Question

EMERGENCY!!

Analyze the cases below via the open market economy analysis method:

-Case of capital flight from Turkey to USA

-From Turkey's economy's point of view

-From USA economy's point of view

Answer 1

Foreign Direct Investment and Profit Transfers: The Turkish Case

Abstract

Turkish businessmen, politicians and most academicians tend to see foreign direct investment (FDI) as a remedy for the chronic lack of capital accumulation in Turkey. The meagre FDI inflows which followed the Customs Union Agreement with the European Union, in 1995, created a deep disappointment among these people. Efforts to attract foreign capital have intensified since 2005 and inflows have soared. However, the greater part of the increase is the result of the Turkish government's privatization programme of publicly owned companies, and the acquisition of private firms by large multinational companies, rather than greenfield investments. This research investigates FDI inflows to Turkey and tries to estimate the transfer of profits.

The risks of large capital losses on the domestic assets of developing countries resulting from expropriation, inflation, or devaluations are identified as the major causes of capital flight. The combination of large foreign loans and capital flight from developing countries during the 1970s and early 1980s reflected different perceptions of domestic residents and foreign lenders regarding the risks of holding domestic assets. However, the debt crisis reduced these differences in perceived risks, and resulted in a decline of foreign loans coupled with continuation of capital flight. If sound macroeconomic and structural policies can reduce those risks, they can also stem capital flight.

From Turkey's economy's point of view

Private capital flight from developing countries has been a source of concern for policy makers, especially since the emergence of the debt crisis and the associated drastic decline in capital inflows from industrialized countries. Capital flight has been viewed as a constraint on economic growth since it implies a loss of resources that could be used for domestic investment. Moreover, it is often argued that a reversal of these capital outflows could significantly contribute to the solution of the debt crisis, and thereby to renewed access of developing countries to international capital markets. These considerations have led the authorities to consider policies that encourage the repatriation of capital flight or at least to stop such outflows. However, identifying which policies can be most effective in achieving these objectives depends crucially on what factors initiated these capital outflows in the first place. This paper reviews the factors that have been identified as stimulating capital flight from developing countries. In this analysis, capital flight is associated with the fraction of a country's stock of external claims that does not generate recorded investment income. Such external claims therefore do not generate a stream of income that can be used to service foreign debts or to finance domestic investment. Capital flight is thus distinguished from "normal" outflows of capital that would be undertaken to achieve portfolio diversification, and that would yield a recorded flow of income. The analysis in this paper suggests that increased risks in the domestic economic environment are likely to be key factors generating capital flight. In particular, two types of risks may have been particularly important: (1) default risk associated with the expropriation of domestic assets; and (2) the risk of large losses in the real value of domestic assets as a result of economic policies that result in rapid inflation or large exchange rate depreciations. Indeed, it is argued that the pattern of foreign capital inflows and capital flight from developing countries in the 1970s and 1980s can be associated with changing perceptions on the part of domestic residents and foreign lenders of the risks associated with holding the domestic and external debt of indebted developing countries. While different perceptions in the risk of holding domestic assets can explain the simultaneous occurrence of large inflows of foreign capital and large capital flight from developing countries during the 1970s and early 1980s, the emergence of the debt crisis and the accompanying policy responses reduced such differences and resulted in a decline of foreign capital inflows coupled with a continuation of capital flight. The rest of this paper is organized as follows: Section II provides estimates of capital flight for a group of developing countries with recent debt-servicing problems. Section III discusses the determinants of capital flight and examines measures of the risk of default associated with holding domestic financial instruments. Section IV considers alternative policies for reducing capital flight, and Section V summarizes the main conclusions. - 2 - II. The Estimation of Capital Flight Previous empirical studies have employed a broad range of definitions of capital flight. Some authors 1/ have adopted a "narrow" approach that identifies capital flight with short-term speculative capital outflows. Others 2/ have adopted a "broad" definition which identified capital flight with total private capital outflows. An alternative approach based on a "derived measure" identifies capital flight with the fraction of a country's stock of external claims that does not yield recorded investment income. 3/ This latter definition implies that a capital outflow should be considered as capital flight only if it limits the resources available for either servicing the country's external debt or the financing of development programs. Numerous studies have compared and critically evaluated these alternative measures, 4/ and there is no general agreement on the relative superiority of each measurement. 5/ This paper uses the "derived" measure to provide update estimates of capital flight in developing countries that have faced debt-servicing problems, since it provide the most direct estimate of the economy's loss of resources that could potentially be used for domestic investment. Empirical estimates suggest that during the period 1977-88 the stock of flight capital increased for a group of developing countries that had faced debt-servicing problems (see the Appendix). 6/ 7/ The aggregate stock 1/ See Cuddington (1986). 2/ See for example, World Bank (1985), Morgan Guaranty Trust Company (1986), and Duwendag (1987). 3/ See Dooley (1986). 4/ See, for example Deppler and Williamson (1987), Gordon and Levine (1989), Cumby and Levich (1987), and Gajdeczka (1990). 5/ Perhaps the most severe criticism to all the proposed measurements is contained in Gordon and Levine (1989). They argue that severe statistical problems prevent the proposed measurements from adequately capturing the scale of capital flight. 6/ The methodology used to compute the estimates of capital flight involves computing the stock of external claims that would generate the income recorded in the balance of payments statistics and subtracting this stock from an estimate of total external claims (see Dooley (1986)). Total external claims are estimated by adding the cumulative capital outflows, or increases in gross claims, as estimated from balance of payments data (which consists of the cumulative outflows of capital recorded in the balance of payments plus the cumulated stock of errors and omissions) to an estimate of the unrecorded component of external claims. This last estimate is generated by subtracting the stock of external debt implied by the flows reported in the balance of payments from the stock of external debt reported by the World Bank. 7/ The countries included in this group are: Argentina, Bolivia, Chile, Colombia, Ecuador, Gabon, Jamaica, Mexico, Nigeria, Peru, Philippines, Venezuela, and Yugoslavia. of capital flight for this group of countries, which amounted to $47 billion at the end of 1978 increased continuously during the period and reached $184 billion at the end of 1988 (Table 1). Although the stock of capital flight showed a sustained increase over the period, the rate of change of capital flight did not follow a stable pattern. As will be further discussed in the next sections, expansionary fiscal and monetary policies coupled with an increasing overvaluation of the exchange rate resulted in high rates of increase in the stock of capital flight during the period 1978-83. 1/ The adoption of stabilization programs in some of these countries reduced somewhat the rate of increase of capital flight during the period 1984-86. In particular, comprehensive adjustment programs were undertaken in some Latin American countries in 1985 and 1986. These programs which included strong contractions of the fiscal deficits and major devaluations of the exchange rate resulted in a sharp decline in the rate of growth of capital flight, which reached only 3 percent during 1986. However, many of these programs were abandoned in 1987; fiscal deficits expanded once more and inflation accelerated. As a result, the rate of growth of capital flight increased once more reaching 18 percent during 1987. As some major countries initiated new adjustment programs, the rate of growth of capital flight decelerated in 1988. It has been argued that given the large magnitudes of capital flight, repatriation of those capital outflows, or at least of the investment income that they generate, could significantly contribute to the solution of the external debt problems that these countries face. A better understanding of the importance of capital flight relative to the countries' external financial position can be gained by analyzing the ratios of capital flight to total external debt and total external claims (Table 1). During the period 1978-82, the ratio of capital flight to total external debt declined from 42 percent in 1978 to 38 percent in 1982 as the large inflows of foreign capital to this group of developing countries more than offset the increase in capital flight. This trend reversed during the period 1983-88 as the ratio of capital flight to total external debt increased from 43 percent in 1983 to 51 percent in 1988. This increase was the result of both a continuous increase in the stock of capital flight and a reduction in the amount of new private foreign lending available to developing countries.

From USA economy's point of view

his dissertation explores the consequences of institutional change in capitalist firms, focusing on vertical dis-integration, the legal boundaries of the firm and what David Weil has called workplace "fissuring," in which corporations place intermediaries (subcontractors, temp agencies, or franchisees) between themselves and workers, often with negative consequences for workers. It focuses specifically on franchising, a type of fissured workplace in which one firm outsources retail operations to smaller, legally independent franchisees. The first chapter uses archival sources to identify the legal and policy changes driving workplace fissuring in the franchising context: specifically the relaxing of antitrust prohibitions on vertical restraints (contractual controls on separate firms, such as price and supplier restrictions). These contractual mechanisms, which allow chains to achieve uniformity and control over their outlets without directly owning them, helped create fissured workplaces in the case of franchising. I show that franchising firms waged a struggle in courts and legislatures to expand their ability to impose vertical restraints, pulling in the legal boundaries of the firm and leaving workers outside.

With a formal model emphasizing the two-level principal-agent problem in franchising (between franchisors and franchisees, and franchisees and workers), the second chapter shows that franchise brands can induce very high levels of franchisee effort by leveraging product market power and one-sided contract terms to reduce the franchisee's bargaining position. Franchising in this context functions as a type of surveillance and labor discipline organizational technology, in which franchise contracts induce franchisees to surveil production workers and extract high levels of effort from them, reducing the investments in monitoring and/or efficiency wages that franchisors would otherwise have to make.

The third chapter exploits a new, hand-collected data set from 530 franchise contracts, to link, to my knowledge for the first time, vertical restraints to workforce characteristics. It uncovers an empirical relationship between contingent, relatively unskilled and low-wage workforces and the likelihood of franchisors imposing vertical restraints. I argue that franchisors impose vertical restraints to target a vulnerable and cheap workforce. By removing alternative profit-making strategies from the franchisees' decision set, these restraints incentivize franchisees to focus on minimizing labor costs and extracting effort from workers for their profit margins.

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