Trade and Exchange Rate Policies in Growth-Oriented Adjustment Programs

The search for "growth-oriented adjustment programs" reflects a widespread malaise concerning IMF stabilization programs in countries suffering from external debt crises. A new orthodoxy is emerging from this search, which links recovery in the debtor countries to a shift to "outward-oriented" development, based on trade liberalization. This paper describes many important limitations of this new orthodoxy. The heavy emphasis on liberalization is a historical, and indeed runs contrary to the experiences of the successful East Asian economies. It also distracts attention from more pressing needs of the debtor economies.

Social Conflict and Populist Policies in Latin America

The central hypothesis of this paper is that high income inequality in Latin America contributes to intense political pressures for macroeconomic policies to raise the incomes of lower income groups, which in turn contributes to bad policy choices and weak economic performance. The paper looks in detail at one common type of policy failure: the populist policy cycle. This particular type of Latin American policymaking, characterized by overly expansionary macroeconomic policies which lead to high inflation and severe balance of payments crises, has been repeated so often, and with such common characteristics, that it plainly reveals the linkages from social conflict to poor economic performance.

External Debt and Macroeconomic Performance in Latin America and East Asia

macroeconomics, Asia, East Asia, Latin America, debt

Institutions Don't Rule: Direct Effects of Geography on Per Capita Income

In a series of papers, my colleagues and I have demonstrated that levels of per capita income, economic growth, and other economic and demographic dimensions are strongly correlated with geographical and ecological variables such as climate zone, disease ecology, and distance from the coast. Three recent papers purport to show that the role of geography in explaining cross-country patterns of income per capita operates predominantly or exclusively through the choice of institutions, with little direct effect of geography on income after controlling for the quality institutions. This note shows that malaria transmission, which is strongly affected by ecological conditions, directly affects the level of per capita income after controlling for the quality of institutions.

Creditor panics: Causes and remedies

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Aspects of the Current Account Behavior of OECD Economies

This essay examines some aspects of capital flows within the OECD, and outlines a framework for analyzing current account movements. In both the theoretical and empirical sections, I argue for the importance of including investment and growth in analyses of the current account. I present empirical evidence confirming that shifts in investment rates explain a large part of recent OECD current account behavior. In addition, the links in theory and practice between exchange rates and the current account are scrutinized. A link between current account deficits and depreciation is evident for the large OECD economies, but not for many smaller European economies. It appears that the exchange rate behavior in the smaller economies can be explained by specific exchange rate policies in these economies.

Gradual Spread of Market-Led Industrialization

The paper introduces asymmetric production conditions between firms and asymmetric transaction conditions between countries into the Murphy-Shleifer-Vishny model of industrialization. It explores a general equilibrium mechanism that generates circular causation loop that each firm's profitability and its decision of involvement in a network of industrial linkages and trade flows is determined by the size of the network, while the network size is in turn determined by all firms' decisions of participation. It shows that the very function of the market is networking relevant self-interested decision makers and utilize the network effects of industrialization, though this function is not perfect. Hence, market led industrialization will gradually spread until the whole world economy is integrated in a single network of trade and industrial linkages as transaction conditions are improved. Also, this general equilibrium mechanism predicts empirical observation that temperate zone is involved in this industrialization process more early than the tropic zone because of its better climate and public health conditions. This paper devises a new approach to specifying zero profit condition for a marginal modern firm, while keeping original feedback loop between positive profit and the extent of the market of the MSV model. Hence, this new method and the trade off between economies of scale and transaction costs can be used to endogenize the number of modern sectors and increases applicability of this type of models which is featured with compatibility between economies of scale and competitive market.globalization, industrialization, market-led development