11 MBA Students Project Topics

1.       Internationalization of the Ethnic Food Industry

Abstract

Small companies from newly emerging markets are usually limited in their growth strategy by lack of market in their own countries. This is mainly due to low purchasing power of the population in their countries. Therefore the companies seek possibilities to grow by establishing themselves on foreign markets. However, due to insufficient resources, the SMEs are not in a position to do enough research on the nature of the new environment they will be faced with. As a result, they do not actually know how to position themselves strategically in terms of marketing efforts. The purpose of this thesis is to investigate the ethnic food segment of food industry and to analyze how a small foreign company manufacturing ethnic food can position itself strategically on the Swedish market. We have used a South African SME -- Ethnic Cuisine Investment Ltd (ECI) as our case company.

In order to analyze the elements of importance in ECI’s strategy, we briefly investigated the macro-environment in order to identify the drivers in this industry. However, our main focus is on the ethnic food segment of food industry, in order to understand its logic. We also scrutinize the firm’s resources and capabilities, so that we can identify the gaps that need to be filled in order for it to succeed in the Swedish market. The complexity and dynamism of the Swedish mrket for ethnic food poses several challenges to a small foreign actor. Thus to act efficiently, the company will need to be very committed and goal oriented. The success of the small actor entering this market will depend on how well the company can organize itself in order to achieve effectiveness in its operations.

SMEs without enough financial resources tend to diversify through alliances with distributors or manufacturers in the new markets. Through such alliances, the SMEs hope to benefit from the other partners’ customers and market experience. Apart from this advantage, SMEs particularly those from emerging markets stand to benefit from the fact that they are helped by their partners in their attempt to penetrate mature markets in the developed world by drawing on the experience accumulated by the partner. Furthermore, alliances between the SMEs from the emerging market and partners from the developed world benefit the two in that, they are able to enhance their national image by developing an international image. The overall strategy pursued by the SMEs on entry to the new market in this case is very much dependent on the distributors positioning strategy. The distributor’s positioning strategy dictates the key elements that the SME involved should focus on in order to survive the challenges facing the two partners in the business environment.

The Food Industry – Global Perspective

Although our thesis will focus on the ethnic food in Sweden, it has to be understood that this is just but a segment of the food industry. Thus, there is a need to first understand the trends and driving forces in the food industry in general within the global perspective as a background to our case. The activities involved in this industry includes; food processing, manufacturing, distribution and food service, all of which involves different activities aimed at creating value demanded by the final consumer. In this industry today, there are several forces that are acting on and within each stage of the value chain. Such forces include issues related to food safety, production technology influences, and the desire for increased profitability, which has led to mergers and acquisitions.1 The diagram below shows the value chain in the food processing sector and the forces that are evidence in every sector in the chain.

2.       Financial Contagion in Emerging Markets

Abstract

The fact that there were several similarities between the financial crises in Mexico 1995 and Asia 1997 makes it interesting to examine whether a model that explained the Mexican crisis also can be applied on the Asian crisis. Thus, this thesis aim is to do a quantitative study of nineteen emerging market economies with a model consisting of three explanatory variables: appreciated real exchange rate, weak banking system and scarce foreign exchange reserves. To the best of my knowledge, a follow-up study of this model has never been made before. Contribution: if the model does a good work explaining also the Asian crisis, it may be used by the market (e.g. international investors and currency traders) as an early warning indicator
of future contagious crises in emerging markets. However, by running regressions I found that the R2values are low (adjusted R2are negative) and neither of the null hypotheses are significant at ten percents level. The conclusion is hence that the model does a poor job explaining what happened in Asia and that further research is needed in order to find a model which can explain patterns when financial crises in emerging markets becomes contagious due to creditors withdrawal of capital.

Prior to the Mexican crisis in 1995 the word contagion had not reached out to the majority of politicians and economists and did therefore only constitute a small part of the economic literature. That changed however, when the Asian crisis 1997 and Russian crisis 1998 showed the very same patterns. Hence, over a couple of years three major financial crises put large parts of the developing world under severe financial distress. The common characteristic between these three rises was the fact that investors decided to withdraw capital causing the countries to experience balance-of-payment crises and in addition, attacked currencies. This phenomenon was named contagion
.
One of the first explanations given subsequent to the Mexican crisis discussed whether current account deficits could be the main driver. That could not be applied for Mexico however, since they had not suffered from neglected financials in the past. Other solutions to the phenomena thus started to arise, implying that the initial literature became quite sprawling. Nowadays economists are more accustomed to these kinds of crises and the literature has thus also become fine tuned as a distinction between pure contagion and fundamental based contagion is agreed on.

Method

The rationale behind the selection of the Asian crisis as follow up study depends mainly on the similarities that prevailed between the South American (Mexican) crisis and the Asian crisis but also on my owninterest in learning more about Asian history. The theoretical frame of reference contains mostly of articles written by internationally wellknown economists which are commonly referred to when discussing contagion. I have selected the different theory angels based upon this aspect. I have not been critical towards the actual conclusions made in the different models and studies which I am aware of. I have also accepted every theory as having an equal probability of being true. Whenever I have found a contradiction to any of the theories, I have presented the opponents view as well.

The rest of this thesis is outlined as follows; next section contains the theory part whichbegins with a discussion regarding the definition of contagion followed by a number of contagion theories with a distinction between fundamental based contagion and pure contagion. The Asian crisis is discussed in section three with special emphasis on the common characteristics among the five worst affected countries and similarities between the Mexican crisis and the Asian crisis. A caption on the relationship between a governments foreign exchange reserves, capital withdrawals and a currency’s devaluation is addressed as well. In section four I conduct my own study based on the model used by Sachs et al [1996] with a discussion regarding the obtained results as closure in part five.

3.       Monetary Policy in a Bipolar International Monetary System

Abstract

The study deals with the international transmission of economic shocks, their consequences for exchange rates and the reconciliation of exchange rate management with monetary policy. The theoretical part of the study consists of a mainstream model of two large, interdependent economies with special emphasis on the effects of various shocks on the inflation rate and exchange rate. The empirical application uses US and German data to shed light on the exchange rate implications of the choices faced by European and US monetary policymakers. The results suggest that the inflation rate is dominated by domestic supply shocks in both economies studied. When such shocks raise the domestic price level, the currency also depreciates. This aspect of the results means that, from a single-country perspective, monetary policy measures aimed at stabilizing the price level can be compatible with stabilization of the exchange rate as well. However, from the viewpoint of the other country, a conflict emerges between exchange rate and price stability. This difference causes a dilemma in international monetary coordination. Allowing that exchange rate considerations affect monetary policy, the situation is further complicated by the fact that exchange rate volatility seems to be for the most part independent of the economic fundamentals included in the study.

4.       The Modern Firm’s International Expansion

Abstract

Process- and stage models outline certain steps which the company follows when expanding internationally. These models were primarily developed already in the 1970’s but have proven to be surprisingly resilient in spite of significant changes in the economic environment. New theories fail to give comprehensive insight into the international expansion of modern firms. This thesis describes a firm’s international expansion in the 21 st century, as well as determines the reason for the process- and stage models still receiving significant attention. According to new theories and our case study, Acne Jeans, the modern firm will internationalise early and fast. Hence, the process- and stage models fail to explain the short time it takes from a company’s founding to its internationalisation, as well as the speed at which the internationalisation takes place. Some of the steps are also out-dated. Yet, the models do prove to have some explanatory power.

International trade has been the subject of much attention and trade has been expanding fast over the last few decades. This has led to an increase in many forms of international business. International trade is believed, and has been proved, to bring with it great potential benefits for most parties involved, such as for the nation’s economy and for the firm itself. Consequently, public policy makers have shown significant interest in the international development of firms. And the managers of the individual firms have tended to focus on exporting and internationalisation, since international activities can provide a useful platform for the exploitation and exploration of competitive advantages.

The firm’s international expansion has been of great interest and it has also been the focus of much prior research. However, most models of this phenomenon were formulated several decades ago. The most prevailing ones are the process- and stage
models developed during the 1970’s. None of the more recently written theories capture the internationalisation process of a “modern” firm in an entirely satisfactory way. They are much more focussed on describing the evolvements in the international economic environment than outlining a description on how firms actually behave when going international. In fact, these papers neither provide comprehensive insight into the actual behaviour of the moden firm, nor do they give an explanation to the fact that the process- and stage models are still widely used

Purpose and General approach

Having studied the evolution in the global economic environment and the developments in theory we are curious to see how well the process- and stage models describe a firm’s internationalisation process today. The purpose of this thesis is to determine how a modern firm’s international expansion can be described in the 21st century as well as establishing the reason for why the process- and stage models are still widely used for describing firms’ internationalisation processes. The approach chosen for this thesis has been to start by determining the major changes in the economic environment. Through an extensive review of research we have formulated developments in the environment, both on the macro level and on the firm level. The review of changes in the economic environment is followed by a description of how economic theory has developed during the course of the last few decades.

Following this section, we establish how the develpments in the economic environment have given rise to a new type of multinational corporation. In the next section we look into the process- and stage models, which are the most prevailing models to date describing the firm’s international expansion. They were primarily developed and formulated during the late 1970’s. Two of the most well known models are Johanson & Vahlne’s Uppsala Model, formulated in 1977, and a stage model published by Lars Håkanson in 1979. These models are indeed still widely used. The Uppsala model is for example used by Andersen (1993), Coviello & McAuley (1999) and Andersson (2000). And Håkanson’s model is referenced in Bagchi-Sen (1995), Westhead et al. (2001) and Ettlinger (2003), among others

5.       Trade Patterns in Europe

Abstract

This thesis investigates in what way trade flows in Europe have been altered and differ for countries belonging to a preferential trade agreement as well as a common currency area. More specifically, how exports among the European countries are affected by memberships with the European Union and the EMU. A total of 72 countries have been chosen which represents the main trading partners between the EU and the rest of the world. Out of these 72 countries, 25 represent EU members which include 12 EMU member countries. The econometric analysis employ a gravity model with 18 variables in order to determine their impact on trade flows. This is done through a regression with a log-log equation where the dependent variable is export. The other variables included are chosen to explain export flows among the EU members as well as their trade with EMU countries and the rest of the world. Furthermore, variables representing trade affinities are included to determine whether or not they have a significant effect on trade.

The regression is divided into four time periods in order to more easily determine how the trade pattern in Europe have altered from the establishment of the EU and the EMU. The first time period represent an early state of EU membership, the second a mature state of EU membership, the third when EU was reformed and the fourth an early state of EMU membership. The regression results illustrate that the majority of the selected variables are significant but most importantly that the trade affinity variables are proven to have an impact on trade flows. The results also show that trade has increased and that in the case of EU membership it is more profitable to join than to remain outside. Moreovr, the result show in particular that countries that belong to the EMU have a stronger orientation of their exports to the rest of the world then other EU countries. For the latter, the European market is of prime importance.

As some of the European Union members have chosen not to convert to the EMU, further questioning have emerged on its importance for the whole union. By comparing the trade flows of those who have chosen not to convert to the EMU with members who have, this paper will hopefully bring some light on export patterns of countries being EMU members and other EU countries in comparison with world countries. Furthermore, the analysis stretches over a time period of 1982 up to 2005 which have been carefully selected in order to be able to compare trade flows of EU members in their trade with other EU members as well as with other countries for each period, where the number of EU members increases for each additional time period.

Presentation of the Problem

This paper aims to analyse what the effects have been on trade for the European countries after the establishment of the European Union. Furthermore, we wish to see if trade patterns have been affected by the introduction of EMU in the European countries. We hope to be able to draw conclusions on to what extent the European countries may have gained from the continuous integration through the European Union as well as the EMU. To be able to see these effects we have chosen to look at four time periods. Period 1 will represent 1982-1984, period 2 represents 1989-1991, period 3 corresponds to 1996-1998 and the final period 4 represents 2003-2005. These time periods were included in order to investigate how trade flows within the European Union have changed over time. Furthermore, the analysis is expected to show changes in trade flows by member countries converting to a common currency. More specifically we have chosen to look at the member states in 2005, commonly known as EU25 (See Appendix 1). Also, EU’s 72 main trading partners in the world have been chosen in order to give a better estimation of the EU members trading. For a list of all included countries in the regression see Appendix 2. The analysis of our regressions will investigate whether or not the European Union and the EMU have had a significant impact on trade patterns in Europe.

The purpose of this paper is to test how trade flows among the European countries have altered due to the expansion of the European Union. The analysis also compares how export flows differ between EU- and EMU-members.

6.       Modelling Inflation in China

Abstract

We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forward-looking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.

China's rapid growth and ever-increasing economic importance imply a need to understand its inflation developments. While some papers have recorded the ability of the New Keynesian Phillips Curve (NKPC) to capture the inflation process in the Mainland, less attention has been paid to differences across China's provinces. This is important, as aggregate figures mask significant differences in economic performance and different degrees of market development across regions, and institutional differences between provinces may impact the link between output growth and inflation. Table 1 in the Appendix presents some key economic statistics for China and its provinces for 2005.1 Moreover, the effectiveness of monetary policy depends on the role of inflation expectations in determining inflation, which is of importance for conducting policy in a major economy with regional differences such as China.

One of the stated aims of China’s gradual transition towards a more flexible exchange rate regime is to develop and implement an independent monetary policy framework effectively, which could in the future also evolve towards adoption of some form of price stability objective. In this regard, differences in the inflation formation process across Chinese provinces matter because they will directly hinge on the effectiveness of monetary policy. Furthermore, inflation differentials between provinces may reflect price adjustment processes between regions which are necessary and desirable from a regional convergence perspective. However, if differences in inflation formation processes are persistent, this might be a reflection of persistent structural rigidities that reduce some region’s capacity, relative to others, to adjust to shocks. Previous literature has reported evidence of substantial trade barriers between the different provinces in China in the past (see Young, 2000). Such measures may prevent price arbitrage between the provinces. Moreover, if regional inflation developments are unrelated to the output gap and marginal costs, then there is little room for monetary policies to anchor inflationary expectations and provide a favourable environment for inter-regional economic growth convergence. Structural policies that target regions where the inflationary process is less responsive to variables that respond to monetary policy might then be called for.

About the data

In our analysis, we use data for 29 Chinese provinces provided by the National Bureau of Statistics (NBS) in their Compendium of Statistics. Chongqing and Tibet are omitted due to data availability. The periodicity of the data is annual, starting in 1978. Chinese economic reforms were initiated at that time in the rural areas, when price and output decisions were liberalised in agricultural markets. Foreign trade and investment were also allowed by the new "open door" policy in 1978 although these were strongly encouraged only in the 1990s, when current account transactions were made fully convertible and tariffs on imported inputs were reduced. We acknowledge the fact that there have been structural changes in the economy during the reform period, which may pose a problem for the parameter stability of an aggregate supply relation. Nevertheless, including observations from 1978 onwards is imperative in order to have adequate observations for empirical analysis, and high-frequency price data for Chinese provinces is either non-existent or notably volatile. Finally, we tackle the stability issue by examining recursive estimates of coefficients for the output gap and inflation rate.

7.       Monitoring and Market Power in Loan Markets

Abstract

Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy. We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks. We find evidence that banks’ investments in branch networks and human capital (personnel) contribute
to information acquisition but not to market power. We also find that managing customers’ money transactions enhances banks ability to control their lending risks.

Whether banks are engaged in one or the other activity may have significant consequences outside the industry itself: a large literature suggests that banks’ (in)ability to solve informational problems affects the severity of the effects of macro-level shocks (eg Greenwald and Stiglitz 1993, Holmstrom and Tirole 1997). It is therefore critical to know whether, and through what mechanisms, banks collect and process information. There exists indirect evidence that banks are indeed in the business of acquiring information.3 The main purpose of this paper is to provide a test of the PHDQV by which banks acquire information. A common feature of information acquisition and market power is that they are both likely to require fixed investments (but see Petersen and Rajan 1994 and section 4 below). Notwithstanding recent investments in electronic banking, commercial banks' most obvious of such investments are those in branch networks and employees' human capital. We argue that investments in branches and human capital can serve two basic purposes: information acquisition and/or market power. Information acquisition requires personnel who are able to collect and analyze information, and investments in human capital increase these abilities.

After presenting the two theoretical models, we build an econometric model that encompasses both and test the models’ predictions using data from Finnish cooperative banks. These banks are small local banks that operate in geographically distinct, non-overlapping markets. They share several common features like ownership form and a quasi-central bank. As a group, they have by far the largest branch network, suggesting that they have made fixed investments. Although these banks share many features and institutions, they operate independently.

The Data and Market Environment

Currently, partly as a result of the severe economic crisis in Finland in the early 1990s, the Finnish banking market is dominated by a few banks/banking groups, one of which consists of over 250 local cooperative banks. Our sample covers almost all of these banks. The other traditional group of local banks, the savings banks, were the most prominent victim of the banking crisis and have been dramatically reduced in size as a consequence of a) a large merger between them and b) a splitting of the merged bank between the remaining banking groups in 1993. As a result of mergers, the three main banking groups in Finland consist of the group of cooperative banks, which we focus on here, and two commercial banks operating on the national level and having a nationwide branch network.

Several studies (eg Koskenkylä and Vesala 1994, Nyberg and Vihriälä 1994, Davis 1995) describe the events before and during the crisis, so we will offer only a synopsis here. The volume of lending grew very rapidly, at times by over 30% p.a. in the late 1980s. The growth was partly due to financial market liberalization that took place in the mid-1980s and partly due to an economic boom and lax monetary policy. The boom ended in a collapse of asset values, including real estate, which was a prime source of collateral, and the economy shrank by 8% in 1992 - 1994. Since then, the economy has been growing. The government bailout of banks has officially been estimated to cost approximately FIM 50 billion. Importantly for us, not a single bank was allowed to fail; hence sample selection is not an important issue.13 Nonetheless, the crisis may affect our results and so we check the robustness of our empirical results in this respect.

A comparison of the nationwide branch networks of different banking groups (see table 1) reveals that as a group the cooperative banks have by far the largest branch network.14 It is clearly larger than that of the other group of local banks, the savings banks. The size of the branch network of commercial bank Merita is roughly two thirds or less then that of the cooperative banks. This supports our implicit assumption that these are banks that have made (larger) fixed investments

8.       Importance of Human Capital in Export Performance

Abstract

The purpose of this thesis is to analyze the effect of human capital in Swedish export. Human capital is here expressed as the number of employees in the private sector per municipality with university education of at least three years. Two regression models were tested with aggregated export value/municipality and export value per kilo/municipality as dependent variables. Human capital as well as the total accessibility to R&D was assumed to have a positive impact on the Swedish export performance. During the last decades many economists have attached great importance to education, knowledge and investments in R&D. Sweden is in general abundant in human capital and have also several world leading companies characterized by knowledge intensive production and export.

According to the Product Life Cycle Theory, Sweden should focus on the first phase that requires high input of human capital and product competition to maintain the competitiveness in the international market. The results indicate as expected that the access to human capital as well as accessibility value per kilo. The assumption about human capital being even more important in high value export could not be confirmed by the results. Innovation promoting investments together with continuous efforts to improve innovation nets and interaction possibilities are presumed to be important factors for Swedish competitiveness also in the future.

The increased importance of human capital is most evident in the well developed economies where the structure has undergone considerable changes since the 1980’s. According to Romer (1990) the output per worker increase that characterizes the western world during the last decades is explained by both technological progress and a more effective labor force. Some economists stress that a well functioning higher educational system is one of the most important elements of the modern economies. Not only because of the development and growth in the long run but also because of the necessity of being competitive in the globalized world and international market of today

Human capital is an important factor when it comes to adopting to new techniques and also for new innovations which are necessary in the export orientated nodes of Sweden to preserve the advantages and to be competitive in today’s global markets. Sweden has in general a high number of educated workers but the differences between both sectors and municipalities are significant.

Human Capital and International Trade

Pioneers like Schultz and Becker developed the Human Capital Theory by emphasizing the importance of human capital in economic growth in the early sixties; it has been a frequently investigated field of research ever since. Schultz refers to education as an investment in man since the consequences (referred to as a form of capital, and therefore called human capital) becomes inseparable from the individual receiving it (1960). His work can be called a first step to an analysis of human capital and its impact on economic growth. Gary Becker was the first one to analyze the rate of return of investment in human capital from a general viewpoint (1993). Becker has realized a multitude of studies including human capital, which has made him the economist strongest associated with the concept.

When it comes to technological improvements and innovation, import plays an important role in the development process. The import stimulates the incentives to create new products and to improve the already existing ones. Within complex and differentiated product areas one can often find intra-industry trade where the imported and exported products are from the same category (Johansson 1993). Paul R. Krugman states in his “Rethinking international trade” (1994) that international trade stimulates innovation and yields a higher rate of return on the innovations than what would have been possible for any innovating economy alone. He mentions the basic Shumpeterian framework describing firms’ willingness to invest in knowledge, which in turn allows them to establish a temporary monopoly position until the knowledge becomes public. Meanwhile, the technology continues to develop by the innovators, creating new monopolies, and so the economy continues evolve. Barro (2001) emphasizes the importance of workers with high educational level as an important factor when adapting to new advanced techniques from leading countries. He claims this form of human capital (especially at the secondary and higher levels of education) to be complementary with the new technologies and therefore significant in the “diffusion of technology”.

9.       Multiple Exchange Rate Systems

Abstract

The response of Central Banks to swings in capital flows is an area within international finance that has received a lot of attention because of the impact such swings may have on macroeconomic performance. The imposition of capital controls is one way to deal with capital flow volatility. The discussion of their effectiveness has sparked an ongoing debate (Edison, Klein, Ricci and Sloek, 2002) in academia and in policy circles.

This chapter looks at a special case of capital controls: multiple exchange rate systems. Their imposition has been a policy instrument used to stop capital outflows and to avoid BOP crises. Recently Argentina (2002) and Venezuela (2003) have implemented multiple exchange rates in an effort to stop capital °ight and to prevent financial crises, in situations where a unified devaluation is not a viable policy option, because high pass-through and liability dollarization imply that a unitary devaluation would lead to high inflation, deteriorating balance sheets and bankruptcies; and where defending the currency is also not an attractive option due to lack of reserves or concerns that rising interest rates will depress economic activityand also hurt firms' profitability as debt service increases. These side effects make multiple exchange rate systems attractive, because they preserve the stabilization role of monetary policy and they also might stop capital flight without having an in°ation spike. Multiple exchange rates segment the foreign currency market so that different exchange rates apply to di®erent types of transactions. When multiple exchange rates are in place, the government sets an offcial or preferential exchange rate for some -or all- current account transactions, and creates a parallel exchange rate at a higher value1 for capital account transactions. So, if there is a run against the local currency or if there is a shock to the capital account, the parallel rate depreciates automatically, without a®ecting the domestic price of imports, and without forcing the Central Bank to lose reserves or increase interest rates.

Nevertheless, the impact of multiple exchange rates on macroeconomic performance has not received full attention in the literature. Most existing studies look at macroeconomic performance and capital controls without paying attention to their simultaneous determination3. Moreover, not all capital controls are created equal. Some policies target capital in°ows while others restrict capital out°ows.

Multiple Exchange Rates and Capital Flows

The benefit of free capital mobility is one of the most controversial and unsettled issues within the international finance literature. Theory mentions many benefits from having an open capital account. For example, Prasad, Rogo,Wei and Kose
(2004) distinguish between direct and indirect benefits from inancial integration. By direct benefits they list \the augmentation of domestic savings, reduction in the cost of capital through better global allocation of risk, transfer of technological and managerial know-how and stimulation of domestic financial sector development". By indirect benefits they consider the promotion of specialization, commitment to better economic policies and signaling".

However, the authors also remark that is has not been possible so far to establish an empirical robust relationship between financial integration and economic performance. But all that glitters is not gold. Second generation models of currency crisis predict that it is possible that countries may suffer capital out°ows or currency crises, even if they have strong fundamentals, raising the issue of potential threats from not having some kind of capital controls. Because of capital market imperfections (like asymmetric information), foreign investors may pull their investments out rom a country, triggering a crisis, even if macroeconomic fundamentals are sound. The literature also shows that herd behavior can make things even worse (Gale (1996)). For example, the contagion literature shows that the financial channel may become important in spreading shocks from one country to another

10.   The Macroeconomics of Rare Events

Abstract

People in developing countries are more often affected by rare events, such as natural disasters and epidemics, than people in developed nations. Furthermore, the intensity of these events is usually higher in poor countries. Among policymakers, these rare events and other external shocks, such as terms-of-trade fluctuations and changes in international conditions, are often explicitly or implicitly blamed for the bad performance of growth. Do these rare events affect economic growth? Are the frequency and intensity of these rare events helpful in explaining the gap in income between rich and poor countries? The answer to this question is important not only for evaluating policies aimed at preventing these events and mitigating their consequences, but also for understanding the reasons why some countries are rich and some poor.

Although there has been a steady increase in the number of researchers tackling these questions, the effects of rare events on economic development and long-run growth remain unclear. There are some studies reporting negative effects while others report no effect or even positive effects. The purpose of this dissertation is to show that these seemingly contradictory findings can be reconciled by exploring the effects of disasters on growth separately by type of disaster. This study examines
the long- term economic impact of natural disasters and epidemics and shows that different types of rare events (natural disasters and epidemics) appear to be associated with different patterns of economic vulnerability ad so entail different options for reducing risk.

A few main conclusions emerge. Rare events significantly affect economic development but not always negatively, and differently across types of disasters and economic sectors. Hence, in order to understand and assess the economic consequences of natural disasters and epidemics and the implications for policy, it is necessary to consider the pathways through which different types of events affect economic development, the different risks posed, and the ways in which economies can respond to these threats.

Conceptual Framework

This section lays out the conceptual framework used to interpret our empirical findings in the following sections. The presentation is divided in two. First, I discuss how to think about the different implications natural disasters may have for economic development. Second, I present a simple two sector model of growth than captures a few of the most important channels through which natural disasters affect growth. From a theoretical point of view there are various models that could rationalize how different shocks (natural disasters) affect economic growth in the medium to longrun. Some natural disasters undoubtedly have a negative short term impact on GDP, and many do affect growth negatively in the medium to long term. For example, droughts can cause heavy crop and livestock losses over wide areas, often affecting several countries simultaneously, as happened in southern Africa in the early 1990s.

Extreme droughts may persist, lasting a few years. Such events have implications not only for agriculture but also for other water related, hydro logically sensitive sectors of an economy, such as hydroelectricity and domestic water supply Disasters may also affect long-run growth through increased indebtedness. Larger fiscal deficits, generated by the need to respond to natural disasters, have potential long-term development implications, primarily relating to the opportunity cost of future debt servicing and repayment costs. Disasters can exacerbate external debt pressures to the extent that they destroy infrastructure and other assets funded with outstanding external loans. Benson and Clay (1998) show that droughts generate big fiscal imbalances. Five of the six economies analyzed in their paper showed a sharp increase in government borrowing in response to drought

11.   Public and Development Economics

Abstract

Economic theory emphasizes the importance of information for the efficiency of markets (Stigler, 1961; Brown and Goolsbee, 2002). Accordingly, reductions in information search costs are expected to enhance market effectiveness. Recent advances in telecommunication technologies (TC) have made information transmission extremely cheap in developed societies. However, in the context of isolated communities in developing countries, TC are still far from being universally available. Therefore, interventions providing new access to TC in such societies provide an ideal opportunity to assess the impact of improved information accessibility on market performance. Furthermore, if market effectiveness is improved with new TC, it becomes interesting to assess how this improved market performance influences household decisions such as the
utilization of child labor and schooling. Accordingly, the purpose of this paper is to shed light on how the introduction of payphones among rural villages in Peru affected agricultural profitability and the utilization child labor.

Previous literature has studied the effects of TC using the introduction of cell phones as exogenous shocks. For example, Jensen (2007) analyzed the impact of cell phones introduction among fishermen in the Indian state of Kerala. The results show that the adoption of mobile phones was associated with a dramatic reduction in price dispersion, the complete elimination of waste, and near-perfect adherence to the law of one price. The mechanism behind such results is that fishermen started using the cell phones to gather information regarding markets with better prices (in short supply) while in the sea. Therefore, they started to go directly towards these markets to sell their catch and, as a result, prices were equated across markets and market clearing resulted in eliminating the waste coming from unsold fish that was common before cell phone availability.

In the same vein, Aker (2010) analyses the effects of cell phone introduction in Niger. She focuses on grain markets and suggests that cell phones reduced price dispersion across markets by 6.4 percent and intra-annual price variation by 12 percent. Furthermore, the study finds greater impacts in market pairs that are farther away and for those with lower road quality. The study suggests that the main mechanism by which cell phones generate these outcomes is a reduction in search costs. Traders who operate in markets with cell phone coverage search over a greater number of markets and sell in more markets, thereby reducing price dispersion.

The FITEL Program

In 1992, the Peruvian government privatized all state-owned telecommunications companies and created a Telecommunications Regulatory Authority (OSIPTEL).3 In May 1993, OSIPTEL created the Fund for Investments in Telecommunications (FITEL) which began to collect a 1% levy charged on gross operating revenues of telecommunications companies in order to fund rural service expansion. In November 2006, FITEL was declared an individual public entity ascribed to the Ministry of Transports and Communications. The specific FITEL intervention studied here provided at least one public (satellite) payphone to each of the 6,509 targeted villages. To do so, FITEL divided the country into seven geographical regions (i.e. north border, north, middle north, middle east, south, middle south, and north tropical forest). The project was executed by granting a 20-year concession to private operators for public telephone services in each geographical region. The selection of the operator for each region was based on an international auction for the lowest subsidy requested from FITEL for the installation, operation and maintenance of these public services. It is worth noting that all phones, regardless of which operator wins each region, had to be homogeneous with respect to the technology (i.e. satellite vsat phones).Targeted villages were selected by FITEL prior to the auctioning process following the three-phase procedure