External Financial Fragility and Capital Flight in Mexico

Mexico suffered capital flight from 1973 up to 1988 practically without interruption. This paper attempts to evaluate the real cost to Mexico of capital flight. A simple macro-economic model is specified on whose basis an estimate of this cost is attempted. It is found that the cost of this capital flight has been enormous. It gave rise to over-indebtedness when financing was still available from external sources, and it entailed short- and long-term losses of output which the country might have generated. The loss of output was estimated at between 1.5% and 2.5% of the total GDP for the period 1973–1991, between 0.9% and 2% for the 1982–1991 period, and between 3.1% and 5.7% for the 1982–1988 adjustment period.     

The impact of the Soviet trade shock on central and East European economies

The paper examines the significance of what is called the Soviet trade shock on central and East European economies. The analysis involves two steps: first, the terms-of-trade effect of replacing the CMEA trading rules by market rules is estimated, and second, the impact of the loss of export markets in the former Soviet Union is assessed. The results of estimating the terms-of-trade effect for Hungary and Poland show that the income losses in 1990–1991 have not been as substantial as commonly believed (3.5 percent of GDP and 1.0 percent of GDP, respectively). The decomposition of the fall of total Soviet imports in 1991 into three categories, reflecting the impact of domestic recession, reduction of trade with ex-CMEA, and diversion of imports from ex-CMEA to western countries allowed us to estimate the CMEA-induced part of the trade collapse at 36 to 49 percent of the total fall of exports to the Soviet Union by the CEECs (except Romania), with the impact of domestic recession being in all cases stronger than the CMEA dissolution effect. An attempt has also been made to estimate the impact of the Soviet trade shock on GDP levels in CEECs. The results obtained indicate that the collapse of exports to the Soviet Union in 1991 may have been responsible for about one third of the officially reported GDP fall in Czechoslovakia and Poland, and for more than half of the GDP fall in Bulgaria and Hungary, but the impact of the CMEA-induced export fall was much smaller. The impact of the Soviet trade shock on Romania was negligible. The results obtained suggest a smaller impact of the Soviet trade shock on Hungary and Poland, as compared with some other studies. The conclusions should, however, be treated with caution, because of many untested assumptions underlying the analysis.I would like to acknowledge helpful comments received on earlier drafts of the paper by Daniel Gross, Dieter Hesse, Gabor Oblath, and Mica Panic. The views expressed in the paper are, however, my own responsibility.     

Structures of foreign trade and income distribution: The case of Mexico

Using Mexico's input-output tables and household survey data, this paper examines various trade strategies and their relationship to commodity production with a view to assesing their effect on the distribution of income. The model incorporates income-induced multiplier effects, taking into account the full range of input import-substitution possibilities. The results show that the differences in the impact on income, particularly, of the lower incomes, are most marked in the tensions between exportable and import-competing activities. On the whole, production per unit of output in the non-tradable sector produces as much factor income as that in the export sector. Expansion of exportable activities marginally improves the economic position of the poor in relation to other income groups, but only when direct effects are taken into account. If, however, domestic production meets the needs of intermediate imports, then the distribution of income remains unaffected by alternative trade strategies.     

CONCEPTS AND PROBLEMS OF CONSISTENCY IN TERMS-OF-TRADE ANALYSIS*

The debate on how to deal with changes of relative prices in national accounts has, so far, remained inconclusive, especially with regard to the question of how to measure gains from changes of terms of trade. Keeping the experiences of the 1970s in mind (i.e. substantial changes of relative prices sparked off by increased oil prices), this state of affairs is not considered tenable. On this background, the paper takes up the old debate on how to deflate figures of domestic product, total as well as by industries. It tries to argue that deflated figures should be presented not only as real product figures by industries (using the double deflation method), but also as real income figures, obtained by deflating the current-prices figures of a certain year by the same general price index. When this is done according to procedures spelled out in detail, gains/losses from changes of the terms of trade in foreign trade will show up as an integral part of the framework. In the paper, special attention is given to the concept of industry terms of trade. On the basis of simplifying assumptions (which are, however, relaxed in the final part of the paper), it is shown how the ratio of real income divided by real product of a certain industry will be proportionate to the terms of trade of the industry concerned, when the latter concept is defined in the appropriate way. Furthermore, the sum of the industry gains/losses from changes of their terms of trade will be equal to the gain/loss of the economy taken as a whole from changes of the terms of trade in foreign trade.     

Are shocks to the terms of trade shocks to productivity?

International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real GDP. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.     

An assessment of the Europe agreements’ effects on bilateral trade, GDP, and welfare

The so-called Europe Agreements had been enacted in the 1990s to initiate the integration of goods markets between the 15 EU incumbent economies as of 1995 and 10 potential entrants located in Central and Eastern Europe. This paper evaluates the trade, GDP, and welfare effects of these agreements by means of structural analysis of a bilateral trade flow model. The results support three conclusions. First, the agreements exerted significant positive effects on goods trade between the EU15 incumbents and the CEEC and, at the same time, they induced trade redirection from other countries. Second, EU15 GDP responded by an increase of much less than 1% while that in the 10 CEEC increased by several percent in response to the agreements. Third, the effects on welfare were moderate in the EU15 but amounted to more double-digit percentage changes in the involved CEEC.     

Trade,income and the Baltic Dry Index

Does trade improve the income levels of the poor and less developed nations? Focusing on the Least Developed Countries (LDCs) designated by the United Nations, we construct a new measure of trade cost, based on the Baltic Dry Index (BDI), as an instrument for trade. The BDI reflects the cost of utilizing dry bulk carriers, which are specially designed vessels for transporting primary goods internationally, where these goods dominate the output and export sectors of the LDCs. We find that a 1% expansion in trade raises GDP per capita by approximately 0.5% on average. This estimate is much larger than previously found in the literature and its quantitative significance emphasizes the importance of trade towards the economic development of low income countries.     

Estimating the trade and welfare effects of Brexit: A panel data structural gravity model

This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. Assuming different counterfactual post‐Brexit scenarios, our main findings suggest that the UK's exports of goods to the EU are likely to decline within a range between 7.2% and 45.7% six years after Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic trade and trade with third countries, inducing a decline in the UK's real income of between 0.3% and 5.7%. The estimated welfare effects for the EU are not different from zero, but some members like Ireland are expected to also experience welfare losses.     

The Finnish Corporate Income Tax Reform and the Financial Strategy of Firms: A General Equilibrium Approach

This paper simulates the effects of the recent Finnish corporate tax reform with a computable general equilibrium model. It shows that the impact of the reform on the capital stock depends on the reactions of firms. If the financial strategy is changed to prefer dividend distribution and share issues, the cost of capital falls and the capital stock increases. On the other hand, if the criterion of financial policy is to minimise the welfare loss of current shareholders, the earlier financial behaviour should be continued. In that case,the induced higher cost of capital leads to a lower capital stock. The overall welfare evaluation of the tax reform is not sensitive to the regime shift: the reform should not have been implemented. This is because the increase in interest income taxation distorts saving decisions, expands the net foreign debt of the economy and weakens the terms of trade.     

Trillions gained and lost: Estimating the magnitude of growth episodes

An increasingly large literature in the empirics of growth has viewed economic growth as an ‘episodic phenomena’. We propose a new technique for measuring the total magnitude of a growth episode: the change in output per capita resulting from one structural break in the trend growth of output (acceleration or deceleration) to the next. Our method allows us to quantify the amount of income gain and loss during growth accelerations and growth decelerations. We show that the income gains and losses are staggering in magnitude, often multiples of the level of income at the start of the growth episode. The top 20 growth accelerations have a net present value (NPV) magnitude of 30 trillion dollars—twice the US GDP. The top 20 growth decelerations account for 35 trillion dollars less in NPV of output. What explains such ‘staggering’ gains and losses in income over relatively short periods is the key question that future research on economic growth should try and address.