This paper explores the impact of political economy factors on exchange rate policy in Latin America. It studies the determinants of the choice of exchange rate regime in Latin America, placing special emphasis on political, institutional and interest group explanations. The presumption is that differences in institutional and political settings, as well as differences in economic structure, can have an effect on the choice of regime and, more generally, on exchange rate policy. In addition to these structural elements, the paper examines whether such political events as elections and changes in government affect the pattern of nominal and real exchange rates.(Revised version of "Politics and Exchange Rates: A Cross-Country Approach for Latin America")
In The Currency Game: Exchange Rate Politics in Latin America, edited by Jeffry Frieden and Ernesto Stein. Baltimore: Johns Hopkins University Press, 2001.Download PDF
This book reports the results of our research on the role of special interest groups in the process of trade policy formation. However, there is little that is unique about this particular type of policy. The methods that interest groups use to affect trade outcomes are the same as the ones they use to influence a myriad of other policy decisions, including both economic issues and issues outside of the economic realm.
This paper develops an explicitly stochastic new open economy macroeconomics' model, which can potentially be used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes. A crucial feature is that we do not simplify by assuming certainty equivalence for producer price setting behavior. Our framework also provides a sticky–price alternative to Lucas's (1982) exchage rate risk premium model. We show that the level risk premium' in the exchage rate is potentially quite large and may be an important missing fundamental in empirical exchange rate equations. As a byproduct analysis also suggests an intriguing possible explanation of the forward premium puzzle.
The concept of legitimacy has fascinated me for many years. Again and again, particularly over the course of the 1960s, I felt that the concepts of legitimacy and illegitimacy provided the organizing principles that helped explain various phenomena with which I was concerned.
My colleagues’ and my work as scholar–practitioners has focused on analysis and resolution of protracted, seemingly intractable conflicts between national, ethnic, or other kinds of identity groups, best exemplified by intercommunal conflicts, such as those in Cyprus, Northern Ireland, Sri Lanka, Bosnia, and apartheid South Africa. My own most intensive and extensive experience, over the past quarter–century, has been with the Israeli–Palestinian conflict, and my analysis draws primarily on that experience.Using the Israeli–Palestinian conflict as a case in point, this chapter examines the way in which issues of national identity can exacerbate an international or intercommunal conflict and the way in which such issues can be addressed in conflict–resolution efforts. The chapter starts out with a brief history of the Israeli–Palestinian conflict, setting the stage for the identity issues at the heart of the conflict. It then proceeds to describe the struggle over national identity between the two people, which has led them to perceive their conflict in zero–sum terms, with respect to not only territory and resources but also national identity and national existence. Next, it argues that long–term resolution of this and similar deep–rooted conflicts requires changes in the groups’ national identities, such that affirmation of one groups’ identity is no longer predicated on negation of the other’s identity. Such identity changes are possible as long as they leave the core of each group’s national identity intact. Furthermore, the chapter proceeds to argue, such changes need to be and can be "negotiated" between the two groups. One venue for negotiating identity, described in the next section, is provided by the problem–solving workshops between Israeli and Palestinian elites that my colleagues and I have convened for many years. Finally, the paper concludes with an illustration of the possibilities and limits of the negotiation of identity, based on a joint Israeli–Palestinian exploration of the problem of Palestinian refugees.
In a comparative study of Japanese and European trade policy, this paper explains how the institutional context of negotiations affects political outcomes. I examine two pathways by which negotiation structure promotes liberalization: issue linkage and legal framing. Broadening stakes through issue linkage mobilizes domestic lobbying for liberalization. Use of GATT/WTO trade law in dispute settlement legitimizes arguments favoring liberalization. This study on international institutions addresses the theoretical debates in the field regarding how interdependence and the legalization of international affairs change the nature of state interaction. I test my argument in the sensitive area of agricultural trade policy. Statistical analysis of U.S. negotiations with Japan and the EU from 1970 to 1999 indicates that an institutionalized issue linkage makes liberalization more likely for both Japan and Europe. This is the most important source of leverage for bringing major policy reform. However, the effect of GATT/WTO legal pressure interacts with the political context. I conclude that domestic political processes make Japan more responsive to pressure from trade rules than the European Union.
Davis, Christina. "Linkage and Legalism in Institutions: Evidence From Agricultural Trade Negotiations." Working Paper 01–01, Weatherhead Center for International Affairs, Harvard University, February 2001.Download PDF
This paper responds to findings by Acemoglu, Johnson and Robinson (2000) that suggest weak institutions, but not physical geography and correlates like disease burden, explain current variation in levels of economic development across former colonies. Using similar data and expanding the sample of countries analyzed, our regression analysis shows that both institutions and geographically–related variables such as malaria incidence or life expectancy at birth are strongly linked to gross national product per capita. We argue that the evidence presented in Acemoglu, Johnson and Robinson is likely limited by the inherently small sample of ex–colonies and the limited geographic dispersion of those countries.
Most recent cross–country analyses of economic growth have neglected the importance of physical geography. This paper reviews the distinctive development challenges faced by economies situated in tropical climates. Using geographic information system (GIS) mapping, the paper presents evidence that production technology in the tropics has lagged behind temperate zone technology in the two critical areas of agriculture and health, and this in turn opened a substantial income gap between climate zones. The difficulty of mobilizing energy resources in tropical economies is emphasized as another significant contributor to the income gap. These factors have been amplified by geopolitical power imbalances and by the difficulty of applying temperate–zone technological advances in the tropical setting. The income gap has also been amplified because poor public health and weak agricultural technology in the tropics have combined to slow the demographic transition from high fertility and mortality rates to low fertility and mortality rates. The analysis suggests that economic development in tropical ecozones would benefit from a concerted international effort to develop health and agricultural technologies specific to the needs of the tropical economies.
Malaysia recovered from the Asian financial crisis swiftly after the imposition of capital controls in September 1998. The fact that Korea and Thailand recovered in parallel has been interpreted as suggesting that capital controls did not play a significant role in facilitating Malaysia?s rebound. However, the financial crisis was deepening in Malaysia in the summer of 1998, while it had significantly eased up in Korea and Thailand. We employ a time–shifted differences–in–differences technique to exploit the differences in the timing of the crises. Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market.
We use data on imports of computer equipment for a large sample of countries between 1970 and 1990 to investigate the determinants of computer-technology adoption. We find strong evidence that computer adoption is associated with higher levels of human capital and with manufacturing trade openness vis-a-vis the OECD. We also find evidence that computer adoption is enhanced by high investment rates, good property rights protection, and a small share of agriculture in GDP. Finally, there is some evidence that adoption is reduced by a large share of government in GDP, and increased by a large share of manufacturing. After controlling for the above-mentioned variables, we do not find an independent role for the English- (or European-) language skills of the population.
The continuing deadly escalation of the Israeli-Palestinian conflict threatens to become an all-out war with devastating consequences for both communities. What makes this situation particularly tragic is the fact that the formula and the will for negotiating a mutually satisfactory agreement to end the conflict remain in place.The negotiators were able to come very close to agreement in Taba last January, and the two populations are still open to a negotiated agreement if they could be convinced that the other side can be trusted.The breakdown in negotiations and the resulting cycle of violence led to the reemergence on both sides—in classical mirror-image fashion—of the belief that there is no negotiating partner on the other side, that “they” do not want to make the compromises required for peace, and that the only language “they” understand is force. Counteracting these beliefs requires a clear endorsement by the leadership on each side of a political solution that would meet the basic needs of the other. The dynamics of escalating violence prevent the leaders from speaking the words and taking the actions that would reassure the other, lest they be seen as weak and yielding to violence. Moreover, Ariel Sharon's strategy and Yasser Arafat's tactics make it particularly difficult for them to make an unambiguous commitment, in advance, to the kind of political outcome on which the resumption of fruitful negotiations now depends.Under the circumstances, outside parties, especially the United States, can make a unique contribution, not only by encouraging the parties to resume serious negotiations but by offering a vision of the broad outlines of the final agreement to which these negotiations must be directed. Following up on Secretary of State Colin Powell's constructive policy address, this vision should be based on the historic compromise that was implicit in the Oslo agreement.Anchored in UN Resolutions 242 and 338, this compromise has the added advantage of international legitimacy. It is predicated on an agreement to end the conflict by sharing the land both peoples claim, through the establishment and peaceful coexistence of two states, in which the two peoples can fulfill their respective rights to national self-determination, give political expression to their national identities, and pursue independent, secure, and prosperous lives.The vision of such a historic compromise must spell out three implications for resolving outstanding issues in the conflict. Each of these implications is painful to one or both parties, but they follow directly from the essence of the compromise.First, the historic compromise must enable Palestinians to establish an independent, sovereign state consisting of the West Bank and the Gaza Strip. To be viable and governable, the state must have contiguous territory within each of its two units and a secure corridor between them. It cannot, therefore, accommodate Israeli settlements with extraterritorial rights, a separate network of roads, and protection by Israeli forces.Second, the historic compromise implies Palestinian acceptance of the legitimacy of Israel as a Jewish-majority state (with full democratic rights for its Arab minority). Therefore, to maintain its Jewish character and its cohesion, Israel cannot accommodate an automatic, large-scale return of Palestinian refugees to the country.Third, the historic compromise calls on the two peoples to share Jerusalem, as an open city, containing the capitals of both states and ensuring full access to the holy sites of all religious communities.Within the broad parameters of these three principles, it is necessary and possible to negotiate mutual accommodations central to the narratives and the internal cohesion of the two societies. Thus, on the issue of settlements, negotiations need to take cognizance of the domestic turmoil that dismantling large numbers of settlements would create for Israel and consider exchanging small segments of the West Bank that have a heavy concentration of Israeli settlers for Israeli territory of equal size and value.On the issue of refugees, recognizing its centrality to the Palestinian identity and narrative, negotiations need to agree on language whereby Israel would acknowledge its share of responsibility and express regret for the plight of the refugees and on a comprehensive program of resettlement and compensation for refugees, including return of a limited number to Israel. On the issue of Jerusalem, negotiations need to work out arrangements for sharing sovereignty and use of both holy sites and public spaces vital to both communities and for providing governance, security, and municipal services on a citywide basis.Formulas for dealing with many of these issues in a mutually satisfactory way have already been explored in previous negotiations, although further efforts are required to shape them into a comprehensive package. That work must and can be done by the parties themselves. Where the United States can make an indispensable contribution is in bringing the parties back to the negotiating table by offering a broad vision of the historic compromise toward which the negotiations must be directed.
Market exchange rates can move around a lot, particularly but not only around currency crises. For this reason, they can properly be averaged over several years for international comparisons. However, the Chinese yuan has been fixed at roughly 8.3/dollar since 1994. In my view it is modestly undervalued, as evidenced by the steady growth of China's foreign exchange reserves, the result of central bank market intervention to keep the yuan from appreciating. China has also had a significant trade surplus in recent years. However, it still maintains controls on outflows of domestic capital. And it is about the enter the WTO, following which under the access agreements China must reduce its import barriers much more than its trading partners do. Many Chinese are fearful of withering foreign competition. If these fears prove to be valid and widespread, the yuan might have to depreciate over the next five years, although my guess is the required depreciation will be modest, e.g. 10-15 percent. Moreover, WTO membership may result in more inbound foreign investment, thus mitigating the required depreciation or even eliminating it altogether. The bottom line is this: the market exchange rate provides a much better basis for converting Chinese GDP into dollars than does some artificially constructed ppp rate. Following the pattern of Japan and Korea, the real exchange rate of the rmb might appreciate over time, as China develops, but that process will occur at a modest rate, over decades.
Paper presented at Congress public hearing "Chinese Budget Issues and the Role of the PLA in the Economy," December 7, 2001.Download PDF
This paper considers policies of the industrialized countries, as they pertain to crises in emerging markets. These fall into three areas: (1) their own macroeconomic policies, which determine the global financial environment; (2) their role in responding to crises when they occur, particularly through rescue packages, which have three components —reforms in debtor countries, public funds from creditor countries, and private sector involvement; and (3) efforts to reform the international financial architecture, with the aim of lessening the frequency and severity of future crises. A recurrent theme is the tension between mitigating crises that occur, and the moral hazard that such efforts create in the longer term. In addition to reviewing these three areas of policy, we consider the institutions through which the more powerful countries exercise their influence. We conclude with a discussion of the debate over the sins of the International Monetary Fund, and proposals for reform.
The terrorist attacks that destroyed the World Trade Center and damaged the Pentagon triggered the most rapid and dramatic change in the history of U.S.foreign policy. On September 10, 2001, there was not the slightest hint that the United States was about to embark on an all–out campaign against "global terrorism." Indeed, apart from an explicit disdain for certain multilateral agreements and a fixation on missile defense, the foreign policy priorities of George W. Bush and his administration were not radically different from those of their predecessors. Bush had already endorsed continued NATO expansion, reluctantly agreed to keep U.S. troops in the Balkans, reaffirmed the existing policy of wary engagement with Russia and China, and called for further efforts to liberalize global markets. The administration's early attention focused primarily on domestic issues, and newinternational initiatives were notably absent.This business–as–usual approach to foreign policy vanished on September 11. Instead of education reform and tax cuts, the war on terrorism dominated the administration's agenda. The United States quickly traced the attacks to al–Qaeda — the network of Islamic extremists led by Saudi exile Osama bin Laden — whose leaders had been operating from Afghanistan since 1996. When the Taliban government in Afghanistan rejected a U.S. ultimatum to turn over bin Laden, the United States began military efforts to eradicate al–Qaeda and overthrow the Taliban itself. The United States also began a sustained diplomatic campaign to enlist foreign help in rooting out any remaining terrorist organizations "with global reach." U.S.officials emphasized that this campaign would be prolonged and warned that military action against suspected terrorist networks might continue after the initial assault on al–Qaeda and its Taliban hosts.This article analyzes how the campaign against global terrorism alters the broad agenda of U.S.foreign policy. I focus primarily on the diplomatic aspects of this campaign and do not address military strategy, homeland defense, or the need for improved intelligence in much detail. These issues are obviously important but lie outside the bounds this essay.I proceed in three stages. The first section considers what the events of September 11 tell us about the U.S. position in the world and identifies four lessons that should inform U.S. policy in the future. The second section explores how the campaign on terrorism should alter the foreign policy agenda in the near–to–medium term: What new policies should the United States pursue, and what prior goals should be downgraded or abandoned? The third section addresses the long–term implications, focusing on whether the United States will be willing to accept the increased costs of its current policy of global engagement. I argue that this decision will depend in part on the success of the current campaign, but also on whether the United States can make its dominant global position more palatable to other countries.Published in International Security 26, no. 3 (Winter 2001/02): 56-78.
This article introduces a theory of ethnic war. It argues that the likelihood of ethnic violence is largely a function of how the principal antagonists—a state and its dissatisfied ethnic minority—think about territory. Attempts to negotiate a resolution short of war will fail when: (1) the ethnic minority demands sovereignty over the territory it occupies, and (2) the state views that territory as indivisible. Ethnic war is less likely to break out if only one of these conditions is met, and very unlikely if neither condition is met. The article first introduces a theory to explain ethnic war. It then presents a statistical analysis of the theory's key variables and tests the theory's causal logic by comparing Moscow's interactions with Tatarstan and with Chechnya. The article concludes with three implications: ethnic groups are rational; that certain settlement patterns will not be amenable to outside intervention; and partition may not be a good policy option to end violence.
Toft, Monica Duffy. "Indivisible Territory and Ethnic War." Working Paper 01–08, Weatherhead Center for International Affairs, Harvard University, December 2001.Download PDF
We study the organization of federations – or international unions – which decide together the provision of certain public goods. The benefit of centralization depends on the internalization of the spillovers, that of decentralization on the adaptability to local differences. We individuate as an optimal institutional design a form of fiscal federalism based on decentralization of expenditures and a system of subsidies and transfers between countries. Since this solution can be politically unfeasible, we study institutional compromises between a centralized federation and a decentralized one. "Flexible unions" and federal mandates in which both the state and federal levels are involved in providing public goods are typically superior to complete centralization and politically feasible. Finally, we study the effects of a qualified majority voting rule in a centralized system: we find that it can be a useful device to correct a bias toward "excessive" union–level activism.
We construct a set of indicators to measure the policy–making role of the European Union (European Council, Parliament, Commission, Court of Justice, etc.), in a selected number of policy domains. Our goal is to examine the division of prerogatives between European institutions and national ones, in light of the implications of normative models and in relation to the preferences of European citizens. Our data confirm that the extent and the intensity of policy–making by the EU have increased sharply over the last 30 years. Such increase has taken place at different speeds, and to different degrees, across policy domains. In recent times the areas that have expanded most are the most remote from the EEC's original mission of establishing a free market zone with common external trade policy. We conjecture that the resulting allocation may be partly inconsistent with normative criteria concerning the assignment of policies at different government levels, as laid out in the theoretical literature.
This article starts from a very simple (and unoriginal) premise: actors who enter into a social interaction rarely emerge the same. For mainstream international relations theories this is at one and the same time an uncontroversial statement and a rather radical one. It is uncontroversial because mainstream IR accepts that social interaction can change behavior through the imposition of exogenous constraints created by this interaction. Thus, for instance, neorealists claim that the imperatives of maximizing security in anarchical environment tends to compel most states most of the time to balance against rising power. Contractual institutionalists also accept that social interaction inside institutions can change behavior (strategies) in cooperative directions by altering cost–benefit analyses as different institutional rules act on fixed preferences.
The UK political system has long exemplified ?majoritarian? or ?Westminster? government, a type subsequently exported to many Commonwealth countries. The primary advantage of this system, proponents since Bagehot have argued, lie in its ability to combine accountability with effective governance. Yet under the Blair administration, this system has undergone a series of major constitutional reforms, perhaps producing the twilight of the pure Westminster model. After conceptualizing the process of constitutional reform, this paper discusses two important claims made by those who favor retaining the current electoral system for Westminster, namely that single–member districts promote strong voter–member linkages and generate greater satisfaction with the political system. Evidence testing these claims is examined from comparative data covering 19 nations, drawing on the Comparative Study of Electoral Systems. The study finds that member–voter linkages are stronger in single member than in pure multimember districts, but that combined districts such as MMP preserve these virtues. Concerning claims of greater public satisfaction under majoritarian systems, the study establishes some support for this contention, although the evidence remains limited. The conclusion considers the implications of the findings for debates about electoral reform and for the future of the Westminster political system.
The "new economy" has become a buzzword to characterize the American economy, with positive connotations but imprecise meaning. Sometimes it is used to refer only to selected high technology sectors, specifically computers, semiconductors, software, and telecommunications. But usually the term implies significant changes in the US economy as a whole. At its most dramatic, the term suggested that the traditional business cycle has been banished, inflation and unemployment have been brought forever under control, US long–term growth rates have increased significantly, and the high–value stock market was not over–valued and indeed would continue to rise. More modestly, it suggests that the structure of the US economy has changed fundamentally, with the implication, inter alia, that monetary and fiscal measures affect the economy differently from the way they did in the past. Finally, it suggests that US productivity growth has returned to, or at least toward, the high levels it enjoyed in earlier years, before the slowdown of the mid–1970s. This paper will discuss the factual bases for conjecturing that the United States might indeed have a "new economy," review the controversies and evidence surrounding that claim, and suggest how the emergence of a "new economy," if indeed there is one, might affect economies elsewhere in the world, including the Asia–Pacific region.