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Turkish economic association international conference on economics

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3 Eylül, Cuma Friday, September 3

Contributed Session 36 - International Macroeconomics III Workshop 5

Current Account Imbalances And Exchange Rate Adjustment: An Analysıs For Pakıstan Economy

CANPOLAT, Naci (Hacettepe University)

KHAN, Imran (Hacettepe University)
As the global financial crisis unfolded in 2008, Pakistan’s ability to tap international capital markets is severely impaired. The severity of impact of global financial crisis further compounded by the domestic vulnerabilities such as weak macroeconomic fundamentals, high security cost and growing energy crisis. The large current account deficit and decimated liquidity flows to Pakistan heightened the risk of current account reversals. In this paper we examine the consequences of a current account reversal in Pakistan in the light of Obstfeld and Rogoff (2005) model. The model is implemented in R programming environment. The model is calibrated by using 2000 data and simulation results are obtained for 2009.Preliminary results indicate that current account rebalancing requires large changes in the level of real exchange rate and terms of trade.

JEL codes: F32; F47

3 Eylül, Cuma Friday, September 3

Contributed Session 36 - International Macroeconomics III Workshop 5

Monetary Regimes vs Exchange Rate Regimes: The International Monetary System in Perspective

CESARANO, Filippo (Bank of Italy)

This paper argues that the key to the design and workings of monetary arrangements is the paradigm for the nature of money and its effects on the economy. The interaction between theory, market forces, and technology underlies the succession of ideal types – commodity money, fiat money, and intangible money – that represent the past, present, and future of monetary organization. The three exemplars are examined, focusing on the respective paradigms to illuminate the properties and rules governing each system. The main findings point to an increase in entropy of exchange rate regimes and heightened flexibility, consonant to the lack of consistent monetary rules and enforcement thereof.

JEL: F33; E42

3 Eylül, Cuma Friday, September 3

Contributed Session 37 - Agriculture and Trade Workshop 6
Regional Impact of the Climate Change on Agriculture in Turkey: A Spatial CGE analysis

DUDU, Hasan (Middle East Technical University)

ÇAKMAK, Erol (Middle East Technical University)
Agricultural production in Turkey continues to depend heavily on the climatic conditions due to ineffective use of already developed irrigation infrastructure. The probable effects of climate change on the technical conditions of agricultural production are studied by many researchers. The common conclusion of these studies is that growing-degree days will be prolonged and Turkey will experience hotter and drier summers along with milder and drier winters (Cline, 2007; Kadıoğlu and Şaylan, 2000; Kadıoğlu, 2008; Fujihara et al., 2008; Komuscu et al., 1998; Kapur et al., 2007). Further the frequency of hydrological extremes will increase implying more drought years (Fujihara et al., 2008; Sensoy et al., 2007). Implications of these changes on agricultural yields and production are also well quantified by various researchers (Çaldağ and Şaylan, 2005;, Şaylan and Çaldağ, 2007; Kapur et al., 2007). Dudu et al. (2010) use a Walrasian CGE model to link the effects of climate change to the whole economy through the agricultural sector. The partial equilibrium models used to study the impact of climate change in agriculture have limited number of crops (Dellal and McCarl, 2004 and 2009).

The main research question of this study is quantifying the effects of climate change on agricultural sector and regional economy by taking into account the interregional interactions and dynamics of the adjustment to the new equilibrium under well-established climate scenarios for Turkey. We expect to shed light on the effects on consumer and producer welfare in each region, national accounts and trade balances.

The model that will be used for that purpose will be built on the previous CGE modeling framework by enhancing the regional dimensions and updating the calibration year to 2008. Regional economic activities will be modeled explicitly at NUTS I level. In that way we will be able to include theoretical contributions from regional location theory in the CGE framework.

Model will be used to run simulations about climate change. For that purpose, effects of climate change on agricultural production will be simulated. The shock will be region and crop specific. Further the simulations will be run not only through the yield changes but key variables such as water availability and irrigation efficiency will also be shocked to obtain more realistic results. Further, Economic cost of mitigation measures suggested in the literature will also be calculated and compared to the cost of baseline scenario in terms of GDP loss.

The model can also be used to obtain information on the macroeconomic and welfare implications of an external shock. The suggested model framework will allow us to differentiate the effects of climate change among regions and hence we will be able to make policy suggestions on a regional basis. The results will be useful in determining the priority of infrastructure investments among different regions.

Consequently, we seek to develop economically feasible mitigation measures that are activity and region specific. By including the feasibility dimension of these measures in our analysis we will be able to present a comparative study about the cost of taking and not taking appropriate actions.

JEL codes: C68; Q54
3 Eylül, Cuma Friday, September 3

Contributed Session 37 - Agriculture and Trade Workshop 6
The Role of Quality Perception on Export Markets: The Case of Turkey’s Bilateral Intra-Industry Trade
ERİÇ, Gülçin Elif (Istanbul Technical University)

KAYAM, Saime Suna (Istanbul Technical University)
The export potential of a country depends largely on the demand for its goods in export markets. According to demand-sided intra-industry trade theorists, such as Linder (1961) and Lancaster (1980), diversification of consumers’ tastes and thus quality of goods play an important role in demand. Since, quality perception is related to people's consumption behaviour and their income levels, perception of quality is relative, not absolute. Related to this, it can be said that export markets are not homogeneous but heterogeneous. In this respect, this paper aims to see whether quality perception differs between different export markets or not.

Based on World Bank’s main criteria, economies are classified into six geographic regions and four income groups. Making use of Turkey’s bilateral trade by covering a longer period, namely 1990-2009, this paper examines the differences in the quality of goods exported from Turkey to these different regions and income groups. We argue that Turkish exports are considered as low-quality goods in high-income countries and high-quality goods in the low and middle-income countries.

At first, the type of bilateral trade is determined for each commodity group. Then, we use Greenaway, Hine and Milner (GHM) approach in order to decompose IIT into its vertical and horizontal components. Finally, we examine any differences in terms of quality between country groups and analyse the factors that cause that difference.
JEL codes: F14; F10

3 Eylül, Cuma Friday, September 3

Contributed Session 37 - Agriculture and Trade Workshop 6

Intra Industry Trade in Agrıcultural and Food Products: The Case of Turkey

KÜÇÜKEFE, Bige (Namık Kemal University)

DEMİRÖZ, Dündar Murat (Namık Kemal University)

In the classical trade theories each country is specialized in goods which they have comparative advantages. But in the recent decades, countries may specialize in different types of a given commodity from within the same country. High proportion of total trade among industrialized countries is Intra Industry Trade (IIT). IIT has become a striking characteristic of the international trade regime, especially in the manufacturing industry. When we look at specific, agriculture and food transformed into a large industry. With the assistance of technological changes, products are differentiated in the same industry.  Depending on this situation countries simultaneously export and import processed products increasingly.  The aim of this paper is to investigate the level of Intra Industry Trade at the agricultural and food products in Turkey. For this purpose static and dynamic IIT indices are calculated. The data are supplied by the TUIK at the two digit level of the Standard International Trade Classification (SITC) in U.S. dollars. Grubel-Lloyd (GL) and adjusted Grubel-Lloyd (C) indices, are calculated at SITC, 2 digit levels over the 1989-2008. And also MIIT is calculated for three periods, 1989-1996, 1996-2001, 2001-2008.
JEL Codes: F12,F14

3 Eylül, Cuma Friday, September 3

Contributed Session 38 –Crisis, Debt and Trade Workshop 7

Should the Sovereign Debt Crisis Worry Emerging Asia?

ISLAM, M. Shahidul (Institute of South Asian Studies)
While emerging Asia, with the exception of India, has a low debt-to-GDP ratio, there is growing concern about the region’s exposure to the sovereign debt crisis of major advanced economies. This is largely due to an increasing economic interdependence between advanced economies and developing Asia. There is a strong linkage between their bond markets, portfolio investment, FDI flows and trade, among others- not to mention, the central bank of China alone holds nearly a quarter of the United States’ Treasury Securities. There is a concern that United States and other debt-ridden developed economies could stoke inflation and devalue their currencies to partly offset their debt.

Against this backdrop, the aim of this paper is to explore the likely debt reduction strategies of the United States and highly indebted European economies. Historical experiences are also analyzed in this regard. This paper argues that the debt-ridden advanced economies are likely to reduce their debt-to-GDP ratio, banking on both GDP growth and inflation. However, the relative effects of these two variables will depend on their economic recovery. Analyzing the behavior of bond markets, yield curves, key central banks balance sheets and other variables that explain inflation expectations, it is of the view that a soft default via inflation remains a danger but Asia and the West’s ever-growing economic interdependence- that captured in the global imbalances literature- is likely to reduce the risk. Instead, it concludes that, one might see prolonged financial and other economic imbalances or, at best, a slow adjustment between the two stakeholders in the years to come.

Jel codes: F34, F43

3 Eylül, Cuma Friday, September 3

Contributed Session 38 –Crisis, Debt and Trade Workshop 7

Financial Crisis: Indian Economic Growth and External Sector

NAURIYAL, D. K. (Indian Institute of Technology Roorkee)

SAHOO, Bimal (Indian Institute of Technology Roorkee)

This paper empirically examines the impact of current world-wide recession on India’s growth. The data ort his study were compiled from RBI and Central Statistical Organisation (CSO). The paper has applied regression technique with GDP as dependent variable, while exports, imports, FDI and FII were taken as independent variables. Prior to regression analysis, all the variables are tested for stationarity, applying Augmented Dickey-Fuller (ADF) test. The data sets were also tested for seasonality by applying auxiliary regression. Because of the problem of multicolinearity among the independent variables, three models, dropping one of the highly collinear variables, were estimated. The results suggest that financial crisis has adversely impacted India’s GDP although imports, exports and FDI were found to have exercised stimulating influence through technological spill-over and other externalities. The paper suggests that recovery of global economy is extremely important for Indian economic growth although the effects of global slow down could be minimized through the use of stimulant fiscal and monetary measures.

Jel code: F00, F10

3 Eylül, Cuma Friday, September 3

Contributed Session 38 –Crisis, Debt and Trade Workshop 7

Business cycle comovement and trade in intermediate goods

PUNDIT, Madhavi (Boston College)
There has been unprecedented volatility in global production and trade during this economic crisis. The international dimension of this volatility is not surprising in view of the rapid globalization and integration in recent decades. Intermediates in production account for an increasing percentage of world trade as countries take advantage of lower factor costs abroad. Empirical studies have highlighted that countries with such trade linkages exhibit more synchronized business cycles. This positive correlation raises the question of causality. Traditional theoretical mechanisms propose the direction where higher bilateral trade in intermediate goods causes increased business cycle correlations. However, the data shows that trade is positively correlated with comovements in GDP as well as total factor productivity (TFP) and the current work explains only the first relation. I build a small open economy model that makes two contributions -- first, it predicts both positive correlations as seen in the data. Second, it explains potential causality in the reverse direction, i.e. countries might choose trade partners based on the properties of their business cycles. Specifically, the model predicts that when the elasticity of substitution between domestic capital and intermediate imports is low, i.e. the country is constrained by domestic technology; there is greater benefit from trading with a positively correlated source and self-insuring through capital accumulation. I test this prediction empirically. By suggesting potential causality in the reverse direction, i.e. from business cycles to trade, this paper adds a new dimension to macroeconomic and trade policy. When studying optimum currency areas, regional agreements and trade treaties, current and forthcoming, policy makers should be looking at the TFP correlation as an important determinant of welfare post integration.

Jel code: F41, E32

3 Eylül, Cuma Friday, September 3

Invited Lecture Consensus

International Trade, Natural Resource Abundance and Economic Growth
GAITAN, Beatriz (University of Bern)

ROE, Terry L. (University of Minnesota)
We study the role of natural-resource abundance on economic growth in a two-country Ramsey model. The countries differ only in that one is endowed with an exhaustible resource that is a necessary factor of production in both countries and in their initial stocks of capital. Conditions are shown where gains from trade lead to a natural resource curse without market distortions. The curse is shown to solely depend on technological and preference parameters. Within a resource curse setting, the larger (smaller) the capital stock of the economy poor in exhaustible resources to that of the economy rich in exhaustible resources, the larger (smaller) is the GDP growth underperformance of the country rich in exhaustible resources. These findings can help explain why the curse occurs in some countries and not others. We also show the existence of history-dependent steady-state equilibria.
Jel codes: O13, O41
3 Eylül, Cuma Friday, September 3

Invited Lecture Consensus
A New New Global Auto Industry?
KIERZKOWSKI, Henryk (Graduate Institute of International Studies – Geneva)>
The global automotive sector will most likely experience groundbreaking changes over the coming decades. The sector is confronted with a multi-dimensional technological revolution spurred by radical product innovation, shifts in customer demand and government incentives. A dominant driver will be growing public concern about climate change.

Much of the anticipated incremental and radical change in automotive technologies will occur outside the traditional automotive sector with products such as electric batteries. The global automotive industry is also undergoing major structural change driven by shifts in demand with new hubs of manufacturing formed in China and India. As a consequence of the automotive revolution, there will be major changes in trade flows.

This paper brings together a number of robust trade models to shed some light on the likely evolution of the global automotive industry. Vertical product differentiation, intra-industry trade and fragmentation of production leading to international outsourcing are important features of the existing global automotive sector.

China and possibly India may well become leading players by 2050, if not earlier. The consequences of economic growth in these two countries will be stupendous. The number of cars will increase in the world from present 646 million to 2,906 million in 2050. Most of the increase will occur in developing economies. In particular, China with a car fleet of only 21 million in 2005 is projected by the World Bank to have 573 million cars by 2050, roughly the same number as the present stock of cars in the entire world. India is expected to have by mid-century a fleet of 367 million cars, about the size of the today's U.S. stock.

The impending demand changes will alone shake up the global auto industry. But there are also big shocks to be expected on the supply side. The car industry will likely go electric thus completing a circle that began more than a century ago. It is generally not known that the beginning of the automobile industry clearly belonged to the electric car.

Why is the electric car expected to make a comeback? There seem to be two primary reasons: 1) growing concerns with environmental issues manifested at the level of individual citizens, local communities, governments and even the world. This is a very powerful combination of interests, views and ideals. The strength of this wide and informal alliance has only been reinforced by recent oil price increases and economic crises; 2) greatly improved batteries have become available and a battery is the heart of an electric car. Here again, China is emerging as a key player.

3 Eylül, Cuma Friday, September 3

Contributed Session 39- Issues in Northern Cyprus Economy Workshop 3

The Effects of Political Trade Barriers on Social Welfare in Northern Cyprus: A Game Theoretical Model
GÖNÜLTAŞ, Suna (Doğuş Üniversitesi)

ORBAY, Benan Zeki (Doğuş Üniversitesi)
Serious political difficulties prevent trade relationship of In Northern Cyprus with other countries. Northern Cyprus’s international trade relationships should be through Turkey except for some special cases. Clearly, this situation creates an additional inefficiency for this country.
In this study, we aim to analyze the effects of these political barriers on North Cyprus economy. For this purpose, we use a three-country game theoretical model, namely, Northern Cyprus, Turkey and another foreign country. As it is known, goods can not be directly sold to the foreign countries from Northern Cyprus. We assume that a manufacturer aims to sell its product in the foreign country. Under the current political situation the only option is to sell via a distributor firm located in Turkey. In Turkish market there exist n other firms competing with the distributor in foreign country market. In our model, North Cyprus Government determines its support policy in the first stage. In the second stage, North Cyprus firm bargains with the distributor for the profit obtained in the foreign market. All firms play a Cournot game in the foreign country market in the third stage. We analyze the equilibrium of this model and compare with the situation of no barriers between the Northern Cyprus and the foreign country. This comparison helps us to understand the extent of the welfare loss of Northern Cyprus caused by existing political barriers. Results indicate that the level of transportation cost, the employment creation effect of production, the size of foreign country market and the degree of competition in Turkey are the main factors influencing the extent of this welfare loss.

JEL codes: F20; C78

3 Eylül, Cuma Friday, September 3

Contributed Session 39 - Issues in Northern Cyprus Economy Workshop 3

Performance of Small and Medium-Sized Manufacturing Enterprises in North Cyprus Under Global Financial Crises

LİSANİLER, Fatma Güven (Eastern Mediterranean University)
Although the business climate appears to have improved since 2003, with the opening of the borders between North and South Cyprus, the construction boom, triggered by the submission of the UN Peace Plan (The Annan Peace Plan) (2004) aimed at ending the partition of the island, and the introduction of the Green Line Trade agreement between North and South Cyprus, North Cypriot enterprises still face a variety of serious difficulties which is even became more serious with global economic crises.

This paper describes the performance of small and medium-sized manufacturing enterprises (SMEs) in North Cyprus based on the General Industry and Business Censuses (1970, 1998 and 2004) and the Turkish Republic of Northern Cyprus Manufacturing Industry’s Profile and Expectations Report (2009). First the paper outlines the structure, and development of manufacturing SMEs in relation to total number, size, ownership, finance structure, and geographical distribution. Than it analyzes SME performance in relation to production, employment, and productivity in comparison to larger enterprises and describes how these have changed with the recent global financial crises. The paper also assesses the obstacles faced by businesses and examines some aspects of the institutional environment that can hinder businesses adjustment in the face of economic slowdown based on the Turkish Cypriot Competitiveness Reports (2003-2004, 2008-2009 and 2009-2010).

Preliminary results show that SMEs producing for the domestic markets weathered the crisis better than larger firms, though many have been hit hard too, especially the ones in construction industry. They did not experience a generalized drop in production and employment, and, in some areas, even increased their productivity relative to that of larger firms. One of the reasons why SMEs performed better than large firms was that they were less dependent on imported inputs.

JEL codes: E20; E29

3 Eylül, Cuma Friday, September 3

Contributed Session 39 - Issues in Northern Cyprus Economy Workshop 3

Cyprus – UK Migration Corridor: Economic Implications of Remittances


McDONALD, Scott (Oxford Brookes)

THIERFELDER, Karen (US Naval Academy)
Cypriot labour migration to Britain started in the late 1950s with the active recruitment of labour by the British government, and was spurred on by the conflict between Turkish and Greek speaking communities in Cyprus. After the island gained its independence from Britain, Cypriots were given the option to choose either a Republic of Cyprus passport or a British passport due to the colonial ties with Britain (Mehmet Ali, 2001), making it relatively easy for them to migrate and work in Britain. The 1962/68 Commonwealth immigration legislation, inter-communal conflicts of 1963 and 1967/68 as well as the 1974 Turkish military intervention all led to mass emigration of Cypriots to Britain.
According to GMig2 database, 43% of unskilled and 42% of the skilled Cypriot migrant workers are resident in the UK. Thus, it is not surprising that 49% of remittances sent to Cyprus are by Cypriot migrant workers in Britain. Cyprus is one of the ten countries who became an EU member as a result of the Eastern enlargement of the EU in 2004. The EU’s fifth enlargement process induced substantial labour migration from accession states – mostly eastern European – into the states of the EU15. In response a number of EU15 states took steps to limit the migration of labour because of fears about the potential political and economic consequences of increased competition in domestic labour markets. However, no limitations were imposed on the migration of Cypriots to the UK thus encouraging further Cypriot emigration. This paper reports an analysis of the economy wide effects of changes in both labour migration from Cyprus to Britain and labour remittances to Cyprus by migrant workers. Migrations decisions are endogenised through labour supply functions that respond to changes in the relative wages in EU regions. Due to the past migration patterns and volumes of Cypriot workers, the analyses focuses on labour migration to the UK and the economic implications for Cyprus and the UK. The analyses are carried out using a 17-region, 21-sector and 5-factor aggregation of the GTAP database augments by the labour and remittance data from the GMig2 database (Walmsley et al. 2007) and additional IMF data (McDonald and Sonmez, 2004). The computable general equilibrium model used is a development of the GLOBE model - GLOBE_MIG (see McDonald & Thierfelder, 2008). GLOBE_MIG allows for bilateral labour migration through labour supply function and a richer characterization of domestic labour markets that allow, among other things, (limited) migration between labour types. This latter feature is important since it allows ‘skilled’ labour in one region to migrate to another region where the labour services are traded on the ‘unskilled’ labour markets. Preliminary results indicate that there will be some incentives for increased migration of Cypriot labour into the UK and in some scenarios, will have major negative implications for the performance of the domestic Cypriot economy. While the negative welfare implications are offset by increased remittances these compound the adverse implications for domestic Cypriot production through ‘Dutch Disease’ effects that cause exchange rate appreciation.

JEL codes: C68; F24

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