Research Library

2003
Frankel, Jeffrey. 2003. “Experience of and Lessons from Exchange Rate Regimes in Emerging Economies”.Abstract

This paper was written for Monetary and Financial Cooperation in East Asia, Macmillan Press, 2003, in consultation with the Regional Economic Monitoring Unit of the Asian Development Bank, and Takatoshi Ito and Yung Chul Park, coordinators of the ADB core study on exchange rate arrangements. The author would like to thank Sergio Schmukler for preparing Table 3.

The paper reviews recent trends in thinking on exchange rate regimes. It begins by classifying countries into regimes, noting the distinction between de facto and de jure regimes, but also noting the low correlation among proposed ways of classifying the latter. The advantages of fixed exchange rates versus floating are reviewed, including the recent evidence on the trade–promoting effects of currency unions. Frameworks for tallying up the pros and cons include the traditional Optimum Currency Area criteria, as well as some new criteria from the experiences of the 1990s. The Corners Hypothesis may now be "peaking" as rapidly as it rose, in light of its lack of foundations. Empirical evidence regarding the economic performance of different regimes depends entirely on the classification scheme. A listing of possible nominal anchors alongside exchange rates observes that each candidate has its own vulnerability, leading to the author?s proposal to Peg the Export Price (PEP). The concluding section offers some implications for East Asia.

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Desai, Mihir A. 2003. “The Fiscal Impact of High Skilled Emigration: Flows of Indians to the U.S.”.Abstract

Easing immigration restrictions for the highly skilled in developed countries portend a future of increased human capital outflows from developing countries. The myriad consequences of these developments for developing countries include the direct loss of the fiscal contributions of these highly skilled individuals. This paper analyzes the fiscal impact of this loss of talent for a developing country by examining human capital flows from India to the U.S. The escalation of the emigration of highly skilled professionals from India to the U.S is examined by surveying evidence on the changing nature of the Indian–born in the U.S. during the 1990s. The loss of talent to India during the 1990s was dramatic and highly concentrated amongst the prime–age work force, the highly educated and high earners. In order to estimate the fiscal losses associated with these emigrants, this paper first estimates what these emigrants would have earned in India, and then integrates the resulting counterfactual distributions with details of the Indian fiscal system to estimate fiscal impacts. Two distinct methods to estimate the counterfactual earnings distributions are implemented: a translation of actual U.S. incomes in purchasing power parity terms and an income simulation based on a jointly estimated model of Indian earnings and participation in the workforce. The PPP methods indicate that the foregone income tax revenues associated with the Indian–born residents of the U.S. comprise one–third of current Indian individual income tax receipts. Depending on the method for estimating expenditures saved by the absence of these emigrants, the net fiscal loss associated with the U.S. Indian–born resident population ranges from 0.24% to 0.58% of Indian GDP in 2001.

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WCFIA Working Paper 03–01, January 2003.

Levitsky, Steven. 2003. “From Labor Politics to Machine Politics: The Transformation of Party-Union Linkages in Argentine Peronism, 1983?1999”.Abstract

The Argentine (Peronist) Justicialista Party (PJ)** underwent a far–reaching coalitional transformation during the 1980s and 1990s. Party reformers dismantled Peronism?s traditional mechanisms of labor participation, and clientelist networks replaced unions as the primary linkage to the working and lower classes. By the early 1990s, the PJ had transformed from a labor–dominated party into a machine party in which unions were relatively marginal actors. This process of de–unionization was critical to the PJ?s electoral and policy success during the presidency of Carlos Menem (1989–99). The erosion of union influ–ence facilitated efforts to attract middle–class votes and eliminated a key source of internal opposition to the government?s economic reforms. At the same time, the consolidation of clientelist networks helped the PJ maintain its traditional work–ing– and lower–class base in a context of economic crisis and neoliberal reform. This article argues that Peronism?s radical de–unionization was facilitated by the weakly institutionalized nature of its traditional party–union linkage. Although unions dominated the PJ in the early 1980s, the rules of the game governing their participation were always informal, fluid, and contested, leaving them vulner–able to internal changes in the distribution of power. Such a change occurred during the 1980s, when office–holding politicians used patronage resources to challenge labor?s privileged position in the party. When these politicians gained control of the party in 1987, Peronism?s weakly institutionalized mechanisms of union participation collapsed, paving the way for the consolidation of machine politics–and a steep decline in union influence–during the 1990s.

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Moghadan, Assaf. 2003. “A Global Resurgence of Religion?”.Abstract

In recent years and decades, a widespread assumption that the world is experiencing a global rise of religion has persisted. Yet, the hypothesis of a "global resurgence of religion" has not been tested by means of empirical evidence. This study uses statistical time series and crosscountry data to test the hypothesis of "a global religious resurgence," and to assess its scope.

To address this question, the study examines global trends in religious adherence, and measures change of religious behavior and values over time in a multitude of countries spanning across six continents. The study identifies seven criteria by which the degree of religiosity among a certain population can be measured, using time–series and cross–country data. The study also examines other global religious trends, including a comparative overview over the relationship between religion and state in most countries, scanning variables such as the performance of religious parties in elections; preferential treatment of religions; countries with an official state religion; references to religion in constitutions; and countries under Sharia law.

The study concludes that there is ample evidence that the argument of a "global resurgence of religion" can largely be sustained, with the notable exception to this trend being the postindustrial countries—where the trend towards secularization itself, however, is far from consistent.

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Simmons, Beth A. 2003. “Globalization and Policy Diffusion: Explaining Three Decades of Liberalization”.Abstract

One of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world. These policies have affected the lives of millions of people, yet our most sophisticated political economy models do not both temporally and spatially. We hypothesize that this clustering might be due to processes of policy diffusion. We think of diffusion as adequately capture influences on these policy choices. Evidence suggests that the adoption of liberal economic practices is highly clustered resulting from one of two broad sets of forces: one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting. We develop arguments within these broad classes of mechanisms, construct appropriate measures of the relevant concepts, and test their effects on liberalization and restriction of the current account, the capital account, and the exchange rate regime. Our findings suggest that domestic models of foreign economic policy making are insufficient. The evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country's sociocultural peers. We interpret the latter influence as a form of channeled learning reflecting governments' search for appropriate models for economic policy.

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Frankel, Jeffrey. 2003. “Globalization and the Environment”.Abstract

Fears that globalization hurts the environment are not well–founded. A survey reveals little statistical evidence, on average across countries, that openness to international trade undermines national attempts at environmental regulation through a "race to the bottom" effect. If anything, favorable "gains from trade" effects dominate, for measures of air pollution such as SO2 concentrations. Perceptions that WTO panel rulings have interfered with the ability of individual countries to pursue environmental goals are also poorly informed. Recent rulings have in fact confirmed that countries can enact environmental measures, even if they affect trade and even if they concern others? Processes and Production Methods (PPMs), provided the measures do not discriminate among producer countries.

People care about both the environment and the economy. As real incomes rise, their demand for environmental quality rises. This translates into environmental progress under the right conditions–democracy, effective regulation, and externalities that are largely confined within national borders and are therefore amenable to national regulation. Increasingly, however, environmental problems spill across borders. Global externalities include climate change and ozone depletion. Economic growth alone will not address such problems, in a system where each country acts individually, due to the free rider problem. Multilateral institutions are needed, and national sovereignty is the obstacle, not the other way around.

673_frankel_final.pdf

WCFIA Working Paper 03-02, May 2003.

Rodrik, Dani. 2003. “Growth Strategies”.Abstract

This is an attempt to derive broad, strategic lessons from the diverse experience with economic growth in last fifty years. The paper revolves around two key arguments. One is that neoclassical economic analysis is a lot more flexible than its practitioners in the policy domain have generally given it credit. In particular, first–order economic principles–protection of property rights, market–based competition, appropriate incentives, sound money, and so on–do not map into unique policy packages. Reformers have substantial room for creatively packaging these principles into institutional designs that are sensitive to local opportunities and constraints. Successful countries are those that have used this room wisely. The second argument is that igniting economic growth and sustaining it are somewhat different enterprises. The former generally requires a limited range of (often unconventional) reforms that need not overly tax the institutional capacity of the economy. The latter challenge is in many ways harder, as it requires constructing over the longer term a sound institutional underpinning to endow the economy with resilience to shocks and maintain productive dynamism. Ignoring the distinction between these two tasks leaves reformers saddled with impossibly ambitious, undifferentiated, and impractical policy agendas.

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Alford, William P, and Shen Yuanyuan. 2003. “Have You Eaten? Have You Divorced? Debating the Meaning of Freedom in Marriage in China.” Ideas of Freedom in the Chinese World. Palo Alto: Stanford University Press.Abstract

A great deal of discussion about freedom in the People?s Republic of China has proceeded on certain assumptions about the role of the state and about law's place in helping define it. At the heart of these assumptions is the idea that the cause of freedom in China will best be advanced through the state's retrenchment and a concomitant ceding of power to non–state actors, particularly with respect to economic and social matters. This notion is perhaps most obvious in calls for the promotion of greater economic freedom via both the "privatization" of state– owned enterprise and an increasing reliance on market forces, but it also informs the view that such measures are or soon will be leading to a marked growth in political freedom. And it undergirds the conviction of most observers that what is termed the rise of civil society will perforce enhance personal freedom in China. As the noted Chinese scholar Liu Junning observed in a recent essay extolling Hayek, "almost all of those who shape public opinion in China are liberals [as] classical liberalism now dominates China?s intellectual landscape."

Law occupies a prominent position in this vision, being increasingly seen in both academic and policy circles as critical to the attainment for Chinese of fuller economic, political, and social freedoms. In part, the prominence accorded law is attributable to its perceived potential, however imperfectly realized to date in the PRC, to facilitate the above described transfer of power from state to society by limiting the spheres of life over which the former has authority and providing constraints as to the manner in which such authority is to be exercised. No less importantly, law is extolled for the vital role it has to play, once the state has receded, in establishing the proverbial "level playing field" on which a new society is to be grounded. In contrast to the avowedly political and highly particularistic manner in which the Chinese state historically reached into citizens' lives, law is commended for being facilitative, rather than determinative, providing a neutral framework through which citizens, each endowed with the same rights and each entitled to invoke the uniform procedural protection that formal adjudication is intended to provide, may work things out for themselves.

679_haveyoueaten.pdf
Norris, Pippa. 2003. “How Damaging is the Transatlantic Rift?”. Download PDF

Beckfield, Jason. 2003. “Inequality in the World Polity: The Structure of International Organization”.Abstract

Recent research reveals strong effects of involvement in international organizations on state policies, but much of this research downplays inequality in world political participation, and there is only a limited understanding of what explains world-polity ties. Using data on memberships in intergovernmental and international non-governmental organizations (IGOs and INGOs) for 1960 through 2000, this study analyzes inequality in the world polity. IGO ties are fairly evenly distributed, but the level of inequality in INGO ties is as high as the level of world income inequality. Since 1960, inequality in ties to IGOs decreased sharply, but inequality in ties to INGOs remained more stable. A conflict-centered model of the world polity is developed here that explains world political participation as a function of material and symbolic conflict. Rich, core, Western states and societies have significantly more ties to the world polity than do others. Powerful states dominate IGOs less now than they did in 1960, but rich, core, Western societies have grown more dominant in the INGO field.

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Desai, Mihir A. 2003. “Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe”.Abstract

We explore the impact of the institutional environment on the nature of entrepreneurial activity across Europe. Political, legal, and regulatory variables that have been shown to impact capital market development influence entrepreneurial activity in the emerging markets of Europe, but not in the more mature economies of Europe. Greater fairness and greater protection of property rights increase entry rates, reduce exit rates, and lower average firm size. Additionally, these same factors also associated with increased industrial vintage – a size–weighted measure of age – and reduced skewness in firm–size distributions. The results suggest that capital constraints induced by these institutional factors impact both entry and the ability of firms to transition and grow, particularly in lesser–developed markets.

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Frankel, Jeffrey. 2003. “Iraq's Currency Solution? Tie the Dinar to Oil”.Abstract

Well–functioning monetary arrangements are as important as other aspects of the infrastructure, in putting Iraq back on the road of economic development. After the unification of the two kinds of dinars that have been circulating, the next order of business will be to decide what should determine the value of the currency. What exchange rate regime is appropriate for Iraq, at this key juncture in its history?

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Pill, Huw. 2003. “Japan's Bubble: Monetary Stability and Structural Economic Reform.” National Institute for Research Advancement Design Japan Conference.Abstract

In the context of a small monetary DSGE model of the business cycle, this paper investigates the interrelationship between structural economic reform (modeled as the introduction of greater competition in the goods market) and monetary stability (captured by the dynamic stability of the resulting macroeconomic system). After making minor but plausible adjustments to the standard New Keynesian macroeconomic framework, the paper demonstrates that a conventional monetary policy framework, defined by adherence to the so–called Taylor principle, may – contrary to the received wisdom – fail to maintain macroeconomic and monetary stability. The likelihood of such failure increases as structural economic reform is introduced for two reasons: first, greater goods market competition narrows equilibrium mark–ups and thus the leverage monetary policy exerts over cyclical inflation developments; and, second, private sector expectations are subject to non–fundamental shocks that arise from the uncertainty surrounding the effectiveness of structural reform.

675_pillrevision1.pdf
Subramanian, Ajantha. 2003. “Mukkuvar Modernity: Development as a Cultural Identity”.Abstract

In the general elections of 1996, a village of Catholic fishers from the south Indian district of Kanyakumari voted overwhelmingly for the Hindu nationalist Bharatiya Janata Party. In this essay, I explore the cultural politics of development that led to this curious alliance between a group of low caste (Mukkuvar) Catholics and a majoritarian politics that has consistently defined India?s Christians and Muslims as alien threats to the "Hindu nation."

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Martin, Lisa L. 2003. “Multilateral Organizations after the U.S.-Iraq War of 2003”.Abstract

At the end of World War II, the United States found itself in a situation of unprecedented power. The economy of the former hegemonic state, Britain, was decimated by the war. So were the economies of the rest of Western Europe, including Britain?s foremost European economic challenger, Germany. While the Soviet Union presented a growing military threat, in economic terms U.S. power was unchallenged, leaving the United States in a position of hegemony.

Washington responded to this new position by adopting policies of multilateralism. Drawing lessons from the economic catastrophes of the interwar years, leaders in the United States determined that the only way to safeguard U.S. interests was to remain deeply engaged with the rest of the world, rather than turning inwards as after World War I. A major mechanism Washington used to implement this policy of engagement was the creation of multilateral organizations, including the United Nations, the Bretton Woods institutions, NATO, and others.

As the new millennium gets underway, the United States finds itself unexpectedly in a position of unipolarity, with no serious military challengers and economic challengers all facing serious problems of their own. A student of international relations who somehow missed the decades of the 1980s and 1990s would be startled at this turn of events. In the late 1970s and early 1980s, the discussion centered around how declining U.S. power might translate into instability in the international system. The assumption that the United States would continue its relative decline was challenged by some, but widespread.

Anyone comparing U.S. policy in 2003 to that in, say, 1948, would be struck by the contrast. In both periods American power was immense, creating a situation of hegemony or unipolarity. Yet U.S. policy in 2003 did not reflect the ultilateralism of the late 1940s and early 1950s. Rather than creating and strengthening multilateral institutions, the United States turned to unilateral policies, denigrated the entire notion of multilateralism as a principle, and refused to participate in numerous new multilateral ventures such as the International Criminal Court.

This paper begins with the observation of this paradox and builds on it to analyze the future of multilateral organizations. I begin by examining the concept of multilateralism, both in theory and in history. I then turn to an analysis of multilateralism, asking why the United States turned to multilateralism after World War II and evaluating its payoffs. The final section applies the insights developed in the rest of the paper to the future of multilateral organizations. It concludes that the current policy of "ad hoc multilateralism," or turning to multilateral organizations opportunistically, fundamentally misunderstands the nature and motivation for multilateralism. Such a policy is therefore likely to fail, leaving the United States with a stark choice between expensive unilateralism and needing to rebuild its reputation as a reliable participant in multilateral endeavors.

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Simmons, Beth A. 2003. “Pax Mercatoria and the Theory of the State”.Abstract

No idea is more enticing to policymakers and academics alike than the proposition that economic interdependence encourages peaceful international relations. Policymakers are gratified that trade is a policy lever that governments can influence. Academics are encouraged by the (relative) ease of constructing long time series of bilateral cross–border transactions in goods for most countries. On top of this, economists tell us trade is economically efficient. Policymakers, scholars, and consumers should all be thrilled that trade and peace are robustly correlated.

This is why it is essential to submit the pax mercatoria hypothesis to severe scrutiny, both methodologically and theoretically. This chapter does the latter and focuses on one particular theoretical issue to which few scholars have given serious attention: what is the theory of the state that provides a plausible mechanism linking private trade to public conflict behavior? The first section argues that this question deserves attention. The second section outlines three general approaches to state–society relations and discusses the implications of these for empirical research. The third section concludes and calls for research that includes more meaningful tests, informed by more explicit theories of state–society relations.

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In Economic Interdependence and International Conflict edited by Edward Mansfield and Brian M. Pollins. Ann Arbor: University of Michigan Press, 2003.

Robinson, James A. 2003. “The Political Economy of Clientelism”. Download PDF

Rosenthal, Howard, and Erik Berglof. 2003. “The Political Origin of Finance: The Case of Federal Bankruptcy Law in the United States”.Abstract

This paper draws on the legislative history of U.S. bankruptcy law to challenge the influential view that a country's legal origin and mechanism shape investor protection and ultimately financial development and economic growth. Even though the United States has an English legal origin, uses common law, and copied its first federal bankruptcy law from English law, the current U.S. bankruptcy regimes is diametrically opposite to that of the U.K. We show that the American experience can only be understood in the perspective of politics. During the formative 19th century legislative activity was strongly related to general economic conditions: every major reform attempts came in severe economic downturns. Legislative proposals only led to adoption of laws when there was a conservative lock on Congress and the Presidency. Moreover, an in–depth analysis of voting behavior during two critical episodes shows that congressional voting on bankruptcy was strongly influenced by general ideological positions, i.e., how legislators vote on other issues. In fact, even though we show that banking, but not commercial, interests influence outcomes, ideology is a much more important factor explaining voting behavior. We argue that political origins and ideological divides are grossly overlooked in our understanding of the determinants of financial (and legal) development. The ideologically charged congressional debate over bankruptcy reform at the turn of the twenty–first century echoes our historical analysis.

661_berglofrosenthal.pdf
Robinson, James A. 2003. “Politician-Proof Policy?”.Abstract

In this paper I discuss the nature of the political constraints that the World Bank faces in delivering basic services to the poor. The main problem arises because the Bank has to work through domestic governments which have political aims different from helping the poor. The conceptual approach attractive to economists and central to the WDR2004 is the notion of politician proofing . Given that political incentives derail good policies, how can those policies be politician–proofed? I argue that evidence and theory suggests that such an approach is ultimately futile, basically because we simply do not understand the relevant political incentives. I discuss alternative policy strategies and conclude that what is required is a much more fundamental assessment of what type of political equilibria deliver services to the poor. As I illustrate with the case of Botswana, once the political equilibrium is right, everything goes right and politician proofing in redundant.

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Martin, Lisa L. 2003. “The President and International Commitments: Treaties as Signaling Devices”.Abstract

U.S. presidents can choose the form of international agreements that they negotiate. Using the constitution?s Article II procedure to gain ratification of a formal treaty is a costly and time–consuming endeavor, so presidents frequently turn to executive agreements that do not require approval by 2/3 of the Senate. Given this alternative, why do presidents ever choose the Article II procedure? This paper argues that treaties serve as a costly signal of intent to comply with the terms of international agreements. The choice between treaties and executive agreements is therefore a strategic executive decision that takes into account the anticipated reactions of other states. A signaling model predicts that high–benefit agreements should take the form of treaties. The predictions of purely domestic models of a positive relationship between the reliability of a government and the probability that an agreement is a treaty should not hold. These propositions are tested on a large dataset of U.S. international agreements between 1980 and 1999.

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