CREDIBILITY, MACROECONOMIC FUNDAMENTALS AND MARKOV REGIME SWITCHES IN THE EMS

The main objective of this paper is to use the Markov regime‐switching modelling framework to describe and analyse the credibility of a number of countries participating in the European Monetary System during 1980–1998. Our credibility indicator, based on Hughes Hallet et al.'s (1997) methodology, is subject to discrete regime shifts and is made dependent on macroeconomic fundamentals. We carry out extensive testing to assess the specification of the Markov regime‐switching model and the potential existence of permanent breaks. A contribution of our paper is the specification of a multivariate Markov switching model that allows us to examine whether macroeconomic variables have asymmetric effects on credibility. Another contribution is the specification of a regime‐switching model with time‐varying transition probabilities, which enables us to determine whether changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We find strong evidence of regime switching behaviour in all countries. Both the level of credibility and the transition probabilities display an asymmetric response to changes in macroeconomic variables, with the stance of fiscal policy exerting the most systematic influence in all countries.     

La vulnérabilitééconomique,défi persistant à la croissance africaine

Résumé: Alors qu'après une longue période de stagnation la croissance semble être revenue en Afrique, la question se pose de savoir si la nouvelle croissance africaine est durable. Cet article examine dans quelle mesure la croissance africaine est vulnérable aux chocs exogènes et quelles en sont les implications pour le financement internatìonal du développement. It montre en premier lieu la persistance de la vulnérabilité des économies africaines au regard de l'indice de vulnérabilitééconomique des Nations unies (EVI), utilisant une première série rétrospective de cet indice. En second lieu, s'appuyant sur divers travaux récents, il souligne l'importance de la vulnérabilité structurelle pour la croissance et le développement, particullèrement en Afrique. Enfin il examine le rôle du financement international pour réspondre à la vulnérabilité des économies africaines, suggérant de faire de la vulnérabilité structurelle un des critères d'allocation de l'aide de d'adapter les modailités de l'aide pour lui faire jouer de façon efficace un rôle d'assurance. Abstract: While after a long stagnation growth seems to have come back in Africa, the issue remains to know whether the new African growth is sustainable. This paper examines to what extent African growth is vulnerable to exogeneous shocks and what are the implications for international developement finance. First it evidences the persistent vulnerability of African economies with regard to the U.N. Economic Vulnerability Index (EVI), using a first retrospective series of that index. Second, relying on several recent works, it unerlines that structural vulnerability matters, in particular in Africa. Finally it considers how international development finance can be used to face the vulnerability of African economies, suggesting to use structural vulnerability as one of the aid allocation criteria and to adopt modalities of aid so that it can effectively serve as an insurance.     

Equal opportunity and poverty reduction: How should aid be allocated?

This paper analyzes a model of aid allocation equalizing the opportunity between recipient countries to reach a common poverty reduction goal. We propose a fair and efficient aid allocation based on a multicriteria principle. The model considers structural handicaps in recipient countries in terms of lack of human capital and economic vulnerability, their initial poverty, and the natural gap between the growth rate required to reach a development goal and the observed one. We show that our proposed aid allocation favors poor and vulnerable countries with our multicriteria principle. It substantially differs from the observed allocation. Analyses also shed light on the impact of the donors' aversion to the low natural growth gap in recipient countries on the optimal aid allocation and the marginal efficiency of aid.     

Aid Selectivity According to Augmented Criteria

A dominant trend in the literature maintains that donor assistance should be targeted at poor countries with sound institutions and policies. In this context, donor selectivity refers to what extent aid is allocated according to the principles of this ‘canonical’ model. This paper shows that it is legitimate for donors to simultaneously use other selectivity criteria corresponding either to expected factors of aid effectiveness or to handicaps to development. It is notably argued that vulnerability to exogenous shocks and low level of human capital should be considered as selectivity criteria. Taking these other criteria into account dramatically changes the assessment of donor selectivity.     

Has Distance Died? Evidence from a Panel Gravity Model

The estimated coefficient of distance on the volume of tradeis generally found to increase rather than decrease throughtime using the traditional gravity model of trade. This distancepuzzle proved robust to several ad hoc versions of the modelusing data for 1962–96 for a large sample of 130 countries.The introduction of an "augmented" barrier to trade functionremoves the paradox, yielding a decline in the estimate of theelasticity of trade to distance of about 11 percent over the35-year period for the whole sample. However, the "death ofdistance" is shown to be largely confined to bilateral tradebetween rich countries, with poor countries becoming marginalized.     

FINANCIAL DEVELOPMENT,ECONOMIC EFFICIENCY,AND PRODUCTIVITY GROWTH: EVIDENCE FROM CHINA

Financial development might lead to productivity improvement in developing countries. In the present study, based on the Data Envelopment Analysis approach, we use the Malmquist index to measure China's total factor productivity change and its two components (i.e., efficiency change and technical progress). We find that China has recorded an increase in total factor productivity from 1993 to 2001, and that productivity growth was mostly attributed to technical progress, rather than to improvement in efficiency. Moreover, using panel dataset covering 29 Chinese provinces over the period from 1993 to 2001 and applying the Generalized Method of Moment system estimation, we investigate the impact of financial development on productivity growth in China. Empirical results show that, during this period, financial development has significantly contributed to China's productivity growth, mainly through its favorable effect on efficiency.     

Deflation in China

This article investigates the causes of deflation China has experienced since 1998. The analysis is based on a theoretical model which makes the distinction between tradable and non-tradable goods and on the estimation of a reduced equation of consumer price variations for the period 1986–2002. The empirical results corroborate the theoretical predictions. The main conclusion is that the slowing down of inflation and the fall of prices are chiefly explained by Chinese macroeconomic policy. Moreover and contrary to current opinion we find that deflation is partly due to the deceleration of productivity growth in the tradable sector.     

Aid, Volatility, and Growth Again: When Aid Volatility Matters and When it Does Not

In previous papers the authors have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper the authors examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. They first show that aid, even if volatile, is not clearly as pro-cyclical as is often argued, and, even if pro-cyclical, is not necessarily destabilizing. They measure aid volatility by several methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus export flows. Then, in order to take into account the diversity of shocks to which aid can respond, they consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. They finally show through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect.     

How does real exchange rate influence labour productivity in China?

Since China's transition to a market economy, the labour productivity growth has been dramatically rapid, in particular since 1994. This speeding up has been accompanied by the reverse of the exchange rate policy of China, which has strongly depreciated its currency before 1994, and then either appreciated or stabilized it. The theoretical arguments suggesting several kinds of real exchange rate impact on labour productivity are developed. An econometric model is then proposed and estimated, using panel data for the twenty-nine Chinese provinces and for the period from 1986 to 2007. The econometric results show that the appreciation of the real exchange rate had a favourable effect on the labour productivity growth, leading to a kind of virtuous circle: the real appreciation of the currency boosts the growth of labour productivity while, according to the Balassa–Samuelson effect, productivity growth tends to push up the real appreciation. Moreover, this favourable effect is stronger in inland provinces than in coastal provinces, contributing to a minimizing of the gap between inland and coastal provinces.