Latest Papers in the World Economoics Journal



The Informal Economy of the BRICS

This article evaluates the impact of trade liberalisation on the informal economy in the BRICS countries, which have significant unorganised sectors and trade policy changes. The article uses panel data from 1996 to 2015 to measure informality based on the method of Kaufmann and Kaliberda, which estimates the size of the informal sector as the difference between official GDP and electricity consumption. It finds that trade liberalisation has increased informality in the BRICS countries, implying that globalisation and economic growth have not benefited the unorganised sector or reduced inequality and development issues. It suggests that trade policy reforms should be accompanied by measures to improve governance, regulation, social protection and formalisation of the informal sector.

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Averting Public Debt Tsunami

This study introduces an innovative policy proposal designed to improve the fiscal stance of most countries towards long-term sustainability. We suggest implementing ‘deficit taxes’ for individuals and (100-fold higher) ‘deficit fines’ for politicians in any year in which a (cyclically adjusted) budget deficit occurs. In line with the theory of ‘rational inattention’, these taxes and fines will incentivise voters and politicians to stop ignoring debt accumulation and the threat of a fiscal crisis.

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Modern Money Theory

The article criticizes modern money theory (MMT), which is a macroeconomic policy that aims to achieve full employment by using money-financed fiscal deficits, without using any formal modelling. The article claims that MMT policy would not work in an open and internationally highly financially integrated economy, because it would either cause the money stock to grow unsustainably large or require domestic interest rates to be set at levels that would contradict the goal of full employment and create economic and financial instability. The article argues that MMT can only work, at best and if at all, in specific country circumstances, such as having high policy credibility or issuing an international reserve currency, which can prevent the negative effects of MMT policy and make expansionary demand shocks effective.

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Argentina, Crises and the International Monetary Fund
Author: Graham Bird

Argentina has a long history of economic, financial and currency crises and has been exhibiting crisis characteristics since 2018. Crises in Argentina may be analysed using currency crisis models and in particular, experience seems to fit the first-generation model. After a break of 15 years, Argentina has had programs with the International Monetary Fund, a standby agreement in 2018 and an extended fund facility agreement in 2022. The programs have incorporated fairly conventional IMF conditionality in terms of fiscal and monetary correction and currency realignment. On the basis of almost all criteria, the programs have not been successful, and it is important to understand why this is the case. In the recent presidential elections, one candidate advocated dollarization. However, there are underlying problems with this policy approach. Political factors in Argentina play an important role in determining policy choices and outcomes.

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Is ‘Make in India’ a Saga?

The ‘Make in India’ drive aims to boost domestic manufacturing and reduce import dependence, attracting global investors and producers to India’s potential and ecosystem. The manufacturing sector in India has shown weak growth in value added and employment, lagging behind the service sector, due to capital-intensive and labour-saving technologies. India ranks low in several indexing parameters, indicating a lack of strategic effort by the government to improve the manufacturing environment and competitiveness. For ‘Make in India’ to be successful, India needs to create a global workforce, use natural resources optimally, build world-class infrastructure, offer tax incentives and reduce reliance on China.

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A Mandatory Carbon Credit Purchase set by a Country’s Gross National Happiness

Countries should be mandated to purchase carbon credits for their shortfall in nationally determined contributions to the Paris Agreement. The carbon credit purchase quantity for each country should be scaled by a country’s gross national happiness. Governments should fund this carbon credit purchase through national carbon pricing. Mandating government carbon credit purchases will facilitate far-reaching emissions reductions, carbon removal at scale and combat global inequality.

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Enriching the Human Development Index through the Inclusion of Affordable Healthy Diet

This article presents research findings that support adding ‘affordable healthy diet’ as an indicator in the ‘Long and healthy life’ dimension of the Human Development Index (HDI). The article also aims to link the Sustainable Development Goal 2 (End Hunger, Achieve Food Security and Improved Nutrition and Promote Sustainable Agriculture) with the HDI, by showing the importance of food and nutrition security in human development. A quantitative analysis is used, including econometric and statistical methods, to establish the relationship and the statistical significance of affordable healthy diet in the HDI. The study aims to be the first to integrate food and nutrition security in the assessment of human development, using testable and established statistical methods to improve governance, regulation, social protection and formalisation of the informal sector.

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Measuring the 'Flat White Economy'

The ‘Flat White Economy’ defined in the eponymous book is the combination of tech and creative economies that developed initially in the east of London and have since evolved into becoming a significant component of the UK’s GDP and that of other economies. Research undertaken by the Centre for Economics and Business Research (Cebr) estimated that the sector had grown to 12% of the UK’s GDP in 2022, compared to around 9.2% for manufacturing. Measuring the value of services is difficult but measuring the output of creative and tech services, especially since the birth and expansion of the internet, creates additional problems which imply that current estimates of the size of the sector could be too low. There are four main measurement issues: the size, growth and lifecycle of the companies to be surveyed; the accounting treatment of investment in software; a flawed, out-of-date definition of R&D expenditure; and producing relevant price deflators while hindered by the difficulty in measuring quality.

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Monetary Facts and Inflation

Despite recent bouts of inflation in the United States, the United Kingdom, and Europe, central bankers have been attributing the rise in inflation to various non-monetary factors, such as supply chain problems and geopolitical events. However, this article argues that excess money supply is the real culprit behind inflation, echoing the famous quote by Milton Friedman, ‘Inflation is always and everywhere a monetary phenomenon.’ The study finds a high correlation between the rate of growth of the money supply and the rate of inflation, supporting Friedman’s assertion. The author presents updated data from 147 countries spanning the period from 1990 to 2021, reaffirming the tight linkage between changes in the money supply (M2) and inflation. This evidence contradicts claims by central bankers and supports the view that inflation is primarily a result of monetary factors rather than non-monetary ones.

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Are Purchasing Power Parity Exchange Rates Misleading in Oil-Rich Gulf Countries?

This article examines the accuracy of purchasing power parity (PPP) rates in Saudi Arabia. It highlights concerns about the perceived wealth of Saudi citizens based on interviews with American expatriates and wage statistics. It discusses the limitations of the Saudi International Comparison Program (ICP) data, including variations in data quality, differences in product selection, limited coverage and the assumption of uniform consumption patterns. It analyses the divergence between Saudi Arabia’s PPP rates and the fixed market exchange rate and examines the relationship between Saudi Arabia’s PPP rates and oil prices, revealing the paradoxical decline in living standards during periods of high oil prices. In conclusion, the PPP exchange rates for Saudi Arabia appear to fail to accurately assess living standards in Saudi Arabia.

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Reconciling with Two Decades of Quantitative Easing
Author: Chris G. Pope

Credit-based growth has been the cornerstone of industrialisation efforts among most of the world’s present-day advanced economies. This was premised upon the issuance of interest-free credit and/or the regulation of the flow of credit to favour investment in tangible capital formation over speculation. The quantitative easing measures carried out today have benefited mainly the ultra-rich and are unsustainable. As nations respond to inflation, there is high risk of a financial collapse. Central banks such as the Bank of Japan have little they can do within their current policy range to stop this. Japan needs demand for Japanese credit, for productive purposes. It is likely to find this in nations embarking upon credit-based growth to achieve industrialisation in the developing world. This would be a benefit to both the people of Japan and the developing world.

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Exchange Rate Fluctuations and Stock Market Returns in Emerging Asian Economies

Exchange rates are a prominent macroeconomic variable that exposes emerging stock markets to international economic risks. This study attempts to understand and explain stock market returns and exchange rate dynamics in the progressive emerging market group of Asia. The study applies the ARDL modelling technique and Granger causality test to monthly time-series data. It finds that import-dominated countries (India, Indonesia and Turkey) have positive exchange rate coefficients while for export-dominated countries (China), an increase in real effective exchange rate affects stock returns negatively. Causality analysis reveals informational inefficiency among the sample countries except for Indonesia, because exchange rate movements lead stock prices. The study concludes that the exchange rate is highly significant for investors (global and domestic) and policymakers in the Asian economies reviewed, who focus on it to better diversify their portfolios.

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The Impact of Macroprudential Transparency on Price Stability in Advanced and Emerging Economies

Transparent macroprudential policy promotes economic and financial stability by maintaining price stability and enhancing the resilience of financial systems. This study evaluates the impact of macroprudential transparency on inflation levels and expectations using data from 65 economies during the period 2000–2015. It employs panel data methodology and the generalised method of moments approach. The research findings reveal that macroprudential transparency is associated with lower inflation rates and inflation expectations in developing economies and emerging markets. Additionally, the efficiency of prudential transparency is confirmed for countries that do not adopt inflation targeting.

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The Impact of Foreign Direct Investment and Exports on Vietnam’s Economic Growth: 1991-2022

The article examines the impact of foreign direct investment (FDI) and exports on Vietnam's economic growth from 1991 to 2022. Data on FDI, exports and real gross domestic product (GDP) were collected and analysed using EViews 8 software. The results show that both FDI and exports have a positive relationship with economic growth in Vietnam. Specifically, a 1% increase in FDI leads to a 0.2352% increase in economic growth, and a 1% increase in exports results in a 0.5425% rise in economic growth. The study suggests policy implications to promote FDI attraction and export activities to foster Vietnam’s economic growth and development.

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Climate Change Convention: COP27 Activities and Study of GCF Pledged Finance

COP27 focused on adaptation efforts in small island developing states (SIDS) and Africa, aiming to strengthen the resilience of vulnerable local populations and restore land to address biodiversity loss and climate change. This article examines the methodological aspects of the research design and highlights the significance of COP27 in achieving global goals and the objectives of the Paris Agreement. It evaluates Global Climate Fund (GCF) access modalities, such as request for proposals (RFP), the Simplified Approval Process (SAP) and direct access, to engage multiple stakeholders in addressing greenhouse gas mitigation, adaptation, food security, biodiversity conservation and desertification. The GCF’s Readiness Private Sector Programming (PSP) played a crucial role in implementing Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) during COP27, supporting investment in climate action. The article also emphasises the importance of transparency frameworks, domestic policy implementation and national-level decision-making in line with the ambitions of the Rio Conventions. Additionally, the comprehensive approach to channelling funds into sustainable sectors within countries is analysed as a means to achieve the stated goals.

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Hyperinflation in Suriname

Primary data reveal two new instances of hyperinflation, both occurring in Suriname in the 1990s. In June 1993 and October 1994, Suriname experienced monthly inflation rates of 208% and 58.6%, respectively. With these additions, the Hanke-Krus World Hyperinflation Table now records 66 hyperinflation episodes. These are the first recorded instances of hyperinflation in Suriname.

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Are Sovereign Defaults (Partly) Bad Luck?
Author: Colin Ellis

When sovereigns default, the consequences can be disastrous. Domestic banks and companies often suffer alongside their governments, and the sovereigns themselves face high risks of re-defaulting. One contributor to default is often disappointing growth – examining a sample of defaults since 2000, growth has typically fallen short relative to independent forecasts made both one year and two years prior to default. Textual analysis of those errors finds regular attribution of this weak growth to exogenous shocks, beyond the control of the governments that default. This supports the hypothesis that, in part, sovereign defaults reflect bad luck. Finally, there are signs of a relationship between the extent of growth falling short of forecasts and the losses investors suffer in the event of default. Unsurprisingly, larger growth shortfalls are typically associated with higher losses.

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Improving Economic Policy

The consensus model (CM) holds that there is only one equilibrium that needs to be maintained for economic stability. This follows, as a matter of logical necessity, from the model’s fundamental assumptions. The evidence is, however, clear that, independently of each other, asset prices, money supply and demand all need to be kept in balance. The widespread scepticism among economists and central bankers over the single equilibrium assumption is thus abundantly justified. Two important conclusions follow: CM must therefore be discarded if economic policy is to achieve growth with low and stable levels of unemployment and inflation. The existence of three possible disequilibria requires at least three independent policy instruments to allow the economy to be managed successfully. In addition to monetary and fiscal policy, another instrument is thus needed, which tax policy can and should provide. If used appropriately, these three tools can preserve stability. Importantly, the correct use of tax policy should not only prevent the policy errors which have led to rapid inflation and financial crises but restore the trend growth of developed economies to the rates achieved before 2000.

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Graduation From The Prolonged Use of IMF Resources

The International Monetary Fund (IMF) was designed to offer temporary financial assistance to member countries experiencing balance of payments difficulties. However, for a relatively large number of countries the use of IMF resources became prolonged; the Philippines was an extreme example of this. In sharp contrast, since 2000 the Philippines has made no further use of IMF resources and has graduated from the Fund. This article investigates the reasons underpinning graduation in the case of the Philippines and discovers that not only did changed economic circumstances moderate the need to borrow from the IMF, but also political factors made incumbent governments more reluctant to turn to the Fund. Drawing on the Philippines as a case study, the article extracts more general lessons relating to graduation and raises the issue of whether graduation is always desirable. Although a number of studies have examined the prolonged use of IMF resources in considerable depth, up to now the phenomenon of graduation has been largely ignored. This article aims to fill a gap in the academic literature.

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Pakistan’s Poor Governance and Capital Flight
Author: Dev Kar

Pakistan’s chronic economic mismanagement, as reflected in persistently large current account deficits, compelled it to enter into 22 financing arrangements with the International Monetary Fund, the latest one being in 2019. The key factors behind capital flight from Pakistan are its poor scores on governance, such as on political stability and absence of violence and control of corruption, the stranglehold of its elites, and the rising income inequality. We estimate that about 50% of all borrowing since 2001 has been squirreled away abroad by the country’s elites. Governance and economic policies need to be improved in order for Pakistan to avoid a debt crisis in the future.

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A Matter of Wealth, Intangible Wealth and Sustainable Development
Author: Megi Marku

Wealth disparities among countries with varying levels of natural resources have been a long-standing topic of debate. Despite numerous hypotheses proposed over the years, a new concept has recently emerged that is gaining traction among scholars. This concept, known as intangible wealth, is derived from a World Bank study and comprises non-material factors such as human capital, institutional efficiency and effective governance. The intangible wealth hypothesis posits that these intangible factors play a crucial role in explaining the differences between poor and rich countries. By emphasising the importance of intangible wealth, this concept challenges conventional notions of wealth that focus solely on natural resources and material assets. Intangible wealth has emerged as a new concept that explains the differences in economic prosperity among countries. The concept emphasises the importance of factors such as human capital, institutional quality and efficient governance in promoting economic growth. Policymakers can use this concept as a framework for developing policies that promote sustainable economic growth. By focusing on intangible assets, countries can create an environment that is conducive to economic prosperity.

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