Productivity Effects of FDI Inflows: A Literature Review

Foreign Direct Investment (FDI) flows have increased substantially in the past two decades. These developments have motivated the appearance of a large number of empirical papers that test the expected benefits that FDI inflows are assumed to bring to the host countries. We survey the recent theoretical and empirical literature, but restrict our attention to the productivity changes that are induced by increased FDI inflows. We review both the aggregate productivity effects, as well as the spillover effects of FDI on local firms.

Household Inequality, Welfare, and the Setting of Trade Policy

We analyze general equilibrium relationships between trade policy and the household distribution of income, decomposing social welfare into real income level and variance components through Gini and Atkinson indexes. We embed these inequality-adjusted social welfare functions in a general equilibrium structure mapping from tariff protection to household inequality. This yields predictions regarding the linkages between trade protection, country characteristics and inequality in Heckscher-Ohlin and Ricardo-Viner frameworks. In addition, we can separate the efficiency and equity effects of tariffs on welfare. We then examine endogenous tariff formation when policy makers care about both equity and special interests.trade policy, household distribution of income, Atkinson index, Gini index, political econom

Economic Implications of an Association Agreement between the European Union and Central America

Using a global CGE model, we assess the potential macro-economic effects of a future European Union - Central American Association Agreement (EU-CAAA). Currently, many agricultural products from Central America (CA) enter duty-free to the European Union (EU); with two notable exceptions: bananas and sugar. We find that liberalizing the access to both products will bring significant gains to CA, while excluding them from the negotiations will bring no static gains. If trade facilitation mechanisms are implemented and we allow for the expected increase in FDI inflows to CA, welfare gains improve for all scenarios but are conditions on the level of EU agricultural liberalization.EU-CAAA FTA, trade policy, free trade agreement, CGE models, bananas, sugar

Equity, welfare, and the setting of trade policy in general equilibrium

The authors analyzegeneral equilibrium relationships between trade policy and the household distribution of income, decomposing social welfare into real income level and variance components and emphasizing Gini and Atkinson indexes. They embed these inequality-adjusted social welfare functions in a general equilibrium structure mapping from tariff protection to household inequality. This yields predictions regarding the linkages between trade protection, country characteristics, and inequality within a broad general equilibrium framework. In addition, the authors can separate the efficiency and equity effects of tariffs on welfare. They then examine endogenous tariff formation when policymakers care about both equity and special interests.Economic Theory&Research,Inequality,Free Trade,Poverty Impact Evaluation,Investment and Investment Climate

Equity and Trade Policy

We develop a dual approach to analyzing general equilibrium relationships between trade policy and household (as distinct from functional) income distribution, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding efficiency aspects in a dual framework. This includes the introduction of a social welfare function into the dual GE system that is explicitly separable between mean income and income dispersion. This then follows through to the government ob jective function. For government, this is manifested not only in special interest politics, but also through the direct impact of inequality on a governmentÕs ob jective function. We find that equity considerations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the final policy outcome. We also identify a protectionist bias on the part of welfare maximizing governments in capital-rich countries. Our dual framework also offers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.Trade and inequality, Sen welfare functions, duality, political economy of equity

Foreign Direct Investment in Applied General Equilibrium Models: Overview of the Literature

Global applied general equilibrium (AGE) models focus on the interactions between regional product markets. Many of these models are developed to represent trade flows and evaluate trade policies. Foreign direct investment (FDI) and foreign commercial presence are ignored in most of them, although sales by foreign affiliates sometimes exceed the value of trade flows. This paper gives an overview of the scarce literature on modelling FDI in AGE models. Modelling options, data availability and simulation results are reviewed. Some conclusions are drawn for future work.

Potential Economic Effects of TTIP for the Netherlands and the EU. CEPS Working Document No. 425 / September 2016

The Transatlantic Trade and Investment Partnership (TTIP) is a comprehensive preferential trade agreement that is expected to have a significant effect in EU and US bilateral trade and investment relations. As the negotiations are ongoing, this paper uses a scenario analysis to estimate the potential effects of TTIP under likely negotiated outcomes. In our main scenario, we assume a final trade deal where current tariffs are eliminated and non-tariff barriers are significantly reduced. Using a CGE model (WorldScan), we simulate the potential economic effects for the Netherlands and the EU. We find that US-Dutch bilateral trade doubles and this is translated into a positive but moderate effect on income of 1.7% for the Netherlands by the year 2030. These potential gains are higher than those for the EU and the US (both around 1%)

International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU

Using the CGE model WorldScan, we assess the benefits for the EU member states of jointly reaching four of the Lisbon targets (i.e. 70% employment, skills upgrades, increased R&D expenditures and administrative burden reductions of 25%), compared with the alternative when each country unilaterally pursues these reforms. With this approach, we estimate the associated international spillovers of joint EU coordination. Spillovers associated with R&D expenditures are a key factor. When the R&D target is jointly reached in the EU, the effect on output almost doubles and the effect on consumption shows an even greater increase. The other three targets also produce positive spillovers, but of a much lower magnitude.

Reassessing the relationship between inequality and development

We reassess the empirical relevance of the Kuznets Curve with a new inequality dataset. Using panel data estimations that account for the heterogeneity of inequality observations, we test for both the unconditional and the conditional hypothesis that includes alternative inequality determinants. We find that inequality and income levels are related in a cubic function or "tilde-pattern". This novel finding does not contradict the traditional Kuznets hypothesis, but extends it. Increasing inequality in OECD countries during recent years suggests that inequality rises at high levels of economic development. This “tilde-pattern” is robust to different inequality indicators, estimation techniques and control variables.

The construction and interpretation of combined cross-section and time-series inequality datasets

The inequality dataset compiled in the 1990s by the World Bank and extended by the United Nations has been both widely used and strongly criticized. The criticisms raise questions about conclusions drawn from secondary inequality datasets in general. The authors develop techniques to deal with national and international comparability problems intrinsic to such datasets. The result is a new dataset of consistent inequality series, allowing them to explore problems of measurement error. In addition, the new data allow the authors to perform parametric non-linear estimation of Lorenz curves from grouped data. This in turn allows them to estimate the entire income distribution, computing alternative inequality indexes and poverty estimates. Finally, the authors use their broadly comparable dataset to examine international patterns of inequality and poverty.Inequality,Poverty Impact Evaluation,Services&Transfers to Poor,Economic Theory&Research,Poverty Monitoring&Analysis