nep-dev New Economics Papers
on Development
Issue of 2006‒08‒26
39 papers chosen by
Jeong-Joon Lee
Towson University

  1. Investment-Specific Technical Change and the Dynamics of Skill Accumulation and Wage Inequality By Hui He; Zheng Liu
  2. In search of FDI-led growth in developing countries By Dierk Herzer; Stephan Klasen; Felicitas Nowak-Lehmann D.
  3. Sibling Death Clustering in India: State Dependence vs. Unobserved Heterogeneity By Wiji Arulampalam; Sonia Bhalotra
  4. Pulls, Pushes and Entitlement Failures in Labor Markets: Does the State of Development Matter? By Sumon Kumar Bhaumik; Ralitza Dimova; Jeffrey B. Nugent
  5. The Road to Pro-Poor Growth: The Indonesian Experience in Regional Perspective By Peter Timmer
  6. Aid Effectiveness and the Millennium Development Goals By Steven Radelet
  7. The Trouble with the MDGs: Confronting Expectations of Aid and Development Success By Michael A. Clemens; Charles J. Kenny; Todd J. Moss
  8. Is Africa’s Skepticism of Foreign Capital Justified? Evidence from East African Firm Survey Data By Todd J. Moss; Vijaya Ramachandran; Manju Kedia Shah
  9. An Index of Donor Performance By David Roodman
  10. Towards a New Consensus for Addressing the Global Challenge of the Lack of Education By Lant Pritchett
  11. Double-Standards, Debt Treatment, and World Bank Country Classification: The Case of Nigeria-Revised November 2004 By Todd Moss; Scott Standley; Nancy Birdsall
  12. Beyond HIPC: Secure Sustainable Debt Relief for Poor Countries By Nancy Birdsall; Brian Deese
  13. Agricultural Protection in Rich Countries: How Did We Get Here By Kimberly Ann Elliott
  14. Underfunded Regionalism in the Developing World By Nancy Birdsall
  15. Seven Deadly Sins: Reflections on Donor Failings By Nancy Birdsall
  16. Food Security and Economic Growth: An Asian Perspective By Peter Timmer
  17. Behavioral Foundations of Democracy and Development By Ethan Kapstein
  18. From Pushing Reforms to Pulling Reforms: The Role of Challenge Programs in Foreign Aid Policy By Steve Radelet
  19. Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data By Benn Eifert; Alan Gelb; Vijaya Ramachandran
  20. Financial Regulations in Developing Countries: Can they Effectively Limit the Impact of Capital Account Volatility? By Liliana Rojas-Suarez
  21. Ten Myths of the International Finance Facility By Todd Moss
  22. Agriculture and Pro-Poor Growth: An Asian Perspective By Peter Timmer
  23. The Dollar and Development By Dick Sabot
  24. Reliving the '50s: The Big Push, Poverty Traps, and Takeoffs in Economic Development By William Easterly
  25. An Index of Donor Performance-Revised August 2005 By David Roodman
  26. Ghost of 0.7%: Origins and Relevance of the International Aid Target By Michael Clemens; Todd Moss
  27. Disentangling the Determinants of Successful Demobilization and Reintegration By Jeremy Weinstein; Macartan Humphreys
  28. Reforming Development Assistance: Lessons from the UK Experience By Owen Barder
  29. Fragile States and U.S. Foreign Assistance: Show Me the Money By Stewart Patrick; Kaysie Brown
  30. International Capital Flows, Financial Stability and Growth By Graciela L. Kaminsky
  31. What is the Most Effective Monetary Policy for Aid-Receiving Countries? By Alessandro Prati; Thierry Tressel
  32. Constraints to Achieving the MDGs with Scaled-Up Aid By François Bourguignon; Mark Sundberg
  33. Openness, Inequality and Poverty in Africa By Alemayehu Geda
  34. The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries By Jayati Ghosh
  35. Dynamic Links between the Economy and Human Development By Gustav Ranis; Frances Stewart
  36. Does Governance Matter? Yes, No or Maybe - Some Evidence from Developing Asia By M. G. Quibria
  37. How Well Can We Target Resources with “Quick-and-Dirty” Data?: Empirical Results from Combodia By Tomoki Fujii
  38. Central Asia’s Transition After Fifteen Years: Growth and Policy Choices By John Malcolm Dowling; Ganeshan Wignaraja
  39. Central Asia: Mapping Future Prospects By John Malcolm Dowling; Ganeshan Wignaraja

  1. By: Hui He; Zheng Liu
    Abstract: Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative quantity of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through capital-skill complementarity and endogenous skill accumulation, the model is able to account for much of the observed changes in the relative quantity of skilled workers. The model also does well in replicating the observed rise in wage inequality since the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill formation, inequality, and welfare.
    Date: 2006–08
  2. By: Dierk Herzer (Universität Frankfurt, Universität Göttingen); Stephan Klasen (Universität Göttingen); Felicitas Nowak-Lehmann D. (Universität Göttingen)
    Abstract: This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries FDI has no statistically significant long-run impact on growth. In very few cases, FDI indeed contributes to economic growth both in the long and the short run. But for some countries, there is also evidence of growth-limiting effects of FDI in the short or long term. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness, and the level of financial market development in developing countries.
    Keywords: FDI; Growth; Developing countries; Cointegration
    JEL: F43 C22
    Date: 2006–07–11
  3. By: Wiji Arulampalam (University of Warwick and IZA Bonn); Sonia Bhalotra (University of Bristol, CSAE, QEH and CHILD)
    Abstract: Data from a range of different environments indicate that the incidence of death is not randomly distributed across families but, rather, that there is a clustering of death amongst siblings. A natural explanation of this would be that there are (observed or unobserved) differences across families, for example in genetic frailty, education or living standards. Another hypothesis of considerable interest for both theory and policy is that there is a causal process whereby the death of a child influences the risk of death of the succeeding child in the family. Drawing language from the literature on the economics of unemployment, the causal effect is referred to here as state dependence (or scarring). This paper investigates the extent of state dependence in India, distinguishing this from family-level risk factors common to siblings. It offers a number of methodological innovations upon previous research. Estimates are obtained for each of three Indian states, which exhibit dramatic differences in socio-economic and demographic variables. The results suggest a significant degree of state dependence in each of the three regions. Eliminating scarring, it is estimated, would reduce the incidence of infant mortality (among children born after the first child) by 9.8% in the state of Uttar Pradesh, 6.0% in West Bengal and 5.9% in Kerala.
    Keywords: death clustering, infant mortality, state dependence, scarring, unobserved heterogeneity, dynamic random effects logit, multi-level model, India
    JEL: J1 C1 I1 O1
    Date: 2006–08
  4. By: Sumon Kumar Bhaumik (Brunel University and IZA Bonn); Ralitza Dimova (Brunel University); Jeffrey B. Nugent (University of Southern California)
    Abstract: This study adapts a relatively novel model of off-farm labor supply to the changing conditions of Bulgaria during the 1990s. The model’s parameters are estimated separately for each of the three different waves of the Bulgarian Integrated Household Survey, each reflecting remarkably different environmental conditions. Both the parameter values and the changes therein from one survey year to another are explained and used to characterize the way different types of households allocate their labor between farm and off-farm activities. The results demonstrate that Bulgarian households display many of the same labor supply patterns, including entitlement failures, as have previously been observed only in very poor developing countries. As such, they have potentially important policy making implications.
    Keywords: off-farm labor supply, diversification, entitlement failures, transition economies, Bulgaria, institutional change
    JEL: J2 P23 P36 O13 Q12
    Date: 2006–08
  5. By: Peter Timmer
    Abstract: “Pro-poor growth” is the new mantra of the development community. Most donor agencies have active research programs underway to understand the pro-poor process, and the World Bank, with British, French and German bilateral support, is already studying how to operationalize the concept (USAID, 2004; World Bank, 2004). Definitions vary, but they all revolve around connecting the poor to rapid economic growth so there is a concomitant rapid reduction in poverty. What is new is the focus on economic growth as the primary vehicle for sustainable reductions in poverty, distributional initiatives and processes playing a secondary role. This exploratory essay, commissioned by the Indonesia Project at Australian National University (ANU), places this new interest in pro-poor growth in regional perspective and then attempts to draw historical and policy lessons for Indonesia.1 The main challenge is to link our relatively robust understanding of the growth process with much more limited understanding of distribution processes. A panel data set of eight Asian countries provides grist for the empirical mill. A revised version of this paper is forthcoming in the Bulletin of Indonesia Economic Studies.
    Keywords: Indonesia, pro-poor growth, economic growth, distribution process
    JEL: R11 F33 F35 O10 O18 I32
  6. By: Steven Radelet
    Abstract: This paper focuses on key ways in which donors can improve the quality of foreign assistance and make it more effective in achieving the Millennium Development Goals (MDGs). The paper makes three central arguments. First, donors should be much more goal and results oriented in their assistance programs, and should work with low-income countries to ensure that poverty reduction strategies (PRSs) have specific, well-defined goals both in the short-run and long-run. PRSs should be expected to specifically refer to the MDGs, even if governments choose to adopt goals that do not exactly coincide with the MDGs. PRSs should provide both a "baseline scenario" with targets consistent with the most likely policy changes and levels of financing and a "high achievement" scenario with much more ambitious targets which lays out the additional policy, institutional, and financing changes needed to reach these goals. Second, donors must go beyond the rhetoric of "country selectivity" and actually begin to allocate aid more seriously to poorer countries with strong and moderate governance. Although there has been some improvement in aid allocation in recent years, much more can be done. Donors should establish basic rules for allocating aid based on the extent of poverty and the quality of governance, not to be dogmatic and rigid, but to provide some defenses against other forces that push aid allocations towards political and commercial considerations. Third, country selectivity should be conceived as much more than simply allocating more money to countries with stronger governance: it should change the way donors deliver aid to different countries. Well-governed countries should have a much greater say in designing aid programs, should receive more of their aid as program funding, and should receive longer-term commitments from the donor community. In these countries, foreign assistance should finance a broader set of activities, with most (but not all) of the funding channeled through the recipient government. Poorly governed countries should not only receive less money, they should receive more of it as project aid, it should come with a shorter time commitment, should be focused on a narrower set of activities, and much of it should be distributed through NGOs.
    Keywords: Millennium Development Goals (MDGs), development assistance, poverty reduction strategy
    JEL: F33 F35 O10 O15 I31 I32 I12 I21
  7. By: Michael A. Clemens; Charles J. Kenny; Todd J. Moss
    Abstract: The Millennium Development Goals (MDGs) are unlikely to be met by 2015, even if huge increases in development assistance materialize. The MDGs are a set of quantitative, time-bound targets for indicators such as poverty, education and mortality in developing countries adopted unanimously by the UN in 2000. However, the rates of progress required by many of the goals are at the edges of or beyond historical precedent. At the same time, there appear to be limits to the degree to which aid can contribute to development outcomes. Estimates of the ‘cost’ of reaching the MDGs are nevertheless frequently misinterpreted to mean that a certain quantity of aid—such as the oft-cited $50 billion—could cause the Goals to be met. Despite many benefits of the MDGs, there has been little discussion so far of potential costs of the specific form taken by these goals, especially the creation of unreasonable expectations about what is achievable in a short time frame and about the role of aid in the development process. Many countries making extraordinarily rapid progress on MDG indicators, due in large part to aid, will nonetheless not reach the MDGs. Unrealistic targets thus may turn successes into perceptions of failure, serving to undermine future constituencies for aid (in donors) and reform (in recipients). This would be unfortunate given the vital role of aid and reform in the development process and the need for long-term, sustained aid commitments. Though goal-setting can be useful, these particular goals might be better viewed not as practical targets but instead as valuable reminders of the stark contrast between the world we have and the world we want, and as a call to redouble our search for interventions to close the gap more rapidly.
    Keywords: Millennium Development Goals (MDGs), development assistance
    JEL: F35 O10 O15 I31 I32 I12 I21
  8. By: Todd J. Moss; Vijaya Ramachandran; Manju Kedia Shah
    Abstract: The world has increasingly recognized that private capital has a vital role to play in economic development. African countries have moved to liberalize the investment environment, yet have not received much FDI. At least part of this poor performance is because of lingering skepticism toward foreign investment, owing to historical, ideological, and political reasons. This wariness has manifested in many ways, including a range of business environment factors that impede greater foreign flows. Although much of the ideological resistance has faded, a number of specific challenges to the purported benefits of FDI have been successful in preventing more active liberalization and in moving to deal with indirect barriers. New data from firm surveys in Kenya, Tanzania, and Uganda suggest that there are important positive effects from FDI for both the host economies and the workers in foreign-owned firms. Based on our three-country sample, foreign firms are more productive, bring management skills, invest more heavily in infrastructure and in the training and health of their workers, and are more connected to global markets. At the same time, foreign firms do not appear to succeed by grabbing market share and crowding out local industry. These results suggest that many of the common objections to foreign investment are exaggerated or false. Africa, by not attracting more FDI, is therefore failing to fully benefit from the potential of foreign capital to contribute to economic development and integration with the global economy. Length: 30 pages
    Keywords: Africa, foreign capital, Kenya, Tanzania, Uganda, foreign direct investment,
    JEL: F21 F33 E22 G15 O15 O19
  9. By: David Roodman
    Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the “development-friendliness” of their policies. It is revised and updated annually. In the 2004 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee, which does not net out interest received. The qualitative factors are three: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for “project proliferation.” The selectivity weighting approach avoids some conceptual problems inherent in the Dollar and Levin (2004) elasticity-based method. The proliferation penalty derives from a calibrated model of aid transaction cost developed in Roodman (forthcoming). The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes (income effect) and b) specific tax incentives for giving (price effect). Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the score countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, score in the bottom third. Standings by the 2004 methodology have been relatively stable since 1995.
    Keywords: Commitment to Development Index, development aid, transfers, aid donor
    JEL: O1 O2 F33 F34 F35
  10. By: Lant Pritchett
    Abstract: This paper is part of the Copenhagen Consensus process, which aims to assess and evaluate the opportunities available to address the ten largest challenges facing the world. One of these ten challenges is the “lack of education.” This paper will define “lack of education,” in terms of enrollments, attainments and learning achievement. It provides an analytical framework to evaluate the various options that can be used to address this issue. Education can be described as equipping people with the range of competencies necessary to lead productive, fulfilling lives fully integrated into their societies and communities. Many of the international goals are framed exclusively around enrollment, which is merely a means towards creating competencies and learning achievement. This paper discusses the scope and options for improving people’s competencies, and describes the conditions for effective policy action.
    Keywords: education, Copenhagen Consensus process, enrollment
    JEL: O15 I21 I22
  11. By: Todd Moss; Scott Standley; Nancy Birdsall
    Abstract: Nigeria is currently classified by the World Bank as a ‘blend’ country, making it the poorest country in the world that does not have ‘IDA-only’ status. This paper uses the World Bank’s own IDA eligibility criteria to assess whether Nigeria has a case for reclassification. Given that the country has not borrowed from IBRD for the past eleven years, such a change would merely recognize what is already de facto the case. Based on our analysis, Nigeria clearly qualifies as IDA-only based on its low income level and lack of creditworthiness. Its record of policy performance appears to be the final barrier, but we show it is no worse on performance than three African comparator groups: the current IDA-only pool, previous reverse-graduates, and the IDA-only oil producers. We also question the logic of this criterion for IDA-only ‘eligibility’ (though not of course for actual allocation or disbursements). Certainly, Africa’s three previous reverse-graduates and Angola’s current IDA-only status suggest that Nigeria is facing a double-standard. We thus conclude that Nigeria does have a strong case for reclassification. Nigeria has good reason to request such a change as it would allow it more equal consideration of its access to IDA grants (restricted to IDA-only countries) including for HIV/AIDS programs and its allocation of IDA loans. Reclassification would also strengthen the case for Nigeria receiving an immediate write-down of a large portion of its debt to bilateral donors (along the lines of concessional Naples terms for IDA-only countries), which we argue is critical to any hope that the current government’s economic and political reform efforts can be sustained. The creditors have good reason for supporting such a change as part of a broader strategy for encouraging progress in Africa’s most populous country, and one that is key to stabilizing a region where internal conflict and Islamic radicalism create threats to global security.
    Keywords: Nigeria, debt, World Bank, IDA, poverty, global security
    JEL: F34 O10 F33 F35 F51
    Date: 2004–11
  12. By: Nancy Birdsall; Brian Deese
    Abstract: In 1999, the United States and other major donor countries supported an historic expansion of the heavily indebted poor country (HIPC) debt relief initiative. HIPC had two primary goals: reduce poor countries’ debt burdens to levels that would allow them to achieve sustainable growth; and promote a new way of assisting poor countries focused on home-grown poverty alleviation and human development. Three years after the initiative came into existence, we are beginning to see the apparent impact that HIPC is having, particularly on recipient countries' ability and willingness to increase domestic spending on education and HIV/AIDS programs. Yet it has also become clear that the HIPC program is not providing a sufficient level of predictability or sustainability to allow debtor countries (and donors) to reap the larger benefits, particularly in terms of sustained growth and poverty reduction, originally envisioned. An adequate amount of predictable debt relief can be an extremely efficient way of transferring resources to poor countries with reasonable economic management (indeed, more effective than traditional aid). But the full benefits of the transfer, in improved capacity to manage their economies, and in increased investor confidence in an economy's future, require that creditors, investors and committed recipient government officials have confidence that the improved debt situation will be sustained over the medium term. After reviewing some of the main critiques and proposals for change, we offer here a new way forward -- a proposal to deepen, widen, and most importantly insure debt relief to poor countries. We focus on the insurance aspect of our proposal, that would safeguard countries against external shocks for a decade, and on the advantages of financing such insurance by limited mobilization of IMF gold. We see this proposal as a practical way to make debt relief more predictably sustainable in HIPC countries, and a proposal around which international donors could consolidate their efforts in the near term.
    Keywords: heavily indebted poor country (HIPC), debt relief, poverty, sustained development
    JEL: F34 O15 F33
  13. By: Kimberly Ann Elliott
    Abstract: After a half century of multilateral bargaining to reduce trade barriers, agriculture stands out for the degree of protection and government support that it still enjoys in most rich countries. This makes agricultural protection a natural focus of the current Doha Round of trade negotiations: in addition to offering the juiciest targets for liberalization, this round is supposed to address the needs of developing countries, where the vast majority of the world’s farmers, most of them poor, reside. But is there any reason to think trade negotiations are more likely now than in the past to encourage substantial reform of rich countries’ farm policies? This paper looks at the evolution of and current approaches to agricultural policies in rich countries to see if there are lessons from the past that might improve chances for reform this time around.
    Keywords: trade barriers, agriculture, Doha, poverty
    JEL: F13 O24 Q17 Q18
  14. By: Nancy Birdsall
    Abstract: This paper argues that regional public goods in developing countries are under-funded despite their potentially high rates of return compared to traditional country-focused investments. Regional public goods only receive about 2.0-3.5 percent out of total ODA annually according to the definition used in this paper. The rate of return to regional investments is likely to be high, especially in Africa, where investments in regional infrastructure and institutional integration would reduce the high costs imposed by the region’s many small economies and many borders. There are several reasons for the under-funding of regional public goods. First, to produce regional infrastructure and manage multi-country institutions requires coordination among two or more developing country governments. The recent donor emphasis on countries’ “ownership” of their own priorities is more supportive of national programs. Second, bilateral donors prefer country-based transfers given their potential for providing geo-strategic and political benefits, and the multilateral banks have limited scope for lending for regional programs since their principal instrument is a loan to a single-country government that must guarantee its repayment. Countries could coordinate their borrowing, but that would require reaching agreement on attribution of the associated benefits to allow appropriate allocation of the burden of financing among two or more governments. Combined, these problems of coordination, (lack of) ownership, and attribution make financing of regional programs costlier for donors to arrange, and riskier in terms of their sustainability and benefits. In Africa the under-funding of regional public goods is primarily a political and institutional challenge to be met by the countries in this region. But the donor community ought to consider the opportunity cost – for development progress itself, in Africa and elsewhere – of its relative neglect, and explore changes in the aid architecture that would encourage more attention to regional goods.
    Keywords: development aid, donor community, aid reform
    JEL: F33 F35 O19 H41 R1
    Date: 2004–11
  15. By: Nancy Birdsall
    Abstract: In the face of continuing development challenges in the world's poorest countries, there have been new calls throughout the donor community to increase the volume of development aid. Equal attention should be given to the reform of the aid business itself, that is, the practices and processes and procedures and politics of aid. This paper sets out the shortcomings of that business on which new research has recently shed light, but which have not been adequately or explicitly incorporated into the donor community's reform agenda. It outlines seven of the worst "sins" or failings of donors, including impatience with institution building, collusion and coordination failures, failure to evaluate the results of their support, and financing that is volatile and unpredictable. It suggests possible short-term practical fixes and notes the need ultimately for more ambitious and structural changes in the overall aid architecture.
    Keywords: development aid, donor community, aid reform
    JEL: F33 F35 O19
    Date: 2004–12
  16. By: Peter Timmer
    Abstract: Food security is an elusive concept. Many economists doubt that it has any precise meaning at all. Having enough to eat on a regular basis, however, is a powerful human need, and satisfying this need drives household behavior in both private and public markets in predictable ways. Indeed, the historical record suggests that policy initiatives by central governments to satisfy this need for food security—at the level of both households and national markets—can speed economic growth in countries where a substantial proportion of the population does not get enough to eat. Paradoxically, in most successfully developing countries, especially those in the rice-based economies of Asia, the public provision of food security quickly slips from its essential role as an economic stimulus into a political response to the pressures of rapid structural transformation, thereby becoming a drag on economic efficiency. The long-run relationship between food security and economic growth thus tends to switch from positive to negative over the course of development. Because of inevitable inertia in the design and implementation of public policy, this switch presents a serious challenge to the design of an appropriate food policy.
    Keywords: Food security, democracy, foreign assistance, economic development
    JEL: D13 Q18 I31
    Date: 2004–12
  17. By: Ethan Kapstein
    Abstract: Since 1974 the world has experienced a “third wave” of democratization. Ensuring that these new democracies consolidate is critical to both global prosperity and peace. Unfortunately, the academic literature that might help policy-makers shape appropriate foreign assistance programs remains underdeveloped, in that it lacks strong behavioral foundations, or explanations of why people act the way they do. This paper argues that the process of democratic consolidation requires a transition from clientelistic to contractual exchange relationships. Without that transition, efforts to promote democratic consolidation are unlikely to succeed.
    Keywords: democracy, foreign assistance, economic development
    JEL: O17 F35 D73
    Date: 2004–12
  18. By: Steve Radelet
    Abstract: Most donors deliver aid in very similar ways across recipient countries even though recipients vary widely in the quality of their governance, commitment to strong development policies, degree of political stability, and level of institutional capacity. Aid effectiveness could be improved if donor systems were designed to take into account key differences in recipient countries. Proponents of country selectivity argue that donors should provide more aid to countries with better policies and stronger institutions because they are likely to achieve better results. But country selectivity could be used to influence more than the amount of aid. It could also influence the way aid is delivered, including the extent to which recipient countries set priorities and design activities, the mix of project versus program aid, the breadth of aid-financed activities, the length of donor commitments, and the distribution of aid to governments, NGOs, and other groups. Donors could employ a differentiated strategy for aid delivery based on a country’s quality of governance and commitment to development. This approach would create incentives that would challenge recipients to strengthen institutions and policies. The pull or reward for demonstrating stronger governance would be greater national policy ownership, more flexible and attractive aid modalities, and larger, more predictable and longer term resource commitments. This approach differs significantly from traditional aid programs in which donors “push” countries to reform by negotiating aid disbursements in return for specific policy changes (sometimes known as “buying” reforms). This chapter considers what role pull instruments or challenge programs (such as the World Bank's Poverty Reduction Support Credits or the United States' Millennium Challenge Account) could play within the overall framework of foreign aid, asking how they could be designed to function as effective and efficient incentive instruments and how they could best complement other aid modalities. It looks first at how challenge programs differ from more conventional aid approaches, taking the Millennium Challenge Account as an example, and shows how challenge programs fall conceptually within the pull rather than push incentives type. It then develops an argument for differentiated aid strategies across countries based on key characteristics of recipient countries.
    Keywords: Aid effectiveness, country selectivity, governance, and commitment to development
    JEL: F33 F35 O21
  19. By: Benn Eifert; Alan Gelb; Vijaya Ramachandran
    Abstract: This paper ties together the macroeconomic and microeconomic evidence on the competitiveness of African manufacturing sectors. The conceptual framework is based on the newer theories that see the evolution of comparative advantage as influenced by the business climate -- a key public good -- and by external economies between clusters of firms entering in related sectors. Macroeconomic data from purchasing power parity (PPP), though imprecisely measured, estimates confirms that Africa is high-cost relative to its levels of income and productivity. This finding is compared with firm-level evidence from surveys undertaken for Investment Climate Assessments in 2000-2004. These confirm a pattern of generally low productivity, and also suggest the importance of high indirect costs and business-environment-related losses in depressing the productivity of African firms relative to those in other countries. There are differences between African countries, however, with some showing evidence of a stronger business community and better business climate. Finally, the paper adopts a political-economy perspective on the prospects for reform of Africa’s business climate, considering African attitudes to business and the fractured nature of African business sectors as between indigenous, minority and foreign investors. The latter have far higher productivity and a greater propensity to export; however, Africa’s difficult business climate and the tendency to overcome this by working in ethnic networks slows new entry and may decrease the incentives of key parts of the business community form constituting an aggressive pressure group for reform. Even though reforms are moving forward in several countries, this slows their impact and raises the possibility that countries settle into a low-productivity equilibrium. The paper concludes with a discussion of the findings for reforms to boost the competitiveness and diversification of African economies.
    Keywords: Africa, manufacturing, private sector, business climate,
    JEL: D5 D2 E3 F2
  20. By: Liliana Rojas-Suarez
    Abstract: This paper identifies two alternative forms of prudential regulation. The first set is formed by regulations that directly control financial aggregates, such as liquidity expansion and credit growth. An example is capital requirements as currently incorporated in internationally accepted standards; namely capital requirements with risk categories used in industrial countries. The second set, which can be identified as the “pricing-risk-right” approach, works by providing incentives to financial institutions to avoid excessive risk-taking activities. A key feature of this set of regulations is that they encourage financial institutions to internalize the costs associated with the particular risks of the environment where they operate. Regulations in this category include ex-ante risk-based provisioning rules and capital requirements that take into account the risk features particular to developing countries. This category also includes incentives for enhancing market discipline as a way to differentiate risk-taking behavior between financial institutions. The main finding of the paper is that the first set of regulations—the most commonly used in developing economies-- have had very limited usefulness in helping countries to contain the risks involved with more liberalized financial systems. The main reason for this disappointing result is that, by not taking into account the particular characteristics of financial markets in developing countries, these regulations cannot effectively control excessive risk taking by financial institutions. Moreover, the paper shows that, contrary to policy intentions, this set of prudential regulations can exacerbate rather than decrease financial sector fragility, especially in episodes of sudden reversal of capital flows. In contrast, the paper claims, the second set of prudential regulation can go a long way in helping developing countries achieving their goals. The paper advances suggestions for the sequencing of implementation of these regulations for different groups of countries.
    Keywords: regulation, liquidity, credit growth, pricing-risk-right, financial institutions, capital flows, developing countries
    JEL: O16 F30 F32 F33 F36 F43 H3 D81
  21. By: Todd Moss
    Abstract: The British proposal to create an International Finance Facility in order to ‘frontload’ $50 billion in aid per year until 2015 has generated a lot of attention and will likely be a major topic at the G8 meeting this July. But the IFF has also been shrouded in confusion and misconceptions. This paper explains the IFF proposal and highlights some of the common misunderstandings surrounding it, including the mechanics of the scheme itself, the potential for a U.S. role, and the expectations of aid which underlie the IFF’s premise. The UK deserves plaudits for elevating global poverty on the international agenda and for seeking ways to better harness the power of private capital markets for development. But the IFF, as currently conceived, is an idea that merits more scrutiny and a healthy dose of skepticism.
    Keywords: development aid, International Finance Facility (IFF), poverty, private capital market
    JEL: F33 F35 F4 O12
  22. By: Peter Timmer
    Abstract: No country has been able to sustain a rapid transition out of poverty without raising productivity in its agricultural sector. Despite this historical role of agriculture in economic development, both the academic and donor communities lost interest in the sector, starting in the mid-1980s. This was mostly because of low prices in world markets for basic agricultural commodities, caused largely by the success of the Green Revolution in Asia. After two decades of neglect, interest in agriculture is returning. This paper explores the reasons why agriculture is back on the policy agenda for donors and poor countries alike. The most important reason is new understanding that economic growth is the main vehicle for reducing poverty and that growth in the agricultural sector plays a major role in that overall growth as well as in connecting the poor to growth. There is a sharp debate, however, between “optimists” and “pessimists” over the potential for small-scale agriculture to continue to play these historic roles. In a world of open trade, ready availability of cheap food in world markets, continued agricultural protection in rich countries, and economies of scale in access to food supply chains that are increasingly dominated by supermarkets and export buyers, large-scale farms with state-of-the-art technology and access to efficient infrastructure can push smallholders out of commercial markets. Consequently, the paper concludes, geographic coverage and operational efficiency of rural infrastructure, coupled to effective investment in modern agricultural research and extension, will determine the future role for agriculture in poverty reduction.
    Keywords: agriculture, economic development, economic growth, poverty,
    JEL: Q1 O13 O4 F35
  23. By: Dick Sabot
    Abstract: Global poverty and poverty reduction are right now, more prominent public issues in high-income countries than they have ever have been, but progress toward the eradication of global poverty is at increasingly grave risk due to global macro-economic imbalances. At the heart of the problem is the U.S. external deficit that has turned the U.S. into the world’s largest debtor nation while developing countries, most notably in East Asia, are now among the world’s largest creditors. The impact of the adjustment of the U.S. external deficit on developing country economies will depend on U.S. macro-economic policy ahead, whether growth of U.S. exports or a decline in U.S. imports accounts for most of the reduction of the external deficit, how China, and by implication the rest of East Asia, respond to what happens in the U.S., and on the speed with which the U.S. deficit is closed. A review of how the world economy came to find itself in this historically unprecedented situation is followed by three potential scenarios for the likely impact on developing country economies of a marked decline in the U.S. external deficit. In the first scenario, the decline of the U.S. external deficit is fairly slow and steady and developing countries are able to substitute domestic demand growth for external demand growth and adjust without a recession. In the second scenario, U.S. aggregate demand for imports declines more severely because of slower economic growth and a smaller contribution of U.S. export growth to the closing of the external deficit. Chinese import demand growth is adversely affected and developing countries face a decline both in U.S. and Chinese import demand. In the third and last scenario, a sudden adjustment that generates a global financial tsunami, most likely triggered by a run on the dollar that leads to a spike in interest rates in the U.S. and a sharp drop in U.S. import demand, would transmit the downturn from the U.S. to the rest of the world.
    Keywords: economic development, poverty reduction, U.S. external deficit, import, export
    JEL: F1 F4 E6
  24. By: William Easterly
    Abstract: The classic narrative of economic development -- poor countries are caught in poverty traps, out of which they need a Big Push involving increased aid and investment, leading to a takeoff in per capita income -- has been very influential in development economics since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low income countries are rejected by the data in most time periods. There is evidence of divergence between rich and poor nations in the long run, but this does not imply zero growth for the poor countries. Moreover, this divergence is more associated with institutions rather than the disadvantages of initial income. The idea of the takeoff does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid and investment as the standard narrative would imply.
    Keywords: economic development, poverty trap, foreign aid
    JEL: O1 O4 F33 F34 F35
  25. By: David Roodman
    Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the “development-friendliness” of their policies. It is revised and updated annually. In the 2005 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee. The qualitative factors are: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for “project proliferation.” The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes or b) specific tax incentives for giving. Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the scored countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, rank at or near the bottom. Standings by the 2005 methodology have been relatively stable since 1995.
    Keywords: Commitment to Development Index, development aid, transfers, aid donor
    JEL: O1 O2 F33 F34 F35
  26. By: Michael Clemens; Todd Moss
    Abstract: The international goal for rich countries to devote 0.7% of their national income to development assistance has become a cause célèbre for aid activists and has been accepted in many official quarters as the legitimate target for aid budgets. The origins of the target, however, raise serious questions about its relevance. First, the 0.7% target was calculated using a series of assumptions that are no longer true, and justified by a model that is no longer considered credible. When we use essentially the same method used to arrive at 0.7% in the early 1960s and apply today’s conditions, it yields an aid goal of just 0.01% of rich-country GDP for the poorest countries and negative aid flows to the developing world as a whole. We do not claim in any way that this is the ‘right’ amount of aid, but only that this exercise lays bare the folly of the initial method and the subsequent unreflective commitment to the 0.7% aid goal. Second, we document the fact that, despite frequent misinterpretation of UN documents, no government ever agreed in a UN forum to actually reach 0.7%—though many pledged to move toward it. Third, we argue that aid as a fraction of rich country income does not constitute a meaningful metric for the adequacy of aid flows. It would be far better to estimate aid needs by starting on the recipient side with a meaningful model of how aid affects development. Although aid certainly has positive impacts in many circumstances, our quantitative understanding of this relationship is too poor to accurately conduct such a tally. The 0.7% target began life as a lobbying tool, and stretching it to become a functional target for real aid budgets across all donors is to exalt it beyond reason. That no longer makes any sense, if it ever did.
    Keywords: International aid, development assistance, aid target
    JEL: O1 F33 F34
  27. By: Jeremy Weinstein; Macartan Humphreys
    Abstract: Since 1989, international efforts to end protracted conflicts in Africa, Latin America, and Asia have included sustained investments in the disarmament, demobilization, and reintegration (DDR) of combatants from the warring parties. Yet, while policy analysts have debated the organizational factors that contribute to a successful DDR program, little is known about the factors that account for successful DDR at the micro level. Using a new dataset of ex-combatants in Sierra Leone, this paper analyzes, for the first time, the individual level determinants of demobilization and reintegration. Conventional views about the importance of age and gender for understanding reintegration find little support in the data. Instead, we find that an individual’s prospect of gaining acceptance from family and neighbors depends largely on the abusiveness of the unit in which he or she fought. Finally, while internationally-funded programs designed to assist the demobilization and reintegration process may have had an effect at the macro-level, we find no evidence that those who participated in DDR programs had an easier time gaining acceptance from their families or communities as compared to those who did not participate.
    Keywords: demobilization, reintegration, conflict, disarmament, Sierra Leone
    JEL: O1 F35 F51 F52
  28. By: Owen Barder
    Abstract: The establishment of the UK Department for International Development in 1997, and the evolution of the UK’s foreign aid policies, has provoked international interest as a possible model for other countries to follow. The UK now combines in a single government department not only the delivery of all overseas aid, but also responsibility for analyzing the impact on developing countries of other government policies, such as trade, environment and prevention of conflict. The department is led by a Cabinet-level minister. It has a remit to articulate the UK’s long-term security, economic and political interests in helping to build a more stable and prosperous world, and to ensure that this long-term goal is considered alongside the more immediately pressing concerns of political, security and commercial interests. It has benefited from a sharp focus on its long-term mission to reduce poverty overseas. Within a few years, the new Department has established a reputation for itself, and for the UK Government, as a leader in development thinking and practice. This paper describes the institutional changes in more detail, and considers how they came about. It also considers the steps that will be needed to consolidate its early success.
    Keywords: development, foreign aid, UK, poverty reduction, Department for International Development
    JEL: O1 F35
    Date: 2005–10
  29. By: Stewart Patrick; Kaysie Brown
    Abstract: The Bush administration has increasingly acknowledged that weak and failing states represent the core of today’s global development challenge. It has also recognized that such states are potential threats to international peace and security. But despite the rhetoric, it has yet to formulate a coherent strategy around fragile states or commit adequate resources towards engaging them. Excluding funding for Iraq, Afghanistan, Pakistan, and HIV/AIDS, the administration’s FY07 budget request proposes to spend just $1.1 billion in direct bilateral assistance to fragile states—little more than a dollar per person per year. In this new working paper, CGD research fellow Stewart Patrick and research associate Kaysie Brown urge U.S. policymakers to consider increasing aid to fragile states and to think creatively about how and when to engage these troubled countries. The authors also call for the policy community to integrate non-aid instruments into a more coherent government strategy. To put its money where its mouth is, the U.S. should treat aid to weak and failing states as a form of venture capital, with high risk but potentially high rewards. This will require patience and perseverance, but will also reap greater rewards when successful.
    Keywords: weak state, fragile state, security, peace, U.S. foreign assistance
    JEL: F35 F52 O10
  30. By: Graciela L. Kaminsky
    Abstract: The explosion and dramatic reversal of capital flows to emerging markets in the 1990s have ignited a heated debate, with many arguing that globalization has gone too far and that international capital markets have become extremely erratic. In contrast, others have emphasized that globalization allows capital to move to its most attractive destination, fuelling higher growth. This paper re-examines the characteristics of international capital flows since 1970 and summarizes the findings of research of the 1990s on the behaviour of international investors as well as the short- and long-run effects of globalization on financial markets and growth.
    Keywords: international capital flows, globalization, mutual funds, stock market prices, financial liberalization.
    JEL: F30 F32 F33 F34 F36 G12 G15
    Date: 2005–12
  31. By: Alessandro Prati; Thierry Tressel
    Abstract: This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.
    Keywords: Aid effectiveness, monetary policy, real exchange rate, Dutch disease
    JEL: O11 O4 O23 E5 F35
    Date: 2006–02
  32. By: François Bourguignon; Mark Sundberg
    Abstract: This paper examines the macroeconomic and structural constraints to scaling up aid flows to developing countries to meet the Millennium Development Goals in 2015, including infrastructure, competitiveness and the real exchange rate, labour markets, fiscal constraints, governance, and aid volatility and fragmentation. The impact of these constraints on cost-efficient sequencing and composition of scaled-up aid flows is considered, using a dynamic computable general equilibrium model applied to Ethiopia. The main conclusions are that: (i) accelerating growth through productivity-enhancing infrastructure investment (and improved governance) is key to achieving the MDGs; (ii) large increases in aid risk undermining competitiveness and future growth; and (iii) skilled labour constraints require careful aid sequencing that limit the scope for frontloading.
    Keywords: Millennium Development Goals (MDGs), aid effectiveness, scaling up aid, absorptive capacity.
    JEL: O11 O12 O21
    Date: 2006–03
  33. By: Alemayehu Geda
    Abstract: This paper explores the relationships between openness, poverty and inequality in Africa. The analysis begins with a review of social development on the continent since 1980, followed by a discussion of openness and a lengthy exploration of the patterns of trade and finance that link Africa to the rest of the world. The macroeconomic policy framework that guided African policymaking over the last three decades is the lens through which poverty and inequality are further examined. The paper highlights the major factors underpinning openness and social development, and concludes with policy recommendations.
    Keywords: Africa, inequality, income distribution, poverty, social development, globalization, international trade, debt, financial flows, economic growth, structural adjustment, liberalization.
    JEL: D31 D63 F02
    Date: 2006–08
  34. By: Jayati Ghosh
    Abstract: This paper considers the main elements of the standard pattern of financial liberalization that has become widely prevalent in developing countries. The theoretical arguments in favour of such liberalization are considered and critiqued, and the political economy of such measures is discussed. The problems for developing countries, with respect to financial fragility and the greater propensity to crisis, as well as the negative deflationary and developmental effects, are discussed. It is concluded that there is a strong case for developing countries to ensure that their own financial systems are adequately regulated with respect to their own specific requirements.
    Keywords: financial liberalization, development banking, financial fragility, financial crisis, deflation.
    JEL: F41 F43 G15
    Date: 2005–10
  35. By: Gustav Ranis; Frances Stewart
    Abstract: This paper empirically confirms the significance of various links in each of two chains over time: from economic growth (EG) to human development (HD), including EG itself, income distribution, the social expenditure ratio and female education; from HD to EG, including HD itself, along with the investment ratio. Our most important conclusion concerns sequencing over time. EG, which is an important input into HD improvement, is itself not sustainable without such improvement, either prior or simultaneous. Therefore, traditional policy advice, which argues that HD improvements must wait until EG expansion makes it affordable, is likely to be in error.
    Keywords: human development, economic growth, comparative country studies
    JEL: O11 O15 O50
    Date: 2005–11
  36. By: M. G. Quibria (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper seeks to explore the relationship between economic growth and governance performance in Asian developing economies. This exploration yields some interesting conclusions. First, notwithstanding its tremendous economic achievements, the state of governance in Asia is not stellar by international comparison. Indeed, a majority of these countries seem to suffer from a governance deficit. Second, contrary to our expectation, data do not suggest any strong positive link between governance and growth: paradoxically, countries that exhibit surpluses in governance on average grew much slower than those with deficits. The paper ends with some conjecture about this apparent paradox.
    Keywords: Governance, Institutions, Growth and Asia
    JEL: O10 O40 O53
    Date: 2006–01
  37. By: Tomoki Fujii (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Poverty reduction is a top priority for international organizations, governments and non-governmental organizations. The aid resources available for poverty reduction are, however, severely constrained in many countries. Minimizing the leakage of aid resources to the non-poor is a key to maximize poverty reduction with limited amount of resources availble. One way to minimize such leakage is to target resources geographically. That is, policymakers can move resources to the poorest parts of the country. Geographic targeting can be quite effective when poverty is unevenly distributed across the country, and this proves to be the case in many countries.
    Date: 2006–01
  38. By: John Malcolm Dowling (School of Economics and Social Sciences, Singapore Management University); Ganeshan Wignaraja (Asian Development Bank)
    Abstract: This paper presents a coherent and systematic analysis of the collapse and subsequent revival of the Central Asian Republics (CARs) since 1990. The focus is on the pattern of growth and structural change during the cycle of decline and subsequent revival in the CARs which have been inadequately analyzed in the literature on transition. The paper relates economic performance to initial conditions, country characteristics and policies. Within this framework, it proposes a simple typology of policies (including a new Type III set of policies on regional cooperation and industrial competitiveness) and relates them to the cycle of decline and revival in the CARs. It goes on to examine medium-term prospects and policy needs for the CARs.
    Keywords: growth, economic reform, regional cooperation, industrial competitiveness, Central Asia, transitional economies
    Date: 2006–01
  39. By: John Malcolm Dowling (School of Economics and Social Sciences, Singapore Management University); Ganeshan Wignaraja (Asian Development Bank)
    Abstract: Central Asia has emerged as one of the world’s fastest growing regions since the late 1990s and has shown notable development potential. This is significant for a region comprising largely of small landlocked economies with no access to the sea for trade. Among the advantages, of the region are its high- priced commodities (oil, gas, cotton and gold), reasonable infrastructure and human capital as legacies of Soviet rule; and a strategic location between Asia and Europe. Furthermore, many Central Asian Republics (CARs) have embarked on market-oriented economic reforms to boost economic performance and private sector competitiveness. Central Asia: Mapping Future Prospects considers the region’s economic prospects to 2015. It charts recent economic performance, highlighting the economic revival. It also synthesizes recent forecasts and constructs scenarios for future economic variables against a constant global background. Projections include, among others, gross domestic product (GDP), manufactured exports per head, GDP per capita and poverty. A special theme chapter develops a manufacturing competitiveness index to compare the CARs with other transition economies and explores the impact of economic reform and supply-side factors (e.g. foreign investment and human capital) on industrial performance
    Date: 2005–10

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