Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The Case of Romania [1 ed.] 9781611225747, 9781608761821

Citation preview

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES

IMPACT OF INVESTMENTS ON AN EMERGING ECONOMY:

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

MODELS AND FORECASTS. THE CASE OF ROMANIA

No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES Trust, Globalisation and Market Expansion Jacques-Marie Aurifeille, Christopher Medlin, and Clem Tisdell 2009. ISBN: 978-1-60741-812-2

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program Paul W. O'Byrne (Editor) 2009. ISBN: 978-1-60741-807-8 TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program Paul W. O'Byrne (Editor) 2009. ISBN: 978-1-60876-705-2 (Online Book) Government Interventions in Economic Emergencies Pablo Sastre (Editor) 2010. ISBN: 978-1-60741-356-1 NAFTA Stock Markets: Dynamic Return and Volatility Linkages Giorgio Canarella, Stephen M. Miller and Stephen K. Pollard 2010. ISBN: 978-1-60876-498-3

Progress in Economics Research, Volume 15 Albert Tavidze (Editor) 2010. ISBN: 978-1-60741-872-6 Employment and Labor Issues: Unemployment, Youth Employment and Child Labor Lance K. Valencia and Bryson J. Hahn (Editors) 2010. ISBN: 978-1-60876-282-8 Cognitive Finance: Behavioral Strategies of Spending, Saving and Investing Philipp Erik Otto 2010. ISBN: 978-1-60876-279-8 Economic Forecasting Alan T. Molnar (Editor) 2010. ISBN: 978-1-60741-068-3 Lectures and Thoughts on Mineral Economics K.K. Chatterjee 2010. ISBN: 978-1-60741-589-3 Issues in Economic Thought Miguel-Ángel Galindo Martín and Cristina Nardi Spiller (Editors) 2010. ISBN: 978-60876-173-9

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Emerging Markets: Identification, New Developments and Investments John V. Reynolds (Editor) 2010. ISBN: 978-1-61668-160-9 Understanding the Process of Economic Change in Turkey: An Institutional Approach Tamer Çetin and Feridum Yilmaz (Editors) 2010. ISBN: 978-1-60876-945-2

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Entrepreneurship Incubators and Economic Growth. Anastasia Petrou, Panagiotis Liargovas and Irene Daskalopoulou 2010. ISBN: 978-1-61668-260-6 The Impact of Foreign-Owned Companies on Host Economies Maria C. Latorre 2010. ISBN: 978-1-61668-171-5 The Impact of Foreign-Owned Companies on Host Economies Maria C. Latorre 2010. ISBN: 978-1-61668-452-5 (Online Book) Labor and Employment Issues Nickolas H. Mullen (Editor) 2010. ISBN: 978-1-60741-286-1

Labor and Employment Issues Nickolas H. Mullen (Editor) 2010. ISBN: 978-1-61668-883-7 (Online Book) Emerging Markets: Identification, New Developments and Investments John V. Reynolds (Editor) 2010. ISBN: 978-1-61668-441-9 (Online Book) Minerals Price Increases and Volatility Petro Martinovich (Editor) 2010. ISBN: 978-1-60741-653-1 Household Behavior in the US and Japan Kosei Fukuda 2010. ISBN: 978-1-60876-992-6 Global Model Simulation: A Frontier of Economic Science Akira Onishi 2010. ISBN: 978-1-60876-843-1 Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania Cornelia Scutaru (Editor) 2010. ISBN: 978-1-60876-182-1

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES

IMPACT OF INVESTMENTS ON AN EMERGING ECONOMY:

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

MODELS AND FORECASTS. THE CASE OF ROMANIA

CORNELIA SCUTARU EDITOR

Nova Science Publishers, Inc. New York

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA   Impact of investments on an emerging economy : models and forecasts  the case of Romania / [edited by] Cornelia Scutaru.  p. cm.  Includes bibliographical references and index.  ISBN ɰɮɯŞɨŞɭɨɨɩɩŞɬɮɫŞɮſ‡Ş„‘‘ƀ 1.  Investments‐‐Romania‐‐Econometric models.   2.  Romania‐‐Economic conditions‐‐1989‐‐‐Econometric models.   3.  Economic forecasting‐‐Romania‐‐Econometric models.  I. Scutaru, Cornelia.  HG5692.I58 2009  330.9498‐‐dc22  2009036305 

Published by Nova Science Publishers, Inc.  New York

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

CONTENTS ix 

Preface Chapter 1

Chapter 2

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Investments in an Emerging Economy: Case of Romania Lucian-Liviu Albu 

1 

Empirical Models of Investment Impact on Economy: Statistical Information Cristian Stanica  

19 

Empirical Models of Investment Impact on Economy: Error Correction Models Cornelia Scutaru 

35 

Empirical Models of Investment Impact on Economy: Modeling Using Neural Networks Corina Sâman 

79 

Empirical Models of Investment Impact on the Economy: VAR Models Bianca Pauna 

101 

Perspectives and Analysis: Comparisons of Results Cornelia Scutaru 

125 

Investment Strategies Lucian-Liviu Albu and Marioara Iordan 

Index

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

133  153 

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

PREFACE This new book addresses the problem of correlations between investments, economic growth and employment using three different instruments: error correction models, neural networks and VAR models. Analyzing the results, the authors conclude about the coherence of the three types of models which have considered the reciprocal influences between investments and economic growth; investments and employment. The factors with positive impacts (GDP growth, foreign direct investments, degree of imports coverage by exports, wage increase) and negative impacts (active interest rate, depreciation of the exchange rate, unemployment, increase in tax burden) upon investments were revealed and policy measures formulated. Chapter 1 - Usually, the concept of emergent economy was used before the collapse of communist regimes in Central and East European countries to characterise an economy functioning in a manner not conforming to a proper standard free marked oriented economy. As a rule, in this group of countries was included majority of non-communist countries, coming from less developed to developing countries. Main criterion was a demonstrated trend from a so-called natural economy based on non-tradable goods to an increasing part of tradable goods and services. The chapter includes a discussion about: characteristics of the national economy; role of investment in economy. Chapter 2 - The sensitivity of economic systems to short-term shocks requires the elaboration of some theories that might describe the dynamics of indicators on short time periods. These studies need an improvement in the statistical data. In addition to the quarterly indicators from national accounts, there are some monthly indicators, but these are insufficient in completely describing demand and offer fluctuations. Thus, some econometric approaches in the last few years have provided monthly macroeconomic indicators (for example, GDP) from their

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

x

Cornelia Scutaru

quarterly data. This chapter presents our algebraic method to estimate monthly components of Romanian nominal GDP based on their quarterly data. Finally, these are used to obtain a monthly estimation of GDP. The series to be interpolated are defined as unobserved variables, and the available monthly series requiring interpolation are defined as related series. The investment interpolation procedure, the same as any other series, is carried out in two steps: computation of monthly series of investments at current prices through the algebraic algorithm and computation of the monthly series at constant prices. Chapter 3 - The chapter analyzes the developments and the short-term perspectives of investment impacts upon economic growth and employment. The statistical data come from monthly series (2000-2008), which reflect the developments specific to a small emergent economy. In order to capture the effects of economic crisis on the prospective evolution of the Romanian economy, one cannot rely on the trend provided by the model, but on the shock imposed through exogenous variables. This happens because the model was built with statistical data that cover a period of relative economic stability. The first part of the paper analyzes the Granger causal structures that characterize the investment phenomenon and reveals the response of the exogenous variables to shocks, with the help of non-restricted VAR models. In the second part, a ECMs model is built, in which the long-term equation describes the relationship between the investment rate and the GDP and the real active interest rate, while the short-term dynamics analyze the impacts of foreign trade and employment upon investment. Evolution perspectives and certain economic policy measures required in times of world economic crisis are also presented. Chapter 4 - Feedforward neural networks (FNN) have been successfully applied in finding approximate solutions to a large range of problems. This technique could be applied to problems involving estimation of nonlinear models when we do not want or are not able to specify the exact form of the nonlinear function. The flexibility of this technique permits choosing the right model from a series of them after the searching phase for the optimal architecture. The aim is to find the best model from a forecasting point of view. Chapter 5 - The relationship between domestic investment, FDI and economic growth can better be studied with the help of dynamic simultaneous models because they are more flexible and do not require a division of variables in endogenous and exogenous. We applied the VAR methodology to the Romanian data in order to answer questions regarding the direction of causality between investment and growth rate and answer questions related to whether FDI does crowed in or out domestic investment. We have found a bi-lateral causality

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Preface

xi

between FDI and growth rate of the GDP which allowed us to conclude that the two reinforced themselves, high GDP growth rates attracts FDI, which adds to the stock of the country’s capital and increases the GDP growth rate. We also found evidence that domestic investment is increasing the GDP growth rate. In addition we found a one way causality between FDI and domestic investment. In short run FDI is crowding out investment, but after the initial period, spill over effects increase investment opportunities, therefore FDI is crowding in investment in the middle run. In the second VAR model we included labour market variables as well. We found evidence that the FDI contributes towards increased average wages and increased average wages generate higher domestic investment. The impulse response function showed that higher GDP growth rates contributes to the increased employment and a shock in domestic investment is generating increases in both the gross wage and unemployment rate. The effect of a shock in the FDI generates both increased average gross wages as well as decreasing unemployment rates, therefore there is evidence that FDI generates new employment opportunities. Shocks in the growth rate of the gross wage decrease all variables. This effect is normal since higher real gross wages reduce the profitability of companies all over the economy reducing economic activity. Chapter 6 - We addressed the problem of correlations among investments, economic growth and employment using three different instruments: error correction models, neural networks and VAR models. Analysing the results, we might draw conclusions about the coherence of the three types of models which consider the reciprocal influences between investments and economic growth and investments and employment. The factors with positive impacts (GDP growth, foreign direct investments, degree of imports coverage by exports and wage increase) and negative impacts (active interest rate, deppreciation of the exchange rate, unemployment and increase in tax burden) on investments were revealed and policy measures were formulated. Chapter 7 - The capital inflows, the so-called foreign direct investments (FDI) are considered as an essential factor for the economic growth in less developed countries, such is the case of Romania after the accession to the European Union. There are, however, countries that face different problems related to their economic policies. In this chapter are addressed several basic issues related to the balance of payments imbalances, to the instability of exchange rates (problems in general of monetary kind, which occur due to the use of different currencies by countries or groups of countries) and, most important, to the direct flows of capital.

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

In: Impact of Investments ... Editor: Cornelia Scutaru

ISBN 978-1-60876-182-1 © 2010 Nova Science Publishers, Inc.

Chapter 1

INVESTMENTS IN AN EMERGING ECONOMY: CASE OF ROMANIA Lucian-Liviu Albu1 Institute for Economic Forecasting

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

ABSTRACT Usually, the concept of emergent economy was used before the collapse of communist regimes in Central and East European countries to characterise an economy functioning in a manner not conforming to a proper standard free marked oriented economy. As a rule, in this group of countries was included majority of non-communist countries, coming from less developed to developing countries. Main criterion was a demonstrated trend from a socalled natural economy based on non-tradable goods to an increasing part of tradable goods and services. The chapter includes a discussion about: characteristics of the national economy; role of investment in economy.

CHARACTERISTICS OF THE NATIONAL ECONOMY Beginning with 1998 it was demonstrated empirically that the behaviour of Romanian economy tends to converge to those existing in a normal market

1 Research professor, director of Institute for Economic Forecasting, Corresponding Member of Romanian Academy.

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Lucian-Liviu Albu

2

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

economy and presented in specialised literature. Moreover, after its acceptation into EU the Romanian economy must evolves in lines with economic theories. Using some more accurate statistical data available for last period (but before the recent global crisis) and following an original methodology (firstly published in 2006; see Albu, 2006) we tried to verify in case of Romania some fundamental hypotheses from standard literature. Thus, by applying certain simple models derived from standard ones in our experiment we estimated values for some essential parameters in order to evaluate the long-term trends. We used two partial models referring to the impact of investment on GDP growth and respectively to the interest rate – investment relationship. Finally, an equation including inflation dynamics was taken into account. As basic model, following the standard literature we used three basic equations, as follows: r (α)

=

aα+b

(1)

α (i)

=

c / (d + i)

(2)

i (p)

=

ep+f

(3)

where r is GDP growth rate, α – investment rate (in GDP), i – interest rate, p – inflation, a, b, c, d, e, and f – parameters (estimated econometrically). According to the proposed methodology (Albu, 2006), first equation tries to capture the impact of investment on GDP growth. Second equation demonstrates an inverse relation between interest rate and investment. Third equation takes into account a direct relation between inflation and interest rate. Using some simple algebraic operations, based on the above equations we obtained some other useful derivate equations, as follows: r (i)

=

b + a c / (d + i)

(4)

α (p)

=

c / [d + (e p + f)]

(5)

i (α)

=

(c / α) – d

(6)

Moreover, it is useful to express the empirical inflation – GDP growth rate relation as follows:

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

Investments in an Emerging Economy: Case of Romania r (p)

=

b + a c / (d + e p + f)

3 (7)

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

We tried to estimate the parameters in equations in case of the Romanian economy based on available data for various periods. A conclusion was that only since 1998 the statistical data proved to be relevant. For instance, the output of our experiment on the Romania’s pre-accession period into EU is shown in Figures 1, where: variables are expressed as per cent; and t is time (years); E attached to the name of variable means estimated; r_L and r_U (represented as black dashed lines) mean the lower limit and respectively upper limit (95% Confidence Intervals).

Figure 1a.

Figure 1b.

Impact of Investments on an Emerging Economy: Models and Forecasts. The Case of Romania : Models and Forecasts. The

4

Lucian-Liviu Albu

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Figure 1c.

Moreover, following the proposed methodology, in Figures 2 we present some 3D graphic representations for variables and their attached Contour Plot corresponding to the real annual registered data for the period of pre-accession of Romania into EU. Thus, as conclusions for that period we can see that a GDP growth rate of about 7% could be obtained for an investment rate around 22% and an interest rate near 10% (it is represented by the peak 7 on the map (α, i, r)). From the contour map (p, i, r) we can see the line 5 (5% GDP growth rate) that follows very close the diagonal line of plan p-i, which can be interpreted as a natural rate of GDP growth rate in case of Romania. Similar conclusion, but for investment rate, could be derived from contour map (p, i, α), where as a trajectory for its natural rate could be considered the top line following very close the diagonal line of plan p-i. Finally, the contour map (p, α, r) demonstrates a negative impact of inflation on GDP growth, in case of Romania. Coming from relation (1) the simulation model demonstrated a critical value of 13.2% for investment rate (αcr1). For α