IMF Research Bulletin, volume 8, number 3; September 2007

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IMF Volume 8, Number 3

B U L L E T I N September 2007

In This Issue

Research Summary

How Does Globalization Affect Developing Countries?

How Does Globalization Affect Developing Countries?


Country Study: Croatia


Visiting Scholars


Staff Papers


Working Papers


External Publications by IMF Staff


Prachi Mishra and Petia Topalova Over the past two decades, the world economy has become increasingly integrated as flows of goods, labor, and capital across countries have expanded rapidly. Although there is a general belief that globalization has important long-term benefits through its impacts on growth and productivity, a large body of literature has focused on the distributional impacts of globalization, especially its effects on labor markets, and the short-term adjustment costs associated with countries’ integration into the world economy. This article reviews the most recent IMF research on two important channels of globalization—emigration and trade—and focuses primarily on their impacts in developing countries. Emigration Although a vast theoretical and empirical literature considers the impact of immigration on destination countries, little work has been done on emigration and its impact on source countries. (See Borjas (1994, 1995) for surveys of the empirical literature on immigration.) This is surprising, because the shares of the labor force emigrating from many individual source countries are considerably higher than the proportionate changes in the labor forces of many receiving countries owing to immigration. To cite a few examples, the labor forces in Barbados, Belize, El Salvador, Guyana, and Jamaica have been reduced by 20 percent or more owing to emigration to member countries of the Organization for Economic Cooperation and Development (OECD) over 1970– 2000. In comparison, immigrants constitute about 15 percent of the U.S. labor force and the corresponding shares are considerably lower in most other OECD countries. In general, source countries do not record information on those who emigrate. Mexico and other Latin American countries—from where immigration is mostly to the United States—offer ideal case studies, however, because U.S. data sources can be used to analyze the impact on the source countries. Along these lines, Cardarelli and Ueda (2004) assess the impact of migration to the United States on the welfare of source countries. Using the income produced by the nationals of the country irrespective of where they live as a yardstick, they estimate that the well-being of Mexican-born people was, on average, 20 percent higher over 1994–2003 than the country’s GDP alone would suggest. Cardarelli and Ueda also conclude that immigration opportunities to

IMF Research Bulletin

the United States have raised the well-being of nationals born in several other developing countries, particularly in Latin America and the Caribbean (e.g., El Salvador, Nicaragua, Haiti, and Jamaica) and in the Philippines and Vietnam. One potential channel of welfare gains for remaining residents is the large flow of remittances back into the country from emigrants living abroad (see IMF, 2005). While annual remittances averaged about 3 percent of GDP in Mexico during 1990–2003, they amounted to more than 10 percent of GDP in El Salvador and Jamaica during the same period. By focusing on workers who have stayed home, Mishra (2007) examines the effect of emigration to the United States on wages in Mexico using data from the Mexican and U.S. censuses for 1970–2000. She finds a strong and positive effect of emigration on Mexican wages: a 10 percent decrease in the number of Mexican workers in a given skill group (defined by schooling and experience) increases the average wage in that skill group by about 4 percent. (Aydemir and Borjas (2006) find a similar result.) The impact on wages differs dramatically across schooling groups, with the greatest increase being for the higher wage earners (those with 12–15 years of schooling) owing to the higher emigration rate for this group. Emigration accounts for approximately 37 percent of the increase in relative wages of high school graduates (12 years of schooling) and 14 percent of the increase in relative wages of those with some college education (13–15 years of schooling) between 1990 and 2000. Hence, although all categories of workers who stay home benefit in terms of higher wages, emigration could serve as one partial explanation for the increasing wage inequality in Mexico. The positive effect of emigration on wages in Mexico is confirmed by Hanson (forthcoming). He examines changes in the distribution of labor income across regions of Mexico during the 1990s, a period of rapid globalization of the Mexican economy. He finds that over the decade, average hourly earnings in high-migration states rose by 6 to 9 percent relative to low-migration states. Although workers gain owing to higher wages and families benefit from remittance inflows, capital owners who hire these workers lose. Estimates suggest that there is a small aggregate annual welfare gain for Mexico (including the gain from remittances). Emigration can lead to welfare loss, however, if account is taken of the fact that emigration of high-skilled workers leads to a decline in the productivity of those who stay behind. For example, qualified doctors, researchers, and engineers confer positive externalities on the rest of the population, and these are lost when they

emigrate. For example, Mishra (2006) estimates substantial productivity losses for those who stay behind in Caribbean countries because of the very high rates of emigration by high-skilled workers. One important channel through which emigration affects the livelihoods of those who remain in the source countries is remittances. For example, remittances to India have grown rapidly owing to increases in migration and in the total earnings of the migrants as documented by Gupta (2005). Gupta also finds that remittances are affected by the economic environments in the source countries and appear to be countercyclical—that is, they are higher during periods of low economic growth in India. None of the remaining economic or political variables considered in the paper—including political uncertainty, interest rates, or exchange rate depreciation—are found to affect remittances significantly. A recent paper by Lueth and Ruiz-Arranz (2007) estimates a vector error correction model for Sri Lanka to determine the response of remittance receipts to macroeconomic shocks. Unlike the Gupta (2005) study on India, this paper finds that remittance receipts are procyclical and decline when the island’s currency weakens, undermining their usefulness as a shock absorber and calling into question the notion that remittances are largely motivated by altruism. Though the literature on emigration and remittances has largely focused on individual country studies, recent work has also been done at the Fund on the causes and consequences of remittances in a cross-country framework. Spatafora and Aggarwal (2005) show that remittances to developing countries have grown steadily over the past 30 years and currently amount to about $100 billion a year. For many developing economies, remittances constitute the single largest source of foreign exchange, exceeding export revenues, foreign direct investment (FDI), and other private capital inflows. Moreover, remittances have proved remarkably resilient in the face of economic downturns. Their study finds that remittances can help improve a country’s development prospects, maintain macroeconomic stability, mitigate the impact of adverse shocks, and reduce poverty. Chami, Fullenkamp, and Jahjah (2003) and Giuliano and Ruiz-Arranz (2005) analyze the relationship between remittances and growth for a panel of countries. Although the former study, using an instrumental variable model with fixed effects (with the difference between host-country and recipient-country incomes being used as an instrument for remittances), finds that remittances are associated with lower growth (possibly through decreased labor force participation, limited job searches, or lower investment in risky

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projects), the latter, using a different empirical strategy based on generalized method of moments (GMM), finds that remittances are associated with higher growth in less financially developed countries. Finally, Gupta, Pattillo, and Wagh (2007) find that remittances mitigate poverty and promote financial development in sub-Saharan African countries.

(See Slaughter and Swagel, 1997 and Feenstra, 2007 for a survey.) This is also the conclusion reached by Tokarick (2005), who uses an applied general equilibrium model to decompose the effects of changes in trade- and technology-related variables on wages of skilled and unskilled labor in the United States between 1982 and 1996. The impact of trade-related factors (such as tariff reductions, improvements in the terms of trade, or increases in the trade deficit) on the widening wage gap was dwarfed by the differential Trade rate of growth in skill-biased technical change across sectors. A large body of research shows that trade openness in develTwo new studies reexamine the effect of globalization on oping countries has raised aggregate incomes and growth labor’s share in a broader set of advanced economies. After rates (see Berg and Krueger, 2003 for a survey) and led to analyzing the experience of 18 advanced economies over the faster productivity growth. (See Topalova, 2004 and Amiti period 1960–2000, Guscina (2006) concludes that in the era and Konings, 2005 for evidence on India and Indonesia.) of globalization, both technological progress and internaIn contrast, the internal distributional consequences of tional trade (measured as the share of imports and exports trade reform, especially in developing countries, are still in GDP) have squeezed labor compensation and its share in the subject of intense debate. national income—an outcome (See Goldberg and Pavcnik, that is consistent with the 2007 for a survey.) The stanHeckscher-Ohlin predictions. “Remittances to developing countries have dard model used to analyze Building on Guscina’s meththe labor market consequences odology, Jaumotte and Tytell grown steadily over the past 30 years and of trade liberalization—the currently amount to about $100 billion a year.“ (2007) tackle the same quesStolper-Samuelson theorem— tion in the context of OECD predicts that trade liberalizaeconomies in the 1980s. They tion will shift income toward a consider a broader measure of country’s abundant factor, thus raising inequality in capitalglobalization, including the terms of trade, offshoring, and and skilled-labor-abundant developed countries while lowimmigration, and control for technological progress and ering inequality in developing countries. Davis and Mishra changes in labor market practices. Their findings confirm (2007) discuss a variety of reasons why the assumptions Guscina’s results: labor globalization (in addition to techunderlying the Stolper-Samuelson model may be too simnological progress) has acted to reduce the labor share. The plistic to hold in the real world. One possible reason is that main effects, however, stem not from trade in goods and the pattern of trade depends on a country’s “local,” rather services (captured by terms of trade changes) but from offthan global, factor abundance—that is, we need to compare shoring and immigration. a country’s factor abundance to those of other countries Although the effect of globalization on wages in that produce the same set of goods. For example, Mexico advanced countries is statistically significant, it is relatively is less skill abundant than the United States but more skill small in magnitude. Using 1995 data on nine Asia-Pacific abundant than China. When Mexico joined the General Economic Cooperation (APEC) member countries, includAgreement on Tariffs and Trade (GATT) in the mid-1980s, ing the United States, Saito and Tokutsu (2006) simulate a it opened its borders to the less-skill-abundant world, which general equilibrium model with different types of industries could explain the rising wage inequality it experienced in (producing tradables and nontradables) and different types the late 1980s. of trade (in final goods or intermediate inputs) for a region The Stolper-Samuelson prediction received much attenwhere each member country is large enough to affect prices tion in the 1990s, which witnessed a substantial decline of goods and services produced in that region, and establish in the relative wages of unskilled workers in advanced that the overall effect of a tariff cut on relative wages can be economies as trade with developing countries expanded. negligible. Academic research concluded, however, that globalizaAlthough the experiences of advanced countries genertion’s contribution to the rise in inequality was, at most, ally match the predictions of the standard trade model, modest relative to that of skill-biased technical change. many developing countries, including Argentina, Brazil,

IMF Research Bulletin

Colombia, China, India, and Mexico, experienced wideninvestment or as sharp a decline in child labor. Wei and ing wage gaps between skilled and unskilled labor during Wu (2001) also use cross-city differences in order to idenperiods of trade reform during the 1980s and 1990s. Of tify the effect of trade openness on urban-rural income course, rising wage inequality coincident to trade liberalizainequality in China. They find that cities that experienced tion does not necessarily imply a causal impact, since trade a greater degree of openness in trade (as measured by the reforms were accompanied by significant domestic reforms ratio of exports to GDP) also tended to demonstrate a in most countries. A vast body of literature has focused on greater decline in urban-rural income inequality over the trying to identify the causal link between trade liberalizaperiod 1988–93. Although the previously mentioned studtion and distributional outcomes in developing countries. ies focus only on import liberalization or trade openness, Two key methodologies used are the industry-level and Hanson (2007), using a broader measure of globalization regional approaches, which examine whether industries that captures both FDI and imports and exports, finds or regions that were more exposed to trade liberalization that in the 1990s, states in Mexico with high exposure to experienced larger changes in labor market outcomes. (See globalization experienced increases in labor incomes relaGoldberg and Pavcnik, 2007 for an extensive survey on the tive to low-exposure states. literature of the distributional effects of globalization in Several studies document the presence of adjustment developing countries.) costs borne by workers in previously protected sectors after Mishra and Kumar (2005) trade reforms in developuse the industry-level methodoling countries. It is therefore ogy to estimate the impact of important to gauge these “In Indian states where inflexible labor the dramatic trade liberalizashort-run costs and compare laws impeded factor reallocation, the adverse tion in India in 1991 on the them to the long-run gains industry wage structure. They from trade reforms. This is impact of liberalization on poverty find a negative relationship exactly the question tackled was more pronounced.” between changes in trade policy by Choudhri, Faruqee, and and changes in the industry Tokarick (2006). Within a wage premium, suggesting that dynamic general equilibrium ­liberalization-induced productivity increases at the firm model, they decompose the welfare effect of trade liberallevel (as documented in Topalova, 2004) were passed on to ization into a steady-state efficiency gain and a transitional workers, leading to decreased wage inequality. Although loss associated with wage-price stickiness. For a wide range these findings are in contrast to those of earlier studies of plausible parameter values, and under various policy on developing countries and a concurrent study on India regimes, they show that the transitional loss is small relative (Topalova, 2005), they are consistent with the experience of to the steady-state gain. They also find that the adjustment Poland (Goh and Javorcik, 2007). costs of trade are lower under flexible exchange rates than Topalova (2005, 2007), however, applies the regionalfixed exchange rates. level approach to establish that districts in India that were In conclusion, emigration and trade both increase more exposed to trade liberalization (because they conthe aggregate incomes of developing countries (once the tained a mix of industries exposed to liberalization) expeincomes of emigrants are included in the former case). In rienced a slower relative reduction in poverty in the 1990s. contrast, the existing evidence on the distributional impact The findings are related to the extremely limited mobility of globalization and the adjustment costs associated with it of factors across regions and industries in India. Indeed, is mixed, particularly for trade. Further efforts are needed in Indian states where inflexible labor laws impeded facto enable researchers to understand these important issues tor reallocation, the adverse impact of liberalization on fully. poverty was more pronounced. Examining further the consequences of these short-term adjustment costs of References trade reforms, Edmonds, Pavcnik, and Topalova (2007) establish that communities that have relied heavily on Amiti, Mary, and Jozef Konings, 2005, “Trade Liberalization, employment in protected industries before liberalization Intermediate Inputs, and Productivity: Evidence from did not experience as large an increase in human capital Indonesia,” IMF Working Paper 05/146.

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Aydemir, Abdurrahman, and George J. Borjas, 2006, “A Comparative Analysis of the Labor Market Impact of International Migration: Canada, Mexico and the United States,” NBER Working Paper No. 12327 (Cambridge, Massachusetts: National Bureau of Economic Research). Berg, Andrew, and Anne Krueger, 2003, “Trade, Growth and Poverty: A Selective Survey,” IMF Working Paper 03/30. Borjas, George J., 1994. “The Economics of Immigration,” Journal of Economic Literature, Vol. 32 (December), pp. 1667–717. ———, 1995, “The Economic Benefits of Immigration,” Journal of Economic Perspectives, Vol. 9, No. 2, pp. 3–22. Cardarelli, Roberto, and Kenichi Ueda, 2004, “Domestic and Global Perspectives of Migration to the United States,” in United States: Selected Issues, IMF Country Report No. 04/228. Chami, Ralph, Connel Fullenkamp, and Samir Jahjah, 2003, “Are Immigrant Remittance Flows a Source of Capital or Development,” IMF Working Paper 03/189. Choudhri, Ehsan, Hamid Faruqee, and Stephen Tokarick, 2006, “Trade Liberalization, Macroeconomic Adjustment and Welfare: Unifying Trade and Macro Models,” IMF Working Paper 06/304. Davis, Donald R., and Prachi Mishra, 2007, “Stolper-Samuelson Is Dead and Other Crimes of Both Theory and Data,” in Globalization and Poverty, ed. by Ann Harrison (Chicago: University of Chicago Press and National Bureau of Economic Research). Davis, Donald R., and David E. Weinstein, 2002, “Technological Superiority and Losses from Migration,” NBER Working Paper No. 8971 (Cambridge, Massachusetts: National Bureau of Economic Research). Docquier, F., and A. Marfouk, 2005, “International Migration by Educational Attainment (1990−2000),” Release 1.1 (Washington: World Bank). Edmonds, Eric, Nina Pavcnik, and Petia Topalova, 2007, “Trade Adjustment and Human Capital Investments: Evidence from Indian Tariff Reform,” IMF Working Paper 07/94. Feenstra, Robert C., 2007, “Globalization and Its Impact on Labor,” Global Economy Lecture, Vienna Institute for International Economics Studies, February, available on the Internet at Giuliano, Paola, and Marta Ruiz-Arranz, 2005, “Remittances, Financial Development and Growth,” IMF Working Paper 05/234. Goh, Chor-ching, and Beata Javorcik, 2007, “Trade Protection and Industry Wage Structure in Poland,” in Globalization and Poverty, ed. by Ann Harrison (Chicago: University of Chicago Press and National Bureau of Economic Research). Goldberg, Pinelopi Koujianou, and Nina Pavcnik, 2007, “Distributional Effects of Globalization in Developing Countries,” Journal of Economic Literature, Vol. 45 (March), pp. 39–82. Gupta, Poonam, 2005, “Macroeconomic Determinants of Remittances: Evidence from India,” IMF Working Paper 05/224.

Gupta, Sanjeev, Catherine Pattillo, and Smita Wagh, 2007, “Impact of Remittances on Poverty and Financial Development in SubSaharan Africa,” IMF Working Paper 07/38. Guscina, Anastasia, 2006, “Effects of Globalization on Labor’s Share in National Income,” IMF Working Paper 06/294. Hanson, Gordon, forthcoming, “Emigration, Labor Supply and Earnings in Mexico,” in Mexican Immigration, ed. by George Borjas (Chicago: University of Chicago Press and National Bureau of Economic Research). ———, 2007, “Globalization, Labor Income and Poverty in Mexico,” in Globalization and Poverty, ed. by Ann Harrison (Chicago: University of Chicago Press and National Bureau of Economic Research). International Monetary Fund (IMF), 2005, World Economic Outlook, April (Washington). Jaumotte, Florence, and Irina Tytell, 2007, “The Globalization of Labor,” in IMF, World Economic Outlook, April (Washington). Lueth, Erik, and Marta Ruiz-Arranz, 2007, “Are Workers’ Remittances a Hedge Against Macroeconomic Shocks? The Case of Sri Lanka,” IMF Working Paper 07/22. Mishra, Prachi, 2006, “Emigration and Brain Drain: Evidence From the Caribbean,” IMF Working Paper 06/25. ———, 2007, “Emigration and Wages in Source Countries: Evidence from Mexico,” Journal of Development Economics, Vol. 82, pp. 180–99; also published as IMF Working Paper 06/86. ———, and Utsav Kumar, 2005, “Trade Liberalization and Wage Inequality: Evidence from India,” IMF Working Paper 05/20; also forthcoming in the Review of Development Economics. Saito, Mika, and Ichiro Tokutsu, 2006, “The Impact of Trade on Wages: What If Countries Are Not Small?” IMF Working Paper 06/155. Slaughter, Matthew, and Phillip Swagel, 1997 “The Effect of Globalization on Wages in the Advanced Economies,” IMF Working Paper 97/43. Spatafora, Nikola, and Renna Aggarwal, 2005, “Two Current Issues Facing Developing Countries,” in IMF, World Economic Outlook, April (Washington). Tokarick, Stephen, 2005, “Quantifying the Impact of Trade on Wages: the Role of Nontraded Goods,” Review of International Economics, Vol. 13 (November), pp. 841–60; also published as IMF Working Paper 02/191. Topalova, Petia, 2004, “Trade Liberalization and Firm Productivity: The Case of India,” IMF Working Paper 04/28. ———, 2005, “Factor Immobility and Regional Impacts of Trade Liberalization: Evidence from India” (unpublished; Washington: International Monetary Fund). ———, 2007, “Trade Liberalization, Poverty and Inequality: Evidence from Indian Districts,” in Globalization and Poverty, ed. by Ann Harrison (Chicago: University of Chicago Press and National Bureau of Economic Research). Wei, Shang-Jin, and Yi Wu, 2001, “Globalization and Inequality: Evidence from China,” NBER Working Paper No. 8611 (Cambridge, Massachusetts: National Bureau of Economic Research).

IMF Research Bulletin

Country Study


Athanasios Vamvakidis Croatia’s economic prospects are promising. In recent years, it has enjoyed solid economic growth, a stable currency, and low inflation, and has made progress in fiscal consolidation. Croatia completed its final Stand-By Arrangement with the IMF in 2006, and negotiations for EU membership are well under way. Recent growth, however, has been above potential, and external vulnerabilities have emerged. Structural reforms have moved more slowly than in peer countries, and the role of the state is still significant in most aspects of economic activity. With the highest external debt-to-GDP ratio among transition countries, the Croatian economy is subject to exchange and interest rate risks. Recent IMF staff research on Croatia has focused on reforms to ensure macroeconomic stability, increase potential growth, and reduce external vulnerabilities.

Croatia has experienced solid growth in recent years, but IMF staff estimates indicate somewhat lower potential growth, which highlights the need for structural reforms. Real GDP growth averaged around 4¾ percent annually during 2001–05 and continued at 4.8 percent in 2006. Moore and Vamvakidis (2007) estimate Croatia’s potential growth, however, at 4–4½ percent. This estimate is robust to different methodologies: estimation of a production function; simulation of a growth model for Croatia using estimates from a cross-country regression; and a growth diagnostic exercise. Increasing Croatia’s potential growth will require significant productivity-enhancing reforms. The results in the study highlight the critical need for structural reforms to improve the business environment by reducing the administrative burden, legal uncertainties, and corruption, and to reduce the role of the state in the economy by making faster progress on fiscal consolidation and privatization. The analysis indicates that despite recent steps in the right direction, Croatia’s progress in structural reforms has been slower than in peer countries and needs to be accelerated to increase productivity and growth. In a similar vein, Konuki’s (2004) analysis of Croatia’s labor market performance—which has been poor, compared with other Central and Eastern European countries—indicates the need for reforms to relax Croatia’s strict employment protection regulation to boost

employment in the official sector, expand the tax base, and boost productivity. One reason for the slow pace of structural reforms in Croatia, which is analyzed in Vamvakidis (2007), may be the ease of obtaining foreign financing. A political economy model and empirical evidence from a sample of emerging and transition economies suggest that external financing often acts as a “pain reliever” by postponing the needed treatment of a “sick” economy by economic reform. In Moore and Vamvakidis (2007), a simulation of the model for Croatia shows that the rapid rise in external debt may, indeed, have financed the status quo, contributing to delays in the overall reform process. The results suggest that policies to reduce Croatia’s indebtedness could trigger broader reforms that would, in turn, contribute to faster economic growth. Fiscal consolidation can have such an impact. Spending cuts and good revenue performance, which is due largely to faster-than-projected growth, reduced the general government deficit from 6.1 percent of GDP in 2003 to 3 percent of GDP in 2006. Croatia’s general government still spends 49 percent of GDP, however, compared with an average of 40 percent for its regional peers. The vulnerabilities associated with Croatia’s high current account deficit (7.6 percent of GDP in 2006) and external debt (85 percent of GDP in the same year) also call for fiscal tightening. Gueorguiev (2007) applies the IMF’s Global Fiscal Model to show how a strategy of cutting expenditure and taxes—while also reducing the deficit—could stimulate investment and the labor supply, leading to higher output and consumption, and a lower current account deficit. According to the model simulations, the benefits of such a strategy increase at least proportionately with the degree of ambition in efforts to reduce public expenditure. A corporate income tax cut and cuts in social security contributions would also result in benefits—indeed, the simulations may understate the employment and competitiveness payoffs from lower social security contributions. Balance-sheet analysis in Hilaire and Ilyina (2007) indicates that Croatia’s external vulnerabilities have increased in recent years, in particular in the private nonfinancial sector. These vulnerabilities stem from both a rapid buildup of external debt, fueled mostly by private demand for credit, and deepening financial euroization. External debt as a per-

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centage of GDP—whether gross, net, or short term—rose sharply between 2000 and 2005, while the debt-service burden has remained broadly stable, owing to low international interest rates in that period. Firms and households have accumulated large net liabilities that are sensitive to changes in exchange and interest rates, which has placed a premium on avoiding sharp exchange rate and interest rate movements but also restricted the scope for autonomous monetary policy. Indeed, Cˇihák and Konuki (2004) show empirically that when there is a broadly stable kuna-euro exchange rate combined with a relatively open capital account, monetary policy in Croatia is ineffective for aggregate demand management, leaving fiscal policy as the main policy tool. Financial conditions in the economy are only weakly correlated with the monetary policy stance; and although monetary policy can exert limited control over money market interest rates, its influence on lending rates is uncertain and is felt with long lags. Despite recent prudential and administrative measures implemented by the central bank through the end of 2006—including a marginal reserve requirement on banks’ foreign borrowings and a period of administrative controls—rapid credit growth has persisted. Banks have avoided the measures by expanding lending through nonbank channels or have chosen to pay the costs of these measures in order to capture market share. In Cˇihák (2004), evidence of falling interest rate spreads—­particularly for foreign, large, and well-capitalized banks—is one of many indicators of the strong competition for market share in Croatia’s banking sector. In this context, strong prudential supervision is critical to counter an excessive buildup of banks’ foreign currency exposures to unhedged clients. Rapid credit growth in recent years has raised banks’ susceptibility to an economic downturn. Mitra (2007) estimates a simple model of credit risk and bank stability in a three-stage, least-squares framework for emerging markets in Europe. Simulations of the model for Croatia suggest that a slowdown in economic growth could have a large negative effect on bank capitalization by affecting borrowers’ ability to service their loans. This means that banks should build buffers during good times, by either raising capital or making provisions for unidentified losses. The analysis also finds that Croatian banks are not necessarily passing on the higher risk of foreign exchange-linked loans to unhedged clients by charging higher interest rates, possibly owing to strong competition among the top banks. Thus, the possibility that the risk premium embedded in loan interest rates is

too low reinforces the case for banks to build up provisions or raise capital. References Cˇihák, Martin, 2004, “The Determinants of Lending Rates and Domestic Spreads in Croatia,” in Republic of Croatia: Selected Issues and Statistical Appendix, IMF Country Report No. 04/251, pp. 16–27. ———, and Tetsuya Konuki, 2004, “Monetary Transmission in Croatia,” in Republic of Croatia: Selected Issues and Statistical Appendix, IMF Country Report No. 04/251, pp. 4–15. Gueorguiev, Nikolay, 2007, “Economic Effects of Reducing the Size of the Government in Croatia: A Note Based on the IMF’s Global Fiscal Model,” in Republic of Croatia: Selected Issues, IMF Country Report No. 07/82, pp. 40–54. Hilaire, Alvin, and Anna Ilyina, 2007, “External Debt and BalanceSheet Vulnerabilities in Croatia,” in Republic of Croatia: Selected Issues, IMF Country Report No. 07/82, pp. 55–79. Konuki, Tetsuya, 2004, “Employment Protection in Croatia,” in Republic of Croatia: Selected Issues and Statistical Appendix, IMF Country Report No. 04/251, pp. 28–35. Mitra, Srobona, 2007, “Bank Stability and Credit Risk in Croatian Banks,” in Republic of Croatia: Selected Issues, IMF Country Report No. 07/82, pp. 80–102. Moore, David, and Athanasios Vamvakidis, 2007, “Economic Growth in Croatia: Potential and Constraints,” in Republic of Croatia: Selected Issues, IMF Country Report No. 07/82, pp. 7–39. Vamvakidis, Athanasios, 2007, “External Debt and Economic Reform: Does a Pain Reliever Delay the Necessary Treatment?” IMF Working Paper 07/50.

Visiting Scholars, June 2007–January 2008 Joshua Aizenman; University of California, Santa Cruz; 9/11/07–9/14/07 Gordon Hanson; University of California, San Diego; 7/9/07–8/31/07 Massimiliano Marcellino; Bocconi University, Milan, Italy; 6/18/07–8/14/07 Warwick McKibbin; Australian National University, Canberra; 7/16/07–1/31/08 Andrew Rose; University of California; 8/6/07–8/10/07 Kang Tan; Australian National University, Canberra; 7/16/07–1/31/08

IMF Research Bulletin

IMF Staff Papers Volume 54, Number 3 (Forthcoming) “The Political Economy of Nominal Macroeconomic Pathologies” Shanker Satyanath and Arvind Subramanian “Deficit Limits and Fiscal Rules for Dummies” Paolo Manasse “Work Absence in Europe” Lusine Lusinyan and Leo Bonato “Is Housing Wealth an ‘ATM’? The Relationship between Household Wealth, Home Equity Withdrawal, and Saving Rates” Vladimir Klyuev and Paul Mills

“Spending Seigniorage: Do Central Banks Have a Governance Problem?” Alain Ize “The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform” Helge Berger and Stephan Danninger For information on ordering and pricing, please point your browser to To read articles in this and other issues of IMF Staff Papers and the data underlying them on the Web, please see­

IMF Working Papers 2006 No. 06/298 “Tax, Welfare, and Pension Reforms in Slovenia: Implications for Work Incentives and Labor Participation” Egoumé-Bossogo, Philippe; Tuladhar, Anita No. 06/299 “Recent Dynamics of Crude Oil Prices” Krichene, Noureddine No. 06/300 “A VAR Analysis of Kenya’s Monetary Policy Transmission Mechanism: How Does the Central Bank’s REPO Rate Affect the Economy?” Cheng, Kevin C. No. 06/301 “The Shortcomings of a Partial Release of Employment Protection Laws: The Case of the 2005 French Reform” Cahuc, Pierre; Carcillo, Stéphane No. 06/302 “On Myopic Equilibria in Dynamic Games with Endogenous Discounting” Bolt, Wilko; Tieman, Alexander F. No. 06/303 “Assessing Competitiveness After Conflict: The Case of the Central African Republic” Bakhache, Said; Lewis, Mark; Kalonji, Kadima D.; Nachega, Jean-Claude No. 06/304 “Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models” Choudhri, Ehsan U.; Faruqee, Hamid; Tokarick, Stephen

2007 No. 07/1 “Policy Credibility and Sovereign Credit: The Case of New EU Member States” Hauner, David; Jonáš, Jirí; Kumar, Manmohan S. No. 07/2 “Cooperative Banks and Financial Stability” Hesse, Heiko; Cˇihák, Martin No. 07/3 “Banking Sector Integration and Competition in CEMAC” Saab, Samer Y.; Vacher, Jerome No. 07/4 “Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered” Meredith, Guy No. 07/5 “Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports” Chami, Saade; Ahmed, Faisal; Ben Ltaifa, Nabil; Schneider, Todd

September 2007

No. 07/6 “Can a Rule-Based Monetary Policy Framework Work in a Developing Country? The Case of Yemen” Chami, Saade; Elekdag, Selim; Schneider, Todd; Ben Ltaifa, Nabil No. 07/7 “Monetary Policy Implementation: Results from a Survey” Buzeneca, Inese; Maino, Rodolfo

No. 07/19 “The CFA Arrangements—More Than Just an Aid Substitute?” Yehoue, Etienne B. No. 07/20 “The Use of Mortgage Covered Bonds” Avesani, Renzo G.; Garcia Pascual, Antonio; Ribakova, Elina

No. 07/8 “Collateral Damage: Exchange Controls and International Trade” Wei, Shang-Jin; Zhang, Zhiwei

No. 07/21 “Public Expenditure in Latin America: Trends and Key Policy Issues” Clements, Benedict J.; Faircloth, Christopher; Verhoeven, Marijn

No. 07/9 “Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China” Dollar, David; Wei, Shang-Jin

No. 07/22 “Are Workers’ Remittances a Hedge Against Macroeconomic Shocks? The Case of Sri Lanka” Lueth, Erik; Ruiz-Arranz, Marta

No. 07/10 “Quasi-Fiscal Deficit in Non-Financial Enterprises” Tchaidze, Robert

No. 07/23 “SAFTA: Living in a World of Regional Trade Agreements” Rodríguez-Delgado, Jose Daniel

No. 07/11 “Role of Debt Maturity Structure on Firm Fixed Assets During Sudden Stop Episodes: Evidence from Thailand” Iannariello, Maria Pia; Morsy, Hanan; Terada-Hagiwara, Akiko

No. 07/24 “What Explains Germany’s Rebounding Export Market Share?” Danninger, Stephan; Joutz, Frederick L.

No. 07/12 “Public Debt and Fiscal Vulnerability in the Middle East” Fouad, Manal; Maliszewski, Wojciech; Hommes, Martin; Morsy, Hanan; Petri, Martin; Söderling, Ludvig No. 07/13 “What Should Macroeconomists Know About Health Care Policy?” Heller, Peter S. No. 07/14 “China: Strengthening Monetary Policy Implementation” Laurens, Bernard; Maino, Rodolfo No. 07/15 “Mortality and Lifetime Income: Evidence from U.S. Social Security Records” Duggan, James E.; Gillingham, Robert; Greenlees, John S.

No. 07/25 “The Fear of Freedom: Politicians and the Independence and Accountability of Financial Sector Supervisors” Quintyn, Marc; Ramirez, Silvia; Taylor, Michael No. 07/26 “Italy—Assessing Competition and Efficiency in the Banking System” Drummond, Paulo Flavio Nacif; Maechler, Andrea M.; Marcelino, Sandra No. 07/27 “Fiscal Policy and the Exchange Rate-Current Account Nexus” Kim, Jun Il No. 07/28 “Public Pension Reform: A Primer” Jousten, Alain

No. 07/16 “Does Trade and Technology Transmission Facilitate Inequality Convergence? An Inquiry into the Role of Technology in Reducing the Poverty of Nations” Das, Gouranga Gopal

No. 07/29 “Aging, Asset Allocation, and Costs: Evidence for the Pension Fund Industry in Switzerland” Gerber, David S.; Weber, René

No. 07/17 “Lucas vs. Lucas: On Inequality and Growth” Cordoba, Juan Carlos; Verdier, Genevieve

No. 07/30 “Precautionary Monetary and Fiscal Policies” Berkmen, Pelin

No. 07/18 “Building Supervisory Structures in Sub-Saharan Africa: An Analytical Framework” Quintyn, Marc; Taylor, Michael

No. 07/31 “VAT Fraud and Evasion: What Do We Know, and What Can Be Done?” Keen, Michael; Smith, Stephen C.

IMF Research Bulletin

No. 07/32 “Sources of Inflation in Sub-Saharan Africa” Barnichon, Regis; Peiris, Shanaka J.

No. 07/45 “Pricing Fund Liquidity Provision” Rossi, Marco

No. 07/33 “Exchange Rate Policy and Liability Dollarization: An Empirical Study” Berkmen, Pelin; Cavallo, Eduardo E.

No. 07/46 “Tax Reform and Debt Sustainability in Germany: An Assessment Using the Global Fiscal Model” Botman, Dennis P. J.; Danninger, Stephan

No. 07/34 “Fixed Exchange Rates and the Autonomy of Monetary Policy: The Franc Zone Case” Veyrune, Romain

No. 07/47 “Financial Globalization and the Governance of Domestic Financial Intermediaries” Tressel, Thierry; Verdier, Thierry

No. 07/35 “Remittances in the Pacific Region” Browne, Christopher; Mineshima, Aiko No. 07/36 “Danish for All? Balancing Flexibility with Security: The Flexicurity Model “ Zhou, Jian-Ping No. 07/37 “Strategies for Fiscal Consolidation in Japan” Botman, Dennis P. J.; Edison, Hali J.; N’Diaye, Papa M’B. P.


No. 07/38 “Impact of Remittances on Poverty and Financial Development in Sub-Saharan Africa” Gupta, Sanjeev; Pattillo, Catherine A.; Wagh, Smita No. 07/39 “Capital Structure and International Debt Shifting” Huizinga, Harry; Laeven, Luc; Nicodeme, Gaetan No. 07/40 “Do South-South Trade Agreements Increase Trade? CommodityLevel Evidence from COMESA” Mayda, Anna Maria; Steinberg, Chad No. 07/41 “Inflation in Poland: How Much Can Globalization Explain?” Allard, Céline No. 07/42 “Give Trust a Chance: A Model of Trust in the Context of an IMFSupported Program” Sembene, Daouda No. 07/43 “Colonial Origins, Institutions, and Economic Performance in the Caribbean: Guyana and Barbados” DaCosta, Michael No. 07/44 “External Linkages and Contagion Risk in Irish Banks” Duggar, Elena; Mitra, Srobona

No. 07/48 “The Lending Channel in Emerging Economies: Are Foreign Banks Different?” Arena, Marco; Reinhart, Carmen; Vázquez, Francisco F. No. 07/49 “On the Welfare Benefits of an International Currency” Kannan, Prakash No. 07/50 “External Debt and Economic Reform: Does a Pain Reliever Delay the Necessary Treatment?” Vamvakidis, Athanasios No. 07/51 “Democracy and Foreign Education” Spilimbergo, Antonio No. 07/52 “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints” Johnson, Simon; Ostry, Jonathan David; Subramanian, Arvind No. 07/53 “Are Regional Trade Agreements in Asia Stumbling or Building Blocks? Some Implications for the Mekong-3 Countries” Tumbarello, Patrizia No. 07/54 “The Quest for Price Stability in Central America and the Dominican Republic” Jácome, Luis Ignacio; Parrado, Eric No. 07/55 “Can the Natural Resource Curse Be Turned into a Blessing? The Role of Trade Policies and Institutions” Arezki, Rabah; van der Ploeg, Frederik No. 07/56 “International Evidence on Fiscal Solvency: Is Fiscal Policy ‘Responsible’?” Mendoza, Enrique G.; Ostry, Jonathan David

September 2007

No. 07/57 “Egypt: Searching for Binding Constraints on Growth” Enders, Klaus

No. 07/69 “Will a Regional Bloc Enlarge?” Albertin, Giorgia

No. 07/58 “A Primer on Sovereign Debt Buybacks and Swaps” Medeiros, Carlos I.; Polan, Magdalena; Ramlogan, Parmeshwar

No. 07/70 “Modeling Aggregate Use of Fund Resources: Analytical Approaches and Medium-Term Projections” Ghosh, Atish R.; Goretti, Manuela; Joshi, Bikas; Thomas, Alun H.; Zalduendo, Juan

No. 07/59 “Introduction to Applied Stress Testing” Cˇihák, Martin No. 07/60 “Policies, Enforcement, and Customs Evasion: Evidence from India” Mishra, Prachi; Subramanian, Arvind; Topalova, Petia

No. 07/71 “Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies” Baig, Taimur; Mati, Amine; Coady, David; Ntamatungiro, Joseph

No. 07/61 “The Macroeconomic Effects of Migration from the New European Union Member States to the United Kingdom” Iakova, Dora M.

No. 07/72 “Monetary Policy in an Equilibrium Portfolio Balance Model” Kumhof, Michael; van Nieuwerburgh, Stijn

No. 07/62 “Is the Quantity of Government Debt a Constraint for Monetary Policy?” Mitra, Srobona

No. 07/73 “Audit Committees in Central Banks” Camilleri Gilson, Marie-Thérèse; Lybek, Tonny; Sullivan, Kenneth

No. 07/63 “Growth in the Dominican Republic and Haiti: Why Has the Grass Been Greener on One Side of Hispaniola?” Jaramillo, Laura; Sancak, Cemile No. 07/64 “International Finance and Income Convergence: Europe Is Different” Abiad, Abdul; Leigh, Daniel; Mody, Ashoka

No. 07/65 “Do Economists’ and Financial Markets’ Perspectives on the New Members of the EU Differ?” Luengnaruemitchai, Pipat; Schadler, Susan No. 07/66 “Can Regional Integration Accelerate Development in Africa? CGE Model Simulations of the Impact of the SADC FTA on the Republic of Madagascar” Hallaert, Jean-Jacques

No. 07/74 “Contagion Risk in the International Banking System and Implications for London as a Global Financial Center” Chan-Lau, Jorge A.; Mitra, Srobona; Ong, Li L. No. 07/75 “Sovereign Ceilings ‘Lite’? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies” Borensztein, Eduardo; Cowan, Kevin; Valenzuela, Patricio No. 07/76 “Flattening of the Phillips Curve: Implications for Monetary Policy” Iakova, Dora M. No. 07/77 “Interpreting EU Funds Data for Macroeconomic Analysis in the New Member States” Rosenberg, Christoph B.; Sierhej, Robert

No. 07/67 “Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model” Ganelli, Giovanni; Tervala, Juha

No. 07/78 “British Influence on Commonwealth Budget Systems: The Case of the United Republic of Tanzania” Lienert, Ian

No. 07/68 “Politically Optimal Fiscal Policy” Kumhof, Michael; Yakadina, Irina

IMF Working Papers and other IMF publications can be downloaded in full-text format from the “Research at the IMF” website at


External Publications by IMF Staff Journal Articles

IMF Research Bulletin Antonio Spilimbergo Editor Paul Gleason Assistant Editor Feras Abu Amra Systems Consultant Julio Prego Typesetting


The IMF Research Bulletin (ISSN: 1020-8313) is a quarterly publication in English and is available free of charge. Material from the Bulletin may be reprinted with proper attribution. Editorial correspondence may be addressed to The Editor, IMF Research Bulletin, IMF, Room HQ1-9-718, Washington, DC 20431 USA; or e-mailed to [email protected] For Electronic Notification: Sign up at (e-mail notification) to ­receive notification of new issues of the IMF Research Bulletin and a variety of other IMF publications. Individual issues of the Bulletin are available at external/pubs/ft/irb/ archive.htm. For Print Subscriptions: Address requests to Publication Services, Box‑X2001, IMF, Washington, DC 20431 USA; e-mail: [email protected]

Chamon, Marcos; Mauro, Paolo “Pricing Growth-Indexed Bonds” Journal of Banking and Finance Kandil, Magda; Dincer, Nergiz; Berument, Hakan “The Effects of Exchange Rate Fluctuations on Economic Activity in Turkey” Journal of Asian Economics Kose, M. Ayhan; Blankenau, Bill “How Different Is the Cyclical Behavior of Home Production Across Countries?” Macroeconomic Dynamics Kose, M. Ayhan; Hirata, Hideaki; Kim, Henry “Sources of Fluctuations: The Case of MENA” Emerging Markets Finance and Trade Milesi-Ferretti, Gian Maria; Lane, Philip “Capital Flows to Central and Eastern Europe” Emerging Markets Review Mishra, Prachi “Emigration and Wages in Source Countries: Evidence from Mexico” Journal of Development Economics Papageorgiou, Chris “Is the Asymptotic Speed of Convergence a Good Proxy for the Transitional Growth Path?” Journal of Money, Credit and Banking Strand, Jon “Public-Good Valuation and Intrafamily Allocation” Environmental and Resource Economics

Other External Publications (Books, Conference Volumes, etc.) Kandil, Magda; Ersel, Hasan “Markets and Growth for MENA Countries: Financial Markets” Explaining Growth in the Middle East Keen, Michael; Strand, Jon “Indirect Taxes on International Aviation” Fiscal Studies Kose, Ayhan; Prasad, Eswar; Rogoff, Kenneth; Wei, Shang-Jin “Financial Globalization, Growth and Volatility in Developing Countries” National Bureau of Economic Research (NBER) volume, Globalization and Poverty, ed. by Ann Harrison Prati, Alessandro; Tressel, Thierry “What Is the Most Effective Monetary Policy for Aid-Receiving Countries?” Policy Matters: Economic and Social Policies to Sustain Equitable Development A full and updated listing of external publications of IMF staff (from 1997 onward), including forthcoming publications, can be found in a searchable database on the “Research at the IMF” website at

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