Jamus Jerome Lim

Trade Openness Reduces Growth Volatility When Countries are Well Diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the effect of trade openness on growth volatility. The authors also identify positive thresholds for product diversification at which the effect of openness on volatility changes sign. The effect is shown to be positive only for a minority of countries with highly concentrated export baskets. This result is shown to be robust to both explicit accounting for endogeneity as well as the inclusion of a host of additional controls.

Crisis, Contagion, and East Asian Stock Markets

Following the 1997 financial crisis in East Asia, the issue of contagion has resurfaced. Contagion has most often been associated with high frequency events; hence, it has been measured on stock market returns, interest rates, the exchange rate, or linear combinations of them. This paper tests for evidence of contagion between selected East Asian stock markets, thereby exploring the importance of the linkages between stock markets as a transmission channel during the crisis.

Tinker, Taper, QE, Bye? The Effect of Quantitative Easing on Financial Flows to Developing Countries

This paper examines gross financial inflows to developing countries between 2000 and 2013, with a particular focus on the potential effects of quantitative easing policies in the United States and other high-income countries. The paper finds evidence for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels. Moreover, quantitative easing had an additional effect over and above these observable channels, which the paper argues cannot be attributed to either market expectations or changes in the structural relationships between inflows and observable fundamentals. The baseline estimates place the lower bound of the effect of quantitative easing at around 5 percent of gross inflows (for the average developing economy), which suggests that of the 62 percent increase in inflows during 2009-13 related to changing global monetary conditions, at least 13 percent of this was attributable to quantitative easing. The paper also finds evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than foreign direct investment to our measured effects from quantitative easing. Finally, the paper performs simulations that explore the potential effects of the withdrawal of quantitative easing on financial flows to developing countries.

Export Diversification in a Transitioning Economy: The Case of Syria

How does the process of export diversification play out in a transitioning economy, especially in light of government policy aimed at trade liberalization? This paper examines this question by considering a directed policy effort by Syria -- an economy transitioning from both economic centralization and resource dependence -- to liberalize its trade in 2001. In addition to documenting the patterns of diversification at the aggregate level since the implementation of the policy, we also examine factors that are related to diversification at the sectoral level. Our findings suggest that, while Syria has achieved reasonably rapid export diversification, this may to a large extent be the result of structural transformations in the economy, and that further consolidation of diversification gains may require continued policy reform along the lines of strengthening Syrias weak institutional and business environment.

Growth Poles and Multipolarity

This paper develops an empirical measure of growth poles and uses it to examine the phenomenon of multipolarity. The authors formally define several alternative measures, provide theoretical justifications for these measures, and compute polarity values for nation states in the global economy. The calculations suggest that China, Western Europe, and the United States have been important growth poles over the broad course of world history, and in modern economic history the United States, Japan, Germany, and China have had prominent periods of growth polarity. The paper goes on to analyze the economic and institutional determinants, both at the proximate and fundamental level, that underlie this measure of polarity, as well as compute measures of dispersion in growth polarity shares for the major growth poles.

East Asia in the Information Economy

The Information Economy has captured the imagination of all levels of society. Yet very often, analyses tend to reflect personal biases or propose incredulous scenarios. This essay does not seek to rewrite old rules for a new economy; rather, it seeks to provide a balanced perspective on opportunities and challenges facing East Asia, using a multidisciplinary approach. It finds that although these countries differ in their levels of development in the Information Economy, their prospects of growth depend on the policies that they choose to pursue. Deliberations on economic issues (such as the potential for productivity gains from ICT), political concerns (including the need to cope with changing government‐people dynamics), and social changes (such as the diminution of local cultures and the widening digital divide) often involve both costs as well as benefits. The optimal balance is likely to differ between countries, with no clear model answers.

Export Diversification in a Transitioning Economy

How does the process of export diversification take place in an economy in transition, especially in light of government policy aimed at trade liberalization? This article examines this question by considering a directed policy effort by Syria – an economy in transition from both economic centralization and resource dependence – to liberalize its trade between 2001 and 2008. In addition to documenting the patterns of diversification at the aggregate level since the implementation of the policy, we also examine factors that are related to diversification at the sectoral level. Our findings suggest that, while Syria has achieved reasonably rapid export diversification, this may to a large extent be the result of structural transformations in the economy, and that further diversification may require continued policy reform designed to strengthen Syrias weak institutional and business environment.

Institutional Quality Mediates the Effect of Human Capital on Economic Performance

This paper considers the relationship between institutional quality, educational outcomes, and economic performance. More specifically, it seeks to establish the linkages by which government effectiveness affects per capita income, via its mediating effect on human capital formation. The empirical approach adopts a two-stage strategy that estimates national-level educational production functions that include government effectiveness as a covariate, and then uses these estimates as instruments for human capital in cross-country regressions of per capita income. The results identify a significant and positive effect of human capital on per capita income levels, and partially resolves the inconsistency between macro- and micro-level studies of the effect of human capital on income. The results also remain robust to alternative specifications, extension to a panel setting, subsamples of the data, and fully endogenous institutions.

Unconventional monetary policy normalization in high-income countries : implications for emerging market capital flows and crisis risks

As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries. In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, the risk of more abrupt adjustments remains significant, especially if increased market volatility accompanies the unwinding of unprecedented central bank interventions. According to simulations, abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months. Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows.

Foreign Bank Behavior During Financial Crises

One of the persistent policy problems faced by governments contemplating financial liberalizations is the question of whether to allow foreign banks entry into the domestic economy. This question has become ever more urgent in recent times, due to rapid financial globalization, coupled with the credit contractions experienced as a result of the 2007/08 financial crisis. This paper examines the question of whether opening the financial sector to foreign participation is a good idea for developing countries, using a unique bank-level database of foreign ownership. In particular, the authors examine whether the credit supply of majority foreign-owned financial institutions differ systematically conditional on a crisis event in their home economies. They show that foreign banks that were exposed to crises in their home countries exhibit changes in lending patterns that are lower by between 13 and 42 percent than their non-crisis counterparts.