GGD Flashcards

Question

Institutions & international finance: From their more robust IV-based analysis Rodrik et al (2004) find that geography is generally negatively (albeit not always significantly) related to income. This is direct contrast to the OLS-based findings where distance from the equator is found to be strongly and positively associated with higher incomes. Explain why Rodrik et al (2004) maintain however, that geography remains a very important underlying determinant of income.

Answer 1

In the second stage models, geography is not found to be significant (and often negatively related) as determinant of income. However, Rodrik et al find that geography is an important determinant of institutional quality, and institutions are in turn highly significantly related to income. Thus geography exercises an important, indirect, impact on income.

Answer 2

Williamson: international migration is generally associated with a growing wedge between wages earned by unskilled migrants and unskilled domestic workers and those received by skilled domestic workers. This is associated with rising inequality. Milanovic: global inequality has been rising and is disproportionately due to location. A global citizen’s living standard is largely affected by his country of birth. Given the importance of location, international migration emerges as one of the key means for an individual to significantly raise his living standard.

Answer 3

The Winters et al (2003) proposal focuses on the temporary migration of workers who are employed as part of the implementation of specific projects and are expected to return to their home country following completion of those projects. The typical expectation would be for the earnings received by these temporary workers to be lower than those received by local unskilled workers (via, for example, the elimination of a component aimed at covering social security contributions). But since the migrants’ employment is clearly linked to the life-time of a specific project, the proposal can be sold as temporary and thereby as less politically sensitive.

Answer 4

Hartmann et al (2017) suggest that economic complexity is associated with lower inequality. Possible reasons include: that the mix of products produced by a country constrains the occupational choices, learning opportunities and bargaining power of workers; that complexity and diversity of products are a good proxy for the knowledge and knowhow in an economy not captured by conventional human capital measures; that productive structures can proxy social capital and health of institutions (complex products require social and professional networks); economies based on the exports of a few natural resources are likely to exhibit political structures prone to capture.

Answer 5

See the graph. The welfare increase to consumers from reduced pollution is at least Cq₀, the cost of undoing original pollution, which is equal to area A+B. The loss of producer surplus is area ![]() A so that the overall increase in welfare is at least B.

Answer 6

There is no import of the good, so the tariff will change nothing.

Answer 7

The increase in welfare will now still positive, given the assumptions made in the example. But production of the good will be too high: it will stay at q₀ rather than shrink to q₁, creating a dead-weight loss.

Answer 8

Each nation should internalize global pollution cost by domestic policy, combined with free trade. In a first best optimum this would in all likelihood lead to different standards but in practice political economy considerations will favour harmonized standards setting across nations, perhaps with exceptions for developing countries.

Answer 9

* Stronger trade linkages: if industry shocks are important in driving economic cycles, then the co-movement of economic cycles is expected to decrease when stronger trade linkages are associated with inter-industry specialization, whereas (ii) co-movement is expected to increase when stronger trade linkages are associated with intra-industry specialization. * Financial linkages: (also p 609). (i)Foreign direct investments, contagious effects of shocks could increase synchronization, on the other hand (ii) financial openness could decrease the co-movement of economic cycles by facilitating inter-industry production specialization through the easy reallocation of capital, * Fiscal policy trends: In the (i) AEs fiscal policy tends to be counter-cyclical while in (ii) EEs it tends to be pro-cyclical, perhaps due to credit constraints and incomplete capital markets. (i+ii) Across AEs and EEs the net effect would be to reduce the co-movement of cycles

Answer 10

* Definition: A rise in the price of a good e.g. through trade will raise the price of the abundant factor and decrease the price of the scarce factor. Also applies to neutral technical progress. Thus with a skilled sector and unskilled sector, technical progress in the skilled sector will increase wages in the skilled sector relative to the unskilled sector, fueling wage inequality. In a country that trades both high and low skill intensive products, a rise in the price of the low skill product will lead to an increase in wages for low skilled workers relative to high skilled workers and vice versa when the price falls. * S-S theory is applied here with the two factors skilled and unskilled labour. AEs being relatively abundant in skilled labour. When trade barriers between AEs and EEs are reduced S-S would expect real wages for skilled labour to increase and for unskilled labour to decrease

Answer 11

(1) S-S would (for the same reason) predict the wage gap to decrease due to tariff reductions in EEs and DEs, which did not happen in practice; (2) S-S effect on wage gap in AEs would be driven by relative price increase of skill-intensive products, but there’s no evidence of such an increase in the 1980s (Leamer did find such price changes in the 1970s); (3) empirical research suggests that only 20% of wage gap in AEs can be explained by trade; (4) reallocation of skilled labour from low-skill to high-skill sectors did not take place

Answer 12

(1) Biased technological change that increases marginal productivity of skilled labour (much) more than of unskilled labour (e.g. IT revolution); (2) labour market policies that reduced the power of unions and affecting especially organized (mostly unskilled) labour

Answer 13

* 40 Euro since this is sufficient to make firms clean up or pay for cleaning up out of the tax. Note: not 50 Euro since that would unnecessarily distort consumption * This is a bad idea from a welfare point of view: the decrease in consumer surplus is larger than the increase in producer surplus * Cross-border pollution requires international coordination

Answer 14

Sachs and Warner suggest that appreciation of the real exchange rate, following the discovery and exploitation of natural resources, leads to a decline of non-resource export sectors. If this results in a substantial loss of learning-by-doing in the non-resource export sectors, then total factor productivity growth may fall. Also: Natural resources may also invite rapacious rent seeking and thus hamper growth. Reduced need for tax revenue may lead to reduced pressure for political reform

Answer 15

The volatility measure derived by van der Ploeg and Poelhekke (2009) is based on a country’s realized growth variability. However, in the face of considerable uncertainty countries may well pursue policies that minimize the volatility of growth – at the possible expense of the level of economic growth. To the extent that countries pursue such a strategy the volatility measure derived by van der Ploeg and Poelhekke may not successfully identify those countries that face the greatest uncertainty in their economic environment.

Answer 16

The Collier and Hoeffler (2004) study suggests that the size of diaspora increases the likelihood of a civil war outbreak via its interaction with the indicator capturing time since previous conflict. The suggestion is that the financing that can be furnished by the diaspora may slow the depreciation of conflict-specific capital, so that the time since previous conflict becomes less strongly associated with a lower risk of conflict outbreak.

Answer 17

Collier and Hoeffler suggest that natural resource availability reduces the opportunity cost of launching a civil war. They proxy natural resource availability with an indicator of natural resource dependence (natural resource exports/GDP). Brunnschweiler and Bulte (2008) suggest that a proper measure of natural resource abundance is more appropriate, and find that with such a variable the relationship with outbreak of civil war becomes negative – suggesting that the opportunity cost of civil war *rises*.

Answer 18

Rodrik et al (2004) argue that the proximate “drivers” of growth, such as accumulation of physical and human capital and technical change, may themselves be determined by the “deep” drivers of geography, international integration and institutions that they explore. Indeed, they explicitly examine the relationship between physical capital per worker, human capital per worker, and total factor productivity, and these ‘deep’ determinants. Consistent with their findings on the drivers of differences in income levels, they find that institutions appear to be most strongly associated with the growth drivers. In particular they find a very strong impact of institutions on physical capital availability.

Answer 19

Settler mortality rates were found to be a good instrument for countries’ institutional strength. These rates were found to be strongly correlated with indicators of present-day rule of law, and yet are arguably unrelated in any independent way with present day income levels. However, as pointed out by Rodrik et al (2004) settler mortality rates are patently unable to explain patterns of income differences in countries that have never been colonized (e.g. Turkey, Ethiopia). Thus, instruments don’t make a theory.

Answer 20

Domeland et al., suggest that because “gunboat diplomacy” reduced the risk of debt repudiation, lenders were willing to lower the financing costs of new lending to sovereign borrowers.

Answer 21

The ex-ante odious regime policy framework calls for an international body that will decide and designate countries as odious regimes. Any lending to such regimes, once they have been designated as such, will then not be deemed to recoverable by lenders if the successor government repudiates those loans. In the presence of odious creditors – countries that are willing to lend as a means to pursue ulterior objectives – it becomes difficult to see how a consensus can be built amongst lending nations that particular regimes should be designated as odious.

Answer 22

The canonical supply/demand illustration can be adapted by assuming that capital flows follows the flows of people. In other words it is assumed that the labor demand curve shifts out as the labor supply curve shifts out (illustrate). In the new equilibrium there is more employment at a wage rate that may be no lower than what prevailed earlier, and thus domestic workers are not worse off. Given that migration flows would put downward pressure on capital/labour ratios in the receiving country, this could raise the returns to capital and thereby induce inflows of capital, which in turn raises the demand for labour. Given however, that in the second century of mass migration the “quality” of migrants is lower than in the preceding century – indicating that the current migrants are poorer and less well educated, in relative terms, than in the preceding century of migration – it is unlikely that they will bring with them significant inflows of capital.

Answer 23

Historically, particularly strong resistance to migration has come from unskilled native workers who compete with migrants in the labor market. Migrants coming in under the “family reunification” policy are generally dependents (women and children) who are less likely to compete with native workers.

Answer 24

Concept 1 inequality is a measure of global inequality based in which each the per capita income of each country enters into the calculation with the same weight. On the basis of this concept, global inequality was seen to be rising between 1980 and 2000, indicating that countries were diverging from each other over time. Concept 2 weights each country’s per capita income by its population – so that large countries such as China and India receive particularly large weight. Because China and, subsequently, India were growing particularly rapidly during this interval, global inequality was seen to fall on the basis of the concept – suggesting “convergence” across countries.

Answer 25

Milanovic is referring to global inequality, and in particular to his analysis that suggests that the overwhelming driver of global inequality comes from differences across countries in their average income. He suggests that knowledge of a person’s country of citizenship is virtually sufficient to know where that person is located in the global income distribution. And a person seeking to change his position in this global income distribution will thus naturally look to change his geographic location. Williamson (2005) is discussing the impact of in-migration on the recipient country’s income distribution. He reports findings from model-based projections suggesting that immigration increases inequality, and notes as well that the demise of migration after WWI likely contributed to the levelling of inequality post WWII.

Answer 26

Volatility could be associated with liquidity constraints , driving reduced innovation ( Aghion et al) and therefore lowering growth. Bernanke (1983) suggests that investments may be irreversible, so that that in downturns resources are committed inefficiently, thereby reducing growth. On the other hand, volatility might induce additional saving for precautionary purposes, and this might stimulate growth.

Answer 27

Van der Ploeg and Poelhekke (2009) show that the level of financial development is negatively related to volatility. In a country, like Norway, with a high level of financial development, the fact that it is natural resource dependent thus translates less sharply into greater volatility. In this case the direct, positive, effect of natural resource dependence might outweigh the negative effect of volality on growth, resulting in an overall positive impact of natural resource dependence on growth.

Answer 28

Ratio of primary product exports to GDP is better seen as a measure of primary product *dependence* rather than a measure of natural resource abundance.

Answer 29

Collier and Hoeffler estimate two sets of models: one where the specification attempts to reflect opportunity or “greed” reasons for starting a civil war; and a second set that attempts to capture “grievance” motives for launching a civil war. They include inequality amongst the grievance factors – arguing that with greater inequality there may be more calls for redistribution and lower social cohesion. The two models are then combined and it is found that one cannot reject that the combined model is preferred to either one of the abbreviated models. However, they demonstrate that very few of the drivers of civil war in the grievance model are statistically significant in either the abbreviated grievance model or the combined model, while the explanatory variables in the greed model generally do a good job of explaining the outbreak of civil war. They conclude therefore that the opportunity factors are the more important explanatory variables.

Answer 30

Acemoglu et al (2001) propose using settler mortality rates as an instrument for countries’ institutional strength. These rates were found to be strongly correlated with indicators of present-day rule of law, and yet are arguably unrelated in any independent way with present day income levels. However, as pointed out by Rodrik et al (2004) settler mortality rates are patently unable to explain patterns of income differences in countries that have never been colonized (e.g. Turkey, Ethiopia). Thus, instruments don’t make a theory.

Answer 31

The Rodrik analysis reveals that while geography does not appear to be directly correlated with income levels, it is strongly correlated with institutional quality which in turn is strongly correlated with income levels. Thus geography does play an important role, but an indirect one.

Answer 32

As lenders factor in the risk that at least some of their loans will be repudiated, they may raise the costs for all borrowers. In the case of the ex-ante odious regime policy, governments designated as odious regimes may choose to renege on their earlier, legitimate, debts, thereby further inducing lenders to raise interest rates for all borrowers in order to cover default risk.

Answer 33

The ex-ante Odious regime policy proposal is predicated on the establishment or designation of a body that is empowered to designate existing regimes as odious or not. It is not clear how this body would be established and what process would be followed to identify odious regimes. The possible presence of odious lenders might make it even more difficult to reach consensus around the identification of odious regimes.

Answer 34

The inflow of migrants from Cuba to Miami had the effect of sharply reducing the flow of migrants from elsewhere in the US to Miami. As a result the downward pressure on wage rates induced by the Cuban migrants was offset by the labor market tightening effect of a reduction in migrants from other parts of the U.S.

Answer 35

Alongside the in-migration there was significant accumulation of capital (largely financed from abroad) and this had the effect of boosting labor demand alongside the expansion of labor supply – thereby reducing the downward pressure on wages.

Answer 36

Concept 1 refers to measuring inequality across countries on the basis of average per capita income per country – with each country having equal weight in the calculation. Concept 2 takes concept 1 but then weights each country by its population so as to capture the fact that countries vary massively in terms of their contribution to the global population. Concept 3 treats each person in each country as an individual and looks at the individual’s respective income level. There is no attribution to the population of a given country that country’s respective average per capita income.

Answer 37

Decomposing global inequality into a within-country and between-country component reveals that by far the largest contribution to global inequality comes from average income differences between countries. Thus a person born in a poor country is unlikely to be able to climb very far up the global income ladder if he stays within his own country. The only way to make further progress is to move to a richer country (migrate).

Answer 38

* The relationship between poverty and TL will be very complex, and different for different countries. Also both will be subject to many external influences which will be impossible to cover all (or even part of it) in a regression. * Macroeconomic volatility is one of the most important sources of risk for all households. Presumption is that open economies are less stable. More open capital markets should be associated with smoother consumption but more volatile investment, whereas more opengoods markets should be associated with greater output volatility. This is because goods market integration allows economies to specialize and thus reduces risk in spreading in production. However, don’t find significant correlations between openness and volatility, mainly because many shocks appear to be common across countries. Presumption that volatility causes uncertainty which in turn reduces investment and therefore growth. Empirical tests of this hypothesis give mixed results. * Different policies may have different impact on intra-household allocation, e.g., new employment opportunities for women can increase burden for women and potentially affect investment in children’s human capital * Different impact on men’s or women’s activities can shift intra-household ‘balance of power’ * Focusing on household total expenditure can therefore be misleading simplification

Answer 39

* Samuelson-Stolper; migration * One would expect the opposite trend in EEs, but in fact there we see the same trends as in AEs * Technical progress biased in favour of high-skill labour; labour market policies * Labor market policies: growing industry concentration gives employers more power. Also the most important factor behind the collapse in workers’ bargaining power has been the erosion in the share of workers in a union. * Technical change: technical change favors more skilled (educated) workers (increases their productivity though tools such as computer), replaces tasks previously performed by the unskilled, and increases the demand for skills.

Answer 40

* Pro: standards can help producers in product specification; they can facilitate intra-sector trade in sectors with world-wide supply chain. * International Standards mean that consumers can have confidence that their products are safe, reliable and of good quality. * Con: they can also create barriers to entry because compliance is costly; standardization can help (e.g. containers) but also frustrate innovation

Answer 41

Pro: political economy; monitoring compliance. Con: in a first-best world standards would be based on local fundamentals such as technology, tastes, resources; harmonized standards are likely to be sub-optimal from a welfare economic point of view

Answer 42

Exporters would typically favour higher (harmonized) standards than importers, because high standers would lead to higher prices and therefore an improvement of the terms of trade for exporters

Answer 43

Exam April 2020, figure out answer

Answer 44

Exam April 2020, figure out answer

Answer 45

* Lower growth: * Volatility could result in liquidity constraints for firms, driving reduced innovation, especially if financial institutions are poorly developed; with complete financial markets long-term investment is counter-cyclical, mitigating volatility. * Reduces risk-adjusted returns, which lowers investment as well as growth. * Political argument: bonanzas induce false sense of security * Increase: Higher volatility leads to higher precautionary saving, resulting in higher investment and thus faster growth

Answer 46

Exam April 2020, figure out answer

Answer 47

* the effects of U.S. immigration between 1979 and 1995 * were to reduce the earnings of skilled natives by 2.5 percent and the unskilled native born by 4.6 percent. Immigration therefore contributed to a rise in U.S. earnings inequality, the earnings ratio of the skilled to the unskilled having increased by 2.1 percent. If instead perfect world capital mobility is assumed (capital flows into the U.S. economy in response to immigration, keeping the rate of return constant), then earnings for skilled natives now actually increase (although only slightly) while those of unskilled natives fall by 4.6 percent as before. Therefore, the earnings ratio of the skilled to the unskilled increases by more (5 percent) when there is perfect world capital mobility and hence elastic capital supplies. * There is a moral here that is worth stressing. Immigrant absorption is much easier in times when world capital markets are globally integrated. Under such conditions, world capital is allowed to chase after world migrations, augmenting the capacity of the host country to absorb the immigrants. Complaints about crowding-out and evidence of rising inequality are muted under such conditions, conditions satisfied before 1913 and after 1970. They were not satisfied between 1913 and 1970, when world capital markets were in a shambles. * This analysis of the two centuries ignores some important differences in the character of the immigration and the structure of the economy—differences that should have mattered to the economywide impact. First, the late 20th century skill gap between immigrants and natives was five times larger than in the late 19thcentury; hence, the immigrants’ influence on reducing the host country skill mix— diluting its “quality”—should have been much greater in more recent times. Added to that, the unskilled are now a much smaller share of the U.S. labor force, and so a given immigrant inflow should make a proportionately larger contribution to the unskilled labor supply. Hence, the effects of immigration on the unskilled wage should be even greater today than they were a century ago. However, these forces have a potential offset, the absorptive capacity of the U.S. economy. Consider that agricultural employment, where labor was unskilled, accounted for muhc in 1870 then now. Land was a much more important factor of production a century ago—and land is a quasi-fixed factor. Given the importance of land, there were much stronger economywide diminishing returns to a rising unskilled labor force in the 19th century, effects that were only partly ameliorated by international capital mobility. For this reason, the same immigrant inflow had larger effects on unskilled earnings in the nineteenth century than it does today. Apparently trends in these two offsetting forces (a rising skill gap between immigrant and native born versus an improved capacity to absorb the immigrant) have been pretty much a wash, since the net effect of the two is similar then and now.

Answer 48

The inflow of migrants from Cuba to Miami had the effect of sharply reducing the flow of migrants from elsewhere in the US to Miami. As a result the downward pressure on wage rates induced by the Cuban migrants was offset by the labor market tightening effect of a reduction in migrants from other parts of the U.S. Israel: Alongside the in-migration there was significant accumulation of capital (largely financed from abroad) and this had the effect of boosting labor demand alongside the expansion of labor supply – thereby reducing the downward pressure on wages.

Answer 49

Exam April 2020, figure out answer

Answer 50

* Clear * Two sides: * On the one hand, trade liberalization makes economies more competitive and thus is likely to reduce disequalizing rents to insiders. The end of import substitution programs and associated rationing of access to foreign exchange has probably been the greatest single factor in reducing the corrosive effects of corruption and rent-seeking in Latin America. Trade liberalization can also generate new labor-intensive jobs in agriculture and manufacturing – raising the incomes for example of the rural poor. And trade liberalization implies cheaper imports, reducing the real costs of consumption for the urban poor – who after all unlike the rich use most of their income for consumption. * On the other hand, trade liberalization leads to growing wage gaps between the educated and uneducated, also in developing countries. Apparently the combination of technology change with the globalization of markets is raising the demand for and the wage premium to skilled labor faster than the educational system is supplying skilled and trainable workers. And the distribution of education, though improving slowly, is still highly unequal. * PAM and wage ineqaulity: Workers with higher ability are matched with more-sophisticated firms. In this event more-able workers are paid higher wages, and the rate at which wages rise with ability depends on how strong the complementarity between worker ability and firm sophistication is in the productivity function. The rate of wage increase determines in turn wage inequality in this ability range.

Answer 51

Exam April 2020, figure out answer

Answer 52

Argument: Unfair trade: if you have to pay less attention to environmental standards (and therefore e.g. exports become more expensive), then field is not level playing Political salience of these objections: argument for environmental diversity is perfectly legitimate since environment is differently valued between countries in the sense that the utility function defined on income and pollution is not identical and homothetic, but also because of differences in endowments in technologies; thus, argument that others with different CCII standards are illegitimately and unfairly reducing their costs does not hold

Answer 53

Mixed evidence. Some evidence that lowering labour standards in one country correlated with lowering in another. Greater evidence for weakening of enforcement, rather than of the standards themselves – more so in DE than AE.

Answer 54

Finds positive relationship between international standards and exports/imports, especially for AE. International standards supportive of trade because of lowered transaction costs. For DE standards can form barriers to trade especially sanitary and technological barriers. For national standards, mixed positive and negative effects on trade. Positive correlation between standards and trade does not necessarily prove that standards are not harmful for trade. But the necessity for standards is so high that countries have to adopt international standards if they want to export more (reverse causality). Standards two-edged sword: * Beneficial to trade – help in product specification, facilitate intra-industry trade * Harmful to trade – barriers to entry due to cost of compliance, standardization can hurt (or help) innovation

Answer 55

* Political – gunboat diplomacy, military action, trade sanctions, diplomatic sanctions. * Legal – asset seizures, legal costs, legal difficulty in obtaining new loans. (although often legal decisions are difficult to enforce and creditors would rather settle for restructuring) * In a few cases where creditors have obtained judgments in their favor, they have found it difficult to collect on them * However, even just the threat of litigation can limit countries’ access to financing. For example, countries in default proceedings may have difficulties in obtaining letters of credit for trade purposes, because creditors fear repayments on new credit lines may be seized * Market – Higher interest rates, reputational costs (legal and market mechanisms related) – however effects of default only last for a short time. * Defaulting countries face higher financing costs, as well as reduced access to loans. However, effects appear to be rather short-lived following resolution of the default. * Default is often associated with a decline in trade. Evidence shows that trade declines follow default. But it is difficult to demonstrate that they are caused by default as opposed to by the reason for default. * Default is often associated with lower GDP. Note however, that countries typically default in bad times, when GDP is trending downward. * Overall likely that market enforcement costs outweigh legal costs of default. Especially with debts to commercial creditors. With debts to official creditors, legal costs (statutory suspensions of new loans) likely dominate.

Answer 56

May lead to: * Higher financing costs * Difficulty in obtaining loans * Bad reputation may trigger capital flight

Answer 57

According to theory, immigration increases labour supply, therefore lowering wages. If labour markets don’t clear, immigrants displace natives or increase ranks of unemployed. clearly workers lose, employers win. Reality is more complicated: * Immigrants may stimulate labour demand as goods/capital markets adjust. * Unskilled immigrants may displace native unskilled, but native skilled may gain. * Immigrants may be dependent on unemployment benefits – fiscal burden for natives. Empirics: * Modest negative impact on unskilled wages * Increases inequality by raising skilled wages and lowering unskilled wages

Answer 58

3 ways to address global inequality: * Higher growth in poor countries. * Global redistributive schemes. * Migration.

Answer 59

* What types of matches maximize aggregate value? Becker showed that if the value of a match exhibits complementarity, then positive assortative matching maximizes the aggregate value of marriages; that is, the man with the largest value of the masculine characteristic is matched with the woman with the largest feminine characteristic etc. Complementarity of the values of matches means that the increase in the value of a match when the masculine characteristic is replaced with a larger one is larger the larger the feminine characteristic in the match. In other words, the marginal gain from a masculine characteristic is increasing in the attractiveness of the woman in the match. This property is also known as supermodularity. * log supermodularity: The same logic can be applied to matching workers with managers or firms. An important difference between these types of matches and those in the above-described marriage market is that while one man is typically matched with one woman in a marriage, many workers are matched with a single manager or a single firm. These models use a stronger notion of complementarity in order to obtain clear portrayals of inequality; they assume that the natural logarithm of the value of a match exhibits complementarity. This property is also known as log supermodularity. This implies that a marginal increase in the characteristic of one party raises the marginal value of the other party’s characteristic proportionately more than the value of the match.

Answer 60

* Growth and stability * Growth? Poverty reduction? * Productivity? * Macro stability? * Openness makes economy vulnerable to global shocks * On the other hand local shocks could well be stabilized by global integration * Opening-up might create opportunities (e.g. cash crops) only for those who can aﬀord taking risks (typically not the poor). E.g., poor can suﬀer from higher food prices without being able to beneﬁt from higher prices for cash crop goods * There is always a lot of moving in and out of poverty: eﬀect TL diﬃcult to isolate * Evidence on macro stability of TL is mixed * Households * Prices transmitted? Prices: Markets must exist to transmit price changes * Zimbabwe: abolishing state monopoly (1990s) for buying cotton from farmers led to more competition, better prices and better input availability * Zambia: deregulation of maize market left remote farmers marginalized because they could no longer sell their maize * Markets created / destroyed? * Do households respond? * Spillovers? * Vulnerability? * Wages and employment * More employment, higher wages? * Transitional unemployment? * Stolper-Samuelson (beware: unskilled labour not always the abundant factor (e.g. Latin America: natural resources and land) * Government revenue * Less government revenue? * Less revenue bad for the poor * Taxes and spending: * Tariﬀs source of government revenue * Reduced revenue might lead to reduced pro- poor spending of government * Conversely, WTO rules do not allow new tariﬀs (which are often pro-rich anyway) * WTO bans on subsidies are not real constraint to government policies * Increased openness makes taxation of capital more diﬃcult (Rodrik) * Adjustment costs * Long-run beneﬁts do not solve immediate poverty concerns * TL can create immediate hardship * Most important problem: what happens to market for unskilled labour? Some evidence points to fast adjustment. Labourers in heavily protected sectors can be hit hard by TL. Focus complementary policy on initially poor or near-poor, but political economy considerations (i.e. popular support) could call for wider focus

Answer 61

* Opportunity model results (logit regression) - significant variables * Primary commodity exports (peaking at around 33% of GDP) * Secondary schooling, growth in preceding episode (negative) * Months of peace preceding conflict (proxying conflict-specific capital) * Miliary advantage (marginally significant) * Population * Per capita income (instead of schooling) * Diaspora variable – when interacted with months of preceding peace. Interpretation here is that diaspora helps to attenuate the loss of conflict specific capital via financing * Quantitative indicators of grievance * Ethnic/religious hatred, proxied by polarization index of ethnic composition * Political repression, proxied by Polity III data set on political rights and autocracy & Gastil Index: measure of political openness * Political exclusion: exploitation of minority becomes more likely the larger the minority, since there is more to extract. Thus proxied by size of majority: majority = 45%-90% of population * Economic inequality: income: proxied by Gini coefficient, and ratio of top to bottom quintiles. Asset: Gini of land ownership

Answer 62

* Reputation: explains why default leads to reduced access to finance in two ways: Adverse selection models: default provides signal that a government is a “bad payer” type, implying higher financing costs. Moral hazard models: creditors exclude defaulting countries from borrowing in the future in order to enforce payment. * Note higher financing costs (higher interest rates) and/or reduced financing availability will have economy-wide impacts. “Bad payer” type signal could also signal poor protection of property rights, and trigger capital flight

Answer 63

* Because there is no delay in establishing the illegitimacy of odious loans, legal costs are likely to decline. However working out arrears on legitimate debt would remain a time-consuming exercise, with associated costs. * Reputational costs related to repudiating debt contracted by odious regime are likely to fall, partly because borrowing costs pre-default are likely to be higher * Arrears on legitimate debt would result in restriction in the availability of financing for non-odious regimes, and will raise the cost of borrowing. * While lending to odious regimes likely to fall, incentive of odious regimes to default on legitimate debt likely rises. Overall impact on legal costs is ambiguous. * Ex-ante policy clearly identifies which loans are enforceable. In other respects this policy suffers from similar problems as ex-post variant. * Also, non-trivial difficulties in establishing a process whereby odious regimes are identified.

Answer 64

* During time required to establish odious nature, access to financing during litigation will not improve. * Success should allow for a workout at favorable terms. Although note Argentina achieved 70% haircut without odious regime framework. * Cost of borrowing for all countries likely to rise as creditors price in an expected probability of regime being declared odious * Regimes declared odious will be more likely to default on earlier, legitimate, debt. Creditors adhering to framework will be punished with defaults on loans to earlier predecessor regimes, while creditors lending to odious regimes are likely to be repaid (as long as odious regime remains in power). * Availability of resources from official creditors is likely to diminish (as creditors are unable to predict perfectly which regimes are deemed ex-post odious). * Welfare of legitimate regimes is likely to fall, as borrowing costs rise. Welfare in odious regimes also likely to fall – successor countries will have to incur high legal costs

Answer 65

* Who would lend to projects that did not meet predefined standards? * Relative to situation with non-odious debt policy, incentives to default could still be higher, if costs of verifying the legitimacy of loans are prohibitively high. * Also official creditors may shy away from projects in which the costs of meeting the proposed standards would be very high, even if these projects are in the interest of the population.

Answer 66

* Legal costs are likely to be higher than current default mechanisms, audits also costly. Lags are likely to increase and so access to new financing will continue to hold in the interim. Note in particular the difficulty and subjectivity of certain definitions of odious debt. How to differentiate between a project that was good ex-ante but failed, and one that was failed because it was bad ex-ante? * Market costs: not clear how mechanism would affect probability of default. Likely market costs would be similar or higher to situation without framework. Odious regimes may have lower incentive to default on legitimate debt.