Freund, Caroline

Person:
Freund, Caroline

Macroeconomics Trade & Investment

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Macroeconomics Trade & Investment

Last updated January 31, 2023

Biography

Caroline Freund is Director of Trade, Regional Integration and Investment Climate. Previously she was a Senior Fellow at the Peterson Institute for International Economics. She has also worked as Chief Economist for the Middle East and North Africa at the World Bank, after working for nearly a decade in the international trade unit of the research department. Freund began her career in the international finance division of the Federal Reserve Board and spent a year visiting the research department of the IMF. She has published extensively in academic journals and is the author of Rich People Poor Countries: The Rise of Emerging Market Tycoons and their Mega Firms. She is a US national and received a PhD in economics from Columbia University.

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Now showing 1 - 10 of 39

What Constrains Africa’s Exports?

(World Bank, 2011-10-18) Freund, Caroline ; Rocha, Nadia

Africa's share of global exports has dropped by 50 percent over the last three decades. To stem this decline, aid for trade to the region has increased rapidly in recent years. Assistance can target improvements in three important components of trade facilitation: transit times, documentation, and ports and customs. Of these, transit delays have the most economically and statistically significant effect on exports. Specifically, a one day reduction in inland travel times leads to a 7 percent increase in exports, after controlling for the standard determinants of trade and potential endogeneity. Put another way, a one day reduction in inland travel times translates into a 2 percentage point decrease in all importing-country tariffs. By contrast, longer delays in the other areas have a far smaller impact on trade. Large transit delays are relatively more harmful because they are associated with high (within-country) variation, making delivery targets difficult to meet. Finally, the results imply that transit times are primarily about institutional features—such as border delays, road quality, fleet class and competition and security—and not geography.
Loss Aversion and Trade Policy

(World Bank, Washington, D.C., 2004-09) Freund, Caroline ; Özden, Çağlar

This paper provides new survey evidence showing that loss aversion and reference dependence are important in shaping people's perception of trade policy. Under the assumption that agents' welfare functions exhibit these behavioral elements, we analyze a model with a welfare-maximizing government and with the lobbying framework of Grossman and Helpman (1994). The policy implications of the augmented models differ in three important ways. One, there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained. Two, protection following a single negative price shock will be persistent. Three, irrespective of the extent of lobbying, there will be a deviation from free trade that tends to favor loss-making industries. The augmented models are more consistent with the observed structure of protection, and in particular, explain why many trade policy instruments are explicitly designed to maintain prices at a given level.
Trade, Regulations, and Growth

(World Bank, Washington, DC, 2004-03) Bolaky, Bineswaree ; Freund, Caroline

Trade does not stimulate growth in economies with excessive business and labor regulations. The authors examine the effect of openness on growth using cross-country regressions in both levels and changes. Results from the levels regressions imply that increased openness is associated with a lower standard of living in heavily-regulated economies. Growth regressions confirm that the effect of increased trade on growth is absent in these countries. The authors also find that once they control for the effect of trade on growth in heavily regulated economies, the evidence that trade positively affects growth is stronger than has been found in previous studies. Excessive regulations restrict growth because resources are prevented from moving into the most productive sectors and to the most efficient firms following liberalization. In addition, in highly regulated economies, increased trade is more likely to occur in the wrong goods-that is, goods where comparative advantage does not lie. The results imply that countries must create a sound business environment before trade can be used as an engine of growth.
On the Conservation of Distance in International Trade

(World Bank, Washington, DC, 2004-05) Berthelon, Matias ; Freund, Caroline

The volume of world trade has grown more than twice as fast as real world income since 1980. Surprisingly, the effect of distance on trade has increased during this period. It could be that countries are trading greater volumes of goods that are highly sensitive to distance. An alternative explanation is that distance has become more import for a significant share of goods. Using highly disaggregated bilateral trade data, the authors find that adjustment in the composition of trade has not influenced the way in which distance affects trade. In contrast, for about 25 percent of industries, distance has become more important. This implies that the increased distance sensitivity of trade is a result of a change in relative trade costs that affects many industries, as opposed to a shift to more distance-sensitive products. The authors also find that homogeneous products are twice as likely to have become more distance sensitive as compared with differentiated goods. This is consistent with the hypothesis that falling search costs, resulting from improvements in transport and communications, are relatively more important for differentiated goods. The results offer no evidence of the "death of distance." Rather, they suggest that distance-related relative trade costs have remained unchanged or shifted in favor of proximate markets.
All in the Family : State Capture in Tunisia

(World Bank, Washington, DC, 2014-03) Rijkers, Bob ; Freund, Caroline ; Nucifora, Antonio

This paper examines the relationship between regulation and the business interests of President Ben Ali and his family, using firm-level data from Tunisia for 1994-2010. Data on investment regulations are merged with balance sheet and firm-level census data in which 220 firms owned by the Ben Ali family are identified. These connected firms outperform their competitors in terms of employment, output, market share, profits, and growth and sectors in which they are active are disproportionately subject to authorization requirements and restriction on foreign direct investment. Consistent with theories of capture, performance differences between connected firms and their peers are significantly larger in highly regulated sectors. In addition, the introduction of new foreign direct investment restrictions and authorization requirements in narrowly defined five-digit sectors is correlated with the presence of connected firms and with their startup, suggesting that regulation is endogenous to state capture. The evidence implies that Tunisia's industrial policy was used as a vehicle for rent creation for the president and his family.
Reciprocity in Free Trade Agreements

(World Bank, Washington, DC, 2003-05) Freund, Caroline

The author uses detailed trade, tariff, and income data for countries involved in 91 trade agreements negotiated since 1980 to test for reciprocity in free trade agreements. The results offer strong evidence of reciprocity in North-North and South-South free trade agreements, but there is little empirical support for reciprocity in North-South trade agreements. In particular, after controlling for other determinants of trade preferences, the results suggest that a one percent increase in preferences offered leads to about a one-half of a percent increase in preferences received in North-North and South-South trade agreements. Freund also finds evidence that large countries extract greater trade concessions from small countries. This leads to a modified form of reciprocity in North-South agreements. A large increase in access to a developing country market leads to only a small increase in access to a rich country market. The results imply that there are incentives for countries to maintain protection in order to extract more concessions from trade partners. But in general, such perverse incentives should be less of a concern in developing countries involved in North-South agreements because the value of a developing country tariff preference in terms of its effect on trade preferences from a rich country is quite small. The gains from unilateral liberalization are likely to far outweigh potential gains from using protection as a bargaining chip in trade negotiations. The evidence is consistent with a repeated game model of trade liberalization. The model presented shows that trade preferences granted are increasing in trade preferences received. This implies that countries can extract greater concessions from trade agreement members if they have higher external trade barriers. However, if a country's trade barriers are very large then the gains from reneging on the agreement in the short run will be high, making the agreement unenforceable despite offering long-term gains. So, there is a reciprocity-credibility tradeoff. High tariffs may allow countries to extract more concessions from potential trade agreement partners, but they also make the country less credible in actually implementing agreed tariff concessions. If a country's external tariff is very high relative to other countries, then it will not be able to commit credibly to any free trade agreement.
The Anatomy of China's Export Growth

(World Bank, Washington, DC, 2008-05) Amiti, Mary ; Freund, Caroline

Decomposing China's real export growth, of over 500 percent since 1992, reveals a number of interesting findings. First, China's export structure changed dramatically, with growing export shares in electronics and machinery and a decline in agriculture and apparel. Second, despite the shift into these more sophisticated products, the skill content of China's manufacturing exports remained unchanged, once processing trade is excluded. Third, export growth was accompanied by increasing specialization and was mainly accounted for by high export growth of existing products (the intensive margin) rather than in new varieties (the extensive margin). Fourth, consistent with an increased world supply of existing varieties, China's export prices to the United States fell by an average of 1.5 percent per year between 1997 and 2005, while export prices of these products from the rest of the world to the United States increased by 0.4 percent annually over the same period.
Export Surges : The Power of a Competitive Currency

(World Bank, Washington, DC, 2008-10) Freund, Caroline ; Pierola, Martha Denisse

How can countries stimulate and sustain strong export growth? To answer this question, the authors examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least seven years. They find that export surges in developing countries tend to be preceded by a large real depreciation-which leaves the exchange rate significantly undervalued-and a reduction in exchange rate volatility. In contrast, in developed countries, the role of the exchange rate is less pronounced. The authors examine why the exchange rate is so important in developing countries and find that the depreciation leads to a significant reallocation of resources in the export sector. In particular, depreciation generates more entries into new export products and new markets, and the percentage of new entries that fail after one year declines. These new products and new markets are important, accounting for 25 percent of export growth during the surge in developing countries. The authors argue that maintaining a competitive currency leads firms to expand the product and market space for exports, inducing a large reorientation of the tradable sector.
Does Regionalism Affect Trade Liberalization toward Non-Members?

(World Bank, Washington, DC, 2008-10) Estevadeordal, Antoni ; Freund, Caroline ; Ornelas, Emanuel

This paper examines the effect of regionalism on unilateral trade liberalization using industry-level data on applied most-favored nation tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. The findings show that preferential tariff reduction in a given sector leads to a reduction in the external (most-favored nation) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these "complementarity effects" of preferential liberalization on external liberalization do not arise in customs unions. Overall, the results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.
Trading on Time

(World Bank, Washington, DC, 2006-05) Djankov, Simeon ; Freund, Caroline ; Pham, Cong S.

The authors determine how time delays affect international trade using newly collected World Bank data on the days it takes to move standard cargo from the factory gate to the ship in 126 countries. They estimate a modified gravity equation, controlling for endogeneity and remoteness. On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 70 kilometers on average. Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. In particular, a day's delay reduces a country's relative exports of time-sensitive to time-insensitive agricultural goods by 6 percent.