TRADE, EXCHANGE RATES AND ECONOMIC TRANSITION
Their
results show that in developed countries, trade tends to be profitable for
firms, and the related profits seem to be shared with employees. But in some
developing regions such as Asia and, to a lesser extent, Latin America, trade
and wages do not seem to be related by such a profit sharing mechanism. This,
the researchers suggest, is due to a lack of union power or insufficient
specialisation in high profit industries in these countries.
Since
the WTO's Seattle meeting, NGOs, unions and other representatives of the civil
society have called for more equity in the globalisation process. According to
these claims, globalisation benefits capital holders and multinational firms at
the expense of workers and other smaller, possibly non-exporting, firms. In this
study, Mirza and Fontagné explore
who does gain from openness to trade.
In
recent years, particular attention has been paid to the role of profits in the
impact of trade on labour in developed and developing countries. Changes in the
wage premium have been explained by changes in profits arising from openness.
The basic idea is that foreign firms that enter the market shift profits from
domestic firms that would be otherwise shared with employees.
This
view appears to be consistent with Canada and US data. Evidence on trade policy
and labour market adjustment in Mexico and Morocco suggests that openness had a
small impact on wages and employment. The main reasons come from the
organisation of the labour and product markets in these developing countries
that is consistent with the profit sharing analysis.
But
if trade shifts some profits to foreign firms selling on the domestic markets,
then why cannot extra profits be made and then shared with employees through
exporting. Moreover, these researchers ask, does openness - through both imports
and exports - affect the wage premium identically in developed and developing
countries? In the latter, profits accruing to protected factors may be important
as well, while profits from exporting might be more limited. As a matter of
fact, opening those economies may be associated with the loss of large profits
on the domestic market in industries characterised by imperfect competition,
while these countries would tend to specialise and export in rather competitive
industries with respect to their comparative advantage.
The
study links the industry wage premium to both domestic and foreign market share
variables. These are linked to wages by a channel of adjustment that represents
an interaction between the market power of the firms and the negotiation power
of unions. In fact, when selling to a domestic or a foreign market, a national
industry extracts profits as long as its firms on average benefit from
sufficient market power. Whether these profits are shared with employees then
depends on the power of unions. Now, if either firms or unions lack of market
power in the commodity and labour markets respectively, then the channel between
openness and the wage premium breaks down.
Is
there a channel of adjustment between the wage premium and the domestic and/or
foreign market shares at the industry level for different groups of countries.
The study analyses a data set matching trade, activity and labour-related data
for around 29 industries in 65 countries, during the period 1981-97.
For
OECD countries, an increase in export as well as domestic market shares is
associated with an increase in wages in a small majority of the industries. This
supports the idea that in rich countries an increase in export or domestic
market shares is a source of rents that is then shared with employees in the
majority of the industries. This phenomenon is also present, though to a lesser
extent, in Mediterranean countries.
In
Latin America, profits seem to be acquired and then shared with employees when
there is an increase in domestic sales only. There are no significant positive
relations when selling abroad. This suggests that unions do have some market
power in Latin America, although it is only used to shift domestic profits not
the extra profits from exporting.
Finally,
in Asian countries, neither domestic nor foreign sales have significant and
positive effects on the wage premium. This suggests that Asian firms are either
specialising in competitive industries in which there are no profits to be
extracted, or they are acquiring profits through trade but unions in these
countries are not strong enough to shift them to employees.
ENDS
Notes
for Editors:
‘International Trade and Rent Sharing in Developed and Developing Countries’
by Daniel Mirza and Lionel Fontagné was presented at the Royal Economic
Society’s 2002 Annual Conference at the University of Warwick. Mirza is at the
University of Nottingham; Professor Fontagné is at CEPII and TEAM in Paris.
For
Further Information: contact
Daniel Mirza on 0115-846-6447 (email: daniel.mirza@nottingham.ac.uk);
Lionel Fontagné on +33-1-53-68-55-43 (email: fontagne@cepii.fr); or RES Media Consultant
Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
Was
the recent currency collapse in Argentina the result of a genuine crisis of
economic fundamentals? Or did it come about through a self-fulfilling panic? New
research by Professor Marcus Miller, Javier Fronti
and Lei Zhang of the University of
Warwick suggests that the answer will become clear with the performance of
Argentina’s economy over the next few months.
Their
analysis, presented at the Royal Economic Society’s Annual Conference on
Tuesday 26 March, argues that if by financial restructuring and indexation, the
current administration can make devaluation work, fundamentals were clearly the
problem in this ‘slow-motion train crash’.
Failure
to make devaluation work, followed by economic chaos, would support the view
that the high interest rates were due to a self-fulfilling crisis that should
have been resisted by ever more determined commitment to the currency board.
The
currency board system as it operated in Argentina was very successful in
reducing inflation to zero and below. But public debt rose above 50% of GDP -
and over 500% of exports - towards the end of 1990s, and the economy moved into
severe recession as interest rates rose decisively above US levels. By the third
quarter of 2001, for example, the ‘country risk premium’ was about 1500
basis points.
Two
very different policy recommendations were put forward. Critics of the currency
board (for example, the authors of the Fenix plan) recommended devaluation and
default on the grounds that the peso was seriously overvalued against the dollar
and that the debt burden was unsustainable. (Their explanation of high interest
rates was that the market took the same view.)
To
defenders of the currency board, however, devaluation and default were
unnecessary and the high interest rates were a sign of panic, which would
disappear given sufficiently resolute commitment. Guillermo Calvo, for example,
took this ‘multiple equilibrium’ view.
To
encompass both of these interpretations, Professor Miller and his colleagues
adopt an analytical framework in which the abandonment of a fixed exchange rate
regime is triggered by an optimising policy-maker: but the market is aware of
the choice of trigger and there is a run-up in interest rates as it is
approached. This framework allows for the existence of liabilities in foreign
currency (so that spreads reflect a default premium); and recognition that
ending the currency board would require a change of policy-maker (as Mr Cavallo
would evidently never devalue or default).
Starting
with the view that there was a genuine crisis of economic fundamentals, the
analysis shows the rise in interest rates and the fall in economic activity as
markets forecast Cavallo’s downfall, followed by devaluation and default. As
fundamentals deteriorate, there is a ‘slow-motion train crash’, made worse
by excessive commitment to the peg. Although there is, as yet, no explicit
treatment of the magnitude of external and internal debt, the analysis is
calibrated to produce an interest rate run-up and devaluation consistent with
was observed in reality.
If
the economic costs of leaving the peg increase strongly with the size of
devaluation, however, this allows for the other interpretation, namely that
devaluation and default may be too costly ever to be optimally chosen so the
pressures to quit are those of a self-fulfilling panic, which should be resisted
by ever more determined commitment to the currency board.
In
conclusion, the researchers argue that the costs associated with devaluation and
default are not in fact exogenous but are themselves policy-determined. The
‘Fenix view’ will be borne out if, by financial restructuring and
indexation, the current administration can make devaluation work. Failure to do
this, followed by economic chaos, would support the view that the high interest
rates were due to a self-fulfilling crisis that should have been resisted.
ENDS
Notes
for Editors:
‘The Collapse of the Argentine Peso: Economic Fundamentals or Self-fulfilling
Panic?’ by Javier Fronti, Marcus Miller and Lei Zhang was presented at the
Royal Economic Society’s 2002 Annual Conference at the University of Warwick.
The authors are at the University of Warwick.
For
Further Information:
contact Marcus Miller on 024-7652-3048 (email: marcus.miller@warwick.ac.uk); or
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).
The
rapid growth in the net external liabilities of the United States and its
implications for a possible reversal in the current strength of the dollar are a
dominant theme of discussion in economic policy circles. Speaking at the Royal
Economic Society’s Annual Conference on Monday 25 March, Philip
Lane and Gian Maria Milesi-Ferretti
presented their analysis of the relationship between international transactions,
countries’ net external asset positions, and the real exchange rate, using a
new data set on external assets and liabilities.
Their
study of a sample of OECD economies for the period 1970-98 provides direct
evidence that the relationship between the trade balance and net foreign assets
depends on investment returns, output growth and exchange rate movements. In
addition to the trade balance effect, the empirical findings also confirm the
importance of relative productivity as a key determinant of the relative price
of non-traded goods and the real exchange rate.
Lane
and Milesi-Ferretti’s research focuses on long-run relationships between the
trade balance, net foreign assets and the real exchange rate. In simple terms,
the standard argument linking net foreign assets, the trade balance and the real
exchange rate runs as follows. A positive net external asset position enables a
country to run persistent trade deficits. In turn, the capability to sustain a
negative net export balance is associated with an appreciated real exchange
rate.
Conversely,
a debtor country that must run trade surpluses to service its external
liabilities may require a more depreciated real exchange rate. Indeed, the size
of the trade surplus that a debtor country has to run to service its external
liabilities will depend on the rate of return it has to pay on these
liabilities, as well as on its output growth rate.
In
the example of the United States, a debtor country that grows quickly and
manages to earn returns on its foreign assets that are higher than the payouts
on its foreign liabilities requires a much smaller trade surplus to stabilise
its net foreign asset position than a country with poor growth performance and
unfavourable net investment income flows. By extension, the magnitude of any
real exchange rate depreciation will be smaller in the former case.
The
research shows that the magnitude of the trade balance coefficient increases
with increasing country size - it is more important for the United States or
Japan than for Iceland or Denmark - and there is direct evidence that the
relative price of non-traded goods co-moves with the trade balance, even
controlling for relative sectoral productivity.
The
study also highlights the important role played by differences in rates of
return on external assets and liabilities in shaping the dynamics of net foreign
assets. Understanding the sources of these differences in rates of return is an
important topic on the research agenda.
The
debate on the relationship between international payments and real exchange
rates has a long and distinguished intellectual history. It was at the forefront
in the late 1920s, with the debate between Keynes and Ohlin on the impact of
German war reparations; in the 1970s, with the debate on the implications of oil
price shocks; in the early 1980s, in the aftermath of the debt crisis; and in
the mid- and late 1980s, with the debate on causes and consequences of the large
swings in the value of the dollar.
ENDS
Notes
for Editors:
‘External Wealth, the Trade Balance, and the Real Exchange Rate’ by Philip
R. Lane and Gian Maria Milesi-Ferretti was presented at the Royal Economic
Society’s 2002 Annual Conference at the University of Warwick.
Lane
is at the Institute for International Integration Studies, Trinity College
Dublin, and CEPR; Milesi-Ferretti is at the International Monetary Fund and CEPR.
For
Further Information:
contact Philip Lane via email: plane@tcd.ie; or RES Media Consultant Romesh
Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
SO MANY ROCKET SCIENTISTS, SO FEW MARKETING CLERKS:
OCCUPATIONAL
MOBILITY IN TIMES OF RAPID TECHNOLOGICAL CHANGE
One
of the few positive legacies from socialism is thought to be the high level of
educational attainment of the labour force. Nevertheless, the stock of human
capital - in terms of occupations - has proved inadequate to the needs of a
modern market economy. New research by Nauro
Campos and Aurelijus Dabušinskas,
presented at the Royal Economic Society’s Annual Conference on Wednesday 27
March, shows that the transition from plan to market entails a process of
massive occupational change.
Their
study investigates the magnitude and determinants of this process of
occupational change using data from the Estonian Labour Force Survey. They find
that almost 50% of wage earners in the country changed occupations between 1989
and 1995 and that job tenure was the main determinant of this occupational
mobility.
The
results also show the remarkable speed with which the market mechanism takes
root: in just this short period, the variation in returns to current and
alternative occupations play increasingly meaningful roles in explaining
occupational change.
The
motivation for the study is that the process of economic development in general,
and that of transition in particular, necessarily involves occupational change.
One of the least appreciated features of the process of economic development is
that it is not enough for workers to move from the rural to the urban sector;
they must change occupations.
A
second motivation for studying occupational mobility is that it can throw light
on the recent debate on the skill premium. One
argument is that rising wage inequality in the last two decades in the United
States, the UK and Canada is due to skill-biased technological change. Studying
occupational mobility may be useful because one of its determinants is the
transferability of skills across occupations. In this light, the premium may
have risen for skills that are more easily transferable.
A
final motivation is that occupational change is at the heart of the allocation
of talent problem: one of the most important aspects of the process of
accumulation of human capital regards occupational choice.
In particular, how society's pool of talent is allocated to
entrepreneurial or rent-seeking activities is of fundamental importance vis-à-vis
long-term growth.
This
study provides a detailed description of the changing composition of the stock
of human capital (in terms of the occupational mix), and investigates the
determinants of this process of occupational change.
The
results use data from the Estonian Labour Force Survey 1995, a representative
survey of Estonian workers covering the period from 1989 to 1995. The data cover
the end of the socialist period as well as the early years of the transition to
a market economy.
Depending
on the level of aggregation used to classify occupations, the results indicate
that between 35% and 50% of all Estonian wage earners changed occupations in
this short period of time. Moreover,
the bulk of these occupational switches happened in the early years, at the very
beginning of the transition. Job tenure is the main determinant of occupational
mobility: it has a negative impact from 1989 to 1994.
The
results also show the remarkable speed with which the market mechanism takes
root: the returns to current and alternative occupations play, over these few
years, increasingly meaningful roles in explaining occupational change. For
example, the effect of the returns to the currently held occupation only
gradually becomes statistically significant and of the expected sign (higher
returns to the current occupation lower the probability of changing
occupations).
This
same gradual emergence happens to returns to alternative occupations. Moreover,
the results are not sensitive to the effects of gender, nationality, labour
market conditions, heterogeneity of workers and complexity of the occupational
switch.
ENDS
Notes
for Editors: ‘So Many
Rocket Scientists, So Few Marketing Clerks: Occupational Mobility in Times of
Rapid Technological Change’ by Nauro F. Campos and Aurelijus Dabušinskas was
presented at the Royal Economic Society’s 2002 Annual Conference at the
University of Warwick.
Campos
is in the Department of Economics, University of Newcastle; Dabušinskas is at
CERGE-EI, Charles University, Prague.
For
Further Information:
contact Nauro Campos on 0191-222-6861 (fax: 0191-222-6548; email: n.f.campos@ncl.ac.uk); or
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).
Which
countries in Europe are most in favour of a more equal society? New research by Marc
Suhrcke reveals that despite a rather successful adjustment towards the
principles of a market economy and a functioning democracy, people living in the
formerly socialist countries of the East continue to display much more
egalitarian attitudes than those living in the established market economies of
the West.
Suhrcke‘s
research – to be presented at the Royal Economic Society’s Annual Conference
at the University this week - analyses a large-scale international survey
covering 14 Western market economies and seven transition countries from Central
and Eastern Europe, asking respondents about the degree to which they tolerate
current income differences.
Ranking
countries by their attitudes to inequality shows Portugal to be most
‘egalitarian’, even ahead of the transition countries. France comes fourth,
behind Bulgaria and Russia, but still more egalitarian than Hungary, Czech
Republic, Eastern Germany, Slovenia, Latvia and Poland. The least egalitarian
views are expressed in Norway, Switzerland and the Netherlands.
The
study examines a series of factors that explain individual attitudes to
inequality – individual income, individual mobility experience, the actual
level of income inequality, and the individual perception of the determinants of
income generation – but systemic effect turns out to be the most powerful
determinant of differences in attitudes between East and West. Hence, it seems
much more difficult to adjust attitudes than to change economic and political
realities.
Other
things equal, a person living in the transition countries is almost 20% more
likely than someone from the West to ‘strongly agree’ with the statement
that income differences within the respondent’s country are currently too
large. The higher the actual level of income inequality, the less willing people
are to tolerate existing income differences. But the size of the influence is
comparatively small: it would take a huge increase in income inequality – a
20-point leap in the standard measure of income inequality (the Gini
coefficient) corresponding to the difference between the Swedish and the
Philippine level of income inequality – to achieve a 20% higher probability of
answering ‘strongly agree’.
Tolerance
of current levels of inequality also depends strongly on whether people perceive
them as ‘fair’, that is, resulting from differences in individual effort and
skills. On average, a mere 13% of respondents in the transition countries
believes that in their country people actually do get rewarded for their
efforts, compared to a figure of 36% in the Western market economies.
These
results confront policy-makers in the transition countries with a particularly
severe dilemma. Governments in the more advanced candidate countries for
accession to the European Union (EU) have spent a substantial amount of their
limited budgets to keep income inequality at about the Western average. But
popular pressure to increase these redistributive efforts is much stronger than
in the West, as these results confirm.
The
problem is that this pressure clashes with the facts that: a) these countries
have far less financial resources than the West to redistribute; and b)
financing it via social insurance contributions has already worsened firms’
competitive positions in these countries. So attitudes may not only be lagging
behind economic adjustment, they may
even hinder further necessary adjustment as the countries are preparing for the
competitive pressures of the EU internal market.
ENDS
Notes
for Editors:
‘Preferences for Inequality: East vs West’ by Marc Suhrcke will be presented
at the Royal Economic Society’s 2002 Annual Conference at the University of
Warwick on Monday 25 March.
Suhrcke
is at the UNICEF Innocenti Research Centre, 12, Piazza SS. Annunziata, 50122
Florence, Italy.
For
Further Information:
contact Marc Suhrcke on +39-055-2033-345 (sec: -356; fax: +39-055-244817; email:
msuhrcke@unicef.org);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095
(email: romesh@compuserve.com).
MEASURING
VULNERABILITY: WHY UNCERTAINTY CAN BE
AS
DAMAGING FOR HUMAN WELLBEING AS POVERTY
Analysts
and policy-makers often focus on poverty statistics in formulating policy. But
new research by Professor Ethan Ligon and Laura
Schechter of the University of California at Berkeley suggests that they
should also place great weight on minimising the displacement and uncertainty
generated by big changes in policy. Their analysis of a period of great economic
turmoil in Eastern Europe, presented at the Royal Economic Society’s Annual
Conference on Wednesday 27 March, suggests that vulnerability to future calamity
can rival poverty in determining overall human well-being.
Economists
have traditionally used estimates of the incidence of poverty to try and measure
the well-being of less fortunate members of society. But extensive research
confirms the common-sense notion that one's sense of well-being depends not on
current poverty alone, but also on one's sense of vulnerability to future
calamity.
Ligon
and Schechter construct a measure of this vulnerability, and use it to evaluate
the well-being of a sample of households from Bulgaria in 1994. This was a
period of great economic turmoil: prices were liberalised, inequality increased
and, in the end, the Communists were re-elected to power. The research shows
that during this period, households' well-being was reduced nearly as much by
uncertainty as by poverty.
In
particular, during this tumultuous period, vulnerability reduced household
well-being by an average of 26%. Of this, 53% was due to poverty, and 47% due to
uncertain future prospects. 23% of the uncertainty can be directly attributed to
macroeconomic shocks that affected the entire population.
Of
course, not everyone was equally vulnerable to these shocks. In particular,
education was of key importance in reducing vulnerability, though those who
lived in rural areas and owned livestock were less vulnerable than were
city-dwellers.
Analysts
and policy-makers have often tended to focus on poverty statistics in
formulating policy. This research suggests that they should also place great
weight on minimising the displacement and uncertainty generated by big changes
in policy, as these can rival poverty in determining well-being.
Similarly,
various forms of social insurance can help to shield households from
uncertainty. While these points may have been appreciated before in a rather
general way, this research provides a basis for quantifying the benefits
associated with reducing uncertainty.
ENDS
Notes
for Editors:
‘Measuring Vulnerability’ by Ethan Ligon and Laura Schechter was presented
at the Royal Economic Society’s 2002 Annual Conference at the University of
Warwick.
The
authors are at the University of California, Berkeley.
The
study was presented at a special session of the conference on ‘Insurance
Against Poverty‘, organised by Stefan Dercon of the University of Oxford. The
other studies presented were by Orazio Attanasio of University College London on
‘Empirical Implications of Imperfect Enforceability’ and by Dercon on
‘Informal Insurance, Public Transfers and Consumption Smoothing’.
For
Further Information:
contact Professor Ethan Ligon on +1-510-643-5411 (email: ligon@are.berkeley.edu); or
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).
Last updated
12th April 2002