Abstract: Controlling for the aggregation bias in FDI flows and the home and host country heterogeneity within and between Northern and Southern countries, we explore the effects of bilateral FDI flows on host country productivity growth, and on the productivity convergence dynamics between the host and the productivity-frontier country. Using bilateral FDI flows data from 108 host and 240 home countries over 1990-2012, and employing a variety of estimation techniques together with a rich battery of robustness tests, we find no significant effect of bilateral FDI flows on either host country productivity growth or on the productivity gap between the host and the frontier country. We also show that these findings are not sensitive to the direction of FDI flows, which are South-South, South-North, North-South or North-North. In a decomposition exercise, we also fail to find any significant effect of bilateral or aggregate FDI flows on physical capital growth. Yet, we find some evidence of a positive effect of FDI flows on human capital growth but just in one direction, South-South. Last but not least, we fail to find any productivity growth or convergence effect at the sectoral level, including agricultural, industry or services sectors.
Abstract: This article surveys the literature on costs and benefits of South-South vs. North-South economic exchanges. Unlike the case for North-South exchanges, academic work on South-South economic relations has been historically limited given their marginal importance in the global economy. After the 1990s, the literature has changed in two main ways. First South-South trade and finance since then has increased dramatically, leading to a bourgeoning literature on the topic. Second, the rise of the Emerging South has opened up new lines of inquiry to include not just the traditional topics of trade and preferential trading agreements, but also cover technology transfer, capital flows, labor migration, institutions, and environment. We discuss how this literature has evolved to take into account of the greater complexity of South-South relations with a focus on China in Africa as well as the blurring of the lines between heterodox and mainstream analysis of South-South relations. We end the review by showing how the empirical and theoretical literature is exploring the increasing divergence within the global South between what we refer to as the Emerging South and the Rest of South.
-"Exchange Rate Adjustments and US Trade with China: What does a State Level Analysis Tell Us? Global Economy Journal 17(2): 1-14, 2017 (with C. Wu).
Abstract: In this paper we explore the trade effects of bilateral real exchange rate changes between the 50 U.S. states and China over the period of 2005-2012. There is significant heterogeneity in the productive capacities of 50 states with major implications for their trade patterns. The empirical results based on state-level trade flows and state-level relative prices suggest that the long-run real exchange rates elasticity of US exports to China is in the range of [-3.77, -2.85] and that of Chinese exports to the US is in the range of [-0.23, -3.34]. We also find that state-level differences in human capital and financial development are significant determinants of their export performances with respect to China.
-"Effects of FDI Flows on Institutional Development in the South: Does It Matter Where the Investors are from?" World Development 78, 341-359, 2016.
Abstract: Global FDI flows to and from developing countries have increased significantly since the 1990s. While developing countries saw this as a positive development, many economists and policy makers in developed countries have raised concerns regarding the institutional effects of developing country investments in other developing countries. In this paper we explore the effects of bilateral FDI flows on institutional development gaps between countries and whether such effects are conditional on the direction of flows including South-South, South-North, North-South and North-North directions. The empirical results using bilateral flows between 134 countries and a variety of institutional development measures during 1990-2009 suggest that the institutional development effects of FDI flows in any direction including the North-South or South-South directions are not significant. In any case we do not find any significant convergence or divergence effect of FDI flows on the institutional distance between host and home countries. We also fail to find any significant effect of aggregate North-South FDI flows on host country institutions. In contrast, we find that aggregate South-South FDI flows have a significantly negative effect on host country institutions. Furthermore, we find some evidence that South-South FDI flows may be harmful to institutional development in natural resource rich countries while the opposite is true for North-South flows. Overall, the results suggest that there is no strong evidence of any benevolent or malevolent effects of bilateral FDI flows from developed or developing countries to developing countries.
-"Institutional Differences and Direction of Bilateral FDI Flows: Are South-South Flows any Different than the Rest?" The World Economy, 39(12): 2000-2024, 2016 (with C. Hu).
Abstract: We explore the asymmetric effects of institutional differences on bilateral FDI flows conditional on countries' development levels, previous experiences of foreign investors, and bilateral trade relations. The empirical results using bilateral FDI data from 134 countries during 1990-2009 suggest that institutional differences create entry barriers for foreign investors only in North-South and South-North directions, and more so for the former. Furthermore, Southern investors appear to have a comparative advantage in institutionally different developing countries. Finally, we find no evidence that investor experiences in other institutionally different countries or existing trade linkages negate the negative effect of institutional distance.
-"Total Factor Productivity, Foreign Direct Investment and Entry Barriers in Chinese Automobile Industry" Emerging Markets Finance and Trade 52(2): 302-321, 2016. (with L. Su).
Abstract: We explore three questions on FDI: 1) What are the differences in entry barriers for foreign, public and private investors? 2) What are the effects of past productivity levels on future FDI decisions? 3) What is the effect of equity structure on future TFP levels? The empirical results based on a monopolistic competition model and using a firm-level dataset from the Chinese automobile industry suggest that foreign investors face higher entry barriers and react stronger to past TFP levels. FDI is also found to improve future TFP more than others. Finally, WTO accession is found to reduce entry barriers for foreign and domestic private investors while increasing for public investors.
Abstract: We investigate the level and volatility effects of real exchange rates on productivity growth of manufacturing firms with heterogeneous access to debt, and domestic and foreign equity markets in Turkey. We find that while volatility affects productivity growth negatively, having access to foreign or domestic equity, or debt markets does not alleviate these effects. Furthermore, foreign or publicly traded companies do not appear to perform significantly better than the rest. We detect, however, that productivity is positively related to credit market access. Additionally, we find that while export-oriented firms react positively to currency appreciations, they are hurt more from volatility.
Abstract: This paper explores two questions. First, do Preferential Trade Agreements (PTAs) affect manufactured goods exports of developing countries? Second, does it matter for developing countries whom they sign the PTAs with? We find that the answer to both questions is yes. Using bilateral manufactured goods exports data from 28 developing countries during 1978-2005; we find that South-South PTAs have a significantly positive effect on manufactured goods exports. In contrast, no such effect is detected in the case of South-North PTAs. We confirmed the robustness of these findings to estimation methodology, sample selection, time period, zero trade flows, and multilateral trade resistance.
Abstract: Employing a matched employer-employee dataset, this paper explores the effects of exchange rate volatility on the growth performances of domestic versus foreign, and publicly traded versus non-traded private manufacturing firms in a major developing country, Turkey. The empirical results using dynamic panel data estimation techniques and comprehensive robustness tests suggest that exchange rate volatility has a significant growth reducing effect on manufacturing firms. However, having access to foreign, and to a lesser degree, domestic equity markets is found to reduce these negative effects at significant levels. These findings continue to hold after controlling for firm heterogeneity due to differences in export orientation, external indebtedness, profitability, productivity, size, industrial characteristics, and time-variant institutional changes.
Abstract: This paper investigates the effects of real exchange rate uncertainty on manufactures exports from 28 emerging economies, representing 82% of all developing country manufactures exports, and explores the sources of heterogeneity in the uncertainty effects by controlling for the direction of trade (South-North or South-South), and the level of financial development of the exporting country. The empirical results show that for more than half of the countries the uncertainty effect is unidirectional, either South-South or South-North, and the median impact is negative. In addition, while we find that financial development augments trade, exchange rate shocks can negate this effect. Last but not the least, trade among developing economies improves export growth under exchange rate shocks.
Abstract: The effects of trade openness on within country income inequality in developing countries are found to be inconclusive in existing literature. This study proposes a “threshold effect” to address this issue. We argue that when exports benefit a large portion of population, it is more likely to decrease income inequality within a country; otherwise increasing exports will likely increase the income inequality. Using a data set of 55 developing countries from 1981-2005, we find that if the employment share of manufacturing industry is above (below) a threshold, the increase in the share of manufactures exports reduces (increases) the within-country income inequality.
Abstract: Using bilateral trade data in total and technology-and-skill-intensive manufactured goods for 28 developing countries that account for 82% of all developing country manufactures exports between 1978 and 2005, this paper explores the effects of financial development on the pattern of specialization in South-South and South-North trade. The empirical results using dynamic panel regressions and comprehensive sensitivity tests suggest that financial development in the South has an economically and statistically significant positive effect on the share of total and technology-and-skill-intensive manufactures exports in GDP, and total exports in South-South trade. In contrast, no such significant or robust effect of financial development is found in South-North trade. Overall, the positive effect of financial development is found to be asymmetric favoring South-South significantly more than South-North trade. In addition, financial development is found to be increasing technology-and-skill-intensive manufactured goods exports significantly more than total manufactured or merchandise goods exports.
Abstract: Employing a unique panel of 691 private firms that accounted for 26% of total value-added in manufacturing in Turkey, the paper explores the impacts of exchange rate volatility on employment growth during the period of 1983 - 2005. The empirical analysis using a variety of specifications, estimation techniques, and robustness tests suggest that exchange rate volatility has a statistically and economically significant employment growth reducing effect on manufacturing firms. Using point estimates, our results suggest that for an average firm a one standard deviation increase in real exchange rate volatility reduces employment growth in the range of 1.4 - 2.1 percentage points.
Abstract: Using firm level panel data, we analyze the impacts of rates of return gap between financial and fixed investments under uncertainty on real investment performance in three emerging markets, Argentina , Mexico and Turkey . Employing a portfolio choice model to explain the low fixed investment rates in developing countries during the 1990s, we suggest that rather than investing in irreversible long term fixed investments, firms may choose to invest in reversible short term financial investments depending on respective rates of returns and the overall uncertainty in the economy. The empirical results show that increasing rates of return gap and uncertainty have an economically and statistically significant fixed investment reducing effect while the opposite is true with respect to financial investments.
Abstract: Using micro-level panel data, the paper analyses the impacts of short-term capital flow volatility on new fixed investment spending of publicly traded real sector firms in three major emerging markets that are Argentina, Mexico and Turkey. The empirical results including comprehensive sensitivity tests suggest that increasing volatility of capital inflows has an economically and statistically significant negative effect on new investment spending of private firms. Accordingly, a 10 per cent increase in capital flow volatility reduces fixed investment spending in the range of 1-1.7, 2.3-15.1, and 1 per cent in Argentina , Mexico and Turkey respectively.
Abstract: The paper analyzes the impacts of cash flow from multiple investments in real and financial sectors on the new fixed investment spending of real sector firms. The empirical results based on the Euler equation approach and semi-annual firm level data from two major emerging markets, Mexico and Turkey , suggest that profits and rates of returns from fixed and financial assets have differential effects on fixed investment spending of real sector firms. Accordingly, increasing availability and accessibility of alternative investment opportunities in financial markets c8an become instrumental in channeling real sector savings to short-term financial investments instead of long-term fixed capital formation and thus lead to deindustrialization.
Abstract: Using semi-annual data from 1993 to 2003 for all publicly traded manufacturing firms in Turkey , this paper explores the impacts of macroeconomic uncertainty and external shocks on profitability of real sector firms in the presence of multiple investment options in both real and financial sectors. The paper argues that increasing availability and accessibility of investment opportunities in the financial markets help real sector firms sustain profit margins despite market rigidities, increasing goods market competition, or higher levels of risks. The empirical results based on dynamic panel estimations show that increasing macroeconomic uncertainty and volatility have a significantly negative effect on firm profitability. In contrast, increasing share of financial investments in total assets is found to be reducing such negative effects at a statistically and economically significant level.
Abstract: The paper by using micro-level data analyzes the impacts of macroeconomic uncertainty and country risk on real investment under financial liberalization. The results suggest that increasing macroeconomic volatility and country risk hurt fixed investment spending of real sector firms.
Abstract: The last two decades have witnessed resurgence in South-South trade, investment, and regional integration. This paper examines trade performance in total and technology-and-skill-intensive manufactures for a sample of 28 developing countries with both developed (South-North) and other developing (South-South) countries. Previous studies and our sample data shows that South-South trade in manufactures is characterized by higher capital and skill intensive factor content relative to South-North trade with major implications for development in the South including the possibility of dynamic gains through learning by exporting, technological externalities, allocative efficiencies and scale economies. The paper concludes by discussing obstacles for increasing South-South trade and possibilities for future research on the topic.
Abstract: Using micro level company panel data, I analyze the impacts of financial liberalization on real investment behavior under capital market imperfections, volatile macro-prices and changing county risk levels. I argue that financial liberalization in developing countries has become instrumental in channeling real sector savings to speculative short-term investments instead of long-term investment projects and hence altered the pattern of capital accumulation in the real sectors of the economy.
Abstract: This article analyses the role of historically-determined institutional and political characteristics in determining both the nature of the adjustment process, and its economic and political outcomes, in Turkey. In particular, the author explores the degree to which the formation of rent-seeking coalitions has contributed to the failure of neo-liberal economic reforms in the country. The analysis suggests that the Turkish experience since the early 1980s offers a unique case for studying the relationships between the state bureaucracy, the military, the business sector, civil society, and international economic actors. Unlike previous research in this area, this article focuses especially on the role of the military as an interest group in the process of economic liberalization in Turkey.
Abstract: The risks and benefits of financial liberalization is a highly contentious issue in the current economic debate. This article focuses on Turkey’s ‘‘lost decades’’ and tries to reveal the underlying factors behind the economic collapse in the country. Two elements will be analyzed: (a) the role of public sector together with the domestic banking sector in setting the stage for alternating financial crisis, and (b) the effect of close correlation between external debt and capital flight on the economy. This paper argues that there exists a contemporaneous bi-directional causality between external debt and capital flight in the Turkish economy. Exploration of this fact may have some important implications for economic policy modeling in Turkey’s crisis-ridden economy.
Publications in Edited Books
Abstract: After three decades of market-oriented reforms along the Washington consensus, full employment has not yet been materialized in developing countries despite significant gains in fiscal and monetary discipline, and price stability. The current study analyzes the sources of structural transformation in the labor markets of developing counties after liberalization and structural adjustment programs using Turkey as a case study. We argue that the experience of Turkey as a major developing country with almost three decades of liberalization experience is not unique and can help determine the causes of disappointing labor market performances observed in other countries. In exploring the sources of sluggish employment creation major attention is given to liberalization, fixed capital accumulation, growth and labor market interaction. The paper also explores the effects of liberalization programs on labor market flexibility, distribution, wage-productivity link, and gender divisions in labor markets.
Abstract: The paper reviews the theoretical and empirical evidence on the relationship between financial liberalization and socio-political risk by identifying the inter-dependent nature of socio-political and economic fault lines . In particular, the research examines the dynamic relationship between the volatility of short-term capital flows and socio-political instability. Accordingly, the socio-political risk is argued to be endogenously determined with the volatility of short term capital inflows such that increasing volatility by disrupting market activities, domestic investment and growth increases socio-political risk, which further feeds into the volatility of such flows. Using evidence from three major developing countries that are Argentina , Mexico and Turkey and applying Granger causality tests and Impulse Response Functions, the paper finds support for the presence of an endogenous relationship between the volatility of short-term capital inflows and socio-political instability. The results challenge the previous research regarding the use of political risk as a purely exogenous variable.
Abstract:This paper examines value creation and distribution in acquisitions in the context of Turk Telekom privatization. We find that operational synergies, in addition to traditional sources of synergies, play an important role in value creation. Specifically, re-allocation of resources from in efficient business units to efficient ones contributes to value creation. We also document that the privatization method as well as the post-privatization regulatory framework are significant determinants of the success or failure of privatization programs in developing countries especially with regard to increasing competition, efficiency and value transfer to the public.