Traded Goods Sector Research Articles

Revisiting the Commodity Curse: A Financial Perspective

We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labour. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand, amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances.

Wage and Price Dynamics in a Large Emerging Economy: The Case of China

This study finds that the growth in labour costs in China is not passed through fully to final prices in China, neither in the tradable goods sector nor in the economy as a whole. This probably reflects the strong pressure on profit margins from a highly competitive environment, especially in manufactured goods. The potential implications of labour cost increases in China for global inflation pressures are also discussed.

DO FOREIGN AID AND REMITTANCE INFLOWS HURT COMPETITIVENESS OF EXPORTS OF PACIFIC ISLAND COUNTRIES? AN EMPIRICAL STUDY OF FIJI

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONSince their independence in the second half of the last century, the Pacific island countries (PICs)1 have been receiving generous foreign aid. Besides supplementing domestic savings, they have been adding to real resources of PICs, as they are in foreign exchange. In recent years, steadily rising inward remittances sent by migrant islanders residing and working in Australia, New Zealand, United States and Europe, have exceeded aid inflows. Aid and remittance flows into PICs have been observed to be relatively more stable and larger in terms of percentages of gross domestic product (GDP) when compared to those of other developing countries.Expectedly, they have been raising concerns whether these inflows are hurting the export competitiveness of the island nations, a phenomenon known as Dutch disease,2 which seems to be responsible for continuing stagnation in export earnings as reflected in their ratios to respective GDPs of the concerned PICs, and generally decreasing trend in export growth rates. Decline in export competiveness is associated with appreciation of currencies, which is identified as one of the side effects of capital inflows.There are a number of publications on PICs, beginning from the path breaking sixvolume study conducted by Hilarian Codipilly of World Bank (1993), which pointed out to the Pacific paradox of plentiful aid with no growth, by attributing to the ineffective use of aid, studies by IMF including Browne (2006) and Avalos (2013) of UN ESCAP (2013). These studies hinted at the possibility of Dutch Disease. However, there has been no definitive empirical study. Most of the empirical studies undertaken so far have been cross-sectional studies employing panel data. They came invariably to an identical conclusion that the results obtained were of ambiguous nature and that occurrence of a Dutch disease was conjectural. These empirical studies include Fielding (2007a, 2007b, 2010), Brown (2008).The reason behind the ambiguous nature of results appears to be due to inadequacies. In the first place, the period studied for countries included in the panel was short; the number of variables chosen for study did not go beyond exchange rate, aid and remittances and inflation, since data on other contingent factors influencing growth process were not available for the same period for all countries concerned. To the best of knowledge of the authors, there is no study undertaken so far of any specific PIC in this regard. This paper seeks to fill the gap by taking up Fiji, which among all PICs, has a fairly longer database offering sufficient scope for an intensive study by focusing on contingent factors as well.The paper is organized on the following lines: whilst the next section presents a brief summary of the literature on the Dutch disease; the third section reviews the trends in aid and remittance inflows received by PICs in general and Fiji in particular; the fourth section outlines the methodology adopted for the empirical investigation; the fifth section reports the results; and the last section presents conclusions with policy implications.2. A BRIEF REVIEW OF LITERATURE ON DUTCH DISEASEOne of the earliest contributions to the literature on the impact of steady inflows of aid was that of Professor Corden (1984). Focusing attention on the effect of capital inflows on domestic relative prices and output, Corden (1984) called the small states as price takers, since prices of all traded goods are fixed in world markets. Therefore, increase in domestic expenditure would result only in the rise of the prices of goods that are not internationally traded. The resultant relative price change would lead to a change in the composition of output, with the traded goods sector contracting. The aggregate output falls, justifying the description of the relative price effect as 'Dutch disease'.Fielding (2007a) explains that in the basic Dutch disease model, the nature of the exchange rate regime makes little difference to the effects of an increase in foreign exchange income. …

Wage and Price Dynamics in China

AbstractWe study wage‐price dynamics in Mainland China with a novel data set using province‐level data from 1994 to 2010. We find that the growth in labour costs in China is not passed through fully to final prices, neither in the tradable goods sector nor in the economy as a whole. This probably reflects the strong pressure on profit margins from a highly competitive environment, especially in manufactured goods. These findings have potential implications for global price developments, given China's relevance in global supply chains.

¿Por qué cae la participación de los salarios en el ingreso total en México?

This article examines the evolution of the wage share in total income in Mexico during the period 2003-2013 distinguishing between the tradable and non tradable goods sectors. The main stylized fact of the period is that the fall in the wage share is due to an acute reduction of this share in the tradable goods sectors, particularly manufacturing, and not to the performance in the non tradable goods sectors where the wage share is approximately constant. This contrast is attributed to differences between sectors in price formation mechanisms together with contrasting labor productivity trends (fast growth in the tradables sectors and stagnation, with few exceptions, in the non tradables sectors). The article also addresses the paradox of why the rising profitability in the tradable goods sectors has not led to higher rates of capital accumulation and growth in these sectors, a feature that is explained by the evolution of unit labor costs which, despite its absolute reduction in manufacturing, have not significantly fallen relatively to those in the United States due to an even greater fall in the wage share in that countrýs manufacturing industry.

International reserves and growth: assessing the mercantilist motive in Latin America

Official reserves have increased to unprecedented levels since the mid-1990s, particularly in developing economies. One of the reasons ascribed for accumulating official reserves is the so-called mercantilist motive. This motive is seen as a part of an active industrial policy in the sense that these resources allow the monetary authorities to maintain a stable and undervalued real exchange rate, promoting economic growth and development via the tradable goods sector. In this paper we attempt to assess this motive using data for ten selected Latin American economies during the period 1996–2011. Unlike most previous work done on this topic, we consider official reserves as one of the determinants of the real exchange rate. Our econometric findings indicate that international reserves in the region appreciate the real exchange rate. This result suggests that the strategy of hoarding reserves in Latin America has not promoted economic growth and development.

The effects of fiscal shocks on the exchange rate in the EMU and differences with the USA

We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, in line with the “twin deficits” hypothesis. Our results are consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector. Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the USA in response to higher government spending. Such different behaviour is attributed to two factors, namely the leading role of the US dollar as a “safe haven” currency and the countercyclical behaviour of discretionary government spending in the USA.

Distributional Effects of Monetary Policy in Emerging Market Economies

We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.

The role of the exchange rate regime in the process of real and nominal convergence

The Balassa–Samuelson (B–S) hypothesis suggests that, in catching-up countries, inflation will be comparatively higher, as prices of non-traded goods “catch up” with the growth of productivity in the tradable goods sector; as a result, these countries will experience real appreciation. However, a general result of the literature is that the B–S effect can only explain part of the excess inflation observed in European catching-up countries. One feature of these studies is their neglect of the role of the exchange rate regime in affecting price convergence. In this paper, instead, we argue that the choice of the exchange rate regime may affect nominal convergence. To show this, we first model the regime choice and, in a second stage, estimate a B–S type of regression for each regime. Our results show that, for countries that pegged to or adopted the euro, the effect of an increase in dual productivity growth (the difference in productivity growth between the traded and non-traded sectors) on the dual inflation differential is twice as large as that in “flexible” countries. We conclude that, in catching-up countries, too early adoption of the euro may foster excess inflation, beyond what would be implied by B–S convergence only.

Local job multipliers of mining

The mining industry is capital intensive, and generally, direct labour employed is low compared to other industries. Considering this, when analysing local economic effects of mining it is important to observe local job multipliers that the industry generates in other sectors of the economy. In this study we use data from the recent Australian mining boom to estimate local job multipliers from mining, using econometric models and avoiding the rigidities and strong assumptions that input–output based models rely on. With census data and samples of Australian sub-state regions, our estimations show that local multipliers of mining are important for some local services sectors such as transport and rental and accommodation services, while local job spillovers into tradable goods sectors (manufacturing and agriculture) are statistically not significant. We also show how the magnitude of local multipliers varies nationwide from those of regions where operating mines are located.

Wage and Price Dynamics in a Large Emerging Economy:: The Case of China

This study finds that the growth in labour costs in China is not passed through fully to final prices in China, neither in the tradable goods sector nor in the economy as a whole. This probably reflects the strong pressure on profit margins from a highly competitive environment, especially in manufactured goods. The potential implications of labour cost increases in China for global inflation pressures are also discussed.

On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal

In this paper, we investigate whether foreign currency accounts help overcome credit constraints in developing countries. We analyze a novel bank-level data set from Nepal, where a steady inflow of remittances has contributed to foreign currency deposits on commercial bank balance sheets. In this data set we find that: (i) Banks hedge their FX exposure by investing in FX assets. (ii) Banks also hedge indirectly via their sectoral lending composition: Banks with a large share of FX deposits primarily lend to firms in traded-goods sectors. They lend only little to the non-traded sectors, as well as deprived sectors of the economy that have been targeted by various support programs. While the direct impact of FX accounts on relaxing credit constraints thus appears small, and biased towards specific sectors, there is also a substantial indirect effect via the additional creation of domestic deposits that benefits all sectors of the economy.

Economic Structure, Welfare, and the Real Exchange Rate

Transitioning or developing countries that are in the process of catching-up usually experience an increase in the productivity of the tradable goods sector. This often entails a subsequent increase in real wages, which may lead to higher wages in the non-trading sectors of the economy. If productivity in these sectors does not sufficiently increase, a country will experience rising inflation rates and an appreciation of their real exchange rate, which is known as the Balassa-Samuelson effect. Such a development can eventually hamper economic growth and welfare in a country and can also lead to a sudden stop and a serious crisis. In this paper, we first present a simple theoretical model inspired by Christopoulos et al. (2010) to highlight how structural changes in the economy that alter the sectoral structure of an economy and its wages and welfare level impact the real exchange rate. We will also provide empirical evidence for the case study in Latvia.

Revisiting the Balassa-Samuelson Model with Markup Variations

Un réexamen du modèle de Balassa-Samuelson en présence de taux de marge endogènes Cet article s’intéresse au rôle des variations des taux de marge lors de la transmission des chocs de productivité sectorielles et de dépenses publiques au prix relatif des biens non échangeables. Le modèle de Balassa-Samuelson dans lequel le marché des biens est parfaitement concurrentiel suggère que, premièrement, le prix relatif augmente de 1 % suite à une augmentation du rapport des productivités sectorielles de 1 %, et que, deuxièmement, les chocs de dépenses publiques n’ont aucun impact sur le prix relatif à long terme. Appliquant les méthodes de cointégration en panel à un groupe de quinze pays de l’OCDE, nos résultats empiriques rejettent ces deux prédictions. Au contraire, nous montrons qu’une hausse de la productivité relative entre les deux secteurs de 1 % augmente le prix relatif des biens non échangeables de seulement 0.70 % et qu’une augmentation de la part des dépenses publiques dans le PIB de 1 % entraîne une hausse du prix relatif d’environ 1 %. Cet article montre ensuite que ces faits empiriques peuvent être répliqués par un modèle d’économie ouverte à deux secteurs dans lequel les changements de la composition de la demande en biens non échangeables génèrent des variations endogènes des taux de marge. Classification JEL : E20, E62, F31, F41.

As the Current Account Turns: Disaggregating the Effects of Current Account Reversals in Industrial Countries

AbstractThis paper extends the study of current account (CA) reversals by considering the implications for the composition of output and employment. It is shown that decreases in CA deficits imply increases in tradable relative to non‐tradable output and/or declines in investment. The impact of CA ‘rebalancing’ should therefore be expected to vary considerably across sectors of an economy. This intersectoral variation is studied by examining the dynamics of output, employment and prices using data for 55 sectors of the economy during 14 industrial country reversal episodes. The output and employment declines associated with CA reversals are most clearly evident in investment‐related sectors, while sectors related to primary commodities generally perform relatively well following reversals. Reversals are also followed by increases in relative inflation for tradable goods sectors.

Aid and Dutch Disease in Sub-Saharan Africa

International aid has an ambiguous effect on the macroeconomy of the recipient country. To the extent that aid raises consumer expenditure, there will be some real exchange rate appreciation and a shift of resources away from traded goods production and into non-traded goods production. However, aid for investment in the traded goods sector can mitigate this effect. Also, a relatively high level of productivity in the non-traded goods sector combined with a high level of investment will tend to depreciate the real exchange rate. We examine aid inflows in twenty-six Sub-Saharan African countries and find a variety of macroeconomic responses. Some of the variation in the responses can be explained by variation in observable country characteristics; this has implications for donor policy.

Trade Contraction and Employment in India and South Africa during the Global Crisis

Summary The paper estimates the effects of the 2008–09 trade contraction on employment in India and South Africa, using social accounting matrices (SAMs) in a Leontief multiplier model. Employment results are presented at aggregate and industry levels and examine gender and skills biases. The most notable finding is that India and South Africa experienced substantial employment declines as a result of trade contraction with the European Union and the United States. A large share of these declines occurred in the non-tradable sector and resulted from income-induced effects, illustrating how a shock originating in the tradable goods sector had strong ripple effects throughout these economies.

The Effects of Fiscal Shocks on the Exchange Rate in the EMU and Differences with the US

We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We employ a new database that contains quarterly fiscal variables for the Euro Area as a whole. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, which turns out to be fully consistent with the “twin deficits” hypothesis. The different components of public spending, namely wage and non-wage consumption expenditure, overall public consumption expenditure and public investment, bring about real appreciations. Our results are therefore also consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector. Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the US in response to higher government spending. This discrepancy can ultimately be explained by the reaction of nominal interest rate spreads and the uncovered interest parity condition. The dissimilar reaction of short-term nominal interest rate spreads is attributed to two factors, namely the role of the US dollar as a safe haven currency and the countercyclical behaviour of discretionary government spending in the US.

US Trade and Access to Trade Facilitating Services in Partner Countries: An Empirical Analysis

The issue of liberalization of international trade in services has received considerable attention in recent years. One of the benefits discussed in the literature is the role of services in facilitating goods trade among countries. We test this claim by analyzing the impact of trade in services on manufactured goods exports to the U.S. using data for 30 trading partners for the period 1992-2000. We use Instrumental Variable estimation to control for potential endogeniety. Our analysis also addresses the debates regarding whether services trade and goods trade are substitutes or complements. The answer depends upon whether imported services are used more intensively in the traded goods sector or in the non-traded goods sector. The key empirical results indicate that, on average, aggregate service imports from the U.S. have a significant and positive impact on goods exports to the U.S. in the case of low income nations but not in the case of high income countries. In most cases, the impact is significant and positive for business

Sectoral Capital–Labor Ratios and Total Factor Productivity: Evidence from Asia

AbstractThis paper examines the relationship between sectoral capital–labor ratios and total factor productivity (TFP) for six Asian economies in the context of the Balassa–Samuelson model. A strong prediction of the model is that the capital–labor ratios in both the traded‐ and nontraded‐goods sectors depend on the TFP in the traded‐goods sector. Both single‐equation and panel cointegration tests support this implication of the model.