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Ajit Singh, Mr. Rudolph Matthias, and Mr. Jack D. Glen
This large empirical study of corporate profitability in emerging markets during the 1980s and 1990s measures the intensity of competition. Data on corporate rates of return, profit margins, and output-capital ratios reveal that the recent liberalization has been associated with reduced corporate profit margins and improved capital utilization efficiency. The paper also analyzes persistency in corporate profitability and finds that competitiveness was no less intense in developing countries than in advanced countries. Although the paper is not directly concerned with the Asian crisis, it provides evidence on important structural hypotheses about the crisis.
Ajit Singh, Mr. Rudolph Matthias, and Mr. Jack D. Glen

I. I ntroduction This paper reports on a large empirical study of corporate rates of return in emerging markets during the 1980s and 1990s. Its main purpose is to analyze changes in corporate profitability and to examine their implications for the dynamics of the competitive process in these countries, and for economic efficiency. Apart from their intrinsic interest, these issues have acquired fresh significance in the context of the current crisis in the east Asian economies. It has been argued that these highly successful economies with an unparalleled

Ajit Singh, Mr. Rudolph Matthias, and Mr. Jack D. Glen

Front Matter Page Research Department Authorized for distribution by Michael Mussa Contents I. Introduction II. Liberalization, the Dynamics of Competition and Corporate Rates of Return III. Data and Variables IV. Summary Description and Preliminary Analysis of the Data V. Multivariate Analysis VI. Persistency of Profitability in Emerging Markets VII. Conclusion Tables 1a. Top Listed Manufacturing Corporations. All Sample Countries. Distribution of their Average Rates of Return on Total Assets 1b. Top Listed Manufacturing

International Monetary Fund

-shareholdings in Japan and increasing concern about slow progress with restructuring and boosting corporate rates of return. Japan’s equity market rebounded following the easing of monetary policy in March and the election of a pro-reform Cabinet in April, although prices have since fallen back. The economy’s cyclical deterioration and recent monetary policy easing have also contributed to a significant weakening of the yen since early 2000. Faced with a weakening economy, the BoJ sought to ease the stance of monetary policy in early 2001. In February, a Lombard facility to

International Monetary Fund

Gaps in the P-Star Model—Evidence from Spain, ” IMF Working Paper 98/64 ( May ). Ghosh , Atish R. , and Jonathan D. Ostry , 1993 , “ Do Capital Flows Reflect Economic Fundamentals in Developing Countries? ” IMF Working Paper 93/34 ( April ). Glen , Jack , Ajit Singh , and Rudolph Matthias , 1999 , “ How Intensive Is Competition in the Emerging Markets? An Analysis of Corporate Rates of Return from Nine Emerging Markets, ” IMF Working Paper 99/32 ( March ). Goldfajn , Ilan , and Rodrigo O. Valdés , 1997 , “ Capital

Mr. Roger H. Gordon

is much riskier than the return to investments in bonds, and so it requires a higher expected return in equilibrium to compensate. Yet the evidence in Feldstein and Summers suggests that not only is the average corporate rate of return above the real interest rate during the sample period, but even the minimum corporate return (6.4 percent in 1974) is above the maximum real interest rate (2.5 percent in 1964). If the observed corporate return is simply the return to corporate capital, the return to capital stochastically dominates the return to bonds, which is

Mr. Roger H. Gordon
When the top personal tax rates are above the corporate rate, high-income individuals have an incentive to reclassify their earnings as corporate rather than personal income for tax purposes. U.S. tax law at least imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting. However, entrepreneurs setting up new firms can easily reclassify their income for tax purposes. This tax incentive therefore favors entrepreneurial activity. The paper discusses how best to subsidize entrepreneurial activity while avoiding other economic distortions.
Mr. Roger H. Gordon

explanation might simply be that the return to corporate capital is much riskier than the return to investments in bonds, so requires a higher expected return in equilibrium to compensate. Yet the evidence in Feldstein and Summers suggests that not only is the average corporate rate of return above the real interest rate during the sample period, but even the minimum corporate return (6.4 percent in 1974) is above the maximum real interest rate (2.5 percent in 1964). If the observed corporate return is simply the return to corporate capital, the return to capital

International Monetary Fund

disappointing . Continued unwillingness to restructure or liquidate companies is adding to excess capacity and deflationary pressures, and harming the operations of healthier companies. Corporate rates of return remain low, and little headway has been made in reducing the still significant excesses of capital, debt, and employment. Concerns about the impact of restructuring on unemployment may also be slowing down the process—the government’s approval of Daiei’s restructuring plan under the Industrial Revitalization Law may reflect a desire to limit job losses relative to

International Monetary Fund
The new government in Tokyo has a window of opportunity to address the deep-seated structural problems that lie at the root of Japan's lackluster economic performance over the past decade. The government has appropriately identified banking sector problems as a top priority. Broader reforms are needed to strengthen the regulatory framework and lay the basis for a sound banking system. In the near term, fiscal policy should remain responsive to changing economic circumstances. Enhancing the transparency of the monetary policy framework is required.