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4511. A Quantitative Trade Model with Unemployment

Author:
Kyu Yub Lee
Publication Date:
10-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Over the last decade, quantifying the welfare effects from tariff changes has become one of the main challenges among international trade economists. There are a number of quantitative trade models with micro-foundations which emphasize demand-side (Anderson and Van Wincoop 2003), supply-side (Eaton and Kortum 2002), Bertrand competition (Bernard et al. 2003), extensive and intensive margin (Chaney 2008), etc, and conclude that trade liberalization with tariff reductions leads an economy to reach a higher level of welfare compared to pre-liberalization (Costinot and Rodriguez-Clare 2014). While elegant, these models inducing gravity equations share the common assumption, a perfect labor market. Quantitative trade models with full-employment developed so far have not taken account of labor market frictions when evaluating the welfare effects from tariff changes. This paper aims to fill the gap in the trade literature by explicitly considering labor market frictions. I employ search-and-matching to a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity, in order to quantify the welfare effects from tariff changes. The paper shows that labor market frictions can be a source of comparative advantage in the sense that better labor market conditions contribute to lower cost in production. Labor market frictions play a critical role in determining the probability of exporting goods to trading partners, and interact with bilateral trade share, price, expenditures, etc. Unemployment and changes in unemployment rates due to tariff reductions contribute welfare changes across countries, implying that welfare effects based on quantitative trade models with full-employment are likely to be biased. I confirm the biased welfare effects by revisiting Caliendo and Parro (2015), who conduct an analysis of the welfare effects from the NAFTA from 1993 to 2005. I show that the welfare gap between theirs and mine has a positive correlation with changes in observed unemployment rates across countries. With the constructed model, I further conduct counterfactual exercises by asking what would happen if China’s tariffs remain unchanged from 2006 to 2015. It turns out that there are mild welfare effects to trading partners in the world trading system.
Topic:
Tariffs, Economic Policy, Trade, Unemployment, and Welfare
Political Geography:
China and Asia

4512. Exchange Rates and Firm Exports: The Role of Foreign Ownership and Subsidiaries

Author:
Hyelin Choi and Hyo Sang Kim
Publication Date:
08-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchange rate helps to boost export growth, we should have observed a sub-stantial increase in export in the EU and Japan. However, the effectiveness of the exchange rates on exports appears to be weak across countries. This anomaly is one of the central puzzles in international macroeconomics: why large movements in the exchange rate have modest effects on the aggregate variables such as import prices, consumer prices, and quantity of exports. In this paper, we examines the role of global production linkages on ex-change rate elasticities by using Korean firm-level data. At firm-level, foreign-owned firms or firms with foreign subsidiaries participated in the Global Value Chains (GVC) play an important role in weakening the effect of ex-change rate movements on firm exports. The empirical results show that the exchange rate elasticity of total export is about -0.64, which implies that 10% appreciation of Korean Won would make a drop in total export by 6.4%. However, the exchange rate elasticities of firms are not the homogeneous across firms. We find that the exchange rate elasticities of firm exports are significant and negative for domestic-owned firms and firms without foreign subsidiary whereas those are insignificant for foreign-owned firms and firms with foreign subsidiaries. After controlling exports to foreign affiliates, we still find that the estimated exchange rate elasticities of exports are statistically insignificant, but become negative and relatively larger for firms with global production linkages. More-over, firms with higher GVC integration measure or more imported inter-mediate inputs have the significantly lower exchange rate elasticities of firm exports. It suggests that developments of global production linkages via firm ownership, within-industry or within-firm in the last decade play an essential role in alleviating the effect of exchange rate movements on the firm exports.
Topic:
Exchange Rate Policy, Economic Policy, Exports, Macroeconomics, and Global Value Chains
Political Geography:
Global Focus

4513. Financial Market Integration and Income Inequality

Author:
Jae Wook Jung and Kyunghun Kim
Publication Date:
07-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets. The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality? We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled. We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.
Topic:
Development, Income Inequality, Financial Markets, Economic growth, and Integration
Political Geography:
Global Focus

4514. Vietnam’s Low National Competitiveness: Causes, Implications and Suggestions for Improvement

Author:
LE Quoc Phuong
Publication Date:
04-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
The WEF’s annual assessment using the GCI index in 2006-2017 shows that Vietnam’s national competitiveness has been low. Globally, Vietnam has ranked in the middle of economies surveyed. Regionally, Vietnam has been in the middle of ASEAN countries. With regard to the level of development, before 2015 Vietnam was in stage 1 (factor-driven), together with Cambodia, Laos and Myanmar. Since 2015 Vietnam has shifted toward a transition to stage 2 (efficiency-driven), which also includes Brunei and the Philippines. The country, however, has lagged behind Indonesia and Thailand (in stage 2), Malaysia (in transition to stage 3) and Singapore (in stage 3, innovation-driven). To complement the WEF’s assessment, this study provides an in-depth anal-ysis of main causes of Vietnam’s low competitiveness from the country’s perspective. These are structural problems due to its factor-based growth model, expansionary policies to aid growth, slowly improved business envi-ronment, low R&D expenditure, poorly performing higher education and under-developed infrastructure. Further, the research examines implications of these shortcomings for Vi-etnam. These are low productivity, diminishing GDP growth, middle income trap, macroeconomic instability, low business competitiveness, low technolo-gy level, low human capital quality and environmental degradation. Based on the analysis of the shortcomings and their consequences, policy measures are proposed to improve Vietnam’s competitiveness. Major sugges-tions include structural reforms to change the growth model from factor-based to productivity-based, raising technology level and enhancing human capital quality, improving the business environment, ensuring macroeconomic stability, upgrading infrastructure and learning from advanced economies.
Topic:
Infrastructure, Economic growth, and Economic Policy
Political Geography:
Vietnam and Southeast Asia

4515. Trends in Israel’s Regional Foreign Policies: July-December 2018

Author:
Roee Kibrik and Nimrod Goren
Publication Date:
07-2018
Content Type:
Working Paper
Institution:
Mitvim: The Israeli Institute for Regional Foreign Policies
Abstract:
This document briefly outlines major trends in Israel’s regional foreign policies over the past six months. It is based on the Mitvim Institute’s monthly reports that cover ongoing developments in the Israeli-Palestinian peace process/conflict, Israel’s relations with the Middle East, Europe and the Mediterranean, and the conduct of Israel’s Foreign Service.
Topic:
Conflict Prevention, Foreign Policy, Diplomacy, Regional Cooperation, International Affairs, and Peace
Political Geography:
Russia, Turkey, Middle East, Israel, Greece, Jerusalem, Gaza, Syria, Egypt, Jordan, Cyprus, and European Union

4516. Nigeria’s 2019 Elections: Change, Continuity, and the Risks to Peace

Author:
Aly Verjee, Chris Kwaja, and Oge Onubogu
Publication Date:
09-2018
Content Type:
Special Report
Institution:
United States Institute of Peace
Abstract:
Nigeria’s keenly anticipated national elections are scheduled to take place in February and March 2019. These elections will mark the sixth vote since the reintroduction of democracy in 1999—and will follow the country’s first peaceful transition of power to an opposition party in 2015, when Goodluck Jonathan of the PDP conceded to Muhammadu Buhari of the rival APC. Based on field research in eight states and Abuja, this Special Report identifies the emerging and shifting risks of election violence for Nigeria’s 2019 elections and provides recommendations for Nigerian authorities and international donors supporting the electoral process to help mitigate these risks.
Topic:
Elections, Democracy, Violence, and Peace
Political Geography:
Africa and Nigeria

4517. The Role of U.N. Peacekeeping in China’s Expanding Strategic Interests

Author:
Marc Lanteigne
Publication Date:
09-2018
Content Type:
Special Report
Institution:
United States Institute of Peace
Abstract:
Despite its growing status as a major economic and military power, China continues to be a strong supporter of UN peacekeeping operations. China is not only the second-largest financial contributor to UN peacekeeping (after the United States), it has roughly 2,500 personnel deployed in ongoing missions, including in active combat zones in Mali and South Sudan—far more than any other permanent member of the UN Security Council. This Special Report examines what China hopes to gain from its participation in UN peacekeeping, as well as the challenges it will face as its troops find themselves in more dangerous “peace enforcement” situations.
Topic:
Foreign Policy, United Nations, Peacekeeping, and Peace
Political Geography:
China, Asia, Mali, and South Sudan

4518. South Sudan’s Civil War and Conflict Dynamics in the Red Sea

Author:
Payton Knopf
Publication Date:
09-2018
Content Type:
Special Report
Institution:
United States Institute of Peace
Abstract:
The five-year-old civil war in South Sudan is an unparalleled humanitarian and security crisis, causing the largest exodus of refugees on the African continent since the Rwandan genocide and leaving over a third of the population displaced and two-thirds severely food insecure. Beyond the human toll on South Sudan’s long-suffering citizens, the country’s unraveling underscores the shifting political and security fault lines in the Horn of Africa. This Special Report surveys the region’s various interstate hostilities and intrastate conflicts and suggests ways the United States can reassert its influence to begin contributing meaningfully to the resolution of South Sudan’s civil war and conflicts in the greater Red Sea region.
Topic:
Security, Civil War, Conflict, Peace, and Humanitarian Crisis
Political Geography:
Africa and South Sudan

4519. China’s Evolving Role as a U.N. Peacekeeper in Mali

Author:
Jean-Pierre Cabestan
Publication Date:
09-2018
Content Type:
Special Report
Institution:
United States Institute of Peace
Abstract:
Chinese troops have been stationed in Mali for the last half-decade as part of the UN-mandated stabilization force. Deployed after rebel groups overran large portions northeastern Mali in 2013, it was just the second time Beijing had ever contributed combat troops to a UN peacekeeping mission. This Special Report examines how China is using its peacekeeping activities in Mali as an opportunity to train troops and test equipment in a hostile environment—and as a way of extending its diplomatic reach and soft power in Africa and beyond.
Topic:
Foreign Policy, Diplomacy, United Nations, Peacekeeping, Conflict, and Peace
Political Geography:
Africa, China, Asia, and Mali

4520. Participatory Action Research for Advancing Youth-Led Peacebuilding in Kenya

Author:
Illana M. Lancaster, Sahlim Charles Amambia, Felix Bivens, Munira Hamisi, Olivia Ogada, Gregory Ochieng Okumu, Nicholas Songora, and Rehema Zaid
Publication Date:
10-2018
Content Type:
Policy Brief
Institution:
United States Institute of Peace
Abstract:
One-third of today’s generation of youth—those ages ten to twenty-four—live in fragile or conflicted countries and are susceptible to the sway of ideological narratives of violent extremism. Evidence suggests, however, that they also play active and valuable roles as agents of positive and constructive change. Part of a USIP portfolio that engages youth leaders as critical partners, this report documents an initiative undertaken in Kenya in 2017 and 2018 and explores its utility and effectiveness as an approach for youth-led peacebuilding in marginalized communities marked by violent extremism.
Topic:
Education, Governance, Violent Extremism, Democracy, Youth, and Peace
Political Geography:
Kenya and Africa