Trade,growth, and convergence in a dynamic Heckscher–Ohlin model

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher–Ohlin model—a combination of a static two-good, two-factor Heckscher–Ohlin trade model and a two-sector growth model—with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.     

Entrepreneurship and productivity: The slow growth of the planned economies

Trends in gross domestic product (GDP) and total factor productivity (TFP) growth in the former socialist economies seem to indicate that these economies were converging to unusually low long-run growth rates in the late 1980s. In this paper we develop an endogenous growth model of entrepreneurship that is able to account for the difference in long-run performance between centrally planned economies and market-oriented ones. Long-run growth rates of output and productivity are determined by the growth of the stock of managerial knowledge, which in turn depends on the share of the population involved in entrepreneurial activities and on the time that spent on those activities. We analyze the effect of two characteristics of centrally planned economies on their growth performance. First, in centrally planned economies factors of production are distributed by the central planner to the firms' managers through a contest that uses up some of the managers' productive effort. Second, the leadership is “egalitarian,” in the sense that it treats individuals with different abilities equally. We show that these two features reduce the fraction of people becoming entrepreneurs/managers, as well as their managerial effort, which in turn reduces long-run output and TFP growth. Furthermore, we find that centrally planned economies have lower income inequality and slightly higher capital–output ratios, which is consistent with these countries' experiences.     

Specific Factors,Learning, and the Dynamics of Trade*

In the postwar period, the volume of trade among developed countries has increased at a much higher rate than GDP. This article presents a dynamic general equilibrium model of trade between developed countries that accounts for this pattern of trade dynamics. Countries trade in goods that use good‐specific skilled labor and unskilled labor as factors of production. Specific skills are learned on the job and there exist positive effects in learning. Small initial differences in the distribution of experts in each country generate an increasing pattern of specialization over time. Knowledge spillovers across sectors are crucial determinants of the trade pattern.     

Reforming state owned enterprises in China: Effects of WTO accession

In December 2001 China became a member of the World Trade Organization (WTO). By signing the accession protocol, China not only agreed to reform its trade policy, but it also accepted regulations that implied reductions on government subsidies to the state-owned sector. In this paper we claim that the latter, largely ignored in the literature, generate important welfare gains that need to be attributed to WTO accession. We develop a dynamic general equilibrium model with state and private enterprises. We calibrate the model to the Chinese economy and we quantitatively assess the economic effects of reducing subsidies to the state sector as required by the WTO. We find the welfare benefits of such reduction in subsidies to be substantial. Using the context of China, this paper identifies a new channel through which WTO accession increases a country's welfare: it induces reforms on domestic subsidies which lead to an increase in economic efficiency.     

China's vulnerability to currency crisis: A KLR signals approach

In this paper we use the Kaminsky–Lizondo–Reinhart (KLR) [Kaminsky, G., Lizondo, S., Reinhart, C., 1998. Leading Indicators of Currency Crises. International Monetary Fund Staff Papers 45, 1–48.] approach to conduct an ex-post study of the probabilities of China suffering a currency crisis during the period of January 1991 to December 2004. Two high-probability periods are identified: July 1992–July 1993 and August 1998–May 1999. The first period correctly predicts China's 1994 devaluation. The second period predicts currency devaluation in the aftermath of the Asian crisis, which did not occur. The results of the model indicate that the fundamentals were weak enough for China to experience contagion of the Asian crisis, and raise the question of the possible role of China's institutional arrangements in preventing the crisis. The paper further analyzes the economic fundamentals of China that drive the high probability of crises, and provides some suggestions for further reform.