Introduction to Empirical Section

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Appendix 1

I code economic policy as statist if they follow any of the following criteria:

  1. If the Financial Openness Index (Brune 2004) index is 0, meaning all forms of capital inflows and outflows are restricted (FOI).

  2. If Public Investment (which includes state enterprise investment and government fixed investment, Pfefferman et al 1999) is greater than 10% of GDP (SPI).

  3. If there is major investment in state enterprises or nationalization of private enterprises in more sectors than there are privatization or liquidation of state enterprises (SEI).

Because I haven’t finished coding all country years for the SEI measure, I also code economic policy as capitalist if they have initiated a privatization program post-1988 and have a FOI greater than zero.

An ideal operationalization of policies regarding international private investment flows (such as FDI) would capture nuances such as how restrictive policies are, or, if incentives are offered, how attractive these policies are. Unfortuntately, operationalizing policies addressing foreign direct investment specifically is difficult. One data set that attempts to do this is the investment freedom variable in the Heritage Foundation’s Index of Economic Freedom. For this variable,

“Questions examined include whether there is a foreign investment code that defines the country’s investment laws and procedures; whether the government encourages foreign investment through fair and equitable treatment of investors; whether there are restrictions on access to foreign exchange; whether foreign firms are treated the same as domestic firms under the law; whether the government imposes restrictions on payments, transfers, and capital transactions; and whether specific industries are closed to foreign investment.” (Beach and Kane 2008, p. 48).
However, data only go as far back as 1995, and it is difficult to code for earlier years – descriptions for different levels of freedom use measures such as “very few,” “few,” and “significant;” and the description of actual policies in sources such as the IMF’s AREAER are often vague, incomplete, difficult to compare, or missing altogether for early years, particularly for African countries.

For the foreign investments constraint I therefore use Brune’s Financial Openness Index (FOI), which is blunt regarding FDI (0 for restrictions, 1 for no restriction), but at least the measures are comparable. In order to capture finer gradations, Brune includes other types of international transactions that are likely to influence the decisions of foreign investors.

“The FOI is available for 187 countries over the period 1965-2004… it includes twelve categories of current and capital account transactions: (1) exchange rate arrangements (multiple/dual v. unified); (2) payments from invisible transactions (referring to payments for services such as financial or legal advice, royalties, transfers to overseas residents); (3) proceeds from invisible transactions; (4) proceeds from exports; (5) inward controls on money market transactions; (6) outward controls on money market transactions; (7) inward controls on credit operations; (8) outward controls on credit operations; (9) inward controls on foreign direct investment; (10) outward controls on foreign direct investment; (11) real estate transactions; and (12) controls on provisions and operations of commercial and credit institutions. Each category is coded as either having significant restrictions (“closed”=0) or not (“open”=1)” (Brune and Guisinger 2007).
The most common measure of the prominence of state enterprises comes from the Economic Freedom of the World data set (Gwartney and Lawson 2008), which is a 1-10 index that uses two types of data to categorize country-years - the sectors where state enterprises are active, and government investment as a percentage of total investment. For example, when state enterprises are limited to economy-of-scale industries such power utilities (and government investment is 15-20% of total investment) the economy is given a rating of 8 out of 10; if SOEs are present in energy, transportation, and communication sectors (and government investment is 25-30% of total) the economy is given a rating of 6, etc. I do not use this measure for two reasons. First, the data is only available every five years until 2000. Second, government investment as a percentage of total investment, which is appropriate for some purposes, is not appropriate for this project since I am using the state enterprise policy as a determinant of private investment.20

In the spirit of Gwartney and Lawson, however, I use investment dollars and sectors to measure state enterprise activity. The first measure I use is public investment as a percentage of GDP (SPI). Public investment is the sum of investment by the government and all state enterprises. Using state enterprise data alone, such as the data from the Bureaucrats in Business data set (World Bank 1995), is problematic because different countries categorize state enterprises different ways. Some are considered individual entities, in which case separate statistics are maintained, others are considered part of the government, in which case they are not (see Pfefferman et al 1999 for a discussion). I use the public investment as percentage of GDP data from Easterly 2001, which updates the Pfefferman et al (1999) data set.

The second approach is to count sector level state enterprise activity. Because of the lack of annual data on how many sectors have active state enterprises (for example, the data set in Short 1984 includes sector data for 21 sub-Saharan African countries in the “late 1970s”), I take the approach of counting sectors in which governments are actively investing in or divesting from state-owned enterprises to create a State Enterprise Activity Index (SEI). I utilize the following definition: a public or state-owned enterprise is “an organization (1) whose primary function is the production and sale of goods and/or services, and (2) in which the government or other government-controlled agencies have an ownership stake that is sufficient to ensure them control over the enterprise, regardless of how actively that control is exercised” (Tanzi 1984). I use a 50% threshold to determine control. To operationalize investment I code the following events: establishment of a new enterprise in which the government has majority control; major expansion or rehabilitation of a state-owned enterprise; or nationalization, which I define as increasing the government’s share or equity above 50%. In some cases nationalization is achieved through market prices and in other cases compensation is significantly below market prices. In this sense, the sector count approach is superior to the level of investment measured in dollars. Divestment occurs when the state privatizes or liquidates the state-owned enterprise. Following the definition I use, I do not consider contracts for private management as privatization. I count the net number of investment activities (i.e. investment activities minus divestment activities) by sector for 27 sectors. If a government has a positive net number, meaning it is investing in state enterprise activities in more sectors than it is divesting, then it is considered to be implementing a statist economic strategy.21

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