Transcript How have small open economies responded to the challenge

How have small open economies
responded to the challenge of
globalization?
Mark A. Wynne
Federal Reserve Bank of Dallas
Prepared for "The Challenges of Globalization for Small Open
Economies with Independent Currencies“
Reykjavik, Iceland, May 31- June 1, 2007
Small open economies
• Which countries are small & open?
• Smallness => price taker in global markets
• Applebaum & Kohli (1979)
– Canada-US relationship
• Relevant price data difficult to obtain
• Reliance on quantity measures
Average annual inflation rate,
1973-2004 (log)
Openness to trade
8
7
6
5
4
3
Correlation: -0.35
2
1
0
0
20
40
60
80
100
Share of imports in GDP,
average 1973-2004
120
140
Average annual inflation rate,
1973-2004 (log)
Openness to capital
8
7
6
5
4
3
Correlation: -0.16
2
1
0
0
2
4
6
8
Ratio of foreign liabilities to GDP,
average 1973-2004
10
12
Average annual inflation rate,
1973-2004 (log)
Openness to labor
8
7
Correlation: -0.17
6
5
4
3
2
1
0
0
10
20
30
40
50
60
Foreign born population as share of total,
average 1970-2005
70
United Kingdom population growth
Thousands of persons
250
Net migration
200
Natural increase
150
100
50
0
1985
-50
1990
1995
2000
2005
Globalization and fiscal policy
• Tytell & Wei: no effect of openness to
capital on budget deficits
– No a priori reason to expect other dimensions
of openness to matter
• Other dimensions of fiscal policy
– Tax competition
Adjusted top statutory tax rate on corporate
income in the EU
40
EU15
35
30
NMS10
EU25
25
20
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
A case study: Ireland
• Classic example of small open economy
– Small:
• 0.2 percent of global GDP
– Open:
• Imports + Exports = 147% of GDP
• Open labor market
• Foreign assets + liabilities > 1500% of GDP
• Poster child for benefits of globalization:
– Per capita GDP:
• 1960: $4,987 (35% of US)
• 2005: $29,990 (80% of US)
The Celtic Tiger
Thousands of constant 2000 US $
GDP per capita
40
35
30
25
Ireland
US
20
Euro area
15
Spain
10
5
Greece
Portugal
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
A case study: Ireland (II)
• Monetary policy framework:
– Currency board 1922-1979
– Managed float 1979-1999
– Monetary union 1999-date
• Fiscal policy
– Corporate tax regime
The downside - inflation
8
7
Ireland
HICP
Percent
6
Ireland CPI
5
4
3
2
EMU13
HICP
1
0
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Sources of population growth in
Ireland
80
Net migration
Thousands of persons
60
40
Natural increase
20
0
-20
-40
-60
1985
1990
1995
2000
2005
Independent floating currencies
70
60
Total
Number
50
40
Number of countries with
floating regime in 1990 that
were still floating as of date shown
30
20
10
0
1980
1985
1990
1995
2000
2005
Concluding observations
• Openness (to trade, capital, labor) seems
to be associated with better inflation
outcomes
• Less evidence of an effect on fiscal policy
– Tax competition does seem to be affecting
corporate tax policy across the EU