Productive Capacities, Economic Growth and Economic Growth Volatility in Developing Countries: Does Structural Economic Vulnerability Matter?

Recent years’ global shocks (e.g., the 2008 financial crisis and the COVID-19 pandemic) and environmental shocks — such as natural disasters — have heightened the vulnerability of developing countries to future shocks, and can compromise their development prospects. International institutions and researchers have advocated that the strengthening of productive capacities in these countries would help enhance the resilience of their economies to shocks, and promote sustainable development. This paper has examined the effect of productive capacities on economic growth and economic growth volatility in developing countries, in particular when they face a high level of structural economic vulnerability. The analysis covers 117 developing countries over the period of 2000–2018. It shows that productive capacities not only promote economic growth, but also reduce economic growth volatility. On the other hand, structural economic vulnerability reduces economic growth (in particular when it exceeds a certain level), and induces greater volatility of economic growth. Interestingly, productive capacities promote economic growth and reduce economic growth volatility in countries that face a high degree of structural economic vulnerability. These findings support the recommendation by international institutions and researchers that if they were to enhance the resilience of their economies to shocks, and promote sustainable economic growth, developing countries (in particular the poorest ones) should strengthen their productive capacities.

Corporation Tax, the Exchange Rate, and Cross-Border Firm Mobility

In this paper, we extend a new open economy macroeconomics (NOEM) model to examine the effects of a corporate tax reduction on home and foreign countries. The feature of this open economy model is that cross-border relocation of firms is allowed. We show that (i) a reduction in the home corporate tax rate induces an exchange rate appreciation (depreciation) when the degree of cross-border firm mobility is large (small) and (ii) when the degree of cross-border firm mobility is large (small), a reduction in corporate tax is beneficial (detrimental) to the domestic country but detrimental (beneficial) to the foreign country.

External Debts and Economic Growth when Debt Rating Matters

The paper investigates the dependence pattern of economic growth on external debt supply by accounting for the safety of debts, measured by the sovereign debt rating. The method of cross-section regression is based on a sample of 145 advanced and developing economies with averaged data over the 1990–2019 period. The pattern of economic growth follows a U-shaped curve, for which the growth rate is first decreasing and then increasing on the external debt supply. A possible explanation can rely on the sovereign debt rating. For low supply of external debts, more supply of debts reduces the debt rating, which, in turn, lowers the economic growth rate. But for high enough supply of debts, more debts raise their rating, improving the growth rate. These results are robust on controlling for various determinants of economic growth and on the fixed effect panel regression.

The Nonlinear Impact of Institutional Quality on International Reserves: International Evidence

This paper investigates the nonlinear effect of institutional quality on the holding of international reserves by applying the two-step system generalized method of moments on data consisting of 67 countries from 1996 to 2016. The hypothesis is that the association between institutional quality and international reserves has an inverted U pattern. The coefficient sign of the institutional quality and its square term supports the hypothesis. Besides, the marginal effects suggest that the higher the institutional quality index, the lower the demand for reserves. The outputs indicate the importance of good institutional quality in reducing the overdependence on international reserves.

Environmental Effects of Trade Liberalization–Evidence from China’s Pilot Free Trade Zone

Free trade zone (FTZ) in China has been demonstrating remarkable achievements since its establishment, yet its effects on the environment in the zones cannot be ignored. However, there is still a lack of research on the impact of the quasi-natural experiment in the China pilot FTZ on China’s environment. Based on this, this paper uses panel data from 196 cities in China from 2010 to 2017 and uses the propensity score matching and difference in difference (PSM-DID) model to empirically test the environmental effects of the establishment of the FTZ. The result shows that there is an obvious causal relationship between the establishment of the FTZ and environmental quality. The establishment of the FTZ has exacerbated the environmental pollution problem in the pilot zone. Through a series of robustness tests, it is concluded that the estimated results of the benchmark model are robust. However, after a further study on whether the effect of the FTZ on environment is time varying, it was found that the effects of the FTZ on the environmental pollution in the test zones gradually weakened over time, which means that with the gradual maturity of China’s free trade pilot zone, the positive effect on environmental improvement will gradually highlight.

Lending Relationship in the Traditional Credit Market — Implications for Credit Risk Management Strategy in Micro Credit Institutions

Asymmetric information increases the credit rationing of micro-enterprises. Lender–borrower relationships help to provide this information, thereby increasing the availability of loans. This study aims to investigate the relationship between micro-lenders and micro clients. It is accomplished by describing how such relationships are developed, and analyzing these relationships’ impact on the availability and credit term using multivariate regression. The results showed that the strength of lender–borrower relationships positively impacted credit access, but it did not significantly impact the credit term. Furthermore, the amount of income and loan purpose, as the proxies of business characteristics, negatively impacted credit access. These results highlight the critical role of the lender–borrower relationship and business characteristics in the risk management strategy and the sustainability of microfinance institutions.

A Decade After the 2009 Global Recession: Macroeconomic Developments

Emerging market and developing economies (EMDEs) weathered the 2009 global recession relatively well. However, the impact of the global recession varied across economies. EMDEs with stronger pre-crisis fundamentals — such as large foreign exchange reserves, sound fiscal positions, and low inflation — suffered milder growth slowdowns, in part due to their greater capacity to engage in monetary and fiscal stimulus. Low-income countries were also resilient, as foreign aid and inflows of remittances remained relatively stable. In contrast, EMDEs that were heavily dependent on short-term capital flows — such as portfolio investment and cross-border bank lending — fared less well, especially those in Europe and Central Asia. A key lesson for EMDEs is the need to strengthen macroeconomic frameworks and create policy space to prepare for future global downturns.

Restrictive Policy to Curb Capital Flows Volatility

We examine the role of the restrictive policy, through capital controls, in reducing the capital flows volatility. The study highlights the effects of these controls to dampen international financial shocks. Using quarterly data of 28 emerging economies over the period between 1999 and 2019, three empirical approaches are applied, dynamic panel data, ARDL, and local projections models. Four indexes of capital controls have contributed to the finding that a tighter level of capital controls reduces the sensitivity of capital flows to monetary and exchange rate shocks. These findings on the benefits of capital controls are particularly asymmetric according to the differences between controls on inflows and outflows, and the differences between floating and pegged exchange rate regimes.

Examining the Asymmetric Effects of Third-Country Exchange Rate Volatility on Pakistan–China Commodity Trade

Keeping in view the idea of the third-country effect by Cushman, the analysis attempts to capture the asymmetric impact of third-country exchange rate volatility on Pakistan–China commodity trade. The empirical analysis is based on the annual data for 14 industries that export from Pakistan to China and 34 industries that import to Pakistan from China. The findings of the study confirm that nonlinear models generate more significant results both in the short and long runs. Moreover, the empirical findings suggest that the asymmetric assumption alone is not enough, and instead, we should use it along with the third economy effect.