Abstract: We use cooperative game theory to analyze the strategic impact of three controversial pipeline projects. Two of them, Nord Stream and South Stream, allow Russian gas to bypass transit countries, Ukraine and Belarus. Nord Stream’s strategic value turns out to be huge, justifying the high investment cost for Germany and Russia. The additional leverage obtained through South Stream, in contrast, appears small. The third project, Nabucco, aims at diversifying Europe’s gas imports by accessing producers in Middle East and Central Asia. The project has a large potential to curtail Russia’s power, but the benefits accrue mainly to Turkey, while the gains for the EU are negligible.

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Abstract: This paper challenges the common view that exports generally contribute more to GDP growth than a pure change in export volume, as the export-led growth hypothesis predicts. Applying panel cointegration techniques to a production function with non-export GDP as the dependent variable, we find for a sample of 45 developing countries that: (i) exports have a positive short-run effect on non-export GDP and vice versa (short-run bidirectional causality), (ii) the long-run effect of exports on non-export output, however, is negative on average, but (iii) there are large differences in the long-run effect of exports on non-export GDP across countries. Cross-sectional regressions indicate that these cross-country differences in the long-run effect of exports on non-export GDP are significantly negatively related to cross-country differences in primary export dependence and business and labor market regulation. In contrast, there is no significant association between the growth effect of exports and the capacity of a country to absorb new knowledge.

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Abstract: FIW, a collaboration of WIFO (www.wifo.ac.at), wiiw (www.wiiw.ac.at) and WSR (www.wsr.ac.at) FIW –Working PaperDistributional eff ects of preferential and multilateral trade liberalization: the case of ParaguayElizabeth Jane Casabianca1In this paper I apply Porto (2006) to Paraguay using household level data. The aim is to assess the distributional impact of the preferential and multilateral trade liberalization in a small member country. I also follow Nicita (2009) assuming incomplete pass-through on prices of traded goods which in turn influence both household consumption and earnings of household membersin the labour market. I estimate these effects highlighting the diff erence between the impact of the preferential trade agreement and the multilateral one. Finally, I am able to depict if and who trade integration has benefi ted

Abstract: Trade liberalization is no Pareto-improvement - there are winners (high-skilled) and losers (low-skilled). To compensate the losers the government is assumed to introduce unemployment benefits (UB). These benefits are financed by either a wage tax, a payroll tax, or a profit tax. Using a Melitz-type model of international trade with unionized labor markets and heterogeneous workers we show that: (i) there is a threshold level of UB where all trade gains are destroyed, (ii) this threshold differs between different kind of taxes, (iii) there is a clearcut ranking in terms of welfare for the chosen funding of the UB: 1. wage tax, 2. profit tax, 3. Payroll tax.

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Abstract: The objective of this paper is to assess whether the level of unionization and the rigidity of the exchange rate affected wages and monetary policy in SEE and CIS during the ongoing economic crisis. Towards that end, a New Keynesian model with price and wage rigidities is used. The model is estimated with a panel GMM over the period January 2002 – March 2011 on sample of 19 countries. Several findings emerge. First, the output gap is found not to depend on the real interest rate, in accordance with the underdeveloped financial markets in these economies. Second, inflation is found not to depend on the output gap, but on the wage gap, which stresses the relevance of the labour unions for the inflation dynamics in these countries. Third, the labour wedge that arises from the monopolistic competition in the labour market works mainly through the wage gap, not the output gap, in accordance with the high unemployment in these countries. Fourth, monetary policy responded counter-cyclically during the crisis in countries with weak trade unions, differently from countries with strong unions: in crisis times, weak economy drags wages down in low-unionized countries and monetary policy relaxes in these countries, both due to lower wages and due to the weaker economy; on the other hand, strong unions prevent a weak economy to drag wages down in crisis times and central banks in these countries are found not to react to economic activity, prices or wages. Fifth, the fixed exchange rate is found to restrain monetary policy in times of crisis, too – in countries with flexible exchange rates, monetary policy during the crisis responds to movements in output gap and reserves, in contrast to countries with fixed exchange rate, where monetary policy does not respond to any domestic macroeconomic variable.

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Abstract: In international relations, short-run incentives for non-cooperation often dominate. Yet, (external) institutions for enforcing cooperation are hampered by national sovereignty, supposedly strengthening the role of selfenforcing mechanisms. This paper examines their scope with a focus on contingent protection aka tit-for-tat in trade policy. By highlighting various strategies in a (linear) partial-equilibrium framework, we show that retaliation of non- cooperative behavior by limiting market access works as a disciplining device independently of supply and demand parameters. Our theoretical results are backed by empirical evidence that countries more frequently involved in WTO-mediated disputes entailing tit-for-tat strategies pursue on average more liberal trade regimes.

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Abstract: This paper estimates to what extent "green" crisis-era measures have an impact on the "climate-friendliness" of imports in the Asia-Pacific region. Testable predictions and the empirical strategy are derived from the seminal paper of Eaton and Kortum (2002). The empirical results show that at the intensive margin implemented "green" measures are associated with an increase of sourcing from more rather than less energy intensive countries. One reason for this surprising result may be that governments have presented the state interventions as being "green" although the main purpose was not the environment. At the extensive margin, results are slightly more promising. The implementation of "green" measures seems to decrease the likelihood that imports are sourced from a relatively more energy intensive origin. However, the results are not very strong as to statistical and economic significance. In sum, only limited evidence for environmental benefits of "green" crisis-era interventions through the import channel exist. The implementation of such measures may in fact be associated with an environmental degradation of imports. Moreover, supplier countries being "close" competitors to the interventionist country (in terms of technology levels) relatively loose import share if discriminatory "green" measures are implemented. Stated differently, the alleged "green" measures protect domestic against foreign suppliers with similar technology levels.

Abstract: This paper shows that reduced heterogeneity of exporter-specific goods can provide a direct explanation of the distance puzzle. Using COMTRADE 4-digit bilateral trade data we find that the elasticity of trade to distance has increased by 8% from 1962 to 2009. Theoretical foundations of the gravity equation indicate that the distance coefficient is the product of the elasticity of trade costs to distance and a measure of heterogeneity, e.g. the substitution elasticity between exporter-specific goods in the Armington framework. This parameter has increased by at least 12-29% from 1962 to 2009. The evolution of the distance coefficient is thus compatible with a 4-16% reduction in the elasticity of trade costs to distance.

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Abstract: This paper examines the extent and evolution of exchange rate pass-through (ERPT) using panel cointegration approach. For 27 OECD countries, we provide a strong evidence of incomplete ERPT in sample of 27 OECD countries. Both FM-OLS and DOLS estimators show that pass-through elasticity does not exceed 0.70%. When considering individual estimates, we note a cross-country differences in the long run ERPT. We find that inflation regime and exchange rate volatility are potential macroeconomic sources of this long-run heterogeneity. When focusing on the subsample of 12 European Monetary Union (EMU) countries, our results show a steady decline in the degree of ERPT throughout the different exchange rate arrangements: pass-through elasticity was close to unity during the "snake-in-the tunnel" period while it is about 0.50% since the formation of the euro area. The observed decline in ERPT to import prices was synchronous to the shift towards reduced inflation regime.

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Abstract: This report considers the impact of offshoring on labour markets. The report begins by surveying the empirical literature linking offshoring activities to changes in employment and the relative wage and employment of high- to low-skilled workers. The report moves on to consider recent developments in offshoring activities and in labour markets for a sample of 40 developing and developed countries. Based on these developments the report draws conclusions on the likely developments in offshoring and its impact on labour markets.

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Abstract: 2011 war das zweite Jahr der Erholung der Weltwirtschaft nach der Wirtschaftskrise, entspre-chend fiel das Wachstum deutlich niedriger aus als 2010. Es reduzierte sich auch im Jahres-verlauf drastisch, und die Gefahr einer neuerlichen Rezession war zur Jahreswende nicht aus-zuschließen. Vorlaufende Stimmungsindikatoren zeigen jetzt an, dass der Tiefpunkt zur Jah-reswende 2011/12 überschritten wurde. Die österreichischen Exporte stiegen 2011 nominell nur mit 11,7%, nach 16,7% im Jahr der ersten Erholung. Dies ist angesichts der ungünstigen Regionalstruktur (Krisen in Italien und Slowenien) und der noch immer nicht ausreichenden Fokussierung auf rasch wachsende Technologiesparten und dynamische Märkte in Asien er-freulich. Die Importe erhöhten sich infolge der steigenden Energiepreise noch stärker, sodass ein höheres Handelsbilanzdefizit als 2010 verzeichnet wurde. Die Leistungsbilanz erreichte wie in den letzten Jahren einen erheblichen – wenn auch sinkenden – Überschuss. Die Exportquote stieg, es konnten aber Marktanteile, die 2010 verloren wurden, nicht zurückgewonnen werden.

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Abstract: This paper studies the impact of trade within US-headquartered multinational companies (MNCs) on labour demand for all employees, as well as, for those of high and low skill in US manufacturing for the period 1995 - 2005. We find strong evidence on the positive and negative effect of intra-firm exports and imports respectively, on aggregate employment. he former effect is stronger than the latter. Moreover, we find that demand for low-skilled labour is negatively associated with intra-firm imports, while unaffected by intra-firm exports. In contrast, high-skilled labour demand is positively linked to intra-firm exports but unaffected by intra-firm imports. The last two findings put together, suggest that low-skill intensive stages of the value-added chain are mostly transferred to the US affiliates abroad, while highskill intensive ones are mostly kept within the US parents.

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Abstract: In this paper regional integration among the countries of the Middle East and North Africa (MENA) is addressed. There are a number of economic and integration blocs with one or more MENA countries’ participation, but there is no one overarching agreement that would cover the whole MENA region. The results of various gravity model calculations suggest that intra-MENA trade is below its potential. Intra-MENA trade is a small fraction (5.9% in exports, 5.1% in imports) of the MENA countries’ total trade. Exports to the EU are ten times, imports from the EU eight times more relevant than intra-MENA trade flows. The most recent goal of the EU-MENA cooperation has been the creation of a deep Euro-Mediterranean Free Trade Area, aimed at a substantial liberalization of trade between both the EU and Southern Mediterranean countries (North-South), and Southern Mediterranean countries themselves (South-South). Recent research result point out that a successful revival of intra-regional trade in Central Europe was conditional upon these countries’ close integration with the EU. In the case of the Central European countries close integration meant full EU membership, what is for the MENA not available currently. Nevertheless a provision of some of the main attributes of deep integration with the EU, even without full membership, may facilitate intra-MENA trade to a similar way as it did for Central Europe.

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Abstract: Der modernen Außenwirtschaftstheorie entsprechend ist zu erwarten, dass die Einführung des Euro durch eine Reduktion der fixen und variablen Handelskosten zu einer Erhöhung des Außenhandels der Eurozone geführt hat, und zwar sowohl über den extensiven als auch den intensiven Rand. Aufgrund gegenläufiger Effekte infolge des – im Vergleich zu andern Handelspartnern – schwachen Wirtschaftswachstums der Eurozone liefern einfache deskriptive Statistiken hierzu keine offenkundige Evidenz; der Anteil des Intra-Eurozonenhandels ist seit der Einführung des Euro sogar gesunken. Die überwiegende Anzahl ökonometrischer Studien weist jedoch auf positive Handelseffekte des Euro in einer Größenordnung von durchschnittlich 10-15% hin. Ein großer Teil dieser Effekte ist auf eine Ausweitung bestehenden Handels (intensiver Rand) zurückzuführen, während die Ausweitung der gehandelten Güterarten (extensiver Rand) eine geringere Rolle gespielt haben dürfte. Überdurchschnittlich hohe Effekte sind in Wirtschaftssektoren mit einem hohen Verarbeitungsgrad und starker Produktdifferenzierung (Pharmazeutische Industrie, Maschinenbau, Konsumgüterindustrie) zu verzeichnen. Die größten Exportsteigerungen infolge des Euro konnte Deutschland erzielen, für Österreich liegen die Ergebnisse ebenfalls über dem Durchschnitt der Eurozone. Schließlich lassen die höheren Effekte für kleine, erst unlängst der EU beigetretene Länder erwarten, dass die Auswirkungen künftiger Beitritte zur Eurozone stärker ausfallen könnten.

Abstract: FIW publishes quarterly FIW Notes. They present an overview of the most important Austrian and international developments regarding international economics. There is only a German version available.

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Abstract: The main objective of this paper is to examine the determining factors of outward FDI from four major OECD investors US, Germany, France and the Netherlands to developing countries located in different world regions. Our goal is to elucidate whether the motivation for FDI differs among these investors. Rather than relying on specific theories of FDI determinants we examine them all simultaneously employing Bayesian Model Averaging (BMA) in a panel data set with 129 FDI destinations in 5 geographical regions over the period 1995-2008. This approach permits us to select the most appropriate model that governs FDI allocation and to distinguish robust FDI determinants. We find that all our investors search for destinations with whom they have established intensive trade relations and that offer a qualified labor force. However, low wages and attractive tax rates are robust investment criteria too, and a considerable share of FDI is still resource-driven. Our investors show fairly similar strategies in the main FDI destinations.

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Abstract: This paper examines whether European integration, manifesting itself in increased trade and FDI linkages, new specializations and economic policy coordination, contributed to the synchronization of business cycles in the enlarged EU. We estimate the effects on bilateral growth rate correlations in 1995-2008 in a simultaneous equations model which permits to model endogenous relationships and unveil direct and indirect effects. Trade and FDI prove to have a strong impact on synchronization, specifically between incumbent and new EU members. More coordinated fiscal policies and, particularly in EU 15, the alignment of monetary policies promoted synchronization. Nevertheless, flexible exchange rates remained important adjustment instruments for the new member states. Increasing manufacturing specialization is not counteracting synchronization. The achieved EU income convergence, a declared objective of EU policy, supported business cycle synchronization.

Abstract: FIW publishes quarterly FIW Notes. They present an overview of the most important Austrian and international developments regarding international economics. There is only a German version available.

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Abstract: 2010 zeichnete sich eine leichte Erholung der weltweit getätigten Direktinvestitionen ab. Der Wert des Zustroms von passiven Direktinvestitionen nach Österreich – ein Großteil davon ging auf reinvestierte Gewinne zurück – lag mit 2,9 Mrd. € im Jahr 2010 jedoch unter dem Vorjahreswert. Im ersten Halbjahr 2011 wurden allerdings bereits wieder 8,6 Mrd. € an Direktinvestitionen in Österreich getätigt. Aktivseitig wurden 2010 6,3 Mrd. € im Ausland investiert. Der Bestand an österreichischen Direktinvestitionen im Ausland betrug 2009 113,3 Mrd. € (+6%). 2010 rechnet die OeNB mit einem DI-Bestand von 128,7 Mrd. € (+13,6%). Noch stärker als das Volumen ist 2009 die Anzahl der österreichischen Direktinvestoren im Ausland gestiegen. Eine Verlangsamung der Dynamik ist jedoch bei den anteilsgewichteten Beschäftigten in den Direktinvestitionsunternehmen im Ausland zu erkennen. Passivseitig kam es 2009 sogar zu einem Rückgang der Beschäftigtenzahlen, obwohl der Bestand an ausländischen Direktinvestitionen in Österreich 2009 wieder deutlich anstieg (+12,6%). Auch für 2010 wird mit einem weiteren Bestandszuwachs (+3,7% bzw. 124,3 Mrd. €) gerechnet. Die regionale Verteilung der österreichischen Direktinvestitionsbestände im Ausland ist weiterhin durch eine starke Konzentration auf die Region Mittel- und Osteuropa charakterisiert, wenn auch mit sinkender Bedeutung. 2009 kam es zu einem weiteren, deutlichen Rückgang der Eigenkapitalrentabilität des Direktinvestitionsbestandes in den MOEL 21. Die Bedeutung passiver Direktinvestitionen zeigt sich, indem fast ein Drittel des Umsatzes aller österreichischer Unternehmen im marktwirtschaftlich bestimmten Bereich von auslandskontrollierten Unternehmen erwirtschaftet wird. Innerhalb der F&E-Ausgaben entfällt mehr als die Hälfte der Ausgaben in Österreich auf auslandskontrollierte Unternehmen. Die Dominanz des deutschen Nachbarn als wichtigster passiver Direktinvestor hält auch 2009/2010 an, jedoch kam es auch zuletzt erneut zu leichten Anteilsverlusten. 2009 konnte fast die Hälfte aller ausländischen Direktinvestitionsbestände in Österreich (58,8 Mrd. €) Holdinggesellschaften zugerechnet werden. Von den 113 Mrd. € aktiven Direktinvestitionen Österreichs wurden gute 40% von ausländisch kontrollierten Investoren getätigt. Der Anteil des Warenexports aller international verflochtener Unternehmen in Österreich am gesamten österreichischen Warenexport betrug 2009 fast 40%, dieser ist jedoch in den letzten 3 Jahren gesunken.

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Abstract: Schweiz und Österreich sind offene Volkswirtschaften mit einem großen Bankensektor. Seit dem Zusammenbruch des Bretton Woods System 1971 steigt die Zahl der Finanzkrisen wieder an. Laut IWF gab es schon vor der letzten weltweiten Krise von 1970 – 2007 208 Währungskrisen, 124 Bankenkrisen, 63 Staatsschuldenkrisen. Die internationalen Kapitalflüsse, zuerst hohe Zuflüsse dann „sudden stopp“ oder sogar Abflüsse spielten bei den aktuellen Krisen in Europa eine zentrale Rolle. Sowohl Island, als auch Osteuropa, als auch die Krisenländer im Euroraum verzeichneten vor der Krise hohe Zuflüsse an Kapital, die sich in der Krise umkehren und durch öffentliche Finanzmittel ersetzt werden müssen, um eine geordnete Anpassung zu ermöglichen. Die Schweiz hat das umgekehrte Problem und muss sich mit Interventionen gegen die hohen Kapitalzuflüsse, die zu einer Überbewertung des Franken führten wehren. In allen diesen Fällen war staatliches Eingreifen gegen dieses Marktversagen durch überschießende Kapitalflüsse erforderlich. Insgesamt haben die Schweiz und Österreich die jüngste Krise durch wirtschaftspolitische Aktionen im internationalen Vergleich bisher gut, mit geringeren Wachstumseinbrüchen und einer rascheren Rückkehr zu Wachstum bewältigt. In der Schweiz Interventionen gegen die Frankenaufwertung, in Österreich die Stabilisierung Osteuropas durch EU/IWF, um Marktversagen zu korrigieren. Die finanziellen Auswirkungen waren allerdings unterschiedlich - in der Schweiz ein Verlust der Nationalbank von 36,3 Mrd. Franken (2010 und 1. Halbjahr 2011), in Österreich ein Gewinn von 2 Mrd. Euro für das Budget durch niedrigere Finanzierungskosten über die Laufzeit der 2009 und 2010 aufgenommenen Kredite. Auch das Verlustpotential liegt in Österreich niedriger. Umgekehrt ist die Lage bei den Banken-Hilfspaketen. Hier dürfte die Schweiz Gewinne erzielen, während in Österreich insgesamt eher Verluste zu erwarten sind. Die Schweizer Nationalbank könnte Währungsreserven dazu verwenden Staatsanleihen von Euroraum-Krisenländern zu kaufen. Das Marktversagen – Kapitalabflüsse aus Euroraum-Krisenländern, Kapitalzuflüsse in die Schweiz – würde damit direkt korrigiert und der Aufwertungsdruck auf den Franken verringert werden. Schweizer Investoren könnten ebenfalls diese Staatsanleihen kaufen und würden damit die Schweizer Nationalbank bei ihrem Bemühen zur Stabilisierung des Wechselkurses unterstützen.

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Abstract: This FIW Special International Economics takes a long term perspective on international merchandise trade and tracks specialisation patterns of 19 world regions over the period 1980 to 2009. The data reveals that the path of trade specialisation is not predetermined: globalisation may intensify initial specialisations or may induce technological upgrading leading to new specialisation patterns. The emergence of the highly successful East Asian electronics cluster is easily discernible from our analysis as is the catch-up process of Eastern Europe. The experience of these dynamic regions contrasts with that of the African regions, West Asia and to some extent South America, whose primary role in the world economy is still that of oil and raw material suppliers. We also show that international trade in technology intensive industries has broadened geographically. High income countries in Europe, Japan and the US which dominated trade in high tech manufactures until the 1980s have suffered a considerable loss of market shares to the benefit of emerging East Asian countries causing a lot of concern about the EU’s export performance in high technology industries among European policy makers. R&D policy has become a major component of Europe’s industrial policy which is intended to support the continuous process of technological upgrading high income countries need to remain competitive in world markets. European high income regions have been successful in this respect in the sense that their export structures continue to shift towards more technology intensive industries despite the losses of global market shares which must be seen as a consequence of a broader participation in world trade. We read the major shifts in global world trade over the past decades and in particular the ‘rise of Asia’ as evidence that active trade and industrial policies can ignite and support the industrialisation process and technological upgrading within the manufacturing sector. At the same time Eastern Europe showed that a technological catch-up process can also be achieved by relying on foreign direct investment and deep trade integration with more advanced trading partners in the region. In contrast, the policies pursued by South American countries after the debt-crisis of the 1980s did not seem to have fostered significant technological upgrading. Given the undetermacy of trade specialisation over time and the multiple paths to technological upgrading we believe that international trade rules should ensure – more than they do now – that all countries have the required policy space to implement policies that foster structural changes in their economies.

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Abstract: The absorptive capacity represents the ability of enterprises to efficiently absorb and internalise knowledge from outside: it represents the link between firms’ capabilities to implement new products and the external stock of technological opportunities, such as those spilled-out from Multinational Enterprises (MNEs). In this framework, the present paper aims at testing the absorptive capacity of Italian firms arising from inward Foreign Direct Investment (FDI). Given the peculiar characteristics of the Italian productive system, our analysis will focus on three different dimensions: technology gap between foreign and local enterprises, domestic firm size, and geographical distribution of firms. Our findings suggest that technological gap and firm size matter considerably for the spillover effect. Moreover, spillovers exhibit a subnational dimension, being present only in North-East region of the Peninsula.

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Abstract: A number of theoretical studies have tended to trace the nature of globalization process’ impacts (mostly characterised by trade opening) on informality, while relevant empirical literature has been not well developed. The paper aims to fill this knowledge gap by shedding further light on the linkages running from globalisation to informality in developing countries. Moreover, in this study, globalisation is characterised not only by trade integration but also by other globalisation aspects, such as social globalisation, financial globalisation and so forth. To achieve the main objective, we employ the Bayesian statistical techniques, which allow one to determine, from a large set of different globalization indicators, a subset of indicators most likely to influence the size of informality. Our finding reveals that the indicators with consistently high inclusion probabilities are trade integration, trade reforms, de jure financial openness and social globalisation. On the other hand, many covariates found significant in previous empirical studies are not robust to including in informality modelling.

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Abstract: This paper develops a structural empirical general equilibrium model of aggregate bilateral trade with path dependence of country-pair level exporter status. Such path dependence is motivated through informational costs about serving a foreign market for first-time entry of (firms in) an export market versus continued export services to that market. We embed the theoretical model into a structural dynamic stochastic econometric model of bilateral selection into import markets and apply it to a data-set of aggregate bilateral exports among 120 countries over the period 1995-2004. In particular, we disentangle the role of changes in trade costs, in labor endowments, and in total factor productivity for trade, bilateral market entry, numbers of firms active, and welfare. Dynamic gains from trade differ significantly from static ones, and path-dependence in market entry cushions effects of impulses in fundamental variables that are detrimental to bilateral trade.

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Abstract: This paper develops a structural empirical general equilibrium model of aggregate bilateral trade with path dependence of country-pair level exporter status. Such path dependence is motivated through informational costs about serving a foreign market for first-time entry of (firms in) an export market versus continued export services to that market. We embed the theoretical model into a structural dynamic stochastic econometric model of bilateral selection into import markets and apply it to a data-set of aggregate bilateral exports among 120 countries over the period 1995-2004. In particular, we disentangle the role of changes in trade costs, in labor endowments, and in total factor productivity for trade, bilateral market entry, numbers of firms active, and welfare. Dynamic gains from trade differ significantly from static ones, and path-dependence in market entry cushions effects of impulses in fundamental variables that are detrimental to bilateral trade.