Commentary : demographic changes and international factor mobility

Population

Latin America and Foreign Capital in the Twentieth Century: Economics, Politics, and Institutional Change

Latin America began the twentieth century as a relatively poor region on the periphery of the world economy. One cause of a low level of income per person was capital scarcity. Long run growth via capital deepening requires either the mobilization of domestic capital through savings, or large inflows of foreign capital. Latin America's capital inflows were large by global standards at the century's turn, and even up to the 1930s. But after the 1930s, Latin America was not so favored by foreign capital as compared with other peripheral regions for example, the Asian economies. The Great Depression is conventionally depicted as a turning point in Latin America for commercial policy and protectionism, thus marking the onset of import substitution and a long-run increase in barriers in international goods markets. However, this paper argues that policy responses in the 1930s, and subsequent decades of relative economic retardation, can be better understood as the cause and effect of the creation of long-run barriers in international capital markets. To support this notion, I discuss the quantitative extent of these barriers and their effects on economic growth. As for causality, I argue that the political economy of institutional changes in the 1930s in the periphery might be understood in similar terms to those economic historians have used to discuss the macroeconomic crisis in the core. Such a political-economy model might thus have universal (rather than core-specific) use. It might predict the 'reactive' and 'passive' responses by periphery countries to external shocks, and the persistence of such shocks in the postwar period. In conclusion, I touch on the important implications of these ideas for the current situation in Latin America, where recent policy reforms aim to undo the last sixty years of isolation and reintegrate Latin America into the global economy.

A Century of Purchasing-Power Parity

This paper investigates purchasing-power parity (PPP) since the late nineteenth century. I collected data for a group of twenty countries over one hundred years, a larger historical panel of annual data than has ever been studied before. The evidence for long-run PPP is favorable using recent multivariate and univariate tests of higher power. Residual variance analysis shows that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer halflives) of deviations in such regimes, but is due to the larger shocks to the real-exchange rate process in such episodes. In the course of the twentieth century there was relatively little change in the capacity of international market integration to smooth out real exchange rate shocks. Instead, changes in the size of shocks depended on the political economy of monetary and exchange-rate regime choice under the constraints imposed by the trilemma.

Foreign Capital in Latin America in the Nineteenth and Twentieth Centuries

This paper examines the history of foreign investment in Latin America in the two centuries since independence. Investment flows to the region were sometimes large and always volatile. Symptoms of overborrowing, sudden stops, debt, default and crises have been evident from the beginning. In general the economies in the hemisphere struggled for most of the nineteenth century to develop reputations for macroeconomic stability and sound finance, and foreign capital was thus repelled for the long periods. In the twentieth century, most of the region, like the rest of the world, turned inward and against foreign capital markets, a policy trend that emerged in the interwar period and has only recently begun to reverse. These historical perspectives shed light on the region's current relative isolation and its future economic challenges.

Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price

The PPP puzzle is based on empirical evidence that international price differences for individual goods (LOOP) or baskets of goods (PPP) appear highly persistent or even non-stationary. The present consensus is these price differences have a half-life that is of the order of five years at best, and infinity at worst. This seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons, typically days or weeks. However, current empirics rely on a particular choice of methodology, involving (i) relatively low-frequency monthly, quarterly, or annual data, and (ii) a linear model specification. In fact, these methodological choices are not innocent, and they can be shown to bias analysis to-wards findings of slow convergence and a random walk. Intuitively, if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it. If we suspect arbitrage costs are high enough to produce a substantial band of inaction' then a linear model will fail to support convergence if the process spends considerable time random-walking in that band. Thus, when testing for PPP or LOOP, model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets.

Globalization, Trade, and Development: Some Lessons From History

Recent research in international economic history has opened up new lines of enquiry on the origins of globalization, as well as its causes and consequences. Such findings have the potential to inform contemporary debates and this paper considers what lessons this body of historical work has for our current understanding of the linkages between trade and development.

The Purchasing Power Parity Debate

Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it was first advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than thirty years, a distinct reversion in economic thought.

Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective

Great attention is now being paid to global imbalances, the growing U.S. current account deficit financed by growing surpluses in the rest of the world. How can the issue be understood in a more historical perspective? We seek a meaningful comparison between the two eras of globalization: "then" (the period 1870 to 1913) and "now" (the period since the 1970s). We look at the two hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present. We consider two of the most controversial and pressing questions in the current debate. First, are current imbalances being sustained, at least in part, by return differentials? And if so, is this reassuring? Second, how will adjustment take place? Will it be a hard or soft landing? Pessimistically, we find no historical evidence that return differentials last forever, even for hegemons. Optimistically, we find that adjustments to imbalances in the past have generally been smooth, even under a regime as hard as the gold standard.

The Monetary Consequences of a Free Trade Area of the Americas

How will free trade affect monetary policy and exchange rate regime choices in the Americas? While the European Union illustrates how the creation of an integrated market in goods and services can enhance monetary cooperation and integration, it is not clear that Europe's experience translates to Latin America, where the political circumstances are different. We try to understand whether the monetary consequences of existing regional trade agreements, including but not limited to the European Union, mainly reflect spillovers from trade integration, or whether observed outcomes have been mainly about politics. Our results incline us toward the latter interpretation, leaving us pessimistic about the basis for deeper monetary cooperation. If exchange rate volatility is to be tamed, then the more widespread adoption of inflation targeting, which we find to be associated with a significant reduction in bilateral exchange rate volatility, may be the most promising path.

Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31

What determines sovereign risk? We study the London bondmarket from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low credibility of the interwar gold standard. Before 1914 gold standard adherence effectively signalled credibility and shaved 40 to 60 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure such benefits. Countries that devalued before resumption were treated favorably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.