nep-afr New Economics Papers
on Africa
Issue of 2005‒01‒23
seven papers chosen by
Suzanne McCoskey
US Naval Academy

  1. Foreiegn Direct Investment vs. Foreiegn Portfolio Investment By Itay Goldstein; Assaf Razin
  2. Does Food Aid Harm the Poor? Household Evidence from Ethiopia By James Levinsohn; Margaret McMillan
  3. Colonialism, Inequality, and Long-Run Paths of Development By Stanley L. Engerman; Kenneth L. Sokoloff
  4. Small-Scale Irrigation Dams, Agricultural Production, and Health: Theory and Evidence from Ethiopia By Lire Ersado
  5. What Factors Influence World Literacy? Is Africa Different? By Dorte Verner
  7. Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach By Ilan Noy

  1. By: Itay Goldstein; Assaf Razin
    Abstract: The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI is characterized by hands-on management style which enables the owner to obtain relatively refined information about the productivity of the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the relatively well-informed FDI investor has a low resale price because of a "lemons" type asymmetric information between the owner and potential buyers. The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the smaller volatility of FDI net inflows relative to FPI net inflows.
    JEL: F3
    Date: 2005–01
  2. By: James Levinsohn; Margaret McMillan
    Abstract: This paper uses household-level data from Ethiopia to investigate the impact of food aid on the poor. We find that food aid in Ethiopia is "pro-poor." Our results indicate that (i) net buyers of wheat are poorer than net sellers of wheat, (ii) there are more buyers of wheat than sellers of wheat at all levels of income, (iii) the proportion of net sellers is increasing in living standards and (iv) net benefit ratios are higher for poorer households indicating that poorer households benefit proportionately more from a drop in the price of wheat. In light of this evidence, it appears that households at all levels of income benefit from food aid and that %u2013 somewhat surprisingly %u2013 the benefits go disproportionately to the poorest households.
    JEL: F1 O1
    Date: 2005–01
  3. By: Stanley L. Engerman; Kenneth L. Sokoloff
    Abstract: Over the last few years, colonialism, especially as pursued by Europeans, has enjoyed a revival in interest among both scholars and the general public. Although a number of new accounts cast colonial empires in a more favorable light than has generally been customary, others contend that colonial powers often leveraged their imbalance in power to impose institutional arrangements on the colonies that were adverse to long-term development. We argue here, however, that one of the most fundamental impacts of European colonization may have been in altering the composition of the populations in the areas colonized. The efforts of the Europeans often involved implanting ongoing communities who were greatly advantaged over natives in terms of human capital and legal status. Because the paths of institutional development were sensitive to the incidence of extreme inequality which resulted, their activity had long lingering effects. More study is needed to identify all of the mechanisms at work, but the evidence from the colonies in the Americas suggests that it was those that began with extreme inequality and population heterogeneity that came to exhibit persistence over time in evolving institutions that restricted access to economic opportunities and generated lower rates of public investment in schools and other infrastructure considered conducive to growth. These patterns may help to explain why a great many societies with legacies as colonies with extreme inequality have suffered from poor development experiences.
    JEL: N10
    Date: 2005–01
  4. By: Lire Ersado
    Abstract: Ersado looks at the feasibility and potential of instituting small-scale irrigation dams to reduce Ethiopia’s dependence on rainfed agriculture and the associated food insecurity. He develops a theoretical framework to assess the welfare implications of irrigation development programs and provides empirical evidence from microdam construction and reforestation projects in northern Ethiopia. The author pays particular attention to health-related costs of establishing small-scale irrigation dams in areas prone to waterborne diseases. While the theoretical analyses imply that the net welfare impacts of irrigation dams cannot be known a priori due to potential health costs, the empirical evidence shows that current agricultural yield and farm profit have increased in villages with closer proximity to the dams than in those more distant. The increased disease incidence due to standing pools of water has, however, led to significant declines in the returns from investment in irrigation water. Households with poor health are less likely to adopt productivity-enhancing as well as resource-conserving technologies, which are crucial for achieving the ultimate goal of sustainable agricultural development. The ensuing sickness has also led to reduction in labor allocation to off-farm activities. The findings underline the importance of weighing beforehand the magnitude of potential economic benefits against health costs of water development programs. The overall evidence, however, suggests that carefully designed irrigation dams could significantly improve agricultural production and food security, particularly in areas where waterborne diseases pose negligible risk to health or can be cost-effectively controlled. This paper—a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region—is part of a larger effort in the Bank to achieve global food security and poverty alleviation.
    Keywords: Agriculture; Environment; Health & Population; Labor & Employment; Public Sector Management; Rural Development
    Date: 2005–01–14
  5. By: Dorte Verner
    Abstract: Ninety-five percent of the world’s illiterate people live in developing countries, and about 70 percent are women. Female illiteracy rates are particularly high in Sub-Saharan Africa. In Niger and Burkina Faso, for example, more than 90 percent of women are illiterate. This paper presents a model of literacy. It shows that the main determinants of worldwide literacy are enrollment rates, average years of schooling of adults, and life expectancy at birth. Income has a weak nonlinear effect, negatively affecting literacy until a threshold level of per-capita income of about $2,200 a year is reached and positively affecting literacy thereafter. Finally, African countries do not have a significantly higher literacy rate when controlling for other factors. This paper—a product of the Social Development Family, Latin America and the Caribbean Region—is part of a larger effort in the Bank to reduce poverty and social exclusion.
    Keywords: Education; Governance; Poverty; Social Development
    Date: 2005–01–14
  6. By: Edgar L. Feige (University of Wisconson-Madison)
    Abstract: Many public policy decisions require analytical and empirical knowledge concerning the size, growth, causes and consequences of the ‘underground economy”. This paper seeks to clarify the meaning of underground activity, updates various discrepancy and fiscal estimates of its size and growth, and examines the empirical implications of new evidence concerning the growing use of US currency (dollarization) throughout the world for indirect estimates of the underground economy in the U.S. The paper examines all indirect and direct methods of estimating the amount of US currency held abroad and concludes that between 40% -45% of US currency is held abroad. This result stands in sharp contrast to the estimates presented by Porter and Judson (1996) who claim that as much as 55% -70% of US currency is held abroad. The new estimates of overseas currency are used to derive a domestic currency series which is the appropriate variable for use in currency demand models that purport to provide estimates of the size of the underground economy. This paper appears in Exploring the Underground Economy: Studies of Illegal and Unreported Activity. Susan Pozo (ed.) W.E Upjohn Institute for Employment Research, Kalamazoo, MI, 1996
    Keywords: currency abroad, underground economy, unreported income, unrecorded income, non-observed income, currency demand, demand for money, money supply.
    JEL: E41 H26 E52 F3 O17
    Date: 2005–01–18
  7. By: Ilan Noy (Department of Economics, University of Hawaii at Manoa)
    Abstract: The IMF creates “moral hazard,” when it provides bailouts to countries that face a BOP crisis. Two central questions are posed: is moral hazard observable in the data; and, if it is, what is its magnitude? We search for evidence that the unprecedented bailouts of the last decade have changed the investing environment in such a way that international investors started believing that their investments were insured. Our events-study is based on IMF-led events identified as both important and unexpected, such as the bailout loan for Mexico in 1995 and the absence of one for Russia in 1998. Our conclusion is negative: no such change in the moral hazard effect was observed. We demonstrate that events surrounding the out-of-sample Argentinean default (Dec. 2001) support our finding.
    Date: 2004

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