How Government Borrowing Affects Investment and the Trade Balance

Foreign Direct Investment and the environment From pollution havens to sustainable development A WWF-UK Report Nick Mabey and Richard McNally July 1998 WWF Conserves wildlife and the natural environment for present and future generations. All rights reserved. All material appearing in this publication is subject to copyright and may be reproduced with permission. Any reproduction in full or in part of this publication must credit WWF-UK as the copyright owner. The views of the author expressed in this publication do not necessarily reflect those of WWF. The author has used all reasonable endeavours to ensure that the content of this report, the data compiled, and the methods of calculation and research are consistent with normally accepted standards and practices but no warranty is given to that effect nor any liability accepted by the authors for any loss or damage arising from the use of this report by WWF-UK or by any other party. The material and the geographical designations in this report do not imply the expression of any opinion whatsoever on the part of WWF concerning the legal status of any country, territory, or area, or concerning the delimitation of its frontiers or boundaries.  WWF-UK, 1999 Registered Charity No 201707 For further information, contact: Nick Mabey Economics & Development Policy Officer Richard McNally Economics & Development Policy Assistant WWF-UK Panda House, Weyside Park Godalming, Surrey GU7 1XR Telephone: + 44 (0)1483 426444 Fax: +44 (0)1483 426409 Website: www.wwf-uk.org CONTENTS Executive Summary 1: INTRODUCTION 9 1.1 Structure of the Report 10 PART I: ANALYSIS 2: FDI AND SUSTAINABLE DEVELOPMENT: SCALE, TRANSITION AND DISTRIBUTION 13 2.1 Trends in Economic, Social and Environmental Development 13 2.2 Environmental Advantage or Market and Policy Failures? 16 2.3 Environmental Kuznet's Curves: Will Growth Bring Environmental Sustainability? 17 2.3.1 The relationship of the EKC to economic theories of sustainability 18 2.4 “Transitional” Effects and Long-run Environmental Damage 20 2.4.1 The role of official Export Credit Agencies and Multilateral Banks 20 2.4.2 Structural and indirect impacts of FDI 21 2.5 Distributional Impacts of Large Investment Projects 22 3: FDI IN THE NATURAL RESOURCE SECTOR 24 3.1 FDI and Natural Resource Sectors: Facts and Figures 24 3.2 FDI in Natural Resource Sectors: Implications for Sustainable Development 25 4. SUMMARY: THE MACRO-LEVEL IMPACTS OF FDI 29 5. ENVIRONMENTAL IMPACTS OF FDI: BEYOND POLLUTION HAVENS 30 5.1 The Environmental Performance of Foreign Investors: the "Pollution Havens" Debate 30 5.1.1 Determinants of the Pollution Havens debate 30 5.1.2 Evidence at the aggregate level 31 5.1.3 Case studies: sectors and industries 32 5.1.4 Conclusions from the evidence: prices and markets matter! 38 5.2 Stuck in the Mud: the Chilling Effect of Investment Liberalisation 39 5.3 Other Dynamics between the Foreign Investor and Domestic Regulator 41 5.4 Pollution Haloes: Evidence and Extent 42 5.5 Conclusions: FDI, Environment and Competition – the Real Issues 44 5.5.1 Improving the environmental performance of FDI 45 FDI and the Environment WWF-UK, Page 2 PART II: SOLUTIONS 6. FROM LEGAL COMPLIANCE TO ACTIVE CORPORATE CITIZENSHIP. 49 6.1 Defining Environmental Best Practice for Foreign Investors 50 6.2 Ecolabelling in Resource-Intensive Sectors 51 7. REFORMING INTERNATIONAL INVESTMENT AGREEMENTS: REMOVING BARRIERS TO SUSTAINABLE DEVELOPMENT 54 7.1 International Investment Agreements: Balancing Flexibility and Investor Confidence How Government Borrowing Affects Investment and the Trade Balance How Government Borrowing Affects Investment and the Trade Balance By: OpenStaxCollege When governments are borrowers in financial markets, there are three possible sources for the funds from a macroeconomic point of view: (1) households might save more; (2) private firms might borrow less; and (3) the additional funds for government borrowing might come from outside the country, from foreign financial investors Let’s begin with a review of why one of these three options must occur, and then explore how interest rates and exchange rates adjust to these connections The National Saving and Investment Identity The national saving and investment identity, first introduced in The International Trade and Capital Flows chapter, provides a framework for showing the relationships between the sources of demand and supply in financial capital markets The identity begins with a statement that must always hold true: the quantity of financial capital supplied in the market must equal the quantity of financial capital demanded The U.S economy has two main sources for financial capital: private savings from inside the U.S economy and public savings Total savings = Private savings (S) + Public savings (T – G) These include the inflow of foreign financial capital from abroad The inflow of savings from abroad is, by definition, equal to the trade deficit, as explained in The International Trade and Capital Flows chapter So this inflow of foreign investment capital can be written as imports (M) minus exports (X) There are also two main sources of demand for financial capital: private sector investment (I) and government borrowing Government borrowing in any given year is equal to the budget deficit, and can be written as the difference between government spending (G) and net taxes (T) Let’s call this equation 1/6 How Government Borrowing Affects Investment and the Trade Balance Quantity supplied of finacial capital = Quantity demanded of finacial capital Private savings + Inflow of foreign savings = Private investment + Government budget deficit S + (M – X) = I + (G –T) Governments often spend more than they receive in taxes and, therefore, public savings (T – G) is negative This causes a need to borrow money in the amount of (G – T) instead of adding to the nation’s savings If this is the case, governments can be viewed as demanders of financial capital instead of suppliers So, in algebraic terms, the national savings and investment identity can be rewritten like this: Private investment = Private savings + Public savings I = S + (T – G) + (M – X) + Trade deficit Let’s call this equation A change in any part of the national saving and investment identity must be accompanied by offsetting changes in at least one other part of the equation because the equality of quantity supplied and quantity demanded is always assumed to hold If the government budget deficit changes, then either private saving or investment or the trade balance—or some combination of the three—must change as well [link] shows the possible effects Effects of Change in Budget Surplus or Deficit on Investment, Savings, and The Trade Balance Chart (a) shows the potential results when the budget deficit rises (or budget surplus falls) Chart (b) shows the potential results when the budget deficit falls (or budget surplus rises) What about Budget Surpluses and Trade Surpluses? The national saving and investment identity must always hold true because, by definition, the quantity supplied and quantity demanded in the financial capital market must always be equal However, the formula will look somewhat different if the 2/6 How Government Borrowing Affects Investment and the Trade Balance government budget is in deficit rather than surplus or if the balance of trade is in surplus rather than deficit For example, in 1999 and 2000, the U.S government had budget surpluses, although the economy was still experiencing trade deficits When the government was running budget surpluses, it was acting as a saver rather than a borrower, and supplying rather than demanding financial capital As a result, the national saving and investment identity during this time would be more properly written: Quantity supplied of financial capital = Quantity demanded of financial capital Private savings + Trade deficit + Government surplus = Private investment S + (M – X) + (T – G) = I Let's call this equation Notice that this expression is mathematically the same as equation except the savings and investment sides of the identity have simply flipped sides During the 1960s, the U.S government was often running a budget deficit, but the economy was typically running trade surpluses Since a trade surplus means that an economy is experiencing a net outflow of financial capital, the national saving and investment identity would be written: Quantity supplied of financial capital = Quantity demanded of financial capital Private savings = ...The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results Marc A. Miles R~itgti, Colltgr, Rntg<r\-Thr Stnte Lrl?r'er\rt\ This paper examines the statistical relationship between de\raluation ant1 both the trade balance and the balance of paymelits for 16 de\raluatio~lsof 14 countries in the 1960s. Using several tests involv- ing both the seemingly u~lrelated and pooled cross-section time- series regression techniques, the paper tests the effect of devaluation hile sta~~dardizirlg for other variables that map affect the foreign accounts. \Yhile the balance of pa)-merits does seem to improve follo\ving devaluation, no evidence is found to support the hypothe- sis that cievaluation improves the trade balance. The paper con- cludes that the acljustment to devaluation is essentially monetary in nature, involving only a portfolio stock adjust~nent. Within the international trade literature, it is not uncommon to find arguments about lvhether devaluation will improve the trade balance or the balance of payments. Each theoretical approach has its own set of arguments. For example, the proponents of the elasticities ap- proach (e.g., Robinson 1947; Metzler 1948) describe the necessary and sufficient conditions for an improvement in the trade balance in terms of elasticities of demand and supply. If the demand elasticities are sufficiently large and the supply elasticities sufficiently small, devaluation should improve the trade balance. Proponents of the absorption approach (e.g., Alexander 1952; Johiison 1967) describe 11on. devaluation nlay change the terms of trade, increase production, l'he author ~vould like to thank Jacob Frenkel, Harr! Johnson, Arthur Laffer, Stephen Slagee, John Bilson. and an anonvmous referee for helpful aclvice and corn- ments. The\- should not be held responsible. holve~er, for any remaining errors. [Joiir~i(il 01 PoJ~IIc(I/ F~orzo~riv, 1979. xol. Xi, no 11 'G 1979 by 1 he Yni\ersii\ of C:hicago. 0022-380817Y~8703-00Oti$01 58 THE ETFECTS OF DEVAI L ATION 60 1 switch expenditure from foreign to domestic goods, or have some other effect in reducing domestic absorption relative to production and thus improving the trade balance. International niorletarists (e.g., Mundell 197 1 ; Dornbusch 1973n; Frenkel and Rodriguez 1975) argue that derraluation reduces the real value of cash balaiices andlor changes the relative price of traded and nontraded goods, thus im- proving both the trade balance and the balance of payments. This article, however, examines the statistical relationship between devaluation and the two foreign accounts. More specifically, the arti- cle tries to determine if, on the average, devaluation improves the trade balance andior the balance of payments. No attempt is niade to show the merits of one theoretical approach over another. While the theoretical discussion is primarily in terms of a monetarist model, the final empirical 111odel is a reduced-form equation that is not inconsis- tent u.ith the other theoretical models. If devaluation causes a significant improvement in the trade balance, this irnprovernent should he statistically observable regardless of ivhich theoretical ap- proach is used. Section I describes empirical studies of the effects of devaluation by other authors and analyzes why their approaches fail to answer the relevant questions completely. Section I1 describes the functional forms used in this study and summarizes the theory behilid the model. Section I11 describes the various tests and their results. Finally. Section IV summarizes the results and drarvs some conclusions. I. Other Empirical Studies In recent years several papers have appeared tvhich have tried to analyze empirically the effect of devaluation on the trade balance and balance of payments. There are three basic objectio~is that one can niake DEVALUATION AND THE TRADE BALANCE: A NOTE ALBERT 0. HIRSCHM/IAN I N SPITE of extensive literature on the 1 subject, one point in the formal theory of foreign exchanges still needs clarification: the effect of devaluation on the trade (or current account) balance when total imports (current payments) are not equal to total ex- ports (current receipts). AIarshall was first to point out that devalua- tion nliqht produce an unfavorable effect on a balance of trade in equilibrizun on the condition that "the total elasticity of demand of each country be less than unity, and on the average be less than one half. . . ." He added that "nothing approaching this has ever occurred in the real world: it is not inconceivable, but it is absolutely impossible." Lerner has re- stated this theorem in his Econo?nics of Con- trol. The theory was considerably amplified by A. J. Brown who added the elasticities of sup- ply, the marginal propensities to import, and several other factors to the demand elasticities as determinants of the trade balance upon devaluation. * The starting point of Brown's investigations remained, however, a trade bal- ance in equilibrium. This assumption was discarded by Joan Robinson who derived the correct formula for the effect of devaluation on a trade balance which is not in equilibrium, but only for the case of the balance expressed in domestic cur- rency: she ignored the fact that a different expression obtains for the usually more im- portant balance in terms of foreign currency. 'The author is an economist with the Board of Gover- nors of the Federal Reserve System; the views expressed in this note are not necessarily those of the Board. Thanks arc expressed to Alesander Gersch~nkron and George Jaszi for thoroush discussion and criticism. '.41fred hfarshall, Money, Credit, and Commerce (London, 1923)~ -kppendix J, p. 354. 3Ne~ 1944, p. 378. I'ork, 'A. J. Brown, "Trade Balances and Exchanre Stability," Oxfovd Econor~tic Papers, VI (April 19421, pp. 57-75. Cf. also J. J. Polak, "Exchange Depreciation and International Monetary Stability," this REVIEW, XXIX (1947). p. 178, for an adaptation of Brown's formula. Joan Robinson, Essays in the Theory of Employment (Osford, 1917, 2nd Edition), pp. 142, 143. Since attention will be focused here on the effect of devaluation for varying positions of the trade balance, the following analysis will be made only in terms of demand elasticities. To the reader of Brown and Robinson this will mean that the elasticities of supply are assumed to be infinite, i.e., that exports and imports are supplied at constant costs within the rele- vant range. This, however, need not be the case if the analysis is made in terms of elas- ticities of demand for foreign exchange rather than for the ZIO~~~VZ~ imports from abroad. OF -4 short digression may be in order to explain this distinction. The study of the effect of devaluation on the trade balance can start by considering the demand and supply curves for foreign exchange which have been made familiar by the writings of Bresciani-Turroni, Viner, and hlachlup. These curves result from a transposition of 3Iarshall's curves for E- and G-bales, so as to make the ordinate represent the ratio of interchange between E- and G-bales and the abscissa either E- or G-bales. From here it seems quite natural to pass to the foreign exchange diagram in which the abscissa repre- sents quantities of foreign (domestic) currency, while the ordinate denotes the rate of exchange expressing the number of units of domestic (foreign) currency that have to be yielded to acquire one unit of foreign (domestic) cur- rency. Great care must be exercised, however, in making John Pielemeier 1 Poor Health, Poor Women: How Reproductive Health Affects Poverty By Margaret E. Greene Does poor reproductive health prevent poor women from escaping poverty? Despite the plethora of survey data showing that poor households tend to be larger and that poor women tend to have higher rates of fer- tility, experts have debated whether these conditions cause poverty or are symptoms of poverty. In research funded by the MacArthur Foundation and published by the World Bank, Thomas Merrick and I found that poor reproductive health outcomes—early childbear- ing, maternal mortality/morbidity, and unintended/ mistimed pregnancy—have negative effects on overall health, and, under certain circumstances, on educa- tion and household well-being. FOCUS on population, environment, and security Issue 16 June 2008 Lessons From the First Generation of Integrated Population, Health, and Environment Projects FOCUS on population, environment, and security 2 Shifting Priorities, Falling Funding At the September 1994 International Conference on Population and Development (ICPD) in Cairo, Egypt, the reproductive health field underwent a major shift. Instead of viewing family planning sole- ly as a way to “control” population growth, policy- makers and practitioners re-envisioned it as part of a comprehensive approach that sought to empower women, meet men and women’s stated health needs, and improve sexual health and quality of life. This shift spurred donor pledges, although contributions still fell short. Since the ICPD, many in the donor community have changed their approach to development financ- ing, diverting funds away from projects that focus primarily on reproductive health. Donor agencies and development banks have shifted support from specific health services (e.g., maternal health or family planning) to entire health sector programs, with some funding targeted for high-priority prob- lems such as HIV/AIDS and infectious diseases. These donors—and the parliaments that approve their budgets—grew impatient with “traditional” approaches to aid that produced limited results or benefited the rich more than the poor. They now favor results-oriented programs that seek to address the underlying structural problems of poverty or broad international development goals, rather than provide specific health services. Current health fund- ing is more likely to be tied to broader grants or the Millennium Development Goals (MDGs), which do not include family planning and reproductive rights. To respond to this shift in donor priorities, the reproductive health sector needs to demonstrate that poor reproductive health does, in fact, make it more difficult for a woman and her family to escape pov- erty. Common sense suggests that poor reproductive health outcomes—such as early pregnancies, unin- tended pregnancies, excess fertility (when actual births exceed desired fertility), and poorly managed obstetric complications—would increase the chanc- es of remaining poor. While many researchers have demonstrated the effects of poverty on reproductive health outcomes, fewer have focused on the reverse relationship. Robust, compelling evidence link- ing good reproductive health to poverty reduction would support efforts to include it in country-level poverty reduction strategies and in the allocation of international poverty reduction funding. Results: Reproductive Health Matters We grouped reproductive health outcomes under three broad headings: early childbearing; maternal mortality and morbidity; and unintended/mistimed pregnancy and large family size. Clearly, these group- ings overlap; early childbearing may How Government Borrowing Affects Private Saving How Government Borrowing Affects Private Saving By: OpenStaxCollege A change in government budgets may impact private saving Imagine that Evidence for interactions between domains of TatA and TatB from mutagenesis of the TatABC subunits of the twin-arginine translocase Claire M. L. Barrett and Colin Robinson Department of Biological Sciences, University of Warwick, Coventry, UK The twin-arginine translocation (Tat) system operates in the plasma membranes of a wide range of bacteria as well as the thylakoid membrane in plant chloro- plasts (reviewed in [1,2]). Working in parallel with the Sec system, it is responsible for the export of a subset of proteins into the periplasm, outer membrane or extracellular medium, and the primary defining attrib- ute of the system is its ability to transport proteins in a fully folded state [3,4]. Particular attention has centred on a series of periplasmic proteins that are exported only after binding redox cofactors such as FeS or molybdopterin centres [5–8] although it should also be emphasized that the system also transports proteins that do not bind cofactors [1,2]. Substrates for the Tat pathway are exported post- translationally [8] after synthesis with cleavable, N-ter- minal signal peptides that almost invariably contain an essential twin-arginine motif in the N-terminal domain [9,10]. They then interact with a translocon in the inner membrane that consists, minimally, of three sub- units (TatABC) in Escherichia coli and several other Gram-negative bacteria studied to date. Genetic stud- ies indicate that the tatABC genes are all important for Tat activity although a fourth gene, tatE, encodes Keywords green fluorescent protein (GFP); Tat system; twin-arginine; protein transport; signal peptide Correspondence C. Robinson, Department of Biological Sciences, University of Warwick, Coventry, CV4 7AL, UK Fax: +44 2476523701 Tel: +44 2476523557 E-mail: Crobinson@bio.warwick.ac.uk (Received 13 December 2004, revised 25 February 2005, accepted 8 March 2005) doi:10.1111/j.1742-4658.2005.04654.x The twin-arginine translocation (Tat) system transports folded proteins across the bacterial plasma membrane. Three subunits, TatA, B and C, are known to be involved but their modes of action are poorly understood, as are the inter-subunit interactions occurring within Tat complexes. We have generated mutations in the single transmembrane (TM) spans of TatA and TatB, with the aim of generating structural distortions. We show that sub- stitution in TatB of three residues by glycine, or a single residue by proline, has no detectable effect on translocation, whereas the presence of three gly- cines in the TatA TM span completely blocks Tat translocation activity. The results show that the integrity of the TatA TM span is vital for Tat activity, whereas that of TatB can accommodate large-scale distortions. Near-complete restoration of activity in TatA mutants is achieved by the simultaneous presence of a V12P mutation in the TatB TM span, strongly implying a direct functional interaction between the TatA ⁄ B TM spans. We also analyzed the predicted amphipathic regions in TatA and TatB and again find evidence of direct interaction; benign mutations in either subunit completely blocked translocation of two Tat substrates when present in combination. Finally, we have re-examined the effects of previously ana- lyzed TatABC mutations under conditions of high translocation activity. Among numerous TatA or TatB mutations tested, TatA F39A The Difference between Level of Trade and the Trade Balance The Difference between Level of Trade and the ... equal However, the formula will look somewhat different if the 2/6 How Government Borrowing Affects Investment and the Trade Balance government budget is in deficit rather than surplus or if the balance. .. rise in the trade deficit The following modules discuss each of these possible effects in more detail 4/6 How Government Borrowing Affects Investment and the Trade Balance Key Concepts and Summary... 5/6 How Government Borrowing Affects Investment and the Trade Balance investors, which means a trade deficit of 2000 This example shows that in this case there is a higher budget deficit, and