Brady Bonds. 3. Illegitimate. Foreign Debt and Default. Ecuadorian Public Debt according to ministry of finance (and IMF). ⢠Three ways to reduce public debt:.
Wealth-to-income ratios, capital share of income and public debt in Ecuador TRISTAN AUVRAY LILIANA CANO
SASE 2016 – UC BERKELEY 24 – 26 JUNE 2016
Outline 1. Motivation 2. Data and methods 3. Main findings 4. Concluding remarks
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Outline
SASE 2016
Motivation (1/3) Explaining functional inequalities • Increasing interest in the study of income and wealth inequality over the last years. • Piketty (2013) and Piketty and Zucman (2014) have documented the evolution of wealth-to-income ratios (β) and capital share of income (α) in 8 developed economies in the long run. • In some countries wealth-to-income ratios have risen from about 200300% in the 70’s to 400-600% in 2010. U shaped evolution. • Consequently, the capital share of income α=rβ has increased over the last years. 1.
Assessing the structure of the functional distribution of income in a developing economy.
SASE 2016
Motivation
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Motivation (2/3) Explaining determinants of wealth accumulation • Piketty and Zucman (2014): wealth accumulation into volumen (savings flows, volume adjustments) and relative prices (capital gains or loss). • Increasing wealth-income ratios : 1) fluctuations in relative prices of assets. 2) high saving rates (s) and declining growth rates (g) long term law β = s/g. 2. How do aggregate wealth to income ratios evolve in developing countries? Are there other determinants than the β= s/g formula?
SASE 2016
Motivation
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Motivation (3/3) Explaining the dynamics of public debt • In this paper we make use of balance sheets, recently produced by the Ecuadorian central bank, to construct a database on National Wealth (public and private wealth) as proposed by Piketty and Zucman (2014). • This database provides extensive information on: a) wealth, b) public assets and public debt, c) growth and savings rates, d) factor shares, from 2007 to 2013. 1. To analyze the dynamics of the public debt in Ecuador. 2. Assessing the weight of China as a creditor of Ecuador.
SASE 2016
Motivation
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Data and methods (1/3) • Piketty (2013), Piketty and Zucman (2014) and System of national accounts SNA 2008 • Main definitions employed: a)
private wealth: net wealth (assets minus liabilities) of households and non profit institutions serving households.
b)
public (government) wealth: net wealth (assets minus liabilities) of public administrations and government agencies.
c)
national wealth:
= =
SASE 2016
+ + domestic capital + net foreign assets
Literature review
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Data and methods (2/3) d)
= domestic capital, which can be decomposed into housing, agricultural land and other domestic capital including: the market value of corporations, other non financial assets held by private or public sectors net of their liabilities.
d) & = &' + () National income = domestic output + net foreign factor income Wealth to income ratios
f)
β =
g) β
=
h) β
=
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,.,/.,0.-
private wealth to income ratio public wealth to income ratio national wealth to income ratio Literature review
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Data and methods (3/3) d) Factor shares: a basic accounting law
α = 4 β5 where :
α = capital share of income 4 = rate of return on capital β5 = wealth-income ratio
SASE 2016
Literature review
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National Wealth at market value Private (7 ) and public (7 ) wealth-income ratios Ecuador 2007 - 2013
2.5 years
Authors’ calculation
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Main results
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National Wealth at book value Private (7 ) and public (7 ) wealth-income ratios Ecuador 2007 - 2013
2 years 4 years
2.5 years
Authors’ calculation
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Main results
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Factor Shares of national income (factor-price) 8 =497 Ecuador 2007 - 2013
Authors’ calculation
SASE 2016
Main results
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The dynamics of public debt (1/2) • Public debt is an important topic in the analysis of wealth and is a recurrent issue since the Mexican debt crisis in 1982 until the recent Greek sovereign debt crisis.
1.Inability to pay and default on Brady Bonds
• Three ways to reduce public debt:
2. Exchange of old Brady bonds by new Global bonds, on the basis of the precrisis market price
– Inflation – A permanent budget surplus (austerity) – Default and debt restructuring Ecuador in 1999 and 2008 3. Illegitimate Foreign Debt and Default Ecuadorian Public Debt according to ministry of finance (and IMF)
Authors’ calculation
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Public debt
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Public Debt and Chinese Lending to Ecuadorian Government
Authors’ calculation
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Public debt
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Structure of financial liabilities of Ecuadorian Government A decrease by 14% points
Authors’ calculation
We know that half of Chinese loans to LA An increase by 14% points countries include clauses to be repaid in oil, and these clauses have probably transformed loans contracts into trade credit contracts. The structure of financial liabilities of Ecuadorian government has radically changed over 2007-2013 ,with an increasing weight of "Other accounts payable" (F.8 SNA classification) which includes "Trade credit and advances" (F.81) SASE 2016
Public debt
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An estimate of Chinese Bilateral Debt • Two hypotheses concerning the increase of the item “Other accounts receivable/payable (including F.81 Trade credit and advances)” – It is an external debt (oil 50% of Ecuadorian exportations) – The increase in this item comes from bilateral Chinese loans Financial liabilities in % of national income Of Which Total 2007 2008 2009 2010 2011 2012 2013
Chinese Debt Other External Debt
52% 46% 45% 49% 51% 52% 54% SASE 2016
0% 0% 1% 5% 10% 12% 13%
38% 33% 31% 26% 27% 24% 25% Public debt
External Debt in % of financial liabilities Of Which Total 74% 72% 70% 63% 73% 69% 70%
Chinese Debt Other External Debt 0% 0% 2% 10% 19% 22% 24%
Conclusion • ‘‘Piketty & Zucman’’ analysis of national balance sheets in a developing country: – Importance of book value rather than market value to understand the weight of capital – Quick change in LACs over the 10 last years: importance of short-term public investment rather than the long term law β = s/g. – Importance of national balance sheets rather than numbers of ministry of finance.
• Debt restructuration: just a change of creditors: • New model of development? • Concern about oil prices and ability of developing countries to reimburse their debt (China joining the creditors’ Club de Paris)
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Conclusion
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Wealth to income ratios, capital share of income and public debt in Ecuador TRISTAN AUVRAY LILIANA CANO
