1

The business environment in emerging economies

Prof. Olivier CadotSpring Semester, 2014

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SEMINAR OBJECTIVES

Get the big picture

o How is the world economy evolving? What is the role of emerging economies

o Basic differences between industrial and emerging economieso What do we know about economic development? Understand to

anticipate

Learn to analyze data

o Do and present descriptive statisticso Do and interpret basic regression analysiso Understand indices

Learn to present and discuss your ideas

o Select what you communicateo Give a «narrative» to your analysiso Provide constructive comments to others

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SEMINAR EVALUATION

Hands-on data analysis exerciseo Get datao Organize it (cleaning, formatting)o Analyse it (descriptive statistics, econometric analysis)o Present your results

Group projecto Topic to be agreed with instructor/assistanto Original contribution (not just review of the literature)o Data analysis

Discussion of group projects

Optional: In-class case presentation and discussion

Exercises 30%

Group workPaper 50%Discussion 20%

Total 100%

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SEMINAR FORMAT AND SCHEDULE

Six introductory sessionsFebruary 20, 27; March 6, 13, 20, 27

Group work, phase I (topic determination & data gathering): AprilGroup meetings with professor/asssistant, round I: Week of April 15

Group work, phase II (analysis and preliminary draft): MayGroup meetings with professor/assistant, round II: Week of May 12Assignment of «discussant» roles

Presentations and discussion: May 15, 22, 29

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SUGGESTIVE LIST OF PAPER TOPICS

o Governance in extractive industries o Country competitiveness analysiso Measuring «logistics friendliness»o Export entrepreneurshipo Statistical analysis of competitiveness and other indiceso Public-private partnerships in public utilities, with a focus on water

privatizationo Free-trade agreementso Product standards, technical regulations, and competitiono NGO management & accountabilityo Project impact analysis

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UNDERSTANDING GLOBALIZATION

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TRADE GROWS FASTER THAN PRODUCTION

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Low & middle income

High income

Openness ratioTrade growth vs. GDP growth

8

SHIFTING PATTERNS, SHIFTING CENTER OF GRAVITY

Source: JM Grether and N Mathys (2006), “Is the World’s Economic Center of Gravity Already in Asia?”, mimeo, Univ. of Lausanne

2015

9

THE RISE OF ASIAN PLAYERS

0

2

4

6

8

10

12

14

16

18

Trade in services (% ofGDP)

Service exports: India, 1975-2010

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THE DECLINE OF THE RICH COUNTRIES

- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

Share of world GDP, constant dollars,OECDShare of world GDP, constant dollars,non-OECD

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Share of world GDP at PPP, OECD

Share of world GDP, at PPP, non-OECD

Income shares: current USD At PPP

Growth 1950-2010: Developed vs. developing Growth 1950-2010: By region

Second great divergence

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THE WORLDWIDE DISTRIBUTION OF INCOME, 1970-80

Source: Sala i Martin 2002

Income distribution over time: World, 1970-80

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Source: Sala i Martin 2002

Income distribution over time: World 1990-98

THE WORLDWIDE DISTRIBUTION OF INCOME, 1990-98

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Absolute poverty headcount, million individuals

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WHO’S LEFT ON THE ROAD SIDE?

GDP growth and growth of bottom 20% income

GDP growth

Average income growth, bottom 20%

The global poverty reduction is also visible in Africa Remaining confined in fragile states

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DIFFERENCES IN VALUES (I): HOFSTEDE (1980)

Power acceptance Individualism

“Masculinity” (competitiveness) Risk aversion

Source : http://www.clearlycultural.com/geert-hofstede-cultural-dimensions/uncertainty-avoidance-index/

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DIFFERENCES IN VALUES (II): A CULTURAL DISTANCE INDEX

2 21 11

i i i

i

F s sH

1 1 1ij i j i jD s s s s

Intra-country fragmentation index

Inter-country distance index (Thoenig et al. 2009)

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HAS CULTURAL DISTANCE SHRUNK?

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DETERMINANTS OF CULTURAL DISTANCE

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THE INTERNATIONALIZATION OF COMPANIES

-

1.00

2.00

3.00

4.00

5.00

6.00

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Low & middle income

High income

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Low & middle income

High income

Inward and outward FDI flows

Inward

Outward

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GLOBAL TRADE PATTERNS

250375

1’395

628628

263263 427

242

10555

75

Source: Adapted from The Economist, A Survey of Logistics, 17 June 2006, p. 5.Million US dollars

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TRADE IN VALUE ADDED

Start from a material balance equation

Invert it to get the “inverse Leontieff matrix” (output requirements per unit of final demand)

Define the share of value added in gross output in country r, call it V

Combine with Leontieff matrices to get VA as a share of gross output

And with gross exports to get VA as a share of gross exports

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BREAKING DOWN THE USES OF VALUE ADDED

Foreign VA

Domestic VA

Absorbed domestically

Exported

As final good

As intermediate

For local absorption

For exportTo third countries

For re-export back home

Multiple counting in trade stats

Measuring trade flows in terms of gross exports generates multiple counting

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THE VALUE CONTENT OF EXPORTS: A PUZZLE

On aggregate, the domestic content of exports correlates negatively with GDP per capita

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68

1012

-3 -2 -1 0 1 2ln GDP per capita

Electronics ChemicalsAgri-food

A possible explanation: Aggregation bias

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EXPANDING THE INPUT-OUTPUT MATRIX TO BREAK DOWN THE USES OF VA

Standard IO table

Expanded IO table

Breakdown estimated using trade data

Uses Sector 1 Sector 2Dom. final

demand

Sector 1Sector 2Domestic VAIntermediate imports

Domestic absorptionExports

Sources

Uses Sector 1 Sector 2Dom. final

demand

SourcesFor local

absorptionFor export to third countries

For export back to home

Sector 1Sector 2Domestic VAIntermediate imports

Foreign intermediate use

Exports

Foreign final demand

Domestic absorption

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… AND ISOLATING VA EXPORTED IN INTERMEDIATE PRODUCTS

Use of value added Domestic Foreign

Absorbed in domestic production

Exported

As final goodDirect VA in final goods

As intermediate goodUsed and absorbed in direct export market

Direct VA exports

Used for re-export to third marketsIndirect VA

exports

Used for re-export back to homeReturning

home

Source of value added

Foreign VAGROSS EXPORTS

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DECOMPOSITION OF GROSS EXPORTS VARIES A LOT ACROSS COUNTRIES

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BACK TO THE VA BREAKDOWN: GLOBAL VALUE CHAIN PARTICIPATION

Foreign VA

Domestic VA

Absorbed domestically

Exported

As final good

As intermediate

For local absorption

For exportFor re-export back home

To third countries

GLOBAL VALUE CHAIN

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A COUNTRY DOWNSTREAM IN THE VALUE CHAIN

Foreign VA

Domestic VA

Absorbed domestically

Exported

As final good

As intermediate

For local absorption

For exportFor re-export back home

To third countries

GLOBAL VALUE CHAIN

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A COUNTRY UPSTREAM IN THE VALUE CHAIN

Foreign VA

Domestic VA

Absorbed domestically

Exported

As final good

As intermediate

For local absorption

For exportFor re-export back home

To third countries

GLOBAL VALUE CHAIN

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INDICES OF GVC POSITION AND PARTICIPATION

Foreign VA

Domestic VA

Absorbed domestically

Exported

As final good

As intermediate

For local absorption

For exportTo third countries

For re-export back home

Index of GVC participation : high when country/ sector integrated into a value chain

sc scsc

sc sc

IV FVGVC participationE E

Index of GVC position : high when country/ sector is upstream of a value chain

Large when upstream Large when downstream

ln 1 ln 1sc scsc

sc sc

IV FVGVC positionE E

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PARTICIPATION AND POSITION IN ELECTRONIC GVCS

JPN

WEU

USA

MEX-non EPZ

CHN-non EPZ

RUS

EFTA

AUS

TWN

KOR

PHL

IND

ZAF

MYS

MEX-EPZ

VNM

HKG

THA

IDN

BRA

CANEEU

CHN-EPZ

SGP

0.2

.4.6

.81

GV

C p

artic

ipat

ion

inde

x

-1 -.5 0 .5GVC upstream position index

Source: Adapted from Koopman et al. (2011), Figure 2

Well integrated, downstream

Poorly integrated, little use of

foreign intermediates

Well integrated,

upstream

upstreamdownstream

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CAPTURING THE GAINS ALONG A GVC: THE IPOD

Source: Adapted from Dedrick et al. 2008

JapanUSKoreaChina

Apple

marg

in

Hard dr

ive

Display

Multim

edia

proces

sors

Contr

oller

chip

Batte

ry pac

k

SDRAM m

em 32

M

Mobile

RAM

Flash

memory

Other c

ompo

nents

Assem

bly & te

sting

Distrib

ution

Retai

ling0

50

100

150

200

250

300

350

Human capital, R&D

Capital

Re-captured by Apple

Labor

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HOW MUCH DOMESTIC VA IN EXPORTS?

Uses Sector 1 Sector 2Dom. final

demand

Sector 1Sector 2Domestic VAIntermediate imports

Domestic absorptionExports

Sources

Approach

o Start from input-output tableo Allocate VA to different uses in proportion to gross outputo Calculate the fraction of domestic VA in gross exports

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A SECOND LOOK AT GLOBAL TRADE IMBALANCES

45o lineCompare U.S. bilateral trade deficit witho China (red)o Japan (purple)

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WHAT DOES IT CHANGE TO LOOK AT VALUE ADDED? RCA

Balassa

sector 's share in country c's exports

sector 's share in world exports

/ // /

s

sc scGE sc ccsc

s s sss

x x x xRCAx x x x

Trade in value added sector 's share in country c's VA

sector 's share in world VA

/ // /

s

sc scVA sc ccsc

s s sss

VA VA VA VARCAVA VA VA VA

Source: Koopman et al. (2011)

RCA in finished metal products (ISIC 28)