Virkar: Globalisation, Investment, and Global Economic Growth – Examining the Causes of Recent Banking Crises

Abstract:

For any economy to be healthy, a strong financial system is required to efficiently move funds from unproductive to productive economic agents. Banks play an important role in this respect as their presence and structure reduces the problems of adverse selection, moral hazard, and asymmetric information. Recent decades have been overshadowed by a series of systemic banking crises that have left many parts of the developing world gasping for breath. In particular, economies like Mexico and the East Asian tigers have been hit hard both during and in the aftermath of such financial misadventures. This chapter thus attempts to examine the causes of banking crises in the light of available evidence. More specifically, the research enumerates and analyses the role of both macroeconomic and microeconomic factors in precipitating such crises through a critical examination of the existing literature, and illustrates each factor with examples from key pan-global financial catastrophes.

 

Available for download here.

Bano & Tabbada: Foreign Direct Investment Outflows – Asian Developing Countries

Abstract:

Foreign Direct Investment originating from East, Southeast, and South Asian developing countries has increased significantly since 1980. This paper examines the extent and determinants of Foreign Direct Investment outflows from these countries between 1980 and 2011. We use selected home country-specific macroeconomic variables and identifies the key determinants of Foreign Direct Investment outflows using correlation and regression analysis. The results show that Foreign Direct Investment outflows are closely associated with high levels of Gross Domestic Product, high domestic savings, large foreign reserves, export orientation, and relatively large Foreign Direct Investment inflows in the source countries, with the strength and importance of each factor varying with the level of development. Our main conclusion is that, although non-traditional Foreign Direct Investment outflows have so far been confined to a limited number of developing countries, mostly Asian, other developing countries could also become capital exporters with a supportive international environment and appropriate domestic policies.

Available for download here.

 

 

Meng: Sovereign wealth fund investments and policy implications – a survey

Abstract:

This article addresses a research gap by providing a comprehensive survey of SWFs as international institutional investors and clarifying the definition of SWFs. By doing so, this paper aims to provide a balanced set of policy prescriptions towards SWFs.

This paper conducted a comprehensive survey of world major 24 SWFs with assets under management of 500 million USD between 2008 and 2012. Key dimensions include objectives, funding and governance, asset allocation and investment activities.

SWFs are planning institutions with management direction. They present great variety in terms of funding mechanism, governance, asset allocation and investment strategies, but they in essence pursue financial returns. It is not evident that SWFs are primarily motivated by political objectives and distinctively different from other international institutional investors. Difficulty in interpreting SWFs should not lead to the imposition of constraints on SWFs.

More in-depth and dynamic analysis of SWFs requires better data access. For such a purpose, case studies and longitudinal studies should be adopted, with particular emphasis on comparing SWFs with different types of financial institutional investors as well as typical SOEs and multinational enterprises.

This study is trying to demystify SWFs based on a comprehensive survey. As a result, this article may assist investors, policy makers and regulators to gain a better understanding of SWFs, their investment behaviours and rationales behind.

The contribution of this paper is that we provide a deeper understanding of the strategy and empirics of SWF operations. First, after a clearer definition of the phenomenon of SWFs, we can explain their investment strategies and behaviour as firms. Second, we can derive rational policy prescriptions and third we can propose a research agenda that will further deepen our understanding of SWFs and the appropriate policy prescriptions.

 

Available for download here.

Jones: When Do ‘Weak’ States Win? A History of African, Caribbean and Pacific Countries Manoeuvring in Trade Negotiations with Europe

ABSTRACT:

Can small ‘weak’ countries shape the outcomes of asymmetric trade negotiations and, if so, how? I scrutinise ten episodes of trade negotiations involving powerful European states and small developing countries from Africa, the Caribbean and Pacific (ACP) since the 1960s. I draw on legal agreements, public documents, interviews with and the written memoirs of key negotiators, media reports and the secondary literature.

I show that ACP countries influenced outcomes in important ways. For each negotiation I establish the variation between European preferences and the final negotiated outcome and show that in four of the ten negotiations there was a substantial gap between what European countries wanted and the final outcome. Close examination and comparison of these ten negotiations suggests that when three conditions hold, small developing countries can exert substantial influence even in a profoundly asymmetric encounter: First, the small state must be able to “walk away” from the negotiation at no cost. Second, where the small state is considered to be highly strategic by the large state, it can use this as a source of leverage. Third, the small state must have the political leadership and technical skills to deploy an astute negotiating strategy.

 

Available for download here.

Joffe: Why does capital flow from poor to rich countries?

ABSTRACT:

Lucas’ classic paper (1990) highlighted the paucity of capital flows from rich to poor countries, in contrast with predictions of standard theory. He suggested four explanations – but they cannot explain the copious capital flows from certain emerging relatively low-income countries, notably China, to the USA. Empirical studies confirm Lucas’ observation. Additionally, Prasad et al (2007) showed that developing countries with less reliance on foreign capital grow faster. Gourinchas & Jeanne (2009)

added a second puzzle, the “allocation puzzle”: flows are not only too low, they are directed toward countries with lower productivity growth and lower investment, i.e. the “wrong” ones; they attribute this to a distortion in savings, e.g. financial repression.

This paper traces the causal processes in post-reform China. Starting around 1978, reforms allowed rural households to keep their own surpluses, facilitated “township-village enterprises”, established enterprise areas open to FDI (e.g. Shenzhen), and began making state-owned enterprises (SOEs) more efficient. High productivity at comparatively very low cost was gradually achieved, and openness to trade allowed Chinese goods to conquer the world.

Statistical analysis shows that the generated profits led to high levels of capital accumulation, both corporate and public sector. Together with high household savings, channelled by state banks into (primarily) SOEs, this provided ample capital for reinvestment, as well as a large surplus. No capital inflows were required, except for FDI which had a vital technology-importation role. In particular, the massive export success generated hard currency, allowing large-scale purchase of overseas assets, e.g. US Treasury Bonds.

China is not unique: previous East Asian economies had parallel experiences on a smaller scale (cf. also Buera & Shin (2011)).

Thus, a relatively simple explanation of both puzzles is possible. More sophisticated interpretations, e.g. Kalemli-Ozcan et al (2010), Sandri (2010), Reinhardt et al (2013), are discussed from a methodological viewpoint.

 

Available for download here.

 

Stephen & Parizek: New Pressures on the WTO – The Rise of Illiberal Trading States

ABSTRACT:

Since its creation in 1995, the WTO has become the major institutional pillar of the global economy, a guarantor of market openness and a prominent disseminator of liberal economic commitments. But the rise of new powers such as China, Brazil and India calls into question the durability of its existing policy content and institutional design, as evidenced by the failure of the Doha Round after 14 years of negotiations. This paper argues that the WTO is facing new challenges not just due to the rise of new powers, but due to rising powers’ economic constitution as ‘illiberal trading states’. Illiberal trading states seek trade integration through market access abroad, but defend their capacity to operate illiberal forms of capitalism at home. The deadlock in the Doha Round therefore not only underscores the salience of power shifts for the performance of international institutions, but also highlights the increased heterogeneity of preferences of the cluster of systemically significant states at the centre of the world trading system. We develop this argument analytically through an analysis of the economic rise and state-society relations of the BRICS countries, and demonstrate its salience empirically during multilateral negotiations at the WTO through an analysis of rising and established powers’ revealed preferences during the Doha Round.

 

Available for download here.

Betz: Modeling the Concept of ‘Hegemony’ in International Financial Systems

ABSTRACT:

In this paper, we perform a graphical analysis of hegemonic leadership in international finance, based upon the historical studies by Kindleberger and Sobel about the Dutch and British financial hegemony in the 1600s-1800s. The socio-technical systems of public and of private finance in nations interact with the self-organizing system of international finance. We design a systems model for a stable international financial system in a global world, using the lessons from the history of Dutch and British fiscal hegemony.

Available for download here.

Kulish & Rees: Unprecedented changes in the terms of trade

ABSTRACT:

The development of Asia exposed many commodity-exporting economies to unprecedented changes of their terms of trade. We set up a small open economy model to estimate the magnitude and timing of breaks in the long-run level and variance of the terms of trade. The model’s balanced growth path gives rise to wedges between tradable, headline, and non-tradable rates of inflation and between the growth rates of investment and aggregate output as a result of multiple productivity trends that trigger off
drifts in relative prices as in the data. Using Australian unfiltered aggregate data, we find evidence of an increase in the long-run level and volatility of the terms of trade. Single-equation structural break tests point to a larger increase in the long-run level of the terms of trade. But inferences in general equilibrium rely on many observables that also respond to shifts in the long-run level of the terms of trade.

Available for download here.

Okano-Heijmans: Trade Diplomacy in EU–Asia Relations

From the Executive Summary:

The aim of this Clingendael Report is to provide insight into the state of affairs of the European Union’s trade diplomacy, with a particular focus on East Asia and on the consequences of trade talks among countries in the Asia–Pacific region for the EU and for European governments. Competitive multilateralism in Asia–Pacific trade diplomacy is assessed for its impact on the geostrategic position of the EU and its member states, followed by an analysis of the effectiveness of EU trade diplomacy in Asia. The focus is not so much on the economic benefits that trade agreements may provide, but rather on the role that politics, security, stability and norm-setting take in the rationale behind negotiations. Surprisingly few attempts have been made so far to analyse this complex subject comprehensively from a European perspective.

The EU´s trade diplomacy stands out for its formal, rather legalistic approach to linking economics and politics. This strategy is founded on the so-called ‘2009 Common Approach’, which holds that a predefined set of political clauses must be included in political agreements with third countries, while also essentially reducing free-trade agreements to a subset of such political agreements. This political straitjacket limits the EU’s ability to engage in a more flexible, strategic approach that is needed in the context of Asian competitive multilateralism.

 

Available for download here.

Nölke, ten Brink, Claar & May: Domestic Structures, Foreign Economic Policies and Global Economic Order – Implications from the Rise of Large Emerging Economies

ABSTRACT:

The rise of the large emerging economies of Brazil, India and China can be counted among the most important contemporary structural changes in the global political economy. This article attempts to determine whether these countries have a common institutional model for governing their economies and addresses the implications of these commonalities for global economic institutions. The approach consists of three major steps: firstly, a general ideal type for encompassing capitalism in these large emerging economies is constructed, and dubbed ‘state-permeated market economy’. Secondly, we compare these countries empirically, with regard to the features highlighted by the ideal type and in contrast to other varieties of capitalism. Finally, we extrapolate some long-term implications for the global economic order, based on the assumption that foreign economic policies will be informed by domestic institutional structures. Based on these three steps we conclude that a further deepening of the liberal global order is unlikely.

Available for download here.