REER MOVEMENTS AFFECT TRADE SHARES – REALLY? Surjit S Bhalla Comment on Chinoy- Jain “What Drives India’s Exports…” presented at India Policy Forum, New Delhi, July 11, 2018
REER MOVEMENTS AFFECT TRADE SHARES – REALLY? The paper by Chinoy-Jain (2018) is comprehensive and on a much talked about topic – what is happening to Indian exports, and the relationship of the same with economic growth . They make two major claims about their research: First – “Why have Indian exports slumped in recent years and failed to materially respond to accelerating global growth over the last year?” Second, importantly – “Our model can explain a significant slowing of exports in recent years, thereby confirming both global demand and exchange rate dynamics have posed meaningful headwinds to exports in recent years, rather than the presumed temporary factors such as demonetization and GST.” REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 2
REER MOVEMENTS AFFECT TRADE SHARES – REALLY? • Their model is a straightforward export growth model (function of prices proxied by the real exchange rate, and global GDP and/or trade growth). • No problems with their specification except I have some concerns. • First, the definition of REER – the definition is just with price changes with a basket of currencies (RBI’s REER36 or the more comprehensive BIS definition, REERBIS). However, this definition excludes any Balassa-Samuelson effects. (See Bhalla(2012), Rajan(2015)). REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 3
STRANGE RESULTS WITH COMPLICATED ECONOMETRICS AND SMALL SAMPLE SIZES – RBI AND FISCAL DEFICITS; C-J AND EXPORT SHARES • There are also problems with the time-period of analysis – from 2005 onwards. While REER36 only started in 2005, the BIS series goes much farther back. Why not estimate with quarterly data from 1996 onwards? Especially since REERBIS yields a higher price elasticity than REER36? • Note there are similar problem with RBI’s 2017 study relating quarterly data with fiscal deficits. RBI’s estimation also starts from 2005, but once earlier data was incorporated into the specification, the result got changed from a significant positive effect from fiscal deficits to inflation, to no effect whatsoever! • This points to the fragile nature of relationships with small sample size – all the more reason to extend the analysis to 1996. REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 4
REER MOVEMENTS AFFECT TRADE SHARES – REALLY? • We also have a problem in obtaining a negative elasticity for REER. For most specifications, we obtain a positive , but not significant, coefficient for REER. For world income (or trade) growth, we obtain elasticities (above 2) as obtained by Chinoy-Jain (2018). • Simple old-fashioned annual data can yield important insights – e.g. REER (RBI or BIS) has zero explanatory power for explaining export movements; maybe true REER – corrected for productivity (see Devaluing to Prosperity) will work better! • But let pictures tell the true story! REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 5
INVESTMENT SHARES – NOMINAL AND REAL 40 Importance of Deflator - Investments Share in GDP 38 36 34 32 in % 30 28 26 24 22 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fiscal Year Gross Investment/GDP (Current Prices) Gross Fixed Capital Formation/GDP (Constant 2010 Prices) REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 6
HAVE INDIAN EXPORTS UNDERPERFORMED? – SHOW ME THE EVIDENCE • But India has performed well, very well, in export growth. • Look at trade shares – Chinoy-Jain (2018) make much of this echoing the pink media lamenting Indian export performance over the last few years. Indeed, Chinoy-Jain offer it as key evidence - “both global GDP growth and global exports growth have slowed much less dramatically than India’s exports have. In particular, global exports growth averaged 3.8% (in real terms) between 2004 and 2011, and 2.6% over the last six years – a drop off of 30% in growth rates. It is clear, therefore, that India has underperformed global exports over the last 6 years.” REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 7
The Importance of Deflators Trends in Indian Goods & Services Exports (as a % of GDP) 30 110 BIS- Real effective exchange rate (2010 = 100) 25 105 20 100 in % 15 95 10 90 5 85 0 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Goods & Services Goods Services REERBIS REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 8
POSITIVE CORRELATION BETWEEN EXPORTS AND REER • Price of world manufacturing exports has stayed the same since 2007 – was 89.1 then and was 91.1 in 2017. For the first few months in 2018, this OECD price index has increased by 6 % to 96.9. Note that this index averaged 99 2011 to 2014! • Increase in REERBIS during boom time (2004 to 2007) – perhaps this is the reason we get a positive co-efficient for REER on Exports. REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 9
BOOM TIME FOR INDIAN EXPORTS AND REER 1999-2007 Non-Oil Export Growth REER Year Real Dollar REER36 BIS (Y-o-Y in %) 1999 13.4 8.9 - 90 2005 20.9 19.5 102 96.6 2007 5.7 20.6 108 102.1 2011 17.3 21.4 111.6 102.4 2014 -0.7 -2.1 106.7 92.8 2015 -3.7 -7.1 112.2 100 2016 4.8 2.9 113.3 101 2017 1.5 7.5 119.2 105.4 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 10
BASIC STATS ON EXPORT GROWTH (CONTINUED) Non-Oil Export Growth ∆Manufacturing Deflator Year World Manufacturing Deflator Real Dollar India World (Y-o-Y in %) 1999 13.4 8.9 - 3.3 - 2005 20.9 19.5 - 4.8 - 2007 5.7 20.6 89.1 5 7.6 2011 17.3 21.4 99.9 7.6 8.1 2014 -0.7 -2.1 98.4 3 -0.2 2015 -3.7 -7.1 88.8 -0.3 -9.7 2016 4.8 2.9 87.8 1 -1.1 2017 1.5 7.5 91.1 2.9 3.8 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 11
Indian Exports (G&S) share in World Trade Up- REER Up Trends in Indian Goods & Services Exports (as a % of World's GDP) 4 110 BIS- Real effective exchange rate (2010 = 100) 3.5 105 3 100 2.5 in % 2 95 1.5 90 1 85 0.5 0 80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Goods & Services (Constant 2010 Prices) Goods Services REERBIS REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 12
EXPORT SHARES DECLINING – MAYBE TAXATION ? Exports/GDP in 2016 Change in export share 2007-2016 Profit Retained (after taxes & wages, in %) Country Share Rank Share Rank Share Rank (lowest=1) Vietnam 94 7 22 2 61 40 Korea 45 24 2 19 67 54 Bangladesh 16 75 -1 25 66 52 India 20 69 -1 26 45 13 Thailand 70 11 -1 29 73 70 Sri Lanka 22 61 -5 39 45 14 Indonesia 18 71 -8 45 70 63 Philippines 27 51 -9 46 57 31 China 22 62 -16 56 32 7 Malaysia 72 10 -37 62 60 38 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 13
MAJOR TAKE-AWAYS ON EXPORT GROWTH AND REER Small sample size yields dangerous results – extend quarterly data till 1996 (statutory warning – won’t change 1. results). REER movements behave perversely – largest appreciation of REER (not corrected for productivity) associated with 2. largest increases in export shares Decline in Export Shares (as % GDP) not much of an indicator of export performance between 2007-2016; India rank 3. 26 th among developing economies (population >5 mil). Most of investment share decline explained by lower increases in investment deflator 4. Indian share in world exports (constant 2010$) at peak 2.6 % in2014-2016, vs. 1.8 % in 2007 5. Share of exports in own GDP at 19.1 % in 2016; was 20.4 % in 2007; peak was 24.5 in 2011 when REERBIS was also at 6. its peak prior to 2017 Looking for explanation of “bad” export performance in all the wrong places; only 45 % of profits retained in India 7. (after payment of wages and taxes); in Bangladesh, Vietnam, Korea, Indonesia, Thailand – between 60 and 73 % REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 14
So what explains Growth – Rael Interest Rates? Chart 1: Are interest rates relevant in affecting economic growth? Yes 15.0 2010 2007 2004 2005 2006 1999 GDP growth for demonetization sector (in %) 1995 10.0 2015 2003 2009 1989 1997 1978 2014 2002 1985 1982 1986 2013 1993 1996 2011 2012 1987 1984 1998 2016 2001 1992 1988 1994 2000 1991 1983 1981 1990 5.0 2008 1979 DEM Coefficient = -0.49 1980 t-statistic = 4.15 R2 = 0.26 0.0 0.0 5.0 10.0 15.0 Lagged real interest rate (in %) The demonetization sector is defined as GDP minus mining minus manufacturing minus public administration and defence REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 15
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