Deciding to Peg the Exchange Rate in Developing Countries: The Role of Private-Sector Debt

We argue that a higher share of the private sector in a country’s external debt raises the incentive to stabilize the exchange rate. We present a simple model in which exchange rate volatility does not affect agents’ welfare if all the debt is incurred by the government. Once we introduce private banks who borrow in foreign currency and lend to domestic firms, the monetary authority has an incentive to dampen the distributional consequences of exchange rate fluctuations. Our empirical results support the hypothesis that not only the level, but also the composition of foreign debt matters for exchange-rate policy.     

Dependence on External Finance: An Inherent Industry Characteristic?

Rajan and Zingales (1998) use U.S. Compustat firm data for the 1980s to obtain measures of manufacturing sectors’ Dependence on External Finance (DEF). They take any differences in these measures to be structural/technological and thus applicable to other countries. Their joint assumptions about how to obtain representative values of DEF by sector and about why these values differ fundamentally have been adopted in additional studies seeking to show that sectors benefit unequally from a country’s level of financial development. However, the assumptions as such have not been examined. The present study, conducted with cyclically adjusted annual measures of DEF derived from U.S. industry data for 1977–1997, attempts to do so using data that are aggregated by sector.     

SECTORAL ELASTICITY OF SUBSTITUTION AND RETURNS TO SCALE IN SOUTH AFRICA

Elasticity of substitution and returns to scale are estimated on a sectoral basis for South Africa using panel-based generalised least square procedure. Apart from sectoral differences in terms of elasticity of substitution, the study found that elasticity of substitution is below unity in all of the sectors. Most of the sectors studied are found to have increasing returns to scale in production. The study further explores the implications of elasticity of factor substitution and returns to scale on growth and employment creation. It is argued that a greater number of jobs can be created from growth of sectors with constant or decreasing returns to scale than from the same level of output growth generated by sectors with increasing returns to scale. This is the case when the employment-creating potential of the same amount of additional output is compared in all the sectors examined. By virtue of scale economies, a sector like finance, insurance, real estate and business services generates more output with less proportional increase in inputs, which means growth in this sector may not have the desired impact on job creation. However, given the sector's large share (20%) of the country's total output and employment, it may generate more jobs, even if sectors like utilities and construction experience the same level of output growth. Given its importance for growth and employment, the study recommends further investigation into the reasons why elasticity of substitution is lower in sectors like utilities, mining and trade, catering and accommodation services.     

On the empirical distribution of the Balassa index

On the Empirical Distribution of the Balassa Index. — The concept of revealed comparative advantage as measured by the Balassa index is widely used in practice to determine a country’s weak and strong sectors. Interpreting the Balassa index is difficult, however, in view of the limited knowledge to date on the distribution of this index. We analyze theempirical distribution of the Balassa index and its stability and properties over time, using Japan-European Union trade data. It appears that the distribution is relatively stable over time and that the widely used rule that “a Balassa index above one” identifies a strong sector, selects about one-third of all industries. On the other hand, the distribution appears to differ markedly across countries.     

The extent of anti-export bias in the South African economy during the 1990s

An analysis of trade incentives in the South African economy during the 1990s reveals two major findings. Firstly, the extent of the anti-export bias in South Africa's trade policy during the 1990s is less than is claimed in the empirical literature. The sectors subjected to an anti-export bias accounted for around 7 per cent of total output in 1990 and 21 per cent in 1999. Secondly, sectoral output growth did not strongly correlate with the prevailing trade incentives of the 1990s. Export production continued despite the prevalence of import substituting incentives in many sectors. Although further research is needed, this suggests that attention should also be given to other factors related to domestic competitiveness (e.g. skills development, productivity enhancement, competition policy, etc.) and market access if South African export production is to be significantly increased.     

Sources of time-varying exchange rate exposure

We report evidence of a time-varying link between returns on national stock market indexes and exchange rate returns (exchange rate exposure). We use this evidence to analyze the sources of changes over time in exchange rate exposure. Using monthly data for 14 industrialized countries for the period 1975–2006, we report evidence of a cointegration relation between exchange rate exposure and the industry composition of a country’s imports, and weaker evidence of a cointegration relation between exchange rate exposure and openness to trade.     

A Simple Cross-Country Index of Trade Specialization

We propose a cross-country specialization index - the B ^⋆ - defined as the share of a given product in total country’s exports “normalized” by the average share across all countries. This indicator draws from the Revealed Comparative Advantage index suggested by Balassa (Manch Sch Econ Soc Stud 33(2):99–123, 1965), but its dynamic and cardinal properties are more suitable to perform a cross-country analysis over time. This feature is illustrated with a simple two-country by two-product stylized example and complemented with empirical evidence derived from 79 countries/groups of countries and four distinct technological sectors since the late sixties. We also provide empirical evidence on the external shape of the distribution of the B ^⋆ and on its intra-distribution dynamics in different technological sectors. The results indicate that the overall degree of specialization is higher for high-tech exports than for low-tech exports. From a dynamic point of view, there is evidence of significant persistence of the cross-country export patterns.     

Forecasting the optimal structure of the Russian banking system

The systemic approach is used to substantiate the conclusion that in sustainable banking systems, the number of banks and the structure of the banking sector depend on the amount of the dominant bank’s assets. It is shown that if Sberbank’s share in the Russian banking system’s total asset is 0.26, the number of banks in it should decrease several times and stay within the range of 55–165.     

Technological catch-up or resource rents?

This paper studies contribution of capital deepening, technological progress and efficiency improvement to economic growth while focusing on cross-country data, and thus finds itself at the crossroads of growth and development accounting. We take a production frontier approach to growth accounting and choose DEA as the frontier estimation method. To explore the effects that windfall gains from natural resource use have on growth, output data are corrected for pure natural resource rents—part of GDP figures not earned by either labor or capital. Taking into account countries’ natural resources, we find that in the two decades from 1970 to 1990 the average contribution of technological catch-up to per worker output growth was, if anything, negative on the worldwide scale and this trend continued till the mid 1990ies. Analysis of efficiency estimates also shows a possible change over the period of 1970–1990 in the effect of natural resources on country’s performance     

Trade Specialization in Latin America: The Impact of China and India

This paper examines the extent to which the growth of China and India in world markets is affecting the patterns of trade specialization in Latin American (LA) economies. We construct a measure of Revealed Comparative Advantage (RCA) by 3-digit ISIC sector, country, and year. This RCA accounts for both imports and exports. The empirical analyses explore the correlation between the RCAs of LA and the two Asian economies. Econometric estimates suggest that the specialization pattern of LA—with the exception of Mexico—has been moving in opposite direction to the trade specialization pattern of China and India. Labor-intensive sectors (both unskilled and skilled) probably have been negatively affected by the growing presence of China and India in world markets, while natural resource and scientific knowledge intensive sectors have probably benefited from China and India’s growth since 1990. JEL no.  F10, F14     

Has China de-industrialised other developing countries?

China’s opening to trade is interpreted as a shift in world average factor endowments, which altered the comparative advantage of other countries. In the rest of the world on average, this shift lowered the share of labour-intensive manufacturing in the sum of labour-intensive manufacturing and primary output by 1–3.5 percentage points, and the corresponding export share by 1.5–5 points. The de-industrialising effect varied among countries, and was clearest in East Asia. It was significant, but not big enough to be a serious threat to growth or equity in most other developing countries.     

State-of-the-art of Russia’s heat supply systems

The paper overviews the contemporary state of Russia’s heat supply systems and fuel consumption within its centralized part, the structure of heat consumption by economic sectors and types of industrial consumers. As shown, the centralized heat supply systems, providing the major part of country’s economy with low temperature heat, have heat losses and accident rate at a critical level. The state of decentralized heat supply systems of low rise buildings is not covered by national statistics at all. A second paper on the prospects and development of Russia’s heat supply systems will be published in a subsequent issue.     

Energy sanctions and the global economy: mandated vs unilateral sanctions

International Economics and Economic Policy - The world is witnessing an unprecedented episode of ‘economic warfare’, with more than 30% of global GDP (the G7’s share) pitched...     

A comparison of the executive leadership of Mikhail Gorbachev and Ronald Reagan

Abstract

This article estimates firm mark-ups to evaluate market competition in Korean manufacturing industries for the period of 1982–2004 and analyzes how the mark-ups differ across industry sectors. For the manufacturing sector as a whole, our results lead us to reject the null hypothesis of a competitive market, although market imperfection varies across industry sectors. Meanwhile, the parameter for union bargaining power over firm profit was much smaller than those found in the previous studies and insignificant in some industry sectors. Our firm-level results indicate that intra-industry variation in mark-ups and returns to scale is greater than inter-industry variation as shown in the sector analysis. Also, we find that mark-ups respond counter-cyclically to aggregate demand shocks and that the magnitudes of responses differ from industry to industry.     

Dynamic Panel Data Evidence on the Trade-Income Relation

This paper revisits the relationship between a country’s openness and its per capita income. Building on Frankel and Romer, it argues that a dynamic econometric specification similar to the ones used in empirical growth studies better fits the theoretical literature and also resolves some otherwise unresolved inconsistencies. The preferred econometric method is Blundell and Bond’s system-GMM estimator, which allows dealing with measurement error, weak instruments, and time-invariant country-specific effects. The findings confirm the existence of a strong effect of trade on income but fail to find evidence for trade as an independent factor of divergence. JEL no. F43, O40     

The investment development path in space

Although spatial hypotheses are not new in the FDI literature, their examination in the dynamic context of the ‘investment development path’ (IDP) provides some new insights. In this paper, we examine proximity to markets at different stages of the IDP as a determinant of a country’s own foreign direct investment (FDI) pattern. Our main contribution lies in the empirical estimation of the importance of spatial determinants for the emergence of inward and outward FDI. Our results support that distance to countries at higher stages up the IDP which are better integrated into the world FDI network, has a negative effect on the probability of transition from any stage of the IDP to the next. The magnitude of the impact is generally increasing in the stage of the surrounding markets.     

Baumol,Engel, and beyond: accounting for a century of structural transformation in Japan, 1885–1985†

This article examines the drivers of the long‐run structural transformation in Japan. It uses a dynamic input–output framework that decomposes the reallocation of the total output across sectors into two components: the demand side and the supply side, or technological change. To perform this task, we employ 13 seven‐sector input–output tables spanning 100 years (1885 to 1985). The results show that the demand‐side factors, as a combination of the Baumol and Engel effects, were the key explanatory factors in more than 60 per cent of the sector‐period cases in the pre‐Second World War period, while the supply‐side effect drove structural transformation in more than 75 per cent of such cases in the post‐Second World War period. Detailed decomposition results suggest that in most of the sectors, changes in private consumption were the dominant force behind the demand‐side explanations. The demand effect was found to be strongest in the commerce and services sector, which contributed to the rapid growth of GDP in Japan throughout the twentieth century.     

Monotonicity of indices of “Revealed“ comparative advantage: Empirical evidence on Hillman’s condition

Conclusions The necessary and sufficient condition suggested by Hillman [1980] for the index of RCA, when used in cross-country comparisons, to provide a one-to-one relationship between pre-trade comparative advantage and revealed comparative advantage is fulfilled for the great majority of the “commodities” traded in 1985 by 118 developing economies. Given the low level of data aggregation (the lowest for which statistical information is currently available), the large sample of countries and the high percentage of developing economies’ total exports captured in this research, we can conclude that Balassa’s export-performance index, for cross-country comparisons, is a good indicator of comparative advantage as reflected by pre-trade prices. In other words, Hillman’s condition is a useful indicator of the presence of monotonicity in indices of RCA: we have observed that at a 5-digit level of commodity aggregation, increases in Balassa’s export performance index of RCA are likely to correspond to increases in export levels. Aggregation of commodities at a 3-digit and at a 1-digit level suggests that Hillman’s condition is unlikely to be violated if the cause for values of the Hillman’s Index less than one is due to export specialization; on the contrary, the number of cases of a Hillman Index smaller than one due to a large share of world markets is expected to be negatively related to the level of aggregation. Our results suggest that Hillman’s index should be calculated in any empirical investigation trying to assess the long-term implications of trade liberalization negotiations using an export-performance index of RCA. There is evidence that, if used at a disaggregated level, the HI is a tool that may help flag cases in which the RCA index can be a misleading indicator of countries’ comparative advantage, even in cross-country comparisons. It may also help reduce disagreements regarding the most appropriate coefficient of RCA. Further research should be directed toward enlarging the sample of countries to include the entire world and to incorporate at least three years of trade so as to be able to eliminate the possible influence of cycles.     

Do Investors Care if Steve Jobs is Healthy?

Steve Jobs of Apple, Inc., is one of the best known CEOs in the world, and some stock analysts have termed him “irreplaceable.” Using conventional event study methods, we test the magnitude of these announcements on Apple’s share price and its market capitalization. We focus upon nine “events” between 2004 and 2009 in which new information about Mr. Jobs’ health was flushed into the marketplace, on occasion by Apple itself, but more often by the commentary and speculations of media observers, stock analysts and bloggers. We find that the impact of these announcements upon Apple share prices is mixed, usually modest, and disappears over time. We conclude that Jobs’ health has an impact on Apple’s share price and market capitalization, but that impact is not always negative and not nearly as large as many observers apparently believe.     

The distribution of seigniorage: a note on klein and neumann

Conclusion Building on Drazen [1985], we have developed a suitable framework for the analysis of the revenue from money and its distribution between the government and the central bank. In contrast to the accounting system offered by K-N, this framework adopts a consistent approach with respect to the stock and flow aspects of monetary revenue. Comparing their measure of the government’s share in monetary revenue with ours, one can conclude that K-N: (i) neglect the stock effects of monetary revenue; (ii) use an incorrect concept of debt in their definition of the government’s revenue; and (iii) mistakenly include a revaluation term in their definition of fiscal seigniorage. After correction for this last factor the share of the government in total seigniorage rises from 38.3 per cent to 64.8 per cent. It should be noticed that in the literature often a narrower concept of monetary revenue is used, namely the change in high-powered money (M). This concept neglects the stock component of the revenue of money (r M) as well as the operating and other costs of the central bank. At first sight, this may seem appropriate if the analysis concentrates on the tax aspect, i.e. the savings due to money creation, rather than the broader issue of evaluation of the benefits of the monetary monopoly. This concerns the extensive literature on optimal seigniorage as well as the literature on the tax-seigniorage trade-off [cf. Grilli, 1989]. However, as is clearly pointed out by Klein and Neumann, it is just with respect to this fiscal aspect of money that the distribution of revenues from money between the central bank and the government becomes relevant.