nep-dev New Economics Papers
on Development
Issue of 2005‒09‒11
seventeen papers chosen by
Jeong-Joon Lee
Towson University

  1. Why are Capital Flows so Much More Volatile in Emerging Than in Developed Countries? By Fernando A. Broner; Roberto Rigobon
  2. A Model of Foreign-Born Transfers: Evidence from Canadian Micro Data By Don J. DeVoretz; Florin P. Vadean
  3. The Marginal Product of Capital By Francesco Caselli; James Feyrer
  4. Bridging the Barriers: Knowledge Connections, Productivity, and Capital Accumulation By R. Quentin Grafton; Tom Kompas; P. Dorian Owen
  5. Sweet land or Sweat land: Two proposals for facilitating access to land and adjustment to eroding EU sugar preferences in Fiji By Satish Chand
  6. Integration and Transition – Vietnam, Cambodia and Lao PDR By Suiwah Leung; Vo Tri Thanh; Kem Reat Viseth
  7. Market Reform, Productivity and Efficiency in Vietnamese Rice Production By Tom Kompas
  8. Why is capital flowing out of China? By Christer Ljungwall; Steven Wang
  9. Trade Policy at the Crossroads - The Indonesian Story By David Vanzetti; Greg McGuire; Prabowo
  11. A PHILLIPS CURVE FOR CHINA By Joerg Scheibe; David Vines
  15. Indonesia's New Deposit Guarantee Law By Ross H. McLeod
  16. Minimum Wages and Poverty in a Developing Country: Simulations from Indonesia's Household Survey By Kelly Bird; Chris Manning
  17. How Much Does Investment Drive Economic Growth in China? By Duo Qin; Marie Anne Cagas; Pilipinas Quising; Xin-Hua He

  1. By: Fernando A. Broner; Roberto Rigobon
    Abstract: The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks (“crises”) than those to developed countries, (ii) shocks are subject to contagion, and (iii) – the most important one – shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.
    Date: 2005–09
  2. By: Don J. DeVoretz (RIIM, Simon Fraser University and IZA Bonn); Florin P. Vadean (HWWA Hamburg and RIIM, Simon Fraser University)
    Abstract: This paper models financial transfers outside the household for both the Canadian-born and foreign-born Canadian populations in a traditional expenditure framework. Using survey data we estimate transfer functions as part of a larger expenditure system and calculate Engel elasticities for remittances by both the Canadian and foreign-born populations. We conclude that transfers outside the household are a normal good for recent Asian immigrants and a luxury good for all other immigrants and Canadians. Immigrant transfers upon arrival are greater than Canadian-born transfers indicating a strong entry effect. Assimilation or convergence to the Canadian-born norm over time is however very slow. We also find evidence of negative foreign-born transfers as sending country households remit to Canadian immigrant households. Finally, all foreign-born groups generally consider remittances to charitable organizations a greater necessity than inter-household transfers.
    Keywords: immigration, remittances
    JEL: J63 O15
    Date: 2005–07
  3. By: Francesco Caselli; James Feyrer
    Abstract: Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that the MPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions. Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries' incomes.
    JEL: E22 O11 O16 O41
    Date: 2005–08
  4. By: R. Quentin Grafton (Asia Pacific School of Economics and Government, The Australian National University); Tom Kompas (Asia Pacific School of Economics and Government, The Australian National University); P. Dorian Owen (Asia Pacific School of Economics and Government, The Australian National UniversityTitle:)
    Abstract: The paper explains the large differences in cross-country productivity performance by modeling and testing the effects of social barriers to communication on productivity and capital accumulation. In an optimal growth model, social barriers to communication that impede the formation of knowledge connections are shown to reduce both transitory and steady-state levels of total factor productivity (TFP), per capita consumption, and reproducible capital. A ‘bridging’ parameter in the growth model that lowers the disutility of forming knowledge connections generates testable and dynamic implications about the effects of social barriers on capital, consumption, and productivity. Extensive empirical testing of the theoretical propositions yields a robust and theoretically consistent result — linguistic barriers to communication reduce productivity and capital accumulation. The findings provide a theoretical justification and a robust explanation for cross-country differences in TFP, and fresh insights into how productivity ‘catch up’ may be initiated.
    Keywords: knowledge connections, productivity, economic growth
    JEL: O41 C61 C21
    Date: 2004–11
  5. By: Satish Chand (Asia Pacific School of Economics and Government, Australian National University)
    Abstract: The resolution of problems with lease renewals in Fiji, particularly in the sugarcane districts, has ramifications for private investment and growth in the entire economy. The impending withdrawal of subsidies to sugar as world trade is liberalised has increased the urgency of finding solutions to these problems. This paper draws on game theory to characterise the problems facing the Fiji sugar industry. The incentives for land and ethnic politics are identified. Separate proposals are put forward to facilitate secure access to land and to minimise adjustment costs from the erosion of preferences under the Sugar Protocol. The rationalisation forced upon the sugar industry, if managed well, could induce land reforms that could improve the investment climate and the prospects for growth, whilst minimising pains of adjustment.
    Keywords: Fiji, access to land, EU, Sugar, European Union, economic growth, private investment, game theory, rationalisation
    JEL: C70 O13 H71
    Date: 2004–06
  6. By: Suiwah Leung (Asia Pacific School of Economics and Government,Australian National University.); Vo Tri Thanh (CIEM); Kem Reat Viseth (NIM)
    Abstract: Coming out of French colonial rule and central planning, the three transitional economies of Indochina, Vietnam, Cambodia and Lao PDR, embarked on market-oriented reforms in the late 1980s and early 1990s. Vietnam was certainly the most successful, but all three countries quickly achieved macroeconomic stability and rapid growth. However, the Asian financial crisis in 1997/98, as well as the countries’ use of administrative edicts in response to the crisis, highlights the fragile nature of their transition. The paper holds as a premise that effective integration of the three Indochina economies with the “old ASEANS” involves the former developing market institutions that can sustain “quality” growth which will take them out of the transitional economy status. It finds that, although the three economies are open to international trade and investment flows, their domestic market structures are still very much under-developed, with heavy protection of the state sector in terms of tariff structures and bank credits, and inadequate legal and judiciary developments. As a result, foreign investment flows which went principally into the state-owned enterprises in Vietnam and Lao PDR, and into the quota-dependent garment sector in Cambodia, peaked in the mid-1990s and have been declining ever since. Private sector developments have been retarded, and the process of building a commercial/legal infrastructure to support private enterprise has only just begun. Meanwhile, modern production technologies and processes involving component manufacturing in different countries and then assembly in yet a third country (the so-called “component production and assembly within integrated production systems”) means that the cost of doing business includes not just labour cost but also cost of services such as transport, telecommunication, electricity, insurance and banking. The latter are high cost industries dominated chiefly by SOEs in Vietnam and Lao PDR. The bilateral agreements already in place and the WTO agreements (when negotiated) will set deadlines for the three countries to open their service sectors to entry by international firms. Competition has, and will continue, to drive down prices for these services, thereby benefiting the domestic private sector as well as improving competitiveness for foreign direct investments. Implementation of the international trade agreements will also help to streamline cumbersome laws and regulations as well as improve the judiciary in the three countries, again with significant benefits for the domestic private sector. An important challenge is to develop the necessary human resources to complement the countries’ public administration reform. Another challenge is to maintain macroeconomic stability whilst opening the countries’ domestic and external financial sectors. A third challenge for the “New ASEANs” is to counter protectionism of the developed countries with whom they enter trade agreements.
    Keywords: integration, transition, Vietnam, Cambodia, Lao PDR, growth, macroeconomic stability, ASEAN, foreign direct investment, garment sector, infrastructure, private sector, FDI, competition, protectionism
    JEL: P27 F36 F15 F13 O53
    Date: 2005–01
  7. By: Tom Kompas (Asia Pacific School of Economics and Government,Australian National University.)
    Abstract: This paper analyzes the dramatic increases in rice output and productivity in Vietnam due largely to market reform, inducing farmers to work harder and use land more efficiently. The reform process is captured through changes in effort variables and a decomposition of total factor productivity (TFP) due to enhanced incentives for two main reform periods: output contracts (1981-87) and trade liberalization (1988-94). The results show that the more extensive is market reform the larger the increase in TFP and the share of TFP growth due to incentive effects, suggesting that more competitive markets and secure property rights matter greatly. However, in the post-reform period (1995-99), the incentive component of TFP dissipates as a result of falls in the price of rice and slow increases in input prices, especially for hired labour, fertilizer and capital. A stochastic production frontier is estimated to determine what farm-specific factors limit efficiency gains. Results show that farms in the main rice growing regions, those with larger farm size and farms with a higher proportion of rice land ploughed by tractor are more efficient, suggesting the need for additional reforms to augment productvity. In particular, the requirement that rice be grown in every province in Vietnam, restrictions on farm size (especially in the north) and the slow development of rural credit markets for capital and land are seen to restrict the level and growth of efficiency substantially.
    Keywords: market reform, total factor productivity, efficiency, rice production
    JEL: O13 O47 Q10
    Date: 2004–04
  8. By: Christer Ljungwall (China Centre for Economic Research at Peking University); Steven Wang (Department of Economics and statistics, Goteborg University)
    Abstract: This paper uses quarterly balance of payment data over the years 1993:1 - 2003:4 to explore the determinants of Chin's capital flight. The long run relationship and dynamic interactions among the variables are examined using cointegration and innovation accounting methodology. The result that capital flight is stimulated by external debts growth is noteworthy. The 'Holy Trinity' exlpains the link: For the agents in Chian, when the authorities insist in keeping a rgidly pegged CNY excahnge rate and monetary policy autonomy, incurring external debts is a ready challenge for large-scale cpaital inflows and outflows. As the country's external debts are state-guaranteed, the 'revolving-door syndrome' intensifies debtors moral hazard in expecting a government bail-out, and they over-borrow from abroad; hence there is an incident of capital flight. Despite China's strict control of its fiancial account, capital flight happens, and it is defacto being funded by increasing external debts. Hence, reforms in external debts management and fiscal resource allocation should be introduced to downsize such capital flight.
    Keywords: capital flight, cointegration, China
    JEL: F21 G15 F32
    Date: 2004–01
  9. By: David Vanzetti (Asia Pacific School of Economics and Government, The Australian National University); Greg McGuire (United Nations Support Facility for Indonesia Recovery); Prabowo (United Nations Support Facility for Indonesia Recovery)
    Abstract: Indonesia provides an interesting case study of the potential benefits and costs of alternative trade strategies that are under active consideration in many developing countries. The ASEAN region has recently announced a deepening of its commitments and is considering widening the agreement to include countries such as China, Japan and the Republic of Korea. A bilateral agreement with the United States is also a possibility. Against this background, Indonesia’s options on trade policy range from increasing protection to actively pursuing bilateral, regional and multilateral initiatives.
    Keywords: Indonesia, trade policy, United States, US, ASEAN, Japan, bilateral agreement, protection, incentive
    JEL: F13 O31 F14 F15
    Date: 2005–01
  10. By: Jesus Felipe; J. S. L. Mc Combie
    Abstract: This paper provides evidence of a problem with the influential testing and assessment of Solow's (1956) growth model proposed by Mankiw et al (1992). It is shown that when the assumption of a common rate of technical progress is relaxed in the neoclassical model, the goodness of fit of Mankiw et al's equation improves dramatically. However, and more inportantly, it is shown that this result, as well as the magnitude of estimates obtained, merely reflects a statistical artifact. This has serious implications for the possibility of actually testing Solow's growth model.
    Date: 2004–08
  11. By: Joerg Scheibe; David Vines
    Abstract: This paper models Chinese inflation using an output gap Phillips curve. Inflation modelling for the world's sixth largest economy is a still under-researched topic. We estimate a partially forward-looking Phillips curve as well as traditional backward-looking Phillips curves. Using quarterly data from 1988 to 2002, we estimate a vertical long-run Phillips curve for China and show that the output gap, the exchange rate, and inflation expectations play important roles in explaining inflation. We adjust for structural change in the economy where possible and estimate regressions for rolling sample windows in order to test for and uncover gradual structural change. We evaluate a number of alternative output gap estimates and find that output gaps which are derived from prodcution function estimations for the Chinese economy are of more use in estimating a Phillips curve than output gaps derived from simple statistical trends. Partially forward-looking Phillips curves provide a better fit than backward-looking ones. The identification of a non-increasing exchange rate effect on inlation during a period of large import growth hints at increased pricing to market behaviour by importers. This result is relevant to policies regarding possible exchange rate liberalisation in China.
    JEL: E12 E31 E32
    Date: 2005–02
  12. By: James B. Ang; Warwick J. McKibbin
    Abstract: The objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of Malaysia. We argue that the results obtained from cross-sectional studies are not able to address this issue satisfactorily and highlight the importance of country specific studies. Using time series data from 1960 to 2001, we conduct cointegration and various causality tests to assess the finance-growth link by taking saving, investment, trade and real interest rate into account. Contrary to the conventional findings, our results support the view that output growth causes financial depth in the long-run.
    JEL: E44 O11 O16 O53
    Date: 2005–05
  13. By: Jesus Felipe
    Abstract: This paper shows that unit labor costs (ulcs), the most widely used measure of competitiveness, can be interpreted as the labor share in output multiplied by a price-adjustment factor. This has three main implications. First, ulcs are not just a technical concept since they embody the social relations that affect the distribution of income between the social classes. Secondly, lower ulcs should not necessarily be interpreted as implying that an economy is more competitive, ie, that it will grow faster, and vice versa. In wage-led growth economies, an increase in the wage share leads to an increase in the equilibrium capacity utilization rate, which leads to an increase in the growth rate of the capital stock. Hence it is possible to find that the countries with fast-growing ulcs are the ones registering faster growth in exports or in GDP. Once one analyzes ulcs taking into account their functional distribution dimension, "Kaldor's paradox" ceases to be an anomalous result. Finally, one can define the concept of unit capital cost as a measure of competitiveness and shift the burden of lack of growth or loss of market share to capital.
    JEL: E25 F02 O47 O53
    Date: 2005–02
  14. By: Jesus Felipe
    Abstract: This comment raises three main issues about He and Qin's (2004)attempt at modeling investment in the PRC. The first is this author's skepticism about the general applicability of the neoclassical model of investment to the PRC. Second, that their model for business investment, based on the neoclassical theory of investment, can be viewed as an approximation to an accounting identity derived by manipulating two other identities, namely, that of the capital share in output, and that of the motion of the capital stock. It is shown that the difference between He and Qin's equation and the identity is simply yhat they use the rental price of capital, while the identity relies on the profit rate. At best, all their analysis would indicate is that rental price of capital and profit rate are different. It is also argued that the empirical results are not clearly related to the supposed theoretical model. Based on this, the conclusion is that the policy implications of He and Qin's alleged model are somewhat dubious. Third, He and Qin's equation for government investment introduces the deviations of output from the long-run trend as an explanatory variable, estimated using an aggregate production function. The problems underlying this latter concept make the estimation of the output trend using this method a questionable exercise. Also, the empirical results suffer from serious problems of interpretation.
    Date: 2005–08
  15. By: Ross H. McLeod
    Abstract: The blanket guarantee introduced in 1998 in response to the emerging banking and economic crisis resulted in $50 billion of losses to the general public. The government has now introduced a law that enables the phasing out of this blanket guarantee, but which also allows for its reinstatement in the event of any threatened collapse of the banking system. Rather than eliminating the possibility of any repetition of the previous banking disaster, the new law effectively mandates an almost identical approach to handling system-wide banking collapses in the future, suggesting that the authorities and their advisers learned very little from the recent bitter experience. It is argued here that the crucial starting point for formulating policy in this field is to correctly specify the exact purpose that government intervention is intended to serve: namely, the avoidance of major macroeconomic disruption as a result of bank failures.
    Keywords: banking, bailout, deposit guarantee, deposit insurance, moral hazard
    JEL: E42 E44 G21 G28
    Date: 2005–08
  16. By: Kelly Bird; Chris Manning
    Abstract: This study focuses on the efficiency of minimum wage policy for poverty reduction, taking Indonesia as a case study. A simulation approach assesses who benefits and who pays for minimum wage increases. On the benefits side, the rise in minimum wages boosts incomes in households with low wage workers. However, increases in wage costs are passed on through higher consumer prices. As a result, three out of four poor households lose in net terms, even when we assume no job losses. The findings suggest that minimum wages are unlikely to be an effective antipoverty instrument, at least for Indonesia.
    Keywords: Minimum Wages, Poverty, Income distribution, Indonesia
    JEL: I31 J33 J38 O15
    Date: 2005
  17. By: Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank); Pilipinas Quising (Asian Development Bank); Xin-Hua He (Chinese Academy of Social Sciences)
    Abstract: Investment-driven growth has long been regarded as a key development strategy in China. This paper investigates empirically the validity of this view. Post-1990 data analyses and macroeconometric model simulations show that market demand has become a regular force in driving investment since reforms, that non-demand-driven investment growth contributes to increasing capital-output ratio far more than output growth, that government investment exerts a pivotal role in amplifying investment cycles, albeit effective in promoting employment, and that delayed and rising consumption from current investment surge can help sustain the impact of growth even with constant-returns-to-scale in the long-run GDP.
    Keywords: Investment, Growth, Impulse response function, Cointegration, Granger non-causality
    JEL: E22 E62 R34 O23 P41
    Date: 2005–08

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