Showing papers in "European Journal of Comparative Economics in 2014"

An Optimum Currency Crisis

Abstract: This paper presents an ex-post assessment of the current situation of the Economic and Monetary Union (EMU) in light of the conditions prescribed by the theory of Optimum Currency Areas (OCA). The analysis shows that those conditions were satisfied at very different degrees. Factors mobility has clearly increased since the inception of the Eurozone, with an important difference between free movement of capital, which can be considered as fully accomplished, and labour mobility, which has improved, but to a lower degree. Prices and wages flexibility was initially lower compared to other regions, like the US, but has improved over time. The similarity of business cycles among different economies joining the euro was a condition not respected at the beginning, which probably led to sustained imbalances within the Eurozone. Finally, fiscal union was the main missing element of the initial construction of the Eurozone, and still is. The common budget is so exiguous that its effectiveness as shock absorption mechanism is negligible. The analysis then shows how some of the concerns raised on the eve of the euro did actually materialize, even if not immediately. First, in its first decade the Eurozone did not experience major turbulences, because growing financial integration was compensating the need for fiscal transfers, through the private insurance channel. Second, once the long-feared shock hit, the mechanism proved weak and non-resilient. The inherent weaknesses of the EMU became evident. Third, as it had been foreseen, the cost of the adjustment after the shock fell mainly on labour, with much higher and longer unemployment in the Eurozone than both non-Eurozone EU and the US. Fourth, as the theory suggested, the lack of common mechanisms of adjustment dramatically increased socio-economic divergences within the EMU.

Labor Markets in the Transition Economies: An Overview

Abstract: 1. Introduction One of the more controversial aspects of the process of transition from central planning to a market economy in Eastern Europe and the former Soviet Union has been the performance of the labor market. High levels of unemployment at the outset of the transition were variously seen as having the potential to derail or delay meaningful reforms, as evidence that pursuing so-called "big bang" transition strategies were misguided, and as a demonstration that the transition was a complex process, one that brought both the fruits of capitalism as well as its problems, not the least of which were unemployment and income inequality. (3) While the subsequent recovery of output in these economies in the late 1990s was taken as evidence of progress with transition, the persistently high levels of unemployment gave rise to the notion of a "jobless recovery" where output rose without a concomitant increase in employment, leading to greater income inequality and to labor market pathologies such as high levels of youth unemployment and rising long-term unemployment. From 2000 to 2008, the transition economies experienced something of a boom, fueled in part by the global bubble economy that increased inflows of FDI, thereby increasing both the rate of capital formation and the growth of TFP through technology spillovers (Brada and Slaveski, 2012). Financial capital inflows increased as well, stimulating domestic demand and, at times, setting off housing and asset bubbles. The expansion of the global economy also increased the prices of fuels and minerals exported by some transition economies as well as the demand for steel, automobiles, etc., which were important in the export mix of other transition economies. On the eve of the crisis, unemployment rates had fallen significantly, suggesting that the effects of whatever labor market distortions, such as labor hoarding, soft budget constraints for employers and restrictive labor regulations, that had existed earlier in the transition period had ceased to be barriers to effective labor market functioning, and, although the crisis led to sharp increases in unemployment, the effect appears to have been short lived. This paper highlights the main issues surrounding the performance of transition economy labor markets, reviews these within the framework of a consistent set of macroeconomic data, identifies areas of agreement and those where further research is needed, and draws policy conclusions where possible. We begin by examining the macroeconomic trends evident during the transition, discuss some of the issues pertaining to the data on unemployment, and examine the literature on the functioning of the labor market from a macroeconomic standpoint. In the second half of this paper we examine microeconomic and structural factors that shape employment and labor market performance. 2. Macroeconomic Trends and Their Effect on Labor Markets 2.1 Reforms and Growth The period since 1989 has seen major changes in output and employment in the countries of Eastern Europe and the former Soviet Union (FSU). Initially, all these countries saw a large decline in GDP (Table 1). The true extent of the decline in economic activity may have been less than official statistics suggest, and the true magnitude of the decline is the subject of considerable controversy (Campos and Coricelli, 2002), due to possible errors in the measurement of output (Johnson et al., 1997); to problems in the proper measurement of prices in a period of high inflation, large relative price and quality changes, and changes in the structure of economic activity (Filer and Hanousek, 2000); and to the emergence of a large, partly private, shadow economy of unregistered producers and under-reported output (Dobozi and Pohl, 1995). Nevertheless, for the purposes of this paper, we assume that the large inter-country differences in performance, as well as of the general path of output and inflation, can be viewed as reasonable approximations of events in the transition economies. …

FDI inflows and trade imbalances: Evidence from Developing Asia

Abstract: 1. Introduction For most developing and transition countries, the relationships between trade and Foreign Direct Investment (FDI) are at the heart of globalization. On the one hand, overall growth dynamics in the developing regions have been stimulated by strong growth in their exports. On the other hand, the new international financial landscape has been characterized by an unprecedented growth in private financial flows to the detriment of official development assistance. Since 1993, FDI has become the most important external financing source in the developing world, followed by portfolio investment and private loans (see Figure 1). In 2010, the share of FDI inflows reached 51% of total capital flows to developing countries, while their inward stock of FDI amounted to about one third of their Gross Domestic Product (4) (GDP) compared to just 10% in 1980 (UNCTAD, 2011a). [FIGURE 1 OMITTED] Among the developing regions of the world, East Asia and Pacific (EAP) have clearly been the most successful in increasing exports (by volume) and in attracting FDI. The increased international mobility of both goods, services and intangible assets, together with the greater flexibility and divisibility of the production process, has made the entry of Multinational Corporations (MNCs) into manufacturing and services the key vehicle for Asia's successful integration into the global economy. Boosted largely by MNCs from the North (as well as by those from the South), the increasing fragmentation of production in the global economy has in turn led to increased exports of manufacturing parts, components and associated services (see Figure 2). The largest wave of production-sharing schemes is to be found in developing countries, particularly in the dynamic Asian economies (UNCTAD, 2011b). [FIGURE 2 OMITTED] The rapidly growing Asian countries' successful experience with exports and FDI has reinforced the tendency of international organizations to prescribe policies in favor of trade liberalization and foreign capital attraction. This means that the overall pattern of export growth is dependent on participation in production fragmentation or the "global supply chains" that link developing countries to international markets (UNCTAD, 2011b). However, many observers argue that the dynamics of trade and financial integration have increased the vulnerability of national economies to the risks incurred by different cost, market and production connectivities. In contrast to the industrial economies in the Bretton Woods system, the developing and transition countries are much more open, with a greater trade component and more prevalent capital inflows. Open economies today react differently to relative price shocks, or demand and supply factors. In particular, the development of international production networks and related FDI flows has increased the import content of export production. While they enjoy the benefits of the processing trade regime, of policies designed to promote FDI and of special economic zones, most developing countries still face balance of payments problems in conjunction with their export-oriented growth (Soukiazis and Cerqueira, 2012). Financial crises in emerging market economies illustrate the risks stemming from the volatility of private international capital flows, especially speculative short-term flows. However, few studies have investigated how export-led growth with massive capital inflows may result in current account imbalances. In view of this, the present research paper aims to investigate whether trade imbalances are linked to FDI inflows. Participation in production fragmentation operated by MNCs has enabled developing countries to enter international markets. However, one consequence of this is that their current account balances are increasingly shaped by FDI and trade. FDI can disrupt macroeconomic stability through monetary counterparts and relative price movements; it can also directly affect the balance of payments through the investment balance, as a share of GDP produced in the host country is repatriated abroad in the form of profits and dividends. …

The Democracy and Economic Growth Nexus: Empirical Evidence from Côte d'Ivoire

Abstract: This paper investigates the relation between economic growth and democracy for Cote d'Ivoire for the period 1960 to 2012. It analyzes both the long-run relation and the direction of causality. To this end, an autoregressive distributed lag (ARDL) model of cointegration and a Granger causality test have been implemented within a vector error correction model (VECM) framework. The results show cointegration in the long run when regime durability is taken into account. Indeed, for economic growth and democracy to move together in the long run, they need to be associated with regime durability. The tests for causality show long run causality running from GDP per capita and regime durability to democracy. In the short run, only the regime durability granger causes democracy. These results suggest that economic growth through strong institutions is a precondition for democratization.JEL: O10, D72, C32, P16Keywords: Democracy, Income, Cointegration, Causality(ProQuest: ... denotes formulae omitted.)1. IntroductionThe determinants of economic growth continue to be central to the debate among economists. According to the neoclassical view about the theory of growth, key factors for economic growth are labor, physical and human capital. Empirical studies, however, suggest that these factors are inadequate to understand growth and provide many instances where countries with similar per capita levels of physical and human capital realize very different rates of economic growth.Thus, other factors need to be accounted for. Many authors since Douglas North's early work (summarized in North, 1990) stressed that the main missing factors are 'institutions'. The key institutional factor considered in the literature is the political regime, notably the degree of democracy. Many developing countries in general and Sub-Saharan African countries in particular have a complex history of regime changes, where the pressures of international organizations and other aid donors for democratization play an important role.In the empirical literature, there is no consensus about the relationship between democracy and economic growth. This divergence of views on the relationship between these two variables is related either to the data and variables used in the study, the characteristics of the countries under study or the model specification (Gundlach and Pal dam, 2008). Moreover, establishing the causal effect of economic growth on democracy is challenging because of endogeneity problems like omitted variables and reverse causality issues.This paper intends to contribute to this literature by a case study of Cote d'Ivoire spanning the time period from 1960 to 2012, which has experienced three decades of single party (1960-1990) and two decades of multipartism (1990-2012). It contains a set of formal tests analyzing the direction of causality between democracy and economic growth. More specifically, the objective of this paper is to investigate the existence of a long-run relation and the direction of causality between economic growth and democracy in Cote d'Ivoire. To this end, we first perform a multivariate cointegration test with regime durability as a control variable on the country dataset mnning from 1960 to 2012 and cross-check this long-run relationship with an autoregressive distributed lag (ARDL) model approach to cointegration. Next, we use the Granger causality test within a vector error correction model (VECM) and estimate three different models using a non-linear specification: Ordinary Least Squares (OLS) estimation, Fully Modified OLS (FM-OLS) and Dynamic Ordinary Least Squares (DOLS).The rest of the paper is arranged as follows: Section 2 analyses briefly the political and economic process in Cote d'Ivoire, Section 3 describes the data sources and outlines the econometric methodology. Section 4 presents and discusses the results. Section 5 concludes the paper by drawing some policy implications. …

Heterogeneity in Institutional Effects on Economic Growth: Theory and Empirical Evidence

Abstract: This article explains the peculiarities of institutional effects on growth rates in post-communist countries. By proposing a certain dependence of the institution-growth nexus on the nature of institutional emergence, the distinction between revolutionary and evolutionary processes of institution formation is introduced. Theoretical and empirical juxtapositions show that transition countries’ institutions which are constructed revolutionarily differ from those that emerge evolutionarily in a twofold manner in their relationship to growth. Growth rates of their economies are less likely to depend on the quality of economic institutions and are more likely to be a function of the maturity of political institutions. In addition, economic institutions in post-communist countries are a product of the quality of political bodies to a greater extent than their evolutionary alternatives.

The Great Depression and the Great Recession: A Comparative Analysis of their Analogies

Abstract: The decades preceding the Great Depression and the U.S. subprime mortgage crisis have close similarities. Both decades were characterized by rapid growth without major contractions, by an increase in liquidity, a lack of inflation, and a generalized decrease in risk premiums. Additional similarities included significant changes in the financing of real estate by commercial banks along with a consolidation of the banking sector and high hopes that the efficiency of monetary policy would prevent financial crises. These decades were also characterized by the consolidation of the powers of young central banks (the Federal Reserve System in the 1920s and the European Central Bank in the 2000s), by unsuccessful attempts to control market speculation, by their international dimensions, and by the eruption of crises after the failure of a major American financial institution that could have been avoided. Understanding these analogies help us better identify the causes of the subprime mortgage crisis and prevent history from repeating itself to the extent of such large-scale devastating consequences.

When Is Ordinary Law-Making Tolerated?

Abstract: Institutions matter: they affect individual action, influence cooperation, and are crucial in making the difference between wealth and poverty, growth and stagnation. Yet, the explanatory power of modern institutional theorizing has not been exceedingly satisfactory.In contrast with the mainstream perspective, this paper suggests a theory of institutional dynamics based on the notions of justice, liberty, and tolerance. In particular, we put forward a stylized model of society, within which individuals are characterized by their ideological traits. We discuss under which conditions tensions emerge, and when demand for institutional change builds up. We conclude that today's democracies are inherently stable, and that this stability is explained by the socialist notion of liberty that characterizes the vast majority of the population of a typical modern society.JEL: A12, A13, A14, B52, D02Keywords: Legitimacy, tolerance, justice, institutions.1. From institutions to legal rulesInstitutional analysis has always played a key role in political science and sociology. On the one hand, the historical school of political science has depicted institutions as "procedures, routines, norms and conventions embedded in the organizational structure of the polity", the purpose of which is to define authority and contain conflicts (Hall and Taylor, 1996: 938). In this view, institutional resilience and path-dependence are explained by the actions of the coalitions in power, which rationally try to preserve their prerogatives by making change through ordinary law-making difficult; and also by the presence of cultural elements, as a consequence of which institutions are shaped by the individuals' visions of the world, visions that are in turn affected by the context within which individuals operate and develop their beliefs and opinions, particularly about social goals and about the purpose and scope of government (Steinmo, 1992). On the other hand, sociologists maintain that institutions are ultimately the expression of the community's shared beliefs (Berger and Luckmann, 1966). Thus, sociological institutionalism lays considerable emphasis on people's perception of the existing system of laws, government agencies, and procedures, and analyzes the possible tensions between the moral standards of a society and the formal and informal structures in place within that society.Despite their numerous points of contact, however, the historical and the sociological views have originated two different research agendas. Historical scholars have been trying to assess what kind of shocks interrupt a path-dependent process and how the actors involved react to shocks. By contrast, the sociological context has been discussing the notion of legitimacy, which ensures that the individual recognizes an institution as the source of authority and is ready to comply.The economics profession has also been aware of the importance of the institutional dimension. As Adam Smith pointed out over two centuries ago, institutions affect individual action, influence cooperation, and are crucial in making the difference between wealth and poverty, growth and stagnation.1 Not surprisingly, therefore, speculation about the role and purpose of the "humanly devised constraints that shape human interaction" (North 1990: 3) has generated a substantial literature.2 From the institutional perspective, however, the real challenge is not about searching, designing, and maintaining the best institutions. Rather, it is about explaining why individuals tolerate and possibly support the institutions they have, even when those institutions have failed to deliver the expected results - say in terms of material wealth or income growth. And it is about investigating what moves them to look for substantial institutional change.In this paper we abandon the traditional institutional analytical agenda and focus on the last two questions - institutional tolerance and institutional tensions3 - by framing an interdisciplinary approach that draws from the traditions of political-science, sociology, and economics. …

International Trade in Outermost Europe: A Comparative Analysis of Mayotte Island and French Overseas Departments

Abstract: This article analyzes determinants of exports and imports by French overseas departments and reveals insights into the market access of these ultra-peripheral regions. Special attention focuses on Mayotte Island, which will take on the status of the "Outermost Region of Europe" in 2014. The estimates, based on gravity models, show that (a) economic crises in a partner country hinders imports from French overseas departments; (b) immigration, a serious concern in Mayotte, has a significant, negative impact on the trade deficit, by both raising imports and reducing exports; (c) historical colonial links can still explain trade; and (d) a common language with the partner country boosts exports from Mayotte more than exports from other overseas departments.JEL: C5, F14, O15Keywords: Ultra-peripheral European regions, Mayotte, Gravity model(ProQuest: ... denotes formulae omitted.)1. IntroductionOur aim is to help the outermost regions to become more self-reliant.-Johannes Hahn, European commissioner, 20 June 2012Situated throughout the Atlantic and Indian Oceans, the Caribbean Sea, and in South America, the outermost regions of Europe account for more than 4 million inhabitants and represent a particular challenge for European integration. These regions-defined by their remoteness, economic dependence on a few products, small size, and insularity2-include the four French overseas departments of French Guiana, Guadeloupe, La Reunion, and Martinique; the Portuguese regions of Azores and Madeira; and Spain's Canary Islands. Mayotte Island will join this group in 2014. With this study, we seek to analyze the trade integration of these regions, which is a central focus of European policy. Because extended trade data are not available for the Spanish or Portuguese regions, we investigate French overseas departments during 1990-2011. Very few studies analyze these regions;3 no previous studies have considered Mayotte.Mayotte belongs to the Comoros Islands archipelago4 and has a long history with France. As a component of the French colonial empire, starting in 1840, Mayotte became an overseas territory in 1946, along with the other islands of the Comoros: Grande Comore, Anjouan, and Moheli. In December 1974, a referendum on the independence of the Comoros Islands was organized, involving consultation with the population, island by island. Among the four islands, only Mayotte refused independence, with a 63.8% majority. In early 1976, the population of Mayotte again confirmed overwhelmingly that it wanted to remain French (99.4%). A law passed 24 December 1976 thus granted it the status of territorial collectivity; in 2001, that status changed to a "departmental collectivity," though Mayotte did not become an actual department. The law prompted the transfer of executive power from the Prefect to the President of the General Council. Finally, on 21 February 2007, another new law shifted the status of Mayotte, in view of its possible transformation into an overseas department. On 31 March 2011, it thus became the fifth overseas department and 101st French department overall, and on 11 July 2012, the European Council recommended that it take the status of a "ultra-peripheral region" (UPR) of the European Union, starting on 1 January 2014. Considering its unique characteristics, remoteness, and insularity, Mayotte can expect to receive significant EU structural funds of approximately 475 million Euros during 2014-2020. These funds will help it complete priority projects to improve sanitation, roads, ports and airports, electrification, and education-projects for which the costs are likely to exceed 1 billion Euros.With an estimated 2009 gross domestic product (GDP) per capita of 6570 Euros (INSEE, economic accounts), Mayotte differs considerably from mainland France, as well as in relation to other overseas departments, at both economic and social levels. Specifically, its GDP per capita is approximately two times lower than that of France's other overseas departments and four times lower than that of the mainland France. …