Technology Choices and Growth

Report
Technology Choices and Growth:
Testing and Expanding the
propositions of New Structural
Economics
R. L. Bruno, E. Douarin, J. Korosteleva and S. Radosevic
Prepared for the Transition Economies Meets New Structural Economics
SSEES, UCL June 25-26, 2013
Outline
• Key objectives.
• Theoretical considerations.
– Development Strategies and Technology Choice: the New
Structural Economics (NSE) paradigm
• Data, Technology Choice Index (TCI) construction
and methodology.
• Financial sector distortions and TCI.
• Hypotheses Testing.
– Empirical results I: TCI and growth.
– Empirical results II: Financial sector inefficiencies, TCI, and
growth.
• Conclusions.
2
Key objectives
• We test the basic propositions of NSE, i.e. the
relationship between TCI and growth:
– We employ a larger sample of countries (164) over a
longer time span (1963-2009).
• We further expand this theory to transition
economics (TE) by testing whether key propositions
of NSE hold for the TE group, and its sub-groups,
namely Former Soviet Union (FSU) and Central
European Economies (CEE).
Are transition economies special?
• We examine the association between financial
sector distortions and TCI with further implications
3
for growth.
Development Strategies and Technology
Choice Index (TCI): the NSE paradigm
• Key propositions of NSE:
– Long term growth is feasible only in contexts where policies and
institutions are conducive to the development of sectors
consistent with the Comparative Advantage of a country: CAF
strategy (following).
– TCI is a valid proxy to capture whether a country follow a CAD
strategy, comparative advantage defying (vis-à-vis a CAF
strategy):
• Lin (2012): sample of 122 countries, time period including 1962-1999
(see also Lin 2003)
• On average, TCI is significantly negatively correlated with long-term
growth measured by GDP pc.
– TCI is expected to be highly correlated to financial distortions: the
4
higher the ‘structural’ distortion the higher the financial one.
How to compute the Technology Choice
Index (Lin 2012)
5
Technology Choice Index (cont.)
• What is TCI capturing?
– Higher TCI = more distortion, proxy for CAD strategy
– A context in which policies and institutions favour a capitalintensive manufacturing sector (raising value added in
manufacturing AVM, and lowering labour LM)
– This compares with other approaches in the literature:
• Lewis's two sectors development model (1954) (role of unlimited
supply of labour)
• Rostow’s stages of economic growth (1991) (V: from precondition to
take off…to beyond mass consumption)
• “Big push” idea, Rosenstein-Rodan (1943) (Eastern and S.E. Europe)
– Key point: the shift from low productivity primary production to
higher productivity manufacturing is a pivotal stage in the
development process of an economy. This is not always
successful, though.
6
TE meets NSE: an initial assessment
• On an intuitive level, one would expect the
countries of CEE and FSU to be primary example
of the negative relationship between CAD and
growth.
• During central planning: heavily distorted
economies with strong emphasis on capital
intensive manufacturing: surely a CAD!
• With transition, a progressive move towards more
liberal market economies (with a lot of variations
across countries though): surely a move towards a
CAF!
7
Figure 1: TCI2: the Manufacturing Sector
productivity in transition economies
Armenia
Azerbaijan
Belarus
Bosnia and Herzegovina
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Macedonia
Moldova
Poland
Romania
Russian Federation
Serbia
Slovakia
Slovenia
Tajikistan
Ukraine
0 2 4 6 8
0 2 4 6 8
0 2 4 6 8
TCI2
0 2 4 6 8
0 2 4 6 8
Albania
1960
1980
2000
2020 1960
1980
2000
2020 1960
1980
2000
2020 1960
1980
2000
2020 1960
1980
2000
2020
year_num
Graphs by Country
8
TCI and Financial sector distortions
• The CAD and CAF strategy cannot be assessed in
an institutional vacuum (Lin et al. 2011).
• A country adopting a CAD strategy will require
economic distortions introduced through substantial
government interventions on the economy
(“forced”).
• The development of financial structure is argued to
be endogenous to the government's growth strategy
with a CAD strategy being associated with a
financial structure deviating farther away from its
estimated optimal structure (Lin and Xu, 2012).
9
Measures of financial distortions
• Size vs. efficiency
• Financial structure distortions (size)
Size 1=
Size 2=
• Financial structure gap (Demirguc-Kunt et al. 2011)
• Estimate financial structure ratio based on sample of
OECD countries.
• Calculate sample-wide country-year residuals based on
the estimated regressions, and take the logarithm.
10
Measures of financial distortions
• Banking Inefficiency
– the net interest margin is equal to the value of a bank’s
net interest revenue as a share of its total earning assets.
– overhead cost is the value of a bank’s overhead costs as
share of its total assets.
Higher level of interest margins and overhead costs
indicate lower levels of banking efficiency (lower
competition).
11
Hypotheses
Type of relevance of
NSE propositions
Time relevance
Hypotheses
Relevance for
transition economies
•Transition economies differ from the rest of the sample: a negative
relationship between TCI and growth is less likely for them, but we expect
some differences across CEE and FSU with the TCI in the former being
positively related to growth, whereas TCI in the latter being negatively
associated with growth (think at the comparatively more advanced
manufacturing sector of CEE vis-a-vis FSU)
•Higher level of TCI is associated with a financial structure deviating farther
away from its estimated optimal level, but this effect differs across group of
countries.
•The financial sector inefficiencies should be strongly correlated to TCI in
highly distorted economies.
•The link between TCI and financial distortions is less pronounced in
transition countries, being more robust in FSU countries and less so in Central
and East European economies.
•The effect of TCI on growth is further reinforced via larger values of
deviation of the optimal financial structure from its actual one.
Financial distortions
•TCI is especially relevant prior to the 1980s but not for later periods in view
of decrease incidence of autonomous development strategies
•After 1980s we should observe lower level of TCI as effects of CAF strategies
and thus the relationship between TCI and growth should be weaker
12
Table 1: Estimating the effect of TCI2 on growth:
robust regression results
Dependent variable: growth rate of
the GDP pc (constant 2000 US$)
Ln TCI2
(1)
(2)
(3)
(4)
-0.008***
(0.002)
-0.002**
0.001
0.001**
(0.001)
0.001***
(0.000)
0.011*
(0.007)
-0.003
(0.003)
-
Ln TCI2_x_ CEE
-
-0.008***
(0.002)
-0.003***
0.001
0.001**
(0.001)
0.001***
(0.000)
0.013*
(0.007)
-0.003
(0.003)
0.015**
(0.007)
-
0.004
(0.003)
-0.040***
0.004
-0.025***
(0.006)
-.002***
(.001)
-
Ln TCI2_x_ TE
-0.007***
(0.002)
-0.003***
0.001
0.001**
(0.001)
0.001***
(0.000)
0.015**
(0.007)
-0.003
(0.003)
-
Ln TCI2_x_ FSU
-
-
0.035***
(0.013)
Yes
No
439
15.84***
0.034***
(0.013)
Yes
No
439
15.11***
0.017**
(0.007)
-.147*
(0.083)
0.031***
(0.012)
Yes
No
439
14.14***
0.032**
(0.014)
-.162**
(0.07)
.566***
(0.088)
Yes
Yes
439
10.90***
Ln_gdp_pc_(start decade)
Ln_Population Total _(start decade)
ln_axrateLCUperUS
Distance to equator
Landlocked
Constant
Time fixed effects (decade)
Country fixed effects
Observations
F-st.
-
Source: World Bank Financial Structure Dataset (2012), WB WDI 2012 edition; UNIDO
Note: *,**,*** denote significance on the 10, 5 and 1-percent level, respectively. Standard errors reported in parentheses.
13
TE meets TCI
• Unexpectedly low level of TCI before and at the
onset of transition: low level of distortions?
• Positive relationship between growth and TCI for
this sub-sample of countries, when TE are pooled
together.
• Quite puzzling!
• Variations in the relationship between TCI and
growth across CEE and FSU, though.
14
TCI2 in Highly Distorted Economies
Bolivia
Brazil
Burkina Faso
Burundi
Cameroon
Central African Republic
China
Côte d'Ivoire
Ecuador
El Salvador
Eritrea
Ethiopia
Gambia
Ghana
Iran
Kyrgyzstan
Lesotho
Malawi
Nicaragua
Niger
Nigeria
Papua New Guinea
Paraguay
Peru
Rwanda
Senegal
Somalia
Suriname
Syria
1020304050
1020304050
1960
Tanzania
Thailand
Uganda
1980
2000
2020 1960
1980
2000
2020
Zambia
1020304050
TCI2
1020304050
1020304050
1020304050
Benin
1960
1980
2000
2020 1960
1980
2000
2020 1960
1980
2000
2020 1960
1980
2000
2020
year
Graphs by Country_NUM
15
Table 2: Estimating the effect of TCI2 on growth. Highly-distorted
countries: robust regression results
Dependent variable: growth rate of the GDP pc (constant
2000 US$)
(1)
(2) Excluding potential
outliers
-0.004
(0.002)
-0.004
(0.003)
-0.001**
0.001
-0.001***
0.001
0.001
(0.001)
0.001
(0.001)
ln_xrateLCUperUS
0.003***
(0.000)
0.001***
(0.000)
Distance to equator
0.016**
(0.007)
0.015**
(0.007)
-0.001
(0.003)
-0.002
(0.003)
Ln TCI2
Ln_gdp_pc_(start decade)
Ln_Population Total _(start decade)
Landlocked
Ln TCI2_x_ HDD
Constant
-0.004**
(0.002)
-0.004*
(0.002)
0.036***
(0.013)
0.036***
(0.013)
Decade time fixed effects
Yes
Yes
Observations
439
429
14.75***
14.15***
F-st.
Source: World Bank Financial Structure Dataset (2012), WB WDI 2012 edition; UNIDO
Note: *,**,*** denote significance on the 10, 5 and 1-percent level, respectively. Standard errors reported in parentheses.
16
Highly Distorted Economies meet TCI
• Highly distorted economies seem to show a
behaviour fully predicted by the NSE.
• Negative relationship between growth and TCI for
this sub-sample of countries, when are pooled
together.
• Variations in the relationship between TCI and
growth across CEE and FSU, HDD.
• A non-monotonous relationship?
17
Financial structure gap and TCI: Empirical
Results
• The relationship between TCI and financial structure
gap differs across countries depending on the level of
TCI.
• Our results suggest that deviation from optimal
financial structure is only significant for relatively high
values of TCI2 (75th quantile) for our sample of
countries as a whole, and for the group of FSU
countries specifically.
• The positive relationship between TCI2 and distorted
financial structure is strongly and positively significant
for the group of Highly-distorted economies
regardless of the range of values for TCI2.
18
Table 3: TCI and Financial Structure Gap:
Simultaneous Quantile Regression
Quantile/ Dependent
variable: TCI2
Whole sample
Size1
Size2
Transition economies
Size1
Size2
CEE
Size1
Size2
FSU
Size1
25th
R-sq
50th
R-sq
75th
Rsq
Obs
-0.02**
(0.009)
-0.023***
0.08
-0.003
(0.011)
-0.007
(0.01)
.20
0.018**
(0.01)
0.015*
(0.008)
0.31
1233
0.31
1229
0.04
(0.04)
0.04
(0.05)
0.08
-0.01
(0.03)
-0.01
(0.03)
0.03
0.01
(0.017)
0.018
(0.02)
0.27
200
0.27
198
-0.01
(0.027)
0.001
(0.05)
0.003
-0.026
(0.039)
0.014
(0.05)
0.03
0.006
(0.034)
-0.01
(0.03)
0.12
159
.10
157
0.16***
(0.04)
0.09
(0.06)
0.51
41
.48
41
0.16***
(0.03)
0.14***
(0.03)
0.22
124
.22
124
0.08
0.08
0.002
0.035
0.22
00.07
(0.05)
(0.055)
Size2
0.001
0.22
0.029
(.5)
(0.064)
Highly-distorted economies
Size1
.20***
0.09
0.25***
(0.068)
(0.07)
Size2
.19**
0.06
.18**
(0.08) Dataset (2012), WB WDI 2012 edition;
(0.07) UNIDO .
Source: World Bank Financial Structure
.20
.20
0.02
0.31
0.30
0.19
.17
Note: *,**,*** denote significance on the 10, 5 and 1-percent level, respectively. Bootstrapped standard errors, clustered by country year reported in parentheses.
19 The
regression controls for the level of economic development proxied by ln of GDP pc at const 2000 US dollars. For reproducibility of the results we run 2000 replications with
seed set at 1001.
Banking sector inefficiencies and TCI
• There is positive association between bank inefficiency
and high values of TCI in the whole sample.
• Decrease in net interest margin and respectively
increase in the degree of competition in banking sector
has positive effect in Central and Eastern European
countries for reducing TCI, we fail to find any significant
results for FSU economies, though.
• Similarly, to financial structure results we get robust
results for the group of Highly-distorted economies,
suggesting that reduction in net interest margin, and
consequently increase in bank efficiency will facilitate a
move towards CAF strategy.
20
Table 4: TCI2 and Bank Inefficiency measures: Simultaneous Quantile
Regression results
Quantile/
Dependent
variable: TCI2
Whole economy
Overhead costs
NetIntMargin
25th
R-sq
50th
R-sq
75th
Rsq
Obs
-.13***
(0.02)
-0.03
(0.04)
.1
-0.08***
(0.03)
0.01
(0.03)
.23
0.000
(0.03)
0.09***
(0.032)
0.35
1246
.34
1269
.24***
(0.058)
0.005
(0.074)
0.03
0.19
(0.085)
0.01
(0.075)
0.31
233
.30
238
.26***
(0.07)
.23***
(0.07)
0.09
0.23***
(0.06)
0.23***
(0.065)
.16
172
.13
170
-.41
(.33)
-.33**
(.13)
.22
-.44
(.32)
.-25
(.20)
.28
172
.23
68
0.06**
(0.024)
0.35***
(0.06)
.28
0.03
(0.06)
0.28**
(.12)
.27
160
.29
162
Transition economies
Overhead costs
0.07
(.1)
NetIntMargin
0.01
(.11)
CEE
Overhead costs
0.07
(0.08)
NetIntMargin
.18**
(0.08)
FSU
Overhead costs
-.43*
(.233)
NetIntmargin
-.27**
(.108)
Highly-distorted economies
Overhead costs
-0.02
(0.06)
NetIntMargin
0.32***
(0.09)
0.08
.14
.13
0.01
0.02
.21
.28
.19
.21
.21
.24
0.09
.27
.32
Source: World Bank Financial Structure Dataset (2012), WB WDI 2012 edition; UNIDO .
Note: *,**,*** denote significance on the 10, 5 and 1-percent level, respectively. Bootstrapped standard errors, clustered by country year reported in parentheses.
21 The
regression controls for the level of economic development proxied by ln of GDP pc at const 2000 US dollars. For reproducibility of the results we run 2000 replications with
seed set at 1001.
Growth, TCI and Financial Structure Gap
• Larger deviations in actual financial structure from
its optimal one further reinforce a negative effect
of TCI on growth.
22
Growth, TCI and Financial Structure Gap
Explanatory variables
Number obs.
F st.
Coefficient
-0.014**
(0.06)
-0.019**
(0.009)
-0.001
(0.004)
-0.005**
(0.002)
0.003
(0.006)
-0.016
(0.010)
0.007*
(0.002)
0.0001
(0.0001)
0.008
(0.007)
171
14.68
Pr>z AR(1) / Pr>z AR(2)
00.016/0.666
Hansen test of overid.
restrictions, Chi2
(Pr.>chi2)
.294
Ln_gdp_pc_start
Ln TCI
FinStr gap
Ln TCI_x_FinStr_gap
Landlocked
Legal origin UK
Ln Population Size
Natural Resources Exports
Private Credit to GDP
Note: SYS GMM regression results
Dependent variable: growth averaged over 5-year non-overlapping periods of time.
23
Conclusions I
• Our analysis confirms the negative relationship
between TCI and growth found by Lin (2012).
• These results also hold for the group of highly
distorted economies.
• However, we find that the NSE propositions cannot
be generalized to the overall group of transition
economies for which the relationship is positive.
• This positive relationship is due to two different subgroups. For CEE, the relationship between TCI2
and growth is positive while for the FSU is negative.
24
Conclusions II
• We also confirm that the positive relationship between
larger financial sector distortions and Technology Choice
Index, although this relationship is not homogeneous, and
it differs across different groups of countries depending
on the aspect of financial structure or financial sector
distortions we look at (size vs. efficiency)
• While controlling for potential endogeneity between
economic growth, TCI and financial sector distortions our
study also reveals that the negative effect of TCI on
growth is further reinforced by larger deviation in the
actual financial structure from its estimated optimal level.
25
Discussion I
• The Technology Choice index is very important
element of the development strategy of a country
• Also the Financial sector Distortion (size and/or
efficiency) is a key ingredient for a sustainable
development strategy.
26
Discussion II
• We discussed the relevance/adequacy of TCI as an
indicator of CAD/CAF strategy and/or distortion.
• In fact, the relationship between TCI/FinDist and
growth seems to be characterised by:
1. Non-monotonicity
2. Groups’ specific effects (CEE, FSU, HDD)
We are developing our research in this direction by
constructing a simultaneous estimation of the
TCI=f(FinDist)
Growth=f(TCI) =>
Growth=f(TCI(FinDist))
We are aware of important challenges for endogeneity
and selection.
27
THANK YOU
28

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