Global Trade Analysis Project Country Risk and Capital
Global Trade Analysis Project Country Risk and Capital Flows The case of South Africa by group no. 2
Global Trade Analysis Project Background • South Africa has undergone a great deal of political change • The implication were among a number of thinks a significant reduction in the country risk associated with investments in SA. • Implementation in the GTAP model: – standard model and GE closure – no need for swaps
Global Trade Analysis Project Implementation • Shock: • Estimate based on ‘real observations’ • Measure based on Deutchmark bond issues fell by 13. 5 per cent • We shock the cgdslack by this amount (13. 5 per cent)
Global Trade Analysis Project Model equations Expected rate of return rore(r) = rorg = cgdsslack Allocation of investments: rore(r) = rore(r) - RORFLEX*(ke(r)-kb(r))
Global Trade Analysis Project Results
Global Trade Analysis Project Results - demand for intermediates and factors • Derived direct demand from cap. good sector – Techmnfc – Svces • Factor market effects – factor intensities in expanding sectors – factor prices (+) • Supply prices (zero profits) • Trade effects (effects on other regions)
Global Trade Analysis Project Risk Premium decline: FTA among SA and Rest of Southern Africa • Pre-shock data FTA and Non-FTA • Post-shock data FTA and Non-FTA • Welfare effects on Rest of S. Africa
Global Trade Analysis Project Pre-shock trade flows RESTSA - SA (US$ m)
Global Trade Analysis Project Pre-shock inputs to capital goods industry, SA
Global Trade Analysis Project Post-shock: Welfare effects
Global Trade Analysis Project Post-shock: Increased Allocative Efficiency, Rest of Southern Africa Allocative effect 37 mtax - 47 Light manf Tech manf EU 21 25 ROW Tech manf Heavy manf Increased imports to RESTSAF from EU and ROW
Global Trade Analysis Project Small Group II Extension: • Effects of Changing RORFLEX parameter
Global Trade Analysis Project Introduction: The RORFLEX and The Rate of Return Approach The sensitivity of the RORFLEX Backward shock
Global Trade Analysis Project Investment depends on ‘expected’ rate of return in next period This rate declines as capital stock rises. . The rate at witch this decline is expected is a function of the flexibility parameter RORFLEX(r ) > 0 So RORE( r )=RORC( r)[KE( r ) / KB( r )] -RORFLEX( r )
Global Trade Analysis Project More about RORE( r). . ROR Flexibility(parameter) Expected rate of return End of period Capital stock RORE( r )=RORC( r)[KE( r ) / KB( r )] -RORFLEX( r ) Current period rate of return Beginning capital stock Thanks, to Soren and Rob
Global Trade Analysis Project Modeling risk • The global bank equalizes risk-adjusted rates of return, so that risk-adjusted rates for all regions are egal to some global average; • with: • RORE( r)= non risk-adjusted expected rate of return • RISK( r)= ratio of equilibruim returns in region r to the global average rate of return
Global Trade Analysis Project A risk premium We have RORE(r )/RISK( r)=RORG => RORE( r) = RISK( r) * RORG by total differentiation rore(r ) = rorg + risk( R) We have also rore(e)= rorg + cgdslack(s ) [equation 11’ , Hertel and Tsigas] so cgdslack(r )=risk(r ) ==> cgdslack is equivalent to the percentage change in the variable RISK We can refer to this, rather than risk
Global Trade Analysis Project RORFLEX …and regional investment changes • We assume that investors behave that changes in regional rates of return are equalized across regions; • the global rate of return changes by the same percent : • A small RORFLEX needs large changes in end of capital stock, KE(r ), to induce small changes in RORE(r ) • THEN – Low values of RORFLEX(r ) lead to big changes in regional investment – High value lead to small changes: ” In this case the supply of new capital goods is not very sensitive to changes in the expected return
Global Trade Analysis Project THE SENSITIVITY OF THE RORFLEX RORE=f [RISK(r)] RORFLEX Cgdslack(r ) -13% 5% 10% 20% d. K (Supply Capital)
Global Trade Analysis Project Impacts of RORFLEX Impacts on net capital inflow and welfare effects. Simulations: change value of RORFLEX Shock is always the same (cgdslack = -13. 5%) • RORFLEX = 10% (base run) • RORFLEX = 5% • RORFLEX = 20% RORFLEX is changed for all five regions.
Global Trade Analysis Project Net Capital Inflow
Global Trade Analysis Project Welfare Effects
Global Trade Analysis Project Backward shock Net Capital Inflow in SA 15’ 676 5’ 726 5‘ 02 7 -414 Time +13. 5% shock -13. 5%
Global Trade Analysis Project Why an Adjustment? Net Capital Inflow in SA 5’ 726 5‘ 02 7 5’ 44 1 -414 1’ 797 7’ 52 3 Time
Global Trade Analysis Project Possibilities of Adjustment Problem: Change of Investment is too big compared with the historical Values Possibilities: • Shock; Assumption is still the same (Shock cgdslack=+13. 5%) • RORFLEX; Increase of RORFLEX reduces Investment
Global Trade Analysis Project Calculated Value for RORFLEX 5’ 44 1 13. 25
Global Trade Analysis Project EXTENSIONAL SIMULATION GROUP 2 SINICHI YAMAGUCHI MANABU SHIMASAWA
Global Trade Analysis Project • How to shock ? SHOCK BASE SHOCK capital inflow into South Africa: negative shock to “cgdslack” cgdslack("safrica") = -13. 5 ADDITIONAL SHOCK technical progress at TECHMNFC & SVCES: positive shock to “ao” ao("TECHMNFC", "SAFRICA") = 1. 0 ao("SVCES", "SAFRICA") = 1. 0
Global Trade Analysis Project Initial effects induced by Tech change Capital inflow = Direct Investment Capital Stock increase Management resource ( know-how , hi-tech etc) increase Technical Progress Output increase (equation(35)(36)) Price fall (equation (6’))
Global Trade Analysis Project Welfare Decomposition (1) A : summarized welfare report
Global Trade Analysis Project Welfare Decomposition (2) C 1 : TECH decomp. Tech change C 11 : AO cont. output augm. tech change
Global Trade Analysis Project Market Price (pm) change % change
Global Trade Analysis Project BASE EXT Volume change in Endowments
Global Trade Analysis Project Export quantities change % change
Global Trade Analysis Project SOME CONCLUSIONS Additional impacts on “ao( , )” cause : • SVCES sector growth • endowments concentration to SVCES • Other sectors scale decrease • Total export decrease (more capital inflow)
Global Trade Analysis Project Endogenous capital stock Gregg Watts and A. Salazar Brandao
Global Trade Analysis Project Y Y’Y’ Y” Y’ YY Y K K’ K’ long run capital stock K
Global Trade Analysis Project Variable Original Endogenous Capital Stock Gross investment 36 US$ b 30 US$ b Depreciation Net Investment Capital Stock Rental price qgdp 19 US$ b 17 US$ b 0% 7. 6% 0. 6% 22 US$ b 8 US$ b 18% -8. 5% 6. 1%
Global Trade Analysis Project Original Bal. of Trade Endogenous Capital Stock -10 US$ b -1 US$ b Welfare 3 US$ b 8 US$ b cnt_tot +1. 9 US$ b -0. 3 US$ b pexport (share) 99% 100% ----------------------------------------Perc. changes Exports Extraction Hvymnfc Svces Price Qty. 3. 0 6. 3 7. 0 -13 -21 -18 -0. 2 -1. 6 -0. 8 +0. 7 +6. 4 +2. 2
Global Trade Analysis Project Perc. changes Original Price Qty. Endogenous Capital Stock Price Qty. Capital 8 0 -9 18 Land -12 0 15 0 Nat. Res, -13 0 6 0 Unsklab 8 0 4 0 Sklab 10 0 4 0 ----------------------------------------Agriculture 4. 9 -3. 9 -0. 4 +3. 3 Hvymnfc 6. 3 -8. 4 -1. 6 +7. 2 Svces 7. 0 +2. 7 -0. 8 +6. 0
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