Post on 26-Dec-2015
Crises, What Crises?
Nauro F. Campos
Brunel University,
CEPR (London) and
WDI - University of Michigan
Cheng Hsiao
Department of Economics
University of Southern California
Jeffrey B. Nugent
Department of Economics
University of Southern California
ICE-TEA 2006
Turkish Economic Association
Ankara, Turkey
Reform literature: studies show that crises beget economic reforms, but largely silent on the question of which crises matter most Our Questions:
Reform literature: studies show that crises beget economic reforms, but largely silent on the question of which crises matter most Our Questions:1. Which types of crises matter most?
2. Do the effects differ from one type of reform to another (trade and labor market reforms)?
3. Do the effects of the economic crises on reform differ from region to region?
4. Are the reforms interrelated?
5. Are the answers to these questions sensitive to:
a. the relations between the different kinds of reform,
b. the relations between the different types of crises
c. institutional and other conditions?
1. Which types of crises matter most?
2. Do the effects differ from one type of reform to another (trade and labor market reforms)?
3. Do the effects of the economic crises on reform differ from region to region?
4. Are the reforms interrelated?
5. Are the answers to these questions sensitive to:
a. the relations between the different kinds of reform,
b. the relations between the different types of crises
c. institutional and other conditions?
1.Put together a unique data set covering more than 100 developed and developing countries for 5-year periods from 1950 to 2000.
2. Develop measures of two types of crises – economic and political – and two types of reform.
3. Estimate the determinants of these two reform indexes (LMR and TL).
4. Determine the sensitivity of the results to different measures of each type of crisis, interrelationships between the crises and reforms.
1.Put together a unique data set covering more than 100 developed and developing countries for 5-year periods from 1950 to 2000.
2. Develop measures of two types of crises – economic and political – and two types of reform.
3. Estimate the determinants of these two reform indexes (LMR and TL).
4. Determine the sensitivity of the results to different measures of each type of crisis, interrelationships between the crises and reforms.
To answer these questions, we
I. Introduction: On Reform: Theory and Empirical EvidenceI. Introduction: On Reform: Theory and Empirical Evidence
Even though there is gradual convergence in some kinds of policy reforms, such as in fiscal and monetary policy reforms, in other areas of reform, there is little or no convergence, with major countries remaining unreformed and others even reversing their earlier reforms, often as the benefits of thsee reforms appear not to be as strong as they had been anticipated.
While theoretical literature quite developed, empirical literature has lagged. What there is has been of the case study type or for short periods of time or cross-sectional.
Even though there is gradual convergence in some kinds of policy reforms, such as in fiscal and monetary policy reforms, in other areas of reform, there is little or no convergence, with major countries remaining unreformed and others even reversing their earlier reforms, often as the benefits of thsee reforms appear not to be as strong as they had been anticipated.
While theoretical literature quite developed, empirical literature has lagged. What there is has been of the case study type or for short periods of time or cross-sectional.
Reform Theory: Alesina and Drazen (1991) Drazen and Grilli (1993)Reform Theory: Alesina and Drazen (1991) Drazen and Grilli (1993)
While reform (like financial reforms) with virtually no losers is easy, that with losers (structural reforms) may be more difficult (Rodrik 1996)
Key hypothesis: Structural reforms require agreements
among the contending groups. War of attrition: Each party has an incentive
to hold out until the other party or group decides to make a concession.
Existence of a crisis can shorten the delay, forcing compromise and concessions earlier
Examples and anecdotal evidence offered usually focuses on economic crises but we suggest political crises also.
While reform (like financial reforms) with virtually no losers is easy, that with losers (structural reforms) may be more difficult (Rodrik 1996)
Key hypothesis: Structural reforms require agreements
among the contending groups. War of attrition: Each party has an incentive
to hold out until the other party or group decides to make a concession.
Existence of a crisis can shorten the delay, forcing compromise and concessions earlier
Examples and anecdotal evidence offered usually focuses on economic crises but we suggest political crises also.
Existing Empirical Evidence
Existing Empirical Evidence
Bruno and Easterly (1996): effect of hyperinflation on stabilization policy
Drazen and Easterly (2001): Effects of economic crises on subsequent economic performance: Mixed results
Alesina, Ardagna and Trebbi (2006) Stabilization likely to occur noy only following crisis but also in “honeymoon period” of a new government in presidential systems
Tornell (1998) Trade reform more likely when both economic crisis and political crises occur
However, Lora (1998), for LA only, shows only economic crises to have effect
Bruno and Easterly (1996): effect of hyperinflation on stabilization policy
Drazen and Easterly (2001): Effects of economic crises on subsequent economic performance: Mixed results
Alesina, Ardagna and Trebbi (2006) Stabilization likely to occur noy only following crisis but also in “honeymoon period” of a new government in presidential systems
Tornell (1998) Trade reform more likely when both economic crisis and political crises occur
However, Lora (1998), for LA only, shows only economic crises to have effect
II. Measuring Trade Liberalization, Labor Market Reform and CrisesII. Measuring Trade Liberalization, Labor Market Reform and Crises
* Trade liberalization measure Follow Sachs and Warner (1995) dichotomous measure
“OPEN” as updated and corrected by Wacziarg and Welch(2003) for 114 countries, 1970s and 1980s
We extend this back wherever possible to the 1950s (with other data from Gwartney, Lawson and Damira (2000), Penn World Tables and Index of Economic Freedom
A country was classified as Closed, i.e., OPEN=0, if any one or more of the following dummy variables was positive: (1) an average tariff rate of 40 per cent or more, (2) non-tariff barriers covering 40 per cent or more of trade, (3) a black market exchange premium of at least 20%, (4) a state marketing agency or board for major exports, and
(5) a socialist economic system (as defined by Kornai 1992).
* Trade liberalization measure Follow Sachs and Warner (1995) dichotomous measure
“OPEN” as updated and corrected by Wacziarg and Welch(2003) for 114 countries, 1970s and 1980s
We extend this back wherever possible to the 1950s (with other data from Gwartney, Lawson and Damira (2000), Penn World Tables and Index of Economic Freedom
A country was classified as Closed, i.e., OPEN=0, if any one or more of the following dummy variables was positive: (1) an average tariff rate of 40 per cent or more, (2) non-tariff barriers covering 40 per cent or more of trade, (3) a black market exchange premium of at least 20%, (4) a state marketing agency or board for major exports, and
(5) a socialist economic system (as defined by Kornai 1992).
Indexes of Labor Market Reform (LMR)
Indexes of Labor Market Reform (LMR)
These are all based on indexes of labor market rigidities or restrictions
For OECD countries: Blanchard and Wolfers (2000) (BW), index of
Employment Protection 1960-2000 for 5 year periods only
For LAC countries: Heckman and Pages (2000) from late 1980s to late 1990s. Computed as the present value of costs of dismissing a worker in formal sector according to job security regulation to the firm at time worker is hired (exclusive of court costs)
For other regions: Botero, Djankov, La Porta, Lopez-de-Silanes and Shleifer (2003) and extended by World Bank (2004) for other regions. This is a “Rigidity of Employment Laws Index based on three major subindices (difficulty of hiring, regidity of hours and difficulty of firing indexes), each of which is based on a number of more detailed indicators. This index is limited to the years beginning only in 1995
BW’s starting point is Index of Employment Protection (OECD 1999), OECD “late 1980s” and “late 1990s,” (based on inter alia ILO conventions, eg discrimination, child labor and fair dismissal), which they then extend by filling in in-between values by linear interpolation and then going back to 1960 on the basis of Lazear’s data and notice requirements and severance pay via backcasting
These are all based on indexes of labor market rigidities or restrictions
For OECD countries: Blanchard and Wolfers (2000) (BW), index of
Employment Protection 1960-2000 for 5 year periods only
For LAC countries: Heckman and Pages (2000) from late 1980s to late 1990s. Computed as the present value of costs of dismissing a worker in formal sector according to job security regulation to the firm at time worker is hired (exclusive of court costs)
For other regions: Botero, Djankov, La Porta, Lopez-de-Silanes and Shleifer (2003) and extended by World Bank (2004) for other regions. This is a “Rigidity of Employment Laws Index based on three major subindices (difficulty of hiring, regidity of hours and difficulty of firing indexes), each of which is based on a number of more detailed indicators. This index is limited to the years beginning only in 1995
BW’s starting point is Index of Employment Protection (OECD 1999), OECD “late 1980s” and “late 1990s,” (based on inter alia ILO conventions, eg discrimination, child labor and fair dismissal), which they then extend by filling in in-between values by linear interpolation and then going back to 1960 on the basis of Lazear’s data and notice requirements and severance pay via backcasting
Further Steps for LMR Indexes: What did we do?Further Steps for LMR Indexes: What did we do?
For LAC and other non-OECD countries: we backcasted and sidecasted these indexes for recent years backwards in time using variables like the following:
NEWEP = F (Dummy variables for Legal origins (French, English, German)
Time-Varying data on adoption of ILO Conventions (chldlb, forclb, abolfl, eqlrem, discrm)
Share of agriculture (and share squared) Quality of institutions index (property rights) Regional dummies
Key Data: Forteza and Rama (2001, World Bank) Number of obs = 148; R-squared = 0.8139;
Adj R-squared = 0.7928; Root MSE = 0.563
Used these coefficients and actual data to backcast and sidecast missing values.
For LAC and other non-OECD countries: we backcasted and sidecasted these indexes for recent years backwards in time using variables like the following:
NEWEP = F (Dummy variables for Legal origins (French, English, German)
Time-Varying data on adoption of ILO Conventions (chldlb, forclb, abolfl, eqlrem, discrm)
Share of agriculture (and share squared) Quality of institutions index (property rights) Regional dummies
Key Data: Forteza and Rama (2001, World Bank) Number of obs = 148; R-squared = 0.8139;
Adj R-squared = 0.7928; Root MSE = 0.563
Used these coefficients and actual data to backcast and sidecast missing values.
Convert TL and LMR indexes into the same 0-1 range
and same direction (higher values reflecting
Trade Liberalisation and Labor Market Reform as
in Lora (1998)
Subtract each value from the series maximum and
divide this by the series range (maximum minus
minimum value). Once all the variables are
collected, they are aggregated and transformed
into a 0 to 1 scale (with 1 indicating maximum
reform over countries and years
Convert TL and LMR indexes into the same 0-1 range
and same direction (higher values reflecting
Trade Liberalisation and Labor Market Reform as
in Lora (1998)
Subtract each value from the series maximum and
divide this by the series range (maximum minus
minimum value). Once all the variables are
collected, they are aggregated and transformed
into a 0 to 1 scale (with 1 indicating maximum
reform over countries and years
Next Step on LMR Indices
Measures of CrisesMeasures of Crises Political (3)
Political Instability: Principal components index of revolutions, coups, political assassinations during each 5 yr period (Banks 2005)
Inverse measure: Regime Durability (Polity IV) Civil War Intensity (Correlates of War Project)
Economic (4) Max fall in GDP No. of years in currency or debt crises Inverse Measure: Current Account Balance (CAB)
Political (3) Political Instability: Principal components index of
revolutions, coups, political assassinations during each 5 yr period (Banks 2005)
Inverse measure: Regime Durability (Polity IV) Civil War Intensity (Correlates of War Project)
Economic (4) Max fall in GDP No. of years in currency or debt crises Inverse Measure: Current Account Balance (CAB)
Measures of Political Institutions
Measures of Political Institutions
Party Fractionalization Index
Political Constraints Index (Henisz
2000)
Party Fractionalization Index
Political Constraints Index (Henisz
2000)
Figure 1. Trade Liberalisation and Labour Market Reform in Asia (n max=19)
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Figure 2. Trade Liberalisation and Labour Market Reform in Europe (n max=21)
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Figure 3. Trade Liberalisation and Labour Market Reform in Africa (n max=44)Note: in 1950-54, 1955-59 and 1970-74 the average for trade liberalisation is zero.
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Figure 4. Trade Liberalisation and Labour Market Reform in Latin America (n max=24)
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Figure 5. Trade Liberalisation and Labour Market Reform in MENA (n max=18)
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Figure 6. Trade Liberalisation and Labour Market Reform in USA, Canada, New Zeland, Australia (n max=4)
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1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-1994 1995-1999
Trade liberalisation Labour market reform
Panel Data EstimationPanel Data Estimation
Each Reform Index = F( Economic Crises, Political Crises,
Institutions) Test for Pooling across Regions:
Homogeneity across regions rejected Sensitivity Analyses
Alternative Measures of Crises Allowing feedbacks between the two
types of reforms both contemporary and with lags
Each Reform Index = F( Economic Crises, Political Crises,
Institutions) Test for Pooling across Regions:
Homogeneity across regions rejected Sensitivity Analyses
Alternative Measures of Crises Allowing feedbacks between the two
types of reforms both contemporary and with lags
Initial Model with No Feedback between Reform
Types
Initial Model with No Feedback between Reform
Types Ritc = α +β1Ptc + β2 Etc + β3Xtc + ε
where Ritc is reform index i at time t in country c
P = Intensity of Political Crises
E = Intensity of Economic Crises
X = Institutional and Other Controls
Ritc = α +β1Ptc + β2 Etc + β3Xtc + ε
where Ritc is reform index i at time t in country c
P = Intensity of Political Crises
E = Intensity of Economic Crises
X = Institutional and Other Controls
121 tctctcitc XEPR 121 tctctcitc XEPR 121 tctctcitc XEPR 121 tctctcitc XEPR 121 tctctcitc XEPR
Table 1 Effects on Trade Lib.Table 1 Effects on Trade Lib.SIGNS EXPECTED
ALL DEVEL AFRICA ASIA LAC
Max fall GDP +
+ *
Curr. Crises +
- *** - ** - ** - **
CAB - + ** + **
Regime Durab -
- ** + ** - **
Polit. Inst. +
+ ** + ** + **
Table 2 Labor Market Liberalization
Table 2 Labor Market LiberalizationSIGNS
EXPECTED
ALL DEV. AFRICA ASIA LAC MENA
Max fall GDP +
- * - ** - ***
Curr. Crises +
CAB - + *** + * + ***
Regime Durab -
+ *** + * + ***
+ **
Polit. Inst. +
- ** - **
Next Step: Sensitivity Analysis
Next Step: Sensitivity Analysis
Use alternative measures of both Economic and Political Crises Debt Crises (Economic) Civil War Intensity (Political)
Repeat Tables 1, 2 substituting these alternative measures for Currency Crises and Regime Durability
These results given in Tables 3, 4
Use alternative measures of both Economic and Political Crises Debt Crises (Economic) Civil War Intensity (Political)
Repeat Tables 1, 2 substituting these alternative measures for Currency Crises and Regime Durability
These results given in Tables 3, 4
Table 3 Trade LiberalizationTable 3 Trade LiberalizationSIGNS EXPECTED
ALL DEVEL AFRICA ASIA LAC
Max fall GDP +
+ *
Debt Crises +
- ** - * - * - **
CAB - + **
Civil War Intensity-
- ** * - ** - ** - *
Polit. Inst. +
+ *** + * + **
Table 4 Labor Market Reform
Table 4 Labor Market Reform
Neither Debt Crises nor Civil War Intensity has a significant effect in any region
While effects of Max Fall GDP no longer significant , those of CAB and Political Instability have very similar effects as in Table 2
Neither Debt Crises nor Civil War Intensity has a significant effect in any region
While effects of Max Fall GDP no longer significant , those of CAB and Political Instability have very similar effects as in Table 2
Next Step: Allow for lagged effects across Reforms
Next Step: Allow for lagged effects across Reforms
Trade Lib affected by Lagged LMR
Ritc= α0+α1Rjt-1c+β1Ptc+β2Etc+β3Xtc+ ε LMR affected by Lagged Trade
Liberalization Tables 5, 6 repeat the
specifications of Tables 1, 2, respectively, with this added variable in each case
Trade Lib affected by Lagged LMR
Ritc= α0+α1Rjt-1c+β1Ptc+β2Etc+β3Xtc+ ε LMR affected by Lagged Trade
Liberalization Tables 5, 6 repeat the
specifications of Tables 1, 2, respectively, with this added variable in each case
Table 5 for Trade Liberalization
Table 5 for Trade Liberalization
Lagged Labor Market Reform Variable has significant negative effects in Africa, LAC
The Max Fall GDP still has positive effect only in LAC
Currency Crisis still has negative effects in All, DEV, Africa and LAC
CAB still has positive effects in All, Africa Regime Durability still has positive effects
in DEV, negative effects in All, Africa Political Instability still has positive effects
in All, DEV, LAC and MENA
Lagged Labor Market Reform Variable has significant negative effects in Africa, LAC
The Max Fall GDP still has positive effect only in LAC
Currency Crisis still has negative effects in All, DEV, Africa and LAC
CAB still has positive effects in All, Africa Regime Durability still has positive effects
in DEV, negative effects in All, Africa Political Instability still has positive effects
in All, DEV, LAC and MENA
Table 6 for LMRTable 6 for LMR Lagged Trade Liberalization has
significant positive effects on LMR in All, Africa, and Asia
Effects of Max Fall GDP remain Negative and Significant in All, Asia and Transition
Effects of CAB remain Positive and Significant in All, DEV and Africa
Effects of Political Instability remain negative in All, Africa
Effects of Regime Durability Remain Positive in All, DEV, Asia, MENA
Lagged Trade Liberalization has significant positive effects on LMR in All, Africa, and Asia
Effects of Max Fall GDP remain Negative and Significant in All, Asia and Transition
Effects of CAB remain Positive and Significant in All, DEV and Africa
Effects of Political Instability remain negative in All, Africa
Effects of Regime Durability Remain Positive in All, DEV, Asia, MENA
Final Step: Allow for Simultaneous Interaction between the Two
Reform Variables: 2SLS Estimates
Final Step: Allow for Simultaneous Interaction between the Two
Reform Variables: 2SLS Estimates Ritc= α0+α1Rjtc+β1Ptc+β2Etc+β3Xtc+ ε Difficulty of Identifying Good Instruments. Can no longer
have identical specifications. We exclude Max Fall GDP from Trade Lib, Currency Crises and CAB from LMR
Multicollnearity also present Results in Table 7 for Trade Lib. weaker, with fewer
significant determinants. But in No case is there a sign reversal. No support for
Econ. Crisis Begets Reform (Curr Crisis, CAB) have opposite sign
Support for Political Crisis remains: Regime Durability negative, significant,in Africa, Pol Instability positive, though not statistically significant
For no region and for each reform is there evidence of simultaneous feedback between the reforms.
Ritc= α0+α1Rjtc+β1Ptc+β2Etc+β3Xtc+ ε Difficulty of Identifying Good Instruments. Can no longer
have identical specifications. We exclude Max Fall GDP from Trade Lib, Currency Crises and CAB from LMR
Multicollnearity also present Results in Table 7 for Trade Lib. weaker, with fewer
significant determinants. But in No case is there a sign reversal. No support for
Econ. Crisis Begets Reform (Curr Crisis, CAB) have opposite sign
Support for Political Crisis remains: Regime Durability negative, significant,in Africa, Pol Instability positive, though not statistically significant
For no region and for each reform is there evidence of simultaneous feedback between the reforms.
Table 8 for LMRTable 8 for LMR
No Simultaneous feedback in Reforms
For DEV only is there a positive, significant effect of Economic Crisis on LMR
Political Instability Hinders LMR Because of multicollinearity and
identification problems, cannot reject possibility of feedbacks between the two reforms, but certainly does not support this.
No Simultaneous feedback in Reforms
For DEV only is there a positive, significant effect of Economic Crisis on LMR
Political Instability Hinders LMR Because of multicollinearity and
identification problems, cannot reject possibility of feedbacks between the two reforms, but certainly does not support this.
CONCLUSIONSCONCLUSIONS Robustness checks of Tables 3-8 generally find
very similar results as in Tables 1, 2 Political Crises seem to be more important
determinants of reform than Economic Crises For political crises the effects differ in sign
between the two reforms: Negative of LMR Positive on trade liberalization
Heterogeneity in results across regions: should not pool
Other determinants: Level of GDP, Institutions (Party Fractionalization) Both Positive for TL and negative for LMR
Robustness checks of Tables 3-8 generally find very similar results as in Tables 1, 2
Political Crises seem to be more important determinants of reform than Economic Crises
For political crises the effects differ in sign between the two reforms: Negative of LMR Positive on trade liberalization
Heterogeneity in results across regions: should not pool
Other determinants: Level of GDP, Institutions (Party Fractionalization) Both Positive for TL and negative for LMR
Future ResearchFuture Research Instead of determining only levels
of TL and LMR in each country and period, should also determine Speeds of implementation
Conduct detailed case studies to determine why the effects of political crises vary across regions as well as types of reform
Investigate the determinants of other reforms (financial sector reform, privatization, etc.
Instead of determining only levels of TL and LMR in each country and period, should also determine Speeds of implementation
Conduct detailed case studies to determine why the effects of political crises vary across regions as well as types of reform
Investigate the determinants of other reforms (financial sector reform, privatization, etc.