Preferential Trading and Real Wages

Following the Stolper–Samuelson type of logic, the general impression is that freeing up trade, whether preferentially as in the North American Free Trade Agreement (NAFTA) or on a nondiscriminatory basis as in the Uruguay Round, must lower real wages in one set of countries and raise them in the other set of countries. An increase in the real wage in all countries as a result of freeing up of trade either relies on gains via an improvement in the terms of trade or requires special assumptions such as increasing returns, complete specialization or asymmetries in production technology. This paper shows that even within a standard three-country, three-good, small-union model, preferential trade liberalization can lead to increased real wages in both partner countries without necessarily relying on terms-of-trade improvements, increasing returns, complete specialization, or asymmetries in production technology.     

The Impact of Labor Market Regulations

This article investigates the impact of labor market regulationsin a setting with incomplete compliance. It takes as its startingpoint the limited evidence regarding the distortionary costsof labor market regulations and argues that there may existnatural limits to the efficiency losses engendered by such regulations.The article reviews some stylized facts regarding labor marketbehavior, presents an analytical model that may explain suchbehavior, and provides a checklist for assessing the distortionaryimpact of regulations such as minimum wages.     

BEYOND RATE OF RETURN: REORIENTING PROJECT APPRAISAL

Traditional approaches to project appraisal fail in practiceto address two fundamental questions: whether a project belongsin the public or the private sector; and what effect any externalassistance associated with the project has on the country'sdevelopment. The first issue is of general interest to bothnational policymakers and international donors. If the governmentprovides a good or service that would otherwise have been providedby the private sector, the net contribution of the public projectcould be low. The second issue is of particular concern to donors.If financial resources are fungible, the project being appraisedmight well have been undertaken with out external financing.In this case, donor funds are actually financing some other,unappraised project. Both cases argue for a shift in the emphasisof project evaluation away from a concern with precise rate-of-returncalculations and toward broader sectoral analyses and publicexpenditure reviews. In this context, three areas critical forproper project appraisal include a consideration of the rationalefor public intervention, the fiscal impact of the project, andthe fungibility of external assistance.