Asian Countries as Capital Exporters:
Studies of Prospective International Capital Ownership Patterns
Across the Pacific at the Turn of the Century
In 1988, the current account surplus of Japan was and about 2.8 percent of its GNP. On the other hand, the current account 2.8 percent of its GNP. The bilateral current account surplus of the Japan had accumulated net assets equal to 292 bi11ion dollars (10.2 of its GNP), and the U.S. accumulated net liability equal to 532.5 of its GNP). These figures, along with their historical trends, clearly indicate that Japan is emerging as one of the major capital exporting countries and that the United States is shifting its position from capital exporter to capital importer. In the meantime, Taiwan is also transforming itself into a capital exporter (the current account surplus of Taiwan was or more than 8 percent of its GNP; the level of foreign reserves at ) We also expect that Korea will become a major capital exporter if it follows the pattern of Japan’s economic development in this respect as it has followed it in many other respects. The purpose of this study is to explain these trends in the current account and the accompanying capital movements by utilizing a growth theoretic frame work, and to predict probable patterns of international credit-debt of major countries in the future. The changing international credit-debt structure depends on the path of net excess savings over investment, which in turn depends on people’s consumption choice over time. In a world where capital movements are becoming more and more liberalized, what are the long-run consequences of cross-country differences in the saving ratio (1966a) applied neoclassical growth theory to this problem and derived a simple formula for the asymptotic debt-capital ratio of the country with the relatively smaller propensity to save in the world economy where capital moves freely. He also put forward a hypothesis on the determinants of capital movements that was tested on U.S.-Canadian data. This apparatus has also been applied to the recent large trade surplus (capital export) of Japan to the United States in Hamada and Iwata (1985). Here it was shown that after the deregulation of Japanese capital controls in 1980, capital movements took on similar patteins to those predicted by theoretical model. This exercise also bears a strong similarity to the analysis of inter-sectoral factor movements which was explored by Fei and Ranis (1964), and already applied to the Pacific Area (Fei, Ohkawa and Ranis, 1985). In this study we have attempted to extend this exercise to see how this growth the oretic approach can explain the past pattern of capital movements among countries on the globe. In order to analyze properly the determinants of capital movements and to forecast future capital ownership patterns, however, we must identify the historical trends in international capital movements in the past and the current state of the net capital flows as well as current credit-liability patterns. In order to diagnose and possibly to prescribe policy actions, one has to have the an atomy of the current situation. Accordingly, we have to construct a flow-of-funds table, both in terms of flows and outstanding stocks at the global level. This is a challenging task, but at the same time, an extremely difficult task. Difficulties stem from the un availability of the data, differences in statistical definitions between countries, ever-changing exchange rates, and from the politically sensitive nature of some of the data which impels governments and private institutions to restrict disseminations even Chapter 1 is the first step in constructing a consistent estimation of the world credit-debt structure in the past and present. We attempt to provide a global perspective on international capital ownership patterns. In Chapter 1 we had to be satisfied with a very rough bird’s-eye approximation of the regional components of the credit-debt structure among those countries like the United States, Japan, Germany, and the United Kingdom, where substantial data are After presenting a brief overview of the current account structure in the 1980s, we construct the world asset- and debt-matrix and examine its characteristics. Also, we derive the total and regional decomposition of the net asset-debt position of the United States, Japan and Germany; and by comparing them with the accumulated current account balances, we seek the relationship between the current account and the flow of funds captured by the net change of the external position. Also, we examine the regional decomposition of the foreign direct investment and portfolio investment of the United States and Japan. A striking result found in this paper is that though during the seven years between 1980 to 1987 Japan recorded a large current account surplus of 254 billion dollars vis-a-vis the United States, most of the flow of funds went, however, through EC in such a way that the United States increased its liability to EC by 323 billion dollars while it increased its liability to Japan only by 82 billion dollars. The re-evaluation problem can be a source of this discrepancy between the accumulated balance of payments and the change in the net credit position. The main reason for this discrepancy, however, could be explained as fo1lows: Suppose the payments of trade transactions between two countries are made through the third country, and international investments are also made in the same manner. Suppose a Japanese company exports goods to the United States and transfers the payment to its account in a British bank in London. Then, in the Japanese current account statistics, this transaction is recorded as an export to the United States; in the U.S. balance of payments as an import from Japan. In the capital account, however, it will be recorded as an increase in the net position of Japan towards the United Kingdom as well as a reduction in the net position of Unite States towards the This observation indicates the necessity of a comprehensive framework to analyze the global movements of capital. The profession already has theories of direct investments often based on methods of industrial organization and sometimes based on the microeconomic analysis of the foreign investment incentives to circumvent the protection effects of import tariffs and quotas; it has the theory of portfolio investment based on the international generalization of the capital market theory; also, the theory of short-term capital flows depending on the interest parity; finally, we have the theory of financial intermediation that explains layers of credit and liabilities consistent with the analysis of the savings investment conducted in this study. However, there seems to be hardly any comprehensive framework that integrates these theories of capital movements with the macroeconomic savings investment gap. In order to explain the international financial intermediation observed in this chapter, we have to develop an international theory of financial intermediation. This gives us an important but formidable task, which we hope to pursue Chapter 2 represents an extension of Chapter 1 and introduces data useful for constructing regional world asset and debt matrices for the two interesting parts of the world, the Asian New Industrializing Economies (NIEs) and the Heavily Indebted Latin American Countries (HILACs). Despite the lack of complete data for the regional distribution of external assets and debt, Chapter 2 gathers important data that are sufficient to draw a number of interesting conclusions. In part I of Chapter 2, we study the NIEs that are emerging as crucial countries in international capital movements in the Asian region. Taiwan and perhaps Korea are becoming major capital exporters, while Hong Kong and Singapore are now playing indisputably crucial roles as international financial centers. More specifically, the total external assets of Korea and Taiwan have grown tremendously in the 1980’s. Korea has moved from being a large to a small net debtor country, while Taiwan has become a large net asset country. Korea and Taiwan, under the government control. Accumulated most of their external assets in the form of foreign exchange reserves, but we expect an increase in foreign direct and portfolio investment by Korea and Taiwan in the Foreign direct investment has become a significant source of capital for Taiwan, Hong Kong, and Singapore. While the absolute amount of FDI entering Korea is significant, it nevertheless is small relative to the Korean borrowing from foreign creditors. Hong Kong and Singapore have become crucial financial intermediaries in the Asian region. Singapore’s ACU has grown remarkably over the course of the 1980’s; Hong Kong’s offshore banking center quickly caught up with Singapore in size after the creation of the Tokyo Offshore Market by Japan in Behind the scene, de-regulation and liberalization of international capital flows are in progress in the Asian region. For example, the growth of NIE securities markets, increasing access by foreigners to the Korean stock exchange, loosening of regulations on foreign direct investment, less government control on foreign currency holdings in Korea and Taiwan, and the creation of the TOM (Tokyo Offshore Market) by Japan are all examples of this important trend. , we focus on the thirteen most indebted countries of Chile, Columbia, Costa Rica, Ecuador, Honduras, Mexico, Nicaragua, Peru, Uruguay, and Venezuela. On the HILACs’ debt side, we find that their dependence on the U.S. has increased, especially to private creditors, while EEC lending to the them declined substantially, especially from private sources. Japanese lending to these countries increased during the 1980’s but remains small relative to the U.S. On the HILACs’ asset side we find that they have shown an increasingly strong preference for placing their assets in U.S. banks as opposed to U. K. and West German banks. The external assets of the HILACs have increased at a significant rate over the 1980’s, strongly suggesting that capital flight remains a significant problem in the Regarding foreign direct investment we find that FDI has been an important source of capital for the HILACs, but that this source has declined substantially relative to the debt over the course of the debt crisis and its aftermath. The most significant feature of the debt problems of the HILACs is the growing financial interconnection between the HILACs and both the public and private sector of the United States. The U.S. has become inextricably intertwined with the Latin American debt dilemma. While, on the face of it, stratagems like debt conversion and greater lending by the IMF, the World Bank, and the Japanese government are important steps towards alleviating the debt problems of the HILACs, it is important to consider as well the destabilizing effects of this third party intervention on the willingness of both the U. S. and the HILACs to continue to compromise on the debt problem. Chapter 3 studies the trends of current accounts and accompanying capital movements from a growth-theoretic perspective and attempts to predict the credit-debt structure among major industrialized countries (the United States, Japan and West Germany), at the turn of the twenty-first century. The past movements of national savings and investment may support the “habitat” view by Feldstein and Horioka that the supply of savings create investment where it is generated. Rapid increases in the United States foreign debt would imply, however, the relevance of the “traditional” view that capital moves so as to equate its rates of return. The difference in saving ratios among countries could lead to a serious consequence. The simulation exercises show that the ratio of external debt to capital stock in the United States will over the long run in the absence of the recovery of its savings ratio to the historical standard of the 1970s. The U.S. and Japan moves toward significant reduction in external imbalance after 1988. Now the current account surplus two countries in term of GNP reached at about 2 the bilateral U.S.-Japan current account balance still remains large and unchanged from 1988. It is likely to register about which constitutes one of the factors to intensify trade friction between In view of these facts, Chapter 4 follows up Chapter 3 in studying the underlying trend of sustained bilateral imbalance between the U.S. and Japan. In Chapter 3 there remained a significant gap between theoretical estimates based on the model and actual development of bilateral current account imbalance. Theoretical values tend to overestimate the actual trend notably with respect to U.S.-Japan bilateral external imbalance, while the gap is smaller in the case of U.S.-Germany imbalance. Chapter 4 shows that the intensive use of land as well as land price hike in Japan in the 1980s may affect the external After reviewing the gap on U.S.-Japan bilateral imbalance between the model estimate and actual imbalance, Chapter 4 assesses the role of the land and land price rise as one of the determinants of external imbalance. It is shown that the land price hike tends to diminish the net capital outflow from Japan to the U.S. The policy measures to contain the land price rise in Japan may give rise to enlarged external surplus. On the other hand, the U. S. can reduce the net capital inflow by strengthening policy measures to reduce the land price rise. The higher land-capital stock ratio in Japan reduces the equilibrium borrowing-capital stock ratio of the U.S. Moreover, Chapter 4 has the following interesting policy implications. Higher tax on land rent in the U. S. may lead to lower borrowing ratio, while it increases the net lending ratio in Japan through the decline in real land price and land-capital stock ratio. This result is in sharp contrast to the view that the land price decline in Japan may decrease the current account surplus through increased housing investment. In our model, capital accumulation is enhanced by less attractive rate of return on land (crowding-in). But the resulting lower land-capital stock ratio leads to higher lending ratio of creditor country. Conversely, the higher land-capital stock ratio in Japan works to reduce both the short-run net borrowing of the U.S. to Japan and the long-run The dependence of the time preference rate on the income level of a country provides us with a significant implication in the understanding of the dynamic relationship between savings behavior and the pattern of economic development. Personal savings are the main source of supply of capital. They are channeled through financial markets to firms and used for capital accumulation. New investment expands the production capacity embodying high productivity. More output is produced with more efficient technology, generating more income. When the time preference rate hinges on the income level, higher levels of income will affect the time preference rate and hence the consumption-savings pattern. If the intertemporal consumption tilts toward the future, as is suggested by Fisher, more savings will be available for capital accumulation and economic growth might be accelerated. On the other hand, if consumers prefer present consumption to that in the future, as is suggested by Uzawa, the speed of economic growth will slow down. Chapter 5 studies the implication of the time-preference schedule for the growing world economy. Conventionally, economic growth theory was based on the assumption of a constant rate of time preference. Uzawa and Obstfeld introduced the rate of time preference that increases with the utility level. Irving Fisher (The Theory of Interest) has a different opinion, however, that people are more time impatient at the lower level of Chapter 5 assumes a non-monotonic time preference schedule such that people are more patient at the middle income levels and are less Patient when they are either very poor or rich. Based on a nonlinear savings function out of wealth implied by such a time-preference schedule, this chapter develops a single-good, multi-country growth model of a global economy with free capital mobility. The long-run property of this system is characterized by three kinds of long-run equilibrium: the starvation (fatal attractor) equilibrium, the imperialism equilibria dominated by a nation or by a group of nations, and the co-prosperity equilibrium where the wealth and the income of countries in the system grow proportionately. Bifurcation phenomena and the global stability of the system by the Lyapunov function will Our system has a strong resemblance to some models of ecology where species compete for their survival(May, Stability and Complexity . Here we can properly analyze the transition of a debt or to a creditor country from a global perspective, and Thus, time preference rate is one of the key variables in intertemporal pattern of consumption, even though constancy of the time preference rate has been assumed traditionally as constant in most of the literature on this issue. Chapter 6 examines empirically the validity of the constancy hypothesis of the time preference schedule, or the relationship between time preference and economic development. There are three alternatives: Irving Fisher’s hypothesis that the time preference rate is a decreasing function of the income level; Uzawa’s hypothesis that the time preference rate is an increasing function of consumption or income level; the last hypothesis used in Chapter 5 is a combination of Fisher’s and Uzawa’s hypothesis that suggests at the existence of a turning point in the time preference. Using postwar annual time series data on consumption in several countries, Chapter 6 tests the constant time preference hypothesis. When the constant hypothesis is not supported by the data, we further investigate statistically whether the time preference schedule is well represented by Fisher’s hypothesis or by Uzawa’s or by their combination. The countries covered by our study are Taiwan, Korea, Japan, Germany and the U.S.A. The first four countries are well-known for their high personal saving rates, while the saving rate of the U. S. A. has been notably low. Moreover, the three countries in the Far East have enjoyed high economic growth in the post-war period. To sum up the results, the constant time preference hypothesis is valid only for Korea and Germany. For Japan and Taiwan, the combined hypothesis is appropriate. For the U. S. A., the Fisherian hypothesis is supported by the data. Interestingly, the turning point in the time-preference schedule roughly coincides with the period when high income growth switches to low income growth. Needless to say, our research still has some difficulties and problems. In particular, in order to apply our framework to current policy issues, we have to be very careful not to neglect the important factors that may play crucial roles in the issues under consideration. Brief, but pertinent, comments by Willem H. Buiter, John C. H. Feiand T. N. Srinivasan clearly point out limitations and imperfections of interpret those comments as the indication of the fact that a wide research potential is open in the direction we are proceeding.

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