NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Conferences

The NBER Reporter Winter 2004: Conferences



2003 East Asian Seminar on Economics Focused on International Trade
Tax Policy and the Economy
Developing and Sustaining Financial Markets, 1820-2000
Financing Retirement in Japan

2003 East Asian Seminar on Economics Focused on International Trade

The NBER's Fourteenth Annual East Asian Seminar on Economics (EASE), sponsored jointly with Hong Kong University of Science and Technology (HKU), Korea Development Institute (KDI), Tokyo Center for Economic Research (TCER), Chung-Hua Institution for Economic Research (CIER), and the Australian Productivity Commission, took place in Taipei, Taiwan on September 5-7. The organizers were NBER Research Associates Takatoshi Ito, of Tokyo University, and Andrew K. Rose, of University of California, Berkeley. The following papers were discussed:

Kyoji Fukao, Hitotsubashi University, and Keiko Ito, ICSEAD, "Vertical Intra-Industry Trade and the Division of Labor in East Asia"
Discussants: Chin Hee Hahn, KDI, and Ho-Mou Wu, National Taiwan University

Carolyn L. Evans, Federal Reserve Board, and James Harrigan, Federal Reserve Bank of New York, "Tight Clothing: How the MFA Affects Asian Apparel Exports"
Discussants: Leonard Cheng, HKU, and Philippa Dee, Australian Productivity Commission

Mitsuyo Ando and Fukunari Kimura, Keio University, "Unprecedented Formation of International Production/Distribution Networks in East Asia"
Discussants: Hong Hwang, National Taiwan University, and Somkiat Tangkitvanich, Thailand Development Research Institute

Chin Hee Hahn, "Exporting and Performance of Plants: Evidence on Korea"
Discussants: Kyoji Fukao and James Harrigan

Shin-Horng Chen and Meng-Chun Liu, CIE, "International R and D Deployment and Developing Countries' Locational Advantage: A Case Study of Taiwan"
Discussants: Thomas J. Prusa, NBER and Rutgers University, and Somkiat Tangkitvanich

Philippa Dee and Jyothi Gali, Australian Productivity Commission, "The Trade and Investment Effects of Preferential Trading Arrangements"
Discussants: Bih-Jane Liu, National Taiwan University, and Erlinda Medalla, Philippine Institute for Development Studies

Kozo Kiyota, Yokohama National University, and Shujiro Urata, Waseda University, "The Impacts of Free Trade Agreements on Foreign Trade in East Asia" Discussants: Dukgeun Ahn, KDI, and Erlinda Medalla

Deng-Shing Huang, Academia Sinica, "Trading Blocs in East Asia: Empirical Evidence from Gravity Model"
Discussants: Keiko Ito and Andrew Rose

Leonard K. H. Cheng and Zihui Ma, HKU, "The Effects of Financial Crises on International Trade"
Discussants: Chin Hee Hahn and Kozo Kiyota

Edgar Cudmore and John Whalley, NBER and University of Western Ontario, "Border Delays and Trade Liberalization" (NBER Working Paper No. 9485)
Discussants: Francis Lui, HKU, and Chong-Hyun Nam, Korea University

Tain-Jy Chen and Ying-Hua Ku, CIER, "The Effect of FDI on Domestic Employment"
Discussants: Keiko Ito and Francis Lui

Thomas J. Prusa, "The Growing Problem of Antidumping Protection and What It Means for the Asia-Pacific Region"

Discussants: Takatoshi Ito and Chong-Hyun Nam

Dukgeun Ahn, "WTO Dispute Settlements in East Asia"
Discussants: Da-Nien Liu, CIER, and John Whalley

Ito and Fukao investigate the deepening international division between labor and factor intensities in Japan, focusing mainly on the manufacturing sector. First they analyze the factor contents of trade; they find that Japan's factor content of net-exports of capital and non-production labor grew rapidly, while its net-exports of production workers fell by a large amount. Interestingly, the decline in the factor content of net-exports of production workers was almost entirely caused by Japan's trade with China and Hong Kong. However, most of the macroeconomic change in the capital-labor ratio and the skilled-labor ratio are attributable to a "within-industry" shift, rather than a "between-industry" shift. The empirical analysis provides only weak evidence that the deepening international division of labor contributes to the change in factor intensities in each industry. These results suggest that specialization in the export of skilled-labor-intensive products may have contributed to the increase in the relative demand for skilled (professional, technical, managerial, and administrative) labor within industry. However, at the same time, these results imply that changes in trade patterns (specialization in capital-intensive production) did not offset the excess supply of capital in Japan. That is, Japan is not specializing adequately in the export of capital-intensive goods, despite the fact that the price of capital is low and capital is abundant.

International trade in apparel and textiles is regulated by a system of bilateral tariffs and quotas known as the Multifiber Arrangement or MFA. Despite a long-standing interest in the effects of the MFA, Evans and Harrigan are the first researchers to assemble a time series of detailed product-level data from the United States on the quotas and tariffs that comprise the MFA. They analyze how the MFA affects the sources and prices of U.S. apparel imports, with a particular focus on the effects on East Asian exporters during the 1990s. They show that, while a large fraction of U.S. apparel is imported under binding quotas, there are many quotas that remain unfilled. They also show that binding quotas raise import prices substantially, suggesting both quality upgrading and rent capture by exporters. In contrast, tariffs reduce import prices. Finally, the authors argue that the substantial shift of U.S. apparel imports away from Asia in favor of Mexico and the Caribbean during the 1990s is due only partly to discriminatory trade policy: the other reason is an increasing demand for timely delivery that gives a competitive advantage to nearby exporters.

Ando and Kimura claim that the international production/distribution networks in East Asia are "unique," at least at this moment in time, in their significance in the regional economy, their geographical extensiveness involving a large number of countries in the region, and their sophistication of both intra-firm and arm's-length relationships across different nationalities. The authors begin by reviewing crucial changes in the policy framework in the developing East Asian countries a decade ago, and then sketching the theory behind the mechanics of international production/distribution networks. In the empirical part of the paper, the authors analyze overall trade patterns of the major East Asian countries in order to confirm the importance of international trade to machinery parts and components. Then they examine the micro data on Japanese corporate firms to look closely at the nature of networks through the pattern of FDI. The authors also quantify the magnitude of economic activities of Japanese firms through different channels of transactions, using the firm nationality approach.

Using the annual plant-level panel data on Korean manufacturing during 1990 to 1998, Hahn examines the relationship between exporting and various performance measures, including total factor productivity. In particular, he asks whether exporting improves productivity (learning) and whether more productive plants export (self-selection). The evidence supports both self-selection and learning-by-exporting effects, although the latter seems only short-lived. Both effects have a role in explaining positive cross-sectional correlations between exporting and TFP. Similar effects are observed when shipments or employment is considered as the performance measure. These results are broadly in line with previous studies on other countries, but contrast sharply with Aw, Chung, and Roberts (2000) who do not find any strong evidence of self-selection or learning in Korea. Hahn suggests that the benefits from exporting have been realized not only through resource reallocation channel but also via the TFP channel.

Liu and Chen examine the R and D internationalization of a newly industrializing country - Taiwan being a prime example - with a special focus on the factors underlying locational advantage for attracting multinationals' offshore R and D. They begin with an examination of the literature on R and D internationalization and globalization, emphasizing the significance of "first-tier supplier advantage" in the Taiwanese context. The authors take advantage of an official database to reveal the patterns of foreign corporate R and D in Taiwan and to examine the determinants of foreign affiliates' R and D intensities at the industrial level. The empirical results show that foreign affiliates in Taiwan with a higher R and D-intensity tend to be more export-oriented, localized in Taiwan in terms of sourcing of materials and capital goods, and to belong to sectors with a larger pool of the R and D labor force.

Dee and Gali quantify the impact of traditional and "new age" provisions of preferential trading arrangements (PTAs) on merchandise trade and investment. They estimate gravity models of bilateral trade and investment and find that recent and some past PTAs are not as benign as some contemporary empirical assessments have suggested. A careful consideration of the analytical issues - including controlling comprehensively for other observable and unobservable factors, and testing explicitly for whether the trade and investment effects are significantly different after PTA formation than before - accounts for the less favorable findings in this study. It is also possible for PTAs to have adverse effects on investment flows. If investment responds in "beachhead" fashion to the trade provision of PTAs, then the trade carried out from those beachheads could constitute traditional trade diversion. The investment provisions of PTAs also could create investment diversion. However, Dee and Gali find little evidence of beachhead investment, but rather of net investment creation in response to the "new age," non-trade provisions of PTAs. Thus, the finding on investment is more positive than for trade, but not without qualifications.

Urata and Kiyota examine the impact of East Asia Free Trade Area (FTA) on trade patterns in East Asia. They use a multi-sector computable general equilibrium model and a database developed by Hurtle (1997) and his colleagues at Purdue University. There are four major findings in this paper. First, the impacts of FTA on GDP and the welfare of member countries are generally positive. Second, and surprisingly, an East Asia FTA does not seem to affect the patterns of comparative advantage or intra-industry trade very much. Third, one would expect that output would decline for the protected sectors as a result of FTA, but that expectation is not really found. Finally, an East Asia FTA will promote regionalization in East Asia, but it will not necessarily promote regionalization in an Asian Free Trade Area.

Huang applies a gravity model in order to find empirical evidence on trading blocs in East Asia for the era following 1980. Special attention is paid to the role of openness on the part of mainland China in shaping East Asia's trade pattern. There is significant evidence of a trading bloc within a Chinese circle, including Taiwan, Hong Kong, and mainland China. Although the trade flows between Taiwan and mainland China were severely suppressed before 1987, the Chinese circle as a whole is highly integrated in terms of trade, indicating the important role that Hong Kong plays as a trading agent in the Chinese circle. The empirical results from after 1990 show that mainland China's openness in trade is empirically supported. On the other hand, East Asia as a whole is fostering a trading bloc, in the empirical sense.

Ma and Cheng study the effects of financial crises on international trade, both theoretically and empirically. Their major findings are that banking crises had a negative impact on imports but a positive impact on exports in the short term, whereas currency crises decreased both imports and exports in the short term but increased exports in the long term.

Delays at the border for customs clearance are seemingly a central feature of the trade regime in the CIS states. Cudmore and Whalley argue that, with queuing costs being determined endogenously in such circumstances, tariff liberalization (even in the small economy case) can worsen welfare, since tariff revenues are replaced by resource-using queuing costs. On the other hand, corruption can improve welfare if queuing costs are replaced by resource-transferring bribes. The authors also show how added distortions between perishable and non-perishable, or between light and heavy, goods also can arise. They show these outcomes using a simple general equilibrium model, and explore the numerical implications using Russian data. The orders of magnitude are both significant and opposite in sign to conventional analyses.

Chen and Ku study the effects of FDI on domestic employment by examining data on Taiwan's manufacturing industry. Treating domestic versus overseas production as two distinctive outputs from a joint production function, they first estimate the effect of overseas production on the demand for domestic labor. They find that overseas production generally reduces the demand for domestic labor as overseas products substitute for primary inputs in domestic production (substitution effect). But overseas production also allows the investor to expand domestic output through enhanced competitiveness. The expanded domestic output leads to more employment at home (output effect). The net effect of FDI on domestic employment is a combination of substitution and output effects. For Taiwan, the net effect is positive in most cases but it differs across groups. Technical workers tend to benefit most from FDI, followed by managerial workers, and blue-collar workers benefit the least; indeed they may even be adversely affected. This suggests that after FDI, a reconfiguration of the division of labor within a firm tends to shift domestic production toward technology and management-intensive operations.

Prusa examines trends in antidumping (AD) use with particular focus on the Asia-Pacific region, the traditional source for much of the rhetoric justifying AD actions. He shows that AD is the world's biggest trade impediment primarily because of its use by countries that previously did not use AD ("new" users). Twenty years ago, the top four users accounted for 98 percent of AD actions; nowadays these traditional AD users account for only about 40 percent of the disputes. After controlling for size, it becomes apparent that new users are filing at prodigious rates, five, ten, and even twenty times the rate of the traditional users. The proliferation has not affected the propensity for Asia-Pacific countries to be targeted by AD actions. Over the past decade, Asia-Pacific countries are subject to over 40 percent of both new and traditional user AD actions. Interestingly, there are differences in the industry composition of trade complaints between new and traditional users. Traditional and new users both tend to target industries where they are losing comparative advantage. Since this pattern varies across countries, though, AD complaints differ across source countries. In other words, the pattern of AD use says as much about the filing country as it does about the target countries.

East Asian countries have become much more active in using the WTO dispute settlement system to assert their legal rights. The dispute settlement experience for these countries so far has shown a strong tendency of domestic governments to defend the economic interest of major industries. Their primary counterparts for trade disputes are still the major developed countries, including the United States and the European Communities. In some sense Thailand is peculiar in that it brought disproportionately many complaints to the WTO dispute settlement system while it was hardly challenged by other Members. In contrast to the GATT era, Korea has become legally very aggressive under the WTO system. Ahn also notes that Japan rarely has been challenged since October 1998. Except for China, most East Asian countries lack the national procedure to link private economic interests to the WTO dispute settlement procedures. The next question for these Members may be how to establish a domestic system to properly represent their private economic interests in a more balanced manner and to make the WTO dispute settlement system a benign instrument for the entire economy, not a captive tool of a particular segment of industries.

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Tax Policy and the Economy

The NBER's Eighteenth Annual Conference on Tax Policy and the Economy, organized by James M. Poterba of NBER and MIT, took place in Washington, DC on November 4. These papers were discussed:

Susan Dynarski, NBER and Harvard University, "Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Saving Incentives"

Mark E. Doms, Federal Reserve Bank of San Francisco; and Wendy E. Dunn, Stephen D. Oliner, and Daniel E. Sichel, Federal Reserve Board, "How Fast Do Personal Computers Depreciate? Concepts and New Estimates"

Joseph Gyourko, University of Pennsylvania, and Todd Sinai, NBER and University of Pennsylvania, "The (Un)Changing Geographical Distribution of Housing Tax Benefits: 1980 to 2000"

Emmanuel Saez, NBER and University of California, Berkeley, "Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications"

Mihir A. Desai, NBER and Harvard University, and William M. Gentry, NBER and Williams College, "The Character and Determinants of Corporate Capital Gains"

Coverdell Educational Savings Accounts and 529 saving plans are marketed as attractive vehicles for college savings. But Dynarski finds that college savings plans can actually harm some families. The joint treatment of college savings by the income tax code and the financial aid system creates tax rates that exceed 100 percent for those families on the margin of receiving additional financial aid. Since even families with incomes above $100,000 receive need-based aid, the impact of these very high taxes is quite broad. Dynarski finds that an aid-marginal family with funds in a Coverdell is worse off than if it did not save at all. Simulations show that $1,000 of pretax income placed in a Coverdell for a newborn and left to accumulate until college will face income and aid taxes that consume all of the principal, all of the earnings, and an additional several hundred dollars. This perverse outcome is the product of poor coordination between the tax code and the financial aid system.

Doms, Dunn, Oliner, and Sichel provide new estimates of depreciation rates for personal computers using an extensive database on used prices. Their results show that used PCs lose roughly half their remaining value, on average, with each additional year of use. The bulk of that decline reflects the downward revaluation of existing PCs, which is driven by the steep ongoing drop in the constant-quality prices of newly-introduced models. In addition, PCs experience age-related declines in value that stem from the inability of older models to perform the full range of desired tasks and from the decision to retire installed units. The authors estimate that the resulting depreciation proceeds slowly during the early part of the PC's lifetime but then picks up. Their estimate of the depreciation rate averages about 22 percent annually over the first five years of service. However, this figure is sensitive to constant-quality price change. When the authors constrain their estimation to following the NIPA constant-quality price series, the depreciation rate increases to an average pace a bit above 34 percent. Finally, their estimates suggest that the current tax depreciation schedule for PCs is about right in a zero-inflation environment. However, because the tax code is not indexed for inflation, the tax allowances would be too small in present value for inflation rates above the very low level now prevailing.

Using tract-level data from the 1980, 1990, and 2000 censuses, Sinai and Gyourko estimate how the income tax-related benefits to owner-occupiers are distributed spatially across the United States. Even though the top marginal tax rate has fallen substantially since 1979 and the tax code more generally has become less progressive, the tax subsidy per household or owner was virtually unchanged between 1979 and 1989, and then rose substantially between 1989 and 1999. Geographically, gross program benefits have been and remain very spatially targeted. At the state level, California's owners have received a disproportionate share of the subsidy flows over the past two decades. Their share of the gross benefits nationally has fluctuated from 19 to 22 percent. Depending upon the year, this is 1.8 to 2.3 times the Californians' share of the nation's owners. For the median state, the ratio of its share of tax benefits to its share of owners has declined over time, from 0.83 in 1979 to 0.76 in 1999. The data at the metropolitan area level reveal even more dramatic spatial targeting, and a spatial skewness that is increasing over time. Comparing benefit flows in 1979 in the top 20 areas versus those in the bottom 20 areas, owners in the highest subsidy areas received from 2.7 to 8.0 times the subsidy reaped by owners in the bottom group. By 1999, the analogous calculation finds that owners in the top 20 areas are receiving from 3.4 to 17.1 times more benefits than owners in any of the 20 lowest recipient areas. Despite the increasing skewness, the top subsidy-recipient areas tend to persist over time. In particular, the areas with very high benefit per owner are heavily concentrated in California and the New York City-to-Boston corridor. While taxes are somewhat higher in these places, it is the high and rising house prices that appear most responsible for the large and increasing skewness in the spatial distribution of benefits.

Saez uses income tax return data from 1960 to 2000 to analyze the link between reported incomes and marginal tax rates. Only the top 1 percent incomes show evidence of behavioral responses to taxation. The data display striking heterogeneity in the size of responses to tax changes overtime, with no response either short-term or long-term for the very large Kennedy top rate cuts in the early 1960s, and striking evidence of responses, at least in the short term, to the tax changes since the 1980s. The 1980s' tax cuts generated a surge in business income reported by high-income individual taxpayers because of a shift away from the corporate sector, and the disappearance of business losses for tax avoidance. The Tax Reform Act of 1986 and the recent 1993 tax increase generated large short-term responses of wages and salaries reported by top income earners, most likely attributable to re-timing in compensation to take advantage of the tax changes. However, it is unlikely that the extraordinary trend upward of the shares of total wages accruing to top-wage income earners, which started in the 1970s and accelerated in the 1980s and especially the late 1990s, can be explained solely by the evolution of marginal tax rates.

Desai and Gentry analyze how corporate capital gains taxes affect the capital gains realization decisions of firms. They outline the tax treatment of corporate capital gains, the consequent incentives for firms with gains and losses, and the efficiency consequences of these taxes in the context of other taxes and capital market distortions. Despite receiving limited attention, corporate capital gains realizations have averaged 30 percent of individual capital gains realizations over the last fifty years and have increased dramatically in importance over the last decade. By 1999, the ratio of net long-term capital gains to income subject to tax was 21 percent and was distributed across a variety of industries. Time-series analysis of aggregate realization behavior demonstrates that corporate capital gains taxes affect realization behavior significantly. Similarly, an analysis of firm-level investment and PPE disposal decisions and gain recognition behavior similarly suggests an important role for these taxes in determining when firms raise money by disposing of assets and realizing gains.

These papers will be published by the MIT Press as Tax Policy and the Economy, Volume 18. They are also available at "Books in Progress" on the NBER's website.

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Developing and Sustaining Financial Markets, 1820-2000

The most recent NBER/Universities Research Conference took place in Cambridge on December 5 and 6. Organizers Lance E. Davis, NBER and California Institute of Technology; Larry D. Neal, NBER and University of Illinois; and Eugene N. White, NBER and Rutgers University, put together this program on the history of financial markets:

Robert E. Wright, New York University, "Early U.S. Financial Development in Comparative Perspective: New Data, Old Comparisons"

Daniel Waldenström, University of California, Los Angeles, "Understanding the Emergence of Stock Exchanges: The Case of Pre-WWI Stockholm"
Discussant: Ranald Michie, University of Durham, England

William L. Silber, New York University, "What Happened to Liquidity When World War I Shut the NYSE?" Discussant: John James, University of Virginia

Marc Flandreau, University of California, Berkeley, and Pierre Sicsic, Banque de France, "Speculative Credit and the Money Market: The Marché des Reports in France 1875-1914"
Discussant: Peter Lindert, University of California, Davis

Marc Flandreau and Nathan Sussman, Hebrew University, "Old Sins: Exchange Clauses and European Foreign Lending in the 19th Century"

Robert J. Weiner, George Washington University, "Financial Innovation in an Emerging Market: Petroleum Derivatives Trading in the 19th Century"
Discussant: Kirsten Wandschneider, Middlebury College

Richard S. Grossman, Wesleyan University, and Stephen H. Shore, University of Pennsylvania, "The Cross-Section of Stock Returns before World War I"

Hans-Joachim Voth, MIT, "Stock Price Volatility and Political Uncertainty: Evidence from the Interwar Period" Discussant: Benjamin R. Chabot, NBER and University of Michigan

Efraim Benmelech, University of Chicago, "Asset Salability and Debt Maturity: Evidence from the 19th Century American Railroads"

Gerhard Kling, University of Tuebingen, "Disclosure of Mergers without Regulatory Restrictions: Comparing Insider Trading in the year 1908 and 2000 in Germany"
Discussant: Marc D. Weidenmier, NBER and Claremont McKenna College

Wright presents new estimates of the assets of U.S. financial intermediaries and the number and authorized capitalization of U.S. corporations. He also compares the U.S. financial system to that of Great Britain and New York state's financial system to that of Canada, two contiguous entities with similar populations. The available data confirm the narrative evidence that New York's financial development was decades ahead of Canada's. Also, by about 1830, the U.S. financial system compared favorably with Britain's. Finally, Wright shows that by 1990 many nations had yet to reach the level of financial "depth" (defined assets of financial intermediaries/GDP) achieved by the U.S. financial system before 1830.

Waldenström describes and analyzes the emergence of the Stockholm Stock Exchange and its initial formation of ownership and governance. The exchange was initiated by private actors but became publicly owned because of current market regulation. The author also sets out a research agenda for the exploration and evaluation of the early Nordic stock markets.

The suspension of trading on the New York Stock Exchange for more than four months following the outbreak of World War I fostered a substitute market on New Street as a source of liquidity. The New Street market suffered from impaired price transparency because its transactions were not disseminated on the NYSE ticker and its quotations were blacklisted at the leading newspapers. Silber shows that despite the incomplete information flow and the somewhat wider bid-ask spreads compared with the New York Stock Exchange, New Street offered economically meaningful liquidity services. The interference with price transparency turned an individual stock's reputation for liquidity into an important added variable in explaining the structure of bid-ask spreads on New Street.

Flandreau and Sicsic study the relationship between the money market and speculative credit in France in the last part of the 19th century. To them it seems clear that, despite the size of the "pool" of speculative credit, the marché des reports gradually developed as a complementary market to the money market. This happened via a multitude of mechanisms, the central trend of which was the gradual linking of the interest rate for investments in trade bills to the rate for reports in the strict sense. This coupling was the result of the establishment of a robust official market on the Paris stock exchange and the subsequent rise in competition between banks and this market, which ended up improving the efficiency of the marché des reports in the 1890s. These developments took place in two stages. First there was a consolidation of the Paris parquet, confirmed by the geographical pattern of the speculation during the 1881-2 crash. Second, the development of an over-the-counter market - the marché des reports en banque - resulted in the weakening of the monopoly or virtual monopoly enjoyed by the agents de change, and put them under competitive pressure. This mechanism brought brokerage costs down in practice, several years before the Fleury-Ravarin Bill. This Bill, which was of such interest to contemporary writers, did little more than institutionalize a fact. The natural extension of this situation was, of course, the centralized clearing of stock exchange reports or, in other words, the quotation by the agents de change of a single rate for all the securities used in reports. This did not happen until after WWI though.

Flandrau and Sussman challenge a popular explanation for "original sin" - the default prone borrowing of long-term debt in foreign exchange by emerging markets - that emphasizes the lack of credibility and commitment of governments which prevents them from borrowing in their own currency. Basing their account on the history of emerging market borrowing in the nineteenth century, the authors offer an explanation based on historical path dependence. They document that almost all IPOs of governments in foreign markets were in foreign exchange, or with foreign exchange clauses, independent of those countries' institutional features. They show that a small number of countries could circulate debt denominated in their own currency in secondary markets, again irrespective of their constitutional setup. The authors argue that market liquidity can explain both phenomena. Having an internationally circulating currency allows countries to circulate their debt in secondary markets. Going for an IPO in a large financial center is an attempt to tap the greater liquidity of that center's money market and currency. It makes prefect sense to borrow then, in that center's currency. The evolution of vehicle currencies and liquid money markets has more to do with the historical evolution of trade, going back to medieval times, than with institutional reform. Escaping from original sin requires that the country emerge as a leading economic power - a rare historical event, reserved for the United States of the nineteenth century and Japan of the twentieth century.

Weiner presents an historical investigation of a derivatives market whose very existence has been forgotten by economists, notwithstanding its importance at the time - exchange trading of oil spot, futures, and options contracts in the late nineteenth century. The very different time period and institutions provide a laboratory for comparison of empirical results from modern futures markets. The first modern futures trading in an industrial commodity, crude oil, had disappeared before economists became interested in derivatives markets, and thus does not appear on the long list of commodities traded at one time or another on futures exchanges. When futures trading in petroleum again became big business in the 1980s, it was described in both the academic and trade press as something new, made possible for the first time. Had the early oil exchanges been unsuccessful, or of minor importance, their disappearance without a trace would be understandable. Such is not the case, however; the exchanges were among the largest early cases of centralized trading in the United States. Contemporary accounts claimed that the volume of business transacted was exceeded only by the New York and San Francisco Stock Exchanges. Petroleum was big business in late-nineteenth century America, ranking only behind wheat and cotton among exports. The United States produced virtually all of the worlds' oil, and about two-thirds of production was exported (chiefly to Europe), but most of it was refined in the United States. The exchanges started trading in the early 1870s, and reached their height in the early 1880s. By the late 1880s, trading had declined precipitously as refining (the downstream industry) was monopolized by the Standard Oil Trust. By the mid-1890s, the spot and futures markets had dried up, and been replaced in part by vertical integration, and in part by "posted prices," representing what the Standard was willing to pay producers in each field. Derivatives markets in petroleum would not return until the 1970s, by which time the first era had been long forgotten.

Grossman and Shore examine the cross-section of stock returns using an original dataset containing annual observations on price, dividends, and shares outstanding for nearly all stocks listed on U. K. exchanges between 1870 and 1913. The authors construct portfolios based on past returns, size, and dividend yield and compare the properties of these portfolios created with historical U.K. data to identically constructed portfolios created with CRSP data. Unlike the CRSP data, the historical U.K. data do not display excess returns for portfolios of small stocks or portfolios of stocks that have done badly in the past five years. However, portfolios sorted on dividend yield have similar return dynamics in both samples. Stocks paying no dividends have higher returns; among stocks paying dividends, returns increase with the dividend yield. The historical data have the same return pattern as modern data for portfolios sorted on dividend yield, but not for portfolios sorted on past performance. The presence of one anomaly but not the other in historical data can be reconciled by the high degree of responsiveness of dividends to returns during this period.

In 1914, German stock market capitalization was higher relative to GDP than in the United States, and the country financed a larger share of capital formation via equity. Many countries that have largely bank-based financial systems today had thriving equity markets at the beginning of the century. Voth examines the causes of the divergent paths of financial system development highlighted in the recent work by Rajan and Zingales, who emphasize the role of the Great Depression in determining subsequent developments. Voth analyzes the extent to which political uncertainty, driven by institutional fragility and the tumultuous politics of the 1920s and 1930s, caused instability in equity markets. Stock prices swung widely during the Great Depression, contributing to the excess volatility highlighted by Shiller and undermining the case for markets-based financial systems. Voth examines the Merton/Schwert hypothesis, that concern about the survival of the capitalist system was crucial. Using a panel data set on riots, demonstrations, and other indicators of instability for 32 developed and developing countries during the interwar period, Voth shows that political instability caused drastic falls in stock prices. Much of the increase in volatility during the Great Depression can be explained by political factors. Voth estimates the probability of revolution and shows that higher risks of turmoil are associated with greater volatility.

Benmelech studies the relationship of asset salability to capital structure. Using a unique dataset of more than 200 nineteenth century American railroads, he finds that salability and debt maturity are strongly correlated. Railroads that had more redeployable cars, and that conformed to the standard track gauge, had longer debt maturities. Moreover, he finds that the potential demand for the railroads' rolling stock and track mileage were significant determinants of debt maturity. Interestingly, there is no evidence that salability or industry-demand for assets were correlated with leverage. Similar results emerge from a study of COMPUSTAT firms in 1980-2001, suggesting that the results in this paper are not sample specific, and can be interpreted consistently using Shleifer and Vishny's (1992) model.

Who gains from mergers? Kling concentrates on insiders and outsiders by investigating the adaptation process of stock prices around public merger announcements. The means of disclosure is essential. If firms hide information, they will hurt outsiders. Hiding information does not yield higher cumulated abnormal returns - but the higher the expected gains from mergers, the higher the incentive to hide information. Hence, it should be worthwhile to restrict insider trading by forcing firms to uncover mergers. In contrast to the year 1908, premerger gains in the year 2000 are attributable to irrational speculation and not to insider trading.

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Financing Retirement in Japan

The Sixteenth Annual TRIO Conference, so-named because it is jointly sponsored by the NBER, the Centre for Economic Policy Research (CEPR), and the Tokyo Center for Economic Research (TCER), took place on December 8 and 9 in Tokyo. This year's conference focus was "Financing Retirement." Organizers were Takeo Hoshi, NBER and University of California, San Diego; Sadao Nagaoka, Hitotsubashi University and TCER; and Toshiaki Tachibanaki, Kyoto University and TCER. The program was:

Olivia S. Mitchell, NBER and University of Pennsylvania, and John Piggott, University of New South Wales, "Unlocking Housing Equity in Japan"
Discussants: Pierre Pestieau, Universite de Liege and CEPR, and Miki Seko, Keio University and TCER

Frank de Jong, University of Amsterdam and CEPR, "Pension Fund Investments and the Valuation of Liabilities under Conditional Indexation"
Discussants: Toni Braun, University of Tokyo, and Keisuke Ito, Mizuho-DL Financial Technology Co., Ltd.

Toshiaki Tachibanaki, Kyoto University and TCER, and Tomohiko Takeuchi, Kyoto University and TCER, "The Differences in the Economic Effects Between the DB Plan and the DC Plan"
Discussants: Olivia S. Mitchell, and Masaharu Usuki, NLI Research Institute

Robert Dekle, University of Southern California, "Financing Consumption in an Aging Japan: The Role of Foreign Capital Inflows and Immigration"
Discussants: Toshihiro Ihori, University of Tokyo and TCER, and Makoto Saito, Hitotsubashi University and TCER

Takashi Oshio, Tokyo Gakugei University and TCER, "Social Security and Trust Fund Management"
Discussants: Frank De Jong, and Yasushi Iwamoto, Hitotsubashi University and TCER

Pierre Pestieau, "Social Security and the Well-Being of the Elderly"
Discussants: Robert Dekle, and Tokuo Iwaisako, Hitotsubashi University

Kohei Komamura, Toyo University and TCER, and Atsuhiro Yamada, Keio University and TCER, "Who Bears the Burden of the Social Insurance?"
Discussants: Takero Doi, Keio University and TCER, and John Piggott

Releasing equity in housing via reverse mortgages (RMs) may be a natural mechanism for boosting consumption, reducing public pension liability, and mitigating the demand for long-term care facilities in Japan. In order to implement RMs, Mitchell and Piggott find, existing inhibitors would need to be removed. For example, RMs might be exempted from the capital gains tax and transactions taxes. In addition, more attention might be focused on the tax status of annuity income flows and on interest rate deductions for RMs. Clearly, housing market reforms to enhance information flows would be needed, particularly regarding new and existing housing trades. This would enable the securitization of housing loans and lines of credit. Finally, improvements in other aspects of capital markets, including the establishment of reinsurance mechanisms to help lenders offer these reverse mortgages while having some protection against crossover risk, would be important. The infrastructure required to build RM markets is not simple, and in the Japanese case, the demand will be dampened by the fact that residential housing values appear to be declining. This fact, plus low interest rates, imply that lenders will find reverse mortgages less appealing than otherwise. Nevertheless, RMs can be a good way to finance elderly consumption in Japan, particularly against the backdrop of governmental financial stringencies.

De Jong reviews the investment policy of collective pension plans. The defined benefit nature of these plans would call for an investment portfolio that consists entirely of long-term index-linked bonds. In practice, pension plans have substantial investments in equities and real estate. De Jong suggests two reasons to invest in equities: the lack of a well-developed market in index-linked bonds, and deliberate deviations from the defined benefit nature of the plan. Further, he assesses the value of limited or conditional indexation options found in many plans.

There are several problems with the old-age pension systems in Japan, both public and enterprise systems. Takeuchi and Tachibanaki are concerned with the latter. They note that public pension benefits may be reduced because: 1) the seriously lower birth rate and aging of the population will prevent retired people from enjoy the current level of benefits; and 2) the slower growth rate of the economy will decrease the amount of social insurance revenues (that is, contributions) in public pension programs in the future. Under these circumstances, it is desirable to develop enterprise pension programs in order to maintain the current level of income for retired people. In reality, though, enterprise pension systems in Japan have not developed sufficiently, although there have been several reforms. The authors examine and discuss these positive and negative aspects, both theoretically and empirically.

Dekle projects the impact of demographic change on Japanese capital flows by simulating the impact of aging on Japanese saving and investment rates. He projects declining saving and investment rates, with saving rates declining faster than investment rates, leading to current account deficits and capital inflows. H also predicts deteriorating government budget balances, unless there is drastic fiscal reform. A unique feature of his paper is that he also examines scenarios in which the government allows sizable immigration (400,000 immigrants per year from 2005 to 2040) into Japan. He shows that, with this immigration, Japan's projected capital inflows as a percentage of consumption will be much smaller, because the higher labor force will be able to raise Japan's GDP to help sustain its growing elderly population. With the larger labor force from immigration, Japanese GDP in 2020 will be 22 percent higher, and 50 percent higher by 2040. Finally, with immigration, social security and healthcare spending as a percentage of GDP will be lower, meaning that future tax increases can be smaller.

Oshio asks why and to what extent the government should have a social security trust fund, and how it should manage the fund in the face of demographic shocks. He shows that having a government trust fund in some form is necessary, given an aging population, to achieve the (modified) golden rule or to offset the negative income effect of a pay-as-you-go system. But in a closed economy, it is not advisable to use such a trust fund as a buffer for demographic shocks, because it could lead to a widening of intergenerational inequality. Oshio also discusses the policy implications of his analysis for the social security reform debate in Japan.

Pestieau clarifies the concept of generosity as applied to social security systems. He distinguishes among three types of generosity with the possibility of trade-offs. There is the generosity towards early retirement, the overall generosity of an old age system, and the generosity towards retirees with low entitlements.

Using the society-managed health insurance data, which is a cross-sectional time-series and covers 1670 health insurance societies for seven years (FY1995-2001), Komamura and Yamada find for the first time in Japan that half of the employer's contribution to health insurance is shifting back to the employees in the form of wage reduction. On the other hand, the authors cannot find such evidence for the contribution to long-term care insurance using a two-year (FY2000-01) panel data set.

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