rafmacalaba/datause-encoder-data huggingface dataset:
Trade and human capital
            accumulation: evidence from U.S. immigrants
WPS4144 Trade and Human Capital Accumulation - Evidence from U.S. Immigrants

# Dörte Dömeland*

# Abstract

This study provides empirical evidence that trade increases on-the-job human capital accumulation by estimating the effect of home country openness on estimated returns to home country experience of U.S. immigrants. The positive effect of trade on on-the-job human capital accumulation remains significant when controlling for GDP, educational attainment and institutional quality. It is not the result of self-selection, heterogeneity in returns to experience, English speaking origin or cultural background. The effect persists when restricting the sample to non-OECD countries, thereby resolving the theoretical ambiguity whether trade increases or decreases learning-by-doing. The role of trade in generating economic growth is therefore likely to be more important than generally considered.

JEL Classiffication: O15, F00

# World Bank Policy Research Working Paper 4144, March 2007

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

*I am very grateful to Antonio Ciccone for excellent advice and suggestions and thank Jaume Garcia, Christian Haefke, Adriana Kugler, Martin Menner, Joel Shapiro, Ernesto Villanueva, Lutz Weinke and Michael Wolf for very useful comments. Email: ddomelandnarvaez@worldbank.org. Tel: ++1-202-458-1238
Market structure and market access
The authors examine an issue at the
            nexus of domestic competition policy and international
            trade, the interaction between goods trade and market power
            in domestic trade and distribution sectors. Theory suggests
            a set of linkages between service-sector competition and
            goods trade supported by econometrics involving imports of
            22 OECD countries compared with 69 exporters. Competition in
            services affects the volume of goods trade. Additionally,
            because of interaction between tariffs and competition, the
            market structure of the domestic service sector becomes
            increasingly important as tariffs are reduced. Empirically
            service competition apparently matters most for exporters in
            smaller, poorer countries. The results also suggest that
            while negotiated agreements leading to cross-border services
            liberalization may boost goods trade as well, they may also
            lead to a fall in goods trade when such liberalization
            involves foreign direct investment leading to increased
            service sector concentration.
Institutions, infrastructure, and trade
The authors examine the influence of
            infrastructure, institutional quality, colonial and
            geographic context, and trade preferences on the pattern of
            bilateral trade. They are interested in threshold effects,
            and so emphasize those cases where bilateral country pairs
            do not actually trade. The authors depart from the
            institutions and infrastructure literature in this respect,
            using selection-based gravity modeling of trade flows. They
            also depart from this literature by mixing principal
            components (to condense the institutional and infrastructure
            measures) with a focus on deviations in the resulting
            indexes from expected values for given income cohorts to
            control for multicollinearity. The authors work with a panel
            of 284,049 bilateral trade flows from 1988 to 2002. Matching
            bilateral trade and tariff data and controlling for tariff
            preferences, level of development, and standard distance
            measures, they find that infrastructure and institutional
            quality are significant determinants not only of export
            levels, but also of the likelihood exports will take place
            at all. Their results support the notion that export
            performance, and the propensity to take part in the trading
            system at all, depends on institutional quality and access
            to well-developed transport and communications
            infrastructure. Indeed, this dependence is far more
            important, empirically, than variations in tariffs in
            explaining sample variations in North-South trade.
An analysis of crop choice :
            adapting to climate change in Latin American farms
The authors explore how Latin American
            farmers adapt to climate by changing crops. They develop a
            multinomial choice model of farmer's choice of crops.
            Estimating the model across over 2,000 farmers in seven
            countries, they find that both temperature and precipitation
            affects the crops that Latin American farmers choose.
            Farmers choose fruits and vegetables in warmer locations and
            wheat and potatoes in cooler locations. Farms in wetter
            locations are more likely to grow rice, fruits, and squash,
            and in dryer locations maize and potatoes. Global warming
            will cause Latin American farmers to switch away from wheat
            and potatoes toward fruits and vegetables. Predictions of
            the impact of climate change must reflect not only changes
            in yields or net revenues per crop but also crop switching.
Asian century or multi-polar century
The "rise of Asia" is
            something of a myth. During 1990-2005 China accounted for 28
            percent of global growth, measured at purchasing power
            parity (PPP). India accounted for 9 percent. The rest of
            developing Asia, with nearly a billion people, accounted for
            only 7 percent, the same as Latin America. Hence there is no
            general success of Asian developing economies. China has
            grown better than its developing neighbors because it
            started its reform with a better base of human capital, has
            been more open to foreign trade and investment, and created
            good investment climates in coastal cities. China's
            success changes the equation going forward: its wages are
            now two to three times higher than in the populous Asian
            countries (Bangladesh, India, Indonesia, Pakistan, and
            Vietnam), and China will become an ever-larger importer of
            natural resource and labor-intensive products. Developing
            countries need to become more open and improve their
            investment climates to benefit from these opportunities.
            China itself faces new challenges that could hamper its
            further development: unsustainable trade imbalance with the
            United States, energy and water scarcity and unsustainable
            use of natural resources, and growing inequality and social
            tension. To address the first two of these challenges, good
            cooperation between China and the United States is
            essential. The author concludes that we are more likely to
            be facing a "multi-polar century," than an Asian century.
Are price-based capital account
            regulations effective in developing countries
The author evaluates the effectiveness
            of policy measures adopted by Chile and Colombia, aiming to
            mitigate the deleterious effects of pro-cyclical capital
            flows. In the case of Chile, according to his Generalized
            Method of Moments (GMM) analysis, capital controls succeeded
            in reducing net short-term capital flows but did not affect
            long-term flows. As far as Colombia is concerned, the
            regulations were capable of affecting total flows and also
            long-term ones. In addition, the co-integration models
            indicate that the regulations did not have a direct effect
            on the real exchange rate in the Chilean case. Nonetheless,
            the model used for Colombia did detect a direct impact of
            the capital controls on the real exchange rate. Therefore,
            the results do not seem to support the idea that those
            regulations were easily evaded.
Controls on capital inflows and
            external shocks
The author attempts to analyze whether
            price-based controls on capital inflows are successful in
            insulating economies against external shocks. He presents
            results from vector auto regressive (VAR) models that
            indicate that Chile and Colombia, countries that adopted
            controls on capital inflows, seem to have been relatively
            well insulated against external disturbances. Subsequently,
            he uses the auto regressive distributed lag (ARDL) approach
            to co-integration to isolate the effects of the capital
            controls on the pass-through of external disturbances to
            domestic interest rates in those economies. The author
            concludes that there is evidence that the capital controls
            allowed for greater policy autonomy.
Substitutability and protectionism :
            Latin America's trade policy and imports from China and India
The authors examine the trade policy
            response of Latin American governments to the rapid growth
            of China and India in world markets. To explain higher
            protection in sectors where a large share is imported from
            these countries, they extend the "protection for
            sale" model to allow for different degrees of
            substitutability between domestically produced and imported
            varieties. The extension suggests that higher levels of
            protection toward Chinese goods can be explained by high
            substitutability between domestically produced goods and
            Chinese goods, whereas lower levels of protection toward
            goods imported from India can be explained by low
            substitutability with domestically produced goods. The data
            support the extension to the "protection for sale"
            model, which performs better than the original specification
            in terms of explaining Latin America's structure of protection.
Political leadership, conflict, and
            the prospects for constitutional peace
The emphasis on constitutional political
            economy has been that new rules and institutions can be
            devised that improve the welfare of a society. Given the
            number of societies that are infected with political
            conflict and, as a result, lower levels of welfare, this
            paper attempts to analyze why we do not see more
            constitutional conventions aimed at eliminating conflict.
            The key idea is that expressively motivated group members
            may create incentives for instrumentally motivated group
            leaders such that it leads them to choose conflict rather
            than compromise. Nonetheless, it is not argued that such a
            peace is impossible to obtain. This leads to a further
            question, that if such a constitutional agreement could be
            found, would the expressive perspective alter the
            conventional instrumental perspective on the sort of
            constitutional reform that should be undertaken?
Remittances and the real exchange rate
Existing empirical evidence indicates
            that remittances have a positive impact on a good number of
            development indicators of recipient countries. Yet when
            flows are too large relative to the size of the recipient
            economies, as those observed in a number of Latin American
            countries, they may also bring a number of undesired
            problems. Among those probably the most feared in this
            context is the Dutch Disease. This paper explores the
            empirical evidence regarding the impact of remittances on
            the real exchange rate. The findings suggest that
            remittances indeed appear to lead to a significant real
            exchange rate appreciation. The paper also explores policy
            options that may somewhat offset the observed effect.
A framework for thinking about
            enterprise formalization policies in developing countries
What policies encourage firms to become
            formal? The standard approach emphasizes reducing the costs
            of compliance with government regulation. This is unlikely
            to be sufficient. Instead we need to understand compliance
            as a function not only of firm-level costs and benefits but
            also in terms of the interaction between the firm and its
            competitors and between the firm and the state. This paper
            emphasizes the coordination and credibility issues involved
            in promoting formalization and discusses possible
            institutional solutions, among them business associations
            that make the benefits of membership dependent on
            compliance, information sharing arrangements among
            government agencies and improvements in the quality of
            public management.
The Mexican pension annuity market
This paper analyzes the performance and
            development of the Mexican pension annuity market
            established as a consequence of the 1997 pension reform. The
            Mexican experience displays interesting characteristics
            providing lessons for other countries that still need to
            design the decumulation phase of their newly established
            second pillars. At the same, time it raises some technical
            and policy concerns that need addressing as they could
            hamper, in the future, the healthy development of the
            market. The paper concludes that: 1) general life insurance
            companies may better hedge longevity risk than specialized
            annuity companies; 2) competition should be based on prices
            rather than additional products; 3) better disclosure of
            options under the 1973 and 1997 social security laws should
            be given to disability and life annuitants; and 4) various
            measures should be taken to improve asset liability
            management including allowing companies to trade over the
            counter derivatives and substituting over time the
            regulatory asset liability management framework with an
            economic asset liability management framework.
India rising - faster growth, lower indebtedness
Over the past 25 years, India's
            economy grew at an average real rate of close to 6 percent,
            with growth rates in recent years accelerating to 9 percent.
            Yet by 2005-06, the general government debt-to-GDP ratio was
            34 percentage points higher than in the 1980s. The authors
            examine the links between public finances and growth in the
            post-1991 period. They argue that the main factor in the
            deterioration of government debt dynamics after the
            mid-1990s was a reform-induced loss in trade, customs, and
            financial repression taxes. Over time, these very factors
            plus lower entry barriers have contributed to stronger
            microfoundations for growth by increasing competition and
            hardening budget constraints for firms and financial sector
            institutions. The authors suggest that the impressive growth
            acceleration of the past few years, which is now lowering
            government indebtedness, can be attributed to the lagged
            effects of these factors, which have taken time to attain a
            critical mass in view of India's gradual reforms.
            Similarly, the worsening of public finances during the late
            1990s can be attributed to the cumulative effects of tax
            losses, the negative growth effects of cuts in capital
            expenditure that were made to offset the tax losses, and a
            pullback in private investment (hence, growth and taxes), a
            situation which is now turning around. Insufficient capital
            expenditures have contributed to the infrastructure gap,
            which is seen as a constraint especially for rapid growth in
            manufacturing. The authors discuss ongoing reforms in
            revenue mobilization and fiscal adjustment at the state
            level, which if successfully implemented, will result in a
            better alignment of public finances with growth by
            generating further fiscal space for infrastructure and other
            development spending.
Choosing the currency structure for
            sovereign debt : a review of current approaches
This paper acknowledges the fact that
            some countries have to borrow in foreign currencies due to
            the various constraints they face. Starting from this point,
            the author reviews approaches for trying to determine the
            currency structure for sovereign debt, and discusses some
            issues inherent in these approaches. The analysis mainly
            focuses on the correlations of domestic fundamentals with
            the actual versus equilibrium exchange rate in light of the
            long-term perspective of a debt manager and changing
            exchange rate regimes. In addition, the author makes some
            observations on the characterization of exchange rate
            volatilities in the existing approaches.
About urban mega regions : knowns
            and unknowns
Mega urban regions are not a passing
            phenomenon. They are likely to persist and to enlarge their
            economic footprints because they benefit from the advantages
            of market scale, agglomeration economies, location, and the
            increasing concentration of talented workers. Metropolitan
            regions which are polycentric, relatively well managed, and
            have invested heavily in transport infrastructure are able
            to contain some of the problems attendant upon a
            concentration of people and industry. Moreover, with energy
            and water resources becoming relatively scarce and many
            countries anxious to preserve arable land for farming, the
            economic advantages of densely populated urban areas are on
            the rise because they have a lower resource utilization
            quotient. During the next 15 years, mega urban economies
            could coalesce in three Southeast Asian locations: Bangkok,
            Jakarta, and the Singapore-Iskander Development Region (IDR,
            South Johor). The Bangkok and Jakarta (Jabotabek)
            metropolitan regions have passed the threshold at least in
            terms of population size but they have yet to approach the
            industrial diversity, dynamism, and growth rates of a
            Shanghai or a Shenzhen-Hong Kong region. Singapore, if
            coupled with IDR, has the potential but it is still far from
            being an integrated urban region. This paper examines the
            gains from closer economic integration and the issues to be
            settled before it could occur. The paper notes that a
            tightening of localized economic links between two sovereign
            nations through the formation of an urban region would
            involve a readiness to make long-term political commitments
            based on a widely perceived sense of substantial spillovers
            and equitably shared benefits. Delineating these benefits
            convincingly will be essential to winning political support
            and a precondition for a successful economic flowering.
Financing of the private sector in
            Mexico, 2000-05 : evolution, composition, and determinants
The objective of this paper is to
            describe the evolution, composition, and determinants of
            financing to the nonfinancial private sector in Mexico
            between 2000 and 2005. Supported by the macroeconomic
            environment and financial system reforms, total financing to
            the private sector (particularly consumer credit) increased
            relative to GDP, while accessibility and affordability
            generally improved. Equity issuance did not play an
            important role during the period under consideration.
            Although the supply of financing shifted toward domestic
            nonbank providers, commercial banks remain the primary
            source of funding. Significant progress was made in cleaning
            up bank loan portfolios and in strengthening financial
            system soundness and infrastructure. The prospects for
            continued private sector financing growth remain very
            positive, but financing is not spread out evenly across all
            market segments. The authors conclude with some policy
            implications to further facilitate deeper and broader
            financing of the private sector.
Shadow sovereign ratings for unrated
            developing countries
The authors attempt to predict sovereign
            ratings for developing countries that do not have risk
            ratings from agencies such as Fitch, Moody's, and
            Standard and Poor's. Ratings affect capital flows to
            developing countries through international bond, loan, and
            equity markets. Sovereign rating also acts as a ceiling for
            the foreign currency rating of sub-sovereign borrowers. As
            of the end of 2006, however, only 86 developing countries
            have been rated by the rating agencies. Of these, 15
            countries have not been rated since 2004. Nearly 70
            developing countries have never been rated. The results
            indicate that the unrated countries are not always at the
            bottom of the rating spectrum. Several unrated poor
            countries appear to have a "B" or higher rating,
            in a similar range as the emerging market economies with
            capital market access. Drawing on the literature, the
            analysis presents a stylized relationship between borrowing
            costs and the credit rating of sovereign bonds. The launch
            spread rises as the credit rating deteriorates, registering
            a sharp rise at the investment grade threshold. Based on
            these findings, a case can be made in favor of helping poor
            countries obtain credit ratings not only for sovereign
            borrowing, but for sub-sovereign entities' access to
            international debt and equity capital. The rating model,
            along with the stylized relationship between spreads and
            ratings can be useful for securitization and other financial
            structures, and for leveraging official aid for improving
            borrowing terms in poor countries.