The Service Sector in Asia: Is It an Engine of Growth?

The underdeveloped service sector in Asia has the potential to become a new engine of economic growth for developing Asia, which has traditionally relied on export-oriented manufacturing to power its growth. The central objective of this paper is to empirically analyze the prospects for the service sector as a future engine of growth. Our analysis of 12 Asian economies indicates that the service sector already contributed substantially to the region’s growth in the past. Furthermore, somewhat surprisingly in light of the difficulty of achieving productivity gains in services, we also find that services labor productivity grew at a healthy pace in much of the region. Overall our analysis provides substantial cause for optimism about the role of the service sector as an engine of growth in Asia. However, some Asian countries where the service sector is currently struggling, such as the Republic of Korea and Thailand, will find it more challenging to develop the sector

Why Are The Wages of Job Stayers Procyclical?

This paper explains how real wages are procyclical for those who stay with the same employer. On the basis of the Panel Study of Income Dynamics data for the period of 1974-75 to 1990-91, we find that the substantial wage procyclicality among job stayers is mostly accounted for by great wage adjustments during the period when the unemployment rate reaches a historical minimum level from the start of the employee's current job. This finding explains how the real wages of job stayers behave asymmetrically over the cycle and more importantly how the evidence of stayers' great wage procyclicality accords with the theoretical prediction of implicit contracts that stresses costless mobility.

Understanding the Backus-Smith Puzzle: It’s the (Nominal) Exchange Rate, Stupid

Backus, Kehoe and Kydland (BKK 1992) showed that if international capital markets are complete, consumption growth correlations across countries should be higher than their corresponding output growth correlations. In stark contrast to the theory, however, in actual data the consumption growth correlation is lower than the output growth correlation. By assuming trade imperfections due to non-traded goods, Backus and Smith (1993) showed that there is an additional impediment that works to lower the consumption growth correlation. While Backus and Smith’s argument was successful in partially explaining the low growth correlation puzzle, it contributed to generating another puzzle because the data forcefully showed that consumption growth is negatively correlated with the real exchange rate, which is a violation of the theory. In this paper, by decomposing the real exchange rate growth of the OECD countries into the nominal exchange rate growth and the inflation differential, we find that nominal exchange rate movements are the main source for the Backus-Smith puzzle. We find that the nominal exchange rate moves counter-cyclically with consumption movements, which is a violation of the risk sharing theory with non-traded goods. We also find that the violations are more pronounced when nominal exchange rate changes are larger in absolute value . In contrast, the negative of bilateral inflation differentials is positively correlated with bilateral consumption movements. The latter finding is in accordance with the theory. Furthermore, using intranational data for the United States where the nominal exchange rate is constant, the Backus-Smith puzzle disappears, although complete risk sharing is rejected.Risk Sharing; Exchange Rate

Monetary Integration Ahead of Trade Integration in East Asia?

Regionalism is taking two forms. It is occurring firstly through free trade arrangements and secondly through monetary arrangements. In this paper, we highlight the issues related to the reversal of sequence between trade integration (free trade agreement) and monetary integration (a monetary union). While the Euro area pursued trade integration first, from a theoretical point of view, there is no clear reason for introducing trade integration ahead of monetary integration. On the contrary we point out many good reasons for forming a monetary union before a free trade agreement.

IMF Bailouts and Moral Hazard

This paper empirically investigates the extent of investor moral hazard associated with IMF bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of IMF bailouts of countries undergoing financial crisis. We do not find strong evidence that the extent of investor moral hazard changed after the non-bailout of Russia in August 1998 that signaled a modification to IMF intervention policy. In contrast, we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the IMF and that are thereby more likely to be bailed out by the IMF. This pattern prevailed even after the Russian crisis.IMF, moral hazard, sovereign bond spreads, international financial architecture

Complementarity among International Asset Holdings: Do Banks Have a Special Role?

This paper studies the pattern and structure of cross-border bilateral financial asset holdings. By utilizing an extended dataset and employing a variant of gravity models, we find strong evidence for the presence of complementarities among bank loans, shortand long-term debts, and portfolio equity holdings. The complementarities can be explained by common factors of standard gravity models such as economy size, state of development, and information cost proxies, as well as bilateral trade in goods and services. However, we also find the presence of a direct channel of complementarities among financial asset holdings that cannot be explained by these gravity factors. We proceed to investigate whether the complementarities can be characterized by the models that predict a special role of banks in alleviating information asymmetry. We find supporting evidence for this hypothesis in that international bank lending tends to increase the volume of portfolio asset holdings. This acceleration effect of bank lending is stronger for destination countries with higher degrees of ‘law and order,’ which suggests that cross-border bank lending may not lead to capital market integration, despite reduced information cost, if there is no appropriate infrastructure to facilitate portfolio investment. By investigating the structure of bilateral asset holdings, we also find positive evidence for the information role of banks. The share of bank lending decreases with increasing state of development of destination countries measured by per capita GDP and human capital accumulation, but increases with increasing distance, suggesting that information cost may play an important role in determining the structure of cross-border asset holdings.Cross-border asset holdings; Financial integration; Bank lending

Does Regionalism Lead to More Global Trade Integration in East Asia?

Since early 1999, global trade liberalization has moved to the wayside as regional preferentialtrade agreements have become the preferred choice in East Asia. Does this shift toward regional trade agreements (RTA) suggest that global trade and welfare levels will be raised? Regional preferential trade arrangements, in contrast to unilateral trade liberalization, may well cause both 'trade creation’ and ‘trade diversion’. If an RTA raises trade and welfare among its members but hurts the welfare of non-members, its net effect on global trade and welfare becomes ambiguous. The hypothesis of ‘natural trading partners’ suggests that RTAs comprising natural trading partners are more likely to create trade between member countries, and less likely to divert trade from non-member countries, and thus leading to large improvements of economic welfare. Based on the existing RTAs in the world, we find that if an RTA forms between geographically proximate countries (measured either by distance or border), trade significantly increases between member countries. At the same time, we find that geographical proximity also contributes to increasing trade between a member and the rest of the world. We apply our findings to East Asia and examine how the existing or proposed East Asian trading blocs affect intra-bloc and extra-bloc trade, and thereby global trade. We find the East Asian RTAs are likely to create more trade among members without diverting trade from non-members.Regionalism; Global trade integration; Trade creation; Trade diversion

Exchange Rate Regimes and Economic Linkages

We investigate how the exchange rate regime influences economic linkages across countries. We divide the exchange rate regime into three classifications: currency union, peg and floating exchange rates. Unlike most studies solely focusing on the relationship between anchor and client countries, the exchange rate regime between any two countries is inferred based on their relationship to the common anchor currency. Then we empirically explore how the various exchange rate regimes impact on bilateral trade, output co-movement and financial integration. Financial integration is measured by the degree of risk sharing reflected in consumption co-movement relative to output co-movement. We find that, while currency union has the greatest effect, the peg regime also significantly boosts trade. We also find that, while the peg regime contributes to both output and consumption co-movements, the currency union strengthens only consumption co-movement and possibly lowers output co-movement. These findings are interpreted that the currency union, the strictest form of pegged regimes, leads to higher industry specialization and better risk sharing opportunities than the less strict peg regime.Exchage Rate Regime, Economic Linkage, Trade, Output Co- movement, Cosumption Co-movement, Risk Sharing

Proliferating Regional Trade Arrangements: Why and Whither?

This paper investigates why regional trade arrangements (RTAs) are proliferating extensively and how the effects of multiple RTAs, by interacting with each other, evolve over time. Our empirical analysis, based on an extended gravity model utilizing a large panel data set of 175 countries from 1948 to 1999, shows that RTAs on average increase global trade by raising intra-bloc trade without damaging extra-bloc trade. The net trade effects, however, heavily depend on the types of RTA strategic evolution over time, which we group as ¡°expansionary¡± RTAs, ¡°duplicate¡± RTAs or ¡°overlapping¡± RTAs. We find that countries excluded from an RTA can benefit more from duplicating a separate RTA than from joining an existing RTA. This result explains why the number of bilateral trade blocs, rather than the membership size of existing RTAs, is currently exploding. We also find that the net trade creation effects of RTAs are substantially lower for countries participating in overlapping RTAs. This result suggests that it is less likely that the currently proliferating RTAs will completely merge and lead the world economy to global free trade. Our empirical results are robust to controlling for the characteristics of countries that may influence the impact of RTAs.RTA, Global Trade, Regional Trade, Trade Creation, Trade Diversion