Chander Kant

Minority Ownership, Deferral, Perverse Intrafirm Trade and Tariffs

When the foreign subsidiary has minority local ownership and the MNF engages in transfer pricing, its intrafirm exports are always from the country with the higher marginal cost. Further, permitting deferral from home taxation of non-repatriated foreign profits changes the nature of intrafirm trade from efficient to perverse even when the foreign subsidiary is fully-owned by the MNF. Intrafirm trade differs significantly from that between unrelated buyers and sellers, and tariffs on such trade (when it is perverse) can restore global production efficiency.

State of the Developing World: PPP Income, Catching-Up/Falling Behind, and No Growth

Short AbstractUsing the new PWT, that for the first time permit income comparisons overtime too, and defining growth for followers as catching-up, the developing world (excluding China and one or two countries) consisting of 99/100 countries with 3.9/4.0b. population has not shown any growth since either 1951 or 1971.Long AbstractThis paper takes the view country of residence matters. It distinguishes the catch up of a country’s income to the frontier from studies of absolute poverty and of global inter-personal distribution of income. It uses the real GDP estimates from the new generation of PWT that for the first time permit real GDP comparisons not only across countries but also over time. There has been no assessment of catch-up either in the past decade or using the new PWT. Following the neo-classical “advantage of backwardness,” i.e., the advantage followers have to simply bring in ideas to create value already in use in the leaders, it defines growth for developing countries as catching up. It defines a catch up index, and computes it for all developing countries since 1951; or since the country became independent - if it became independent after 1951. It suggests growth should be examined over a period longer than 20 years due to unusual events that may last a decade or more. More than half the developing countries have fallen behind since their base year. To assess catch-up of developing countries as a group, it prefers using the population weighted geometric mean (GM). It uses 1971 and 1991 as alternative base years. It shows the developing world (excluding China and one or two countries) consisting of 99/100 countries with 3.9/4.0b. population in 2010 has not achieved any growth since either 1951 or 1971. At the same time, divergence of their incomes has increased continuously. If usable data for 12 countries excluded due to lack of data were available, the developing world’s overall catch-up would decrease and their divergence of incomes would increase. Of the 30 best performers during 1991-2010, ten fell-behind and six did not catch-up faster than 0.5 annually when their performance is examined over either 1971-2010 or 1951-2010 periods. Fast catch-up for 20 years does not mean take-off to self-sustained growth over the long-term. Citing recent estimate of more than a trillion dollars of illicit capital outflows from developing and emerging markets each year, it suggests institutions and structural factors may matter the most.

Multinational Corporations and Institutions

This paper examines whether the recent conclusion that foreign direct investment (FDI) has a positive effect on institutions in developing countries depends on a country having reached a certain threshold level of institutional quality. The relevant literature has recently coalesced around the view effects of capital account globalization on growth are elusive; its main benefit is likely to be collateral. We examine the collateral impact on institutions of investment through a multinational corporation and using cross-section analysis. We show FDI’s positive effect on institutions in developing countries is driven by upper middle income countries. When the institutional quality is very low, FDI cannot lift it; when it reaches a middle level, it can. In view of persistent global inequality, and failure of developing countries to catch-up, and recent emphasis on “fundamental” causes of growth (like institutions) as distinguished from “proximate” causes like physical capital, labor in efficiency units, and technology of the Solow model, understanding how institutions may be affected is important.

Financial Globalization & Institutions in Developing Countries

A recent consensus in the relevant literature finds the main benefit of financial globalization to be its collateral effects. In the last two decades it has also been realized traditional Solow factors of physical capital, labor in efficiency units, and technology are “proximate” causes of growth: they depend on “fundamentals” in which institutions play a central role. We examine whether a country with greater openness to portfolio investment has better quality relevant institutions. The premise is relevant institutions cannot remain completely local when globalization has occurred. Two country-level institutional indicators – developed by the World Bank’s Doing Business team – that became available in 2010 are used. The sample consists of all developing countries for which both portfolio and institutional data are available. We find countries with greater financial globalization have institutions of higher quality. This conclusion is robust to using i) a different sample,ii) alternative dependent variables, iii) alternative or additional control variable and an additional regressor, iv) different techniques to examine endogeneity, and v) is supported by a natural experiment.