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 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.
We present a model of the effects of legal protection of minority shareholders and of cash flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 371 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders, and weaker evidence of the benefits of higher cash flow ownership by controlling shareholders for corporate valuation.
Ethnicity plays an ambiguous role in the great transformation. On the one hand, ethnicity creates: by providing incentives that organize the flow of resources across generations, it provides the capital for urban migration and the acquisition of skills for industrial employment. On the other hand, ethnicity destroys: ethnic conflict leads to costly acts of violence. Using data drawn largely from Africa, this paper explores the two faces of ethnicity. In so doing, it finds that the presumed link between ethnicity and violence is more complex and less threatening than most assume. Those who claim a straightforward link are making an elementary error in the reading of tabular data.
Working Paper 99–11, Weatherhead Center for International Affairs, Harvard University, October 1999.
This paper examines the regional distribution of public employment in Italy. It documents two sets of facts. The first is the use of public employment as a subsidy from the North to the less wealthy South. We calculate that about half of the wage bill in the South of Italy can be identified as a subsidy. Both the size of public employment and the level of wages are used as a redistributive device. The second set of facts concerns the effects of a subsidized public employment on individuals? attitudes toward job search, education, "risk taking" activities etc. Public employment discourages the development of market activities in the South.
During the past two decades or so, capital controls have been lifted, national capital markets have been liberalized and international capital markets have exploded among the advanced industrial economies and beyond. As major players with significant stakes in the smooth operation of international capital markets, the United States and Europe have common interests in the emergence of a regulatory framework that enhances market stability, minimizes systematic risks, and allows for the efficient operation of markets. Yet despite the growth in cross border capital movements, regulatory cooperation is at times plagued by differences in national approaches and preferences, difficulties coordinating rules where multiple regional or international organizations are involved, and regulators' reluctance to cooperate fully with foreign jurisdictions... A single chapter cannot do justice to the range of rules and agreements that have been made among the banking and securities regulators of Europe and America over the past decade. Rather than strive for exhaustiveness, this chapter selects three issue areas that illustrate particular dynamics of rule development: capital adequacy standards for internationally active banks; anti–money laundering efforts; and international accounting standards for foreign listings on local stock exchanges. There are two key dimensions that these cases illustrate: the problem of defection (which demands stronger rules of surveillance and sanction than mere coordination problems), and the issue of the scope of agreement (systematic problems demand multilateral solutions).
This paper investigates private–interest, public–interest, and political–institutional theories of regulatory change to analyze state–level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank–dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branch–ing deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.
From the Quarterly Journal of Economics 114 (November 1999): 1437-67Download PDF
I want to take advantage of some of the gaps in the literature to propose an argument about realpolitik–as–ideology that explores variation in the intensity or hardness of realpolitik as a function of variation in the requirements for the legitimation of power inside a social group. Specifically, I want to make the following related arguments, moving from least to most controversial: ? Regime legitimation involves, among other things, the construction of a ?national identity? among the members of a society. ? Identity construction rests on establishing and perpetuating differences between the ingroup and all other outgroups. ? Foreign policy is a process in which differences between a sovereign nation–state ingroup and a sovereign nation state outgroup are (re)created. ? Foreign policy, therefore, is critical for identity construction and thus for legitimation. ? When state elites come to believe their legitimacy is declining or under challenge foreign policy will be a key tool/process used to intensify ingroup identity inside the nation state. ? Foreign policy strategies will be both positive (e.g. designed to cue pride and superiority in being a member of the ingroup) and negative (e.g. designed to cue fear and disdain towards outgroups). ? The specific content of these positive and negative strategies will depend on the specific, contingent contents of national identity.
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 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.
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.
We present a simple theory of the quality of elected officials. Quality has (at least) two dimensions: competence and honesty. Voters prefer competent and honest policymakers, so high–quality citizens have a greater chance of being elected to oce. But low–quality citizens have a iacomparative advantageli in pursuing elective oce, because their market wages are lower than the market wages of high–quality citizens (competence), and/or because they reap higher returns from holding oce (honesty). In the political equilibrium, the average quality of the elected body depends on the structure of rewards from holding public oce. Under the assumption that the rewards from once are increasing in the average quality of once holders there can be multiple equilibria in quality. Under the assumption that incumbent policymakers set the rewards for future policymakers there can be path dependence in quality.Discussion Paper 134, Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis, 2000.
This study, conducted during the 1998–99 academic year at Harvard University, takes a look at the foreign affairs landscape on the eve of the new millennium. Its emphasis is on examining the challenges the Department of State faces in applying updated information technology (IT) and related organizational restructuring to sustain its leadership in managing foreign affairs on behalf of the secretary of state and the president. The study is based on academic research at Harvard, close scrutiny of two reports done on State in the fall of 1998, as well as the Department's own plan for improving its IT capabilities during the first five years of the 21st century. It also includes findings from a large number of interviews with officials in Washington at the State Department, the Department of Defense, and the Central Intelligence Agency, and at overseas posts (Ottawa, Paris, Lyon, Vienna and Frankfurt).
The focus of this paper is to elaborate on the issue of economic cooperation and integration within the framework of the Association of Southeast Asian Nations (ASEAN). The opportunities and challenges facing Vietnam in its regional economic cooperation and integration will also be discussed.
One of China's chief problems at this point is that, in its desire to bring about economic development while retaining political control, Party leaders are not sure how tolerant they can be, while the Chinese people, on the other hand, do not know what individual activities are accepted at a any given time. Since 1978 and throughout China=s opening to the West, Chinese leaders have encouraged the people to achieve economic prosperity and have even promoted private ownership, whereas social activities have been suppressed. The latest confrontation in China occurred in late 1998, when President Jiang Zemin denounced attempts to found an opposition party and made clear that AEconomic reforms were not a prelude to Western style multiparty democracy.@5 Also the Tiananmen Square incident in 1989 destroyed much of the internal and international trust that had been created during the previous ten years. This kind of rough handling is contrary to the people=s standpoint; many of them, especially those educated abroad, can compare both the political atmosphere and the Party's promises about "socialistic freedom" with their experiences in other countries.
Terrorism is a significant threat to U.S. national interests. To counter this threat U.S. policymakers have used a variety of options over the past thirty years, including political–diplomatic measures, economic sanctions, a sustained law enforcement effort, and the periodic use of military force. Of all the tools available to the U.S. in its struggle against terrorism, none has been as controversial as military force, due to the potential for deaths to innocent civilians and other collateral damage, casualties to U.S. servicemen, and other potential political risks. Mindful of these risks, this paper examines the utility of using military force against terrorism based on an analysis of three case studies: U.S. air strikes against Libya in 1986, U.S. cruise missile strike against Iraq in 1993, and cruise missile strikes against Sudan and Afghanistan in 1998. This analysis examines the military, political, and strategic results from each of the cases, and based on this analysis, concludes that military force is an essential and productive component of the U.S. strategy to contain terrorism.
Critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies. Supporters argue that foreign aid can be used to reward good governments. This paper documents that there is no evidence that less corrupt governments receive more foreign aid. This result holds for the allocation aid as well as for debt relief and it is robust across different corruption measures and for different time periods. Thus, there is no evidence that the allocation of aid or debt relief was targeted to the less corrupt countries even in recent periods. As to the dynamics of the relationship between foreign aid and corruption we find some indication that increases in aid are associated with contemporaneous increases in corruption, a result that is supportive of the so called "voracity effect".
Failure to cooperate for mutual benefit does not necessarily signal ignorance or irrationality or even malevolence, as philosophers since Hobbes have underscored. Social scientists have lately analyzed this fundamental predicament in a variety of guises: the tragedy of the commons; the logic of collective action; public goods; the prisoners' dilemma. In all these situations everyone would be better off if everyone could cooperate. In the absence of coordination and credible mutual commitment, however, everyone defects, ruefully but rationally, confirming one another's melancholy expectations.
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