ALBERT

Notes: We argue that the Kearney/Foreign Policy (KFP) index of globalisation is constructed by making some problematic assumptions about the measurement, normalisation and weighting of the variables included in the index. We propose alternative measurement, normalisation and weighting rules, and using these rules, recalculate the ranking of the fifty countries, using the original KFP data. Specifically, we use, in various combinations: (i) variables ‘adjusted’ for geographical characteristics of countries; (ii) statistically optimal weights obtained by principal components analysis; (iii) a normalisation rule that treats different years of observations separately. We find that the country rankings change significantly when adjusted variables are used, indicating that the original KFP index is partially measuring geographical differences between countries.

Notes: The integration of the former communist countries of central and eastern Europe into the European Union creates a dilemma for the EU's regional policy. The EU's expenditure on regional policy (its ‘active’ regional policy) has been guided by political reactions to deepening or enlarging the EU, not by a rational strategy for regional policy. In contrast, the strong EU instrument of state aid control, developed for competition policy (its ‘reactive’ regional policy) has been relatively successful in avoiding a national race of regional subsidies among the member states. We show that a shift from active regional policy to reactive, competition-oriented, regional policies is the preferred way for the established member states to handle the challenge of enlargement. At the same time, however, this shift is politically difficult for the accession countries to accept, despite the fact that this shift might prove better for them economically. This regional policy dilemma is one of the major obstacles for the full integration of the accession countries into the EU.

Notes: The rules governing trade and capital flows have been at the centre of controversy as globalisation has proceeded. One reason is the belief that trade and capital flows have massive effects on the labour market – either positive, per the claims of international financial institutions and free trade enthusiasts, or negative, per the ubiquitous protestors at WTO, IMF and World Bank meetings demanding global labour standards. Comparing the claims made in this debate with the outcomes of trade agreements, this paper finds that the debate has exaggerated the effects of trade on economies and the labour market. Changes in trade policy have had modest impacts on the labour market. Other aspects of globalisation – immigration, capital flows and technology transfer – have greater impacts, with volatile capital flows creating great risk for the well-being of workers. As for labour standards, global standards do not threaten the comparative advantage of developing countries nor do poor labour standards create a ‘race to the bottom’.

Notes: Developing countries have been increasing their participation in the formal institutions and proceedings of the multilateral trading system. A prominent example is their more frequent involvement as defendants and plaintiffs in GATT/WTO trade disputes. This paper provides an initial economic appraisal of developing country performance in the GATT/WTO dispute settlement system. We measure the economic resolution of these disputes through trade liberalisation gains, and our results suggest that developing country plaintiffs have had more success under WTO disputes than was the case under the GATT. We also document evidence on potential determinants of this success: the capacity for plaintiffs to make credible retaliatory threats and the guilty determinations by GATT/WTO panels. Finally, there is also some evidence that developing countries have recognised the importance of retaliatory threats and have responded by changing their pattern of dispute initiation under the WTO to better take advantage of the instances in which they have sufficient leverage to threaten retaliation and induce compliance with GATT/WTO obligations.

Notes: This paper evaluates Burundi's progress with trade policy reform, by comparing earlier analyses of Burundi's trade policies undertaken in the 1980s with that of the WTO's recent Trade Policy Review. Since the mid-1980s Burundi has been trying to reform its trade and macroeconomic policies against the background of continuous socio-political tensions and periodic outbreaks of violent tribal conflict. A ‘then and now’ comparison allows us to assess both the extent of the trade reforms and of the economic return to those reforms. It is evident that there has been a significant rationalisation and simplification of trade policy. Burundi has eliminated most quantitative import restrictions and reduced the average level and range of its tariffs. The scope for allocative distortions, undesirable redistributive effects and for impediments to investment and growth has been substantially reduced. However, a return to reform in terms of export growth or diversification and of overall economic growth is not discernible yet. This is unsurprising, given the scale of the economic disruption. Sustained socio-political stability, among other things, will be required to induce the investment in human and physical capital needed for a positive return to trade policy reform.

Notes: The World Trade Organisation published a Trade Policy Review of Canada in 2003. In this paper, we discuss the WTO Review and augment the discussion by presenting original data and reviewing the empirical literature. The WTO concludes that Canada's trade regime is open and transparent but maintains barriers in a few important sectors. We subject this claim to empirical scrutiny, comparing Canada's actual imports to a multilateral benchmark based on the gravity equation. We show that Canada imports about what should be expected given the size of its economy and its location. In a second benchmarking exercise, we show that Canada's anti-dumping initiations are in proportion to its imports and that Canada's exports are targeted less by other countries’ anti-dumping investigations than what might be expected based on Canadian export levels. Like many other countries, Canada has pursued trade liberalisation through the World Trade Organisation while simultaneously signing multiple regional trade agreements. Our summary of the recent literature indicates that Canada's regional trade agreements have generated more trade creation than trade diversion. Canada has also spurred imports from the least developed countries by unilaterally eliminating tariffs and quota barriers on 48 of the world's poorest countries in January 2003. We also discuss Canadian progress in opening its agriculture and clothing industries. Overall, we conclude that Canada appears committed to advancing globalisation through multilateral trade liberalisation supplemented by unilateral and bilateral initiatives.

Notes: This paper draws on Hinkle and Schiff (2003). It analyses the planned Economic Partnership Agreements (EPAs) between the EU and Sub-Saharan Africa (SSA) from a development perspective. It does not take a position on whether SSA should enter into EPAs with the EU. Rather, it starts from the notion that the process of forming EPAs is unlikely to be reversed and examines the conditions that will maximise SSA's benefits from the EPAs. If this notion is correct, then the analysis presented in the paper applies. On the other hand, Pascal Lamy, the EU Trade Commissioner, made a proposal at the May 2004 G-90 summit in Dakar that might lead to a change in the EPA process. He proposed that the G-90, a group consisting of ACP and non-ACP LDC countries, should not have to make concessions at the WTO Doha Round of multilateral trade negotiations, i.e., he proposed a ‘free round’ for the G-90. This proposal opens the door to the possibility that the same might apply to the ACP countries in the EU-ACP negotiations and that the EPA process might be reversed. The paper considers the key issues raised by the planned EPAs, their relationship to the WTO's Doha Round and the EU's Everything-but-Arms Initiative, the changes needed to make the EPAs internally consistent, the domestic reforms in SSA that would need to accompany trade liberalisation in both goods and services, and the potential effects of the EPAs on regional integration in SSA. The EPAs will pose a number of policy challenges for SSA countries, including: restructuring of indirect tax systems, reduction of MFN tariffs, liberalisation of service imports on an MFN basis and related regulatory reforms in the services sector, and liberalisation of trade in both goods and services within the regional trading blocs in SSA. The paper also finds that the EPAs provide an opportunity to accelerate regional and global trade integration in SSA. To realise the potential development benefits of the planned EPAs, two steps are essential. First, the EU must, as it has stated, truly treat the EPAs as instruments of development, subordinating its commercial interests in the agreements to the development needs of SSA. Second, the SSA countries need to implement a number of EPA-related trade policy reforms. However, the latter is far from certain, given the lack of reform momentum in SSA.

Notes: Tunisia and Egypt have both recently undertaken significant steps toward trade reform. They have committed to a partnership agreement with the European Union. Both countries have also joined the WTO and are participating in Doha Round discussions on the liberalisation of non-tariff barriers on both goods and services trade. These developments provide an interesting context within which to investigate not only the changes in welfare associated with reforms affecting the trade in goods, but also the impacts of services liberalisation. Using open-economy computable general equilibrium models for both Tunisia and Egypt, this paper explores the reasons why structural differences in these two economies imply different opportunities and challenges with trade reform and services liberalisation. The gains from eliminating barriers at the border for goods trade are significantly greater for Tunisia than Egypt. Both countries, however, gain substantially from liberalisation of foreign direct investment in services. Furthermore, economic growth is more evenly distributed across sectors than with liberalisation of trade in goods alone. In addition to reporting on the impact of alternative policies on income, output, employment and trade, sector-level effects are also considered.

Notes: This paper analyses the impact of rules of origin on patterns of trade in the context of the pan-European system of diagonal cumulation. The paper first highlights the importance of rules of origin in all preferential trading arrangements while arguing that those rules can easily lead to trade suppression and/or trade diversion. We then focus on the introduction of the pan-European system in 1997 and show evidence to suggest that the introduction of the system materially impacted on trade between the EU, and its CEFTA, EFTA and Baltic states partner countries. The main body of the paper then empirically explores the impact of the lack of cumulation in the textile industry on the countries of the Southern Mediterranean. The results suggest that rules of origin may indeed substantially constrain trade between non-cumulating countries, possibly by as much as 70–80 per cent in aggregate. While preferential trading agreements thus serve to increase intra-PTA trade through the liberalisation of trade barriers, they may also be doing so by effectively raising external barriers to trade through the use of constraining rules of origin. To the extent that they do so increases the likelihood of trade diversion and trade suppresion.

Notes: The central theme of this paper is that sustained rapid growth cannot be achieved without rapid growth in trade. A review of the experience during the past four decades offers virtually no examples of countries achieving sustained rapid growth – called miracles in this paper – without simultaneously experiencing sustained rapid growth in trade in the presence of low or high but declining barriers to trade. Simultaneously, the claim that opening to trade leads to sustained income losses is unfounded. A review of the experience of the countries that have faced stagnation or declining per-capita incomes on a long-term basis – called debacles in this paper – reveals no connection to a sustained surge in imports.

Notes: Book reviewsINTERNATIONAL MONETARY FUND, Fiscal Adjustment in IMF-Supported Pro-grams: Evaluation Report.MAGNUS BLOMSTRÖM (ed.), Structural Impediments to Growth in Japan.EDWIN M. TRUMAN, Inflation Targeting in the World Economy.

Notes: This paper discusses the potential impacts of services trade liberalisation on developing countries and reviews existing quantitative studies. Its purpose is to distill themes from current literature rather than to advocate specific policy changes. The picture emerging is one of valiant attempts to quantify in the presence of formidable analytical and data problems yielding only a clouded image of likely impacts on trade, consumption, production and welfare emerging to the point that the policy implications of results are not always clear.A central intuition would seem to be that with genuine two-sided (OECD/non-OECD) liberalisation in services that are seemingly considerably labour-intensive in delivery, the potential should be there for significant developing country gains from global liberalisation allowing full cross-border delivery. However, this picture is neither fully endorsed by available studies, neither is it explicitly contradicted. This seems to be the case for a number of reasons.One difficulty with the studies is that the conceptual underpinnings of what determines trade in services and how this trade differs analytically from that of trade in goods (if at all) is an issue prior to assessments of impacts of liberalisation of trade in services on developing countries being discussed. Key issues here are the treatment of mobility for service providers (both firms and workers), and the differing analytical structures needed to analyse individual service items (banking, insurance, telecoms, etc.). Some recent analytical work suggests that liber-alisation in some service items, such as banking, need not always yield gains, and this contrasts with quantitative studies where analytical structures mirror conventional trade in goods treatments.The discussion and measurement of barriers to service trade in both developed and developing countries is also problematic. One is talking of domestic regulation, entry barriers, portability of providers, competition policy regimes more so than only barriers at national borders, as with tariffs. Both representing and quantifying such barriers raise major difficulties, and these are also spelled out in the paper. Which barriers actually restrict trade, and which do not because they are redundant is one issue, for instance. It is also often misleading to represent barriers in simple ad valorem equivalent form. As a result, numerical modelling work on the effects of service trade barriers which is based on ad valorem equivalent modelling is often not fully convincing.In addition, individual country results vary considerably across studies in ways that it is frequently hard for outsiders to understand. Studies do, however, point towards a tentative conclusion that effects are small and positive for developed and most developing countries if FDI flow changes accompanying service trade liberalisation are excluded from the analysis, but much larger and more variable across countries if they are present. This could be taken to suggest that mode 3 GATS liberalisation (roughly captured in some studies) might be important for developing countries; but mode 4 GATS liberalisation could be even more important given large barriers to labour flows across countries. Thus, if service trade liberalisation is thought of primarily as a surrogate for improved functioning of global factor markets in which more capital flows to developing countries and more labour flows from them to developed countries, then developing countries could benefit in a major way from genuine two-sided (OECD/non-OECD) liberalisation. Developing countries fear, however, that in global negotiations on services liberalisation where there is an asymmetry of power that largely one-sided liberalisation may be the outcome, and their gains will be correspondingly limited. The paper concludes by evaluating econometric studies on linkage between services liberalisation and country growth rules, and briefly discusses some key sectoral issues in health services and transportation.

Notes: Books reviewed:DOUGLAS A. IRWIN, Free Trade Under FireBARBARA BLASZCZYK, IRAJ HOSHI and RICHARD WOODWARD (eds.), Secondary Privatisation in Transition Economies: The Evolution of Enterprise Ownership in the Czech Republic, Poland and SloveniaJAGDISH BHAGWATI (ed.), Going Alone: The Case for Relaxed Reciprocity in Freeing TradeTHEO S. EICHER and STEPHEN J. TURNOVSKY (eds.), Inequality and Growth: Theory and Policy Implications

Notes: We examine in this paper the effects of WTO Accession on policy-making and institutional reforms in transition countries. This is done by looking at the experience of those transition countries which are already Members of the WTO and/or which have recently acceded. We start by trying to distinguish between effects of accession negotiations and from those which are the results of autonomous policy initiatives. The areas of domestic policy-making which are considered in the analysis include market access, governance, government budget, structural reforms, trade and investment arrangements with regional partners and macroeconomic management. We find that no precise blueprint of accession conditions can be ascertained and argue that the WTO played a role, albeit not an exclusive one, in the process of liberalisation. We also find that the costs of WTO Accession are not negligible, but that the benefits of WTO Membership are significant in terms of improved, more predictable, market access and its stability, improved governance and a recourse to better economic policies without significant loss to government revenues.

Notes: In large measure, the voice that developing countries were able to exercise in Cancun was a result of their effective coalition formation. In this paper we present a brief overview of the various coalitions that played an important role at Cancun. The greater part of this paper focuses on one among these various coalitions: the G20 on agriculture. The G20 presents an especially fascinating case of a coalition that combined a great diversity of members and apparently incompatible interests. All theoretical reasoning and historical precedent predicted that the group would collapse in the endgame. And yet the group survived. We investigate the sources of the unity of this group and trace them to a process of learning that allowed the group to acquire certain structural features and develop strategies that helped to cement it further. While our central dependent variable is the cohesion of the G20, we also address the derivative question of the costs and benefits of maintaining such coalitions. The Cancun coalitions give us an excellent case of coalitions that managed to retain their cohesion, but also ended up with a situation of no agreement rather than a fulfilment of even some of their demands. We examine some of the causes behind the impasse in the negotiation process and suggest ways in which future outcomes could be improved.

Notes: This paper sheds light on the risks associated with currency board arrangements, referring to the severe liquidity crisis that emerged in Argentina in November 2000. The inability of the Argentinean economy to grow because of an overvalued peso and the massive borrowing needs of the government in the context of rapidly rising borrowing costs seriously undermined the credibility of the fixed-exchange rate regime. Given the widespread dollarisation of the financial sector on the liability side, Argentina had arguably little choice but to stick to the currency board. A series of measures aimed at reviving growth were implemented but with no signs of upturn in demand, increasingly distrustful international investors and growing social unrest, the country was forced into default in December 2001, putting an abrupt end to its decade long experiment with hard money. This study shows that with rigid labour markets, a lack of fiscal discipline and the absence of a natural anchor currency, Argentina was never a strong candidate for a hard peg.

Notes: For FDI to help alleviate absolute poverty and stimulate economic growth in developing countries, two conditions have to be met. First, developing countries need to be attractive to foreign investors. Second, the host-country environment in which foreign investors operate must be conducive to favourable FDI effects with regard to overall investment, economic spillovers and income growth. This paper argues that it is more difficult to benefit from FDI than to attract FDI. The widely perceived concentration of FDI in few developing countries tends to obscure that, in relative terms, various small and poor countries are fairly attractive to FDI. Yet, the mobilisation of domestic resources remains by far, more important than attracting FDI for financing investment and stimulating economic growth. Furthermore, high inward FDI is no guarantee for poverty alleviation and positive growth effects. In particular, the empirical evidence suggests that host-country conditions typically prevailing in poor countries, including weak institutions and an insufficient endowment of complementary factors of production, constrain the growth-enhancing and poverty-alleviating effects of FDI. The crux is that creating an environment in which FDI may deliver social returns will take considerable time exactly where development needs are most pressing.

Notes: Prior to the onset of the Asian financial crisis there was a deterioration in the external trade position of most countries that were affected by the Asian currency crisis. However, little is known about why this occurred. This paper aims to identify the causes of a slowdown in export growth in Malaysia. While misaligned exchange rates have been widely cited as a cause of the slowdown in East Asia; in the Malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance. Using the US/yen dollar rate as a proxy for exchange rate misalignment and US total new orders for electronics as a proxy for global electronics demand, cointegration analysis was used to establish the likely causes of a slowdown in Malaysia's export performance. The empirical evidence suggests that the coincidence of exchange rate misalignment with a downturn in the global electronics demand cycle was responsible for the sharp deterioration in export performance.

Notes: Two basic views can be discerned in post-mortems of Argentina's currency board: (1) that weak fiscal policy was fundamentally to blame, and (2) that the peso had become too severely overvalued for the peg to survive. This paper evaluates the evidence for these rival interpretations. The real effective exchange rate index did not indicate massive overvaluation, but this index does not capture the effects on the equilibrium rate of the ‘sudden stop’ in capital flows to emerging markets after 1998. It also understates the amount of adjustment required for Argentina to reach the equilibrium rate, because neighbour countries’ dollar exchange rates were held up by Argentina's overvaluation, as is indicated by their depreciation in 2002. Argentina was particularly vulnerable to the sudden stop because of the extreme volatility of its portfolio inflows. Fiscal policy simulations suggest that, even with a substantially improved primary balance from 1994 onwards, loss of investor confidence would still have triggered unsustainable debt dynamics once the recession began to bite after 1998. The stagnation of output and prices in Argentina created a yawning gap between the interest rate on debt and the rate of growth of nominal GDP. Had the currency been floated in, say, 1995, the real devaluation of the peso would still have pushed up the debt/GDP ratio, but higher output would have left greater scope for addressing this by running a sizeable primary surplus. Moreover, the more gradual depreciation under floating might have allowed the economy to adjust to higher debt service payments without resort to default. The IMF has criticised itself for not pressing for tighter fiscal policy in the 1990s. A more fundamental criticism would be that it was seduced by the bipolar model into complacency about adjustment to real shocks and forgetting the teachings of optimum currency area theory.

Notes: Books reviewed:Robert E. Litan, Michael Pomerleano and V. Sundararjan (eds), The Future of Domestic Capital Markets in Developing CountriesPedro-Pablo Kuczynski and John Williamson (eds), After the Washington Consensus: Restarting Growth and Reform in Latin America

Notes: Democratising the governance of the IMF will significantly improve the institution's capacity to manage crises. The implementation of a democratic framework requires a reform of the Fund's ‘quota regime,’ which mediates the distribution of voting power. An optimal reform of the quota regime that reflects the increased weight of emerging economies requires matching the number of policy objectives with the number of policy instruments. Presently, there is a classic ‘assignment problem’ whereby one policy instrument (i.e., the quota regime) is aimed at achieving three objectives (i.e., member contribution obligations, access rights, and voting rights). Three different instruments need to be adopted. Member contributions should be based on member's capacity to pay; access to resources should be based on need; and voting rights should balance the rights of creditors with the principle of sovereign equality. These reforms will enhance the Fund's legitimacy and accountability as a forum for global economic policy-making.

Notes: The issue of special and differential treatment (SDT) for developing countries in the WTO has become a source of tension in North-South trade relations. The absence of an effective SDT regime clearly contributed to the failure of the Cancún Ministerial meeting of the WTO. This paper argues for a new approach that puts the emphasis on efforts to improve the development relevance of WTO rules and create mechanisms which allow greater differentiation across WTO members in determining the applicability of WTO disciplines; complemented by non-discriminatory liberalisation of trade in goods and services in which developing countries have an export interest. The former is key in allowing the WTO to expand its reach to new ‘behind the border’ policies; and the latter is important to establishing a development dimension in multilateral trade negotiations.

Notes: In this paper we study the on-going trade dispute between Canada and Brazil on export subsidies in the aircraft industry and the reasons for its escalation. This is a peculiar case of strategic trade policy insofar as the good, i.e. regional jets, is heavily dependent on sub-systems that are imported in the two countries. The hypothesis that the dispute solely derives from the search for rents and externalities is therefore incomplete. Without downplaying the role of interest politics, we argue that in both countries ideas about the goals of trade policy have an important place in explaining why this dispute drags on. For Canada, the belief in a rules-based trading regime has led it to strongly oppose violations, while insecurity about its competitiveness has led to a variety of government schemes to support firms in advanced sectors like aerospace. For Brazil, its place as a leader of the developing world acted as a rallying point for government and firms alike. The research also argues that the WTO process has actually made a resolution of the dispute more difficult by making it too costly for firms and countries to comply with the costs of losing.

Notes: Books reviewed:Kaushik Basu, Henrik Horn, Lisa Román and Judith Shapiro (eds), International Labor StandardsLori G. Kletzer, Imports, Exports, and Jobs: What Does Trade Mean for Employment and Job Loss?Richard Baldwin, Giuseppe Bertola and Paul Seabright (eds), EMU: Assessing the Impact of the EuroIan Bannon and Paul Collier (eds), Natural Resources and Violent Conflict: Options and Actions

Notes: Stochastic simulations are used on the Liverpool Model of the UK to assess the effect of UK euro entry on macroeconomic stability. Instability increases substantially, particularly for inflation and real interest rates. A key factor is the extent of the euro's instability against the dollar; by adopting a regional currency the UK imports this source of shocks, as well as losing its control of interest rates. The results are not highly sensitive to changes in assumptions about the degree of labour market flexibility, the use of fiscal policy, and increased convergence of monetary transmission.

Notes: This paper quantifies the impact on the economies of the world of complete liberalisation of trade in a key services sector, telecommunications, using a global general equilibrium model. Barriers to trade in telecommunications are highest in developing regions and lowest in developed regions. The paper uses new estimates of these barriers for telecommunications. The results indicate that completely liberalising trade in telecommunications would benefit the world as a whole in terms of increased production by 0.1 per cent. Although the distribution of gains among regions is not even, most regions are projected to gain from liberalising trade in telecommunications. In general, the regions with the highest barriers benefit most. The analysis demonstrates that commercial presence of foreign firms via foreign direct investment is an important mode of delivering telecommunications.

Notes: This paper evaluates aid by considering how effective aid has been in exerting leverage on policy choices. It is rather easy to demonstrate that if a country is unwilling to implement policy reforms, attaching conditions to aid will not ensure sustained reform. In this sense conditionality does not work. This ignores the fact that donors, through aid and conditions, can influence recipient policies. The argument of this paper is that if the analysis focuses on channels of influence, one can better identify ways to enhance aid effectiveness. Reform is a slow and difficult process and donors would be more effective ‘development partners’ if they see their role as being to support rather than force this process. In simple terms, donors should provide the information and technical assistance to help governments to make policy choices, rather than dictating choices by imposing conditions.

Notes: This paper examines the concept of global public goods (GPGs) and in that context explores the extent of aid (ODA) presently being diverted to GPG provision and whether such diversion skews aid-flows towards some recipients. These are examined on the basis of OECD data for the late 1990s. The main argument of this paper is that ODA should not be used for financing GPG provision by developing countries. Instead, it is suggested that other sources of financing the provision of GPGs should be developed keeping in view the various technologies by which the GPGs can be produced and design principles for supra-national institutions. Various arguments from Sandler, Barrett and Kanbur are considered. In particular, Kanbur's suggestion of two tensions involving the principles of economies of scale, subsidiarity, economies of scope and specialisation, is explored further.

Notes: In the light of the importance of foreign direct investment (FDI) for the promotion of economic development, this paper examines the impact of the changes in the real exchange rate and its volatility on FDI. Examining Japan's FDI by industries, we found that the depreciation of the currency of the host country attracted FDI, while the high volatility of the exchange rate discouraged FDI. Our results suggest the need to avoid over-valuation of the exchange rate and to maintain stable but flexible exchange rate in order to attract FDI.

Notes: This study sets out to estimate the impact of R&D on productivity within the private sector, with further analysis of the different impacts of R&D within high-tech and traditional manufacturing firms. We also attempt to examine the spillover effects from R&D investment in the high-tech sector on productivity growth within the traditional industries. Using a sample of 136 large manufacturing firms during the period 1994–2000, we develop an extended version of the Cobb-Douglas production function model, and our findings suggest that Taiwan's R&D investment had a significant impact on firm productivity growth, with output elasticity standing at around 0.18. When the sample is divided into high-tech and traditional firms, the R&D output elasticity in high-tech firms is significantly greater than that found in traditional firms. In addition, the average rate of return in high-tech firms is much greater than that estimated for other industries. Besides, our empirical results show that, although significant, the impact of R&D investment from the high-tech sector, on the productivity growth of traditional firms, is rather limited.

Notes: This paper aims at studying the investment flows in the Greater Pearl River Delta region (Hong Kong-PRD) in China and its impacts on industrial restructuring at the firm-level using a business survey with the Hong Kong-PRD entity acted as a core-periphery economy. The critical effects of gravity distance on transaction costs in the determination of investment flows are examined statistically by a gravity model by incorporating a hypothetical infrastructural construction project. Survey findings show that the evolution of the cross-border operations at the main core has directed the outward FDI flows and the subsequent industrial structural adjustments of the core-periphery economy. This paper has presented a typical illustrative case for further studies of investment flows and its impacts upon industrial adjustments and performance in other regions in China especially after the WTO accession. Its implication on regional economic growth is also discussed.

Notes: This paper reviews the historical evidence on the relationship between globalisation and economic growth. Divergence in the growth of income and industrialisation in the twentieth century is documented but it is also noted that international income inequality appears to have decreased since about 1870 and that long-run trends in the Human Development Index are much less pessimistic about the experience of developing countries. It is argued that trade liberalisation has been good for growth on average but that successful capital liberalisation requires high institutional quality and that the developmental state may have an important role to play in the early stages of development. The recent claim by Robert Lucas that the 21st century will see a massive reduction in income inequality across countries in a globalised world economy is sceptically discussed in the context of empirical evidence that bad institutions are often persistent and that geography is still a major factor in explaining international income differences.

Notes: This paper criticises the World Bank as overly optimistic with respect to its ability to fine-tune development aid and to focus it on countries with ‘good’ policies rather than on countries with ‘poor’ policies in order to raise its effectiveness. It is shown that recipient regions showed very different patterns of aid inflows and economic growth in the past and that aid flows yielded the highest correlation to growth when their magnitudes shrank. It is furthermore argued that categorising countries by quality of domestic policies is not only questionable at a given point of time especially in countries with failing governmental institutions and open borders as in many African countries. It suffers also from incentive problems so that countries receiving more aid can become victims of changes in their domestic policies which are more permissive and etatist to the disadvantage of private agents. The paper instead pleads for a shift to aid policies decoupled from country-specifics and more oriented to fundamental ‘beyond border’ problems of the well-being of the poor. An international endowment fund under supranational law should finance research and implementation of research findings related to common international goods as it was suggested by Sachs concerning aids and tropical disease research.

Notes: The escalation of political conflicts in many developing countries and their impact on economic development have been topical issues in recent development literature. The overwhelming emphasis on ‘ethnic conflicts’ in the literature has, however, precluded analysts from looking at political conflicts beyond their ethnic dimension, in the wider context of the development process. In particular, because of the preoccupation with ethnic roots as the prime source of these conflicts, reverse causation, running from economic policy to political conflict, has been virtually ignored in the debate. The purpose of this paper is to fill this gap through an in-depth case study of the ‘twin political conflict’ in Sri Lanka – the Tamil separatist war in the North and the Sinhala youth uprising in the South – with emphasis on its economic roots. The findings suggest that fundamental contradictions in the national development policy in the restrictive trade regime of Sri Lanka were at the heart of the country's twin political conflict.

Notes: The United States maintains a broad spectrum of economic sanctions against China ranging from export controls to prohibitions on certain imports. Our study finds that, although from a macroeconomic perspective, US sanctions have had no significant adverse effect on China's overall economic growth and trade between the two countries, they do have a negative impact on producers and consumers in both countries. US economic sanctions have hindered technology transfer to China and US investment in China. US restrictions on imports from China have caused deadweight losses for the US due to higher domestic production costs for import substitutes and a reduction in consumption. US export controls have hindered US exports to China and contributed to large US trade deficits with China. The export controls have also caused losses of high-paid jobs in the United States and benefited competitors from other countries. In addition, US economic sanctions against China have had significant third-party effects. China's diversification of imports to sources other than the United States may have a long-term effect on US exports to China even after US economic sanctions against China are lifted.

Notes: This paper argues that the process of economic globalisation is to remain partial, because of its continued reliance upon the national institutions in charge of the definition and enforcement of private property rights. Emerging economies often face critical enforcement problems, but the experience of the European Single Market also suggests that, in this respect, institutional convergence remains extremely slow. Second, the globalisation process since 1990 has seen a sharp growth in private inter-temporal contracts, exemplified by private financial transactions and by contracting on intellectual property rights; both are much more vulnerable to local institutional failures than trade in tangible goods and sovereign credits, which were the hallmark of previous phases of international liberalisation. Thus the ‘frontier’ of globalisation now makes markets more exposed to the underlying fragmentation of national property institution than before. This suggests that multilateral negotiation, as an instrument for the coordination of State institutions, will remain the backbone of international economic integration.

Notes: Books reviewed:THEO BALDERSTON (ed), The World Economy and National Economies in the Interwar SlumpBRIAN R. COPELAND and M. SCOTT TAYLOR, Trade and the Environment: Theory and EvidenceKYLE BAGWELL and ROBERT W. STAIGER, The Economics of the World Trading System PRANAB BARDHAN, International Trade, Growth, and Development: Essays by Pranab BardhanMOONJONG TCHA (ed), Gold and the Modern World Economy

Notes: The role of the multilateral aid agencies in the delivery of aid is as old as the debate on the role of aid in economic development. Aid is effective in a good policy environment. However, effective aid delivery is equally important. This is why the need to reform the institutions involved in the process of delivering aid is crucial. Among others, the paper concluded that there is a need for redefining the roles and the establishment of a well articulated network among the various institutions involved in the aid process. More importantly, given the different actors and motives at play in the transfer of resources to recipient countries, the role of a supranational institution to coordinate and give direction is indispensable.

Notes: This paper reports an empirical study of the factors affecting burden sharing among OECD's 22 DAC members in ‘bankrolling’ the multilateral aid agencies. Annual data over 1970–2000, pooled across the donor countries, form the basis for the empirical estimation of each donor's share in the ODA aid receipts for each multilateral agency. Our findings suggest the existence of reverse exploitation, i.e., the financial burden of the agencies is disproportionally carried by the smaller donors. The study also finds that factors such as inherent donor generosity, donor concern for domestic egalitarianism, and the extent to which donors are pro-poor in their bilateral aid policies have an impact on their readiness to support multilateral agencies financially. Size of the donor government and its budgetary balance positively influence burden sharing of contributions to other multilateral agencies. But neither the phase of economic cycle nor the rate of economic growth affects the burden-sharing responsibility of donors. It was also observed that contributions by EU members to the EC do not appear to crowd-out their contributions to other multilateral aid agencies and that right-wing donor governments are generally more parsimonious with regard to financial assistance to multilateral aid agencies. The preferred alternative, particularly among EU member countries, appears to be the EC.

Notes: The crude oil price of the world increased two-fold during 1999–2002. The price of domestic oil products for the same period increased with a smaller percentage, i.e., 27 per cent. This phenomenon could be attributed to Taiwan's oil market liberalisation after 2000 and its entering the WTO since November 2001. According to this study, the effect of entering the WTO itself suppressed the oil price from increase by 15.455 per cent in 2002. It also reduced the inflation rate by 0.74 per cent and increased the economic growth by 0.39 per cent. Nevertheless, entering the WTO also increases the competition in the oil industry, which is a big challenge to the domestic oil refinery sector and the state-owned Chinese Petroleum Corporation in particular. The price decrease of oil products also increases the demand for oil products and exacerbated air pollution and CO2 emissions. For minimising the negative impact of entering the WTO on the economy, the Taiwan government has devised a series of preparations in the last decade. Those preparations include a step-by-step market liberalisation plan, a strategy taken by the state-owned CPC, a new taxation implementation and the legislative works such as the Petroleum Act. This experience might be worthwhile for the reference of other economies.

Notes: Regional diversity in the process of economic growth is the major concern in this paper. We will try to identify its sources for growth and to specify production functions in each province by estimating translog production function. This paper clarifies the following four facts: First, capital accumulation was a major source for growth in the earlier stage of the Chinese economy, especially in the eastern coastal region. Unexpectedly, capital accumulation is losing its ground over the years. Second, the employment structure of the economy in the eastern region has changed significantly and the shares of workers in the secondary and tertiary industries increased until 1992. Since 1992, these figures have not changed significantly despite China's continuous economic high growth. Third, four distinguishable regional growth patterns have contributed to China's economic growth. Finally, production technologies in each province vary both in the direction of factor intensity and in the elasticity of substitution between inputs.

Notes: Ample efforts of FDI literature have researched on the motives and determinants of FDI flows based on ex-ante conditions. Little has been studied with regard to the effects of post-ante behaviour in determining future investment decisions. Post-ante experience of FDI decisions with regard to foreign investors’ satisfaction or dissatisfaction and future profit expectations on recurrent decisions are critical. This paper, thus, attempts to investigate FDI in the context of an emerging market environment with emphasis on how environmental and institutional factors and the micro-firm effects of how investors’ post-ante views on profits expectations and investment experience would affect MNCs’ decisions on recurrent investment and firm relocation. Empirical results show that decisions in the short and long run were affected differently by the factors under study. Specifically, the short-run decisions were more affected by profit expectations while the long run by post-ante experience on investment satisfaction/dissatisfaction and environmental and institutional determinants.

Notes: Various claims have been made about the causes of the Asian crisis and its spread. Here, we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses, that portfolio investors and hedge funds played a dominant role in initiating and/or spreading the crisis; that moral hazard kept efficient markets from predicting the crisis; and, finally, the common lender hypothesis of Kaminsky and Reinhart. In the process we also test implications of the Calvo-Mendoza model of rational investor ignorance. All are falsified as monocausal explanations. For example, portfolio investments that could not have been subject to substantial moral hazard continued to flow into Asia until very shortly before the crisis. Likewise, banks were a much larger source of capital outflows during the crisis than were portfolio investors. While falsified in their strongest forms, several of these hypotheses in less strong forms should play a role in a more nuanced analysis. It is necessary to move past simple single-factor approaches in order to produce a more complete, synthetic explanation of this episode.

Notes: Books reviewed:Sonja Boehmer-Christiansen and Aynsley Kellow, International Environmental Policy: Interests and the Failure of the Kyoto ProcessRolf Jungnickel (ed.) Foreign-Owned Firms: Are They Different?Thomas Cottier and Petros C. Mavroidis (eds.) Intellectual Property: Trade, Competition, and Sustainable DevelopmentJ. Bruinsma (ed.) World Agriculture Towards 2015/2030: An FAO Perspective

Notes: This paper examines the effects of EU integration in the 1990s on the FDI relations in Europe. We find that the completion of the Single Market, the 1995 enlargement and the so-called Eastern enlargement are characterised by a substantial, positive anticipation effect in the period between the announcement and the formal establishment of each integration step. Neither the Single Market Programme nor the previous enlargement exhibited any further positive effects on intra-EU FDI volumes after their establishment.

Notes: The purpose of this paper is to study selected aspects of Turkish accession to the EU. Joining the EU will require that Turkey attains macroeconomic stability, adopts the Common Agricultural Policy, and liberalizes its services and network industries. Furthermore, joining the EU will require Turkey to adopt and implement the whole body of EU legislation and standards – the acquis communautaire. According to the EU membership criteria, new members must be able to demonstrate the ‘ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union’. Thus Turkey will be expected to adopt the euro when it is ready to do so, but not immediately upon accession. Integration will boost allocative efficiency in the Turkish economy which in turn will make the country a better place to invest. Furthermore, Turkey will reap the benefits from monetary integration and from migration of labour to the EU. But the welfare gains will have a price, and the price will be the adjustment costs associated with the adoption of the acquis communautaire. The final section of the paper considers the effects of accession on the EU in terms of migration and budgetary effects.

Notes: The use of anti-dumping policy has been steadily growing in recent decades, and so has the theoretical and empirical literature on anti-dumping. However, while developing countries as a whole have become at least as active as the ‘traditional’ anti-dumping regimes (the USA, the EU, Canada and Australia), the literature is almost exclusively concerned with the latter group. This article gives an overview of anti-dumping policy and practice in Mexico, one of the leading ‘new’ anti-dumping regimes. It assesses how anti-dumping has expanded since the country began liberalising trade in the mid-1980s, and discusses how the policy has been applied in a protectionist way that is not dissimilar to policy practice in the traditional user countries.

Notes: This paper examines Thailand's pre-crisis exchange rate policy, focusing on the degree of the country's real exchange rate misalignment pre-crisis and its consequent effects on Thailand's trade balance with its two large trading partners, the US and Japan, in the 1980s and 1990s. Defining misalignment as the difference between actual and ‘equilibrium’ exchange rates, we estimate three key ‘equilibrium’ exchange rates of the Thai baht: (a) the real effective equilibrium exchange rate of the Thai baht against its twenty-two major trading partners; (b) the bilateral real equilibrium exchange rates of the baht against the US dollar; and (c) the bilateral real equilibrium exchange rate of the baht against the Japanese yen.

Notes: This paper revisits the question of whether global welfare is higher under a uniform world-wide system of pharmaceutical product patents or with international rules allowing low-income nations to free-ride on the discoveries of firms in rich nations. Key variables include the extent to which free-riding reduces the discovery of new drugs, the rent potential of rich as compared to poor nations, the ratio of the marginal utility of income in poor as compared to rich nations, and the competitive environment within which R&D decisions are made. Global welfare is found to be higher with free-riding across plausible discovery impairment and income utility combinations, especially when rent-seeking behaviour leads to an expansion of R&D outlays exhausting appropriable rents.

Notes: A US patent protects the owner of the intellectual property from imitators producing in the US and foreign imitators selling in the US market. There are two venues for filing infringement cases against international infringement of US patents, with the International Trade Commission (ITC) using Section 337 of the Tariff Act of 1930 or with federal district courts. Three indicators of patent value suggest that patents litigated under Section 337 are on average more valuable; however, their values tend to be more variable. The latter suggests that some firms may be using Section 337 not for protection against international infringement of US patents but for protection against imports.

Notes: This paper evaluates the impact of openness on growth in different country groups using a panel of 79 countries over the period 1970–98. It distinguishes itself from many existing studies in three aspects: Firstly, both trade and FDI are included as measures of openness. Secondly, countries are classified into high-, middle- and low-income groups to compare the roles of trade and FDI in these groups. Thirdly, the possible problems of endogeneity and multicollinearity of trade and FDI are carefully dealt with in a panel data setting. The main findings are as follows. Total trade has a general positive impact on growth in all country groups, although the impact from imports is not significant in high-income countries. FDI has a positive impact on growth in high- and middle-income countries, but not in low-income countries. With the existing absorptive capabilities, low-income countries can benefit from both exports and imports, but not from FDI. These findings suggest that trade and FDI affect growth through different channels and under different conditions. The paper also discusses important policy implications.

Notes: An increasing number of tropical timber-producing nations have enacted bans on export of logs arguing that this will reduce deforestation, expand downstream wood processing and improve the scale efficiency of domestic processing, create jobs and retain more value-added nationally. The theoretical literature is clear that trade restrictions are generally welfare reducing (except in special cases such as when there is a potential for an optimal export tax). At best, a log export ban is a second-best policy tool for reducing deforestation and addressing the associated environmental externalities. In overall terms, the suggestion that log export bans can achieve the objectives expected of them is dubious. However, very little quantitative evidence exists to demonstrate this claim and the paper attempts to address this gap by looking at the economic and environmental impacts of eliminating a log export ban in Costa Rica. The authors argue that eliminating the export ban is Pareto improving and could generate economic gains as high as $14 million per annum with the possibility of relatively modest environmental benefits.

Notes: The Kyoto Protocol gives Annex 1 countries considerable flexibility in the choice of domestic policies to meet their emissions commitments. Possible climate policies include carbon/energy taxes, subsidies, energy efficiency standards, eco-labels, and government procurement policies. In order to meet their targets with minimum adverse effects on their economies, Annex 1 governments with differentiated legal and political systems are highly likely to pursue these policies that may have the potential to bring them into conflict with their WTO obligations. This paper explores the potential interaction between these domestic climate policies and WTO rules. It argues that their potential conflicts can be avoided or at least minimised if WTO rules are carefully scrutinised, and efforts are made early on to ensure that the proposed climate policies comply with them. It suggests an early process of pursuing consultations between WTO members and the Parties to the Climate Change Convention and points to the need of further exploring ways to enhance synergies between the trade and climate regimes.

Notes: While tariff barriers have decreased worldwide through various GATT rounds, anti-dumping has surged to play a crucial role as the most important non-tariff barrier. After much debate and opposition, anti-dumping is on the agenda of the Doha round of multilateral trade negotiations and it is one of the most important issues, especially for developing countries as they are the main targets of this policy instrument. With this prospect, it is important to assess the relevance of anti-dumping not only by focusing on traditional users but by analysing the experience of new users, which are now major players in the field. This paper improves upon existing studies by providing a comprehensive assessment on the use of anti-dumping. First, data on the time pattern of worldwide implementations of anti-dumping laws are presented. This time profile shows interesting relationships with legal developments in GATT and WTO dispositions. Second, usual sources of data are complemented with various other sources. This allows the inclusion of recent heavy users like China, Russia, Taiwan and Ukraine, which are ignored in similar studies but important for their trade volumes. This enlarged and updated dataset shows that new users are even more important than previously thought, with implications for the Doha negotiations.

Notes: Liberalisation of international trade in services through the Movement of Natural Persons (Mode 4) remains one of the least negotiated issues of trade policy among the 144 members of the World Trade Organisation. Economists believe that there is a basic convergence of economic interest between the developed and the developing world for liberalising Mode 4. Yet the multilateral trading system has not facilitated greater worker mobility between the labour-surplus and labour-scarce countries. Is there any economic logic as to why cross-border movements of workers have not followed the pattern predicted by international trade theory? Or are there strong socio-political barriers that have come in the way of liberalising Mode 4? These are some of the questions the paper attempts to answer. The paper shows that the economic arguments against the free movement of natural persons are based on the narrow perspective of the welfare of domestic workers while ignoring the benefit it brings to the economy as a whole. Further, non-economic arguments miss the point that the movement of workers under Mode 4 of GATS is temporary in nature, and so unlikely to have any lasting social and cultural spillovers. The paper gives specific illustrations from the recent past where temporary import of workers from labour-surplus countries has enabled both developed and developing countries sustain their economic growth. It concludes by arguing that the environment for renegotiating WTO commitments under this important sector of international trade in services is better than ever before, even though the current world economic slowdown may delay actual negotiations for a while.

Notes: This paper argues that in view of the resource crunch confronting many developing countries and the fall in overseas development aid flows to them, new sources of development finance need to be found. We consider international taxes, fees and levies that could considerably augment aid flows to developing countries and some of which may have coincident beneficial effects. Estimates of the revenue yield from such taxes and levies are also presented. The paper proposes the establishment of a ‘world development organisation’ to coordinate such effort. A formula for voting within the organisation and another for disbursal of such aid are suggested.

Notes: This paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans. A number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries. Based on the tests, we observe that for bilateral donors, past grant-loan mix (and, hence, reflows from past transfers) do not influence the volume of current resource transfers. Our tests also show that the rate of official borrowing by the recipients (and, by deduction, the extent of their past debt burden) is positively influenced by the extent of the concessionality of such loans – irrespective of whether it is in the form of subsidised interest rates or longer grace periods. The paper concludes with a review of the circumstances in which grants, soft loans and non-concessional loans might have their respective comparative advantage, as well as a discussion of the need, so as to overcome the negative incentive problems of soft loans, for a typical concessional loan package to be separated into two constituent parts. This would enable the recipient to be given the grant component and the option to take from the non-concessional loan component as much as desired.

Notes: This paper examines the main issues involved in translating domestic bankruptcy procedures to the sovereign context. It considers some of the principles by which domestic bankruptcy procedures operate, and the extent to which they apply to international lending. Two recent proposals are considered in more detail, that of Krueger (A New Approach to Sovereign Debt Restructuring) and that of Pettifor (ch. 9/11, Resolving International Debt Crises – the Jubilee Framework for International Insolvency). The paper also considers the question of the ex ante effects of a procedure which makes default less costly, and concludes that despite a negative impact on the ability to borrow, the overall welfare effect need not be negative.

Notes: This paper analyses the organisational structure as well as the characteristics of development finance provided by Arab donor countries. This is done with a comparative view in relation to western donors and with the aim to develop recommendations as to how Arab development finance can be strengthened and rendered more effective for the new millennium. In the 1960s and 1970s Arab donors established a variety of national and multilateral agencies. These agencies share many characteristics of their western counterparts, but some also exhibit distinctive features. Both in terms of absolute volume as well as generosity measured by aid as a percentage of GDP, Arab countries have been important donors in the past, even though recent years have seen a significant fall in Arab aid. Reversing this downfall in aid, targeting its aid better towards the poor and very poor recipient countries and raising the grant share and the concessionality of loans for these countries together with a reallocation of aid towards the social sectors of human development would render Arab aid-giving more effective in terms of poverty alleviation and more in line with western aid. A greater willingness to participate in the ongoing discussions amongst western donors about the proper objectives and design of development finance would help Arab donorsto achieve the recognition they truly deserve. Closer cooperation with western donors would be a logical consequence of taking such a step. However, this would also need to be matched by a greater willingness on the part of western donors to take their Arab counterparts seriously as partners of development finance.

Notes: The effect of increasing openness on real output growth in China is examined. The framework of analysis is a regression model that uses time-series data for each province. For east coastal provinces, increasing openness is found to have positive effects on real output growth, and some of the effects are statistically significant. The results appear to be broadly consistent with the new growth theories that openness enhances long-run growth through its impact on technological improvement. However, inland provinces in China have been isolated from world trade for several decades and their economies devastated. An increased openness in these provinces is found to have, in most cases, negative effects on real output growth.

Notes: The aim of this paper is to consider the possible implications of an EPA between the EU and the Caribbean. The focus is on the Caribbean economies, and on the question of what form of EPA might be pro-development and pro-poor for the region. The discussion outlines the specificities of the Caribbean region, and some of the economies therein as well as detailing the key analytical issues which need to be considered. The empirical analysis focuses on examining patterns of trade by product and geographical source at a highly detailed level of disaggregation. The analysis suggests that future EPA arrangements are more likely to lead to significant trade diversion as opposed to trade creation or trade reorientation. MFN liberalisation would serve to minimise trade diversion, but in turn is likely to lead to greater adjustment costs. If the EPAs are to be pro-development and pro-poor than maintaining/increasing levels of market access to the EU, and ensuring appropriate levels of assistance and aid will be critical.

Notes: The purpose of this paper is to examine trade policy regime and trade-related development issues in the Maldives on the basis of the Trade Policy Review Maldives 2003 of the WTO. The key theme of the paper is that, given the narrow resource base and small domestic market, openness to foreign trade and investment remains the ‘natural’ policy choice for a small developing economy like the Maldives. Since the late 1980s, the Maldivian government has made considerable progress in implementing policy reforms driven by this conviction. However, the reform process is far from complete. High import tariffs maintained predominantly on revenue considerations, a large direct role played by the public sector in foreign trade and some key sectors of the economy, lack of transparency in duty concessions and other investment incentives, failure to incorporate environmental concerns as part of the national development policy, and delays in meeting reform commitments under the WTO are among the key items of the unfinished reform agenda.

Notes: Using a large sample of countries over the 1990s, this paper examines the extent to which institutions’ functioning disables a greater participation of the Middle East and North Africa (MENA) in the world economy. It focuses on the impact on manufactured exports and FDI attractiveness and considers a broad index of political risk as well as indices targeted toward specific aspects of governance (corruption, government effectiveness and the rule of law). The results are robust to different econometric approaches and lend strong support to the hypothesis that the functioning of institutions may disable the participation of MENA countries in the world economy. They suggest that the impact of an improvement in the quality of institutions may result in a sensitive increase of FDI inflows and manufactured exports. That increase is comparable to the one resulting from liberalisation policies. Hence, although institutional reforms can take time, they deserve the necessary efforts given their outcomes as compared to other reforms.

Notes: Portfolio flows channelled via institutional investors were the most dynamic capital flows to emerging markets in the 1990s. We use an asymmetric information framework to derive five propositions about the effects of the activities of foreign institutional investors on emerging markets. We confront these propositions with existing empirical evidence on the financial sector of emerging markets and conclude that institutional investors do not automatically generate benefits for emerging markets. Therefore, capital account and financial market liberalisation needs to be accompanied by careful regulation.

Notes: FDI's spectacular growth, in diverse forms, during the past two decades represented an important force generating greater economic integration. FDI increased substantially in relation to global productive capacity, cross border mergers and acquisitions component of FDI put domestic corporate laggards on notice, and the spread of FDI to non-tradable service sectors generated the possibility that these traditionally low productivity sectors would be brought closer to the standards of international efficiency. Yet, FDI did not perform an integrating role in a more fundamental sense. There is little evidence that FDI served to speed up income convergence across countries. This was the case for two reasons. First, FDI flows remained highly concentrated. Second, the benefits from FDI appear to have accrued principally where conditions were already conducive to investment and growth. Hence, though cross-country disciplines through bilateral, regional and multilateral efforts are important in reducing the distortions that lead to misallocation of capital, domestic efforts to raise absorptive capacity will ultimately be critical. Efforts to increase labour mobility, as foreseen, for example, under GATS, could have a significant effect in raising the benefits from FDI as the more mobile labour serves to bridge the cultural, institutional and contractual differences across nations.

Notes: Rivalry in trade between China and its regional neighbours in ASEAN has become a major preoccupation for many regional policy-makers. For these reasons, strengthening the basis of empirical evidence on regional trade relations is especially important, and this paper does so in two ways. Using very detailed historical trade data, we combine econometric and trade flow analysis to elucidate patterns of export competition and underlying comparative advantage for ASEAN and China. Our findings indicate that the potential exists for both export rivalry and more extensive trade complementarity, but so do many challenges for policy makers who seek to mitigate adjustment costs and facilitate long term efficiency. Our econometric results indicate that, in the short run at least, ASEAN and China are experiencing intensified export competition in prominent third markets such as Japan and the US. More extensive trade flow analysis reveals, however, that in the long run globalisation can accommodate export growth by all the economies of East Asia, if aggregate growth can be sustained to facilitate the structural adjustments necessary for an optimal regional division of labour.

Notes: Our analysis reveals that, from Russia's perspective, there is no economic rationale to unify the price of natural gas it sells domestically and in Europe. We argue that pipelines allow Gazprom to segment the Russian market from the European (including Turkey) market and that Russia has market power in the European market. If Russia were to fail to exploit this market power in its European market, by selling its natural gas to Europe at only full long-run marginal cost plus transportation costs, Russia would lose between $5 billion and $7.5 billion per year (almost two per cent of its GDP). If, instead, Russia were to raise its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run – adjustment costs that cannot be justified on the basis of comparative advantage. We estimate that the efficient world price would be achieved if Gazprom were to employ its optimal ‘two-part tariff’. The optimal two-part tariff would double Gazprom's annual profits in Europe, but it involves significant long-term risks for Gazprom of lost market share.

Notes: Indonesia since the late 1960s constitutes an excellent case study in the political economy of trade protection. There have been major changes in the overall policy regime, from liberalism to significant intervention, and back towards liberalism. There have been large, though declining, inter-industry variations in effective protection. There has been a lively domestic debate, much of it dominated by non-economists. Many actors at home and abroad have a stake in that debate. And, since the 1980s at least, trade policy interventions have been reasonably well documented and quantified. In this paper, we show how quantitative analysis may be employed to shed light on changes in the trade policy regime over time. We also examine the principal actors with an interest in, and influence over, trade policy, delineating where possible how their influence translated into the policy arena. Finally, we speculate on whether the framework developed in this paper is applicable to the very different circumstances prevailing in the post-Soeharto era.

Notes: The proliferation of preferential trading agreements (PTAs) in different regions of the world has been a significant development over the last two decades. South Asian countries have been slowly moving towards a South Asia Free Trade Area (SAFTA) in recent years. The desirability of SAFTA has been questioned by some observers recently. Will SAFTA create gains for its members or not? Is it better for South Asian countries to promote non-discriminatory trade liberalisation rather than SAFTA? The main objective of this paper is to address the above questions, especially the desirability of SAFTA, using a global computable general equilibrium (CGE) model. From the existing empirical and theoretical studies, we have identified three viewpoints on the desirability (or viability) of SAFTA: pessimistic, optimistic, and moderate. The results from two policy scenarios (unilateral liberalisation and SAFTA) confirm the pessimistic view by showing that unilateral liberalisation would benefit South Asian countries much more than preferential liberalisation (SAFTA). In fact, under preferential liberalisation, small countries in the region would gain little or even lose. The present political climate in South Asia also seems to support the pessimistic view.

Notes: The SPS Agreement and the related WTO dispute settlement mechanism are an important first step in strengthening the global trade architecture, bringing in greater transparency and orderly conditions to world food trade. However, implementation of the new trade rules has turned out to be a more complex task than the traditional market access issues handled by the WTO. Several factors, including inadequate financial and technical resources, have constrained devel-oping countries from becoming effective participants in the implementation process, and there is widespread suspicion that SPS regulations are being used as hidden protectionist devices by developed countries. However, despite all the problems, some developing countries have been quite successful in penetrating developed country food markets; they have done so by accepting the consumer preferences and standards in quality-sensitive high-income markets and implementing domestic supply-side measures. While making full use of available international assistance initiatives, developing countries should view the task of complying with SPS standards not just as a barrier but also as an opportunity to upgrade quality standards and market sophistication in the food export sector.

Notes: Because many authors have proposed stimulating the ailing Japanese economy by monetary expansion and yen depreciation, we explore the repercussions of depreciating the yen against the dollar on the other East Asian economies – which largely peg to the dollar. Since 1980, economic integration among Japan's neighbours – China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand – has intensified and (except for China and Singapore) their business cycles have been highly synchronised. These cycles have been closely linked to fluctuations in the yen/dollar exchange rate – through changes in the export competitiveness, inflows of foreign direct investment and intra-Asian income effects. We show that a major yen devaluation would have a negative impact on incomes in other East Asian economies and that it is not a sensible policy option for Japan.

Notes: The large and vibrant informal trade between India, and Bangladesh continues to thrive despite unilateral/regional/multilateral trade liberalisation in these two countries. This calls for an in-depth analysis of India's informal trade with Bangladesh. Using insights from the New Institutional Economics informal and formal institutions engaged in cross-border trade are contrasted to examine whether informal trading arrangements provide better institutional solutions. The analysis, carried out on the basis of an extensive survey conducted in India and Bangladesh reveals that informal traders in India and Bangladesh have developed efficient mechanisms for contract enforcement, information flows, risk sharing and risk mitigation. Further, informal traders prefer to trade through the informal channel because the transaction costs of trading in the informal channel are significantly lower than the formal channel implying that informal trade takes place due to the inefficient institutional set up in the formal channel. The principal policy implication from the study is that unless the transacting environment of formal traders improves, informal trade will continue to coexist with formal trade, even if free trade is established in the SAARC region.

Notes: This paper applies modern tools of economic analysis to examine the nature of transnational terrorism and associated collective action concerns that arise in the aftermath of September 11. Throughout the paper, the strategic interaction between rational terrorists and targeted governments are underscored. Networked terrorists draw on their collective strengths to exploit a maximum advantage over targeted governments’ inadequate and uncoordinated responses. A wide range of issues are explored including governments’ deterrence races, undersupplied pre-emption, and suicidal attacks. Myriad substitutions by terrorists limit government anti-terrorism policy effectiveness. A host of policy responses are evaluated in light of economic analysis and past econometric evidence.

Notes: We discuss the possible dynamic benefits of economic integration for the new members of ASEAN. Direct evidence on regional integration and growth is weak, but three indirect channels are possible. Openness increases access to foreign knowledge, which could help productivity growth. Trade liberalisation is likely to stimulate investment and might promote the integration of the regional production network. Binding liberalisation under AFTA would help ‘lock-in’ and accelerate liberal economic reforms. These gains are not automatic, however. Discriminatory liberalisation will switch imports from sources with high stocks of knowledge towards ASEAN countries, which have lower stocks, and so may lower productivity growth. We term this ‘dynamic’ trade diversion. In addition, local absorptive capabilities must be developed to benefit fully from technology transfer. Finally, we recommend extending AFTA commitments on an MFN basis in order to avoid static and dynamic trade diversions.

Notes: Books reviewed:William C. Hunter, George G. Kaufman And Michael Pomerleano (eds.), Asset Price BubblesNancy Birdsall And John Williamson (With Brian Deese), Delivering on Debt Relief: From IMF Gold to a New Aid ArchitectureKatrin Springer, Climate Policy in a Globalizing World

Notes: Multi-functionality is a currently fashionable argument, especially within the EU, for continued support of the farming sector. However, there is a substantial danger that this will be used, and be seen to being used, as a façade for continued traditional support and protection. If so, the current trend towards liberalised agricultural markets, on which much of the developing world depends, will be frustrated. Nevertheless, farming does matter to many communities, over and above its marketable surplus and the incomes so generated. It follows that any negotiations aimed at liberalising agricultural trade have to take these arguments seriously. To do so requires that the critical elements of the debate be widely understood. This paper outlines these critical elements, in the light of a previous contribution from Hodge (2000). It argues that there are ways in which quasi-market systems can be used to correct market failures implicit in the notion of multi-functionality. It also argues that proper compensation to existing supported farmers is a necessary and separate condition for sensible policy reform. Much of the commentary on farm trade liberalisation confuses the two separate conditions for reform: multi-functionality and compensation. This confusion threatens progress towards agricultural trade liberalisation, without generating any reliable benefits of a more multifunctional agriculture.

Notes: A key element of the EU's free trade and preferential trade agreements is the extent to which they deliver improved market access and so contribute to the EU's foreign policy objectives towards developing countries and neighbouring countries in Europe, including the countries of the Balkans. Previous preferential trade schemes have been ineffective in delivering improved access to the EU market since only a small proportion of the available preferences have actually been utilised. The main reason for this is probably the very restrictive rules of origin that the EU imposes, coupled with the costs of proving consistency with these rules. If the EU wants the ‘Everything but Arms’ agreement and free trade agreements with countries in the Balkans to generate substantial improvements in access to the EU market for products from these countries then it will have to reconsider the current rules of origin and implement less restrictive rules backed up by a careful safeguards policy..

Notes: When the effective protection concept was first developed it was widely regarded as a key measure of the structure of protection and became widely deployed. It was however, subject to a theoretical critique on the grounds that it was essentially a partial equilibrium measure, which could not be easily embedded in a general equilibrium framework. Notwithstanding this critique, the concept has continued to be widely used, especially in the context of policy reform and policy appraisal in developing countries. This paper re-appraises the concept, reviews the extent of its application and discusses the factors behind its longevity as an investigative tool. The paper concludes that the measure still has a role to play in evaluating the structure of protection.

Notes: After briefly explaining the causes of the Japanese asset-price bubble in the 1980s, this paper analyses why the bursting of the bubble developed into a full-fledged financial crisis in the late 1990s. In order to cope with this crisis, the Government has injected capital directly into the banking sector and banks have written off enormous amounts of bad loans. However, the Japanese financial sector remains very weak and Japan still faces a number of problems in its financial system. Firstly, the profit margin of banks is too small to cover the increased default risk following the bursting of the bubble, and there are market distortions created by the government-backed financial institutions and the requirements on new lending to small and medium sized companies. Secondly, banks still have excessive stock investment and crossholding of shares between banks and other companies has weakened the market discipline on entrenched management. Thirdly, the government guarantee of all banking-sector liabilities should be removed. Once the financial system is stabilised, a risk-adjusted deposit insurance premium should be introduced so as to strengthen market discipline on banks, and the huge postal saving system should be privatised to create a level-playing field among deposit taking financial institutions. Besides the foregoing, the weak corporate governance structure of Japanese financial institutions has to be remodelled. The management of banks has shielded themselves by extensive cross-shareholdings, especially with life insurance companies. There has been extensive mutual provision of capital, most large life insurance companies have weak corporate governance, and many of the large shareholders of banks are life insurance companies. This double gearing between banks and life insurance companies has therefore weakened the market control of Japanese financial institutions.

Notes: This paper first summarises Japan's fiscal policies in the 1990s. Then, we investigate the macroeconomic impact of government debt and the sustainability problem. We find that the Keynesian fiscal policy in the 1990s was not effective and fiscal sustainability may therefore become a serious issue. We also estimate the optimal level of deficits and evaluate fiscal reconstruction movements. It is shown that the actual deficit exceeded the optimal level in the late 1990s. We then inspect fiscal reconstruction movements in the Hashimoto Administration in 1997 and find that the major factor of recession in 1997 was not fiscal consolidation. An important lesson from Japan's fiscal policies in the 1990s is that long-run structural reform is more important than short-run Keynesian policy.

Notes: Increasing attention is being paid to political economy dimensions of the IMF's operations. However, up until now, the literature has lacked a systematic overview of how politics and economics interact in this context. This paper sets out to fill the gap. Its conceptual basis is that of the ‘life cycle’ of an IMF programme. What determines the decision to turn to the Fund for financial assistance, what determines the outcome of negotiations, what determines whether a country will come back to the Fund? Answers to these questions cannot be satisfactorily given by examining economics alone. The paper draws on existing evidence to provide an empirically based discussion of the issues involved. It also points the direction in which future research needs to go. Some of the policy implications of the analysis are also examined.

Notes: The review of India's trade policy by the WTO, the third of its kind, is in three parts: the report by the WTO secretariat, a statement by the government of India and minutes of the discussion of the report by the trade policy review board. The review provides detailed information not only on India's trade and foreign investment policies but also an analytical review of India's export and economic performance. The review notes that India has made considerable progress with the liberalisation of its trade and investment regime, but it has a long way to go if it were to achieve a growth rate of eight to nine per cent, the stated objective of the policy makers. This paper, drawing upon the material in the report, analyses India's growth prospects and endorses the broad conclusions of the report.

Notes: This paper provides a selective review of the recent analytical and empirical literature on the benefits and costs of international financial integration. It discusses the impact of financial openness and capital flows on consumption, investment and growth, as well as the impact of foreign bank entry on the domestic financial system. It argues that, for small open developing countries, the benefits of financial integration are mostly long term in nature, whereas risks can be significant in the short run. Careful preparation and management are therefore essential to ensure that short-run costs do not lead to policy reversals. It also stresses that the empirical evidence on the impact of foreign direct investment on domestic capital formation and growth, as well as on the effects of foreign bank entry, should be viewed with caution. In particular, the possibility that foreign bank penetration may lead to adverse changes in the allocation of credit cannot be dismissed on the basis of the existing evidence.

Notes: We discuss liberalising the temporary mobility of workers under Mode 4 of the GATS, particularly the movement of medium and low skilled service providers between developing and developed countries. Such mobility potentially offers huge returns: a flow equivalent to three per cent of developed countries’ skilled and unskilled work forces would generate an estimated increase in world welfare of over US$150 billion, shared fairly equally between developing and developed countries. The larger part of this emanates from the less-skilled, essentially because losing higher-skilled workers cuts output in developing countries severely. The mass migration of less skilled workers raises fears in developed countries for cultural identity, problems of assimilation and the drain on the public purse. These fears are hardly relevant to temporary movement, however. The biggest economic concern from temporary mobility is its competitive challenge to local less skilled workers. But as populations age and the average levels of training and education rise, developed countries will face an increasing scarcity of less skilled labour. Temporary mobility thus actually offers a strong communality of interest between developing and developed countries.The remainder of the paper looks at the GATS provisions on Mode 4 and the commitments that have been made under it. The paper reviews several official proposals for the Doha talks, including the very detailed one from India, and considers several countries’ existing schemes for the temporary movement of foreign workers. Many countries have long had bilateral foreign worker programmes, and some regional agreements provide for liberal and flexible movement. These show what is feasible and how concerns can be overcome. We caution that, to be useful, any WTO agreement must increase mobility, not just bureaucratise it.The paper concludes with some modest and practical proposals. We suggest, inter alia, that licensing firms to arrange the movement of labour is the most promising short-term approach to increasing temporary mobility.

Notes: This paper focuses on the US tariff preference afforded to Mexico relative to non-NAFTA trading partners and evaluates the trade effects of NAFTA in a manner consistent with the idea behind a preferential trading agreement. The estimation technique exploits the time-varying dimension of the tariff preference over 1989 to 2001. This is important because the tariff preference for Mexico into the United States market existed prior to NAFTA. Further, the NAFTA preference was phased in over time. We find that a higher US tariff preference for Mexico corresponds to increased US import demand for Mexican goods, and that a higher Mexican tariff preference for the United States corresponds to increased Mexican demand for US exports. Interestingly, import demand was more responsive to changes in the tariff preference once NAFTA was in place than it was on average.

Notes: Far from being the leader, the US has been a ‘domino’ belatedly falling into line in the global rush toward bilateral and regional free trade arrangements. Often the initiative for negotiations has come from seemingly weaker trading partners. Once in the game, however, and aware of the asymmetries of market power and issue salience that enhance US bargaining leverage, the US has been aggressively pursuing a variety of commercial and diplomatic interests, both tactical and strategic, that include bolstering local democratic institutions and processes of economic reform, strengthening US security ties, accelerating region-wide commercial liberalisation by allying with a regional leader, establishing new precedents to use as bench markers in future trade negotiations, and otherwise using free trade accords to advance its comprehensive global trade policy agenda. Bilateralism and regionalism have opened the door to an explicit introduction of political criteria, in contradiction to GATT/WTO apolitical universalism. While often reactive to the initiatives of other nations, the US has not been indiscriminate, deflecting the entreaties of suitors where US international political economy interests are not served.

Notes: This paper describes the United States recently enacted Africa Growth and Opportunity Act (AGOA) and assesses its quantitative impact on African exports. The AGOA expands the scope of preferential access of Africa's exports to the United States in key areas such as clothing. However, its medium-term benefits – estimated at about US$100-$140 million, an 8−11 per cent addition to current non-oil exports – would have been nearly five times greater (US$540 million) if no restrictive conditions had been imposed on the terms of market access. The most important of these conditions are the rules of origin with which African exporters of clothing must comply to benefit from duty-free access.

Notes: I employ two alternative intra-industry trade Applied General Equilibrium (AGE) models to explain some stylised facts of the British economy. The model with skill-biased technical change (i.e. exogenous skill-biased technical change à la Solow) can explain the rise in wage inequality between skilled and unskilled workers, the decline in manufacturing and the expansion of modern services. However, the model where technical change is trade-induced (i.e. endogenous sector-biased technical change à la Romer) performs better, because it can also explain the exponential rise of imported intermediate capital goods and developments in the wage rate of unskilled workers.

Notes: We examine the competitiveness of Hungarian agriculture and food processing, in relation to that of the EU, based on four indices of revealed comparative advantage, using highly disaggregate data for the period 1992 to 1998. Consistency tests suggest that the indices are less satisfactory as cardinal measures, but are useful in identifying the demarcation between comparative advantage and comparative disadvantage. Hungary is shown to have a comparative advantage in a range of agri-food products, including animals and meat. This complements the findings of those studies that have used price and cost based approaches in identifying competitiveness in cereals and crops. Results indicate that the RCA indices, when interpreted as a binary measure, have remained surprisingly stable during the period of transition, although there is evidence of a weakening in the level of comparative advantage as revealed in the Balassa index.

Notes: This article summarises, extends and updates previous empirical work on the distributional implications of alternative health care financing arrangements in a selection of European countries and the US. On the one hand, total health care payments are almost proportional to ability to pay in most countries. This is predominantly driven by a high reliance on public financing. On the other hand, private payments – out-of-pocket payments as well as private insurance premiums – are highly regressive. More extended reliance on private financing may therefore endanger the equitable nature of financing systems. In addition, private payments put a heavy burden on unfortunate households.