Firm Exit and Exchange Rates: An Examination with Turkish Firm-Level Data

August 25, 2014

By Nazlı Karamollaoğlu (MEF University, Turkey) and M. Ege Yazgan (Istanbul Bilgi University)

http://ideas.repec.org/p/koc/wpaper/1411.html

Policy Brief: 

Exchange rate movements have important implications for survival patterns, particularly for exporting firms in developing countries where exchange rates are more volatile compared to the developed world. Real exchange rate movements are thought to act like tariffs in how they affect survival behavior by altering firms’ competitive positions in both domestic and international markets. In this context, real exchange rate appreciation acts as an increase in foreign tariffs, creating a cost disadvantage for domestic producers in the export markets and raising the level of competition. Consequently, the least productive firms exit the market. For the case of a developing country, the impact of exchange rate appreciation on firms survival is expected to be larger as transactions are generally not hedged because forward markets are not accessible to the bulk of the traders.

The micro-level empirical research in this line of research has mostly concentrated on analyzing the effects of currency variations on firms’ survival, particularly for developed countries due to the lack of data in developing countries.  Using a unique firm-level dataset, compiled by the Central Bank of Turkey, we test the impact of currency appreciation on the survival behavior of Turkish firms in the manufacturing industries for 2002-2009.

Our results indicate that a 1% real appreciation of the Turkish Lira with respect to currency basket, composed of equally weighted US Dollar and Euro, for a given firm decreases the probability of survival by 5%. In comparison to previous empirical studies covering developed countries, such as Baldwin and Yan (2012), Berman et al. (2012), the impact of currency appreciation on the Turkish firms’ survival is much higher. This can be considered as evidence of relative vulnerability of firms in a developing country.  We also find evidence that the high productivity firms have higher probability of survival than the low productivity firms in the presence of exchange rate variation.

From an economic policy point of view, these results emphasize the danger associated with a domestic currency appreciation following a surge of capital inflows and relying on internal demand, through the expansion of domestic credits, as the main driver of economic growth. The case of Turkey constitutes such an example, with its highly volatile GDP growth depending on the intensity of capital inflows (see, for example, Akat and Yazgan (2012)). Especially in a resource constrained emerging market economy such as Turkey (due to low domestic savings), tradable sector,  given its capacity to create foreign resources,  should play an important role as the engine of a sustainable and employment creating growth. However, the evidence presented in this paper indicates that continuing appreciation of domestic currency may have detrimental effects on the development of resilient and strong tradable sector firms.

References:

Akat, Asaf S., and M. Ege Yazgan. (2013),  “Observations on Turkeys Recent Economic Performance”. Atlantic Economic Journal, 41(1):1-27.

Baldwin, John R. & Yan, Beiling, (2010), “Export Market Dynamics and Plant-level Productivity: Impact of Tariff Reductions and Exchange Rate Cycles,” Economic Analysis (EA) Research Paper Series 2010063e, Statistics Canada.

Berman, Nicolas & Martin, Philippe & Mayer, Thierry, (2009). “How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications,” CEPR Discussion Papers 7493, C.E.P.R. Discussion Papers.

Justice Sector Services and the Poor in Jordan : Determining Needs and Priorities

May 30, 2014

By Paul Prettitore

http://ideas.repec.org/p/wbk/wboper/16120.html

Policy Brief:

The justice sector provides citizen avenues to enforce rights and hold government accountable for delivery of public sector services.  Within the formal sector, courts and lawyers are the primary providers of justice services.  While access to such services can prove complicated for all citizens, poor persons face additional obstacles in accessing due primarily to the inability to pay associated fees.  The inability to access courts and lawyers puts the poor at particular disadvantage in a number of circumstances, for example: resolution of intra-family disputes; complaints involving access to social safety nets; and disputes related to employment abuses.  Governments can attempt to fill these gaps by introducing new services, such as legal aid and special funds providing payments for alimony or child support, or making existing services more accessible, for example through tools for citizens to represent themselves in court.   When targeted properly to the poor, these initiatives can help ensure they are aware of the rules that affect them, and are able to enforce these rules in an efficient and effective manner – an approach recommended by the World Bank as a means to address poverty.

Understanding the demands and priorities of poor persons is important to effectively target new services and improve existing ones.  Yet in the MNA region understanding of demand is considerably lacking, as is data that would help identify priorities.  To better understand demand, the Department of Statistics of Jordan and the Justice Center for Legal Aid (JCLA), a Jordanian civil society organization, developed and implemented a survey of 10,000 households focusing on the justice sector – the first of its kind in Jordan.[1]  Its primary objective was to identify the most common types of legal disputes and identify the characteristics of the households and individuals involved in the disputes.  Questions on use of services focused on those provided by courts and lawyers.  The data obtained covers a number of key issues within the justice sector, including: identifying the most common types of legal cases; access to courts and lawyers in terms of costs and awareness of services provided; access to, and familiarity with, legal aid services; and the economic characteristics of families and individuals with legal disputes.  Further disaggregation of data based on monthly expenditure levels and the gender of respondents provides valuable information on the types of issues most affecting the poor and women.

Analysis of this data suggests the following findings:

The poor and near-poor have considerable need, relative to wealthier individuals, for court and lawyer services but less access.  More than two-thirds (68%) of survey respondents reporting an actionable dispute fall into the two lowest categories of expenditure levels, which roughly correspond with the categories of those in poverty and those just above the poverty. The latter group likely falls below the poverty line for certain periods but overall are not classified as poor, and as such are placed in a situation of not qualifying for legal aid services, which are mostly reserved for the poor, but at the same time are not likely to have the financial resources to pay court and lawyer fees.  Only 6% of respondents fall into the highest expenditure category.  (Figure 1)   The increased reporting of disputes by the poor and near-poor, in comparison to wealthier respondents, was consistent along the three categories of disputes – civil, criminal and family law.  This data demonstrates the importance of targeting services to the poor and near-poor, and the need to experiment with service delivery models that take into account high demand and the limited resources of a middle income country.  Legal aid services – broadly covering information, counseling and representation by a lawyer – are usually reserved for the poor.  Tools allowing individuals to represent themselves in court (pro se representation) can benefit the near-poor as well.

Figure 1 Dispute Frequency (by expenditure level)
Source: Jordan Demand for Legal Aid Services Survey 2012

 Law

Poorer persons tend to experience different types of disputes than wealthier ones.  Overall, poorer persons form the bulk of respondents affected by family law disputes.  This is roughly consistent with global trends, based on provision of legal aid services.  Respondents in the lower expenditure categories were much more likely to be involved in personal family law disputes, such as divorce, alimony, child support, inheritance and access to dowries, than richer respondents – around 80% of those in the lower two expenditure categories versus roughly 20% in the higher two expenditure categories.  And within the category of family law, poorer respondents were more likely to be involved in alimony and inheritance cases, and richer ones in cases involving separation/divorce and return of dowries.  This finding highlights the ineffective targeting of legal aid services in Jordan, which are obligated only in cases involving serious crimes but are generally not available for family law cases, which are handled by religious courts.

Very few Jordanians are aware of the availability of legal aid services, but most would use them if they had the option.  Roughly 98% of survey respondents were unaware of existing legal aid servicesAnd ofthe 2% of respondents aware of legal aid, only 17% tried to access it.  The primary reasons for not accessing services were lack of knowledge of how to reach service providers (35%), not actually needing services (33%), and complicated procedures for accessing services (27%)On a more positive note, 78% of respondents that sought legal aid services were able to secure them.  However, more than 80% of respondents stated they would access courts and lawyers if they received assistance in paying fees.

Women and men tend to experience different frequencies and types of disputes.  As individuals, men were three times as likely as women (75% for men versus 25% for women) to report having a legal dispute in the last five years.  Of the households reporting disputes, 92% were headed by men.   This is likely due to a combination of men’s legal and social roles as head-of-household, and women’s low labor force participation (22%) and limited control of economic assets.   Women are considerably more likely to report disputes related to family law cases (44% of women versus 11% of men), and less likely to be involved in criminal and civil matters.  When poverty is considered as a factor, the gap between men and women related to personal status disputes widens even further.  Analysis of the caseload of the Justice Center for Legal Aid, a Jordanian civil society organization and the largest provider of legal aid services in Jordan, demonstrates that poor women were almost ten times as likely to request counseling for family law issues, and eighteen times as likely to qualify for legal representation for such cases based on poverty status.  (Figure 2)

 Figure 2. Case Statistics, Justice Center for Legal Aid (May 2013)

(Source: JCLA Caseload)

 CaseType

Women’s and men’s use of courts and lawyers also varies.  Access to financial resources in addressing disputes is more of a constraint for women than for men, and even more so for female-headed households with women and female-headed households more likely to avoid filing claims in court because of lack of financial resources, and to proceed to court without a lawyer because of inability to pay lawyers’ fees.  Women are also more likely to avoid going to court because of social norms (26% of female respondents versus 17% of men), and are perhaps more likely to seek assistance from civil society organizations.   While there are no formal restrictions on women accessing court services, anecdotal evidence strongly suggests women face societal pressures to avoid pursuing disputes through formal institutions.  At the same time, women may also be more dependent on courts, since they are less likely than men to resolve disputes amicably.  Given the unique obstacles they face, women are more negatively impacted by the lack of comprehensive legal aid services.  Since the survey suggests that awareness of procedures for accessing courts and lawyers varies little between men and women, the key issue is enhancing mechanisms to use that knowledge.

 

[1] ‘Statistical Survey on the Volume of Demand of Legal Aid Services’, Department of Statistics of the Ministry of Planning and International Cooperation and the Justice Center for Legal Aid (2012).

The transmission of oil and food prices to consumer prices. Evidence for the MENA countries

May 9, 2014

By Ansgar Belke and Christian Dreger

http://ideas.repec.org/p/rwi/repape/0448.html

Policy Brief:

In the pre-crisis period of globalization, the rapid integration of huge emerging market countries such as China and India into the world economy led to high demand in global food and energy markets. The depreciation of the US-dollar caused further upward pressure: While international prices are often denominated in dollar, many producers calculate the price in their own currency. Oil and food prices have moved in parallel in recent years (Figure 1). This pattern is probably also driven by legislative mandates to use cropland for the production of biofuels and the increasing role of commodities in international asset portfolios. While the global financial crisis led to a decline in the world demand for commodities, causing oil and food prices to fall, they started to rise again thereafter.

Figure 1: Oil and food prices

Food-Oil

Note: IHS Global Insight (oil, dashed line, right axis), Food and Agriculture Organization of the United Nations (food, solid line, left axis).

Rocketing oil and food prices can affect the real side of the economy, depending on the degree of their transmission to the domestic price level. Price increases may depress the purchasing power of private households and can trigger production losses, as firms will choose labour and capital input to match the shifts in relative prices. In the case of price decreases, a reversal is expected, given that the adjustment pattern is symmetric. The effects should be especially visible in low-income net importing countries. As food represents a relatively large share of the consumption baskets of private households, accelerating prices can lead to increasing poverty and political instability. For instance, high and volatile food prices might have contributed to social unrest in the eve of the Arab Spring. The transmission of oil and food prices to consumer prices is at the centre of our paper.

The degree of price transmission can differ across countries, depending on whether own resources can be mobilized to mitigate the effects. Policy responses may also shape the outcome. In case of price hikes, governments can react by rising subsidies or improved safety nets to protect poor households. Export restrictions might be implemented to stimulate supply at domestic markets. Wage-price spirals may occur in countries with wage and price indexation. To combat the rising inflation pressure, central banks may tighten their monetary policy stance, but with adverse effects on the real economy. Countries with international reserves may react by appreciating their currencies. However, an appreciation hurts firms engaged in export-oriented activities and hampers the build-up of import-competing industries. While such policies could dampen the adverse effects of food and oil price shocks, they can contribute to higher instability in international markets and decrease the incentives of domestic farmers to respond with higher production. In addition, policies are not sustainable, if they imply a deterioration of public budgets.

In a recent study, we have studied the impacts of global food and oil prices on consumer prices for a sample of MENA countries: Algeria, Egypt, Jordan, Libya, Morocco, Syria and Tunisia. The selection is motivated by data availability. All countries are net food importers. Due to strong population growth, the vulnerabilities will likely increase in the future. The region is the most food import dependent region in the world. Food dependency ratios, i.e. net imports over private consumption exceed 50 percent on average.

As the analysis shows, exchange rate movements act as shock absorbers only partially. Estimated food price elasticities are about twice as large as the oil price elasticities. Hence, the impacts of food prices on national consumer prices dominate. The response of real GDP seems to be very limited both in the long and short run. We found also asymmetries in the relationship, i.e. a lower reaction of domestic consumer prices after negative shocks in international prices. This points to the existence of rigidities to downward price adjustments. These rigidities might have been reinforced by extended price subsidies in many countries.

In fact, energy and food subsidies have been used for decades and constitute the major part of the social security safety net in the region. According to the IMF, food subsidies were about 0.7 percent of MENA GDP in 2011. Energy subsidies amounted to $240 billion, which is about 8.5 percent of overall GDP or 22 percent of the government revenues. Furthermore, the region holds more than 13 percent of global wheat stocks. Despite some failures, the strategic food reserves could insulate the region from off-shore price disturbances. On the other hand, subsidies can also increase instability in international markets, as the incentives to food producers are distorted. By comparing the adjustment pattern across countries, our analysis provides an indirect evaluation of the success of policies implemented to cushion the domestic economies from global price shocks.

In this vein, we feel legitimized to consider government interventions to be just another characteristic affecting the pass-through to national inflation. It is supposed that a country should generate sufficient foreign exchange from exports to finance food imports in order to be food secure. Keeping prices and imports of food as stable as possible is achieved not only by importing enough food, but also by interventions based on food reserves and price subsidies. These practices will cost even more in case of global price shocks. For instance, the government will have to double the subsidy paid per unit of imported food in case of a shock doubling the world food price in order to keep imports at levels prevailing at the old international prices.

Regardless of the assumption that food and oil prices fluctuate simultaneously, MENA oil-exporting countries, such as Algeria and the Gulf Council countries, should benefit on the macro level in case of rising oil prices, having more fiscal space to cover food imports and the costs of interventions. The situation in the oil-importing countries will differ and its fiscal capacity will depend on other factors as well, including its relations with the region and the outer world through remittances and trade.

Who hires foreign domestic workers? Evidence from Lebanon

May 5, 2014

By Ali Fakih (Lebanese American University) and Walid Marrouch (Lebanese American University)

http://econpapers.repec.org/paper/izaizadps/dp6822.htm 

Published under the same title in the Journal of Developing Areas, volume 48, issue 3, pp. 339-352, 2014.

Policy Brief:

The past decades have seen a marked increase in the inflow of foreign migrant domestic workers from South Asia, Southeast Asia, and East Africa to the Middle East region driven by a strong demand for affordable domestic help. According to the latest statistics by the International Labour Organization (ILO), the number of foreign domestic workers stood at 53 million around the world in 2013. In the Middle East, their number amounted to 1.4 million. As a matter of fact, the Middle East has attracted a great deal of attention regarding the adverse employment conditions of foreign domestic workers originating from low-income countries.

This study examines the determinants of the demand for foreign domestic workers in Lebanon, which is a middle income country. In such countries, foreign domestic workers’ employment is an important economic activity delivering significant market and non-market services. First, foreign domestic workers provide care services for dependents living in the household. Second, the presence of these workers in the household may play a crucial role in determining the female labor force participation decisions in the destination country. Third, the ease of access to foreign domestic workers in the destination country provides low cost domestic labor, which allows more middle-class households to have access to domestic work services. This is in contrast to rich countries where the cost of hiring domestic workers is high and the demand is limited to wealthy households.

Our study provides new evidence on the demand for foreign domestic work. It is the first attempt aimed at identifying factors that affect the demand for foreign domestic workers in the Middle East. We use a nationally representative sample of all Lebanese households drawn from the National Household Budget Survey (2005). The sample includes 7,431 Lebanese households distributed across all 6 governorates of Lebanon. We consider a set of explanatory variables related to the socio-economic characteristics of households, the characteristics of the household head, and the dwelling characteristics.

Contrary to popular beliefs, we find that the size of the household and the presence of elderly persons are not important determinants of the hiring decision of foreign domestic workers, while the probability of hiring a domestic worker is significantly higher for households with children and disabled persons. This result is in line with well-established evidence in the sociology literature that indicates that downward solidarity (from parents to children) is stronger than upward solidarity (from children to parents). The likelihood of hiring a domestic worker is also increasing in the level of educational attainment of the household head. This finding is in line with the theory of human capital predicting that the level of education is inversely related to the time allocated to household tasks. Interestingly, we find that the number of rooms in the residence rather than its total surface area or type to be the only relevant dwelling characteristic. In fact, in Lebanon most foreign domestic workers reside with their employers, which explains why dwellings -after controlling for size- with more rooms are more likely to have a domestic worker. Finally, our results show that the two most rural and poorest governorates are associated with the strongest negative and significant regional effect on the likelihood of employing a foreign domestic helper.

Important policy implications transpire from our study. Our results highlight the need for increased public investments in care provision in order to provide households with a choice between private and public institutional care, especially for households with children or persons with special needs. Furthermore, it is shown that the trade-off between institutional care and care provided by foreign domestic workers can be more severe in rural areas. Therefore, we suggest several possible solutions, such as reducing the costs of hiring foreign workers in rural areas to provide a short-term substitute for the absence for institutional health care in those areas that lack the adequate infrastructure. Our results also make it possible to speculate about the future demand for domestic workers. At the current trend, smaller households are less likely to hire domestic help yet households with higher educational attainment will be doing the opposite. Such factors make it difficult to predict the final impact of socio-economic trends on the future demand for foreign domestic workers in Lebanon.

 

Time and Consumption Poverty in Turkey

April 18, 2014

By Thomas Masterson (Levy Economics Institute of Bard College), Emel Memis (Ankara University and Levy Economics Institute of Bard College), and Ajit Zacharias (Levy Economics Institute of Bard College)

http://econpapers.repec.org/paper/levlevyop/op_5f46.htm

Policy Brief:

The official measure of poverty in Turkey stipulates a minimum level of consumption expenditures that is supposedly required for attaining a minimum standard of living.  As in other countries, the stipulation ignores the fact that unpaid household production activities contribute to the fulfillment of material needs and wants that are indispensable for attaining this standard. Consequently, for households that lack the time necessary for performing such activities, the official consumption poverty line understates the requisite expenditures. If the household does not have the time to perform the essential activities of household production, it will have to spend money on market substitutes in order to reach the basic living standard—a fact that is not reflected in the official poverty line. To get a more accurate calculus of poverty, we have developed the Levy Institute Measure of Time and Consumption Poverty (LIMTCP), a two-dimensional measure that takes into account both the necessary consumption expenditures and the household production time needed to achieve a minimum standard of living.

Our estimates for 2006 showed that the LIMTCP poverty rate of individuals was 10 percentage points higher than the official rate (40 percent versus 30 percent). Ignoring time deficits in household production resulted in undercounting the poor by a large margin: the ranks of the poor stood at 29.0 million by our reckoning, compared to 21.4 million persons according to the official measure, indicating the existence of 7.6 million hidden poor. The consumption shortfall of poor households was also greater than implied by the official statistics (1.74 times greater). Among the rural areas of Turkey, where poverty is generally considered more pervasive, we found that 58 percent of individuals lived in poverty, compared to 30 percent in urban areas. Differences in the incidence of poverty between urban and rural areas reflect differences in demographic structure, as well as deep-rooted disparities with respect to employment opportunities and earnings.

Long hours on the job are the main proximate cause of time deficits for both men and women—but the effect on women is more drastic. Among full-time workers, the time poverty rate of women was nearly twice that of men (70 percent versus 37 percent), and among part-time workers it was more than nine times as high (37 percent versus 4 percent). This suggests that the source of the gender difference in time poverty does not lie mainly in the discrepancy in hours of employment; rather, it lies in the greater share of household production activities undertaken by women. In fact, we estimated that about one million nonemployed women were time poor because of the relatively high share of household production activities they were required to fulfill.

We also found a higher incidence of time poverty in consumption-poor as compared to non-poor households (65 percent versus 37 percent). Similar disparities across the poverty line can also be observed for employed men (42 percent of the consumption-poor were in time poverty, versus 29 percent of the consumption-non-poor) and women (68 percent versus 48 percent). Consumption-poor urban and rural women had the highest rates of time poverty. Since the majority of the rural, time-poor employed women work without pay on the family farm or enterprise, the impoverishing effects of time deficits may be harder on them than on wage workers. Making work pay and providing the support needed to reach the minimum required consumption is vital for the rural population.

The official poverty rate for adults may be reduced from 26 to 11 percent and the LIMTCP rate may fall from 36 to 26 percent if every nonemployed but employable adult becomes employed in a job that best fits (in a statistical sense) their characteristics (such as age and educational attainment). These substantial reductions in poverty—suggested by our microsimulation model—would still leave much to be desired. Under the prevailing patterns of pay and hours of employment,the simulated LIMTCP poverty rate is practically identical to the actual (presimulation) official rate. Women’s conditions of employment are crucial for the impact of job creation on poverty alleviation, because most of the employable (but currently nonemployed) persons are women. The occupational segregation and earnings disadvantages confronting women workers are well-known. Our study also points toward the impoverishing effects of time deficits on women with low potential earnings.

Despite a recent rise, an exceptionally low female labor force participation rate, far lower than that of countries with similar levels of per capita GDP, still remains as a “Turkish puzzle.” In fact, in recent years, promoting women’s employment as a contributor to higher economic growth has become a key priority for policymakers. In the context of the current policy agenda, our findings highlight the potential of carefully designed employment-centered policies to move the country toward inclusive economic growth and gender equality.

Women’s Education: Harbinger of Another Spring?

March 2, 2014

By Mehmet Alper Dinçer (Education Reform Initiative, Sabanci University), Neeraj Kaushal (Columbia University and National Bureau of Economic Research) and Michael Grossman (City University of New York Graduate Center and National Bureau of Economic Research)

http://econpapers.repec.org/paper/nbrnberwo/19597.htm

Policy Brief:

Economists argue that more educated individuals are more efficient producers of health and more educated parents are more efficient in producing healthy children.  Knowledge helps parents make informed decisions on their children’s nutrition and healthcare. It influences health-related behaviors (such as smoking, drug abuse, binge drinking) and lifestyles (e.g. physical exercise), and parents’, in particular mother’s, health behavior and lifestyle impact child health (e.g. birth weight). Parental education is also the most basic component of socio-economic status, which according to epidemiologists is the key determinant of own and child health (Adler & Newman, 2002). Further, education may affect attitudes towards gender equality empowering women (Mocan & Cannonier, 2012). Because mothers are often the primary caregiver for infants and young children, their empowerment is likely to channel family resources towards mother- and child-wellbeing.

Economists, however, also quibble over empirical evidence to support these hypotheses. Because genetic endowments are a key determinant of a child’s health, it is challenging to provide convincing evidence that the simple association (correlation) between parental education and child health, documented in many studies, implies causality: that parental education improves child health. Arguably, heritable ability may result in more able women seeking higher education and having more able children who have better health (Behrman & Rosenzweig, 2002). Further, future orientation may cause mothers to acquire more education and invest in their children’s health (Fuchs, 1982). Similarly, establishing causality between mother’s education and early marriage, early child-bearing, and fertility outcomes is a challenge because low level of empowerment and high dependency may result in women marrying early and having children thus forgoing education. This is an important issue in many Middle Eastern countries where marriage and child bearing in adolescence are high. For instance, according to the Turkey Demographic Health Survey 2008, approximately 17% of ever-married women aged 20-45 in Turkey are married before the age of 16 and 13% have a child before they turn 17.

In a recent study, we used a “natural experiment” in Turkey to study the causal effect of education on women’s fertility, empowerment, and their children’s health (Dinçer, Kaushal, and Grossman, 2013). In 1997, Turkey passed the Compulsory Education Law that increased compulsory formal schooling from five to eight years. Individuals born after 1985 (who were 11 or less in 1997) were the target of the law.  To accommodate the expected increase in enrollment, the government devoted additional resources on school infrastructure and in hiring new teachers and these investments varied across the sub-regions of Turkey. In our experiment, we formed a treatment group of women who were born between 1986 and 1990 and were affected by the legislation and a corresponding comparison group of women who were born between 1979 and 1985 and were not affected.  We took advantage of variations across cohorts in the number of primary school teachers in the sub-region of residence at age 11 to construct an “instrument” that we applied to predict the educational attainment of young women resulting from the Compulsory Education Law. The predicted education variable, which is independent of heritable traits and a future orientation, is then used to estimate the effect of education on a variety of outcomes experienced by the treatment group of women and their offspring from information obtained when the treatment cohort was between the ages of 18 and 22 and the comparison cohort was between the ages of 23 and 29.

We find that a 10 percentage point increase in the proportion of ever married women with eight years of schooling lowered the number of pregnancies per ever-married woman by approximately 0.13 and the number of children born by 0.11. There is also some evidence of a decline in child mortality caused by mother’s education. Further, our analysis shows that a 10 percentage-points increase in the proportion with eight years of schooling raised the proportion of women using modern family planning methods by eight to nine percent and the proportion of women with knowledge of their ovulation cycle by five to seven percent.  However, we find little evidence that schooling changed women’s attitudes towards gender equality.

From this we infer that the decline in fertility and child mortality (in some models) that we observe could not be on account of changes in women’s attitudes towards gender inequality resulting from increased education. It is more likely that the decline in fertility and child mortality that we observe are on account increases in age at first marriage, age at first childbirth or increased use of contraceptive methods and improvements in women’s understanding of their ovulation cycle. It might be that attitudes are slow to change and that the content of education in classrooms is an important factor when it comes to changing attitudes.

References

Adler, Nancy E., and Katherine Newman. 2002. “Socioeconomic Disparities in Health: Pathways         and Policies.” Health Affairs, 21(2), 60-76.

Behrman, Jere R., and Mark R. Rosenzweig. 2002. “Does Increasing Women’s Schooling Raise            the Schooling of the Next Generation?” American Economic Review, 92 (1),323-334.

Dincer, Mehmet Alper, Kaushal, Neeraj, & Grossman, Michael. 2013. “Women’s Education:      Harbinger of Another Spring? Evidence from a Natural Experiment in Turkey.” NBER Working Paper No. 19597.

Fuchs, Victor R. 1982. “Time Preference and Health: An Exploratory Study.” In Economic       Aspects of Health, ed. by V.R. Fuchs. Chicago: University of Chicago Press, 93-120.

Mocan, Naci H., and Colin Cannonier. 2012. “Empowering Women Through Education:           Evidence from Sierra Leone.” NBER Working Paper 18016.

Graph1

Figure 1: Gross enrollment rate in grades 6-8 (number of students enrolled in grades 6-8 divided by population of children aged 11-13)

The Real Exchange Rate and External Competitiveness in Egypt, Morocco and Tunisia

February 10, 2014

By Zuzana Brixiova (Africa Development Bank), Balázs Égert  (OECD) and Thouraya Hadj Amor Essid (Monastir University)

Disclaimer: This policy brief is based on the Working Paper of the African Development Bank No. 187

http://econpapers.repec.org/paper/adbadbwps/991.htm

Policy Brief:

A real exchange rate that is broadly aligned with its equilibrium value is an important part of a country’s macroeconomic and external competitiveness framework. Persistently misaligned real exchange rates can cause a misallocation of resources between tradable and non-tradable sectors and negatively impact labor market dynamics. Reduced external competitiveness due to over-valued exchange rate hampers exports, aggregate demand, growth and job creation. Besides the longer-term implications, real exchange rate misalignment can lead to inflationary pressures and even trigger speculative attacks. When setting their exchange rate policy, countries also need to balance their goals of reaching competitiveness and macroeconomic stability.

In Egypt, Morocco, and Tunisia concerns about real exchange rate misalignments have prevailed for some time given the countries’ high unemployment, stagnating global export shares, and low the global financial crisis and after the 2011upheaval, with inclusive growth and job creation once again topping the countries’ economic policy agenda. By providing accurate signals to producers, the real exchange rate can help generate competitive jobs via exports. It can also help reduce income inequalities by raising the workers’ marginal revenue product. To be effective, the aligned real exchange rate needs to be complemented by other sound macroeconomic policies and enabling business environment.

As shown by their low and stagnating shares in global exports, Egypt, Morocco and Tunisia have been facing external competitiveness challenges. Low and constant (or marginally rising, as was the case of Egypt) export shares help explain why the aggregate demand growth in these countries has remained subdued and not generated enough ‘decent’ jobs in export sectors. The three North African economies are less diversified than some other emerging market economies at comparable levels of development. Europe accounts for a disproportionate share of their export destinations, reflecting geographical closeness and long-established business ties.

This paper aims to find out whether the real exchange rate misalignment contributed to the weak external competitiveness (e.g., limited export value added and diversification) in the three North African countries. To this goal, it estimates the real equilibrium exchange rate for the past three decades, using the stock-flow approach. This approach differentiates between (i) the medium-term undervaluation caused by the Balassa-Samuelson effect (productivity catch up) that is unlikely to cause abrupt adjustments and (ii) misalignment caused by other factors than productivity differentials. It is particularly suitable for emerging markets that can go through structural and productivity changes impacting the medium-term path of the real exchange rate.

The empirical analysis is based on annual data series for the past three decades, obtained from databases of the African Development Bank and IMF. The estimate results of the real exchange rate models, obtained using the DOLS and ARDL models. For each country, the baseline model linking the real exchange rate to productivity and net foreign assets was estimated first. Subsequently, additional control variables including the government spending ratio, openness, the investment ration and terms of trade were added one by one to the baseline model.

Our results indicate that in the long run, decreases in net foreign assets, equivalent to capital inflows, result in an appreciation of the real exchange rate. Regarding the impact of productivity, the coefficient estimates are generally positive in Egypt, indicating that increases in productivity lead to real exchange rate depreciation. In Morocco the impact of productivity on the real equilibrium exchange rate is significant, but negative, indicating that the increase in productivity has the traditional Balassa-Samuelson effect. In Tunisia productivity has an ambiguous impact on the real exchange rate. Further, a greater openness would lead to a depreciation of the real exchange rate in all three countries. Finally, improvements in terms of trade would lead to real exchange rate appreciation in Egypt and Morocco, most likely via inflation differentials.

Regarding the misalignment between the actual real exchange rate and the long run real equilibrium exchange rate, the paper found that: For Tunisia, the low misalignment in recent years can be explained by the abandonment of the real exchange rate targeting and gradual introduction of the exchange rate flexibility. The real exchange rate of Egypt was overvalued from the mid-1990s until mid-2000s and in recent years, following the rising inflation rate and current account and/or fiscal deficits. In Morocco, misalignment has been low in recent years. The county experienced a short overvaluation in mid- 80s entailed by the current account deficit, followed by the devaluation in the late 1980s. Morocco’s equilibrium exchange rate’s seems to have not been affected by the global economic crises, in part due to prudent monetary policy.

In summary, utilizing – for the first time for North Africa – the stock-flow approach to estimating the real equilibrium exchange rate, this paper estimated misalignments of real exchange rates in Egypt, Morocco, and Tunisia during the past three decades. While Egypt experienced protracted misalignment in the past and recent years, real exchange rates in Morocco and Tunisia stayed closer to their equilibrium values. However, in all the export growth has been lagging some other emerging market economies. The paper suggests that non-price structural factors such as labor market flexibility, skills, and investment climate are a key for unlocking the export and productive potential of the three North African countries. Intra-regional trade – both with North Africa and the rest of the continent – together with greater orientation to fast growing emerging markets could also raise countries’ external competitiveness.

 

 

 

Employment Status, Income Equality, and Poverty in Egypt

February 2, 2014

By Hoda Abd El Hamid Ali

http://econpapers.repec.org/paper/pramprapa/52578.htm

Policy Brief:

The focus of this paper draws on the employment, income equality, and poverty linkages, without a better understanding of such relationship, development strategies aimed at poverty reduction, social justice may be incomplete, as employment is the principal channel through which economic growth reduces poverty. However access to employment is not sufficient to reduce poverty and inequality, the type and quality of work are also important. Many youth , housewives, or retired people are trapped in low-productivity, low or unpaid or other types of work that fall short of their aspirations and that often do not open opportunities to move to more permanent, higher-productivity and better-paid positions.

Therefore, understanding the links between different types of employment status, poverty, and social justice are critical for formulating policy, as many reforms are needed regarding labor regulations to reduce disincentives for hiring and divert job seekers in to the informal sector, where workers do not enjoy the same level of protection as in the formal economy, revisiting public sector hiring practices, active labor market polices needed also to lower unemployment and to promote youth and female employment, and reforming the education system.

This Paper aims first, to analyze and test the factors that influence different practices and participation in the Egyptian labor force, more specifically what determines an individual’s choice to work for paid employment (full or part-time or self employment), or has no paid employment (students of all kinds and levels, household duties, retired or pensioned, unemployed, and others), and to test if the impact of these factors will differ according to gender. Second, linking these employment statuses with poverty and income equality, the paper examines the impact of an individual’s choice of a specific employment status, and his/her perception regarding the importance of having more equal distribution of income on his/her perception regarding the importance of poverty, as the most serious problem in his or her country.

The results underline the importance of analyzing the factors that affect the different employment and unemployment (paid and unpaid employment) practices in the Egyptian labor force and analyzing the linkages between employment, poverty, and income equality, as nowadays the country is struggling and in its ongoing movements towards democracy. Reforming the labor market in Egypt is a major challenge for the country for poverty reduction, creating more social justice and a successful economic transition.

This paper assesses the main micro- determinants of employment status in Egypt, and the joint impact of employment status and income equality on poverty by gender applied on a sample of 3050 individuals obtained from the (2005-2008) wave of the World Values Survey (WVS), the study concludes that there is a discrimination against women’s role in the economy that make them less accessible to better education, health, and technical skills, and in returns to better work.

Women also are more affected by the inequality in distribution of income which makes them also more affected by the poverty problem in Egypt. Supporting the poor especially women, who are often poor, less accessible to better employment with specialized programs and other sorts of assistance seems highly justified. Social security should be reformed to cover all women, reforms are also needed for pensions, and unemployment insurance which was almost non-existent before 2010, to cover all retired, old age, care –giving, and unemployed individuals.

The study also finds that employment status has weak and insignificant impact on poverty; such findings are resulted from the weak relationship between employment and growth. What is needed above all is an employment policy that puts the emphasis on strengthening the growth-employment linkages through promoting highly quality jobs and the notion of decent jobs in particular for the poor. The study also concludes that there is a positive and strong relationship between females’ perceptions regarding the importance of having more equal distribution of income and their perceptions regarding the importance of the poverty problem in the Egyptian economy.

Globalization and wage inequality: the case of Tunisia

November 20, 2013

By Aicha Amaidi

http://econpapers.repec.org/paper/pramprapa/47266.htm

Globalization improves the structure of production by generating a greater use of capital and thus greater demand for skilled relative to unskilled labor. Thus, with the opening and the increased demand for unskilled labor would decrease inequality in developing countries. According to the traditional literature (the theory of international trade and the Stolper Samuelson), trade liberalization should raise compensation of abundant factors. Thus, developing countries are better placed than the developed countries for producing goods and service intensive unskilled labor. The result is a downward pressure on the wages of unskilled workers in developed countries and, conversely, an upward pressure on those of their counterparts in developing countries. However, some extensions to this theory indicate that some developing countries may experience an increase their wage inequality. In this context, we’re trying to verify these contributions in the case of Tunisia.

The study of the impact of globalization, in particular the development of trade and technical progress on the change in qualification or wage inequality poses difficulties for most studies. The major difficulty is to distinguish the influence of trade and international trade of other determinants of changes in the qualifying developing countries. In fact, all the methods of analysis of existing research on the impact of technological developments on the labor market, including wage inequality remains until today marked by uncertainty. In fact, the non-availability of data and the difficulty of measuring technical progress may be the cause of this uncertainty.

Because of the importance of structural economic changes during the period (1983-1993), which is characterized by the implementation of a structural adjustment program (SAP) characterized mainly by a partial liberalization of the Tunisian economy the decomposition has been redone for the two sub periods 1983-1987 (the period prior to the SAP and economic liberalization) and 1988-1993 (period after SAP and economic liberalization).

The complementarity between capital and qualification was in favor of skilled workers and that by increasing their earnings at the expense of unskilled workers. The diffusion of new technologies and capital accumulation largely explain the increase in inequality in wages between skilled and unskilled workers.

In addition, increased investment in research and development and capital accumulation largely wage inequality between skilled and unskilled workers in the Tunisian manufacturing. Plus the rate of capital accumulation is, the greater will be the demand for skilled workers from industries.

The econometric results have some limits. Thus, the series of all variables are short to obtain satisfactory results. In addition, the reliability of the results cannot be explained by the particular nature of the variables used in the model, such as variable salary made based on a number of assumptions.

Do Exchange Rates Affect Inflation? Evidence from Emerging Market Economies?

November 6, 2013

By Baki Demirel, Baris Alpaslan and Emre Guneser Bozdag

http://econpapers.repec.org/paper/kocwpaper/1318.htm

Policy Brief:

In this study, the findings show that inflation targeting policy plays a crucial role in managing expectations that may obstruct monetary policy in emerging market economies, thereby enhancing the central bank credibility and succeeding inflation-targeting.  The results of this research support the idea that the success of inflation targeting may help emerging market economies enhance de-dollarization and reduce pressure on general level of prices.[1]

The findings of this study are important for central bank independence implying the price stability-oriented monetary policy. However, due to the fact that some central banks in emerging market economies that have not successfully adopted a floating exchange rate regime, their independence has become questionable; it may be due to an increase in risk appetite.[2] During a “risk on” period currency appreciation and an increasing current account deficit due to credit expansion is a problem that emerging market economies may face whereas during a “risk-off” period there might be a sudden stop in investment activities in those economies, in response to global economic patterns.[3]

Another problem in emerging market economies adopting inflation targeting is that their credit markets are heavily dependent on banking globalization.[4] The interaction between banking globalization and the central bank is established through the activity in interest rates which might be another cause of a sudden stop in investment activities; implying that  under a floating exchange rate regime it would preclude independent monetary policy, deactivate the well-known “impossible trinity” or  the “Trilemma”, thereby leading to a fear of floating.

Emerging market economies should pay much attention to movements in exchange rates and exchange rate mobility, thus weakening the impact of the control that central banks have on interest rates, and that despite a floating exchange rate regime, exchange rates are thought of as a policy tool. In general, therefore, it seems that emerging market economies may move further away from their core mandate of price stability, in which case macroprudential regulations and even managing capital inflows might be a tool to use.[5] Consequently, central banks should tackle financial stability as well as price stability.

The financial crisis that erupted in 2007-2008 led to changes in managing monetary policies. Prior to the crisis, critics argued that central banks with price and output stability could ensure financial stability and interest rates could be a tool in accordance with this purpose. However, the crisis led to the fact that there is no dichotomy between monetary policy and financial stability. In other words, microprudential regulations that are designed for financial institutions cannot eliminate risks caused by disruptions in the general sense, which is the case for emerging market economies. In general, therefore, it seems that macroeconomic stability is sustained in line with price stability, output stability and together with financial stability.

Last but not least, it can thus be suggested that institutions should be founded for central banks to maintain price and exchange rate stability and to implement macroprudential policies. We believe that central banks should play an active role in macroprudential policies.[6]


[1] Taylor, John B., “Low Inflation Pass-Through, and the Pricing Power of Firms”, European Economic Review, 44: 1389-1408, 2000.

[2] Calvo, Guillermo, Reinhart, Carmen M, “Fear of Floating”, NBER Working Paper, 793, 2000.

[3] IMF, “Global Financial Stability Report: Transition Challenges to Stability”, World Economic and Financial Surveys, International Monetary Fund, October 2013.

[4] Goldberg, Linda, “Banking Globalization, Transmission, and Monetary Policy Autonomy”, Federal Reserve Bank of New York, Staff Reports, No: 640, September 2013.

[5] Ostry,  Jonathan D., Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne, “ Managing Capital Inflows:  What Tools to Use”, IMF Staff Discussion Note”, April 2011.

[6] Ostry, Jonathan D., Atish R. Ghosh, Marcos Chamon, “Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies”, IMF Staff Position Note SPN/12/01 February 29, 2012.

 


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