Trade and harmonization : if your institutions are good, does it matter if they are different ?

Good institutional quality (function) and similar institutional design (form) can promote international trade by reducing transactions costs. The authors evaluate the relative importance of function versus form in a gravity model, using an indicator of different legal systems as a proxy for differences in form, together with indicators of overall institutional quality. They find that good institutions promote trade much more than similar legal systems and have much more explanatory power. This effect is economically large-up to 10 times the effect of different legal systems. Moreover, better infrastructure matters as much as good institutions.Legal Products,Trade Law,Economic Theory&Research,Transport and Trade Logistics,Common Carriers Industry

Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector

Over the past 60 years, the U.S. financial sector has grown from 2.3% to 7.7% of GDP. While the growth in the share of value added has been fairly linear, it hides a dramatic change in the composition of skills and occupations. In the early 1980s, the financial sector started paying higher wages and hiring more skilled individuals than the rest of economy. These trends reflect a shift away from low-skill jobs and towards market-oriented activities within the sector. Our evidence suggests that technological and financial innovations both played a role in this transformation. We also document an increase in relative wages, controlling for education, which partly reflects an increase in unemployment risk: Finance jobs used to be safer than other jobs in the private sector, but this is not longer the case.

Skill Biased Heterogeneous Firms, Trade Liberalization, and the Skill Premium

We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand facing highly competitive skill-intensive firms. In our model, only the lowest-cost firms participate in the global economy exactly along the lines of Melitz (2003). In addition to differing in their productivity, firms differ in their skill intensity. We model skill-biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm-level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest-cost/most-skilled firms expand to serve the export market while less skill-intensive non-exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill-abundant and skill-scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper- Samuelson effects because import competition affects all domestic firms equally.

The power of exports

The authors systematically document remarkably high degrees of concentration in manufacturing exports for a sample of 151 countries over a range of 3,000 products. For every country manufacturing exports are dominated by a few"big hits"which account for most of the export value and where the"hit"includes both finding the right product and finding the right market. Higher export volumes are associated with higher degrees of concentration, after controlling for the number of destinations a country penetrates. This further highlights the importance of big hits. The distribution of exports closely follows a power law, especially in the upper tail. These findings do not support a"picking winners"policy for export development; the power law characterization implies that the chance of picking a winner diminishes exponentially with the degree of success. Moreover, given the size of the economy, developing countries are more exposed to demand shocks than rich ones, which further lowers the benefits from trying to pick winners.Markets and Market Access,Economic Theory&Research,Access to Markets,Airports and Air Services,Tax Law

Wages and Human Capital in the U.S. Financial Industry: 1909-2006

We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.

African Export Successes: Surprises, Stylized Facts, and Explanations

We establish the following stylized facts: (1) Exports are characterized by Big Hits, (2) the Big Hits change from one period to the next, and (3) these changes are not explained by global factors like global commodity prices. These conclusions are robust to excluding extractable products (oil and minerals) and other commodities. Moreover, African Big Hits exhibit similar patterns as Big Hits in non-African countries. We also discuss some concerns about data quality. These stylized facts are inconsistent with the traditional view that sees African exports as a passive commodity endowment, where changes are driven mostly by global commodity prices. In order to better understand the determinants of export success in Africa we interviewed several exporting entrepreneurs, government officials and NGOs. Some of the determinants that we document are conventional: moving up the quality ladder, utilizing strong comparative advantage, trade liberalization, investment in technological upgrades, foreign ownership, ethnic networks, and personal foreign experience of the entrepreneur. Other successes are triggered by idiosyncratic factors like entrepreneurial persistence, luck, and cost shocks, and some of the successes occur in areas that usually fail.

Why Does Capital Flow to Rich States?

The magnitude and the direction of net international capital flows does not fit neo-classical models. The 50 U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows between the U.S. states are consistent with the model. Therefore, the small size and "wrong" direction of net international capital flows are likely due to frictions associated with national borders and not due to inherent flaws in the neoclassical model.

Risk, Cooperation and the Economic origins of social Trust: an empirical Investigation

Extensive research has documented the importance of social trust for economic development, yet the origins of trust remain largely unexplored. This paper examines the historical relationship between risk, cooperation and the emergence of social trust. I hypothesize that norms of trust developed in preindustrial times as a result of experiences of collective action and mutual insurance triggered by the need for subsistence farmers to cope with climatic risk. These norms persisted over time, even after climate had become largely unimportant for economic activity. I test this hypothesis in the context of Europe combining high-resolution climate data for the period 1500-2000 with contemporary survey data at the sub-national level. I find that regions characterized by higher year-to-year variability in precipitation and temperature display higher levels of trust. Consistent with a theory of insurance through geographic differentiation, I also find that trust is higher in regions with more spatially heterogeneous precipitation. Furthermore, variation in social trust is driven by weather patterns during the growing season and by historical rather than recent variability. These results are robust to the inclusion of country fixed-effects, a variety of geographical controls, and regional measures of early political and economic development

Pourquoi de si hauts salaires dans la finance ?

Lettre du CEPII, n°378Parfois jugés extravagants, les salaires de la finance font débat. À partir d’une large base de données portant sur 23 pays au cours de la période 1970-2011, l’étude reprise dans cette Lettre examine leur évolution relative et les déterminants de l’écart observé par rapport à ceux des autres secteurs. En France, les salaires étaient 30 % plus élevés dans le secteur financier que dans le secteur privé non financier au début des années 1980. En 2008, l’écart atteignait 60 %. Aux États-Unis, cet écart a atteint jusqu’à 90 % en 2008 ! Ces évolutions reflètent la meilleure rémunération des travailleurs les plus qualifiés du secteur financier, en particulier ceux qui occupent des fonctions liées à la prise de risque (comme les traders). Est-ce dû à un usage plus intensif des talents à rémunérer ou à l’accroissement de la rente de l’industrie bancaire que les talents parviennent à s’accaparer ? Telle est la question de fond de cette étude, qui montre que la déréglementation financière – en modifiant la portée et l’éventail des activités exercées – constitue le facteur clé de la dynamique des salaires dans la finance. Une histoire de rente donc plus que de talents, accrue par la déréglementation