Jayant Menon

Total factor productivity growth in foreign and domestic firms in Malaysian manufacturing

Abstract In this article, we estimate total factor productivity growth (TFPG) in foreign and domestic firms in 53 Malaysian 5-digit ISIC manufacturing industries for the period 1988 to 1992. We find that most of the growth in real manufacturing output over this period is due to input growth, rather than productivity growth. This is true for both domestic and foreign firms. Where there is non-negligible amounts of TFPG growth, it is concentrated in final goods industries such as household consumer and electrical goods. These are industries that manufacture, and not just assemble. Future productivity growth, if there is to be any, is likely to come from the expansion of these industries, and not from continued growth in assembly activities in the semiconductors and electronic parts industries. The evidence on TFPG presented here suggests that, as of 1992 at least, this shift from assembling to manufacturing had not occurred to any significant extent.

Changes in Technology and Preferences: A General Equilibrium Explanation of Rapid Growth in Trade

We use a computable general equilibrium model in an explanation of the recent rapid growth in Australias trade, particularly intra-industry trade. Relative to previous studies of trade growth based on multiple regression analysis, our approach allows us to: (i) work at a detailed industry level; (ii) use primary variables to represent changes in technology and preferences rather than proxies; and (iii) use a framework based on explicit microeconomic foundations. We find that most of the growth in Australias trade relative to GDP is explained by changes in technology and preferences. Copyright 2000 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Exchange rates and import prices for a small open economy

The exchange rate pass-through for a small open economy in the case of Australian manufactured imports in estimated by applying an econometrics procedure which avoids the pit-falls in previous studies to a carefully assembled data set. For the first time in the literature, estimate of pass-through based on the Johansen (1988) Maximum Likelihood (ML) procedure are provided. It is found that incomplete pass-through has important implications for policy and the macroeconomy.

How important is intra-industry trade in trade growth?

Empirical work on intra-industry trade (IIT) is almost 30 years old. Initial research sought to identify if IIT was a significant share of total trade (TT). The Grubel-Lloyd (GL) index was widely used for this purpose. Interest has since shifted to the changing importance of IITover time. Using movements in the GL index to infer the importance of IIT over time is not only vague, but can be misleading. In this article, we measure the contributions of growth in net trade (NT) and IIT to the growth in TT. To understand changes in IIT over time, we also derive the contributions of imports and exports to the growth in TT, NT, and IIT. All our formulas are illustrated with data for 205 Australian manufacturing industries.

The long-run relationship between the real exchange rate and terms of trade in OECD countries

Using the null hypothesis of cointegration, it is shown that the real exchange rate and the terms of trade of the seven major OECD countries are cointegrated in the long run. Our results also confirm the Granger proposition that there is Granger causality in at least one direction when two variables are I(1) and cointegrated. We find that exchange rate changes Granger-cause changes in the terms of trade for five out of the seven OECD countries, while the causation runs in the opposite direction for the remaining two countries.

Transitional economies in free trade areas: Lao PDR in the ASEAN free trade area

Lao Peoples Democratic Republic (PDR) is a transitional economy, and one of the few least developed economies in the Southeast Asian region. Lao became a member of ASEAN in July 1997, and will participate in the ASEAN Free Trade Area (AFTA) from 1 January 1998. In this paper, we examine the impact that membership of AFTA is likely to have on Laos trade, government revenue and foreign investment flows. We find that: (i) trade diversion is likely to be low, and that AFTA will provide the vehicle to negotiate market access issues with Thailand; (ii) the reduction in government revenue from trade taxes is likely to be low, particularly in light of the high share of informal trade and only low levels of trade diversion; and (iii) foreign direct investment (FDI) flows are likely to grow sharply in the future, as the legal, administrative and institutional framework in Lao develops to meet the ASEAN standard.

Modeling manufactured imports: Methodological issues with evidence from Australia

This paper investigates the relationship between manufactured import flows to Australia, and relative prices and domestic economic activity net of cyclical demand effects over the period 1981Q3 to 1991Q2. This is done through the estimation of import demand functions for total manufactured imports and nine major import categories using the general to specific modeling approach. We find that the homotheticity assumption on activity elasticity is met in most cases. The price elasticity estimates for individual categories range from 0.32 to 2.1, with a weighted-average of 0.52. We also find some evidence of upward bias in price elasticity estimates when an aggregate import function is employed in a context where a significant portion of imports are subject to quantitative restrictions (QRs).

Introduction: Purpose and Scope

The debate over fixed versus flexible exchange rates is one of the longest running sagas in the international economics literature. The case for flexible exchange rates, as it was initially and forcefully put by Friedman (1953) and Johnson (1969), had as one of its pillars the claim that it would provide for a more efficient system of international adjustment. In this context, the advent of floating exchange rates after the breakdown of the Bretton Woods system was greeted with enthusiasm, as it was felt that currencies had moved way out of line from their equilibrium rates during the Bretton Woods era. Under the floating exchange rate regimes, foreign exchange markets around the world have been characterised by a considerable amount of variability, and it has not been uncommon to find bilateral exchange rates displaying wide fluctuations on a month-to-month or even day-to-day basis. However, the initial enthusiasm about the expected equilibrating role of floating exchange rates began to wane as the trade balances of the major trading nations have continued to show remarkable resilience to such changes.

The Theory of Exchange Rate Pass-through

This chapter pieces together the theoretical literature on the relationship between exchange rates and prices of traded goods. This is done to lay the groundwork for the development of models to be used to estimate the degree of exchange rate pass-through and explain inter-product differences in exchange rate pass-through. The discussion is organised so that the different factors that affect the relationship between exchange rates and prices are treated separately. This approach is necessitated by the fact that “there is no single coherent theory of devaluation (or revaluation) under imperfect competition, but rather an amalgam of reasons why prices may not respond fully to exchange rate changes” (Magee 1975:231). Furthermore, the discussion distinguishes between exchange rate pass-through in the short-run and the long-run. This enables us to separate the factors that affect the pace of adjustment of import prices to exchange rate changes from those responsible for a more persistent departure from the full pass-through outcome.

Model, Data and Methodology

This chapter discusses the data and methodology of the study. It is organised in 5 sections. It begins by deriving the models used to estimate the degree of exchange rate pass-through and the determinants of inter-product differences in exchange rate pass-through. These models are based on the theory developed in Chapter 2. Salient features of the data base are discussed in Section 3, while Section 4 defines and describes the variables used in the ensuing econometric analysis, with emphasis on the method of construction. The econometric methodology is discussed in two stages in Section 5. The estimation of the exchange rate pass-through coefficients involves the analysis of time-series data. The econometric issues relevant to this type of analysis are discussed in Section 5.5.1. Emphasis is given to recent developments in the analysis of the time-series properties of the data, particularly in relation to stationarity and cointegration. The analysis of the determinants of inter-product differences in exchange rate pass-through involve the analysis of cross-sectional data. The econometric issues relevant to the cross-section analysis are discussed in Section 5.5.2. A final section provides a summary of major points.