Trade costs, international production shifting, and growth

In this paper I present a North-South endogenous growth model in which the impact of globalization on production location and growth can be analyzed. In the model the skilled-labor abundant North is the only innovator in the world. Using the model, I illustrate a scenario that is particularly interesting. Globalization (a reduction in trade costs) leads to a relocation of production to the South in a differentiated-product sector. As a result, more resources are shifted to R&D in the North, and the growth rate in the world increases. The model has several empirically consistent implications, such as rising relative wages of skilled to unskilled labor under globalization in both the North and South. I also discuss the welfare impact of globalization in this model.     

Exploring GDP growth volatility spillovers across countries

This study takes a portfolio approach to investigate GDP growth volatility spillovers among 120 countries of the world during the 1960–2017 period. Based on the ratios of growth rate to standard deviation, we rank these countries in pools of high-, midsize-, and low-income growth. Using a spillover index that is based on variance decompositions under a vector autoregressive framework, we analyze the sources of growth volatility dynamics in the world in terms of volatility proportions from and to others. We find that high-income growth countries are net transmitters, while low-income growth countries are net recipients of growth volatility. We also find that it takes several years for low-income growth countries to absorb growth shocks of global nature. Overall, our analyses illustrate the importance of partnership in risk sharing as it is related to portfolio strategies and risk management.     

Trade openness and the informational efficiency of emerging stock markets

This paper examines the empirical link between trade openness and the informational efficiency of stock markets in 23 developing countries. Our fixed effects panel regression results document a significant negative relation between trade openness and stock return autocorrelations only when the de facto measure is used. On this basis, we argue that a greater level of de facto trade openness is associated with a higher degree of informational efficiency in these emerging stock markets because the former signals higher future firm profitability, and investors tend to react faster to information when there is less uncertainty about a firm's future earnings or cash flows. Further analyses find no significant association between the extent of financial openness and the degree of informational efficiency.     

Trade policy and productivity

Previous studies on the determinants of productivity emphasized the role of trade and institutions but omitted trade policy due to endogeneity concerns. This paper considers the role of one important element of trade policy: free trade agreements (FTAs). Based on recent work on the determinants of FTAs, we suggest an instrument which is based on the propensity to enter an FTA due to (exogenous) geographical characteristics. We find that differences in institutional quality and trade, due to variations in geography and trade policy, have a sizeable effect on productivity and can explain the huge variation in per capita income across countries.     

Trade effects of monetary agreements: Evidence for OECD countries

This paper analyses the effects of monetary agreements on trade flows using a sample of 25 OECD countries over the period 1950-2004. We find that these agreements have boosted intra-bloc trade. This result especially applies to the case of the euro. More importantly, in contrast to regional trade agreements, all monetary agreements analysed show evidence of trade-creating effects with third countries. Finally, only the euro shows a symmetric impact for the trade-creating effect with non-members, that is, using the euro promotes both the Eurozone's exports and its imports to non-Eurozone markets to a similar extent.     

Foreign direct investment,growth and income inequality in less developed countries

How does foreign direct investment (FDI) affect economic growth in less developed countries (LDCs)? What is its association with changes in the income distribution? This paper empirically examines these issues within a cross section of less developed countries between 1970 and 1989. FDI is positively associated with economic growth within this sample of countries. However, there is no strong association between FDI and changes in income inequality within these same countries and over this same time period. Hence, there is no evidence that FDI is increasing income inequality within this group of LDCs.     

Trade agreements, bargaining and economic growth

Rebelo’s two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.     

Export surges

How can developing countries stimulate and sustain strong export growth? To answer this question, we examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least 7 years. We find that export surges in developing countries tend to be preceded by a large real depreciation, which leaves the exchange rate significantly undervalued. In contrast, in developed countries, the role of the exchange rate is less pronounced. We examine why the exchange rate is important in developing countries and find that the depreciation is associated with a significant reallocation of resources in the export sector. In particular, depreciation stimulates entry into new export products and new markets. These new exports are important, accounting for over 40% of export growth on average during the surge in developing countries. We argue that a large real depreciation induces firms to expand the product and market space for exports.     

Trade openness and government size of small developing countries

This paper examines the causal effect that trade openness has on government size in small developing countries (SDCs). We use the construction of the trade cost variables based on Baltic Dry Index in primary goods as instruments of trade openness to address the endogeneity issue. We find that the increase in trade openness leads to an increase in government size: a 1 percent expansion in trade openness (trade GDP ratio) raises government consumption over GDP ratio by approximately 0.1–0.2 percentage points on average. Its quantitative significance emphasizes the importance of rethinking the costs and benefits of trade openness for SDCs.     

Trade taxes and international investment

Abstract .  This paper demonstrates that international investment disturbs the conventionally understood equivalence between import tariffs and export taxes. Fundamentally, remittances to foreigners introduce an additional pecuniary channel between countries so that two-good Lerner Symmetry generally will not hold. Moreover, because tariffs subsidize investors in the local import competing sector while export taxes can extract rent from foreign investors in the export sector, the pattern of international investment will influence government preferences over trade policy  instruments  as well as levels. Notably, trade tax symmetry is restored by introducing a third policy tool in the form of a direct a tax on international remittances.     

Trade costs and productivity in services sectors

This paper provides the first evidence linking lower international trade costs with higher productivity in services sectors. On average, lowering trade costs by 10% is associated with a gain in total factor productivity of around 0.5%, which is an effect of similar magnitude to that for goods sectors.     

Trade diversion under selective preferential market access

Abstract .  The European Community (EC) operates a multi-layered GSP scheme in which different groups of developing countries are granted varying degrees of market access. This paper analyzes the question of trade diversion among different categories of beneficiary countries ensuing from the selectivity of preferential market access. Evidence from a disaggregated panel data analysis reveals sizable intra-developing country trade diversion. The losses for relatively disadvantaged countries in terms of forgone trade volume are estimated to range between about 2% to 20% of their total trade with the EC. The distortions are driven by highly substitutable, mostly labour-intensive commodities.     

Trade, regulations, and income

We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.     

Trade creating free trade areas and the undermining of multilateralism

This paper indicates that the consequences of regional trade agreements for the world trade system may be deceiving—an arrangement's apparent virtue may constitute the source of its drawback. In a model where governments have political, as well as economic, motivations, I show that a free trade area induces its members to reduce protection against the non-members, and to do so sufficiently deeply to generate overall trade creation. Trade creation amplifies the excluded countries’ access to the integrating markets, but also reduces their extra gains from multilateral liberalization. Thus, trade creation can reverse the support of the excluded countries to liberalization on a multilateral basis. This is more likely to happen when governments outside the free trade area are more responsive to special interests.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.     

Firms’ location decision across asymmetric countries and employment inequality

This paper analyzes the effect of globalization (lower trade costs) on production and trade patterns if, firms are vertically linked, stages of production differ in labor-factors intensity and countries differ in labor-factors prices. In order to reflect the “Continental Europe” experience, relative wages are assumed fixed and spatial changes in production are translated into changes in relative (skilled to unskilled) employment levels. The asymmetry in factors prices across countries results in a unique agglomeration equilibrium for a broad range of trade costs. At low trade costs, firms’ location depends on production costs—vertical specialization occurs. This paper also provides a consistent explanation of the observed increase in employment inequality between skilled and unskilled workers in relatively high-unskilled wage countries.     

Worker remittances,migration, accumulation and growth in poor developing countries: Survey and analysis of direct and indirect effects

A broad but brief survey of the literature on remittances and growth shows that indirect effects are only included via interaction terms. Then, we regress data for migration, worker remittances, savings, investment, tax revenues, public expenditure on education, interest rates, literacy, labor force growth, development aid and GDP per capita growth on migration, remittances and other variables for a panel of countries with income below $1200. The estimated dynamic equations are integrated to a system used for baseline simulations. Comparison with the counterfactual policy simulations ‘only 50% remittances’ or ‘no net migration anymore’ shows that the total effect of remittances on levels and growth rates of GDP per capita, investment and literacy are positive, and that of net migration is negative for literacy and investment but positive for growth.     

Trade, technology, and unemployment: the role of endogenous skill formation

Abstract .  This paper analyses trade in an asymmetric  2 × 2 × 2  world, where the two countries ('Europe' and 'America') differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries. European workers are more averse to wage inequality, and Europe is characterized by lower wage differentials and higher unemployment. Allowing for endogenous skill formation, the effects of a globalization shock, global technological change, and a change in the educational capital stock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, international wage and unemployment differentials are affected by global shocks.     

Remittances,financial development,and growth

Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and growth has not been adequately studied. This paper studies one of the links between remittances and growth, in particular how local financial sector development influences a country's capacity to take advantage of remittances. Using a newly-constructed dataset for remittances covering about 100 developing countries, we find that remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints. This finding controls for the endogeneity of remittances and financial development, does not depend on the particular measure of financial sector development used, and is robust to a number of robustness tests, including threshold estimation. We also provide evidence that there could be an investment channel trough which remittances can promote growth especially when the financial sector does not meet the credit needs of the population.