Showing papers in "The World Economy in 2001"

Benefits and costs of international financial integration : theory and facts

Abstract: The author provides a selective review of the recent analytical and empirical literature on the benefits and costs of international financial integration. He discusses the impact of financial openness on consumption, investment, and growth, and the impact of foreign bank entry on the domestic financial system. Consistent with some recent studies, the author argues that financial integration must be carefully prepared and managed to ensure that the benefits outweigh the short-run risks. Prudent macroeconomic management, adequate supervision and prudential regulation of the financial system, greater transparency, and improved capacity to manage risk in the private sector are important requirements for coping with potentially abrupt reversals in pro-cyclical, short-term capital flows. The author adopts a more skeptical view than some assessments in two areas, however. First, only foreign direct investment appears to provide dynamic gains and improved prospects for growth; the evidence on the benefits of other types of capital flows remains weak. Second, empirical research on the net benefits associated with foreign bank penetration is far from conclusive; in particular, the possibility that such penetration may lead to adverse changes in the allocation of credit among domestic firms cannot be dismissed on the basis of the existing evidence.

The Suitability of ASEAN for a Regional Currency Arrangement

Abstract: This paper examines the costs, benefits, preconditions, and implications of an Association of Southeast Asian Nations (ASEAN) regional currency arrangement that is assumed to culminate in a regional currency. On economic criteria, ASEAN appears less suited for a regional currency arrangement than Europe before the Maastricht Treaty, although the difference is not large. The transition to European Monetary Union (EMU) indicates that the path toward a common currency is fraught with difficulty. A firm political commitment would seem to be vital to ensuring that an attempt to form a regional currency arrangement is not viewed as simply another fixed exchange rate regime, open to speculative crises.

The Unbalanced Uruguay Round Outcome: The New Areas in Future WTO Negotiations

Abstract: The Uruguay Round involved a grand North-South bargain: The North reduced import barriers, particularly in textiles and agriculture. The South adopted new domestic regulations in such areas as services and intellectual property-changes that would lead to increased purchases from the North. In mercantilist economics, apples for apples-imports for imports. In real economics, apples for oranges. The authors argue that while the North's reduction of import barriers benefits both the North and the South, the new domestic regulations adopted by countries of the South could prove costly to those countries. To begin with, the regulations will be expensive to implement. And while the cost side of their impact is secured by a legal obligation (in the case of intellectual property rights, for example, the cost is higher prices for patented goods), the benefits side is not so secured.

International Cartel Enforcement: Lessons from the 1990s

Abstract: The enforcement record of the 1990s shows that private international cartels are not defunct--nor do they always fall quickly under the weight of their own incentive problems. Of a sample of 40 such cartels prosecuted by the United States and the European Union in the 1990s, 24 lasted at least four years. And for the 20 cartels in this sample where sales data are available, the annual worldwide turnover in affected products exceeded $30 billion. National competition policies address harm in domestic markets, and in some cases prohibit cartels without taking strong enforcement measures. The authors propose a series of reforms to national policies and steps to enhance international cooperation that will strengthen the deterrents against international cartelization. Furthermore, the authors argue that aggressive prosecution of cartels must be complemented by vigilance in other areas of competition policy. If not, firms will respond to the enhanced deterrents to cartelization by merging or by taking other measures that lessen competitive pressures.

Private Foreign Investment in India: Pain or Panacea?

Abstract: Private foreign capital, whose presence in Indian industry was long regarded with concern and suspicion, is now presented as a panacea for India's poor industrial and export performance. This paper examines available evidence to compare the behaviour and performance of domestic and foreign-controlled firms in India over the last five decades. It discusses the contribution of foreign capital to aggregate investment, balance of payments and economic growth. We assess the effects of government policy towards foreign investment, review recent changes, and outline implications for the future.

The International Competitiveness of CEEC Agriculture

Abstract: The paper surveys the price competitiveness of agricultural production in Central and East European Countries (CEECs). It draws together empirical work conducted by the authors and other studies that have estimated domestic resource cost (DRC) ratios for agriculture in various CEECs. The paper identifies that in general CEEC crop production is more internationally competitive than livestock farming. During the mid1990s, wheat production in Bulgaria, the Czech Republic, Hungary, Romania and Slovakia was internationally competitive. In contrast, during the same period, milk production was not internationally competitive. However, there is also a considerable degree of variation from country to country; very little of Slovenia's agricultural production is internationally competitive. In the livestock sector the greatest problems lie where large herds have been broken up resulting in fragmented production. This has particularly affected beef and milk production. Considering variations in DRCs by farm type, larger private farms in Hungary and the Czech Republic are more internationally competitive than smaller private farms in crop production. If CEEC producers faced average EU prices for their traded inputs and output, most could be price competitive. However, the conclusions should be treated with caution due to sensitivity of DRC ratios to changes in international prices and the choice of the shadow prices for non-tradable inputs.

China's Accession to the WTO: Timing is Everything

Abstract: Since China’s application in 1987 to resume its status in the Generalized Agreement on Trade and Tariffs (GATT)/World Trade Organization (WTO) there has been a great deal of debate over the timing of China’s accession. Although most of the issues relating to the timing of China’s trade liberalization have been resolved, the abolition of restrictions on Chinese textiles and clothing may still be subject to delay if the United States and Europe choose to implement the safeguards contained in the their bilateral accession agreements with China as well as in the original Agreement on Textiles and Clothing (ATC). In this paper, the effects of alternative target dates for the elimination of restrictions on textiles quotas are examined. Since this issue revolves fundamentally around the question of timing, it is most appropriately addressed in a dynamic model. In this study we use the Dynamic GTAP model. This is applied to a 19-region by 22-commodity aggregation of the GTAP database, supplemented with foreign income data. The paper finds that timing is indeed an important determinant of the profile of structural adjustment required in China and the rest of the world. In light of their interest in delayed implementation the ATC, it is interesting to note that our results suggest slower elimination of these quotas is detrimental to national welfare in North America and Europe.

Banks, Financial Liberalisation and Financial Crises in Emerging Markets

Abstract: The East Asian financial crisis has raised a series of important issues. Amongst them is the question of the role of the banking sector and financial liberalisation in contributing to financial crises. How do weaknesses in the domestic banking sector, when combined with both domestic and international financial liberalisation, engender currency crises? What is lacking in the literature is a simple conceptual framework within which these connections can be conceptualised and drawn out and in which the role of banks is explicitly discussed. This paper seeks to provide just such a framework. Within it, international financial liberalisation can be seen as fuelling a boom in domestic credit, which leads to acute balance sheet problems for domestic banks, and exposes the country concerned to a currency crisis in the event of a sudden reversal of capital inflows, which banking weaknesses may itself trigger.

The IMF After the Asian Crisis: Merits and Limitations of the ‘Long-term Development Partner’ Role

Abstract: We examine the view, espoused by a number of commentators in recent months, that the International Monetary Fund (IMF) should seek to withdraw from its long-term lending operations, in the wake of the recent financial crisis in Asia and elsewhere, and restrict itself to its ‘core competency’ of preventing and where necessary lending into financial crisis. This view is based on a belief that such long-term lending crowds out both private sector operations and short-term IMF lending; and that it is ineffective, because of weaknesses in the IMF’s conditionality. Both of these propositions, we argue, can be challenged. In the poorer developing countries there is virtually no private sector to crowd out, and Enhanced Structural Adjustment Facility (ESAF) operations have been conspicuously successful, not only at promoting growth, but also at achieving structural changes not at all achieved by aid donors such as strengthening the tax base. Such changes inevitably require a longer time-period than the standard three years of an IMF standby, not only in order to induce a production response but also in order to achieve the necessary measure of stabilisation and economic reform without imposing social pressures which wreck the production response. The latter argument is particularly powerful in middle income countries, and provides an argument for IMF support to these countries also whilst they are temporarily excluded from international capital markets. Often also a long-term presence is needed to achieve effective leverage in short-term operations. In such cases the IMF’s long-term lending should be seen as preconditional to the success of, and not as an alternative to, its short-term operations. We therefore argue for the retention of the Fund’s long-term lending function; and for this function not to be transferred to the World Bank, which has less credibility in global financial markets and less comparative advantage in macro-economic management. Measures are indeed needed to reduce the level of the IMF’s exposure to risk in poorer developing countries, but those, we believe, should consist of the preventive measures currently going on, and measures to increase the ratio of equity to debt, rather than measures which would jeopardise the progress in long-term poverty alleviation capacity achieved by the Fund over recent years

Wealth as a Criterion for Sustainable Development

Abstract: In this article the authors define sustainable development as an economic programme along which social well-being does not decline over time. It can be shown that the requirement is equivalent to the maintenance of a comprehensive measure of wealth, where an economy’s wealth is defined to be the social worth of its entire array of capital assets, including natural capital. Using data published by the World Bank on the world’s poorest regions, countries which would be regarded as having performed well if judged on the basis of such indices as GNP per head or the Human Development Index are found to have grown poorer, a few alarmingly so.

Reforming the WTO to Defuse Potential Trade Conflicts in Genetically Modified Goods

Abstract: Perdikis, Nicholas, Kerr, W. A., Hobbs, J. E., 'Reforming the WTO to defuse potential trade disputes in genetically modified goods', World Economy (2002) 24(3) pp.379-398

An Explanation of the International Variation in the Prevalence of Child Labour

Abstract: It is hypothesized that the institutional acceptability of child labor will be more prevalent when the other members of a society gain from its use. Therefore, the cross-country variation in the prevalence of child labor depends on the degree to which child labor affects the welfare of the remaining members of a society. It is demonstrated theoretically that the non-child-labor factors gain from child labor when the economy is closed. As an economy becomes more open to international trade, those gains diminish and even turn negative as the size of the economy increases. Child labor will not exist in capital abundant countries since, in them, child labor makes the non-child-labor factors worse off. It is shown empirically that the cross-country prevalence of child labor falls with increases in a nation's per capita income, its openness to trade, and its economic size. It is argued that trade sanctions, as a remedy for child labor, may be counter-productive since an open economy reduces the benefits of child labor to the other members of a society, and thereby reduces the society's incentive to allow child labor. The model also demonstrates that the economic changes brought on by democracy undermine the practice of child labor.

Tariffs and Growth in Late Nineteenth Century America

Abstract: Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.

Redefining the Role of the State

Abstract: An interview with introduction by Brian Snowdon Professor Joseph Stiglitz is without question one of the world’s leading economists. In his extensive research he has made seminal contributions to the analysis of the economic consequences of incomplete information and uncertainty. This work has greatly enhanced economists’ understanding of the welfare properties of markets and the sources of market failure. His research has also contributed to the development of better microeconomic foundations for Keynesian macroeconomic models. Most recently Professor Stiglitz has been heavily involved in controversial public policy debates relating to the East Asian crisis, problems of transition from communism to capitalism, the limitations of the ‘Washington consensus’, and globalisation and development. A common theme in all of these debates relates to the role of government and legitimate borders of the state in both developed and developing economies. In this article/interview Professor Stiglitz gives his views on these and several other important global issues.

International Organisations in a World of Regional Trade Agreements: Lessons from Club Theory

Abstract: This essay deals with the challenge that international organizations face at the turn of the millennium. The basic insight from the theory of clubs and information theory is that coordination and cooperation require dominant providers. Cooperation becomes more difficult as players become more equal in economic size. Today's environment is less conducive to cooperation than the environment after World War II. By extension, club theory suggests that Regional Trade Agreements are not flukes. They have proliferated because cooperation is feasible in smaller groups with a few larger players. There is a significant risk, however, that regional blocs may replace the multilateral cooperative process. To reduce this risk we propose the creation of an inter-bloc international organization dedicated to reduce blocs' barriers to trade and finance.

Measuring Global Drug Markets

Abstract: The continuing demand for measures of the size of global drug revenues has produced a supply of numbers that consistently overstate international financial flows. This paper shows that, rather than $500 billion, the annual figure in trade terms may be about $25 billion. As with many refined agricultural products, most of the revenues go to distributors rather than to primary producing countries. The authors explore the need for estimates of the global drug markets, address the difficulties of obtaining ‘good’ numbers, and describe opportunities for developing better estimates of flows and revenues. There are at least three reasons for caring about the numbers: they can help to improve understanding of the drug production and consumption problem and identify appropriate policy responses.

Infrastructure Development and Regulatory Reform in Sub-Saharan Africa: The Case of Air Transport

Abstract: This Technical Paper analyses the main policy issues raised by regulatory reform in air transport in sub–Saharan Africa. Its basic premise is that improving air infrastructure is of paramount importance for the region as it tries to integrate more thoroughly into the world economy. On the basis of the experience of OECD countries with privatisation, liberalisation, and regulatory design, the author analyses progress being made in sub– Saharan Africa and identifies three important case studies: the restructuring of the regional airline of Francophone Western Africa, the sell–off of the state–owned airline of Kenya, and the overall reform process in South Africa, by far the largest market in the sub–continent.The analysis highlights the importance of regional dynamics in the upgrading of the air transport industry in developing and emerging areas. Sub–Saharan Africa has made smaller progress in this respect than, for instance, Central America. As the start of the Millenium Round and ... Ce Document analyse les principales questions de politique economique soulevees par la reforme de la reglementation du transport aerien en Afrique subsaharienne. Il montre que l’amelioration de l’infrastructure du transport aerien constitue un enjeu fondamental dans les efforts de la region pour s’integrer devantage dans l’economie mondiale. Sur la base des experiences des pays de l’OCDE dans les domaines de la privatisation, de la liberalisation et de la reglementation, l’auteur analyse les progres realises en Afrique subsaharienne et identifie trois etudes de cas particulierement importantes : la restructuration de la compagnie aerienne regionale de l’Afrique de l’Ouest francophone, la vente de la compagnie aerienne publique du Kenya et le processus plus general de reformes en Afrique du Sud, de loin le plus grand marche du continent.L’analyse met en lumiere l’importance des dynamiques regionales pour renforcer l’industrie du transport aerien dans les pays emergents et en ...

Developing and Distributing Essential Medicines to Poor Countries: The DEFEND Proposal

Abstract: The poorest nations of the world suffer from extreme disease burdens, which go largely untreated because weak incomes and the prevailing system of intellectual property rights fail to provide sufficient incentives to develop new treatments and distribute them at low cost. Recent price reductions for HIV/AIDS drugs are encouraging but offer only a limited solution. We discuss the economic tradeoffs involved in supporting drug and vaccine research through exclusive rights and distributing the fruits of that research to poor countries. We offer a proposal to overcome these incentive problems. Our DEFEND ("Developing Economies' Fund for Essential New Drugs") proposal would work within the existing international legal structure but significantly would raise the returns to R&D in critical medicines and expand distribution programs. A public international organization would purchase the license rights for designated areas and distribute the drugs at low cost with a required co-payment from local governments. Furthermore, governments would restrict parallel trade to support desirable price discrimination. Costs would be funded largely by increased foreign assistance from the developed nations, but these costs would be low in relation to current aid budgets. We believe a strong program could be mounted for $8 billion to $12 billion per year and would be an extremely effective use of foreign aid.(This abstract was borrowed from another version of this item.)

Movement of Natural Persons and the GATS

Abstract: Trade in services has expanded considerably in recent years, However, numerous regulatory barriers constrain such trade, especially when it involves the temporary cross-border movement of labour, also termed, movement of natural persons. Many developing countries have the potential to export services through cross-border movement of professional, semi-skilled and unskilled labour. The General Agreement on Trade in Services (GATS) seeks to progressively liberalise trade in services via different modes of supply, including the movement of natural persons. Under the first round of GATS negotiations, member countries have made sectoral and cross-sectoral commitments to promote trade in services for these different modes of supply. This paper discusses the significance of and various constraints to the movement of natural persons in service trade. It also assesses the nature of liberalisation that has occurred in this mode of supply under GATS and notes the limited progress made in this regard. In view of the ongoing round of GATS negotiations, it suggests ways to stregthen the overall GATS framework through greater transparency and specificity in the commitments on movement of natural persons and through the introduction of various multilateral disciplines.

Dolphins, turtles, mad cows and butterflies: A look at the multilateral trading system in the 21st century

Abstract: As it approached the end of the 20 Century the multilateral trading system appeared to be on a high point. The WTO was in operation for five years, 50 years after the GATT had provided a stop-gap measure for the ill-fated ITO. With the failure of Seattle, the WTO begins the 21 Century with an uphill battle to preserve the multilateral system and to launch a new round of trade negotiations. What are the issues confronting the WTO? How can research help identify and overcome the problems facing the WTO in the next 100 years? Outline

Implementing the Uruguay Round Agreements: Problems for Developing Countries

Abstract: Unilateral removal of trade restrictions is good economics, but it is often bad domestic politics. GATT negotiations for 50 years provided a mechanism to overcome this political incorrectness. The Uruguay Round carried multilateral negotiations into many ‘new areas’ with more complex economics – areas of regulation that establish the basic business environment in the domestic economy, e.g., technical, sanitary and phytosanitary standards; intellectual property law. Doing these things is costly and you can get it wrong – the economic correctness is not so simple as the economic correctness of removing trade restrictions. Making economic sense in these areas requires cost-benefit analysis, experimentation, projects tailored to specific problems. Some developing countries would benefit from reforms in the new areas, but the Uruguay Round requirements do not identify the problems that exist in developing countries and they consequently demand establishment of institutions and regulations that will impose higher costs than benefits on the countries that implement them. Implementation issues are development issues, not trade issues. The procedures of the World Bank are suited to taking on such matters, those of the WTO are not.

The Gulf Co‐operation Council: A Slow Path to Integration?

Abstract: This paper assesses the progress towards the intra-regional integration among the GCC countries. We find that although there is limited trade integration in the region as a whole, there are specific countries (for example Bahrain and Oman) that are significantly integrated with at least one trade partner from within the region. The paper argues that the GCC region will have to create a consensus on the trade barriers on the imports from outside the region if progress towards the intra-regional integration is to be increased.

The foreign exchange origins of Japan's economic slump and low interest liquidity trap

Abstract: Japan’s macroeconomic problem has yet to be properly diagnosed. Throughout the 1990s, policy makers could not decide on the proper macro economic measures to combat the country's severe economic slump. We propose a unified explanation, with deep historical roots, of why aggregate private demand failed to recover after Japan’s stock and real estate bubbles burst in 1991 and deflationary pressure continues. The problem is not purely “made in Japan”. It arises from Japan’s unbalanced mercantile relationship with the United States. Starting in the early 1970s, numerous trade disputes between the two countries created tensions that were (temporarily) resolved by the yen going ever higher against the dollar up to 1995. In the last two decades, this persistent pressure for the yen to rise was further aggravated by Japan’s large current-account (saving) surpluses as the counterpart of America’s large current account (saving) deficits. The legacy is the expectation that trade and financial tensions will recur so that the yen will be higher 10, 20, or 30 years from now—with Japan’s (wholesale) price level forced correspondingly lower and nominal interest rates on yen assets remaining more than four percentage points less than those on dollar assets. This fear of yen appreciation, whose timing is erratic and unpredictable, now inhibits private domestic investment by both Japanese firms and households. Our theory also explains why, in the late 1990s, nominal interest rates on short-term yen assets were compressed toward zero so as to destroy the normal profit margins of the banking system. In this liquidity trap, the Bank of Japan—whose monetary policy has been quite “expansionary”—is powerless to stimulate the flagging economy. To spring the liquidity trap, eliminate deflationary pressure, and restore macro economic balance in Japan, the American and Japanese governments must act jointly to quash the expectation that the yen will be higher in the future than it is today.

Regional Versus Multilateral Solutions to Transboundary Environmental Problems: Insights from the Southeast Asian Haze

Abstract: At an analytical level, economists have often categorised the international dimensions of environmental problems and policies as being national (or competitiveness), psychological (as opposed to physical) and transboundary (global) in nature. Focusing on transboundary pollution problems, the reasons why a multilateral approach among sovereign nations to solve such global externalities may be difficult are discussed within a simple analytical framework. The paper examines the Southeast Asian experience at a regional approach to tackling the haze problem due to the Indonesian forest fires. It goes on to explore multilateral policy options and constraints for dealing with such transboundary environmental pollution problems.

Prohibition and the Market for Illegal Drugs

Abstract: Over the past 25 years in the United States, enforcement of drug prohibition has expanded dramatically. Over the same period, however, the trends in drug production and consumption have been essentially flat, and the real, purityadjusted prices of both cocaine and heroin have more than halved. This combination of facts raises questions about the effectiveness of prohibition enforcement, and it constitutes a puzzle that is interesting to explain. In this paper the authors document these facts and explore possible explanations. They do not claim to provide a complete answer, but shed light on which explanations are likely to be important.

Aggressive Legalism: The Rules of the WTO and Japan’s Emerging Trade Strategy

Abstract: Over the course of the last decade there has been a significant change in Japan’s trade strategy, one that has remained seriously unappreciated for both its contents and its policy implications. The heart of this unfolding strategy is the active use of the legal rules in the treaties and agreements overseen by the WTO to counter what the Japanese government deems to be the unreasonable acts, requests, and practices of its major trade partners. To wit, the Japanese government is deliberately using both the procedural and substantive rules of the WTO to matter to the results and outcomes of major trade disputes involving Japan. And in a relatively short time, it has shown how these rules can be made to serve as both ‘shield’ and ‘sword’ in high-profile trade disputes. This is the strategy that Japan has embraced as the principal means of dealing with its major trade partners, and it reveals much about both a new Japan and the power of international law.

IMF Programmes: Is There a Conditionality Laffer Curve?

Abstract: The long-standing debate over IMF conditionality has received a new lease of life in the context of the debate over a new international financial architecture. Conditionality has increased in recent years and some proposals for reform envisage a continuation of this trend. However, by emphasising the importance of implementation as well as design it may be argued that increased conditionality will have a negative effect on final out-turns; there may be a conditionality Laffer curve. The policy issue is whether conditionality has reached or gone beyond its optimal level. There is some evidence that is consistent with the claim that conditionality has become excessive.