Transparency on Types of Capital

Flows to the Developing Countries 81

4.1.2 The Effect of Transparency, Information Transparency

and Accountability Transparency on Foreign Direct

Investment Flows to Developing Countries 85


and Accountability Transparency on Portfolio

Investment Flows to Developing Countries 89


and Accountability Transparency on Bank Lending in



and Accountability Transparency on Official Flow in


4.1.6 Interaction Term between Transparency, Information

Transparency and Accountability Transparency with

Economic Growth on FDI Flow 96


Transparency, and Accountability Transparency with

Economic Growth on Portfolio Investment 99

4.1.8 Interaction Term Effects between Transparency,

Information Transparency, Accountability

Transparency with Economic Growth on Bank

Lending 101

4.1.9 Interaction Term Effects between Transparency,

Information Transparency and Accountability

Transparency with Economic Growth on Official

Flow 103

4.1.10 Conclusion 105


and Accountability Transparency on Economic

Growth in Natural Resources Countries 106



Natural Resource on Economic Growth 106

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4.1.13 Fuel Export Rents, Transparency, Information

Transparency and Accountability Transparency on

Economic Growth 110



Fuel Export Rent on Economic Growth 110

4.1.15 Food Export Rents, Transparency, Information

Transparency and Accountability Transparency on

Economic Growth 114



Food Export Rent on Economic Growth 114


4.1.18 Lag Order Selection of Panel VAR Optimal Lag

Length: Interrelationship among Transparency,

Income Inequality and Economic Growth in


4.1.19 Panel VAR on the Interrelationship among

Transparency, Income Inequality and Economic


4.1.20 Panel VAR on the Relation Among Economic Growth,

Income Inequality, Transparency and Financial

Development in Developing Countries 121

4.1.21 Variance Decomposition for Interrelationship among

Transparency, Income Inequality and Economic

Growth 123

4.1.22 Variance Decomposition for Interrelationship among

Transparency, Income Inequality, Economic Growth

and Financial Development 125

4.1.23 Impulse-Response Function Analysis for Transparency,

Income Inequality and Economic Growth 127

4.1.24 Impulse-Response Function Analysis for Transparency,

Income Inequality, Economic Growth and Financial

Development 131


5 CONCLUSION 139

5.1 Introduction 139

5.2 Summary of the Research Questions and Objectives of the

Study 139

5.3 Major Finding of Study 140

5.4 Policy Implications 142

5.5 Recommendations 143

REFERENCES 144

APPENDICES 164

BIODATA OF STUDENT 165

PUBLICATION 166

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LIST OF TABLES

Table Page

1.1 Top and Bottom Ten Countries, Average 1980 - 2010 for Information

Transparency Index (ITI) ,Accountability Transparency Index (ATI)

and Transparency Index (TI) 2

1.2 Types of Capital Flow to Different Developing Countries by Sub

Period, Millions of USD 5

1.3 Nature Resource Rent, GDP Per Capita and Transparency of

Developing Countries between 2001 and 2010 20

1.4 Comparison between GNI Per Capita, Gini Coefficient and

Transparency 24

3.1 List of Sample Countries 62

3.2 Summary of Dataset on Types of Capital Flow, Transparency and

Independent Variables 63

3.3 Summary of the Correlation Sign between Independent Variables and

Types of Capital Flows 64

3.4 Summary of the List of Natural Resource Endowment Countries 71

3.5 Dataset of Transparency and Economic Growth for Natural

Resources Endowment Country 72

3.6 Summary of the Correlation Sign between Independent Variables and

Natural Resources 73

3.7 List of Sample Countries 78

3.8 Dataset of Transparency, Income Inequality, Economic Growth and

Financial Development 79

3.9 Summary of the Correlation Sign between Economic Growth,

Transparency, Income Inequality and Financial Development 80

4.1 Maddala and Wu Stationary Test 82

4.2 CIPS Panel Unit Root Test 82

4.3 Pesaran Cross-Section Dependence Test for Dependent and

Independence Variables 83

4.4 The Effect of Transparency on FDI Flow in Developing Countries

(with Natural Resources) over a Period from 1991 to 2010 87

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4.5 The Effect of Transparency on FDI Flow in Developing Countries

(with Financial Development) over a Period from 1991to 2010 88

4.6 The Effect of Transparency on Portfolio Flow in Developing

Countries over a Period from 1991 to 2010 91

4.7 The Effect of Transparency on Bank Lending in Developing

Countries Over a Period from 1991to 2010 93

4.8 The Effect of Transparency on Official Flow in Developing Countries

Over a Period from 1991 to 2010 95

4.9 The Effect of Interaction Term between Transparency and Sub-

Indicator of Transparency on GDP Per Capita on FDI Flow – (NR) 97


Indicator of Transparency on GDP Per Capita on FDI Flow – (FD) 98


Indicator of Transparency on GDP Per Capita on Portfolio

Investment 100


Indicator of Transparency on GDP Per Capita on Bank Lending 102


Indicator of Transparency on GDP Per Capita on Official Flow 104

4.14 The Total Natural Resources Rents, Transparency, Information

Transparency and Accountability Transparency on Economic

Growth 108

4.15 The Interaction Term between Transparency, Information

Transparency and Accountability Transparency with Natural

Resource on Economic Growth 109

4.16 Fuel Export Rents, Transparency, Information Transparency and

Accountability Transparency on Economic Growth 112

4.17 Interaction between Fuel Export Rent with Transparency,

Information Transparency and Accountability Transparency on

Economic Growth 113

4.18 Food Export Rents, Transparency, Information Transparency and

Accountability Transparency on Economic Growth 115

4.19 Interaction between Food Export Rent with Transparency,

Information Transparency and Accountability Transparency on

Economic Growth 116

4.20 Lag Order Selection of Panel VAR Optimal Lag Length 118

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4.21 Result of Panel VAR Model on Transparency, Income Inequality and

Growth 120

4.22 Result of Panel VAR Model on Transparency, Income Inequality,

Growth and Financial Development 122

4.23 Variance Decomposition of Economic Growth, Transparency and

Income Inequality 124

4.24 Variance Decomposition of Economic Growth, Transparency,

Income Inequality and Financial Development 126

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LIST OF FIGURES

Figure Page

1.1 Conceptual Approach of Transparency 1

1.2 Components of Private Capital Flow 3

1.3 Type of Capital Flows to Developing Countries from 1991 to 2010 4

1.4 FDI of Regional Countries from Period 1991 to 2010 6

1.5 Portfolio Investment of Regional Countries from period 1991 to

2010 7

1.6 Bank Lending of Regional Countries from Period 1991 to 2010 7

1.7 Official Flow of Regional Countries from Period 1991 to 2010 8

1.8 Information Transparency and Accountability Transparency Index

from 1991 to 2010 9

1.9 Transparency Index of Regional Countries in Sub-Periods 10

1.10 Transparency on Types of Capital Flow in Developing Countries 13

1.11 Information Transparency on Types of Capital Flow in Developing

Countries 14

1.12 Accountability Transparency on Types of Capital Flow in


1.13 Relationship between Annual Income GDP Per Capita Constant,

USD million and Natural Resources Rent (%) during 2001 – 2010 16

1.14 The Relationship of Transparency on Natural Resources Rents 17

1.15 Comparison between Annualised Growth Rate, Natural Resource

Rents and Transparency for Selected Countries 19

1.16 Comparison between GNI Per Capita, Gini Coefficient and

Transparency in Developing Countries 25

1.17 Comparison between Gini Coefficient in Developing Countries 25

1.18 The Relationship of Transparency on Gini Coefficient in Developing

Countries 27

1.19 The Relationship of Information Transparency Effect on Gini

Coefficient in Developing Countries 27

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1.20 The Relationship of Accountability Transparency on Gini Coefficient

in Developing Countries 28

3.1 The Conceptual Framework on the Effect of Transparency and Sub-

Indicators of Transparency on the Types of Capital Flow 53

3.2 The Conceptual Framework on the Impact of Transparency on

Economic Growth in Natural Resources Endowment Countries 65

3.3 Theoretical Framework on the Transparency, Income Inequality,

Financial Development and Economic Growth 73

4.1 Impulse-Responses for Panel VAR of Economic Growth,

Transparency and Income Inequality 128


Information Transparency and Income Inequality 129


Accountability Transparency and Income Inequality 130


Transparency, Income Inequality and Financial Development 132


Information Transparency, Income Inequality and Financial

Development 133


Accountability Transparency, Income Inequality and Financial

Development 134

4.7 Stability Condition: Economic Growth, Transparency and Income

Inequality 136

4.8 Stability Condition: Economic Growth, Information Transparency

and Income Inequality 136

4.9 Stability Condition: Economic Growth, Accountability Transparency

and Income Inequality 137

4.10 Stability Condition: Economic Growth, Transparency, Income

Inequality and Financial Development 137

4.11 Stability Condition: Economic Growth, Information Transparency,


4.12 Stability Condition: Economic Growth, Accountability Transparency,


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CHAPTER 1

1 INTRODUCTION

Transparency has increasingly become a major issue debated by researchers and

policy makers globally. During the Asian crises in 1997 and sub-prime crises in 2008,

it had not only highlighted the well-being of financial markets, but also other aspects

of economy related to transparency, political stability and inclusion growth which

have remained unresolved. The importance of transparency have widened over others

both geographically and cross-borders.

Transparency is generally defined as the flow of reliable and timely information on

financial, social, political and the economy. Information released is critically crucial

for people to predict on the creditworthiness of borrowers, political stability,

government affairs, social and economic development. Countries with more

transparency have an effective legal framework, efficient system and more stable

economic growth. In contrast, the lack of a transparent government is deliberately

holding back or the unwillingness to release accurate information, misrepresenting

information to the public, corruption and bureaucratic inefficiency.

Information friction has severely distorted the data on countries economic

performance and complexity for investor decision-making. Thus, transparency is

associated with the removal of information asymmetric in the financial markets. On

the other hand, some policy-makers and scholars consider that transparency is a tool

of checklist for the public who requires a check and balance system on the government

in order to prove that criteria are met. According to the transparency conceptual

framework proposed by Andrew Williams (2015) and who constructed new

measurement for the transparency index which consists of sub-indicators of

transparency as shown in Figure 1.1.

Figure 1.1 : Conceptual Approach of Transparency

[Source: Global Index of Information Transparency and Accountability, Williams

(2015)]

Transparency

Information

Transparency

Accountability

Transparency

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Based on Table 1.1, the worldwide overall transparency shows that OECD countries

have the highest transparency, while poor countries are relatively low in transparency

system. The aggregate transparency can be disaggregated into 2 sub-indicators

namely, information transparency index (ITI) and accountability transparency index

(ATI) for 187 countries from 1980 – 2010 period. Based on Table 1.1, OECD

countries are the top 10 countries in both the sub-group index, while the bottom 10

countries are poor developed countries like Bhutan, Afghanistan, Equatorial Guinea,

North Korea etc. OECD countries are more transparent countries, with good

institutional quality and political stability. In contrast, poor countries are associated

with extremely instable politics, lack of transparency in releasing information and a

high rate of corruption.

In macroeconomic environment, transparency is an important factor to determine the

private capital inflow from abroad to the poor countries. Greater transparency attracts

more international capital flow due to more openness trading and financial integration,

quality institutional, lower corruption and property right protection. On the other hand,

lack of transparency is endemic in many of the natural resource endowment countries

which are associated with bureaucratic corruption and slow economic growth rate as

compared with non-resources countries. Consequently, the corruption have

aggravated the income inequality variation across countries which retarded the

economic development.

Table 1.1 : Top and Bottom Ten Countries, Average 1980 - 2010 for Information

Transparency Index (ITI), Accountability Transparency Index (ATI) and

Transparency Index (TI)

Rank Country ITI Country AI TI

1 United States 80.2 Australia 78.5 United States 80.2

2 Australia 79.9 Denmark 76.8 Australia 79.0

3 Canada 78.7 Finland 76.7 Canada 76.5

4 U.Kingdom 77.5 Netherlands 76.3 Finland 76.1

5 Finland 75.5 Luxembourg 76 U.Kingdom 74.9

6 Sweden 75 New Zealand 75.1 Netherland 74.7

7 Slovenia 74.3 Sweden 74.9 Sweden 74.6

8 Netherlands 73.7 Canada 74.4 N. Zealand 72.3

9 France 73 Belgium 74.3 Switzerland 72

10 Germany 72.8 Switzerland 74.2 Germany 71.3

….. …… …. …… …..

178 Bhutan 29.8 Afghanistan 17.8 Chad 25.8

179 Chad 29.8 E.Guinea 16.9 Cuba 23.6

180 Iraq 28.8 Swaziland 16.3 Iraq 23.2

181 Turkmenistan 28.5 Iraq 14.9 E. Guinea 23

182 E. Guinea 28.4 Cuba 13.8 Afghanistan 17.5

183 Liberia 26.5 Libya 13.7 Somalia 13.6

184 Kiribati 23 Saudi Arabia 13.2 Turkmenistan 13.4

185 Afghanistan 19.9 Uzbekistan 12.2 Kiribati 10.1

186 Korea, DPR 13.3 Turkmenistan 10.5 Uzbekistan 9.9

187 Somalia 11.3 Korea, DPR 10.1 Korea, DPR 9.4


(2015)]

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1.1 Issues

This section will discuss the issues of (i) the effects of transparency on the types of

capital flows, (ii) the effect of transparency on economic growth of the natural

resources endowment countries, (iii) the interrelationship among effect of

transparency, income inequality and economic growth.

1.1.1 Capital Flow to Developing Countries

Figure 1.2 : Components of Private Capital Flow

[Source: Statistical report by Institutes of International Finance (IIF), 2014]

The Institute of International Finance (IIF) defined capital flow as the transfer of

ownership of financial asset from one country to another country. The capital flow

consisted of different components of capital such as equity, debt capital and official

flow. Equity capital involved Foreign Direct Investment (FDI) and portfolio

investment, while debt capital involved bank lending. The transactions of assets are

recorded in the financial accounts of each country’s Balance of Payment (BoP). FDI

is a direct equity capital, which includes reinvestment of earning and this direct equity,

which is a long term investment, has considered the investor has more than 10%

ownership in managerial control over the enterprise. Nonetheless, portfolio investment

is another equity capital with less than 10% ownership and short term speculation

investment. Bank lending is debt form capital which generally involved bond

purchases by commercial banks and official flow is a sum of financing provided by

bilateral creditors, International Financial Institutions, International Monetary Fund

(IMF) and the World Bank.

Private capital

Equity capital

Debt capital

Official flow

Foreign Direct

Investment

Portfolio

Investment

Bank Lending

Capital Flows

Taxonomy

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The surge of capital flow across borders was like skyrocketed when trade and finance

were integrated globally. Huge capital flow from advanced countries to developing

countries started in year 1980, but many developing markets such as America Latin,

Asia, Russia and Turkey were severely affected by the financial crises in 1997 and the

global sub-prime crisis that occurred in 2007-2008. As a result, the phenomenon has

triggered an alarm to policy-makers and scholars to re-examine the international

capital flow on the countries growth.

Figure 1.3 : Type of Capital Flows to Developing Countries from 1991 to 2010

[Source: Statistical report by Institutes of International Finance, 2014]

Based on Figure 1.3, the FDI flow is one of the major source of external financing

after the surge in the 1980s. The total of FDI has grown steadily in developing

countries from 1991 to 2010. The private capital flow development has shifted from

FDI to bank lending as a major source for developing countries. Bank lending rose

from 1991 to 1996, but declined sharply during the 1997 financial crises. After 2002,

bank lending rebounded significantly until 2007. However, it has dropped sharply in

2008 due to financial crises. FDI was historically the main foreign capital that have

reached developing countries (as shown in Figure 1). Recently, bank lending have

increased substantially especially over the pre-crisis period between 2002 to 2007. On

the contrary, portfolio investment grew less than 20% from 1991 to 2010 and sharply

declined during the 2008 financial crises. The portfolio investment is part of external

financing and the evolution of capital flow highlighted that portfolio investment is not

a reliable source of financing for economic development due to the relatively volatile

and short-term speculative flow as compared with FDI. The official flow is an

alternative source of capital which flowed to developing countries during the financial

crises. Official flow increased between Eastern Europe, Latin America and Asia due

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

Types of capital flow to emerging countries from 1991 to 2010

FDI Portfolio Bank Lending Official Flow

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to limited international capital market and also a reduction in the flow of official

development assistance in developing countries.

Table 1.2 : Types of Capital Flow to Different Developing Countries by Sub

Period, Millions of USD

[Source: Statistical report by Institutes of International Finance, 2014]

In the regional areas, the capital flow landscape underwent an evolution over the past

20 years, from 1991 to 2000. Table 1.2 illustrated the types of capital flow to different

regional areas such as Middle East & Africa, Latin America, Emerging Europe and

Asia. Figure 1.4 revealed in the statistical graph of FDI that Asia is the top recipient

which has increased more than one fold compared with other regional areas, followed

by Emerging Europe, Middle East & Africa and the least recipient, Latin America.

Latin America’s FDI declined from 1999 to 2003 was mainly due to the weak

economic growth, tumbling stock markets and winding down of privatisation.

Portfolio investment is one of the equity capital and short term speculative investment.

Portfolio investment is not a reliable source of financing for development as it is

largely volatile. Portfolio investment flow has been unstable over the past 20 years, as

it abruptly reversed the capital resulting to a sharp drop during the global financial

crisis in 2008. However, it has recovered and reached its peak of pre-crisis after 2008.

Asia is the top recipient of portfolio investment as compared with its counterparts like

Emerging Europe, Middle East & Africa and Latin America.

Region and component 1991 – 95 1996 – 00 2001 – 05 2006 -10

Middle East & Africa

FDI 2,344.33 6,938.72 21,014.09 63,236.01

Portfolio 781.71 6,805.24 4,806.05 8,563.56

Bank Lending 1981.55 5,785.94 2,267.27 28,210.93

Official Flow 5,979.74 (416.37) (1,267.84) 1,329.06

Latin America

FDI 16,145.23 56,362.67 51,278.57 77,427.60

Portfolio 12,554.65 3,991.43 3,763.35 22,568.74

Bank Lending 9,782.65 7,690.62 (4,020.28) 27,077.87

Official Flow 6,819.40 (155.51) (1,275.81) 9,633.05

Emerging Europe

FDI 6,904.23 15,683.75 34,372.12 92,899.75

Portfolio 1,546.47 3,002.13 3,570.67 5,543.72

Bank Lending 1,955.42 10,498.39 31,600.50 60,304.69

Official Flow 12,955.14 7,753.02 (5,599.98) 8,766.06

Asia

FDI 30,770.93 60,933.07 84,936.03 225,323.14

Portfolio 12,983.23 13,993.21 27,097.03 40,946.05

Bank Lending 29,585.18 (9,851.06) 24,423.58 67,269.23

Official Flow 13,131.71 16,867.11 (6,089.55) 21,182.06

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The external debt has been substantially increased in Asia and Emerging Europe as

the stock of debt has doubled over the past 20 years. In Asia, debt service payments

tripled along with the private debt which has increased due to the financial and capital

account liberalisation. In many developing countries, particularly in South-East Asia,

there has been a substantial increase in foreign exchange reserves as they attempted to

mitigate their vulnerability exposure risks which were associated with volatility in the

international financial markets. However, these developing countries have constrained

or have very limited access to international capital markets albeit it has grown thus

causing the rate to be lowered.

Bank lending is a pro-cyclical and volatile capital which self-fulfils the expectation of

foreign banks and private investors. It might leave debtor countries vulnerable to risk

of disruption reversal of rapid capital flow driven by sentiment on economic policy

and situation. For example, the crisis in Turkey (1999-2001), Argentina (2001-2002),

and Indonesia (1998) have an average cumulative losses ranging from 12-15% of GDP.

The creditors withdrawal of fund has led to the indebted countries to encounter a

default in sovereign risk and the likelihood of exacerbated financial crisis. Thus, the

official credit programme by the International Monetary Fund (IMF) and the World

Bank have alleviated the indebted countries through a small amount of external

financing needs. Based on the official flow as shown in Figure 1.7, the debt capital

flow to Asia, Emerging Europe, Latin America and South Africa was relatively

volatile from 1991 to 2003 but sharply declined from 2004 to 2007. However, it has

recovered and moved upwards after 2007. This benign growth rate was attributed to a

reduction in debt relief and the flow of official development assistance to developing

countries.

Figure 1.4 : FDI of Regional Countries from Period 1991 to 2010

0

50000

100000

150000

200000

250000

300000

350000

19911992199319941995199619971998199920002001200220032004200520062007200820092010

FDI flow pattern in regional areas from 1991 to 2010 (USD'million)

Middle East/Africa Latin America Emerging Europe Asia

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Figure 1.5 : Portfolio Investment of Regional Countries from period 1991 to 2010

[Source: Balance of Payment Statistic from International Finance Institution, 2014]

Figure 1.6 : Bank Lending of Regional Countries from Period 1991 to 2010

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

120000

19911992199319941995199619971998199920002001200220032004200520062007200820092010

Portfolio Investment pattern in regional areas from 1991 to 2010 (USD'million)


-200000

-100000

0

100000

200000

300000

400000

500000

Bank Lending pattern in regional areas from 1991 to 2010 (USD' million)


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Figure 1.7 : Official Flow of Regional Countries from Period 1991 to 2010

[Source: Balance of Payment Statistic from International Finance Institution, 2014]

1.1.2 Sub-Indicators of Transparency, Information Transparency and

Accountability Transparency

Williams (2015) defined transparency as a form of information disclosure to the public

on government policy, political information and macroeconomic matters.

Transparency can be disaggregated into 2 sub-indicators, namely information

transparency and accountability transparency. Information transparency, also known

as information availability to the public, reduces asymmetric information, while

accountability transparency is considered as the check and balance on government

behaviour in managing the public institution (Bellver and Kaufmann, 2005). An

increase in the flow of reliable and timeliness information has reduced the information

asymmetric between the government and the public (Florini, 2000; Vishwanath and

Kaufmann, 1999). Brunetti and Weder (2003) cited that transparency is pivotal for

economic growth as it is closely linked to a reduction in corruption issue and rent-

seeking behaviour by government or public officials.

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

Official Flow pattern in regional areas from 1991 to 2010 (USD'million)


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Figure 1.8 : Information Transparency and Accountability Transparency Index

from 1991 to 2010


(2015).]

In the context of transparency, developing countries who have received foreign capital

have various degree of information transparency and accountability transparency.

Based on Figure 1.8, the accountability transparency index grew from 44 in 1991 to

58 in 2010. The accountability transparency plays an important role to provide

minority right protection, least corruption and execution of policy. A country which is

transparent must have good governance, law and regulatory framework, political

stability, competitive business climate and predictable financial market. However,

information transparency index is ranked below accountability transparency. The

average index of information transparency is ranged between 40 to 50. Information

transparency is a crucial tool to disseminate the economic policy of the government,

political stability, financial and banking regulatory policy. The information

transparency level of a country can be determined by categorising it into (i) quantum

of information released by government, (ii) quality of information by government and

(iii) information infrastructure of countries. In short, these 2 elements are essential

for sustainable growth as these are an indication to the overall transparency of the

country.

Based on Figure 1.9, transparency shows that Emerging Europe has the highest

transparency index followed by America Latin region which has a higher transparency

than Asia and Middle East & Africa over the past sub-periods. It is noticeable that the

transparency in Emerging Europe, Asia and Middle East have increased over the past

20 years, except for the Latin America transparency index which shows a lesser

growth rate (approximately 69.82 in 1991 to 69.98 in 2010). Based on Table 1.2 which

demonstrated that Asia was the top recipient of foreign capital. Emerging Europe

underwent an unprecedented capital boom as compared with Latin America which

0

10

20

30

40

50

60

70

19911992199319941995199619971998199920002001200220032004200520062007200820092010

Average index of information transparency and accountability transparency in developing countries

Information transparency Accountability

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experienced capital volatility and declined during the financial crisis between 2007 to

2008. Does transparency improvement stimulates capital flow to developing countries?

Different countries might have considerable heterogeneity of capital flow towards

transparency.

Figure 1.9 : Transparency Index of Regional Countries in Sub-Periods

[Source: Global Index of Information Transparency and Accountability, Williams,

2015]

1.1.3 Lucas Paradox Theory on Capital Flow to Developing Countries

The theory of Lucas Paradox (Lucas, 1990) argued why capital does has not flow from

rich countries to poor countries? The fundamental reasons are attributed to (i)

production structure of economy, government policies and institutional structure and

(ii) explanation is attributed to the country’s sovereign risk and asymmetric

information. Empirical evident produced mixed results with regard to the evolution of

foreign capital in different developing economies which correspond to the

macroeconomic conditions and changes in the political institution.

Capital flows to developing countries was explained by the “Push & Pull factors”

framework with the underlying factors to determine the surge of capital flow to

developing countries. Under push factors. there is a higher growth rate in developing

countries, the global interest rate, and the United States liquidity growth are higher,

resulting to the aversion of lower global risk that determines the capital inflow in

developing countries. In respect of the pull factors, changes in the fundamentals of the

institutions in developing countries such as lower levels of reserves, higher trade

openness and more flexible foreign exchange approach are responding more to the

global push factors. Although these factors provide evidence to support capital flows,

0

10

20

30

40

50

60

70

80

1991-1996 1996-2000 2001-2005 2006-2010

Transparency Index in regional countries from 1991 to 2010

Middle East America Latin Emerging Europe Asia

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major scholars and International Finance Institutes acknowledged that transparency is

a crucial prerequisite of capital flow to developing countries.

Transparency allows the public and investors to have access to information to evaluate

the risks and to return their composite capital flow to developing counties. It not only

enhances the governance system but also the functions of the financial markets that

are beneficial in attracting foreign investment and mitigating the volatility of excessive

capital flow (Pinar and Volkan, 2018; Egbetunde and Akinlo; 2015; Frenkel and

Menkhoff, 2004). In addition, information infrastructure development plays an

important role to release timeliness and accurate news to the public, particularly to

investors who discover there is friction of information in the capital market before

deciding on the portfolio investment (Gillanders, 2014). Razinm Sadka and Yuen

(1999) highlighted that countries with strong institutional quality provide property

protection right, release of information and civil right to foreign investors by attracting

more Foreign Portfolio Investment to host countries. Accountability transparency is

identified with public governance, perception of corruption and public trust on

government.

Higher transparency in countries signals an effective financial service to investors,

mitigate information asymmetries and financial market facilitate capital to productive

investment (Choi, Rhee and Oh, 2014). Gelos and Wei (2004) stated that the equity

and bond prices were excessively volatile for countries with lack of transparency

which resulted to the investors herding behaviour as they were sentiment-driven and

overreacted to noisy news in uncertain financial markets. Morris and Shin (2002)

highlighted that lack of transparency has led to the destabilising effects due to yielding

more excessive information or “noise” in the financial market which may crowd out

private information and reducing information efficiency. Thus, transparency is

relatively new and requires an assessment on the importance of transparency impact

on international capital flow to developing countries.

1.1.4 Impact of Transparency on Types of Capital Flow

Empirical literature have so far conducted studies on international capital inflow

behaviour, determinant of capital flow and economic growth effects (Kim and Hooper,

2007; Alfaro et al, 2006 and Wei, 2000). However, there is a scarcity of systemic

studies that examined the capital flow corresponding to transparency impacts required

for further investigation. Based on Figures 1.10, 1.11 and 1.12 which showed that FDI

responded negatively to transparency, while other capitals such as portfolio, bank

lending and official flow responded positively. However, all types of capital

responded positively to information transparency in developing countries. The slopes

of FDI and portfolio investment are less responsive than bank lending and official flow

to information transparency. Diagram 9 revealed that the slope between accountability

transparency and FDI is flattened, while there is a positive effect of accountability

transparency on portfolio investment, bank lending and official flow in developing

markets. Hence the graph analysis implied that there is more capital flow to developing

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countries with higher transparency information transparency in accountability

transparency, except for FDI which has responded negatively to transparency.

Alfaro, Kalemli-Ozcan and Vadym (2008) emphasised that the quality of institution

and macroeconomic fundamental have asserted positive impact on the capital flows to

developing countries. Besides market development and the degree of market openness,

the institutional quality proxies such as, the degree of transparency, information

frictionless, accountability transparency of institution are significant factors which

affect the sensitivity of capital flows to host countries. Portfolio investment, bank

lending and official flow are more sensitive than FDI in terms of the degree of

transparency, information transparency and accountability transparency.

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Figure 1.10 : Transparency on Types of Capital Flow in Developing Countries

[Source: Diagram constructed by author based on datasets from the Institutes of International Finance (2014) and Global Index of Information

Transparency and Accountability, Williams (2015)]

Nigeria Egypt

Morocco

South Africa

Republic Of Lebanon

Saudi Arabia

United Arab EmiratesArgentina

Brazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria

Czech RepublicHungary

Poland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

KoreaMalaysia

Philippines

Thailand

67

89

1011

ln FD

I

3.6 3.8 4 4.2 4.4Ltran

LFDI linear production

Impact of Transparency on FDI flow to emerging countries

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon

Saudi ArabiaUnited Arab Emirates

ArgentinaBrazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria

Czech Republic

HungaryPoland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

24

68

10

ln Po

rtfolio

3.6 3.8 4 4.2 4.4Ltran

Lportfolio linear production

Impact of transparency on Portfolio in emerging countries

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon


Argentina

Brazil

ChileColombia

Ecuador

Mexico

Peru

VenezuelaBulgaria

Czech Republic

Hungary

PolandRomania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

78

910

11

ln Ba

nk Le

nding

3.6 3.8 4 4.2 4.4Ltran

Lbanking Lending) linear production

Impact of Transparency on Bank Lending in EC

Nigeria

Egypt

Morocco South Africa

Republic Of Lebanon

Saudi Arabia

United Arab Emirates

Argentina

Brazil

ChileColombia

Ecuador

Mexico

PeruVenezuela

BulgariaCzech Republic

Hungary

Poland

Romania

Russian Federation

TurkeyUkraine

China

India

IndonesiaKorea

MalaysiaPhilippines

Thailand

56

78

910

ln Of

ficial

Flow

3.6 3.8 4 4.2 4.4Ltran

Lofficial flow linear production

Impact of Transparency on Official Flow in EC

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Figure 1.11 : Information Transparency on Types of Capital Flow in Developing Countries



NigeriaEgypt

Morocco

South Africa

Republic Of Lebanon

Saudi Arabia


Brazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria


Poland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

KoreaMalaysia

Philippines

Thailand

67

89

1011

ln FD

I

2.5 3 3.5 4 4.5Linfo


Impact of Information Transparency on FDI in emerging countries

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon

Saudi Arabia United Arab Emirates

ArgentinaBrazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria

Czech Republic

HungaryPoland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

24

68

10

ln Po

rtfolio

2.5 3 3.5 4 4.5Linfo


Impact of Information Transparency on Portfolio in EC

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon


Argentina

Brazil

ChileColombia

Ecuador

Mexico

Peru

Venezuela Bulgaria

Czech Republic

Hungary

PolandRomania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

78

910

11

ln Ba

nk Le

nding

2.5 3 3.5 4 4.5Linfo


Impact of Information Transparency on Bank Lending in EC

Nigeria

Egypt


Republic Of Lebanon

Saudi Arabia


Argentina

Brazil

ChileColombia

Ecuador

Mexico

PeruVenezuela


Hungary

Poland

Romania

Russian Federation

TurkeyUkraine

China

India

IndonesiaKorea

MalaysiaPhilippines

Thailand

56

78

910

ln Of

ficial

Flow

2.5 3 3.5 4 4.5Linfo


Impact of Information Transparency on Official Flow in EC

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Figure 1.12 : Accountability Transparency on Types of Capital Flow in Developing Countries



Nigeria Egypt

Morocco

South Africa

Republic Of Lebanon

Saudi Arabia


Brazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria


Poland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

KoreaMalaysia

Philippines

Thailand

67

89

1011

ln FD

I

3.2 3.4 3.6 3.8 4 4.2Lacc


Impact of Accountability on FDI in emerging countries

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon

Saudi Arabia United Arab Emirates

ArgentinaBrazil

Chile

Colombia

Ecuador

Mexico

PeruVenezuela

Bulgaria

Czech Republic

HungaryPoland

Romania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

24

68

10

ln Po

rtfolio

3.2 3.4 3.6 3.8 4 4.2Lacc


Impact of Accountability on Portfolio in EC

Nigeria

Egypt

Morocco

South Africa

Republic Of Lebanon


Argentina

Brazil

ChileColombia

Ecuador

Mexico

Peru

Venezuela Bulgaria

Czech Republic

Hungary

PolandRomania

Russian Federation

Turkey

Ukraine

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

78

910

11

ln Ba

nk Le

nding

3.2 3.4 3.6 3.8 4 4.2Lacc


Impact of Accountability on Bank Lending in EC

Nigeria

Egypt


Republic Of Lebanon

Saudi Arabia


Argentina

Brazil

ChileColombia

Ecuador

Mexico

PeruVenezuela


Hungary

Poland

Romania

Russian Federation

TurkeyUkraine

China

India

IndonesiaKorea

MalaysiaPhilippines

Thailand

56

78

910

ln Of

ficial

Flow

3.2 3.4 3.6 3.8 4 4.2Lacc


Impact of Accountability on Official Flow in EC

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1.1.5 Natural Resources Rents and Economic Growth

Generally, many endowment countries with natural resources are blessed with rich

resources and generate higher economic growth. Nonetheless, this traditional

assumption is controversial with earlier empirical evidential findings that countries

with natural resources endowment have a slower growth which arose from resource

curse as compared to non-resource countries. The prevalence of resource curse in

developing countries has retarded economic growth which is normally measured

according to poverty, inequality, deprivation in social welfare and obstructed freedom

and transparency. As a result, resources rich countries tend to perform badly and have

not experienced sustainable economy growth. Figure 1.13 shows the negative

relationship between GDP per capita US dollar and share of natural resources rents.

In other words, the higher export primary commodity resulted to a decline in GDP per

capita countries. These natural resources endowment countries with political

instability is caused by a weak institutional structure, poor regulation framework, lack

of transparency, deliberately withhold information and rent seeking. Consequently,

this has affected the domestic market which is unable to perform efficiently on the

allocation of resources and impaired growth.

Figure 1.13 : Relationship between Annual Income GDP Per Capita Constant,

USD million and Natural Resources Rent (%) during 2001 – 2010

[Source: GDP Per Capita (USD million) & Natural Resource Rent (%) from WDI]

1.1.6 Natural Resources Rent and Transparency Effects in Developing

Countries

The failure of the governance system has always been controlled by a small group of

top elites who have ultimate power to design public policy choice, social welfare for

citizens and development policy. This group of special elites focuses on exporting

flourished primary commodity rather than on non-resources manufacture industry as

Algeria

Argentina

Australia

Bahrain

Bolivia

Brazil

Burkina Faso

Cameroon

Canada

Chile

ChinaColombia

Congo, Dem. Rep.

Congo, Rep.

Costa Rica

Cote d'Ivoire

Czech Republic

Denmark

Dominican Republic Ecuador

Egypt, Arab Rep.

El Salvador

Ethiopia

FinlandFrance

Gabon

Germany

Ghana

Greece

GuatemalaHonduras

Hungary

India

Indonesia

Iran, Islamic Rep.

Ireland

IsraelItaly

Jamaica

Japan

Jordan

Korea, Rep.

Kuwait

Latvia

Liberia

Lithuania

MadagascarMalawi

Malaysia

Mali

Mexico

Moldova

Mozambique

NetherlandsNew Zealand

Nicaragua

Niger

Nigeria

Norway

Oman

Pakistan

Panama

Papua New Guinea

Peru

Philippines

Poland

Portugal

Qatar

Romania

Saudi Arabia

Senegal

Sierra Leone

Slovenia

South Africa

Spain

Sri Lanka

SwedenSwitzerland

Syrian Arab Republic

Thailand

Togo

Trinidad and Tobago

Tunisia

Turkey

Uganda

United KingdomUnited States

Uruguay Venezuela, RB

ZambiaZimbabwe

46

810

12

(Log

)GDP

Per

Cap

ita co

nstan

t, USD

mil

-4 -2 0 2 4(Log) Natural Resource Rent (%)

LGDP (US) linear prediction

Correlation between GDP per capital constant and Natural Resource Rent

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they move away from fostering an effective institution to protect contract enforcement

and enhance competition. The lack of transparency institution allowed the top elites

in natural resources endowment countries to be more opportunistic prone to rent-

seeking, corruption and patronage. Thus, this phenomenon has caused a positive link

between corruption and natural resources rents in natural resources endowment

countries. Figure 1.14 shows that natural resources rents is negatively related to

transparency country. Natural resources endowment countries have higher revenue

leading to less transparency in countries. The Government is prone to the rent seeking

behaviour when natural resources rents increased with the lack of transparency

institution. Consequently, it is harmful to the overall economic development as

expropriate of resources, poor legal and governance system, vulnerable financial

market ceases investment inflow.

Figure 1.14 : The Relationship of Transparency on Natural Resources Rents

[Source: Natural Resource Rent (%), WDI & Global Index of Information


The abundance of natural resource has been discussed as it has detrimental effect on

the development of economy in the long run. (Sachs and Warner, 1997). The Dutch

disease postulated that many countries with abundance of natural resources abundance

export their commodity products to international markets that induce the exchange

rate appreciation through the trading of natural resources. As a result, the trading of

natural resources has created a direct impact on tradable products of other industrial

sectors resulting to a loss of competitors in international markets. Ultimately, investors

shifted their investment to trading in natural resources that can generate higher revenue

rather than on the industrial sector in order to prevent diversified economic growth.

On the other hand, a weak institution will discourage firms to engage in productive

investment if countries are susceptible to corruption and rent seeking activity

(Kasekende, Abuka and Sarr, 2016; Torvik, 2002). Resource rents from extractive

industry generally undermines the quality of institutions. Consequently, the countries

AlgeriaAngola

Egypt, Arab Rep.

Iran, Islamic Rep.Iraq

Jordan

Kuwait

Lebanon

Libya

Morocco

OmanQatar

Saudi Arabia

Tunisia

United Arab EmiratesYemen, Rep.

Afghanistan

Argentina

Bangladesh

Brazil CanadaChina Colombia

Ethiopia

France

Germany

IndiaIndonesia

Italy

KenyaMexico

Myanmar

NepalPakistan

Peru

PhilippinesPoland

Congo, Dem. Rep.

MalaysiaNigeria

Romania

Russian Federation

Spain

South AfricaSudan

Tanzania

Thailand

Turkey

UgandaUzbekistan Chile

Chad

CameroonEcuadorVenezuela, RB

Bulgaria

Brunei Darussalam

Czech RepublicCosta Rica

Cuba

Croatia

Gabon

Georgia

Ghana

Greece

Jamaica

Lao PDR

Mauritius

New Zealand

Norway

Tonga

Ukraine

-6-4

-20

24

Natur

al Re

source

s Ren

ts (%)

3 3.5 4 4.5Transparency

average TN linear production

Effect of Transparency on Natural Resources Rents

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with an abundance of natural resources can breed the government with lack of

transparency and accountability transparency. Thus, weak institutional quality and

market failure are created by countries with an abundance of natural resources (Tsani,

2013; Bhattarcharyya and Hodler, 2009; Sachs and Warner, 1997). Nonetheless.

Mehlum, Moene, and Torvik (2006) argued that the initial condition of institution can

determine the level of blessing or curse on natural resources abundance. Williams

(2009 & 2015) emphasised that although higher transparency countries do not undergo

faster economic growth rate, but, nevertheless, it maintains a stable economic growth.

Thus, greater transparency and accountability transparency from the government are

required in extractive industries.

Transparency can serve as a check and balance system, reducing information

asymmetric, red tape and bureaucratic corruption thus giving a louder voice to the

citizens over the government’s wrong doing (Gaventa and Mcgee, 2013). Hence,

transparency plays a critical role in this information age which discloses the news on

resource distribution, information and data on government affairs, particularly on

extraction revenue and government expenditure (Babajanian, 2014). However, there

is less systematic empirical literature that is focused on the transparency acts as

mediator to influence the transparency-growth nexus in natural resources endowment

countries.

1.1.7 Transparency, Natural Resource and Economic Growth in Developing

Countries

EITI initiatives highlighted that extractive industries published more information and

transparency allowing people to predict government revenue, rents channel to

productive asset and curb corruption problems. Based on Table 1.3, natural resource

rents are positively related to GDP per capita among, Oman, Saudi Arabia, Congo

Democratic Republic, Kuwait, Iran Islamic Republic, Algeria, Ecuador, Tajikistan,

Mongolia, Chad and Ghana. United Nations (2010) reported that the trend in the share

of natural resources between 1995-2009 show that the revenue rents rose rapidly

between 2000 and 2009 despite a contraction occurred between 1995 and 2000. Saudi

Arabia and Algeria showed that the annualised growth rate of natural resources rents

have simultaneously increased the annualised growth rate of GDP per capita and

transparency. This implies the countries’ economies experienced stable growth as

reflected natural resource extracted is well planned for social welfare on conditioned

higher transparency of government. However, nature resource rents have substantially

increased in Mongolia and Tajikistan which reflected relatively the low GDP per

capita and varied transparency. In the case of Gabon and Cote d’lvoire, their

economies and transparency have deteriorated or were negatively affected by their

natural resources. This phenomenon is unhealthy to economic growth as substantial

nature resources rents derived from extraction industry has expropriated its

contribution to slower economic growth and high likelihood rent-seeking behaviour.

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These countries believed that good institution can promote transparency to derive

blessing from natural resources. Nonetheless, there are some countries like Equatorial

Guinea, Angola, Nigeria, Estonia, Russian Federation, Yemen Republic and Uganda

who experienced natural resource rents exhibited a large decline or resource curse

which was attributed to supply and demand shock have resulted commodity price

volatility (Frankel, 2010; Davis and Tilton, 2005). Surprisingly, GDP per capita is

positively associated with transparency in these countries. On the other hand, nature

resource rents which deteriorated in Angola and Nigeria were attributed to the business

cycling season and commodity price fluctuation in international market. Surprisingly,

GDP per capita and transparency increased despite deterioration in the nature

resources rents. Gabon and Cote d’Ivoire showed that the increase in nature resource

rents have undermined the growth in GDP per capita and transparency in countries. In

conclusion, nature resources endowment have impacted towards GDP per capita and

transparency across-countries.

Gabon and Cote dÍvoire natural resource rents are negatively related to GDP Per

Capita which has impacted the undermining institution development and lack of

transparency. However, Libya differs from Gabon and Cote d’Lvoire in which natural

resource rent have positively causal links with GDP per capita, but deteriorated its

transparency. Hence, this phenomenon of economic growth considerably varies a

between cross-countries and so far less systematically study to address the ambiguity

of transparency effect on natural resource rents and economic growth.

Figure 1.15 : Comparison between Annualised Growth Rate, Natural Resource

Rents and Transparency for Selected Countries

-1

0

1

2

3

4

5

SaudiArabia

Algeria Mongolia Tajikistan Angola Nigeria Gabon Coted'Ivoire

Libya

A n n u a l i s e d G r o w t h R a t e B e t w e e n N a t u r a l R e s o u r c e

R e n t s , G D P P e r C a p i t a A n d T r a n s p a r e n c y O n S e l e c t e d

C o u n t r i e s

Natural Resource rent GDP Per Capita Transparency

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Table 1.3 : Nature Resource Rent, GDP Per Capita and Transparency of Developing Countries between 2001 and 2010

Natural Resource rent GDP Per Capita Transparency

Country Name 2001 2010

Annualised

Growth rate (%) 2001 2010

Annualised

Growth rate (%) 2001 2010

Annualised

Growth rate (%)

Oman 35.30394 37.19757 0.053638 19497.38 19920.65 0.021709 51 60 0.176471

Saudi Arabia 31.73722 42.25471 0.331393 14640.44 18753.98 0.280971 44 54 0.227273

Congo, Dem. Rep. 18.51488 35.32451 0.907898 257.4408 311.2479 0.209008 34 42 0.235294

Kuwait 38.86783 48.40151 0.245285 37153.71 37725.14 0.01538 60 72 0.2

Iran, Islamic Rep. 21.1437 22.62879 0.070238 4320.615 6299.919 0.458107 31 44 0.419355

Algeria 14.12193 19.99752 0.416062 3600.781 4473.486 0.242366 46 59 0.282609

Ecuador 7.997753 10.86741 0.358808 3759.895 4657.302 0.238679 63 64 0.015873

Tajikistan 0.398237 1.329414 2.338251 450.3955 744.1842 0.65229 29 46 0.586207

Mongolia 7.453136 38.59285 4.178068 1632.556 2650.347 0.623434 44 53 0.204545

Chad 8.32772 24.5042 1.942486 497.3131 895.878 0.801437 25 40 0.6

Ghana 9.499031 12.45269 0.310943 989.4436 1323.099 0.337215 46 64 0.391304

Equatorial Guinea 74.29556 32.05231 -0.56858 10026.25 22366.29 1.230773 25 35 0.4

Angola 45.62338 39.04265 -0.14424 2312.765 3886.479 0.680447 42 45 0.071429

Nigeria 31.45962 13.79803 -0.56141 1304.771 2314.964 0.77423 43 59 0.372093

Estonia 2.236851 1.076088 -0.51893 10817.25 14639.47 0.353345 71 81 0.140845

Russian Federation 19.55 13.90135 -0.28893 6850.517 10674.99 0.558275 62 70 0.129032

Yemen, Rep. 30.57106 21.29078 -0.30356 1153.688 1310.054 0.135536 40 45 0.125

Uganda 12.4145 10.70826 -0.13744 424.809 608.9549 0.433479 51 58 0.137255

Gabon 31.61219 33.48308 0.059183 10113.21 9312.049 -0.07922 56 45 -0.19643

Cote d'Ivoire 3.285925 6.435806 0.958598 1323.865 1236.085 -0.06631 58 54 -0.06897

Libya 27.00933 54.9834 1.035719 8691.427 11933.78 0.373052 41 37 -0.09756

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1.1.8 Interaction Term between Transparency with Natural Resource on

Economic Growth

In general, empirical literature highlighted that natural resources are negatively

affected by growth in weak institutional countries (Acemoglu, Johnson and Robinson,

2001 & 2002). Mehlum et al (2006) interacted natural resource endowment with the

rule of law on economic growth dependence on the nature of these combination.

However, recent studies have given much attention on existence of interaction

between natural resources and transparency effect on economic growth in natural

resource endowment countries. Sala-i-Martin and Subramanina (2013) and Leite and

Weidmann (1999) emphasised that the interaction effect on the economic

development of both natural resources and institutional quality may vary across

countries. Natural resource positively impacted the economic growth as the institution

quality improves, while a substantial increase in natural resource diminished the good

effects of institution quality to growth.

Apart from the explanation of natural resource, there is a consensus of empirical

literature on the vast difference in the economic performance among economies with

different natural resources bases. Woolcock, Pritchett and Isham (2001) hypothetically

argued that the economies capacity difference is associated with different types of

resource sector, particularly point source and diffuse resource sector. Point source

natural resource is an extraction industry such as fuel, oil, ore and iron, while diffuse

natural resource is known as primary commodity, rice, wheat, animals and coffee. It

is no doubt that point source natural resource based governments have more control

and ownership on this resource due to specific geographical areas, whereas diffuse

source based government has less control on primary commodities which are more

diffused in international markets. Hence, the difference in the type of export structure

economies have influenced various types of political institutional, socioeconomic and

economic growth. Nonetheless, scholars have started to debate on the relationship

between point and diffuse resource with transparency on the economic growth. Both

point and diffuse resource determine the blessing or curse to the economic growth

dependence on the degree of transparency as well as information transparency and

accountability transparency.

1.1.9 Relationship between Income Inequality on Economic Growth

The relationship between national income per capita and inequality was linked to

Kuznets curve theory which explained the inequality rise and then fall (inverted U-

curve) as economic growth (Kuznets, 1955). The productivity in the manufacture

sector was not favourably distributed to the rural sector which led to greater income

inequality. However, the higher level of economic growth can only be achieved when

scarcity resources was equally distributed (Islam and McGillivray, 2019; Deininger

and Squire, 1996). There is extensive empirical studies which recognised the causal

relationship on the effect of inequality on the economic growth. Neoclassical

assumption was focused mainly on growth in relation with the efficiency and

productivity. However, Persson and Tabellini (1991) evidently found that inequality

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was negatively related to economic growth, while Forbe (2000) argued that greater

inequality was related to faster economic growth. Inequality does matter for economy

development and inclusive distribution policy as it has an impact on long run growth.

Persistence of inequality was cited as the main factor behind the slow economic

growth in developing countries. Economic growth can narrow the income inequality

gap in developed countries like Norway, Switzerland, Finland and Germany as they

have good institutions which provide protection right, rule of law, well functioned

financial markets, and increased social welfare. Acemoglu, Johnson and Robinson

(2001 & 2005) stressed that difference in income per capita is closely linked to

institution quality and economy policy. Weak institution pursued distortionary

macroeconomic policy that caused macroeconomic volatility is likely to be the

underlying institutional problems. Natural resource endowment has historically

caused high inequality as top elite access to large economic opportunity (Engerman

and Sokoloff, 2000).

The income disparity further arise in developing countries as aggravated by weak

institution, elite have unlimited private interest gained and political power,

manipulation of financial market, lack of transparency in government, limited

accessible information by public and constraint poor access to financial services. Thus,

transparency in government activity has recently been debated which captured the

attention of scholars and policy-makers to ensure stable economic growth rather than

faster economic growth. Nonetheless, there is less empirical analysis focused on the

impact of transparency on income inequality and economic growth.

1.1.10 Transparency, Income Inequality and Economic Growth in Developing

Countries

Does some of the developing countries with higher transparency have faster economic

growth and lower income inequality? Table 1.4 reported that developing countries

experienced considerable variety in economic growth, income inequality and

transparency development. Table 1.4 shows the mix result between GNI per capita,

Gini coefficient and transparency on the basis of 1995 and 2010 data. As an aggregate,

there is substantial increase in the annualised growth rate of GNI per capita ranging

between 4.08% to 7.03% for countries such as China, Georgia, Romania, Bulgaria and

Kazakhstan on year 2010 and the living standards of people have improved in these

countries.

However the Gini coefficients have simultaneously increased which ranged from 0.17%

to 0.22% which is mainly due to the increase in GNI per capita as well as increase in

transparency ranging from 0.80% to 0.43% in year 2010. In contrast, there are some

developing countries like Mexico, Namibia, Thailand and Paraguay who have

experienced a reduction in income inequality ranging between 0.05% to 0.10% upon

GNI per capita have increased ranging between 0.26% to 0.93% and also increased in

transparency ranging between 0.05% to 0.10%. As a result, these countries have

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relatively little improvement in GNI per capita which has led to an equal redistribution

of resource on conditioned higher transparency.

This phenomenon is contradictory to those countries with higher GNI per capita and

have worsened the inequality gap despite increased in transparency. Therefore, we

cannot draw a conclusion that high GNI per capita growth has led to the improvement

of income inequality on conditioned transparency increased, while less GNI per capita

growth reduces income inequality on conditioned transparency increased. It remains

ambiguous that whether the statistical illustrated in these variables have an economical

relationship? In other words, GNI per capita may lead to a causality impact to

inequality and transparency or reverse causality is inadequately identified.

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Table 1.4 : Comparison between GNI Per Capita, Gini Coefficient and Transparency

GINI Coefficient, GNI Per Capita and Transparency of Middle Income countries

GINI Coefficient GNI Per Capita (USD) Transparency

Countries 1995 2010

Annualised

growth rate (%) 1995 2010

Annualised

growth rate (%) 1995 2010

Annualised growth

rate (%)

Argentina 43.13 40.23 -0.0673 7330 9240 0.2605 70 67 -0.0428

Belarus 25.35 26.27 0.0366 1370 5990 3.3722 44 70 0.5909

Brazil 51.65 46.69 -0.0958 3680 9650 1.6222 64 66 0.0312

Bulgaria 29.23 34.22 0.1706 1360 6910 4.0808 53 76 0.4339

China 43.99 53.85 0.2240 540 4340 7.0370 43 59 0.3720

Colombia 49.87 48.3 -0.0315 2140 5540 1.5887 70 76 0.0857

Costa Rica 41.52 45.37 0.0926 3170 7230 1.2807 63 69 0.0952

Dominican Republic 44.46 44.34 -0.0026 1910 5290 1.7696 52 60 0.1538

Ecuador 50.15 44.15 -0.1197 1970 4410 1.2385 62 64 0.0322

Georgia 41.28 42.33 0.0255 540 3000 4.5555 40 72 0.8

Iran 43.39 36.86 -0.1505 1330 6020 3.5263 39 44 0.1282

Jordan 37.91 34.75 -0.0832 1510 3820 1.5298 48 69 0.4375

Kazakhstan 32.82 28.94 -0.1183 1280 7440 4.8125 47 64 0.3617

Macedonia, FYR 28.15 41.28 0.4666 1720 4720 1.7441 37 73 0.9729

Malaysia 43.54 42.63 -0.0211 4000 8230 1.0575 58 72 0.2413

Mexico 47.72 43.5 -0.0885 4570 8840 0.9343 64 74 0.1562

Namibia 65.45 58.38 -0.1080 2420 4360 0.8016 46 58 0.2608

Panama 50.50 47.04 -0.0685 3470 7010 1.0201 58 67 0.1551

Paraguay 50.27 47.34 -0.0582 1680 2930 0.7440 56 61 0.0892

Peru 52.60 47.46 -0.0976 1920 4360 1.2708 58 69 0.1896

Romania 27.9 32.24 0.1555 1500 8590 4.7266 60 79 0.3166

Russian Federation 44.7 41.63 -0.0686 2640 9980 2.7803 62 70 0.1290

South Africa 55.42 59.4 0.0716 3850 6250 0.6233 56 73 0.3035

Thailand 43.06 39.48 -0.0831 2750 4610 0.6763 52 71 0.365385

Turkey 43.17 38.15 -0.1164 2850 9960 2.4947 59 72 0.220339

Venezuela 41.88 36.85 -0.1202 2910 11530 2.9621 69 63 -0.08696

[Source: Standardized World Income Inequality Database (SWIID), 2014, GDP per capita (USD constant, 2010), WDI database & Global Index of Information Transparency

and Accountability. Williams. (2015)]

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Figure 1.16 : Comparison between GNI Per Capita, Gini Coefficient and

Transparency in Developing Countries

Figure 1.17 : Comparison between Gini Coefficient in Developing Countries

1.1.11 The Role of Transparency on Income Inequality and Economic Growth

Transparency is closely related with the governance role of institution in economic

growth. Institution is generally known as the formal and informal rule that exists in a

-1

0

1

2

3

4

5

6

7

8

GNI Per Capita, Gini Coefficient and Transparency on developing countries between 1995 & 2010

GNI Per capita GINI Transparency

010203040506070

Arg

enti

na

Bel

aru

s

Bra

zil

Bu

lgar

ia

Ch

ina

Co

lom

bia

Co

sta

Ric

a

Dominican

…

Ecu

ado

r

Ge

org

ia

Iran

Jord

an

Kaz

akh

stan

Mac

edo

nia

, FYR

Mal

aysi

a

Mex

ico

Nam

ibia

Pan

ama

Par

agu

ay

Per

u

Ro

man

ia

Russian…

Sou

th A

fric

a

Thai

lan

d

Turk

ey

Ven

ezu

ela

Gini Coefficient of developing countries in period 1995 and 2010

1995 2010

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society forming the institutional structure which constrains human behaviour and

thought, social habit, tradition, rule of law, constitution, contracts and property right

(North, 1990). A high quality institution with more accountability transparency and

transparency system can facilitate the development of a well-functioning economy,

financial market, and an optimised aggregate output. A high transparency country also

releases information on government policy to its citizen which will have a great impact

on economic development.

Transparency also plays a critical role in distribution of resources and influences the

level of market efficiency, information access by the public and public official

accountability transparency. Many economists attributed the positively related strong

governance to income distribution, as educated people are better able to understand

and demand for the government to be more transparent and for the accessing of

timeliness information by the public. Besides, people have demanded that the

government place large sources to be redistributed for the benefit of public health care,

business opportunity and public development which directly will boost the overall

well-being in developing countries.

Nonetheless, the lack of transparency may lead to the government being less prudent

in managing resources and bureaucratic corruption which exacerbated the persistence

of inequality, slower economic growth rate and an overcrowding of private investment

and competition in countries (Bagchi and Svejnar, 2015). Moreover, a weak institution

is less responsible to release transparent information required by foreign investors who

are uncertain with regard to macroeconomic environment and political instability that

deter capital inflow to developing countries. The lack of accountability in bureaucratic

administration reduces property security and contractual rights that leads to greater

error in the management of resources, and lower predictability of government action

with a high likelihood that are prone to rent-seeking and corruption due to a lower

balance-check system adoption.

Financial development is one of the channels to mitigate inequality in developing

countries. In fact, many developing countries are constrained by the credit market,

while the rich group continues to enjoy their existing bank facilities (Naceur and

Zhang, 2016). Hence, this imperfect credit may lead to higher income inequality for

the poor household. They are less capable of taking a loan from banks due to lack of

collateral or underdeveloped capital markets, higher transaction costs and contract

enforcement costs (Bourguignon, 2004; Beck, Kunt and Levine; 2004, Birdscall,

2007). The credit constraint can hinder the poor individual from venturing into new

business with high-return prospect (Galor and Zeira, 1993). Rodrik (1998) and

Bourguignon (2004) argued that the redistributive pressure is affected by the unrest of

political institution which channelled inequality resulting to the development of a

retarded economy. It cannot be doubted, that the high level of inequality can delay the

development of institutions thus causing the market environment to be less conducive

or accountable.

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Figure 1.18 and 1.20 show that the gini coefficient is positively related to transparency

and accountability transparency. On the contrary, Figure 1.19 shows that the gini

coefficient is negatively related to information transparency for developing countries.

Such circumstances remain to be questioned why transparency and accountability

transparency failed to improve income inequality which are controversial with

previous empirical literature which highlighted that the strong governance reduces

income inequality via resources redistribution. Hence, this study seeks to address this

issue.

Figure 1.18 : The Relationship of Transparency on Gini Coefficient in Developing

Countries

Figure 1.19 : The Relationship of Information Transparency Effect on Gini

Coefficient in Developing Countries

[Source: Diagram constructed by author based on datasets from the Standardised

World Income Inequality Database (SWIID), 2014 & Global Index of Information


Argentina

Belarus

BrazilBulgaria

China

Colombia

Costa Rica

Dominican Republic

Ecuador

Hungary

JordanKazakhstan

Malaysia

Mexico NamibiaPanama

PeruRomania

South Africa

Thailand

Tunisia

Turkey

Venezuela, RB

ArmeniaBolivia

Egypt, Arab Rep.

El Salvador

GuatemalaHondurasIndiaIndonesia

NicaraguaParaguay

Philippines

Senegal

ZambiaBangladeshMadagascarMalawi

Mali

Nepal

Uganda

3.63.8

44.2

4.4

Transp

arency

3.2 3.4 3.6 3.8 4 4.2Gini Coefficient

av-ltran linear prediction

Effect of transparency on gini coefficient in developing countries

Argentina

Belarus

Brazil

Bulgaria

ChinaColombia

Costa RicaDominican RepublicEcuador

Hungary

Jordan

Kazakhstan

Malaysia

Mexico

Namibia

PanamaPeru

Romania

South Africa

Thailand

Tunisia

TurkeyVenezuela, RB

Armenia

Bolivia

Egypt, Arab Rep.

El Salvador

GuatemalaHondurasIndia

Indonesia

NicaraguaParaguay

Philippines

Senegal

Zambia

BangladeshMadagascar

Malawi

Mali

Nepal Uganda

3.23.4

3.63.8

44.2

Infor

matio

n Tra

nspa

renc

y

3.9 4 4.1 4.2 4.3 4.4Gini Coefficient

av-lgini linear prediction

Effect of Information Transparency on gini coefficient in developing countries

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Figure 1.20 : The Relationship of Accountability Transparency on Gini

Coefficient in Developing Countries

[Source: Diagram constructed by author based on datasets from the Standardised

World Income Inequality Database (SWIID), 2014 & Global Index of Information


1.2 Problem Statement

1.2.1 Transparency Impact on Capital Flow to Developing Countries

The economies of developing countries were increasingly opened to the world

financial integration over the past 20 years. During the 1997 Asian financial crises,

the private capital flow in developing countries dropped sharply from USD322 billion

in 1996 to USD 158.3 billion in 1998. However, the foreign capital flow to developing

countries recovered and reached pre-crisis level from 2000 to 2008. FDI is historically

the main foreign capital to developing countries, but more recently bank lending has

increased substantially. Surprisingly, the overall transparency improvement in many

developing countries also increased over the same period, from 1991 to 2010 (as

shown in figure 4). Is this a statistically and economically meaningful relationship

between transparency and capital flow? It has impetus to examine the motivating

factors behind the causal impact of transparency to capital flow.

There are a number of previous empirical studies which argued that the positive effects

of capital flow is undermined, as the government tapped on the large surge of capital

flow to developing countries. During the financial crises, the economic performance

was retarded by the probability which suddenly stopped the large capital inflow in host

economies. More recently, the capital flow landscape development has changed

substantially in developing countries as the FDI and portfolio investment are still the

Argentina

Belarus

Brazil

Bulgaria

ChinaColombia

Costa RicaDominican RepublicEcuador

Hungary

Jordan

Kazakhstan

Malaysia

Mexico

Namibia

Panama Peru

Romania

South Africa

Thailand

Tunisia

TurkeyVenezuela, RB

Armenia

Bolivia

Egypt, Arab Rep.

El Salvador

GuatemalaHondurasIndia

Indonesia

NicaraguaParaguay

Philippines

Senegal

Zambia

BangladeshMadagascar

Malawi

Mali

Nepal Uganda

3.2

3.4

3.6

3.8

44.

2

Acco

unta

bilit

y Tr

ansp

aren

cy

3.2 3.4 3.6 3.8 4 4.2Gini Coefficient

av-lgini linear prediction

Effect of Accountability transparency on gini coefficient in developing countries

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main resources, but shifted to debt capital forms like bank lending and multilateral

credit have emerged as a new form of external financing to host economies. Hence,

previous empirical studies have focused on one type of capital, particularly on FDI or

portfolio investment that have neglected bank lending and multilateral credit, which

were deemed considerably important for economic performance.

The lack of transparency measures and inadequate economic data on government

policies are underlying factors associated with the issues on the financial crises in

developing countries such as Turkey Mexico (2001), Russia and Brazil (1998), East

Asia (1997) and Mexico (1995). It has triggered economists and the attention of policy

makers to focus on the role of transparency in financial crisis prevention. Poor

transparency in financial domestic markets are responsible for the financial crisis as it

is vulnerable to exposure risk from international financial market. Information

asymmetric and government inefficiency are key factors that are contributing to

market inefficiencies that had led to a sudden reversal of foreign capital. In such a

phenomenon, foreign capital will only flow systematically to high transparency

countries, while investors will diverge foreign capital from countries with lack of

transparency clarity and information friction. For portfolio investment, international

investors’ herding behaviour with asymmetric information as fund manager opposed

the rational to invest more in ambiguous markets during good economic period, while

international investors move towards more transparent market as fund manager

responsible for scrutiny and pressure on their portfolio decision during bad economic

period. Heterogeneity in the recurrence of bank lending in developing countries may

arise from political failure and presence of incumbent corruption.

The study examines the effect of transparency on the types of capital flow. Higher

transparency allows countries with better governance that leads to large capital surge

disproportionately faster or vice versa. The study seeks to address whether

transparency and its sub-indicator of transparency can cause differential response of

capital flow due to heterogeneous nature of capital flow. The response of different

capital flow to transparency may vary considerably. Also, this study goes beyond the

existing literature by shedding light on what is the extent of the impact on transparency

improvement that is systematically linked to capital flow in developing countries.

The analysis also evaluates the interaction between transparency, and sub-indicators

of transparency with economic growth on capital flow. More specifically, if a

country’s transparency is high, more information transparency will be released and

the strong accountability transparency interact with economic growth will promote the

countries capital flow. Nonetheless, if countries lack transparency, information

asymmetric and bureaucratic corruption could hinder capital flow to host countries.

Thus, this study answers the puzzle of Lucas Paradox approach by hypothetical on the

economic growth which interacts with transparency, information transparency and

accountability transparency which are expected to have a positive influence on the

foreign capital flow to developing countries.

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1.2.2 Transparency Effects on Economic Growth in Natural Resources

Endowment Countries

The Extractive Industries Transparency Initiative (EITI) stressed on the importance of

governance measure by publishing information on the oil, gas and mining industries

which are beneficial to the people. EITI seeks to promote public awareness on

regulatory framework and the legality of extractive industries. However, Figure 15

shows that substantial increase of natural resources rents in Mongolia and Tajikistan

have reflected relatively low in GDP per capita which varies according to the degree

of transparency. Libya’s natural resources rents though positively related to GDP per

capita, but has deteriorated its transparency. The economies and transparency of

Gabon and Cote d’Ivoire are negatively affected by their natural resources boom.

Hence, majority of the natural resource endowed countries have worsened the

economy than the less endowed countries.

In fact, the existing empirical evidence acknowledged that resource curse do not lay

its factors on physical and human capital, but there is growing literature body which

focused on the unconditional factor in resource curse - correlation between natural

resource with growth without taking into consideration other factors such as

transparency plays a role as mediator for natural resource growth nexus. Hence, there

is inadequate analysis that pays attention to explain the transparency that may

influence this relationship.

There are some countries with good institutions who have turned natural resources

rent to sustainable development via governance measures and information publication

to public. Norway is known as the third largest fuel exporter, after Russia and Saudi

Arabia, and is one of the most successful countries in the world, with the least

corruption, market friendly policies and developed institutions. Transparency, good

governance and bureaucratic accountability is largely responsible for the sustainable

economic growth.

EITI community have called for transparency initiatives to improve problem arising

from natural resources dependent countries. Blessing or curse of natural resources on

economic growth dependence on the role of institutional transparency is a relatively

new topic to be discussed. There is also a question whether natural resource

endowment countries can draw a lesson from good institutions like Norway and

Botswana to mitigate natural resource curse via institution transparency, information

release and accountability transparency are still ambiguous. In addition, it could

further raised questions as to what extent the transparency affects the types of

resources that will affect the economic development. It is indeed valuable and requires

an agenda or policy to highlight the natural resource governance.

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1.2.3 The Effect of Transparency on Income Inequality and Economic

Growth

Neoclassical growth model has identified several limitations to explain income

inequality. Numerous empirical tests have examined the growth linked inequality

which have turned up to be inconsistent conclusion. The main question remained

ambiguous as to why some countries can successfully reduce inequality, while other

countries failed despite a high capital accumulation.

More recently, international community shifted their attention to transparency that

plays an important role in economic development as transparency institutional provide

good governance to public which lead to resources redistribution. Nonetheless, many

developing countries with large resources rents breed bureaucratic corruption which

exacerbated the persistence of inequality. Countries lacking in transparency have

averagely slower economic growth rate due to instability of political institution which

crowded out private investment and discouraged competition in international market.

Moreover, weak institutions are less responsible to release information on economic

policy to foreign investors who feel uncertain with the macroeconomic environment

and political instability. Lack of accountability transparency in bureaucratic

administration may lead to greater error in resources management and inefficiency on

economy policies.

This study sheds light on the role of financial development in the context of

interrelationship among transparency, income inequality and economic growth.

Financial development is a fundamental element for economic development in

countries as banks facilitate resources to productive investment and allow poor people

accessible to financial services which generate more education and business

opportunity. As a result, financial development minimises the inequality. In contrast,

financial development may not necessarily lead to growth as certain interest group or

top elite who have influential political power to affect resources and economic policy

which can fuel the persistence of inequality.

Up to today, there is less systematic empirical analysis focus on the transparency in

the resources distribution. It is ambiguous that such transparency changes does not

capture the likely effect of income inequality and growth over time. In other words,

does income inequality and growth improve in line with transparency enhancement or

vice versa? Thus, it still remains that the research gap requires to be examined.

By summarising the issues, the capital flow development has changed substantially

from the capital inflow to growth, but the focus has shifted to dealing with the risks of

heterogeneity capital and transparency acts as a mediator in international capital. No

doubt, the capital flow have by far the largest effect on long-run growth, but yet the

recipients are accused of less benefits or left behind the development. There is less

systematic empirical study on the transparency links to capital flow in developing

countries due to limitation of comprehensive transparency data available in

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developing countries. The complexity of capital flow development is no longer

dependent on a single factor, but rather in an interaction terms to explain the capital

flow development. Secondly, many endowed countries are unable to translate their

rents to growth and this issue is related to the institution capacity and transparency

reform in natural resource. EITI has alarmed the serious issues and challenges of

resource curse has been unsolved and transparency initiatives remained in less demand

by extractive industry countries. Most of the study are focused on the causes and effect

of resource on growth, but less study emphasise on both integrating between natural

resource and transparency. Hence, this study has shed light on the transparency which

focuses on the resources endowment and economic growth. Lastly, the lower growth

rate and high income inequality in developing countries has been challenged by policy

makers and scholars. Most of the empirical study have reached a mixed and

inconclusive finding. The major concerns to study the transparency on income

inequality, financial development and growth is sorting the direction of causality.

Hence, this study is interested to identify to interrelationship between the multivariate

in long run growth.

1.3 Research Objectives

i. To investigate the effect of transparency on types of capital inflow to

developing countries and the role of transparency in moderating capital

flows – economic growth nexus.

ii. To examine the effect of transparency on economic growth in natural

resources abundance countries and the role of transparency in moderating

natural resources rents - economic growth relationship.

iii. To evaluate the interrelationship between transparency, income inequality

and economic growth.

1.4 Significance of the Study

This study has originally contributed a few aspects. Firstly, prior empirical literature

on capital flows was well documented on the composition capital flow behaviour in

developing countries, determinants of capital flow and its effect of capital flow on

economic growth. In institutional quality, there was a number of empirical which

tested the stability of institution which influenced the pattern of capital flow by

employing the International Country Risk Guide (ICRG) dataset which consists of six

variables, rule of law, corruption, political risk, bureaucratic constraints, Democratic

Accountability transparency and internal conflict. In addition, some empirical

examined the capital inflow with opacity index which was measured by Water Price

Cooper index. As a consequence, empirical studies have not adequately focus on the

impact of transparency and international transparency community that called for its

importance to safeguard any negative shocks when there is a crisis. Hence, this study

attempts to fill up the gap by employing a new dataset on transparency index which

has a longer term time series and countries (Williams, 2015).

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Transparency role was initially focused on mitigating shock from financial crisis but

has shifted to information asymmetric which affects economic development.

Economic development was widely recognised as a fact that institution matters and it

is able to channel beneficial to growth if the institution promotes transparency level in

countries. With regard to this, International Monetary Fund (IMF) pushed for greater

transparency via initiatives of Code of good practice on fiscal transparency and OECD

(2001) started with Best Practice for Budgetary Transparency. In the event of Mexican

crisis (1994 to 1995), Asia and Russia (1997 to 1998) was due to lack of transparency,

insufficient economic data, weak financial system, uncertainty about government

policy are responsible to the loss in confidence of foreign investors and undermine

global stability. Transparency is generally accepted as the key element of good

governance that promotes investment and growth through an openness policy,

formulation and implementation. Hence, international community shifted their interest

towards the relationship between transparency, international capital, growth and social

inequality.

The new dataset on transparency is able to provide new insight on the behaviour of

capital flow, the transparency effect on economic growth in natural resources

dependence countries, the interrelation between transparency, income inequality and

economic growth. This study allows the government to devise or revise their policy

on these dimension as this issue concerns on the transparency effectiveness in financial

markets, to curb the corruption in natural resources dependence countries and

increased growth inclusive by adopting the transparency initiatives lead to narrow the

gap of income inequality.

Information quality and quantity play a role a new wave of social-economic growth.

Prior empirical literature have paid much attention to the extent financial integration,

political and social, macroeconomic development which have undermined the

significant role of information in the overall quality of governance. Extractive

Industries Transparency Initiatives (EITI) strongly enforced “Publish What You Pay”

for oil extractive countries to adhere to the transparency, information disclosure and

auditing standard procedure. Good institutions facilitate timeliness news, information

and reliable data to make individual, NGO and foreign investors informed on political

stability and predictable economic policies. In addition, the development of

transparency initiatives can enhance the reliable and timely information released in

financial sector by reducing market imperfections and information friction.

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8 BIODATA OF STUDENT

Chia Poh San was born in December 1984 and raised in Petaling Jaya, Selangor. Chia

went through secondary school and STPM at SMK Taman SEA, Petaling Jaya. He

was offered with a degree of bachelor Science (Human Development) in Universiti

Putra Malaysia (UPM) in 2005. Upon completion degree, he decided move on to

Master degree in Economics, majoring in financial economics in 2008 and pursued

his Doctor of Philosophy (PhD) in Economics at UPM from September 2013 to April

2020. Chia was also part-time tutor for Business Research Method (2008) and

Econometrics (2010) in UPM.

Chia has vast finance and banking industry experienced for more than 10 years. He

went to HSBC Bank in 2005, joined as Deputy Manager of Credit & Marketing with

Subsidiary of OCBC Capital from 2010 to 2017, Assistant Vice President of Business

Banking Division in United Overseas Berhad (UOB). With the in-depth finance and

banking background, it has encouraged and motivated Chia enthusiastic to pursue his

dream and passion in PhD in order to achieve academic goal.

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9 PUBLICATION

Chia, P.S. and Law, S. H. (2020). The effect of transparency on the capital flows in

developing countries. Paper accepted for publication in International Journal

of Economics & Management.

universiti putra malaysiapsasir.upm.edu.my/id/eprint/85448/1/spe 2020 5 ir.pdfphotographs and all...

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