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: 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: 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: 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.

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: Free Trade Areas (FTAs) have recently become an integral part of Singapore trade policy. This paper discusses the reasons behind Singapore's recent embracement of ‘new regionalism’ with particular reference to the proposals to form FTAs with Japan and the US. The paper goes on to examine various aspects of Singapore's trade linkages with the two economic superpowers in some detail. Popular discussion of FTAs gives one the appearance that such a trade policy is entirely benign. The paper sounds a cautionary note, highlighting some reasons to be concerned with Singapore's recent embracement of the ‘new regionalism’.

Notes: Globalisation or market integration in Sub-Saharan Africa is closely linked to the structural adjustment programmes. In this paper we focus on their dependence on the politics and institutional characteristics of the countries concerned. In particular, we argue that one important explanation for the dismal performance of many African countries, in spite of all the measures taken towards market liberalisation, is the combination of, first, a magnification of the effects of policy and, second, a lack of willingness or ability on the part of politicians to respect the restrictions imposed on their behaviour and policy choices by the liberalised markets. We look at how the increased exposure to international prices and returns on assets make the economic equilibrium relations – the law of one price and uncovered interest parity – relevant guidelines for economic policy. The argument is illustrated by the case of Zimbabwe, where lack of respect for the restrictions imposed by international markets has led to an economic crisis with negative growth rates and a departure from globalisation.

Notes: Books reviewed in this article:Warwick J. McKibbin and Peter J. Wilcoxen, Climate Change after Kyoto: Blueprint for a Realistic ApproachLudger Wößmann, Schooling and the Quality of Human CapitalMordechai E. Kreinin and Michael G. Plummer, Economic Integration and Development: Has Regionalism Delivered for Developing Countries?Gunther G. Schulze and Heinrich W. Ursprung (eds.), International Environmental Economics: A Survey of the Issues

Notes: This paper examines the effects of capital controls on the composition of inter-national capital flows, paying particular attention to debt inflows versus equity inflows. A two-period small open economy model with stochastic second-period output and asymmetric information between domestic agents and international financiers is utilised to generate predictions regarding the effects of capital controls on the relative use of debt versus equity for financing first-period investment. These capital control implications are then investigated with quarterly frequency panel data for Latin America. Capital controls are found to significantly affect the composition of the capital account.

Notes: This paper measures the size and composition of non-tariff trade costs such as transport, wholesale, and network costs incurred in Canada's merchandise trade using Statistics Canada's latest ‘trade margins’ statistics. It examines how changes in these trade costs have influenced Canada's merchandise trade pattern and the course of economic integration. Our results show that as tariffs have been substantially reduced and largely abolished, costs associated with transport and distribution services now appear much larger than remaining customs duties; therefore, liberalisation in services might be the next key step in promoting greater merchandise trade. Further, reducing transport and other trade-related costs has helped ‘reverse’ the ‘home market effect’, expanding Canada's domestic demand and production for exports of differentiated products.

Notes: We present a simple dynamic theory of child labour, human capital formation, and economic growth that is consistent with some of the main features of child labour and economic development. The model supports a number of testable hypotheses, which we investigate econometrically in a systems approach. Using panel data from 64 countries in the period 1960–1980, the econometric results match the theory well. The incidence of child labour is negatively related to parental human capital and education quality, but is positively correlated with education cost. Further, countries with higher amounts of child labour tend to have lower stocks of human capital in the future. There is also a convergence phenomenon between the level and growth of human capital. The lower the current stock of human capital, the higher is current child-labour use and the faster is the growth rate of human capital.

Notes: We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of the Doha Round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 per cent in the Doha Round would increase world welfare by $686.4 billion, with gains of $164.0 billion for the United States, $132.6 billion for Japan, and significant gains for all other industrialised and developing countries/regions. If there were global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would increase by $2.1 trillion, with gains of $497.0 billion (5.5 per cent of GNP) for the United States and $401.9 billion (6.2 per cent of GNP) for Japan. Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than the Doha multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile and Korea, and the United States with Chile, Singapore and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some non-member countries for both the regional and bilateral FTAs analysed. The welfare gains from multilateral trade liberalisation are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

Notes: An emerging international market for education is exploding through the confluence of both new demand and supply factors. The demand factors include important and reciprocal demographic changes in both the developed and the developing world, and a new emphasis on improving ‘human capital’ as a source of national competitiveness and equity. The supply factors include the adoption of new competitive trading strategies by countries competing for students with the United States; changes in the need for ‘lifelong learning’ and the information technology revolution. This article analyses these dynamic factors and discusses remaining bottlenecks to the expansion of international trade in education. The article concludes by laying out some of the implications for the future of the national and international education markets.

Notes: Critics of globalisation object to many things, some of which can be easily understood within standard economic models, but others of which seem to reflect a view of the world that economists generally do not share. This paper attempts to identify several alternative frameworks for analysis within which some of their criticisms may be understood, with the ultimate aim of extracting testable implications that differ from standard models. Three such alternative models are suggested, all of which focus mainly on the behaviour of owners and managers of corporate capital: an anti-labour model, in which capitalists are willing to sacrifice some of their own profits for the chance to make labour worse off; a labour-monopsony model in which capitalists co-operate globally to increase profits by depressing wages; and an international political economy model in which capitalists use their resources to influence the political process for more than just obtaining import protection. This third framework, which is not spelled out in any detail here, has capitalists seeking policies such as export subsidies and other means of promoting market access, and it also has them influencing the international negotiations that set the rules of international agreements and organisations, such as the NAFTA and WTO. Examples of the latter sort of influence are discussed.

Notes: This paper compares the globalisation experience of the late 19th century with that of the post world war period. It notes the enormous changes in the world economy arising from the increasing participation of the developing countries in the world goods, labour and capital markets and the reduction in the cost of communications that has underlined these changes. More importantly globalisation was made by a consensus on trade, debt and macroeconomics which has led to policy reforms in developing countries including China whose entry into the WTO provides a high watermark in globalisation of the latter period. The paper notes that globalisation is not in danger of reversal given that the forces that led to this outcome in the earlier period have become weak. Ideas, interests, international relations and stability achieved in the post World War period gives ground for qualified optimism about the continuation of globalisation.

Notes: The current accounts data of industrial countries exhibits some strong patterns that are inconsistent with the intertemporal approach to the current account. This is the basic model that international economists have been using for more than two decades to think about current account issues. This paper shows that it is possible to go a long way towards reconciling the theory and the data by introducing two additional features to the basic model: investment risk and adjustment costs to investment. Moreover, these extensions generate new and unexpected theoretical predictions that receive substantial support in the data. The overall message is therefore positive: with a couple of reasonable modifications, the intertemporal approach to the current account provides a fairly good description of the industrial country data.

Notes: After a brief review of the literature to the early 1970s, this paper assesses the contributions by economists during the past three decades to measuring the distortionary effects of trade policies. It does not pretend to be a comprehensive survey, but draws on selections from the literature that give a sense of the distance the profession has travelled from a trade policy practitioner's viewpoint since Corden's first paper on the subject in 1957. Phenomenal though that progress has been, there is ample room for further improvement in computing the economic (and other) effects of trade-related policies and their reform. The paper concludes with suggestions of where the priorities should be in global modelling of trade policy reform, as the world moves into the next round of multilateral trade negotiations.

Notes: This paper notes that there is a need to get to a fourth stage in the evolution of the relationship of free trade to laissez faire going beyond the three stages identified in Max Cordon's magisterial book Trade Policy and Economic Welfare. In the first stage free trade was a special case of the argument for laissez faire. In the second stage many arguments for protection arose with various qualifications to the case of free trade and laissez faire. In the third stage the link between free trade and laissez faire was broken and in the theory of domestic distortions it was noted that all arguments for protection except in the case of monopoly power in trade were second best arguments. Moreover, it was possible to devise measures such as taxes and subsidies that reduced the distortion through government intervention. But noting that government intervention itself carries with it problems of rent seeking and directly unproductive activities as well as the taking into the proper role of Government, laissez faire seems the best policy. Hence the need for a fourth stage in the evolution of free trade and laissez faire to link them together again.

Notes: The nexus of real exchange rate (RER) and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in Asian and Latin America during the period 1985-2000. It is found that the degree of appreciation in RER associated with capital inflow is uniformly much higher in Latin American countries compared to their Asian counterparts, despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy. The econometric evidence suggests that both the composition of capital flows and differences in the degree of response of RER to capital flows matter in explaining these contrasting experiences. While RER appreciation is a phenomenon predominantly associated with other (non-FDI) forms of capital inflows (OCFW), a given level of OCFW brings about a far greater degree of appreciation of the real exchange rate in Latin America where the importance of these flows in total capital inflow is also far greater. On the policy front, Asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the RER against the appreciation pressure of capital inflows. There is, however, no evidence to suggest that sterilised intervention can generate a lasting impact on the real exchange rate.

Notes: This paper analyses the November 2000 liquidity crisis that brought Argentina near default on its foreign debt. The main purpose of this paper is to assess whether this crisis may be taken as a warning signal for Estonia, given the similar exchange-rate system shared by the two countries. It seems that with a low level of public debt and a balanced budget, Estonia will not face a similar liquidity crisis as its Latin American counterpart, which remained heavily reliant on foreign borrowings. But the substantial real exchange-rate appreciation of the kroon under the Currency-Board Arrangement has resulted in serious external imbalances, which will need to be corrected to avoid balance of payments pressure and reduce Estonia's high dependency on the level of foreign direct investments.

Notes: This paper empirically examines three possible reasons for the high and rising unemployment of low-skilled employees in Germany: (i) an upsurge in inter-industry trade, (ii) a skill-biased technical change, and (iii) a failure of labour market adjustment. The empirical analyses indicate that an exogenous wage-setting process as well as a bundle of factors, including a skill-biased technical and structural change, have contributed to the decline in relative demand for low-skilled employees in Germany. Thus, economic policy in Germany should focus on improving the employability of workers in the lower segment of the labour market and on raising the adjustment flexibility, above all the flexibility of the wage structure, of the German labour market.

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 is a revision of an Invited Paper for the Australian Conference of Economists, Adelaide, 1-3 October 2002. The research on which the paper draws was funded by the Grape and Wine Research and Development Corporation, the Rural Industries Research and Development Corporation, and the Australian Research Council. Thanks are due to Nick Berger for his pioneering work in developing a prototype of the database and model used in this paper (see Berger, 2000) and to an anonymous referee for helpful comments.

Notes: Books reviewed:Horst Siebert, Economic Policy Issues of the New EconomyCharles E Lindblom, The Market System: What is it, How it works, and What to Make of itRonald Findlay, Lars Jonung and Mats Lundahl (eds), Bertil Ohlin: A centennial Celebration (1899-1999)

Notes: I explore the interactions between comparative, competitive and absolute advantage in a two-country model of oligopoly in general equilibrium. Comparative advantage always determines the direction of trade, but both competitive and absolute advantage affect resource allocation, trade patterns and trade volumes. Competitive advantage in the sense of more home firms drives foreign firms out of marginal sectors but also makes some marginal home sectors uncompetitive. Absolute advantage in the sense of a uniform fall in home costs tends to raise home output in all sectors but also leads both countries to specialise less in accordance with comparative advantage.

Notes: This paper raises the question when both goods and factors can move in an opening of two countries’ borders whether it is possible to say a priori which of the two would move and which moves faster as both move. The paper notes that this question should be answered in terms of the extent of the existing barriers whether natural or policy based and the ability to shift production activities in the two countries or regions. The issue is analysed taking into account the movement of goods and factors between the centres of activity in Israel and the West Bank and Gaza. The main finding of the analysis in this case is that following the opening of the borders, adjustment took place predominantly through the movement of factors, almost exclusively labour: and only to a very limited extent through the exchange of goods. This may be due to the short distances and prohibition of shifting residences. In steady state this is expected to be large and sustained compared to an increase and a decline of labour movement in steady state if residency were available..

Notes: This paper examines the international economic policies of the eastern European and Soviet Successes States in the early 1990s which provide one of those wide-open windows of opportunity when powerful vested interests are not lobbying for retention of an existing tariff structure. Moreover, the simultaneous abandonment of central planning by over two dozen countries provided a natural experiment in which a range of differing policies might have been pursued. Policymakers in transition economies have generally ended up pursuing liberal non-discriminatory trade and foreign exchange policies. There are exceptions and the majority may be wrong, but the presumption is that, perhaps after a learning or trial-and-error process, decision makers have found the rules of thumb suggested by economists to be their best guide to international economic policy. This paper notes that integration of transition economies into the global trading system has been surprisingly successful. Almost all the countries in transition from central planning have accepted the WTO rule-based system in principle, even if there are variations in trade policies and performance, and have generally pursued multilateral non-discriminatory trade policies. In particular, the potential danger of regionalism proving more attractive than multilateralism has not eventuated. The revealed behaviour of policymakers suggests that trade liberalisation is a good rule of thumb and regional groupings among transition economies have been insignificant. Despite a proliferation of new currencies, varying exchange rate regimes, and differing degrees of currency convertibility, the general pattern has been to accept convertibility for current account transdactions, and in many cases to extend this to a de jure commitment and to allow substantial capital account convertibility. A general policy conclusion in favour of more open and non-discriminatory trade and exchange policies have passed the test of acceptability by policymakers in over two-dozen countries in this category.

Notes: Japan's interest rates have been compressed toward zero because of pressure coming through the foreign exchanges. Twenty years of current-account surpluses have led to a huge buildup of claims – mainly dollars – on foreigners. Because of ongoing fluctuations in the yen/dollar exchange rate, Japanese financial institutions will only willingly hold these dollar claims if the nominal yield on them is substantially higher than on yen assets. In the 1990s to 2002 as US interest rates have come down, portfolio equilibrium has been sustained only when nominal interest rates on yen assets have been forced toward zero. One consequence is the now infamous liquidity trap for Japanese monetary policy. A second consequence is the erosion of the normal profit margins of Japan's commercial banks, leading to a slump in new bank credit and an inability to grow out of the overhang of old bad loans.

Notes: Home governments seek to enhance the international competitiveness of private enterprises not only through export credit, but also through preferential loans for foreign direct investment (FDI). Indeed, contrary to the common image of nation-states resenting their loss of jurisdiction over the mobile transnational corporation, some governments have become active financiers of multinational investment to serve their industrial policy goals. The uneven use by industrialized states of preferential credit to further MNC expansion challenges the current characterization of home government policy as both homogenous and ineffective for the task of industrial promotion. The world's most active state in FDI finance, Japan, has enjoyed an inordinate degree of freedom to engage in subsidization of MNC investment since no international regime on FDI credit, similar to the OECD arrangement on government export finance, exists. Moreover, Japanese labor has not challenged the legitimacy of state FDI finance. In the absence of international or societal constraints on soft FDI credit, Japanese self-restraint in FDI subsidization is better explained by the internal budgetary makeup of government financial institutions with a mandate to finance FDI. Treasury bureaucrats concerned with healthy public finances and politicians eager to reward core support groups, have repeatedly competed for control over the budgetary strings on soft FDI finance. This political contest is far from over. This paper, therefore, highlights the political agency behind rules of financial discipline that have so far inhibited Japanese rent-seeking international economic behavior.

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.