nep-sea New Economics Papers
on South East Asia
Issue of 2006‒03‒18
sixteen papers chosen by
Kavita Iyengar
Asian Development Bank

  1. The Effect of Exchange Rate Changes on Trade in East Asia By Willem THORBECKE
  2. La nueva China cambia al mundo By Marcela Cristini y Guillermo Bermudez
  3. Integration and Trade Specialization in East Asia By Yose Rizal Damuri; Raymond Atje; Arya B. Gaduh
  4. Income Mobility of Individuals in China and the United States By Niny Khor; John Pencavel
  5. Do Peers Affect Student Achievement in China's Secondary Schools? By Weili Ding; Steven Lehrer
  6. Leisure Time in Japan: How Much and for Whom? By Scott M. Fuess, Jr.
  7. Forecasting Inflation and GDP growth: Comparison of Automatic Leading Indicator (ALI) Method with Macro Econometric Structural Models (MESMs) By Duo Qin; Marie Anne Cagas; Geoffrey Ducanes; Nedelyn Magtibay-Ramos; Pilipinas Quising
  8. Borrowing constraints and protracted recessions By Keiichiro Kobayashi; Masaru Inaba
  9. Networks of Small Producers for Technological Innovation: Some Models By Chandra Pankaj
  11. Technocracy in Indonesia: A Preliminary Analysis By Takashi Shiraishi
  12. A Macroeconometric Model of the Chinese Economy By Duo Qin; Marie Anne Cagas; Geoffrey Ducanes; Xinhua He; Rui Liu; Shiguo Liu; Nedelyn Magtibay-Ramos; Pilipinas Quising
  13. The Persistence and Predictive Power of the Dividend-Price Ratio By Cheolbeom Park
  14. Inflation, unemployment, labor force change in the USA By Ivan O. Kitov
  15. Complementarity and Transition to Modern Economic Growth By Hyeok Jeong; Yong Kim
  16. Is there a difference between solicited and unsolicited bank ratings and if so, why ? By Patrick Van Roy

  1. By: Willem THORBECKE
    Abstract: East Asia is characterized by intricate production and distribution networks. Higher skilled workers in Japan, South Korea, and Taiwan produce sophisticated technology-intensive intermediate goods and capital goods and ship them to China and ASEAN for assembly by lower skilled workers and reshipment throughout the world. These networks have promoted economic efficiency and functioned as an engine of growth. They have also been accompanied by large trade imbalances with the U.S. that could cause Asian currencies to appreciate against the dollar. This in turn would alter relative exchange rates in Asia, given the variety of exchange rate regimes in the region. This paper investigates how such exchange rate changes would affect trade within Asia and between Asia and the U.S. The results indicate that exchange rate changes can cause significant declines in exports of intermediate and capital goods from developed Asia to developing Asia. This evidence implies that exchange rate appreciations in developed Asia relative to developing Asia would disrupt the complimentary relationship that exists between these countries in the trade of sophisticated technology-intensive goods. The results also indicate that exchange rate elasticities for trade between Asia and the U.S. are not large enough to lend confidence that a depreciation of the dollar would improve the U.S. trade balance with Asia. This evidence implies that policymakers in the U.S. should not expect too much from an appreciation of Asian currencies and should focus instead on shortfalls of saving relative to investment if they are concerned about their trade imbalances.
    Date: 2006–03
  2. By: Marcela Cristini y Guillermo Bermudez (FIEL)
    Date: 2004–09
  3. By: Yose Rizal Damuri (Centre for Strategic and International Studies, Jakarta, Indonesia); Raymond Atje (Centre for Strategic and International Studies, Jakarta, Indonesia); Arya B. Gaduh (Centre for Strategic and International Studies, Jakarta, Indonesia)
    Abstract: The 1990s saw East Asia becoming more integrated as trade barriers fell, trade intensity and intra-industry trade increased, and production networks formed. This greater integration has resulted in changing patterns of trade specialization in the region, as different economies adjust. Some economies (especially resource-rich economies) maintain their top trade-specialty products, while others move towards higher-productivity manufacturing goods. Nonetheless, we observe in all East Asian countries in our study a trend towards specializing in products with higher sophistication and technological intensity. Meanwhile, our examination of the product specialization mobility and our empirical analysis suggest no indication of East Asian countries being in a "low-productivity specialization trap" which would disable them from shifting their specialization towards higher-productivity and higher-value goods.
    Keywords: trade specialization, regional integration, East Asia
    JEL: F15
    Date: 2006–03
  4. By: Niny Khor (Stanford University); John Pencavel (Stanford University and IZA Bonn)
    Abstract: Though much has been written about annual income inequality in China, little research has been conducted on longer run measures of income inequality and on income mobility. This paper compares income mobility of urban individuals in China and the United States in the 1990s. The following questions are taken up. To what extent are measures of annual income inequality misleading indicators of long-run income inequality? How much income mobility was there in China in the first half of the 1990s and how did this compare with mobility in other countries? Have real income increases been greater for the poor or the rich? How important is the variation in permanent incomes in China and how has this changed?
    Keywords: income inequality, income mobility, China, United States
    JEL: D31 D63 O15
    Date: 2006–03
  5. By: Weili Ding (Queen's University); Steven Lehrer (Queen's University)
    Abstract: Peer effects have figured prominently in debates on school vouchers, desegregation, ability tracking and anti-poverty programs. Compelling evidence of their existence remains scarce for plaguing endogeneity issues such as selection bias and the reflection problem. This paper is among the first to firmly establish the link between peer performance and student achievement, using a unique dataset from China. We find strong evidence that peer effects exist and operate in a positive and nonlinear manner; reducing the variation of peer performance increases achievement; and our semi-parametric estimates clarify the tradeoffs facing policymakers in exploiting positive peers effects to increase future achievement.
    Keywords: Peer Effects, Ability Grouping, Selection on observables, China, Academic performance, Teacher quality
    JEL: I2 Z13 P36
    Date: 2005–02
  6. By: Scott M. Fuess, Jr. (University of Nebraska-Lincoln and IZA Bonn)
    Abstract: Japan is famous for long working hours. For decades the Japanese government has tried to influence how people spend their free time. In 5-yearly surveys since 1986, the government has surveyed "quality of life" by gauging how much time people spend daily in various "noneconomic" activities. Using results from the 1986, 1991, 1996, and 2001 surveys, this study determines whether time spent daily on leisure activities has actually changed. Controlling for labor market forces, in recent years Japanese adults have not experienced more leisure time overall. They have increased time spent, one hour per week, in media-oriented leisure; this increase, however, comes at the expense of more outgoing amusements like hobbies, playing sports, or socializing with friends. There is a significant gender gap for leisure time. Shorter work schedules do encourage a more active leisure lifestyle. Leisure is directly related to regular income, but is stifled by bonus pay.
    Keywords: time allocation, leisure time and working hours, country studies, Japan
    JEL: J20 J22 J40
    Date: 2006–03
  7. By: Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank (ADB), and University of the Philippines); Geoffrey Ducanes (Asian Development Bank (ADB), and University of the Philippines); Nedelyn Magtibay-Ramos (Asian Development Bank (ADB)); Pilipinas Quising (Asian Development Bank (ADB))
    Abstract: This paper compares forecast performance of the ALI method and the MESMs and seeks ways of improving the ALI method. Inflation and GDP growth form the forecast objects for comparison, using data from China, Indonesia and the Philippines. The ALI method is found to produce better forecasts than those by MESMs in general, but the method is found to involve greater uncertainty in choosing indicators, mixing data frequencies and utilizing unrestricted VARs. Two possible improvements are found helpful to reduce the uncertainty: (i) give theory priority in choosing indicators and include theory-based disequilibrium shocks in the indicator sets; and (ii) reduce the VARs by means of the general→specific model reduction procedure.
    Keywords: Dynamic factor models, Model reduction, VAR
    JEL: E31 C53
    Date: 2006–03
  8. By: Keiichiro Kobayashi; Masaru Inaba
    Abstract: This paper shows that some of the puzzling observations in the protracted recessions of the 1990s in Japan and the 1930s in the United States can be accounted for by a simple variant of the neoclassical growth model with borrowing constraints. There are three puzzles: First, a large wedge emerged between the marginal rate of substitution between consumption and leisure and the marginal product of labor. This labor wedge is associated with declines in labor inputs. Second, although shrinkage of investment was observed in both episodes, a wedge that represents investment frictions did not emerge. Third, in spite of unprecedented monetary easing in Japan since the late 1990s, deflation has continued. A key ingredient is the emergence of a huge accumulation of nonperforming debts, which must have been a consequence of the large fluctuations in asset prices. The debts tighten the borrowing constraints and can cause the puzzling features of the recessions, which may be protracted if the bad debt problem persists for years.
    Date: 2006–03
  9. By: Chandra Pankaj
    Abstract: Small producers face a variety of challenges - some related to markets and others related to capabilities. Inability to develop technological capabilities has often restricted small firms from growing large. In this paper, we present learning from three global networks , i.e., TAMA in Japan, Wenzhou in China and Rajkot in India, that have adopted a variety of mechanisms of coordination between small producers and has led to both capability enhancement and demand enhancement. We argue that the capability enhancement effects play as significant a role as demand enhancement effects in the growth of small firms. Coordination that allows firms to improve their capabilities enhances both productivity as well as innovative capabilities to develop new products and processes. The paper, with the help of these three case studies, presents a generic model for SME development that is based on acquiring distinctive capabilities and linkages with other small producers or other members of the supply chain. We propose distinctive determinants of a collaborative model for engaging SMEs in technological innovation over a period of time. These are : Focus of the Firm, Interactive Producers, Processing and Product Manufacturing, Innovation Investment, Markets, Market Makers (and market making processes), and Regulatory Support.
    Date: 2006–03–07
  10. By: Kazuhiko NISHINA (Graduate School of Economics, Osaka University); Tatsuro Nabil MAGHREBI (Faculty of Economics, Wakayama University); Moo-Sung KIM (College of Business Administration, Pusan National University)
    Abstract: This study develops a new model-free benchmark of implied volatility for the Japanese stock market similar in construction to the new VIX based on the S&P 500 index. It also examines the stochastic dynamics of the implied volatility index and its relationship with realized volatility in both markets. There is evidence that implied volatility is governed by a long-memory process. Despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. The implied volatility index is also found to be inclusive of some but not all information on future volatility contained in historical returns. However, its higher out-of sample performance provides further support to the rationale behind drawing inference about future stock market volatility based on the incremental information contained in options prices.
    Keywords: Licensing; Implied volatility index, Out-of-sample forecasting, GARCH modelling
    JEL: C52 C53 G14
    Date: 2006–03
  11. By: Takashi Shiraishi
    Abstract: This paper traces the evolution of technocracy in Indonesia, while asking how to explain the changing effectiveness of the economic team of ministers from the early Suharto era to the current era under President Susilo Bambang Yudhoyono in the economic policy decision making. The paper argues that the technocracy nurtured by the New Order was cohesive and effective in part because of its shared academic background and technical expertise and in part because of its adherence to the three principles of balanced budget, open capital account, and pegged exchange rate system and its ability to serve as Soeharto's right arm in formulating and executing national development policies. In the late Soeharto era, however, these academic technocrats faced increasing challenges from engineers entrenched in the government agencies such as the Ministry of Industry, the Investment Coordination Agency and the BPPT (Agency for the Assessment and Application of Technology). Technocrats who, in alliance with the IMF, attempted to use the Asian crisis to force structural reforms on Indonesia found themselves shut out by Soeharto. The transitional governments led by B.J. Habibie, Abdurrahman Wahid, and Megawati sought institutional and political alternatives to the discredited technocratic economic policy-making process. These alternatives ranged from putting technocrats in touch with other key players in Indonesia's economy and politics such as businessmen, the mass media, emerging politicians and future technocrats to the outright bypassing of technocracy to the empowerment of MOF for the sake of macroeconomic stability at the expense of BAPPENAS and long-term national planning. With the enactment of a series of laws governing the BI, government finance, and national development planning as well as constitutional revisions, however, a new institutional framework is now in place. This new institutional framework will go a long way toward upholding the mid-term and long-term economic rationality of the policy-making process. But technocrats will now also become even more dependent on their ability to secure the backing of the president, whose decisions on economic policy will likely be influenced by non-technical and highly politicized issues. Moreover, the technical expertise that was once commanded only by the academic technocrats is now shared not just by technocratic bureaucrats, but also politicians and political (ex-)activists with backgrounds in economics. This means that a range of perspectives in economic thinking is now available for political appropriation. In this sense, it is clear that technocracy can no longer be shielded from "politics". In retrospect, it has never been. If it had once looked as if it was under the New Order, Soeharto made it appear so. But those days are over. Although the institutional foundation is now in place for the independence of Central Bank, the fiscal prudence of the Ministry of Finance and the planning function of the BAPPENAS, their performances ultimately depend on who runs these institutions and what political processes inform their operations.
    Date: 2006–03
  12. By: Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank (ADB)); Geoffrey Ducanes (Asian Development Bank (ADB)); Xinhua He (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Rui Liu (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Shiguo Liu (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Nedelyn Magtibay-Ramos (Asian Development Bank (ADB)); Pilipinas Quising (Asian Development Bank (ADB))
    Abstract: This paper describes a quarterly macroeconometric model of the Chinese economy. The model comprises household consumption, investment, government, trade, production, prices, money, and employment blocks. The equilibrium-correction form is used for all the behavioral equations and the general→simple dynamic specification approach is adopted. Great efforts have been made to achieve the best possible blend of standard long-run theories, country-specific institutional features and short-run dynamics in data. The tracking performance of the model is evaluated. Forecasting and empirical investigation of a number of topical macroeconomic issues utilizing model simulations have shown the model to be immensely useful.
    Keywords: Macroeconometric model, Chinese economy, Forecasts, Simulations
    JEL: C51 E17
    Date: 2006–03
  13. By: Cheolbeom Park (Department of Economics, National University of Singapore)
    Abstract: This paper presents strong statistical evidence that the dividend- price ratio in the US has experienced a change in persistence from I(0) to I(1), while stock returns have not. This provides an econometric explanation why the predictive power of the dividend-price ratio in the US has changed drastically. When the dividend-price ratio is I(0), it can have predictive power for future stock returns by the force of the cointegration relation between dividends and stock prices. However, if the dividend-price ratio becomes I(1), then it should have no predictive power for stock returns which have not experienced a change in persistence and are well known to be I(0). This relation between the persistence and the predictive power of the dividend-price ratio is well observed not only in the US but also in Japan, although the underlying causes and directions of the change in persistence appear different in the two countries.
    Keywords: Change in persistence, Dividend-price ratio, Predictability, Stock returns
    JEL: C12 C22 G12
  14. By: Ivan O. Kitov (Russian Academy of Sciences)
    Abstract: of personal income distribution normalized to the total nominal GDP. Inflation is found to be a mechanism, which counters changes in the relative incomes induced by economic growth and population changes - both in number and age structure. A model is developed linking the measured inflation (consumer price index or GDP deflator), unemployment and change in labor force. During the last twenty-five years, unemployment in the USA has been a lagged linear function of inflation. In turn, inflation has also been a lagged linear function of relative change in labor force with time. The lag is currently three years. Only a small decrease in labor force participation rate is currently observed in contrast to a strong increase between 1965 and 1990. According to the indicated relationship, the well-known stagflation period clearly resulted from the lag: the sharp increase in inflation coincided in time with the high unemployment induced by the high inflation period two years before. One can predict the unemployment rate in the USA in the following two years within the accuracy of inflation measurements. For example, the end of 2005 is a pivot point from a period of decreasing unemployment to one of moderate growth from 5% in 2005 to 6% in the middle of 2008. Starting in 1960, cumulative values of the observed and the model predicted unemployment are in agreement with the lag between inflation and unemployment. Inflation is defined by a lagged linear function of rate of change in labor force. The observed and predicted inflation almost coincide for the last forty years of annual measurement values, smoothed by a five-year wide moving window curves and as cumulative curves as well. Deviation of the curves before 1960 can be explained by a degraded accuracy of the measurements. A severe decrease in the rate of change of labor force is expected after 2010. This drop can potentially induce a long-term deflationary period. The same effect has been observed for Japan starting in 1990. There are numerous implications of the results for monetary and social policy-makers. The most important is an absence of any means to control inflation and economic growth except though a reasonable labor policy. In addition, some urgent measures are necessary to prevent the start of a deflationary period in 2010-2012.
    Keywords: inflation, unemployment, labor force, USA, time series models
    JEL: E3 E6 J21
    Date: 2006
  15. By: Hyeok Jeong; Yong Kim
    Abstract: In developing countries, the gradual transition to modern growth seems puzzling given the large productivity growth gap between traditional and modern sectors. We document this transition and develop a theory that resolves this puzzle. The key forces are sector-specific complementarity between work-experience and labor, and exogenous technical progress present only in the modern sector. Using nationally representative micro data from the Socio-Economic Survey of Thailand (1976-1996), we measure the theory by estimating cross-sectional earnings functions, and assess if the model jointly captures the observed transition dynamics of earnings growth and inequality. The model successfully explains the gradual transition, stagnation then take-off of aggregate earnings, and the rise and fall of experience-earnings profiles in Thailand.
    Keywords: Sector-Specific Complementarity, Modern Economic Growth, TFP and Inequality
    JEL: O11 O47 J31
  16. By: Patrick Van Roy (National Bank of Belgium, Department of International Cooperation and Financial Stability)
    Abstract: This paper analyses the effect of soliciting a rating on the rating outcome of banks. Using a sample of Asian banks rated by Fitch Ratings ("Fitch"), I find evidence that unsolicited ratings tend to be lower than solicited ones, after accounting for differences in observed bank characteristics. This downward bias does not seem to be explained by the fact that betterquality banks selfselect into the solicited group. Rather, unsolicited ratings appear to be lower because they are based on public information. As a result, they tend to be more conservative than solicited ratings, which incorporate both public and nonpublic information.
    Keywords: Credit rating agencies, Unsolicited ratings, Selfselection, Public disclosure, Accounting transparency
    JEL: G15 G18 G21
    Date: 2006–03

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