nep-sea New Economics Papers
on South East Asia
Issue of 2007‒01‒13
twenty papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Industrial competitiveness of the auto parts industries in four large Asian countries : the role of government policy in a challenging international environment By Doner, Richard F.; Noble, Gregory W.; Ravenhill, John
  2. "Bankruptcy Law, Corporate Finance, and Corporate Revival Process in Japan"(in Japanese) By Noriyuki Yanagawa; Sumio Hirose; Fumio Akiyoshi
  3. "Post-crisis Exchange Rate Regimes in ASEAN:A New Empirical Test Based on Intra-daily Data" By Shin-ichi Fukuda; Sanae Ohno
  4. Monetary and Exchange Rate Stability in South East Asia By Christian Bauer; Bernhard Herz
  5. Real Estate and the Asian Crisis By John Quigley
  6. New Industries in Southeast Asia’s Late Industrialization: Evolution versus Creation - The Automation Industry in Penang (Malaysia) considered By Leo van Grunsven
  7. An Empirical Study of Asian Stock Volatility Using Stochastic Volatility Factor Model: Factor Analysis and Forecasting By Silvia S.W. Lui
  8. Financial Crisis and Foreign Exchange Exposure of Korean Exporting Firms By Ronald A. Ratti; Sung-Wook Yoon; Jae-Young Choi
  9. The Role of Education in Economic Growth through the Sectoral Reallocation of Labor By Soohyung Lee
  10. Financial Constraints on Investment in an Emerging Market Crisis: An Empirical Investigation of Foreign Ownership By Garrick Blalock; Paul Gertler; David I. Levine
  11. Industrialization and Infant Mortality By Maya Federman; David Levine
  12. The Dividend Pricing Model: New Evidence from the Korean Housing Market. By Min Hwang; John Quigley; Jae Son
  13. The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development By António Antunes; Tiago Cavalcanti; Anne Villamil
  14. Harnessing the Private Sector for Rural Development, Poverty Alleviation and HIV/Aids Prevention By Steven Lim; Michael P. Cameron; Krailert Taweekui; John Askwith
  15. Singapore Information Sector: A Study Using Input-Output Table By Toh Mun Heng; Shandre M. Thangavelu
  16. Information Loss in Volatility Measurement with Flat Price Trading By Peter C.B. Phillips; Jun Yu
  17. Maximum Likelihood and Gaussian Estimation of Continuous Time Models in Finance By Peter C.B. Phillips; Jun Yu
  18. Simulation-based Estimation of Contingent-claims Prices By Peter C.B. Phillips; Jun Yu
  19. Price Discovery in Time and Space: The Course of Condominium Prices in Singapore By Min Hwang; John Quigley
  20. Selectivity, Quality Adjustment and Mean Reversion in the Measurement of House Values By Min Hwang; John Quigley

  1. By: Doner, Richard F.; Noble, Gregory W.; Ravenhill, John
    Abstract: Rationalization and stabilization following the Asian financial crisis of the late 1990s combined with the expansion and liberalization of regional and global trade to create significant parts industries in China, Indonesia, and the Republic of Korea. Conventional policies of stabilization and liberalization, however, cannot fully explain growth patterns. Japan and Korea grew into major players before liberalizing trade and investment, while even after extensive liberalization Indonesia has yet to move from extensive to intensive growth. These anomalies suggest that to explain success in the auto parts industry we need to move beyond liberalization to look at policies and institutions promoting economies of scale, skill formation, quality upgrading, supplier-linkage cooperation, and innovation. In Japan, the regional and global leader, innovative assemblers led industrial development and supported key suppliers, but the government also supported diffusion of quality control techniques and new technology to small and medium enterprises, and encouraged stable employment among core employees. Korea remains weaker on both small and medium enterprise and employment fronts, but government-encouraged consolidation around a small number of business groups, an extended period of protection, and support for export promotion led to economies of scale. Liberalization of foreign investment after the financial crisis helped ameliorate the excessive statism of earlier policies and strengthened the parts industry. In China, liberalization for WTO entry, rapid expansion in demand, and strong support by local governments encouraged a wave of foreign investment in both assembly and parts. In contrast, institutional weaknesses continue to constrain development opportunities in Indonesia.
    Keywords: Technology Industry,Economic Theory & Research,Water and Industry,Markets and Market Access,Non Bank Financial Institutions
    Date: 2006–12–01
  2. By: Noriyuki Yanagawa (Faculty of Economics, University of Tokyo); Sumio Hirose (Faculty of Economics, Sinshu University); Fumio Akiyoshi (Graduate School of Economics, University of Tokyo)
    Abstract: This paper examines corporate revival processes in Japan. In recent years, corporate revival processes are drastically changing in Japan. For example, important bankruptcy laws have been revised and Industrial Revitalization Corporation was established. Moreover, many corporate revival funds are actively investing. This paper explains those new movements and examines how those new activities will change the Japanese economy.
    Date: 2005–06
  3. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Sanae Ohno (Faculty of Economics, Musashi University)
    Abstract: The purpose of this paper is to investigate what affected the post-crisis exchange rates of three ASEAN countries: Singapore, Thailand, and Malaysia. Our critical departure from previous studies is the use of intra-daily exchange rates. The use of the intra-daily data is useful in removing possible estimation biases which the choice of numeraire may cause. It can also contrast exchange rate movements during the time zone when the government intervention is active with those when the intervention is not active. We examine how and when the ASEAN currencies changed their correlations with the U.S. dollar and the Japanese yen. We find significant structural breaks in the correlations during the time zone when East Asian market is open. In the post-crisis period, the first structural break happened when Malaysia adopted the fixed exchange rate and the second break happened when some East Asian countries introduced inflation targeting. The structural breaks suggest strong monetary and real linkages among the ASEAN countries.
    Date: 2006–10
  4. By: Christian Bauer; Bernhard Herz
    Abstract: Regaining exchange rate stability has been a major monetary policy goal of East Asian countries in the aftermath of the 1997/98 currency crisis. While most countries have abstained from re-establishing a formal US Dollar peg, they have typically managed the US Dollar exchange rate de facto. We show that most of these countries were able to regain their monetary credibility within a relatively short time period. The Argentine crisis in 2001 caused a minor setback in this process for some countries. We measure the credibility of monetary policy by separating the fundamental and excess volatility of the exchange rate on the basis of a chartist fundamentalist model. The degree of excess volatility is interpreted as the ability of the central bank to manage the exchange rate via the coordination channel.
    Keywords: monetary policy, exchange rate policy, credibility, technical trading, East Asia
    JEL: D84 E42 F31
  5. By: John Quigley (University of California at Berkeley)
    Abstract: This paper suggests that activities in the real estate markets in Southeast and East Asian economies were an important contributing force to the financial crises of 1997 in the Asian economies. The analysis relies upon unpublished data reported contemporaneously by financial institutions and market watchers to document the extent of the imbalances in the real property market that were evident to informed observers at the time of the financial collapse. The analysis argues that a series of reforms in the regulation of the property market and the treatment of real property loans by financial institutions are necessary to prevent the recurrence of the kind of speculative bubble that contributed to the financial crises in Asia. Given the recentness of the crisis, the nature of the data and the absence of definitive statistical sources, the results are tentative, but they are certainly consistent with a financial collapse whose proximate cause was unchecked activity in the property market.
    Date: 2006–06–27
  6. By: Leo van Grunsven
    Date: 2006–12
  7. By: Silvia S.W. Lui (Queen Mary, University of London)
    Abstract: This paper is an empirical study of Asian stock volatility using stochastic volatility factor (SVF) model of Cipollini and Kapetanios (2005). We adopt their approach to carry out factor analysis and to forecast volatility. Our results show some Asian factors exhibit long memory that is in line with existing empirical findings in financial volatility. However, their local-factor SVF model is not powerful enough in forecasting Asian volatility. This has led us to propose an extension to a multi-factor SVF model. We also discuss how to produce forecast using this multi-factor model.
    Keywords: Stochastic volatility, Local-factor model, Multi-factor model, Principal components, Forecasting
    JEL: C32 C33 C53 G15
    Date: 2006–12
  8. By: Ronald A. Ratti (Department of Economics, University of Missouri-Columbia); Sung-Wook Yoon; Jae-Young Choi
    Abstract: During the Asian crisis, a rise in short-term for debt relative to short-term debt denominated in domestic currency results in a significant decline in negative exposure of Korean firms, with Chaebol firms able to benefit more. Exposure of non-Chaebol firms is significantly affected by maturity of debt. Results are consistent with recent work modeling firm level phenomena during financial crisis that emphasizes the importance of credit constraints, and with observations that exporting firms have significantly higher foreign debt ratios and eve of crisis export and foreign debt ratios are strongly correlated with growth in sales immediately after the crisis.
    Keywords: Foreign exchange rate exposure; Foreign debt; Short term debt; Financial crisis; Credit rationing
    JEL: G15 F31 F34
    Date: 2006–11–28
  9. By: Soohyung Lee
    Abstract: The main questions of this paper are as follows: Whether and to what extent does rising educational attainment contribute to a country's economic growth by facilitating the reallocation of labor from the agricultural sector to the non-agricultural sector? The transition from the agricultural sector to the non-agricultural sector ("transition" hereinafter) is an important aspect of a country's development. Consider China as an example. In China, around 70% of the labor force worked in the agricultural sector in 1980, whereas only 47% remained in the agricultural sector in 2000. Over the same period of time, China's gross domestic product (GDP) per capita increased from U.S. $173 to $856. In addition, cross-country data demonstrate that developed countries have a lower share of employment in agriculture than less-developed countries. For instance, high income countries had 4% of their employees engaged in the agricultural sector in 2000, whereas middle income countries had 40% of their employees working in the agricultural sector. In low income countries, the share may be even larger: in Bangladesh, for example, more than 60% of employees work in the agricultural sector. Based on these empirical observations, using calibration exercises a number of papers have demonstrated the possibility that income differences across countries can be explained by different onsets of transition (Gollin et al. 2002, 2004, Parente et al. 2000, Restuccia et al. 2003). In contrast, there is little empirical research based on micro-level data studying the factors that affect the speed of transition. As far as I am aware, the most closely related empirical study of transition was carried out by Jeong and Kim (2005) using data for Thailand. However, the authors focused more on replicating gradual transition than on determinants governing the speed of transition. They relied on the assumption of “sector specific complementarity between work-experience and labor†to explain the slow transition, but did not provide direct empirical evidence for this assumption. In contrast to existing research, this paper tries to shed light on one hypothesized factor affecting the speed of transition: raising educational attainment may facilitate the labor force moving from the agricultural sector to the non-agricultural sector. I use a Chinese household panel dataset--the China Health and Nutrition Survey (CHNS)--to measure the extent to which educational attainment raises the probability of a worker obtaining a non-agricultural job. To extract the causal effect of education, I use the increase in the number of secondary schools during the Cultural Revolution (CR) in China (1966 to 1976) as an instrumental variable. Reducing the differences between the peasantry and the rest of the population was identified as being a major goal of the CR; as a result of this ideology, the policies of this period promoted mass education among underserved groups, including rural populations especially in terms of the secondary schooling (Hannum 1999). My preliminary results suggest that one more secondary school per 10,000 people in a province is correlated with an increase in 1.15 years of schooling. Using a Probit model with this instrumental variable, I estimate that one more year of schooling raises the probability a worker will obtain a non-agricultural job by 4.53%. However, what does this estimation imply for transition and aggregate economic growth? In China, the share employed in agriculture has decreased from 68.1% in 1982 to 50% in 2000 (Chinese Statistical Yearbook, 2003). On the other hand, the average years of schooling of workers in China has increased from 5.83 years to 7.66 years (Chinese Population Census 1982, 2000). Hence, this increase in schooling, 1.84 years, may have contributed 8.34% points to the decrease in the agricultural share of employment from 1982 to 2000. In terms of the real GDP growth, accurate growth accounting requires further study. However, a back-of-the-envelope calculation suggests that the decrease in the agricultural employment share due to rising educational attainment implies an increase of 0.65% points of the real GDP per worker growth per annum. Although the growth and level accounting remains to be done, I believe that this paper can contribute to the economic growth literature by testing whether and to what extent education causes growth. Within this research literature, many papers have suggested the possibility of a causal effect of education on growth, but a recent study by Bils and Klenow (2000) questions this causal relationship. For example, if we include the role of education in sectoral reallocation (0.65% point), the contribution of education to the annual growth rate of the real GDP per worker increases from about 20% to 32%. Therefore, we can conclude that education causes growth (at least 12%) and that its contribution to growth is significant
    Keywords: Education; Sectoral Shift; Transition; China
    JEL: O1 O5 I2 J6
    Date: 2006–12–03
  10. By: Garrick Blalock (Cornell University); Paul Gertler (University of Caifornia, Berkeley and NBER); David I. Levine (Haas School of Business, UC Berkeley)
    Abstract: JEL classification codes: O16, F23, E32, O12Abstract:We investigate whether capital market imperfections constrain investment during an emerging market financial crisis. Both large currency devaluations and widespread collapse of the banking sector characterize recent crises. Although a currency devaluation should increase exporters' competitiveness and investment, a failing banking system may limit credit to these firms. Foreign-owned firms, which have greater access to overseas financing but otherwise face the same investment prospects, provide an ideal control group for determining the effect of liquidity constraints. We test for liquidity constraints in Indonesia following the 1997 East Asian financial crisis, a period when the issuance of new domestic credit declined rapidly. Exporters' value added and employment increased after the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only exporters with foreign ownership increased their investment significantly. The failure of domestic firms to invest under profitable conditions suggests that they may have faced liquidity constraints. Investment by foreign-owned firms increased post-crisis capital stock by about 4% more than would have occurred if all the firms were domestically owned.
    Keywords: Liquidity Constraints, Foreign Direct Investment, Financial Crisis, Indonesia,
    Date: 2006–06–27
  11. By: Maya Federman (Pitzer College); David Levine (Haas School of Business, University of California, Berkeley)
    Abstract: On average, infant mortality rates are lower in more industrialized nations, yet health and mortality worsened during early industrialization in some nations. This study examines the effects of growing manufacturing employment on infant mortality across 274 Indonesian districts from 1985 to 1995, a time of rapid industrialization. Compared with cross-national studies we have a larger sample size of regions, more consistent data definitions, and better checks for causality and specification. We can also explore the causal mechanisms underlying our correlations. Overall the results suggest manufacturing employment raised living standards, housing quality, and reduced cooking with wood and coal, which helped reduce infant mortality. At the same time, pollution from factories appears quite harmful to infants. The overall effect was slightly higher infant mortality in regions that experienced greater industrialization.
    Keywords: industrialization, infant mortality, Indonesia, pollution, indoor air pollution,
    Date: 2006–06–27
  12. By: Min Hwang (National University of Singapore); John Quigley (University of California, Berkeley); Jae Son (Kok-Kuk University)
    Abstract: It is generally conceded that dividend pricing models are poor predictors of asset prices. This finding is sometimes attributed to excess volatility or to a dividend process manipulated by firm managers. In this paper, we present rather powerful panel tests of the dividend pricing relation using a unique data set in which dividends are set by market forces independent of managers' preferences. We rely on observations on the market for condominium dwellings in Korea - perhaps the only market in which information on dividends and prices is publicly and continuously available to consumers and investors. We extend the "dividend-price ratio model" to panels of housing returns and rents differentiated by type and location. We find broad support for the dividend pricing model during periods both before and after the Asian Financial Crisis of 1997-1998, suggesting that the market for housing assets in Korea has been remarkably efficient.
    Keywords: Housing prices,
    Date: 2006–07–13
  13. By: António Antunes (Banco de Portugal, Departamento de Estudos Economicos, and Faculdade de Economia, Universidade Nova de Lisboa); Tiago Cavalcanti (Departamento de Economia, Universidade Federal de Pernambuco, INOVA, Faculdade de Economia, Universi-dade Nova de Lisboa.); Anne Villamil (Department of Economics, University of Illinois at Urbana- Champaign)
    Abstract: This paper studies the effect of financial repression and contract enforcement on entrepreneurship and economic development. We construct and solve a general equilibrium model with heterogeneous agents, occupational choice and two Financial frictions: intermediation costs and financial contract enforcement. Occupational choice and firm size are determined endogenously, and depend on agent type (wealth and ability) and the credit market frictions. The model shows that differences across countries in intermediation costs and enforcement generate differences in occupational choice, firm size, credit, output and inequality. Counterfactual experiments are performed for Latin American, European, transition and high growth Asian countries. We use empirical estimates of each country's financial frictions, and United States values for all other parameters. The results allow us to isolate the quantitative effect of these financial frictions in explaining the performance gap between each country and the United States. The results depend critically on whether a general equilibrium factor price effect is operative, which in turn depends on whether financial markets are open or closed. This yields a positive policy prescription: If the goal is to maximize steady-state efficiency, financial reforms should be accompanied by measures to increase financial capital mobility.
    Keywords: Financial frictions; Financial reform; Occupational choice; Development
    JEL: E60 G38 O11
  14. By: Steven Lim (University of Waikato); Michael P. Cameron (University of Waikato); Krailert Taweekui (Khon Kaen University); John Askwith
    Abstract: In resource-constrained developing countries, mobilizing resources from outside sources may assist in overcoming many development challenges. This paper examines the Thai Business Initiative in Rural Development (TBIRD), an NGO-sponsored program that brings together the comparative advantages and self-interest of rural villages, private sector firms and a facilitating NGO, to improve social and community health outcomes in rural areas. We analyze key issues in the program with data from Northeast Thailand. We find that the TBIRD program appears to improve the income earning and other prospects of the TBIRD factory workers. Further, TBIRD factory employment exhibits a pro-poor bias. A key impact is to provide jobs for people who might otherwise be at increased risk of HIV infection through poverty-induced decisions to migrate to urban centres and participate in the commercial sex industry. This program adds another important tool for development planners in the fight against HIV/AIDS.
    Keywords: rural development; poverty; HIV/AIDS; Thailand
    JEL: O29 I38 L31
    Date: 2007–01–15
  15. By: Toh Mun Heng (Business School, National University of Singapore); Shandre M. Thangavelu (Singapore Centre for Applied and Policy Economics (SCAPE) Department of Economics, National University of Singapore)
    Abstract: The paper measures the impact of information technology on the output growth of Singapore economy. A vibrant information sector will play an important catalytic role in developing Singapore into a knowledge-based economy. The analysis provided in the paper support the assertion that information economy will be a precursor to a knowledge-based economy. The information sector grew in tandem with the expansion of export in the first half of the 1990s. By the second half of the 1990s, it developed sufficient momentum and capability to expand domestically as a cluster. The use of ICT as intermediate input is found to be generally pervasive in the economy. The paper also investigated the impact of falling prices of information input on sectoral GDP. It is found that for a 10% decrease in information input prices, the sector GDPs had to increase by 0.05% to 2.2%. The overall impact for the economy is a positive 0.84% increase in national income (GDP) for a 10% decline in information input prices.
  16. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Jun Yu (Singapore Management University)
    Abstract: A model of price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading.
    Keywords: Bernoulli process, Brownian semimartingale, Flat trading, Quarticity function, Realized volatility
    JEL: C15 G12
    Date: 2007–01
  17. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Jun Yu (Singapore Management University)
    Abstract: This paper overviews maximum likelihood and Gaussian methods of estimating continuous time models used in finance. Since the exact likelihood can be constructed only in special cases, much attention has been devoted to the development of methods designed to approximate the likelihood. These approaches range from crude Euler-type approximations and higher order stochastic Taylor series expansions to more complex polynomial-based expansions and infill approximations to the likelihood based on a continuous time data record. The methods are discussed, their properties are outlined and their relative finite sample performance compared in a simulation experiment with the nonlinear CIR diffusion model, which is popular in empirical finance. Bias correction methods are also considered and particular attention is given to jackknife and indirect inference estimators. The latter retains the good asymptotic properties of ML estimation while removing finite sample bias. This method demonstrates superior performance in finite samples.
    Keywords: Maximum likelihood, Transition density, Discrete sampling, Continuous record, Realized volatility, Bias reduction, Jackknife, Indirect inference
    JEL: C22 C32
    Date: 2007–01
  18. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Jun Yu (Singapore Management University)
    Abstract: A new methodology is proposed to estimate theoretical prices of financial contingent-claims whose values are dependent on some other underlying financial assets. In the literature the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but is not necessarily the best method in finite samples. The present paper proposes instead a simulation-based method that improves the finite sample performance of the ML estimator while maintaining its good asymptotic properties. The methods are implemented and evaluated here in the Black-Scholes option pricing model and in the Vasicek bond pricing model, but have wider applicability. Monte Carlo studies show that the proposed procedures achieve bias reductions over ML estimation in pricing contingent claims. The bias reductions are sometimes accompanied by reductions in variance, leading to significant overall gains in mean squared estimation error. Empirical applications to US treasury bills highlight the differences between the bond prices implied by the simulation-based approach and those delivered by ML. Some consequences for the statistical testing of contingent-claim pricing models are discussed.
    Keywords: Bias reduction, Bond pricing, Indirect inference, Option pricing, Simulation-based estimation
    JEL: C15 G12
    Date: 2007–01
  19. By: Min Hwang (University of California, Berkeley); John Quigley (University of California, Berkeley)
    Abstract: There is increasing evidence that aggregate housing prices are predictable. Despite this, a random walk in time and independence in space are two maintained hypotheses in most empirical models of housing price measurement. This paper examines the price discovery process in individual dwellings over time and space by relaxing both assumptions, using a unique body of data from the Singapore private condominium market. We develop a model that tests directly the hypotheses that the prices of individual dwellings follow a random walk over time and that the price of an individual dwelling is independent of the price of a neighboring dwelling. The model is general enough to include other widely used models for housing price determination as special cases. The empirical results clearly support mean reversion in housing prices and also diffusion of innovations over space. We find that serial and spatial correlation "matter" in the computation of price indices and the estimation of investor returns. This predictability may suggest that excess returns are possible. We use the monthly price series derived from condominium sales to investigate this issue. When aggregate returns are computed from models that assume a random walk and spatial independence, we find that they are strongly autocorrelated. When returns are calculated from more general models that permit mean reversion, the estimated autocorrelation in investment returns is reduced. Finally, when they are calculated from models permitting mean reversion and spatial autocorrelation, predictability in investment returns is completely absent.
    Date: 2006–06–27
  20. By: Min Hwang (National University of Singapore); John Quigley (University of California, Berkeley)
    Abstract: This paper develops a model of price formation in the housing market which accounts for non-random selection of those dwellings sold on the market from the stock of existing houses. The model also accounts for changes in the quality of dwellings themselves and tests for mean reversion in individual house prices. The model is applied to a unique body of data representing all dwellings sold in Sweden's largest metropolitan area during the period 1982-1999. The analysis compares house price indices that account for selectivity, quality change and mean reversion with the conventional repeat sales models used to describe the course of metropolitan housing prices.
    Date: 2006–06–27

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