Warren Alpert Professor of Business Administration
Laura Alfaro is the Warren Alpert Professor of Business Administration. She is also a Faculty Research Associate in the National Bureau of Economic Research's International Finance and Macroeconomics Program and the International Trade and Investment Program, member of the International Finance Corporation (IFC) Economic Advisory Board, the Latin-American Financial Regulatory Committee (CLAAF), Faculty Associate at Harvard's Weatherhead Center for International Affairs, and member of the David Rockefeller Center for Latin American Studies’ (DRCLAS) policy committee, among others. She served as Minister of National Planning and Economic Policy in Costa Rica from 2010-2012, taking a leave from HBS. In 2008, she was honored as a Young Global Leader by the World Economic Forum. Professor Alfaro is the author of multiple articles published in leading academic journals such as the American Economic Review, Review of Economic Studies, Journal of Political Economy, Journal of International Economics, and of Harvard Business School cases related to the field of international economics and in particular international capital flows, foreign direct investment, sovereign debt, trade, and emerging markets.
Laura Alfaro is the Warren Alpert Professor of Business Administration. At Harvard Business School since 1999, she is also a Faculty Research Associate in the National Bureau of Economic Research's International Finance and Macroeconomics Program and the International Trade and Investment Program, member of the International Finance Corporation (IFC) Economic Advisory Board, the Latin-American Financial Regulatory Committee (CLAAF), Faculty Associate at Harvard's Weatherhead Center for International Affairs, and member of the David Rockefeller Center for Latin American Studies’ (DRCLAS) policy committee, among others. She served as Minister of National Planning and Economic Policy in Costa Rica from 2010-2012, taking a leave from HBS. In 2008, she was honored as a Young Global Leader by the World Economic Forum. Professor Alfaro is the author of multiple articles published in leading academic journals such as the American Economic Review, Review of Economic Studies, Journal of Political Economy, Journal of International Economics, and of Harvard Business School cases related to the field of international economics and in particular international capital flows, foreign direct investment, sovereign debt, trade, and emerging markets.
At Harvard Business School since 1999, Professor Alfaro has taught in General Management Program, the Program for Leadership Development, and in other executive education offerings as well the first year and second year of the MBA program and the doctoral program. She earned her Ph.D. in Economics from the University of California, at Los Angeles (UCLA), where she was recipient of the Dissertation Fellowship award. She received a B.A in economics with honors from the Universidad de Costa Rica and a 'Licenciatura' from the Pontificia Universidad Catolica of Chile where she graduated with highest honors. She was awarded a Francisco Marroquin Foundation scholarship.
Laura Alfaro, Gonzalo Asis, Anusha Chari and Ugo Panizza
The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman’s Z-score). Firm size plays a critical role in the relationship between leverage, firm fragility, and exchange rate movements in emerging markets. While the relationship between firm leverage and distress scores varies over time, the relationship between firm size and corporate vulnerability is relatively time invariant. All else being equal, large firms in emerging markets are more financially vulnerable and also systemically important. Consistent with the granular origins of aggregate fluctuations in Gabaix (2011), idiosyncratic shocks to the sales growth of large firms are positively and significantly correlated with GDP growth in our emerging markets sample. Relatedly, the negative impact of exchange rate shocks has a more acute impact on the sales growth of the more highly levered large firms.
Laura Alfaro, Pol Antràs, Davin Chor and Paola Conconi
In recent decades, advances in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. We describe a property-rights model of firm boundary choices along the value chain that generalizes Antràs and Chor (2013). To assess the evidence, we construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with input-output tables. In line with the model's predictions, we find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm's propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage, as well as by the firm's productivity. Our results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.
In the past decade, foreign participation in local-currency bond markets in emerging countries increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can accumulate reserves and borrow internationally using their own currency. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and render consumption smoother. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.
Assessing the productivity gains from multinational production has been a vital topic of economic research and policy debate. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and revenue distributions rightward while between-firm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.
Emerging-market governments adopted capital control taxes to manage the massive surge in foreign capital inflows in the aftermath of the global financial crisis. Theory suggests that the imposition of capital controls can drive up the cost of capital and curb investment. This paper evaluates the effects of capital controls on firm-level stock returns and real investment using data from Brazil. On average, there is a statistically significant drop in cumulative abnormal returns consistent with an increase in the cost of capital for Brazilian firms following capital control announcements. The results suggest significant variation across firms and financial instruments. Large firms and the largest exporting firms appear less negatively affected compared to external-finance-dependent firms, and capital controls on equity inflows have a more negative announcement effect on equity returns than those on debt inflows. Real investment falls in the three years following the controls. Overall, the findings have implications for macro-finance models that abstract from heterogeneity at the firm level to examine the optimality of capital control taxation.
Laura Alfaro, Paola Conconi, Harald Fadinger and Andrew F. Newman
What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper provides evidence that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. It follows from firms' maximizing behavior that higher prices induce more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at high prices, the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration.
This paper discussed the importance of an “integrated approach” to the study of the effects of FDI on host countries. Macro-level work that examines countries at different stages of development and institutional capacity is needed to surface the role of local conditions and absorptive capacities; micro-level work, that is firm-level data in developed as well as developing nations, to understand the mechanisms that impart substance to the anticipated benefits; and theoretical work to guide the analyses. The paper summarizes likely motives for foreign direct investment and potential effects of FDI on local economies as well as recent findings from the macro literature on the role of complementarities between FDI and local policies, conditions, and institutions. It explores as well new efforts to understand the micro mechanisms and channels by which host countries can benefit from multinational activity, within and between firm productivity increases.
Recent rulings in the ongoing litigation over the pari passu clause in Argentinian sovereign debt instruments have generated considerable controversy. Some official-sector participants and academic articles have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. This paper critically examines this claim and argues that the incentives for holdout litigation are limited because of (1) significant constraints on creditor litigation, (2) substantial economic and reputational costs associated with such litigation, and (3) the availability of contractual provisions and negotiating strategies that mitigate the debtor's collective action problems. It also argues that the fact-specific equitable remedy in the Argentina case was narrowly tailored to Argentina's unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.
The explosion of multinational activities in recent decades is rapidly transforming the global landscape of industrial production. But are the emerging clusters of multinational production the rule or the exception? What drives the offshore agglomeration of multinational firms in comparison to the agglomeration of domestic firms? Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of pairwise-industry agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. Our analysis presents new stylized facts that suggest the emerging offshore clusters of multinationals are not a simple reflection of domestic industrial clusters. Agglomeration economies including capital-good market externality and technology diffusion play a more important role in the offshore agglomeration of multinationals than the agglomeration of domestic firms. These findings remain robust when we address potential reverse causality by exploring the regional pattern and process of agglomeration.
This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm size dynamics and reallocation of resources within industries. Following deregulation, resource misallocation declines, and the left-hand tail of the firm size distribution thickens significantly, suggesting increased entry by small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The reallocation of market shares toward a small number of large firms and a large number of small firms is characterized as the "shrinking middle" in Indian manufacturing. Small- and medium-sized firms may continue to face constraints in their attempts to grow.
Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych
We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find (1) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries' productivity growth; (2) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign; (3) net public debt financed by private creditors is positively correlated with growth; and (4) public savings are strongly positively correlated with growth, whereas the correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.
We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years.
The main arguments in favor of and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
Laura Alfaro, Sebnem Kalemli-Ozcan, Areendam Chanda and Selin Sayek
Do multinational companies generate positive externalities for the host country? The evidence so far is mixed varying from beneficial to detrimental effects of foreign direct investment (FDI) on growth, with many studies that find no effect. In order to provide an explanation for this empirical ambiguity, we formalize a mechanism that emphasizes the role of local financial markets in enabling FDI to promote growth through backward linkages. Using realistic parameter values, we quantify the response of growth to FDI and show that an increase in the share of FDI leads to higher additional growth in financially developed economies relative to financially under-developed ones.
Using firm-level data, this paper analyzes the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, and private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2007. We find great dynamism displayed by foreign and private firms as reflected in the growth of their numbers, assets, sales, and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story, rather, is one of an economy still dominated by the incumbents (state-owned firms) and, to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales, and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.
We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.
Alfaro, Laura, Andrew Charlton, and Fabio Kanczuk. "Plant-Size Distribution and Cross-Country Income Differences." In NBER International Seminar on Macroeconomics 2008, edited by Jeffrey A. Frankel and Christopher Pissarides. Cambridge, MA: National Bureau of Economic Research, 2009.
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We use a new firm-level dataset that establishes the location, ownership, and activity of 650,000 multinational subsidiaries. Using a combination of four-digit-level information and input-output tables, we find the share of vertical FDI (subsidiaries that provide inputs to their parent firms) to be larger than commonly thought, even within developed countries. Most subsidiaries are not readily explained by the comparative advantage considerations whereby multinationals locate activities abroad to take advantage of factor cost differences. Instead, multinationals tend to own the stages of production proximate to their final production, giving rise to a class of high-skill, intra-industry vertical FDI.
Alfaro, Laura, and Andrew Charlton. "Intra-Industry Foreign Direct Investment."American Economic Review 99, no. 5 (December 2009): 2096–2119. (Also Harvard Business School Working Paper No. 08-018 and NBER Working Paper No. 13447.)
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We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.
Alfaro, Laura, and Fabio Kanczuk. "Debt Maturity: Is Long-Term Debt Optimal?"Review of International Economics 17, no. 5 (November 2009): 890–905. (Also Harvard Business School Working Paper, No. 06-005 and NBER Working Paper No. 13119.)
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Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, we find the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.
Alfaro, Laura, and Fabio Kanczuk. "Optimal Reserve Management and Sovereign Debt." Journal of International Economics 77, no. 1 (February 2009): 23–36. (Also Harvard Business School Working Paper, No. 07-010, 2006 and NBER Working Paper No. 13216.)
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Laura Alfaro, Sebnem Kalemli-Ozcan and Selin Sayek
This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation—physical and human capital—does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences.
Alfaro, Laura, Sebnem Kalemli-Ozcan, and Selin Sayek. "FDI, Productivity, and Financial Development." Special Issue on Multinational Enterprises and Foreign Direct Investment. World Economy 32, no. 1 (January 2009): 111–135.
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Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych
We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries—the "Lucas Paradox." The theoretical explanations include cross country differences in fundamentals affecting productivity and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.
Studying the relation between equity market liberalization and imports of capital goods, we examine one channel through which international financial integration can promote growth. For the period 1980–1997, we find that after controlling for other policies and fundamentals, stock market liberalizations are associated with a significant increase in the share of imports of machinery and equipment. We hypothesize this can be attributed to the consequences of financial integration, which allows access to foreign capital, and provide evidence consistent with this channel. Our results suggest that increased access to international capital allows countries to enjoy the benefits embodied in capital goods.
We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide set of parameters, the only equilibrium is one in which the sovereign defaults in all states; additional output losses, however, sustain equilibria that resemble the data. We show that due to the adverse selection problem, some countries choose to delay default to reduce loss of reputation. Moreover, although equilibria with no default imply in greater welfare levels, they are not sustainable in highly indebted and volatile countries.
This paper further tests Romer's (1993) extension of Kydland and Prescott's (1977) predictions for dynamic-inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, I find that openness does not play a role in restricting inflation in the short-run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification.
Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan and Selin Sayek
The purpose of this paper is to examine the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents have two choices: they can work for the foreign company in the FDI sector and use their wealth to earn a return or they can choose to undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents in the economy to take advantage of knowledge spillovers from FDI. The empirical evidence suggests that FDI plays an important role in contributing to economic growth. However, the level development of local financial markets is crucial for these positive effects to be realized.
Several recent papers have used plant-level data and panel econometric techniques to carefully explore the existence FDI externalities. One conclusion that emerges from this literature is that it is difficult to find evidence of positive externalities from multinationals to local firms in the same sector (horizontal externalities). In fact, many studies find evidence of negative horizontal externalities arising from multinational activity while confirming the existence of positive externalities from multinationals to local firms in upstream industries (vertical externalities). In this paper we explore the channels through which these positive and negative externalities may be materializing, focusing on the role of backward linkages. In particular, we criticize the common usage of the domestic sourcing coefficient as an indicator of a firm's linkage potential and propose an alternative, theoretically derived indicator. We then use plant-level data from several Latin American countries to compare multinationals' linkage potential to that of domestic firms. We find that multinationals' linkage potential in Brazil, Chile and Venezuela is higher than for domestic firms. For Mexico, we cannot reject the hypothesis that foreign and local firms have similar linkage potential. Finally, we discuss the relationship between this finding and the conclusions that emerge from the recent empirical literature.
This paper examines the economic consequences of political conflicts that arise when countries implement capital controls. In an overlapping-generations model, agents vote on whether to open or close an economy to capital flows. The young (workers) receive income from wages only while the old (capitalists) receive income from savings only. We characterize the set of stationary equilibria for an infinite horizon game. Assuming dynamic-efficiency, when the median representative is a worker (capitalist), capital-importing countries will open (close) while capital-exporting countries will close (open). These predicted patterns are consistent with data on liberalization policies over time and across various countries.
The paper presents an overlapping-generations model where agents vote on whether to open or close the economy to international capital flows. Political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the productivity shocks.There are three possible equilibrium outcomes: economies that eventually remain open; those that eventually remain closed; and those that cycle between open and closed. In line with the stylized facts, cycles are more common in economies with intermediate development levels.
This paper provides a political economy explanation for temporary exchange-rate-based stabilization programs by focusing on the distributional effects of real exchange-rate appreciation. I propose an economy in which agents are endowed with either tradable or nontradable goods. Under a cash-in-advance assumption, a temporary reduction in the devaluation rate induces a consumption boom accompanied by real appreciation, which hurts the owners of tradable goods. The owners of nontradables have to weigh two opposing effects: an increase in the present value of nontradable goods wealth and a negative intertemporal substitution effect. For reasonable parameter values, owners of nontradables are better off.
We characterize the agglomeration patterns of industries and plants in Europe, distinguishing Eurozone countries and the United States. Using a micro-level index, we quantify the degree of geographic concentration in industrial activities and explore how firm heterogeneity, industry attributes, and location fundamentals jointly explain the observed patterns. Our analysis shows that there is a clear hub-and-spoke structure in the geographic distribution. Larger and more productive plants, especially the superstars of each industry, are more centered than their smaller, less productive counterparts. The greater agglomeration surrounding superstars is particularly pronounced in the Eurozone but not present in the rest of Europe. Location fundamentals also play an important role and can sometimes mitigate the importance of agglomeration economies around large firms. Regions with different levels of economic development, including in education and technology, exhibit distinct agglomeration patterns. The findings suggest heterogeneity in the ability of regional policies to build superstar-centered industry clusters.
Research has sought to understand how foreign direct investment affects host economies. This paper reviews the empirical literature, specifically addressing the question: How does FDI affect economic development of host countries and what is the role of local financial markets in mediating the potential benefits? We first define FDI and discuss general theories on types and drivers of FDI. This review takes a host-country perspective rather than a firm perspective and thus only highlights the key insights from the rich firm-level literature on MNCs. We then focus on how financial conditions in host countries affect the extent of FDI-related capital inflows, shape the operations of foreign firms, and mediate the extent of productivity spillovers from FDI to local firms. The survey focuses mainly on work related to developing countries.
Alfaro, Laura, and Jasmina Chauvin. "Foreign Direct Investment, Finance and Economic Development." In Encyclopedia of International Economics and Global Trade, Vol. 3: Foreign Direct Investment and the Multinational Enterprise, edited by Mariana Spatareanu. Singapore: World Scientific, forthcoming.
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Multinationals exhibit distinct agglomeration patterns, which have transformed the global landscape of industrial production (Alfaro and Chen, 2014). Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of pairwise-industry agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. In particular, we run a horserace between two distinct economic forces: location fundamentals and agglomeration economies. We find that location fundamentals, including market access and comparative advantage, and agglomeration economies, including capital-good market externality and technology diffusion, play a particularly important role in multinationals' economic geography. These findings remain robust when we use alternative measures of trade costs, address potential reverse causality, and explore regional patterns.
Among the prominent economic trends in recent decades is the exponential increase in flows of goods and capital driven by technological progress and a falling number of restrictions. A key driver of this phenomenon has been the cross-border production, foreign investment, and trade of both final and intermediate goods by multinational corporations. Research has sought to understand how foreign direct investment (FDI) affects host economies. This paper reviews the main theories and empirical evidence of two streams of literature: the mechanisms by which multinational activity might create positive effects and externalities to countries and the role of complementary local conditions, also known as “absorptive capacities,” that allow a country to reap the benefits of FDI paying particular attention to the role of factor markets, reallocation effects, and the linkages generated between foreign and domestic firms. The survey focuses mainly on work related to developing countries.
Falling transportation costs and rapid technological progress in recent decades have precipitated an explosion of cross-border flows in goods, services, investments, and ideas led by multinational firms. Extensive research has sought to understand the geographic patterns of foreign direct investment (FDI). This chapter reviews existing theories and evidence specifically addressing questions including: How is FDI distributed across space? Why does the law of gravity apply? How do the costs of transporting goods, tasks, and technologies influence firms’ decisions to separate tasks geographically and locate relative to one another? We discuss a variety of theoretical mechanisms through which transport cost and other geographic friction influence FDI and present the key empirical studies and findings.
Alfaro, Laura. "Foreign Direct Investment: Effects, Complementarities, and Promotion." Chap. 2 in Partners or Creditors? Attracting Foreign Investment and Productive Development to Central America and Dominican Republic, edited by Osmel Manzano, Sebastián Auguste, and Mario Cuevas, 21–76. Inter-American Development Bank, 2015. (Also in Spanish: ¿Socios o Acreedores? Atracción de Inversión Extranjera y Desarrollo Productivo en Mesoamérica.)
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In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use "quality" to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics, which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.
Alfaro, Laura, and Anusha Chari. "Reforms and the Competitive Environment." Chap. 8 in Reforms and Economic Transformation in India, edited by Jagdish N. Bhagwati and Arvind Panagariya. Oxford University Press, 2012.
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This paper examines the evolution of the literature on the relationship between foreign direct investment (FDI) and growth in host countries, particularly developing countries. It provides a broad overview, with a focus on two elements that have recently become particularly important, (1) the role of complementary local conditions conducive to reaping the benefits of FDI (which relate to when FDI will generate growth) and (2) the mechanisms by which FDI creates positive externalities (which relate to how FDI generates growth).
Alfaro, Laura, and Matthew Johnson. "Foreign Direct Investment and Growth." Chap. 20 in The Evidence and Impact of Financial Globalization, edited by Gerard Caprio, 299–307. Elsevier, 2012.
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Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Capital Flows in a Globalized World: The Role of Policies and Institutions." In Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, edited by Sebastian Edwards. National Bureau of Economic Research Conference Report. University of Chicago Press, 2007. (Also NBER Working Paper No. 11696.)
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Alfaro, Laura, and Eliza Hammel. "Latin American Multinationals." In The Latin American Competitiveness Report. New York: Oxford University Press, 2006. (Issued by WEF/CID.)
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Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models.
Alfaro, Laura, Cathy Ge Bao, Maggie X. Chen, Junjie Hong, and Claudia Steinwender. "Foreign Powers, Institutions, and Firms in Shanghai's Concession Era." Working Paper, January 2019.
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Alfaro, Laura, Maggie Chen, Andrea Lucchesi, and Naercio A. Menezes Filho. "Outsourcing Innovation: The China Shock Hits Brazil." Working Paper, January 2019.
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Alfaro, Laura, Davin Chor, and Maggie Chen. "Information, Globalization and Preferences for Economic Policy: Evidence from Randomized Surveys." Working Paper, January 2019.
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Laura Alfaro, Manuel García-Santana and Enrique Moral-Benito
We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset on the universe of corporate loans for 2003–2013 to identify bank-specific shocks for each year using methods from the matched employer-employee literature. Combining firm-specific measures of upstream and downstream exposure, we construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no significant impact on employment during the expansion period. Downstream propagation effects are comparable or even larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and contractions.
Laura Alfaro, Nick Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew F. Newman, Raffaella Sadun and John Van Reenen
Little is known about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which final good producers choose which suppliers to integrate and whether to delegate decisions to integrated suppliers, when they are ex-ante uncertain about their ability. In this setting, integration has an option value: ownership rights give producers authority to delegate or centralize production decisions, depending on the realized ability of suppliers. To assess the evidence, we construct measures of vertical integration and delegation for thousands of firms in many countries and industries. Consistent with the model, we find that (i) integration and delegation covary positively; (ii) firms delegate more decisions to integrated suppliers of more valuable inputs; and suppliers are more likely to be integrated if (iii) they produce more valuable inputs and (iv) operate in industries with greater productivity dispersion.
Alfaro, Laura, Nick Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew F. Newman, Raffaella Sadun, and John Van Reenen. "Come Together: Firm Boundaries and Delegation." Harvard Business School Working Paper, No. 18-051, December 2017. (Revised May 2019.)
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Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
We evaluate manufacturing firms' responses to changes in the real exchange rate (RER) using detailed firm-level data for a large set of countries for the period 2001–2010. We uncover the following stylized facts: In export-oriented emerging Asia, real depreciations are associated with higher firm-level probabilities to engage in R&D, faster growth of firm-level productivity, and cash flow and higher export entry rates. We find negative effects for firms in other emerging economies, which are relatively more import dependent, and no significant effects for firms in industrialized economies. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect export demand, borrowing constraints, and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on firm-level productivity growth across regions into these channels. We estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements and conduct several robustness analyses. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric.
Laura Alfaro, Gonzalo Asis, Anusha Chari and Ugo Panizza
This paper documents a set of new stylized facts about leverage and financial fragility for emerging market firms following the Global Financial Crisis (GFC). Corporate debt vulnerability indicators during the Asian Financial Crisis (AFC) attributed to corporate financial roots provide a benchmark for comparison. Firm-level data show that post-GFC, emerging market corporate balance sheet indicators have not deteriorated to AFC crisis-country levels. However, more countries are close to or in the “vulnerable” range of Altman’s Z-score, and average leverage for the entire emerging market sample is higher in the post-GFC period than during the AFC. Regression estimates suggest that the relationship between leverage, exchange rate depreciations, and corporate financial distress is time varying. A central finding is that firm size is correlated with corporate distress and, further, that currency depreciations amplify the impact of leverage on financial vulnerability for large firms during a crisis. Consistent with Gabaix (2011) the paper finds a granularity effect in that large firms are systemically important—idiosyncratic shocks to the sales growth of large firms significantly correlate with GDP growth in our emerging markets sample. Relatedly, the sales growth of large firms with higher leverage is more adversely impacted by exchange rate shocks. While this result holds for the average country in our sample, there is substantial cross-country heterogeneity.
Recurrent concerns over debt sustainability in emerging and developed nations have prompted renewed debate on the role of fiscal rules. Their optimality, however, remains unclear. We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default modified to incorporate quasi-hyperbolic preferences. For reasons of political economy or aggregation of citizens’ preferences, government preferences are present biased, resulting in over-accumulation of debt. Calibrating this parameter with values in the literature, the model can reproduce debt levels and frequency of default typical of emerging markets even if the household impatience parameter is calibrated to local interest rates. A quantitative exercise finds welfare gains of the optimal fiscal policy to be economically substantial and the optimal rule to not entail a countercyclical fiscal policy. A simple debt rule that limits the maximum amount of debt is analyzed and compared to a simple deficit rule that limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule yields welfare gains virtually equal to the optimal rule.
Alfaro, Laura, and Fabio Kanczuk. "Fiscal Rules and Sovereign Default." Harvard Business School Working Paper, No. 16-134, June 2016. (Also NBER Working Paper w23370. Revised January 2019.)
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We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm-level data set in a broad sample of developed and developing countries, which enables us to present both cross-country and industry-level evidence. We find a positive robust correlation between de jure and de facto measures of international financial integration and proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution. We then explore potential channels through which foreign capital may encourage entrepreneurship. We find that entrepreneurial activity is higher in industries which have a large share of foreign firms in vertically linked industries. Second, we find that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration.
The article introduces a special volume on the “Euro at Twenty” as the currency was first introduced January 1, 1999. The volume includes papers by renowned leaders and thinkers: Jean-Claude Trichet, former President of the European Central Bank; Claudia Buch, Vice-President of the Deutsche Bundesbank; and two prominent academics: Barry Eichengreen and Charles Wyplosz.
Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
Real exchange rate devaluations are typically seen as a viable development strategy, but the effectiveness of the approach may vary over time and across countries. This column explores this issue by focusing on the microeconomics of firm-level responses to exchange rate fluctuations. Results show varying patterns of responses to fluctuations by region and by import/export orientation. These results highlight the crucial role of a firm’s integration in global value chains.
Laura Alfaro, Nicholas Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew Newman, Raffaella Sadun and John Van Reenen
Economists have largely ignored the deep interdependency between integration and delegation. This column describes a new theory of integration and delegation choices aimed at shedding light on how these distinct elements of organizational design interact. Contrary to what is suggested by a naïve one-dimensional approach, the model predicts that delegation and outsourcing should be negatively correlated, a prediction that holds up well when the model is applied to data for thousands of firms across many industries and countries.
Laura Alfaro, Manuel García-Santana and Enrique Moral-Benito
Propagation through buyer-seller interactions may amplify the aggregate impact of bank lending shocks on real activity. This column presents insights from estimating the direct and indirect effects of exogenous credit supply shocks in Spain between 2002 and 2013. Both direct and indirect effects of bank credit shocks had sizable effects on investment and output throughout the period. Trade credit extended by suppliers and price adjustments both appear to explain downstream propagation of financial shocks.
Recent rulings in the ongoing litigation over the pari passu clause in Argentinian sovereign debt instruments have generated considerable controversy. Some official-sector participants and academic articles have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. This paper critically examines this claim by evaluating market reactions to litigation using an event study methodology. We analyze the effect on sovereign bonds from litigation events, with particular emphasis on Argentina for the period, 1993-2014. We find evidence that the market reacts differently to Argentina than in other countries.
Laura Alfaro, Gonzalo Asis, Anusha Chari and Ugo Panizza
Leverage levels in emerging market firms rose dramatically in the aftermath of the Global Crisis. This column examines whether concerns of a repeat of the Asian financial crisis, which was largely attributed to corporate financial roots, are justified. While firm financial fragility is more widespread, it is less severe than in the period preceding the Asian Financial Crisis. However, certain large firms with high levels of foreign currency leverage are a potential key source of vulnerability in the transmission of adverse shocks such as exchange rate depreciations.
Capital controls are back in fashion. This column discusses new firm-level evidence from Brazil showing that capital controls segment international financial markets, reduce external financing, and lower firm-level investment. They disproportionately affect small, non-exporting firms, especially those more dependent on external finance. This suggests that macro-finance models focusing on aggregate variables are missing an important dimension by abstracting from firm-level heterogeneity.
According to the IMF, last decade saw a number of countries actively managing their exchange rates. Is this a good way for emerging economies to protect themselves from the large swings of international markets? This column presents a new "pseudo-flexible" exchange rate policy for emerging economies that is both sustainable and allows for accumulating reserves in conjunction with domestic debt, resulting in low exchange-rate volatility.
Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych
With all the focus on Europe, it is easy to ignore the argument that global imbalances remain a drag on economic recovery. This column decomposes international capital flows into public and private components and claims that upstream flows from emerging to advanced economies and global imbalances in general are the result of the same underlying factor.
The re-occurring phenomenon of sovereign default has prompted an enormous theoretical and empirical literature. Most of this research has focused on why countries ever chose to pay their debts (or why private creditors ever expected repayment). The problem originates from the fact that repayment incentives for sovereign debts are minimal since little can be used as collateral and the ability of a court to force a sovereign entity to comply has been extremely limited, especially given the lack of a supranational legal authority capable of enforcing contracts across borders. In this paper we contrast the market reaction to attempts to enforce sovereign debt contracts via U.S. "dollar diplomacy" in Latin America in the pre-World War II period and by legal action in the 1990s and early 2000s. We argue that dollar diplomacy created an effective and credible enforcement regime while legal actions by creditors, conversely, do not appear to have done so.
Agglomeration effects are important but difficult to measure. This column uses a new database with precise geographical information to investigate the locational interdependence of multinational firms. Knowledge spillovers and capital- and labour-market externalities exert a significant effect on the co-agglomeration of multinational headquarters, while input-output linkages also play a significant role in the case of subsidiary co-agglomeration.
What microeconomic forces drove the structural transformation of India's economy in recent decades? This column studies firm-level data and portrays a dynamic economy driven by the growth of private and foreign firms. But the Indian economy did not go through an industrial shakeout phase driven by creative destruction. The endurance of incumbent firms prevented a dramatic microeconomic transformation.
Alfaro, Laura. Review of "The Monetary Geography of Africa," by Paul R. Masson and Catherine Patillo. Journal of International Economics 67, no. 2 (December 2005): 515–520.
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Alfaro, Laura, and Fabio Kanczuk. "Sovereign Debt: Indexation and Maturity." Working Paper (Inter-American Development Bank. Research Dept.), No. 560, December 2005. (Prepared for IADB Conference on Sovereign Debt, December 2005.)
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Abdelal, Rawi, and Laura Alfaro. "Capital and Control: Lessons from Malaysia."Challenge 46, no. 4 (July–August 2003): 36–53. (Also published in French as "Contrôle des capitaux: les enseignements de lexpérience malaisienne." Problèmes économiques, no. 2,837 (December 2003), pp. 21-28.)
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Laura Alfaro, Augusto de la Torre, Guillermo Calvo, Roque Benjamin Fernandez, Pablo Guidotti, Paulo Leme, Enrique Mendoza, Guillermo Perry, Carmen Reinhart and Liliana Rojas-Suarez
Alfaro, Laura, Augusto de la Torre, Guillermo Calvo, Roque Benjamin Fernandez, Pablo Guidotti, Paulo Leme, Enrique Mendoza, Guillermo Perry, Carmen Reinhart, and Liliana Rojas-Suarez. "Mexico's Financial Risks: Solving Pemex for a Solvent Mexico." Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, no. 41, July 2019.
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Laura Alfaro, Guillermo Calvo, Alberto Carrasquilla, Augusto de la Torre, Roque Benjamin Fernandez, Pablo Guidotti, Enrique Mendoza, Guillermo Perry and Liliana Rojas-Suarez
Laura Alfaro, Guillermo Calvo, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Liliana Rojas-Suarez and Ernesto Talvi
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Alfaro, Laura, Guillermo Calvo, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Liliana Rojas-Suarez, and Ernesto Talvi. "Protectionist Threats and Increasing Financial Volatility: Is Latin America at a Crossroads?" Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, April 2018.
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Laura Alfaro, Guillermo Calvo, Alberto Carrasquilla, Augusto de la Torre, Roque Benjamin Fernandez, Pablo Guidotti, Enrique Mendoza, Guillermo Perry and Liliana Rojas-Suarez
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Alfaro, Laura, Guillermo Calvo, Alberto Carrasquilla, Augusto de la Torre, Roque Benjamin Fernandez, Pablo Guidotti, Enrique Mendoza, Guillermo Perry, and Liliana Rojas-Suarez. "Latin America's Options for Times of Protectionism." Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, No. 37, April 2017.
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Laura Alfaro, Guillermo Calvo, Alberto Carrasquilla, Pedro Carvalho de Mello, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Enrique Mendoza, Liliana Rojas-Suarez and Ernesto Talvi
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Alfaro, Laura, Guillermo Calvo, Alberto Carrasquilla, Pedro Carvalho de Mello, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Enrique Mendoza, Liliana Rojas-Suarez, and Ernesto Talvi. "Argentina's Challenging Path to More Open Markets." Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, No. 35, April 2016. (See CLAAF’s website for previous statements.)
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Laura Alfaro, Guillermo Calvo, Pedro Carvalho de Mello, Roque Benjamin Fernandez, Pablo Guidotti, Enrique Mendoza, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez and Ernesto Talvi
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Alfaro, Laura, Guillermo Calvo, Pedro Carvalho de Mello, Roque Benjamin Fernandez, Pablo Guidotti, Enrique Mendoza, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez, and Ernesto Talvi. "Latin America: Back to the 1980s or Heading for Rebound?" Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, No. 34, November 2015. (See CLAAF’s website for previous statements.)
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Laura Alfaro, Guillermo Calvo, Pedro Carvalho de Mello, Pablo Guidotti, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez and Ernesto Talvi
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Alfaro, Laura, Guillermo Calvo, Pedro Carvalho de Mello, Pablo Guidotti, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez, and Ernesto Talvi. "The End of a Cycle in Latin America and Its Associated Risks." Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, no. 33, March 2015. (See CLAAF 's website for previous statements.)
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Laura Alfaro, Guillermo Calvo, Alberto Carrasquilla, Pedro Carvalho de Mello, Pedro De Gregorio, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez and Ernesto Talvi
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Alfaro, Laura, Guillermo Calvo, Alberto Carrasquilla, Pedro Carvalho de Mello, Pedro De Gregorio, Roque Benjamin Fernandez, Pablo Guidotti, Guillermo Perry, Carmen Reinhart, Liliana Rojas-Suarez, and Ernesto Talvi. "Enter the Dragon: Risks from China to Latin America." Comité Latinoamericano de Asuntos Financieros (CLAAF) Statement, no. 31, June 2014. (See CLAAF 's website for previous statements.)
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Alfaro, Laura, and Elizabeth A. Meyer. "International Macroeconomics — An Online Tutorial." Harvard Business School Teaching Note 715-048, April 2015.
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This tutorial is a web-based, interactive program which will provide students with an introduction to the basic principles of macroeconomics and international macroeconomics.
Alfaro, Laura, and Elizabeth A. Meyer. Introduction to International Macroeconomics. Harvard Business School Tutorial 715-702, April 2015.
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All managers face a business environment in which international and macroeconomic phenomena matter. International capital flows can significantly affect countries' development efforts and provide clear investment opportunities for businesses. During the 1990s and early 2000s, the world witnessed an explosion in capital flows at the global level. Gross foreign assets and liabilities stood at two or three times GDP for many countries, as compared to just two decades ago. This explosive growth, especially in emerging markets, has been fueled both by changes in world politics (e.g., the end of the Cold War, collapse of the Soviet Union, shifting political climate in China, and political changes in Latin America and Asia) and advances in technology. Private capital flows—debt finance, equity capital, and foreign direct investment (FDI)—became larger than current and past official capital flows. This new era of foreign capital mobility has also been characterized by low interest rates in industrial countries, growing external imbalances in the U.S. economy, and the rise of China, all of which posed new challenges to policy management. In 2009, the global economy remained mired in a deep crisis following the subprime meltdown in the U.S. The situation was also a true testimony of how intertwined individual economies had become over the years. The effect of policies to deal with the ongoing global crisis and new policy choices remain to be seen. Understanding these phenomena—the determinants of capital flows, the effects of foreign capital on host countries, the impact of exchange-rate movements, and the genesis of financial and currency crises—is a crucial aspect to making informed managerial decisions. The cases in this book have been designed to give students an appreciation of the critical role of institutions and policies in affecting patterns of international capital flows and the abilities of government to manage them effectively. The case studies are tied together by two broad themes: (1) the determinants and effects of international capital, and (2) policy-makers' management of these flows. The cases approach these themes by exploring institutional detail in deep local context. The cases expose students to recent key events that have shaped the way economists think about these subjects. The events covered have a clear global perspective as the cases are set in Africa, Asia, Europe and Latin America, as well as the United States. The cases also cover events that occurred during the last three decades as not only do they affect the business environment that managers face today but they also hold important lessons. An important feature the cases reveal is the cyclical nature of international capital flows. Global Capital and National Institutions: Crisis and Choice in the International Financial Architecture is composed of three intellectual segments: (1) Determinants and Effects of International Capital Flows, (2) Policies and Strategies for Harnessing the Benefits of Financial Globalization, (3) Challenges and Policies of Large Economies. Chapter I presents a detailed overview of the cases and readings in the module and relates the cases included to the main patterns of international capital flows in the last thirty years. Finally, the chapter also presents the key insights from the field of international economics covered in the cases as well as the current state of debate among policy-makers.
Alfaro, Laura. "Globalization Meets National Institutions: International Capital Flows, Harvard Business School Module Note Instructor Only, 708-041." 2008.
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Alfaro, Laura, and Elizabeth A. Meyer. "Introduction to International Macroeconomics." Harvard Business School Course Overview Note 714-050, February 2014. (Revised August 2014.) (Also available as tutorial.)
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In the decades following 2005, China faced significant financial challenges. Inflation spiraled upwards and China’s economy stagnated in the wake of the Global Financial Crisis. The country’s leaders took an interventionist approach to weather the storm, controlling capital and exchange rates. These actions raised criticism from other nations, and in 2017 the U.S. initiated the U.S.-China Trade Wars, which enforced tariffs and requirements for increased transparency. As implications of the trade wars remained uncertain, many wondered whether the central bank would introduce further discreet steps to change the yuan. Would China’s currency appreciate as substantially against the U.S. dollar as predicted by economists? And when would further change occur? The stakes were high; a freer yuan float would impact groups within and outside of China very differently. Would China’s currency then be allowed to depreciate or appreciate if fundamentals required it?
Alfaro, Laura, and Sarah Jeong. "Floating the Exchange Rate: In Pursuit of the Chinese Dream." Harvard Business School Case 320-039, November 2019.
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For decades, Chile was heralded as South America’s pillar of stable economic growth. Chile was the world’s largest producer of copper and enjoyed a long period of over 30 years of world demand for its resources. In 2013, the commodity boom ended and was replaced by a slow period of economic activity. By 2019, a culmination of factors had contributed to widespread protests. Major streets in Santiago were shut down due to demonstrations by workers across 20 ports. Mining unions urged the government to lift the state of emergency and end curfews. It was unclear how these stoppages would affect copper production and prices in a country that produced a third of the world’s supply.
Alfaro, Laura, and Sarah Jeong. "Renegotiating NAFTA." Harvard Business School Teaching Note 319-096, February 2019. (Revised February 2019.)
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Laura Alfaro, Laura Phillips Sawyer and Haviland Sheldahl-Thomason
On September 20, 2017, Hurricane Maria swept over Puerto Rico, devastating the island’s infrastructure and agriculture. The natural disaster was layered atop years of mounting financial distress. Before the hurricane, Puerto Rico had accumulated $74 billion in debt and beginning in 2014, the island had withheld debt payments despite the commonwealth’s constitutional guarantee of its general obligation bonds. In turn, the island found itself effectively excluded from capital markets while simultaneously unable to declare bankruptcy in US courts due to its status as a territory. In 2016, the US Congress had intervened, passing the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), which established an eight-member Oversight Board to manage the island’s fiscal planning and restructure its debts and other fiscal obligations under bankruptcy-like proceedings. Many stakeholders felt hopeful that the Oversight Board could help Governor Ricardo Rosselló enact reforms that would improve public services, eliminate government waste, re-establish creditworthiness, and ultimately, foster economic growth. But, many questions still remained: Was Promesa and the Oversight Board the best method to assist the island in fiscal recovery? Was the Board’s fiscal plan an acceptable approach? Would the island be able to regain access to capital markets and attract investments without allocating funds for its creditors in the near future?
Alfaro, Laura, Laura Phillips Sawyer, and Haviland Sheldahl-Thomason. "Rebuilding Puerto Rico." Harvard Business School Case 719-018, November 2018. (Revised October 2019.)
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Laura Alfaro, Christian Ketels, Haviland Sheldahl-Thomason, Sarah Jeong and Marcin Piatkowski
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Alfaro, Laura, Christian Ketels, Haviland Sheldahl-Thomason, Sarah Jeong, and Marcin Piatkowski. "Poland at a Crossroads." Harvard Business School Case 319-065, October 2018. (Revised October 2019.)
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Laura Alfaro, Haviland Sheldahl-Thomason and Sarah Jeong
January 1, 2019 marked the 25th anniversary of the North American Free Trade Agreement (NAFTA). Twenty-five years after the landmark trade pact was signed by the United States, Canada, and Mexico, considerable debate surrounded it. Trade and trade agreements were a focal point of the 2016 U.S. presidential election. NAFTA came into effect on January 1, 1994, after being backed by the Republican administration of U.S. President George H. W. Bush and the Democratic administration of U.S. President Bill Clinton during its implementation. It created the largest free trade area in the world at the time. Since implementation, total trade between NAFTA countries grew 280%; in comparison while trade to non-NAFTA partners grew by 195%. Critics of NAFTA claimed that it had contributed to a loss of manufacturing jobs to Mexico, increased inequality in all countries, and undercut environmental laws. Those who supported NAFTA, however, noted that in addition to trade, output, and overall employment, investment among the three nations increased, and productivity also grew. Furthermore, the agreement led to lower prices. By 2018, all countries experienced low unemployment rates. With changes in NAFTA looming, many questioned whether the accord had brought more benefits than costs to its signatories. Could the costs be minimized under a new agreement without reducing the benefits? Did buying local goods help create the most jobs in a country? What was the role of business? Everyone wondered what the potential ramifications of the new NAFTA, or lack of, would be.
Alfaro, Laura, Haviland Sheldahl-Thomason, and Sarah Jeong. "Renegotiating NAFTA." Harvard Business School Case 318-143, June 2018. (Revised August 2019.)
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The American shale revolution has upended oil and gas markets for nearly a decade. Prices have risen then plunged, production has surged and then waned, LNG has boomed, and technology and productivity have improved. The U.S. energy policy, under the Obama administration, authorized a handful of gas exporters, despite pressure from domestic chemical and utility interests, and approved oil exports for the first time in 40 years. Environmental issues and questions remain unresolved. No one knows for certain what America’s energy trajectory will look like in the next decade.
In the early 21st century, there was a noticeable trend of declining productivity growth. Despite the persistent decline in productivity growth, a consensus on its explanation had not been reached. Some of the debate focused on the technicalities of productivity measurement, and the structural shift involved with the increased usage and introduction of robots in place of workers, garnering the interest of academic economists, businesses and policymakers. Another contention was whether declining productivity was the result of secular stagnation, a more permanent economic state of low growth and lack of economic progress, or whether it was the result of deleveraging and the post-Global Financial Crisis period, a mere cyclical phase. Distilling the sources and drivers of productivity decline was further complicated by the rise in economic integration across countries, and even more so considering research findings that research and innovation was becoming less productive and more difficult. What, if anything, was the role of government? Should businesses play a role? If so what should they do? Teaching Note for HBS No. 718-013.
Alfaro, Laura, and Hayley Pallan. "The Productivity Decline: Demographics, Robots, or Globalization?" Harvard Business School Teaching Note 718-014, September 2017.
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In the early 21st century, there was a noticeable trend of declining productivity growth. Despite the persistent decline in productivity growth, a consensus on its explanation had not been reached. Some of the debate focused on the technicalities of productivity measurement, and the structural shift involved with the increased usage and introduction of robots in place of workers, garnering the interest of academic economists, businesses and policymakers. Another contention was whether declining productivity was the result of secular stagnation, a more permanent economic state of low growth and lack of economic progress, or whether it was the result of deleveraging and the post-Global Financial Crisis period, a mere cyclical phase. Distilling the sources and drivers of productivity decline was further complicated by the rise in economic integration across countries, and even more so considering research findings that research and innovation was becoming less productive and more difficult. What, if anything, was the role of government? Should businesses play a role? If so what should they do?
Alfaro, Laura, and Haviland Sheldahl-Thomason. "Colombia: the National System for Competitiveness and Innovation." Harvard Business School Supplement 717-031, December 2016. (Revised January 2017.)
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Laura Alfaro, Christian Ketels, Marcela Merino Dominguez and Haviland Sheldahl-Thomason
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Alfaro, Laura, Christian Ketels, Marcela Merino Dominguez, and Haviland Sheldahl-Thomason. "Naranya: Created in Mexico." Harvard Business School Case 716-062, February 2016. (Revised February 2017.)
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Laura Alfaro, Jesse Schreger and Haviland Sheldahl-Thomason
After more than 40 years of membership in the European Union, the United Kingdom voted via referendum to separate from the EU on June 23, 2016. Following the surprise verdict (termed Brexit), a political upheaval followed, with many ministers, including Prime Minister David Cameron, resigning or being sacked, and markets collapsed. As markets recovered, Theresa May was chosen as the new prime minister of the UK in charge of leading the separation.
The future of the UK and its relationship with Europe was uncertain. No country had ever left the EU before, so there was no precedent to follow and no clear indication of what the UK planned to do after exiting. Why had the British voted to leave? Would the UK and the EU be able to agree on a mutually beneficial arrangement? What would be the effects, politically and economically, on the UK and European countries? The impact of the disunion on the relationship between the EU and the UK was yet to be seen.
Alfaro, Laura, Jesse Schreger, and Haviland Sheldahl-Thomason. "Brexit." Harvard Business School Case 717-028, November 2016. (Revised March 2018.)
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Laura Alfaro, Christian Ketels, Haviland Sheldahl-Thomason and Marcela Merino Dominguez
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Alfaro, Laura, Christian Ketels, Haviland Sheldahl-Thomason, and Marcela Merino Dominguez. "Naranya: Created in Mexico." Harvard Business School Teaching Note 717-002, August 2016.
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Laura Alfaro, Rafael Di Tella, Ingrid Vogel, Renee Kim, Sarah Jeong, Matthew Johnson and Jonathan Schlefer
Investors and policymakers throughout the world were confronted with the risk of painful economic consequences arising from the large U.S. current account deficit. In 2007, the U.S. current account deficit was $731 billion, equivalent to 5.3% of GDP. The implications of the deficit were debated with intensity. At one extreme, it was argued that large deficits would eventually resolve themselves smoothly, even if they persisted for many more years. Former Federal Reserve Chairman Alan Greenspan was among those expecting a "benign resolution to the U.S. current account imbalance." Other analysts, such as economists at the World Bank, believed the large deficits raised the risk of a sharp and disorderly fall of the dollar and that necessary macroeconomic adjustment could be painful, for the United States as well as for the rest of the world. The Financial Times asked: "How long will foreigners be prepared to make such generous 'gifts' to the US?" In this environment, Berkshire Hathaway, run by legendary investor Warren Buffett, postulated that current account imbalances would lead to "some chaotic markets in which currency adjustments play a part" and announced to shareholders a plan to increase investment in overseas companies to protect against this risk. It remained to be seen what the short- and long-term implications of the current account deficit would ultimately yield.
Alfaro, Laura, Rafael Di Tella, Ingrid Vogel, Renee Kim, Sarah Jeong, Matthew Johnson, and Jonathan Schlefer. "The U.S. Current Account Deficit." Harvard Business School Case 706-002, July 2005. (Revised October 2019.)
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After struggling through the country's longest recession since 2008, the U.K. was expected to grow faster than any other G7 nation in 2014. Analysts wondered whether the return to growth was because, or in spite of, Prime Minister David Cameron's controversial £113 billion austerity plan introduced in 2010. Despite the positive upturn in the economy, U.K. policymakers still faced challenges with rapidly rising income inequality, an economy dominated by the financial sector, a possible housing bubble, and an approaching referendum on Scotland's independence. Moreover, many claimed the U.K. was at risk of secular stagnation, a slowdown in economic growth caused by a structural deficiency in demand. What could the government do to put the country on a sustained and balanced growth trajectory?
Alfaro, Laura, Lakshmi Iyer, and Hilary White. "The United Kingdom and the Means to Prosperity." Harvard Business School Teaching Note 715-055, May 2015.
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In late December 2014, Shinzo Abe was elected to another term as the prime minister of Japan. His re-election was largely interpreted as a vote of confidence for his economics policies, collectively referred to as "Abenomics." Comprised of three "arrows," including expansionary monetary policy, fiscal stimulus, and structural reform, these strategies were designed to reverse Japan's two-decade long challenge with deflation and sluggish growth. Japan also faced several worrisome structural issues, including a demographic crisis, strict labor regulations, and low wage growth, despite low unemployment, in addition to a debt balance that reached 240% of GDP. As the Abe government launched a second round of quantitative easing, totaling ¥80 trillion per year, many wondered, would Abe's three arrows be enough to reverse Japan's problems with economic growth, rising debt, and persistent deflation?
After struggling through the country's longest recession since 2008, the U.K. was expected to grow faster than any other G7 nation in 2014. Analysts wondered whether the return to growth was because, or in spite of, Prime Minister David Cameron's controversial £113 billion austerity plan introduced in 2010. Despite the positive upturn in the economy, U.K. policymakers still faced challenges with rapidly rising income inequality, an economy dominated by the financial sector, a possible housing bubble, and an approaching referendum on Scotland's independence. Moreover, many claimed the U.K. was at risk of secular stagnation, a slowdown in economic growth caused by a structural deficiency in demand. What could the government do to put the country on a sustained and balanced growth trajectory?
In 2005, the government of India enacted the Special Economic Zones (SEZ) Act in order to attract investment, generate export revenues, and create manufacturing jobs. However, several planned projects faced difficulties in acquiring land for setting up the SEZ. In December 2007, the government introduced a new piece of legislation, which proposed to extend the power of eminent domain to allow the government to acquire land for SEZs. Was this the right response to the land acquisition problems of private firms? Was the SEZ strategy the right one for India's economic growth?
In October 2008, Tata Motors canceled their car manufacturing plant in West Bengal state, in the face of widespread farmer protests over land acquisition issues. This meant abandoning a project in which the company had invested $300 million and delaying the launch of the Nano, the world's cheapest car. What strategy could Tata have pursued to avoid this outcome? Would similar problems arise in Gujarat state, where the project had been relocated?
Alfaro, Laura, and Lakshmi Iyer. "Public Purpose and Private Property (TN) (A) and (B)." Harvard Business School Teaching Note 709-028, March 2009.
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Vietor, Richard H.K., and Laura Alfaro. "The U.S. Shale Revolution: Global Rebalancing?" Harvard Business School Teaching Note 714-052, April 2014.
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Laura Alfaro, Hilary White and Haviland Sheldahl-Thomason
Over the past decade, Brazil's future as a leading world economic power appeared certain. An expanding middle class and commodity boom had fueled economic growth, with GDP growth hitting a peak of 7.5% in 2010. However, the high cost of conducting business in Brazil, known as "Custo Brasil," was hurting domestic manufacturing, while incoming foreign investments threatened to overwhelm Brazilian markets. Under President Dilma Rousseff, economic growth stagnated, and the Rousseff administration struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the competitiveness of Brazilian exports.
Over the past decade, Brazil's future as a leading world economic power appeared certain. An expanding middle class and commodity boom had fueled economic growth, with GDP growth hitting a peak of 7.5% in 2010. However, the high cost of conducting business in Brazil, known as "Custo Brasil," was hurting domestic manufacturing, while incoming foreign investments threatened to overwhelm Brazilian markets. Under President Dilma Rousseff, economic growth stagnated, and the Rousseff administration struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the competitiveness of Brazilian exports.
In February 2013, the G-20 finance ministers met in Moscow, Russia to discuss the rising anxieties over a potential international currency war. It was speculated that certain countries were purposely devaluing their currencies in order to improve their competitiveness in global markets. Emerging markets contended that the expansionary monetary policies of the major central banks, such as the US Federal Reserve, European Central Bank, and the Bank of England, were causing significant and detrimental spillover effects, such as currency appreciation, declining exports, and rising inflation, in less developed economies. Conversely, the major central banks insisted that such policies were necessary for reviving economic growth both domestically and internationally. Would these policies successfully create a resurgence of growth? Can expansionary monetary policies be considered "beggar-thy-neighbor" actions by emerging markets? How should developing nations respond?
Laura Alfaro, Richard H.K. Vietor and Hilary White
For the past few decades, Australia has dealt with the benefits and costs of repeated mining booms—inflation, a housing bubble, a current account deficit and growing dependence on China. Between 1996 and 2007, however, Australia had most of these issues under control and grew at impressive rates, becoming one of the richest of developed countries. Yet competitiveness in its non-mining sectors declined. Since the financial crisis, additional challenges associated with climate change, minerals taxes, migration and an overvalued currency have complicated the issues facing Julia Gillard and her Labor Party, with a very thin majority.
Alfaro, Laura, Richard H.K. Vietor, and Hilary White. "Australia: Commodities and Competitiveness (TN)." Harvard Business School Teaching Note 713-063, February 2013.
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Laura Alfaro, Richard H.K. Vietor, Bill Russell, Hilary White and Haviland Sheldahl-Thomason
For the past few decades, Australia has dealt with the benefits and costs of repeated mining booms—inflation, a housing bubble, a current account deficit and growing dependence on China. Between 1996 and 2007, however, Australia had most of these issues under control and grew at impressive rates, becoming one of the richest of developed countries. Yet competitiveness in its non-mining sectors declined. Since the financial crisis, additional challenges associated with climate change, minerals taxes, migration, fiscal deficits and currency fluctuations have complicated the issues facing both Labor and Liberal administrations, with a very thin majority. Meanwhile, Australia's non-mineral competitiveness continues to recede.
In 2008, Andres Velasco, Chile's Finance Minister, was under mounting criticisms over his fiscal policy. As the world's largest copper producer, Chile was benefiting from the rise in copper prices, which had more than tripled since 2003. Copper revenues translated into greater income for the government as Chile's biggest copper producer, Codelco, was a state-owned enterprise. Velasco had chosen to save the bulk of the copper revenues into two stabilization funds; by the end of August 2008, the collective amount represented more than 20% of Chile's GDP. Several critics wanted the funds to be used to improve the poor public education system, income gap, and other impending social issues. After all, Chile had one of the most unequal distributions of wealth in the world. Productivity was stagnant and economic growth had slowed down significantly since the 1990s. What should Velasco do amid growing public discontent? Was it really in Chile's best interest to keep saving the copper wealth?
In 2009, Chile's Finance Minister Andres Velasco's fortunes had been reversed. His fiscal policy that had come under attack just a year ago had been used to finance a $4 billion fiscal stimulus package amid the global economic downturn. Velasco was now Chile's most popular minister. However, the future of Chile's fiscal policy was questionable with the election of a new president, Sebastian Pinera, the first conservative leader to lead Chile in two decades.
Thierry Porte, Rawi E. Abdelal, Laura Alfaro and Jonathan Schlefer
In 1997, amidst Japan's ongoing financial problems, Prime Minister Ryutaro Hashimoto sought to restructure the financial sector to make it more transparent and globally competitive. He hoped that this effort, dubbed the "Big Bang" after the British financial restructuring a decade earlier, would prove as successful. But the financial problems, which seemed to have abated, looked as if they might be worsening. Thus, Hashimoto had to weigh priorities. Should he focus on long-term restructuring, immediate financial rescue, or both? Might an over-emphasis on long-term restructuring increase the chances that major banks could collapse? And what were the best economic and political strategies in these arenas? As a major developed economy, Japan offers an analog to the problems that faced the United States in its 2008–2009 financial crisis.
Thierry Porte, Rawi E. Abdelal, Laura Alfaro and Jonathan Schlefer
In 1997, amidst Japan's ongoing financial problems, Prime Minister Ryutaro Hashimoto sought to restructure the financial sector to make it more transparent and globally competitive. He hoped that this effort, dubbed the "Big Bang" after the British financial restructuring of a decade earlier, would prove as successful. But the financial problems, which seemed to have abated, looked as if they might be worsening. Thus, Hashimoto had to weigh priorities. Should he focus on long-term restructuring, immediate financial rescue, or both? Might an over-emphasis on long-term restructuring increase the chances that major banks could collapse? And what were the best economic and political strategies in these arenas? As a major developed economy, Japan offers an analog to the problems that faced the United States in its 2008-09 financial crisis.
Australia's Prime Minister Kevin Rudd faced a daunting task that he never imagined he would have to face when he was elected two years ago. Australia at that time was poised to enter its 17th year of uninterrupted growth. Commodity exports were booming, largely driven by China's insatiable appetite for raw materials. Then the global financial crisis erupted in 2008, brewing challenges for the world's biggest exporter of coal and iron ore. Prime Minister Rudd pushed for massive stimulus packages to revive domestic consumption and demand. Yet as an economy heavily dependent on trade, tumbling commodity prices brewed difficult times for Australia's trade deficit and its persistent large current account deficit. What was in hold for Australia's deficit, which had been in the red all but four years since 1950? In addition, how should policymakers address the intense concerns regarding China's growing interest in Australia's prized natural resources sector?
Alfaro, Laura, and Renee Kim. "Australia: The Riches and Challenges of Commodities (TN)." Harvard Business School Teaching Note 710-066, June 2010.
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The global economy was expected to suffer from negative growth for the full year in 2009, a phenomenon not seen since World War II. While the U.S. subprime mortgage disaster was blamed as the original instigator, it was noted that the "global imbalances" of the U.S. current account deficit funded for many years by other nations such as China were also a chief culprit of the crisis. Policymakers around the world recognized that the scope and scale of the financial crisis required a coordinated global response. Yet there were conflicting views on what kind of action was needed to address the first global financial crisis of the 21st century.
By March 2008, the U.S. Government and the U.S. Federal Reserve Board had taken various policy measures over the last few months to tackle the subprime mortgage crisis that threatened to drag the economy into a recession. The Bush administration approved a fiscal stimulus package exceeding $150 billion. Interest rates had been repeatedly cut at the fastest pace in decades, to 2.25% as of March 2008. The Fed, in an unprecedented move, helped JPMorgan Chase to take over Bear Stearns, which was on the brink of collapse. Yet as the global economy faced slower growth stemming from the U.S. mortgage crisis, policy makers were caught in an intense debate over what the 'right' solution would be, and the implication of these policies on global imbalances.
In March 2009, the U.S. economy was in a severe recession not seen since the Great Depression after the subprime mortgage crisis had spiraled out of control. The situation had dramatically changed in one year since the Federal Reserve Board had helped to bailout investment bank Bear Stearns. Deflation, not inflation, had become a top concern. Interest rates were near zero percent. Five million jobs had been lost. The new Barack Obama administration had pushed forward with a $787 billion stimulus package, coupled with various programs to address the frozen credit markets and depressed investors' confidence. Yet the burning question in every policymaker's mind was-how effective would the various plans work to revive the U.S. economy?
Alfaro, Laura, and Renee Kim. "U.S. Subprime Mortgage Crisis: Policy Reactions (TN) (A) and (B)." Harvard Business School Teaching Note 710-003, August 2009.
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On March 21, 2008, the U.S. government secured an agreement from two leading sovereign wealth funds (SWFs) to adopt a new set of investment principles to govern the Funds' activities. SWFs, broadly defined as an investment fund owned by a national or a government, were gaining prominence across the globe, especially with their recent investments in troubled U.S. financial firms that had suffered significant losses from the subprime mortgage crisis. Yet SWFs were viewed with suspicions amid concerns that they could have potential political interests behind their investments. Many SWFs also lacked disclosure or transparency regarding their activities or investment goals. Countries such as the United States felt that some kind of international regulation had to be imposed, but would it be possible?
Toshihiko Fukui, Governor of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more “normal” levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden.
Toshihiko Fukui, Governor of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more "normal" levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden.
Assuming office in December 2012, Prime Minister Shinzo Abe was determined to revive Japan's stagnating economy through an ambitious plan known as 'Abenomics.' Under the guidance of the newly appointed governor of the central bank, Haruhiko Kuroda, the Bank of Japan adopted quantitative easing as its new monetary policy, pledging to double the nation's monetary base in two years through the purchase of long-term government bonds. While Kuroda insisted that Japan needed to "use every means available" to combat deflation, critics wondered whether inflation would increase the nation's public-sector debt to unsustainable levels or outpace growth in wages. Furthermore, skeptics debated whether Prime Minister Abe was wise to make the Bank of Japan the key player in moving the nation toward economic growth. Others questioned whether, unlike in the past, the Bank of Japan would take the necessary steps to carry through with the policy.
Alfaro, Laura, and Renee Kim. "Kinyuseisaku: Monetary Policy in Japan (TN) (A) & (B)." Harvard Business School Teaching Note 708-028, January 2008. (Revised March 2009.)
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In July 1997, Thailand became the first Asian "tiger" economy to abandon its fixed exchange rate system in response to speculative attacks on its currency. Investors started to flee Asia, and the crisis rapidly spread to other countries. Central banks spent billions of dollars to try and defend their currencies, only to seek emergency bailouts from the International Monetary Fund. This case presents a chronology of events that unraveled during the Asian financial crisis from 1997 to the end of 1998.
South Korea, as one of the Asian "tiger" economies, transformed itself into the world's 11th largest economy and major exporter by 1996, emerging from being one of the lowest income countries in the region back in the 1960s. Yet one year later in 1997, Korea was swept up in the Asian financial crisis and sought a record $58 billion bailout from the International Monetary Fund. The crisis exposed fundamental weaknesses in the Korean economy, from bad loans to reckless growth policies pursued by large conglomerates. Sweeping reforms took place and the Korean economy rebounded quickly. Yet as Korea approached the 10-year anniversary of the crisis, the nation found itself pondering whether it had implemented enough institutional and structural reforms, or whether more had to be done, such as searching for a new economic development model to ensure its future.
Alfaro, Laura, and Renee Kim. "Transforming Korea Inc: Financial Crisis and Institutional Reform (TN)." Harvard Business School Teaching Note 708-027, October 2007.
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Examines what happened to Korea after the 1997 financial crisis and the implementation of the IMF-mandated reforms imposed on Korea as conditionalities to the country's emergency loan package.
The role of distressed debt funds, also known as "vulture funds," in sovereign debt restructuring was a hotly debated topic, especially after the success of Elliot Associates in converting an $11 million investment in Peruvian bonds worth $21 million into a $58 million cash payout from the country, representing the full face value of the bonds plus past-due interest. Highlights the problems associated with debt restructuring coordination. On the one hand, many observers derided firms such as Elliot and Dart as "vultures" or "rogue creditors" who sought to profit on sovereign debt restructurings at the expense of countries suffering economic hardship and of the majority of bondholders whose cooperation allowed the restructurings to take place. Critics believed that these holdout creditors created "collective action problems" and presented a major obstacle to successful sovereign debt restructurings. On the other hand, other observers argued that activist investors actually improved the market overall by demonstrating the enforceability of contracts. In fact, they argued that creditors faced too many hurdles in collecting against countries after receiving favorable judgments in support of claims.
Alfaro, Laura, and Ingrid Vogel. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone (TN). Harvard Business School Teaching Note 708-010, August 2007.
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Successive economic crises of the 1990s and early 2000s intensified focus on reform of the "international financial architecture." Because many of these crises involved defaults on sovereign bonds, an important component of the discussion revolved around the composition of international capital flows and sovereign debt restructuring. With the official sector, private creditors, and sovereign debtors focused on different issues, proposals surrounding the topic varied widely. Describes some of the proposals and summarizes scholarship on their advantages and disadvantages.
At the 2005 Group of Eight summit, world leaders agreed to relieve the world's poorest countries' debt burdens and double aid to Africa by 2010. The announcement raised questions whether debt relief would really help the poor. By examining past aid trends and policies of multilateral institutions, such as the International Monetary Fund and the World Bank, this case also questions whether aid can allow poor countries to break the vicious cycle of poverty, and/or how aid can be used effectively.
Alfaro, Laura, Eric D. Werker, and Renee Kim. "Aid, Debt Relief, and Trade: An Agenda for Fighting World Poverty (TN) (A) and (B)." Harvard Business School Teaching Note 707-049, June 2007. (Revised February 2008.)
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Laura Alfaro, Rafael M. Di Tella, Ane Damgaard Jensen and Vincent Marie Dessain
Explores the tax policy choices made by Slovakia and the impact of reforms. Set in 2006, looks at the decision facing new Prime Minister Robert Fico as he faces the public's "reform fatigue." Traces the development of tax and fiscal policies since Slovakia's independence in 1993, focusing on the 2004 implementation of the rovna dan, or "equal tax," a drastic simplification of the tax system. A major theme is the impact of labor market and welfare reform, as well as the effective tax rates of both investors and workers. Another important theme relates to Slovakia's desire to join the EU and adopt the Euro.
Alfaro, Laura, Rafael M. Di Tella, Ane Damgaard Jensen, and Vincent Marie Dessain. "Rovna Dan: The Flat Tax in Slovakia." Harvard Business School Case 707-043, March 2007. (Revised March 2010.)
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Alfaro, Laura, Rafael M. Di Tella, and Renee Kim. "Rovna Dan: The Flat Tax in Slovakia (TN)." Harvard Business School Teaching Note 708-003, October 2007.
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Describes Ireland's transformation from one of Europe's poorest countries to one of its richest in just 10 years, earning it the title Celtic Tiger. The spectacular story of growth and recovery is attributed, in large part, to foreign direct investment (FDI), particularly from the United Sates. The government of Ireland has continually nurtured the climate for investment and through its investment promotion arm, Ireland Development Authority (IDA), has aggressively sought investment projects. Despite the apparent miracle, some question the FDI-focused policy and special incentives given. Their skepticism stems largely from the fact that Ireland's indigenous industry has remained on the periphery of this transformation, with limited linkages to the foreign sector. Offers an opportunity to examine the debate surrounding FDI. Was FDI the key ingredient in Ireland's success? What does it take for a country to attract FDI? Did government agencies, specifically IDA, play a role in the Irish success story? Also, analyzes other causes of growth--namely, Ireland's entry into the European Union and subsequent larger market access, as well as a sound macroeconomic policy.
Alfaro, Laura. "Foreign Direct Investment and Ireland's Tiger Economy (TN) (A) and (B)." Harvard Business School Teaching Note 706-025, December 2005. (Revised March 2010.)
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Alfaro, Laura, Rafael M. Di Tella, Ingrid Vogel, and Renee Kim. "The U.S. Current Account Deficit (TN)." Harvard Business School Teaching Note 706-008, August 2005. (Revised December 2008.)
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Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "The U.S. Current Account Deficit (CW)." Harvard Business School Spreadsheet Supplement 706-701, August 2005.
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On July 21, 2005 China revalued its decade-long quasi-fixed exchange rate of approximately 8.28 yuan per U.S. dollar by 2.1% to 8.11 and, at the same time, introduced a more market-based exchange rate system. Many analysts and economists were disappointed with what they considered too small a change and called for more flexibility in the U.S. dollar/yuan exchange rate. Modification to China's exchange rate regime had been eagerly anticipated and much debated in the preceding months as China's trade surplus against the United States reached record highs and as friction intensified with Europe and Japan. Also, analysts argued that the tightly managed exchange rate put a strain on China's own economy. Not only was the exchange rate expensive to sustain, but it contributed to--as well as limited China's flexibility in responding to--a potentially overheating economy. Although China's extensive controls on the movement of capital into the country helped to counteract some inflationary pressure, controls were becoming more porous as China increasingly integrated with the world economy. It remained to be seen what China would ultimately choose to do with its exchange rate regime.
On July 21, 2005 China revalued its decade-long quasi-fixed exchange rate of approximately 8.28 yuan per U.S. dollar by 2.1% to 8.11% and, at the same time, introduced a more market-based exchange rate system. Many analysts and economists were disappointed with what they considered too small a change and called for more flexibility in the U.S. dollar-yuan exchange rate. Provides a timeline of further changes relevant to the Chinese renminbi.
In July 2005, China revalued its currency by 2.1% and adjusted its exchange rate regime toward a more market-based system. Esquel Group, a family-run, privately held textiles firm specializing in high-quality cotton shirts with its most significant manufacturing base located in China, was among those companies confronted with the challenge of addressing the revaluation of the yuan and the possibility of future appreciation. Provides a brief overview of China's textile industry and background on Esquel Group.
With its $3 billion investment in Chinese state bank China Construction Bank, Bank of America--the second U.S. bank behind Citigroup in terms of assets and market capitalization--was one of several foreign banks directly participating in China's banking sector reform. Banking sector reform was considered by some analysts to be an important complement to capital account liberalization and further changes to China's exchange rate regime.
In July 2005, China revalued its currency by 2.1% and adjusted its exchange rate regime toward a more market-based system. ABB, a global power and automation technologies company based out of Switzerland with operations in China, was among those companies confronted with the challenge of addressing the revaluation of the yuan and the possibility of future appreciation. Provides background on ABB's activities in China as well as incentives provided by Chinese officials for multinational corporations to move inland.
The Chinese operations of Alcatel, a global communications solution provider based in France, were faced with strong local competition and a difficult market. It remained unclear how Alcatel would be able to recover growth in the Chinese market. Initiatives were underway to increase focus on services over equipment, to increase Chinese research and development presence, and to merge with U.S. competitor Lucent.
Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "To Float or Not to Float? In Pursuit of the Chinese Dream." Harvard Business School Teaching Note 706-060, May 2006. (Revised November 2019.)
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In 1991, Chile adopted a framework of capital controls focused on reducing the massive flows of foreign investment coming into the country as international interest rates remained low. Capital inflows threatened the Central Bank's ability to manage the exchange rate within a crawling band, which aimed eventually to lower Chile's rate of inflation to international levels. Until the Asian financial crisis of 1997 and the Russian debt crisis of August 1998, the Chilean economy performed spectacularly under, or perhaps in spite of, these controls. In the aftermath of the Asian and Russian crises, Chile's economy began to suffer through both trade and financial channels. Chile's current account deteriorated not only because Chile relied on Asia as a market for one-third of its exports, but also as the price of cooper, Chile's largest export product, plummeted in the face of dwindling Asian demand. Financial flows to Chile, like to emerging markets in general, fell dramatically as investors panicked. By the end of 1999, Chile had experienced Latin America's most severe "sudden stop" of external capital flows. In this new economic environment, Chile was forced to reevaluate its system of capital controls. Many observers in the private sector blamed the controls for unnecessarily adding to the strain and demanded the controls be dismantled completely. Meanwhile, Chile's Central Bank continued to defend the controls and argued that they had helped insulate the country for worse contagion.
Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Capital Controls in Chile in the 1990's (A & B) (TN)." Harvard Business School Teaching Note 705-039, May 2005. (Revised February 2008.)
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In October 2002, Brazilians elected a left-wing president, Luis Inacio Lula da Silva, for the first time in that country's history. As markets faltered in response, Lula sought to reaffirm his commitment to fiscal discipline, a floating exchange rate, and inflation targeting. By August 2003, however, his attempt to change market sentiment was threatened as the country faced a looming recession. Skeptics began to worry that the new PT (Worker's Party) government would be forced to resort to printing money to meet its campaign promises. Furthermore, after Argentina's massive default on its public debt at the end of 2001, observers were questioning the sustainability of Brazil's debt situation. Lula was under intense pressure to deliver results immediately and implement measures that would help spur the economy.
In October 2002, Brazilians elected a left-wing president, Luis Inacio Lula da Silva, for the first time in that country's history. As markets faltered in response, Lula sought to reaffirm his commitment to fiscal discipline, a floating exchange rate, and inflation targeting. By August 2003, however, his attempt to change market sentiment was threatened as the country faced a looming recession. Skeptics began to worry that the new PT (Worker's Party) government would be forced to resort to printing money to meet its campaign promises. Furthermore, after Argentina's massive default on its public debt at the end of 2001, observers were questioning the sustainability of Brazil's debt situation. Lula was under intense pressure to deliver results immediately and implement measures that would help spur the economy.
Alfaro, Laura, and Rafael Di Tella. "Brazil 2003: Inflation Targeting and Debt Dynamics (Abridged) ." Harvard Business School Case 713-041, October 2012.
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Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Brazil 2003: Inflation Targeting and Debt Dynamics (TN)." Harvard Business School Teaching Note 704-039, May 2004. (Revised July 2008.)
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On September 1, 1998, the government of Malaysia imposed currency and capital controls in response to the financial crisis that had swept Asia. The controls sparked an enormous controversy in the world of international finance. Some celebrated the controls for insulating the Malaysian economy from the unstable international financial system. Others criticized the controls for trapping investors and allowing the government to protect the interests of "cronies." This debate also raised the central question about the future of the international financial architecture: What is the appropriate balance between financial market freedom and government discretion in the management of the global economy?
Only in the waning years of the 20th century did international financial markets begin to enjoy the freedom from government regulation that they had experienced before the first world war. By 2002, international capital markets had grown to be enormous--$1.2 trillion flowed around the globe per day. The massive size of the market presented policy makers with a serious challenge as they were forced to grapple with the costs and benefits of such mobile capital. This note briefly relates the modern history of capital controls and summarizes scholarship on the advantages and disadvantages of international financial market regulation.
Abdelal, Rawi E., and Laura Alfaro. "Capital Controls." Harvard Business School Background Note 702-082, April 2002. (Revised September 2002.)
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Laura Alfaro, Debora L. Spar, Faheen Allibhoy and Vinati Dev
In the years since independence, tiny, landlocked Botswana has gone from being one of the world's poorest nations to becoming a stable, prosperous state, blessed with the highest sustained growth rate in the world. This case highlights the role that foreign direct investment (FDI) has played in this success, as well as how strong local institutions have helped to harness the benefits that the foreign investor--here, the giant De Beers company--has brought. Also, examines how Botswana was able to avoid the natural resource curse that has haunted so many other resource-abundant countries.
Alfaro, Laura. "Botswana: A Diamond in the Rough (TN)." Harvard Business School Teaching Note 703-036, April 2003. (Revised February 2008.)
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Briefly reviews motivations and trends behind foreign direct investment and multinational corporations as well as the policy debate that surrounds them.
Alfaro, Laura, and Esteban Clavell. "Foreign Direct Investment." Harvard Business School Background Note 703-018, October 2002. (Revised March 2009.)
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In a world context of international institutions such as the World Trade Organization and the International Monetary Fund and their interaction with developing countries, this case looks at an African development initiative to address its own problems: The New Economic Partnership for Africa's Development (NEPAD). With an emphasis on democracy and governance, NEPAD's primary objective is to eradicate poverty in Africa and bring long-term and sustainable political, economic, and social change to the region. Examines in depth this initiative "by Africans for Africans" and how it is likely to evolve.
Rawi E. Abdelal, Laura Alfaro and Brett Laschinger
In less than a decade, Bombardier had grown from a medium-size Canadian company to a highly profitable global player largely on the strength of the introduction of a new generation of regional jet and successfully marketing its product to airlines around the world. Events taking place on the other side of the globe, however, threatened Bombardier's hard-earned success. A nasty trade dispute with Brazilian rival Embraer was dragging on into its fifth year with no end in sight. Recent developments in the dispute at the WTO were forcing CEO Robert Brown and his team to decide on a strategy for what could very well turn out to be the most critical year in the company's history.
In 2001, Brazil stands at a crossroads. The country seems to be emerging from decades of economic stagnation. The economic situation remains tenuous, however, Brazil's leaders must now chart a forward course. Most critically, they must decide whether Brazil's future rests with close links to the global economy.
Laura Alfaro, Yasheng Huang and Marios S. Kalochoritis
On January 6, 1999, Itamar Franco, the governor of the state of Minas Gerais, the second-largest state in Brazil, declared a 90-day moratorium on its debt payment to the federal government. The announcement triggered a run on the Brazilian currency, the Real, and threatened the macroeconomic stability carefully constructed by President Fernando Henrique Cardoso since 1993. Confidence in the country on the part of foreign investors was badly shaken. This case traces the origin of this crisis.
Alfaro, Laura. "Una reflexión sobre los datos de la Encuesta Nacional de Hogares 2010. Evolución reciente de la pobreza en Costa Rica." Diario Extra (December 27, 2010).
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Alfaro, Laura. "MIDEPLAN asume acciones de preparación técnica del proceso de transferencias de competencias y recursos del Poder Ejecutivo a los Gobiernos Locales." Diario Extra (July 17, 2010).
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