“Institutions and Development Revisited: A nonparametric approach.” with S. R. Basu, Policy Issues in International Trade and Commodities Study Series, No 42, UNCTAD, 2010
The paper uses the Li-Racine (2004) generalized kernel estimation methodology to examine the role of institutions in understanding differential levels of development across countries. The analysis is carried out for a set of 102 countries over 1980 to 2004. Similar to parametric results established in the literature, the nonparametric analysis lends further support to the view that institutions matter in the development of countries. For a majority of the cases considered, institutions have a positive impact on development. Our results indicate (a) parametric estimates suffer from misspecification bias and (b) the impact of institutional quality on development quality is heterogeneous across countries and time periods.
“Healthcare in United States: Why is supply so price insensitive?” with S. K. Das, Contemporary Economic Policy, Vol 27 (4), 2009.
Health spending as a percentage GDP in the U.S. economy is growing, from 5% in 1960 to about 16% in the current period and it is predicted to grow to as much as 30% in 2050. Then why is the supply of health care in the U.S. so insensitive to steeply rising prices? The paper conducts an econometric study to show that high health care costs have an adverse impact on labor productivity, causing a negative production externality in all industries. So, can the rising cost of health care affect U.S. comparative advantage? The paper seeks answers to these questions in a general equilibrium model and finds that the labor productivity shock is responsible for the sluggish or declining supply of health care. Consumers are able to afford less health care due to a possible decline in real wages. U.S. comparative advantage becomes a non-issue, provided that the equilibrium is stable in spite of a negatively sloped health care supply curve. Negative externality, leading to market failure may be addressed in two alternative ways.
"Distribution Neutral Abatement Policy in a Model of Trade and Environment” with S. K. Das, Environment and Development Economics Vol 14 (4), 2009.
The Pollution Haven Hypothesis (PHH) states that with weak environmental policies a country can create comparative advantage in the polluting sector. This paper formulates a 3-good-3-factor model where the abatement input is a pure intermediate-good. In our model, the PHH as well as the neoclassical trade theorems are valid only when environmental policies are distribution neutral. Inspired by the U.S. Clean Air Act, we develop and estimate a dynamic panel model. We find that U.S. environmental policies are consistent with distribution neutrality. Our results indicate that lowering abatement standards in all industries is the only way the U.S. can become a pollution haven. In the context of our model, the PHH has damaging implications for the world environment.
“Trade and Environment: A Theoretical and Empirical Analysis” Occasional Paper No. 118, Export Import Bank of India, Quest Publications, India, July 2007.
Over the last few decades, while economists have advocated industrial growth, scientific discoveries, trade, international relations and technological process, environmentalists have voiced against environmental degradation, industrial pollution, climatic changes, deforestation and species extinction. There is a growing concern among advocates of free trade that environmental policies can be used as non-tariff barriers to trade. Opponents argue that free trade agreements will start a race to the bottom, forcing developed nations to lower their environmental standards to match those in the less developed nations. The disputes at the WTO in the late nineties, arising from the ban of tuna imports from Mexico and shrimp from India, Pakistan, Thailand and Malaysia are case studies often cited in this issue. In this context, the present study has several contributions to the current trade and environment controversy. It addresses the heart of the debate, which is the effect of environmental policies on the pattern of trade and the composition of industrial output. Some of the existing literature seems to prove with certainty that the effect of regulation on relative prices and output is straightforward. For example, the pollution haven hypothesis states that countries with poorer standards specialize in the production and export of polluting products. A corollary is that, if standards are made more stringent, the polluting sector in these countries will contract. Thus, for the benefit of the environment, trade agreements should be linked with environmental agreements. The present study is a serious attempt to examine the validity of above mentioned proposition both from theoretical and empirical point of view. It shows that there are unanticipated consequences of regulation on pollution, production structure, income distribution and the pattern of trade.
“Can Stricter Environmental Regulations Increase Export of the Polluting Good?” with S. K. Das, The BE Journal of Economic Analysis and Policy, Vol. 7, Iss. 1 (Topics), Article 26, 2007.
According to the Pollution Haven Hypothesis (PHH) weak environmental policies improve a country’s comparative advantage in the polluting sector thus promoting its expansion. In this paper we develop a neo-classical general equilibrium model with two goods and two factors and show that the relationship between environmental policies and comparative advantage can be ambiguous. We focus entirely on emission caps or command and control (CAC) programs of regulation and treat abatement as equivalent to a technological retardation. We show that when the technological retardation is Hick neutral, the PHH holds and the Heckscher Ohlin Samuelson (HOS) theorem determines trade patterns between a capital abundant country and a labor abundant country that follow different environmental policies. If pollution abatement is capital biased in the polluting sector, which is likely to be the case, the standard trade theorems and the PHH may not hold. The paper derives a sufficient condition under which the PHH would hold. However, if this condition is violated, the PHH as well as the HOS theorem may not hold.
“Convergence in the Consumption Behaviour: A Northeast Perspective” with S. K. Das, in A. Barua, eds., India’s Northeast: Developmental Issues in a Historical Perspective, Manohar, Delhi, 2004.
This paper makes an attempt to analyze production and consumption patterns of eight states in the Northeastern region of India. It is interesting to observe that while the consumption standards of these states have converged to the Indian average, their production levels lag behind the all India average, making ‘dependency ratio’ rather high. The discrepancy between high consumption standards and poor production performance is being supported by central transfers to these states. Since this is not an economically viable situation, our paper makes several suggestions for economic development of the Northeastern region. We point out that there is possibility of intra-regional trade as well as trade with Bangladesh, Myanmar and Bhutan. But this will require substantial investment in infrastructure to facilitate a greater volume of trade even with the rest of India. The Northeastern region, however, has two advantages: higher literacy rate, particularly female literacy rate relative to the Indian average and an environment that is yet to be polluted by industrialization. Investment in infrastructure in the Northeastern region seems to be justified by many factors including the need to achieve an optimal geographic distribution of industrial pollution.
“Trade Transport and Environment Linkages at the U.S. Mexico Border: Which Policies Matter?” with L. Fernandez, submit to Journal of Environmental Management.
We apply a fixed effects model to examine the impact of trade and environmental policies on air quality at ports along the U.S.-Mexico border. We control for other factors influencing air quality, such as air quality of cities near the border, volume of traffic flows and congestion. Results show the air quality improved after 2004, when the diesel engine policy was applied. We see mixed results for the trade policy, whose implementation time varies across ports along the international border. Controlling for air quality in cities near the border is essential for assessing the policy contributions to air quality.
“Trade, Environment and Welfare in a Model of Monopolistic Competition” with S. K. Das, re-submit to Eastern Economic Journal.
In a North-South model of trade in which the market structure is monopolistically competitive, though North’s attempt to reduce pollution creates a ‘pollution haven’ in South, its terms of trade improve and total number of varieties produced in the world economy may increase. The paper distinguishes between the direct and indirect welfare effects of North’s environmental policy. While the direct effect on welfare is due to abatement, indirect effects are results of the policy’s impact on prices, wages, outputs and varieties. A complex set of forces operate to determine indirect welfare effects of a tax or tariff on a pollution-causing raw material: the crucial factors are price elasticity of demand, elasticity of substitution between labor and raw material, South’s trade orientation and the dependency ratios. An optimally chosen pollution tax directly hurts but indirectly benefits South. The indirect welfare effect of a tariff is similar to that of a pollution tax. However, a positive optimum tariff may not exist, in which case North’s optimum policy would be free trade.
“Is conflict between Economic Growth and Equitable Distribution of Income inevitable? Theory and Evidence from India,” with S. K. Das, invited to submit a paper for Collected Volume Series titled, India by Global Thinkers, World Scientific Publishing Co. (Singapore)
This paper examines the theoretical relationship between growth and distribution through income transfers. Current work on this emphasizes the role of initial conditions. The ultimate effect of income transfers on growth rates is found to be a combination of two factors: accumulation and redistribution. It is not necessarily true that income transfer will invariably reduce growth rates. If the initial distribution of income is fairly unequal, growth induces greater equality. On the other hand, at high levels of per capita incomes, growth may raise inequality if the initial level of inequality is not very high. This brings a new dimension in the ‘inverted-U hypothesis’. Looking at the growth experiences of the Indian economy, which is known as one of those economies where economic inequalities are extremely high, we find that during 1981-2002 regional income inequality has increased but annual growth rates are negatively correlated with inequality measures which obviously means that the transfer mechanism is not working very well.
“Export Structure and Economic Performance in Developing Countries: Evidence from Nonparametric Methodology” with S. R. Basu, under review, Policy Issues in International Trade and Commodities Study Series, No 42, UNCTAD, August 2010.
The objective of the paper is to use nonparametric methodology to examine the relationship between skill and technology contents of exports and GDP per capita, controlling for institutional quality and enrolment ratio. The paper uses the Li-Racine (2004) generalized kernel estimation methodology to examine the role of export structure in understanding economic performance across countries and country-groups. We also control for other factors that influence economic performance such as, institutional quality as well as enrolment ratios. The analysis is carried out for a set of 88 countries over 1995 to 2007.
“Will the polluting sector expand under stricter environmental regulations? A nonparametric SUR estimation” under review, Econometric Reviews, August 2010.
According to the Pollution Haven Hypothesis (PHH), weak environmental policies promote expansion of a country’s polluting sector by improving its comparative advantage in the polluting sector. However, theoretical models as well as empirical papers show mixed results. The paper utilizes a local linear generalized least squares estimation technique on U.S. data for 26 industries corresponding to the 3-digit level International Standard Industrial Classification (ISIC) system, during 1976 – 2001, to examine the impact of higher abatement costs on the labor market as well as the size of the polluting industries. Errors of the regression model show contemporaneous correlation as in the case of Zellner’s (1962) SUR model. The results find, pollution cannot be reduced without affecting the distribution of income, and that the impact of higher abatement costs on relative size varies from industry to industry. The findings of the paper have several implications of policy makers in the area of trade and environment.
“State Income Inequality, Income Transfers and Growth in the US Economy: Theory and Evidence Based on Random coefficient Estimation,” with S. K. Das, under review, Bulletin of Economic Research,August 2010.
“Monte Carlo Results on A Nonparametric Estimation of Seemingly Unrelated Regression Equations” August 2010.
This paper proposes a nonparametric estimator of a system of regression equations, with mutually correlated disturbances and unknown functional forms. A Monte Carlo experiment is carried out to examine the small sample properties of alternative estimators such as the ordinary least squares (OLS), Zellner’s two-stage Aitken (ZGLS), the local linear least squares (LLLS) and the local linear generalized least squares (LLGLS) estimates. It is observed that the proposed nonparametric estimator drastically outperforms the parametric estimators when the data generating process is non-linear.
“A cap and trade model of international trade,” with S. K. Das, invited to present at the Annual Meeting, Western Economic Association, in July 2010
This paper underscores the importance of an international agreement to set the caps and permit allocation parameters uniformly for all countries, while allowing free international trading in permits. The standard trade theoretic model, in which one variant of cap-and-trade is introduced, shows that the cap-and-trade policy has a two-way impact. Simultaneously, an advantage for the clean sector and a disadvantage for the polluting sector are created, which has no unanticipated consequences and which leaves no scope to dispute the pollution haven hypothesis. A country may employ cap-and-trade policies to improve its competitiveness in world trade. Increasing the supply of permits may turn out to be a new trade policy, making a mockery of the objective of reversing climate change. An econometric study, using nonparametric estimation of product share functions of three-digit industries in 17 countries, shows a positive relationship between product share and air pollution after controlling for capital/labor ratios.
“Are the Fundamental of the Economy Strong? Health Care Costs and Workers Productivity: A Nonparametric Bootstrap based SUR Analysis”, invited to present at Annual Meeting, Southern Economic Association, November 2008.
The paper conducts an econometric study to show that high health care costs have an adverse impact on labor productivity, with U.S. data. We employ a Seemingly Unrelated Regressions Equations Model to capture the inter-relations among 4 U.S. regions. In all 4 regions the relationship between healthcare costs and labor productivity is negative. To deal with bias associated with incorrect functional form, we also estimate a nonparametric SURE model. The nonparametric model gives mixed results, which could be due to endogeneity problem. The negative relationship is a crucial assumption to explain the U.S. health care puzzle. Our parametric results find support for the view that the U.S. health sector is imposing a negative externality on all other sectors of the economy, thus leading to a market failure.
“Joint venture and export pessimism” with S. K. Das, University of California, Riverside, Working papers in Economics by the Department of Economics, UCR, August 2002.
After a joint venture agreement with a high-income country’s firm, an export-oriented but technologically backward firm in a low-income country may earn higher profit, but may not be able to improve its export market performance, unless the world market size is large. In a two-firm-two-country model, the export performance of a low-income country’s firm may suffer in a joint venture, or if the high income country’s firm plays a leadership game. However, the high-income country’s firm may prefer a joint venture to a leadership game if the profit share of the low-income country’s firm can be restricted. Under certain conditions, the low-income country’s firm should compete with the high income country’s firm and use various market signals to improve its credibility in the world market. A general model with ‘n’ firms of ‘n’ low-income countries forming a global joint venture with one firm of a high income country, shows that, the joint venture is feasible only if there are no more than three technologically backward firms and that it may be possible for a single firm of a low-income country to meet the export clause imposed by its government.
Economic Growth and Inequality with S. K. Das, invited to write for World Scientific Publishing Co. (Singapore).
The book develops a model to show that the relationship between economic growth and inequality depends upon certain initial conditions. A country’s income distribution, growth rate and poverty in the base year determine its growth path as well as income distribution, at various levels of disaggregation. The theory suggests that a large number of studies on the relationship between economic growth and distribution of income need to be re-examined by classifying the samples according to initial conditions. We provide empirical evidence with country-level data using random co-efficient model estimates as well as nonparametric estimates. The nonparametric allow us to comment on the growth-inequity relationship in a country as well as country groups.