nep-sea New Economics Papers
on South East Asia
Issue of 2005‒03‒13
seventeen papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Understanding Export Led Growth and Late Industrialisation to Explain the Differences in the Post Reform Performance of India and China By Morris Sebastian
  2. A less effective monetary transmission in the wake of EMU? Evidence from lending rates pass-through By Gianluca Di Lorenzo; Giuseppe Marotta
  3. Productivity Spillovers, Terms of Trade and the "Home Market Effect" By Giancarlo Corsetti; Philippe Martin; Paolo A. Pesenti
  4. Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission By Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
  5. What is the Impact of Software Patent Shifts?: Evidence from Lotus v. Borland By Josh Lerner; Feng Zhu
  6. Financial Crises, 1880-1913: The Role of Foreign Currency Debt By Michael Bordo; Christopher Meissner
  7. Global Climate Policy in a Post-Kyoto World By Georg Muller-Furstenberger; Gunter Stephan
  8. How Transition Paths Differ: Enterprise Performance in Russia and China By Sumon Bhaumik; Saul Estrin
  9. Consolidation, Scale Economies and Technological Change in Japanese Banking By Solomon Tadesse
  10. Banking Fragility and Disclosure: International Evidence By Solomon Tadesse
  11. Financial Development and Technology By Solomon Tadesse
  12. Retained State Shareholding in Chinese PLCs: Does Government Ownership Reduce Corporate Value? By Lihui Tian; Saul Estrin
  14. Network Triads: Transitivity, Referral and Venture Capital Decisions in China and Russia By BAT BATJARGAL
  15. Internet Entrepreneurship: Networks and Performance of Internet Ventures In China By BAT BATJARGAL
  16. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries By Richard M. Bird; Eric M. Zolt
  17. Second-Best Optimal Taxation of Capital and Labor in a Developing Economy By Cecilia Garcia Penalosa; Stephen J. Turnovsky

  1. By: Morris Sebastian
    Abstract: Both India and China began to reform in the early eighties, with the Indian reforms being very slow until 1991-92 after which they 'take-off' While there are many differences the crucial difference is that China adopted the same export led growth (ELG) policies of the successful East Asian economies - South Korea, Taiwan, Singapore, Hong Kong and Thailand, while Indian policies have been distinctly laissez-faire. Orthodoxy’s false understanding of ELG (the East Asian trade strategy), which was as far from laissez faire as can be imagined, is the root cause of the failure of other diversified economies in their pursuit of open door policies. Purposeful and massive under valuation of their currency was part of the East Asian strategy, which while making the ratio of exportables to importables close to their international prices, provided for simultaneous export growth and import substitution; something not possible in orthodoxy’s standard work horse -the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods sector. ELG can therefore with compatible with little or no protectionism. This aspect of the East Asian trade (and development) strategy has been poorly understood even by the structuralists who otherwise (on the aspect of the state’s involvement) had demolished the liberal laissez-faire thesis. India's reforms have resulted in considerable discrimination against the manufacturing enterprises. Exports have grown far more slowly than was otherwise possible. The more equal distribution of income in China, and the differences in the macroeconomic policies explain most of the other observed performance differences between the two countries on aspects such as the inward flow of FDI, investment, savings, growth of particular industries. Some of he crucial dimensions of the macroeconomic policies consistent with ELG in the context of China are brought out. These are structural undervaluation of the currency, expansionary monetary policy and exchange rate targeting with only one way openness to the capital account, if at all. The character of FDI itself, which differs sharply between the two countries is related to the differences in the macro economic policies. The Chinese and the East Asian success extends the notion of 'late industrialisation' to one where external demand (along with domestic demand) is realised for the high speed expansion of manufacturing ELG. The supply side of the same strategy is build on exploiting ‘idle’ and underutilised labour which alone is capable of generating the vast gains from trade. Standard models gains from trade are incomparable small in relation. A significant part of the gains do accrue to the destination countries in the from of falling prices so that there are few political difficulties in the pursuit of ELG even by large countries like China. Thus ELG is more akin to a Lewisian process that employs previously underemployed labour for tradables goods production with rising (to high level) investment rates. India is more than ripe for ELG. It can ignore the lessons from the Chinese experience only at much cost to its growth. High growth in excess of 9% is possible with ELG since even with conservatism it is achieving 6+ %. This paper also argues that the mistaken pursuit of laissez-faire as being export led growth in India would only result in the further hollowing out of manufacturing.
    Keywords: India, China, Pure trade theory, multidimensional issues in trade, non-tradables, undervalued exchange rate, Export led growth, import substituion, open economy, development, late-industrialisation
    Date: 2005–03–07
  2. By: Gianluca Di Lorenzo; Giuseppe Marotta
    Abstract: A new approach to search for structural breaks in the retail lending rates pass-through in the wake of EMU is proposed and implemented for Italy and Portugal. The econometric exercise shows that breakpoints cluster in the second semester 1999 and that the pass-through on short term lending is, in contrast with earlier research, sizeably lower in the post-break period. The recently proposed distinction between monetary policy and cost-of-funds approaches in the passthrough analysis does not yield different breakpoints. These results challenge the widely held view that EMU has in its wake enhanced the effectiveness of monetary transmission via the banking sector and made it more uniform across countries, because of rising and converging PTs. A strengthened relationship lending could at least partly explain the reduced passthrough in the Italian case.
    Keywords: Interest rates; Monetary policy; European Monetary Union; Relationship lending; Cointegration analysis; Structural breaks
    JEL: E43 E52 E58 F36
    Date: 2005–03
  3. By: Giancarlo Corsetti; Philippe Martin; Paolo A. Pesenti
    Abstract: This paper analyzes the welfare implications of international spillovers related to productivity gains, changes in market size, or government spending. We introduce trade costs and endogenous varieties in a two-country general-equilibrium model with monopolistic competition, drawing a distinction between productivity gains that enhance manufacturing efficiency, and gains that lower the cost of firms' entry and product differentiation. Our model suggests that countries with lower manufacturing costs have higher GDP but supply a smaller number of goods at a lower international price. Countries with lower entry and differentiation costs also have higher GDP, but supply a larger array of goods at improved terms of trade. The sign of the international welfare spillovers depends on terms of trade, but also on consumers' taste for variety. Higher domestic demand has macroeconomic implications that are similar to those of a reduction in firms' entry costs.
    JEL: F41 F32
    Date: 2005–03
  4. By: Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
    Abstract: The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers.
    JEL: E44 F3 C5
    Date: 2005–03
  5. By: Josh Lerner; Feng Zhu
    Abstract: Economists have debated the extent to which strengthening patent protection spurs or detracts from technological innovation. In this paper, we examine the reduction of software copyright protection in the Lotus v. Borland decision. If patent and copyright protections are substitutes, then weakening of one form of protection should be associated with an increasing reliance on the other. We find that the firms affected by the diminution of copyright protection disproportionately accelerated their patenting in subsequent years. But little evidence can be found for harmful effects: in fact, the increased reliance on patents is correlated with some positive outcomes for firms.
    JEL: O3
    Date: 2005–03
  6. By: Michael Bordo; Christopher Meissner
    Abstract: What is the role of foreign currency debt in precipitating financial crises? In this paper we assemble data for nearly 30 countries between 1880 and 1913 and examine debt crises, currency crises, banking crises and twin crises. We pay special attention to the role of foreign currency and gold clause debt, currency mismatches and debt intolerance. We find fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, a key finding is that countries with noticeably different backgrounds, and strong institutions such as Australia, Canada, New Zealand, Norway, and the US deftly managed their exposure to hard currency debt, generally avoided having too many crises and never had severe financial meltdowns. Moreover, a strong reserve position matched up to hard currency liabilities seems to be correlated with a lower likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We also see that countries with previous default histories seem prone to debt crises even at seemingly low debt to revenue ratios. Finally we discuss the robustness of these results to local idiosyncrasies and the implications from this representative historical sample.
    JEL: F33 F34 N20
    Date: 2005–03
  7. By: Georg Muller-Furstenberger; Gunter Stephan
    Abstract: Obviously, there are different views on how successful the Kyoto process was in establishing interna-tional cooperation in greenhouse gas abatement. But independent of that, the question is urgent: What might happen after 2012? Will there be a new initiative for an internationally coordinated climate policy or does the world fall back into a regime of non-cooperative abatement policies? This paper analyses costs and benefits of three different post-Kyoto policy options: On the one hand there is PARETO which is the nickname for the pareto-efficient internationalization of the external effects of global cli-mate change through international trade in carbon rights on the one hand. And there is CAP as well as INTAG on the other. Both are unilateral climate policies. CAP denotes a scenario where regions aim for reducing domestic carbon emissions by a certain percentage annually. INTAG is a short cut for intensity targeting which is the US’ most preferred climate policy option. It refers to the same abate-ment policy, however by means of technological progress only
    Keywords: Climate policy; intensity targeting; R&D investments; Integrated Assessment
    JEL: O33 Q38 Q43
    Date: 2005–02
  8. By: Sumon Bhaumik; Saul Estrin
    Abstract: We use enterprise data to analyse and contrast the determinants of enterprise performance in China and Russia. We find that in China, enterprise growth and efficiency is associated with rapid increases in factor inputs, but not correlated with ownership or institutional factors. However, in Russia, enterprise growth is not associated with increases in factor quantity (except for labor) or quality. The main determinants of company performance are instead demand and institutional factors at a regional level. We explore possible interpretations of these results, including the impact of institutional and managerial quality.
    Keywords: enterprise performance; privatization in Russia and China.
    JEL: D23 L22 O12 P31
    Date: 2005–01–01
  9. By: Solomon Tadesse
    Abstract: The paper examines the technological structure of the Japanese banking sector before the onset of the banking crisis and structural reforms of the 90s in order to shade light on the logic of the recent trend to consolidation in the industry. While diseconomies of scale are shown to be pervasive in the large banks, defying the rationale for consolidation, the paper presents evidence of an underlying technological progress that operates to significantly increase the industry’s efficient minimum size, generating economies at larger banks, thus justifying the ongoing trend in consolidation. The results suggest that, to the extent that consumers can benefit from lower costs of bank production, policies that promote a more concentrated banking structure might be consistent with public interest.
    Keywords: Scale Economies; Technical Change; Banking
    JEL: G21 D24 O3
    Date: 2005–02–01
  10. By: Solomon Tadesse
    Abstract: Motivated by recent public policy debates on the role of market discipline in banking stability, I examine the impact of greater bank disclosure in mitigating the likelihood of systemic banking crisis. In a cross sectional study of banking systems across 49 countries in the 90s, I find that banking crises are less likely in countries with financial reporting regimes characterized by (i) comprehensive disclosure (ii) informative disclosure, (iii) timely disclosure and (iv) more stringent auditing.
    Keywords: Banking Crisis, Disclosure, Transparency, Audit Stringency
    JEL: G21 G28
    Date: 2005–02–01
  11. By: Solomon Tadesse
    Abstract: Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.
    Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation
    JEL: G1 G21 G32 E44 O14 O31 O34 O4
    Date: 2005–02–01
  12. By: Lihui Tian; Saul Estrin
    Abstract: The role of government shareholding in corporate performance is central to an understanding of China’s newly privatized large firms. In this paper, we analyze shareholders as agents that can both harm and benefit companies. We examine the ownership structure of 826 listed corporations and find that government shareholding is surprisingly large. Its effect on corporate value is found to be negative, but non-monotonic. Up to a certain threshold, corporate value decreases as government shareholding stakes increase, but beyond this corporate value begins to increase. We interpret this in terms of ownership concentration and the advantages of government partiality.
    Keywords: government shareholding, corporate governance, China.
    JEL: G32 G34 G15 L33
    Date: 2005–02–01
    Abstract: This study examines the impact of entrepreneurs’ network structure and knowledge homogeneity/heterogeneity of their network members on product development, and revenue growth of software ventures in China and Russia. The empirical data are composed of structured interviews with 159 software entrepreneurs in Beijing and Moscow. The study found that structural holes and knowledge heterogeneity affect positively product diversity in interactive ways. The study also found that knowledge homogeneity accelerates product development. Product development speed enhances revenue growth in the long term. However, the combination of speed with dense and homogeneous networks harms revenue growth over time. The effects of structural holes and knowledge heterogeneity on product diversity and revenue growth over time are more salient in Russia due to the unique institutional, social, and cultural conditions present in the country.
    Keywords: networks, knowledge, entrepreneurs, software, China, Russia.
    JEL: M13 D85 L14 L25 P27
    Date: 2005–02–01
    Abstract: This article examines effects of dyadic ties and interpersonal trust on referrals and investment decisions of venture capitalists in the Chinese and Russian contexts. The study uses the postulate of transitivity of social network theory as a conceptual framework. The findings reveal that referee-venture capitalist tie, referee-entrepreneur tie, and interpersonal trust between referee and venture capitalist have positive effects on referrals and investment decisions of venture capitalists. The institutional, social and cultural differences between China and Russia have minimal effects on referrals. Interpersonal trust has positive effects on investment decisions in Russia.
    Keywords: Transitivity, triads, referral, venture capital, China, Russi
    JEL: G24 D85 M13 P27
    Date: 2005–02–01
    Abstract: This article examines the contingent value of entrepreneurs' networks to survival likelihood of Internet ventures, and the dynamics of entrepreneurs' networks over time. The empirical data are composed of the longitudinal surveys of 94 Internet ventures in Beijing, China. The study found the positive and the negative contingent effects of structural holes on the survival likelihood of new firms. The study found that networking skills of entrepreneurs are associated positively with the changes in networks over time. Improved social skills lead to greater firm legitimacy.
    Keywords: Structural holes, human capital, Internet, entrepreneurship, China
    JEL: M13 D85 L14 L25 P27
    Date: 2005–02–01
  16. By: Richard M. Bird (International Tax Program, Rotman School of Management, University of Toronto); Eric M. Zolt (University of California, Los Angeles)
    Abstract: In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive - they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach.
    Keywords: redistribution, progressivity, developing countries, tax policy, personal income tax, benefit taxation
    JEL: H22 H24 O15 O17 O23
  17. By: Cecilia Garcia Penalosa (CNRS, GREQAM and IDEP); Stephen J. Turnovsky (University of Washington)
    Abstract: This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.
    Keywords: endogenous growth, optimal taxation, informal sector, developing economies.
    JEL: E62 O17 O23
    Date: 2003–05

This nep-sea issue is ©2005 by Kavita Iyengar. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.