Showing papers in "The World Economy in 2016"

A Practitioners’ Guide to Gravity Models of International Migration

Abstract: The use of bilateral data for the analysis of international migration is at the same time a blessing and a curse. It is a blessing since the dyadic dimension of the data allows researchers to analyze many previously unaddressed questions in the literature. This paper reviews some of the recent studies using this type of data in a gravity framework in order to identify important factors a ecting international migration ows. Our review demonstrates that considerable e orts have been conducted by many scholars and that overall we have a much better knowledge of the relevant determinants. Still, the use of bilateral data is also a curse. The methodological challenges that are implied by the use of this type of data are numerous and our paper covers some of the most signi cant ones. These include sound theoretical foundations, accounting for multilateral resistance to migration as well the choice of appropriate estimation techniques dealing with the nature of the migration data and with endogeneity concerns

Current Account ‘Core–Periphery Dualism’ in the EMU

Abstract: Current account (CA) dispersion within European Union (EU) Member States has been increasing progressively since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process able to stimulate a log run rebalancing as neoclassical theory predicts. To shed light on the issue, this paper investigates the determinants of Eurozone CA imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries, three time horizons corresponding to various steps in European integration, different control variables and several panel econometric methods. The results suggest that within the EU group of countries financial integration contributed to explain the CA deterioration in the peripheral countries especially in the post-EMU period creating an asymmetric behaviour within the EMU. From a financial stability perspective, this ‘divergence’ could hinder the effectiveness of monetary policy. By reducing the apparent benefits of participating in the monetary union, it also raises the risk of a break-up.

Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements

Abstract: In a seminal article, Rose (2004) found that the assumed positive impact of the WTO on international trade was questionable. This finding has been scrutinised and modified in subsequent research, using different data sets, econometric methods and separating the WTO from other forms of trade agreements. A key characteristic of the subsequent literature is the rather simplistic way in which trade agreements are treated whereby all trade agreements are lumped together. Trade agreements come, however, in many different forms and shapes. This study addresses these differences in trade agreements. Using a unique database of 296 trade agreements, we distinguish 17 trade-related policy domains and indicate whether the agreements contain legally enforceable commitments. This extensive and novel taxonomy of trade agreements enables us to allow for the possible heterogeneity of the impact of trade agreements on international trade. Using a gravity model, we find that trade agreement heterogeneity indeed matters for international trade and that countries experience significant trade increases due to comprehensive trade agreements even if not all participants are in the WTO.

The Impact of Sanitary and Phytosanitary Measures on Market Entry and Trade Flows

Abstract: In an attempt to disentangle the impact of sanitary and phytosanitary (SPS) measures on trade patterns, we estimate a Heckman selection model on the HS4 disaggregated level of trade. We find that aggregated SPS measures constitute barriers to agricultural and food trade consistently to all exporters. But conditional on market entry, trade flows are positively affected by SPS measures. Additionally, we find that SPS measures related to conformity assessment hamper market entry and trade flows, while SPS measures related to product characteristics pose an entry barrier but increase bilateral trade flows conditional on meeting the standard.

A New Global Index of Infrastructure: Construction, Rankings and Applications

Abstract: We construct comprehensive and comparable indices on the most relevant components of economic infrastructure. An unobserved components model is employed to cover the largest possible number of developing and developed countries over the period 1990–2010. We map major findings from the new indices of infrastructure and provide country rankings, which we also compare with subjective assessments of infrastructure in the World Economic Forum's Global Competitiveness Report. Finally, we exemplify possible applications related to trade and foreign aid. By overcoming several data limitations, our new global index can help assess the links between infrastructure and economic development more systematically.

The Effects of Greenfield FDI and Cross‐border M&As on Total Factor Productivity

Abstract: We examine the effects of greenfield FDI and cross-border mergers and acquisitions (M&As) on total factor productivity (TFP) in developed and developing host countries of FDI. Using panel data for up to 123 countries over the period from 2003 to 2011, we find that greenfield FDI has no statistically significant effect on TFP while M&As have a positive effect on TFP in the total sample. Greenfield FDI and M&As both appear to be ineffective in increasing TFP in the sub-sample of developing countries. In contrast, M&As have a strong and positive effect on TFP in the sub-sample of developed countries.

Informality in the process of development and growth

Abstract: ‘Informality’ is a term used to describe the collection of firms, workers and activities that operate outside the legal and regulatory systems. It is widespread in the majority of developing countries – in a typical developing economy, the informal sector produces about 35 per cent of GDP and employs 70 per cent of the labour force. This paper studies informality in the context of economic development by presenting a model and projections that link informality, regulations, migration and economic growth. This analytical framework highlights the trade-offs between formality and informality, the relationship between the different types of informality, and the connection between them and the forces of labour, capital and productivity growth. The paper models the behaviour of the informal sector based on the following fundamental asymmetry: formal firms confront higher labour costs, while informal firms face higher capital costs and lower productivity. Using mandated minimum wages as the policy-induced distortion, the model first studies the static allocation of formal and informal capital and labour in a modern economy. Second, it opens the possibility of labour migration from a rudimentary economy with ample supply of labour (e.g. rural areas or less advanced neighbouring countries). Third, the model analyses the dynamic behaviour of the formal and informal sectors, considering how they affect and are affected by economic growth and labour migration. Then, the paper presents projections for the size of labour informality, in the modern and rudimentary economies, in the next two decades for a large group of countries representing all regions of the world. The projections are based on the calibration and simulation of the model and serve to discuss its usefulness and limitations.

Determinants of International Student Migration

Abstract: This paper considers what factors determine the migration of overseas students, when students cross borders for higher education. We utilise a gravity model for international student mobility and derive estimates for a sample of 18 countries of destination and 38 countries of origin over the period 2005–11. Our results confirm that geographical distance and the presence of a common language are powerful in explaining bilateral student flows. Our most interesting finding is that time zone differences have a statistically significant and economically large effect in determining international student flows.

Global competition for attracting talents and the world economy

Abstract: This paper studies the effect of liberalizing the international mobility of college-educated workers on the world economy. First, we combine data on effective and desired migration to identify the net pool of foreign talents (NPFT) of selected high-income countries. So far, the EU15 has poorly benefited from its NPFT while the US has mobilized a large portion of it. Second, we use a micro-founded model to simulate the effects of skill-selective liberalization shocks. In our benchmark model, a worldwide liberalization induces larger long-run income gains for the EU15 (+8.8 percent) than for the US (+5.9 percent). However, less attractive EU countries such as Austria, Belgium, Germany, Greece, Luxembourg and the Netherlands benefit less than the US. In addition, liberalizing high-skilled migration decreases income per worker by 2.5 percent in developing countries. Overall, it increases efficiency (+6.2 percent in the worldwide average level of income per capita) and inequality (+1.2 percentage points in the Theil inequality index). Much greater effects can be obtained if total factor productivity varies with human capital.

Accounting for the Differences Between Gross and Value Added Trade Balances

Abstract: One of the main stylised facts that has emerged from the recent literature on global value chains is that bilateral trade imbalances in gross terms can differ substantially from those measured in value added terms. However, the factors underlying the extent and sign of the differences between the two measures have so far not been investigated. Here, we propose a novel decomposition of bilateral gross trade balances that accounts for the differences between gross and value added concepts. The bilateral analysis contributes conceptually to the literature on double counting in trade by identifying the trade flow in which value added is actually recorded for the first time in international trade statistics. We apply our decomposition framework to the development of intra-EU-27 trade balances from 1995 to 2011 and show that a growing share of intra-EU bilateral trade balances is due to demand in countries other than the two direct trading partners. The latter accounted for 25 per cent of the total variance of intra-EU gross bilateral trade balances in 2011, which marks a considerable rise from 3 per cent in 1995.

Technology Spillovers from FDI. Evidence on the Intensity of Different Spillover Channels

Abstract: The aim of this paper is to empirically disentangle specific channels of technology spillovers from FDI to domestic firms. To this end, we look into the mechanisms of technology diffusion through FDI and investigate six measures of spillovers in a sample of Romanian firms for the period 1999–2007. Our results show that the position in the supply chain is essential for capturing FDI spillovers, as local suppliers enjoy productivity gains, while local clients suffer productivity losses. We also show that foreign affiliates internalise all benefits associated with supplier upgrading, thus raising concerns about the social return on technology transfer. Additionally, our approach allows us to separate horizontal spillovers into a competition effect, an imitation/demonstration effect and a labour mobility component. We find only labour mobility to act as an efficient channel for horizontal knowledge diffusion, even though its direction depends highly on human capital.

EU Trade Preferences and Export Diversification

Abstract: Since at least the 1960s, the European Union (EU) has offered various kinds of non-reciprocal trade preferences for developing countries. Originally, these trade preferences had at least two policy goals: (i) to increase export volumes for developing countries and thereby boost their export earnings, and (ii) to facilitate export diversification. While extensive research has confirmed that the first of these goals is typically met, the second goal seems to have been largely forgotten by researchers as well as in policy circles. The aim of this paper is therefore to analyse the impact of the EU’s non-reciprocal trade preferences for developing countries on export diversification. Our estimation results suggest that some trade preference programs, such as the Generalised Scheme of Preferences (GSP), are associated with increasing ranges of export products. By contrast, preferences offered to Mediterranean countries typically have no significant effects, and African, Caribbean and Pacific (ACP) preferences actually have negative effects toward the end of our time period, suggesting that ACP countries may respond to preferences by specializing into fewer goods. (Less)

FDI and Financial Market Development in Africa

Abstract: The literature on the relationship between foreign direct investment (FDI), financial market development (FMD) and economic growth focuses mainly on two aspects: the relationship between FDI and economic growth, and the role played by FMD in that linkage. The literature is almost silent on the relationship and the direction of causality between FDI and FMD. Although it has been established that FDI contributes more to growth in countries with a more developed financial market, it is not clear how FDI and FMD interact with each other. The aim of this paper is to fill this gap in the African context. Particularly, in Africa, where stock markets experience low liquidity and less transparency, FDI can be an impetus for financial market reforms and serve as a mechanism to improve the transparency and the depth of the financial markets. Also, well-functioning financial markets can help channel foreign investments more efficiently into productive sectors, and therefore create more value for investors, hence making the countries more attractive to FDI. In short, both FDI and FMD will impact each other simultaneously, which is confirmed by our findings. We document a bidirectional causality between FDI and FMD. Furthermore, the multivariate regression results of the system of simultaneous equations also confirm the positive relationship between FDI and FMD in Africa. We also find that FDI contributes to economic growth in Africa after controlling for endogeneity between FDI, FMD and economic growth.

The China (Shanghai) Pilot Free Trade Zone: Background, Developments and Preliminary Assessment of Initial Impacts

Abstract: The China (Shanghai) Pilot Free Trade Zone (SPFTZ) founded one year ago is a trial for China's new round of reform and opening up, which has promised liberalisation on the capital account and trade facilitation as its main objectives. Here, we discuss why China adopted such a pilot zone after three decades of economic development, and explore what the differences are between the SPFTZ and other free trade areas, and developments of the SPFTZ in the past year. We also make a preliminary assessment of the SPFTZ's initial impacts, especially of its impact on China's capital account opening and financial liberalisation. It is possible that the successful practice of the SPFTZ and more pilot policies replicated in China will give rise to a more balanced Chinese economy in the following decade.

Assessing Regional Risks From Pandemic Influenza: A Scenario Analysis

Abstract: We analyse the economic risks from two influenza pandemics that represent extremes along the virulence-infectiousness continuum of possible pandemics: a high virulence–low infectiousness event and a low virulence–high infectiousness event. Our analysis involves linking an epidemiological model and a quarterly computable general equilibrium model. We find that global economic activity is more strongly affected by a pandemic with high infection rates rather than high virulence rates, all else being equal. Regions with a higher degree of economic integration with the world economy face greater risks of negative effects than less integrated regions.

When an Importer's Protection of IPR Interacts with an Exporter's Level of Technology: Comparing the Impacts on the Exports of the North and South

Abstract: Using bilateral trade data of countries from 2000 to 2007, this paper contributes to the empirical literature on the role of intellectual property rights (IPRs) in global trade. The existing literature has focused on how IPRs in the destination country affect exports from a source country. In this paper, we add an additional dimension: the level of technology of the exporting country (LT). This is quite important for distinguishing the impact of IPRs on the exports of developed and developing countries, since the technology levels vary across countries at different stages of development and intellectual property rights better protect exports that are technologically advanced than exports that are imitative and potentially infringing. By factoring in the level of technology (LT), our empirical analysis makes the case that IPRs can act as barrier to exports from the South, especially the rapidly catching-up economies, and thus as one source for the middle-income trap phenomenon.

The concurrent impact of Cultural, Political, and Spatial Distances on International Mergers and Acquisitions

Abstract: This paper explores the concurrent effects of cultural, political, and spatial distances on mergers and acquisitions (M&A) flows occurring between any two countries belonging to the whole European Union (27 States) or to the European Neighbours group (16 States) over the period 2000–11. In the econometric analysis, based on zero-inflated models, we simultaneously estimate the probability of engaging in a cross-border M&A and the intensity of the deals. This allows us to adequately model the two different mechanisms which may result in the absence of deals in the cross-border bilateral M&A transactions. The absence of deals may be due to either the lack of any transactions or unsuccessful negotiations. Taking into account the effect of population, gross domestic product, technological capital, financial conditions and quality of the institutions, we find robust evidence that the multi-dimensional distance between two countries negatively affects both the probability and the intensity of M&A deals.

How Do Exporters React to Changes in Cost Competitiveness

Abstract: Various international institutions such as the European Commission, the ECB and the OECD often use unit labour costs as a measure of international competitiveness. The goal of this paper was to examine how well this measure is related to international export performance at the firm level. To this end, we use Belgian firm-level data for the period 1999 to 2010 to analyse the impact of unit labour costs on exports. We find an estimated elasticity of the intensive margin of exports with respect to unit labour costs between −0.2 and −0.4. This elasticity varies between sectors and between firms, with more labour-intensive firms having a higher elasticity. The microdata also enable us to analyse the impact of unit labour costs on the extensive margin. Our results show that higher unit labour costs reduce the probability of starting to export for non-exporters and increase the probability of exporters stopping. While our results show that unit labour costs have an impact on the intensive margin and extensive margin of firm-level exports, the effect is rather low, suggesting that pass-through of costs into prices is limited. The latter is consistent with recent trade models emphasising that not only relative costs, but also demand factors such as quality and taste matter for explaining firm-level exports.

Does the Quality of Investment Protection Affect FDI Flows to Developing Countries? Evidence from Latin America

Abstract: Studies on the impact of international investment agreements (IIAs), including bilateral investment treaties (BITs), on foreign direct investment (FDI) inflows have been inconclusive. This paper contributes to the debate about the effectiveness of IIAs using an original database that differentiates between investment agreements according to the quality of investor protection, and which covers a wide variety of trade and investment agreements signed and ratified in the Americas. We find evidence that in the least likely case of south–south FDI flows, high-quality international investment treaties have a demonstrable effect on foreign direct investment inflows. Moreover, international investment agreements appear to be most effective in a context of deeper economic integration. That is, they work better when they provide higher quality protection to investors and when they are combined with other preferential economic integration agreements, such as trade agreements.

Institutional Differences and the Direction of Bilateral Foreign Direct Investment Flows: Are South–South Flows any Different than the Rest?

Abstract: We explore the asymmetric effects of institutional differences on bilateral foreign direct investment (FDI) flows conditional on countries' development levels, previous experiences of foreign investors and bilateral trade relations. The empirical results using bilateral FDI data from 134 countries during 1990–2009 suggest that institutional differences create entry barriers for foreign investors only in North–South and South–North directions, and more so for the former. Furthermore, Southern investors appear to have a comparative advantage in institutionally different developing countries. Finally, we find no evidence that investor experiences in other institutionally different countries or existing trade linkages negate the negative effect of institutional distance.

Impacts of Emerging Asia on African and Latin American Trade: Projections to 2030

Abstract: Rapid growth in Asia's emerging economies has boosted export earnings of resource-rich economies over the past decade. Whether or not those high growth rates continue, how will structural changes in Asia alter the relative importance of their imports of primary products? This paper projects production and trade patterns of Africa and Latin America to 2030 under various growth and policy scenarios in Asia, using the GTAP model of the global economy. We compare a projection assuming relatively conservative economic growth in China and India with a projection in which those economies continue to grow rapidly (albeit slower than in the previous decade). We then compare our conservative growth baseline with two alternative scenarios: one assuming Africa and Latin America choose to invest more in public agricultural RD the other assuming China and India dampen that import growth by restricting their imports of key food grains (following the historical pattern of economies such as Japan and Korea). The final section summarises the results and draws out policy implications for Latin America and Africa.

Are Trade Preferences more Effective than Aid in Supporting Exports? Evidence from the Everything But Arms Preference Scheme

Abstract: This study examines the effect of the Everything But Arms (EBA) trade preferences regime on exports from African, Caribbean and Pacific countries (ACP) to the European Union (EU). With this aim, an augmented gravity model is estimated for exports from the 79 ACP countries to the EU-15 for the time period 1995 to 2005 using panel data techniques. The model estimates are used to quantify the effect of the EBA preferences on the ACP LDCs’ export performance and to compare it with the impact of official development assistance. In addition to their separate effects, the combined impact of EBA and aid flows is examined. The main results do not confirm a positive effect of the EBA regime on exports. Otherwise, the combined effect of EBA and aid on exports is positive, supporting an EU development strategy that includes both sorts of assistance, aid and trade preferences.

Heterogeneous Firms, Globalisation and the Distance Puzzle

Abstract: Despite the strong pace of globalisation, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman et al. (2008) (HMR henceforth). Using three different data sets, we find that the distance coefficient increases over time when ordinary least squares (OLS) is used, while the non-linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle, thus, arises from a growing bias of OLS estimates. The latter is explained by an increase in the importance of the bias from omitting the number of heterogeneous exporting firms relative to the bias from omitting zero trade flows. Furthermore, we show that including zero trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).

EU Anti‐dumping and Tariff Cuts: Trade Policy Substitution?

Abstract: The world trading system in its current form aims at reducing multilateral trade barriers across the board. Indeed, the last successfully concluded multilateral trade negotiations led to substantial tariff concessions on the part of most developed economies. What, however, happened to other forms of import protection? Have substantial tariff concessions subsequently been replaced by the use of alternative forms of import protection? In this paper we empirically investigate the relationship between negotiated external tariff cuts and the subsequent use of anti-dumping actions by the EU. Evidence is found for larger Uruguay Round tariff cuts increasing the probability of subsequent anti-dumping investigations.

Did Globalisation Influence Credit Market Deregulation

Abstract: We investigate whether globalisation influenced credit market deregulation over the period 1970-2010. Globalisation is measured by the KOF indices of globalisation. Credit market deregulation is measured by the credit market freedom indicators of the Fraser Institute. The results from both cross-sectional and panel regressions using ordinary least squares indicate a positive correlation between globalisation and credit market deregulation. We account for reverse causality using predicted trade openness as an instrumental variable and show that this approach gives rise to different conclusions. Two-stage least squares estimations do not show that globalisation had a causal influence on credit market deregulation.

Measuring the Impact of China's Export Growth on its Asian Neighbours

Abstract: The rise of China as an economic power has led to concern in many countries, especially among Asian countries, that this development poses a serious threat to their own economic performance and in particular their ability to export. The empirical support for this view remains inconsistent however: with mixed evidence for the view that Chinese exports has harmed or helped exports by other Asian economies and which countries are more or less affected. One explanation for these inconsistencies might include the various biases that follow from the use of a gravity model that is specified in an a-theoretical manner. In this paper, we study the effect of the Chinese exports growth on those by other Asian countries using the empirical framework outlined by Baldwin and Taglioni (2006). The disadvantage of this approach is that we capture the relative effect rather than its direction. That is, when using the theoretically robust gravity model we are able to identify which countries are more or less harmed by Chinese exports and not whether the effect is positive or negative. To identify that we use instead trade on parts and components and final goods. Taken together we evidence of a positive relation between Chinese and its Asian neighbours’ exports, with countries with greater endowments of human capital and capital-labour ratio benefiting most from this growth.

Variable Trade Costs, Composition Effects and the Intensive Margin of Trade

Abstract: We estimate the elasticity of extra EU French firm-level exports with respect to applied tariffs – a variable trade cost. We implement a method controlling for unobserved firm characteristics driving selection in exports market, and controlling for the multilateral resistance terms. Results confirm a significant negative impact of tariffs on firm-level exports, with one fifth of this impact falling on the induced adjustment in the exporters' product mix. When controlling for this adjustment and focusing on the core exported products, the elasticity of the product-destination firm-level exports with respect to applied tariffs is estimated at about −2.5.

Legal But Costly: An Analysis of the EU GM Regulation in the Light of the WTO Trade Dispute Between the EU and the USA

Abstract: In this study, we investigate the new European Union (EU) regulations in the light of the ruling by the World Trade Organization (WTO) panel on the trade in genetically modified crops. To this end, we describe: the basic differences in approaches between the EU and the complaining parties with regard to genetically modified crops, what the main arguments were of the complaining parties as well as the defence of the EU, what the final judgement of the panel was and finally, we describe the current EU regulations. We then analyse to what extent, the arguments and conclusions of the panel still hold regarding the new EU legislation. We find that parts of the current EU legislation, that is, the safety bans as they are currently in place, are in breach of the WTO commitments. Moreover, the new approval procedures have the potential to also break these rules, although whether or not they will, depends on how the European Commission acts. Whether or not the EU will be challenged at the WTO remains an open question, as the decision to fight before the WTO may be more costly than working out new bilateral trade agreements.

Accounting for Stylised Facts about Recent Anti-dumping: Retaliation and Innovation

Abstract: Recent work has found certain stylised facts about anti-dumping (AD) actions. (i) AD actions are mostly between industrial and developing countries; (ii) developing countries use AD to retaliate against industrial countries; and (iii) AD is concentrated in R&D-intensive industries. This study develops an analytical framework that can account for these empirical findings. The model suggests that market expansions and/or improvement in R&D capability in the South are essential in avoiding AD wars with the North. Interestingly, stricter enforcement of intellectual property rights in the South has little effect on stopping AD wars between the North and the South.

RTAs' Proliferation and Trade‐diversion Effects: Evidence of the ‘Spaghetti Bowl’ Phenomenon

Abstract: This paper investigates the trade-diversion effects of regional trade agreements (RTAs), so-called “Spaghetti bowl” Phenomenon (SBP), in multilateral trade. The SBP is due to the proliferation of RTAs. Thus, we investigate the relationship between the number of RTAs concluded by a country and the additional trade value attributed to an RTA. The main finding reveals a negative trade-effect between them, confirming the existence of SBP multilateral trade. However, results could not conclude evidence of a negative effect of overlapping RTAs, involving the existence of SBP, within North-North, North-South or South-South trade. But, the additional trade value attributed to an RTA concluded with EU countries or US seems to confirm significantly a trade-diversion effect because of the number of RTAs signed by these countries.