The Dependent-Economy Model With Both Traded and Nontraded Capital Goods*

Dynamic versions of the dependent-economy model have been criticized for arbitrarily assuming that capital is either tradable or nontradable, and for choosing either the traded or nontraded sector to be capital intensive. Our model incorporates both types of capital and shows that the relative sectoral intensity of nontraded capital determines the dynamic adjustment of the relative price of nontradables. When the traded sector is intensive in nontraded capital, the saddlepath is flat. When the nontraded sector is intensive in nontraded capital, the saddlepath is negatively sloped. the relative sectoral intensity of traded capital primarily affects current-account dynamics.     

Intertemporal Substitution and Terms-of-Trade Shocks

The paper examines the relationship between transitory terms‐of‐trade shocks and private saving. Using a model allowing for nonseparability between the consumption of tradables and nontradables, the paper estimates the intertemporal elasticity of substitution while accounting for the intratemporal elasticity of substitution between the consumption of tradables and nontradables. Empirical analysis of data for five industrial countries indicates that in response to transitory terms‐of‐trade shocks, intertemporal substitution of consumption and intratemporal substitution of consumption between tradables and nontradables both have large effects on private saving.     

Capital market integration and gender inequality

This study explores the effects of globalization on gender inequality. Specifically, we describe how, in terms of capital market integration, globalization alters the gender gap in wage rates through changes in labor demand for capital‐intensive sectors. Consequently, via changes in the bargaining positions of men and women, globalization leads to opposite effects on the couple's labor supply and fertility decisions in capital‐importing and capital‐exporting countries. Moreover, by considering the properties of the industrial structures of capital‐importing and capital‐exporting countries, we show that globalization induces empirically observed declines in fertility rates throughout the world.     

Industrial development in Malaysia and Singapore: Empirical analysis with multiple‐cone Heckscher–Ohlin Model

This paper employs the multiple‐cone Heckscher–Ohlin model to analyze industrial development in Malaysia and Singapore. In particular, we focus on industrial upgrading along with capital accumulation as a key determinant for the cross‐country difference in production technology and income. By pooling two countries’ data on factor endowment and sectoral output in manufacturing from 1990 to 2008, we estimate the common industrial development paths of the two‐cone Heckscher–Ohlin model, the Rybczynski linear relationship between capital–labor ratio and sectoral output per capita. Our results demonstrate that, after controlling for quality of workers (by educational attainment), the two countries resided in different cones during our sample period, implying that Singapore succeeded in accumulating capital steadily with the support of foreign investment and upgrading its industry mix to make it more capital‐intensive. The separation of cones is also consistent with the observed gap in gross domestic product per capita between the two countries. Furthermore, we implement a factor‐augmenting productivity test to see the gaps in efficiency of capital and human‐capital‐augmented labor and confirm no significant difference between the two countries.     

FDI,SECTORAL OUTPUT AND REAL EXCHANGE RATE DYNAMICS UNDER FINANCIAL OPENNESS

This paper adopts an alternative approach to the study of the impact of capital inflow on the real exchange rate by foremost, analysing the effect of FDI inflow on the ratio of tradables to nontradables, and then estimating the relationship between the tradable‐nontradable ratio and the real exchange rate, while accounting for the role of financial openness. Based on data for a group of developing countries, the findings show that an increase in FDI inflow is associated with a decrease in the tradable‐nontradable ratio, and that an increase in the tradable‐nontradable ratio leads to a depreciation of the real exchange rate; this effect being greater with an increase in financial openness. This suggests that an increase in FDI inflow could result in an expansion of the nontradable sector, which would be associated with a greater appreciation of the real exchange rate under a higher level of financial openness.     

Endowments,Specialization, and Policy

The paper explores the relationship between industry shares in production and their determinants including factor endowments, technology, and government policies, in a GDP–function framework. We use a new international panel dataset on production and trade compiled by the World Bank. As an intermediate step we calculate Hicks‐neutral productivity indices that vary across industries, time, and countries. We find that own‐TFP is robustly associated with industry shares across time and countries and that, after correcting for these productivity differences, output shares are related to factor endowments (Rybczynski effects) in a plausible way. Once Rybczynski effects are controlled for, we find little evidence of demand‐side policies (import tariffs) affecting the allocation of resources; we find, however, more role for supply‐side policies as the relative size of capital‐intensive industries is positively associated with infrastructure–capital endowments.     

Recent Technological and Economic Change among Industrialized Countries: Insights from Population Growth*

Cross‐country observations on the effects of population growth are used to show why differences in rates of growth in working‐age population may be a key to understanding differences in economic performance across industrialized countries over the period 1975–1997 versus 1960–1974. In particular, we argue that countries with lower rates of adult population growth adopted new capital‐intensive technologies more quickly than their high population growth counterparts, therefore allowing them to reduce their work time without deterioration of growth in output‐per‐adult.     

Capital Market Openness and Output Volatility

In this paper, using data from 21 advanced and 81 developing countries during 1971–2010, we empirically examine the impact of capital market openness on output volatility. We find that opening of capital markets increases the output volatility of developing countries. Furthermore, we find that the main channel through which capital market openness increases volatility is currency and external‐debt crisis. Finally, we find that while Asian countries are less likely to experience a crisis, they become even more unstable than other developing countries once a crisis occurs. Our evidence strengthens the case for caution in developing countries' opening up of their capital markets.     

SHIFT WORKING AND TRADE IN LABOUR SERVICES WITH TIME ZONE DIFFERENCES

Using a two‐factor (labour and capital), two‐good (shift‐working and non‐shift‐working commodities) model with two countries (Home and Foreign), which are located in different time zones, we highlight the impact of trade in labour services (via communications networks) on the comparative advantage of countries capable of such trade. It is shown that a comparative advantage in a shift‐working commodity is held by pairs of countries in different time zones and connected through a good communication network. Concerning factor prices, if the shift‐working commodity is capital (respectively, labour) intensive, the wage rate for day‐shift labour will decrease (respectively, increase) as a result of trade in labour services. It is also demonstrated that this labour service utilization is mutual: some of Home's day‐shift labour will be utilized for the Foreign night shift, and vice versa. Thus, periodic trade in labour services occurs across countries.     

Risky business: Institutions vs. social networks in FDI

Political economy scholarship on foreign direct investment (FDI) emphasizes variation in host country political risk but overlooks variation in investors' sensitivity to political risk. We show that relational contracting, relationship‐based contract enforcement, is more efficient for high‐risk, human capital‐intensive activities for which the costs of writing legally enforceable contracts are prohibitive. We disaggregate FDI into two distinct varieties: mergers and acquisitions (M&A) and venture capital (VC). We propose that VC flows are less sensitive to host institutions but correlate strongly with skilled migrant networks that monitor compliance and impose reputational costs. Our empirical analysis of dyadic VC and M&A flows covers over 100 countries during 1980–2009. We address other mechanisms through which migrant networks facilitate FDI and verify our results hold at the country‐industry level. These findings suggest that relational contracting facilitates global integration of dynamic, knowledge‐intensive industries even when formal institutions are weak.     

Nonhomothetic Preferences and International Trade

This study examines whether nonhomothetic preferences underlie the “missing trade” problem associated with factor content of trade models. We first find that per capita income goes a long way in explaining differences in goods consumption across countries. We then find a striking correlation between the factor content of consumption and per capita income, and show that accounting for this is a key part of resolving the case of the missing trade. However, nonhomothetic preferences over broad categories of expenditure play only a small role in this phenomenon. Rather, we find that as income grows, spending is directed towards the relatively capital‐intensive version of a given good. Since recent research shows that capital intensity is correlated with quality ( Schott, 2004 ), our results suggest that within‐product quality differences are likely important for explaining the factor content of trade, whereas nonhomothetic preferences over broad categories of expenditure are much less so.     

Capital Mobility—Resource Gains or Losses? How,When, and for Whom?

This paper investigates which of the two types of countries—resource‐rich or resource‐poor—gains from capital market integration and capital tax competition. We develop a framework involving vertical linkages through resource‐based inputs as well as international fiscal linkages between the two types of countries. Our analysis shows that capital market integration causes capital flows from resource‐poor to resource‐rich countries and improves global production efficiency. However, such gains accrue only to resource‐poor countries, and capital mobility might even negatively affect resource‐rich countries. Furthermore, we show that resource‐rich countries can exploit the gains when taxes on capital are available.     

NEW MEASURES OF PRICES AND PRODUCTIVITY FOR TRADABLE AND NONTRADABLE GOODS*

Empirical work on the division of real output and prices into tradable and nontradable components has not kept pace with theoretical developments. The conventional proxies of prices and productivity by tradable and nontradable sector are examined and found deficient in several important respects. It is demonstrated that an approach that relies on the long–standing data on gross domestic product by industry of origin can overcome some of these deficiencies. These data are used to construct new annual measures of prices and productivity for tradable and nontradable output for 12 industrial countries over the period 1950–73. While far from precise, the new measures are consistent with the following criteria for distinguishing between tradables and nontradables: the degree of foreign trade participation should be higher for tradables than for nontradables; the degree of international commodity arbitrage, as measured by cross-country correlations of price changes, should be higher for tradables than nontradables; and tradables should be closer substitutes than nontradables for traded goods from other countries (imports). Despite the considerable conceptual advantages of the new measures of prices and productivity over the conventional proxies, correlation analysis indicates that the new and old measures usually move together rather closely in our 12 subject countries. The correlations are higher across the alternative relative productivity measures than for the alternative relative price measures.     

Persistent income gaps in an occupational choice model with multi‐goods

In this study, we propose a theory to explain why income gaps persist. We model a simple overlapping‐generations economy with three consumption goods and two types of workers. We find that high‐skilled workers have comparative advantage in skill‐intensive jobs and low‐skilled workers in less skill‐intensive jobs. This pattern of comparative advantage determines occupational choices by workers. Combined with human capital accumulation, the occupational choices widen income gaps between families. At the same time, the relative price of skill‐intensive goods declines owing to productivity improvement. The decline holds back income gaps from exploding. The implications of skill‐biased technological change are also examined.     

Factor Price Equality and Biased Technical Change in a Two-Cone Trade Model

We reconsider the effects of long‐run economic growth on relative factor prices across cones of specialization. We model economic growth as exogenous technical change. Allowing for capital biased technical change with a sector bias and for endogenous commodity prices, we find that economic growth may increase or decrease factor price differences across cones. For a neutral demand side and capital biased growth in the most capital intensive sector, we find that economic growth encourages less factor price diversity across cones.     

International trade and directed search unemployment in general equilibrium

We develop an open economy general equilibrium model, with auction‐based directed search unemployment, to study the interactions of trade and unemployment. The theory ascribes all outcomes purely to the fundamentals of technology and endowment. If countries differ by endowment, trade makes both the unemployment rate and the rental in the capital‐(labour‐) abundant country rise (decline) but does not lead to equalization. If, alternatively, countries differ by technology, trade increases (decreases) the unemployment rate in the country whose technology is relatively superior (inferior) for producing the capital‐intensive good.     

Global capital markets,housing prices,and partisan fiscal policies

In recent years, global imbalances have channeled the excess savings of surplus countries toward the real estate markets of deficit countries. By consequence, the deficit countries that attracted lots of foreign capital experienced large run‐ups in house prices, whereas most surplus countries that exported capital exhibited flat or slow house price growth. We first use new house price data and a novel instrumental variable design to show the causal relationship between housing prices and capital inflows, particularly through debt bonanzas. We then argue that international capital flows affect the fiscal policy preferences of both voters and political parties by way of their impact on housing prices. Where capital inflows are large and housing prices are rising, we expect voters to respond by demanding both lower taxes and less publicly‐provided social insurance because rising house prices allow homeowners to self‐insure against income loss. In contrast, declining house prices produce greater demands for social insurance, particularly among those most exposed to housing market risk. We present evidence from two cross‐national surveys that supports these claims, as well as a “before and after” analysis of the housing crash in Eastern Europe. We also show that the connection between house prices and social policy also manifests itself in government spending outcomes, mediated by partisan control.     

Agricultural productivity,the real effective exchange rate,and structural change: Some evidence from Africa

Agriculture is thought to play a number of roles in the early development process. All of these roles involve fostering non‐agricultural development, in particular manufacturing. It is argued in this paper that agriculture plays a role that has hitherto been ignored. Specifically, if agricultural labor productivity increases faster than manufacturing labor productivity, the real effective exchange rate will depreciate. This depreciation of real effective exchange rate occurs because in very poor countries agriculture makes up the dominant share of both GDP and employment. The depreciation also makes it easier for a country to expand the production of tradables relative to nontradables, with manufacturing being the main tradable. This proposition, which as agricultural labor productivity increases relative to manufacturing labor productivity the real effective exchange rate depreciates, is tested using data drawn from 10 sub‐Saharan African countries.     

THE CASE FOR PAY-AS-YOU-GO PENSIONS IN A SERVICE ECONOMY

The elderly consume more labour‐intensive services than young individuals. This makes them vulnerable to rising costs of services due to higher wages, which can be caused by increased capital accumulation. This paper shows that in a model with a service sector, the golden‐rule capital stock is lower and dynamic inefficiency is more likely to occur than in the conventional one‐sector model. This implies that in many cases, a positive Pay‐As‐You‐Go tax maximises long‐run welfare in a service economy. Calculations based on data from the United Kingdom and the Netherlands show that the long‐run optimal degree of funding coincides with the current situation in these countries.     

APPROPRIATE TECHNOLOGY AND INCOME DIFFERENCES

This article studies the relative productivity of skilled to unskilled workers across countries. Relative productivities are broken down into the human capital embodied in skilled workers and relative physical productivities (reflecting production techniques). I find that skilled workers from poorer countries embody less human capital and are also relatively less physically productive. Furthermore, results show that production techniques are inappropriate for most low‐income countries, and these countries experience large increases in GDP per capita by increasing the relative physical productivity of skilled to unskilled workers. This suggests that there are significant barriers to the adoption of skill‐complementary technologies.