Optimal fiscal policy in a small open economy with limited commitment

We introduce limited commitment into a standard optimal fiscal policy model in small open economies. We consider the problem of a benevolent government that signs a risk-sharing contract with the rest of the world, and that has to choose optimally distortionary taxes on labor income, domestic debt and international transfers. Both the home country and the rest of the world may have limited commitment, which means that they can leave the contract if they find it convenient. The contract is designed so that, at any point in time, neither party has incentives to exit. We define a small open emerging economy as an economy where the limited commitment problem is active in equilibrium. Conversely, a small open developed economy is an economy in which the commitment problem is not active. Our model is able to rationalize some stylized facts about fiscal policy in emerging economies: i) the volatility of tax revenues over GDP is higher in emerging economies than in developed ones; ii) fiscal policy is procyclical in emerging economies; iii) emerging economies may “graduate” from procyclical fiscal policy and adopt countercyclical policies in the long run.     

The yield curve in a small open economy

Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be strongly correlated with those of the United States. This observation has recently led support to the view that, in these economies, the long-end of the yield curve has decoupled from its short-end and naturally to a concern that monetary policy may have lost some of its autonomy. We set up and estimate a two-country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co-movement of long-term nominal interest rates of different currencies. We show that differences in the persistence of domestic and foreign disturbances, a hypothesis for which we find support in recent data, can explain the observed pattern of correlations. These correlations are not evidence of weaker monetary policy.     

The yield curve in a small open economy

Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be strongly correlated with those of the United States. This observation has recently led support to the view that, in these economies, the long-end of the yield curve has decoupled from its short-end and naturally to a concern that monetary policy may have lost some of its autonomy. We set up and estimate a two-country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co-movement of long-term nominal interest rates of different currencies. We show that differences in the persistence of domestic and foreign disturbances, a hypothesis for which we find support in recent data, can explain the observed pattern of correlations. These correlations are not evidence of weaker monetary policy.     

Modeling economic growth with tourism for small open economies

The purpose of the paper is to develop an economic growth model and analyze the impact of changes in tourists’ income on the growth of tourism dependent small open economies. We use a general theoretical construct to answer the question of how the price elasticity of tourism demand, income elasticity of tourism demand, and the concentration in the service sector influence the economic development of small economies. One of the main results is that the policy planners in small open economies may consider specific policies to influence the strength of market competition. An ensuing effect of such policies is that the labor incomes will increase. The approach provides a microeconomic foundation for macroeconomic modeling which can be used for applied research, and the model can be easily extended to examine other dimensions of economic development.     

The Pace and Stability of Small Enterprise Innovation in Highly Dynamic Economies: A China‐Based Template*

In this paper, we analyze the dynamics of knowledge spillover entrepreneurship in the Chinese “transitional” context, as a template for the evaluation of the pace and stability of small business innovation institutionalization in many transition economies, and we also provide theory and evidence to further develop knowledge spillover entrepreneurship theory. Based on the first available cross‐sectional data set (2005 for 2004) covering 158 manufacturing sectors over the five Chinese provinces representing one‐third of China's industrial output, the empirical analysis provides evidence that local competition/specialization affect the pace/stability of innovation institutionalization in small enterprises and large‐medium enterprises differentially, suggesting new insights for research and policy in the transition‐economy/small business management context.     

Scale economies,entry, and welfare

This study shows how scale economies, initial size differences among firms, potential competition, and adjustment costs may influence the entry of firms into a dynamic oligopoly. It also examines the effects of these factors on the final size distribution of firms in an industry, and on the welfare levels of consumers and producers. We find that low to moderate scale economies are insufficient for Cournot-Nash competition to drive small firms from the market. Only when scale economies are quite high will the distribution of firm sizes become degenerate. Potential competition and the size of incumbent firms' capital stocks are additional barriers to entry. The welfare conclusion is that there may be a government role to preserve potential competition, but also to dissuade small firms from entering certain markets where there are economies of scale.     

Job Creation Process in a Transition Economy

In many European countries, SME policy is close to being a synonym for job creation. Most empirical research on the job-generation potential of small firms over the last decade has been done in the stable and favorable economic conditions of market economies. The paper investigates the role of small firms in more difficult circumstances. On an empirical data set for Slovenia, the paper tries to show that small firms have been the most important employer during the transition period, a finding that very likely can be extrapolated for other European transition economies. Over the last decade Slovenia has transformed from a labor-managed economic system to a market-oriented economy. If we compare the firm-size structure in a socialist-like economy to the firm-size structure in a mature market economy close to equilibrium, we notice a typical absence of small- and medium-sized firms, with the exception of craft shops. That was how Slovenia appeared in the early nineties. Charac-terized by the removal of administrative barriers, transition encouraged a spontaneous entrepreneurial wave through an expanding small business sector. The ensuing changes in employment distribution changed the firm-size structure.     

互联网平台经济与正在缓解的市场扭曲

改革开放以来,我国区域经济发展取得了令人瞩目的成绩,但是局部地区资源错配现象依然存在。我国互联网平台经济的迅速崛起,引发了人们的思考:作为一种跨部门、跨区域的市场交易机制,互联网平台经济是否有助于缓解局部地区市场扭曲?基于对这一问题的思考,本文采用2009—2017年我国省际面板数据,借助中介效应回归模型,实证分析互联网平台经济对市场扭曲的影响。结果表明,互联网平台经济对金融市场错配和技术市场错配具有显著的改善效应,其关键影响机制在于:一方面,作为一种跨区域营销和贸易机制,互联网平台经济有助于显著加剧区域内市场竞争;另一方面,作为一种跨区域产业分工与协调机制,互联网平台经济有利于显著提升区域产业专业化水平。在价值链作用下,这种发端于产品市场的机制效应会传递至要素市场,使得技术资源、金融资源等要素市场的扭曲局面得以改善。实证结果还显示,互联网平台经济的竞争效应仅在私营企业间产生显著影响,在国有企业间缺乏显著性。本文能够为进一步厘清市场效率变革的原因机制提供一个理论解释视角,为促进市场一体化建设提供政策参考。     

Exchange Rate Effects on Domestic Prices in Bulgaria and Poland: Progress in Making Markets?

The economic liberalization which has occurred in Central and Eastern Europe (CEE) over the past 15 years generally has involved establishing domestic markets and privatizing state‐owned firms, both with the intention of integrating the CEE economies into the global economy and allowing the benefits of competition to be realized. We explore how well this has been accomplished in two countries, Poland and Bulgaria, and the domestic conditions that contribute to its accomplishment. The sensitivity of domestic markets to international shocks, as reflected in exchange rate effects on domestic prices, may be viewed as an indicator of how integrated a country’s markets are into the global economy, and a proxy for competition in those markets. In explaining variation in exchange‐rate pass‐through, we examine the impact of market structure, economic liberalization and infrastructure as factors contributing to the development of competitive markets. We find that although integration into global markets can significantly increase market competitiveness, domestic factors also play a significant role.     

Small and medium-sized enterprises in the Republic of Korea: Implications for the development of technology-intensive industries

Korea's miraculous growth and meteoric rise as a newly industrializing economy have carried with them considerable costs. Initial reliance on Korean large business groups, the chaebol, was an appropriate policy choice for creating competitive advantage through economies of scope for the export market. However, the neglect of the small and medium-sized industrial sector and resulting weak backward linkages with parts industries have become a burden on the performance of these same big businesses. This issue is particularly critical because Korea must make a transition into more knowledge- and technology-intensive industries in the face of a rising real wage level. This paper examines how the underdevelopment of the small and medium-sized industrial sector undermined the overall efficiency of the Korean economy, in terms of added costs and low quality of final products produced by big businesses, thus hindering Korea's transition into more technology-intensive industries.     

Welfare-optimal trade and competition policies in small open oligopolistic economies

Standard trade theory claims that free trade is welfare-enhancing. We show that this is not the case if at least one sector of the economy is a Cournot oligopoly. In a simple small open economy with one oligopolistic and one competitive sector, welfare is an inverted U-shaped function of tariffs. Hence, an optimal tariff rate can be determined. The optimal rate depends on the number of firms in the oligopolistic sector. Below the optimal level, the competitive sector overproduces, i.e. oligopolistic good have a higher marginal effect on welfare. Increasing tariff rates stimulate the production of the oligopolistic sector by dampening imports. Under balanced trade, this reduces exports and production in the competitive sector, thus shifting resources to oligopolistic goods production. We also find that given certain levels of protection, perfect competition is not welfare maximal and, hence, not desirable. The finding explains why developing economies with imperfect competition are often reluctant to embrace trade liberalization and why, conversely, countries with high levels of external protection may be unenthusiastic about competition theory.     

ASEAN and China: Export Rivals or Partners in Regional Growth?

Rivalry in trade between China and its regional neighbours in ASEAN has become a major preoccupation for many regional policy‐makers. For these reasons, strengthening the basis of empirical evidence on regional trade relations is especially important, and this paper does so in two ways. Using very detailed historical trade data, we combine econometric and trade flow analysis to elucidate patterns of export competition and underlying comparative advantage for ASEAN and China. Our findings indicate that the potential exists for both export rivalry and more extensive trade complementarity, but so do many challenges for policy makers who seek to mitigate adjustment costs and facilitate long term efficiency. Our econometric results indicate that, in the short run at least, ASEAN and China are experiencing intensified export competition in prominent third markets such as Japan and the US. More extensive trade flow analysis reveals, however, that in the long run globalisation can accommodate export growth by all the economies of East Asia, if aggregate growth can be sustained to facilitate the structural adjustments necessary for an optimal regional division of labour.     

Market Justification for Policy on Small Enterprise Development

The process of liberalization in developing economies and the increasing competition faced by Small Enterprises raise crucial policy issues on small enterprise development. The policy maker in developing economies like India are faced with the option of supporting small enterprises through steps like reserving certain industries or by developing their ability to compete in niche markets. Enterprise level decisions are also critical for survival of these organisations. Selecting from these options require an understanding of the advantages that small enterprises have over the large enterprises. The advantage of flexibility and responsiveness to consumer needs of small enterprise is expected to result in customer satisfaction in a market with differing consumer needs. The hypothesis relates customer satisfaction to market share in a heterogeneous market. A field study is carried out among consumers of packaged butter in a state in India. The results do not indicate customer satisfaction with lower market share in a heterogeneous market.     

全球经济周期调整与中国对外开放政策

伴随金融危机,全球经济处于一个艰难的调整期。在这一时期中无论是发达经济体和新兴经济体经济都遭受巨大冲击,甚至不同程度陷入衰退;中国的经济也受到很大不利影响。为了应对金融危机,保持经济增长,中国应积极调整对外开放政策。     

WTO背景下改革补贴政策研究

近年来,国际社会对我国政府补贴的质疑甚嚣尘上,政府补贴特别是对国有企业的补贴,在世界贸易组织(WTO)规则下面临变革。党的十九大明确提出,要清理废除妨碍统一市场和公平竞争的各种规定及做法。推进经济高质量发展对政府补贴提出了进一步规范的要求。本文通过梳理分析世界主要经济体的补贴情况,从理论和实践角度讨论补贴在国际范围内所具有的客观性和普遍性,得出补贴是政府支持产业发展,激发市场活力的重要政策工具。对我国政府补贴和对国有企业补贴的情况进行梳理研究,结合国际实践经验,探索符合WTO规则的,促进我国市场经济健康快速发展的补贴政策体系,并针对补贴中存在的问题提出深化改革的对策建议。     

Twin dollarization and exchange rate policy

This paper develops a small open economy general equilibrium model with nominal rigidities to study twin dollarization in East Asian economies, a phenomenon where firms borrow in US dollars and also set export prices in US dollars. In this model, we endogenize both the currency of liability denomination and the currency of export pricing. We show that a key factor that affects firms' dollarization decisions is exchange rate policy. Twin dollarization is an optimal strategy for all firms when exchange rate flexibility is limited, which implies that a fixed exchange rate regime may lead to an equilibrium with twin dollarization. Furthermore, we find that twin dollarization can reduce the welfare loss caused by the fixed exchange rate regime, as it helps to cushion the economy against domestic nominal risk.     

Small businesses as a research subject: Some reflections on knowledge of small businesses and its effects on economic theory

Most economists agree in their view of small and medium-sized enterprises, or small businesses (SMEs), as a marginal scientific subject. They may go so far as to ignore them, either because they think these economic units do not lend themselves to conventional economic studies — studies which, for instance, take into account the sacred cow theory of economies of scale — or because they see them as being not really different from big businesses.However, at least a few economists have recognized, first, the many characteristics differentiating SMEs from big firms, and second, their increasing importance in terms of numbers and job creation within economies. Among these few, Schumpeter was one of the first to show the importance of entrepreneurs and SMEs as the main variable of change in an economy. Simon and Lucas also explained the difference between small and big firms through the differing abilities required by managers to run them. Penrose looked at the question from another point of view by highlighting the interstices taken up by SMEs to fulfil needs that cannot be fulfilled by bigger units. Critics of the theory of economies of scale showed that such economies may be offset by a number of diseconomies, thus justifying the efficiency of many SMEs. More recently, Mills and Schumann suggested that SMEs compensate for their lack of economies of scale by their production flexibility, particularly in today's turbulent economy.The limits of traditional economic theory are clearly demonstrated by the fact that it does not take account of all these theories, concepts and ideas. It thus neglects a number of important economic phenomena, including the persistence and current expansion of SMEs. Consideration of such phenomena may lead to the development of a new economic theory based on the concepts of instability and contingency, together with the behaviour of entrepreneurs and small firms, thus tending to contradict, in particular, the concept of equilibrium in conventional economic theory.A first version of this paper has been presented as invited speaker at the symposium of TETRA Group at Lyon, France, 30–31 May 1990. I thank the colleagues Fritz Rieger, Frances Solé Parrellada, Jacques Filion and the two referees for their very interesting suggestions on a preliminary second version.     

In Search of a Competition Policy in a Competitive Economy: The Case of Hong Kong

The authors propose an exploratory framework to study competition policy development in general and apply it in the context of Hong Kong. Competition policy (in the U.S., commonly referred to as antitrust policy) is defined here as concerned with the public policy prohibiting anticompetitive behavior and the abuse of dominant market power on the part of businesses. The framework identifies four core variables that are important in influencing the development and implementation of a competition policy. These variables are the consumer protection agenda, external pressure, the political landscape, and the size of the economy. It is proposed that the way government responded to these forces has been instrumental in shaping how and why the competition policy debate in Hong Kong evolved the way it did. It also underscores the importance of recognizing the indigenous nature in the development of competition policy in any economy. Future research directions to generalize the framework are also suggested. These include further development and expansion of the core variables, contextualization of the framework for cross‐national comparisons, and undertaking longitudinal studies to examine the sensitivities of the competition policy to changes in the core forces over time.