ESRI Discussion Paper Series No.

43

Vector Autoregressive Analysis of the Validity of the Two-gap Model for Nine Large Recipients of Japans ODA
by Michiko Yamashita and Anil Kumar Khachi

June 2003

Economic and Social Research Institute Cabinet Office Tokyo, Japan

Vector Autoregressive Analysis of the Validity of the Two-gap Model for Nine Large Recipients of Japans ODA

By

Michiko Yamashita* & Anil Kumar Khachi**

Economic and Social Research Institute Cabinet Office, Japanese Government

June 2003

Senior Economist, Economic and Social Research Institute: michiko.yamashita@mfs.cao.go.jp Former graduate student of the National Graduate Institute for Policy Studies (GRIPS), and intern in the Young Professional Program of the Economic and Social Research Institute (ESRI). The views expressed in this paper do not necessarily represent those of the ESRI, or of the Japanese government.
**

Abstract The purpose of this paper is to identify empirically the factors that have promoted or restrained the economic growth in developing countries, based on the well-known growth model called the two-gap model. The authors apply vector autoregressive (VAR) analysis to nine developing countries, to which Japan has liberally provided ODA over the past 30 years. The results of the empirical tests, however, do not give a straightforward answer to the effectiveness of the two-gap model. It reveals instead that the growth-promoting (restraining) factors vary across the countries, implying that each country requires its own development strategies. Chapter 1 of this paper briefly reviews the historical path of Japans ODA policies. Chapter 2 describes the theoretical framework and the empirical methodologies employed in the analysis. Chapter 3 presents the results of the empirical tests, and concludes its implications.

Contents Chapter 1 Historical evolution of Japans ODA 1.1 Overview of Japans ODA ...................................................1 1.2 Large recipients of Japans ODA .........................................4 1.3 Development paths of the recipients ....................................9 Chapter 2 Two-gap models and time-series analysis 2.1 Theories of development assistance ...................................15 2.2 Methods of empirical analysis............................................17 Chapter 3 Empirical VAR model analysis 3.1 VAR model specification ....................................................24 3.2 Unit root tests .....................................................................25 3.3 Granger causality tests ........................................................25 3.4 Impulse response analyses ..................................................25 3.5 Variance decompositions ....................................................25 3.6 Conclusions........................................................................26 References .............................................................................................39

Figures and tables

Figure Figure Figure Table Table Table Table

1-1 1-2 1-3 1-4 1-5 1-6 1-7

Annual ODA extended by Japan, US and Germany......................10 Official and private capital flows to developing countries............11 Official and private debts of developing countries................12 Large recipients of Japans ODA (1960-1999)..................13 Large recipients of Japans ODA (1970-1999)..............................13 Large recipients of Japans ODA (1980-1999)..............................13 Large recipients of Japans ODA (1990-1999)..............................14

Figure 2-1 Static trade model...........................................................................22 Figure 2-2 Two-gap model...............................................................................23 Table Table Table Figure 3-1 3-2 3-3 3-4 Development paths of major countries..........................................27 Unit roots tests...............................................................................29 Granger causality tests...........................................................30 Response of per capita GDP growth to one standard deviation impulses two standard errors...........................................31 Variance decomposition of per capita GDP growth.......................36

Table 3-5

Chapter 1. Historical Evolution of Japans ODA 1.1 Overview of Japans ODA Japans Official Development Assistance has expanded four-fold over a period of 15 years, from $3.8 billion in 1985 to its peak of $15.3 billion in 1999 (see Figure 1-1). The Japanese government eagerly increased official aid to dampen pressure from abroad to recycle its huge accumulated trade surplus, and to take commensurate responsibilities as an economic global superpower in the international development community. Due to the prolonged recession in Japan, however, the public sector has been facing financial difficulties. Japans ODA budget will reportedly be reduced by 9.4 percent for fiscal 2003, following the 11.9 percent cut in fiscal 2002. (1) Medium-term ODA Plans The Ministry of Foreign Affairs (MOFA) publicized the Sixth ODA 5-year plan in 1999, covering the period from 1999 through 2004, in which the necessity of gaining the understanding and support of the Japanese public for ODA was articulated. The plan emphasized that the government would 1) pursue and implement aid projects in a more appropriate, efficient, and effective manner; 2) honor its obligations of accountability to the national Diet and the public at large; and 3) coordinate ODA more closely with Japanese foreign policies and other policies pertaining to the national interest1. For the first time since 1977, the year the first ODA 5-year plan was announced, the plan did not declare the numerical targets of ODA to be attained during the period. 1st ODA plan (1978-1980) targeted to double the annual amount of ODA, from $1.4 billion per year to $2.8 billion per year at the end of the period. 2nd ODA plan (1981-1985) targeted to double the 5-year total amount of ODA, from $10.7 billion to $21.4 billion at the end of the period. 3rd ODA plan (1986-1992) targeted to double the annual amount of ODA, from $3.8 billion per year to $7.6 billion per year at the end of the period, resulting in a 7-year total amount of more than $40 billion. 4th ODA plan (1988-1992) targeted to double the 5-year total amount of ODA, from $25 billion to $50 billion at the end of the period. 5th ODA plan (1993-1997) targeted to 1) attain the 5-year total amount of ODA, ranging from $70 billion to $75 billion during the period, and 2) increase ODA grants and untied projects.

1 Japan's ODA Annual Report 1999, MOFA (Chapter 3, Section 1)

6th ODA plan (1999-2004) targeted to 1) narrow down and prioritize the focus of ODA projects, 2) encourage partnership with NGOs in execution of ODA projects, and 3) formulate nation-wise plans for facilitating the medium-term ODA guidelines.

(2) New Miyazawa Initiative The Ministry of Finance (MOF), on the other hand, publicized the New Miyazawa Initiative in 1998 to assist Asian countries in recovering from the damages inflicted by the financial crisis in 1997. The MOF announced that Japan would provide a package of support measures totaling $30 billion, of which $15 billion would be made available for medium- to long-term financial needs, and another $15 billion for short-term capital needs during the process of implementing economic reform2. The Initiative included the following assistance measures: The Japan Bank for International Cooperation (JBIC) would provide official financial assistance by extending ODA yen loans or trade finance to Asian countries, and by acquisition of the sovereign bonds issued by them. The JBIC would support Asian countries in raising funds from the international financial market by guaranteeing bank loans and bond issuance. Figure 1-2 shows that the private capital flows are dominating since 1995. The MOF would establish an Asian currency crisis support facility to provide interest subsidies to Asian countries that borrowed funds from JBIC or private banks, if loans were extended jointly with the Asian Development Bank (ADB). The JBIC would continue to provide co-financing with the World Bank and ADB to Asian countries to restructure corporate debts and restore stability in the financial market. The MOF would request the World Bank and ADB to provide technical assistance through Japan Special Funds to Asian countries that implemented a comprehensive approach to restore the financial system. The MOF would prepare short-term funds to Asian countries in the form of swap arrangements to facilitate trade finance and other needs in the course of their economic reforms program.

2 See the MOF website at http://www.mof.go.jp

(3) ODA Reform Proposals Debate on Japans ODA amongst experts in development assistance, business communities, journalists, NGOs, and civil society became vigorous after July 1998, when Prime Minister Obuchi ordered steps to be taken to improve the transparency and efficiency of ODA. Consequently, the Ministerial Council on External Economic Cooperation worked out some specific measures for that purpose, including formulation of a medium-term policy on ODA and country assistance programs for individual recipient countries. A series of proposals on ODA reforms were made public by the government consultative bodies thereafter: The Council on ODA Reforms for the 21st Century released its final report in January 1998, and recommended improved information disclosure, effective collaboration of the entire government, and promotion of organic interaction among the different schemes. The Council on External Economic Cooperation presented its own views on ODA reform in a report entitled Proposal for Further Promotion of Economic Cooperation in the Future in June 1998. The Special Committee on External Economic Cooperation of the Liberal Democratic Party released a proposal entitled Strategic Economic Cooperation for the 21st Century in July 1999, and recommended that the MOFA be assigned a pivotal role in ODA administration. Special emphasis was placed on political participation and strategic utilization of aid, as well as accountability to the public. The Committee on Oversight and Administration of the House of Councilors adopted a resolution on ODA in August 1999. It called on the government to formulate country assistance programs, prioritize aid programs, address environmental issues, expand human resources development, find and hire more specialists, collaborate with NGOs, improve evaluation systems, and enhance activities for publicity and disclosure. Prior to the administrative reform of the central government in January 2001, the Japan Export-Import Bank and the Overseas Economic Cooperation Fund were merged into the Japan Bank for International Cooperation in October 1999 to enhance the effectiveness of ODA and OOF funding. The Second Council on ODA Reforms presented its final report in March 2002, which emphasized the following points: 1) utilize Japans human resources and technology by finding/fostering development personnel and collaboration with NGOs; 2) prioritize and make ODA more effective by establishing a Board on

Comprehensive ODA Strategy that discusses basic policies and priorities of ODA projects, and serves as a catalyst to activate public discussions; 3) drastically improve the ODA implementation system by securing policy consistency, speedy and flexible responses, and ceaseless review of the projects. Following the proposal of the above committee on ODA reform, the MOFA established the Board on Comprehensive ODA Strategy in June 2002 to discuss comprehensive policies on ODA from strategic viewpoints. It set up task forces to review the ODA Charter adopted in 1992, and to formulate country assistance programs for Vietnam and Sri Lanka. In July 2002 the MOFA decided to sequentially implement 15 specific measures for ODA reform under the principle of implementing whatever possible in the following five areas: 1) auditing; 2) evaluation; 3) partnership with NGOs; 4) exploring/fostering/utilizing human resources; and 5) information disclosure and public relations. In December 2002 the MOFA announced that it would undertake three major changes in ODA policies and implementation: 1) review the ODA Charter to reflect the evolving international debates with such new concepts as sustainable development, poverty reduction, human security, and peace-building; 2) change the debt relief method from providing grant aid for debt relief to canceling official debts (see Figure 1-3), so that it reduces the burden on debtor countries; and 3) establish a committee for grant aid to enhance transparency in various stages of the project implementation.

1.2 Large Recipients of Japans ODA (1) 1960-1969 Japans ODA started as war reparations to a few Asian countries. Reparations totaling some $1.2 billion were initially paid in kind to Burma, the Philippines, Indonesia, and South Vietnam by way of industrial goods and construction services managed by Japans trading companies. Later, Laos, Cambodia, Thailand, Malaysia, Singapore, Korea, and Micronesia received a total of 245 billion in concessional and tied-yen loans, while China renounced its right to war reparations from Japan in 19783. The tied-yen loans promoted Japans manufacturing industries and supported its export promotion policy. Technical assistance started in 1954, when Japan participated in the Colombo Plan, and
3 International Development Journal (2003.1), p. 37.

sent engineers to joint-development projects being implemented in South and Southeast Asia in cooperation with 24 countries and the World Bank. The Overseas Technical Cooperation Agency (OTCA), which later became the Japan International Cooperation Agency (JICA) in 1974, was founded in 1964 to dispatch Japanese experts and engineers to developing countries, while receiving their officials and engineers for training in Japan. The first ODA yen loan of 18 billion yen was extended to India to finance a project under the Colombo Plan in 19584. The Overseas Economic Cooperation Fund (OECF) was founded in 1961 to extend yen loans to finance imports and development projects. Japan became a member of the Organization for Economic Cooperation and Development (OECD) in 1964, and was accepted as a donor country of the Development Assistance Committee (DAC) of OECD. Japan took the initiative for the creation of the Asian Development Bank (ADB), which was established in 1966. According to the creditors reporting system of the DAC, Japans ODA disbursement (net of repayment) in the 1960s amounted to $1.94 billion, approximately four percent of the world ODA total of $50 billion. Of the $1.94 billion of Japans total ODA in the 1960s, the share of yen loans was 53 percent, and that of grants including technical assistance was 47 percent. The six countries that received more than 10 percent of their total ODA from Japan in the 1960s are Bhutan, Indonesia, Korea, Myanmar, Philippines, and Taiwan (see the left side of Table 1-4). Japan continued to provide more than half of ODA received by Indonesia, Myanmar, and Philippines in the 1990s. (2) 1970-1979 The 1970s was an epochal era for Japans ODA, and helped to strengthen ties with the ASEAN countries. The oil crisis that broke out in 1973 and the subsequent rapid inflation of primary products in the international commodities market made it clear that the Japanese economy was fragile, and dependent on the oil-producing countries. This incident impressed Japanese policymakers with the importance of securing natural resources, and so-called diplomacy on resources started. Prime Minister Fukuda announced the Fukuda doctrine when he visited the five ASEAN countries and Burma in 1977, and promised to provide $10 billion for their joint development projects with Japan. Massive ODA was also extended by Japan to the oil-producing countries, especially to Iran and Iraq. The Japan Export-Import Bank provided loans to Japanese developers/

4 Komori (2002), p. 81.

producers/traders of natural resources to set up joint ventures in developing countries to develop/produce resources, and import products to Japan. Large-scale development projects, such as the Asahan aluminum project in Indonesia, the the Bandar-e Khomeini petrochemical project in Iran, and the Amazon aluminum project in Brazil were launched in the early 1970s, reinforcing public-private cooperation in the resource sector. The left side of Table 1-5 shows the countries which received more than 10 percent of their total ODA from Japan in the 1970s . China, Malaysia, Paraguay, Saudi Arabia, Singapore, Sri Lanka, and Thailand continued as large recipients of Japans ODA until the 1990s. In 1974, the Ministerial Meeting of the DAC adopted an agreement that stipulated that the procurement tenders for the projects of ODA loans be open to all countries. Following this agreement, Japan substantially raised its ratio of untied ODA yen loans. In 1978 the Japan-US Joint Declaration was concluded, in which Japan announced a policy that in principle all ODA loans would be untied5. This principle resulted in a rapid hike of the untied ratio of ODA loans, finally reaching 100 percent in 1980. Later, in 1992, the DAC adopted guidelines for procurement measures that stated that mutual surveillance be regulated in implementing projects of not only official loans but also of associated loans with private funds to secure transparency. (3) 1980-1989 Japans escalating trade surplus in the latter half of the 1980s brought pressure from abroad to recycle the surplus. The MOFA reformulated the medium-term ODA plan three times in 1981, 1985, and 1988, increasing the targets for ODA from $21.4 billion in five years to more than $50 billion in five years. The MOF announced in 1987 that Japan would recycle official funds of more that $30 billion in three years. In 1989 the MOF increased its target to $65 billion in five years. Japan achieved this target in 1992 by recycling $67.2 billion in official funds to developing countries. The previous decade had seen massive recycling of the oil dollars into the Latin American economies, but the rise in US interest rates saw a step decline in the private capital inflows. The crash in international commodity prices exacerbated the trade imbalance in a number of countries, and contributed to the serious debt problem in countries such as Mexico, Argentina, Brazil, Chile and Ecuador. Mexico was compelled to default on its international loan commitments in 1982, followed shortly thereafter by Brazil. The debt problems in Latin America were finally subdued when the US Treasury Secretary, Nicholas Brady, took leadership in persuading private banks

5 Kim (2002), p.79.

to reduce/cancel the loans to those countries, or exchange the loans for the stocks of the firms in debt, known as debt for stock swap. On the other hand, the IMF and the World Bank provided rescue loans to those countries with the condition that their governments should initiate structural reform policies by tightening fiscal expenditures, devaluating the currency, slashing wages, and opening up the goods market to activate the market mechanism to scale down the public sector. The structural reform policy taken by the IMF/WB, however, was criticized for subduing economies, and the drastic devaluation of the currencies actually increased the burden of paying back the dollar-denominated loans, rather than alleviate the pains of the debtor countries, as was planned. Japan extended bilateral ODA to rescue many of these debt-ridden countries, and increased its subscriptions and voluntary contributions to the multilateral development banks. Of the $65 billion of targeted official capital outflows, the MOF disbursed $23.5 billion as OOF, $12.5 billion as bilateral ODA, and $29 billion in contributions to the multilateral development institutions 6 . The left side of Table 1-6 shows the countries that received more than 10 percent of the total ODA from Japan in the 1980s. Most of them continued to do so in the 1990s. Brazil and Mongolia received more than 40 percent of their total ODA from Japan in the 1990s. (4) 1990-1999 According to revised DAC data, Japan was the largest ODA creditor from 1993 through 2000, reaching its peak of $15.3 billion in 1999. The share of Japans net ODA ($73 billion) in the DAC total ($414 billion) was 17.7 percent in the 1990s, whereas the share of ODA loans ($38 billion) was 32.3 percent, and that of ODA grants ($35 billion) was 11.9 percent. In addition to ODA, Japan provided $47 billion of net OOF (50 percent of the DAC total) in the 1990s, of which $8 billion was multilateral OOF. Meanwhile, Japans private capital flow to developing countries in the 1990s amounted to $87 billion, or 11 percent of DAC total private flows. After the break up of Soviet Union in 1991, countries in Central Asia and Eastern Europe were added to the list of eligible recipient countries of the DAC, while the newly industrialized economies in Asia (Korea, Taiwan, Singapore, and Hong Kong) were phased out from the list of recipients in the late 1990s. In 1995, the DAC adopted an agreement entitled Development Partnerships in the New Global Context, in which public-private partnership and ownership of the targeted country/group in

6 International Development Journal (January 2003), p. 49.

implementing the development aid programs was emphasized. This agreement initiated the reform of the official aid agencies and the measures of technical assistance worldwide. Public-private partnership promoted the participation of NGOs and civil society in implementation, monitoring, and evaluation of the ODA projects. NGOs are the major actors of technical assistance in many donor countries other than Japan. The MOFA set up small-scale subsidies to assist the development efforts of internal and external NGOs in 1989, and started regular consultation with internal NGOs in 1996. It also encouraged grassroots monitoring by the local NGOs, which work closely with the development project sites funded by official development assistance. The left side of Table 1-7 shows the countries that received more than 10 percent of the total ODA from Japan in the 1990s. Most of the countries in this table had received scarce amount of ODA from Japan in the 1960s through 1980s. It is perhaps indicative of the major role taken up by Japan in the field of ODA, especially when the US and the European countries scaled down their bilateral development assistance in South America and Africa after the end of the cold war. (5) 2000-present The international development community began to focus on poverty reduction as the main goal of development assistance after the financial crisis in 1997. The IMF/WB took the initiative to provide debt relief to the heavily indebted poor countries (HIPC Initiative) on the condition that the beneficiary countries would formulate poverty-reduction strategic plans (PRSP) under their guidance. The HIPC Initiative is considered by many to cast the largest burden on Japan, since the outstanding balance of ODA yen loans ($99 billion) amounts to nearly 37 percent of the total bilateral ODA loans ($270 billion) by all DAC donors at the end of 20007. Japan also made a commitment to subscribe to the HIPC fund for canceling the multilateral debts extended by the IMF, the World Bank, and other regional development banks. The Millennium Summit of the United Nations adopted the Millennium Development Goals (MDG) in June 2000, which targeted the reduction of poverty8 in half by 2015. The UN Conference on Financing for Development, held in March 2002, adopted the Monterrey Consensus as a development cooperation strategy in the 21st century, which emphasized the mobilization of domestic savings of, and the private capital inflows into, developing countries. Prime Minister Koizumi presented the Initiative for Global
7 Yamashita (2003), p.57 8 Poverty is defined as those who live on less than one US dollar a day

Sharing in August 2002 at the World Summit for Sustainable Development in Johannesburg, where he committed to education of personnel in developing countries who engage in such issues as environment protection and trade liberalization relating to the Doha Agreement of the WTO, adopted in November 2001. 1.3 Development Paths of the Recipients The right side of Tables 1-4 through 1-7 shows the relative ratios of the 10 year average of per capita real GDP (calculated in constant 1995 US$ price) in the 1960s through the 1980s to those of the 1990s being normalized as 1, whereas the column on the extreme right gives the average per capita real GDP of the 1990s in constant 1995 prices. The right side of Table 1-4 indicates that the economies of Myanmar and Philippines did not grow as fast as those of Indonesia, Korea, and Taiwan. Korea and Taiwan had similar rapid growth paths, almost doubling their income every decade. The economy of the Philippines, however, stalled in the 1990s. As seen in the right side of Table 1-5, China, Hong Kong, Malaysia, Singapore, and Thailand are all countries in East and Southeast Asia that grew as rapidly as Korea and Taiwan. Costa Rica, Mexico, Paraguay, and Sri Lanka however grew slowly. The growth was negligible in the 1980s in Costa Rica, and in the 1990s in Mexico and Paraguay, when the debt problems overwhelmed many countries in Latin America. In the oil-producing countries, such as Iran, Nigeria, Peru, and Saudi Arabia, the economic growth slowed significantly, as oil prices fell over the 1980s and 1990s. The per capita GDP of Iran and Saudi Arabia in the 1990s decreased by more than 30 percent compared to the 1970s. No country in Table 1-6 grew as fast as those in Table 1-4 or Table 1-5. Only Chile and Colombia showed steady growth from the 1960s through 1990s, though the growth in Chile stagnated in the 1990s, while it accelerated in Colombia. Bolivia did not see any appreciable growth over these 40 years. Kuwait and Zambia have significantly degenerated since 1960s. Other countries, such as Argentina, Bangladesh, Brazil, Fiji, Honduras, Kenya, Nepal, Pakistan, Syria, Turkey and Uruguay, grew slowly, and growth stagnated somewhat in the 1980s and 1990s. The countries that grew slowly but steadily in Table 1-7 are the Dominican Republic, India, Oman, Seychelles, and Swaziland. Central Africa, Ghana, and Venezuela declined, while most of the other countries stagnated. On the other hand, Dominica, Grenada, St. Lucia, St. Vincent, and Vietnam grew rapidly over the 1990s

Figure 1-1 Annual ODA extended by Japan, US and Germany

US$ 100million
180 160 140 120 100 80

Germany

Japan

US

145 132 114 87 94 96 91 73 56 32 38 32 43 28 38 29 38 44 47 101 91 90 77 63 49 91 117 110 112 113 101 99 76 75 106 94 76 94 69 59 88

153 135

91

100

82 71 58 36 32

81

69

70

68

60 40 20 0 80 81

56

55

50

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

(Source) Development Assistance Committee, OECD

10

Figure 1-2 Official and private capital flows to developing countries

ODA US$ billion 1800 1592 1600 1400 1200 1000 800 600 429 400 200 0 -200 (Source) Development Assistance Committee, OECD 82 32 3 1960 46 109 41 3 1965 65 148 70 11 1970 67 257 39 133 1975 403 50 262 1980 414 95 31 288 1985 1990 1995 -45 2000 545 715 730 99 86 99 745 OOF PF

1237 904

589

537

11

Figure 1-3 Official and private debts of developing countries

Bilateral OF US$ billion 2500 2061 2000 1668 1500 1181 834 1000 510 63 500 14 15 7 0 26 1970 156 49 33 18 56 1975 436 189 71 49 127 1980 412 92 108 222 1985 66 208 397 1990 236 290 346 569 534 669 Praivate Flows Muitilaternal OF Garanteed PF

573

512

1995

2000

(Source) World Bank, Global Development Finance 2001

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Table 1-4 Large recipients of Japans ODA (1960-1999)

Countries Bhutan Indonesia Korea Myanmar Philippines Taiwan
Share of Japan's ODA to total ODA (%) Real GDPP (1990s= 1) GDPP 1960-69 1970-79 1980-89 1990-99 1960-69 1970-79 1980-89 1990-99 25.0 4.4 12.6 25.9 --0.68 438 28.3 28.1 43.8 62.7 0.27 0.39 0.62 961 11.6 38.5 69.6 -0.15 0.29 0.52 10,250 65.9 46.9 46.7 58.9 0.67 0.74 0.93 2,361 49.9 40.4 49.2 51.8 0.74 0.92 1.02 1,061 11.7 232.0 14.9 19.4 0.14 0.28 0.54 12,538

Table 1-5 Large recipients of Japans ODA (1970-1999)

Countries China Costa Rica Hong Kong Iran Iraq Laos Malaysia Mexico Nigeria Paraguay Peru Saudi Arabia Singapore Sri Lanka Thailand
Share of Japan's ODA to total ODA (%) Real GDPP (1990s= 1) GDPP 1960-69 1970-79 1980-89 1990-99 1960-69 1970-79 1980-89 1990-99 0.0 15.3 41.0 39.3 0.18 0.24 0.45 555 0.1 10.9 1.9 18.3 0.59 0.81 0.83 3,410 1.1 15.7 11.1 36.6 0.20 0.37 0.67 21,546 1.2 73.5 -0.5 10.3 -1.32 0.91 1,485 0.6 52.1 36.4 -0.7 ----3.0 10.8 12.8 25.5 --0.77 376 7.2 48.7 55.9 38.8 0.28 0.43 0.64 4,043 1.8 22.9 35.2 0.0 0.58 0.78 0.96 3,338 0.1 10.7 33.5 6.2 0.85 1.19 0.95 257 0.2 13.3 50.7 48.3 0.53 0.72 0.99 1,814 0.3 13.4 9.6 26.7 1.00 1.17 1.13 2,141 0.0 12.4 39.9 41.5 0.74 1.38 1.22 6,940 5.5 33.4 33.6 81.0 0.14 0.32 0.56 26,521 7.4 10.7 20.7 31.9 0.43 0.54 0.73 693 8.9 36.8 57.5 30.8 0.22 0.35 0.54 2,539

Table 1-6 Large recipients of Japans ODA (1980-1999)

Share of Japan's ODA to total ODA (%) Real GDPP (1990s= 1) GDPP 1960-69 1970-79 1980-89 1990-99 1960-69 1970-79 1980-89 1990-99 Argentina -19.6 1.0 17.5 15.7 0.78 0.97 0.92 7,449 Bangladesh 0.0 9.5 16.2 13.0 0.74 0.68 0.80 315 Bolivia 0.1 7.1 14.4 11.4 1.00 1.09 0.97 898 Brazil 1.7 6.8 28.4 43.8 0.45 0.77 0.95 4,095 Chile 0.3 5.3 49.9 24.6 0.49 0.53 0.61 4,384 Colombia 0.5 0.7 13.4 12.6 0.52 0.70 0.84 2,289 Fiji 0.0 1.0 15.7 33.6 0.59 0.83 0.89 2,482 Honduras 0.0 2.9 10.3 13.2 0.78 0.93 0.99 702 Kenya 0.4 5.4 10.8 16.3 0.63 0.88 0.99 337 Kuwait -9.0 11.9 10.9 2.49 1.69 0.73 15,734 Mongolia 0.0 0.0 14.7 43.6 --1.17 409 Nepal 0.4 8.2 17.7 23.1 0.74 0.74 0.80 204 Pakistan 4.4 7.3 13.6 21.9 0.44 0.57 0.78 488 Qatar 0.0 4.3 28.8 36.2 ----Samoa 0.0 4.8 17.8 30.5 --0.98 940 Solomon Island 0.0 3.5 12.0 32.5 -0.60 0.85 821 Syria 0.2 0.1 28.0 27.7 0.49 0.73 0.92 1,120 Tonga 0.0 6.6 16.1 29.9 --0.89 1,577 Turkey 0.0 2.8 14.3 17.4 -0.66 0.78 2,839 Uruguay 0.1 0.9 13.1 16.0 0.67 0.75 0.82 5,712 Zambia 0.0 8.5 10.8 8.5 1.60 1.60 1.26 422

Countries

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Table 1-7 Large recipients of Japans ODA (1990-1999)

Share of Japan's ODA to total ODA (%) Real GDPP (1990s= 1) GDPP 1960-69 1970-79 1980-89 1990-99 1960-69 1970-79 1980-89 1990-99 Cambodia 5.5 5.0 0.6 18.9 ---268 Central Africa 0.0 0.6 3.6 12.2 1.32 1.36 1.19 336 Djibouti 0.0 0.1 1.4 11.6 ---863 Dominica 0.0 0.2 2.2 15.7 --0.71 3,089 Dominican Republic 0.1 0.4 8.0 24.3 0.46 0.72 0.88 1,565 Ecuador 0.2 9.8 8.8 14.3 0.53 0.81 0.98 1,531 El Salvador 0.3 8.6 0.1 11.5 0.95 1.11 0.86 1,592 Ghana 0.4 2.6 8.8 16.3 1.17 1.16 0.91 378 Grenada 0.0 0.1 0.4 17.0 --0.71 3,015 Guatemala 0.0 2.0 1.8 15.7 0.71 0.96 0.97 1,451 India 3.7 4.3 6.7 28.3 0.52 0.57 0.70 374 Jamaica 0.0 0.2 5.1 14.3 0.88 1.09 0.89 1,773 Jordan 0.1 0.5 2.3 26.8 -0.85 1.19 1,569 Mauritania 0.0 0.5 2.3 11.6 0.87 1.09 1.01 456 Oman 0.0 0.1 2.3 13.1 0.21 0.60 0.86 5,623 Panama 0.0 1.2 9.6 34.6 0.62 0.86 0.93 2,971 Papua New Guinea 0.0 0.5 4.1 11.1 0.67 0.91 0.84 1,010 Seychelles 0.0 0.0 3.0 10.5 0.38 0.55 0.71 6,873 St. Lucia 0.0 0.0 4.6 12.8 --0.60 3,792 St. Vincent 0.0 0.0 4.7 15.1 --0.69 2,388 Swaziland 0.0 0.4 1.5 11.9 -0.67 0.79 1,417 Vanuatu 0.0 0.0 4.7 14.4 --1.10 1,426 Venezuela 0.1 2.5 9.1 14.7 1.14 1.22 1.02 3,514 Vietnam 1.4 5.3 1.3 26.5 --0.69 271 Yemen 0.1 0.8 5.1 12.9 ---276

Countries

(Source) SNA data: World Development Indicators, World Bank Macro data: Global Development Network Growth Database, World Bank ODA data: Geographical Distribution of Financial Flows to Aid Recipients, OECD Financial data: International Financial Statistics, IMF Government data: Government Financail Statistics, IMF (Database) Development Assistance and Developing Economies Database Kokumin Keizai Kenkyuu Kyokai, http://www.kkri.org

14

Chapter 2. Two-gap Models and Time-series Analysis 2.1 Theories of Development Assistance Development assistance can be defined as capital and technology transfers provided by industrialized countries to developing countries for the purpose of improving the welfare of the latter. Various economic models have been designed to explain how these transfers would affect the macro economies of the recipient countries. Eaton (1989) carried out an exhaustive review of the various theories of development assistance and foreign capital flows. We introduce some of them briefly in this section. (1) Static Trade Models The World Development Report for 1985 discussed the reasons why official capital flows were essential for economic growth in the developing countries. They include: 1) information deficiency on the sovereign risks and investment opportunities in the developing countries; 2) long gestation period for investment as in social sectors such as education and civil works, deemed essential for development, would cause private capital to be undersupplied; 3) in compensating the private capital shortages, concessionary and long-term official capital flows would activate developing economies, and therefore 4) improve the welfare of the world as a whole. The static two-commodity two-country trade model presented by Ohlin (1929) can be used to discuss the transfer paradox. The income effect of capital transfers in the recipient country would deteriorate the recipients terms of trade to create the necessary trade surplus for the donor country (see Figure 2-1). The answer to whether this deterioration in the terms of trade would lead to a trade deficit, and whether it would have an immiserizing effect on the recipient country is complicated. Jones (1985) argued that it would depend on the countrys production technology and consumption tastes. Yano and Nugent (1999) created a theoretical model for 44 heavily-indebted countries that have tradable and non-tradable commodities, and conducted an empirical test on the hypothesis that capital transfers to a small country would increase the demand for, and consequently the production of, the non-tradable goods of the country. It would change the relative prices of commodities in favor of tradable goods, and thereby expand the trade deficit and lower the growth rate, causing the immiserizing effect on the recipient. Using data from 1970 to 1990, their test indicated that out of 44 countries, development assistance was positively related with the GDP growth rate in 20

15

countries, while it was negatively related in 24 countries, rendering the effects of assistance indeterminate. (2) Two-gap Models McKinnon (1964), Chenery and Strout (1966), Findlay (1973), and others applied the Harrod- Domar growth model to show that foreign capital can raise the growth rate by raising the availability of capital for production, where the capital-output ratio is held constant (see Figure 2-2). The two-gap approach introduces the assumption that an imported commodity not produced domestically is essential for the production of investment goods. If the availability of foreign exchange to purchase these imported capital goods constrains the growth of the economy9, the growth would be exogenous, since it depends on foreign investment goods and technology. Foreign capital can be introduced in the form of official flows, or foreign direct investment (FDI). On the other hand, if the above assumption does not hold, and the economy can domestically produce investment goods, then a shortage of domestic savings could be an essential constraint on growth. If the economy produces only enough consumption and investment goods to maintain the current production level, it does not save or grow. If the availability of foreign capital to compensate for the lack of domestic savings constraints the growth of the economy, we may call the growth endogenous, since the economy has technology and human resources of its own. The recent endogenous growth theory discussed by Lucas (1990), Romer (1990), and others asserts that knowledge or human capital accumulation drives a sustained growth of economy. Imaoka (1998) discussed that the Asian countries that have grown rapidly in the 1990s initially took an exogenous and export-led development path. Later, the foreign exchange earned by strong exports increased their domestic savings and changed their development pattern to fit in the endogenous growth path. Therefore, he insisted that the impacts of the foreign assistance be studied carefully, based on the individual microeconomic analysis, not by the prevalent cross-country data analysis. Ishii (2001) argued that though the World Bank and other regional development banks had provided enough foreign capital to developing countries for filling the two-gaps calculated by the Harrod-Domar model, none of them successfully attained endogenous growth. (3) Optimization Models Fukao (2000) formulated the performance of developing countries that maximize their welfare in analogy of a representative individual who maximizes the present value of
9 Eaton (1989), p. 1329.

16

utility from his life-time consumption u(c), along an optimal capital accumulation path in analogy of a representative firm that maximizes its net worth, under the condition that the countrys debt cannot exceed the present value of the firms life-time production. He used Solows production function f(k) with per capita human capital h included. Fukaos model suggests that, with capital-labor ratio k of a country measured by labor competence hL, so that k = K/hL, a smaller k implies a larger current account deficit for the country. The reason why this is so is because if h is large and therefore k is small, then rapid capital accumulation of the country leads to a prospect of large net production, thereby inducing a larger consumption level than the current production level, which leads a current account deficit. Recent discussion of social capital advocated by Putnam (1993) emphasizes that good social relationships, such as credibility, obedience to the rules, and networking, improve the efficiency of cooperative performance/activities of the society, and affect the growth of the economy. Knack and Keefer (1997) constructed a proxy of the social capital index for 29 countries, whereby they tested the correlation between the index and the growth rate of per capita GDP. They concluded that credibility improves labor productivity by affecting the quality of human capital. Their results, however, are not yet conclusive10. 2.2 Methods of Empirical Analysis (1) Cross-country Data Analyses In the Harrod-Domar model, where production technology and the capital-labor ratio are fixed, capital accumulation is essential for growth. In the neoclassical Solow-Swan model, on the other hand, the capital-labor ratio changes to accommodate technology innovation, which is the source of growth. Barro (1990) and others, who advocate the endogenous growth theory, assert that the government policies, such as open trade and education, could stipulate the countrys long-term growth rate. It has provoked many studies using cross-country empirical analysis 11. King and Levine (1993), for example, specified a regression model with such explanatory variables as 1) financial depth, represented by the ratio of bank deposits to GDP as a proxy of progress in financial intermediation, and 2) the level of education, represented by the enrollment ratio at the secondary education level as a proxy of human capital. Radelet, Sachs and Lee (1997) adopted the theory of conditional convergence in
10 Inaba (2002), pp. 17-23. 11 Shioji (2001), pp.43-45

17

identifying the factors responsible for differences in growth rates across countries, and conducted empirical analysis 12 using the cross country framework. The explanatory variables of their model were 1) output per worker in 1965 as an initial condition, 2) endowment of natural resources, 3) geographic characteristics, such as landlocked or tropics, 4) demographic characteristics, 5) education, and 6) government policies, such as openness and quality of institutions. Their results indicated that the rapid growth in East Asia could be mostly attributed to policy factors, and less to the initial conditions or the endowment of natural resources. Since the 1960s, the World Bank has also conducted empirical analyses using the cross-country data for developing countries to estimate the effects of development assistance that the Bank and other multilateral institutions, as well as bilateral donors, had provided. The Bank presented the impact of ODA on the growth of developing economies in its report Assessing Aid (1998), based on the cross-country data analysis done by Burnside and Dollar (1997). The report concluded with the result that a sustained increase of ODA by one percent of the recipients GDP has an impact of accelerating its growth rate by 0.5 percent, if the recipient employs good policy management in terms of macroeconomic stability, openness of the market, and governance in institutions. Kokumin Keizai Research Institute (KKRI), consigned by the former Economic Planning Agency of the Japanese government, repeated the above exercise done by Burnside and Dollar (1997) with more comprehensive data for 121 countries. KKRI (2000) concluded that good policy management had little effect on promoting the growth rate. In addition, it estimated the impacts of Japans yen loans on economic growth, and concluded that sustained extension of yen loans equivalent to one percent of the recipients GDP has an impact of accelerating its real per capita growth rate by 0.23 percent, while the total ODA extended by DAC countries other than yen loans has an impact of accelerating only by 0.03 percent. (2) General Equilibrium Model Analyses The Computable General Equilibrium (CGE) model provides a powerful tool for assessing effects of policy changes on the worldwide economy. The CGE model has a static optimization mechanism in that it instantly restores imbalance occurring in the relative prices of goods and factors of production. The Walrasian mechanism built in to the model ensures that demand and supply in the goods, labor and capital markets would be equalized through the adjustment processes induced by the relative price

12 Ishii (2001), pp.73-75

18

changes. The Global Trade Analysis Project (GTAP) of the US designed, and has been revising a workable CGE model open to economists and research institutes in the world. Kawasaki (2002) compared the impact of yen loans extended by Japan to six Asian countries by using the GTAP simulation model, with the impact of trade liberalization facilitated by Japans unilateral abolition of tariff/non-tariff barriers against the imports from those countries. It concluded that the impact on growth of recipients economies is larger in case yen loans are provided, while the impact on recipients utility is larger in case trade liberalization is facilitated. Yamashita (2003) tested the hypothesis of transfer paradox by using the GTAP model. The results of the simulation rejected transfer paradox, implying that the utility level of the capital recipients improves generally due to the quantity effects of the exports, in spite of the deterioration in the terms of trade. At the same time, the utility level of the donors improves, though to a lesser extent, due to the ameliorated terms of trade effects. It also tested the effects of technology transfers and unilateral tariff reductions to developing economies, and found the results favorable for the recipients. (3) Time-series Data Analyses13 Empirical analysis using time-series data requires that each variable xt is stationary, meaning that: 1) its mean E(xt) and variance V(xt) are constant over time t, and 2) the value of covariance Cov(xt, xt-k) between two time periods t and t-k depends only on the lag k and not on the actual time t at which the covariance is computed14. The problem of spurious regression is likely to arise, when two time-series exhibit both strong upward or downward trends. In this case the high R2 could be due to the presence of the trend, not due to any meaningful relationship between the two. It is know that if a time-series model includes one non-stationary variable, then the regression could be spurious, even though it exhibits a high R2 and significant t-values. a) Unit Root Tests Let us denote the stochastic error term by ut, which has zero mean, constant variance, and is not autocorrelated. Such an error term is called white noise. If xt = xt - xt-1 is stationary, where is the first-difference operator, the original series xt is called integrated of order 1, and denoted by I(1). In general, if a time series has to be differenced r times before it becomes stationary, it is integrated of order r, or I(r).

13 This section was written based on Gujarati (1995), Matsuura and McKenzie (2001), Wago and Ban (1995), and

Eviews Users Guide (1994).

14 Gujarati (1995), p.713

19

Consider the autoregressive model xt = xt-1+ ut, where ut is white noise. If =1, then xt is a non-stationary time-series known as a random walk, and we say that xt has a unit root. The model can be modified as xt = ( - 1) xt-1+ ut = xt-1+ ut, where = - 1. The unit root is tested for xt under the null hypothesis that = 0. More generally, the unit root is tested for xt under the null hypothesis that = 0 in the time series model xt = xt-1 + t + + ut, where t is a time trend, and is a drift parameter (intercept). If the error term ut is autocorrelated, then the model is modified to include more lags:
xt = xt-1 + i

x
i =1

t i

+ t + + ut ................................................... (1)

The number of lagged difference terms to include m is determined empirically by Akaike information criterion (AIC), or Schwarz criterion (SC). The unit root test for xt under the null hypothesis = 0 applied to the model (1) is called augmented Dickey-Fuller (ADF) test. We can effectively apply the Phillips-Perron (PP) test to the same model, when ut is autocorrelated. b) Vector Autoregressive (VAR) Models A reduced form of the autoregressive model with multi-variable time series is denoted as follows, where yt is a j vector of endogenous variables, xt is a k vector of exogenous variables, i and i are matrixes of coefficients to be estimated, and ut is a j vector of error terms or impulses in the language of VAR: yt =

i= 1

yt-i + i xt-i + + ut ......................................................... (2)

i= 1

Since VAR models do not distinguish the dependent variables from the independent variables, the notation of yt and xt is conventional. Under the assumption that ut is neither autocorrelated nor correlated with any of the right-hand side variables, we can appropriately estimate the coefficients by OLS. The number of lags m is again determined by Akaike information criterion (AIC), or Schwarz criterion (SC). c) Granger Causality Tests Consider the two-variable VAR model with m lags for simplicity: yt =

i= 1

yt-i + i xt-i + + ut....................................................... (3)

i= 1

We say that a time series xt Granger causes a time series yt, if lagged yt and lagged xt explain current yt. More specifically, if the null hypothesis i = 0 (for all i) is
20

rejected, then xt Granger causes yt. then xt does not Granger cause yt.

Conversely, if we cannot reject the null hypothesis,

The null hypothesis is tested by the F-value: F(m; n-2m-1) =

( RSSR USSR) / m USSR /(n 2m 1)
............................................. (4)

Here n is the number of observations, and n-2m-1 is the degree of freedom in estimating (3) by OLS. USSR is the sum of squared residuals unrestricted of the estimation, and RSSR represents the sum of squared residuals restricted by i = 0 (for all i) of the same estimation. This F-test is called Granger causality test. d) Impulse Response Analyses An impulse response function is created by converting the VAR model (2) to the vector moving average model of infinite order VMA( ). It traces the effects of one standard deviation shock to one of the impulses ut on current and future values of the endogenous variables yt in the converted form. The impulses are usually correlated, so that they have a common component which cannot be associated with a specific variable. A common method of dealing with this issue is to attribute all of the effects of any common component to one variable that comes first in the VMA( ) model. More technically, the error terms are orthogonalized by Cholesky decomposition, so that the covariance matrix of the resulting impulses is diagonal. While this method is widely used, it is rather arbitrary, and changing the Cholesky ordering of the variables could dramatically change the impulse responses. e) Variance Decompositions Variance decomposition provides a different method of depicting the system dynamics. It decomposes variation in a targeted endogenous variable yt into the component shocks to all endogenous variables in the VMA( ) model, and provides information about the relative importance of each random impulse ut to the targeted variable.

21

Figure 2-1

Static Trade Model

Good-2 Import of the recipient

Good-2 Import of the recipient Export of the donor

Offer curve of the donor

Production possibility set of the recipient

Offer curve of the recipient

Terms of trade (p 1/p 2)

Good-1 Export of the recipient

Terms of trade (p 1/p 2) *

Good-1 Export of the recipient Import of the donor

22

Figure2-2

Two-gap Model

Growth rate
Current account restraint (Import-export gap)

Savings restraint (Investment-saving gap)

sd (1 m ) ( + )

(m e )
(Note) s d : Domestic saving ratio

Capital transfer ratio to GDP

m : Ratio of imported production goods to GDP e : Ratio of exports to GDP : Capital output ratio of imported production goods : Capital-output ratio of domestic production goods
(Source) Williamson (1990), p.213

23

Chapter 3. Empirical VAR Model Analysis In conducting empirical tests using the VAR model, we have selected nine developing countries (given in Table 3-2) out of 14 countries listed in Table 3-1 as samples to be tested. These samples were chosen on the condition that the country has annual data of the real and current GDP, per capita real GDP (denoted as GDPP), total ODA received (net of repayment), real domestic investment (INVS), foreign direct investment (FDI), and real exports (E) and imports (M) from 1970 through 1999. Table 3-1 shows that the ratios of FDI and ODA to current GDP are very small, compared to the ratio of real domestic investment to real GDP. They could thus hardly work as the driving force of growth of per capita GDP. The growth rate of Latin American countries fell in the 1980s and 1990s, while in most Asian countries it accelerated during the same decades. The ratio of FDI to current GDP increased in all countries, while that of ODA decreased in most countries. Another important consideration for the sample country was that the first difference of the logarithm of per capita GDP, denoted as D(logGDPP) and implying the annual growth rate of per capita GDP, should be stationary. The data were collected by the Kokumin Keizai Research Institute (KKRI) commissioned by the Economic and Social Research Institute (ESRI) of the Cabinet Office in 2002. 3.1 VAR Model Specification

We conduct the VAR estimates based on the theoretical framework of the two-gap model discussed in Section 2.1(2). We concentrate on the performance of the variable logGDPP. All other variables in the estimates are the ratios to real GDP (INVSR, ER and MR), or the ratios to current GDP (ODAR and FDIR). The two-gap model argues that the economic growth is limited by two restraining factors: the current account (foreign exchange) restraint and the domestic savings restraint (see Figure 2-2). The foreign exchange restraint curbs the imports of capital goods and input materials, which are essential for the countrys investment and production. The domestic savings restraint curbs investment and imports. Exports are the main source of foreign exchange earnings. FDI is a long-term capital transfer to finance investment, while ODA is a concessionary capital transfer to finance imports, investment, or government consumption. Here, we introduce a variable GAIKA=ER+ODAR+FDIR to represent the foreign exchange restraint. Explanatory variables representing the savings restraint are the GDP ratios to investment INVSR and imports MR.

24

3.2 Unit Root Tests Table 3-2 presents the results of the unit root tests to check that the variables used in the VAR models are stationary. The unit roots were tested for the levels and the first differences of all variables by the Phillip-Perron test and the augmented Dicky-Fuller test with one-year lags. Most variables rejected the null hypotheses of being the unit roots for their first differences with 5 percent significance, while only a few variables rejected the hypothesis for their levels. Some variables passed the augmented Dicky-Fuller tests with lags longer than one year. 3.3 Granger Causality Tests Table 3-3 gives the results of the Granger causality tests using the above VAR models with varying lags from one to three. Only the cases that rejected the null hypothesis of causality with 10 percent significance are reported in the table. The variables that promote or curb economic growth differ from country to county. In Bangladesh, China, Indonesia, Malaysia, and Pakistan, INVSR is the factor that promotes (restrains) growth. The same factor is GAIKA in Thailand, and MR in Malaysia. GAIKA affects investment in Bangladesh, Peru, and Thailand, while it affects imports in China, Indonesia, and Thailand. Conversely, economic growth affects investment or imports in Bangladesh, Brazil, Indonesia, Malaysia, Pakistan, and Thailand. Since production is the source of domestic savings, growth could be an indirect factor of the savings restraint. Therefore, once a country takes off and attains high economic growth, it could resolve the savings restraint by itself, and ride on a sustainable development path, as Imaoka (1998) advocated. 3.4 Impulse Response Analyses Figure 3-4 presents the responses of D(logGDPP) to the impulses given by one standard deviations of the lagged explanatory variables D(logGDPP)-1, D(INVSR)-1, D(MR)-1, and D(GAIKA)-1. We placed D(logGDPP)-1 first in Cholesky ordering as the most influential explanatory variable, following the suggestion given by Sims (1980). However, the figures show that the impulses do not necessarily have positive or consistent impacts on economic growth across the countries. 3.5 Variance Decompositions

Table 3-5 presents the variance decomposition of the estimated error terms of D(logGDPP) responding to the impulses of the above explanatory variables. The decomposition shows the relative magnitude of impacts on growth of each impulse.
25

We verified that the changes in Cholesky ordering of explanatory variables other than D(logGDPP)-1 do not affect the results much. The results indicate that the dominant factors affecting the growth in per capita GDP vary from country to country. Aside from the growth in the previous year, investment is the primary factor in Bangladesh, China, Pakistan and Thailand. Similarly, imports are a prominent factor in Malaysia. Investment and imports are both influential in India, while investment, imports and foreign exchange are all influential factors in Peru. In Brazil, however, none of those seems to be a dominant factor. 3.6 Conclusions

We conducted various tests using the VAR model analysis to identify the factors that promote or restrain economic growth based on the two-gap model. The results of the Granger causality tests in Section 3.3 do not give clear evidence that domestic savings and foreign exchange are two restraining factors on growth across the countries. It shows, however, that once a country attains high economic growth, the country could resolve the savings restraint by itself, and lead to a sustainable growth path. The relaxation of the foreign exchange restraint, on the other hand, could promote investment and imports of the country, but it would not directly lead to higher growth. In China, for example, the prominent driving force is investment. However, an increase in foreign exchange promotes imports rather than investment. The results of the variance decomposition of growth in Section 3.5 reveal that the growth-promoting (restraining) factors vary across the countries, implying that each country requires its own development strategies.

26

Table 3-1 Development Path of Major Countries

Country Population Real GDP Year (millions) (US$ billion) Argentina 1960-69 22 129 1970-79 26 186 1980-89 31 205 1990-99 35 258 Bangladesh 1960-69 58 14 1970-79 76 16 1980-89 97 24 1990-99 119 38 Brazil 1960-69 83 161 1970-79 107 359 1980-89 134 549 1990-99 158 681 China 1960-69 715 70 1970-79 902 122 1980-89 1,047 263 1990-99 1,195 669 India 1960-69 483 95 1970-79 608 131 1980-89 759 201 1990-99 922 347 Indonesia 1960-69 104 27 1970-79 131 50 1980-89 162 98 1990-99 193 186 Korea 1960-69 28 43 1970-79 35 103 1980-89 40 216 1990-99 45 461 Real GDPP
(US$) Growth (%)

Ratio to Real GDP (%) Import Export Invest 4.7 3.8 4.6 9.9 7.6 8.0 10.2 14.7 5.3 7.6 5.0 8.2 -14.4 20.7 20.5 9.3 12.4 13.3 10.8 21.8 27.8 27.1 5.9 14.5 19.4 28.5 4.0 4.4 6.1 9.1 3.8 3.9 4.8 10.1 3.2 3.4 5.4 7.8 -14.2 20.0 23.3 -6.5 6.9 9.9 21.3 23.6 18.3 18.0 18.8 15.6 19.0 19.4 25.4 33.2 25.0 21.5 21.6 34.2 36.6 38.2 19.8 22.2 22.9 23.6 7.0 14.2 22.9 26.9 14.7 23.5 28.2 33.5

FDI -0.11 0.65 2.51 0.00 0.00 0.13 1.13 0.67 1.49 0.00 0.51 4.09 0.04 0.04 0.39 0.77 0.37 1.06

Ratio to Current GDP (%) Cur Acct ODA net ---3.09 -2.52 ---2.63 -0.51 --4.19 -2.02 -1.68 ---0.38 1.77 -0.73 -1.59 -1.27 ---3.15 -1.12 ---0.05 0.53 0.1 0.06 0.08 0.07 0.00 4.70 6.59 4.28 0.92 0.17 0.07 0.03 0.00 0.00 0.36 0.47 2.02 1.13 0.80 0.56 -2.86 1.17 1.11 6.36 1.63 0.07 -0.01

Debt -18.8 55.6 39.7 13.5 33.4 40.5 21.3 40.0 29.0

5,813 7,202 6,826 7,449 234 213 251 315 1,932 3,317 4,095 4,299 98 135 249 555 195 215 264 374 256 379 601 961 1,522 2,939 5,299 10,250

2.56 1.30 -2.19 3.19 1.24 -0.47 1.73 3.15 2.98 5.92 0.93 0.36 0.41 4.10 7.89 8.55 1.61 0.40 3.72 3.73 1.46 5.31 4.41 3.05 5.61 6.80 6.56 5.20

--

--

--

--

--

---

7.7 17.0 13.6 17.5 28.2 40.2 45.6 77.8 35.9 40.8 21.9

--

--

--

32.0 41.5 26.6 26.8 2.6 12.3 21.6 30.7

--

--

---

--

0.26 0.67

27

Population Real GDP Country Year (millions) (US$ billion) Malaysia 1960-69 9 11 1970-79 12 21 1980-89 16 40 1990-99 20 83 Mexico 1960-69 43 83 1970-79 58 154 1980-89 75 238 1990-99 90 302 Pakistan 1960-69 52 11 1970-79 70 20 1980-89 94 36 1990-99 121 59 Peru 1960-69 11 24 1970-79 15 38 1980-89 19 47 1990-99 23 50 Philippines 1960-69 32 25 1970-79 43 42 1980-89 54 58 1990-99 70 74 Thailand 1960-69 30 17 1970-79 41 37 1980-89 51 70 1990-99 59 150 Venezuela 1960-69 9 36 1970-79 13 54 1980-89 17 60 1990-99 22 76

Real GDPP
(US$) Growth (%)

Ratio to Real GDP (%) Import Export Invest 41.4 36.8 48.8 82.3 17.2 16.0 14.8 31.1 54.4 36.8 26.4 21.2 16.4 13.2 10.9 15.7 18.8 18.8 22.9 40.4 24.4 26.1 26.4 41.9 -21.7 20.4 21.2 45.8 44.6 52.5 87.1 6.9 7.1 14.7 27.5 14.0 11.5 12.2 15.4 13.1 9.8 9.9 13.1 17.0 15.5 22.4 33.6 14.4 16.8 23.0 40.0 -27.2 20.1 26.8 17.2 22.0 27.2 35.2 33.1 33.7 25.8 26.1 26.0 20.1 20.0 18.1 29.3 16.8 18.5 21.6 18.8 22.5 21.2 22.1 25.2 30.6 29.3 35.3 22.7 30.8 21.9 17.6

FDI -2.97 3.18 5.53 0.80 0.98 2.19 0.13 0.33 0.89 0.37 0.13 2.92 0.30 0.57 1.71 0.57 0.97 2.58

Ratio to Current GDP (%) Cur Acct ODA net -0.51 -2.87 -1.57 0.71 0.70 0.64 0.22 0.16 0.09 0.08 0.07 7.21 4.54 3.07 1.94 0.42 -0.77 1.29 0.97 0.84 1.24 1.63 1.77 1.07 0.84 1.07 0.60 0.15 0.04 0.04 0.06

Debt -19.4 56.2 45.2 -25.3 54.4 40.2 -47.5 39.9 49.7 50.8 76.5 64.9 -35.3 75.5 61.1 -15.6 36.2 57.3 -18.5 55.6 54.4

1,148 1,746 2,585 4,043 1,928 2,618 3,200 3,338 216 277 378 488 2,149 2,499 2,426 2,141 780 978 1,081 1,061 570 888 1,372 2,539 4,000 4,291 3,569 3,514

3.49 5.18 3.02 4.55 3.48 3.33 0.12 1.54 3.87 1.62 4.02 1.47 2.30 1.12 -1.90 1.50 1.85 3.06 -0.55 0.41 4.59 4.58 5.40 3.94 1.22 0.44 -2.69 0.02

--

---0.82 -3.72 ---2.78 -4.03 ---4.81 -5.22 ---3.56 -2.03 --4.93 -3.90 -2.80 -1.08 1.39 3.44

--

--

--

--

--0.37 0.16 2.60

28

Table 3-2 Unit Root Tests

Country Variable Bangladesh D(logGDPP) D(INVSR) D(MR) D(GAIKA) Brazil D(logGDPP) D(INVSR) D(MR) D(GAIKA) China D(logGDPP) D(INVSR) D(MR) D(GAIKA) India D(logGDPP) D(INVSR) D(MR) D(GAIKA) Indonesia D(logGDPP) D(INVSR) D(MR) D(GAIKA) Malaysia D(logGDPP) D(INVSR) D(MR) D(GAIKA) Pakistan D(logGDPP) D(INVSR) D(MR) D(GAIKA) Peru D(logGDPP) D(INVSR) D(MR) D(GAIKA) Thailand D(logGDPP) D(INVSR) D(MR) D(GAIKA) Phillip-Perrot Test Prob Adj R2 0.0001 0.0000 0.0000 0.0000 0.0011 0.0022 0.0005 0.0000 0.0027 0.0000 0.0003 0.0007 0.0000 0.0000 0.0000 0.0000 0.0007 0.0004 0.0032 0.0003 0.0003 0.0001 0.0004 0.0000 0.0002 0.0000 0.0004 0.0000 0.0019 0.0015 0.0016 0.0000 0.0069 0.0002 0.0000 0.0000
29

PP

Augmented Dicky-Fuller Test ADF Prob Adj R2 -8.938 -5.949 -4.318 -4.875 -2.735 -2.994 -2.614 -5.082 -2.784 -3.703 -4.127 -3.242 -4.591 -6.268 -2.650 -3.642 -2.238 -2.360** -3.028 -3.354 -3.108 -2.360* -3.413 -5.317 -3.597 -3.670 -5.956 -5.775 -3.527 -4.231 -3.083 -4.385 -3.115 -3.827 -3.814 -4.918 0.0000 0.0000 0.0003 0.0001 0.0118 0.0065 0.0155 0.0000 0.0105 0.0012 0.0004 0.0036 0.0001 0.0000 0.0143 0.0014 0.0350 0.0291** 0.0060 0.0028 0.0050 0.0280* 0.0024 0.0000 0.0015 0.0013 0.0000 0.0000 0.0015 0.0003 0.0052 0.0002 0.0049 0.0009 0.0009 0.0001 0.805 0.737 0.708 0.722 0.298 0.242 0.343 0.546 0.243 0.469 0.395 0.304 0.602 0.779 0.405 0.475 0.314 0.397 0.260 0.398 0.347 0.439 0.351 0.547 0.523 0.637 0.612 0.607 0.284 0.375 0.275 0.643 0.249 0.406 0.430 0.582

-4.755 -6.560 -8.537 -7.276 -3.631 -3.316 -3.964 -5.277 -3.267 -5.179 -4.183 -3.884 -6.690 -12.673 -4.924 -5.316 -3.864 -4.100 -3.263 -4.258 -4.235 -4.566 -4.090 -5.085 -4.309 -6.883 -4.079 -6.328 -3.385 -3.358 -3.528 -7.209 -2.894 -4.313 -5.143 -5.718

0.423 0.586 0.725 0.662 0.301 0.263 0.341 0.489 0.255 0.478 0.367 0.327 0.586 0.758 0.452 0.495 0.330 0.354 0.267 0.379 0.373 0.411 0.353 0.469 0.392 0.633 0.354 0.586 0.270 0.285 0.289 0.649 0.200 0.388 0.475 0.532

Note: *lags:2, **lags:3

Table 3-3 Granger Causality Tests

Country
Bangladesh

Null Hypothesis: D(logGDPP) does not Granger Cause D(GAIKA) D(GAIKA) does not Granger Cause D(INVSR) D(INVSR) does not Granger Cause D(GAIKA) D(INVSR) does not Granger Cause D(logGDPP) D(logGDPP) does not Granger Cause D(INVSR) D(MR) does not Granger Cause D(GAIKA) D(logGDPP) does not Granger Cause D(INVSR) D(INVSR) does not Granger Cause D(logGDPP) D(GAIKA) does not Granger Cause D(MR) D(logGDPP) does not Granger Cause D(MR) D(MR) does not Granger Cause D(INVSR) D(logGDPP) does not Granger Cause D(INVSR) D(logGDPP) does not Granger Cause D(MR) D(logGDPP) does not Granger Cause D(GAIKA) D(INVSR) does not Granger Cause D(MR) D(MR) does not Granger Cause D(INVSR) D(INVSR) does not Granger Cause D(GAIKA) D(GAIKA) does not Granger Cause D(MR) D(INVSR) does not Granger Cause D(logGDPP) D(logGDPP) does not Granger Cause D(INVSR) D(INVSR) does not Granger Cause D(logGDPP) D(MR) does not Granger Cause D(logGDPP) D(logGDPP) does not Granger Cause D(MR) D(logGDPP) does not Granger Cause D(INVSR) D(INVSR) does not Granger Cause D(logGDPP) D(INVSR) does not Granger Cause D(MR) D(GAIKA) does not Granger Cause D(INVSR) D(GAIKA) does not Granger Cause D(INVSR) D(GAIKA) does not Granger Cause D(logGDPP) D(logGDPP) does not Granger Cause D(MR) D(GAIKA) does not Granger Cause D(MR)

Lags Obs F-Stat

Prob 0.0121 0.0905 0.0428 0.0000 0.0750 0.0693 0.0573 0.0355 0.0436 0.0029 0.0314 0.0177 0.0000 0.0082 0.0001 0.0497 0.0110 0.0865 0.0557 0.0303 0.0575 0.0234 0.0379 0.0272 0.0454 0.0357 0.0888 0.0270 0.0021 0.0610 0.0099

1 1 1 2 2 2 1 1 1 2 2 1 1 1 1 2 2 2 3 2 3 3 1 2 3 1 3 1 2 3 3

27 7.36 27 3.11 27 4.58 26 18.19 26 2.94 26 3.04 28 28 28 27 27 3.97 4.94 4.52 7.71 4.07

Brazil China

India Indonesia

28 6.45 28 50.17 28 8.26 28 20.48 27 3.45 27 5.57 27 2.74 26 3.01 27 26 26 28 27 26 28 26 28 27 26 26 4.11 2.98 3.98 4.81 4.27 3.23 4.93 2.52 5.52 8.25 2.91 5.02

Malaysia

Pakistan

Peru Thailand

30

Figure 3-4 Response of per capita GDP to one S. D. Impulses 2 S. E.

Bangladesh Response of D(LOGGDPP) to D(LOGGDPP)
.03 .03

Response of D(LOGGDPP) to D(INVSR)

.02

.02

.01

.01

.00

.00

-.01

-.01

-.02 1 2 3 4 5 6 7 8 9 10

-.02 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(MR)

.03 .03

Response of D(LOGGDPP) to D(GAIKA)

.02

.02

.01

.01

.00

.00

-.01

-.01

-.02 1 2 3 4 5 6 7 8 9 10

-.02 1 2 3 4 5 6 7 8 9 10

Brazil Response of D(LOGGDPP) to D(LOGGDPP)

.06 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10 .06 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.06 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10 .06 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1

Response of D(LOGGDPP) to D(GAIKA)

10

31

China Response of D(LOGGDPP) to D(LOGGDPP)

.05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 1

Response of D(LOGGDPP) to D(GAIKA)

10

India Response of D(LOGGDPP) to D(LOGGDPP)

.05 .04 .03 .02 .01 .00 -.01 -.02 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.05 .04 .03 .02 .01 .00 -.01 -.02 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 1

Response of D(LOGGDPP) to D(GAIKA)

10

32

Indonesia Response of D(LOGGDPP) to D(LOGGDPP)

.12 .08 .04 .00 -.04 -.08 -.12 1 2 3 4 5 6 7 8 9 10 .12 .08 .04 .00 -.04 -.08 -.12 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.12 .08 .04 .00 -.04 -.08 -.12 1 2 3 4 5 6 7 8 9 10 .12 .08 .04 .00 -.04 -.08 -.12 1

Response of D(LOGGDPP) to D(GAIKA)

10

Malaysia Response of D(LOGGDPP) to D(LOGGDPP)

.05 .04 .03 .02 .01 .00 -.01 -.02 -.03 -.04 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 -.04 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.05 .04 .03 .02 .01 .00 -.01 -.02 -.03 -.04 1 2 3 4 5 6 7 8 9 10 .05 .04 .03 .02 .01 .00 -.01 -.02 -.03 -.04 1

Response of D(LOGGDPP) to D(GAIKA)

10

33

Pakistan Response of D(LOGGDPP) to D(LOGGDPP)

.03 .03

Response of D(LOGGDPP) to D(INVSR)

.02

.02

.01

.01

.00

.00

-.01

-.01

-.02 1 2 3 4 5 6 7 8 9 10

-.02 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(MR)

.03 .03

Response of D(LOGGDPP) to D(GAIKA)

.02

.02

.01

.01

.00

.00

-.01

-.01

-.02 1 2 3 4 5 6 7 8 9 10

-.02 1 2 3 4 5 6 7 8 9 10

Peru Response of D(LOGGDPP) to D(LOGGDPP)

.08 .06 .04 .02 .00 -.02 -.04 -.06 1 2 3 4 5 6 7 8 9 10 .08 .06 .04 .02 .00 -.02 -.04 -.06 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(INVSR)

Response of D(LOGGDPP) to D(MR)

.08 .06 .04 .02 .00 -.02 -.04 -.06 1 2 3 4 5 6 7 8 9 10 .08 .06 .04 .02 .00 -.02 -.04 -.06 1

Response of D(LOGGDPP) to D(GAIKA)

10

34

Thailand Response of D(LOGGDPP) to D(LOGGDPP)

.2 .2

Response of D(LOGGDPP) to D(INVSR)

.1

.1

.0

.0

-.1

-.1

-.2

-.2

-.3 1 2 3 4 5 6 7 8 9 10

-.3 1 2 3 4 5 6 7 8 9 10

Response of D(LOGGDPP) to D(MR)

.2 .2

Response of D(LOGGDPP) to D(GAIKA)

.1

.1

.0

.0

-.1

-.1

-.2

-.2

-.3 1 2 3 4 5 6 7 8 9 10

-.3 1 2 3 4 5 6 7 8 9 10

35

Table 3-5 Variance Decomposition of per capita GDP Growth Bangladesh Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.017 100.00 0.024 67.80 0.025 62.52 0.025 61.65 0.025 61.35 0.025 61.26 0.025 61.24 0.025 61.23 0.025 61.23 0.025 61.23 D(INVSR) 0.00 31.73 36.55 37.11 36.95 36.88 36.88 36.88 36.89 36.89 D(MR) D(GAIKA) 0.00 0.00 0.20 0.27 0.25 0.69 0.29 0.96 0.74 0.96 0.90 0.96 0.92 0.96 0.92 0.96 0.92 0.96 0.92 0.96

Brazil Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.043 100.00 0.046 97.02 0.049 95.91 0.050 94.72 0.050 92.70 0.050 92.07 0.050 92.04 0.050 91.97 0.050 91.91 0.050 91.87 D(INVSR) 0.00 0.13 0.18 0.20 0.32 0.33 0.36 0.36 0.37 0.37 D(MR) D(GAIKA) 0.00 0.00 0.03 2.82 0.82 3.09 0.87 4.21 2.87 4.11 3.30 4.31 3.29 4.30 3.29 4.37 3.35 4.37 3.38 4.38

China Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.033 100.00 0.039 91.54 0.041 87.02 0.042 85.88 0.042 85.77 0.042 85.93 0.043 85.74 0.043 85.58 0.043 85.57 0.043 85.58 D(INVSR) 0.00 8.14 7.82 8.38 8.30 8.20 8.34 8.37 8.37 8.36 D(MR) D(GAIKA) 0.00 0.00 0.09 0.23 2.67 2.49 3.02 2.73 2.98 2.95 2.91 2.95 2.94 2.98 3.01 3.04 3.01 3.04 3.01 3.05

Cholesky Ordering: D(LOGGDPP) D(INVSR) D(MR) D(GAIKA)

36

India Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.033 100.00 0.034 97.85 0.036 83.74 0.036 83.60 0.036 83.48 0.036 83.35 0.036 83.32 0.036 83.31 0.036 83.31 0.036 83.30 D(INVSR) 0.00 0.03 2.91 2.98 2.97 3.03 3.05 3.05 3.05 3.05 D(MR) D(GAIKA) 0.00 0.00 0.28 1.85 0.34 13.00 0.47 12.95 0.58 12.97 0.58 13.04 0.58 13.05 0.59 13.05 0.59 13.05 0.59 13.05

Indonesia Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.040 100.00 0.048 79.80 0.058 72.01 0.059 70.00 0.061 67.89 0.063 69.54 0.064 69.30 0.067 70.03 0.067 69.80 0.069 69.48 D(INVSR) 0.00 2.17 13.80 13.37 13.67 12.88 12.84 13.34 13.29 13.58 D(MR) D(GAIKA) 0.00 0.00 16.37 1.66 13.08 1.11 14.12 2.51 15.95 2.49 15.16 2.42 15.12 2.74 14.08 2.55 14.35 2.55 14.50 2.45

Malaysia Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.037 100.00 0.044 82.36 0.048 71.14 0.048 70.13 0.049 67.00 0.050 66.28 0.050 66.04 0.050 65.71 0.050 65.70 0.050 65.65 D(INVSR) 0.00 4.09 9.49 9.34 9.16 9.05 9.08 9.01 9.03 9.02 D(MR) D(GAIKA) 0.00 0.00 3.32 10.23 10.67 8.70 11.14 9.38 14.94 8.90 15.84 8.84 16.04 8.84 16.44 8.83 16.44 8.83 16.50 8.84

Cholesky Ordering: D(LOGGDPP) D(INVSR) D(MR) D(GAIKA)

37

Pakistan Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.018 100.00 0.019 92.30 0.020 91.82 0.023 66.90 0.025 62.51 0.026 57.77 0.027 56.88 0.027 58.04 0.027 56.75 0.027 56.50 D(INVSR) 0.00 5.52 6.09 29.33 30.05 35.23 34.89 33.92 34.92 35.15 Peru Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.055 100.00 0.063 80.77 0.069 70.06 0.074 61.77 0.076 60.33 0.079 54.96 0.081 52.63 0.083 51.27 0.084 51.50 0.084 51.32 D(INVSR) 0.00 0.01 7.67 12.22 11.72 16.72 19.63 20.78 20.67 20.73 D(MR) D(GAIKA) 0.00 0.00 10.47 8.75 9.32 12.95 8.33 17.69 10.49 17.46 12.40 15.92 11.95 15.80 11.78 16.17 11.86 15.97 11.97 15.98 D(MR) D(GAIKA) 0.00 0.00 1.27 0.91 1.23 0.86 1.40 2.37 4.78 2.66 4.42 2.58 5.13 3.10 5.00 3.04 5.25 3.07 5.28 3.06

Thailand Period 1 2 3 4 5 6 7 8 9 10 S.E. D(logGDPP) 0.033 100.00 0.039 91.54 0.041 87.02 0.042 85.88 0.042 85.77 0.042 85.93 0.043 85.74 0.043 85.58 0.043 85.57 0.043 85.58 D(INVSR) 0.00 8.14 7.82 8.38 8.30 8.20 8.34 8.37 8.37 8.36 D(MR) D(GAIKA) 0.00 0.00 0.09 0.23 2.67 2.49 3.02 2.73 2.98 2.95 2.91 2.95 2.94 2.98 3.01 3.04 3.01 3.04 3.01 3.05

Cholesky Ordering: D(LOGGDPP) D(INVSR) D(MR) D(GAIKA)

38

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