This paper investigates the political determinants of government decisions that benefit special interests, and specifically government decisions to deal with banking crises. I find that governments make smaller fiscal transfers to the financial sector and are less likely to exercise forbearance in dealing with insolvent financial institutions the more informed are voters, the closer are elections, and the larger the number of political veto players (conditional on the costs to voters of these policy decisions). The results suggest that policies that might be appropriate in the U.S. context for mitigating the magnitude of banking crises may be less efficacious in settings with other institutional arrangements.
In this concept paper, the Joint Working Group on Israeli–Palestinian Relations—a group of influential Palestinians and Israelis that has been meeting periodically since 1994 to discuss final–status issues in the Israeli–Palestinian negotiations—explores the future relationship between the two societies after the signing of a peace agreement. The paper considers a relationship based on total separation between the two societies and states as neither realistic nor desirable. Instead, it envisages a future relationship based on mutually beneficial cooperation in many spheres, conducive to stable peace, sustainable development, and ultimate reconciliation. The basis for such a relationship must be laid in the process and outcome of the final–status negotiations and in the patterns of cooperation established on the ground.Efforts at cooperation and reconciliation cannot be pursued apart from their political context. The paper argues that the only feasible political arrangement on which a cooperative relationship can be built is a two–state solution, establishing a genuinely independent Palestinian state alongside of Israel. The resolution of final–status issues must be consistent with the sovereignty, viability, and security of both states.The paper then proceeds to describe several models for the relationship between the two states and societies. It advocates a model of close cooperation, but proposes that this relationship be built in stages. The scope and speed of expanding and institutionalizing cooperative activities must be determined by experience—by the extent to which such activities meet the needs of both parties, enhance mutual trust, and reduce inequalities between the parties.Finally, the paper discusses three avenues for promoting a cooperative relationship based on equality, reciprocal benefit, and mutual trust and respect: the development of functional ties and civil–society institutions across national borders; programs directed toward attitude change and stereotype reduction; and efforts to close the economic and political gap between the two societies.
Kelman, Herbert C. "The Future Israeli-Palestian Relationship." Working Paper 99–12, Weatherhead Center for International Affairs, Harvard University, 1999.Download PDF
Foreign-invested enterprises (FIEs) are now a significant force in Chinese economy, as measured by their size, performance, and their encroachment on China's most important industries. This paper challenges many of the conventional views on the factors behind this growth of FIEs. The paper offers an institutional and policy perspective explaining the high Chinese demand for foreign equity capital. The basic contention is that FIEs’ advantages over domestic firms exceed the capital and technological advantages in their possession and these extra–ownership–specific advantages arise from the way the Chinese economic institutions are organized. There are two sources of these advantages. One is that foreign firms provide a range of functions that are under–provided by domestic firms due to regulatory and institutional factors. Another source arises from the fact that premium is conferred on FIEs’ form of organization. Certain advantages, by regulations and policies, are granted to FIEs and thus domestic firms have incentives to acquire these advantages by a process of corporate conversion into FIEs. These two sources of extra–ownership–specific advantages create a higher Chinese demand for foreign equity capital than would otherwise be the case under an alternative institutional and policy context.
Huang, Yasheng. "Why is There So Much Demand for Foreign Equity Capital in China? An Institutional and Policy Perspective." Working Paper 99–04, Weatherhead Center for International Affairs, Harvard University, March 1999.Download PDF
In this paper we lay out the fiscal and financial policies that can help protect economies from the kind of global financial turbulence the world is now experiencing. Exchange rate policies are discussed in a separate paper.
In this paper we collect detailed information on the budget institutions of Latin American countries. We classify these institutions on a "hierarchical"/"collegial" scale, as a function of the existence of constraints on the deficit, and voting rules. We show that "hierarchical" and transparent procedures have been associated with more fiscal discipline in Latin America in the eighties and early nineties.Working Paper 394, Office of the Chief Economist, Inter-American Development Bank, June 2006.
This paper attempts to assess the performance of alternative exchange rate regimes in Latin America relative to the benefits they are theoretically supposed to deliver. We will test empirically whether flexible systems allow for better cyclical management, more monetary autonomy and improved control of the real exchange rate. We find that flexible exchange regimes have not permitted a more stabilizing monetary policy but instead have tended to be more pro–cyclical. In addition, flexible regimes have resulted in higher real interest rates, smaller financial systems and greater sensitivity of domestic interest rates to movements in international rates. We also find that flexible regimes tend to promote wage indexation. We show that the revealed preference of Latin America is to allow very little exchange rate movement, even in periods of large real shocks such as 1998. We explain this preference as a consequence of de facto wage indexation and the high proportion of dollar–denominated financial liabilities. The paper then discusses the problems with fixed exchange rates and reviews the current interest in supra–national currencies, including full dollarization.
This paper asks how do the differences in income, fertility, participation and education come about. The central argument we develop is that the differences within and between countries are to a large extent related to a set of family choices that are strongly influenced by the potential returns to female education in the labor market. Differences in income, fertility, participation and human capital investment are not solely affected by personal characteristics. There are underlying conditions in the Latin American economies that are greater than individuals and families themselves and that shape family decisions. Some of them come from the functioning of labor markets, technological progress, factor endowments, and other factors at the country level. For instance, when the returns to education in the labor market are less differentiated, so that uneducated workers receive relative greater pay compared to educated workers, the differences in fertility, participation and the education of the new generations between poor and rich, are smaller. Therefore, what matters the most for these choices are the returns to unskilled labor. This has strong implications for income inequality.
We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold–up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equilibrium compares with the efficient allocation.
In this paper we analyze three views of the relationship between the exchange rate and financial fragility: (1) the moral hazard hypothesis, according to which pegged exchange rates offer implicit insurance against exchange risk and thereby encourage reckless borrowing and lending; (2) the original sin hypothesis, which emphasizes an incompleteness in financial markets which prevents the domestic currency from being used to borrow abroad or to borrow long term even domestically; and (3) the commitment problem hypothesis, which sees financial crises as resulting from neither moral hazard nor original sin but from the weakness of the institutions that address commitment problems. We examine the evidence on these hypotheses and draw out their implications for exchange–rate policy in emerging markets.
This paper provides an opinionated overview of many of the global economic initiatives currently on the table. We will structure the paper by discussing the different views about what is wrong with the world, or as economists would say, the principal distortions that are out there. This will clarify the logic behind the proposals and provide a means of assessing them.
The paper does not try to answer the question, Why is Turkey, in spite of its evident geopolitical and strategic importance, not yet a member state of the European Union? Instead, it looks more into, What can be done, what should be done, to make Turkey become a member of the European Union?
This paper deals with currency and banking crises, and the possible causes behind these events, in order to recommend a set of warning or leading indicators, policy actions, and structural reforms that are necessary to prevent or to alert policymakers of the eventuality of a crisis. In doing so, it first reviews the literature on currency crises, beginning with the so–called "first generation" models of balance–of payments crises, whose pioneer wrote his influential paper few years before the debt crises erupted in the developing world (Krugman 1979).
The influence of monetary policy over interest rates, and via interest rates over nonfinancial economic activity, stems from the central bank's role as a monopolist over the supply of bank reserves. Several trends already visible in the financial markets of many countries today threaten to weaken or even undermine the relevance of that monopoly, and with it the efficacy of monetary policy. These developments include the erosion of the demand for bank–issued money, the proliferation of nonbank credit, and aspects of the operation of bank clearing mechanisms. What to make of these threats from a public policy perspective in particular, whether to undertake potentially aggressive regulatory measures in an effort to forestall them depends in large part on one's view of the contribution of monetary policy toward successful economic performance.
This essay considers some prescriptions that are currently popular regarding exchange rate regimes: a general movement toward floating, a general movement toward fixing, or a general movement toward either extreme and away from the middle. The whole spectrum from fixed to floating is covered (including basket pegs, crawling pegs, and bands), with special attention to currency boards and dollarization. One overall theme is that the appropriate exchange rate regime varies depending on the specific circumstances of the country in question (which includes the classic optimum currency area criteria, as well as some newer criteria related to credibility) and depending on the circumstances of the time period in question (which includes the problem of successful exit strategies). Latin American interest rates are seen to be more sensitive to US interest rates when the country has a loose dollar peg than when it has a tight peg. It is also argued that such relevant country characteristics as income correlations and openness can vary over time, and that the optimum currency area criterion is accordingly endogenous.
This essay makes two principal points about the role of preferences in explaining international politics. First, for most analytical purposes, preferences must be kept separate from other things–most important, from characteristics of the strategic setting. Otherwise, we are unable to distinguish between the causal role of actors' interests and that of their environment. Second, scholars need to be explicit about how they determine the preferences of relevant social actors. Whether preferences are variables of interest or control variables, it is essential that they be derived clearly and unambiguously.
This paper focuses on Thailand, partly because that is where the dramatic events started, to identify the problems in Thailand that gave rise to its crisis. Important details differ from country to country. Focussing on Thailand will give some flavor of what was happening, with some similarities with other countries.
Was the Cold War a distinctive moment for U.S.–Latin American relations? The answer can be no. The United States had faced military, political, and economic competition for influence in the Americas from extracontinental powers both before and during the Cold War. The United States pursued ideological objectives in its policy toward Latin America before, during, and after the Cold War. And the pattern of U.S. defense of its economic interests was not appreciably different during the Cold War than before. And yet, this article argues that the Cold War was a distinctive moment because ideological considerations acquired primacy over U.S. policy in the region to an extent unparalleled in the history of inter–American relations. As a consequence, this ideologically–driven U.S. policy often exhibited nonlogical characteristics because the instruments chosen to implement U.S. policy were too costly, disproportionate, or inappropriate. The article focuses on those instances when the United States used military force to achieve its aims or when the United States promoted or orchestrated an attempt to overthrow a Latin American government.
Domínguez, Jorge I. "U.S.-Latin American Relations During the Cold War and its Aftermath." Working Paper 99–01, Weatherhead Center for International Affairs, Harvard University, January 1999.Download PDF
This paper will suggest that the responses that have been given by many economists concerning exchange rate policy over the past few decades are inadequate and possibly quite poor advice to decision–makers.
This paper surveys the issues involved in cooperation among nations to slow down the climate change which many believe the extensive consumption of fossil fuels and other aspects of modern life are generating, through emissions of greenhouse gases, especially carbon dioxide. It addresses the possible social and economic impacts of global warming, the elements involved in evaluating the pros and cons of taking steps to reduce those impacts, and the issues involved in engaging most of the world's states, with diverse economic circumstances, in a cooperative endeavor to reduce greenhouse gas emissions. It expresses doubts about the efficacy of a global approach based on national emission targets, such as those set by the 1997 Kyoto Protocol, and favors instead mutually agreed actions, focused on a common emissions tax.
Cooper, Richard. "International Approaches to Global Climate Change." Working Paper 99–03, Weatherhead Center for International Affairs, Harvard University, 1999.Download PDF
This paper explores four factors which we hardly notice from year to year, but which accumulate relentlessly over time, such that by 2015 they will have profoundly transformed the world as we now know it. The four factors are population growth, growth in per capita income, increasing international mobility among national firms and individuals, both made possible and driven by technological changes in transportation and communication, and the aging of existing political leaders (as well as everyone else).