Post on 15-Aug-2015
THE BRICS ECONOMIES: DISSIMILARITIES
AND COMMONALITIES
Roberto Castello Branco 1 João Victor Issler 1
Bruno Ricardo Delalibera 1
1FGV/EPGE and FGV Growth & Development
June 2015
THE BRICS: NOT JUST A FAD
I Large size
I China and the quest for global power
I High growth potential
I The dynamics of structural transformation
I From acronym to a formal group
2 / 14
THE CHINESE PREEMINENCE
I The fastest growing economy and the largest among theBRICS
I A heavy weight in the world economy
I #2 GDPI #1 exporter, #2 importer, #2 FDI recipientI #1 stock of international reserves, #2 largest exporter of
capitalI #1 manufacturer, #1 consumer of metals and energyI #1 producer of S&E graduates, #2 R&D investor, #2
producer of scienti�c papers
I But still well behind in the convergence path
3 / 14
THE CHINESE QUEST FOR GLOBAL
POWER
I Creation of new multilateral �nancial institutionsI NDB, SILK ROAD, AIIB
I Becoming a global investor
I FDI out�ows of US$ 580 billion � 2005/14I Japan x China: approaches to access natural resources
I Pursuing the status of global currency for the CNYI Bilateral currency swap agreementsI Gradual liberalization of capital mobilityI HKG as a major RMB o�shore market � Dim Sum bondsI SH-HKG connect
4 / 14
CHINA'S INITIATIVES IN GLOBAL
FINANCE: POTENTIAL ECONOMIC BENEFITS
I Extraction of seigniorage, low-cost debt issuance denominatedin the domestic currency, prestige
I Closer integration with global �nancial markets
I Diversi�cation of the foreign asset portfolio
I Diversi�cation of household asset portfolio away from realestate assets
I Exploitation of comparative advantages in infrastructurebuilding and standardized capital goods
5 / 14
COMMONALITIES AND DISSIMILARITIES
I The BRICS share many of the typical commonalities ofemerging market economies
I Simultaneously, heterogeneity stands out as a key feature
I Dissimilarities involve many dimensions, including the responseto the growth slowdown of the last four years
6 / 14
DISSIMILARITIES: DEMAND AND SUPPLY
STRUCTURE
I Brazil resembles the economic structure of a mature developedeconomy
I Its economy has been consumption-driven (84.9% of GDP)contrasting with China, where consumption's share is too low(48.2%)
I China has been investment-driven: investment to GDP ratio of49%, very high even by Asian standards, matched only bySingapore in the 80's
I Brazil's saving rate has been low enough to �nance itsinvestment/GDP ratio (18
I India: adopting a di�erent growth model, but investment toGDP ratio (33%) follows the experience of other fast growingAsian economies
7 / 14
DISSIMILARITIES: DEMAND AND SUPPLY
STRUCTURE
I China: an industrial economy (44% of GDP), manufacturingaccounts for 32% of aggregate supply
I Manufacturing share of GDP is lower than 20% in the otherBRICS, in line with EMs average
I Brazil and South Africa: large service sectors, approximately70% of GDP, large room to boost aggregate TFP
I Services in China: 43.2% of GDP
I High-skilled labor only 15.5%, lower than Brazil (23.3%) andIndia (25.0%), and much lower than Korea (51.4%)
8 / 14
DISSIMILARITIES:INTERNATIONAL TRADE
I Brazil is one of the world's most closed economies: goods andservices trade �ow only 28% of GDP. Not a player in theglobal supply chain
I Other BRICS are open to trade, average trade to GDP ratio of51%
I Brazil, Russia and South Africa large commodity exporters
I China and India large commodity importers
I China: large exporter of manufactures (94%).
I India: large exporter of services (35%).
I China: #1 destination for Brazilian, Russian and SouthAfrican exports and #2 for Indian exports
9 / 14
DISSIMILARITIES: URBANIZATION
I Brazil: very urban, 85% of the population living in the cities
I China (54%) and India (32%) still face a long transition tourbanization
I This requires substantial investment in education, housing andinfrastructure. On the other hand, there is a signi�cantexpected TFP payo� through labor reallocation and di�usionof ideas
10 / 14
DISSIMILARITIES: DEMOGRAPHIC
TRANSITION
I India and South Africa have very young populations:demographic dividend is expected to last through 2040.
I China and Brazil are facing the prospects of an increasingdependency ratio very soon
I The Russian population, the oldest among the BRICS, hasalready started to decline, which adds another growthchallenge
11 / 14
STELLAR GROWTH RATES ARE GONE
I Chinese credit�fueled investment growth model has exhausted.TFP growth slowed down and total credit/GDP climbed to282% in 2014 from 158% in 2007
I Credit�fueled consumption growth employed by Brazil, Indiaand South Africa are also exhausted
I Brazil faces serious macroeconomic disequilibrium and TFP isstagnated
I India: the poorest of the BRICS � per capita GDP 8% of theUS, 69% of population living below the poverty line. Reformsstalled over the last ten years
I Russia: reversal of the privatizations of the 90's,institutionalized rent-seeking and the empire building mentalityis back
I South Africa: strong union activism, rigid labor and productmarkets, supply bottlenecks, legacies of the apartheid regime
12 / 14
CHINA'S REFORM AGENDA:
DELEVERAGING AND BETTER RESOURCE
ALLOCATION
I Anti�corruption campaign
I Fiscal reform of the provinces
I Restructuring of the SOE's
I Financial reform
I Lifting barriers to labor mobility
I Unblocking services activities to the private sector
I Deregulation
13 / 14
INDIA'S REFORM AGENDA: FIGHTING
POVERTY AND MISALLOCATION OF RESOURCES
I Anti-corruption campaign
I Aadhaar project
I Financial reform
I Elimination of subsidies
I Liberalization of the energy industry
I Investment in infrastructure
I Deregulation
I Relaxation of barriers to FDI in�ows
I Strengthening of intellectual property protection
14 / 14
BRICS: Testing for Commonalities using CommonFeatures
Bruno Delalibera (FGV), Roberto Castello Branco (FGV), Joao V.Issler (FGV)
June, 2015
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 1 / 16
Common Features – Basic Ideas
1 Series y1t has property A.
2 Series y2t has property A.
3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.
4 Cointegration is the most well-known example of common features.
5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16
Common Features – Basic Ideas
1 Series y1t has property A.
2 Series y2t has property A.
3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.
4 Cointegration is the most well-known example of common features.
5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16
Common Features – Basic Ideas
1 Series y1t has property A.
2 Series y2t has property A.
3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.
4 Cointegration is the most well-known example of common features.
5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16
Common Features – Basic Ideas
1 Series y1t has property A.
2 Series y2t has property A.
3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.
4 Cointegration is the most well-known example of common features.
5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16
Common Features – Basic Ideas
1 Series y1t has property A.
2 Series y2t has property A.
3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.
4 Cointegration is the most well-known example of common features.
5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16
Common Features – Basic Ideas
Engle and Kozicki (1993) main example.
1 No cointegration for log-levels of GDP for the U.S. and Canada.Instantaneous growth rates of GDP for the U.S. and Canada haveserial correlation and there is a linear combination of growth ratesthat is white noise. Cycles in U.S. and Canadian GDP growth aresynchronized.
2 This is our main finding between the growth rates of GDP for BRICScountries (also for Industrial Production).
3 Factor models and latent features:(∆ ln yUSt
∆ ln yCANt
)=
(λ1
)ft +
(εUSt
εCANt
), or,
∆ ln yUSt − λ∆ ln yCANt = εUSt − λεCANt ,(1 −λ
)is the cofeature vector, eliminating the SCCF.
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16
Common Features – Basic Ideas
Engle and Kozicki (1993) main example.
1 No cointegration for log-levels of GDP for the U.S. and Canada.Instantaneous growth rates of GDP for the U.S. and Canada haveserial correlation and there is a linear combination of growth ratesthat is white noise. Cycles in U.S. and Canadian GDP growth aresynchronized.
2 This is our main finding between the growth rates of GDP for BRICScountries (also for Industrial Production).
3 Factor models and latent features:(∆ ln yUSt
∆ ln yCANt
)=
(λ1
)ft +
(εUSt
εCANt
), or,
∆ ln yUSt − λ∆ ln yCANt = εUSt − λεCANt ,(1 −λ
)is the cofeature vector, eliminating the SCCF.
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16
Common Features – Basic Ideas
Engle and Kozicki (1993) main example.
1 No cointegration for log-levels of GDP for the U.S. and Canada.Instantaneous growth rates of GDP for the U.S. and Canada haveserial correlation and there is a linear combination of growth ratesthat is white noise. Cycles in U.S. and Canadian GDP growth aresynchronized.
2 This is our main finding between the growth rates of GDP for BRICScountries (also for Industrial Production).
3 Factor models and latent features:(∆ ln yUSt
∆ ln yCANt
)=
(λ1
)ft +
(εUSt
εCANt
), or,
∆ ln yUSt − λ∆ ln yCANt = εUSt − λεCANt ,(1 −λ
)is the cofeature vector, eliminating the SCCF.
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16
Common GDP Cycles – BRICS (no India)
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 4 / 16
Common Growth Cycles – BRICS (no India)
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 5 / 16
Common Features – VAR and VECM
Vahid and Engle (1993): VAR for yt , an n-vector of I (1) log GDP (or logIndustrial Production):
yt = Γ1yt−1 + . . . + Γpyt−p + εt . (1)
VECM:
∆ yt = Γ∗1 ∆ yt−1 + . . . + Γ∗p−1 ∆ yt−p+1 + γα′ yt−1 + εt . (2)
Normalized cofeature vectors:
α =
[Is
α∗(n−s)×s
]Quasi-structural model (restricted VECM):
[Is α∗′
0(n−s)×s
In−s
]∆ yt =
[0
s×(np+r )
Γ∗∗1 . . . Γ∗∗p−1 γ∗
] ∆ yt−1
...∆ yt−p+1
α′yt−1
+ vt . (3)
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 6 / 16
A GMM Test for Common Cycles
GMM approach: exploits the following moment restriction and testH0 :existence of s linearly independent SCCF:
0 = E
[Is α∗′
0(n−s)×s
In−s
]∆ yt−
[0
s×(np+r )
Γ∗∗1 . . . Γ∗∗p−1 γ∗
] ∆ yt−1
...∆ yt−p+1
α′yt−1
⊗ Zt−1
,
where the elements of Zt−1 are the instruments comprising past series:α′yt−1, ∆ yt−1, ∆ yt−2, · · · , ∆ yt−p+1. The test for common cycles is anover-identifying restriction test – the J test proposed by Hansen (1982).This test is robust to HSK of unknown form if it uses a White-correctionin its several forms.
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 7 / 16
Common-Cycle Tests (GDP)
GDP
Country Brazil China Russia South Africa
Brazil -China 0.70 -Russia 0.50 0.48 -South Africa 0.37 0.62 0.17 -
Table: Real GDP: P-Values of Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 8 / 16
Common Cycles in Industrial Production
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 9 / 16
Common Cycles in Industrial Production
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 10 / 16
Common Cycles in Industrial Production
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 11 / 16
Common-Cycle Tests (Ind. Production)
Industrial Production
Country Brazil China India Russia South Africa
Brazil -China 0.050 -India 0.022 0.066 -Russia 0.410 0.180 0.015 -South Africa 0.390 0.062 0.012 0.030 -
Table: Industrial Production: P-Values of Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 12 / 16
Common-Cycle Tests (Exports)
Exports
Country Brazil China India Russia South Africa
Brazil -China 0.004 -India 0.013 0.001 -Russia 0.002 0.005 0.000 -South Africa 0.002 0.001 0.002 0.000 -
Table: Exports: P-Values in Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 13 / 16
Common-Cycle Tests (Imports)
Imports
Country Brazil China India Russia South Africa
Brazil -China 0.002 -India 0.015 0.002 -Russia 0.210 0.019 0.003 -South Africa 0.001 0.001 0.370 0.003 -
Table: Imports: P-Values in Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 14 / 16
Common-Cycle Tests (BRICS and US)
BRICS and US
Country Industrial Production GDP
Brazil 0.09 0.22China 0.54 0.69India 0.62 -Russia 0.21 0.14South Africa 0.48 0.23
Table: BRICS and US: P-Values of Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 15 / 16
Common-Cycle Tests (BRICS and Euro)
BRICS and Euro zone
Country Industrial Production GDP
Brazil 0.057 0.293China 0.050 0.420India 0.011 -Russia 0.021 0.270South Africa 0.024 0.210
Table: BRICS and Euro zone: P-Values of Common-cycle tests – GMM based
B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 16 / 16