|
Publications
Working
Papers - Abstracts
This page contains
abstracts for some of SCEPA's Working Papers.
For a complete list of papers go to the main
working paper page.
2006
SCEPA Working Paper 2006-1
Codrina Rada and Lance Taylor (The New School for Social Research).
Developing and Transition Economies in the Late 20th Century: Diverging Growth Rates, Economic Structures, and Sources of Demand. June 14, 2006.
Download (345 KB)
This study is about the growth and development performance of non-industrialized regions in the latter part of the 20th century. The key topics are a “great divergence” of regional growth rates of GDP per capita since around 1980 and changes in economic structure that were associated with it. Our most notable findings are: sustained growth among “successful” countries was accompanied by structural change in terms of shifts in output and labor shares, trade diversification, and sustained productivity growth with (in some cases) strong reallocation effects due to movements of labor from low to high productivity sectors. Regions that did not enjoy per capita growth showed little structural evolution apart from a rising employment/population ratio in service sectors. There was a generally positive association of growth rates of capital stock and output, but capital productivity dropped off in the upwardly diverging regions. That group also raised educational levels by several average years of schooling, but so did several slow growers. The implication is that human capital accumulation by itself is not sufficient to stimulate growth. Neither is foreign direct investment (FDI), which appeared to be associated with growth in some regions but had little apparent impact in others. Finally, on the demand side, we examine shifts in net borrowing by the private sector, government, and rest of the world. Mutually offsetting co-movements of government and foreign net borrowing occurred sporadically at most. In other words, the widely accepted “twin deficits” view of macro adjustment does not seem to apply, nor does the “consumption-smoothing” behavior postulated by Ricardian equivalence theory. Macroeconomic flexibility, on the other hand, may be very important. Strong fluctuations in private and foreign net borrowing did not derail growth in the upwardly diverging Tigers and (to a lesser extent) Southeast Asia.
2004
SCEPA Working Paper 2004-06
Egor Kraev. Financial Accounting Matrix and Transaction
Matrices: A Concise Formalism for Describing Financial Stock Dynamics.
December 1, 2004.
Download (218 KB)
Financial Accounting
Matrix/Transaction Matrices is a novel way to describe financial
stock dynamics, both for model construction and data analysis, that
cleanly integrates with the Social Accounting Matrix formalism for
describing financial flows. Its purpose is to address the following
issues: Firstly, a financial transaction typically affects several
asset stocks, making it difficult to see which transactions gave
rise to the observed behavior of a given stock. Secondly, every
financial transaction is subject to net wealth constraints, and
specifying and observing these can substantially increase the effort
of model specification. Finally, while a Social Accounting Matrix
is a powerful technique for tracing money flows in an economy, it
is not very good at describing stock-flow relationships and stock-specific
issues such as revaluation. By arranging the financial stocks in
a Financial Accounting Matrix (FAM) according to holder, issuer
and denomination, and by using a collection of constant matrices
(Transaction Matrices) that describe the structure of the financial
sector in a given country, we can decompose the observed changes
in the financial stocks into revaluation, net lending, and capital
transactions in a computationally efficient way. Conversely, the
FAM/TM formalism allows us to explicitly specify portfolio allocation
behavior of the different institutions in an economy while automatically
observing their net wealth constraints. Thus, the proposed formalism
cleanly separates universal accounting constraints, country-specific
financial sector structure, and behavior of agents within that structure.
CEPA Working Paper 2004-05
Codrina Rada and Lance Taylor (New School University). Empty
Sources of Growth Accounting, and Empirical Replacements à la Kaldor
with Some Beef. November 10, 2004.
Download (141 KB)
Standard sources
of growth accounts are empty of content because they rely on neoclassical
production theory. Rather, analysis can be based on productivity
growth equations derived either from NIPA accounting conventions
or algebraic identities. These complementary schemes impose valid
restrictions on growth rates of the wage rate, profit rate, capital,
labor, and their respective average productivities. A Solow-type
growth model based on proper accounting can be shown to converge.
Detailed results differ markedly from those of the standard model.
Alternative, essentially Kaldorian supply-and demand-based alternatives
to sources of growth based on a familiar output growth vs. productivity
growth diagram with constant employment growth contours added in
look like a useful alternative to the mainstream models.
CEPA Working Paper 2004-04
Dean Baker, Andrew Glyn, David Howell, and John Schmitt (New
School University). Unemployment and Labor Market Institutions:
The Failure of the Empirical Case for Deregulation. September,
2004.
Download (255 KB)
It has become
widely accepted that poor employment performance can only be effectively
addressed with fundamental reforms of national labor market institutions.
This call for extensive deregulation has long been a central tenet
of orthodox economics, but has attained increasing prominence with
the rise in European unemployment since 1973. Commissioned by the
International Labor Organization, this paper extends our earlier
assessment of the recent literature that makes use of cross-country
statistical evidence to show that labor market institutions can
explain the pattern of unemployment across the developed world since
the 1960s. We focus here on a 2003 study by IMF researchers both
because it was produced under the auspices of a leading multinational
institution whose empirical work and policy recommendations are
highly influential worldwide and because the IMF authors rely heavily
on the data and methodology of several important recent studies.
CEPA Working Paper 2004-03
Christy Huebner Caridi (New School University). The Relationship
between Credit Expansion, Inactive Balances, and the Capital Stock.
August 10, 2004.
Download (75 KB)
This paper examines
the inter-temporal association between capital assets, financed
though credit expansion, and the stock of inactive balances. It
is the opinion of the present author that Keynes's disavowed Say's
Law because of a fundamental imbalance between the use of capital
assets and monetary savings. Further, because of this disjoint,
current economic activity is dependent upon demand injections financed
through credit expansion. If debt financed demand is not forthcoming,
then the economy will contract. Within this construct, the primary
constraint is the ability to hold prior period income in an inactive
state. The interest rate is the price of the constraint.
CEPA
Working Paper 2004-02
Massimiliano La Marca (Middle East Technical University).
Real Exchange Rate, Competitiveness and Policy Implications:
a formal analysis of alternative macro models. May
25, 2004.
Download (884 KB)
The paper provides
a broad overview on the definition, determination and adjustment
mechanism of the real exchange rate and the macro internal and external
equilibrium conditions, in a wide range of macromodels. By adopting
the method of the “alternative closures” we start from
basic relations, add complementary hypotheses (real wage resistance,
capital mobility, external balance, or full employment) and show
how the different frameworks (Keynesian, Kaleckian, Neoclassical)
depart and reach alternative policy implications. The mutual consistency
and impact of those different assumptions are highlighted; in particular
we show the role of price competitiveness and terms of trade in
the international adjustment mechanism, the hidden linkages and
real contribution of dynamic models relative to static ones and
of general equilibrium relative to Keynesian models and the nexus
between the short-run income effect of net exports and long-run
general-equilibrium balanced trade and price equalization that allow
for consistency between standard macro and trade policies. The evolution
of the concept of equilibrium real exchange rate is also explored,
while IMF medium- and long-run applications are also critically
framed in the existing literature.
CEPA
Working Paper 2004-01
Nazim K. Ekinci (Middle East Technical University)
and Korkut Erturk (University of Utah). Turkish
Currency Crisis of 2000-1, Revisited. January 13, 2004.
Download (108 KB)
Turkey’s
exchange rate based stabilization program had collapsed within just
eleven months of its implementation. Unsustainable public debt dynamics
and fragility of the banking system have been the main reasons blamed
for the demise of the program. However, the banking sector fragility
became an issue only after the economy was hit buy a liquidity crunch
in November 2000. Because the central bank functioned as a quasi
currency board, the liquidity crunch was caused by a reversal of
the capital inflow. The onset of the stabilization program brought
down interest rates as expected and thus created ample opportunities
for speculative investors to make safe one-sided bets. Thus, in
our view the real cause of the capital reversal was profit taking
on the part of foreign speculative investors holding government
securities who conjectured that falling interest rates had reached
their limit at the time.
2003
CEPA
Working Paper 2003-06
Egor Kraev (University of Maryland). Modeling
Macroeconomic and Distributional Impacts of Stabilization and Adjustment
Packages: Current Literature and Challenges. November 28, 2003.
Download (432 KB)
Structural adjustment
policy packages sponsored by the IMF and the World Bank are a combination
of monetary, fiscal and trade measures intended to curb inflation,
improve the balance of payments, and foster economic growth. From
a brief discussion of a typical structural adjustment policy package
and the debate about its macroeconomic and distributional impacts,
we derive a list of desirable characteristics for an adequate model
thereof. Upon reviewing the literature on the issue, we see beginnings
of a consensus on how to construct the sectoral structure of the
real side of the economy and the formation of relative prices, and
effective tools for analyzing distributional impacts also on population
groups different from those used in formulating the model. However,
the views on the proper relationship (in particular, directions
of causality) between credit, prices, and real output are sharply
divided between the monetarist and the structuralist school, with
only one model allowing for an endogenous switch between the two
corresponding modes of behavior. We also find that current methodologies
are not very useful for representing the behavior of the economy
prior to the achievement of the hypothetical equilibrium, thus not
allowing for calibration of model behavior to time series and potentially
resulting in low quality of parameter estimation. Furthermore, currently
used formalisms for representation of stock-flow relationships involving
capital account transactions are quite unwieldy, requiring the model
builder to manually keep track of accounting identities and thus
unnecessarily increasing the effort of model building.
CEPA
Working Paper 2003-05
Jörg Huffschmid (University of Bremen). Economic
Policy Obstacles to Full Employment and Social Cohesion in Europe.
October 8, 2003.
Download (103 KB)
Structural adjustment
policy packages sponsored by the IMF and the World Bank are a combination
of monetary, fiscal and trade measures intended to curb inflation,
improve the balance of payments, and foster economic growth. From
a brief discussion of a typical structural adjustment policy package
and the debate about its macroeconomic and distributional impacts,
we derive a list of desirable characteristics for an adequate model
thereof. Upon reviewing the literature on the issue, we see beginnings
of a consensus on how to construct the sectoral structure of the
real side of the economy and the formation of relative prices, and
effective tools for analyzing distributional impacts also on population
groups different from those used in formulating the model. However,
the views on the proper relationship (in particular, directions
of causality) between credit, prices, and real output are sharply
divided between the monetarist and the structuralist school, with
only one model allowing for an endogenous switch between the two
corresponding modes of behavior. We also find that current methodologies
are not very useful for representing the behavior of the economy
prior to the achievement of the hypothetical equilibrium, thus not
allowing for calibration of model behavior to time series and potentially
resulting in low quality of parameter estimation. Furthermore, currently
used formalisms for representation of stock-flow relationships involving
capital account transactions are quite unwieldy, requiring the model
builder to manually keep track of accounting identities and thus
unnecessarily increasing the effort of model building.
CEPA
Working Paper 2003-04
Lance Taylor and Codrina Rada (Center for Economic
Policy Analysis). Can The Poor Countries Catch Up? Sources of
Growth Accounting Gives Weak Convergence for the Early 21st Century.
June 27, 2003.
Download (188 KB)
Projections
of per capita income gaps between nine regional groups of transition/developing
economies and the rich economies for the period 1998-2030 are made
on the basis of an extended sources of growth equation taking into
account Kaldor-Verdoorn effects, possible impacts on labor productivity
of trade liberalization and/or astute industrial policy, human and
physical capital accumulation, employment and population growth,
shifting shares of labor in income and traded goods in output, shifts
in capital productivity, productivity growth retardation due to
convergence, and specific regional effects. Under optimistic assumptions
about all these factors and in the historically unprecedented absence
of adverse macroeconomic shocks over three decades, modest relative
convergence of all regions to the rich countries may be possible.
However, except for one region (the "Tigers") absolute
income gaps are projected to widen.
CEPA
Working Paper 2003-03
Nelson H. Barbosa-Filho and Lance Taylor (Federal
University of Rio de Janeiro and Center for Economic Policy Analysis).
Distributive and Demand Cycles in the US Economy—A Structuralist
Goodwin Model. June 4, 2003.
Download (244 KB)
There are regular
counter-clockwise cycles involving capacity utilization u
(horizontal axis) and the labor share Ψ (vertical axis)
in the US economy since 1929. As in Richard Goodwin's cyclical growth
model, Ψ can be interpreted as a Lotka-Volterra predator
variable and u as prey. In a phase diagram, dynamics around
the ú = 0 schedule respond to effective demand which
econometric estimation (1948-2002) shows to be profit-led. Distributive
dynamics around the Ψ = 0 curve demonstrate a long-term
profit squeeze. Across cycles, the real wage and labor productivity
grow at 0.57% per quarter, holding the wage share broadly stable.
Modeling the cycle in the (u, Ψ) plane provides a parsimonious
description of demand and distributive dynamics, consistent with
the macroeconomics embedded in the work of Michal Kalecki, Goodwin,
and subsequent followers.
JEL Classification: B500, E110, E120, E320.
Keywords: effective demand, income distribution, structuralist macroeconomics,
predator prey dynamics.
CEPA
Working Paper 2003-02
Korkut Erturk (University of Utah). On the
Changing Nature of Currency Crises. May 11, 2003.
Download
(157 KB)
In the crises
of 1980s, ever-increasing current account deficits, fueled by unsustainable
economic expansions, were invariably the main cause of rising devaluation
risk that eventually led to the reversal of capital flows. By contrast,
in the 1990s, speculative expectations about changes in asset prices
and sovereign risk have instead become the main determinants of
capital flow reversals. The paper examines the nature of this transformation
and tries to give a stylized account of these new 'capital account
driven' crises. It is argued that although a country might seem
to benefit for a time from capital inflows when asset prices are
generally expected to rise, this can only be temporary since asset
prices cannot keep increasing indefinitely and an abrupt reversal
of capital flows ensues once it is taught that asset prices have
peaked.
JEL Classification: E32, F21, 041.
Keywords: devaluation risk, capital flows, capital accounts, crises,
economic growth, asset prices.
CEPA
Working Paper 2003-01
Lance Taylor and Codrina Rada (Center for Economic
Policy Analysis). Debt Equity Cycles in the Twentieth Century.
May 5, 2003.
Download
(252 KB)
Long-term cycles
in the equity-capital (q) and debt-capital (λ)
ratios exist in the US, UK, and Japan. They follow a broadly
clockwise pattern in the first two economies and counterclockwise
in Japan. The data as constructed satisfy flows of funds for loans
and a standard equation for the return to equity, which boil down
to differential equations for λ and q. Under
appropriate restrictions on the Jacobian, this system generates
long-term predator-prey cycles. The clockwise variant arises when
capital stock growth is "debt-led" and the debt ratio
is "equity accelerated." "Debt-burdened" growth
and "equity-decelerated" debt produce counterclockwise
oscillations. A transcritical bifurcation involving the "required"
return to equity in response to shifting "fundamentals"
adds realistic equity price dynamics to both variants.
JEL Classification: E32, F21, O41 O57.
Keywords: long-term cycles, equity capital, debt-capital, economic
growth, country studies.
2002
CEPA
Working Paper 2002-16
Edgar Pardo-Beltrán (New School for Social
Research and Universidad Externado de Colombia). Effects of
Income Distribution on Growth. November 4, 2002. This paper
is a recipient of the David
Gordon Award for 2001-2002.
Download (321 KB)
Several theories
hold that income distribution affects economic growth. Some of them
use cross-section country regression analysis to demonstrate their
beliefs. This procedure has such a bulk of problems that its results
should be analyzed carefully. Theories supported by this kind of
empirical verification are most affected. Results suggest that a
relationship between income distribution and economic growth exists
but it seems to be nonlinear, complex and dynamic. Alternative statistical
methods can be used in combination with historical studies and case
studies, where institutions are included, for a better understanding
of prevalent linkages.
JEL Classification: C21, O11, O15, O40, O50.
Keywords: income distribution, economic growth, economic development,
country studies, cross-sectional models.
CEPA
Working Paper 2002-15
Giammario Impullitti and C. Matthias Rebmann
(New School University). An Agent-Based Model of Wealth
Distribution. September 2002 (revised September 26).
Download (451 KB)
We investigate
the agent-based modeling technique in a model of wealth distribution.
In the first part we discuss this modern approach to economic modeling
in the light of two major methodological approaches in the history
of economic analysis, classical political economy and neo-classical
economics. In the core part of the paper we present a model which
belongs to the large group of essentially neo-classical models that
neglect work, production, and productive relations, but rather focuses
on distributive interactions in a hunter-gatherer society. We obtain
interesting dynamics of inequality in the simulation of wealth distribution.
We analyze some causal links between the rules and parameters on
the one side and the results on the other side. In this way, we
can explain some results in terms of the mechanisms generating them
instead of just admiring an"emergent structure." The analysis
of relative inequality as measured by the Gini coefficient shows
an inverse correlation between the average degree of vision (agent's
skills) and wealth inequality expressed by the Gini coefficient.
We also explored the effects of inheriting initial wealth and vision.
Finally, we do not succeed in simulating the Pareto law, thus failing
in replicating an empirical pattern of capitalist distribution of
wealth.
JEL classification: B41, C15, C63, D31
Keywords: economic methodology, wealth distribution, inequality,
computation techniques.
CEPA
Working Paper 2002-14
Günseli Berik (University of Utah), Yana
van der Meulen Rodgers (College of William and Mary), and
Joseph E. Zveglich, Jr. (Asian Development Bank).
Does Trade Promote Gender Wage Equity? Evidence from East Asia.
August 2002.
Download (320 KB)
This study explores
the impact of competition from international trade on the gender
wage gap in Taiwan and South Korea between 1980 and 1999. The dynamic
implications of Becker’s (1959) theory of discrimination lead
one to expect that increased competition from international trade
reduces the incentive for employers to discriminate against women.
This effect should be more pronounced in concentrated sectors of
the economy, where employers can use excess profits to cover the
costs of discrimination. Alternatively, wage discrimination may
increase with growing trade in a context of employment segregation
that limits women’s ability to achieve wage gains. The empirical
strategy controls for differences in market structure across industries
in order to isolate the effect of competition from international
trade. Estimation results are not consistent with Becker’s
theory, as greater international competition in concentrated sectors
is associated with larger wage gaps between men and women.
JEL classification: F14, F15, J31
CEPA
Working Paper 2002-11
Ipek Ilkaracan (New School for Social Research)
and Raziye Selim (Istanbul Technical University).
The Role of Unemployment in Wage Determination: Further Evidence
on the Wage Curve from Turkey. August 2002. This paper is a
recipient of the David
Gordon Award for 2001-2002.
Download (327 KB)
This paper presents
an empirical estimation of the correlation between wages and regional
unemployment rates in Turkey, more specifically it explores the
role of regional unemployment rates in wage determination. The analysis
builds upon a series of recent empirical studies on the wage-unemployment
relationship, now commonly known as “the wage curve,”
a downward sloping curve in wage-unemployment space. The existing
studies are for most part in advanced market economies, while this
paper presents one of the few attempts at a wage curve analysis
within the context of a developing market economy. A cross-sectional
estimation of micro level individual wage data for the Turkish labor
market in 1994, suggest a statistically significant negative correlation
between wages and regional unemployment rates. Separate regressions
for men and women, however, show a wage curve to exist only in the
male labor market. The study also presents the results on other
variables of wage determination such as returns to schooling, returns
to age, job tenure, gender, industrial and occupational affiliation
of the worker, economic sector and union status.
JEL classification: J31, J64, O15
Keywords: wage curve, unemployment, Turkey
CEPA
Working Paper 2002-10
Janine Berg (CEPA) and Dante Contreras
(Universidad de Chile). Political-Economic Regime and the Wage
Curve: Evidence from Chile, 1957-96. August 2002. This
paper is a recipient of the David
Gordon Award for 2001-2002.
Download (276 KB)
This paper tests
whether a wage curve—a negative relationship between unemployment
and pay—existed in Santiago, Chile during 1957-1996. The analysis
is divided into two periods corresponding to the distinct economic
models in place in the country. For 1957-1973, during the period
of inward-led development, we reject the existence of a wage curve.
The second period, 1974-1996, corresponds to an external opening
of the economy and the deregulation of publicly controlled industries
and labor relations. For this period, we find a wage curve of –0.08,
which is similar to the United States and other western, capitalist
economies.
Disaggregating the analysis for different groups of workers, we
find that since the economic reforms, women’s pay falls three
times more than men’s when unemployment doubles. Also, non-university
educated and public sector workers have suffered greater pay decreases
from unemployment. Workers in the informal sector do not experience
a drop in pay, contradicting the notion that the informal sector
acts as a buffer for unemployed formal-sector workers.
JEL classification: J30, J60
Keywords: wage curve, unemployment, inequality, Chile
CEPA
Working Paper 2002-09
Susan K. Schroeder (New School University and University
of Bremen): A Minskian Analysis of Financial Crisis in Developing
Countries. August 2002.
Download (309 KB)
This paper provides
a framework for examining developing-country financial crisis. It
is based upon Hyman Minsky's financial fragility thesis and applied
to the case of Thailand 1984-1999. There is empirical evidence for
the evolution of the Thai economy through the Minskian regimes (hedged
through speculative to Ponzi) in the period prior to the onset of
the 1997 Asian crisis. Evidence also suggests that the Ponzi regime
has two stages and that the rate of return on nonproductive speculative
investment turns negative as the country entered the Ponzi regime.
The diversion of foreign capital inflows to speculative investment
played an important part in the deterioration of the Thai financial
position. These results, if general, have strong implications for
the field of country risk analysis, in particular, for the design
of early warning models of financial crisis for developing countries.
JEL classifications: F4, E1, O5, D
Keywords: Asian crisis, country risk, developing countries, financial
crisis, financial fragility, Minsky, Ponzi, Thailand
CEPA
Working Paper 2002-08
Matthew J. Slaughter (Dartmouth College and NBER): Does
Inward Foreign Direct Investment Contribute to Skill Upgrading in
Developing Countries? June 2002.
Download (251 KB)
How do multinational
firms affect both the demand for and supply of skills in host-country
labor markets? On the demand side, inward can FDI stimulate demand
for more-skilled workers in host countries through several channels.
To date, most empirical evidence indicates that these channels work
mainly within multinationals themselves, rather than through knowledge
spillovers to domestic firms. On the supply side, the question of
how inward FDI influences the development of human capital is much
less clear, with possible links at both the micro- and macro-levels.
This paper offers some new empirical evidence on the links between
inward FDI and within-industry skill upgrading for a country-industry-year
panel spanning both developed and developing countries. The main
empirical finding is a robustly positive correlation between skill
upgrading and the presence of affiliates of U.S. multinationals,
with this correlation even stronger among the sub-sample of developing
countries. This correlation is consistent with inward FDI stimulating
skill upgrading in these developing countries.
CEPA
Working Paper 2002-07
Christy Huebner Caridi (New School University): Keynes'
Inactive Balances, the Banking Sector and Effective Demand.
May 2002.
Download (53 KB)
This paper offers
a fresh look at the economic theories advanced by Keynes. Keynes
correctly asserted that in a fractional reserve banking system supply
could not create its own demand when agents held time and savings
deposits as a longrun store and entrepreneurs were engaging in the
disinvestment of capital. There are two fundamental problems. The
first, disinvestment creates a disjoint between ex-ante supply and
current period income; the second, the banking sector cannot transfer
real resources, therefore, it cannot intermediate savings. Thus,
the economy requires demand injections, financed by bank debt, if
it is maintain economic activity.
Keywords: Keynes, fractional reserve banking, capital stock, time
and savings deposits, inactive balances.
CEPA
Working Paper 2002-01
David R. Howell (CEPA). Increasing Earnings Inequality
and Unemployment in Developed Countries: Markets, Institutions and
the 'Unified Theory.' January 2002.
Download (254 KB)
It is widely
accepted that global forces of technology and trade have caused
a profound shift in labor demand towards the most highly skilled,
generating sharply rising earnings inequality in flexible labor
markets (the U.S.) and persistently high unemployment in rigid labor
markets (Europe). This paper critically assesses the evidence for
this "Unified Theory." It finds little compelling empirical
support for either the skill-biased demand shift explanation for
high U.S. earnings inequality or the rigid labor markets explanation
for high unemployment in Europe. This assessment challenges the
policy orthodoxy of the 1990's that developed economies feature
a strict inequality-unemployment tradeoff and that policy options
are therefore limited to skills enhancement in the U.S. and labor
market de-regulation in Europe. It is suggested that the theoretical
dominance of the textbook supply/demand model has contributed to
the neglect of labor market institutions for U.S. wage outcomes
and tight macroeconomic policy for European unemployment.
2001
CEPA
Working Paper 2001-06
Nelson H. Barbosa Filho (CEPA). The Balance-of-payments
Constraint: From Balanced Trade to Sustainable Debt. December
2001, revised January 2002.
Download (110 KB)
This paper extends
the balance-of-payments constraint on growth known as Thirlwall's
law to incorporate unbalanced trade and debt accumulation. Assuming
that small open economies face a liquidity constraint, the text
shows the growth and real-exchange-rate policy rules consistent
with a stable ratio of net exports to income. Given such rules,
the text shows how the trade balance of a small open economy is
residually determined by the ratio of foreign debt to income allowed
by international conditions.
JEL classification: F300 and F410.
Keywords: Balance of payments constraint, trade, debt, growth.
CEPA
Working Paper 2001-05
Nelson H. Barbosa Filho (CEPA). Effective Demand and Growth:
An Analysis of the Alternative Closures of Keynesian Models.
December 2001.
Download (122 KB)
This paper presents
a one-sector model where investment and autonomous expenditures
determine the growth rate of income. The analysis starts with the
dynamics of demand-led growth and the interaction between investment
and autonomous expenditures. Since by definition investment determines
the growth rate of capital, the paper uses the relation between
demand-led growth, multifactor productivity growth, and labor-force
growth to analyze the alternative closures of the supply side. After
discussing how partially endogenous labor force and multifactor
productivity may relax supply constraints, the paper shows how changes
in the average propensity to save may accommodate investment and
autonomous expenditures when the economy reaches its maximum growth
rate. Since nothing prevents the functional distribution of income
from changing before that happens, the paper concludes with a two-species
model (for the labor share of income and the income-capital ratio)
to illustrate how demand-led growth can generate business fluctuations
while remaining below supply constraints.
JEL classification: E120, O410, B220, and B500.
Keywords: Growth, effective demand, Keynesian, demand-led.
CEPA
Working Paper 2001-04
Nelson H. Barbosa Filho (CEPA). International Liquidity
and Growth in Brazil. November 2001.
Download (124 KB)
This paper analyzes
the relation between international liquidity and growth for Brazil
in 1966-2000. Defining the former as the ratio of foreign reserves
to foreign (interest-bearing) debt, the objective is to build a
model connecting growth with international liquidity, and then check
whether the results from such a model hold up in practice. The model
builds upon Thirlwall's (1979) law and uses some basic accounting
identities to specify a liquidity constraint on small open economies.
The main implication of such a model is that, similar to what happens
with liquidity constrained agents in closed economies, small open
economies tend to adjust their current account, especially their
trade balance, to the availability of external finance. Thus, in
face of fluctuations in international liquidity, one should expect
fluctuations in growth after a time lag. This is exactly what the
paper verifies for Brazil in 1966-2000, that is, changes in Brazil's
international liquidity tends to lead changes in its growth rate.
Overall, inertia and international liquidity explains approximately
40% of the variation in Brazil's growth rate in 1966-2000.
JEL classification: F410, F430, O200, and O540.
Keywords: International liquidity, liquidity constraint, growth,
Brazil.
CEPA
Working Paper 2001-03
Eugene Canjels (New School University) and Ute Volz
(Johann Wolfgang Goethe-Universität). Share Contracts and
Unobserved Ability. November 2001.
Download (237 KB)
We present a
model with a monopolistic landlord and tenants with unobservable
ability. In this setting, the landlord should use a wage contract
to extract the full surplus due to ability since a share or fixed
rent contract leaves some of the surplus in the hands of the tenants.
We combine this issue with a standard moral hazard problem on the
tenants' side, which argues for a fixed rent contract. A share contract
is an optimal compromise between these two forces.
JEL classification: C72, D82, O12, Q15.
Keywords: Sharecropping, tenancy contracts, agricultural contracts,
pooling equilibrium.
CEPA
Working Paper 2001-02
David Howell and Friedrich Huebler (CEPA). Trends in Earnings
Inequality and Unemployment Across the OECD: Labor Market Institutions
and Simple Supply and Demand Stories. May 2001. [Globalization,
Labor Markets, and Social Policy No. 23]
Download (183 KB)
Grounded in
the standard supply and demand model, the conventional wisdom assumes
a tradeoff between earnings inequality and unemployment, blames
low skills for high earnings inequality in the U.S. and U.K., and
attributes high European unemployment to institutional constraints.
This paper finds little evidence of a tradeoff between earnings
inequality and unemployment across OECD countries, and while welfare
state institutions aimed at employment, unemployment, and wage protection
matter a great deal for differences and changes in earnings inequality,
they do not appear to be the main source of OECD employment problems.
This evidence suggests a need to move beyond the policy implications
of the simple textbook model. Specifically, returning to a more
compressed wage distribution is not likely to create "European"
levels of unemployment in the U.S., and greater earnings inequality
is not likely to fix employment problems in Europe. Policy makers
should give more credence to the view that the right kind of labor
market institutions can further both egalitarian and efficiency
goals.
2000
CEPA
Working Paper 2000-21
Lance Taylor (CEPA). Exchange rate indeterminacy
in portfolio balance, Mundell-Fleming, and uncovered interest rate
parity models. April 2002 (revised; formerly Exchange Rate
Determination in Portfolio Balance, Mundell-Fleming, and Uncovered
Interest Parity Models. April 2001 (revised; formerly Exchange
Rate Determination in the Portfolio Balance, Mundell-Fleming, and
(Perhaps) More Plausible Models (February 2000) and The Exchange
Rate Is Indeterminate in the Portfolio Balance and Mundell-Fleming
Models - Each Has One Fewer Independent Equation than People Usually
Think (1999)). [Economic Policy Analysis No. 8]
Download (189 KB)
With full stock/flow
accounting respected, the two-country open economy portfolio balance
model has just two independent equations for asset market clearing.
It can determine home and foreign interest rates but not the exchange
rate. If asset market equilibria vary smoothly over time, the balance
of payments equation in the Mundell-Fleming model is not independent
and cannot set the exchange rate either. The familiar fixed reserves/"floating
rate" vs. endogenous reserves/"fixed rate" dichotomy
does not exist, and "fundamentals-based" econometric models
of the exchange rate are bound to fail. An alternative is a two-country
IS/LM model with exchange rate dynamics added. Its dynamic properties
under uncovered interest rate parity are briefly explored.
JEL classifications: F32, F41.
Key words: Exchange rate, Mundell-Fleming model.
CEPA
Working Paper 2000-15
Thomas R. Michl (Colgate University) and Duncan K. Foley
(New School University). Social Security in a Classical Growth
Model. June 2000, revised September 2001. [Economic Policy Analysis
No. 11]
Download (177 KB)
This paper develops
a growth model with overlapping generations of workers who save
for life-cycle reasons and Ricardian capitalists who save from a
bequest motive. The population of workers accommodates growth,so
that the rate of capital accumulation is endogenous and determines
the growth of employment. Two regimes are possible, one in which
workers’ saving dominates the long-run and a second in which
the long-run equilibrium growth rate is determined completely by
the capitalist saving function, sometimes called the Cambridge equation.
The second regime exhibits a version of the Pasinetti Paradox: changes
in workers’ saving affect the level, but not the growth rate,
of capital in the long run. Applied to social security, this result
implies that an unfunded system relying on payroll taxes reduces
workers’ lifetime wealth and saving, creating level effects
on the capital stock without affecting its long-run growth rate.
These effects are mitigated by the presence of a reserve fund, various
levels of which are examined. Calibrating the model to realistic
parameter values for the U.S. facilitates an interpretation of the
controversies over the percentage of the national wealth originating
in life-cycle saving and the effects of social security on saving.
The model is offered as an analytical framework for the review of
current topics in fiscal policy, in particular identifying the social
security reserve fund as a potential vehicle for generating capital
accumulation and effecting a progressive redistribution of wealth.
JEL classification: E1, E6.
Keywords: Overlapping generations growth, social security, Pasinetti
paradox.
1999
CEPA
Working Paper 1999-06
Nelson H. Barbosa-Filho (CEPA). A Note on the Theory of
Demand-Led Growth. December 1999. [Economic Policy Analysis
No. 10]
Download (68 KB)
This paper presents
a demand-led growth model where an exogenous investment function
drives capital accumulation through a Bernoulli differential equation.
In such framework investment generates savings through changes in
capacity utilization and/or income distribution, making economic
growth totally demand-led. Taking a Structuralist perspective, the
model is purposefully made to be consistent with different Keynesian
closures for the investment function, as well as with different
assumptions about savings' adjustment to investment.
CEPA
Working Paper 1999-04
Carl Chiarella (University of Technology, Sydney), Peter
Flaschel (University of Bielefeld), and Willi Semmler
(New School University). The Macrodynamics of Debt Deflation,
September 1999. [Economic Policy Analysis No. 7]
Download (2 MB)
With the recent
events of the large-scale financial crisis in some parts of the
world and the slowly declining inflation rate in major OECD countries
debt deflation has again become an important topic in economic research.
In a model with debt issuing firms, financing their investment,
we explore the interaction of high nominal levels of debt, output
prices, increase in real debt and declining economic activity. This
destabilizing mechanism is explored in the context of a small-scale
as well as in a large-scale Keynesian demand constraint economy.
In both models labor market dynamics are emphasized. Our principle
conclusion is that the small-scale as well as the large-scale models
are prone to accelerating downward instability caused by over-indebtedness
and declining prices if the process is not stopped by floors to
deflation by appropriate government policies. Moreover, contrary
to conventional views flexible exchange rates may add to downward
instability.
CEPA
Working Paper 1999-01
Gang Gong (New School for Social Research), Willi Semmler
(New School for Social Research), and Peter Flaschel (University
of Bielefeld). A Macroeconometric Study on the Labor Market and
Monetary Policy: Germany and the EMU. January 1999. [Economic
Policy Analysis No. 5]
Download (1.8 MB)
Germany will
be one of the core countries in the European Monetary Union (EMU).
Currently there is therefore a great interest in issues of labor
market and monetary policy in Germany. On the basis of a macroeconometric
model we study the interaction of labor market and alternative monetary
policies using German data sets. More specifically the paper has
three objectives. We first present a macroeconometric framework
of disequilibrium type that is useful for empirically studying the
interaction of the goods market, financial market and the labor
market. Second, we estimate the model with quarterly German time
series data from 1970.1 - 1991.1. Third, we evaluate the effect
of different monetary policy rules and their impact on output stabilization,
labor market and inflation rates, employing stochastic simulations.
Two alternative monetary policy rules are considered, namely the
monetary authority 1) targeting monetary aggregates or 2) targeting
the interest rate. The latter rule originates in Taylor (1993) and
has also been called the Taylor rule. The model is econometrically
estimated through ML estimation using the similated annealing as
global optimization procedure. The role of monetary policy for the
labor market and inflation are studied for Germany through stochastic
simulations. For the EMU such a study has particular importance
since there is still a debate over monetary policy rules under the
EMU and its effect on the labor market and inflation rate. We also
contrast the results to studies on the US concerning labor market
and monetary policy be of great interest for policy makers.
1998
CEPA
Working Paper 1998-21
David Kucera (CEPA). Unemployment and External and Internal
Labor Market Flexibility: A Comparative View of Europe, Japan, and
the United States. October 1998. [Globalization, Labor Markets,
and Social Policy No. 11]
Download (137 KB)
This paper examines
the relationship between unemployment and labor market flexibility.
The latter is considered in the broadest sense - as it relates to
labor markets at large (external flexibility) and to practices within
firms (internal flexibility). The first part of the paper addresses
the argument that differences in employment performance among the
advanced economies result largely from differences in labor market
flexibility. Empirical evidence is considered on nominal and real
wage flexibility, labor market institutions, the trade-off between
unemployment and inequality (the so-called unified theory), social
policy, and Beveridge curves. With the exception of ambiguous evidence
on the duration of unemployment insurance benefits, there is little
solid evidence that high unemployment results from labor market
rigidities.
The second part
of this paper addresses the argument that Japan's low rate of unemployment
results from high internal labor market flexibility. This assertion
is suspect, or at least overstated, for several reasons. Japanese
firms' reliance on internal flexibility is not an alternative to
but rather is complemented by external flexibility. This external
flexibility is provided disproportionately by women workers, who
serve as a buffer workforce. Rather than being counted as unemployed,
Japanese women who lose their jobs tend to leave the labor force
altogether. This is manifested in the remarkably high proportions
of discouraged workers in Japan, the vast majority of them women.
Thus the Japanese unemployment rate as well as unemployment volatility
are deceptively low, much more so than for the other advanced economies.
Most studies examining wage flexibility in relation to unemployment
conclude that wage flexibility is comparatively high in Japan. But
studies that examine the relationship between changes in nominal
or real wages and output conclude that Japan does not have comparatively
high wage flexibility. The point is of relevance not only for the
literature on comparative wage flexibility but also for that on
labor market institutions and unemployment, in which is is assumed
that Japan has comparatively high wage flexibility.
JEL classification:
J6, J7, L2.
CEPA
Working Paper 1998-20
Ute Pieper (CEPA). Deindustrialization and the Social
and Economic Sustainability Nexus in Developing Countries: Cross-Country
Evidence on Productivity and Employment. May 1998, revised March
1999. [Globalization, Labor Markets, and Social Policy No. 10]
Download (268 KB)
In an empirical
investigation of the interactions between industrial structure and
macro outcomes, an accounting framework was applied to relate changes
in sectoral employment and output compositions to changes in overall
productivity growth over time. The numerical results were interpreted
using a taxonomy describing industrialization and deindustrialization
in developing countries. The findings suggest that, in particular,
industrial performance correlates with the overall performance of
an economy, and therefore is the key sector in explaining the sustainability
of different regional patterns in overall productivity and employment
growth. That is, negative rates of productivity growth in the industrial
sector are strongly associated with negative productivity growth
for the economy as a whole, and vice versa. Further, slow industrial
growth may lead to low road development, in which productivity growth
trades off with employment growth, while high road development is
defined as simultaneously expanding employment and overall productivity
growth.
JEL classification: O4, O11, O14.
Keywords: aggregate productivity, economic growth, structural change,
sustainability.
CEPA
Working Paper 1998-19
Eugene Canjels (New School for Social Research). Risk
and Incentives in Sharecropping: Evidence from Modern U.S. Agriculture.
October 1998. [Economic Policy Analysis No. 4]
Download (259 KB)
A new data set
shows the extensive use of sharecropping in modern U.S. agriculture
particularly in wheat, rice, corn, soybeans, and cotton. For these
five crops, I investigate the importance of risk and three types
of incentive problems that are commonly regarded to 'cause' sharecropping.
A direct measure of risk from county level weather data is constructed
and this measure is a major explanation in the choice between cash
and share contracts. The potential for exploitation of the land
by the tenant is also an important determinant of tenancy choice.
Finally, for three inputs, fertilizer, petroleum products, and herbicides
& pesticides, incentive problems in the provision of inputs by the
tenant are shown to exist. For these inputs, I show that sharecroppers
use less than cash renters, but this difference is eliminated when
the costs of these inputs are also shared.
CEPA
Working Paper 1998-17
David Kucera (CEPA). Foreign Trade and Men and Women's
Employment and Earnings in Germany and Japan. August 1998 (Revised).
[Globalization, Labor Markets, and Social Policy No. 9]
Download (146 KB)
This paper provides
an empirical analysis of the effects of foreign trade expansion
on men and women's employment and earnings in Germany and Japan
since the early-1970s. The analysis is prompted by trade studies
identifying manufacturing industries appearing most vulnerable to
foreign trade, industries in which German and Japanese women are
disproportionately represented. Evidence is found that foreign trade
expansion had a more adverse effect on women's than men's manufacturing
employment in Japan and a more equal effect in Germany. In spite
of this, demand shifted away from women's employment in Germany
after the early-1970s, for both the manufacturing sector as a whole
and for manufacturing industries with high female percentages of
employment. No such demand shifts occurred in Japan. In the face
of these differences in demand and of remarkable similarity in female
labor supply, male-female wage differences narrowed in Germany and
widened in Japan, for both manufacturing and non-agricultural employees.
These diverging patterns of male-female wage differences are explained
by the more marginal basis on which Japanese women were integrated
into the workforce, reflected in the character of women's part-time
and temporary employment as well as union representation. To some
extent, the more marginal basis on which Japanese women were integrated
into the workforce resulted from the explicit policies of Japanese
firms, referred to as "Operation Scale-Down" (genryo keiei). In
Germany, too, the character of women's integration into the workforce
appears to result in part from explicit policies undertaken by The
Federation of German Trade Unions (Deutscher Gewerkschaftsbund),
the largest German federation of unions.
JEL classification: J3, J5, F1.
CEPA
Working Paper 1998-11
Lance Taylor (CEPA). Lax Public Sector, Destabilizing
Private Sector: Origins of Capital Market Crises. July 1998,
revised October 1998. [International Capital Markets and the Future
of Economic Policy No. 6]
Download (116 KB)
A principal
message of this paper is that external financial crises are not
caused by an alert private sector pouncing upon the public sector’s
foolish actions such as running an unsustainable fiscal deficit
or creating moral hazards. They are better described as private
sectors (both domestic and foreign) acting to make high short-term
profits when policy and history provide the preconditions and the
public sector acquiesces. This conclusion emerges from a review
of balance of payments crises in the Southern Cone around 1980,
Mexico in 1994-95, East Asia in 1997-98, and Russia in 1998 in light
of existing theories - speculative attack models and moral hazard
- and a synthesis of ideas proposed by Salih Neftci and Roberto
Frenkel. The standard theories do not explain history well. The
Frenkel-Neftci framework supports a better description of crisis
dynamics in terms of five elements:(1) the nominal exchange rate
is fixed or close to being pre-determined; (2) there are few barriers
to external capital inflows and outflows; (3) historical factors
and the conjuncture act together to create wide financial "spreads"
between returns to national assets and borrowing rates abroad -
these in turn generate capital inflows which push the domestic financial
system in the direction of being long on domestic assets and short
on foreign holdings; (4) regulation of the system is lax and probably
pro-cyclical; (5) stock-flow repercussions of these initially microeconomic
changes through the balance of payments and the financial system’s
flows of funds and balance sheets set off a dynamic macro process
which is unstable. Policy alternatives are discussed in terms of
these five conditions and the present global macroeconomic environment,
in particular the destabilizing interventions of the International
Monetary Fund in East Asia.
CEPA
Working Paper 1998-05
José Antonio Ocampo (Economic Commission on Latin
America and the Caribbean (ECLAC), United Nations) and Lance
Taylor (CEPA). Trade Liberalization in Developing Economies:
Modest Benefits but Problems with Productivity Growth, Macro Prices,
and Income Distribution. March 1998. [Globalization, Labor Markets,
and Social Policy No. 8]
Download (74 KB)
Arguments regarding
trade and other forms of liberalization in developing countries
are reviewed. Microeconomically, the standard case for liberalization
is dubious under increasing returns to scale and when firms can
invest directly in productivity enhancement. Distributional effects
of commercial policy changes can be regressive and large, but the
"rents" they generate can serve as a basis for effective policy
intervention contingent on firms' performance. Macroeconomically,
the case of liberalization rests on Say's Law, which is not always
enforced. It is complicated by the facts that recent combined current
and capital market liberalizations have been associated with strong
exchange rates and high interest rates, and that output and productivity
growth have positive mutual feedbacks which liberalization may well
suppress. All these effects can only be sorted out by institutional
and historical analysis at the country level, as opposed to cross-country
regressions or computable general equilibrium models with causal
structures favoring trade liberalization already built in.
CEPA
Working Paper 1998-04
Peter Flaschel (University of Bielefeld, Germany), Gang
Gong (University of Bielefeld, Germany; and National Institute
for Economic Research, Johannesburg, South Africa) and Willi
Semmler (New School for Social Research). A Keynesian Based
Econometric Framework for Studying Monetary Policy Rules. March
1998. [Economic Policy Analysis No. 2]
Download (2.3 MB)
In the framework
of a Keynesian based monetary macromodel we study the implications
of alternative monetary policy rules. Our monetary macromodel exhibits
the following features: asset market clearing, disequilibrium in
the product and labor markets, sluggish price and quantity adjustments,
two Phillips curves for the wage and price dynamics and expectations
formulation which represents a combination of adaptive and forward
looking behavior. Two alternative monetary policy rules for controlling
inflation are considered: the monetary authority (1) targeting monetary
aggregates or (2) targeting the interest rate. For those two policy
rules the model's dynamic features are explored given certain parameter
constellations. Then the key parameters of the model variants are
estimated through GMM and single equation estimations employing
US time series data 1960.1-1995.1. Stochastic simulations are performed
and contrasted with US macroeconomic data in terms of standard deviations
of macro variables as well as their cross-correlation to output.
The model can be viewed as an alternative to equilibrium macromodels
in fitting macroeconomic data. With respect to out two monetary
regimes it seems that in terms of volatility the model variant with
the second policy rule gives a better fit whereas for cross-correlation
with output the variant with the first policy rule performs better.
CEPA
Working Paper 1998-02
Enrique Ganuza (United Nations Development Program) and
Lance Taylor (CEPA). Macroeconomic Policy, Poverty, and Equality
in Latin America and the Caribbean. February 1998. [Globalization,
Labor Markets, and Social Policy No. 6]
Download (86 KB)
This paper takes
up a question frequently raised but rarely addressed empirically
- do macroeconomic policy changes and exogenous macro shocks have
significant impacts on poverty and income inequality more generally?
For 15 countries in Latin America and the Caribbean over the past
two decades, the answer is unequivocally "Yes." Specifically, poverty
reduction appears to be generally associated with increases in GDP
and GDP per capita, reductions in unemployment, reductions in inflation,
increases in the minimum wage, reductions in overall inequality,
and increases (or at least stability) of the share of social expenditures
in GDP.
The foregoing
relationships are observed over macro "episodes" (typically bounded
by substantial economic disturbances and/or major realignments in
policy). Countries and overall time periods examined include Argentina,
1974-96; Bolivia, 1980-96; Brazil, 1985-96; Chile, 1974-96; Colombia,
1978-95; Costa Rica, 1989-96; Cuba, 1989-96; Dominican Republic,
1981-96; Ecuador, 1970-96; Jamaica, 1960-95; Mexico, 1984-94; Nicaragua,
1980-93; Paraguay, 1970-96; Peru, 1985-95; and El Salvador, 1980-96.
Within this
data set, the authors identify 49 episodes. Poverty incidence is
estimated for 45 of them: it stays stable or rises in 26 and decreases
in the remaining 19 cases. The sample appears to be large enough
to provide insight into distributional processes which operate across
nations, or at least developing countries in the Western Hemisphere.
The paper concludes with some implications for economic policy.
CEPA
Working Paper 1998-01
David R. Howell, Margaret Duncan and Bennett Harrison (New
School for Social Research). Low Wages in the US and High Unemployment
in Europe: A Critical Assessment of the Conventional Wisdom.
August 1998 (Revised). [Globalization, Labor Markets, and Social
Policy No. 5]
Download (485 KB)
Measured by
changes in real wages, earnings inequality and unemployment, the
economic position of lower skilled workers has declined sharply
over the past two decades across the developed countries of the
OECD. In this paper we survey a wide-ranging empirical literature
for evidence bearing on the Unified Theory - the popular idea that
strong shifts in demand away from low-skilled workers, caused mainly
by computerization and related forms of advanced technology, explain
both the declining wages of low skilled workers in the "flexible"
labor market of the United States and high and rising unemployment
in "rigid" European labor markets.
On the U.S.
side, we find little evidence of large or accelerating skill-biased
demand shifts after the early 1980s as measured by standard indices
of the skill-intensity of employment. This is significant since
most of the impact of computerization on the organization and skill
requirements in the workplace has occurred in precisely this later
period. There is also little unambiguous evidence of a close link
between computerization and relative wage change. Nor do we find
that the conventional skill-biased demand-shift story offers a compelling
explanation for the rise in unemployment rates experienced by most
European countries. Across the OECD, rising low-skilled unemployment
does not appear to drive much of the increase in the overall rate;
measures of wage rigidity are not closely correlated with unemployment
problems; and no clear empirical link has been established between
the recent rise in unemployment and the presence of strong wage-setting
institutions and social policies.
If the empirical
basis of the Unified Theory is so shallow, what accounts for the
broad consensus in its favor? We speculate that at least part of
the answer lies in the natural attraction of a simple story, particularly
one that is so consistent with the textbook demand-supply model
of the labor market. We conclude with some conjectures on the direction
an alternative account might take that places less weight on technology
driven demand shifts and greater weight on the effects of fundamental
political, institutional and structural changes.
1996
CEPA
Working Paper 1996-05
Ute Pieper and Lance Taylor (CEPA). The Revival of the
Liberal Creed: The IMF, The World Bank, and Inequality in a Globalized
Economy. October 1996, revised January 1998. [Globalization,
Labor Markets, and Social Policy No. 4]
Download (80 KB)
Half the people
and two-thirds of the countries in the world lack full control over
their own economic policy decisions. To a great extent, expatriate
"experts" managed by industrial country nationals and based in Washington
DC regulate their macroeconomics, investment projects, and patterns
of social spending. The principles guiding these decisions from
afar are known as the Washington Consensus. They are based
on the "neoliberal" or "market-friendly" brand of economic policy
analysis that has become predominant over the past dozen years.
In some cases local policy-makers have been even more enthusiastic
about neoliberalism than their colleagues from Washington.
Such "globalization"
of economic policy, however, has precedents. In fact, the dramatic
shifts in economic and social policy of the 1980s go far toward
recreating the environment prior to the Great Depression; advocates
of "neo"liberalism say little that is unfamiliar from the debates
of the 1920s. The world has come full circle - institutionally,
ideologically, and politically.
Out of the
disaster of World War II emerged an international consensus of economic
collaboration of governments and the liberty to organize national
life at will which was manifested in the establishment of the World
Bank and the International Monetary Fund. Paradoxically, for developing
countries these same institutions today represent the intellectual
backbone and political force behind the dismantling of the truly
utopian ideas of the 1940s.
By first providing
a historical account of the origins and evolution of the World Bank
and the IMF, the paper attempts to speak to the present debate on
the issues of "globalization", when the capacity to reconcile market
and social contradictions is more and more impaired by growing economic
and financial imbalances that come with increasing interdependence
of liberalized global markets. These issues are then illustrated
in the context of concrete country experiences with structural adjustment
policies and their distributional outcomes in a globalized economy.
The paper concludes by suggesting ways to reform the two agencies.
CEPA
Working Paper 1996-04
Robert A. Blecker (American University). NAFTA, the Peso
Crisis, and the Contradictions of the Mexican Economic Growth Strategy.
July 1996. [Globalization, Labor Markets, and Social Policy No.
3]
Download (112 KB)
This paper
analyzes the causes of the massive peso devaluation of December
1994 and the ensuing economic crisis in Mexico. The paper argues
that, while earlier devaluation might have been helpful, Mexico's
economic growth strategy in the early 1990s was fraught with internal
inconsistencies that made a collapse of that strategy inevitable.
Especially, Mexico's use of the nominal exchange rate as an "anchor"
to control inflation resulted in a real overvaluation of the peso
in 1990-94, which combined with the liberalization of foreign trade
led to unsustainable current account deficits financed by volatile
inflows of "hot money." Since the devaluation, the Mexican government
is counting on increased net exports and direct foreign investment
to be the "engine of growth," while maintaining tight fiscal and
monetary policies that suppress domestic demand in order to control
inflation. The paper argues that Mexico is trying an economic strategy
based on a redistribution of income from wages to profits, and evaluates
the prospects for this regressive redistributional strategy to succeed
or fail.
CEPA
Working Paper 1996-03
Ajit Singh (University of Cambridge). Pension Reform,
The Stock Market, Capital Formation and Economic Growth: A Critical
Commentary on the World Bank's Proposals. April 1996 (revised).
[Globalization, Labor Markets, and Social Policy No. 2]
Download (120 KB)
Proposing far-reaching
reforms to the pension systems, the World Bank has recently suggested
that the existing pay-as-you-go pension systems in many rich as
well as poor countries, should be replaced by fully funded, mandatory,
preferably private pensions, as the main pillars of the new system.
It argues that these reforms will not only benefit the pensioners,
but also enhance savings, promote capital formation and economic
development. This paper provides a critical examination of the Bank's
theses and concludes that it has adopted a one-sided view of the
relationships between the key critical variables. The proposed reform
may therefore neither protect the old nor achieve faster economic
growth.
JEL classification: E2, I10, G1.
CEPA
Working Paper 1996-02
John Eatwell (University of Cambridge, CEPA). International
Capital Liberalisation: The Impact on World Development. August
1996, revised October 1996 (formerly International Capital Liberalisation:
The Record). [Globalization, Labor Markets, and Social Policy
No. 1]
Download (205 KB)
Given that financial
markets operate as a Keynesian beauty contest and the real economy
has no automatic tendency to converge to full-employment growth,
then the simple rules of the game embodied in the policy positions
believed by market participants to be held by other market participants
will be imposed on the economy. The downside risks involved in flaunting
the rules of the game will create a deflationary bias in government
policy. This is reinforced by the very high costs of debt in a situation
in which real interest rates typically exceed growth rates by a
substantial margin. High interest rates are themselves the outcome
of the attempt to maintain financial stability in a potentially
volatile world. So the post-war goal of "a high and stable level
of employment" is abandoned, and replaced by the goals of "long-term
price stability" - the path to which is defined according to the
rules of the game.
A liberalised,
sophisticated financial system, with a premium placed on the possibility
of exit, is a fragile financial system. That fragility is manifest
in liquidity crises, some of which have substantial reverberations
in reduced real output; in risk aversion in the private sector which
produces a bias toward the short-term, and a corresponding reluctance
to invest for the long-term; in risk aversion in the public sector,
producing a bias toward deflationary policies; and in persistent
demands for greater "flexibility" to increase the possibilities
of exit.
It is often
argued that nothing can be done to change the present system, since
capital flows can overwhelm the actions of any one government. This
is certainly true. But it is equally true that the foundation stones
of the world financial system are the monetary instruments issued
by a small number of major governments. Ultimately, those governments
acting together have the potential to control capital flows. But
that potential will only be manifest if governments themselves have
a different theory of economic policy than the theory which currently
dominates economic and political debate. As Peter Temin has made
clear, the Depression of the 1930s was a product both of the loss
of international financial control and the fact that governments
were convinced of the necessity of deflationary policies. They had
no alternative theory. Without a change of theory by governments,
without an active willingness to pursue expansionary monetary and
fiscal policies, no formal structure of financial controls would
deliver recovery. It took the experience of the Depression and of
World War II economic management to change the theory. In the same
way, it is unlikely today that a significant reassertion of control
over international financial structures is possible without an equally
major change in priorities and analyses by all major governments.
Such seismic changes have historically been associated with the
aftermath of world-wide economic and political disruption.
CEPA
Working Paper 1996-01
Thomas I. Palley (AFL-CIO). The Saving-Investment Nexus:
Why it Matters and How it Works. 1996 (Revised). [Economic Policy
Analysis No. 1]
Download (141 KB)
The causal relation
between saving and investment has momentous implications for fiscal
policy. If saving causes investment, this lends support for policies
of fiscal austerity. Neither the national income accounts nor economic
theory can resolve issues of causality. This paper presents a VAR
analysis that examines the saving - investment relation. The principal
findings are that investment spending is negatively impacted by
personal saving and independent of government saving. Increases
in personal saving have a negative effect on government saving.
These patterns are consistent with the Keynesian paradox of thrift.
JEL classification: E2, E6, H6.
Keywords: saving, investment, fiscal policy, paradox of thrift.
|
