Thy Neighbor's Curse: Regional Instability and Economic Growth

We show that regional instability, defined as politicalinstability in neighboring countries, has a strong negative effecton a country's economic performance. The magnitude of this negativeexternality is similar in size to that of an equivalent increasein domestic political instability. We also identify two mainchannels through which regional instability lowers economic performance.First, regional instability disrupts trade flows. The sharesof merchandise and manufactured trade are lower in countrieswith high regional instability. Second, regional instabilityleads to increased military outlays. Defense expenditures arehigher in countries with high regional instability. In contrast,the share of government expenditures allocated to education islower in countries with politically unstable neighbors. Our resultssuggest the existence of negative spillovers among politicallyunstable neighboring countries. These adverse regional influencesshould be taken into account when projecting the future economicperformance of countries. The evidence presented also suggeststhat the gains from reducing regional instability extend farbeyond the welfare of the country experiencing political unrest.Policies directed at settling current territorial disputes ina peaceful and orderly manner can have large beneficial effectsfor parties not directly involved in the conflict.     

New Tools in Comparative Political Economy: The Database of Political Institutions

This article introduces a large new cross-country database,the Database of Political Institutions. It covers 177 countriesover 21 years, 1975–95. The article presents the intuition,construction, and definitions of the different variables. Amongthe novel variables introduced are several measures of checksand balances, tenure and stability, identification of partyaffiliation with government or opposition, and fragmentationof opposition and government parties in the legislature.     

Exchange rates and prices in Europe

Zusammenfassung Wechselkurse und Preise in Europa. — Dieser Aufsatz behandelt die Implikationen von Asymmetrien in der übertragung von Preisst?rungen bei zentralisierter Wechselkurspolitik in einem System gesteuerter Kurse wie dem Europ?ischen W?hrungssystem. Es wird gezeigt, da\ bei derartigen Asymmetrien unwiderruflich feste Wechselkurse suboptimal sind, selbst dann, wenn die politischen Ziele der L?nder identisch und die Wechselkurs- und Geldpolitiken zentralisiert sind. Im empirischen Teil werden die asymmetrischen übertragungen von Preisst?rungen aufgezeigt, indem Input-Output-Matrizen für vier europ?ische L?nder simuliert werden. Dabei ergibt sich, da\ diese Asymmetrien in der Tat betr?chtlich sind und da\ sie bei einer optimalen Festsetzung der Wechselkurse ausdrücklich in Rechnung gestellt werden sollten.

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Résumé Taux de change et prix en Europe. —- Dans cet article les auteurs discutent les implications des asymétries en transmission des perturbances de prix pour une politique de taux de change centralisée dans un système de taux dirigés comme le Système Monétaire Européen. Ils démontrent que, sous des asymétries, les taux de change fixés irrévocablement sont sous-optimum, même si les buts politiques des pays sont identiques et si les politiques de taux de change et monétaires sont centralisées. Puis les auteurs donnent de l’évidence empirique pour des asymétries en transmission des perturbances de prix en simulant des matrices input-output pour quatre pays Européens. Le résultat est que ces asymétries sont vraiment considérable; par conséquent, un cadre optimum de taux de change devrait tenir compte d’elles.

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Resumen Tipos de cambio y precios en Europa. — En este trabajo se discuten las consecuencias que tienen asimetrías en la transmisión de perturbaciones de los precios para políticas de cambio centralizadas dentro de un sistema de tipos de cambio manejados como el Sistema Monetario Europeo. Se demuestra porqué en presencia de estas asimetrías tipos de cambio fijos e irrevocables son suboptimales, incluso cuando los objetivos de política son idénticos en todos los países y las politicas de cambios y monetarias son centralizadas. A continuación se présenta evidencia empfrica de asimetrías en la transmisión de perturbaciones de los precios simulando matrices insumo producto de cuatro países europeos. Los resultados indican que estas asimetrias son importantes y que a raíz de ello un régimen de cambio óptimo debiera tomarlas en cuenta explícitamente.

     

The Behavior of Nontradable-Goods Prices In Europe: Evidence and Interpretation*

This paper examines the evolution of the relative price between tradable and nontradable goods in a group of European countries. A model of an open economy is used to analyze different factors that can account for an increase in the relative price of nontradable goods. These factors are (a) faster technological progress in the tradable goods sector, (b) demand shifts toward nontradable goods, and (c) real wage pressures. the relevance of these factors is analyzed empirically for France, Germany, Italy, Spain, and the United Kingdom.     

Income policies, inflation and relative pay :

We provide new measures of ethnic, linguistic, and religious fractionalization for about 190 countries. These measures are more comprehensive than those previously used in the economics literature and we compare our new variables with those previously used. We also revisit the question of the effects of ethnic, linguistic, and religious heterogeneity on the quality of institutions and growth. We partly confirm and partly modify previous results. The patterns of cross-correlations between potential explanatory variables and their different degree of endogeneity makes it hard to make unqualified statements about competing explanations for economic growth and the quality of government. Our new data, which features the underlying group structure of ethnicities, religions and languages, also allows the computation of alternative measures of heterogeneity, and we turn to measures of polarization as an alternative to the commonly used index of fractionalization.     

Fractionalization

We provide new measures of ethnic, linguistic, and religious fractionalization for about 190 countries. These measures are more comprehensive than those previously used in the economics literature and we compare our new variables with those previously used. We also revisit the question of the effects of ethnic, linguistic, and religious heterogeneity on the quality of institutions and growth. We partly confirm and partly modify previous results. The patterns of cross-correlations between potential explanatory variables and their different degree of endogeneity makes it hard to make unqualified statements about competing explanations for economic growth and the quality of government. Our new data, which features the underlying group structure of ethnicities, religions and languages, also allows the computation of alternative measures of heterogeneity, and we turn to measures of polarization as an alternative to the commonly used index of fractionalization.     

Terrorism and the world economy

It has been argued that terrorism should not have a large effect on economic activity, because terrorist attacks destroy only a small fraction of the stock of capital of a country (see, e.g., Becker, G., Murphy, K., 2001. Prosperity will rise out of the ashes. Wall Street Journal October 29, 2001). In contrast, empirical estimates of the consequences of terrorism typically suggest large effects on economic outcomes (see, e.g., Abadie, A., Gardeazabal, J., 2003. The economic cost of conflict: A case study of the Basque country. American Economic Review 93, 113-132). The main theme of this article is that mobility of productive capital in an open economy may account for much of the difference between the direct and the equilibrium impact of terrorism. We use a simple economic model to show that terrorism may have a large impact on the allocation of productive capital across countries, even if it represents a small fraction of the overall economic risk. The model emphasizes that, in addition to increasing uncertainty, terrorism reduces the expected return to investment. As a result, changes in the intensity of terrorism may cause large movements of capital across countries if the world economy is sufficiently open, so international investors are able to diversify other types of country risks. Using a unique data set on terrorism and other country risks, we find that, in accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5% of GDP. The magnitude of the estimated effect is large, which suggests that the “open-economy channel” impact of terrorism may be substantial.     

The internalization of externalities in the production of electricity: Willingness to pay for the attributes of a policy for renewable energy

This paper investigates the willingness to pay of a sample of residents of Bath, England, for a hypothetical program that promotes the production of renewable energy. Using choice experiments, we assess the preferences of respondents for a policy for the promotion of renewable energy that: (i) contributes to the internalization of the external costs caused by fossil fuel technologies; (ii) affects the short-term security of energy supply; (iii) has an impact on the employment in the energy sector; and (iv) leads to an increase in the electricity bill. Responses to the choice questions show that our respondents are in favour of a policy for renewable energy and that they attach a high value to a policy that brings private and public benefits in terms of climate change and energy security benefits. Our results therefore suggest that consumers are willing to pay a higher price for electricity in order to internalize the external costs in terms of energy security, climate change and air pollution caused by the production of electricity.     

The psychosocial behaviour of young Spanish smokers

This paper studies the psychosocial behaviour of Spanish smokers between the ages of 14 and 18, with the aim of identifying the factors associated with both the decision to consume tobacco and the quantities to consume. To that end, a Type II Tobit model is used, which is estimated by using data drawn from the Spanish Surveys on Drug Use in the School Population corresponding to 1994, 1996, and 1998. The results show that the two decisions are strongly associated with a number of psychosocial determinants. In particular, evidence was found that the probability of smoking and the quantity consumed are positively related to variables such as the age of the adolescent, his/her disposable income, or education failure. The estimates also show that the realization of informative campaigns about the risk of tobacco and other substance abuse reduces both the proportion of smokers and the number of cigarettes consumed.