GEI Working Paper Abstracts

Working papers produced by the research projects in the Global Economic Institutions Programme have begun to appear. They are available for £4/$8 each from: Subscriptions Officer, Centre for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, UK.

Papers: [1-5] | [6-10] | [11-14] | [15-16] | [17-22] | [23-26] | [36-45]

[46-47]

Working Paper No. 17

An Agenda for the WTO: Strengthening or Overburdening the System
by Stephen Woolcock
October 1996


In December 96 the first biannual ministerial meeting of the WTO will take place in Singapore. This meeting will begin to address some of the key issues facing the WTO in terms of its future agenda and thus its role in the international trading system. Underlying the debate on any specific issue at the Singapore meeting will be the issue of widening versus deepening of the GATT/WTO rules. Should the WTO respond to pressure from some of its developed members and begin talks on new issues, such as investment, competition and trade and labour standards, in order to ensure that it keeps up with the continued internationalization of markets, or should it stress widening its membership in order to ensure that the fundamentals of free trade are extended to all countries?

This paper discusses the factors that will shape this debate, both in the run up to the Singapore meeting and beyond. It analyses the various agenda items, including completion of existing work in the WTO, further liberalization within the realms of existing policies and the new issues. Ultimately it will be some combination of these agenda items which will constitute the balance between widening and deepening the WTO. The paper argues that the WTO must widen and deepen. This means that no country or issue can be excluded a priori. But the main purpose of the paper is to contribute to a wider, informed debate on the issues. International commercial diplomacy now affects more and more domestic interests and yet there us little informed public debate on the topic. The current talks on the WTO's agenda provides an opportunity for such a debate and it is hoped that this paper can make a contribution to such a debate.

Working Paper No. 18

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Drazen and Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semi-elasticity of demand for money to provide estimates of the maximum visible real deficit.

Working Paper No. 19
Seigniorage, Inflation and IMF Intervention
Marcus Miller and Lei Zhang
October 1996


Using a static Barro model, this paper illustrates two possible reasons causing excessively high inflation in former Soviet republics: the time consistency problem facing a government when it plans to use money to finance deficits and the 'free-rider' problem in the ROUBLE zone where coordination between the central banks of the republics was absent. Extending the above model to incorporate stochastic deficits, this paper derives the trigger points for various fiscal stabilizations. It shows that the time consistency problem can be improved by precommitment and that an outside agency, such as the IMF, can play a significant role in promoting earlier stabilization. Two particular mechanisms for the outside agency are identified: first, its ability to aid the government to achieve intertemporal credibility by agreeing on specific plans; and second, its role in weaning countries off inflationary finance by promoting fiscal reform.

Working Paper No. 20
Sovereign Debt Buybacks Revisited
Jonathan P Thomas
November 1996


The arguments put forward by Bulow and Rogoff (1988, 1991) against sovereign debt buybacks are re-examined in a willingness-to-pay framework. This paper argues that the Bulow-Rogoff framework treats default by a debtor as an event with no deadweight loss, and, as such, underestimates the potential gains from a buyback. The willingness-to-pay framework allows deadweight costs of default to be introduced in a consistent and simple fashion into the buybacks calculus. Two versions of this framework are considered. First, a model in which the default costs induce an all-or-nothing default decision is analysed. In this case, an ambiguous result is derived in which the variability of the debtor's income determines whether (small) buybacks are beneficial to the debtor, even though expected total transfers to the creditor increase, consistent with Bulow-Rogoff. Second, default costs are modelled so as to induce at most a partial default. This model corresponds most closely, in terms of the repayment behaviour of the sovereign debtor, to the models used by Bulow and Rogoff. It is shown that small buybacks are always beneficial to the debtor in this case. The second version is extended to include an investment opportunity. Only if the country has sufficiently scarce resources where the investment can be made, will a buyback be harmful to the interests of the debtor. Implications concerning the efficacy of donations for buyout purposes by third parties, such as the World Bank and the IMF, are analysed.

Working Paper No. 21
Competition Policy and Integration: Levelling or Tilting the Playing Field
Peter Holmes
November 1996

The EU is calling on the Central and East European countries (CEECs) to harmonize competition laws much more tightly than has been required for member states. The Europe Agreements indicated the general obligation and the recent White Paper spelt out the reasons in greater depth. The EU, despite asymmetrically abolishing conventional measures of protection, retains contingent protection on industrial goods. Some have argued that once the CEECs adopt competition rules akin to those in the EU, it will be possible to abolish all anti-dumping duties as the competition rules can then be used to deal with 'unfair competition'. This paper argues that the alignment of competition laws should be part of an accession strategy, and not a condition for free trade on industrial goods.

Working Paper No. 22
Is There Convergence in a Two-speed Europe? Evidence from the Labour Markets
Andrew Hughes Hallett and Maria Demertzis
January 1997

This paper examines whether Europe’s emerging ‘two-speed’ framework reflects genuine differences in market structures underpinned by relatively immobile labour, or whether it is really the result of poor economic management in the periphery. Using models of German leadership and of locational competition, we show that bargaining behaviour is the origin of the two-speed divide. The core enjoys German leadership and the periphery locational competition, and as a result convergence in competitiveness between the two was negative in the 1980s and painfully slow in the 1990s. Divergence is underpinned by strict inflation control in the leading economy, while price convergence causes increasing inequalities in the distribution of unemployment rates. That exposes a conflict between nominal convergence and real convergence, which is ultimately incompatible with further integration. Indeed, to prevent its competitive edge being eroded, the core may well prefer to preserve its two-speed regime.