economics

Research: Do trade restrictions actually increase exporting?

Stock photo of a young woman shopping for electronic devicesImposing trade restrictions on parallel imports has the surprising effect of motivating a firm to export, according to a new study by economists Santanu Roy of SMU’s Dedman College and Kamal Saggi of Vanderbilt University.

Using game theory analysis, the economists found that diverse parallel importing policies among countries today make it possible to analyze for the first time how competition between firms and allowing or banning parallel imports can influence competition in foreign and domestic markets.

“Our research is the first to look at the consequence of strategic policy setting by governments in the context of competition in domestic and foreign markets,” said Roy, professor and director of graduate studies in the Department of Economics.

Most surprising among the findings, he said, is that imposing trade restrictions on parallel imports can actually motivate a firm to export – which can be the case when the market to which the firm is exporting is smaller than its own.

“So even though you are formally prohibiting the import of a product, you are actually promoting trade,” Roy said. “And that’s a new way of looking at this.”

Parallel importing occurs when a manufacturer exports its trademarked or patented products to a foreign market where demand, policies or price pressures require the goods be sold at a lower price. A third-party buyer purchases the low-priced goods and imports them back to the manufacturer’s home country, undercutting domestic prices.

The controversial practice has spawned gray market retail, where consumers buy high-value, brand-named goods at cut prices, such as electronics, video games, alcohol, books and pharmaceuticals.

Some advocates of free trade decry parallel importing, saying it infringes on manufacturers’ intellectual property rights accorded by copyright, patent and trademark laws. That, in turn, can discourage investment in new technology and products.

As a result, some countries allow parallel importing; others ban it. For example, parallel importing is allowed among the member countries of the European Union. It’s not permitted by the United States, although exceptions exist for many different products. Generally speaking, developed nations restrict parallel importing, while developing nations allow it.

The study by Roy and Saggi found there is no one-size-fits-all solution – neither a global ban nor a blanket endorsement. In fact, the authors found that policy diversity is working well because it takes into account important variables such as similarity or dissimilarity of markets, as well as competing products and government regulations.

“The only area where there may be need for intervention is where there may be major asymmetries between countries – where one country is very large and the other is very small,” Roy said.

Roy and Saggi report their findings in two articles: “Equilibrium Parallel Import Policies and International Market Structure,” a scenario in which there are quality differences in the products across countries, forthcoming in the Journal of International Economics; and “Strategic Competition and Optimal Parallel Import Policy,” a scenario in which there is asymmetrical protection of intellectual property, forthcoming in the Canadian Journal of Economics. The two economists were members of a development research group at the World Bank that researched parallel importing.

Written by Margaret Allen

> Read the full story from the SMU Research blog

Study: English-language dominance marginalizes most EU citizens

Stock photo of a man's hand writing 'Do you speak English?' on a clear panelThe European Union has 27 member countries and 23 official languages, but its official business is carried out primarily in one language — English. Yet the striking findings of a new study show that barely a third of the EU’s 500 million citizens speak English.

What about the other two-thirds? They are linguistically disenfranchised, say the study’s authors.

For the EU’s non-English speakers, their native languages are of limited use in the EU’s political, legal, communal and business spheres, conclude economists Shlomo Weber of SMU and Victor Ginsburgh of the Free University of Brussels (ULB), the authors who conducted the study. Those who are disenfranchised have limited access to EU laws, rules, regulations and debates in the governing body — all of which may violate the basic principles of EU society, the researchers say.

“Language is the proxy for engagement. People identify strongly with their language, which is integral to culture and traditions,” Weber says. “Language is so explosive; language is so close to how you feel.”

Weber and Ginsburgh base their findings on a new methodology they developed to quantitatively evaluate both costs and benefits of government policies to either expand or reduce diversity. The method unifies previous approaches to measure language diversity’s impact, an area of growing interest to scholars of economics and other social sciences.

“With globalization, people feel like they’ve been left on the side of the road. If your culture, your rights, your past haven’t been respected, how can you feel like a full member of society?” says Weber. “It is a delicate balance. People must decide if they want to trade their languages to increase by a few percentage points the rate of economic growth.”

Beyond the EU, the Weber-Ginsburgh methodology can evaluate linguistic policies in other nations, too, including the United States. It builds on a body of earlier published research by Weber, Ginsburgh and other economists.

They report their findings and present the methodology in their new book, How Many Languages Do We Need? The Economics of Linguistic Diversity (Princeton University Press). The research is noted on the web site of the International Monetary Fund in a review by Henry Hitchings.

Previous researchers found that 90 percent of the EU’s official documents are drafted in English and later translated to other languages, often French and sometimes German. Previous research also has documented frustration among EU officials with the political entity’s multitude of languages, as members wonder whether they are being understood.

Against that backdrop, the Weber-Ginsburgh analysis of the EU used official data from a routinely conducted EU survey of member states carried out in 2005 and later. The data came from answers to questions that included: What is your mother tongue? Which languages are you conversant in? How do you rate your fluency on a scale of very good, good or basic?

Weber and Ginsburgh found that of all the languages, English embraces the most EU citizens, followed by German second and French third. Yet those languages fall far short of including all people. Nearly two-thirds of EU citizens — 63 percent — don’t speak or understand English, while 75 percent don’t readily speak or understand German, and 80 percent don’t speak or understand French.

“English is spoken almost everywhere around the world,” the authors write, “but it is still far from being spoken by almost everyone.” At the same time, many non-native speakers of English feel the onslaught of that language’s global domination, a phenomenon that wasn’t generally foreseen and that evolved only within the past 60 years.

Weber and Ginsburgh discovered one EU age group that is less marginalized by English than other groups: youth ages 15 to 29. Fewer than half the young people – 43 percent – are disenfranchised, the researchers found.

Written by Margaret Allen

> Read the full story at the SMU Research blog

Research Spotlight: Does public insurance provide better care?

In the fierce national debate over a new federal law that requires all Americans to have health insurance, it’s widely assumed that private health insurance can do a better job than the public insurance funded by the U.S. government.

But a first-of-its-kind analysis of newly available government data found just the opposite when it comes to infants covered by insurance.

Among the insured, infants in low-income families are better off under the nation’s government-funded public health insurance than infants covered by private insurance, says SMU economist Manan Roy, the study’s author.

The finding is surprising, says Roy, because the popular belief is that private health insurance always provides better coverage. Roy’s analysis, however, found public health insurance is a better option — and not only for low-income infants.

“Public health insurance gets a lot of bad press,” says Roy. “But for infants who are covered by health insurance, the government-funded insurance appears to be more efficient than private health insurance — and can actually provide better care at a lower cost.

“Private health insurance plans vary widely,” Roy says. “Many don’t include basic services. So infants on more affordable plans may not be covered for immunizations, prescription drugs, for vision or dental care, or even basic preventive care.”

The U.S. doesn’t have a system of universal health insurance. But the Patient Protection and Affordable Care Act signed into law by President Obama on March 23, 2010, requires all Americans to have health insurance. The act also expands government-paid free or low-cost Medicaid insurance to 133 percent of the federal poverty level.

SMU Ph.D. candidate and Adjunct Professor of Economics Manan Roy

“Given the study’s surprising outcome, it’s likely that the impact of national reforms to bring more children under public health insurance will substantially improve the health of infants who are in the worst health to begin with,” says Roy (pictured right). “It’s likely to also help infants who aren’t low-income.”

Roy presented her study, “How Well Does the U.S. Government Provide Health Insurance?” at the 2011 Western Economic Association International conference in San Diego. She is a Ph.D. student and an adjunct professor of economics in SMU’s Dedman College of Humanities and Sciences.

A large body of previous research has established that insured infants are healthier than uninsured infants. Roy’s study appears to be the first of its kind to look only at insured infants to determine which kind of insurance has the most impact on infant health — private or public.

Roy found:

  • Infants covered by public insurance are mostly from disadvantaged backgrounds. Those under Medicaid and its sister program — CHIP — come mostly from lower-income families. Their parents — usually black and Hispanic — are more likely to be unmarried, younger and less educated. Economists refer to this statistical phenomenon — when a group consists primarily of people with specific characteristics — as strong positive or negative selection. In the case of public health insurance, strong negative selection is at work because it draws people who are poor and disadvantaged.
  • Infants on public health insurance are slightly less healthy than infants on private insurance. On average they had a lower five-minute Apgar score and shorter gestation age compared to privately insured infants. They were less likely to have a normal birth weight and normal Apgar score range, and were less likely to be born near term.
  • Infants covered by private health insurance are mostly from white or Asian families and are generally more advantaged. They are from higher-income families, with older parents who are usually married and more educated. Their mothers weigh less than those of infants on public insurance. This demonstrates strong positive selection of wealthier families into private health insurance.
  • Roy then compared the effect of public insurance on infant health in relation to private health insurance. To do that, she used an established statistical methodology that allows economists to factor negative or positive selection into the type of insurance. In comparing public vs. private insurance — allowing for strong negative selection into public health care — a different picture emerged.

“The results showed that it’s possible to attribute the entire detrimental effect of public health insurance to the negative selection that draws less healthy infants into public health insurance,” Roy says.

Written by Margaret Allen

> Read the full story at the SMU Research blog

Research Spotlight: Mathematical model predicts nations’ stability

Stock photo of flags of many nations from a low angleThanks to a new model created by an international research group, it is now possible to predict which European countries are more likely to become united or which are more likely to break up. It does so by not only considering demographic and economic criteria but, most ingeniously of all, culture and genetics.

SMU economist Shlomo Weber was a member of the team and co-author of the study that was published in the Journal of Economic Growth.

The scientists said their method quantitatively analyzes the stability and disintegration of European nations. It also estimates the implicit benefits of a larger European Union or, in other words, what would happen if the EU were one country. They also give empirical support for the use of genetics as an indicator of cultural heterogeneity amongst nations.

Besides Weber, other researchers included scientists from the Carlos III University of Madrid, the Toulouse School of Economics in France and the New Moscow School of Economics in Russia.

It has always been common knowledge that the more nations that join together in unity, the greater the profits, said Ignacio Ortuño Ortín, a researcher at the University of Madrid. This is because the market gets bigger and costs are shared. On the other hand, when many regions or countries are brought together there is a difference in populations, both economically and culturally. This, in turn, implies a high cost. There was a need for methodology that quantitatively analyzes these two aspects using specific cases.

The model the researchers put forward includes factors such as a country’s wealth alongside size and cultural differences in terms of population genetics. According to the experts, the most difficult aspect to quantify when making predictions is the “measurement” of countries from a cultural point of view.

“We take population genetics data and then use it to support the fact that such genetic distance between regions can be used as a good tool when approaching cultural distance,” Ortuño said.

According to the scientists, this does not suggest that genetics explains culture but that there is a correlation between the two. This means that populations that have intermixed more will also display greater cultural similarity. “We are not saying that genes explain the way a person thinks,” clarifies Ortuño.

In order to put consistency of their model to the test, a real-life case was chosen: the disintegration of Yugoslavia. The authors of the study found that the economic differences between its republics determined the order of disintegration – a fact that coincided with their model. Likewise, cultural differences, although small, played a key role in triggering instability.

Courtesy of the Spanish Foundation for Science and Technology

> Get the full story from the SMU Research blog

Research Spotlight: In Africa, cell phone boom can’t mask development needs

Addis Ababa, EthiopiaSMU economist Isaac Mbiti has seen in his native Kenya how cell phone use in Africa is booming. Some say it will transform the continent. However, Mbiti’s latest research reveals that cell phones alone can’t drive development. Still critical is a regulatory environment to foster use, plus roads, water, electricity and education.

The fast-growing use of cell phones in Africa, where many people lack the basic human necessities, has made headlines worldwide the past few years. The surprising boom has led to widespread speculation – and hope – that cell phones could potentially transform the impoverished continent.

But new research by Mbiti and Tufts University economist Jenny C. Aker finds that cell phones, while a useful and powerful tool for many people in Africa, cannot drive economic development on their own.

Mbiti and Aker say that while there is evidence of positive micro-economic impacts, so far there’s limited evidence that mobile phones have led to macro-economic improvements in African countries.

Cell phones can do only so much, say the researchers. Many Africans still struggle in poverty and still lack reliable electricity, clean drinking water, education or access to roads.

“It’s really great for a farmer to find out the price of beans in the market,” says Mbiti. “But if a farmer can’t get the beans to market because there is no road, the information doesn’t really help. Cell phones can’t replace things you need from development, like roads and running water.”

Mbiti and Aker will publish their findings in the article “Mobile Phones and Economic Development in Africa” in the Journal of Economic Perspectives. The Washington, D.C.-based Center for Global Development, an independent nonprofit policy research organization, has published a working version of the paper online.

To really have an impact, say Mbiti and Aker, the cell phone boom requires complementary access to public infrastructure, such as reliable electricity. “Also needed are appropriate policies and regulations that can promote the development of innovative mobile phone-based applications such as mobile banking services that have the potential to positively impact the economic livelihood of Africans,” Mbiti says.

The researchers also cite areas where more research is needed, such as the number of direct and indirect jobs created by the cell phone industry; whether mobile phones actually drive increases in gross domestic product; accurate mobile phone penetration rates; and whether cell phones are driving consumer surpluses due to increased market competition.

Written by Margaret Allen

Above, a neighborhood in Addis Ababa, Ethiopia.

> Read more at the SMU Research blog

Economics celebrates 50th anniversary of SMU’s oldest Ph.D. program

Richard B. JohnsonThe Department of Economics in SMU’s Dedman College celebrated the 50th anniversary of its Ph.D. program – the University’s first – on May 7, 2010, in the Jones Great Hall of Meadows Museum.

The program was founded by Richard B. Johnson, chair of the Economics Department from 1952 to 1968 and founder of SMU’s Southwestern Graduate School of Banking. The “Johnson Document” of 1957-58 laid out the proposed Ph.D requirements, and the University’s Board of Trustees approved the new program in May 1958.

A key step in the program’s beginning was the 1958 hiring of Paul T. Homan as the department’s new Director of Graduate Student Studies. Formerly of the University of Southern California, Homan was also the longtime editor of the American Economic Review.

Economics Ph.D. David Bowers with Willis Tate and Paul Homan, 1963On January 5, 1963, David Bowers received SMU’s first Ph.D. degree from the Department of Economics; he was one of the first 6 students admitted to the program in 1959. He made his career as a faculty member at Case Western Reserve University, where he specialized in macroeconomics, business cycles and economic forecasting. He also served as chair of Case Western’s Department of Managerial Studies and its Department of Banking and Finance.

In addition, the Department of Economics produced SMU’s first woman Ph.D. recipient. Mona Hersh-Cochran successfully defended her dissertation on “Milk Distribution: A Study in Market Structure and Regulation” on April 26, 1966. She then began a long career as a professor of economics at Texas Woman’s University, where she had begun teaching during her last year of Ph.D. studies. Hersh-Cochran was a 1991 recipient of TWU’s most prestigious award for faculty, the Cornaro Outstanding Professor Award. She received SMU’s Distinguished Alumni Award in 1995.

Economics, as part of a combined department with history, was one of SMU’s original programs of study during its 1915-16 opening year. Two professors taught 8 undergraduate courses during that first academic year.

Today, the department has 15 faculty members and 3 full-time lecturers teaching nearly 80 undergraduate, Master’s-level and Ph.D. courses. As of March 2010, the department listed 438 undergraduate majors, and it grants an average of 3 doctorates in economics each year – with 5 and 6 Ph.D. candidates earning degrees in 2009 and 2010 alone.

(Above right, Richard B. Johnson, chair of the SMU Department of Economics from 1952 to 1968 and founder of the economics Ph.D. program and SMU’s Southwestern Graduate School of Banking.)

(Above left, economics student David Bowers receives SMU’s first Ph.D. degree from President Willis M. Tate – left in photo – and Director of Graduate Student Studies Paul T. Homan. Dallas Morning News staff photo by Bill Winfrey.)

Research Spotlight: What causes appendicitis?

Human anatomy showing location of appendixWhat triggers appendicitis, and why is it more common in certain years and in the summer? SMU researchers have published evidence that a flu-like virus is to blame.

Dedman College Professors Tom Fomby, Economics, and Wayne Woodward, Statistical Science, reviewed 36 years’ worth of hospital data on cases of appendicitis, influenza and gastric viral infections. They discovered that appendicitis admissions peaked in the years 1977, 1981, 1984, 1987, 1994 and 1998.

The clustering pattern suggests that appendicitis outbreaks are typical of viral infections. The data also showed a slight increase in the number of appendicitis cases during the summer months.

Fomby and Woodward described their findings in “Association of Viral Infection and Appendicitis,” published in the January issue of the journal Archives of Surgery. Since then, it has been the subject of articles in several media outlets, including The Daily Mail Online, USA Today, BusinessWeek, Science Daily and many others.

Read more from the SMU Research blog

Research Spotlight: Does might make right in global trade rules?

global-currencies-300.jpgThe World Trade Organization‘s rules governing the multilateral trading system may pass legal litmus tests, but from an economic standpoint, do they work?

Kamal Saggi, chairman of the Department of Economics in SMU’s Dedman College of Humanities and Sciences, has been examining international trade and the effects of multinational companies on developing countries since graduate school at the University of Pennsylvania. Lately he’s also been delving into the legal layers of trade. A recent research focus has been India’s burgeoning pharmaceutical industry.

“India has one of the most advanced pharmaceutical industries in the developing world and is poised to be a world player,” says Saggi, Dedman Distinguished Collegiate Professor of Economics and a 2003 Ford Fellowship recipient. “But pharmaceutical patents have been a big area of controversy.” Divergent approaches to intellectual property (IP) have often caused friction between Indian and global pharmaceutical companies. “In India, you could patent a process but not a product,” says Saggi, who grew up in India.

By developing alternative production procedures, Indian companies cleared their country’s legal hurdle to produce cheap, generic drugs that could meet local demand and be exported to other developing countries. In 1995, member countries of the World Trade Organization (WTO) successfully negotiated a multilateral agreement that “basically says all members have to adopt the same rules and regulations regarding patents, trademarks and copyrights,” he says. The WTO ruling protected the status quo for U.S. and European enterprises, but the benefit to firms in emerging economies was debatable, Saggi says. “Developing countries were asked to ratchet up their legal coverage of IP, but the question was: Why should they?”

His study of that complex issue appears in the paper “Intellectual Property Rights, Imitation, and Foreign Direct Investment: Theory and Evidence” (National Bureau of Economic Research, 2007). Saggi built a mathematical model that captured the essence of the problem – was it economically worthwhile for developing country members of the WTO to adopt its new rules regarding IP?

He and three co-authors – Lee Branstetter, Carnegie Mellon University; Raymond Fisman, Columbia University School of Business; and C. Fritz Foley, Harvard Business School – then plugged firm-level data on U.S. multinational companies collected by the Bureau of Economic Analysis into the model to “theoretically and empirically analyze the effect of strengthening intellectual property rights in developing countries.”

The economists determined that there were more gains than risks to the budding economies. “In some instances, it may be a case of trading apples for oranges. For example, a developing country may say, ‘If we reform our IPR, then you’ll open up agricultural trade to us,'” Saggi says. Or, as in the case of Indian pharmaceuticals, it may be an apples-for-apples exchange.

“We found IPR reform in developing countries had a pretty substantial effect,” he says. “Where the IP laws have been strengthened, there has been a measurable increase in multinational investment.” For example, some multinationals split aspects of research and development, such as clinical trials, into separate operations in collaboration with Indian companies.

Read more from the 2009 SMU Research magazine
Find more of Kamal Saggi’s research at his faculty homepage

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