THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES

Implementing fiscal programs during monetary policy expansions seems to improve significantly their economic stimulus. We find this result by estimating the effect of government consumption shocks on gross domestic product (GDP) using a panel of 23 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business‐cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal‐monetary policy coordination. Our results also show lower multipliers in developing economies with flexible regimes, especially during economic slowdowns. (JEL E62, E63, F32)     

FOREIGN DIRECT INVESTMENT IN A TWO‐TIER OLIGOPOLY: COORDINATION,VERTICAL INTEGRATION,AND WELFARE*

We study foreign direct investment (FDI) by two independent investors/entrants into a two‐tiered oligopolistic industry. An FDI subsidy at a single stage of production can be sufficient to resolve the coordination problem facing investors thereby inducing entry at both stages. However, due to linkage offsetting, FDI at both stages may yield lower domestic welfare than FDI at a single stage. Vertical integration not only solves the coordination problem, it also eliminates double marginalization. But since the integrated multinational does not sell the intermediate to local firms, its entry generates no vertical linkages and can yield lower welfare than FDI by independent firms.     

ASIA'S ROLE IN THE GLOBAL ECONOMIC ARCHITECTURE

The global economic and financial landscape has been transformed over the past decade by the growing economic size and financial power of emerging economies. The new Group of Twenty summit process, which includes the largest emerging economies, has established high‐level international policy cooperation in this new setting. This article argues that effective global economic governance will also require changes in key global organizations—such as the International Monetary Fund, World Bank, World Trade Organization, and the Financial Stability Board—and closer collaboration between global and regional organizations. We suggest that federalism be introduced on a global scale by creating hierarchies of global and regional organizations with overlapping ownership structures in various functional areas (as is already the case with the World Bank and regional development banks in the area of development finance). Asia could contribute to this transformation by building effective institutions to promote macroeconomic and financial stability and deepen regional trade and investment integration. Similar logic could be applied to a broader issue of providing international public goods, such as environmental and climate protection, communicable disease control, and disaster risk management. (JEL F02, F13, F33, F55, O59)     

The effect of output specification on the optimal policy design for electric utilities

We show that the manner in which the production process is seen when analyzing data on electricity production has an impact on the policy conclusions. In particular, we show that the different specifications of output found in the literature can generate quite diverse views regarding regulation and optimal industry structure, even when using the same data to estimate a cost function. To illustrate this we use information gathered from the Spanish Electric Industry and analyze electricity activities following three approaches: the traditional aggregate activity view, the multistage model and the multioutput-multistage approach. We estimate the degree of economies of scale S and derive marginal costs for all models, plus economies of vertical integration (EVI) for the last two ones. Then we compare these results and verify that the aggregate analysis can mislead policymaking.     

COMPETITION OR COOPERATION IN URBAN SERVICE DELIVERY?

ABSTRACT: Inter‐municipal cooperation is now as common among US local governments as for profit privatization. This article uses data from a national survey in 2007 to explore the benefits of cooperation – economies of scale, service coordination across the metropolitan region and greater community control. While privatization reforms have focused on harnessing the benefits of a competitive market, cooperation may be the new frontier where economies of scale and efficiency gains can be achieved with governments working together in a new form of collaborative service delivery.     

Network costs and the regulation of wholesale competition in electric power

We characterize the cost function for electric power transmission. It is complex and non-linear, exhibiting scale economies over its range. The social planning problem for network transmission expansion is illustrated with a simple numerical example. The regulatory problem for joint generation and transmission cost minimization is addressed. It is shown that information asymmetries about the transmission cost function can lead to coordination losses when there is competition in the generation segment. We parametrize the tradeoff between potential coordination losses in transmission planning and benefits of competition and examine some potential alternatives for improved regulation of the transmission planning process.     

Government policy and the probability of coordination failures

This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.     

How should emerging economies float their currencies?

Floating exchange rates seem to be gaining ground in Latin America, East Asia and the transition economies. The recent crises left many economies with no alternative but to float. Others have moved toward floating, searching for greater flexibility and insulation from external shocks. The question for most emerging market economies, then, is no longer to float or not to float, but how to float. Four issues arise in this regard. The first is how to float and have low inflation. The second is whether floating provides as much insulation as conventional theory predicts, especially in the presence of dollarized liabilities. Which leads to the third point: the relationship between the stability of the exchange rate and that of the financial system. The fourth is how to conduct monetary policy under a float, and the role of inflation targeting. We consider each of these points in turn, and conclude that a workable model of how to float seems to be emerging from the so‐far successful experience of countries like Chile and Brazil. It involves the adoption of an inflation target as the main anchor for monetary policy, coupled with a monetary policy reaction function that — aside from reacting to the output gap and other determinants of the inflation rate — reacts also partially to movements in the nominal exchange rate. JEL classification: F3, F4, E4, E5     

Law enforcement and transition

We present a simple model to analyze law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyze two institutional mechanisms for solving the coordination problem. A first mechanism, which we call “dualism”, follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the “bad” equilibrium, provided the “accessing” country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.     

WELFARE ENHANCING COORDINATION IN CONSUMER COOPERATIVES UNDER MIXED OLIGOPOLY

The recent globalization of world economies has led the retail markets of developed countries towards increasing levels of integration and strategic interdependence. A non negligible share of retail and food markets is currently served by co‐operative societies. Consistently with this trend, the consumer cooperatives have recently experienced increasing levels of integration. The main aim of this paper is to study the welfare effects of coordination among consumer cooperatives competing in quantities in a mixed oligopoly against profit‐maximizing firms. We show that, in absence of agency problems, under increasing or constant returns to scale a higher output coordination of the consumer cooperatives does not affect the total welfare as long as a nonnegative profit constraint holds in these firms. On the other hand, under decreasing returns to scale, the consumer cooperatives contribute more to social welfare when acting on behalf of all consumers. This is because, by coordinating consumers’ preferences, these firms can reduce their market output, thus helping the market to come closer to the first best. All together these results seem to provide an argument in favour of the recent process of integration involving consumer cooperatives in many developed countries.     

Metrics capturing the degree to which individual economies are globalized

We discuss metrics of globalization for individual economies as distance measures between fully integrated and trade restricted equilibria in economies initially operating under less than full integration with the global economy. Such metrics can be used to construct country globalization metrics reflecting the distance of economies from full global integration due to trade barriers, barriers to factor flows, barriers to international financial intermediation, solved technological diffusion and other economy-specific features yielding less than full integration into the global economy. Many distance metrics present themselves and none are wholly satisfactory since they each behave differently across various displacements from integration. Distance measures can, for instance, be small in goods space but large in price space. We present alternative measures constructed for eight OECD economies and comment in a concluding section on other measures used elsewhere in the literature such as trade/GDP ratios.     

PRODUCTIVE RECESSIONS AND JOBLESS RECOVERIES

We explore international variation in business cycle dynamics to gain insights into the recent pattern of robust productivity growth during downturns (productive recessions) and weak employment growth during recoveries (jobless recoveries) seen in some advanced economies. We find that sectoral change is associated with productive recessions but that labor market rigidity can impede reallocation and reduce the probability of a productive recession. We also find evidence of a link between productive recessions and jobless recoveries and that recessions dominated by reductions to employment, rather than changes in average employee hours, are more likely to be associated with jobless recoveries. (JELF44, E32)     

A reconsideration of the problem of social cost: Free riders and monopolists

Summary. One version of the Coase Theorem is, If property rights are fully allocated, competition leads to efficient allocations. This version implies that the public goods problem can be solved by allocating property rights fully. We show that this mechanism is not likely to work well in economies with global externalities because the privatized economy is highly susceptible to strategic behavior: The free-rider problem manifests itself as a complementary monopoly problem in an associated private goods economy. Thus, our work relates the validity of the Coase Theorem to the literature on the incentives for strategic behavior in economies with complementarities. Received: 12 May 1999; revised version: 9 July 1999     

Frontiers and sustainable economic development

Exploiting new resource “frontiers,” such as agricultural land and mineral reserves, is a fundamental feature of economic development in poor economies. Yet frontier-based development is symptomatic of a pattern of economy-wide resource exploitation in developing economies that: (a) generates little additional economic rents, and (b) what rents are generated are not being reinvested in other sectors. Such development is inherently unsustainable. The following paper explains this phenomenon, and provides evidence that long-run expansion of agricultural land and oil and natural gas proved reserves across poor economies is associated with lower levels of real income per capita. The paper proposes a frontier expansion hypothesis to explain why the structural economic dependence of these economies on frontier land expansion and resource exploitation is not conducive to sustained long-run growth. The key to sustainable economic development in poor economies will be improving the economic integration between frontier and other sectors of the economy, targeting policies to improved resource management in frontier areas and overcoming problems of corruption and rent-seeking in resource sectors.      

Ricardian trade and the impact of domestic competition on export performance

Abstract This paper develops and empirically examines a model of relative productivity differences both within and across industries for small open economies. We decompose the effect of industry productivity on export performance into direct effect of own‐firm productivity and an indirect effect of higher peer‐firm productivity. In a sample of Chilean and Colombian plants, we find evidence of both a positive direct effect and a negative indirect effect. The empirical evidence supports our theoretical prediction that industry‐specific factors of production and asymmetric substitutability between domestic and foreign varieties drive the negative indirect effect. JEL classification: F10, F11, F12     

SYNCHRONISING DEREGULATION IN PRODUCT AND LABOUR MARKETS

Deregulation typically comes with redistribution of rents and thus with opposition from the losing interest groups. We show that, by exploiting complementarities, synchronising deregulation across markets makes this opposition lower. Indeed, a particular deregulation may reduce rents for one interest group, but may result in gains for another interest group. Synchronising reforms can therefore offer a way out of the ‘sclerosis’ of especially European markets. For this effect, we build a microeconomic model based on two assumptions: Cournot competition à la Vives in the product markets and firms hiring workers in accordance with an efficiency wage in the labour markets. As being particularly relevant for European economies, we focus on product market regulation that determines the degree of market integration and labour market regulation that determines the degree of employment protection.     

Financial Integration,Growth and Volatility

The aim of this paper is to evaluate the welfare gains from financial integration for developing and emerging market economies. To do so, we build a stochastic endogenous growth model for a small open economy that can: (i) borrow from the rest of the world; (ii) invest in foreign assets; and (iii) receive foreign direct investment. The model is calibrated on 46 emerging market and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is around 13.5% of initial wealth. Compared with financial autarky, actual levels of financial integration translate into higher annual growth rates.     

Incentive Mechanism Design for Production Economies with Both Private and Public Ownerships

In this paper we deal with the problem of incentive mechanism design which yields efficient allocations for general mixed ownership economies when preferences, individual endowments, and coalition patterns among individuals are unknown to the planner. We do so by doubly implementing the proportional solution for economies with any number of private sector and public sector commodities and any number of individuals as well as the coexistence of privately and publicly owned firms with general convex production possibility sets. Furthermore, the mechanisms work not only for three or more agents, but also for two-agent economies. Journal of Economic Literature Classification Numbers: C72, D61, D71, D82.     

Scope economies in the pharmaceutical sector

The paper’s objectives are twofold: to propose an experimental simulation to measure scope economies between pairs of submarkets and to point out the role of submarkets in explaining the concentration level in the pharmaceutical market. We simulate scope economies consistent with the diversification choices of large international companies in the years 1987 and 1997. Our results suggest that: i) the random diversification (that is no scope economies hypothesis) is rejected, and ii) scope economies are significant. (JEL: C15, D21, L11, L65)     

Economies of scale in Norwegian electricity distribution: a quantile regression approach

In this article, we investigate scale economies in Norwegian electricity distribution companies using a quantile regression approach. To the best of our knowledge, this is the first attempt to apply this estimation technique when analysing scale economies. We estimate the cost elasticities of the two output components: network length and number of customers, to calculate returns to scale. Our results show large potential of scale economies, particularly for the smallest companies. We also find that returns to scale is increasing over time. These findings have important implications for policymakers when they are deciding the structure of the industry in the future.