Tracking NAFTA's Shadow 10 Years on: Introduction to the Symposium

The North American Free Trade Agreement (NAFTA) is arguablythe first "case study" of what might be expected from the increasingnumber of preferential trade agreements involving both developedand developing economies. Ten years after the treaty’sinception, it is time to assess how its outcomes compare withinitial expectations. The articles in this symposium issue provideinsights into the effects of NAFTA on economic geography, trade,wages and migration, and foreign investment from Mexico’sperspective. The contributions paint a complex post-NAFTA realitycharacterized by persistent intrabloc trade barriers, interregionalinequality within Mexico, labor market outcomes that seem closelytied to migration patterns and international trade and investment,and foreign investment flows that appear weakly related to tradeagreements. NAFTA seems to be the first trade agreement in historyfor which the traditional static trade creation or diversioneffects are likely negligible—and hard to identify inany case.     

Making Conditional Cash Transfer Programs More Efficient: Designing for Maximum Effect of the Conditionality

Conditional cash transfer programs are now used extensivelyto encourage poor parents to increase investments in their children’shuman capital. These programs can be large and expensive, motivatinga quest for greater efficiency through increased impact of theprograms’ imposed conditions on human capital formation.This requires designing the programs’ targeting and calibrationrules specifically to achieve this result. Using data from theProgresa randomized experiment in Mexico, this article showsthat large efficiency gains can be achieved by taking into accounthow much the probability of a child’s enrollment is affectedby a conditional transfer. Rules for targeting and calibrationcan be made easy to implement by selecting indicators that aresimple, observable, and verifiable and that cannot be manipulatedby beneficiaries. The Mexico case shows that these efficiencygains can be achieved without increasing inequality among poorhouseholds.     

Diversification of Macroeconomic Risk and International Integration of Capital Markets: The Case of Mexico

This article tests the arbitrage pricing theory in the contextof the unstable macroeconomic years in Mexico, 1977–87.Using information on returns on assets available to domesticinvestors—primarily stocks traded at the local stock exchange—anattempt is made to ascertain the extent to which these assetshave offered premia for a set of proposed sources of risk. Thepervasive factors that play an important role in asset pricingin Mexico are unexpected inflation, unexpected money growth,innovations in the Standard & Poor's 500 price series, andinnovations in the dollar oil price. A residual market factoris obtained, using the McElroy and Burmeister model. Given thatthese risks get premia over and above the riskless rate, expectedrates of return in Mexico have been higher during the yearsof erratic macroeconomic conditions. Mexico is not consideredto be well integrated with the international capital marketsbecause local sources of risk—such as inflation—arenot priced in the United States, whereas international sourcesof uncertainty—such as oil price shocks—are pricedlocally but not in the United States.     

Do Some Forms of Financial Flows Help Protect Against "Sudden Stops"?

There is a debate on whether some forms of financial flows offerbetter protection against crises than others. Using a largepanel data set that includes advanced, emerging, and developingeconomies during 1970–2003, this article analyzes thebehavior of several types of flows: foreign direct investment(FDI), portfolio equity investment, portfolio debt investment,other flows to the official sector, other flows to banks, andother flows to the nonbank private sector. Differences acrosstypes of flows are limited with respect to volatility, persistence,cross-country comovement, and correlation with growth at homeor in the world economy. However, consistent with conventionalwisdom, FDI is the least volatile form of financial flow, whenthe average size of net or gross flows is taken into account.The differences are striking during "sudden stops" in financialflows (defined as drops in total net financial inflows of morethan percentage points of GDP compared with the previous year).In such episodes, FDI is remarkably stable, and portfolio equityseems to play a limited role. Portfolio debt experiences a reversal,though it recovers relatively quickly, and other flows (includingbank loans and trade credit) experience severe drops and oftenremain depressed for a few years.     

Market Access and Welfare under Free Trade Agreements: Textiles under NAFTA

The effective market access granted to textiles and apparelunder the North American Free Trade Agreement (NAFTA) is estimated,taking into account the presence of rules of origin. First,estimates are provided of the effect of tariff preferences combinedwith rules of origin on the border prices of Mexican final goodsexported to the United States and of U.S. intermediate goodsexported to Mexico, based on eight-digit Harmonized System tariff-linedata. A third of the estimated rise in the border price of Mexicanapparel products is found to compensate for the cost of complyingwith NAFTA’s rules of origin, and NAFTA is found to haveraised the price of U.S. intermediate goods exported to Mexicoby around 12 percent, with downstream rules of origin accountingfor a third of that increase. Second, simulations are used toestimate welfare gains for Mexican exporters from preferentialmarket access under NAFTA. The presence of rules of origin isfound to approximately halve these gains.     

Insights on Development from the Economics of Happiness

The literature on the economics of happiness in developed economiesfinds discrepancies between reported measures of well-beingand income measures. One is the so-called Easterlin paradox:that average happiness levels do not increase as countries growwealthier. This article explores how that paradox—andsurvey research on reported well-being in general—canprovide insights into the gaps between standard measures ofeconomic development and individual assessments of welfare.Analysis of research on reported well-being in Latin Americaand Russia finds notable discrepancies between respondents’assessments of their own well-being and income- or expenditure-basedmeasures. Accepting a wide margin for error in both types ofmeasures, the article posits that taking such discrepanciesinto account may improve the understanding of development outcomesby providing a broader view on well-being than do income- orexpenditure-based measures alone. It suggests particular areaswhere research on reported well-being has the most potentialto contribute. Yet the article also notes that some interpretationsof happiness research—psychologists’ set point theory,in particular—may be quite limited in their applicationto development questions and cautions against the direct translationof results of happiness surveys into policy recommendations.      

Do Taxes Matter for Foreign Direct Investment?

The tax sensitivity of foreign direct investment (FDI) has importantpolicy implications. If FDI is not responsive to taxation, thenit may be an appropriate target for taxation by the host country.This question is examined for Mexico by estimating the responseof FDI from retained earnings and transfers from abroad to thetax regimes in Mexico and the home country, the credit statusof multinationals, country risk factors, and regulatory andtrade regimes in Mexico. FDI in Mexico is found to be sensitiveto the tax regimes in Mexico and the United States, the creditstatus of multinationals, country credit ratings, and the regulatoryenvironment. Thus Mexico's current policies to dismantle regulationsand employ a tax system competitive with the United States areexpected to have salutory effects on FDI in Mexico.     

Price Effects of Preferential Market Access: Caribbean Basin Initiative and the Apparel Sector

Preferential trade arrangements should be evaluated by theireffect on prices rather than by their effect on the total valueof trade. This point is emphasized in the theoretical literaturebut rarely implemented empirically. This article analyzes theU.S. Caribbean Basin Initiative’s (CBI’s) impacton the prices received by eligible apparel exporters. The CBI’sapparel preferences are the most important and heavily usedunilateral preferences because of high trade barriers imposedon exports from the rest of the world. A fixed-effects generalizedleast squares (GLS) estimation is used to isolate the effectsof other factors (such as quality, exchange rates, and transactioncosts) and to identify the effects of tariff preferences. CBIexporters capture only about two-thirds of their preferencemargin despite the high degree of competition among importers.This translates into a 9 percent increase in the relative pricesthey receive, with some variance across countries and years.Countries specializing in higher value items capture more ofthe preference margin, and the implementation of the North AmericanFree Trade Agreement (NAFTA) has a negative effect. RemovingMultifibre Arrangement quotas significantly lowers the benefitsof CBI preferences.     

Elections and Capital Flows

This paper investigates the extent to which elections affect capital flows. I find little evidence of political capital flow cycles in advanced economies. In emerging and developing countries, however, presidential elections significantly lower preelection foreign direct investment (FDI) inflows but have no effect on other types of capital flows. Furthermore, I find evidence that these cycles are not caused by economic crises related to elections or preelection manipulation of policy variables. These results suggest that uncertainty about future government policies, which should have greater impact on more irreversible forms of capital flows like FDI, may be an important factor in generating this cycle.     

Price Informativeness and Investment Sensitivity to Stock Price

The article shows that two measures of the amount of privateinformation in stock price—price nonsynchronicity andprobability of informed trading (PIN)—have a strong positiveeffect on the sensitivity of corporate investment to stock price.Moreover, the effect is robust to the inclusion of controlsfor managerial information and for other information-relatedvariables. The results suggest that firm managers learn fromthe private information in stock price about their own firms’fundamentals and incorporate this information in the corporateinvestment decisions. We relate our findings to an alternativeexplanation for the investment-to-price sensitivity, namelythat it is generated by capital constraints, and show that boththe learning channel and the alternative channel contributeto this sensitivity. (JEL G14, G31)     

Globalization, Poverty, and Inequality since 1980

One of the most contentious issues of globalization is the effectof global economic integration on inequality and poverty. Thisarticle documents five trends in the modern era of globalization,starting around 1980. The first trend is that growth rates inpoor economies have accelerated and are higher than growth ratesin rich countries for the first time in modern history. Developingcountries’ per capita incomes grew more than 3.5 percenta year in the 1990s. Second, the number of extremely poor peoplein the world has declined significantly—by 375 millionpeople since 1981—for the time in history. The share ofpeople in developing economies living on less than $1 a dayhas been cut in half since 1981, though the decline in the shareliving on less than $2 per day was much less dramatic. Third,global inequality has declined modestly, reversing a 200-yeartrend toward higher inequality. Fourth, within-country inequalityin general is not growing, though it has risen in several populouscountries (China, India, the United States). Fifth, wage inequalityis rising worldwide. This may seem to contradict the fourthtrend, but it does not because there is no simple link betweenwage inequality and household income inequality. Furthermore,the trends toward faster growth and poverty reduction are strongestin developing economies that have integrated with the globaleconomy most rapidly, which supports the view that integrationhas been a positive force for improving the lives of peoplein developing areas.      

Foreign direct investment and employment: host country experience

This study investigates the effect of foreign direct investment (FDI) on employment creation and wages in Ghana. A simultaneous panel regression model is used in estimating the effect FDI has on employment and wages. The results of this study indicate that FDI has a statistically significant and positive effect on employment levels in Ghana, but has an insignificant effect on wages. FDI can greatly augment domestic efforts by creating more jobs in the economy. The results clearly demonstrate that FDI flows affect employment quantitatively, but not necessarily qualitatively. The study identifies other factors including, productivity, wages, sub-sector, and location as important in influencing employment levels. Also, productivity, labour union, firm size, sub-sector, and location are noted as significant in affecting wages in Ghana. The main value of this paper is in respect of the fact that it provides insight into the effects of FDI flow on employment from a host country perspective. The study recommends that FDI should be considered as an integral part of the Ghanaian economic policy in order to spur on economic growth.     

The location determinants of FDI in the GCC countries

This paper studies the location determinants of FDI flows to the GCC countries, along Dunning's [Dunning, J., 1981. International Production and the Multinational Enterprise. Allen & Unwin, London] OLI paradigm. The paper uses panel data for the period 1980–2002. Panel data model estimates show that oil potential, measured by oil reserves, and oil utilization, measured by oil production, have a surprisingly negative influence on FDI flows, contrary to expectations about positive association between GCC oil resources and FDI flows. However, the relative degree of oil utilization, measured by oil production relative to oil reserves, has a positive influence on inflows. Similar to oil potential and oil utilization, oil price has a negative influence. Estimates also show that while institutional quality, trade openness and infrastructure development encourage FDI flows, human capital significantly discourages them.     

A BENEFIT-COST ANALYSIS OF NUTRITIONAL PROGRAMS FOR ANEMIA REDUCTION

Using benefit-cost analysis, this article evaluates potentialprograms for reducing iron deficiency anemia, one of the mostprevalent nutritional disorders. It discusses the origins andprevalence of anemia and reviews the literature on consequencesof anemia for work capacity, output, learning, and other variables.Costs and benefits are estimated for two types of programs—medicinalsupplementation and fortification of food with iron—andfor three cases—Indonesia, Kenya, and Mexico. Estimatesof benefits are calculated to include the value of additionalwork output in labor-surplus societies. Under a wide range of assumptions, the benefit-cost ratios arefound to be substantially greater than 1: for dietary fortificationratios ranged between 7 and 70 for the three illustrative countries;for dietary supplementation, the range was from 4 to 38 on themost reasonable set of assumptions. The study concludes thatfield trials should be carried out to see if the findings ofthis study are supported in particular cases.      

Agency and Optimal Investment Dynamics

Agency problems limit firms’ access to capital markets,curbing investment. Firms and investors seek contractual waysto mitigate these problems. What are the implications for investment?We present a theory of a firm’s investment dynamics inthe presence of agency problems and optimal long-term financialcontracts. We derive results relating firms’ investmentdecisions, current and past cash flows, firm size, capital structure,and dividends. Among the results, optimal investment is increasingin current and past cash flow; and optimal investment is positivelyserially correlated over time (after controlling for investmentopportunities). These results hold for a range of agency problems.(JEL G30, G31, G32, G35, D82, D86, D92)     

USING RANDOMIZED CONTROL DESIGNS IN EVALUATING SOCIAL SECTOR PROGRAMS IN DEVELOPING COUNTRIES

Seven case studies—from Bolivia, Colombia, Indonesia,Mexico, Nicaragua, Taiwan (China), and Turkey—demonstratethe feasibility of conducting rigorous impact evaluations indeveloping countries using randomized control designs. Thisexperience, covering a wide variety of settings and social programs,offers lessons for task managers and policymakers interestedin evaluating social sector investments. The main conclusions are: first, policymakers interested inassessing the effectiveness of a project ought to consider arandomized control design because such evaluations not onlyare feasible but also yield the most robust results. Second,the acute resource constraints common in developing countriesthat often make program rationing unavoidable also present opportunitiesfor adopting randomized control designs. Policymakers and programmanagers need to be alert to the opportunities for buildingrandomized control designs into development programs right fromthe start of the project cycle because they, more than academicresearchers or evaluation experts, are in the best positionto ensure that opportunities for rigorous evaluations are exploited.      

HOW MUCH DOES TRADE WITH THE SOUTH AFFECT WORKERS IN THE NORTH?

Does trade with developing countries have a small and benigneffect on workers in industrial countries, as most economistshave maintained, or a large and adverse effect, as the generalpublic and advocates of protection believe? A review of theevidence suggests that neither of these positions is tenable.The methods that economists have conventionally used to measurethe effect of North-South trade are biased downward. The truesize of this effect remains uncertain, but some recent studiessuggest that it is much larger than previously estimated. Tradewith the South has probably significantly altered the sectoralcomposition of employment in the North, shifting workers outof manufacturing and into nontraded services. More important,it has probably significantly worsened the relative economicposition of unskilled workers in industrial countries, and mayalso have aggravated the problem of reconciling low inflationwith low unemployment. Even so, the adverse side effects oftrade with the South are much smaller than is popularly supposed.And the popular remedy—protection—is clearly wrong.What is needed instead is more action by governments to offsetthe reduction in the relative demand for unskilled labor throughtraining and education, job creation, and income redistribution.      

Migration, Trade, and Foreign Direct Investment in Mexico

Part of the rationale for the North American Free Trade Agreementwas that it would increase trade and foreign direct investment(FDI) flows, creating jobs and reducing migration to the UnitedStates. Since poor data on illegal migration to the United Statesmake direct measurement difficult, data on migration withinMexico, where census data permit careful analysis, are usedinstead to evaluate the mechanism behind predictions on migrationto the United States. Specifications are provided for migrationwithin Mexico, incorporating measures of cost of living, amenities,and networks. Contrary to much of the literature, labor marketvariables enter very significantly and as predicted once possiblecredit constraint effects are controlled for. Greater exposureto FDI and trade deters outmigration, with the effects workingpartly through the labor market. Finally, some tentative inferencesare presented about the impact of increased FDI on Mexico–U.S.migration. On average, a doubling of FDI inflows leads to a1.5–2 percent drop in migration.     

中国外汇资本流动结构对实际有效汇率影响的实证研究

实际有效汇率(REER)是衡量一国国际竞争力的重要指标,不同的资本流动结构可能会对REER产生不同影响。本文分析了两大类外汇流动和资本流动对REER的作用机制,并对中国的情况进行实证检验。结果发现,加总资本流动对人民币REER升值产生微弱的负影响,外商直接投资导致REER较为显著的升值效应,投资收益和私人部门汇款对REER的升值效应较强。在此基础上,本文建议应该继续加大引进那些高科技的外商直接投资,并积极鼓励其进口,既有助于中国国际竞争力的提高,也有助于中国经常账户的平衡;同时应尽快建立一套完善的监测体系,加强对跨境资金流动的监督管理。     

WHO WINS AND WHO LOSES FROM VOLUNTARY EXPORT RESTRAINTS?:The Case of Footwear

Voluntary export restraints have been a popular resort of industrialcountries faced with increasing competition from exports ofdeveloping countries. As a strategy for circumventing the rulesof the GATT (whose regulations preclude increases in tariffs),these nontariff barriers have been rather successful; whetherthey have been as successful in their aim of protecting andstimulating the industry concerned is another matter. This article looks at what happened when industrial countriesimposed—and then removed—voluntary export restraintson the footwear industry during the 1970s and 1980s. Why didprotectionism spread so fast and then dissipate almost as rapidly,and what effects did this coming and going have on the exportingcountries We suggest that industrial countries removed the restraintsbecause they found ?them either superfluous (the expected employmenteffect failed to materialize) or ineffective (the principalexporters maintained their market share during the height ofthe restrictions), or else because the industry was able toadjust by importing footwear at a profit. Predicting the effect of VERs, and determining how best to managethem, are critical questions for developing countries strugglingto improve their export performance in the 1990s. The resultsof detailed study of a representative industry, summarized here,may assist in the prediction and determination.