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Ibero America Institute for Econ. Research (IAI) Discussion Papers

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No. 210   (Download full text)
Philipp Kolo
Questioning Ethnic Fragmentation's Exogeneity - Drivers of Changing Ethnic Boundaries
Ethnic fragmentation is a variable increasingly used in the economic literature to explain differences in economic development level, growth or the incidence of conflicts. Nearly all articles have in common that they treat ethnic fragmentation as a static, exogenous fact. Only recently some contributions outlined first ideas, why different levels of ethnic fragmentation evolved based on biodiversity and evolutionary theories. This article has two main goals. In connecting with these recent findings, the article boldly confirms their results that a ‘base-level’ of fragmentation evolved due to geographical and evolutionary factors. Additionally, it draws the attention to the impact of colonization on fragmentation, especially on how a country was colonized. The main goal, however, is to show that ethnic fragmentation is not only evolving over centuries, but changes over a short period of time. As static factors, e.g. geographical ones, can’t be responsible for changes in the short run, the article offers a structured assessment of factors that may influence diversity levels in the short term. Although migration is the most obvious factor, urbanization and especially education play an even more important role in influencing a country’s ethnic boundaries.
JEL-Codes: C23, F54, I29, O10, Z10
Keywords: Colonization, Endogeneity, Ethnic fractionalization (ELF), Heterogeneity
No. 209   (Download full text)
Dierk Herzer
Cross-country heterogeneity and the trade-income relationship
This paper makes the following contributions to the literature on the impact of trade on income. First, we use heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors to estimate the effect of trade on income for 75 developed and developing countries, both for the sample, as a whole, and for each individual country. Second, we use a general-to-specific variable-selection approach to identify important determinants of the effect of trade on income. Our main findings are: (i) A one-percent increase in the trade share of GDP results, on average, in a statistically significant increase in income per worker of about 0.18 percent. This result is in contrast to previous studies, which tend to produce either unreasonably large or statistically insignificant estimates of the impact of trade on income. (ii) There are large cross-country differences in the income effect of trade, in particular, between developed and developing countries. For developed countries the income effect of trade is positive, whereas trade has, on average, a negative impact on income in developing countries. (iii) The cross-country heterogeneity in the impact of trade on income can be explained mainly by cross-country differences in primary export dependence, labor market regulation, and property rights protection. The level of property rights protection is positively related, while the levels of primary export dependence and labor market regulation are negatively related to the income effect of trade.
JEL-Codes: F43; F14; C23; C52
Keywords: Trade; Income; Cross-country heterogeneity; Panel cointegration; General-to-specific approach
No. 208   (Download full text)
Sami Bensassi and Inmaculada Martínez-Zarzoso
How Costly is Modern Maritime Piracy for the International Community?
This paper focuses on the impact of maritime piracy on international trade. Piracy increases the cost of international maritime transport through an increase in insecurity regarding goods deliveries. Bilateral trade flows between the main European and Asian countries over the 1999 to 2008 period are used to estimate an augmented gravity model that includes various measures of piracy acts. We found robust evidence indicating that maritime piracy reduces the volume of trade; the effect of ten additional vessels hijacked being associated to an 11% decrease in exports. Using these results, the international cost of piracy in terms of trade destruction is estimated to be 28 billion dollars. Finally, we compare the cost of low intensity conflict like Somalia, to the cost of a full scale conflict (Afghanistan) and to the cost of an autarkic state (North Korea) for the international community in the year 2008.The results indicate that the cost of war more than doubles the cost of low intensity conflict.
JEL-Codes: F10, F51
Keywords: Piracy, International trade, Gravity equation, cost of conflict, security
No. 207   (Download full text)
Dierk Herzer
How does foreign direct investment really affect developing countries` growth?
This paper contributes to the literature on foreign direct investment (FDI) and economic growth in two main ways. First, we examine the effect of FDI on economic growth for 44 developing countries over the period 1970 to 2005 using heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors. In contrast to previous studies, we find that FDI has, on average, a negative effect on growth in developing countries, but that there are large cross-country differences in the growth effects of FDI. Second, we use a general-tospecific model selection approach to systematically search for country-specific factors explaining the cross-country differences in the growth effects of FDI. Contrary to previous results, we find that the cross-country differences in per capita income, human capital, openness, and financial market development cannot explain the cross-country differences in the growth effects of FDI. Instead, the growth effects of FDI are positively related to freedom from government intervention and freedom from business regulation, and negatively related to FDI volatility and natural resource dependence.
JEL-Codes: F21; F43; C23; C21
Keywords: FDI; Growth; Developing countries; Panel cointegration; General-to-specific approach
No. 206   (Download full text)
Felicitas Nowak-Lehmann D., Inmaculada Martinez-Zarzoso, Adriana Cardozo, Dierk Herzer and Stephan Klasen
Foreign Aid and Recipient Countries` Exports: Does Aid Promote Bilateral Trade?
This paper uses the gravity model of trade to investigate the link between foreign aid and exports in recipient countries. Most of the theoretical work emphasizes the negative impact of aid on recipient countries’ exports primarily due to exchange rate appreciation, disregarding possible positive effects of aid in promoting bilateral trade relations. The empirical findings, in contrast, indicate that the net impact of aid on recipient countries’ exports is positive -even though the macroeconomic impact of aid is rather small- and that the average return for recipients’ exports is about 1.50 US$ for every aid dollar spent. We argue that “bilateral aid” seems to promote good bilateral trade relations, mutual trust and familiarity and that those factors reinforce bilateral trade, including recipient country exports. The paper also estimates the effect of different types of aid (bilateral aid versus multilateral aid flowing to a specific recipient) and studies aid’s contribution to an expansion of exports in different regions of the world. It is found that aid is strongly export-enhancing in Asia and Latin America, but not in Africa.
JEL-Codes: F10; F35
Keywords: International trade; foreign aid; recipient exports; bilateral trade relations
No. 205   (Download full text)
Josef L. Loening and Masato Higashi
Decomposing Terms of Trade Fluctuations in Ethiopia
This paper proposes a technique to decompose short-run fluctuations in the terms of trade. Using Ethiopia as an example, we decompose the commodity terms of trade into various components to measure the impact of price and volume shifts as well as export diversification. We use monthly data from the past decade, including periods during the global food and financial crises. Our findings suggest that diversification out of traditional coffee exports to other export commodities successfully mitigated a terms of trade shock. Continued export diversification will be beneficial.
JEL-Codes: F14, O11, O55
Keywords: Terms of Trade, Food Price Crisis, Financial Crisis, Ethiopia
No. 204   (Download full text)
Martin Clever and Inmaculada Martínez-Zarzoso
Deeper Integration: What Effects On Trade
The focus of this paper is to estimate the effect of the different types of regional trade agreements on the volume of trade between country pairs. The analysis will employ the “empirical workhorse” of international trade; the gravity model. We hypothesize that the deeper agreements have a stronger effect on trade, especially when considering the extensive margin of trade. When controlling for the extensive margin of trade, the multilateral trade resistance terms, and the endogeneity bias we are able to obtain satisfyingly accurate treatment effects of the different types of regional trade agreements. Using a panel of 50 countries over the period 1980-1999, we find that customs unions, “deep” free trade agreements, and common markets have stronger effects on bilateral trade than simple free trade agreements.
JEL-Codes: F1
Keywords: Regional trade agreements, Deep integration, International trade flows, Gravity equation, Panel data
No. 203   (Download full text)
Gordon Wilmsmeier, Inmaculada Martínez-Zarzoso and Norbert Fiess
Regional Hub Port Development - The Case of Montevideo, Uruguay
This paper reflects on port development in Uruguay in an environment of trilateral interport competition. The regional characteristics of port development in terms of their geographical, functional and operational characteristics are discussed by analysing the port system’s evolution. The case of Montevideo as the success or failure of a regional hub port development strategy is analysed in detail. Particular attention is given to the evolution and impact of the liner shipping service network in defining the role of a port within a regional port system. Further, the evolution of the port of Montevideo in terms of institutional and organisational and the related strategy are described, with focus on the effect on transhipment cargo in the port. The main findings are twofold. First, port development in Montevideo been driven proactively and under a clear strategy, but still faces a number of challenges. Second, economies of scale in transport, port infrastructure and connectivity are important determinants of port development, of which the latter is principally driven by external actors, the shipping lines. The paper shows that despite strong efforts Uruguay and its principal port Montevideo are highly dependent on external factors, particularly the level of connectivity, in their strategy to develop Montevideo as a regional hub. Thus the findings are relevant in relation to the discussion of Montevideo’s development potentials as a hub on South America’s East Coast in particular and the effects of external influences on port development from in general.
Keywords: Regional port development; transhipment, connectivity; distance; Latin America
No. 202   (Download full text)
Inmaculada Martínez-Zarzoso, Felicitas Nowak-Lehmann D. and Stephan Klasen
The Economic Benefits of Giving Aid in Terms of Donors` Exports
This paper uses the gravity model of trade to investigate the link between bilateral and multilateral foreign aid and exports. There are three primary findings from this approach. First, in the long term, the average return, in terms of an increase in the donor’s level of goods exports, is approximately $ 2.15 US for every aid dollar spent on bilateral aid. Second, multilateral aid has a positive effect on export levels only in the short term, whereas in the long term, the effect is negative. Third, aid from other donors does not give rise to a displacement effect for a given donor-recipient trade relationship. This paper also makes comparisons among donors and finds that aid has a positive and significant effect on most donors’ export levels.
JEL-Codes: F10; F35
Keywords: exports, foreign aid, donors, panel data, sample selection, GLM
No. 201   (Download full text)
Inmaculada Martínez-Zarzoso and Gordon Wilmsmeier
Freight Rates and the Margins of Intra-Latin American Maritime Trade
This paper focuses on the analysis of the relationship between maritime trade and transport cost in Latin America. The data available are disaggregated (SITC 5 digit level) maritime trade flows on trade routes within Latin America over the period 1999-2004. The contribution to the literature is to disentangle the effects that transport costs have on the extensive margin (number of products imported) and the intensive margin (quantity imported of each product) of international trade in order to test some of the predictions of the trade theories that introduce firm heterogeneity in productivity, as well as fixed costs of exporting. Recent investigations show that spatial frictions (distance) reduce trade mainly by reducing the number of shipments and that most firms ship only to geographically proximate customers, instead of shipping to many destinations in quantities that decrease in distance. Our findings confirm this result for intra-LA trade and show that the opposite pattern is observed for ad-valorem freight rates that reduce aggregate trade values mainly by reducing the quantity imported (intensive margin).
JEL-Codes: F10
Keywords: Transport costs; Maritime trade; Latin America; Sectoral data, Competitiveness
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