Question 1. On August 14, 1947 the Indian subcontinent, which was under British rule for nearly two centuries, was granted its independence. Two ceremonies were held for the two newly created countries: one on August 14 in Karachi, then capital of Pakistan one of the new countries; and another on August 15 in Delhi to celebrate the creation of India. Pakistan was made of two parts separated by India, West Pakistan and East Bengal. East Bengal became East Pakistan in 1955, but the arrangement of a two-part country physically separated by more than 1,000 miles left the Bengalis marginalized and dissatisfied. In 1971, East Pakistan declared independence from Pakistan and was renamed Bangladesh. Bangladesh, India and Pakistan make and interesting case for comparison of international finance and the role of institutions since they are relatively newly created states and share a common past. How have these countries performed since independence? Obtain data for the period 1980 – 2013 and:
a. Compare the path of economic growth using GDP, GDP growth, and GDP per capita.
b. Compare the evolution of Agriculture and Manufacture as components of GDP.
c. Compare the evolution of exports and imports over time, and the volatility of each. Explain the behavior of the trade balance from this behavior.
d. Analyze the evolution of exports and imports of the main commodity. Also, calculate the ratio of dependency of exports with respect to that commodity over time.
e. Analyze the path of net transfers in the current account.
f. Analyze the government participation in the economy.
g. Analyze nominal exchange rate behavior.
h. Analyze the indebtedness of the country as a percentage of GDP.
i. Run a regression considering the following variables and analysis:
Variables:
GDP per capita growth
Volatility of GDP
Gross fixed capital formation (% of GDP)
Savings as % of GDP
Labor force participation rate for population 15-64
Degree of openness of the economy [(Exports+Imports)/GDP]
Exports as % of GDP
FDI as a % of GDP
Inflation rate
Exchange rate
Volatility of the exchange rate
Dummy for exchange rate regime
Government expenditures as % of GDP
Regression analysis:
h.1 Estimate a OLS regression for each country where your dependent variable is GDP per capita growth, while the remaining variables are independent variables. Present your results in an organized table marking statistical significance on the standard way. Note: before running your regression plot variables and if you find structural breaks, create and include a dummy variable in your regression for each break. Pay especial attention to the behavior of exchange rates. Also, make sure you have tested and corrected any problems of autocorrelation, multicollinearity, and unit roots you may have in your data.
h.2 Interpret the results of your regression in an economic context for each country over time; and, in a comparison to the other economies (i.e. explain whether you found common patterns in the significance of a variable). Does the choice of exchange rate regime seem to influence the economic performance? Does the degree of openness of the economy appear as a positive influence for the economy? Are the main sources for economic growth domestic or foreign?
h.3 How would you explain the role of institutions in the economic performance of the these economies?
Question 2. Cooper (2008) and Fischer (2003) address the role of portfolio investment, capital investment, savings, and imbalances and the challenges of globalization. Do they agree in their assessment? How does the consideration of the demographics affect their recommendations? Do you think that the use of some type of capital controls would be beneficial for countries trying to integrate themselves into the global financial market? Philippon (2013) address the issue of growth of modern finance. How does his assessment concur or differ from the other authors?
Question 3. Hanson (2012) points out the rise of middle kingdom in recent years. What specific characteristics/behavior have allowed those countries to improve their economic performance? Would those economies be using strategies as the ones described in Bernstein, Lerner, and Schoar (2013)? Would you recommend those countries to use such strategies? Explain.
Question 4. China has been holding an undervalued exchange rate for some time now. Several years ago, in a testimony to Congress, former Federal Reserve chairman Bernanke played down what many consider a grave risk in any trade confrontation with Beijing “that China may decide to sell its huge holdings of U.S. Treasury bills. That could force up U.S. interest rates and add to the cost of borrowing by consumers and business…..U.S. capital markets are sufficiently large and liquid that the impact of such changes would be mostly transitory and could be managed.” (WSJ, 2-20-06).
Would understanding the rise of China as economic power as explained by Huang (2012) and Yang (2012) strengthen or weaken Bernanke’s argument? Explain.
Also, explain why the U.S. opposes an undervalued yuan, and identify the element of the balance of payment that becomes key under these circumstances. What is the role of credibility? What is the role of political selection and of corruption as explained by Besley (205) and Svensson (2005)? Explain. Is there any role on this debate for multilateral organizations such as the International Monetary Fund (IMF), and what such role would be? Explain.