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Angeles-Castro, Ignacio Perrotini-Hernández, and Humberto Ríos-Bolívar Market Liberalism, Growth, and Economic Development in Latin America Edited by Gerardo Angeles-Castro, Ignacio Perrotini-Hernández, and Humberto Ríos-Bolívar Okun’s law and Mexico 271 Figure 13.a.3 Diagnostic tests: correlogram, density, QQplot, cusum residual (source: estimates with information from INEGI) Figure 13.a.4 Model 2: output gap Table 13.a.4 Model R N DW r Q H –1 –8 (8,6) –27 YB = 9.5866 µt + 2.5383 Ut 0.705865 4.2233 (0.1210) 1.749 0.086169 (0.9313) 0.076475 (0.9390) 10.342 (0.1110) 1.0967 (0.4061) Source: own estimations based on INEGI Figure 13.a.5 Model 2: output gap (source: estimates with information from INEGI) Figure 13.a.6 Diagnostic tests: correlogram, density, QQplot, cusum residual (source: estimates with information from INEGI) Okun’s law and Mexico 273 Figure 13.a.7 Model 3: fitted trend and elasticity Table 13.a.5 Model R2 N DW r Q H –1 –8 (8,6) –34 In Yt = 2.6115 µt + 2.5892 In Et 0.993693 2.7109 (0.2578) 1.749 0.085145 (0.9321) 0.10788 (0.9141) 10.480 (0.1058) 1.1143 (0.3771) Source: own estimations based on INEGI Figure 13.a.8 Model 3: fitted trend and elasticity (source: estimates with information from INEGI) Note LGDP: GDP logarithm 274 E Loría and L de Jesús Figure 13.a.9 Diagnostic tests: correlogram, density, QQplot, cusum residual (source: estimates with information from INEGI) Note LGDP: GDP logarithm Notes We thank technical assistance from Manuel García R and Jorge Ramírez, and comments from Armando Sánchez As usual, the responsibility is only ours Upon reviewing the literature, available works can be classified in two main categories: (a) theoretical–empirical studies, in the sense that they review and discuss the estimation methods of Okun’s law (in this respect see: Barreto and Howland, 1993; Altig et al., 1997; Attfield and Silverstone, 1998; Sögner and Stiassny, 2000; Harris and Silverstone, 2001; Crespo, 2003; Friedman and Michael, 1974; Lang and de Peretti, 2002; Prachowny, 1993; Weber, 1995; Schorderet, 2001; Knoester, 1986; Paldam, 1987), and (b) empirical studies, whose main purpose is to estimate the Okun’s coefficients for some countries, even at the level of states or regions, in order to know the existing interrelations between different countries by identifying reciprocities between unemployment and output (see: Abril et al., 1996; Adanu, 2002; Arias et al., 2002; Garavito, 2002; Lemois, 2003; Murillo and Usabiaga, 2002; Freeman, 2001; Lee, 2001; Moosa, 1997 and Schnabel, 2002) In Loría and Ramos (op cit.) the economic implications of the results depicted in this table were carefully analysed In addition, it is worth mentioning that (2) established the natural rate of unemployment (3.72 per cent) and (3) the output elasticity to employment Okun’s law and Mexico 275 where PEA = economically active population (Conapo, 2006), PO = employees (millions of persons) in the formal sector (INEGI, 2007a) This way, the problem of spurious regression could only exist in model and we followed the Johansen procedure (1988) to discard it Accordingly, with a confidence level of 99 per cent we obtained a cointegrating vector with economic sense; statistic trace 27.78 (24.6), adjustment coefficient –0.6275 (standard error: 0.126) References Abril, J.C., H.D Ferullo and A Gnza (1996) ‘Estimación de la relación de Okun: Argentina 1980–1996’ Facultad de Ciencias Económicas, Universidad Nacional de Tucumán, Argentina Adanu, K (2002) ‘A Cross-Province Comparison of Okun’s Coefficient for Canada’ Department of Economics of Victoria, BC, Canada Altig, D., T Fitzgerald and P Rupert (1997) ‘Okun’s Law Revisited: Should we Worry about Low Unemployment?’ Economic Commentary Federal Reserve Bank of Cleveland Arias, E., A.C Kikut and J Madrigal (2002) ‘Estimación de la Ley de Okun para Costa Rica’ Departamento de Investigación Económica, Banco Central de Costa Rica Attfield, C and B Silverstone (1998) ‘Okun’s Law, Cointegration and Gap Variables’, Journal of Macroeconomics Vol 20, No Barreto, H and F Howland (1993) ‘There are Two Okun’s Law Relationships between Output and Unemployment’ Wabash College, Crawfordsville, USA Chavarín, R (2001) ‘El costo del desempleo medido en producto: Una revisión empírica de la Ley de Okun para México’, El Trimestre Económico Vol LXVIII, No 270, FCE, México Conapo (2006) Indicadores demográficos básicos Consejo Nacional de Población Online, available at: www.conapo.gob.mx/00cifras/00indicadores.htm (accessed September 2007) Crespo, J (2003) ‘Okun’s Law Revisited’, Oxford Bulletin of Economics and Statistics Vol 65, No Freeman, D.G (2001) ‘Panel Tests of Okun’s Law for Ten Industrial Countries’, Economic Inquiry Vol 39, No Friedman, B and M.L Wachter (1974) ‘Unemployment: Okun’s Law, Labor Force, and Productivity’, Review of Economics and Statistics Vol 56, No Garavito, C (2002) ‘La Ley de Okun en el Perú: 1970–2000’ Pontificia Universidad Católica de Perú González, J.A (2002) ‘Labor Flexibility in Thirteen Latin American Countries and the United States: Revisiting and Expanding Okun Coefficients’, DREDPR Working Paper No 136 Stanford University Granger, C.W.J (1969) ‘Investigating Causal Relations by Econometric Models and Cross-Spectral Methods’, Econometrica Vol 37, No Harris, R and B Silverstone (2001) ‘Testing for Asymmetry in Okun’s Law: A CrossCountry Comparison’, Economics Bulletin Vol 5, No Hernández, E (1998) ‘Apertura comercial, productividad, empleo y contratos de trabajo en México’, in V Tokman and D Martínez (ed.) Productividad y empleo en la apertura económica OIT Lima, Perú INEGI (2007a) ‘Encuesta Nacional de Ocupación y Empleo’ Indicadores Económicos de Coyuntura Instituto Nacional de Estadística, Geografía e Informática, México Online, 276 E Loría and L de Jesús available at: http://dgcnesyp.inegi.gob.mx/cgi-win/bdieintsi.exe/NIVA05#ARBOL (accessed May 2007) INEGI (2007b) ‘Sistema de Cuentas Nacionales de México’ Indicadores Económicos de Coyuntura Instituto Nacional de Estadística, Geografía e Informática, México Online, available at: http://dgcnesyp.inegi.gob.mx/cgi-win/bdieintsi.exe/NIVA050010#ARBOL (accessed May 2007) Johansen, S (1988) ‘Statistical Analysis of Cointegrating Vectors’, Journal of Economic Dynamic and Control Vol 12, No 2–3 Kalman, R (1960) ‘A New Approach to Linear Filtering and Prediction Problems’, Journal of Basic Engineering Vol 82 Knoester, A (1986) ‘Okun’s Law Revisited’, Weltwirtschaftliches Archiv Vol 122, No Koopman, S.J., A.C Harvey, J.A Doornik and N Shephard (2000) ‘Structural Time Series Analyser, Modeller and Predictor’ Timberlake Consultants Lang, D and C de Peretti (2002) ‘A Strong Hysteretic model for Okun’s Law: Theory and Preliminary investigation’ Université de la Méditerranée, France Lee, J (2001) ‘The Robustness of Okun’s Law: Evidence from OECD Countries’, Journal of Macroeconomics Vol 22, No 20 Lemois, F.A (2003) ‘Estimaciones de la Ley de Okun para Puerto Rico’ Junta de Planificación, Oficina de la Gobernadora, Estado Libre Asociado de Puerto Rico Loría, E (2006) Eudoxio: modelo macroeconométrico de la economía mexicana UNAM México Loría, E and M Ramos (2007) ‘La ley de Okun Una relectura para México, 1970–2004’, Estudios Económicos Vol 22, No Enero-Junio El Colegio de México, México Loría, E., M.G Ramos and L de Jesús (2008) ‘Producto potencial y ciclos económicos en México, 1980.1–2006.4’, Estudios Económicos Vol 23, No Enero-junio El Colegio de México México Moosa, I.A (1997) ‘A Cross-Country Comparison of Okun’s Law Coefficient’, Journal of Comparative Economics Vol 24, No Murillo, I.P and C Usabiaga (2002) ‘Estimaciones de la tasa de paro de equilibrio de la economía espola a partir de la Ley de Okun’ Universidad de Extremadura y Universidad Pablo de Olavide, España Okun, A (1962) ‘Potential GNP: Its Measurement and Significance’, in J Pechman (ed.) (1983), Economics for Policymaking MIT Press Cambridge, MA Paldam, M (1987) ‘How Much does One Percent of Growth Change the Unemployment Rate?’ European Economic Review Vol 31, No 1–2 Prachowny, M (1993) ‘Okun’s Law: Theoretical Foundations and Revised Estimates’, Review of Economics and Statistics Vol 75, No Schnabel, G (2002) ‘Output Trends and Okun’s Law’, BIS Working Papers Monetary and Economic Department, Bank for International Settlements, 111 Sögner, L and A Stiassny (2000) ‘A Cross-Country Study on Okun’s Law’, Growth and Employment in Europe: Sustainability and Competitiveness University of Economics and Business Administration, Vienna Schorderet, Y (2001) ‘Revisiting Okun Law’s: An Hysteretic Perspective’, Discussion Papers Department of Economics, University of California, San Diego Weber, Christian E, (1995) ‘Cyclical Output, Cyclical Unemployment, and Okun’s Coefficient: A New Approach’, Journal of Applied Econometrics Vol 10, No Index Note: Page numbers in italics denote tables, those in bold denote figures adverse effects 199 Andean Community (CAN) 111 development 113, 115–116 membership and representation 116–117 membership evolution/type of organisation 112 see also gravity model; regional integration agreements (RIAs) Andean Pact see Andean Community (CAN) Anderson, J.E 119 Arbache, J.S 198, 199, 205 Argentina business cycle 136 context of decline 133–134 debt 142–143 debt sustainability indicators 143 decomposition of elements of demand 138 development gap 41, 42, 44 economic performance 135–137 exports 143 external constraints 138–141 fiscal policy 140 foreign direct investment (FDI) 141–144 foreign exchange rate 139, 140 GDP 32 Gini coefficient 144 gross investment and savings 45 gross investment coefficient 44–45 growth and productivity 135 income elasticity of imports 48 income per capita 133 industrialisation 141–142 inequality 144–145 inflation rate 35 investment composition 142 ISI 136–137, 139, 142 manufacturing exports 143 model of post-war development 141 monetary policy 141 output decomposition 139 Peronism 136 public capital 142 real exchange rate 140 ‘Rodrigazo’ 137 role of exports 138–139 role of state 141–144 stabilisation 137 summary and conclusions 145–146 trade balance–GDP ratio 39 wage share 145 automatic balancing mechanism 45 balance of payments 17 balance of trade 17 Barreto, H 267 Barro, R 12 Bergstrand, J.H 119, 155 Bertola, G 16 Bessen, J 251 Bhagwati, J 7, bias, in favour of rich countries 21 Bidlingmaier, T 68 Bolivia, exports 117 Bougheas , S 127 Bourguignon, F 13 Brady Plan 233 Brazil devaluation 103 development gap 41, 42, 44 FDI inflows and exchange rate 104 GDP 32 gross investment and savings 46 278 Index Brazil continued gross investment coefficient 45 income elasticity of imports 48 inflation rate 35 inward FDI 90–103 inward FDI by regions 99–100 inward FDI flows 97 inward FDI stock 97 sectoral changes to inward FDI 96–97 trade balance–GDP ratio 39 see also Mercosur; regional integration agreements (RIAs) Bretton Woods, effect of collapse 139–140 Bucheli, M 171 business and finance income (B&F) 210–212 capital account liberalisation 48 capital flows, changed structure 89 capital goods, differentiated 61 capital market, liberalisation 45 ‘chance’ investments 21 Chen, S 10 Chile bilateral agreements 150, 165 data and variables 159–161 development gap 41–42, 43 development strategy 151 economic growth 31 exports 150–151 FDI inflows 150–155, 151 FDI inflows by origin 154, 155 FDI inflows by sector 153 GDP 33 gross investment and savings 46 gross investment coefficient 45 income elasticity of imports 49 inflation rate 36 methodology 155–159 national economy, sectors 150 random effects estimation of the augmented equation 164 random effects estimation of the baseline equation 162 research study 155–165 results 161–165 sources of FDI 154–155 summary and conclusions 165 summary statistics 161 trade balance–GDP ratio 40 variables 160 Chilean Foreign Investment Committee 159, 161 China development gap 44, 44 economic growth 31 GDP 34 gross investment and savings 47 gross investment coefficient 45 income elasticity of imports 49 inflation rate 37 poverty 11 price stability 37–38 trade balance–GDP ratio 41 Clark, B 251 classical economics 26–27 classical international trade theory 60 Cobb–Douglas production function 252 Colombia, exports 117 common external tariff (CET) Andean Community (CAN) 115–116 Mercosur 112, 113 comparative advantage 52 consumer’s decision problem 223–226 consumption dynamics 228–230 Convertibility 137, 141 Convertibility Plan 139 countercyclical policy 29 crisis-proofing 29–30 current account balance 17–18 Cyrus, T.L 121 Deardoff, A.V 120 debt and exchange rate depreciations 244 Mexico 240, 240 debt ratio 247 decline of labour market institutions argument 215 Denison, E.F 255 devaluation, Brazil 103 development gap Argentina 41, 42, 44 Brazil 41, 42, 44 Chile 41–42, 43 China 44, 44 drivers 44–45 evolution of 38–50 income elasticity of demand for imports 48–49 Mexico 41, 43, 44 development, trade strategy for 20–23 developmental industrial policy 50–54 Developmentist State 52 Direction of Trade, IMF data set 159 Doha trade negotiations 20–21, 168 Dollar, D 12, 20 Index Dow Jones Index composite average and FDI inflows 103 Dowrick, S 13, 15 Dunning, J.H 83 East Asia, inward FDI 88 economic growth 31 calculation 220 and trade liberalisation Economic Partnership Agreements (EPAs) 21–22 economy, main characteristics 221–223 Ecuador, exports 118 education changing levels with changing income 202 and income 201, 216 and income bill share per sector 203 and income by sector 203 and income distribution 200–202 education investment, and human capital 63 Edwards, S 20 Emmert, C.F 88 European Union Economic Partnership Agreements (EPAs) 21–22 and Mercosur 113 exchange rate-based stabilisation 34 exchange rate depreciations, and debt 244 exchange rate fluctuations, pass-through effect 37 export performance 15 exports Argentina 114, 138–139, 143 Bolivia 117 Brazil 114 Chile 150–151 Colombia 117 as drivers of growth 19 Ecuador 118 Paraguay 115 Peru 118 Uruguay 115 Venezuela 119 extended neoclassical growth model countries in sample 68 data 67–69 derivation 62–66 empirical application 66–69 panel data regressions of per capita income 71, 76–77 results 69 summary and conclusions 75 extra-regional effects 85, 128 279 Faini, R 16 Fecher, F 251 Ffrench-Davis, R 44 financial fragility hypothesis 233–237 see also Mexico: financial fragility financial liberalisation 48 firm size 142 firms, typology of growth rate 236 flexibility, labour market 30 Foley, D 236 foreign debt crisis, 1982 38, 137 as catalyst for change 28 Chilean response 44 effects in Mexico 195 foreign direct investment as percentage of GDP 92 foreign direct investment (FDI) 61 Argentina 141–144 determinants 84 growth 149 inward stock as percentage of GDP 94 inward stocks 93 and regional integration agreements (RIAs) 82–89 see also inward FDI foreign direct investment, net inflows Mexico, Brazil and middle income countries 91 Mexico, Brazil and rest of world 90 foreign exchange rate Argentina 139 and stabilisation 139, 140, 141 Frankel, J 121 free-market liberalism 220 see also Mexico: free-market liberalism study free trade, assumptions underlying GDP Argentina 32 Brazil 32 Chile 33 China 34 Mexico 33 Gini coefficient Argentina 144, 144 decomposition by income source 210–212, 211, 213 for global inequality 13 international and global comparison 14 global inequality 13 global price variations, simulations 187–189 280 Index globalisation, and income distribution 195–196 Goldberg, P 11 Goldin, C 199, 216 Golley, J 13, 15 Gordon, J 198 governments, role in reform 30 Gradin, C 171 graphic evolution of gravity equation fixed effects for Mercosur and CAN 125 gravity equation for the panels of Mercosur and CAN: fixed effects 124 gravity equation for the panels of Mercosur and CAN: random effects 123 gravity model 110–112, 118–121, 155 distance as the only regressor in the gravity equation 127 exogeneity Hausman Test for distance in the gravity equation 126 graphic evolution of gravity equation fixed effects for Mercosur and CAN 125 gravity equation for the panels of Mercosur and CAN: fixed effects 124 gravity equation for the panels of Mercosur and CAN: random effects 123 hypotheses 119 method 122–123 research study 121–127 results 123–125 robustness and specification 126–127 summary and conclusions 127–128 theoretical support 119–120 Great Britain 10 Greenaway, D 20 Griliches, Z 250, 251, 252, 261 gross investment and savings Argentina 45 Brazil 46 Chile 46 China 47 Mexico 47 gross investment coefficient 44–45 Argentina 44–45 Brazil 45 Chile 45 China 45 Mexico 45 growth and the balance of payments, trade off 18–19, 18 growth models growth performance 19–20 growth rate of firms, typology 236 Gupta, P 198 Hall, B.H 251–252 Hamilton, A 10 Hausman Exogeneity Test 126 Hausmann, R 21 Heckscher–Ohlin theorem 8, 11, 27, 121, 171–172 hedge financing 244, 247, 248 hegemonic tie 135 Helpman, E 119, 121 household composition 216 Howland, F 267 human capital accumulation 60–61, 63–64 human capital, and income 76–77 IADB 88 import growth 16–17 import-substitution industrialisation (ISI) Argentina 136–137, 139, 142 Mexico 195 Impossible Trinity proposition 34 income bill share by education and sector 203 change with changing education levels 202 and education 201 and education by sector 203 income distribution 13 additional forms 210–212 Argentina 144–145 as cyclical 215–216 and education 200–202 and globalisation 195–196 individual 200–205 and market openness 212–214, 214 and trade liberalisation see also inequality income distribution targets 30 income elasticity of demand for imports development gap 48–49 effects of trade liberalisation 16–17 income elasticity of imports Argentina 48 Brazil 48 Chile 49 China 49 Mexico 49 income inequality within countries 11–12 Uruguay 185 Index industrialisation, Argentina 141–142 inequality Argentina 144–145 driving factors 215 effects of liberalisation 195–196 household vs individual 210 international and global 13–15 Mexico see Mexico: inequality study Uruguay 171, 184, 185 see also income distribution infant country protection 22 inflation 31–38 inflation rate Argentina 35 Brazil 35 Chile 36 China 37 Mexico 36 innovation encouraging 21 Schumpeterian approach 50–51 institutions, building 30 international capital markets 34, 37 international inequality 13 international trade, theoretical aspects 60–62 Inverse Hyperbolic Sine Function 157 inward FDI Brazil, by regions 99–100, 99–100 changes by home country/region 97–100 changes by sector 95–97 changes in inflows and FDI stock 90–95 Chile 150–155, 151 Chile, by origin 154, 155 Chile, by sector 153 and Dow Jones Index composite average 103 empirical evaluation 90–103 flows, Brazil 97 flows, Mexico 96 and labour costs 103 Mexico, by regions 98–99, 98 possible explanations for increase 88–89, 100–103 stock, Brazil 97 stock, Mexico 95 see also foreign direct investment (FDI) inward potential index 101 Iwata, H 251 Johnson, H Kaldoor-Verdoorn’s Law 135 281 Kalecki, M 135 Katz, L.F 199, 216 Keynes, J.M 8, 54, 233 Kim, Y.-H 87 knowledge, diffusion 61 knowledge spillover 63, 64 Kraay, A 12, 20 Krugman, P 119, 121 Krugman’s trade theory Kuczynski, P.P 29–30, 51 labour costs, and inward FDI 103 labour market, flexibility 30 law of comparative advantage learning-by-doing, and human capital 64, 74, 78 Levy Yeyati, E 88 liberalising reforms 30 Lichtenberg, F.R 251 Lomé Convention 22 Loría, E 265, 267–268 lost decade 29, 137 Lucas, R 60–61, 255 macroeconomic performance, before and after structural reform 30–38 Mah, J.S 16 Mairesse, J 251–252, 261 Mandelson, P 11 manufacturing exports, Argentina 143 market-incentive mechanisms 30 market openness and income distribution 212–214, 214 market-seeking FDI 85 Martinez-Zarzoso, I 127 McKinnon’s theory 27 Medvedev, D 83 Melo, O 16 Mercosur 87–88, 91, 92, 93, 96–97, 104, 105 establishment 110–111 impact on trade flows 112–113 membership and representation 112–113 membership evolution/type of organisation 112 as model of integration 113 price changes, Uruguay 179 tariffs 176 Uruguay 170 see also gravity model; regional integration agreements (RIAs) mergers and acquisitions 90, 91, 149 Mexico average hourly income per level of education 201 282 Index Mexico continued changes in income and education levels 202 debt 240 development gap 41, 43, 44 effects of trade liberalisation 11 FDI inflows and exchange rate 104 GDP 33 GDP, unemployment, output gap and employment rate, 1985.1–2006.4 267 gross investment and savings 47 gross investment coefficient 45 income elasticity of imports 49 inflation rate 36 inward FDI 90–103 inward FDI by regions 98 inward FDI flows 96 inward FDI stock 95 macroeconomic rate of unemployment, 1970–2004 266 observed growth rate from 1930 to 2002 230 Okun estimations 268 output and unemployment data 265–266 regional integration agreements (RIAs) 86–87 sectoral changes to inward FDI 95–96 trade balance–GDP ratio 40 see also North American Free Trade Organization (NAFTA); Okun models; regional integration agreements (RIAs) Mexico: financial fragility average values for sample of firms 239 dependent variables 243, 245, 246 empirical evidence 238–248 firms’ assets according to financial structure 242 firms’ composition according to financial structure 241, 242 growth and firms’ indebtedness 240 growth rates 239 growth, returns and interest rate: aggregate levels 238 investment 239 methodology 238 net wealth, growth and debt 240 overview 233 see also financial fragility hypothesis private debt 239 probability of hedge, speculative and Ponzi finance 247 summary and conclusions 248–249 Mexico: free-market liberalism study consumption dynamics 228–230 optimal consumption shares, parameters, and estimates 231 overview 220–221 simulation exercise 230–231 summary and conclusions 232 wealth dynamics 226–228 Mexico: inequality study additional forms of income distribution 210–212 data source 196 decomposition of household Gini by income source 213 decomposition of income by economic sectors 202–205 econometric analysis 205–210 factors driving inequality 215 Gini decomposition by income source 210–212, 211 hourly income and educational attainment by sector 203 household vs individual inequality 210 income bill share by sector and education level 203 individual income distribution 200–205 market openness and income distribution 212–214, 214 methodology 200 overview 195–197 returns to education 200–202 returns to education: labour income 209 returns to labour by sectors 205–210 sector performance: labour income 206, 207 skill demand 204–205 summary and conclusions 214–216 theoretical debate 197–199 Mexico: innovation and productivity background to study 251–252 data 250, 254 econometric model 255–256 econometric model specification 256–257 estimate for rural municipalities weighted by product 259 estimate for rural municipalities weighted by registered units 260 estimate for urban municipalities weighted by product 258 estimate for urban municipalities weighted by registered units 260 estimation and model results 257–261 methodology 251 overview 250–251 Index summary and conclusions 261–262 theoretical aspects 252–255 variables 255 Milanovic, B 12, 13 Miles, D 171 Mill, J.S Mincerian earning functions 205 monetary consensus model 34–35 monetary policy, Argentina 141 Morrisson, C 13 NAFTA 86–87, 91, 93, 95, 104, 105 see also regional integration agreements (RIAs) neoclassical theory of international trade 27, 59 new growth theory 81 new regionalism 81, 82–83 North American Free Trade Organization (NAFTA) 86–87, 91, 93, 95, 104, 105 see also regional integration agreements (RIAs) North–South integration 81–82 Nowak-Lehmann, F 127 Ocampo, J.A 28–29 Odagiri, H 251 Okun, A 264, 266 Okun models 265 analysis and discussion 266–268 basic statistics and unit roots, 1985.1–2006.4 269 diagnostic tests 271, 272, 274 econometric bias 266 Granger Causality Test 269 Mexico: Okun’s law, 1985.1–2006.4 270 model 1: first differences 270 Model first differences 270 model 271 model 2: output gap 271, 272 model 273 model 3: fitted trend and elasticity 273 summary and conclusions 268–269 Okun’s law 264–265 Open Regionalism 111 openness 20 Argentina 141 and income distribution 212–214 and inequality 196 orthodox trade theory problems of 8–10 and wage inequality 11–12 Oxfam 22 283 Pacheco-López, P 16–19, 48 Parikh, A 17 Parisi, M.L 252 Pavcnik, N 11 per capita income (PCY) 13, 15 Perón, Juan Domingo 135 Peru, exports 118 Pissarides, C.A 199, 216 Ponzi finance 236, 239, 244, 247, 248 Portantiero, J.C 135, 136 poverty within countries 10–11 effects of trade liberalisation 11 and trade liberalisation Uruguay 171, 184 Uruguay, before and after reform 184, 185 pragmatism 48 price stability 31–32 China 37–38 Mexico 239 primary-commodity dependence 21 privatisation 101 privatised firms, transaction values of cross-border M&As 101 protection arguments for historical context 10 R&D sector, increasing human capital productivity 61 Ramirez, M.D 88 Ramos, M 265, 267–268 Ravallion, M 10, 11 regional integration agreements (RIAs) Brazil 87–88 effect on FDI inflows 93 evaluation of inward FDI 90–103 extra-regional effects 128 FDI stock 93–94 influence 89 inter-regional effects 85 intra-regional effects 84–85, 128 and inward FDI 82–89 Mexico 86–87 North–South integration 81–82 overview 81–82 possible dynamic effects 86 possible static effects 82–84 summary and conclusions 103–106 see also Andean Community (CAN); Mercosur; North American Free Trade Organization (NAFTA) regional production networks 85 284 Index regionalisation, Mercosur countries 112–113 rents, reduction in traded sector 199, 204, 214 Ricardo, D 8, 26–27, 60 rise of service argument 196 rise of services 197–199, 204, 215 Robbins, D.J 198 Rodriguez, F 20 Rodrik, D 8, 20–21, 22, 38, 51 Rojas-Suárez, L 37 Romer, P 61, 255 Rossi, M 171 rules of origin (RoO) 85–86 Sachs, J 20 Sala-i-Martin, X 13 Samuelson, P Santos-Paulino, A 15–16, 17 Schiff, M 81, 82, 87 Schumpeter’s dynamic approach 50–51, 52, 54 self discovery 21 services sector 89 Shackle, G 45 share of cross-border M&A sales in total FDI inflows in Mexico and Brazil 102 Siegel, D 251 Sinha, A 198–199 skill-biased technological change (SBTC) 195–196 skill demand 204–205 skill-enhancing trade hypothesis (SETH) 196, 198, 199, 204, 210, 215 Smith, Adam 10, 26 Solow model Solow, R.M 250, 255 specialisation 21, 60 speculative financing 239, 244, 247, 248 Spilimbergo, A 12 stabilisation Argentina 137 and foreign exchange rate 139, 140, 141 stabilisation policy 29–30 standard theory 197–198 Stiglitz, J 7, 9, 10, 19, 22 Stolper-Samuelson theorem (SST) 195, 197–198 structural change 38, 44–45 structural reform, effects on macroeconomic performance 30–38 structuralist economic theory 38 ‘tariff-jumping’ FDI 84, 85, 87 tariff reduction, poverty and inequality effects 189–190 tariff reduction, poverty and inequality effects see also Uruguay tariffs impact on prices of traded goods 173 Uruguay 169 see also Uruguay technological innovation, effects of 52–53 technological progress 26 technological transfer, and human capital 75 technology, and income distribution 216 temporary adverse effects 199 tequila crises 92, 93 theory of technological innovation 255 Thirlwall, A.P 15–19, 48 Tinbergen, J 155 trade balance 17–18, 38 trade balance–GDP ratio Argentina 39 Brazil 39 Chile 40 China 41 Mexico 40 trade–development connection 26 trade flows gravity model 110–112 impact of Mercosur 112–113 trade integration, effect on income 63 trade liberalisation effects on inequality 195–196 overview 7–8 temporary adverse effects 199 trade performance 15–19 trade reforms 168–169 see also Uruguay trade, static and dynamic gains trade strategy, for development 20–23 trade-to-GDP ratio 38 traded sector, rent reduction 199, 204, 214 traditional theory of international trade 60 transaction values of cross-border M&As privatised firms 101 transatlantic consensus 196 transfer income 212 trap of literacy 74, 78 Treaty of Asunción 110–111 Trujillo Protocol 115–116 Tuman, J.P 88 UNCTAD 18, 83, 84, 88, 89, 91, 101 Index unemployment, as grounds for protection Uruguay compensating variation 180, 182, 183 conclusions 189–190 consumption effect 177 data 190 domestic prices and labour income 175–176 Engle-Granger: cointegration test 187 estimation of effects of national trade reform 176–184 estimation of total effect 183 external trade reform, effects of 174–176, 184–189 income inequality 185 inequality 171, 184 international and domestic prices 174–175 intra and extra Mercosur trade flows 170 Mercosur 170 methodology 171–176 policy implications 189–190 poverty 171, 184 poverty and inequality effects of liberalisation 188 poverty, before and after reform 184, 185 price changes from Mercosur 179 price transmission 184–185 prices and income 174 prices co-integration 182 prices of traded goods and price of nontraded goods 173 probability of employment after Free Trade Agreement with USA 188 research study 171–189 selection models estimation 186 tariff structure 178 tariffs 169 tariffs and non-traded goods 177–180 tariffs and prices of traded goods 173 tariffs and traded goods 176–177 trade openness coefficient 170 285 trade reform, effects of 171–177 trade reforms 169–170 unit-root test: ADF 186 unit-root test: tradable and non-tradable prices 181 wage-price elasticities 180–183 USA 10 Venezuela, exports 119 vertical FDI 85 Vogt, M.G 16 Wacziard, R 20 wage inequality 11 wage-price elasticities, Uruguay 180–183 wage share, Argentina 145 Wakelin, K 252 Warner, A 20 Washington Consensus case for industrial policy 50–53 development gap 38–50 economic growth 31 framework 28–30 inflation 31–38 macroeconomic performance 30–38 overview 27–28 summary and conclusions 53–54 trade liberalisation and balance 38 wealth dynamics 226–228 Wealth of Nations 10 Welch, K 20 Wicksell, K 34 Williamson, J 28, 29–30, 31, 50, 51, 53, 54 Wincoop, E.V 120 Winters, A 11 Winters, L.A 81, 82, 87 World Trade Organization (WTO) 21, 22–23 Yacimientos Petroliferos Fiscales (YPF) 141 ... globalisation in developing countries, say: ‘while inequality has many different dimensions, all existing measures for inequality in developing countries seem to point to an increase in inequality which in. .. Routledge studies in development economics Economic Development in the Middle East Rodney Wilson Monetary and Financial Policies in Developing Countries Growth and stabilization Akhtar Hossain... trade to income, distance between trading partners and membership in a trading bloc Trade agreements have also been accompanied by increasing flows of FDI as shown by Goda in his interesting comparison