nep-dev New Economics Papers
on Development
Issue of 2005‒10‒22
fifty-one papers chosen by
Jeong-Joon Lee
Towson University

  1. Aid Effectiveness on Accumulation. A Meta Study By Hristos Doucouliagos; Martin Paldam
  2. Aid Effectiveness on Growth. A Meta Study By Hristos Doucouliagos; Martin Paldam
  3. Conditional Aid Effectiveness. A Meta Study By Hristos Doucouliagos; Martin Paldam
  4. The Aid Effectiveness Literature. The Sad Result of 40 Years of Research By Hristos Doucouliagos; Martin Paldam
  5. Does development aid help poor countries catch up? By Herbertsson, Tryggvi Thor; Martin Paldam
  6. The impact of demographic dynamics on economic development, poverty and inequality in Mozambique By Stephan Klasen; Silke Woltermann
  7. Taxation Reforms and Changes in Revenue Assignments in China By Ben Lockwood; Ehtisham Ahmad; Raju Singh
  8. Choosing a Budget Management System: The Case of Rwanda By Ian Lienert
  9. Once Again, is Openness Good for Growth? By Ha Y. Lee; Roberto Rigobón; Luca Antonio Ricci
  10. Risk Instability and the Pattern of Foreign Direct Investment in the Middle East and North Africa Region By Kitty K. Chan; Edward R. Gemayel
  11. Are Developing Countries Better Off Spending their Oil Wealth Upfront? By H. Takizawa; E. H. Gardner; Kenichi Ueda
  12. What Are the Channels Through Which External Debt Affects Growth? By Catherine A. Pattillo; Hélène Poirson; Luca Antonio Ricci
  13. Dimensions of Land Inequality and Economic Development By Lennart Erickson; Dietrich Vollrath
  14. Grants Versus Loans By Hulya Ulku; Tito Cordella
  15. Foreign Currency Deposits and International Liquidity Shortages in Pakistan By Abbas Mirakhor; Iqbal Mehdi Zaidi
  16. The Challenge of Fiscal Adjustment in a Democracy: The Case of India By Ricardo Hausmann; Catriona M. Purfield
  17. Financing Uganda's Poverty Reduction Strategy: Is Aid Causing More Pain Than Gain? By Mwanza Nkusu
  18. Microfinance in Africa: Experience and Lessons from Selected African Countries By Rodolphe Blavy; Murat  Yülek; Anupam Basu
  19. Sources of Growth in Sub-Saharan Africa By Emmanuel Brou Aka; Bernardin Akitoby; Dhaneshwar Ghura; Amor Tahari
  20. Growth and Convergence in WAEMU Countries By Abdoul Aziz Wane
  21. Financial Sector Development in the Middle East and North Africa By Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
  22. Macroeconomic Implications of Natural Disasters in the Caribbean By Tobias N. Rasmussen
  23. Local Financial Development and the Aid-Growth Relationship By Selin Sayek; Mwanza Nkusu
  24. How Much Do Trading Partners Matter for Economic Growth? By Vivek B. Arora; Athanasios Vamvakidis
  25. Fiscal Sustainability in Heavily Indebted Countries Dependent on Nonrenewable Resources: The Case of Gabon By Joseph Ntamatungiro
  26. India in the 1980s and 1990s: A Triumph of Reforms By Arvind Panagariya
  27. Domestic Debt Markets in Sub-Saharan Africa By Jakob Christensen
  28. When is Growth Pro-Poor? Cross-Country Evidence By Aart Kraay
  29. Banking in Sub-Saharan Africa: What Went Wrong? By François Leroux; Roland Daumont; Françoise Le Gall
  30. Growth in the Middle East and North Africa By Dalia Hakura
  31. Overview of the Indian Corporate Sector: 1989-2002 By Petia Topalova
  32. Can China Grow Faster? A Diagnosis on the Fragmentation of the Domestic Capital Market By Genevieve Boyreau-Debray; Shang-Jin Wei
  33. From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition By Dani Rodrik; Arvind Subramanian
  34. Economic Geography and Wages: The Case of Indonesia By Mary Amiti; Lisa Ann Cameron
  35. Political Instability and Growth: The Central African Republic By Benoît Mercereau; Dhaneshwar Ghura
  36. Toward More Effective Redistribution: Reform Options for Intergovernmental Transfers in China By Mario Fortuna; Ehtisham Ahmad; Raju Singh
  37. Migration and Foreign Remittances in the Philippines By Robert Burgess; V. Haksar
  38. Trade and Growth in the Presence of Distortions By James H Cassing; Stephen Tokarick
  39. What Undermines Aid's Impact on Growth? By Raghuram Rajan; Arvind Subramanian
  40. Aid and Growth: What Does the Cross-Country Evidence Really Show? By Raghuram Rajan; Arvind Subramanian
  41. Bank Behavior in Developing Countries: Evidence from East Africa By Richard Podpiera; Martin Cihák
  42. Growth Dynamics: The Myth of Economic Recovery By Valerie Cerra; Sweta Chaman Saxena
  43. Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies By Emilio Sacerdoti
  44. Growth Empirics under Model Uncertainty: Is Africa Different? By Charalambos G. Tsangarides
  45. Trade Liberalization and Wage Inequality: Evidence from India By Prachi Mishra; Utsav Kumar
  46. Inequality, Poverty, and Growth: Cross-Country Evidence By Garbis Iradian
  47. Issues in Intergovernmental Fiscal Relations in China By Era Dabla-Norris
  48. The Disconcerting Pyramids of Poverty and Inequality of Sub-Saharan Africa By Paulo Silva Lopes
  49. How Big Are The Benefits of Economic Diversification?: Evidence from Earthquakes By Rodney Ramcharan
  50. Why Do Some Countries Manage to Extract Growth from Foreign Aid? By Jean-François Ruhashyankiko
  51. The Implications of South African Economic Growth for the Rest of Africa By Vivek B. Arora; Athanasios Vamvakidis

  1. By: Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark)
    Abstract: The AEL (aid effectiveness literature) studies the macroeconomic effect of development aid using cross-country or panel data econo¬metrics. It contains about 100 papers of which 43 study whether development aid increases accumulation in the recipient country. Taking all 43 aid-accumulation studies together, the results show that aid has a small insignificant positive effect on investment, and a (fairly) small significant negative effect on domestic savings. The aggregate result is thus an unclear effect on accumulation, but with regional differences. When only studies of Latin American or Asian economies are considered, a small positive and statistically significant investment effect is found, together with a small negative effect on domestic savings. We conclude that in Asia and Latin America, aid is a substitute to domestic savings, but has a net positive impact on investment.
    Keywords: Aid effectiveness, meta study, investments, savings
    JEL: B2 E21 E22 F35
    Date: 2005–07–21
  2. By: Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark)
    Abstract: The AEL (aid effectiveness literature) is econo¬metric studies of the macroeconomic effects of development aid. It contains about 100 papers of which 68 are reduced form estimates of the effect of aid on growth in the recipient country. The raw data show that growth is unconnected to aid, but the AEL has put so much structure on the data that all results possible have emerged. The present meta study considers both the best-set of the 68 papers and the all-set of 543 regressions published. Both sets have a positive average aid-growth elasticity, but it is small and insignificant: The AEL has not established that aid works. Using meta- regression analysis it is shown that about 20 factors influence the results. Much of the variation between studies is an artifact and can be attributed to publication outlet, institu¬ tional affiliation, and specification differences. However, some of the difference between studies is real. In particular, the aid-growth association is stronger for Asian countries, and the aid-growth association is shown to have been weaker in the 1970s.
    Keywords: Aid effectiveness, meta study, economic growth
    JEL: B2 F35
    Date: 2005–07–21
  3. By: Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark)
    Abstract: The AEL (aid effectiveness literature) studies the effect of development aid using econome¬ trics on macro data. It contains about 100 papers of which a third analyzes conditional models where aid effectiveness depends upon z, so that aid only works for a certain range of the variable. The key term in this family of AEL models is thus an interaction term of z times aid. The leading candidates for z are a good policy index and aid itself. In this paper, meta- analysis techniques are used (i) to determine whether the AEL has established the said interaction terms, and (ii) to identify some of the determinants of the differences in results between studies. Taking all available studies in consideration, we find no support for conditionality with respect to policy, while conditionality regarding aid itself is dubious. However, the results differ depending on the authors’ institutional affiliation.
    Keywords: Aid effectiveness, meta study, economic growth, policy conditionality
    JEL: B2 F35
    Date: 2005–07–21
  4. By: Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark)
    Abstract: The AEL consists of empirical macro studies of the effects of development aid. At the end of 2004 it had reached 97 studies of three families, which we have summarized in one study each using meta-analysis. Studies of the effect on investments show that they rise by 1/3 of the aid – the rest is crowded out by a fall in savings. Studies of the effect on growth show an insignificant positive effect. Studies of the effect on growth, conditional on something else, have till now shown weak results. The Dutch Disease effect of aid has been ignored. The best aggregate estimate is that since its start in the early 1960s aid has increased the standard of living in the poor countries by 20%.
    Keywords: Aid effectiveness, meta study, accumulation, growth
    JEL: B2 E21 E22 F35
    Date: 2005–07–21
  5. By: Herbertsson, Tryggvi Thor; Martin Paldam (Department of Economics, University of Aarhus, Denmark)
    Abstract: Aid flows are included into the standard cross-country catch-up relation. Robust¬ness of the result is tested by changing time periods and by adding extra variables. The main results are: Absolute conver¬gence and absolute aid effec¬ti¬ve¬ness are both rejected. While conditional convergence is accepted, conditional aid effecti¬ve¬ness is found to be weak. The two relations are largely inde¬pendent. However, aid has a clear activity effect in the short run. Finally, we try to divide the countries into an A-group where aid is effective and a B-group where it harms. Several criteria of division were explored, but none were very successful – the most satisfactory is the one that divides countries according to their level of development.
    Keywords: Convergence, growth, development aid effectiveness
    JEL: C14 C23 F35 O4
    Date: 2005–07–21
  6. By: Stephan Klasen (University of Goettingen); Silke Woltermann (University of Goettingen)
    Abstract: In this paper, we analyze whether current demographic dynamics in Mozambique are likely to reduce per capita growth and poverty reduction. The findings suggest that population dynamics do not appear to be a major driver of changes in growth of per capita incomes, poverty, or inequality. At the macro level this can be seen at the off-setting effects of population growth on the one hand and the potential to reap the benefits of a demographic gift and higher population density on the other. At the micro level, it is clear that household size has not changed drastically and the existing negative impact of household size on poverty and inequality appears to have fallen in recent years, particularly in rural areas. Thus demographic dynamics have helped support rising per capita incomes and falling poverty rather than hindering it.
    Keywords: poverty, inequality, population growth, Mozambique
    JEL: J1 I32 O15
    Date: 2005–05–01
  7. By: Ben Lockwood; Ehtisham Ahmad; Raju Singh
    Abstract: The value-added tax (VAT) in China has the unusual feature that capital goods are included in the VAT base. In addition, most services are subject to the business tax, which is not creditable against VAT, but which accrues to local governments, and operates as a turnover tax. On grounds of economic efficiency, it would be desirable to eliminate these distortions so that domestic producers are not increasingly placed at a disadvantage as China dismantles tariff and nontariff barriers on competing goods. Reforming indirect taxation would however generate considerable revenue losses for local governments and, in the absence of any compensatory mechanisms, there would be significant impediments to the needed reforms. This paper focuses on the extent of revenue losses, their distribution across provinces, and possible options for compensation.
    Keywords: Fiscal policy , China , Indirect taxation , Value added tax , Tax reforms ,
    Date: 2004–07–29
  8. By: Ian Lienert
    Abstract: Rwanda is making important choices concerning budget processes. A program-oriented budget framework is now used. A new Constitution, adopted in May 2003, has made some important choices concerning the public management system, including the balance of power between the executive and the legislature. Further choices are being made in an organic budget law (under discussion). Compared with the inherited budget management model, the responsibility of spending agencies is likely to be enhanced. Choices have yet to be made on the nationwide government accounting system, the precise role of the Senate in budgeting, and the pace of effective political decentralization.
    Keywords: Budgeting , Rwanda , Budgetary policy , Public finance ,
    Date: 2004–08–09
  9. By: Ha Y. Lee; Roberto Rigobón; Luca Antonio Ricci
    Abstract: Rodriguez and Rodrik (2000) argue that the relation between openness and growth is still an open question. One of the main problems in the assessment of the effect is the endogeneity of the relation. In order to address this issue, this paper applies the identification through heteroskedasticity methodology to estimate the effect of openness on growth while properly controlling for the effect of growth on openness. The results suggest that openness would have a positive effect on growth, although small. This result stands, despite the equally robust effect from growth to openness.
    Keywords: Trade policy , Economic growth , Economic models ,
    Date: 2004–08–11
  10. By: Kitty K. Chan; Edward R. Gemayel
    Abstract: This paper demonstrates that instability associated with investment risk is critical in explaining the level of foreign direct investment for the Middle East and North Africa (MENA) countries, which generally have higher investment risk than developed countries. The empirical results support this hypothesis, whether either the standard deviation or the interquartile range is used as a measure of instability, in a dynamic panel model. The paper recommends a reorientation of policies toward those with a longer-term focus in order to help lower the degree of risk instability for MENA countries.
    Keywords: Foreign investment , Middle East , Africa ,
    Date: 2004–08–12
  11. By: H. Takizawa; E. H. Gardner; Kenichi Ueda
    Abstract: We question the conventional view that it is optimal for government to maintain a stable level of spending out of oil wealth. We compare this conventional policy recommendation with one where government spends all of its oil revenues upfront, at the same rate as oil is extracted. Using a neoclassical growth model with positive external effects of public spending on consumption and productivity, we find that, if the economy is growing along the steady-state balanced path, the conventional view is validated. However, if the economy starts with a lower capital stock, the welfare ranking across two policies can be reversed.
    Keywords: Fiscal policy , Developing countries , Public investment , Oil revenues , Economic growth , Economic models ,
    Date: 2004–08–16
  12. By: Catherine A. Pattillo; Hélène Poirson; Luca Antonio Ricci
    Abstract: This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).
    Keywords: External debt , Economic growth ,
    Date: 2004–02–10
  13. By: Lennart Erickson; Dietrich Vollrath
    Abstract: There are several theories linking land inequality with aspects of economic development. Empirical work on these theories has attempted to establish a relationship between land inequality and institutions, financial development, and education. This research, though, has relied on measures of land inequality that capture only inequality within the class of landholders, ignoring completely the issue of landlessness. This omission raises suspicion about the usefulness of those empirical results. We use a new measure of the breadth of landholdings across the agricultural population to address this issue. We test the proposed relationships regarding land inequality and development using the new measure. The regressions fail to find significant and robust relationships between land inequality of either type and institutions or financial development. We do find that lower land inequality across agricultural populations, but not inequality within the landholding class, is associated with greater public provision of education.
    Keywords: Land reform , Development , Financial sector , Education ,
    Date: 2004–09–02
  14. By: Hulya Ulku; Tito Cordella
    Abstract: Under what conditions should grants be preferred to loans? To answer this question, we present a simple model à la Krugman (1988) and show that, for any given level of developmental assistance, the optimal degree of loan concessionality is positively associated with economic growth if countries are poor, have bad policies, and high debt obligations. We then test our model by estimating a modified growth model for a panel of developing countries, and find evidence supporting our predictions. Finally, we assess the determinants of current aid allocations and find that the degree of concessionality is negatively correlated with countries' levels of development.
    Keywords: Loans , Development , Economic growth , Economic models ,
    Date: 2004–09–13
  15. By: Abbas Mirakhor; Iqbal Mehdi Zaidi
    Abstract: This paper studies the implications of foreign currency deposits (FCDs) for international liquidity shortages in Pakistan. The analysis focuses on how the large volume of FCDs and the specific institutional characteristics of those deposits have made the Pakistan economy highly vulnerable to exogenous shocks. The analysis shows that FCDs created another channel for government borrowing, and fiscal sustainability in a "closed" system may be very different from sustainability in a more "open" system. There is a need to think of these issues in terms of total balance sheet vulnerability, and we recommend measures that would make domestic-currency-denominated assets attractive to investors.
    Keywords: Capital account liberalization , Pakistan , International liquidity , Dollarization ,
    Date: 2004–09–15
  16. By: Ricardo Hausmann; Catriona M. Purfield
    Abstract: India's fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system.
    Keywords: Fiscal management , India , Debt , Fiscal reforms ,
    Date: 2004–09–15
  17. By: Mwanza Nkusu
    Abstract: Uganda's market-friendly development strategy and poverty reduction agenda have attracted large financial inflows, including aid. During 2000-02, concerns about a possible aid-induced Dutch disease were heightened by widening macroeconomic imbalances and an upward trend in the real effective exchange rate (REER). This paper shows that the REER remained broadly stable during a 10-year period and nontraditional exports increased remarkably, contrary to the predictions of the Dutch disease model. Also, economic growth was strong. This good performance is attributed to sound macroeconomic policies and important structural reforms, which have allowed an increased use of available production factors.
    Keywords: Development assistance , Uganda , Poverty reduction , Exchange rates , Economic growth ,
    Date: 2004–09–21
  18. By: Rodolphe Blavy; Murat  Yülek; Anupam Basu
    Abstract: Based on the experience of selected countries, this paper offers a critical presentation of the development of the microfinance sector in Africa. The paper supports the view that microfinance institutions, especially those engaged in full financial intermediation, complement effectively the banking sector in extending financial services and successfully draw on the rich experience of community-based development and preexisting informal methods of financial intermediation in Africa. Growing linkages between microfinance institutions and the banking system and the dissemination of good practices by nongovernment organizations contribute to the sound development of the sector, supported by regulation and supervision by local authorities.
    Keywords: Public finance , Africa , Bank regulations , Savings , Economic models ,
    Date: 2004–09–28
  19. By: Emmanuel Brou Aka; Bernardin Akitoby; Dhaneshwar Ghura; Amor Tahari
    Abstract: Analysis of 1960-2002 data shows that average real GDP growth in sub-Saharan Africa was low and decelerated continuously before starting to recover in the second part of the 1990s. Growth was driven primarily by factor accumulation with little role for total factor productivity (TFP) growth. The recent pickup in economic growth was accompanied by an increase in TFP growth, namely in the group of countries whose IMF-supported programs were judged to be on track. Average annual growth in the region, at 3½ percent during 1997-2002, is less than half of the estimated growth needed to halve the fraction of population living below $1 per day between 1990 and 2015, one of the Millennium Development Goals.
    Keywords: Economic growth , Sub-Saharan Africa ,
    Date: 2004–10–04
  20. By: Abdoul Aziz Wane
    Abstract: This paper investigates convergence and dynamic effects of human and physical capital on growth, in WAEMU countries. Using recently developed models for panel data and a growth accounting model, the study finds that growth is largely explained by changes in literacy rates and factor accumulation, but not by growth of total factor productivity (TFP). Nevertheless, the panel estimation identifies aid, government spending, credit to the private sector, and openness as positive determinants of TFP growth, and government deficits as a negative determinant. The study also finds that per capita income in lower-income WAEMU countries converge to per capita income in higher-income ones when economic policies are similar. These results suggest opportunities for policymakers to enhance growth and convergence.
    Keywords: Economic growth , West African Economic and Monetary Union , Economic models ,
    Date: 2004–10–26
  21. By: Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
    Abstract: Based on data collected on a wide range of financial sector indicators, new indices of financial development for countries in the Middle East and North Africa (MENA) are constructed, encompassing six themes: development of the monetary sector and monetary policy, banking sector development, nonbank financial development, regulation and supervision, financial openness, and institutional quality. The paper finds that the degree of financial development varies across the region. Some countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, more needs to be done to reinforce the institutional environment and promote nonbank financial sector development. Based on a subset of indicators, the MENA region is found to compare favorably with a few other regions, but it ranks far behind the industrialized countries and East Asia.
    Keywords: Financial Sector , Middle East , Africa , Development ,
    Date: 2004–11–02
  22. By: Tobias N. Rasmussen
    Abstract: Each year natural disasters affect about 200 million people and cause about $50 billion in damage. This paper compares the incidence of natural disasters across countries along several dimensions and finds that the relative costs tend to be far higher in developing countries than in advanced economies. The analysis shows that small island states are especially vulnerable, with the countries of the Eastern Caribbean standing out as among the most disaster-prone in the world. Natural disasters are found to have had a discernible macroeconomic impact, including large effects on fiscal and external balances, pointing to an important role for precautionary measures.
    Keywords: Emergency assistance , Developing countries ,
    Date: 2004–12–10
  23. By: Selin Sayek; Mwanza Nkusu
    Abstract: With official development assistance (ODA) set to rise as countries strive to meet the Millennium Development Goals (MDGs), aid effectiveness remains an important area of development policy. An increasing number of studies support the notion that ODA can contribute to growth in a nonlinear relationship. In this paper, we investigate a new hypothesis regarding this relationship: that deeper financial markets in aid-recipient countries facilitate the management of aid flows, thereby enhancing aid effectiveness. An empirical analysis, using a panel data set, finds robust support for the hypothesis.
    Keywords: Development assistance , Economic growth , Poverty , Financial assistance , Economic models ,
    Date: 2005–01–10
  24. By: Vivek B. Arora; Athanasios Vamvakidis
    Abstract: This paper empirically examines the extent to which a country's economic growth is influenced by its trading partner economies. Panel estimation results based on four decades of data for over 100 countries show that trading partners' growth and relative income levels have a strong effect on domestic growth, even after controlling for the influence of common global and regional trends. One interpretation is that conditional convergence is stronger, the richer are a country's trading partners. A general implication of the results is that industrial countries benefit from trading with developing countries, which grow rapidly, while developing countries benefit from trading with industrial countries, which have relatively high incomes.
    Keywords: International trade , Economic growth ,
    Date: 2004–03–02
  25. By: Joseph Ntamatungiro
    Abstract: This paper proposes a framework for assessing fiscal sustainability in heavily indebted countries dependent on exhaustible resources, with reference to Gabon. It finds that fiscal sustainability could be achieved by: (i) developing a fiscal rule for the non-oil primary fiscal balance compatible with an objective for reducing the debt-to-non-oil GDP ratio; (ii) introducing a constant oil-based income transfer per capita allowing intergenerational equity; and (iii) building up an oil savings fund. Long-term simulations show that Gabon's fiscal position is fragile and that a fiscal policy path consistent with the proposed framework could help achieve comfortable levels of net wealth.
    Keywords: Fiscal policy , Gabon , Heavily indebted poor countries , Oil , Debt ,
    Date: 2004–03–04
  26. By: Arvind Panagariya
    Abstract: Bradford DeLong and Dani Rodrik have argued that reforms in India cannot be credited with higher growth because the growth rate crossed the 5 percent mark in the 1980s, well before the launch of the July 1991 reforms. This is a wrong reading of the Indian experience for two reasons. First, liberalization was already under way during the 1980s and played a crucial role in stimulating growth during that decade. Second, growth in the 1980s was fragile and unsustainable. The more systematic and systemic reforms of the 1990s, discussed here in detail, gave rise to more sustainable growth. The paper concludes by explaining why the growth rate in India nevertheless continues to trail that of China.
    Keywords: Economic reforms , India , China , Economic growth ,
    Date: 2004–03–24
  27. By: Jakob Christensen
    Abstract: This study discusses the role of domestic debt markets in sub-Saharan Africa (SSA) based on a new dataset covering 27 SSA countries during the 20-year period 1980-2000. The study finds that domestic debt markets in these countries are generally small, highly short-term in nature, and often have a narrow investor base. Domestic interest payments present a significant burden to the budget, despite much smaller domestic than foreign indebtedness. The use of domestic debt is also found to have significantly crowded out private sector lending. Finally, the study identifies significant differences between the size, cost, and maturity structure of domestic debt markets in HIPCs and non-HIPCs.
    Keywords: Domestic debt , Sub-Saharan Africa , Heavily indebted poor countries ,
    Date: 2004–03–25
  28. By: Aart Kraay
    Abstract: Growth is pro-poor if the poverty measure of interest falls. This implies three potential sources of pro-poor growth: (a) a high rate of growth of average incomes; (b) a high sensitivity of poverty to growth in average incomes; and (c) a poverty-reducing pattern of growth in relative incomes. I empirically decompose changes in poverty in a large sample of developing countries into these components. In the medium run, most of the variation in changes in poverty is due to growth, suggesting that policies and institutions that promote broad-based growth should be central to pro-poor growth. Most of the remainder is due to poverty-reducing patterns of growth in relative incomes, rather than differences in the sensitivity of poverty to growth in average incomes. Cross-country evidence provides little guidance on policies and institutions that promote these other sources of pro-poor growth.
    Keywords: Poverty , Poverty reduction , Income distribution , Economic growth , Developing countries ,
    Date: 2004–04–01
  29. By: François Leroux; Roland Daumont; Françoise Le Gall
    Abstract: The purpose of this paper is to study the origins of banking crises in sub-Saharan Africa, drawing upon the experience of ten countries during the period 1985-95. It examines, in particular, which factors were the most important sources of these crises. The conclusions underscore that the banking crises examined did not represent an entirely special case-a number of factors identified in the general literature, including macroeconomic shocks, were highly relevant-but note that several of their features were nonetheless specific to this part of the world. These banking crises were the very prototype of endemic crises associated with heavy government intervention in the banking system. In this regard, the paper analyzes the complex role of the government in banking in sub-Saharan Africa, the many channels through which governments intervened, and the economic and institutional environment in which the banks operated.
    Keywords: Banking systems , Africa , Financial crisis , Intervention , Bank regulations ,
    Date: 2004–04–20
  30. By: Dalia Hakura
    Abstract: This paper analyzes the weak growth performance in the Middle East and North Africa (MENA) region during 1980-2000 using an empirical model of long-run growth. The relative importance of the factors affecting growth is shown to vary across 16 MENA countries. In GCC countries, where oil revenues are significant, large governments appear to have been a key factor stifling private-sector growth and impeding diversification. In other MENA countries poor institutional quality has held back growth. Political instability is also shown to have played a role. While the MENA region's growth differential with east Asia is explained well in the 1980s, this is less so in the 1990s.
    Keywords: Economic growth , Middle East , Africa , Oil revenues ,
    Date: 2004–04–20
  31. By: Petia Topalova
    Abstract: This paper uses firm-level data to examine the performance of India's nonfinancial corporate sector since 1989 and evaluate its financial vulnerabilities. While promising trends in liquidity, profitability, and leverage of the sector emerged in the early 1990s, they experienced a reversal after 1996. Nonetheless, most indicators were still at comfortable levels, and there is evidence of improvement in 2002, the last year in our sample. However, a number of firms still face problems servicing their debt obligations, posing a risk to lenders. In particular, the aggregate interest coverage of the corporate sector indicates that potential nonperforming loans of the corporate sector remain high. This underscores the need for close monitoring of the corporate sector in the future.
    Keywords: Financial sector , India , Liquidity , Financial crisis ,
    Date: 2004–04–26
  32. By: Genevieve Boyreau-Debray; Shang-Jin Wei
    Abstract: This paper examines possible segmentation of the internal capital market in China. We employ two standard tools from the international finance literature to analyze financial integration across Chinese provinces. Both tests confirm a similar (and somewhat surprising) picture: capital mobility within China is low! Furthermore, the degree of internal financial integration appears to have decreased, rather than increased, in the 1990s relative to the preceding period. Finally, we document that the government tends to reallocate capital from more productive regions to less productive ones. In this sense, a smaller role of the government in the financial sector might increase the rate of economic growth.
    Keywords: Capital markets , China , Capital flows , Financial sector , Economic growth ,
    Date: 2004–05–17
  33. By: Dani Rodrik; Arvind Subramanian
    Abstract: This paper explores the causes of India's productivity surge around 1980, more than a decade before serious economic reforms were initiated. Trade liberalization, expansionary demand, a favorable external environment, and improved agricultural performance did not play a role. We find evidence that the trigger may have been an attitudinal shift by the government in the early 1980s that unlike the reforms of the 1990s, was probusiness rather than promarket in character, favoring the interests of existing businesses rather than new entrants or consumers. A relatively small shift elicited a large productivity response, because India was far away from its income-possibility frontier. Registered manufacturing, which had been built up in previous decades, played an important role in determining which states took advantage of the changed environment.
    Keywords: Productivity , India , Economic growth , Trade liberalization , Demand , Public investment , Agricultural production , Manufacturing ,
    Date: 2004–05–20
  34. By: Mary Amiti; Lisa Ann Cameron
    Abstract: The paper finds a significant shift in the economic characteristics of civil conflicts during the1990s. Conflicts have become shorter but with more severe contractions and a stronger recovery of growth. The overall length and cost of the conflict cycle has probably declined. The stance of macroeconomic policy was an important factor while the underlying "conflict process" remained unchanged. This shift seems related to changes in aid flows since the Cold War: donors became disinclined to provide support during conflict, but more inclined after conflict. These findings are buttressed by the post-conflict experience of countries that received financial assistance from the IMF and of the Democratic Republic of Congo (DRC). These findings have implications for policy and aid priorities after conflict.
    Keywords: Economic conditions , Indonesia , Wages , Demand ,
    Date: 2004–05–25
  35. By: Benoît Mercereau; Dhaneshwar Ghura
    Abstract: This paper provides empirical evidence that the propensity for political instability in the Central African Republic (C.A.R.) has been increased by low tax revenues and deteriorations in the terms of trade. The direct effect of political instability on economic growth is not statistically significant, once account is taken of domestic investment, and economic growth in neighboring countries. The policy implications are: (i) mobilization of domestic revenues to pay public employees' salaries and provide basic social services would lower the probability of coups; (ii) economic diversification would reduce the propensity for adverse terms of trade shocks to fuel coups; and (iii) neighboring countries' efforts to resolve conflicts and achieve sustained growth would be beneficial for the C.A.R.'s economic performance.
    Keywords: Economic conditions , Central African Republic , Economic growth ,
    Date: 2004–05–25
  36. By: Mario Fortuna; Ehtisham Ahmad; Raju Singh
    Abstract: Full implementation of an intergovernmental transfer system based on revenue capacities and expenditure needs could significantly improve both redistribution and equity objectives of the Chinese authorities. This was envisaged in the 1994 fiscal reforms, but the authorities were unable to implement the measures fully. This paper examines mechanisms that might facilitate effective implementation.
    Keywords: Fiscal reforms , China , Income distribution , Fiscal policy ,
    Date: 2004–06–29
  37. By: Robert Burgess; V. Haksar
    Abstract: International migration and large remittance flows have been prominent features of the Philippine economy for many decades. This paper describes the evolving pattern of migration and remittance flows and analyzes some of the channels through which remittances affect economic activity. The empirical evidence does not clearly support the purported short-term stabilizing effect on consumption of remittance flows. Furthermore, as in other countries, the longer term economic effect of such flows is ambiguous.
    Date: 2005–06–15
  38. By: James H Cassing; Stephen Tokarick
    Abstract: Tariffs and other policy distortions typically lower real national income relative to what it otherwise would have been for any given rate of factor accumulation. Even while lowering real income, however, policy distortions may raise an economy's real measured growth rate and so, somewhat deceivingly, give the impression that national welfare has benefited from things like tariff protection. This would be an incorrect conclusion. This paper discusses the issue of how protection can affect the rate of growth for a small, open economy. As shown by Johnson (1970), in the presence of exogenously given factor accumulation, tariffs either raise or lower an economy's growth rate (measured by the change in the value of output at world prices), relative to the no-distortion growth rate. We also discuss the relevance of this result for tariff uniformity, "tariff jumping" foreign direct investment, and the empirical literature on trade and growth. Finally we use a numerical simulation model of Egypt to assess whether the costs of its tax distortions have increased or declined over time.
    Keywords: Tariffs , Egypt , Trade , Economic growth , Capital accumulation , National income accounts , Economic models ,
    Date: 2005–02–03
  39. By: Raghuram Rajan; Arvind Subramanian
    Abstract: We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country's competitiveness, as reflected in a decline in the share of labor intensive and tradable industries in the manufacturing sector. We find evidence suggesting that these effects stem from the real exchange rate overvaluation caused by aid inflows. By contrast, private-to-private flows like remittances do not seem to create these adverse effects. We offer an explanation why and conclude with a discussion of the policy implications of these findings.
    Date: 2005–06–30
  40. By: Raghuram Rajan; Arvind Subramanian
    Abstract: We examine the effects of aid on growth-- in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.
    Date: 2005–06–30
  41. By: Richard Podpiera; Martin Cihák
    Abstract: We analyze the structure, performance, and role of banking systems in the three member countries of the East African Community-Kenya, Tanzania, and Uganda-against the backdrop of recent financial sector reforms. Focusing on the behavior of different types of banks, we find no support for the argument that the presence of large international banks would have an adverse effect on the effectiveness and efficiency of banking sectors in developing countries. International banks are generally more efficient and more active in lending than domestic banks. However, as suggested by the Kenyan experience, the presence of international banks may not lead to increased competition and provision of banking services if weak institutions are allowed to remain in the system.
    Date: 2005–07–14
  42. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework.
    Keywords: Economic growth , Economic recovery , Production , Business cycles ,
    Date: 2005–08–08
  43. By: Emilio Sacerdoti
    Abstract: This study discusses issues of access to bank credit in Sub-Saharan Africa, and examines measures that could help facilitate access by the private sector to bank credit. It reviews in particular obstacles to credit small- and medium-scale enterprises and agriculture, and examines progress in the design and implementation of reform measures that are needed to create an institutional environment more supportive of credit activity. It also reviews bank interest rate spreads and profit margins, and their determinants, and compares such spreads with those prevailing in other regions of the world.
    Date: 2005–08–25
  44. By: Charalambos G. Tsangarides
    Abstract: This paper attempts to identify robust patterns of cross-country growth behavior in the world as a whole and Africa. It employs a novel methodology that incorporates a dynamic panel estimator, and Bayesian Model Averaging to explicitly account for model uncertainty. The findings indicate that: (i) in addition to initial conditions, various economic factors such as higher investment, lower inflation, lower government consumption, better fiscal stance, improved political environment, exogenous terms-of-trade shocks, and fixed geographical factors are robustly correlated with growth; (ii) what is good for growth around the world is, in principle, also good for growth in Africa; and (iii) political and institutional variables are particularly important in explaining African growth.
    Keywords: Economic growth , Africa , Economic models ,
    Date: 2005–02–03
  45. By: Prachi Mishra; Utsav Kumar
    Abstract: We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization-induced productivity increases at the firm level, which get passed on to industry wages. Since tariff reductions were proportionately larger in sectors that employ a larger share of unskilled workers, the increase in wage premiums in these sectors implies that unskilled workers experienced an increase in their relative incomes. Thus, our findings suggest that trade liberalization has led to decreased wage inequality in India.
    Keywords: Trade liberalization , India , Wages , Economic models ,
    Date: 2005–02–04
  46. By: Garbis Iradian
    Abstract: This paper examines the empirical relationship between inequality and growth, and analyzes the impacts of growth, inequality, and government spending on poverty reduction. A new panel dataset has been assembled on inequality and poverty that reduces measurement error and ensures comparability across countries and over time. The empirical results in this paper challenge the belief that income inequality has a negative effect on growth and confirm the validity of the Kuznets curve. Credit market imperfections in low- and medium-income countries are identified as the likely reason for the positive link between inequality and growth over the short-to-medium term. In the long term, inequality may have an adverse impact on growth.
    Keywords: Economic growth , Poverty , Government expenditures ,
    Date: 2005–02–23
  47. By: Era Dabla-Norris
    Abstract: The paper reviews the changing nature of intergovernmental fiscal relations between the provinces and the central government in China over the past two decades and provides an assessment of the success of previous reforms in meeting their objectives. Key existing weaknesses in the current system that undermine these objectives are identified. Alternative instruments, procedures, rules, and incentives that could result in better outcomes are outlined by drawing upon relevant cross-country experiences.
    Keywords: Intergovernmental fiscal relations , China , Income distribution , Fiscal policy ,
    Date: 2005–03–01
  48. By: Paulo Silva Lopes
    Abstract: Poverty and inequality in Sub-Saharan Africa (SSA) should not be ascertained only on the basis of scarce and unreliable income distribution statistics, but should also take into account social conditions. Recent, widely disseminated claims that poverty and inequality have increased over the past 30 years are based on regional income estimates with falling medians and rising upper variances over that period. Graphically, this translates into pyramid-shaped income distributions that, perversely, shift to the left and widen over time. However, during the same period social indicators improved significantly (if insufficiently), and we argue in this paper that such a trend represents progress with social equity in SSA. This point is illustrated through the configuration of alternative "social pyramids" that move for most of the last 30 years in the right direction. However, more recently, social indicators are being set back by the HIV/AIDS pandemic, which will generate greater and more dehumanizing poverty in the years ahead even if meaningful economic growth is achieved. As underscored by the multiplicity of "pyramid" representations, poverty and inequality time trends in SSA can thus best be described as disconcerting in that they remain arguably illusive and definitely disturbing.
    Keywords: Poverty , Sub-Saharan Africa , Social policy ,
    Date: 2005–03–15
  49. By: Rodney Ramcharan
    Abstract: Economic activity is risky. Returns across economic sectors can be highly variable, potentially causing costly adjustments to consumption. However, when returns are imperfectly correlated across sectors and insurance is unavailable, diversification can reduce the economic impact of shocks. Therefore, despite the well-known efficiency benefits from specialization, the risks of too little diversification have long been acknowledged. But how big are the benefits of diversification? This paper exploits the exogeneity and randomness of earthquakes to address this question. There is robust evidence that more specialized economies experience larger declines in consumption when earthquakes occur, and consistent with the insurance channel, the cost of specialization is smaller in more financially developed economies.
    Keywords: Consumption , Exchange risk , Credit , Risk premium , Export diversification ,
    Date: 2005–03–15
  50. By: Jean-François Ruhashyankiko
    Abstract: Aid is primarily given to governments whereas the engine of sustained growth is the private sector. It is therefore illusory to investigate the impact of aid on growth without considering the impact of government interventions on the private sector. The model shows how these interventions improve capacity utilization and growth. However, distortionary interventions can also cause capacity underutilization and an increase in the informal economy, that is, the very market failures the interventions initially sought to address. Countries that fall into this trap are characterized by insufficient credibility in promoting the private sector, which translates into aid dependence and slower growth over time. The empirical evidence is supportive. This paper finds that aggregate aid has a positive impact on growth (even without diminishing returns) but the impact is substantially smaller for low-income countries.
    Keywords: Development assistance , Economic growth , Private sector , Foreign Investment , Economic models ,
    Date: 2005–03–22
  51. By: Vivek B. Arora; Athanasios Vamvakidis
    Abstract: This paper measures the extent to which South African economic growth is an engine of growth in sub-Saharan Africa. Results based on panel data estimation for 47 African countries over four decades suggest that South African growth has a substantial positive impact on growth in the rest of Africa, even after controlling for other growth determinants. The estimates are robust to the effects of global and regional shocks, changes in model specification, and sample period.
    Keywords: Economic growth , Sub-Saharan Africa , Stabilization programs , Trade , Economic models ,
    Date: 2005–03–28

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