Introduction

For understanding the causes and consequences of international trade, recent research increasingly focuses on individual firms. Although this research emphasizes reallocations of resources across heterogeneous firms, it typically assumes frictionless labor markets in which all workers are fully employed for a common wage. In reality, labor markets feature both unemployment and wage inequality, and labor-market institutions are thought to have a prominent role in propagating the impact of external shocks. In this chapter, we draw on recent research in Helpman and Itskhoki (2010) and Helpman, Itskhoki, and Redding (2010) to discuss interdependence across countries.

This framework incorporates a number of features of product and labor markets. Firms are heterogeneous in productivity, which generates differences in revenue across firms. There are search and matching frictions in the labor market, which generate equilibrium unemployment and give rise to multilateral bargaining between the firms and their workers. Although workers are ex-ante homogeneous, they draw a match-specific ability when matched with a firm, which is not directly observed by either the firm or the worker. Firms, however, can invest resources in screening their workers to obtain information about ability. Larger, more-productive firms screen workers more intensively to exclude those with low ability. As a result, they have workforces of higher average ability and they pay higher wages. These differences in firm characteristics are systematically related to export participation. Exporters are larger and more productive than nonexporters; they screen workers more intensively; and they pay higher wages in comparison to firms with similar productivity that do not export.

This volume brings together fifteen essays from various fields of economics to which Assaf Razin has made major contributions in the last thirty years – international economics, economic growth, public economics, and political economy. They all share a common feature: close relevance to economic policy, something which is at the essence of all of Assaf's contributions.

In “Crises: The Next Generation?” Paul Krugman reviews the evolution of the literature on currency and financial crises and suggests a direction to which this literature will turn in the future. The first-generation models were tailored to address a simple scenario. A government maintains a fixed exchange rate while running a budget deficit. The budget deficit is monetized, leading to a loss of foreign exchange reserves. As the level of reserves reaches a lower bound there is a run on the central bank that wipes out the remaining reserves. Unable to support the exchange rate, the government floats the currency. Under these circumstances the timing of the crisis is predictable, as are its consequences. It is an inevitable outcome of a set of inconsistent policies.

This description suited various episodes during the operation of the Bretton Woods system. With the advent of floating exchange rates, however, the nature of crises changed. This is particularly true of the 1992 episodes in Europe, which triggered the development of second-generation models.

Assaf Razin is a distinguished economist who has made major contributions to a number of fields. He is particularly known for his work on human capital and growth, the economics of the family, public economics, and international economics. In international economics he played a major role in the application of modern analytical tools to the study of the balance of payments and exchange rates. He is one of the founders of the intertemporal approach to the balance of payments and his book with Jacob Frenkel established a standard for all future work in this area.

But Assaf Razin is not only a great scholar. He is also one of the founders of the Department of Economics at Tel Aviv University, where he has spent most of his adult life. And he is a great friend. For all these reasons it was indeed a pleasure and a privilege for us to organize a conference in honor of his 60th birthday. The organization proved to be an easy task, because Assaf's many friends happily flocked from all over the globe to celebrate his birthday. As a result we were able to bring together the most distinguished members of our profession to discuss international economic issues. This volume contains the papers from that conference, which took place at the Eitan Berglas School of Economics at Tel Aviv University, March 25–26, 2001.

Introduction

Economists have devoted much effort to the study of efficiency properties of trade policies. These efforts have produced a coherent body of literature that describes how trade policy instruments – such as tariffs, export subsidies, quotas or voluntary export restraints (VERS) – affect economies that trade with each other. And they produced empirical models that have been extensively used to evaluate the efficiency losses from trade policies on the one hand and prospective gains from trade reforms on the other. Examples include quantitative studies of the Single Market programme in Europe (e.g. Flam, 1992) and of the NAFTA (e.g. Garber, 1993).

At the same time another strand of the literature has examined possible explanations for prevailing trade policies. Here efficiency considerations have not played centre stage. Many policies – such as quotas and VERS – impose large burdens on society. Researchers therefore looked for objectives of the policy-makers other than overall efficiency in order to explain them. This literature emphasises distributional considerations. It views trade policy as a device for income transfers to preferred groups in society. And it explains the desire of a policy-maker to engage in this sort of costly transfer by means of political arguments in her objective function (see Hillman, 1989, for a review).

Political economy explanations of trade policies are important, because they help us to understand the structure of protection as well as the major public policy debates.

Introduction

Ninety-six percent of the world's research and development (R&D) is carried out in a handful of industrial countries. The remaining 4% is conducted in a large number of developing countries, though among them only 15 countries perform significant R&D (Coe, Helpman, and Hoffmaister, 1997). This raises the question whether or not the distribution of the benefits of R&D is as skewed as the distribution of expenditures.

Why should we be interested in this question? First, because R&D is an important activity. True, the industrial countries spend only 1.5–3% of gross domestic product (GDP) on R&D, but the rates of return on R&D are so high that even that investment can have a significant impact on output growth.

INTRODUCTION

Economists have devoted much effort to the study of efficiency properties of trade policies. These efforts have produced a coherent body of literature that describes how trade policy instruments - such as tariffs, export subsidies, quotas, or voluntary export restraints - affect economies that trade with each other. And they produced empirical models that have been extensively used to evaluate the efficiency losses from trade policies, on the one hand, and prospective gains from trade reforms, on the other. Recent examples include quantitative studies of the single-market program in Europe (e.g., Flam (1992)) and of NAFTA (e.g., Garber (1993)).

At the same time another strand of the literature has examined possible explanations for prevailing trade policies. Here efficiency considerations have not played center stage. Many policies - such as quotas and voluntary export restraints - impose large burdens on society. Therefore research looked for objectives of the policymakers other than overall efficiency in order to explain them. This literature emphasizes distributional considerations. It views trade policy as a device for income transfers to preferred groups in society. And it explains the desire of a policymaker to engage in this sort of costly transfer by means of political arguments in her objective function (see Hillman (1989) for a review).