Investigating the twin-deficit phenomenon among oil-exporting countries: Does oil really matter?

This study empirically investigates the existence of twin deficits—the impact of fiscal policy on the current account—among selected major oil-exporting countries. Given the huge effects of the oil proceeds on these economies, the study separates the effects of oil on the fiscal balance from its effect on the current account balance. The investigation took a further step by grouping these countries—based on their fiscal policy actions over the period of years under review—into pro-cyclical and counter-cyclical fiscal countries. In line with the existing literature, the impact of fiscal balance on the current account balance takes into consideration the contemporaneous effects brought about by exchange rate fluctuations, the growth in GDP, rate of openness and the growth in money supply. The models are estimated based on a panel of 31 oil-exporting countries over the period 1984–2013, using the two-stage least squares estimation techniques. The results from all countries estimations reveal the existence of twin-deficit in the total economy. In the non-oil economy, on the other hand, the evidence of twin-deficit disappears. This evidence is also reported in the counter-cyclical fiscal countries. Results from pro-cyclical fiscal countries indicated the total opposite, revealing the existence of twin-deficit in the non-oil economy, while this evidence does not occur in the total economy. The indisputable conclusion is that oil dominance continues to blur the existence of twin deficits among the oil-exporting countries.     

Structural transformation and the oil price

What part of the high oil price can be explained by structural transformation in the developing world? Will continued structural transformation in these countries result in a permanently higher oil price? To address these issues I identify an inverted-U shaped relationship in the data between aggregate oil intensity and the extent of structural transformation: countries in the middle stages of transition spend the highest fraction of their income on oil. I construct and calibrate a multi-sector, multi-country, general equilibrium growth model that accounts for this fact by generating an endogenously falling aggregate elasticity of substitution between oil and non-oil inputs. The model is used to measure and isolate the impact of changing sectoral composition in the developing world on global oil demand and the oil price in the OECD. I find that structural transformation in non-OECD countries accounts for up to 53% of the oil price increase in the OECD between 1970 and 2010. However, the impact of structural transformation is temporary. Continued structural transformation induces falling oil intensity and an easing of the upward pressure on the oil price. Since a standard one-sector growth model misses this non-linearity, to understand the impact of growth on the oil price, it is necessary to take a more disaggregated view than is standard in macroeconomics.     

Asymmetric impacts of insurance premiums on the non-oil GDP: some new empirical evidence

ABSTRACT

In this paper, we study the influence of insurance premium on the non-oil gross domestic product in Saudi Arabia. We implement the nonlinear autoregressive distributed lags. The results show that the relationships between insurance premiums and non-oil gross domestic product manifest a nonlinear behaviour. In other words, insurance premiums via positive and negative shocks lead to an increase of growth in the non-oil sector in the long term, whereas the lagged level shocks negatively affect the non-oil GDP in the short run. In addition, the examination of the multiplier effect suggests that positive cumulative changes in insurance premiums and inflation can effect much larger changes in non-oil GDP, while shocks in government spending have a symmetric effect on non-oil GDP growth.     

OPTIMAL FOREIGN BORROWING REVISITED

Foreign capital has become increasingly important in financing investment and growth in developing countries. Foreign capital flows, however, can be volatile as is evident from the recent financial crises. It has also recently been noted by researchers that there is little systematic empirical evidence that foreign capital contributes to the economic growth of developing countries. In this context, this paper attempts to theoretically reevaluate the borrowing behaviour of a developing economy that relies on foreign borrowing for its capital formation. In particular, this paper investigates the implications of different lending policies of international financial institutions. It is found that no matter whether the borrowing interest rate increases with the level of foreign debt per capita or with the foreign‐capital/total‐capital ratio, the economy always moves toward the stationary state. The result holds even when the representative agent regards the interest rate given as constant. This implies that foreign borrowing does help economic growth, irrespective of lending policies of international financial institutions.     

Corruption and natural resource rents: evidence from quantile regression

This study examines the impacts of oil rents on corruption for 157 countries. While existing studies have primarily focused on average effects, we employ quantile regression to estimate the effects of natural resource abundance for different corruption levels. We consider the effects of natural resource rents, mainly oil rents and then compare them with those of total and non-oil natural resources rents. The estimation results show that, generally, more oil rents increase corruption. Specifically, impacts are larger in countries with an intermediate level of corruption and smaller in highly corrupt countries. While total resource rents increase corruption significantly, non-oil resource rents do not. This may be due to non-oil resource rent management (mainly inland) being more subject to public scrutiny. Non-oil natural resources are concentrated in the less-developed sub-Saharan African countries, where corruption is prevalent; therefore, the impacts of natural resource rents are unremarkable.     

Export surges

How can developing countries stimulate and sustain strong export growth? To answer this question, we examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least 7 years. We find that export surges in developing countries tend to be preceded by a large real depreciation, which leaves the exchange rate significantly undervalued. In contrast, in developed countries, the role of the exchange rate is less pronounced. We examine why the exchange rate is important in developing countries and find that the depreciation is associated with a significant reallocation of resources in the export sector. In particular, depreciation stimulates entry into new export products and new markets. These new exports are important, accounting for over 40% of export growth on average during the surge in developing countries. We argue that a large real depreciation induces firms to expand the product and market space for exports.     

Does monetary policy credibility mitigate the fear of floating?

Based on the argument that monetary policy credibility can reduce the fear of floating, we analyze this hypothesis for a set of 47 countries (of which, 32 are developing countries, 26 are Inflation Targeting countries and 16 are Inflation Targeting developing countries). Our study is the first to empirically assess the impact of monetary policy credibility (defined as the central bank's ability to anchor inflation expectations to the target) on the central banks' reaction through the basic interest rate due to exchange rate fluctuations (fear of floating). Based on panel data methodology applied to different samples, the most important result of this paper is that monetary policy credibility is able to mitigate the fear of floating. However, this effect is weaker after the crisis. Our estimates also reveal that Inflation Targeting developing countries present stronger fear of floating, which is justified by the fear of inflation in these countries.     

The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform 1980–1998

I document in this paper a puzzle thathas not received previous attention in the literature. In 1980–98,median per capita income growth in developing countries was 0.0percent, as compared to 2.5 percent in 1960–79. Yet I documentin this paper that variables that are standard in growth regressions—policieslike financial depth and real overvaluation, and initial conditionslike health, education, fertility, and infrastructure generallyimproved from 1960–79 to 1980–98. Developing countrygrowth should have increased instead of decreased according tothe standard growth regression determinants of growth. The stagnationseems to represent a disappointing outcome to the movement towardsthe ``Washington Consensus' by developing countries. I speculatethat worldwide factors like the increase in world interest rates,the increased debt burden of developing countries, the growthslowdown in the industrial world, and skill-biased technicalchange may have contributed to the developing countries' stagnation,although I am not able to establish decisive evidence for thesehypotheses. I also document that many growth regressions aremis-specified in a way similar to the Jones (1995) critique thata stationary variable (growth) is being regressed on non-stationaryvariables like policies and initial conditions. It may be thatthe 1960–1979 period was the unusual period for LDC growth,and the 1980–98 stagnation of poor countries representsa return to the historical pattern of divergence between richand poor countries.     

Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia

We investigate the effect of financial development on economic growth in the context of Saudi Arabia, an oil-rich economy. In doing so, we distinguish between the effects of financial development on the oil and non-oil sectors of the economy. Using the Autoregressive Distributed Lag (ARDL) Bounds test technique, we find that financial development has a positive impact on the growth of the non-oil sector. In contrast, its impact on the oil-sector growth and total GDP growth is either negative or insignificant. This suggests that the relationship between financial development and growth may be fundamentally different in resource-dominated economies.     

Is there an ‘interest rate – speculation’ relationship? Evidence from G7 in the pre- and post-2008 crisis

The article revisits the IS-LM macroeconomic model by incorporating speculation into the investment function. The discussion is supported empirically by using data from the G7 countries to examine the different interest rate regimes in the pre- and post-2008 financial crisis. The estimation of an ‘anchor’ interest rate provides a reference rate for the G7 countries. The empirical study is extended to examine if the three quantitative easing (QE) episodes in the U.S. are growth promoting. The article concludes that the maintenance of a high and stable interest rate policy is needed for sustainable growth in the G7 countries.     

Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective

We test the relationship between the current account and fiscal policy for a group of small open developing economies with fixed exchange rates some of which are oil exporters. Specifically, we test the viewpoint of a Ricardian infinite-horizon representative agent model in which lower public savings are met by equal increases in private savings, and as a result the current account does not respond to the changes in government spending, against a Keynesian’s conventional viewpoint in which a fall in public savings has an adverse effect on the current account balance. Unlike the evidence from flexible exchange rate economies provided by many authors such as Rosensweig and Tallman (Econ Inq 31(4):580–594, 1993), Erceg et al. (Int Finance 8(3):363–397, 2005) and Saleh et al. (South Asia Econ J 6(2):221–239, 2005), the evidence from a panel data analysis and Granger-causality test of these fixed exchange-based countries supports the conventional theory of positive relationship between fiscal and external balances, with causality running from the former to the latter, in oil countries, whereas it supports the Ricardian view for non-oil countries.     

Financial reform and stabilization policy in a developing economy

Despite the long-run efficiency benefits that can be generated by a financial reform program, the authorities in developing countries are often reluctant to enact the required reforms because they fear that these programs will create short-run difficulties for important segments of the financial system. This paper argues that many of these difficulties can be avoided if financial reform is integrated with stabilization policy. The analysis focuses on the specific problem of how to remove nominal interest rate ceilings when complete interest rate decontrolwould lead to widespread bankruptcies amongst the firms in a major segment of the financial system. The optimal combination of stabilization policy and financial reform is shown to involve a mix of discrete and gradual changes in the rate of monetary growth and ceiling lending and depocit rates under either adaptive or rational expectations.     

International trade,economic growth and intellectual property rights: A panel data study of developed and developing countries

This paper examines the role of high-technology trade, IPRs and FDI in determining a country's rate of innovation and economic growth. The empirical analysis is conducted using a unique panel data set of 47 developed and developing countries from 1970 to 1990. The results suggest that: (1) high-technology imports are relevant in explaining domestic innovation both in developed and developing countries; (2) foreign technology has a stronger impact on per capita GDP growth than domestic technology; (3) IPRs affect the innovation rate, but this impact is more significant for developed countries; (4) the results regarding FDI are inconclusive.     

The exploration of economic crises: parameter uncertainty and predictive ability

Over a long horizon, this paper examines joint economic crises and determines the power of 49 variables in predicting such episodes. While incorporating dynamism in the prediction, we generate the predictive power of various specifications and model the uncertainty in the parameters of interest. The results reveal that growth of real gross domestic product per capita, regulation, bank non‐performing loans, interest rate and inflation rate are the most significant variables in predicting the joint economic crises. These variables predict economic crises with about 93% accuracy and can predict joint economic crises in developing countries and recent joint crises.     

International trade,economic growth and intellectual property rights: A panel data study of developed and developing countries

This paper examines the role of high-technology trade, IPRs and FDI in determining a country's rate of innovation and economic growth. The empirical analysis is conducted using a unique panel data set of 47 developed and developing countries from 1970 to 1990. The results suggest that: (1) high-technology imports are relevant in explaining domestic innovation both in developed and developing countries; (2) foreign technology has a stronger impact on per capita GDP growth than domestic technology; (3) IPRs affect the innovation rate, but this impact is more significant for developed countries; (4) the results regarding FDI are inconclusive.     

When does inflation hurt economic growth? Different nonlinearities for different economies

The effects of inflation on growth are shown to change substantially as the inflation rate rises. Moreover, the nonlinearities are quite different for industrial economies than for developing countries. Whereas it is often assumed that inflation does not significantly hurt growth in developing countries until the 20–40% range, we find that the threshold falls within single digits. Marginal growth costs for developing countries then decline significantly above 50% inflation. Failure to account for nonlinearity biases downward the estimated effects of inflation on growth. Mixing industrial and developing economies together also produces unreliable results.     

Exports,policy choices,and economic growth in developing countries after the 1973 oil shock

In a study of 43 developing countries in the 1973–78 period of external shocks, the author has shown that intercountry differences in the rate of economic growth are affected by differences in investment rates and by the rate of growth of the labor force, by the initial trade policy stance and by the adjustment policies applied, as well as by the level of economic development and the product composition of exports. The results show that the policies adopted have importantly influenced the rate of economic growth in developing countries. In particular, an outward-oriented policy stance at the beginning of the period and reliance on export promotion in response to these shocks, appear to have favorably affected growth performance. The results further indicate the possibilities for low-income countries to accelerate their economic growth through the application of modern technology in an appropriate policy framework as well as the advantages of relying on manufactured exports.     

The fallacy of composition and contractionary devaluations: output effects of real exchange rate shocks in semi-industrialised countries

This paper studies whether intra-developing country price competitionhas significant effects on the short-run growth of output indeveloping countries that are specialised in manufactured exports.Regression estimates using the generalised method of momentsapplied to annual panel data for 17 semi-industrialised countriesin 1983–2004 show that these countries exhibit a ‘fallacyof composition’, in the sense that a real depreciationrelative to competing developing country exporters increasesthe home country's growth rate at the expense of its competitors'growth. The results also suggest that real depreciations forthese developing countries relative to the industrialised countriesare contractionary.     

Democracy and Economic Growth: Optimal Level and Transmission Channels

After evening out all the benefits and costs, the overall optimal level of democracy is about 3.2, on a scale of 1 to 7. On average, fully dictatorial countries have a conditioned growth rate of –1.113 percent, fully democratic countries have a conditioned growth rate of 1.146 while countries with the optimal level of democracy/autocracy have a conditioned growth rate of 2.665. In the case of a fully dictatorial country, moving one unit towards democracy can raise the GDP growth rate by about 1.725 points; while for a fully democratic country, moving towards autocracy by one unit can raise the growth rate by about 0.885 points. This study provides useful information for many developing countries which are experiencing substantial pressures to restructure their political system.     

Public Debt,Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries

ABSTRACT

We investigate the causal relationship between public debt ratios and economic growth rates for 31 EU and OECD countries. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and the economic growth rate. We find no causal link from public debt to growth, irrespective of the levels of the public debt ratio. Rather, we find a causal relationship from growth to public debt. In high-debt countries, the direct negative impact of growth on public debt is enhanced by an increase in the long-term real interest rate, which in its turn decreases interest-sensitive demand and leads to a further increase in the public debt ratio.