Cluster A Presencia de proteínas de partición

According to commodity arbitrage the exchange rate will equate the prices of traded goods - the "law of one price" - but this does not apply to non-traded goods. If inter-country productivity

differences between traded and non-traded goods were the same or, failing this, if prices of non-traded goods mainly reflected product­ ivity differences alone this would not matter, but the former is not the case and neither is the latter (for a number of reasons including the use of some traded goods as inputs for non-traded goods, competitive bidding for factors of production and, mainly, because of the tendency for wages to be equalised within countries). Consequently the prices of non-traded goods tend to be higher in high-productivity countries and there is a systematic bias in internal price ratios and so a bias in PPP:

"The greater are productivity differentials in the production of traded goods between two countries, the larger will be differences in wages and in the prices of services and, correspondingly, the greater will be the gap between pur­ chasing-power parity and the equilibrium exchange rate". (52)

If per capita income levels are taken as representative of productivity levels which does not seem unreasonable since a country is likely to

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have a higher per capita income precisely because of higher productivity - then the bias can be expressed as follows: the ratio of PPP to the exchange rate is an increasing function of income levels. Balassa then went on to provide an empirical veri­ fication of hi6 hypothesis.

Although Balassa's reasoning has become fairly widely accepted, his results have been strongly criticised on both theoretical and empirical grounds, principally by Officer (1971*»1976a,1976b). The first theoretical criticism relates to the implicit assumption, made by Balassa, that the impact of a given increase in productivity on the

(53)

internal price ratio is the same for all countries. Specifically, Officer suggests that if this impact is inversely related to levels of productivity amongst countries then converging internal price levels and diverging productivity levels are quite compatible

(although no good reason why such an inverse relationship should actually exist is given). A second, more convincing, theoretical criticism relates to the fact that Balassa ignores quality differences

(5 4 )

in consumer services amongst countries.

Officer begins his empirical attack by arguing that tests of the Balassa hypothesis have produced rather mixed results and an examination of the evidence would seem to bear this out: Delahaut and Kirschen^"^ and Balassa, himself, in a later article (1973)» support his conclusion whilst Clague and Tanzi (1972) found the Balassa hypothesis holds for OECD countries but not Latin American

(56)

countries, and Grunwald and Salazar-Carrillo supported this latter conclusion; whilst failure of the Balassa hypothesis to hold for

developing countries is not surprising, De Vries (1968) using a

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found no support for the hypothesis either. In the light of this, Officer (1971*» 1976b) sets out to rigorously test the Balassa hypothesis. He begins by criticising the methodology of earlier studies (especially that of Balassa himself), in particular Balassa's use of only one variable - GNP per capita - to proxy productivity and also his use of the current exchange rate as an approximation for the equilibrium (PPP) rate; in addition, there are numerous other, le6s important criticisms. Officer then tests the Balassa hypothesis

(including re-running Balassa's original tests) using his improved methodology and finds no support for productivity bias in absolute PPP and virtually none for bias in relative PPP.

In the present context, the presence of productivity bias (if it does exist) would not seem likely to cause any problems conceptually as a suitable variable to allow for it can easily be incorporated into the eclectic approach adopted here. However, at the empirical level there are problems in that even the simplest proxy for productivity, and one much criticised by Officer, GNP per capita, is not available for the period under examination. In fact, national income is included (for other reasons) in the model and a proxy (based on employment data) has had to be found. Consequently, whilst productivity bias is allowed for in that a GNP proxy is one of the independent variables in the model it must be accepted that it is a poor proxy for productivity and com­ pletely lacks sophistication in this context.

A completely different, but probably more fundamental theoretical criticism of PPP (which cannot be sidestepped by simply adding another variable) should also be discussed before moving on to examine the practical problems of applying the hypothesis; this is, what might be called, the "reverse—causation” argument which states that exchange

rates determine prices rather than the other way round. If this is true then as Yeager notes:

"....the statistical evidence in apparent support of purchasing power parity loses force if exchange rates determine rather than reflect the price levels used in the calculations". (5 8)

In fact it is Yeager who provides the most extensive arguments in defence of prices to exchange rates causation. His major argument is very simple: if exchange rate changes lead to changes in the prices of some goods then unless domestic money supply changes, other prices must move in the opposite direction because in the absence of a

permissive monetary policy (or short run changes in velocity) the overall price level cannot change. To support his argument Yeager

(59)