Showing papers in "Review of Development Economics in 2011"

Need, Merit, or Self-Interest—What Determines the Allocation of Aid?

Abstract: Previous studies of aid allocation have concluded that foreign aid is allocated not only according to development needs but also according to donor self-interest. We revisit this topic and allow for donor- as well as recipient-specific effects in our analysis. In addition to comments on the statistical significance of our results we assess the relative economic importance of recipient need, merit, and donor self-interest. Our results indicate that all bilateral donors allocate aid according to their self-interest and recipient need. However, most bilateral donors seem to place little importance on recipient merit. Less than 1% of the variance of aid is accounted for by merit, ceteris paribus. The UK and Japan are exceptions: they allocate more aid to countries with higher growth, higher democracy scores, and fewer human rights abuses.

Do natural resources depress income per capita

Abstract: Most evidence for the resource curse comes from cross-country growth regressions suffers from bias originating from the high and ever-evolving volatility in commodity prices. These issues are addressed by providing new cross-country empirical evidence for the effect of resources in income per capita. Natural resource dependence (resource exports) has a significant negative effect on income per capita, especially in countries with bad rule of law or bad policies, but these results weaken substantially once we allow for endogeneity. However, the more exogenous measure of resource abundance (stock of natural capital) has a significant negative effect on income per capita even after controlling for geography, rule of law and de facto or de jure trade openness. Furthermore, this effect is more severe for countries that have little de jure trade openness. These results are robust to using alternative measures of institutional quality (expropriation and corruption instead of rule of law).

Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets

Abstract: Using a panel of 46 emerging market economies from 1997 to 2008,this paper investigates the key determi-nants of country risk premiums as measured by sovereign bond spreads.Unlike previous studies,the resultsindicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels ofpolitical risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal con-solidation narrow credit spreads,especially in countries with high initial public debt levels.The compositionof fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remainssustainable and the fiscal deficit does not worsen. 1. Introduction Notwithstanding recent developments, financial markets’ perception of credit risks inemerging economies has sharply improved over the last decade. The spread of thecomposite Emerging Market Bond Index Global (EMBIG) calculated by JP Morgantightened by more than 500 basis points between mid-2002 andAugust 2007 (Baldacci,2007). This downward trend was partially reversed during the 2007–08 subprime-induced financial crisis (IMF, 2008), particularly as spillovers spread from majorfinancial centers to emerging markets during the last quarter of 2008. However,EMBIG spreads have recently fallen back to pre-crisis levels (e.g.prior to the collapseof Lehman Brothers in September 2008) as financial markets rebounded following theactions taken by the major economies to repair their banks’ balance sheets and helpspur demand. Overall, the downward trend in bond spreads suggests that a lowerpremium is required to protect investors in emerging market economies againstcountry-specific and asset-class-wide risks than earlier in the decade.Also, the cost ofbuying protection against defaults of sovereign emerging market debt instruments, asmeasured by the spreads of credit default swap (CDS) derivative instruments, felldrastically over the last five years despite the recent cyclical uptick.The literature has attributed the long-term tightening of emerging market spreads tothree factors: (i) sound macroeconomic policies that brought inflation under control(including through more independent monetary authorities),reduced output volatility,and significant reductions in public and external debt (Ciarlone et al.,2007);(ii) highercommodity prices and favorable liquidity conditions that lowered risks and resulted inlarge capital flows to these countries (Hartelius et al., 2008); and (iii) development of

Closing the Technology Gap

Abstract: This paper focuses on the dimensions shaping the dynamics of technology. We present a model where the knowledge stock of a country grows over time as a function of three main factors: its innovation intensity, its technological infrastructures and its human capital. The latter two variables contribute to determine the absorptive capacity of a country as well as its innovative ability. Based on this theoretical framework, we carry out an empirical analysis that investigates the dynamics of technology in a large sample of developed and developing economies in the last two-decade period, and studies its relationships with the growth of income per capita in a dynamic panel model setting. The results indicate that the cross-country distributions of technological infrastructures and human capital have experienced a process of convergence, whereas the innovative intensity is characterized by increasing polarization between rich and poor economies. Thus, while the conditions for catching up have generally improved, the increasing innovation gap represents a major factor behind the observed differences in income per capita.

Banking Sector Performance in Latin America: Market Power versus Efficiency

Abstract: Since the mid-1990s the banking sector in the Latin American emerging markets has experienced profound changes due to financial liberalization, a significant increase in foreign investments, and greater merger activities often occurring following financial crises. The wave of consolidation and the rapid increase in market concentration that took place in most countries has generated concerns about the rise in banks' market power and its potential effects on consumers. This paper advances the existing literature by testing the market power (Structure–Conduct–Performance and Relative Market Power) and efficient structure (X- and scale efficiency) hypotheses for a sample of over 2500 bank observations in nine Latin American countries over 1997–2005. We use the Data Envelopment Analysis technique to obtain reliable efficiency measures. We produce evidence supporting the efficient structure hypotheses. The findings are particularly robust for the largest banking markets in the region, namely Brazil, Argentina, and Chile. Finally, capital ratios and bank size seem to be among the most important factors in explaining higher than normal profits for Latin American banks.

Natural Resource Dependence and Economic Performance in the 1970–2000 Period

Abstract: We look at the type of natural resource dependence and growth in developing countries Certain natural resources called point-source, such as oil and minerals, exhibit concentrated and capturable revenue patterns, while revenue flows from resources such as agriculture are more diffused Developing countries that export the former type of products are regarded prone to growth failure due to institutional failure We present an explicit model of growth collapse with micro-foundations in rent-seeking contests with increasing returns Our econometric analysis is among the few in this literature with a panel data dimension Point-source-type natural resource dependence does retard institutional development in both governance and democracy, which hampers growth The resource curse, however, is more general and not simply confined to mineral exporters

Institutions and the Relation between Corruption and Economic Growth

Abstract: We study the effects of bureaucratic corruption on economic growth in a framework that takes into account that corruption also affects growth through its impact on institutions. We use a formal growth framework in which corruption affects growth negatively because of individual rent-seeking and stealing of public goods, but where corruption may serve a positive role by taking over the role of institutions. We find that the overall effect of corruption on economic growth is highly dependent on the institutional setting of a country. Particularly in situations where institutions are not well developed corruption may be conducive to economic growth. We also find that the interaction among institutions themselves matters. This underscores the importance of taking into account the complete institutional setting when studying corruption, both in theory as well as empirically.

Trade Liberalization and Antidumping: Is There a Substitution Effect?

Abstract: Many nations have undergone significant trade liberalization in the last twenty years even as they have increased their use of contingent protection measures. This raises the question of whether some of the trade liberalization efforts, at times accomplished through painful reforms, have been undone through a substitution from tariffs to nontariff barriers. Among the new forms of protection, antidumping is the most relevant, as its use has spread from few developed countries to a large set of developing countries that are now among the most intense users of this instrument. This paper uses a newly developed database to examine to what extent the use of antidumping in a large set of countries is systematically influenced by the reduction of applied sectoral tariffs. The data set includes information on 29 developing and 7 developed countries from 1991 through 2002. After controlling for time-varying sectoral information as well as macroeconomic conditions, we find evidence of a substitution effect only for heavy users of antidumping among developing countries. In particular, a one standard deviation increase in sectoral trade liberalization increases the probability of observing an antidumping initiation by 32 percent. There is no similar statistically significant result for other developing countries or developed countries. We also find robust evidence of retaliation and deflection effects as determinant of antidumping filings across all subsamples.

Exploring the Links Between Corruption and Growth

Abstract: This paper models the transmission channels through which corruption indirectly affects growth. Results suggest that corruption hinders growth through its adverse effects on investment, human capital, and political instability, while fostering growth by reducing government consumption and, less robustly, increasing trade openness. Overall, a total negative effect of corruption on growth is estimated from these channels. These effects are found to be robust to modifications in model specification, sample coverage, and estimation techniques as well as tests for model exhaustiveness. The negative effect of corruption on growth is found to diminish in economies with low governance levels or a high degree of regulation. No one-size-fits-all policy response appears supportable.

Destined to Receive: The Impact of Remittances on Household Decisions in Armenia

Abstract: The paper uses data from Armenia to test the implications of remittance flows on behavior of receiving households. We find that remittance-receiving households work fewer hours and spend less on the education of their children. While saving more, these households are not leveraging their savings to borrow from the banking system to expand their business activities. This evidence suggests that the benefits of remittances might be overstated and emphasizes the importance of measuring their impact in a general- rather than a partial-equilibrium context

Origin of FDI and Intra‐Industry Domestic Spillovers: The Case of Greek and European FDI in Bulgaria

Abstract: This paper uses firm-level data to assess the horizontal impact of foreign firm ownership on domestic productivity in Bulgaria. We identify a theoretical tradeoff between technological distance (of domestic versus foreign firms) and internalization capacity (of spillovers) and examine the extent to which this is reflected in the impact on the domestic economy of different types and origins of FDI. Emphasis is placed upon the effects of Greek FDI, which is known to be of a distinctively “regional” character. We find that Greek FDI produces significantly larger positive spillovers, which appear more suitable for the Bulgarian context of transition and economic restructuring. We also unveil some notable “hysteresis” and “technology bias” effects for FDI spillovers of all origins, as well as some country-specific ownership-structure and threshold effects.

Nonlinearity between Trade Openness and Economic Development

Abstract: This paper utilizes the instrumental variable threshold regressions approach to reassess the trade–development link. It finds evidence that trade openness contributes to uneven development. Greater trade openness tends to have beneficial effects on real development of high-income countries. For low-income ones, however, trade openness appears to influence real income in a significant and negative way. The data also reveal that greater trade openness has a positive effect on capital accumulation, productivity growth, and financial development in high-income countries, but a negative impact in low-income ones.

Intra‐industry Knowledge Spillovers from Foreign Direct Investment in Research and Development: Evidence from China's “Silicon Valley”

Abstract: This study examines a specific channel of technology diffusion from multinational enterprises to domestic firms in less developed regions: research and development (R&D) activities of multinational enterprises in the host country. Using firm-level panel data from a Chinese science park, known as China's “Silicon Valley,” we find that the R&D stock of foreign-owned firms has a positive effect on the productivity of domestic firms in the same industry, while the capital stock of foreign firms has no such effect. These results suggest that foreign firms' knowledge spills over within industries through their R&D activities, but not through their production activities. In addition, we find no evidence of spillovers from domestic firms or firms from Hong Kong, Macao, or Taiwan, suggesting that the size of knowledge spillovers is larger when the technology gap between source and recipient firms is larger.

Informal Employment and the Role of Regional Governance

Abstract: The aim of this paper is to provide an explanation to why the degree of informal employment may vary substantially between different regions within a country. In Brazil, 45% of workers in the urban labor force are employed informally. The degree of informal employment, however, varies substantially across regions, with some cities having 20% and others having 80% or more of their labor force in the informal sector. The hypothesis assessed here is that the quality of local governance-or government effectiveness-affects the decisions of workers and businesses as to whether to participate in the formal or the informal sector. The empirical analysis, based on data from 5500 Brazilian municipalities, shows that informal employment is lower in regions with better governance, higher average education, and with a relatively large manufacturing sector. Endogeneity concerns are addressed as part of a series of robustness checks of the results. (Less)

Financial Openness and the Dutch Disease

Abstract: This paper studies the relationship between the degree of financial openness and Dutch disease effects of capital inflows in developing countries.The results reveal that an increase in financial openness leads to an appreciation of the real exchange rate. In particular, the study shows that an increase in inflow of foreign direct investments (FDI) results in an appreciation of the real exchange rate in more financially open countries only. The results also suggest that there is a trade-off between the resource movement effect and the spending effect in more financially open economies following an increase in FDI inflows, such that the more the tradable sector expands relative to the nontradable sector, the greater is the real exchange rate appreciation.

Do recruitment ties affect wages? An analysis using matched employer-employee data from Vietnam

Abstract: This paper examines the extent to which recruitment ties affect individual wage outcomes in small and medium scale manufacturing firms. Based on a unique matched employer-employee dataset from Vietnam we find that there is a significant positive wage premium associated with obtaining a job through an informal contact, when controlling for standard determinants of wage compensation. Moreover, we show that the mechanism through which informal contacts affect wages depends on the type of recruitment tie used. The findings are robust across location, firm size categories and different worker types.

Determinants of International R&D Outsourcing: The Role of Trade

Abstract: This paper investigates the determinants of international R&D outsourcing, in particular the role of trade. We construct a monopolistic competition model with heterogeneous firms where outsourcing increases a firm’s fixed transaction as well as its productivity. Financial constraints affect the decision to outsource R&D more to non-exporters than to exporters. In contrast, exporters are more sensitive to a lack of information because they have higher losses when there is technology leakage. We test these predictions using a panel database of Spanish companies. The results highlight the relevance of information in competitive markets, and the role of trade to induce companies to engage in other globalization strategies.

Business Cycle Synchronization in the Proposed East African Monetary Union: An Unobserved Component Approach

Abstract: This paper uses the business cycle synchronization criteria of the theory of optimum currency area (OCA) to examine the feasibility of the East African Community (EAC) as a monetary union. We also investigate whether the degree of business cycle synchronization has increased after the 1999 EAC Treaty. We use an unobserved component model to measure business cycle synchronization as the proportion of structural shocks that are common across different countries, and a time-varying parameter model to examine the dynamics of synchronization over time. We find that although the degree of synchronization has increased since 2000 when the EAC Treaty came into force, the proportion of shocks that is common across different countries is still small implying weak synchronization. This evidence casts doubt on the feasibility of a monetary union for the EAC as scheduled by 2012.

Do Potential Skilled Emigrants Care about Political Stability at Home

Abstract: In this paper, we consider the role of political stability in the source country as a potential reason for skilled emigration. We control for all prospective source country characteristics, and yet skilled emigration is seen to be driven by a relatively better situation of political stability in the home country. Our research clearly shows that government stability, socioeconomic conditions, investment profiles, democratic accountability, internal conflict, and ethnic tensions in source nations have significant impacts on the rate of skilled emigration for a sample of developed and developing countries. The results retain robustness even for a subset of only developing nations.

Strategic environmental policy under free trade with transboundary pollution

Abstract: We analyze the effects of trade liberalization on environmental policies in a strategic setting when there is transboundary pollution. Trade liberalization can result in a race to the bottom in environmental taxes, which makes both countries worse off. This is not due to the terms of trade motive, but rather the incentive, in a strategic setting, to reduce the incidence of transboundary pollution. With command and control policies (emission quotas), countries are unable to influence foreign emissions by strategic choice of domestic policy; hence, there is no race to the bottom. However, with internationally tradable quotas, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. Under free trade, internationally nontradable quotas result in the lowest pollution level and strictly welfare-dominate taxes. The ordering of internationally tradable quotas and pollution taxes depends, among other things, on the degree of international pollution spillovers.

External Openness and Economic Growth in Developing Countries

Abstract: This paper investigates empirically the relationship between two channels of external openness: international trade, foreign direct investment (FDI), and the rate of economic growth implied by the leader–follower model. The predictions of the theory are tested for the group of 97 developing countries in the period of 1974–2006 using static and dynamic panel data estimation methods. The estimation results show that both international trade and FDI positively contribute to growth.

Symmetric or Asymmetric Interest Rate Adjustments? Evidence from Southeastern Europe

Abstract: The purpose of this paper is to examine how effectively the wholesale interest rates are transmitted to the retail rates and whether the interest rate passthrough is symmetric or asymmetric in Greece, Bulgaria, and Slovenia. The disaggregated general-to-specific methodology is applied for testing the symmetry hypothesis in these economies. It is evident from our results that variations exist across the countries examined regarding the monetary transmission process and the symmetry hypothesis alike. This can be interpreted as an indication of a different level of competition, development, and liberalization among the banking systems in these Southeastern European economies.

The Optimal Environmental Tax and Urban Unemployment in an Open Economy

Abstract: This paper investigates how a rise in the urban pollution tax rate may affect urban unemployment and welfare in a small open Harris–Todaro (HT) model with intersectoral capital mobility. First, by formulating urban pollution as a dirty input in manufacturing, we find that an increase in the urban pollution tax rate can increase the level of urban unemployment even with intersectoral capital mobility. That is, the optimistic finding by Rapanos (2007) that environmental protection policy reduces urban unemployment in the long run does not always hold. Second, the (sub)optimal pollution tax rate under urban unemployment is higher than the Pigouvian tax rate (the marginal damage of pollution). This result opposes those of Beladi and Chao (2006) for a closed HT economy and that of Tsakiris et al. (2008) for an open HT economy with sector-specific capital.

Diversification and Specialization Paradox in Developing Country Trade

Abstract: This paper examines and resolves a puzzling issue associated with less developed country (LDC) exportcompositions.Sincethenewlyindustrializedcountry(NIC)takeoffduringtheearly1970s,LDCexportshaveinvolved an increasingly broader and diversified export base. Yet trade theories, both “old” that focus onclassic comparative advantage, and “new” which rely on scale economies, lead to expectations of growingspecialization as a concomitant of LDC takeoff.This study examines periods of rapid growth and structuraltransformationoftradeforarepresentativegroupofLDCscoveringawidegeographicandtemporalsample. 1. Introduction Economic Development literature generally agrees that increasing export diversifica-tion is a concomitant to economic development.An accepted explanation for Africa’sexport stagnation in recent decades is its dependence on mono-culture,and on a singleor small number of commodities.The fact that African countries lag behind other lessdeveloped countries (LDCs) is often explained by its

Monetary policy rules for transition economies: an empirical analysis

Abstract: In this paper, we investigate the monetary policy reaction functions for the new European Union member states. We find interesting differences when looking at both interest rates (the Taylor rule) and monetary base (the McCallum rule) as monetary policy rules. Monetary aggregate is more likely to react to the deviation of inflation from its target, while short-term interest rates are highly sensitive to the deviation of exchange rates in the Czech Republic, Poland, Slovakia, and Slovenia. For Hungary and Romania, both interest rates and money are responsive to inflation. In empirical literature, much attention is paid to the use of the Taylor-type rule for developed economies. However, our empirical results raise questions on the reliance of this rule for these transition economies.

Once Bitten: The Effects of IMF Programs on Subsequent Reserve Behaviour

Abstract: Traditional models have encountered problems in explaining the accumulation of international reserves, particularly in Asia, in the period since the late 1990s. One suggestion has been that countries have sought to self-insure against future crises, either because of a perceived increase in the cost of crises or because of the perceived conditionality costs of using IMF credits. This paper offers an empirical investigation of these ideas, disaggregating across regions and across IMF facilities. We find that IMF programs have had a significant positive effect on subsequent reserve accumulation, allowing for other determinants, and that this effect endures over time. We also find that the effect differs between Latin America and Asia, and that it is not simply a phenomenon that is associated with the Asian crisis of 1997/98. The paper goes on to discuss the implications for the design of policy and for the reform of the IMF.

Exchange Rates and Stock Prices in the MENA Countries: What Role for Oil?

Abstract: This paper considers the linkage between stock prices and exchange rates in four MENA (Middle East and North Africa) emerging markets. In contrast to the existing evidence that uses a global market index to uncover such a relationship it is found that for the sample countries oil prices emerge as the dominant factor in the above relationship. The paper considers the presence of regime shifts and evidence is found of cointegration only for the period following the 1999 oil price shock. Readjustment towards equilibrium in each stock market occurs via oil price changes. Finally, a number of robustness checks are performed and persistence profiles produced.

Environmental Product Standards in North–South Trade

Abstract: Consumption is one channel through which the environment is damaged. To protect the environment, various product standards have been introduced across the world. This paper uses a new economic geography framework to explore the effects of environmental product standards on environment in a North–South trade model. It examines the situation in which the North unilaterally introduces an environmental product standard. Specifically, those products that do not meet the standard are not allowed to be sold in the North's market. It is found that such a standard may worsen the North's environment but improve the South's environment as a result of firm relocation.

Home Bias, Border Effect and Internal Market Integration in China: Evidence from Inter‐provincial Value‐added Tax Statistics

Abstract: This paper examines the home bias in regional trade and the integration of the internal market in China using inter-provincial value-added tax statistics. The administrative border between regions is an important trade barrier that results in home bias. Using a border effect model, we find evidence of home bias in provincial trade and relatively low border effects in domestic-products trade in China. Moreover, the multilateral resistance model, based on a microeconomic foundation, also has strong power in explaining border effects in provincial trade. The empirical results imply that in accordance with some developed economies, China's market integration appears to have reached a high level.

Mexico's business cycles and synchronization with the USA in the post-NAFTA Years

Abstract: The full text of this article is not available on SOAR. WSU users can access the article via database licensed by University Libraries: http://libcat.wichita.edu/vwebv/holdingsInfo?bibId=1448254