Lessons of the crisis for emerging markets

This paper analyzes the impact of the global financial crisis on emerging markets. It argues that the crisis will have enduring implications for policy toward the development and liberalization of financial markets. In particular, emerging markets will rely (even) less on external finance and adopt a less permissive approach to foreign bank presence. In contrast, the crisis will have a much more limited impact on other aspects of globalization. More controversially, the paper argues that the crisis is unlikely to have a major impact on the structure of the international monetary system.     

Overreaction to Fearsome Risks

When risks threaten, cognitive mechanisms bias people toward action or inaction. Fearsome risks are highly available. The availability bias tells us that this leads people to overestimate their frequency. Therefore, they also overreact to curtail the likelihood or consequences of such risks. More generally, fear can paralyze efforts to think clearly about risks. We draw on a range of environmental risks to show the following: (1) Fear leads us to neglect probability of occurrence; (2) As fearsome environmental risks are usually imposed by others (as externalities), indignation stirs excess reaction; (3) We often misperceive or miscalculate such risks. Two experiments demonstrate probability neglect when fearsome risks arise: (a) willingness-to-pay to eliminate the cancer risk from arsenic in water (described in vivid terms) did not vary despite a 10-fold variation in risk; (b) the willingness-to-accept price for a painful but non dangerous electric shock did not vary between a 1 and 100% chance. Possible explanations relate to the role of the amygdala in impairing cognitive brain function. Government and the law, both made by mortals and both responding to public pressures, similarly neglect probabilities for fearsome risks. Examples relating to shark attacks, Love Canal, alar and terrorism are discussed.     

Buyer Power,Transport Cost and Welfare

Manufacturers produce substitute products and sell to consumers in a linear city through competing retail stores. A low cost store obtains large market share by selling at low prices. Assume that a big retailer may exert buyer power by demanding wholesale discounts from manufacturers. The model identifies exclusionary effects of buyer power against competing retailers. It is also found that certain level of buyer power of a discount retailer may maximize social welfare, while that of a regular price retailer may maximize total consumer surplus. Nevertheless, excessive buyer power hurts both consumers and society.     

Profit-Enhancing Parallel Imports

We investigate competition between a domestic intellectual property right holder and a foreign imitator and consider how parallel imports affect their profits. We consider a two-country model. Country A is a developed country where intellectual property rights are highly protected, and country B is a developing country where protection is weak. The intellectual property right holder can sell the products for both markets while the imitator cannot export the products to country A. We find that permitting parallel imports can be beneficial for both players because it serves as a commitment device to soften price competition.     

Government Purchases and the Real Exchange Rate

Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate—which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic.