nep-sea New Economics Papers
on South East Asia
Issue of 2006‒08‒26
thirty-six papers chosen by
Kavita Iyengar
Asian Development Bank

  1. The Direct Substitution Between Government and Private Consumption in East Asia By Yum K. Kwan
  2. The Interplay Between the Thai and Several Other International Stock Markets By Valadkhani, Abbas; Chancharat, Surachai; Harvie, Charles
  3. Modernizing China’s Growth Paradigm By Eswar S. Prasad; Raghuram G. Rajan
  4. Structural Breaks in Trade and Income Per Capita in ASEAN-5 Countries: An Application of Innovational Outlier Models By Jayanthakumaran, Kankesu; Pahlavani, Mosayeb
  5. Bond Markets as Conduits for Capital Flows: How Does Asia Compare? By Barry Eichengreen; Pipat Luengnaruemitchai
  6. The Dollar and Development By Dick Sabot
  7. Does Governance Matter? Yes, No or Maybe - Some Evidence from Developing Asia By M. G. Quibria
  8. Cross-Border Acquisitions and Target Firms' Performance: Evidence From Japanese Firm-Level Data By Kyoji Fukao; Keiko Ito; Hyeog Ug Kwon; Miho Takizawa
  9. Food Security in Indonesia: Current Challenges and the Long-Run Outlook By Peter Timmer
  10. Policy Options for Financing the Future Health and Long-Term Care Costs in Japan By Tadashi Fukui; Yasushi Iwamoto
  11. Research & Development in the Telecommunication Industry in Prewar Japan |Automatic Telephone Switchboard| By Yuki Nakajima
  12. Underpriced Default Spread Exacerbates Market Crashes By Winston T. H. Koh; Roberto S. Mariano; Andrey Pavlov; Sock Yong Phang; Augustine H. H. Tan; Susan M. Wachter
  13. What Determines the Demand for Money in the Asian-Pacific Countries? An Empirical Panel Investigation By Valadkhani, Abbas
  14. Competition Policy in Indonesia By John Malcolm Dowling
  15. Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms By Yuzo Honda; Kazuyuki Suzuki
  16. The Road to Pro-Poor Growth: The Indonesian Experience in Regional Perspective By Peter Timmer
  17. Food Security and Economic Growth: An Asian Perspective By Peter Timmer
  18. Information Technology and The World Growth Resurgence By Dale W. Jorgenson; Khuong Vu
  19. Sources of Economic Growth in South Korea: An Application of the ARDL Analysis in the Presence of Structural Breaks - 1980-2005 By Harvie, Charles; Pahlavani, Mosayeb
  20. Towards statistical standards for children’s non economic work: A discussion based on household survey data By L.Guarcello; S.Lyon; F.Rosati; C. Valdivia
  21. Agriculture and Pro-Poor Growth: An Asian Perspective By Peter Timmer
  22. External Debt, Adjustment, and Growth By Roberto S. Mariano; Delano Villanueva
  23. An Index of Donor Performance-Revised August 2005 By David Roodman
  24. The Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination By Carl Bonham; Richard Cohen; Shigeyuki Abe
  25. Growth Accounting for a Follower-Economy in a World of Ideas: The Example of Singapore By Kong Weng Ho; Hian Teck Hoon
  26. An Index of Donor Performance By David Roodman
  27. Effects of Regional Trade Agreements Using a Static and Dynamic Gravity Equation By Inmaculada Martínez-Zarzoso; Felicitas Nowak-Lehmann D.; Nicholas Horsewood
  28. In search of FDI-led growth in developing countries By Dierk Herzer; Stephan Klasen; Felicitas Nowak-Lehmann D.
  29. Real Exchange Rate, Monetary Policy and Employment By Roberto Frenkel; Lance Taylor
  30. What is the Most Effective Monetary Policy for Aid-Receiving Countries? By Alessandro Prati; Thierry Tressel
  31. A Converging or Diverging World? By Bob Sutcliffe
  32. The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries By Jayati Ghosh
  33. Underfunded Regionalism in the Developing World By Nancy Birdsall
  34. Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version By Stephanie Schmitt-Grohé; Martín Uribe
  35. International Capital Flows, Financial Stability and Growth By Graciela L. Kaminsky
  36. Ten Myths of the International Finance Facility By Todd Moss

  1. By: Yum K. Kwan
    Abstract: We investigate empirically the extent to which government consumption substitutes for private consumption in nine East Asia countries. Panel cointegrating regression uncovers a significantly positive elasticity of substitution between government and private consumption, implying on average government and private consumption are substitutes in East Asia. Country-by-country analysis, however, reveals diversity in the substitutability estimates. The four North East countries – China, Hong Kong, Japan, and Korea – tend to share similar and moderate values of the substitution elasticity. For the five ASEAN countries studied in this paper, the relationship between private and government consumption vary substantially, both in the sign and magnitude of the elasticity of substitution. Private and government consumption in Malaysia and Thailand are strong substitutes, but they are found to be complements in Indonesia and Singapore. In between is the Philippines which has a near zero elasticity of substitution.
    JEL: E6 H5
    Date: 2006–08
  2. By: Valadkhani, Abbas (University of Wollongong); Chancharat, Surachai (University of Wollongong); Harvie, Charles (University of Wollongong)
    Abstract: The paper analyses the effect of various international stock market price indices and some relevant macroeconomic variables on the Thai stock market price index, using a GARCH-M model and monthly data from January 1988 to December 2004. It is found, inter alia, that (a) changes in stock market returns in Singapore, Malaysia and Indonesia in the pre-1997 Asian crisis, and changes in Singapore, the Philippines and Korea in the post-1997 era instantaneously influenced returns in the Thai stock market; (b) changes in the price of crude oil negatively impacted on the Thai stock market only in the pre-Asian crisis period; (c) volatility clustering (i.e. ARCH and GARCH effects) as well as a GARCH-M model were statistically significant only in the pre-1997 era; and (d) stock markets outside the region had no significant immediate impact on monthly aggregate returns in the Thai stock market.
    Keywords: Stock market; conditional volatility; macroeconomic variables; GARCH; Thailand
    JEL: E44 G14 G15
    Date: 2006
  3. By: Eswar S. Prasad (International Monetary Fund and IZA Bonn); Raghuram G. Rajan (International Monetary Fund)
    Abstract: China has achieved tremendous economic progress in the last three decades, but there is much work to be done to make the economy resilient to large shocks, ensure the sustainability of its growth, and translate this growth into corresponding improvements in the economic welfare of its citizens. We discuss the complex challenges that Chinese policymakers face in striking the right balance in terms of speed and coordination of reforms. We argue that China’s current stage of development, along with its rising market orientation and increasing integration with the world economy, may make the incremental and piecemeal approaches to reforms increasingly untenable and, in some cases, could even generate risks of their own. The present favorable domestic and external circumstances provide an excellent window of opportunity for bolder reforms and for tackling some deep-rooted problems without causing much economic disruption.
    Keywords: policy reforms, market-oriented economy, trade and financial integration, policy complementarities
    JEL: P2 F3
    Date: 2006–08
  4. By: Jayanthakumaran, Kankesu (University of Wollongong); Pahlavani, Mosayeb (University of Wollongong)
    Abstract: The founder members of the Association of Southeast Asian Nations (ASEAN-5) – Malaysia, Indonesia, Thailand, the Philippines and Singapore – increasingly adopted outward-oriented policies in trade and investment by enforcing reforms in the mid-1980s. This paper investigates the existence of endogenously determined structural breaks of the trade and income per capita by using historical time series data during the period from 1970 to 2003 for the ASEAN-5 by applying an Innovational Outliner (IO) model in the presence of a potential structural break. We find that significant structural breaks occurred for trade per capita in the mid-1980s, which coincides with the recession in the region. We also find that significant structural breaks occurred for Gross National Income (GNI) per capita in 1997, which coincides with the Asian crisis. The Philippines experienced structural breaks in 1985, which coincides with a recession.
    Keywords: Trade and GDP per capita, IO model, structural break
    JEL: C32 F15 O40
    Date: 2006
  5. By: Barry Eichengreen; Pipat Luengnaruemitchai
    Abstract: We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is head and shoulders above other regions in terms of financial integration. More interesting is that Asia already seems to have made some progress on this front compared to Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, more expeditious and less costly contract enforcement, and greater transparency that lead to larger and better developed financial systems in Asia, something that is conducive to foreign participation in local markets and to intra-regional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.
    JEL: F0 F3
    Date: 2006–08
  6. By: Dick Sabot
    Abstract: Global poverty and poverty reduction are right now, more prominent public issues in high-income countries than they have ever have been, but progress toward the eradication of global poverty is at increasingly grave risk due to global macro-economic imbalances. At the heart of the problem is the U.S. external deficit that has turned the U.S. into the world’s largest debtor nation while developing countries, most notably in East Asia, are now among the world’s largest creditors. The impact of the adjustment of the U.S. external deficit on developing country economies will depend on U.S. macro-economic policy ahead, whether growth of U.S. exports or a decline in U.S. imports accounts for most of the reduction of the external deficit, how China, and by implication the rest of East Asia, respond to what happens in the U.S., and on the speed with which the U.S. deficit is closed. A review of how the world economy came to find itself in this historically unprecedented situation is followed by three potential scenarios for the likely impact on developing country economies of a marked decline in the U.S. external deficit. In the first scenario, the decline of the U.S. external deficit is fairly slow and steady and developing countries are able to substitute domestic demand growth for external demand growth and adjust without a recession. In the second scenario, U.S. aggregate demand for imports declines more severely because of slower economic growth and a smaller contribution of U.S. export growth to the closing of the external deficit. Chinese import demand growth is adversely affected and developing countries face a decline both in U.S. and Chinese import demand. In the third and last scenario, a sudden adjustment that generates a global financial tsunami, most likely triggered by a run on the dollar that leads to a spike in interest rates in the U.S. and a sharp drop in U.S. import demand, would transmit the downturn from the U.S. to the rest of the world.
    Keywords: economic development, poverty reduction, U.S. external deficit, import, export
    JEL: F1 F4 E6
  7. By: M. G. Quibria (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper seeks to explore the relationship between economic growth and governance performance in Asian developing economies. This exploration yields some interesting conclusions. First, notwithstanding its tremendous economic achievements, the state of governance in Asia is not stellar by international comparison. Indeed, a majority of these countries seem to suffer from a governance deficit. Second, contrary to our expectation, data do not suggest any strong positive link between governance and growth: paradoxically, countries that exhibit surpluses in governance on average grew much slower than those with deficits. The paper ends with some conjecture about this apparent paradox.
    Keywords: Governance, Institutions, Growth and Asia
    JEL: O10 O40 O53
    Date: 2006–01
  8. By: Kyoji Fukao; Keiko Ito; Hyeog Ug Kwon; Miho Takizawa
    Abstract: Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms’ productivity and profitability significantly more and quicker than acquisitions by domestic firms. Moreover, we find that there is no positive impact on target firms’ profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.
    JEL: C14 D24 F21 F23
    Date: 2006–08
  9. By: Peter Timmer
    Abstract: In the long run-- over the past four decades--improvements in food security in Indonesia have generally been driven by pro-poor economic growth and a successful Green Revolution, led by high-yielding rice varieties, massive investments in rural infrastructure, including irrigation, and ready availability of fertilizer. In the short run, food security in the country has been intimately connected to rice prices. After more than two decades of stabilizing domestic rice prices around the long-run trend of prices in the world market, Indonesia emerged from the devastating financial crisis in 1998 with domestic rice prices much higher than world prices and much higher than long-run trends of real prices in rupiahs. Although the current political rhetoric pushing for even higher prices uses food security as the rationale (i.e., they will cause greater self-sufficiency in rice), in fact few productivity gains are now available to rice farmers, so their gains will be consumers’ loses. High rice prices have a major impact on the number of individuals living below the poverty line and on the quality of their diet. The paper reviews research on the impact of rice prices on the poor, on real wages in rural and urban areas, and on the broader macroeconomic consequences for investments in labor-intensive manufacturing. Discussion then focuses on how political and economic circumstances have changed since price stabilization, implemented by the national food agency (Bulog), balanced the needs of producers and consumers as Indonesia’s approach to food security. The most important current challenge for the country’s future food security is re-starting rapid, pro-poor growth. An additional challenge on the horizon is the “supermarket revolution,” which is rapidly changing the basic structure of Indonesia’s food marketing system. Within a decade well over half of Indonesia’s rice is likely to be sold in supermarkets, thus transferring to the private sector a supply-management role that had historically been a public sector activity.
    Keywords: food security, Indonesia, agriculture, rice, poverty
    JEL: Q18 I31 R0 J31 J43 D40 E22
    Date: 2004–11
  10. By: Tadashi Fukui; Yasushi Iwamoto
    Abstract: As the Japanese population structure changes, health care and long-term care costs will steadily increase. The current style of financing (pay-as-you-go) will create a large increase in future burden of these costs. This paper studies an alternative policy that prefunds the social insurance benefits for the elderly. During a transition process, the proposed scheme maintains a higher contribution rate in order to accumulate sufficient funds. Under our baseline scenario, the sum of the contribution rates toward health insurance and long-term care insurance increases from 5.06 percent of earnings to 12.41 percent of the same. The rate of increase in overall burdens, including taxes and subsidies, is 63 percent. Our sensitivity analysis has shown that the quantitative implications of the increase in total burdens depend on social cost scenarios, the labor force, and the interest rate. However, labor force scenarios do not have a considerable impact on the rate of burden. As against this, the setting of social costs has a significant impact on the same. Even under the most optimistic scenario, the rate of increase in total burden is 34 percent. Even though we cannot predict the exact amount of the necessary contribution rate that is capable enough to transfer the funded system, what we are sure of is that a significant increase in the contribution rate is inevitable.
    JEL: H55 I10
    Date: 2006–08
  11. By: Yuki Nakajima (The Japan Society for the Promotion of Science)
    Abstract: The telephone system was not sufficiently developed in prewar Japan. This study examines the technological development of automatic telephone switchboard (ATS) to clarify the problems of telephone system in prewar Japan. Ministry of Communication(MOC) introduced automatic telephone system in 1923. From the standpoint of the telephone exchange service, it was a very opportune decision; however, it was technologically premature. Although they had conducted research on the system before WW1, their only choice was the primitive S ~ S system. Further, the dependence on import technology caused different A-type and H-type ATS to coexist. Each local telephone exchange district independently introduced a different type. The MOC had to prepare the specifications and parts for repair for two different systems. These factors hampered the improvement of the telecommunication quality. Standardizing the system by using independent technology became the biggest issue for the MOC in the 1930s. In the 1930s, some joint researches were organized with private enterprises. They tried to develop a gT-typeh or gElectronic Tube-typeh ATS. However, the T-type ATS was merely an improvement over the outdated S ~ S system with respect to the circuit design. On the other hand, Matsumae aimed at a novel technology, an electronic common control system. However, a suitable electronic tube was not invented. As a result, the telecommunication industry was unable to resolve the coexistence problem in the prewar period. However, the engineers of MOC and ATS suppliers recognized their technological backwardness and shared an awareness of the importance of standardization by independent technology. This was the starting point for the research and development system of the telecommunication industry in gPostwar Japan.h
    Keywords: Telephone system, Automatic Telephone Switchboard, Ministry of Communication, Research & Development, Joint Research
    JEL: N65 N75 O33
    Date: 2006–08
  12. By: Winston T. H. Koh (School of Economics and Social Sciences, Singapore Management University); Roberto S. Mariano (School of Economics and Social Sciences, Singapore Management University); Andrey Pavlov (Simon Fraser University); Sock Yong Phang (School of Economics and Social Sciences, Singapore Management University); Augustine H. H. Tan (School of Economics and Social Sciences, Singapore Management University); Susan M. Wachter (Department of Finance, The Wharton School, University of Pennsylvania)
    Abstract: In this paper, we develop a specific observable symptom of a banking system that underprices the default spread in non-recourse asset-backed lending. Using three different data sets for 18 countries and property types, we find that, following a negative demand shock, the “underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced. Furthermore, only one of the countries in our sample continues to exhibit the underpricing symptom following a market crash. This indicates that market crashes have a cleansing effect and eliminate underpricing at least for a period of time. This makes investing in such markets safer following a negative demand shock.
    Keywords: real estate bubble, lender optimism, disaster myopia, Asian financial crisis
    Date: 2006–03
  13. By: Valadkhani, Abbas (University of Wollongong)
    Abstract: This paper examines the long- and short-run determinants of the demand for money in six countries in the Asian-Pacific region using panel data (1975-2002). Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, it is found that (a) the demand for money in the long-run positively responds to real income and inversely to the interest rate spread, inflation, the real effective exchange rate, and the US real interest rate; (b) the long-run income elasticity is greater than unity; and (c) both the currency substitution and capital mobility hypotheses hold only in the long run.
    Keywords: Demand for Money; Money and Interest Rate Spread; Panel Data
    JEL: E41 E52 C33 O11
    Date: 2006
  14. By: John Malcolm Dowling (School of Economics and Social Sciences, Singapore Management University)
    Abstract: The Indonesian economy was dominated by the government in the decades of the 1970s and 1980s through its control of major mining, manufacturing and agricultural activities. Hill (2000) estimates that as much as 40% of non-agricultural GDP was accounted for by government entities in the late 1980s There were still a lot of government corporations up until the late 1980s and early 1990s and governmental control over the banking system was still substantial. Non-financial state owned enterprises (SOEs) contributed 14.5% of GDP in the late 1980s. They also accounted for another 9% of gross domestic investment which rose to 15.7% over the period 1990 –1997 (World Bank, 2000). Three SOEs are of particular note that dominate the sector in terms of revenue and assets are Pertamina (monopoly in oil and gas with diversified holdings in hotels, an airline and office buildings); PLN and PTTelkolm (monopoly in power and telecommunications industry respectively). The SOEs also employ a significant percentage of the labor force (25% according to data from the Indonesia’ Statistics Office). This strong role of the state was derived from the historical break with its colonial past under President Suharto and the distrust of “capitalists”. There was also a need for the Suharto regime in the three decades when he ruled to maintain control of enough industries to maintain its base for extortion and corruption. There was only a gradual and delayed shift toward export promotion and away from import substitution. This was partly the result of lobbying by entrenched interests that were making monopoly profits from new protected industries and corrupt officials that were operating the customs and port facilities. It also had to do with the control of key allocation and production agencies like Bulog and Pertamina. The decline in oil prices in the mid-1980s put pressure on the government to develop a more competitive economic environment which was reinforced by the growing integration of economies in Southeast Asia in conjunction with commitments to the ASEAN Free Trade Agreement. Policy measures focused on trade barriers. Tariffs were lowered and some import monopolies and import licenses were converted to tariff equivalents. There were also reforms in banking and the regulation of foreign direct investment. However, these reforms were partial in nature. Several banks remain under government control and policy required domestic partnerships for foreign direct investment (FDI) approval (see Dowling and Yap (2005) for further details. Nevertheless, despite these shortcomings in the policy environment, there was a measurable improvement in competition and economic efficiency, particularly in the manufacturing sector. Pangestu et al (2002) show that there was a decline in the level of industrial concentration and that the size distribution of firms has become more equal over time. There was also a decline in the prevalence of dominant firms therefore enhancing competition and reducing monopoly power. Finally, there was less stability in market shares after 1990, a development which reflects greater competition1. The evidence of enhanced competition over the decades of the ‘80s and’90s is much less compelling in other sectors of the economy, including agriculture, services, infrastructure and some parts for manufacturing and mining sectors. There are a number of examples that can be cited to support this conclusion including the cement industry (where there were high tariffs on imports, restrictions on number of distributors and allocation of markets) as well as gas distribution, telecommunications and electricity (where an opaque regulatory framework prohibited a level playing field from developing as new entrants came into the market). Furthermore, in the telecoms sector the government remained the majority shareholder in PT. Telkom and Indosat.
    Date: 2005–09
  15. By: Yuzo Honda (School of Economics, Osaka University); Kazuyuki Suzuki (Meiji University)
    Abstract: The literature maintains the statistical significance of cash flow in the investment equation. One criticism against the financing constraint interpretation of cash flow is that cash flow may be picking up information on the future profitability of a firm which Tobinfs Q fails to capture. We confine ourselves to the investment behavior of unlisted automobile parts suppliers, and use the sales of large automobile makers as an exogenous instrument. Despite the various criticisms against the financing constraint interpretation of cash flow, our statistical evidence does not disagree with the hypothesis.
    Keywords: Tobinfs Q, Investment Equation, Cash Flow, Financing Constraint, Japanese Unlisted Firms
    JEL: E22 G31
    Date: 2006–08
  16. By: Peter Timmer
    Abstract: “Pro-poor growth” is the new mantra of the development community. Most donor agencies have active research programs underway to understand the pro-poor process, and the World Bank, with British, French and German bilateral support, is already studying how to operationalize the concept (USAID, 2004; World Bank, 2004). Definitions vary, but they all revolve around connecting the poor to rapid economic growth so there is a concomitant rapid reduction in poverty. What is new is the focus on economic growth as the primary vehicle for sustainable reductions in poverty, distributional initiatives and processes playing a secondary role. This exploratory essay, commissioned by the Indonesia Project at Australian National University (ANU), places this new interest in pro-poor growth in regional perspective and then attempts to draw historical and policy lessons for Indonesia.1 The main challenge is to link our relatively robust understanding of the growth process with much more limited understanding of distribution processes. A panel data set of eight Asian countries provides grist for the empirical mill. A revised version of this paper is forthcoming in the Bulletin of Indonesia Economic Studies.
    Keywords: Indonesia, pro-poor growth, economic growth, distribution process
    JEL: R11 F33 F35 O10 O18 I32
  17. By: Peter Timmer
    Abstract: Food security is an elusive concept. Many economists doubt that it has any precise meaning at all. Having enough to eat on a regular basis, however, is a powerful human need, and satisfying this need drives household behavior in both private and public markets in predictable ways. Indeed, the historical record suggests that policy initiatives by central governments to satisfy this need for food security—at the level of both households and national markets—can speed economic growth in countries where a substantial proportion of the population does not get enough to eat. Paradoxically, in most successfully developing countries, especially those in the rice-based economies of Asia, the public provision of food security quickly slips from its essential role as an economic stimulus into a political response to the pressures of rapid structural transformation, thereby becoming a drag on economic efficiency. The long-run relationship between food security and economic growth thus tends to switch from positive to negative over the course of development. Because of inevitable inertia in the design and implementation of public policy, this switch presents a serious challenge to the design of an appropriate food policy.
    Keywords: Food security, democracy, foreign assistance, economic development
    JEL: D13 Q18 I31
    Date: 2004–12
  18. By: Dale W. Jorgenson; Khuong Vu
    Abstract: This paper analyzes the impact of investment in information technology (IT) on the recent resurgence of world economic growth. We describe the growth of the world economy, seven regions, and fourteen major economies during the period 1989-2004. We allocate the growth of world output between input growth and productivity and find, surprisingly, that input growth greatly predominates! Moreover, differences in per capita output levels are explained by differences in per capita input, rather than variations in productivity. The contributions of IT investment have increased in all regions, but especially in industrialized economies and Developing Asia.
    Keywords: growth, investment, productivity, information technology
    JEL: O47
    Date: 2006–08
  19. By: Harvie, Charles (University of Wollongong); Pahlavani, Mosayeb (University of Wollongong)
    Abstract: The primary objective of this paper is to examine the major determinants of GDP growth in South Korea emphasizing the importance of investment, trade and human capital, using quarterly time series data covering the period 1980Q1 to 2005Q3. The time series properties of the data are, first, analyzed using the Zivot-Andrews (1992) model. The empirical results derived indicate that there is insufficient evidence against the null hypothesis of unit roots for all of the variables under investigation. Second, the Gregory-Hansen (1996) cointegration technique, allowing for the presence of potential structural breaks in the data, is applied, and is found to reject the null hypothesis of no cointegration relationship in favour of the existence of at least one cointegration relation in the presence of single structural breaks in the system. By applying these methodologies we find that most of the endogenously determined structural breaks coincide with the gradual effects of the Asian crisis on the Korean economy. Taking into account the resulting endogenously determined structural breaks the error correction version of the ARDL procedure is then employed, to specify the short- and long-term determinants of economic growth in the presence of structural breaks. Based on the preliminary empirical findings obtained we conclude that, in the long-term, policies aimed at promoting various types of physical and human capital, and trade openness, have improved Korea’s economic growth. More specifically, the empirical results show that while the effects of physical and human capital as well as exports are highly significant, as expected, total imports were found to be non significant, and this could be due to compositional changes away from the importation of capital goods to consumer goods as Korean standards of living have improved. It was also found that the speed of adjustment in the estimated models is relatively high and had the expected significant and negative sign.
    Keywords: Korean economy, growth, structural break, and ARDL analysis
    JEL: O47 C12 C22 C51
    Date: 2006
  20. By: L.Guarcello; S.Lyon; F.Rosati; C. Valdivia
    Abstract: The study forms part of a broader research effort directed towards arriving eventually at an internationally acceptable consensus on the statistical definition of child labour. It looks specifically at children’s non-market activity, its classification (i.e., economic or non-economic), its impact on health and education outcomes, and at some of the issues linked to the inclusion of non-market activity in the definition of child labour. Study findings do not point to any clear causal relationship between hours in non-market activity and health status. But it was pointed out that the relationship between child work and health is very difficult to capture, both for theoretical reasons and because of lack of appropriate data, and that this finding should therefore be interpreted with caution. Findings based on panel data for China do, however, reveal a significant (negative) causal link between hours spend on non-market work and school attendance in the Chinese context. For additional countries where panel data was lacking, an experimental approach is presented for developing an "equivalence ratio", i.e., for combining hours spent on market and non-market activity based on the relative impact of each on children’s schooling. The equivalence ratio of the educational effect of market and non-market activity is found to vary substantially with the number of hours spent in each. It increased with the numbers of hours spent in non-market activity and decreased with the number of hours spent in market activities. This points to the complexity of using such an equivalence ratio for the purpose of a comprehensive definition of child labour.
    Date: 2005–05
  21. By: Peter Timmer
    Abstract: No country has been able to sustain a rapid transition out of poverty without raising productivity in its agricultural sector. Despite this historical role of agriculture in economic development, both the academic and donor communities lost interest in the sector, starting in the mid-1980s. This was mostly because of low prices in world markets for basic agricultural commodities, caused largely by the success of the Green Revolution in Asia. After two decades of neglect, interest in agriculture is returning. This paper explores the reasons why agriculture is back on the policy agenda for donors and poor countries alike. The most important reason is new understanding that economic growth is the main vehicle for reducing poverty and that growth in the agricultural sector plays a major role in that overall growth as well as in connecting the poor to growth. There is a sharp debate, however, between “optimists” and “pessimists” over the potential for small-scale agriculture to continue to play these historic roles. In a world of open trade, ready availability of cheap food in world markets, continued agricultural protection in rich countries, and economies of scale in access to food supply chains that are increasingly dominated by supermarkets and export buyers, large-scale farms with state-of-the-art technology and access to efficient infrastructure can push smallholders out of commercial markets. Consequently, the paper concludes, geographic coverage and operational efficiency of rural infrastructure, coupled to effective investment in modern agricultural research and extension, will determine the future role for agriculture in poverty reduction.
    Keywords: agriculture, economic development, economic growth, poverty,
    JEL: Q1 O13 O4 F35
  22. By: Roberto S. Mariano (School of Economics and Social Sciences, Singapore Management University); Delano Villanueva (School of Economics and Social Sciences, Singapore Management University)
    Abstract: High ratios of external debt to GDP in selected Asian countries have contributed to the initiation, propagation, and severity of the financial and economic crises in recent years, reflecting runaway fiscal deficits and excessive foreign borrowing by the private sector. More importantly, the servicing of large debt stocks has diverted scarce resources from investment and long-term growth. Applying and calibrating the formal framework proposed by Villanueva (2003) to Philippine data, we explore the joint dynamics of external debt, capital accumulation, and growth. The relative simplicity of the model makes it convenient to analyze the links between domestic adjustment policies, foreign borrowing, and growth. We estimate the optimal domestic saving rate that is consistent with maximum real consumption per unit of effective labor in the long run. As a by-product, we estimate the steady-state ratio of net external debt to GDP that is associated with this optimal outcome. The framework is an extension of the standard neoclassical growth model that incorporates endogenous technical change and global capital markets. The major policy implications are that in the long run, fiscal adjustment and the promotion of private saving are critical; reliance on foreign saving in a globalized financial world has limits; and when risk spreads are highly and positively correlated with rising external debt levels, unabated foreign borrowing depresses long run welfare.
    JEL: F34 F43 O41
    Date: 2005–03
  23. By: David Roodman
    Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the “development-friendliness” of their policies. It is revised and updated annually. In the 2005 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee. The qualitative factors are: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for “project proliferation.” The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes or b) specific tax incentives for giving. Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the scored countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, rank at or near the bottom. Standings by the 2005 methodology have been relatively stable since 1995.
    Keywords: Commitment to Development Index, development aid, transfers, aid donor
    JEL: O1 O2 F33 F34 F35
  24. By: Carl Bonham (Department of Economics, University of Hawaii at Manoa); Richard Cohen (College of Business and Public Policy, University of Alaska Anchorage); Shigeyuki Abe (Center for Contemporary Asian Studies, Doshisha University)
    Abstract: This paper examines the rationality and diversity of industry-level forecasts of the yen-dollar exchange rate collected by the Japan Center for International Finance. In several ways we update and extend the seminal work by Ito (1990). We compare three specifications for testing rationality: the ”conventional” bivariate regression, the univariate regression of a forecast error on a constant and other information set variables, and an error correction model (ECM). We find that the bivariate specification, while producing consistent estimates, suers from two defects: first, the conventional restrictions are sucient but not necessary for unbiasedness; second, the test has low power. However, before we can apply the univariate specification, we must conduct pretests for the stationarity of the forecast error. We find a unit root in the six-month horizon forecast error for all groups, thereby rejecting unbiasedness and weak eciency at the pretest stage. For the other two horizons, we find much evidence in favor of unbiasedness but not weak eciency. Our ECM rejects unbiasedness for all forecasters at all horizons. We conjecture that these results, too, occur because the restrictions test suciency, not necessity. In our systems estimation and micro- homogeneity testing, we use an innovative GMM technique (Bonham and Cohen (2001)) that allows for forecaster cross-correlation due to the existence of common shocks and/or herd eects. Tests of micro-homogeneity uniformly reject the hypothesis that forecasters across the four industries exhibit similar rationality characteristics.
    Keywords: Rational Expectations, Heterogeneity, Exchange Rate, Survey Forecast
    Date: 2006
  25. By: Kong Weng Ho; Hian Teck Hoon (School of Economics and Social Sciences, Singapore Management University)
    Abstract: In this paper, we take another approach to accounting for the sources of Singapore’s economic growth by being explicit about the channels through which Singapore, as a technological follower, benefits from international R&D spillovers. Taking into account the channels through which technology developed in the G5 countries diffuses to technological followers, we show that 57.5 percent of Singapore’s real GDP per worker growth rate over the 1970-2002 period is due to multifactor productivity growth. In particular, about 52 percent of the growth is accounted for by an increase in the effectiveness of accessing ideas developed by the technology leaders through improvement in our educational quality and increase in machinery imports and foreign direct investment from the G5 countries. We also find that capital accumulation that takes the form of imports of machinery as well as foreign direct investment from the G5 countries enhances the effectiveness of technology transfer thus raising the rate of return to capital. Compared to the rate of return to capital inferred from the traditional Solow growth model with purely exogenous technological progress of 10.8 percent, taking into account the technology transfer channel raises the implied rate of return to 13 percent.
    Keywords: technological diffusion, idea production function, multifactor productivity growth
    JEL: F43 O33 O47
    Date: 2006–06
  26. By: David Roodman
    Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the “development-friendliness” of their policies. It is revised and updated annually. In the 2004 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee, which does not net out interest received. The qualitative factors are three: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for “project proliferation.” The selectivity weighting approach avoids some conceptual problems inherent in the Dollar and Levin (2004) elasticity-based method. The proliferation penalty derives from a calibrated model of aid transaction cost developed in Roodman (forthcoming). The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes (income effect) and b) specific tax incentives for giving (price effect). Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the score countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, score in the bottom third. Standings by the 2004 methodology have been relatively stable since 1995.
    Keywords: Commitment to Development Index, development aid, transfers, aid donor
    JEL: O1 O2 F33 F34 F35
  27. By: Inmaculada Martínez-Zarzoso (Universität Göttingen); Felicitas Nowak-Lehmann D. (Universität Göttingen); Nicholas Horsewood (University of Birmingham)
    Abstract: This paper evaluates the static effects of preferential agreements between several economic blocs and areas using a dynamic gravity equation. The main aim is to investigate whether regionalism has fostered intra or/and extra blocs international trade, taking into account the existence of heterogeneity over time and across countries and testing whether a dynamic model is preferred to the traditional static specification of the gravity model. This paper argues that the gravity model should be best estimated using Blundell and Bond’s (1998) system-GMM estimator. This procedure remedies some econometric problems such as regressor endogeneity, measurement error and weak instruments, and controls for timeinvariant country-specific effects such as distance or common language.
    Keywords: Gravity equation, integration, international trade, regionalism
    JEL: F14 F15
    Date: 2006–07–07
  28. By: Dierk Herzer (Universität Frankfurt, Universität Göttingen); Stephan Klasen (Universität Göttingen); Felicitas Nowak-Lehmann D. (Universität Göttingen)
    Abstract: This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries FDI has no statistically significant long-run impact on growth. In very few cases, FDI indeed contributes to economic growth both in the long and the short run. But for some countries, there is also evidence of growth-limiting effects of FDI in the short or long term. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness, and the level of financial market development in developing countries.
    Keywords: FDI; Growth; Developing countries; Cointegration
    JEL: F43 C22
    Date: 2006–07–11
  29. By: Roberto Frenkel; Lance Taylor
    Abstract: The exchange rate affects the economy through many channels and, consequently, has diverse macroeconomic and development impacts. Five are analysed in this paper: resource allocation, economic development, finance, external balance and inflation. The use of the exchange rate as a developmental tool in conjunction with its other uses (often in coordination with monetary policy) is at the focus of the discussion.
    Keywords: exchange rate, development policy
    JEL: F3 F4 O2
    Date: 2006–02
  30. By: Alessandro Prati; Thierry Tressel
    Abstract: This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.
    Keywords: Aid effectiveness, monetary policy, real exchange rate, Dutch disease
    JEL: O11 O4 O23 E5 F35
    Date: 2006–02
  31. By: Bob Sutcliffe
    Abstract: This paper discusses some of the problems of method and data in measuring world inequality. It describes some recent attempts to do so and produces its own estimates. There is no simple answer to the question of whether or not the world is becoming more unequal. If a variety of methods are employed and compared, a complex answer emerges, showing that inequality is both declining in some ways and increasing in others. However, there has clearly been an enormous, recent increase in the gap between the very rich and the very poor.
    Keywords: world inequality, poverty, wealth, globalization
    JEL: F D63
    Date: 2005–10
  32. By: Jayati Ghosh
    Abstract: This paper considers the main elements of the standard pattern of financial liberalization that has become widely prevalent in developing countries. The theoretical arguments in favour of such liberalization are considered and critiqued, and the political economy of such measures is discussed. The problems for developing countries, with respect to financial fragility and the greater propensity to crisis, as well as the negative deflationary and developmental effects, are discussed. It is concluded that there is a strong case for developing countries to ensure that their own financial systems are adequately regulated with respect to their own specific requirements.
    Keywords: financial liberalization, development banking, financial fragility, financial crisis, deflation.
    JEL: F41 F43 G15
    Date: 2005–10
  33. By: Nancy Birdsall
    Abstract: This paper argues that regional public goods in developing countries are under-funded despite their potentially high rates of return compared to traditional country-focused investments. Regional public goods only receive about 2.0-3.5 percent out of total ODA annually according to the definition used in this paper. The rate of return to regional investments is likely to be high, especially in Africa, where investments in regional infrastructure and institutional integration would reduce the high costs imposed by the region’s many small economies and many borders. There are several reasons for the under-funding of regional public goods. First, to produce regional infrastructure and manage multi-country institutions requires coordination among two or more developing country governments. The recent donor emphasis on countries’ “ownership” of their own priorities is more supportive of national programs. Second, bilateral donors prefer country-based transfers given their potential for providing geo-strategic and political benefits, and the multilateral banks have limited scope for lending for regional programs since their principal instrument is a loan to a single-country government that must guarantee its repayment. Countries could coordinate their borrowing, but that would require reaching agreement on attribution of the associated benefits to allow appropriate allocation of the burden of financing among two or more governments. Combined, these problems of coordination, (lack of) ownership, and attribution make financing of regional programs costlier for donors to arrange, and riskier in terms of their sustainability and benefits. In Africa the under-funding of regional public goods is primarily a political and institutional challenge to be met by the countries in this region. But the donor community ought to consider the opportunity cost – for development progress itself, in Africa and elsewhere – of its relative neglect, and explore changes in the aid architecture that would encourage more attention to regional goods.
    Keywords: development aid, donor community, aid reform
    JEL: F33 F35 O19 H41 R1
    Date: 2004–11
  34. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses. Third, the welfare gains from interest-rate smoothing are negligible. Fourth, optimal fiscal policy is passive. Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy.
    JEL: E52 E61 E63
    Date: 2006–08
  35. By: Graciela L. Kaminsky
    Abstract: The explosion and dramatic reversal of capital flows to emerging markets in the 1990s have ignited a heated debate, with many arguing that globalization has gone too far and that international capital markets have become extremely erratic. In contrast, others have emphasized that globalization allows capital to move to its most attractive destination, fuelling higher growth. This paper re-examines the characteristics of international capital flows since 1970 and summarizes the findings of research of the 1990s on the behaviour of international investors as well as the short- and long-run effects of globalization on financial markets and growth.
    Keywords: international capital flows, globalization, mutual funds, stock market prices, financial liberalization.
    JEL: F30 F32 F33 F34 F36 G12 G15
    Date: 2005–12
  36. By: Todd Moss
    Abstract: The British proposal to create an International Finance Facility in order to ‘frontload’ $50 billion in aid per year until 2015 has generated a lot of attention and will likely be a major topic at the G8 meeting this July. But the IFF has also been shrouded in confusion and misconceptions. This paper explains the IFF proposal and highlights some of the common misunderstandings surrounding it, including the mechanics of the scheme itself, the potential for a U.S. role, and the expectations of aid which underlie the IFF’s premise. The UK deserves plaudits for elevating global poverty on the international agenda and for seeking ways to better harness the power of private capital markets for development. But the IFF, as currently conceived, is an idea that merits more scrutiny and a healthy dose of skepticism.
    Keywords: development aid, International Finance Facility (IFF), poverty, private capital market
    JEL: F33 F35 F4 O12

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