nep-dev New Economics Papers
on Development
Issue of 2007‒07‒27
seven papers chosen by
Jeong-Joon Lee
Towson University

  1. Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector By Verhoogen, Eric A.
  2. Multinationals and the Creation of Chinese Trade Linkages By Deborah L. Swenson
  3. Large Hoarding of International Reserves and the Emerging Global Economic Architecture By Joshua Aizenman
  4. Human Capital and Economic Growth: Pakistan, 1960-2003 By Abbas, Qaisar; Foreman-Peck, James
  5. The Long-Term Effects of Africa's Slave Trades By Nunn, Nathan
  6. Openness and Inequality in Developing Countries: A New Look at the Evidence By Gourdon, Julien
  7. Trade and Wage Inequality in Developing Countries: South-South Trade Matters By Gourdon, Julien

  1. By: Verhoogen, Eric A.
    Abstract: This paper proposes a new mechanism linking trade and wage inequality in developing countries --- the quality-upgrading mechanism --- and investigates its empirical implications in panel data on Mexican manufacturing plants. In a model with heterogeneous plants and quality-differentiated goods, only the most productive plants in a country like Mexico enter the export market, they produce higher-quality goods to appeal to richer Northern consumers, and they pay high wages to attract and motivate a high-quality workforce. An exchange-rate devaluation leads initially more-productive, higher-wage plants to increase exports, upgrade quality, and raise wages relative to initially less-productive, lower-wage plants within each industry. Using the late-1994 peso crisis as a source of variation and a variety of proxies for plant productivity, I find that initially more-productive plants increased the export share of sales, white-collar wages, blue-collar wages, the relative wage of white-collar workers, and ISO 9000 certification more than initially less-productive plants during the peso crisis period, and that these differential changes were greater than in periods without devaluations before and after the crisis period. A factor-analytic strategy that relies more heavily on the theoretical structure and avoids the need to construct proxies finds similar results. These findings support the hypothesis that differential quality upgrading induced by the exchange rate shock tended to increase within-industry wage inequality.
    Keywords: exchange-rate shock; quality upgrading; trade and wages; wage inequality
    JEL: F16 J31 L11 O12
    Date: 2007–07
  2. By: Deborah L. Swenson
    Abstract: This paper studies the relationship between multinational firm proximity and the formation of new export connections by private Chinese exporters between 1997 and 2003. The results indicate that growth in the presence of multinational firms is positively associated with the formation of new trade by local Chinese firms. Further exploration suggests that information spillovers may drive this result, as the positive association due to own-industry multinational presence is particularly strong in contexts where information improvements may be the most helpful. Thus, it appears that a growing presence of multinational firms may enhance the export capabilities of local domestic firms.
    JEL: F1 F23
    Date: 2007–07
  3. By: Joshua Aizenman
    Abstract: This paper analyzes competing interpretations for the large increases in the hoarding of international reserves by developing countries. While the first phase of the rapid hoarding of reserves in the aftermath of the East Asian crisis has been dominated by self insurance against exposure to foreign shocks, the self insurance motive falls short of explaining the hoarding in Asia in the 2000s. These developments may be a symptom of an emerging new global financial architecture, which is manifested in the proliferation of decentralized and less cooperative arrangements. The emerging financial configuration of developing countries in the aftermath of the 1990s crises has been growing managed exchange rate flexibility, greater monetary independence, and deeper financial integration. Hoarding international reserves is a key ingredient enhancing the stability of this emerging configuration. While not a panacea, international reserves help by providing self insurance against sudden stops; mitigating REER effects of TOT shocks; smoothing overtime the adjustment to shocks by allowing more persistent current account patterns; and possibly even export promotion, though this mercantilist use of reserves remains debatable due to possible coordination issues. Countries following an export oriented growth strategy may end up with competitive hoarding, akin to competitive devaluations. The sheer size of China, and its lower sterilization costs suggests that China may be the winner of a hoarding game. Hoarding international reserves may also be motivated by a desire to deal with vulnerability to internal and external instability, which is magnified by exposure of the banking system to non performing loans. Testing the self insurance and precautionary motives in the context of China may be challenged by a version of the "peso problem." Hoarding international reserves and sterilization have been complementing each other during the last ten years, as developing countries have increased the intensity of both margins.
    JEL: F02 F1 F15 F31 F32 F33 F36 F4
    Date: 2007–07
  4. By: Abbas, Qaisar; Foreman-Peck, James (Cardiff Business School)
    Abstract: This paper investigates the relationship between human capital and economic growth in Pakistan with time series data. The aggregate production function results reject the endogenous growth formulation but indicate broadly similar productivity of secondary schooling to that in OECD economies. Because schooling returns should be higher in a developing economy, this similarity is interpreted as evidence of low average quality schooling. Returns to health spending compare favorably with industrial investment. A substantial portion of growth is due to exogenous factors, including policies, the positive contribution of which appears to have declined after the 1980s. Human capital is estimated to have accounted for about 40 percent of the increase in GDP per head, a figure that is probably biased downwards because of the many unmeasured dimensions of human capital.
    Keywords: Human Capital; Economic Growth; ECM; Pakistan
    JEL: C13 C22 C51 O15 O53
    Date: 2007–07
  5. By: Nunn, Nathan
    Abstract: Can part of Africa’s current underdevelopment be explained by its slave trades? To explore this question, I use data from shipping records and historical documents reporting slave ethnicities to construct estimates of the number of slaves exported from each country during Africa’s slave trades. I find a robust negative relationship between the number of slaves exported from a country and current economic performance. To better understand if the relationship is causal, I examine the historical evidence on selection into the slave trades, and use instrumental variables. Together the evidence suggests that the slave trades have had an adverse effect on economic development.
    Keywords: Africa; Slave trade; Economic development
    JEL: O1 F1 O55
    Date: 2007–07
  6. By: Gourdon, Julien
    Abstract: Integration to world markets is expected to help developing countries to access prosperity. At the same time, increasing opportunities to trade are likely to affect income distribution and whether or not increasing openness to trade is accompanied by a reduction or an increase inequality is highly controversial. This paper brings new evidence on this issue in using a data set covering a large sample of developing countries and a model with improved controls for omitted variables and a new index of trade openness. Trade liberalization increases inequality in countries that relatively well-endowed in capital. Our model assumes that it might be fruitful to breakdown unskilled labor into non-educated and primary-educated as suggested by Wood (1994). The results show that trade liberalization increases inequality in highly educated abundant countries whereas it decreases inequality in primary educated abundant countries. However it increases inequality in non educated abundant countries, suggesting that this part of population does not benefit from trade openness since it is not included in export oriented sectors.
    Keywords: International Trade; Income Distribution; Poverty
    JEL: F11 F16 D3
    Date: 2006–12
  7. By: Gourdon, Julien
    Abstract: The relationship between trade liberalization and inequality has received considerable attention in recent years. The primary purpose of this paper is to present new results on the sources of wage inequalities in manufacturing taking into account South-South (S-S) trade. Globalization not only leads to increasing North-South (N-S) trade, but the direction and composition of trade has also changed. More trade is carried out between developing countries. We observe increasing wage inequality is more due to the South-South trade liberalization than to the classical trade liberalization with northern countries. The second purpose is to elucidate the link between the direction of trade and technological change, arguing that it might explain why we obtain different results for South-South trade and North-South trade on wage inequality. A part of this increasing wage inequality due to S-S trade comes from the development of N-S trade relationship in S-S trade which increases wage inequality in middle income developing countries. However the fact that S-S trade is more skill intensive sector oriented increase wage inequality for all developing countries.
    Keywords: International Trade; Wage Inequality; Skill-biased technical change
    JEL: O3 J3 F1
    Date: 2007–03

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