Research Library

1999

A generation ago, Imre Lakatos (1970) expounded a theory of scientific progress in the natural sciences. Whether he meant his theory to apply to social science or not, it can be employed to help social scientists understand whether their own research programs are progressive. Theories of international relations may never meet Lakatos' rigorous standards, but his criteria for progressiveness provide "clear and sensible criteria for the evaluation of scientific traditions" (Keohane 1983/1986: 161). As other essays for this conference have detailed, Lakatos argued that theories are embedded in research programs, which contain inviolable assumptions (the "negative heuristic," or "hard core"), along with observational hypotheses and scope conditions. Research programs also contain positive heuristics—which suggest to scientists what sorts of hypotheses to pursue.

Working Paper 99–07, Weatherhead Center for International Affairs, Harvard University, 1999.
Lopez-de-Silanes, Florencio, Rafael LaPorta, Andrei Shleifer, and Robert W Vishny. 1999. “Investor Protection and Corporate Valuation”. Abstract

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.

Loh, Anthony Alexander. 1999. “A Stripped-Down Conception of Hegemony”. Abstract

This paper juxtaposes and examines two structural conceptions of benign hegemony. It begins with a critique of the prevailing conception of hegemony in the mainstream study of international relations (IR), by focusing specifically on Kenneth N. Waltz'a brand of neorealism, or "structural neorealism." It suggests that this conception is inadequate for comprehending hegemony as a political phenomenon in international politics. To the extent that this shortfall may have profound implications for the post–Cold War world, it must be remedied. Accordingly, the paper suggests that the prevailing conception must fist be stripped-down of its normative contents and reduced to its structural barebones. An attempt is then made to rebuild a unified conception of hegemony in a binary and comparative mode. A more "scientific" conception, the paper argues, must represent and incorporate two dichotomous or structural approaches to hegemony in international politics. The paper then analyzes the general contours of this "corrected" conception of hegemony, its basic properties, and some dependent variables. It closes by probing some of the strategic implications of this study for the post-Cold War security environment.

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.

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.

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.


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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.

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.

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.

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.

Hausmann, Ricardo. 1999. “Exchange Rates and Financial Fragility”. Abstract

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 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 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.

Cooper, Richard N. 1999. “The Asian Crisis: Causes and Consequences”. Abstract

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.

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