Global Economy Journal

Growth Diagnostics: The Puzzle of Pakistan’s Lagging Economic Growth

Shahrukh Rafi Khan — Tue, 27 Dec 2011 13:11:58 PST

Advocates of growth diagnostics have shown it to be a preferable alternative to other methods of formulating a growth strategy such as cross-country regressions, growth accounting or international benchmarking using cross country surveys. We show that growth diagnostics also suffers from problems and demands a high level of economic sophistication from its practitioners. We suggest a simpler prelude before launching into rigorous analysis and apply this method to address the puzzle of Pakistan’s lagging per capita GDP relative to India.

The Impacts of Trade Liberalisation and Technological Change on GDP Growth in Indonesia: A Meta Regression Analysis

Risti Permani — Tue, 27 Dec 2011 13:11:57 PST

Twelve selected studies investigating effects of trade liberalisation in Indonesia resulting in 25 point estimates are included in the Meta Regression Analysis to assess the growth-enhancing effects of trade liberalisation and technological change. Given high variation across studies, this study finds no robust evidence of the positive impacts of a tariff cut on economic growth rates. However, it finds robust evidence of the growth-enhancing effects of technological change. This study also finds that studies which are published assuming increasing return to scale, focusing on non-agricultural sectors, using pre-1997 databases and with more disaggregated sectors tend to report higher growth effects of trade liberalisation. Compared to results reported by Indonesian researchers, non-Indonesian academic researchers report lower growth effects of trade liberalisation. Overall, this study suggests that providing assistance to developing countries to improve their productivity might be a better approach to multilateral negotiations than putting pressures on these countries to remove their trade barriers.

Greece’s “Unpleasant Arithmetic” Containing the Threat to the Global Economy

James R. Barth et al. — Tue, 27 Dec 2011 13:11:54 PST

Greece's debt-to-GDP ratio is reaching unsustainable levels. But why should the debt load of such a small country cause such outsized tremors in global financial markets?

Greek debt may be relatively small, but a sufficient amount is held by a few major banks in Europe to cause disruptions to the credit system. This effect is magnified because other banks from around the world are exposed to these European banks, making the problem global.

In this article we examine the exposure of banks around the world to Greek debt, and call for swift and decisive action by policymakers to head off a global banking crisis.

International Financial Integration, Investment and Economic Performance in Sub-Saharan African Countries

Abdullahi D. Ahmed — Tue, 27 Dec 2011 13:11:53 PST

This paper examines the issues of international and regional financial integration and its impact taking a sample 25 SSA countries. The research tests both the direct and indirect channels through which the impact of financial integration works and is transmitted to the real economy. Directly, it is argued that financial openness affects economic growth through enabling access to foreign financial markets, increasing financial service efficiency and helping in diversification of risks and consumption smoothing. Thus while inducing additional capital investment, it also fosters macroeconomic discipline. Indirectly, the process of international financial integration facilitates the transfer of technological know-how, promotes trade and enhances specialization.

While financial openness of recent years has laid a strong foundation to consolidate financial integration between regions and with international financial markets, we do not observe a robust link between financial openness and economic growth in SSA region. The empirical analysis considers the possibility of a positive indirect effect, and we report evidence in favour of the indirect transmission root. From our results, we observe a positive and statistically significant association between international financial integration and financial development under all its selected indicators. This finding suggests that financial capital market integration aids growth indirectly through promoting domestic financial markets. The study reports evidence suggesting that good institutions, higher level of human capital, and stable macroeconomic environment play an important role in mitigating the negative impacts of international financial openness.

Governments of the Left and Openness to Imports

James M. Lutz — Tue, 27 Dec 2011 13:11:51 PST

Developed countries have provided different levels of protection to domestic economic sectors facing competition from imports. An analysis of the effective levels of protection in place in 19 developed, democratic countries found that from the 1970s to the beginning of the 21st century, higher levels of protection were present in countries where parties of the left had a greater proportion of the seats in the national legislature. These results indicate that parties of the left were more likely to guard against import competition. After 2004, however, this link disappeared, perhaps reflecting the disruptive effects of the terrorist attacks of 9/11 and the global recession that began a few years later.

The Impact of Chinese Purchases of U.S. Government Debt on the Treasury Yield Curve

Radhames A. Lizardo et al. — Tue, 27 Dec 2011 13:11:50 PST

Examining monthly data from May of 1985 to May of 2008, we find that increases in Chinese purchases of U.S government debt lead to decreases in Treasury yields. The effect is stronger as the maturity increases: a one percent increase in purchases of U.S. Treasuries by Chinese investors lowers the two-year (ten-year) Treasury yield by 10 to 38 basis points (39 to 55 basis points) on average, ceteris paribus . Overall, the demand-side variable capturing Chinese purchases of U.S. Treasuries improves the cointegrating properties of U.S. interest rates. In-sample and out-of-sample forecasts reinforce that the model with Chinese purchases greatly outperforms basic models of the yield curve. This study has implications for the business world since we document that Chinese investors contribute to lower U.S. Treasury yields and thus to lower U.S. interest rates in general.

The Impact of the Movement of Labour: Results from a Model of Bilateral Migration Flows

Terrie L. Walmsley et al. — Tue, 27 Dec 2011 13:11:47 PST

The economics literature increasingly recognizes the importance of migration. In this paper, a bilateral global migration model is developed to investigate the impact of lifting restrictions on the movement of labour. Quotas on skilled and unskilled labour in the developed economies are increased by 3% of their labour forces, with the additional labour supplied by developing economies.

This paper improves upon the previous work of Walmsley and Winters (2005). A critical weakness of the previous work was that it was unable to capture the impacts of specific bilateral migration flows or liberalizations between countries. This paper uses a bilateral global migration model that exploits migration data obtained from Parsons, Skeldon, Winters, and Walmsley (2007) that allow the model to account for bilateral migration flows.

The results confirm that restrictions on migration impose significant costs on nearly all countries, with the modest liberalization increasing global GDP by US$ 288 billion. All of the developed (labour importing) economies gain in terms of real incomes. While results differ across the developing (labour exporting) economies, most gain as a result of the higher remittances sent home.

JEL: F22, C68, 015

How do International Financial Flows to Developing Countries Respond to Natural Disasters?

Antonio C. David — Tue, 27 Dec 2011 13:11:43 PST

This paper uses multivariate dynamic panel analysis to examine the response of international financial flows to natural disasters. The models estimated for a large sample of developing countries point to differentiated responses of specific types of financial flows. The results show that remittance inflows increase significantly in response to shocks to both climatic and geological disasters, thus confirming their compensatory nature. The models suggest a nuanced role for foreign aid. While the responses of aid flows to natural disaster shocks in general tend not to be statistically significant, international assistance to low income countries increases following geological disaster shocks. Furthermore, the results show that typically, other private capital flows (bank lending and equity) do not attenuate the effects of disasters and in some specifications, even amplify the negative economic effects of these events.

Monetary Policy and Oil Prices

Mehdi S. Monadjemi — Mon, 26 Sep 2011 09:00:30 PDT

Because of volatility, commodity prices are excluded from the CPI when inflation targeting is exercised. Rising commodity prices contribute to inflation but central banks show no reaction since the CPI does not register rise in prices. Frankel (2006) argues that monetary policy should consider the price of important export commodities such as oil, in oil exporting countries. He maintains that by doing so, central banks are able to benefit from the fluctuations of the exchange rate in the presence of a negative international trade shocks. Central banks cannot benefit from the fluctuation of the exchange rate if inflation targeting is the strategy for conducting monetary policy.

The European Union and Economic Freedom

Joshua C. Hall et al. — Mon, 26 Sep 2011 09:00:26 PDT

This paper integrates two growing strains of literature. The first strain looks at the effect of economic and political unions on outcomes such as bond ratings and economic convergence. The second strain looks at the determinants of economic freedom across countries. Building from these two literatures, we investigate the impact of joining the European Union on a country’s economic freedom. Using a panel of countries from 1970 to 2007, we find evidence that joining the European Union increases a country’s economic freedom. Empirically, however, the impact of joining the union on economic freedom is small.

Will the World Bank’s Vision Materialize? Relocating China’s Factories to Sub-Saharan Africa, Flying-Geese Style

Terutomo Ozawa et al. — Mon, 26 Sep 2011 09:00:24 PDT

China has emerged as the most proactive partner for Africa’s growth by offering economic aid, investing in development projects in resource extraction and infrastructure building, and expanding trade. In this regard, a number of studies have recently explored China’s growing—yet still nascent—manufacturing investments in sub-Saharan Africa, which the World Bank hopes to see further expanded so as to ignite local industrialization. These studies look mainly at the Africa-side (host) conditions. In contrast, this paper stresses China-side (home) factors and examines the institutional issues involved in this hoped-for scheme of industrial transplantation. The central question addressed is whether the World Bank’s wish will actually come true. China’s potential in this scenario is assessed in terms of the “flying-geese” growth model that explains how comparatively disadvantaged industries in such a rapidly catching-up economy as China’s may be transplanted overseas. This article concludes that at the moment, China’s capacity to transform the sub-Saharan region into a vibrant manufacturing base via foreign direct investment (FDI) is still underdeveloped and quite limited.

On Cargo Security Measures and Trade Costs

José E. Signoret — Mon, 26 Sep 2011 09:00:22 PDT

Can tighter cargo security measures lead to higher trade costs and increased trade frictions? This paper examines the impact of the Container Security Initiative (CSI), implemented by the United States in several foreign ports after the September 11 terrorist attacks. It analyzes monthly data for all containerized U.S. imports from 1999 to 2006, by foreign port and country of origin. The analysis exploits these longitudinal data at the port-level and the varying starting dates across CSI ports to identify the causal effect of the initiative. While higher import charges over time are observed, the results find no significant evidence of a “CSI effect” on either import costs or import flows.

Foreign Aid, FDI, Economic Freedom and Economic Growth in Asian Countries

Aviral Kumar Tiwari — Mon, 26 Sep 2011 09:00:20 PDT

This study examines the effectiveness of foreign aid, foreign direct investment, and economic freedom for selected 28 Asian countries in a panel framework. The model includes foreign aid, foreign direct investment, economic freedom, labor force, and capital stock. The estimation procedure was carried out on pooled annual time series data for the period 1998-2007. For the purpose of analysis, we used static and dynamic panel data techniques. The results indicated that an increase in the fiscal freedom, financial freedom and domestic capital stock were significant factors positively affecting economic growth. Freedom from corruption, inflow of foreign direct investment and foreign aid were significant factors negatively affecting economic growth. Further, we found that life expectancy played a significant and positive role in economic growth. Foreign aid had a non-linear impact (negative impact of high aid flows) upon economic growth.

Correcting the Size Bias in Trade Openness and Globalization Measures

Kam Ki Tang — Mon, 26 Sep 2011 09:00:18 PDT

The trade intensity index, constructed as exports plus imports divided by GDP, is the most commonly used measure for trade openness and globalization. The index tends to indicate small countries are more open than large countries. We show that it is the inconsistence of two implicit assumptions in the index that leads to a size bias in the openness measurement. We use a combination of axiomatic and parametric methods to derive an unbiased, generalized index that embodies the conventional index as a special case. Correcting the size bias leads to very different results in relative openness measures between countries and in the estimates of the growth effect of trade openness.

Antidumping as a Development Issue

Robert M. Feinberg — Mon, 26 Sep 2011 09:00:16 PDT

Antidumping policy was for many years an instrument employed almost exclusively by a small number of developed economies. Over the past 15 years, however, the use of this instrument of trade policy has spread to developing economies, and the overwhelming share of antidumping cases now involve developing countries either as petitioner or as target of these cases. This paper describes these trends in some detail and discusses some implications. A focus of the paper is the absence of discussion in the development economics literature on the topic despite the increasingly important role played by antidumping policy.

The Seamy Side of the Global Economy

Alfred E. Eckes Jr. — Mon, 26 Sep 2011 09:00:13 PDT

Revolutionary developments in technology and the deregulation of borders and economies have enhanced efficiency, stimulated growth, and expanded opportunities for four to five billion people around the world to join the market-oriented global economy over the last generation. But the global economy also has a seamy underside often neglected in academic discussions. This article offers a brief introduction to some of the problems that challenge governance and social stability in the generation ahead. It examines how globalization has multiplied opportunities for organized crime and terrorists; increased human trafficking, as well as forced and child labor; benefited sweatshops; expanded the flow of unsafe food and products; and contributed to environmental hazards. Because of the many complex and controversial issues involved, and the limited data publicly available, the author seeks only to survey current conditions, to identify relevant sources, and to encourage future scholarly research.

Corporate Response to Global Financial Crisis: A Knowledge-Based Model

Vipin Gupta — Fri, 01 Jul 2011 01:13:23 PDT

This paper highlights the need for the emerging market firms to take a strategic approach to build capabilities for resiliency in the face of frequent macro economic crises, even if each crisis is anticipated to be temporary and short-term in nature. A knowledge-based model is developed to highlight the dynamics of interaction between the emerging market vendors and the industrial market clients, as the latter restructure their offshoring contracts in the face of a financial crisis. The model shows the strategic solutions that the emerging market vendors have to transform the situation of crisis into a window of opportunity. In addition, the model provides insights into how the industrial market firms may also moderate the effects of an economic crisis by adopting a strategic knowledge exchange approach (i.e., appropriate capability development), instead of the common reliance on a strategic compensation approach (i.e., lower prices or profits).

The Role of Employment Protection during an Exogenous Shock to an Economy

Miki Malul et al. — Fri, 01 Jul 2011 01:13:19 PDT

This paper explores the role of employment protection when powerful external crises reduce demand for products. We first present a theoretical framework that shows that employment protection has a U-shaped effect on abnormal unemployment during a negative exogenous shock to an economy. Using data from the 33 OECD countries, we analyze how the level of employment protection affected the stability of unemployment rates during the recent global economic crisis. The results suggest that countries with an intermediate level of employment protection will have more stable unemployment rates during a world crisis. The policy implication of our paper is that countries should seek a medium level of employment protection that may act as an automatic stabilizer of the economy on the macro level.

Global Finance after the Crisis: Reform Imperatives and Vested Interests

Wim Naude — Fri, 01 Jul 2011 01:13:17 PDT

The global financial crisis of 2008-09 has stimulated a number of re-assessments of global development. But after two years, not much progress has been made in dealing with the deep causes of the crisis. While it is better understood now why the crisis occurred, more progress is needed in terms of financial reform on the global level in order to prevent future financial crises. A remaining challenge is to strengthen the global financial architecture (GFA). This paper focuses on the GFA and its relationship to the global financial crisis. Recent reform initiatives are discussed. Strong resistance against re-regulation of the financial sector is noted, reflecting the general opposition of vested interests to GFA reform.

A Review of the Crises

Amir Shoham et al. — Fri, 01 Jul 2011 01:13:14 PDT

The literature on the financial crisis is very large and diverse. The intent of this article is to summarize these and other mainstream articles through the lens of two key questions: (1) what caused the crisis? and (2) why have the spillover effects been so devastating in so many industrial countries?

In Section II of this review, we address the demand side for liquidity. Section III presents the supply side of liquidity. Section IV tackles the second question: namely, the contagion effect. Section V introduces the other articles in this special section of the journal.