Potential economic reforms in North Korea: a dynamic general equilibrium model

We use a dynamic general equilibrium model to examine hypothetical market reforms in North Korea. We model partial reform, in which producers choose capital allocations across sectors, with the government still fixing total capital. We also consider two full market reform scenarios. In one, public infrastructure investment remains unchanged, while, in the other, it increases substantially. In all scenarios, we assume a closed economy and a constant military size. Our simulations show little hope for the North Korean economy without boosting infrastructure. Although all of the reforms raise consumption, only significant increases in infrastructure investment bring positive economic growth.     

Economic reform, voting, and local political intervention: Evidence from India

This paper uses the Indian tariff reforms of the early nineties to estimate how voters hurt by economic reforms respond. Regions more hurt by the tariff reform increased their support for both the party that initiated their suffering and parties with similar preferences in favor of poverty-centric policies. This response is surprisingly sophisticated, where voters did not simply punish incumbents for negative income shocks and correctly discounted initial anti-reform stances by opposition parties that later turned out to be false. Furthermore, the strength of this voting response varied with both geography and local political incentives, suggesting that the economic effects of reforms might vary substantially in large and decentralized democracies.     

Comparison of deep integration in the Melitz,Krugman and Armington models: The case of The Philippines in RCEP

We estimate the welfare effects of a modern mega-preferential trade agreement--the Regional Comprehensive Economic Partnership--with three versions of market structure: (i) perfect competition, Armington style; (ii) monopolistic competition based on Krugman (1980); and (iii) monopolistic competition in the style of Melitz (2003). We develop a new numerical model of foreign direct investment (FDI) with heterogeneous firms and extension of the Krugman model that allows small countries to impact the number of varieties. We hold both the trade and FDI responses constant across the three market structures. We find that in all three market structures, there are substantial gains from deep integration, but virtually no gains from preferential tariff reduction. Both our Krugman and Melitz style models produce significantly larger welfare gains than the Armington structure, especially if third countries benefit at least partially from the deep integration reforms via either spillovers or wider liberalization.     

Globalization and financial development

This paper argues that globalization is a key factor in stimulating institutional reforms in developing countries that promote financial development and economic growth. Advanced countries can help in this process by supporting the opening of their markets to goods and services from emerging-market countries. By encouraging these countries to increase their participation in global markets, advanced countries can create exactly the right incentives for developing countries to implement the reforms that will enable them to have high economic growth.     

Structural reforms,fiscal consolidation and external rebalancing in monetary union: A model-based analysis

The paper analyses the impact of structural reforms on external positions in monetary union in a 3-region version of QUEST III. Wage cost moderation and fiscal consolidation improve the current account balance in the medium term, but positive income effects tend to offset the initial increase in the long term. The general pattern is robust across alternative levels of initial foreign indebtedness. While lasting imbalance correction requires a contraction of debt-financed domestic demand, supply-side reform can mitigate the associated output contraction. A scenario is given as illustration that would reverse the 20% competitiveness loss in the EMU periphery during the 2000s and reduce foreign and government debt by 30% and 50% of GDP within ten years.     

Non-cooperative and cooperative policy reforms under uncertainty and spillovers

When countries need to implement costly economic policy reforms, these often imply uncertainties about their effectiveness for the home country and their spillovers to other countries. We develop a model to show that under these circumstances countries implement too few or too many policy reforms. From a social perspective, too many reforms follow if the spillover effects of reforms become sufficiently uncertain. Since centralization of policies to correct inefficient policies is often not possible, we look for alternative instruments that can restore the efficient level of reforms. We compare subsidizing reform efforts with insuring against bad outcomes, and argue that subsidies are advantageous in terms of requiring less information for implementation.     

The effects of IMF conditional programs on the unemployment rate

The fundamental mission of the International Monetary Fund (IMF) is to ensure global financial stability and to assist countries in economic turmoil. Although there is a consensus that IMF-supported programs can have a direct effect on the labor market of recipient countries, it remains unclear how IMF participation decision and conditionalities attached to IMF loans can affect the unemployment rate of borrowing countries. Using a world sample of countries from 1980 to 2014, we investigate how lending conditional programs of the IMF affect the unemployment rate. Our analyses account for the selection bias related to, first, the IMF participation decision and, second, the conditions included within the program. We show that IMF program participation significantly increases the unemployment rate of recipient countries. Once we control for the number of conditions, however, we find that only IMF conditions have a detrimental and highly significant effect on the unemployment rate. There is evidence that the adverse short-run effect of IMF conditions holds robust in the long-run. Disaggregating IMF conditionality by issue area, we find adverse effects on the unemployment rate for four policy areas: labor market deregulation, reforms requiring privatization of state-owned enterprises, external sector reforms stipulating trade and capital account liberalization, and fiscal policy reforms that restrain government expenditure. Our initial results are found to be robust across alternative empirical specifications.     

Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs

Empirical evidence of the impact of policy uncertainty on aggregate investment is mixed. However, if the relationship between policy uncertainty and investment performance is nonlinear, linear regression exercises might not capture the effect of policy uncertainty. In this paper, I present a simple model with investment irreversibility which shows that, in the presence of legal constraints on investment in foreign assets, domestic real investment performance is poorer when liberalization reforms are only partially incredible .     

Joining Global Production Networks: Experience and Prospects of India

Cross‐border dispersion of different stages/slices of the production processes within vertically integrated global industries (“global production sharing”) has been a key structural change in the global economy in recent decades. This paper examines India's experience with exploiting opportunities created by this phenomenon for export expansion from a comparative East Asian perspective. The analysis reveals that India has so far failed fitting into global production networks in electronics and electrical goods, which have been the prime movers of export dynamism in China and the other high‐performing East Asian countries. The findings of this study provide further support to the case for completing the unfinished reform agenda, encompassing both trade and investment policy reforms, and “behind‐the‐border” reforms. There is also a strong case, based on the experiences in East Asia and elsewhere, for combining further reforms with a proactive investment promotion campaign to attract multinational enterprises engaged in global production networks.     

International transmission of environmental policy: A New Keynesian perspective

In this paper we examine the international transmission of environmental policy using a New Keynesian model of the global economy. We first consider the case in which the quality of the environment affects utility, but not productivity. This allows us to look at the trade-off between environmental quality and output. We then consider the case in which the quality of the environment increases productivity but does not affect utility. Our main results show that in both cases a unilateral implementation of a more stringent environmental policy by the domestic country raises foreign welfare under a benchmark parameterization. Our modeling strategy allows an analysis of how nominal rigidities interact with the implementation of environmental reforms, by allowing the domestic country to shift, through exchange rate depreciation, parts of the costs of more stringent environmental policies to the foreign one.     

Is there a “reform fatigue” in the euro area?

The absence of monetary policy within a currency union increases the need for structural reforms that make the participating economies more flexible. However, the absence of exchange rate risk with respect to the other members of the union may reduce the urgency for such reforms. A number of other considerations also suggest that theory is ambiguous about the impact of participating in a currency union on progress in structural reforms. This paper addresses this issue empirically for the euro area. The results suggest that reforms in the euro area seem to have decelerated following the introduction of the euro, but from a fast pace. The paper discusses a number of possible explanations, including “reform fatigue,” the absence of “market punishment,” and “good-times” complacency. Estimates from an empirical growth model suggest that the slowing of reforms may slow down annual output growth by up to 0.2%. However, the results are preliminary and depend on the area of reform considered. Furthermore, the reform dynamics may change with the euro area starting slowing at the end of 2007.     

Trade protection and bureaucratic corruption: an empirical investigation

Abstract .  We examine whether protectionist trade policies lead to increased bureaucratic corruption. Using multiple measures of corruption and trade policies, we find strong evidence that corruption is significantly higher in countries with protectionist trade policies. These results are robust to endogeneity concerns. Next, a panel-data-based GMM methodology is used to estimate a dynamic model of corruption. This estimator controls for country-specific effects, potential endogeneity of trade policy, and existence of measurement errors afflicting the corruption data. The paper strengthens the case for trade liberalization and argues that trade reforms may lead to improvements in governance.     

Trade and product market policies in upstream sectors and productivity in downstream sectors: Firm-level evidence from China

This paper explores the heterogeneous productivity impact of trade, product market and financial market policies over the last decade in China. The paper makes a critical distinction between downstream and upstream industries, focusing on the indirect effects of regulation in upstream industries on firm performance in downstream manufacturing industries. We identify the differential effect of these policies on firm productivity growth depending on how far incumbents are relative to the technological frontier. Trade and product market reforms are found to deliver stronger gains for firms that are closer to the industry-level technological frontier, while the reverse holds for financial market reforms. The key conclusion that can be derived from the empirical analysis is that further product, trade and financial market reforms would bring substantial gains in China and could therefore speed up the convergence process. Taken at face value, the empirical estimates would imply that aligning product, trade and financial market regulation to the average level observed in OECD countries would bring aggregate manufacturing productivity gains of respectively 9%, 3% and 6.5% after 5 years.     

Openness can be good for growth: The role of policy complementarities

This paper studies how the effect of trade openness on economic growth may depend on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris–Todaro model where welfare gains after trade openness depend on the degree of labor market flexibility. The paper then presents cross-country, panel-data evidence on how the growth effect of openness may depend on a variety of structural characteristics. For this purpose, the empirical section uses a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor market flexibility, ease of firm entry, and ease of firm exit. The paper concludes that the growth effects of openness may be significantly improved if certain complementary reforms are undertaken.     

Disaggregated data and trade policy analysis: The value of linking partial and general equilibrium models

Computable General Equilibrium (CGE) models are now routinely utilized for the evaluation of trade policy reforms, yet they are typically quite highly aggregated, which limits their usefulness to trade negotiators who are often interested in impacts at the tariff line. On the other hand, Partial Equilibrium (PE) models, which are typically used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which is required to examine the overall impact of broad-based trade policy reforms. Therefore, a PE–GE, nested modeling framework has the prospect of offering an ideal tool for trade policy analysis. In this paper, we develop a PE model that captures international trade, domestic consumption and output, using Constant Elasticity of Transformation (CET) and Constant Elasticity of Substitution (CES) structures, market clearing conditions and price linkages, nested within the standard GTAP model. In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this PE–GE model in order to contrast the sources of welfare gain in PE and GE analyses. To illustrate the usefulness of this model, we examine the contentious issue of tariff liberalization in the Indian auto sector, using PE, GE and PE–GE models. Both the PE and PE–GE models show that the imports of motorcycles and automobiles change drastically with both unilateral and bilateral tariff liberalization by India, but the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. On the other hand, the GE model overestimates substitution between regional suppliers due to “false competition” and underestimates the welfare gain, due to the problem of tariff averaging in the aggregated model. These findings are shown to be robust to wide variation in model parameters. We conclude that the linked model is superior to both the GE and PE counterparts.     

Industrial de-licensing, trade liberalization, and skill upgrading in India

We investigate the relationship between industrial de-licensing, trade liberalization, and skill upgrading during the 1980s and 1990s among manufacturing plants in India. We use a unique dataset on India's industrial licensing regime to test whether industrial de-licensing during the 1980s and 1990s played a role in skill upgrading, as measured by the employment and wagebill shares of white-collar workers. In addition, we assess the relative contribution of industrial de-licensing and trade liberalization to skill upgrading. We identify two main channels through which industrial de-licensing affects skill upgrading: capital- and output-skill complementarities. Using both difference-in-differences as well as regression discontinuity techniques, we find two important results. First, after controlling for the size-based exemption rule that determined whether or not a plant faced licensing restrictions, industrial de-licensing during the 1980s appears to have increased the relative demand for skilled workers via capital- and output-skill complementarities. Capital- and output-skill complementarities exist for plants in both licensed and de-licensed industries but were stronger in de-licensed industries during the 1980s, prior to India's massive trade liberalization reforms in 1991. Second, regardless of de-licensing, capital- and output-skill complementarities are generally weaker after trade was liberalized during the early 1990s. Together, capital- and output-skill complementarities contributed 75% (57%) and 31% (29%), respectively, of the growth in the employment and wagebill shares of white-collar workers in de-licensed (licensed) industries before trade was liberalized. After trade liberalization, these contributions were smaller. This suggests that trade liberalization may not have played a major role in raising the relative demand for skilled labor during the early 1990s.     

Boom,slump, sudden stops,recovery, and policy options. Portugal and the Euro

Over the past 20 years, Portugal has gone through a boom, a slump, a sudden stop, and now a recovery. Unemployment has decreased, but remains high, and output is still far below potential. Competitiveness has improved, but more is needed to keep the current account in check as the economy recovers. Private and public debt are high, both legacies of the boom, the slump and the sudden stop. Productivity growth remains low. Because of high debt and low growth, the recovery remains fragile. We review the history and the main mechanisms at work. We then review a number of policy options, from fiscal consolidation to fiscal expansion, cleaning up of non-performing loans, labor market reforms, product market reforms, and euro exit. We argue that at this point, the main focus of macroeconomic policy should be twofold. The first is the treatment of non-performing loans, the second is product market reforms and reforms aimed at increasing micro-flexibility in the labor market. Symmetrically, we also argue that at this point, some policies would be undesirable, among them faster fiscal consolidation, measures aimed at decreasing nominal wages and prices, and euro exit.     

Input-trade liberalization and firm export decisions: Evidence from Argentina

Trade openness contributes to the diffusion of the modern technologies embodied in imported intermediate goods, which play a central role in the economic growth of developing countries. This paper investigates the micro-economic effects of input-trade liberalization. Previous work has found positive effects of access to foreign inputs on firm performance. If the availability of imported intermediate goods yields firm productivity gains, we would also expect a positive effect of input-trade liberalization on firm export decisions. This paper contributes to this literature by looking at the relationship between changes in input tariffs and within-firm changes in export status. Using detailed firm-level data from Argentina, I demonstrate that the probability of entering the export market is higher for firms producing in industries that have experienced greater input tariff reductions. These empirical findings are robust to alternative specifications that control for other trade-policy reforms, and industry and firm characteristics.     

Population Aging,Health Care,and Fiscal Policy Reform: The Challenges for Japan

We construct a transition analysis based on a general equilibrium life‐cycle model to investigate the effects of aging, and we evaluate various policy alternatives designed to lessen the negative influence of aging. In particular, we analyze reforms of insurance benefits and tax financing tools that were recently the focus of a great amount of attention and debate in Japan because of the tense financial situation there. We show that although the potential reforms improve the welfare of future generations, the political implementation of such reforms is difficult because of the large welfare costs for the current population. Our analysis suggests that a gradual reform with an intergenerational redistribution will be more politically implementable than an immediate reform.     

Financial market integration: Theory and empirical results

In this article, we introduce a new theoretical international asset pricing model which accounts for partial financial market segmentation. We show that if some investors do not hold all international assets because of implicit and/or explicit segmentation factors, the world market portfolio is not efficient and the classic ICAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We test this model empirically for a sample of emerging markets. Our findings show that the degree of market integration is time-varying and that the premium associated with the domestic risk factors is the most important component of the total risk premium. However, our results also show that most of the emerging markets we study have become more integrated in the end of our sample period as a result of liberalization and reforms.