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External terms-of-trade and labour market imperfections in developing countries

External terms-of-trade and labour market imperfections in developing countries PurposeSome recent empirical studies have found that developing countries are more prone to external terms-of-trade shocks compared to developed nations. With this background, the purpose of this paper is to the question of whether developing countries possess any built-in mechanism that can cope with external terms-of-trade (TOT) shocks both theoretically and empirically.Design/methodology/approachThis paper uses a two-sector, full-employment general equilibrium model with endogenous labour market distortion to conduct its theoretical analysis and then uses an annual panel dataset of 13 small developing countries over the recent time period of 2000-2012 to substantiate its theoretical findings.FindingsTheoretically, this study finds that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of exogenous TOT movements. This analytical result has been found to be empirically valid based on a panel dataset of 13 countries from 2000-2012.Originality/valueThe authors’ analyses suggest that that the developing countries should take utmost caution before adopting the policy of labour market reform because these might impair the effectiveness of their in-built shock-absorbing mechanism against adverse international price movements. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

External terms-of-trade and labour market imperfections in developing countries

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1753-8254
DOI
10.1108/IGDR-07-2017-0045
Publisher site
See Article on Publisher Site

Abstract

PurposeSome recent empirical studies have found that developing countries are more prone to external terms-of-trade shocks compared to developed nations. With this background, the purpose of this paper is to the question of whether developing countries possess any built-in mechanism that can cope with external terms-of-trade (TOT) shocks both theoretically and empirically.Design/methodology/approachThis paper uses a two-sector, full-employment general equilibrium model with endogenous labour market distortion to conduct its theoretical analysis and then uses an annual panel dataset of 13 small developing countries over the recent time period of 2000-2012 to substantiate its theoretical findings.FindingsTheoretically, this study finds that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of exogenous TOT movements. This analytical result has been found to be empirically valid based on a panel dataset of 13 countries from 2000-2012.Originality/valueThe authors’ analyses suggest that that the developing countries should take utmost caution before adopting the policy of labour market reform because these might impair the effectiveness of their in-built shock-absorbing mechanism against adverse international price movements.

Journal

Indian Growth and Development ReviewEmerald Publishing

Published: Apr 9, 2018

References