International capital linkages: Theory and application in a dynamic computable general equilibrium model
This thesis analyzes some of the fundamental, direct consequences of the East Asian meltdown for the global economy—and specifically for the North American food and agricultural producers. To study the impact of this economic crisis, the study develops a novel dynamic global general equilibrium model with international capital mobility, foreign ownership of assets, and errors in investors' assessments of potential returns to investment. This model was successfully applied to a global data base to simulate a baseline scenario of the Asian crisis encompassing Korea, Indonesia, Thailand, Malaysia, the Philippines and Japan. This baseline, originally developed for the World Bank's Global Economic Prospects report, is compared to a marginally deeper crisis represented by a percentage point decline (relative to post-1998 baseline) in annual GDP growth rates in East Asia. The analysis reveals several little-appreciated mechanisms by which different economies, industries and individuals may benefit from this deeper crisis. Provided that the financial crisis remains confined to the current set of economies, its effect on other regions is modest, and in some cases positive. These findings can be traced to a financial effect and a terms-of-trade effect. The financial effect results from a decline in world rates of return in the face of the deeper crisis and implies a positive financial effect for net debtor regions and a negative welfare effect for net creditor regions. The terms-of-trade effect suggests that low prices for East Asian imports, which currently benefit both consumers and producers importing goods for intermediate use from Asia, are a transitory phenomenon. Eventually, countries importing from East Asia will share part of the burden of the crisis because of increased import prices of Asian manufactures. As the deeper crisis slows down the growth of the manufacturing sectors and the downsizing of agriculture in East Asia, the underlying growth in imports of farm products will also diminish. This implies contraction of the North American farm exports and output. In contrast, low investment diminishes the competitiveness of the food processing industry in East Asia. This opens the opportunity for North American food manufacturers to expand and increase its processed food exports. Thus, while North American farmers are negatively affected, food producers are shown to benefit from the marginally deeper crisis in Asia.
Hertel, Purdue University.
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