World Economics Journal

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A Statistician’s Ordeal - The Case of Andreas Georgiou
Miranda Xafa, World Economics, September 2019
For the past eight years Andreas Georgiou has been facing prosecution for the way he discharged his duties while he was president of Greece’s statistical agency (ELSTAT) in 2010-15. His detractors claim that Greece was forced to face harsher conditionality because the deficit was revised upwards, thus helping to justify externally imposed austerity. Despite overwhelming evidence that Mr. Georgiou correctly applied EU rules in revising Greece’s fiscal deficit and debt figures, and despite strong international support for his case, some Greek courts continued the pursuit. The Georgiou case tested the independence of the Greek judiciary, as some senior prosecutors and judges would appear to have repeatedly failed to act in accordance with the rule of law and due process. With a solid majority in parliament, the newly-elected center-right New Democracy government has the opportunity to deliver deep institutional and economic reforms. Ensuring the independence of the judiciary should be a top priority.
Measuring Natural Capital and the Causes of Deforestation
Brian Sturgess, World Economics, September 2019
This study looks at the measurement of the extent, causes and consequences of deforestation as a depletion of a stock of natural capital, a topic of interest to national statistics offices (NSO) in the preparation of satellite accounts. Currently many anomalies and unresolved issues affect the construction of forest databases, although efforts are currently under way to resolve these data problems. Brazil and Indonesia account for 35% of global forest loss in the sample of countries studied in this paper between 1990 and 2015. This has called beef and palm oil to international attention, especially from environmental activists. The case of Malaysia, where consistent data show that reforestation has followed rising GDP per capita and strong policy on forest management, provides strong empirical support for Forest Transition Theory.
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A Comparison of Different Methods of Estimating the Size of the Shadow Economy
Friedrich Schneider & Stefan D. Haigner, World Economics, September 2019
This paper describes and criticizes the MIMIC estimation method due to a double counting problem; a correction is suggested. The measurement methods used for National Accounts Statistics are discussed – the discrepancy method and two new micro survey methods – are described and a third, a micro method, using a combination of company manager surveys and their knowledge to calibrate the size of the shadow economy in firms, is presented. A detailed comparison of the four micro estimation methods with the MIMIC and the corrected MIMIC method are offered. One major result is that the corrected MIMIC method, especially, comes quite close to various types of lately developed micro survey methods.
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Disentangling Foreign Direct Investments
Michael Plouffe, World Economics, September 2019
I describe multinational corporations’ (MNCs’) motivations for engaging in foreign direct investment (FDI) rather than other forms of internationalisation. When it comes to understanding the underlying determinants of an investment, some of the issues presented by FDI studies relying on high levels of aggregated FDI measures are caused by aggregation, and others are driven by data. There are gains from disaggregation in existing studies of both FDI and global supply chains and benefits for policymakers of pursuing and promoting such an approach.
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The Changing Quality of Employment and the Sequencing of Reforms in China
Nomaan Majid, World Economics, September 2019
The paper charts the process through which employment has been transformed in China. Measures of employment quality captured by estimates of regular and non-regular employment and unemployment are used to form a view of the changing employment situation. The increase in the share of regular employment in total employment, from 40.1% in 1990 to 62.7% in 2011, is staggering for the most populous country in the world. This is what lies behind the improvement in employment in China. This paper argues that factors behind the improvement in employment in China can be traced to sequenced policy shifts in sector growth strategies on one hand, and the gradual removal of effective constraints on the physical movement of labour on the other. In other words China has managed its process of structural change.
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China’s Monetary Policy Functions from the Core Inflation Perspective
Yu Li Zhu & Lu Chang Rong, World Economics, September 2019
Based on the open-economy new Keynesian model, this paper studies the influence of core inflation on the central bank’s monetary policy reaction rules by optimising the multi-target welfare loss functions, and draws three conclusions. Sustainable balance of payments should be considered as a goal rather than a tool for monetary policy. The central bank should focus more on core inflation than normal inflation in its daily operations. An authoritative core inflation sequence should be established as a focal point in the policymaking process. In addition, we emphasise that the central bank should accurately judge the impacts of real exchange rate changes, and adjust how frequently it intervenes in interest rates.
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Data Quality Rating: China
World Economics
World Economics, September 2019
The quality of GDP data in China is improving, and up to date in many respects. But is still some way from good quality. Use with caution!
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Is the Business Environment a Matter of Political Economy and Convergence?
Michael Chibba & John M. Luiz, World Economics, September 2019
In this article, the central question addressed is: does the business environment entail a complex nexus of political economy and other factors (government, business, ideology, and leadership) that may or may not manifest convergence? Also, the role of metrics and data is appropriately discussed. Current theories fail to impart an understanding of what the nature of the business environment is, or of the multifaceted nexus and convergence (or divergence) that it may entail. The strength of convergence involved is directly related to the integrity of the business environment and also reflects the overall dynamics in the country of focus. Each of the three country cases examined is fundamentally different, but offers important lessons. The overarching conclusion is that political economy and convergence often play a critical role in the business environment—though certainly not always, as in South Africa, where there is divergence, and in the case of metrics and data on the business environment, which, by design, do not focus on convergence.
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The Belt and Road Initiative (BRI) and China’s European Ambitions
Theodore Pelagidis & Hercules Haralambides, World Economics, September 2019
Recent research shows that a 10% improvement in connectivity between countries along the “Maritime Silk Road” would deliver a 3% decrease in Chinese trade costs, which would in turn boost China’s imports and exports by around 6% and 9% respectively. We identify two ‘missing links’ of BRI: a) connecting the Caspian- to the Black Sea, from Turkmenistan to Romania (branching to Istanbul), and from there – through the port of Constanza and the Danube-Rhine fluvial corridor- all the way up to the North Sea, to Rotterdam in particular; b) connecting the Upper Persian Gulf port system to the Mediterranean. COSCO’s target for Piraeus is for it to become the biggest European port over the next decade, doubling its cargo handling capacity.
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Monetary Integration in the Eurasian Economic Union: What are the Issues?
Marina Hamilton & Graham Bird, World Economics, September 2019
The members of the Eurasian Economic Union (EEU) are continuing to discuss establishing a currency union. Do the characteristics of the EEU economies meet the criteria identified by optimum currency area theory, covering fiscal convergence, exchange rate stability, the symmetry of shocks, the dispersion of inflation and interest rates, and the synchronization of business cycles? This article suggests that the empirical evidence is nuanced. The gains and losses from monetary integration in the EEU would not be equally distributed across member states. As has been the case with the Eurozone, the future prospects for monetary integration in the EEU depend very much on political factors.
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The NTV Model for Total Factor Productivity
Andrew Smithers, World Economics, June 2019
The consensus model for total factor productivity is unsatisfactory; the alternative, non-technology variables (‘NTV’) model resolves the objections to it and should therefore be preferred by economists. The key objections to the consensus model are that it is untestable, its assumption about corporate behaviour is falsified when tested and, for the accounting framework to function, the labour/capital ratio has to be as flexible on old capital as it is on new: an assumption which seems most unlikely. The differences in the results are non-trivial and the NTV model has positive implications for economic policy by showing how they could be changed to boost growth. NTV comprises all the variables, other than changes in labour and technology, that determine the level of investment and the capital stock. Changes in NTV are the net impact on the incentive to invest resulting from changes in the individual constituents, which are profit margins, the cost of equity, the cost of debt, leverage, corporation tax and the hurdle rate, which is the minimum expected return on equity needed to make new investment worthwhile in the opinion of management. The consensus model assumes that investment is partly determined by changes in the cost of capital while ignoring the impact of changes in the cost of equity and debt and in leverage. I show that this assumption is unjustified and why it is preferable to use NTV.
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National Output as Interest on National Capital
John Hartwick, World Economics, June 2019
Current national output can be consider as deriving from a collection of capital goods, including a natural capital good. A model is created which considers Net National Product as interest on capital in the economy: a new approach which touches in a non-trivial way on green national accounting. One important implication is that trading nation draws in part on the capital, including natural capital, of its trading partners and exports in part some of its own capital in its exports. It is also necessary to incorporate pollution spillovers Net National Product which is a hugely vexing issue.
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A Modest Challenge to GDP Reforms: An Economist’s View
Mitsuhiko Iyoda, World Economics, June 2019
This paper explores the importance and possibility of GDP reform by examining the weaknesses of the current GDP concept. The GDP concept itself involves flawed metrics; there are more effective measures of economic and societal well-being. Here we limit our argument to economic well-being. The weaknesses of GDP can be broadly divided into two primary categories: market workability and the GDP framework. We present four types of GDP reform, among which, we consider further, is a modest improvement on current GDP. If not dealt with, the misleading aspects of GDP are likely to produce a misguided economic growth strategy and reduce the likelihood of a ‘positive sum’ result.
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Did Rating Agencies Make the Euro Crisis Worse?
Colin Ellis, World Economics, June 2019
There is a commonly held belief that the euro debt crisis was exacerbated by a spiral of higher yields resulting from rating agencies downgrading euro area sovereigns, but there has been little formal analysis of this hypothesis. Data on ratings and market signals on credit can be made comparable by transforming market metrics into measures that correspond to the same rating scale, known as ‘market-implied ratings’. These signals can be based on bond yields, credit default swaps (CDS) or equity prices. The available data provide no consistent evidence that sovereign rating downgrades led to greater market stresses across so-called ‘peripheral’ euro-area countries. Sovereign ratings were relatively slow to react when the crisis erupted, compared with market signals, but there is also no evidence that they amplified the crisis in terms of triggering further increases in sovereign yields and CDS prices.
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Estimating Loss-in-Output as a Cost of a Financial Crisis
Vighneswara Swamy, World Economics, June 2019
The global financial crisis caused a huge loss of economic output, depletion of financial wealth, extended unemployment, psychological consequences and other significant costs. A quantitative exploration of modelling loss-in-output as a cost of financial crisis using macroeconomic indicators is useful in understanding the impact of a crisis. The conservative estimates for India suggest that, over a period of ten years, a financial crisis can cause a cumulative loss-in-output ranging from 48% of GDP to 59% of GDP after discounting at 0.025 and 0.07 respectively. Intermediate values are also explored. Estimating loss-in-output in terms of GDP simplifies estimation of the impact of financial crises. Policymakers and regulators must be more prudent and alert in sensing the early indicators of a financial crisis and act swiftly in containing its perils.
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How Accurate are Global Trade-Finance Data?
Brian Sturgess, World Economics, June 2019
Over 80% of international trade is financed by some form of credit, but the size of the trade finance market has received little attention by economists. It has been estimated that there is currently a world trade finance gap of around US$1.5 trillion acting as a drag on international trade and GDP growth. Survey-based estimates of traditional trade finance provided by banks at US$4.6 trillion in 2017 are highly inconsistent and are based on flawed data and opaque methodologies. The problem of collecting reliable data needed to promote trade growth and to monitor financial stability is being exacerbated as the trade finance sector is undergoing rapid structural change.
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Income Inequality and Foreign Direct Investment in Australia: A Comprehensive Review
Anna Ploszaj, Tarlok Singh & Jen-Je Su, World Economics, June 2019
Income, wealth and consumption are three main factors that determine people’s standard of living. Many organisations in Australia report that in recent years the Australian standard of living has been changing, with some people falling behind. This paper examines the magnitude of and the factors contributing towards the growing income inequality in Australia. The data shows that income inequality, which in Australia in the mid-1990s was around the same level as in other developed countries, has recently outpaced their levels. The data on FDI shows that, at the same time as income inequality was on the rise, the amount of FDI inflows to Australia increased and despite a higher FDI restrictiveness index than the average for OECD countries Australia holds its position in the top ten countries in terms of the preferred destination of FDI.
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Why Do Currency Crises Recur?: Lessons from Argentina and Turkey
Graham Bird, Graham Bird & Graham Bird, World Economics, June 2019
Argentina and Turkey experienced currency crises in 2018, having also had crises in 2001. Why do crises recur? There are three generations of model that help to explain in theory why currency crises occur, although in practice the theories need to be amalgamated. The recurrence of currency crises implies that either appropriate lessons have not been learnt or, for some reason, countries have been unable to convert learning into actions. Key lessons are first, avoid excessively large fiscal deficits, rapid credit creation and debt accumulation, and second, reduce economic and financial vulnerability and create better insulation from external shocks. Empirical analysis shows that the causes of the crises in Argentina and Turkey in 2018 were different from those in 2001.
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