We would like to thank the Department of Economics at the University of Oregon for sponsoring the Second InsTED Workshop. The workshop was held at the Inn at the 5th, Eugene, Oregon, from August 12th-14th 2014. Special thanks go to Chris Ellis as chair of the local organizing committee and Jodie Rogers for her tireless efforts and attention to detail in the organization of this event.
The program comprised of 22 papers that ranged over three broad topics at the intersection of institutions, trade and economic development. One topic was the implications of international institutions, especially the World Trade Organisation (WTO), for efficiency, equity, and technological innovation especially in developing countries. The second concerned how domestic institutions, both economic and political, affect economic performance. The third was on international trade and commercial policy, especially that involving developing countries. There now follows a summary of all the papers presented at the workshop, organised under these topic headings. A bibliography, together with links to papers where available, is provided at the end.
Efficiency, Equity and Technological Innovation under International Trade and the WTO
Although the InsTED network embraces topics at the intersection of institutions, trade and economic development, there is a certain intrinsic appeal to topics at the union of these three areas. And the papers presented on the World Trade Organisation (WTO) were certainly very appealing in this regard. The keynote address, presented by Kamal Saggi, together with a companion paper presented by Rick Bond, were on innovation and imitation under compulsory licensing as governed by the WTO’s Trade Related Aspects of Intellectual Property (TRIPS) agreement. Compulsory licensing was included in the TRIPS agreement to enable developing country governments to obtain a newly innovated good by issuing a license for its production, say to a domestic producer, if a foreign patent holder was making this difficult. The keynote address paper presented by Kamal showed that if the South is obligated to offer patent protection under TRIPS then compulsory licensing tends to occur in equilibrium and can even make both the developing country and the patent holder better off. This happens when, under compulsory licensing, the developing country obtains a lower quality but cheaper imitation of the good in question while the patent holder obtains higher profits from restricting world supply of its higher quality patented good. The paper presented by Rick explores the feature that total surplus may increase or decrease at the deadline when compulsory licensing is allowed, and shows that welfare of the South only increases if total surplus increases.
The remaining papers in this area concerned the effects of international institutional arrangements on international trade flows and hence welfare. Mostafa Beshkar’s paper asks what the optimal remedy is for the breach of a trade agreement under the WTO. His paper examines the choice between a ‘property rule’ that releases a party from the agreement only if the other party agrees, and a ‘liability rule’ whereby a party can release itself unilaterally. He shows that surprisingly the property rule leads to excessive retaliation, because the parties effectively negotiate their own sanctions, and hence is less efficient than the liability rule where retaliation is more limited. Kristy Buzard, in her paper, endogenizes the effort exerted by lobbies to obtain greater protection, and shows that consequently a trade agreement can be used to discourage lobbying by tying the hands of policymakers. On the other hand, an escape clause can give rise to greater lobbying effort than a more rigid trade agreement because the government’s hands are not completely tied.
Shifting the focus to preferential trade agreements, Tom Zylkin aims to be the first to examine empirically the asymmetric gains across countries within a given free trade agreement. Focusing on the North American Free Trade Agreement (NAFTA), and allowing for no-tariff and tariff barriers, he shows through a detailed investigation of trade liberalization effects across industries that Mexico gains more from NAFTA than both Canada and the US. Exploring a different type of preferential trade arrangement under the WTO, Shushanik Hakobyan estimates the effects of Generalized System of Preferences (GSP) expiration on exports from developing countries to the US. Under GSP, developed countries such as the US are allowed to grant preferential access to exports from developing countries without requiring reciprocated access to corresponding developing country markets. Shushanik shows that, when US GSP expired in 2011 without any certainty over its renewal, exports from developing countries to the US declined by 3 percent on average, with exports on textiles and clothing declining by a sizable 9 percent. The paper presented by Nick Sly examined the effect of a different type of international institution on trade flows. With his collaborators, he examines the effect of bilateral tax treaties on offshoring. They show that the effect of bilateral tax treaties is quite different across countries, since this lowers the cost of offshoring for within-firm transactions which themselves tend to vary across industries. They use this variation to show that offshoring has a positive aggregate effect on US employment but that the impact varies substantially across industries.
The Effects of Domestic Private, Public and Political Institutions on Economic Performance
The keynote address by Avinash Dixit focused on contests fought using agents, setting forth a general framework that can be used to consider institutions in private, public and political domains. The tension brought to light was on the divergent interests between those wishing to engage in a contest and the agents frequently employed to compete. Examples include political parties that use local party machines who are biased away from the median voter and towards the party faithful; and governments that may engage in war using mercenaries to protect would-be citizen soldiers. A key insight that arises from within this framework is that bonuses for success would be required, where possible, to correct for the inefficiencies in outcome that would otherwise arise from the divergence of interests.
What prompts an economy to move away from subsistence agriculture and towards modern methods of production? This question was addressed from an institutional perspective in papers presented by John Morrow and Ben Zissimos. Michael Carter and John ask what gives rise to a viable producer class within society and hence to broad based inclusive growth. They show that while inclusive growth depends on public good provision, public good provision itself depends upon a relatively equitable initial distribution of resources across society. Wealth conditions not only the set of voters in favor of public goods, but the strength of their preferences through campaign contributions. For both these reasons, shared or inclusive growth policies are more likely when the initial wealth distribution is more equal. Ben and Isleide Zissimos focus on the incentives of a ruling elite to put in place institutions that support technology adoption. Conventional wisdom holds that a ruling elite would always have an incentive to support technology adoption because they get to tax the surplus that is generated as a result. The surprising insight from this paper is that ruling elite interests in undermining technology adoption in order to keep wages low, for the purposes of maximizing elite profits, tend to dominate their incentive to generate greater surplus through taxation. The paper presented by Tony Cookson was on the classic issue of institutions that enforce private contacts. He compares economic activity on American Indian reservations that differ by whether contracts are enforced by state courts or tribal courts. His main finding is that state courts, which are argued to be better understood by investors, give rise to greater employment and investment in industries where sunk costs are significant.
The efficiency implications of public institutions were explored in papers presented by Dan Berkowitz and Lorenzo Rotunno. Dan and his collaborators explored the question of whether state ownership of enterprises can promote economic efficiency, or whether their role is more to maintain social stability, against the backdrop of China’s dazzling growth over the last thirty years or so. They conclude that, relative to private firms, the profitability of Chinese state owned enterprises has increased over time. But this has been based on the monopoly positions that state owned enterprises enjoy in the domestic market, coupled with favorable access to credit; they find no evidence of productivity gains relative to private firms. The paper presented by Lorenzo, written with Alen Mulabdic, explores the role of public procurement as a mechanism for pork barrel politics. They find that in countries where political parties are more fractionalized there is a greater tendency to use government procurement for pork barrelling purposes.
The implications of explicitly political institutions received significant attention at the workshop, being the subject of papers presented by Chris Ellis, Tom Groll, Pierre-Guillaume Méon and Petros Sekeris. Chris looked at dynamic dissolutions and unifications of states, through the process of civil wars and invasions. He follows an existing literature in arguing that the incentives to provide public goods drives the structure of states, but shows that by introducing dynamic considerations we can reverse many of the results that had previously be derived on state formation. It is the responsiveness of public good location to the number of countries in future periods that enables the results established in a static setting to be flipped. The paper presented by Petros was also on the causes of civil war. He and his collaborators show that a weak dictator may let his country plunge into civil war to increase his personal rents, weakening the opposition in the process. The presence of natural resources exacerbates the incentives of the ruler to promote civil conflict for his own profit, especially if the resources are unequally distributed across ethnic groups. The paper presented by Tom Groll, with Chris as a co-author, examined dynamic commercial lobbying. Rather than focusing, as much of the prior literature has done, purely on policies in exchange for financial contributions, they consider lobbyists who are for-profit organizations that have no inherent policy bias and interact repeatedly with policy makers. Within this setting, they show that a policymaker obtains an outcome that represents a contract with the lobbyist involving a mix of financial contributions and information on policy proposals. The paper presented by Pierre-Guillaume, written jointly with Khalid Sekkat, studies the impact of democratic and autocratic transitions on governance outcomes. It finds that democratic transitions are on average followed by an improvement in governance after six years. Intriguingly, there also appears to be some evidence of an improvement in governance in anticipation of a democratic transition. On the other hand, the evidence of a deterioration of governance after autocratic transitions is suggestive but limited.
International Trade and Commercial Policy, Possibly Involving Developing Countries
While the development of ‘new trade theory’ and ‘new new trade theory’ was prompted by the predominance since the 1970s of North-North trade flows, Paul Krugman in his Nobel Prize winning address in 2008 noted the rise once again of North-South trade. So it was exciting to see that Ahmed Lashkaripour has developed a framework, the subject of his presentation, that simultaneously accounts for North-North and North-South trade. In it, North specializes in high mark-up industries with a relatively high incentive to export, while lower mark-ups on goods produced by the South generate lower exporting incentives. But surprisingly, Southern countries gain more from opening up to trade because of the relatively large gains from being able to import significantly higher quality products from the North. Relatedly, Kathryn Marshall presented a paper written jointly with Eric Fisher, that tests the Heckscher-Ohlin-Vanek Paradigm in a world with cheap foreign labor. Measuring factors services rather than quantities, their paper shows no statistically significant evidence of missing trade. Using a comprehensive firm-level panel dataset of Danish exports, the paper presented by Anca Cristea finds robust evidence for profit shifting by multinational corporations (MNC) through transfer pricing. The triple difference estimation method that she and her collaborators employ corrects for a downward bias found in previous studies. The bias results from MNCs adjusting their arm’s length prices to obscure the extent of their transfer price manipulations. They show that, after acquiring an affiliate in a country with a corporate tax rate lower than in the home country, Danish multinationals reduce the unit values of their exports there between 5.7 to 9.1 percent on average, which translates into a loss in tax income equal to 3.24 percent of Danish MNCs’ tax returns in 2006 alone.
Turning to commercial policy, Simone Moriconi and his co-authors investigate empirically the interaction of commodity tax competition and product market regulation, finding that these policies are strategic complements. What is the intuition? Deregulation, where regulation is assumed to be inefficiently high to begin with, cuts the time to start a new business, which in turn facilitates a reduction in taxation on each business. Last but certainly not least, Claire Brunel examines the Porter Hypothesis that environmental policy both protects the environment and stimulates domestic economic activity. Whether or not this hypothesis holds will depend, crucially, on whether new environmental technology is developed at home and exported or whether it is imported from abroad. She finds that an increase in the stringency of environmental policy does bring about an increase in environmental innovation, but there is only a very small increase in domestic patents filed. The reason is that much of the innovation for the countries in her sample is imported.
Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)
Daniel Berkowitz, Hong Ma, and Shuichiro Nishioka “Recasting the Iron Rice Bowl: The Evolution of China’s State Owned Enterprises”
Mostafa Beshkar “Political Commitment versus Flexibility in Trade Agreements”
Eric Bondand Kamal Saggi “International Price Negotiations under the Threat of Compulsory Licensing”
Eric Bond and Kamal Saggi “Compulsory Licensing and Patent Protection: A North-South Perspective”
Michael R. Carter and John Morrow “The Political Economy of Inclusive Rural Growth”
Kristy Buzard “Endogenous Politics and the Design of Trade Agreements”
J. Anthony Cookson “Economic Consequences of Judicial Institutions: Evidence from a Natural Experiment”
Anca D. Cristea and Daniel X. Nguyen “Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships”
Giacomo De Luca, Petros G. Sekeris, and Juan F. Vargas “Beyond Divide and Rule: Weak Dictators, Natural Resources and Civil Conflict”
Avinash Dixit “Contests Fought Using Agents: A Framework with Applications to Elections and Wars”
This was a general talk referencing several papers, hence the link is not to one specific paper.
Christopher J. Ellis “Dynamic Dissolutions and Unifications”
Eric Fischerand Kathryn G. Marshall “Testing the Heckscher-Ohlin-Vanek Paradigm in a World with Cheap Foreign Labor”
Thomas Groll, andChristopher J. Ellis “Dynamic Commercial Lobbying”
Shushanik Hakobyan “GSP Expiration and Declining Exports from Developing Countries”
Brian Kovak, Lindsay Oldenski, and Nicholas Sly “Incomplete Contract and the Labor Market Effects of Offshoring”
Ahmad Lashkaripour “Markups, International Specialization, and the Gains from Trade”
Pierre-Guillaume Méon and Khalid Sekkat “A Time to Throw Stones, A Time to Reap: How long does it take for democratic reforms to improve institutional outcomes?”
Simone Moriconi, Pierre M. Picard, and Skerdilajda Zanaj “Commodity Taxation and Regulatory Competition”
Alen Mulabdic, and Lorenzo Rotunno “Home Bias in the Public Sector and the Role of Institutions”
Ben Zissimos, and Isleide Zissimos “Comparative Advantage, Technology Adoption and Political Risk”
Thomas Zylkin “Not all FTAs have the same Advantages”