Socio-Economic Inequalities in Maternity Care under Political Instability: Evidence from Egypt, Jordan, and Yemen

March 22, 2017

By Mesbah Fathy Sharaf (Assistant Professor, Department of Economics, University of Alberta, Canada) and Ahmed Shoukry Rashad (Visiting Assistant Professor, Department of Economics, Frankfurt School of Finance and Management, Germany).

http://d.repec.org/n?u=RePEc:erg:wpaper:1011&r=ara

Medical care during pregnancy is crucial for protecting women from health risks during and after pregnancy and has been consistently linked to better child health outcomes. As part of the global efforts to curb maternal mortality, the United Nations included the reduction in maternal mortality by two-third, between 1990 and 2015, as one of the Millennium Development Goals (MDGs). While the trend in maternal health has been over-studied, little attention has been given in the literature to the disparities in maternal health among socio-economic classes in the Arab countries, especially after the Arab Spring era.

In an earlier study, Lozano et al., (2011) tracked the progress toward the MDGs for health across the world and reported that the Arab countries had made an accelerated progress in curbing maternal mortality. In fact, the steady progress in national averages may mask socio-economic disparities underneath it, since the MDGs for health call for improvement in national averages. The growth in national averages could be attained either by improvement in the health of the poor or the better-off. Consequently, the improvement in national averages may result from the improvement in the health of the better-off, while the poor are lagging behind.

To study the economic-related inequality in maternity care utilization under political instability, we use the most recent rounds of the Demographic and Health Survey (DHS) for Egypt, Jordan, and Yemen. Concentration curves and concentration indices are used to examine the demographic and socio-economic correlates of maternity care utilization, and to assess the situation under the political instability that followed the Arab Spring. Also, we investigate the underlying factors that generate the socio-economic inequalities in maternity care utilization by decomposing the concentration index into its determinants.

We find that the degree of the socio-economic inequalities in maternity care utilization varies largely within the Arab world. The level of inequality is severe and alarming in Yemen, moderate in Egypt, and minor in Jordan. Results of the decomposition analysis show that socio- economic disparities in maternity care utilization are mainly due to the lack of economic resources and its correlates among the poor. While it might be expected that the political instability in the region would adversely affect the progress toward the MDGs for health, the progress in Egypt toward achieving health equity has not been reversed and instead, continued to improve as compared to the DHS round in 2008. However, in Yemen, the available data does not permit such comparison. Though the concentration index for Jordan did not show dramatic change, in particular between 2007 and 2012, yet this still conveys an important message that Jordan was able to maintain its progress toward achieving health equity, despite the recent political upheaval in the region.

Reducing the socio-economic disparity in maternity healthcare requires health and social policy reforms that incorporate demand-side financing programs such as health vouchers scheme and conditional cash transfers to the marginalized women and those living in deprived regions. These programs should be supplemented by supply-side interventions such as mobile clinics to deprived and remote areas, training traditional birth attendant, and upgrading health facility infrastructure and equipment for health care, which requires additional investments in the health sector. In the long run, increasing education, especially among the poor, and poverty reduction measures that focus on rural communities could help narrow the inequalities in maternity healthcare, and hence improves population health outcomes.

References

Lozano, R., et al. (2011). “Progress towards Millennium Development Goals 4 and 5 on maternal and child mortality: an updated systematic analysis.” The lancet 378(9797): 1139-1165.

Granger Causality and the Factors underlying the Role of Younger Generations in Economic, Social and Political Changes in Arab Countries

March 22, 2017

By Ahmed Driouchi and Tahar Harkat, Institute of Economic Analysis & Prospective Studies (IEAPS), Al Akhawayn University, Ifrane, Morocco

http://d.repec.org/n?u=RePEc:pra:mprapa:77218&r=ara

The youngest segments of the population are considered as the main engine of economic, social, and political change. Recent literature underlines the roles of youth in Arab countries and their contributions in conducting major changes. Thus, understanding the characteristics of the current young Arab generation are of prime importance. The latest contributions highlight major differences between new generations and their parents as they are influenced by the Information Technologies (IT), social networks, education attainment and knowledge economy.

The current research is a follow-up to the one focusing on the analytical description of the main variables that are likely to characterize the current era that is surrounding the newest generations (Driouchi & Harkat, 2017; Driouchi & Harkat, 2016, Harkat, Driouchi, & Achehboune, 2016a; Harkat, Driouchi, & Achehboune, 2016b).

This paper explores the causal links between a set of variables in 19 Arab countries (including GCC countries) using Granger Causality tests. This test enables the prediction of the causality between the variables in a sense that if x causes y, if x is able to increase the accurateness of the prediction and forecast of y using time series data that account for demographic, social, technological, and economic variables. The test is conducted for each Arab country separately.

Findings indicate that simpler models are obtained for GCC countries meaning that only few variables appear to be determining the behavior of the new generations. This means that sector policies would easily help in adjusting the welfare of new generations. More complex ones are for the non-GCC countries. This is explained by the difference in terms of the level of development between GCC and non-GCC economies implying that policies need to target more sectors to achieve the desirable outcomes. Even if each of the Arab economies has a unique model, policies should be oriented mostly towards the reduction of unemployment among youth as this latter seems to be the most common driver of both political and social variables, which aligns with the contribution of Harkat, Driouchi and Achehboune (2016a). With regard to other variables, each of the Arab countries should orient its policies towards the main factors that drive changes into their economies.

References:

Driouchi, A. & Harkat, T. (2017). Granger causality and the factors underlying the role of younger generations in economic, social and political changes in Arab countries. MPRA 77218.

Driouchi, A. & Harkat, T. (2017). An empirical descriptive analysis of the factors underlying the role of younger generations in economic, social & political changes in Arab countries. MPRA 77216.

Driouchi, A. & Harkat, T. (2016). Macroeconomic and school variables to reveal country choices of general and vocational education: A cross-country analysis with focus on Arab economies. MPRA 73455.

Harkat, T., Driouchi, A., Achehboune, A. (2016a). Generational gap and youth in Arab countries. MPRA 75834. https://mpra.ub.uni-muenchen.de/75834/1/MPRA_paper_75834.pdf

Harkat, T., Driouchi, A., and Achehboune, A. (2016b). Time series analysis & choices for general and vocational education in Arab economies. MPRA 74770.

Intertemporal CGE Analysis of Income Distribution in Turkey

March 15, 2017

By Aykut Mert Yakut and Ebru Voyvoda

http://d.repec.org/n?u=RePEc:met:wpaper:1703&r=ara

The effects of welfare payments on the labor market outcomes of recipients and the size distribution of income are subject of academics for decades. In the related literature, various country cases show that welfare payments render labor force participation and / or lower hours of work of the recipients. For the Turkish case, there are few studies on the issue although there are controversies on the welfare regime. In the last fifteen years, although number and variety of the programs have been increased and the total budget of such programs has been expanded, the main controversy about such programs have been emphasized the escalation of transfer payments in line with the election calendar and clientelistic and rich households-biased coverage. On the other hand, several studies for Turkey claim that these payments have played a corrective role in terms of income distribution and poverty alleviation, in spite of their small shares in total household income.

This study focuses on the effects of such programs on the size distribution of income in Turkey. To this end, an intertemporal dynamic equilibrium model with heterogeneous agents in a small open economy framework is constructed. One of the notable characteristics of the model is the inclusion of internal migration from rural to urban in the presence of endogenous labor supply decision of individuals. Moreover, this study is the very first attempt for the Turkish case since it extensively utilizes various micro-level data sets in the calibration process of households’ parameters.

The recent policy framework of welfare payments in Turkey is based on unilateral unconditional cash and in-kind payments which are paid as long as individual/household can prove her/its necessity. However, the government has been criticized due to budget allocations on social policies. Among the OECD member countries, Turkey, still has the lowest total social transfers to GDP ratio. The first policy experiment constructed in this study analyzes the effects of an increase in the share of government transfers in GDP by 20%. The expected but undesired outcome of such a policy change is its disincentive effects on the labor supply behaviors of informal workers and unskilled formal wage earners. The results of such an experiment are in line with the previous findings of the literature and indicate that the recent policy package is not sufficient to alleviate income inequality. Moreover, worsening position of households who hold the majority of capital implies a political-economy aspect of such a change in the composition of government expenditures.

As a second experiment, a modified version of the employment subsidy program designed and implemented in the aftermath of the global financial crisis of 2008-9 is simulated. This study, rather than treating all sectors homogeneously and reducing sectoral social security contribution rates uniformly as proposed by the program, assumes that the subsidy rates are endogenous and are functions of sectoral shares in total unskilled formal employment. The results reveal that migration inflows from the rural to the urban expand and the labor supplies of all households increase. The effect is the highest for the informal workers. On the other hand, the size distribution of income improves in favor of relatively poor households.

Sectoral Effects of Monetary Policy: Evidence from Morocco

March 11, 2017

By Charaf Eddine Moussir (Mohammed V University Agdal, Rabat, Morocco)

http://d.repec.org/n?u=RePEc:pra:mprapa:76488&r=ara

The effects of monetary policy on economic performance have long attracted the attention of economists and policy makers. In recent years, there seems to be a growing consensus among economists that monetary policy has an impact on the real economy, at least in the short term. The literature shows that monetary policy can have negative effects on sectoral growth and consequently on overall growth and that; different sectors of the economy react differently to monetary policy shocks (Serju 2003; Alam and Waheed 2006; Dal 2011). Therefore, it is necessary to know the sectors that respond first to a monetary policy shock and if the effects could be more important in some sectors than in others. This may provide pertinent information for economic policy purposes (Ganley and Salmon 1997). The empirical evidence on how the sectors react to monetary policy shocks is relevant about how to stimulate growth. Indeed, studies of sectoral analysis of the transmission channels of monetary policy in developing countries, in particular, indicate that tight monetary policy negatively affects agriculture and manufacturing, which are considered as the primary growth sectors for most developing economies (Serju 2003; Ifeanyichukwu and Olufemi 2012).

There is interest among researchers and policy makers in the effects of transmission of monetary policy on the real economy. Paradoxically, few works have focused on the study of the impact of transmission channels of monetary policy on aggregate growth by sector, even less for developing economies. The changes in monetary shocks on different sectors can occur due to the importance of a particular channel of the transmission mechanism for certain sectors and not for others. This relative intensity, in turn, depends crucially on the structure, the dependency and the availability of the bank credit, and the opening of a particular sector.

This paper investigates the sectoral effects of monetary policy in Morocco over the period 1998Q1 to 2014Q4 using a VAR model. The results of the analysis indicate that at the aggregate level a monetary policy tightening leads to a decrease in the overall GDP and price level. At the disaggregated level, monetary policy has disparate effects on the performance of the different sectors. The extraction industry, manufacturing, construction, hotels & restaurants, the financial and insurance activities are among the more sensitive sectors to monetary policy shocks. On the other hand, monetary policy innovations do not appear to have an adverse impact on agriculture and fishing sectors. This may be due to the structure of these sectors, which depend on a traditional organization (family structure, low use of bank loans). The preceding results imply that the interest rate channel plays a significant role in the transmission process in the case of Morocco.

Diversification des exportations et transformation structurelle au Maroc: Quel rôle pour les IDE1?

March 11, 2017

Par Safaa Tabit (Doctorante, Université Mohammed V Rabat-Agdal) et Charaf-Eddine Moussir (Doctorant, Université Mohammed V Rabat-Agdal)

http://d.repec.org/n?u=RePEc:pra:mprapa:76582&r=ara

Le débat sur le rôle de la diversification comme levier de développement économique a été marqué ses dernières années par un retour en force. Plusieurs raisons expliquent cette résurgence. La forte volatilité des prix de matières premières, associée aux crises des dernières années, a ralenti la croissance économique et a montré la forte vulnérabilité des économies nord africaines aux chocs et ce malgré leur faible niveau d’intégration aux marchés mondiaux, soulignant la nécessité de leur transformation structurelle (Nations Unies, 2013).

En effet, l’environnement économique international a connu au cours des dernières décennies des mutations profondes, à la faveur de la dynamique de la mondialisation. Il en a résulté une nouvelle topographie de puissances et de richesses, suite à l’émergence de nouveaux pays concurrents sur le marché mondial. Dans un contexte mondial fortement concurrentiel et en perpétuelle mutation, la recherche de la compétitivité est devenue un souci majeur et permanent aussi bien de la part des pays développés qu’en voie de développement. La question de la diversification n’est pas récente dans la littérature. Elle représente un enjeu majeur pour le développement économique. De nombreuses contributions économiques ont montré les avantages procurés par la diversification en termes de dilution des risques. Elle distingue deux formes de diversification des exportations: horizontale ou verticale[1]. Selon Taylor (2007), on parle de diversification horizontale des exportations lorsqu’il y a augmentation de la gamme des produits exportés, tandis que la diversification verticale se produit quand il y a une intensification et une sophistication des exportations existantes (Cottet N. & al, 2012). De même, Matthee & Naude (2007) décrivent la diversification horizontale comme une augmentation du nombre de biens et services exportables et la diversification verticale comme un changement de la structure productive d’une exportation des produits primaires à l’exportation des produits manufacturés. Le choix d’une option ou une autre dépend, toutefois, des priorités de croissance spécifiques à chaque pays, leurs dotations en ressources naturelles et leurs situations géographiques.

Afin de booster leurs exportations, les décideurs politiques ont tenté, entre autres, d’augmenter les flux des capitaux étrangers. Le lien positif entre IDE et performance des exportations est le résultat, essentiellement, de deux principaux canaux ; premièrement, les activités exportatrices des multinationales ; lorsqu’une multinationale produit des biens plus diversifiés que les firmes nationales/locales, ceci implique une plus grande diversification de l’offre exportable du pays hôte. Deuxièmement, les effets d’entrainement (Spillover effects) ; à travers le lien indirect avec les multinationales, les firmes locales acquièrent de nouvelles capacités ou des capacités plus avancées leurs permettant de produire et d’exporter des produits qu’ils ne pouvaient pas produire auparavant à cause d’un manque de capacités. Par conséquent, grâce à la diffusion des effets d’entrainement par des entreprises étrangères dans le pays d’accueil, les IDE peuvent stimuler la diversification des exportations (Alaya , 2012).

Ce travail a tenté d’identifier la relation existante entre flux d’IDE et diversification des exportations dans le cadre de l’économie marocaine sur la période 1980-2015. Les résultats de l’estimation, conduite par une modélisation en GMM, fait ressortir un impact positif des IDE et de la FBCF contrairement aux autres variables, en l’occurrence le revenu par habitant, le taux de change effectif réel, le taux d’inflation et la gouvernance. À la lumière de ces résultats, il serait intéressant pour le Maroc de s’orienter vers un régime économique favorisant la diversification par des mesures et des choix organisés et coordonnés. L’économie marocaine semble opérer un transfert vers des industries à plus grande valeur ajoutée. Ces dernières contribuent à l’amélioration des technologies et à l’accroissement de l’expertise technique du pays.

[1] On parle aussi de diversification extensive et intensive.

Where Does Economic Growth in MENA Countries Come From?

March 5, 2017

By Dr. Mohamed Sami Ben Ali (Associate Professor of Economics, Qatar University)

http://d.repec.org/n?u=RePEc:zbw:ifwedp:20174&r=ara 

Policy Brief:

Economic growth can be defined briefly as an increase in the level of output that an economy can produce. The literature on economic growth examines whether the sources of economic growth stem mostly from technological progress, physical capital accumulation, or human capital accumulation. Besides, it is a fundamental debate about a simple question: Why does rapid growth occur in some countries when some others cannot achieve such a performance? The main concern is to disentangle the contributions of capital accumulation and technological progress from this growth process.

The basic literature on sources of economic growth is an attempt to calculate the contributions of the various factors and the level of technology to the growth rate of the output. A pioneering work on economic growth is the study by Solow in 1957. The author uses a production function by connecting output to inputs that are capital and labor-based in physical units. Solow phrases any kind of shift in the production function as “technical change.” This study leads many further studies in the literature.

A recent study by Ben Ali et al. (2016) explores the sources of economic growth for the MENA region and contributes to the debate over whether they stem from technological progress, physical capital accumulation, or human capital accumulation. The study covers the period from 1970 to 2011 for 15 MENA countries namely: Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Malta, Morocco, Qatar, Saudi Arabia, Syria, Tunisia, and Turkey. The authors find evidence that economic growth stems from capital accumulation rather than total factor for all the MENA countries except Israel and Saudi Arabia. They also note that for the fast growing economies among the sample (Egypt and Turkey), the main source is capital accumulation, and the contribution of technological progress is unimportant. A similar interpretation is evidenced for Sudan and Morocco. For those countries, it is important therefore to raise savings and capital accumulation. For Iran, although the contribution of capital stock is very high, the growth rate of output per labor is low. Likewise, Qatar grows negatively although it shows a high contribution of capital stock. These results point to policies that focus on technological progress rather than capital accumulation for Iran and Qatar. Conversely, Saudi Arabia grows negatively although it shows a high contribution of technological progress. This result indicates the importance of policies on capital accumulation rather than technological progress for Saudi Arabia.

 Reference

Ben Ali, M. S., Senay A and Mert, M. (2016)Sources of Economic Growth in The Middle East and North Africa, in Ben Ali, M-S. (eds), Economic Development in the Middle East and North Africa (MENA), Challenges and Prospects, Palgrave Macmillan. New York.

Health and Inclusive Growth in MENA

December 31, 2014

By Randa Alami (Department of Economics, SOAS, University of London, UK)

http://econpapers.repec.org/paper/soawpaper/188.htm

Policy Brief:

Since the 2001 Sachs report on Macroeconomics and Health, health has been re-instated as key ingredient of growth and development. Together with the momentum generated by the Millenium Development Goals (MDGs), this led to the adoption in December 2012 of a UN Resolution on Universal Health Coverage (UHC), which is about the provision of affordable, accessible and good quality care for all.  Both strands emphasised the need to go beyond national health outcomes to look at the building blocks of health systems, which in turn, determine fairness in access and delivery, and shape the financial risks associated with ill-health. Indeed, poor health can compromise the acquisition of both human capital and income, thereby perpetuating poverty. A key implied policy direction in working towards UHC is a prioratisation of health equity, because of its implications for social justice, poverty reduction, and satisfying unmet needs. By the same token, there is a considerable overlap between UHC and inclusive growth, since ensuring good health for all is a pillar of an inclusive growth process.

This paper explores examines health and health policies in MENA (excluding the GCC countries) in this context, arguing that UHC is key strategy for achieving inclusive growth and social justice in the region. It starts by taking stock of existing sectoral evidence on key health outcomes and structural features of current health systems, debunking the myth that MENA displays consistently good health outcomes, and questioning the validity of the simplistic policy conclusions based on these. In fact, outcomes are characterised by severe disparities and inequities in terms of income, locality, and gender. Large swathes of the population, particularly poor mothers, are barely achieving what rich quintiles achieved ten years ago: they are unlikely to do so if current policies continue. Equity in delivery and access are further compromised by the systems’ focus on often mediocre tertiary care centred on large urban centres. They are still described as mismanaged, inefficient, and fragmented (between levels of care, civilian/military, insured/uninsured).

Sectoral literature also documents a clear shift to the provision and access to healthcare on the basis of the ability to pay, which in turn contributed to forgone healthcare and high OOP. Indeed, a striking feature of the region is that citizens have been shouldering most of the financial burden of healthcare. The high levels of OOPs are mostly driven by: the neglect of primary health care, privatisation, poor coverage, and the inability to respond to the epidemiological transition. This burden means that, far from being eased by a golden social contract, poverty and inequality in MENA are seriously under-estimated. Another deficiency of this contract which contributes to high financial risks due to healthcare, is that health insurance is mostly contributory and linked to formal sector employment, or restricted by a lack of coverage and limited packages.

Underpinning this situation has been a policy of more or less explicit neglect of the public sector (be it in terms of financing, equipment, or staff), the macro-reflection of that being the fact that public health spending and budgetary allocations in MENA are below the norm for middle income countries. Consequently, the key policy message is that governments and public health sectors need to play a greater role, particularly in funding and covering the healthcare needs of the poor and the vulnerable. This message and the general relevance of UHC for health policies in MENA has been advocated by regional specialists for some time. Therefore, arguably what is missing is a political will and long-term vision that go beyond piecemeal solutions to sectoral problems. By the same token, achieving inclusive growth in MENA requires a political commitment to put development and social justice back onto the agenda, and to tackle the political exclusions that led to regional, income, and health inequities in the first place.  Using Amartya Sen approach, health problems in MENA, particularly health inequities, are not about medical conditions, but about the lack of political engagement and inadequacies in social policy.

 

International Conference on the Levers of Durable Performance in the Middle East and North Africa (MENA)

November 7, 2014

CALL FOR PAPER

International Conference on the Levers of Durable Performance in the Middle East and North Africa (MENA)

4-5 May 2015

http://www.esc-pau.fr/recherche/mena/callforpaper.html

Pau Business School (ESC Pau) is pleased to invite proposals for its International Conference on the Levers of Durable Performance in the Middle East and North Africa (MENA), to be held on the 4th and 5th of May 2015 in the historic city of Pau, France.

The conference is jointly organized by IRMAP ESC Pau.

The conference is open to professionals, researchers, PhD and Post Doc students and participants from government and public institutions.

Estimation of the net effects of remittances on poverty and inequality. Evidence from rural southern Morocco

October 14, 2014

By Jamal Bouoiyour (Université de Pau, CATT, France)  and Amal Miftah (Université de Paris Dauphine, LEDa, France)

http://EconPapers.repec.org/RePEc:pra:mprapa:55686

Policy Brief: 

Poverty alleviation is widely acknowledged as the ultimate objective of any development policy. Thus poverty assessments and the characteristics of those who are poor have been the main analytic tools for government and policy on poverty. As other developing countries, Moroccan government has taken significant measures in the area of  human and social development. One of the leading measures bears on the launch of National Initiative for Human Development (NIHD) in 2005, targeted at disadvantaged people and geographical areas. Such measures have helped to achieve success the ambitious goal of reducing significantly the number of its population living in extreme poverty gradually[1].

In Morocco, as in many developing countries, recent decades have been marked by unprecedented increase of migrants’ remittances. These financial flows provide a steady income for many Moroccan households. We can imagine that, in this context, remittances from international migrants can contribute to the economic inequalities reduction and improve the living conditions of its beneficiary households. This study assesses empirically these effects by focusing on rural households in southern Morocco. The underlying idea is to imagine a hypothetical scenario without migration of a family member. The average expenditures per household are computed for two cases: the counterfactual situation without migration and the real situation with migration. The data used for this study come from a survey conducted in southern Morocco in 2009. This study looks at the evaluation of the impact of remittances on inequality and poverty in Morocco. The data were collected in 18 communes located in rural and less developed areas of Souss-Massa-Draa, a region with a long history of international migration (the figure in Appendix gives the geographical location of the region). Communes were selected according to certain criteria such as the rate of international migration, the geographic distribution of groups, the socio-ethnic factions, and the access to basic services. Survey was conducted with households collected randomly in these communes. In total 598 household heads were interviewed, providing information on 4,870 family members.

The empirical results of this study show that migrants’ remittances significantly reduce the number of poor households. They also prevent vulnerable households from falling into poverty. In other words, remittances reduce the vulnerability of households to poverty, i.e., the ex-ante risk that a household will, if currently non-poor, fall below the poverty line. Of course, even if migrants are not all from poor families, their remittances may have an indirect effect on the poor through a knock-on effect of spending (Taylor, 2001).

Furthermore, this study reveals the existence of high income inequality and unequal distribution of wealth. Significant differences were also observed in relation to the reception or not of migrants’ transfers. Our results show that migration and remittances have increased income inequality compared to the counterfactual scenario of no-migration. This result confirms the findings of research using this type of empirical approach (Barham and Boucher, 1998 in particular). However, the naïve analysis of the income distribution of households (Adams’s approach) shows that with transfers, income distribution is less uneven.

More specifically, we noted that despite its considerable efforts, Morocco could not progress in reducing income inequality. Remittances cannot replace proactive public policies which aim to fight this scourge. We are therefore entitled to ask about the role of Moroccan government in the income distribution and if recent events in some MENA countries (revolts and change political regimes) should encourage Moroccan officials in the implementation of coherent and long term policies.

Références: 

Barham B, Boucher S (1998) Migration, remittances, and inequality: estimating the net effects of migration on income distribution. Journal of Development Economics Vol. 55 :307-331.

Taylor J.E (1999, 2001) Migrations : nouvelles dimensions et caractéristiques, Causes, conséquences et répercussions en termes de pauvreté rurale. Alimentation, agriculture et développement rural, Problèmes actuels et émergents en matière d’analyse économique et de recherche de politiques, Stamoulis, K.G (Ed.), FAO – ISBN 92-5-204566-X. 1 webpage.

[1] According to statistics from High Commission for Planning (HCP), between 1980 and 2007, poverty at U.S. $ 1 (PPP) per day per person has been virtually eliminated (0.6% in 2007).

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.