Kevin Cowan

Effective Labor Regulation and Microeconomic Flexibility

Microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative-destruction, The main reason why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists object to the hypothesis that labor market regulation hinders the process of creative-destruction, its empirical support is limited. In this paper we revisit this hypothesis, using a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destruction process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law.

Sovereign Debt in the Americas: New Data and Stylized Facts

In this paper, we introduce the first comprehensive database on sovereign debt systematically compiled to ensure comparability, for all countries in the Americas, and use this new data to highlight the main stylized facts regarding sovereign debt for developing America in the last two decades. We find that debt ratios in developing America are comparable to those in developed countries and have remained stable since the late nineties. By contrast, the composition of debt in the region has changed significantly, shifting from foreign currency external to local currency domestic debt. This onshoring and dedollarization of sovereign debt, contrary to conventional wisdom, has not come at the expense of a shortening of maturities. Furthermore, we find that onshoring is correlated with the level economic development and country size, and with the presence of institutional investors.

Financial Integration Without the Volatility

Integration to international capital markets is one of the key pillars of development. However, capital flows also bring volatility to emerging markets. Are there mechanisms to reap the benefits of capital flows without being hurt by their volatility? Are current practices, such as large reserves accumulation, public deleveraging, and export promotion strategies, efficient external insurance mechanisms? In this pa- per we start by documenting the external volatility faced by emerging markets as well as current self-insurance practices, especially among prudent economies. We then provide a simple model that illustrates the inefficient nature of these practices. We argue that with the help of the IFIs in developing the right contingent markets, similar protection could be obtained at lower cost by using financial hedging strategies. We also argue that, at least for now, local governments have an important role to play in the implementation of these external insurance mechanisms.

Fear of Sudden Stops: Lessons From Australia and Chile

Abstract Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sharp shifts in the net supply of external capital (sudden stops). At times, these sudden stops can be the main shock. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia’s historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them it is useful to identify and then distinguish between two inter‐related dimensions of investors’ confidence: country‐trust and currency‐trust. Lack of country‐trust is the fundamental problem behind sudden stops. Lack of currency‐trust in turn weakens a country’s ability to deal with sudden stops and real external shocks. We discuss steps aimed to improve these two dimensions of investors’ confidence in the medium run, and policies to reduce the impact of country‐trust and currency‐trust weaknesses in the short run. 1. This paper is a revised version of the paper prepared for the Financial Dedollarization: Policy Options conference at the Inter‐American Development Bank, 1–2 December 2003. The views expressed in this paper are those of the authors and should not be attributed to the Central Bank of Chile, the Reserve Bank of Australia or any other institution with which they are affiliated. We thank Guy Debelle, Luci Ellis, Darren Flood, Ilan Goldfajn, Simon Guttmann, Paulo Mauro, Tony Richards and Alejandro Werner for their comments. Erwin Hansen provided excellent research assistance.

Labor Market Adjustment in Chile

This paper examines the reasons behind the sudden increase and the slow recovery of unemployment in Chile after the economic slowdown that took place in 1998 as a result of the Asian Crisis. To do so, we analyze the response of employment and wages to this economic shock and show that Chile exhibits substantial wage rigidity. We argue that a large increase in minimum wages, pre-determined before the slowdown, and a widespread practice of negotiating inflation-indexed long-term wage contracts prevented wages from adjusting to the changing economic conditions and slowed down employment growth.

The Effect of Credit Guarantees on Credit Availability and Delinquency Rates

Partial credit guarantees are among the most important interventions designed to improve financial opportunities to small- and medium-size entrepreneurs (SMEs). Here, a third party, usually the government, guarantees the repayment to the lender in the event that the borrower defaults. Almost 100 countries have some form of PCGs; and, in the US alone, PCGs support US

Mishmash on Mismatch? Balance-Sheet Effects and Emerging-Markets Crises

62.5 billion in loans to SMEs. Despite the magnitude of this intervention, the empirical evidence about its effectiveness and its impact on economic incentives is contentious. We use novel data to examine whether credit guarantees affect the credit available to small- and medium-size entrepreneurs (SMEs), and whether they affect repayment. We find that credit guarantees increase the amount of credit; in particular one additional dollar of insurance increases the total credit for SMEs by US

Corporate dollar debt and depreciations: Much ado about nothing?

0.65. We also find that borrowers are 2% less likely to repay insured loans compared to uninsured loans. A decrease in the collection effort by the bank explains this decrease in the repayment rate. However, the monitoring effort remains unchanged.

The Mystery of Original Sin

We critically assess the recent empirical literature on the importance of dollar debt and balance-sheet effects in the emerging-market financial crises of the 1990s. Using a simple model, we discuss which specifications are theoretically appropriate, and provide additional insights as to the proper interpretation of the reduced-form evidence in the literature. We show that the variety of results found in the existing literature are related to the heterogeneity of regression specifications. Using harmonized micro data on corporates across a dozen countries in Latin America and Asia, and we replicate common specifications for the effect of dollar debt on investment and output at the firm level. In this light, we suggest that the literature on corporate-level currency mismatch is hardly a mishmash, but in fact quite concordant.