Post on 19-Jan-2016
Emerging Markets: Emerging Markets: Finance and the Real EconomyFinance and the Real Economy
Campbell R. HarveyDuke University and NBER
Southern Finance Association MeetingsKey West,
November 22, 2002
2
Materials in my presentation are largely drawn from my past and on-going collaborations with Geert Bekaert at Columbia University.
Emerging Markets Research
3
Emerging Markets Research Program
Bekaert and Harvey JFE97Emerging Market Volatility
Bekaert WBER95Investment Barriers
Harvey RFS95; WBER95 Predictable Risk
Bekaert and Harvey JF95Time-Varying Integration
Bekaert and Harvey NBER98 Capital Flows
Bekaert and Harvey JF2000 Foreign Speculators
Bekaert, Harvey & Lumsdaine JFE2002 Dating Integration
Bekaert, Harvey & Lumsdaine JIMF2002 Dynamics of Capital Flows
Bekaert, Erb, Harvey & Viskanta BOOK, JPM97 Behavior of Returns and Asset Allocation
Bekaert, Harvey & Lundblad JDE2002 Finance and Growth Econometrics
Bekaert, Harvey & Lundblad WP2002 Liberalization and Growth
Bekaert, Harvey & Lundblad WP2002 Liberalization and Growth Volatility
Bekaert, Harvey & Lundblad WP2002 Emerging Mrt Liquidity & Expected Returns
4
My first look at the data
• Data through June 1992
• Published in RFS 1995
• What has happened since?
Emerging Markets Research
5
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
Average Annual Geometric Returns Through June 1992
6
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
Average Annual Geometric ReturnsThrough June 1992 – What Happened After?
7
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Average Annualized Standard Deviation Through June 1992
8
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Average Annualized Standard Deviation Through June 1992 –What Happened After?
Data through April 2002
9
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Correlation with World Through June 1992
10
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Correlation with WorldThrough June 1992 – What Happened After?
Data through April 2002
11
-0.50
0.00
0.50
1.00
1.50
2.00
Beta with World Through June 1992
12
-0.50
0.00
0.50
1.00
1.50
2.00
Beta with World Through June 1992 – What Happened After?
Data through April 2002
13
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Date
Ro
llin
g C
orr
ela
tio
n Evolution of World Correlation Five-Year Rolling Window: 20 Countries
Data through April 2002.
IFC Composite
Average of 20 Emerging Countries
14
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Date
Ro
llin
g B
eta
Evolution of World Beta Risk Five-Year Rolling Window: 20 Countries
Data through April 2002.
IFC Composite
Average of 20 Emerging Countries
15
Why is the picture different?
• Financial liberalizations
Emerging Markets Research
16
Official First First Estimate ofLiberalization ADR Country Fund Increase in Net
Country Date Introduction Introduction US Capital FlowsArgentina 89.11 91.08 91.10 93.04Brazil 91.05 92.01 87.10 88.06Chile 92.01 90.03 89.09 88.01Colombia 91.02 92.12 92.05 93.08Greece 87.12 88.08 88.09 86.12India 92.11 92.02 86.06 93.04Indonesia 89.09 91.04 89.01 93.06Jordan 95.12 n/a n/a n/a Korea 92.01 90.11 84.08 93.03Malaysia 88.12 92.08 87.12 92.04Mexico 89.05 89.01 81.06 90.05Nigeria 95.08 n/a n/a n/a Pakistan 91.02 n/a 91.07 93.04Philippines 91.06 91.03 87.05 90.01Portugal 86.07 90.06 87.08 94.08Taiwan 91.01 91.12 86.05 92.08Thailand 87.09 91.01 85.07 88.07Turkey 89.08 90.07 89.12 89.12Venezuela 90.01 91.08 n/a 94.02Zimbabwe 93.06 n/a n/a n/a
The Opening of Equity Markets in Emerging Countries
17
Prices
High Expected Announcement Implementation Low ExpectedReturns of Liberalization Returns
PI
PS
Time
Segmented Integrated
Asset Prices and Market Integration
Return to Integration
18
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60Pre Post
Average Annual Geometric ReturnsPre and Post Bekaert-Harvey Official Liberalization Dates
Data through April 2002. There are no pre-liberalization data for Indonesia.
19
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00 Pre Post
Average Annualized Standard DeviationPre and Post Bekaert-Harvey Official Liberalization Dates
Data through April 2002. There are no pre-liberalization data for Indonesia.
20
-0.10-0.050.000.050.100.150.200.250.300.350.400.45 Pre Post
Correlation with WorldPre and Post Bekaert-Harvey Official Liberalization Dates
Data through April 2002. There are no pre-liberalization data for Indonesia.
21
-0.60-0.40-0.200.000.200.400.600.801.001.201.401.60 Pre Post
Beta with WorldPre and Post Bekaert-Harvey Official Liberalization Dates
Data through April 2002. There are no pre-liberalization data for Indonesia.
22
Implications
• Lower cost of capital
• More investment, employment
• More economic growth
Current research with Geert Bekaert and Chris Lundblad explores the relation between equity market liberalization and the real economy
Emerging Markets Research
23
Geert Bekaert, Campbell Harvey and Chris Lundblad, Does Financial Liberalization Spur Growth? Working paper 2002
Emerging Markets Research
24
Real GDP Growth Rates1980-1997
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
Gro
wth
rate
Pre-liberalization Post-liberalization
25
Real GDP Growth Rates1980-2000
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
Gro
wth
rate
Pre-liberalization Post-liberalization
26
Financial Development
Growth
Financial Liberalization
Relaxing FinConstraints
Investment
GrowthOpportunities
Efficiency ofInvestment
Cost of Capital
27
Controversial exercise• Liberalization implies consumption booms and
inefficient investment (crisis literature)
• Liberalization may lead to reduced savings (endogenous growth literature)
• Liberalization may lead to “hot speculative capital” and induce capital flight (Stiglitz & others)
Financial Liberalization and Growth
28
Financial Liberalization and Growth
What we already know (too many references to list!):
• Financial/banking development associated with higher growth
• Cost of capital decreases
• Investment increases
29
Financial Liberalization and GrowthOutline:1. Did liberalization spur growth?
– Large panel of data– Cross-sectional growth regression with temporal dimension
2. How did liberalization spur growth?3. Accounting for the liberalization effect
– Is is macro-economic reforms?– Is it financial development?– Other simultaneity biases?
4. Conclusions
30
Financial Liberalization and Growth
Caveats:Not much guidance from theory.
• As a result, it is important to conduct extensive robustness experiments
31
Financial Liberalization and Growth
Econometric Framework:
ktititiikkti LibXQy ,,,1980,,,
where yi,t+k,k is real per capita GDP growth between t and t+kQi,1980 is initial GDP,Xi,t represents control variablesLibi,t is a Liberalization indicator variable
32
Financial Liberalization and Growth
Econometric Framework:
)](Z)SX[()](Z)SX[(ˆ
as written becan estimator The
],,[
],,[
Let
111
,,1980,,
YZXZ
LibXQx
TT
titiiti
33
Financial Liberalization and Growth
Econometric Framework:
NN
kktitii
X
X
X
Z
X
X
X
yYxX
00
00
00
,
][ and ][given where,
2
11
,,,
ST is the variance covariance matrix of the sample orthogonalityconditions
34
Financial Liberalization and Growth
Key issues:• Temporal dimension• Different weighting matrices• Liberalization variable• Choice of “k”• Endogeneity of the liberalization decision
35
Financial Liberalization and Growth
Data: Four samples determined by availability of data
• Sample I: 95 countries
• Sample II: 75 countries
[macroeconomic and demographic data]
36
Financial Liberalization and Growth
Data: Four samples determined by availability of data
• Sample III: 50 countries• Sample IV: 28 countries[add financial development indicators]
As data requirements become more stringent, the variance of GDP levels across countries in the sample decreases.
37
Financial Liberalization and Growth
Liberalization dates:• Use Bekaert and Harvey (JF 2000) “official
liberalization” dates• These dates are based on a detailed
chronology of important regulatory events • Augmented with IFC frontier markets and
three developed markets, Spain, New Zealand and Japan
38
Financial Liberalization and Growth
Liberalization dates:• Robustness of our results checked by examining
Bekaert and Harvey (2000)’s “First Sign” dates• These dates based on the earliest date of {official
liberalization, first ADR and first closed-end fund}
• Example: Thailand – “Official” 1987:09– “First Sign” 1985:07
39
40
Financial Liberalization and Growth
Liberalization dates: • Capturing “intensity” or “comprehensiveness”
of the liberalization– Ratio of IFC investable market cap to global stocks
(Bekaert (1995) and Edison and Warnock (2001))– U.S. holdings of domestic market capitalization
• Is it just a proxy for capital account openness? [See Rodrik-Edwards debate]
41
Financial Liberalization and Growth
Are the dates exogenous?
Counter examples
• Spain in the EU
• Some countries cannot liberalize their financial markets
42
Financial Liberalization and Growth
Findings so far:
• We document a liberalization effect on growth with certain "standard control variables"
43
Classic Growth Regression and the Impact of Liberalization
Sample I II III IV
Constant -0.2281 -0.2374 -0.1493 -0.2018 Std. error 0.0179 0.0214 0.0286 0.0658
Log(GDP) -0.0094 -0.0088 -0.0115 -0.0158 Std. error 0.0007 0.0007 0.0008 0.0011
Govt/GDP -0.0039 -0.0178 -0.0187 -0.0301 Std. error 0.0087 0.0098 0.0105 0.0165
Enrollment 0.0305 0.0112 0.0243 0.0566 Std. error 0.0077 0.0097 0.0116 0.0171
Population Growth -0.5594 -0.5731 -0.8159 -1.1013 Std. error 0.0621 0.0691 0.0835 0.1151
Log(Life Expectancy) 0.0755 0.0781 0.0627 0.0838 Std. error 0.0049 0.0056 0.0076 0.0167
Official Liberalization Indicator 0.0095 0.0083 0.0113 0.0130 Std. error 0.0016 0.0017 0.0020 0.0036
44
Financial Liberalization and Growth
Findings so far:
• The liberalization effect is robust to– different definitions of liberalization dates– to business cycle or interest rate controls– allowing for intensity of liberalization
...and independent of capital account liberalization
45
Robustness of the Liberalization Effect
A: Sensitivity to Regional InfluencesSample I II III IV
Official Liberalization Indicator (Latin) 0.0089 0.0075 0.0068 0.0138 Std. error 0.0034 0.0034 0.0035 0.0071
Official Liberalization Indicator (Not-Latin) 0.0108 0.0099 0.0136 0.0133 Std. error 0.0016 0.0017 0.0019 0.0035
B: Sensitivity to Contemporaneous World Growth and Real Interest RatesSample I II III IV
OECD GDP growth (contemporaneous) 0.1469 0.1177 0.1435 0.1695 Std. error 0.0301 0.0328 0.0315 0.0394
World real interest rate (contemporaneous) -0.0625 -0.0484 -0.0132 -0.0182 Std. error 0.0282 0.0309 0.0300 0.0372
Official Liberalization Indicator 0.0097 0.0085 0.0124 0.0141 Std. error 0.0016 0.0017 0.0020 0.0036
46
Alternative measurements of liberalization
Sample I II III IV
Official Liberalization Indicator 0.0095 0.0083 0.0113 0.0130 Std. error 0.0016 0.0017 0.0020 0.0036
First Sign Liberalization Indicator 0.0102 0.0091 0.0105 0.0094 Std. error 0.0015 0.0016 0.0018 0.0033
Intensity Indicator A 0.0101 0.0089 0.0131 0.0132 Std. error 0.0015 0.0018 0.0016 0.0038
Intensity Indicator B 0.0120 0.0110 0.0159 0.0155 Std. error 0.0015 0.0018 0.0016 0.0036
Official Lib. Indicator*(U.S. Holdings/MCAP) 0.0352 0.0325 0.0291 0.0173 Std. error 0.0067 0.0067 0.0067 0.0073
IMF Capital Account Lib. Indicator 0.0022 0.0014 0.0061 0.0043 Std. error 0.0007 0.0008 0.0008 0.0010
IMF Capital Account Lib. Indicator 0.0004 0.0001 0.0044 0.0033 Std. error 0.0008 0.0009 0.0007 0.0009
Official Liberalization Indicator 0.0092 0.0082 0.0098 0.0123 Std. error 0.0016 0.0019 0.0016 0.0044
47
Financial Liberalization and Growth
Channels of increased growth:
• Both: » increased investment, partially through a cost of capital
effect and » increased productivity (which is different from the
financial development literature)
48
Financial Liberalization and Growth
On the mechanism ...
» Liberalization does not lead to consumption binge – investment increases– trade balance decreases
49
Macroeconomic Impact of Liberalization
-0.0300
-0.0250
-0.0200
-0.0150
-0.0100
-0.0050
0.0000
0.0050
0.0100
0.0150
0.0200
I II III IV
Investment/GDP Consumption/GDP Government/GDP Exports-Imports/GDP
50
Financial Liberalization and Growth
On the mechanism ...
» Investment increases - but you need a minimum “country quality level” to see effect– decreased cost of capital associated with more
investment
51
Investment, the Cost of Capital and the Liberalization Effect
Sample II III IV
Official Liberalization Indicator -0.0581 -0.1090 -0.1802 Std. error 0.0166 0.0321 0.0466
Log(Credit Rating) -0.0016 -0.0068 -0.0181 Std. error 0.0016 0.0061 0.0095
Log(Credit Rating)*Lib Indicator 0.0172 0.0315 0.04900.0041 0.0081 0.0113
Minimum credit rating requiredfor liberalization to positively 29.3 31.8 39.6impact investment
52
Financial Liberalization and Growth
On the mechanism ...
» Productivity increases– and this is not just a banking development effect
53
Liberalization, Total Factor Productivity and Capital Growth
Sample I II III IV
Official Liberalization Indicator 0.0055 0.0058 0.0047 0.0077 Std. error 0.0010 0.0011 0.0014 0.0033
Private Credit/GDP 0.0036 0.0037 0.0033 -0.0023 Std. error 0.0013 0.0013 0.0014 0.0019
Official Liberalization Indicator 0.0047 0.0049 0.0044 0.0081 Std. error 0.0010 0.0011 0.0014 0.0033
54
Financial Liberalization and Growth
Accounting for the liberalization effect:
• We investigate whether part of the effect can be ascribed to» macroeconomic reforms» financial development» other regulatory reforms
55
Financial Liberalization and Growth
Accounting for the liberalization effect:
Macroeconomic reforms ...
» Liberalization not spuriously reflecting macroeconomic reforms– we control for trade openness, inflation, black market
premiums, and government deficits
56
Macroeconomic Reforms and Financial Liberalization
Sample I II III IV
Trade 0.0090 0.0105 0.0089 0.0084 Std. error 0.0007 0.0007 0.0010 0.0012
Log(1+Inflation) (Latin) 0.0010 0.0004 0.0011 -0.0003 Std. error 0.0017 0.0016 0.0017 0.0024
Log(1+Inflation) (Not Latin) 0.0088 0.0057 0.0036 -0.0450 Std. error 0.0021 0.0024 0.0053 0.0149
Log(1+Black Market Premium) -0.0093 -0.0096 0.0005 0.0048 Std. error 0.0014 0.0015 0.0014 0.0071
Fiscal Deficit -0.0738 Std. error 0.0178
Official Liberalization Indicator 0.0088 0.0072 0.0110 0.0074 Std. error 0.0011 0.0014 0.0017 0.0032
57
Financial Liberalization and Growth
Accounting for the liberalization effect:
Financial development ...
» Degree of banking and equity market development is important but independent boost from liberalization – we examine the size of private credit, equity market
activity, and equity market size
58
Financial Development and Financial Liberalization
Banking sector development Sample I II III IV
Private Credit 0.0204 0.0234 0.0159 0.0298 Std. error 0.0030 0.0033 0.0046 0.0082
Private Credit*Lib indicator -0.0213 -0.0244 -0.0131 -0.0329 Std. error 0.0031 0.0034 0.0045 0.0082
Official Liberalization Indicator 0.0195 0.0199 0.0178 0.0301 Std. error 0.0023 0.0027 0.0027 0.0056
Impact on growth of increasing private credit from median of segmented countries to median of liberalizedNonliberalizing country 0.0097 0.0101 0.0061 0.0101Liberalizing country 0.0139 0.0126 0.0145 0.0145Increment to growth by liberalizing 0.0042 0.0025 0.0084 0.0044
Impact on growth resulting from liberalization with no change in private credit/GDPLow level of private credit/GDP 0.0143 0.0130 0.0134 0.0156High level of private credit/GDP 0.0042 0.0025 0.0084 0.0044
59
Financial Development and Financial Liberalization
Trading activity
Turnover 0.0170 0.0097 Std. error 0.0037 0.0071
Turnover*Lib Indicator -0.0145 -0.0078 Std. error 0.0038 0.0074
Official Liberalization Indicator 0.0135 0.0151 Std. error 0.0019 0.0040
Impact on growth of increasing turnover from median of segmented countries to median of liberalizedNonliberalizing country 0.0042 0.0009Liberalizing country 0.0132 0.0132Increment to growth by liberalizing 0.0090 0.0124
Impact on growth resulting from liberalization with no change in turnoverLow level of turnover 0.0126 0.0131High level of turnover 0.0090 0.0124
60
Financial Liberalization and Growth
Accounting for the liberalization effect:
Other regulatory reforms ...
» The financial liberalization/growth effect is not a post-banking crisis effect
» The enforcement of law and institutions are important
61
Banking Crises and Financial Liberalization
Growth During Crisis PeriodsSample I II III IV
During Systemic Crisis -0.0048 -0.0066 -0.0062 -0.0095 Std. error 0.0007 0.0008 0.0009 0.0018
Official Liberalization Indicator 0.0090 0.0077 0.0105 0.0083 Std. error 0.0015 0.0018 0.0018 0.0045
During Systemic and Borderline Crisis -0.0048 -0.0064 -0.0081 -0.0075 Std. error 0.0005 0.0006 0.0007 0.0011
Official Liberalization Indicator 0.0093 0.0083 0.0120 0.0099 Std. error 0.0013 0.0014 0.0018 0.0042
62
Banking Crises and Financial Liberalization
Post Crisis Period Growth
Post Systemic Crisis 0.0062 0.0060 0.0001 0.0017 Std. error 0.0009 0.0010 0.0013 0.0042
Official Liberalization Indicator 0.0091 0.0081 0.0112 0.0132 Std. error 0.0014 0.0017 0.0018 0.0045
Post Systemic and Borderline Crisis 0.0049 0.0048 0.0033 0.0050 Std. error 0.0006 0.0007 0.0007 0.0011
Official Liberalization Indicator 0.0093 0.0083 0.0111 0.0127 Std. error 0.0014 0.0016 0.0018 0.0044
63
Financial Liberalization and Growth
Conclusions
• Financial liberalization spurs growth by 1% per annum over the five years
• Survives a battery of robustness experiments
• We understand better the channels whereby growth impacted by financial liberalization
• Liberalization effect not spuriously accounted for by a host of other events such as macro-economic reforms
64
Financial Liberalization and Growth
Conclusions
• Financial liberalization has a very important economic effect
65
Gov/GDP 75th to 50th
Enrollment 25th to 50th
Pop Growth 75th to 50th
Life Exp. 25th to 50th
Liberalization
Total Growth = 3.02%
Financial Liberalization and Growth
Conclusions• Financial liberalization has a very important economic effect
• Consider economic impact of improvements plus a equity market liberalization
Liberalization
66
Financial Liberalization and Growth
On going research
• What about growth volatility?
Geert Bekaert, Campbell Harvey and Chris Lundblad, Growth Volatility and Equity Market Liberalization, Working paper 2002
67
Standard Deviation of GDP Growth Rates1980-1997
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Stan
dard
dev
iati
on
Pre-liberalization Post-liberalization
68
Standard Deviation of GDP Growth Rates1980-2000
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Stan
dard
dev
iati
on
Pre-liberalization Post-liberalization
69
GDP Growth Rate Standard DeviationFull Period (1980-2000) Pre-Crisis (1980-1997)
I II III I II IIIConstant 0.1936 -0.0105 0.0004 0.2179 -0.0087 0.0045 Std Error 0.0142 0.0241 0.0304 0.0127 0.0269 0.0292Initial GDP 0.0046 0.0028 0.0070 0.0052 0.0036 0.0067 Std Error 0.0003 0.0004 0.0005 0.0003 0.0004 0.0005School -0.0116 -0.0175 -0.0161 -0.0077 -0.0136 -0.0151 Std Error 0.0025 0.0011 0.0032 0.0032 0.0016 0.0026Log(Life) -0.0471 0.0045 -0.0045 -0.0547 0.0018 -0.0059 Std Error 0.0036 0.0061 0.0074 0.0035 0.0068 0.0071Gov/GDP -0.0106 -0.0236 -0.0531 0.0048 -0.0108 -0.0157 Std Error 0.0067 0.0047 0.0121 0.0074 0.0054 0.0133PopGR 0.1159 0.3722 0.3865 0.1184 0.3973 0.3159 Std Error 0.0989 0.0362 0.0910 0.1082 0.0438 0.0863
Official Lib -0.0057 -0.0013 -0.0002 -0.0107 -0.0060 -0.0060 Std Error 0.0007 0.0008 0.0012 0.0009 0.0008 0.0012